加载中...
共找到 16,777 条相关资讯
Operator: Ladies and gentlemen, greetings, and welcome to the Crescent Energy Company First Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone requires operator assistance during the conference call, press zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Reid Gallagher from Investor Relations. Please go ahead. Reid Gallagher: Good morning, and thank you for joining Crescent Energy Company’s First Quarter 2026 Conference Call. Today’s prepared remarks will come from our CEO, David Rockecharlie, and our CFO, Brandi Kendall. Our Chief Operating Officer and Executive Vice President of Investments will also be available during Q&A. Today’s call may contain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties, including commodity price volatility, global geopolitical conflict, our business strategies, and other factors that may cause actual results to differ from those expressed or implied in these statements and our other disclosures. We have no obligation to update any forward-looking statements after today’s call. In addition, today’s discussion may include disclosure regarding non-GAAP financial measures. For reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measures, please reference our 10-Q and earnings press release available under the Investors section on our website. With that, I will hand it over to David. David Rockecharlie: Good morning, and thank you for joining us. First, I would like to say thank you to all of our investors, our talented colleagues, and everyone who has been part of our journey as the Crescent Energy Company team. Together, we have executed a consistent strategy, uniquely combining investing and operating expertise to deliver better returns, more free cash flow, and profitable growth. Today, Crescent Energy Company is a top 10 U.S. independent oil and gas producer with more scale, more focus, and more opportunity than ever before. On this solid foundation, we will continue to build tremendous value in the months and years ahead. And our update today gives us great confidence in Crescent’s future. Crescent delivered another strong quarter. We outperformed on production, generated meaningful free cash flow, and made significant progress integrating our Permian assets. As always, I want to begin with three key takeaways. First, strong execution drove outperformance. We exceeded production expectations driven by faster cycle times and some key steps in optimization of our producing base. We further increased free cash flow through an opportunistic refinancing, lowering our cost of capital. Second, we are thrilled with our Permian acquisition, where our integration is ahead of plan, and we see meaningfully more upside every day. We have already exceeded our initial synergy target, capturing $120 million to date, and we are seeing early improvements in both well costs and production. And third, our differentiated combination of investing and operating expertise continues to deliver significant free cash flow both in the quarter and in our future outlook. Let me now discuss the quarter in more detail. We produced a record 341 thousand barrels of oil equivalent per day for the quarter, including 140 thousand barrels of oil per day, and generated $192 million of levered free cash flow. Importantly, first-quarter production was above expectations on both total equivalent volumes and oil volumes, driven largely by base production outperformance and acceleration in the Permian from improved cycle times. While our development plan remains fundamentally unchanged, we are selectively accelerating volumes to capture higher near-term returns while continuing to drive operational efficiencies and lower well costs across our asset base. In the Eagle Ford, we continue to see steady efficiency gains. We continue to increase our use of simul-frac completions across our development, which is reducing costs and accelerating volumes. At the same time, we have strengthened our 2026 development program through an active ground game, increasing lateral lengths and working interests. In the Permian, we are off to a strong start and capturing early wins. The initial phase of our integration focused on stabilizing the assets. We have right-sized capital intensity and implemented our returns-driven operating approach. We are now focused on optimization and have seen impressive early results, with $120 million in synergies captured to date, already exceeding our original target. To provide a few examples, we have improved the operational planning around our development program, efficiently increasing wells per pad and adding roughly 100 thousand incremental lateral feet to our 2026 plan through offset acreage trades and land optimization. We have accelerated cycle times in our 2026 development plan, and we are already having success reducing well costs. From rebidding service contracts to changing fuel usage and facility design, we have achieved over $500 thousand of savings per well versus the prior operator. These are not one-off wins. They reflect Crescent’s operating model and our track record of buying assets and making them better. And importantly, we still see meaningful upside from here. In the Uinta, we have had strong execution, with well costs down roughly 20% year over year as we implement the same proven approach you have seen from us in the Eagle Ford. Implementing simul-frac, increasing efficiency, and extending laterals are just a few of the tools we have brought to the basin to optimize the capital program and increase well returns. Activity this year remains focused on our core Utelem Butte development. Additionally, after strong results in additional formations across the basin and on our acreage, we are investing more capital towards the prudent delineation of our broader resource opportunity. With our meaningful cost improvements and the tremendous stacked resource potential across our position, we see significant opportunity for value creation ahead of us in the Uinta. Our minerals and royalties business has shown similar strong performance. Our portfolio of world-class resource and high-margin cash flow provides valuable exposure to cost-free organic growth. And at current prices, we expect the portfolio to generate approximately $200 million of EBITDA this year, representing a meaningful increase versus our original guidance. Across the portfolio, the results are clear. We are executing well, improving our assets, and generating strong returns and significant cash flow. Our unique combination of investing and operating skills delivered this quarter, and Crescent Energy Company is better positioned than ever before to continue delivering impressive results and long-term value for investors. With that, I will turn the call over to Brandi. Brandi Kendall: Thanks, David. Crescent Energy Company delivered another quarter of strong financial results, generating approximately $690 million of adjusted EBITDA and approximately $192 million of levered free cash flow. These results reflect both strong execution and a portfolio built to generate outsized free cash flow. During the quarter, we also improved our cost of capital with an opportunistic refinancing. We reduced interest expense, extended maturities, and further strengthened the balance sheet, all of which support higher free cash flow going forward. Our capital allocation framework remains consistent and disciplined. First, the dividend. We declared a $0.12 per share dividend for the quarter, continuing our long history of returning cash to shareholders. Second, we remain committed to maintaining a strong balance sheet. We ended the quarter with approximately $2 billion of liquidity, no near-term debt maturities, and a clear pathway to lower absolute leverage over time. And third, our free cash flow provides significant flexibility. At current prices, we expect to generate approximately $1 billion of levered free cash flow in 2026, which gives us the ability to reduce debt, fund accretive M&A, and repurchase shares when appropriate. Our focus remains on long-term per-share value creation, and our scale, cash flow profile, and balance sheet strength give us multiple ways to achieve that. With that, I will turn the call back to David. David Rockecharlie: Thanks, Brandi. Before we open the call for Q&A, I want to reiterate our key messages. First, our base business continues to outperform. We exceeded expectations on production, delivered strong financial results, and continued to improve the efficiency of our operations. Second, our Permian integration is ahead of plan. We have already exceeded our initial synergy target and see further upside ahead. And third, our differentiated combination of investing and operating expertise continues to deliver strong returns and significant free cash flow. Not long ago, Crescent Energy Company was a new public company producing just over 100 thousand barrels of oil equivalent per day. Since then, we have driven profitable growth, significant free cash flow, and meaningful operating efficiencies to create a top 10 U.S. independent oil and gas producer, delivering impressive results like you have seen today. Our strategy remains consistent and, with more scale, more focus, and more opportunity than ever before, we believe Crescent Energy Company has never been better positioned to deliver impressive performance and long-term value in the months and years ahead. We will now open the call for questions. Operator? Operator: Thank you. We will now begin the question-and-answer session. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. We will wait for a moment while we poll for questions. We take the first question from the line of Neal Dingmann from William Blair. Please go ahead. Neal Dingmann: Morning. Nice quarter. David, my first question is just on your operational efficiency. Specifically, how much upside are you already seeing on the Vital assets? It seems like you are already very quickly seeing some upside there. Would love to hear color. Joey: Hey, Neal. This is Joey. I will take that one. We have really hit the ground running. The way I like to describe how we have attacked this is just taking our integration capabilities and moving from a defensive position to an offensive position as quickly as we can. I really like the way slide seven frames it. We wanted to stabilize as quickly as we could. Of course, slowing down the activity helps. I liken it to the way they talk about football: slowing the game down helped us immensely. And we have quickly moved into the optimization process. Some of the first things that we did was rebid our services, which was incredibly timely because we had some 100% diesel fleets out there operating and we were able, through the bidding process, to find some dynamically gas-blending fleets, DGB fleets. If I were to talk about one lever, that would be the biggest one that we have really hit to reduce our cost because displacing 55% to 75% of the diesel, particularly in light of diesel costs currently and also with the gas prices that we are getting in the Permian, it was just a huge win, and you can see the impact of that on slide 12, which I really like as well, being able to get $25 per foot reduction. So that was a big one. Some of the things that are coming down the pike, it is kind of the same playbook, different days: larger pads, implementing simul-frac. Previous operator had maybe done one or two pads towards the end, and we are doing as many pads as we can. I think we are going to be approaching 50% of our wells this year with the simul-frac. And then just doing the things that we do: reducing cycle time, right-sizing artificial lift, reducing facility sizes. The opportunities are plentiful, and I am really proud of how well the team has hit the ground running. Neal Dingmann: Great. And then secondly, wondering—you saw, for instance, Diamondback boost activity. What would it take for you all to do something similar, maybe a rig or two? David Rockecharlie: Hey, Neal. I will just start by taking a quick step back and again reiterating why we talk so much about investing and operating. Deployment of capital is investing. We are really pleased with the M&A that has taken place over the last three years. That is dollars in the ground in a $60 oil price environment, and we think in today’s environment we should be grabbing as much cash flow as we can for the benefit of investors. So we do not see increasing rig activity into a higher price environment. We see producing barrels at really high margin and returning cash to the balance sheet and investors. Operator: We take the next question from the line of Zach Parham from JPMorgan. Please go ahead. Zach Parham: Yes, thanks for taking my question. First, just wanted to ask in the Permian—Waha spot today is around negative $4. Futures indicate that it gets quite a bit better later this year with new pipes coming online. I think Vital had quite a bit of Waha exposure, so I am assuming that is still the case with your Permian asset. How do you factor that into your operations? Do you think about holding back the timing of some turn-in-lines or shutting in some higher GOR wells in the basin with where Waha is today? Brandi Kendall: Hey, Zach. I would say as we sit here today, we are very well hedged from a Waha standpoint over the next 24 months in the mid $2s. I feel like we have a lot of protection there. Zach Parham: Okay. Thanks. And then, David, maybe just following up on one thing you said in your prepared remarks, talking about the delineation of broader resource opportunity in the Uinta. Could you just unpack that a little bit more? What other zones do you plan to test in the near term? What is the timeline there? Just curious for some more color there. John Clayton Rynd: Hey. It is Clay. As we mentioned in the remarks, early in the year we have been focused on the Butte. As we get into the back half of the year, you will see us continue to drill with confidence but take passive delineation opportunities. We mentioned a JV we had on the northeastern side of our acreage that we felt really good about and continue to lean into that. If you think about where we are focused, you can see more of the same as you think about the upper cube. You see activity in the upper cube across the play and then the results we have seen early on our asset that we are really excited about. More to come about the opportunity set for us. Operator: We take the next question from the line of John Freeman from Raymond James. Please go ahead. John Christopher Freeman: Good morning. Thanks. When I look at the nice first-quarter beat, even though you have not officially changed your full-year production guidance, given the strong first-quarter beat and the extra footage that you all are adding, it seems likely that you are going to do better than that original guide. But when I break down the drivers of this outperformance between the faster cycle times that you all are mentioning in the Permian and then the base outperformance, which I assume is your waves of this optimized workover program, is there any way you can flush that out between how much of this—at least of the first-quarter upside—was driven by the base outperformance relative to the improved cycle times? Brandi Kendall: Hi, John. I would say it is roughly 50/50—better cycle times in the Permian and then optimizing the base. John Christopher Freeman: Perfect. And then just the follow-up for me: as you have continued to provide more details about Crescent Royalties the last few quarters and continue to build out that business, when you look at the leverage on Crescent Royalties—obviously with Crescent E&P you have stated leverage targets and things like that—I know Royalties right now is about 1.9 times. Is that sort of the right zip code for that type of business? Is there any sort of targets that we should be thinking about with that business, similar to how we think about the E&P? Brandi Kendall: I will take this. We would expect to be 1.5 times or below on the minerals business as we exit the year. The asset base, as we flag in the materials at today’s commodity prices, is generating close to $200 million of free cash flow. So that free cash flow will go to the balance sheet there. But I think similar zip code as we think about the working interest business from a leverage perspective. Operator: We take the next question from the line of Michael Furrow from Pickering Energy Partners. Please go ahead. Michael Webb Furrow: Hey, good morning. Thanks for taking our questions. Wanted to touch on the improved cycle times again and what they could mean for the overall broader business. The efficiency gains are clearly positive, especially at current oil prices. But one caveat is that accelerated activity could put some pressure on the corporate decline rate. That said, it looks like the base production appears to be performing well. Can you walk us through some of the key drivers behind the base business outperformance and how you are thinking about further optimizing that decline rate from here? David Rockecharlie: Yes. Hey, it is David. I will just start with better performance is better performance, so we feel great about how things are going. And to your point, getting some barrels sooner is not going to fundamentally change decline rate. We really focus on that as a business, as you know, and so I think we feel very comfortable with what I will call the capital discipline and our ability to maintain the production base where we want it. I will turn it to Joey to give some perspective on further outlook there, but the punch line for me is that we have been able to integrate the business faster and make change sooner, and that is just getting us more value, quite simply, sooner. Joey: Michael, I get your question that whenever you get faster cycle times, you have the opportunity to bring more activity in and how does that impact capital. The other thing I would point to is the significant reduction that we are demonstrating on our well costs. So a lot of this increased activity we are paying for—we have indicated even on the West Texas asset a $500 thousand per well reduction in well cost. That will go a long way toward adding a little bit of activity. The other things we have talked about through acreage trades—adding 100 thousand extra feet, not leaving stranded resource—all those things. At the end of the day, I like the way David said it. Efficiency gains are definitely a positive, and then we just balance how the rest of the year plays out by doing everything we can to keep our well costs down. Michael Webb Furrow: Thanks for that. David, I agree with your statement about performance, and it looks like the market is agreeing with that as well. As a follow-up, building off the same subject—the improved cycle times and efficiency gains—you previously mentioned that maximizing cash flows is the objective. Looking later in the year, in the event that operations continue at this pace and the company is faced with a decision on whether to reach or extend the planned number of wells or capital for the year, do you think you will maintain this operational cadence and efficiencies by seeing both production and CapEx higher, or will activity and spending be the governor here? David Rockecharlie: Short answer is that our focus on the corporate targets of decline rate, reinvestment rate, and returns are always going to drive everything there. As you also know, given the new assets we brought in, we have guided to the ability to move up or down one rig throughout the year across the whole portfolio. So the long story short: the activity levels and the business plan are generally already baked in, and a higher price environment just means more cash flow. I do not think you will see us change fundamentally anything as it relates to that, given the flexibility we have already got at the margin. Brandi Kendall: And, Michael, maybe what I would add: no formal change to production or capital guidance for the full year. But given performance to date and, to David’s point, given where commodity prices are, we would expect to be between the mid and the high point on both production and capital. Operator: We take the next question from the line of Oliver Huang from TPH. Please go ahead. Oliver Huang: Good morning, all, and thanks for taking our questions. Just wanted to start out on the synergy side. Great to see you all exceeding the initial target already. But as we look forward, could you provide a composition of what remains to be achieved to hit the updated target from last quarter—just trying to get some better insight to the line of sight there? Brandi Kendall: Hey, Oliver. What we have captured to date is largely overhead, cost of capital, and starting to bring forward the operational synergies. I would say what is left for us: I think there is additional room for us to improve cost of capital. I will let Joey talk about what we are focused on from an ops standpoint, but I think there are also opportunities to further optimize our marketing efforts—not just in the Permian, but across our portfolio. John Clayton Rynd: Good morning, Oliver. We have already talked about some of the capital opportunities that we have identified, particularly with DGB fleets and reducing our diesel usage. Same points on larger pads, longer laterals, increasing our capital efficiency. Maybe a specific example of the way that we are looking at things differently—focusing on value versus chasing volumes. Artificial lift is a perfect example where, different to prior operators, rather than put in the largest ESP that we can to chase a high volume, we would have deference to putting in an appropriately sized ESP that will last longer, maybe all the way up until its next conversion, so you eliminate a workover and a changeout of an ESP that could cost as much as $250 thousand. And then you are just not chasing those peak volumes. The other thing that allows you to do, because you are not chasing those peak volumes, is reduce your facility size—again reducing CapEx. Some of the other things that we have identified are the number of failures that we can eliminate that reduces our workover activity significantly because we had seen a tendency to work over some of the wells multiple times, and we are focused on how we can get rid of those capital workovers. And then doing everything we can to attack LOE as well, and the opportunities there are pretty plentiful. We are looking forward to continuing the pace that we started at the beginning and continuing that through the year. Oliver Huang: Okay, awesome. That is helpful color. Maybe just for a second question, to stick with the Permian: could you please remind us when we might expect to see the first start-to-finish Crescent-designed well, given all the progress on the integration front? And just trying to get a sense for how much of all this that you have talked through is being reflected in the well cost slides with respect to larger pad sizes, longer laterals, simul-frac usage? John Clayton Rynd: I would say it is going to be a little bit of a journey. Obviously, we inherited a drill schedule. We have had the opportunity to make some modifications. But on the front end of this, it has been primarily just what can we do operationally to reduce the cost of what we have. The increased pad size and longer laterals—those are things that are going to start to play out in the latter part of the year and into early next year. What is encouraging is we have had so much success early term on just hitting our operational efficiencies and reducing costs through some pretty simple changes, which keeps me optimistic that some of these other things that are going to be coming with time are going to keep the journey going. But it is going to take a little bit of time for us to have our development plan fully implemented toward the end of the year into next year. Brandi Kendall: And maybe just to add, we think there is outperformance to the $500 thousand reduction in well cost that we have captured. Operator: We take the next question from the line of Phil Jungwirth from BMO Capital Markets. Please go ahead. Ajay Bhukshani: Hey, this is Ajay Bhukshani on for Phil. Great quarter, and thanks for taking our question. I know it is early with the integration, and although you have already achieved quite a bit, can you talk about your initial assessment around Vital inventory in terms of low risk versus total locations? How close are you to having a Crescent view of total inventory, and how are you viewing upside to Permian low-risk locations and moving more wells to this category? John Clayton Rynd: It is Clay. As you just heard from Joey, we are really excited about where we are today. The focus on operational execution and the ability to put points on the board there is real—what you have heard from us. We continue to be excited about the overall inventory opportunity. You heard in David’s prepared remarks our excitement about the acquisition overall and where we sit today, but we have got a lot ahead of us there. I think it will be an ongoing evolution, but if you look at where we sat when we announced the acquisition, we are more encouraged on all fronts, including the inventory side. Ajay Bhukshani: Great, thanks. And for my next one, just wondering, how has the stronger commodity environment changed, if at all, how you approach the A&D market with Crescent Royalties? I bet you guys got those two deals off before the run-up. If you could also just touch on how you are viewing A&D for Crescent E&P in this market as well, that would be great. Thanks. John Clayton Rynd: You mentioned it. We are really excited about what we accomplished across the business. If you look at it over the last couple of years into a very different macro environment, we were able to meaningfully scale the business accretively and expand the opportunity set—obviously with the royalties business and with the scale Permian entry, but also meaningfully scaling our Eagle Ford business where we are the third-largest producer today. When we think about going forward, you have heard from us that the opportunity set we see internally for the business has never been greater. So we have a ton of value-creation opportunity under our control. When we look at the A&D market—obviously a lot of volatility on the commodity side—you have not seen an oil-weighted transaction get announced since the start of the conflict in mid to late February. We continue to be disciplined evaluators of assets, and you would expect us to continue that in this market environment. That includes both across the base E&P business, but also the royalty asset. Clearly, with the portfolio we have built, we have never been in a better position of strength, but we will be disciplined acquirers, disciplined evaluators, and we are really excited about the opportunities that we control today. Operator: We take the next question from the line of John Abbott from Wolfe Research. Please go ahead. John Holliday Abbott: Hey, good morning, and thank you for taking our questions. Question is really early thoughts on 2027. Brandi has already mentioned that for 2026 you will be likely up in the upper half—mid to upper half—of CapEx and production guidance. If we continue to have strong commodity prices, looking to 2027, what are the early puts and takes as we think about the next year? Do you get to the 25% decline rate? Do you change potentially the reduction in the number of Permian rigs? Joey just talked about 50% simul-frac this year in the Permian—maybe that could go higher. What are the early puts and takes as we think about 2027? David Rockecharlie: Hey, John. Great question. Without getting into too much detail too early, I think you know us well enough to know that we are going to continue to just do more of the same and do it better. Very steady focus on production levels—we talk about maintaining flat to very modest growth through the drill bit. We expect to continue to drive performance both on the production and D&C side, but also on the cost side. We would love to continue to generate significant free cash flow following all the core principles—decline rate, reinvestment rate, return on our capital—and strong free cash flow benefiting investors. So call it more of the same in 2027 and, hopefully, a very stable and continually improving business. John Holliday Abbott: And the next question is for Brandi. Brandi, the $140 million working capital draw during the quarter—Is it correct to assume that sort of reverses over the course of the year? And additionally, how are you thinking about or how would you fine-tune cash taxes if higher commodity prices persist? Brandi Kendall: Great questions, John. Working capital—I would expect that to unwind next quarter, and I would say largely related to the A&D transaction that we closed at the end of the fourth quarter. From a cash tax standpoint, specifically with respect to 2026, we have significant tax assets to offset any expected taxable income. Over the longer term, we would expect to become a cash taxpayer in an $80-plus WTI environment. Operator: We take the next question from the line of Hanwen Chang from Wells Fargo. Please go ahead. Hanwen Chang: Could you walk through your current oil marketing exposure—specifically the split between MEH-linked barrels versus WTI-based pricing—and how much of the oil volumes are exposed to spot pricing? Brandi Kendall: Hey, Hanwen. I think your question is coming from just our strong oil realizations this quarter. We printed 99% of WTI. That is a function of the fact that we sell a lot of our South Texas crude based off MEH, which is technically a waterborne crude. Given what is happening in the Middle East, that is pricing at an incremental premium to how MEH has normally traded. I would say roughly 70% to 75% of our crude across the business prices off of MEH. Hanwen Chang: Thanks. And given your MEH exposure, how should we think about the second quarter versus the first quarter? Are you seeing potential for further upside, or is first quarter closer to a high point? Brandi Kendall: With respect to second-quarter oil realizations, I think it is probably in the zip code where first quarter printed. Operator: We take the next question from the line of Charles Meade from Johnson Rice & Company. Please go ahead. Charles Arthur Meade: Yes, good morning, David, to you and the whole Crescent team there. I wanted to ask a question about your CapEx flexibility—specifically about reallocating CapEx within the current capital budget to more oily assets. It seems like the obvious place that you could do that would be by moving updip in the Eagle Ford, but I think there is probably also an opportunity out in the Permian once we get some of these big pipelines online and gas is not so negative anymore. For example, some of the stuff you have further west in Pecos would be—once gas goes positive—maybe there is an opportunity to bring on some oil volumes out there. Could you talk about where you see those opportunities and how likely you are to act on them? David Rockecharlie: Great question. I will start with a really simple answer of yes, and your commentary is music to our ears. We pride ourselves on having flexibility within the portfolio. I think it is one of the really valuable, distinctive things about Crescent’s assets that we have put together. Long story short, we have been able to manage that over the last few years, and this year is much the same—meaning we are today about 90% plus allocated to liquids-oriented drilling, and we will continue to monitor opportunities for the best returns across the portfolio. As you said, we have multiple places in the portfolio where we can allocate more or less capital to liquids and to gas. We are really just looking for the best returns and the best efficiency. We feel great about the program we have today, but we do continue to have flexibility to do exactly what you outlined, and we will stay focused on that. Operator: Ladies and gentlemen, as there are no further questions from the participants, I will now hand the conference over to David Rockecharlie for his closing comments. David Rockecharlie: Great. As I said at the beginning of the call, I would like to thank again all the investors who have trusted us, all the colleagues here at Crescent Energy Company who have helped build this company into what it is today and are going to help us take it forward, continue to improve every day, and everyone else who has been along the ride with us. We do think the best days are ahead for us. We have got a lot of work to do. We appreciate all the questions on this morning’s call, and we are going to get back to work and look forward to having a very strong series of updates, as I said in the beginning, over the coming months and years as we continue to build Crescent Energy Company into an outstanding business. Operator: Ladies and gentlemen, the conference of Crescent Energy Company has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. First Quarter Earnings Conference Call occurring today, May 5, 2026, at 8:00 a.m. Eastern Time. [Operator Instructions] This call will be archived and available for replay at investors.firstwatch.com under the News and Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch to begin. Steven Marotta: Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the first quarter of fiscal 2026 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the condition of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the first quarter performance is a comparison to the first quarter of 2025, unless otherwise indicated. And with that, I will turn the call over to Chris. Christopher Tomasso: Good morning, everyone. Thank you for joining us to discuss our first quarter results as well as our plans for the balance of 2026. First, I want to express my appreciation to our entire team across the country, more than 17,000 dedicated employees whose commitment to making days brighter drives our success. We're pleased with our first quarter performance as several of our key growth initiatives supported solid financial results. We delivered same-restaurant sales growth of 2.8%, generated restaurant-level operating profit margin of 18.5% and expanded the system to 648 restaurants with the opening of 16 new locations. We believe our first quarter results and the benefits we are realizing from our growth initiatives line up well with our full year expectations. As a result, we are reiterating our fiscal 2026 same-restaurant sales growth and total revenue growth guidance. We're also raising the low end of our adjusted EBITDA guidance. Early last year, we began investing in digital marketing programs and accelerated that effort in the first quarter of 2026. We expanded the rollout of our digital marketing campaign to approximately 75% of our restaurant base, up from roughly 1/3 in 2025. Based on early analytics, we are already realizing a positive ROI on the increased expense in the markets receiving support for the first time in addition to the positive ROI in markets benefiting from a second year of investment, reinforcing our conviction in the strategy and plan. The campaign is built around a targeted multichannel approach that spans paid social, online video, paid search and connected TV, allowing us to reach consumers in a relevant and engaging way. We're encouraged by the engagement across several key measures. The campaign is attracting first-time customers who may not have previously considered the brand, reengaging customers who had lapsed in frequency and driving greater frequency among our existing customer base. At the same time, we are seeing improvement across key metrics, including gains in both unaided brand awareness and future purchase intent, which we believe are critical indicators of First Watch's long-term growth potential. These early results demonstrate that our increased investment is not only driving near-term traffic and engagement, but also strengthening the brand and building a higher lifetime customer value, so much so that we are pulling forward several million dollars of marketing spend into the second quarter from the back half of 2026. We're also pleased with the performance of our new core menu. As we discussed on our last conference call, we conducted extensive testing of the menu in 2025, our first comprehensive menu update in more than a decade. The primary objective was to elevate the overall guest experience while also simplifying execution and improving efficiency for our restaurant teams. Following the positive test results, we rolled out the new core menu system-wide by late February. Early reads have been positive across a host of KPIs. For instance, the 2 prior seasonal menu fan favorite items we highlighted, the Barbacoa Breakfast Tacos and the Barbacoa Chilaquiles Breakfast Bowl are both mixing above our expectations and both are higher-margin entrees. In addition, the menu enhancements are driving positive mix of our fresh juices, shareables and add-ons. The new core menu is constructively impacting our consolidated sales mix and overall check composition. We're seeing higher attachment rates and more frequent trade-ups, which have translated into per person check average growth in the first quarter that was incremental to our carried pricing. That dynamic indicates that customers are not only responding well to the updated menu, but also that the new design is encouraging them to explore deeper into our offerings, validating both the strategic intent and the financial discipline behind this important initiative. We also made a tactical decision to extend the duration of our Jumpstart seasonal menu from the traditional 10-week to 20 weeks, a first for our company. This move was motivated by 3 key objectives. First, the increased repetition realized in the longer LTO menu window enables our operators to focus on the exceptional execution of the new core menu. Second, we are using the extended time frame of our Jumpstart seasonal menu to evaluate how a longer-tailed marketing campaign could influence future seasonal menu mix as a percentage of consolidated sales. Encouragingly, attachment of our seasonal menu items has improved alongside the launch of the new menu. Even alongside the positive mix we are seeing from the core menu, it's exciting to see attachment to our seasonal offerings strengthen as customers respond enthusiastically to both. Third, we brought back several of our most successful limited time offerings to the menu in order to generate excitement and strengthen customer engagement. Among these returning favorites were the BEC, a Bacon Egg and Cheddar sandwich served on thick artisan Sordough and the Strawberry Tres Leches French Toast. The newest introduction, the Chimichurri Steak & Eggs Hash is now our highest performing seasonal entree of all time. Successful innovations in our restaurants, like those I've been sharing on this call, illustrate the power of the entrepreneurial First Watch culture. Promising ideas quickly rise to in-restaurant testing, which provides for optimization through the working partnership of our culinary and operations teams. The result is our rich portfolio of new initiatives and upcoming offerings. We recently wrapped up testing of the highest mixing new shareable item is Million Dollar Bacon, which will launch in just a few weeks. Moreover, a suite of offerings that are driving higher attachment and boosting the guest experience is going into test now with an expectation that they will earn their way under the core menu early next year. Shifting the spotlight to development and growth. We remain the fastest-growing full-service restaurant brand in the United States and the success of our recent classes reflects the benefits of following our disciplined real estate site selection criteria and our broad appeal. Our preopening period marketing builds anticipation and trial, which has been supported by our operations teams, who work together to ensure we are executing at a high level upon opening in the critical early months following and for years to come. The class of 2025 annualized sales remains solidly ahead of both our underwriting targets and our comp base. And while still early, our recent class of 2026 NROs is performing even better. Looking ahead, our priorities for 2026 and beyond are focused on driving durable, profitable growth. We're going to expand our presence in the new markets we've recently entered, moving briskly from market entry to market densification. By increasing restaurant density within a local market, we enhance regional efficiencies, broaden our customer base and build additional brand awareness. At the same time, we will continue to be disciplined about where we expand. We are strategically filling in core markets where we already have strong operating leverage while also expanding in emerging markets where we have identified compelling long-term demand and significant white space. The bottom line is First Watch works everywhere. Considering our proven portability, we have the competitive advantage of opening new restaurants in a balanced fashion across core, emerging and new markets on our march to 2,200 locations. We have established ourselves as the leader in daytime dining and continue to grow market share, strengthening our leadership position. When one looks across the landscape, there is simply no other daytime dining brand that brings together our scale, our discipline, our proven ability to grow consistently and the size of the white space still in front of us. Taken together, these attributes truly differentiate First Watch. We're energized by what lies ahead with ongoing innovation leading to growth, and we remain focused on doing what we do best, creating a wonderful place to work for our teams and delivering an experience that keeps customers coming back. And with that, I'll turn it over to Mel. Mel Hope: Thank you, Chris. Total first quarter revenues were $331 million, an increase of 17.3% with positive same-restaurant sales growth of 2.8%. Our top line growth results from the positive same-restaurant sales growth, coupled with contributions from 194 noncomp restaurants, including 68 company-owned new restaurant openings and 19 franchise locations acquired since the fourth quarter of 2024. Same-restaurant traffic growth was negative 2%, with weather negatively affecting the quarter by around 100 basis points in addition to our customary planned sales transfer. Excluding those impacts, underlying traffic trends remain consistent with our expectations. Food and beverage expense was 22.6% of sales compared to 23.8%. As a percentage of sales, costs benefited from carried pricing of around 4% and commodity deflation around 1.6%. The commodity deflation was driven primarily by eggs, avocados and a brief favorable market trend in bacon prices. Labor and other related expenses were 33.7% of sales in the first quarter, a 90 basis point improvement from 34.6% reported in the first quarter of 2025. Carried pricing offset 3.7% of labor inflation, while our labor efficiency was essentially flat as compared to last year. We realized restaurant-level operating profit margin of 18.5% in the first quarter of 2026, a 200 basis point improvement over last year. We realized a percentage margin of 0.3% this quarter at the income from operations line. At $39.9 million, general and administrative expenses were 12.1% of total revenue. The increase compared to last year was largely due to the scheduling of our leadership conference in the first quarter and the expansion of our 2026 equity compensation program. First quarter G&A expenses were lower than our plan due largely to the timing of certain activities. Although, our full year G&A expense plan remains unchanged, we are applying to the second quarter a portion of the marketing expense planned for the back half of the year, leading to our expectation that total second quarter G&A expenses will approximate the first quarters. Adjusted EBITDA increased 22.2% to $27.8 million, a $5 million increase versus the $22.8 million reported last year. Adjusted EBITDA margin was 8.4% as compared to the 8.1% margin we realized in the first quarter of 2025. Net loss was $2.7 million. We opened 16 new system-wide restaurants during the first quarter, of which 13 are company-owned and 3 are franchise owned and ended with 648 restaurants across 32 states. The net effect of acquisitions in the quarter, which includes only the impact of purchases made within the last 12 months, increased revenue by about $8 million and adjusted EBITDA by just over $1 million. For further details on the first quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link. Now, I'll provide our updated outlook for 2026. We are reiterating the 1% to 3% range of same-restaurant sales growth, and we continue to expect positive same-restaurant sales growth in each quarter of 2026. Our guidance includes carry pricing of around 4% in the first half of the year, which blends to 2% for the full year. As a reminder, we did not take any price at the beginning of 2026. And as we have done in the past, we'll revisit menu pricing in the coming months. We continue to expect total revenue growth of 12% to 14% with around 100 net basis points of impact from acquisitions. We are reaffirming a total of 59 to 63 net new system-wide restaurants, which will result from 53 to 55 company-owned restaurants and 9 to 11 franchise-owned restaurants. We also plan to close 3 company-owned restaurants this year. Our company-owned new restaurant development pipeline is weighted to the second half of 2026 Q4 in particular. We continue to expect full year commodity inflation of 1% to 3%. Restaurant level labor cost inflation is expected to be in the range of 3% to 5%. We're raising the lower end of our 2026 adjusted EBITDA guidance range. Our new range is $133 million to $140 million, up from $132 million to $140 million previously. We're reiterating the net impact from the 19 restaurants we acquired in April last year, which are expected to contribute about $2 million to our adjusted EBITDA this year. We continue to expect capital expenditures of $150 million to $160 million. I want to acknowledge the execution across our entire organization this quarter. I'm proud of our operators, our field leaders and our home office staff who navigated a dynamic environment, including weather impacts, welcoming and training a host of new employees, opening high-volume new restaurants and adjusting to our new core menu. Our updated outlook for the year underscores our confidence in our operators and in our new restaurant development pipeline. We appreciate your continued interest in First Watch. And operator, we'd now like you to open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jim Salera with Stephens Inc. James Salera: Chris, I wanted to start by just asking if you could give us some detail around the outperformance that you guys have seen relative to maybe the overall perception of breakfast. I think a lot of investors are concerned that breakfast is one of the more pressured dayparting restaurants given the kind of economic backdrop and yet you guys continue to deliver pretty durable same-store sales. So can you just help us kind of bridge that delta you guys are doing versus kind of the broader breakfast category? Christopher Tomasso: Sure. Thanks. I think for us, it comes down to really 3 things: experience, execution and value. So I think a lot of the news and noise around breakfast and the softness around breakfast really has been targeted more and coming more from QSR. And I think you've seen a lot in the environment here about consumers really looking for value, consistency and the experience. And I think we bring that every day. And so I just think that the consumer is putting a high value on that and finding time in their mornings and middays to come see us. James Salera: If we think about some of the potential impacts on the commodity front, given the energy cost increase following the Iran conflict. Is there anything you are keeping an eye on or we should be keeping an eye on as you start to contemplate pricing in the back half of the year? I know eggs have still come down significantly, but there's been some fluctuation on some other commodities. Christopher Tomasso: Yes, we'll be collecting all that information, and it's part of the consideration. We need to know where the customer is, and we consider that as part of the pricing philosophy and thinking that we'll go through. So it's -- the short answer to your question is absolutely, we think about the pressures that are on the customer from either gas or any other inflation that we see out there. Operator: Our next question comes from the line of Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. Just following up from the comp trend perspective. Obviously, there was a spike in gas prices later in the quarter with the geopolitical concerns and the Iran conflict. I'm just wondering if you could maybe share your thoughts on your ability to work through that, whether there was any change in trend late in the quarter and perhaps into 2Q, if you're willing to share April, just related to the gas price spike. If you can share those sequential trends, that would be great. And then I had one follow-up. Christopher Tomasso: Yes. I think a couple of things from kind of what we just said that I could expand upon. One is the traffic pressure that we felt really was impacted more by weather than gas prices and fuel prices and other pressures. So -- and then when you heard me talk about the performance of our menu and our seasonal menu and how the guests are electing to spend more and go deeper on our menu and add shareables and things like that. That came a little bit later, obviously, because we didn't launch that menu until February. So we've actually been very pleased with how our consumer has interacted with us despite what's going on in the macro. So we're fortunate that we -- our core demographic is higher income. And I think we have a little more insulation to that. And I think the behavior that we're seeing from our customer, certainly as we innovate and give them new reasons to come in and work around our menu has been something that we've been very encouraged by. Mel Hope: And Jeff, our development team does a really good job of locating our new restaurants and the business is close to our customers. So in terms of just convenience, I think that's a helpful attribute that our system enjoys in terms of being near the customer and convenient to them. Jeffrey Bernstein: Understood. And then just a follow-up. Well, first of all, whether you're willing to share April trends or whether there's been any change in trajectory. But otherwise, you did reiterate that you expect positive comps each quarter of this year. The compares are clearly much more difficult. In fact, the third quarter, they're like 600 basis points more difficult than the quarter you just completed. So just wondering your confidence in that. Maybe there are particular initiatives to support such confidence. I'm assuming marketing is near the top, but your willingness to guide to positive through the rest of the year and what gives you that confidence? Mel Hope: Yes. We haven't seen a big shift in the trend in terms of the overall growth or what we have planned for the year. Operator: Our next question comes from the line of Brian Vaccaro with Raymond James. Brian Vaccaro: Just to ask on the First Watch value proposition and kind of your thinking on menu pricing. And maybe you could just talk about how you view the relative value proposition and price points kind of specifically versus some direct peers of the broader category. And when you think about menu pricing, assuming something material doesn't change in terms of the consumer backdrop, do you plan to take something in the second half, given there's still some underlying inflation, whether it be food, labor, et cetera? Christopher Tomasso: Brian, you know us well. You know you're not going to get that answer, but I appreciate you asking. Our philosophy does not change despite the macro environment. You saw what we did when we had record inflation. We will always lean towards the consumer whenever we can. And sometimes that means taking it on the margin. And sometimes it means we catch up a little bit later on. So I'd just tell you that we go into the beginning of the year and the middle of the year, really looking at things that we control. I think you heard me say that the seasonal menu is driving mix above our carried pricing. We love that, obviously. It's -- that's very different than taking price on a like-for-like item and a consumer paying one price one day and another price another day. So -- that's how we like to build check is through innovation and things like that. That said, we see the realities of inflation and other things, labor and all of that, and we try to keep that nice balance. We do know from our research that we have tremendous pricing power, but we also know that the consumer is under pressure. So we really try to walk that fine line. But we go into, and we're about to do it here in the next couple of weeks, a full evaluation of that. And I will say that we feel good that our consumer, our customer is behaving a little bit differently than what we're seeing and hearing out there. And I think it's because of the cocktail of things that we've put out there and put in place 18 months ago. The menu that we launched now has been something we've tested for 18 to 24 months. Same with the marketing and media. You know how we've kind of done the crawl walk run on that. Well, that's all leading to kind of bring together of all those things for our benefit and for the consumer's benefit. So the direct answer to your question is we're going to evaluate it here for a midyear price increase, and we'll do what we think is best. Brian Vaccaro: All right. You know, I had to take a shot at it, but I appreciate that. On commodity inflation, just a quick follow-up. Obviously, nice to see a little bit of year-on-year relief here in the first quarter, Mel, you noted some brief bacon relief maybe, but you obviously reiterated the guide for the year. So can you help us square those 2 a bit? And any color you can provide sort of on your Q2 expectations versus what's embedded in the second half? Mel Hope: So we did have some first quarter relief. The pork prices were a little bit unexpected relief in terms of price for us because our contracts are priced off published agency rates. And during the period that the government shut down, the agency prices were held flat rather than continue to ascend during the period. So that was a little bit of a surprise to us on an important commodity, but also our crop-related commodities of avocados and coffee continue to be expected to rise some through the year. So even though we enjoyed some relief in the first quarter, we are seeing sort of the seasonal increases in some of those. So we're -- our 1% to 3% guide on inflation in COGS, we're standing on that pretty firmly. Brian Vaccaro: All right. And then maybe just one more quick one. Thanks for the color on the G&A pull forward into Q2. Pretty clear on that. But can you just remind us what your expectations are for G&A for the year? Mel Hope: We don't guide to G&A for the year. It's just embedded in our adjusted EBITDA guidance. Operator: Our next question comes from the line of Andrew Charles with TD Cowen. Zachary Ogden: This is Zach Ogden on for Andrew. So you talked about the 1Q mix being driven by the new menu, but that was only fully rolled out for about a month. So is your expectation that mix can actually accelerate further in the balance of the year relative to 1Q? Christopher Tomasso: Yes. Just for clarity, it was about 2 periods in the quarter. So -- and again, it's also -- that mix is also driven by the seasonal menu that is out right now that has our highest mixing item ever. So that's driving it, too. But yes, we don't plan for mix, but based on what we've seen as long as the rest of our seasonal menus deliver the way the first one has or similar to it or on a year-over-year basis, I wouldn't be surprised to see positive mix. Zachary Ogden: Got it. And then you talked about the class of 2026 actually being even stronger than the class of 2025. So can you talk about what's driving that? Is that more of a function of the second-gen sites you're shifting into this year? Or is that a separate factor? Christopher Tomasso: I think the mix of second-gen sites is similar from a percentage standpoint, about half. So I wouldn't say it's necessarily that. I just -- to Mel's point, we're just -- that's an area where we are constantly learning and adapting as we either in site selection or prototype execution, design, those type of things. And that's one of the beauties of our model where we can kind of do those things. We have a kit of parts that we apply to each restaurant. So no 2 of them look alike, but they have very recognizable elements. And we're just constantly getting better. I think if you go back and look at our -- the performance of our new restaurants over the last 7, 8 years, you'll see that every year has gotten better than the last, and we have some standouts in each class. And so that's something that we just continue to innovate around and get better. Actually, I want to add one more thing to that. We've also -- with that comes the evolution of our preopening marketing and building the anticipation for the openings and that type of thing. So we're seeing stronger openings than we've ever seen before, and then they just carry on from there as well. Operator: Our next question comes from the line of Sara Senatore with Bank of America. Sara Senatore: I wanted to ask about marketing. You mentioned that you're pulling forward marketing, but your annual G&A target is unchanged. I guess is the implication that even if the ROI remains quite high, you wouldn't increase the annual spend on marketing? I'm just looking at -- I think last year, I know what you report in your 10-K is maybe not comprehensive, but it looks like you kind of doubled marketing last year. So just trying to understand, given how high the ROI appears to be, whether you would think about just stepping up the marketing budget for the full year? And then a quick follow-up. Christopher Tomasso: I guess -- probably an easy way to think about it is that G&A is the cocktail of a lot of different items, too. So when we maybe throttle up or down the marketing spend. There may be some other areas where we can dial back or push it out. So we manage G&A throughout the year. So the timing shifts from time to time based on what we think is important and what people will respond to at certain times of the year. So those adjustments, I mean, they're ordinary and normal. So we are continuing to manage our G&A inside what our full year plan is. Mel Hope: But specific to marketing, what I would say is by pulling that forward and getting more time to read the results of those dollars being spent gives us the flexibility and optionality to consider doing what you mentioned, Sarah, later in the year should the environment be conducive to that. Sara Senatore: Okay. Got it. And then, Mel, just on the -- you also mentioned that the G&A in the first quarter was slightly below to the same point, below your expectations. And is that the reason your EBITDA beat was a little bigger this first quarter than the full year guidance raised at the low end. Is that how I should think about it, which is some of that beat was maybe timing of G&A? Mel Hope: Yes, that's right, some favorability. Operator: Our next question comes from the line of Brian Mullan with Piper Sandler. Brian Mullan: Just a question on marketing also. If you look at the restaurants that have had the enhanced marketing tactics in place for longer, so maybe the first third of stores, are those performing differently than the stores they got it only more recently? I think what I'm really trying to ask is do the benefits build over time, do you get an initial lift and maybe followed by more benefits? Any color you could shed on that? Mel Hope: Yes. The lift in the restaurants that enjoyed some additional marketing spend last year has been sustained. So we're continuing to spend in those as well. So it's been effective for them not only last year when it was introduced there, but now in this year as well. Christopher Tomasso: And obviously, that was part of what we wanted to evaluate was the cumulative effect of a class, if you will, or a group receiving support and then receiving it again the following year what we should or could expect when that happens. And so that's part of our overall marketing planning as well, certainly as we go through the rest of the year and then into next year. Brian Mullan: Okay. And then as a follow-up, could you just comment maybe on the delivery channel broadly or generally speaking, really strong growth last year, you have to lap it. Is that kind of in the base now and you can grow more slowly? Or would you expect a little mean reversion this year? Just any comments on the balance of the year? Mel Hope: We've continued to see growth there, not to the level that we saw last year. But what we said earlier was that it's kind of in the base now, and we expect it to grow similarly to the rest of the system. And we're pleased that we kind of set a new level that we're growing from organically at this point. Operator: Our next question comes from the line of Jon Tower with Citi. Jon Tower: Chris, this one is for you. I'm just curious, obviously, you mentioned earlier that your new stores are performing exceptionally well, and they continue to build new class year after year after year, getting better in terms of productivity. The backdrop, though, within the competitive set has certainly weakened, at least based on what we can look at in terms of where you guys were thinking around the time of the IPO versus today. So I'm just curious if you can comment on the company's thinking around development over time and the commitment to that long-term low double-digit percent growth for units that you've spoke to over time. Christopher Tomasso: Sure. I think if you look back at how we've grown and how we got to this leadership position over the years, it was through our organic company-owned growth, acquisitions, sizable ones for that matter, external M&A and franchising at some point. This was really at a time when we had a lot of players in our space, in our direct space, at least espousing that they were going to have aggressive growth. And so we absolutely took the opportunity to take footholds in markets -- key markets for us and did so aggressively, and we continue to do that now. But that said, we're always looking at our capital allocation, what's the best strategy for the next 5 years, that type of thing. And so we're comfortable with our current unit growth outlook right now, but we are always evaluating. And if that changes, we'll obviously communicate that appropriately. Jon Tower: Okay. And then maybe just switching up a little bit. In terms of -- you talked about the new menu and the marketing helping with building brand awareness and it sounds like traffic too, to some extent. Can you speak to maybe any complexion of the customer base that you're drawing in with the new marketing campaigns? Are you seeing maybe younger guests come in relative to your existing base? Are you seeing less affluent consumers move into the stores for the first time versus kind of the core base that you have out there? Christopher Tomasso: Yes, that's a great question. We have seen our average age go down for the entire system. And a lot of that's driven by the new market entries, the new restaurants. And if you look -- I mean, if you look at the way our marketing is the channels that we're using, it's a little bit of a self-fulfilling prophecy with our focus on digital and social and that type of thing. So it's something that we're targeting. But we've actually seen quite a bit of growth in millennials. And so just the overall mix of our customer base now is dynamic and is changing, but it's going in the right way. And that's why we talk about attracting the next generation of First Watch customers so that we've been around 43 years and to kind of set us up for the next couple of decades by having a strategy like this. And as we've seen with other concepts, that's not an easy thing to do to keep your current customer base happy and engaged and coming while you engage and onboard, if you will, that next generation. So I think our teams have done an incredible job doing that. And I'm really pleased with the mix of our consumer. We haven't seen anything from -- you mentioned about higher income and that type of thing. Obviously, millennials from an income standpoint, act more like a high-income cohort in the way they choose to prioritize certain things that are important to them. And I think experience is one of those things. So that's a group that's willing to lean in on that. So I just think our offering is so ideal for this kind of transition to broadening our demographic appeal, the social occasion, the social gathering, group dining, brunch, those type of things. So yes, just long answer to it, we are seeing our customer cohort skew a little younger. Operator: Our next question comes from the line of Todd Brooks with Benchmark StoneX. Todd Brooks: Chris, you had said on the last call that you were equally as excited about the potential for the new menu versus the expansion of the enhanced marketing activities to be drivers of the business. here in fiscal '26. I guess, a, any surprises in how things performed across Q1 that either increased or maybe have you favoring one of the initiatives as a driver versus the other? And b, how is kind of the Q1 performance and what these key tactics are delivering kind of bolstering your confidence to still maintain the commentary about positive same-store sales in each quarter for the balance of the year? Christopher Tomasso: Yes. My comment comes from my philosophy of the menu being really the #1 marketing tool. It's something every one of our customer touches. We can -- there can be a cause and effect relationship immediately that you can see and how customers respond to what you've done, how you've innovated. And so I'm not surprised by what we're seeing from the new menu. I think even before we got it in test, there was a level of excitement around here about how it's being presented. We derisked it by bringing on some customer favorites from the past. And so I'm just really pleased that the consumer responded the way we expected them to. We've been very pleased by some of the add-ons like potatoes becoming million potatoes and add an egg and adding salmon to your avocado toast. And these aren't things that we just sat around and talked about. These are things that through our Y tour in speaking with our hourly employees, we hear that customers were adding salmon to the avocado toast. And so why not put it out there and see, okay, if people are willing to ask for it when it's not on the menu, if we put it on there and raise the profile of that, would we see the penetration and we absolutely have. So building the check that way in a way that the consumer wants to do it, again, versus just increasing prices on like-for-like items to me is the most healthy way to drive check, and we've seen that. I will say that, I think all of these things together, whether it's all the work that we did a couple of years ago with the KDS system and the dining room optimizations and the digital waitlist management improvements now coupled with the evolved menu and the increased marketing, I think, is all a really nice mix that's helping us to outperform the industry and deliver results like this. Todd Brooks: That's great. My follow-up and then I'll jump back in queue. Obviously, a really strong opening quarter here in Q1. And I think, Mel, you talked about still looking for a second half and fourth quarter focused balance to the openings for the year. Any cadence you give us first half versus second half on openings? And you talked about densifying markets here in '26. You had the strong same-store sales performance, almost up 3%. But what -- can you share with us kind of the anticipated sales transfer that you plan to absorb this year with more of a focus on backfilling in existing markets? Mel Hope: Yes. So in terms of the cadence of openings, we historically kind of have a big fourth quarter just because human nature tends to push projects a little bit heavier into the fourth quarter. And so I think at least for the average throughout each of the remaining quarters of the year, it's probably pretty similar this year to last year as we continue to try and improve that over time so that we can eliminate bulges in the development that put strain on our operators. So I would -- I'd kind of look to the cadence that we had last year as pretty similar for us this year. And then in terms of densification and sales transfer, when we underwrite new projects, we always consider the sales transfer and we -- and the new restaurants need to cover for that. They need to perform a little bit better in order to sort of pay back the other restaurants that experienced some temporary sales transfer. But that's all pretty planful for us and built into our overall underwriting. So when we say that, restaurants are outperforming or they're doing according to plan, we've already determined what we believe is the sales transfer. And it's generally within our range of expectations overall. We don't typically quantify it, because there's lots of factors that go into the success of building out a market or fortifying a market or cutting off competition or some of those other advantages as well. So we know what it is internally. We don't speak to it publicly very much. But generally, it's part of all the strategic consideration of how we build out a market and how we fortify the brand against a competitive intrusion as opposed to our own sales transfer. Christopher Tomasso: And Todd, I think that's one of the things that -- the point that sometimes gets lost on us because there aren't many, if any, high-growth full-service concepts out there that we do have -- we're a high-growth concept. We have sales transfer as we fortify these markets and do that. It's not immaterial, and it's just a natural headwind to restaurant traffic. But we view it as a positive one rather than any weakness in the core business because for us, same-restaurant traffic is certainly one of the metrics we look at, but there are so many other ones that we do as well. But for us, the profitable market share growth, the attractive new unit returns, all of those things together for us is what we look at and evaluate. So as Mel said, we model for it. We plan for it in the new restaurants, and it's something we've had for a while. Operator: Our next question comes from the line of Gregory Francfort with Guggenheim Partners. Gregory Francfort: I have 2 questions. My first is just labor per operating week growth and it was obviously a lot slower this quarter. And anything to call out maybe besides wage rate, just any other kind of onetime drivers? Mel Hope: Of the labor inflation, you kind of got garbled at the first part of your question on our phone. Can you just say it again? Gregory Francfort: Yes. Sorry, just labor operating week growth. You got more leverage on that line than maybe I expected. Any call-outs or anything else that might continue through this year? Mel Hope: No. I think our operators -- just compared to the first quarter of last year when there was -- when our traffic was under so much pressure and the inflation was affecting everybody. I think our operators had to adjust, but it wasn't sort of a linear adjustment. This year, we have a better operating environment, and that makes it a little bit more predictable in the restaurants in order to manage the crews and to drive operational initiatives through the organization that are efficiencies or staffing, that kind of thing. So nothing remarkable. It's the hard work in Elbow Grease of a good operating crew. Gregory Francfort: Got it. That's helpful. And then maybe this question is for Chris. Obviously, the stock has been maybe more pressured than you or I would have expected. And the returns are still better to develop than they are maybe to buy back stock. But I guess, have you considered potentially doing that? And are there other ways to maybe signal to the market your enthusiasm? And I'm just curious kind of how you think through that piece of the capital allocation, maybe the returns on buying stock versus developing stores, even if it's a lower return, maybe it's more certain. Just any thoughts there? Christopher Tomasso: I'd say the answer to your question is that I agree with you on the stock performance. And I'll just go back to my point that we are evaluating capital allocation. And we have very good returns on our new restaurants. We're creating a vast network of cash-producing machines at high returns and something that the consumer is interested in, right? So we wanted to take advantage of that. But overall, I'd say that from a capital allocation standpoint, we, as a management team and our Board, always look at opportunities to optimize that. And so we'll continue to do that. Mel Hope: And I think Chris is exactly right. Right now, the right thing for the company to do and our strategy is to continue to grow that cash engine, cash production engine. And the day that there is a shift in strategy, we owe the market a lot of explanation about how we -- how that would take place. But you want that cash engine to be as big as it can be. Therefore, you have more options of what to do with the excess cash at the time you make that shift. So I think continuing to build with the kind of returns we get out of our restaurants, the -- our capacity, the way we're building out markets, I think taking advantage of that now is important in the life cycle of the company right now. So building that cash engine is building a lot of value for the future. Operator: Our last question comes from the line of Chris O'Cull with Stifel. Christopher O'Cull: Chris, can you just elaborate on the decision to eliminate the COO position? And maybe what you see as the biggest areas of opportunity with operations to drive efficiency and maybe even improved guest experience? Christopher Tomasso: Yes, absolutely. I think as we looked at our overall G&A setup, and there were a couple of things. It was just a natural evolution for us. And -- but more specifically, it got me closer to operations, which I think is important. It's something that I've done for a long time here in this company and the opportunity to work more closely with the operations leaders. The way we restructured it, it only added one direct report to me. We created 2 SVPs of operations and basically split the country, and I'm able to now be more involved in a day-to-day basis on ops execution and ops strategy, frankly, and kind of be that one foot here, one foot in the field. And I'm excited about it. I think the team is excited about it, but I know we'll be a lot more efficient and effective because I can be more involved. Operator: Thank you. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good morning, ladies and gentlemen, and welcome to the UL Solutions First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. It is now my pleasure to introduce to you, Yijing Brentano. Please go ahead. Yijing Brentano: Thank you, and welcome, everyone, to our first quarter 2026 earnings call. Joining me today are Jenny Scanlon, our Chief Executive Officer; and Ryan Robinson, our Chief Financial Officer. During our discussion today, we will be referring to our earnings presentation, which is available on the Investor Relations section of our website at ul.com. Our earnings release is also available on the website. I would like to remind everyone that on today's call, we may discuss forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other things, statements about UL Solutions results of operations and estimates and prospects that involve substantial risks, uncertainties and other factors that could cause actual results to differ in a material way from those expressed or implied in the forward-looking statements. Please see the disclosure statement on Slide 2 of the earnings presentation as well as the disclaimers in our earnings release concerning forward-looking statements and the risk factors that are described in our annual report on Form 10-K for the year ended December 31, 2025, and subsequent SEC filings. We undertake no obligation to update any forward-looking statements to reflect events or circumstances at the date hereof, except as required by law. Today's presentation also includes references to non-GAAP financial measures, a reconciliation to the most comparable GAAP financial measures can be found in the appendix to the earnings presentation, which is posted on the Investor Relations section of our website at ul.com. With that, I would like now to turn the call over to Jenny. Jennifer Scanlon: Thank you. Good morning, everyone, and thanks for joining us. Let me start off by saying that we had an excellent quarter. We entered 2026 with strong momentum and the first quarter results confirm the trajectory we saw building throughout last year. We are executing with greater precision expanding our margin profile and positioning ourselves to grow with structural mega trends that are propelling our industry's long-term growth. Our resilient business model continues to serve us well as we innovate with our customers while they embrace rapid technological change. Of course, I also want to recognize the incredible team behind these results. executing consistently at this level across geographies and service lines with the backdrop of ever-changing conditions takes real skill and commitment. Our nearly 15,000 employees are both and I don't take that for granted. The decisions we have made to refine our portfolio, optimize our cost structure and allocate capital to growth areas are paying off. Before Ryan walks through the detailed financial results, I'll cover 3 areas: first, highlights of our first quarter performance; second, notable achievements in strategic development since we last reported, including the anticipated acquisition of Eurofins Electrical & Electronics or E&E business; and third, some perspective around the macro and geopolitical factors impacting our end markets. Let me start with the quarter. Our results were excellent. We delivered consolidated revenue growth of 7.5% as compared to the prior year period with organic revenue growth of 5.7%. Adjusted EBITDA grew over 22% and adjusted EBITDA margin expanded 320 basis points. Adjusted diluted EPS increased 31.5% year-over-year. These results exceeded our expectations. Importantly, this performance was not the result of a single factor or a onetime tailwind. It reflects operating efficiency that is increasingly embedded in our business model. The benefits of disciplined expense management higher utilization across our engineering and lab teams and the accelerating impact of our previously announced restructuring program. We are moving quickly on durably improving our costs, and it is showing up in our results. Each of our 3 segments: industrial, consumer and risk in compliance software delivered strong organic growth and several hundred basis points of adjusted EBITDA margin expansion in the quarter. Now let me turn to our milestones achieved and strategic actions from the first quarter and in recent weeks. First, in our core business, we granted our first ever global safety certification for a robot operating in a public environment, certifying Simbe's Tally, an autonomous shelf-scanning robots deployed in retail stores. Tally earns certification to the UL 3300 standard for service robots operating in dynamic spaces where they encounter unpredictable human behavior. As robots expand in the grocery stores, airports, hotels and even homes at scale, we expect the need for rigorous independent certification will continue to grow, and we are a trusted leader in that space. We also issued the world's first certifications for AI-enabled products under the UL 3115 AI safety certification program awarded to Qcells for its data center energy management system and to Omniconn for its smart building platform. Both systems were independently evaluated for robustness, reliability, transparency and degree of human oversight as their operations become increasingly autonomous. As AI moves into critical infrastructure at scale, independent certification is essential to public trust, and we are positioned as a leader. Next, in keeping with our renewed focus on M&A. Last month, we announced a definitive agreement to acquire the Eurofins Electrical & Electronics business, including the MATLAB certification mark. This carve-out is a compelling strategic transaction that we expect to extend our capabilities in key geographies, including EMEA and Asia Pacific, and it will help drive continued growth in the consumer segment. by bringing together a global infrastructure of complementary electrical testing and certification services to meet customer needs. We expect it to close in the fourth quarter of 2026, subject to applicable regulatory approvals and customary closing conditions. The stand-alone business is expected to generate approximately $200 million in revenue for the full year 2026. The transaction is anticipated to be accretive to adjusted diluted EPS in the first full calendar year after closing, excluding intangible amortization and integration costs. We look forward to welcoming the E&E team when the time comes. These are highly skilled colleagues who share our mission of working for a safer world. And we are excited about what this combination means for our customers, and for the long-term growth of UL Solutions. Now let me offer some perspective on the macro environment and what we are seeing across our end markets. The global backdrop is more complex than it was a year ago. but our business is navigating it well. The leading demand drivers of our business remain durable, electrification of products, data center build-outs, advanced product development, fire safety and building construction, supply chain compliance software and the ongoing certification services that support the products carrying the UL mark. We do not view these as cyclical tailwinds. These are structural and they align directly with our capabilities. The characteristics that make us resilient remain strong, recurring revenue, global diversification, long-term customer relationships and a mission-critical role in the product development life cycle. Based on the strength of our first quarter and our visibility into end markets, we are raising our full year 2026 adjusted EBITDA margin outlook. Now I'll turn the call over to Ryan for a detailed review of our first quarter results. Ryan Robinson: Thank you, Jenny, and hello, everyone. I also want to thank all of our team members for delivering a strong start to 2026. The first quarter results reflect the work that has been done to improve our efficiency and earnings quality, and that work is increasingly visible in our numbers. I also want to highlight that Q1 2026 marks the first quarter in which we are reporting under our updated segment structure. As we noted previously, the primary change is the reallocation of certain activities formerly reported in software and advisory into industrial. The remaining software business is now reported as a segment called Risk and compliance software. Recast historical financial data is included in our earnings material and should provide a helpful view of the underlying performance and trajectory of each segment. Now let me walk through the quarter in detail. Consolidated revenue of $758 million was up 7.5% over the prior year quarter, including organic revenue growth of 5.7%. The organic revenue growth was led by our industrial segment, supported by solid contributions from consumer and risk and compliance software. Adjusted EBITDA for the quarter was $197 million, an improvement of 22.4% year-over-year, outperforming our expectations. Adjusted EBITDA margin was 26.0%, up 320 basis points from Q1 2025. Adjusted net income increased 33.8% year-over-year, resulting in a 35.1% increase in adjusted diluted earnings per share. Expenses were well controlled in the quarter. The combination of higher revenues, improved productivity and higher utilization, prudent head count management and restructuring savings contributed meaningfully to our operating leverage. In Q1, revenue benefited by $13 million or 1.8% from FX, and this was offset by higher expenses from FX as local expenses were translated to USD. These changes reduced adjusted EBITDA margin by roughly 40 basis points. Now let me turn to our performance type segment, beginning with Industrial. Revenues in Industrial were $375 million, up 10.3% in total and 8.2% on an organic basis from the first quarter of 2025. Growth was led by ongoing certification services and certification testing with particular strength in energy and automation and materials. Adjusted EBITDA for Industrial increased 20.6% to $123 million in the quarter. Adjusted EBITDA margin improved 280 basis points to 32.8%, driven by operating leverage from revenue growth and disciplined expense management. Turning to Consumer. Revenues were $318 million, up 4.6% in total and 3.0% on an organic basis from the first quarter of 2025. Growth in the first quarter was driven by certification testing and ongoing certification services with particular strength in consumer technology, appliances and HVAC. We noted when we first provided full year 2026 guidance, we expected Q1 to be the most challenging year-over-year comparison period for consumer, given the elevated demand in Q1 2025. In addition, as part of the restructuring program that we announced in November, we exited nonstrategic lines of business with lower profitability. These exits reduced consumer organic revenue growth by about 1% and Considering these dynamics, the underlying consumer growth trajectory remains solid. Consumer adjusted EBITDA increased 25.0% to $55 million. Adjusted EBITDA margin improved 280 basis points to 17.3%, driven by operating leverage, higher employee productivity and expense management, including the head count reductions from the restructuring point. Moving to our Risk and Compliance Software segment. Revenues were $65 million, an increase of 6.6% in total and 4.9% organically from the prior year period. This was led by increased demand for supply chain insights for the retail industry. Adjusted EBITDA for risk and compliance software was $19 million in the quarter, up 26.7% year-over-year with adjusted EBITDA margin expanding 460 basis points to 29.2%. This improvement was primarily driven by operating leverage and higher employee productivity. I want to note that our risk and compliance software segment will look different beginning in Q2 as we completed the divestiture of our EHS software business on April 1. EHS software contributed revenue and profitability to Q1 results and its absence will affect year-over-year comparisons and margin profiles of this segment going forward. We will provide further context when we discuss our outlook. Turning to cash generation and the balance sheet. For the trailing 12 months ended March 31, 2026, we generated $665 million of cash from operating activities and $450 million of free cash flow. During the first quarter, capital expenditures were higher year-over-year, consistent with the commentary we provided on our Q4 2025 earnings call regarding the timing of certain investments from the back end of last year. Our balance sheet remains strong, supported by our investment-grade credit ratings, including Moody's recent upgrade of our rating to Baa2. This provides efficient access to capital to fund both organic investment and strategic M&A. This includes the financing of the E&E acquisition which we expect to fund through a combination of portfolio management activities, cash on hand and available capacity under our credit facility. Approximately 45% of the purchase price is anticipated to be funded through our portfolio management activities. This includes the sale of the EHS software business. In addition, just last week, we signed a definitive agreement to sell our shares in DQS Holdings GMBH for approximately EUR 105 million in cash. We expect the sales to close in the second half of 2026, subject to the receipt of applicable regulatory approvals and satisfaction of closing conditions. The sequencing of our portfolio management actions reflects our deliberate strategy to sharpen our focus on TIC and risk and compliance software while redeploying capital into businesses that extend our core capabilities and global reach. Now turning to our 2026 full year outlook. While the macro environment is more complex today than when we set our original guidance, we have remained focused on our customers. Our execution has been strong, and our performance has been largely unaffected to date. These reasons, among others, have strengthened and allowed us to strengthen our adjusted EBITDA margin guidance. We continue to expect 2026 consolidated organic revenue growth to be in the mid-single-digit range versus full year 2025, anticipating contributions from all 3 segments. As a reminder, the EHS software business accounted for approximately $56 million of 2025 revenue and had margins roughly similar to our consolidated margins. The revenue impact of the EHS software divestiture which was pretty similar each quarter last year will be reflected in the acquisition and divestiture portion of our revenue change starting in Q2, and we do not expect it to affect our organic revenue growth rate. At this time, the forward FX forecast implied an approximately 1% tailwind on revenue growth for the year, and we would anticipate that to be offset with an expense increase from FX. Based on our strong performance in Q1 and the above considerations, we are strengthening our expectation for 2026 adjusted EBITDA margin to be approximately 27.0%, assuming current forward FX rates that I just mentioned. This margin outlook reflects progress on our continued improvement in productivity and restructuring efforts. Q1 was outstanding, and we expect to continue to improve margin. Our capital expenditure outlook for 2026 remains a range of approximately 7% to 8% of revenue. Our current tax rate expectation for the year is approximately 26%. We now expect our remaining expenses related to the previously announced restructuring program to be approximately $3 million as compared to the $5 million to $10 million previously communicated. We anticipate achieving the expense reduction targets we previously communicated. Overall, we are pleased with the start to the year and we believe that we are well positioned to deliver on our objectives while continuing to invest in long-term growth. Now let me turn the call back to Jenny for some closing remarks. Jennifer Scanlon: Thanks, Ryan. For this quarter's highlights some interesting things going on here at UL Solutions, I want to talk about some great events that have been taking place. UL Solutions continues to host data center infrastructure Summit, a series of in-person and virtual events that bring together key stakeholders to align on critical issues surrounding these globally proliferating facilities. Our events began last September at our Northbrook campus and has been a huge hit with our customers and other interested parties around the world. In the first quarter, we hosted our third event in Silicon Valley. This one alone drew more than 150 attendees from 41 different companies. These well-received events really underscore the importance of data center infrastructure and how our customers are looking to us for leadership and help in navigating the complex data center landscape. To close, we are proud of our Q1 results, and we remain dedicated to carrying out our focused strategy on behalf of our customers, our employees and our shareholders. With that, let's open the line for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Andrew Nicholas of William Blair. Daniel Maxwell: This is Daniel on for Andrew this morning. Just curious if you're seeing any notable changes in customer behavior yet, that's attributable to the conflict there on? And then should we think about that similar to how the tariff narrative has played out? Or is it more of a get pressure that can't be resolved by changing factory locations? Jennifer Scanlon: Thanks, Daniel. And we appreciate the question and certainly, in some areas of the world, but everybody is paying attention to. But for us, our demand drivers in the Middle East are a very small portion of our EMEA. And what we're seeing on customer behaviors continues to be what I would term a normal reaction to the uncertainty that they're facing, but no material effect on our business at this point. Of course, we're paying very close attention to the safety of our employees in the region. Operator: The next question comes from Andrew... Jennifer Scanlon: Hold on, I think there was a second part to that question, Daniel? I just want to make sure we got it all. Daniel Maxwell: Yes. It was just how that compares to the tariff impact and whether it would be sort of a similar reaction process from customers or wonder it's something that's a little less avoidable by restoring operations. Jennifer Scanlon: Yes. I think in this situation, again, with regard to comparing it to tariffs. As I always say, our customers just continue to make ongoing decisions that are the smart right answers for their business around where they want to conduct their research and development and where they want to manufacture and how their supply chains all fit together. So we're not, again, seeing anything unusual we're seeing just normal logical decision-making out of customers, and we're positioned to follow them wherever they go. But again, the Middle East for us is a very, very small portion of our customer base amount revenue. Operator: The next question comes from Andrew Wittmann with Baird. Andrew J. Wittmann: Yes. Great. So I guess the question that I wanted to ask about was about the AI adoption, the UL 3300 standard. I'm glad you brought it up, Jenny, because I think this should be an opportunity for the company. And I just -- just given that this is a new standard and kind of rolled out there and its importance, I just was hoping you could give us a little bit more context about where the standard sits relative to the innovation curve of the industry against competitive standards that might be being made other places. I want to get a sense of how well bought into the industries that are making robotics are into this standard versus other things, what may be industry organizations have signed up to use this one as a standard, just kind of the competitive positioning overall for this? And anything you can give us about your outlook in terms of what this means financially over the next couple of years would obviously be helpful as well. Jennifer Scanlon: Yes. Thanks, Andrew. It's a fun topic, and it's certainly an interesting topic. And actually, what it highlights, and I'm going to kick out for a second here, is the confluence of the UL 3300, which is robotics, and safety of robotics in areas where there's a lot of human interaction. And UL 3115, which is really the transparency and the bias and the use of AI when it gets embedded in products. And it's just a perfect example of the confluence of technologies and the complexity that our customers are looking to us to help them address and solve. So certainly, specifically on robotics, what we're seeing is service robotics, that sector has had steady growth. And it is becoming more complicated raising the bar for that safety and that reliability. So we are -- and in particular, our consumer sector, working very closely with a series of customers. This will continue to play out in that space. And it also brings together other service elements that UL provide such as our EMC wireless safety or cybersecurity safety and, of course, just embedded software and functional safety of these products. So it's always hard to point to one trend to say this is how that affects growth and opportunity. But certainly, it's the perfect example of the type of digitalization and megatrends that we've been pointing to. Operator: The next question comes from [ Ryan Rivera ] of Bank of America. Unknown Analyst: I was wondering on the software business, post the EHS divestiture and the move of advisory into industrial. How should we think about the underlying run rate growth of the remaining compliance and risk business? Ryan Robinson: Yes, I would say, overall, we're excited about Risk and Compliance Software. We think the focus in being more transparent about the underlying economics of the software business will be helpful for people. the portion that we divested -- to be divested is slightly slower growing than the remainder of the portfolio. So all things to consider it should mix up a bit more. We don't give specific segment-level revenue guidance, but we would anticipate continued growth in that segment, both based on underlying factors, but our continued efforts to improve our go-to-market sales processes. Operator: The next question comes from Seth Weber of BNP Paribas. Seth Weber: Ryan, I wanted to ask about the strength in the free cash flow in the quarter, unusually strong here. Anything that you'd call out attribute the strength to? And just maybe bigger picture, your view towards larger M&A, your appetite to do a bigger deal and kind of thoughts on leverage. Ryan Robinson: So first of all, we're pleased with our continued growth in cash flow from operations and free cash flow, I think it's more appropriate to look at it on a longer-term basis, and we quote some trailing 12-month figures. In the first quarter, we did have particularly strong cash flow from operations that was driven by our increases in net income margin, but also we had some working capital items like accounts payable growth that can occur in a short period of time like 1 quarter. So we're pleased with the continued growth in free cash flow, and particularly over a longer time period. So we're pleased to be able to fund the Eurofins E&E acquisition relatively easily from portfolio management activities, cash on hand and modest draw on our existing credit facility. We do continue to be very well capitalized and have capacity to do more. It is important for us to maintain a robust capital structure, and we're targeting continuing of metrics that are consistent with investment-grade credit ratings, but that leaves us a lot of flexibility and capacity to do other things. Operator: Our next question comes from Seth (sic) [ Jason ] Haas of Wells Fargo. Jun-Yi Xie: This is Jun-Yi on for Jason Haas. You guys have previously talked about seeing more EBITDA margin improvement to occur in the second half of '26. Is that still the expectation? Or have you seen some of the restructuring initiative improvements been pulled forward into 1Q given the outperformance? Ryan Robinson: Yes. Increase margin comparisons as we progress in the year. And I would expect it to be relatively smooth for the remainder of the year. We continue to make progress on some of the restructuring initiatives that we discussed. We're not free of those. So we expect those to continue to provide some additional benefits. Jennifer Scanlon: Is there a follow-up? Operator: Sorry. I've lost you there, the line had fade its way. The next question comes from George Tong of Goldman Sachs. Jinru Wu: This is Anna on for George. My question is, we're actually hearing a lot about manufacturing capacity looks back to the U.S. in government budget increases for U.S. manufacturing, Along the trend, are you seeing any higher utilization rate of industrial TSC services driven by U.S. specific regulatory that your consumer [indiscernible]? Jennifer Scanlon: And the second half of your question cut out, but I think we got it. But can you just repeat after you said, are we seeing anything affecting industrial? And then... Jinru Wu: Yes. So just with the onshoring trends also impact your consumer segment demand as well from the end market perspective? Jennifer Scanlon: Thank you. I think what we're seeing is continues to be consistent. We're not seeing a dramatic shift on reshoring to the United States, but certainly, there's movement. There's movement all over the world. The places where we're seeing the most movement is across Asia. And again, this is just -- we're able to track where our ongoing certification services are performed. So the areas that we're seeing the greatest increase, but remember, off of a low base are areas like Southeast Asia, Vietnam, India, Malaysia, Indonesia, as well as some miles increase off of a large base in the United States and a mild slope increase off of a large base in China. So as far as affecting our 2 businesses, we test wherever our customers need us to test, and we will perform ongoing certification services wherever they need it. Operator: The next question comes from Stephanie Moore of Jefferies. Stephanie Benjamin Moore: I wanted to touch on the margin performance in the quarter and just to make sure I'm understanding correctly. So obviously, very strong performance at the start of the year. And note, this is with 40 basis points of FX headwinds. I just want to confirm that the actual underlying performance was actually better. So as you think about just the margin expectations for -- as you progress through the year, maybe just talk about your level of confidence just given the momentum in the first quarter and really the decision to still raise our guidance and maybe opportunity for additional upside as the year progresses? Ryan Robinson: Thank you very much for the question, Stephanie. And I'll start with FX just mechanically and then go more deeply into the fundamentals. So yes, you're correct. The first quarter revenue increased by about 1.8% due to translation of non-U.S. revenue in the U.S. dollars, but also expenses that are non-U.S. dollar denominated translated in group. So it had an offsetting effect in our earnings, but because revenue went up, it reduced our reported adjusted EBITDA margin by about 40 basis points. The comment we made in outlook is be volatile, but the current rates would estimate a similar effect by about 1% and have that 1% offset. So some margin headwind as a result going forward. In regard to the underlying we're pleased with the performance in the quarter, and it's 1 quarter. So that allowed us to raise the range from 26.5% to 27.0%, and we're pleased with the progress, and we'll continue to monitor it through the year. We did have some changes. We're divesting that EHS software business that started April 1. We're having a more fulsome impact of some revenue that we're exiting. As a reminder, with our restructuring initiatives, we're stepping out of some service lines that collectively have about 1% revenue impact and we'll continue to monitor the business as we go forward. But we're pleased with the progress so far, and that collectively, 1 quarter in gave us confidence to at least raise the bottom end of the range. Jennifer Scanlon: And let me just add, I want to give a shout out to our 15,000 employees around the world. I'm really pleased with the ways in which they are embracing opportunities to improve productivity is the right use of tools and process improvements. And I'm also really pleased with the way that we've approached our cost discipline. So it put us in a position to move guidance upward. Operator: The next question comes from Josh Chan of UBS. Joshua Chan: Jenny, Ryan, congrats on the quarter. I was wondering about the growth rate in Q1. I guess, you were lapping some tougher compares in at least consumer. So Q1 was supposed to be the lowest growth quarter of the year? Do you think that will still be the case? So how are you thinking about sort of the performance in growth after the strong Q1? Jennifer Scanlon: Yes. There's a lot of nice things that we saw in growth in Q1. And as we look forward, we continue to believe that the trends that we've seen will be consistent. If you look at our industrial growth, as Ryan mentioned, our power and automation opportunities continue and that hits both ongoing certification and certification testing. In consumer, we were certainly pressured by excess of certain typically non-certification testing growth. But again, these were areas that were nonstrategic and lower margin for us. So that will continue to suppress consumer growth year-on-year as we exit those businesses. And then in Risk and Compliance Software, as Ryan indicated, the exit of EHS, while it was a nice margin contributor was on the lower growth side of Risk and Compliance Software. So we're not seeing really any -- as we look at our outlook, it's grounded in fundamentals, and we very confident in our mid-single-digit guidance here. Operator: The next question comes from Arthur Truslove of Citi. Arthur Truslove: The first question I had was just around the the margin development. So essentially, you managed to grow revenue organically by 40 million organic expenses up by just also down by 3. I was just wondering if you could sort of explain how you've had so little cost pressure in there. So I guess, with that in mind, it'd be interesting to know what proportion of the organic revenue growth was pricing versus volume? And ultimately, how you managed to grow revenue so much with so little incremental cost pressure? Jennifer Scanlon: Yes, I'll start, and then I'll let Ryan comment on pricing and volume. But really, when you look at the approach of the messages that we've been delivering, we do see operating leverage off of a stable cost base and continue to have opportunities to better use capacity and have our teams focus on productivity based on the trends and processes that they continue to use and to improve. We did see the restructuring begin to flow through. So that has certainly been beneficial. And then we've been very focused on the value that we provide our customers and increasing the billable utilization in both of our lab teams as well as our engineers. And what's exciting about that is that's the technical leadership that our customers want. And so making sure that we're getting the value from that technical leadership is really important. So I would say those are the kind of the headlines on where we're focused on this margin expansion, and then Ryan can talk about pricing volume. Ryan Robinson: Yes. Thank you for the question, Arthur. So as we said, we report 4 revenue categories, the 2 that are most amenable to looking at price and volume, our certification testing and non-certification testing and other services. So together, those grew 7.1%. And in the first quarter, more of that growth was actually from volume than price. And we're encouraged by that. We believe volume growth reflects real underlying demand for new products. We're expanding in new geographies and there's healthy new activity regarding product introduction. Pricing remains constructive, and the cost of our services is just a small fraction of the total product development costs for manufacturers. We also had growth of 8.2% in ongoing certification services. And in that case, there were meaningful contributions from both price and volume. Operator: And does that conclude your questions, Arthur? Ladies and gentlemen, with no further questions in the question queue. We have reached the end of the question-and-answer session. I will now hand back to Jenny Scanlon for closing remarks. Jennifer Scanlon: Thank you, everyone, for joining us today. We, as always, appreciate your support, and we look forward to updating you on our progress next quarter. Operator: Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.
Operator: Hello, everyone. Thank you for joining us, and welcome to Corebridge Financial Inc. First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Isil Muderrisoglu, Head of Investor and Rating Agency Relations. Please go ahead. Isil Muderrisoglu: Good morning, everyone, and welcome to Corebridge Financial's earnings update for the first quarter of 2026. Joining me on the call are Mark Costantini, President and Chief Executive Officer; Chris Filiaggi, our Interim Chief Financial Officer and Chief Accounting Officer; and Lisa Longino, our Chief Investment Officer. We will begin with prepared remarks by Mark and Chris, and then we will take your questions. Today's comments may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management's current expectations and assumptions. Corebridge's filings with the SEC provide details on important factors that may cause actual results or events to differ materially from those expressed or implied by such forward-looking statements. Except as required by the applicable securities laws, Corebridge is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change and you are cautioned to not place undue reliance on any forward-looking statements. Additionally, today's remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on our website at investors.corbridgefinancial.com. With that, I would now like to turn the call over to Mark and Chris for their prepared remarks. Marc? Marc Costantini: Good morning. and thanks for joining us. I'd like to formally welcome our CFO, Chris Filiaggi, to the call as well as our Chief Investment Officer, Lisa Longino, I'll begin this morning with a recap on the strategic rationale of our transformative merger with Equitable and an update on progress we've made to date followed by some observations on the current market environment and our corporate business model performed in the first quarter. I'll also spontalize some of the actions we're taking to win with customers. Turning to Slide 3, we are bringing together 3 outstanding franchises to create a diversified financial services company with leading positions in retirement, life, wealth and asset management. Together, we will have more than 12 million customers and $1.5 trillion in assets under management and administration. Our combined distribution capabilities will be formidable. We will have a large multichannel distribution ecosystem to reach the broadest possible customer base. Our enhanced scale will drive significant synergies, $500 million in expense synergies plus meaningful upside opportunities from additional revenue tax and capital synergies. Our greater scale should reduce our cost of capital to help us provide better customer solutions at lower cost, allow for greater investment and strengthen our ability to attract top talent. The transaction will allow us to further diversify our source of income, which helps provide resilient earnings across market cycles. Our growth prospects will be considerable across the combined company's businesses with our integrated model allowing us to capture the full value chain. The balance sheet of the combined company will be robust. By 2027, we expect earnings to exceed $5 billion per year, cash generation will be strong and consistent, topping $4 billion per year. The merger will be immediately accretive to both earnings per share and cash generation. both of which should increase to 10-plus percent by year-end 2028. Turning to Slide 4. The upside potential for all our businesses will be strengthened with the merger. In individual retirement and life, we will have meaningful revenue synergies. For example, our fixed and fixed index annuities will complement Equitable's annuity offerings and their variable universal life product will complement our life offerings. Together, we will be a leader in the [indiscernible] group retirement space with a large workplace distribution force. We will have more capabilities and balance sheet capacity to support our growth in institutional markets. In the combined company's asset management and wealth management businesses, Alliance Bernstein will have nearly $1 trillion in AUM and we'll have over 5,000 advisers to drive growth. We are making good progress on steps required to close this transformative transaction. We already have completed a vast majority of our regulatory filings, our Form S-4, including the shareholder proxy statement will be filed with the U.S. Securities and Exchange Commission shortly. We believe the shareholders of both companies will approve the transaction, given its compelling rationale. The executive team of the combined company has been determined and will be communicated soon. I'm confident we have the right leadership to execute on all our strategic objectives. Both companies have established integration management offices that are hard at work planning a seamless integration that captures the full value of the synergies. Finally, an important update on the timing of share repurchases. As we indicated in the 8-K filed earlier this month, we are exploring undertaking share repurchases prior to the closing of the merger including during the period from filing the preliminary proxy with the SEC until we mail the final proxy to shareholders. We also continue to expect another opportunity when we can repurchase shares after the shareholder board December, subject to normal blackout periods. Any remaining capital we plan to deploy will be facilitated post close likely through an accelerated share repurchase. Turning to Slide 5. Corebridge demonstrated strong performance driven by favorable industry demographics and sustained customer demand in the first quarter. Despite facing heightened market volatility and competition, our disciplined approach continues to deliver solid results. Our wide array of product and service offerings enable us to meet a wide variety of customer needs, enhance the stability of our financial results and allow us to allocate capital where returns are the highest. Our powerful balance sheet continues to give us financial flexibility and our disciplined execution shows up in everything we do. Our overall performance in the quarter was strong. Excluding variable investment income and notable items, year-over-year operating earnings per share were up 13% and adjusted return on equity was up 120 basis points. The foundation of our success is winning with customers and I include our distribution partners and plan sponsors in that category. We were proud to be ranked #1 by J.D. Power for partner satisfaction and annuity distribution. This validates our strategic focus on the adviser experience and our goal of being the easiest firm in the industry to do business with. We also continue to see strong momentum in our Group Retirement NPS and with planned sponsor satisfaction rising year-over-year. I'll have more to say about how we're investing in customer experience in a minute. In Individual Retirement, we delivered strong sales of $4.3 billion, while maintaining pricing discipline and consistently positive net flows. The market outlook remains positive -- the Peak 65 surge is continuing with another 4 million Americans hitting that retirement milestone this year. In Group Retirement, we continue to see the transition from a spratifee-based business. Fee-based earnings are approximately 60% of the total with advisory and brokerage assets rising to all-time highs, growing 14% year-over-year, benefiting from record levels and net inflows. In life, excluding VII and seasonally higher mortality, we continue to deliver earnings within our guided range, reinforcing a stable earnings for the company. And in institutional markets -- the underlying business continues to grow with an 18% increase in reserves. We issued $1 billion of guaranteed investment contracts in January, including our first-ever Canadian dollar-denominated GIC. The pension risk transfer pipeline remains healthy with greater activity expected in the second half of the year. I believe the key to our success will be a relentless focus on putting the customer at the center of everything we do. Our road map is simple: to deliver a differentiated customer value proposition, be the easiest company to do business with and maintain a world-class distribution. That is how we generate more value for customers and investors alike. As I said on my first earnings call 3 months ago, we're going to make the investments needed to improve the customer experience. Those efforts are well underway at Corebridge in 2026. A few highlights. We've launched a customer council steered by the executive leadership group and comprised of cross-functional senior leaders from across the company. They are showcasing key initiatives, sharing best practices, identifying quick wins and above all, ensuring we maintain a customer-first mindset. Across our retail operations, we're modernizing how new business is onboarded by further enhancing digital submissions, strengthening upfront suitability checks and improving real-time application status, all of which has removed uncertainty, delay and friction from the process. We've launched a new wealth management digital experience last month that allows clients to seamlessly navigate their product and service relationship with us and stay connected with their financial adviser. We're moving permanent life products onto our digital submission platform, and we're launching a new payroll platform that makes it easier for group retirement plan sponsors to integrate their payroll data with us. In closing, we're excited about the future of our business. Externally, powerful demographic tailwinds are creating a large market opportunity. Internally, our customer-first mindset and emphasis on operating at speed will enable us to capture a significant share of that opportunity. The result will be a company that delivers significant growth in earnings per share cash generation and shareholder value. This is true of Corebridge today and will continue into the future as a combined company. With that, I'm pleased to turn the call over to Chris. Christopher Filiaggi: Thank you, Marc. I'm excited to join today's call and will provide further color on our performance for the first quarter. Starting with Slide 6. Our results this quarter underscore the strength of the Corebridge model, consistent growth and active capital deployment balanced by expense control and portfolio optimization. Performance was largely in line with our guidance from the fourth quarter, highlighting our diverse stable earnings patterns and agility and capital management. We reported adjusted pretax operating income of $629 million and earnings per share of $1.05. The first quarter results were impacted by underperformance of our variable investment income. Excluding the impact of VII and notables, EPS increased by 13% year-over-year, demonstrating the underlying strength of our core businesses. VII returns were impacted by several components including positive alternative investment returns, offset by unrealized mark-to-market losses on investments accounted for at fair value with changes in fair value reported in adjusted pretax operating income. Adjusting for long-term alternative investment returns and notable items, we delivered a run rate operating EPS of $1.17, representing a 9% increase year-over-year. Finally, adjusted ROE was 10.6% or approximately 12% on a run rate basis. Excluding VII and notables, this reflects a 120 basis point increase year-over-year, underscoring our commitment to consistent profitable growth. Turning to Slide 7. Our businesses continue to evolve, delivering highly diversified sources of earnings and strong, stable cash generation regardless of the market environment. Our core sources of income, excluding alternatives and notable items, increased 1% year-over-year with some variation in the underlying components. Fee income increased by 9%, driven by growth in assets under management and advisory alongside favorable market tailwinds. Spread income increased by 1%, which is in line with our guidance around the earning of the majority of the 2025 fed rate cuts. To put that in perspective, had those rate cuts not occurred base spread income would have been approximately $20 million to $25 million higher. Underwriting margin decreased 2% year-over-year due to exceptionally favorable mortality in the first quarter of 2025. Lastly, general operating expenses were in line with our expectations. This reflects ongoing investments we are making in our platform, as Mark highlighted earlier, as well as typical first quarter seasonality. Looking ahead, we remain fully committed to disciplined expense management and improving our operating leverage over time. Turning to Slide 8 and looking at our capital position. Our balance sheet continues to be healthy and strong. We ended the quarter with over $1.7 billion in holding company liquidity, supported by our U.S. insurance companies distributing $925 million of dividends in the quarter and our level of liquidity exceeds the holding company's needs for the next 12 months. Capital return to shareholders reached $1.4 billion in the quarter. This included the completion of our planned capital returns related to the VA reinsurance transaction totaling $1.8 billion. Excluding those VA reinsurance proceeds, we maintained our payout target with a payout ratio of 88%. Lastly, our insurance companies remain well capitalized with capital ratios exceeding our targets. Next, I'll review a few highlights from each of our businesses. The details of which can be found in the appendix to our earnings presentation. These results exclude the impact of notable items and variable investment income. Starting with Individual Retirement, we continue to be very positive about this business. The outlook is backed by strong fundamentals and demographic tailwinds that continue to drive demand for our retirement solutions. Premiums and deposits were $4.3 billion, demonstrating growth both sequentially and on a year-over-year basis. Leveraging [indiscernible] first quarter industry projections, we maintained our market share of total annuity sales year-over-year. This includes our newer Vila product, highlighting our success with key distribution partners. Net flows into the general account remained positive at approximately $0.5 billion, contributing to continued growth in the underlying business. We saw surrender activity in line with our expectations. This reflects fixed and index annuities reaching the end of their tender charge periods. As we look at the full year, we reaffirm our estimate for big spread income to be approximately $2.55 billion. While we continue to see some spread compression, we still expect it to level off by the end of 2026, assuming the current market outlook and 2 additional Fed rate cuts. Lastly, AP TOI increased 1% year-over-year, supported by growth in spread and fee income, highlighting the growth in the underlying business. Turning to Group Retirement. We are seeing this business evolve as a growing percentage of the American workforce is reaching retirement age. This demographic shift and the steps we are taking because of it are fundamentally changing how we generate value, moving us toward a more diversified and resilient earnings profile. Continued momentum in our advisory and brokerage initiatives resulted in a record level AUMA and net flows of over $300 million in the first quarter. The strong performance is directly related to our efforts focused on the adviser experience and operational ease of doing business, which is delivering early measurable wins as we continue to invest in the platform. APT line decreased 17% year-over-year. This reflects lower spread income, partially offset by growth in fee income. This transition is intentional. As our clients move into the decumulation phase, we are seeing a natural mix shift away from the spread-based products and towards fee-based income. This aligns with our broader strategy to emphasize capital-light earnings, which now account for nearly 60% of group retirement earnings. Our Life Insurance business delivered another strong quarter, in line with the guidance we provided back in the fourth quarter, reflecting higher seasonal mortality in the range of $15 million to $20 million. This performance is consistent with both our historical experience and seasonal expectations for the start of the year. We generated $850 million in sales this quarter, in line with first quarter expectations. [indiscernible] declined 5% year-over-year. While mortality trends are favorable and aligned with first quarter expectations, they were below the exceptional mortality experienced in the prior year quarter. Going forward, we remain confident in the steady cash flow and stability this segment provides for the broader portfolio. Institutional markets continues to be a consistent growth engine with both underlying reserves and total earnings trending upward. First quarter sales included over $1 billion in GICs maintaining the consistent momentum we've seen highlighting our ongoing commitment to the GIC and FABN market. APT OI increased 15% year-over-year. This growth was underpinned by an 18% expansion in our reserves and a 13% increase in assets under management and administration. Lastly, a comment on pension risk transfer. Sales in this space are inherently episodic. While we expect volume variability from quarter-to-quarter, our pipeline remains strong. We anticipate an uptick in activity we move into the second half of 2026. Next, I'd like to take a moment to address recent headlines regarding the life insurance industry and its investment portfolios. Corebridge has a long-standing history in private placements recognizing that the vast majority of companies today are privately held rather than public. We are able to utilize this asset class to achieve diversification across our portfolio that isn't available through public issuance alone. These assets are a natural fit for our liabilities and allow us to not only capture an illiquidity premium, but to do so with the protection of financial covenants, while maintaining a high-quality investment grade profile. Corebridge maintains control over all aspects of our asset portfolio and risk profile, whether our private debt is originated internally or externally, we maintain rigorous ongoing processes to underwrite, reunderwrite, rate and model our private assets. Out of the $284 billion statutory investment portfolio, $49 billion is in private debt, which is a high-quality diversified book, where 91% of the assets are rated investment grade. To provide further context on our private debt, I'll address a couple of recent areas of focus, beginning with private credit over what we categorize as middle-market lending. Our allocation here stands at $3.3 billion, representing only 1% of our total portfolio. These investments have attractive risk-adjusted returns and we continue to expect [indiscernible] losses in the middle market lending will be yield adjustments and not credit events. Further, within the middle market allocation, our debt exposure to the software sector is less than $300 million and all of it is currently performing. Another area of focus in the financial press has been BDCs, like middle market lending, this represents a small part of our portfolio where we hold $1.7 billion of debt issued by BDCs. Our entire exposure consists of debt instruments with no equity holdings in these originations. We Generally, we are a senior lender in these investments and the average asset coverage ratio is approaching 2x, meaning significant asset impairment would be necessary to impact our position in the capital stack. Given our current exposure, robust management processes and the alignment of our liabilities, we remain very comfortable with our positioning. Our rating migration has been net positive over the last 4 years, and we routinely perform sensitivity testing to ensure we remain well capitalized across all market cycles. In clothing, we remain focused on maintaining a strong balance sheet while generating growing returns to shareholders. Our guidance laid out in the fourth quarter remains largely in place, and we continue to believe 8% to 9% is the appropriate expectation for alternative investment returns over the long term although we do anticipate continued market-driven headwinds based on the current environment. With that, I will turn the call back to Isil. Isil Muderrisoglu: Thank you, Chris. As a reminder, please limit yourself to one question and one follow-up. Operator, we are now ready to begin the Q&A portion of the call. Operator: [Operator Instructions] Your first question comes from the line of Suneet Kamath with Jefferies. Suneet Kamath: Marc, I wanted to start on distribution. Just curious what you're hearing from your distribution partners post the merger announcement, is there anything that we should be thinking about in terms of sort of limitations on how much product they want to get from any one counterparty? Or is that not really a concern? Marc Costantini: Yes. Suneet, thanks for the question. I appreciate it. It's actually a very good question because as we were going through the process with Equitable when we're looking at various levels of synergies, we did challenge ourselves in terms of what I guess I would refer to as dis-synergies. And as we announced it, and both firms obviously reached out to all of our distribution partners. I must say to to our delight, we haven't heard any, I would say, apprehension about the depth and breadth of the the presence will have across these channels. And part of it is because the suite of products, both companies are bringing to the merger are very complementary. So -- so if you even pick the largest distributors on each side, the overlap is de minimis, so and the overall volume and -- at the end of the day, we feel strongly, and this is a strong premise around this transaction that scale matters and the manufacturing depth and breadth matters. And it's easier, we feel for an adviser for he or she to learn a handful of stories and be comfortable dealing with a handful of manufacturers, but when it comes to obviously, the distribution side, but there's a servicing side as well and how they live the brand. So we feel that's value add. So the answer to your question is we haven't heard of any, and we were obviously very pleased by that outcome. Suneet Kamath: Okay. That's helpful. And then, I guess, I just want to make sure we're thinking about this right. When you talk about the $4 billion of cash and the $5 billion of earnings, mean that would sort of imply free cash flow conversion of like 80%, which seems high. So I'm assuming that $4 billion of cash is sort of before holdco expenses, but -- just wanted to get a little bit more color on how you're coming up with those numbers and what they include. Marc Costantini: Yes. Thank you, Suneet. Yes. So the short answer is, you are correct. And that's kind of the pro forma that both firms put out there when we obviously communicated this transaction a month or so ago. And so I'll leave it at that, but that's right. And that's pro forma guidance of where we expect the obviously, operating income to be in the flows, obviously, from the operating entities. And and it reflects, obviously, the very attractive synergies we'll get out of the transaction as well. Operator: Your next question comes from Alex Scott with Barclays. Unknown Analyst: First on how you envision health management strategy evolving over time? I know you're not ready to give revenue synergies, that kind of thing. But Mark, I've heard you talk about Wealth Management. I know Equitable, I think, is maybe even gotten a little further down the road with their build-out of wealth management. How do you expect to leverage that? What are you planning to do on that front, even if you could just provide something more qualitative. Marc Costantini: Yes. Alex, it's great to take here, Voice. So you're right. We -- and the collective we are very bullish on the wealth management space. I think if I objectively look at what Equitable advisers has done and what they've done with that business and the margins and the accretion and the growth of the margins over time and the volume and the AUMs, I think they have wonderful story. And obviously, they have an operating model that's proven to be successful. And they've got 4,500, 4,600 advisers, obviously, in the market. So on our side, I'm going to around about 1,000 advisers we have as part of that business. And we are investing a lot on the infrastructure there to, as you know, cross-sell and upsell, obviously, into those plan participants, and we feel there's a great opportunity there. I think we mentioned in the last call that we think that's upwards of $30 billion of upside there, and we're as Chris mentioned in his remarks, we are harvesting that opportunity right now. Having said all that, your implicit observation there that their platform is more mature and advanced is true, right? And -- so in the category of the devil is in the detail that we are working through now and between now and close that into after close, how we bring both organizations to bear and ensure that 1 plus 1 equals 3, but we are very sensitive to the fact that we're talking about individuals that are larger have clients that want to grow their own book of business opportunistically, and we are being obviously attentive to that as we bring the 2 organizations together and it's too early to tell exactly what it looks like. But we are very, very, obviously, bullish on that business as we look forward. Unknown Analyst: Got it. Helpful. Second one I had is just on artificial intelligence and investment that you're going to make there over time. I heard some of the comments in your introductory commentary around the initiatives you've already got going on some of the digital interfaces that I think you mentioned. How are you coordinating those efforts with Equitable? I mean how quickly can you start working together on AI adoption just given -- I know this transaction probably takes some time to get the closure and so forth, but that a lot of these initiatives are taking shape very quickly in the background. Marc Costantini: Yes. Thank you. That's obviously a very important topic, and I'll give you 3 perspectives. The first one is that each firm is operating independently between now and close, right? So let's assume closest towards year-end. What we do now is compare notes about the history and what we've done and not and develop plans as to how we come together and to integrate the firm, but we operate very much independently until they close. So some of the initiatives that they have ongoing will, I'm sure, continue and some of that we have, which I'll talk about in a second here, we'll definitely continue. We are being thoughtful though if there's overlap in some of these initiatives so that we identify, let's say, the go-forward platform or approach so that when we plan for integration, we reflect that. So the second point I'll make is that, yes, we are accelerating our investment and deployment of AI capabilities. And I want to highlight the point that we want to invest in differentiated outcomes. And what I mean there is that we want to invest heavily in the front end and how do we enable and accelerate the distribution of our products and services to our various channels. And I say this by wanting to arm and facilitate our distribution to provide a better service and guidance and identify faster, the better clients for the products and services that we offer and help people retire with. So that will be -- and that is a very key focus of ours. Then it's enabling a differentiated, I would say, brand and how they live our brand and that comes to the tail end servicing and claims. And I would say that a simple example of what we've deployed over the last few months is digital agents that help our group retirement plans manage their affairs. And as you can imagine, when people call and want to do certain things with their group retirement plan, there's a lot of complexity for the servicing individuals to get to the right information and get the right outcome, and we've got digital agents there now helping surface the right characteristics of every plan and contract that individual has. So that would be one example of how we've deployed it. And I think there will be more as time goes on now. The one aspect, and you've heard me say this last quarter is that obviously, winning with customers and putting the customer at the forefront of everything we do is very important. And obviously, the digitization and implementation of thoughtful AI to our platform will be a key part of getting to that outcome. Operator: Your next question comes from Tom Gallagher with Evercore ISI. Thomas Gallagher: One question on the deal then a separate question on investment exposure. The -- so my question on the deal is the revenue synergies. And Marc, I know you're you're still getting through more detailed estimates for what these opportunities represent. But the fact that you're highlighting it as one of the parts of the strategic rationale for doing the deal, is it fair to assume that this could be material to earnings. I'll define that as 5% or more as a percent of earnings when we look to 2028 and beyond in terms of the potential opportunity here. Or is it more modest? I just want to get a broader sense because I think this is part of the strategic rationale for doing the deal. Marc Costantini: Yes. So thanks for the question. I guess there will be ample revenue synergies that we expect on our transaction. I think we obviously guided towards the $100 billion of assets coming from the corporate side of the equation to AllianceBernstein over time. And that will be from the general account and obviously, the separate account assets. There's a lot of cross revenue synergies about us, corporate selling some of our fixed annuities and fixed index and the resented the accruable advisers channel, which I think -- you've heard, obviously, that there's billions there being written that we have access to. There's a VUL product on their side that was on our design table that we'll be able to introduce and then there's the cross-sell and upsell into these group retirement plans that I was just talking to [indiscernible] actually, I think it was Alex asking. So -- but -- so those now -- it's too early to put a number on it. I wouldn't want to say above or below your number and and provide guidance that we haven't worked through at this point. I think as Robin and I have been mentioning to all of you, we will have an Investor Day in the first half of next year. And at the top of the list or as part of the key aspects of that will be to provide additional guidance on this revenue synergies. So far, obviously, we've indexed on the expense synergies given they were easier to identify as we went through the process, and that's what we're guiding to. And -- but there will be obviously some capital tax and revenue synergies as well tied to the transaction, which is why -- we think this one -- this transaction is obviously appealing on across many dimensions, including this one. Thomas Gallagher: Okay. Fair point. I guess my question on the investment side is -- I appreciate the disclosure on the BDC debt, the $1.7 billion. We've gotten a number of questions on that. And can you -- can you just give a little more clarity on -- I think there's this perception out there that since a lot of the BDCs own risky debt, 10% plus yielding pipe loans, single B quality, how certain investors sort of equivocate that to that must be the risk for that exposure. And I think it's not. But can you talk about how you think about that $1.7 billion of BDC debt, is it all investment grade? I assume it largely is, but how that's very different than the underlying exposures that the BDCs have themselves? Marc Costantini: Yes. Tom, I was going to have Lisa, who's on our call and give you context there. So Lisa, please? Unknown Executive: Okay. Tom, it's nice to meet you. Thanks for the question. Look, the way we think about BDCs is, first and foremost, we look at the larger ones. We look at ones that could be public or really the majority of ours are nontraded. So given they're closed-end funds, they are regulated under the 40 Act, and they have some regulatory covenants in there that help. We view it as the portfolios are highly cash generative diversified pool, first liens with -- I mean, the conservative leverage in the low LTVs. And we spend a lot of time looking at that. And our asset managers will go in and regularly look at the portfolio monthly, how is it doing? What does the cash look like? What is picked, what trades are they doing because it is loan investments and there is leverage at the portfolio of companies, we spend a lot of time doing that. And the risk mitigants really are a significant portfolio diversity in the low LTV and even when we look at stress cases there, it does point to some solid recovery through the unsecured BDC debt because of the structuring. So -- and we really -- we constantly review the asset coverage ratio. So -- and all of this is investment grade, solid investment grade. And as Chris mentioned, we don't have any equity exposure. Operator: Your next question comes from Ryan Krueger with KBW. Ryan Krueger: I think your Individual Retirement sales were roughly flat year-over-year. And I think you said market share was pretty consistent. So that suggests that the industry was also about flat. Just any commentary on why you think sales have slowed at this point. I think the rate environment is still pretty similar to what it was. We obviously have the continued aging of the population. So I just was wondering if you had any perspective on why you think annuity sales have been slowing a bit after the big uptick in the last several years. Marc Costantini: Yes. Ryan, it's Marc. So thank you for your question. Yes, I think as you mentioned, our sales are relatively flat year-over-year and quarter-over-quarter across our individual retirement side. I would note that we continue to have very robust activity in the individual retirement side on [indiscernible] side. And as you mentioned, we continue to believe that the demographic trends are very positive and a tailwind, right? We don't have yet the Q1 market share data, right? So when we guide that we've maintained our share from our perspective, it's based on us accumulating data from our distributors and all that. But our gut tells us that actually our share will have somewhat increased, which which does mean as well, obviously, that the flows across the industry maybe have tempered a bit. I feel that, that is very temporary. And we feel, obviously, here at Corebridge that we purposely obviously have a depth and breadth of product for different obviously, solutions for the Americans as they accumulate savings for retirement and then draw on retirement income, right? And we believe there's robust demand and we don't make a quarter a trend or a conclusion as to what the direction of travel, and we feel that there's still a lot of growth in that space overall. So -- but more to come as all the actual stats come out is what I would say as well. Ryan Krueger: And then just had a question on the Japan commercial partnership you're pursuing with Nippon Life. When you think that could become operational? And how many of an opportunity do you think that could actually be for the company over time? Marc Costantini: Yes. It's a very good question. And we have a very rich and ongoing discussions with Nippon. As you know, and you -- you've mentioned here, Nippon is a very important strategic investor in our firm. There will be obviously a or investor in the go-forward firm. And that stems as well from the core manufacturing opportunities we have with them. Like -- as you've heard me say many times, like brand and distribution matters and you need world-class and they have that in spade and Japan. And -- so we are working on co-manufacturing products. Their economy there is reflating. There's a need for the same products we sell. Having said so, they have a process as well as they evaluate what goes through their distribution channels and what's right for the end consumer there. And we're trying to develop products with them that meet those needs and then they got to be filed. They got to be approved, and they got to be deployed. So I would say that if there's anything that would be announced at a through the course of 2026, if that happens, it takes at least another 9 to 12 months from then to actually have something in market, right, because of the nature of the regulatory process and the finding process and making sure it gets on the appropriate distribution shelf appropriately. So -- so that's kind of the frame I would give you. But we're working in collaboration with our -- obviously, with Nippon there, and I am cautiously optimistic that there will be something that we will do with Nippon over the course of time, but that's kind of the time line. The other thing I'll say maybe is that -- if we look post merger, we have obviously some great asset management, to Alliance Bernstein, and they have a great global presence and that is another part of the equation where we think there's great revenue synergies eventually as we partner across the world. Operator: Your next question comes from Wes Carmichael with Wells Fargo. Wesley Carmichael: First question was on individual retirement. Just on the surrender rate in fixed annuities and FIA that ticked up a little bit sequentially. So just curious if you think that's going to continue to kind of stay that level from here? Was there a bit of maybe just volatility in the quarter from product exiting surrender charge. And did you see any elevated surrender charge income come through in the quarter? Marc Costantini: Yes. Thank you, Wes. I appreciate the question. So I think as we've guided in prior quarters, there is some business that is approaching the surrender charge period across our fixed annuity and fixed connect annuity typically, those products have a 5- to 6-year kind of surrender charge period, and they're getting to the end of that point. So over the course of the '26, '27 and '28, we do see spike in that business maturing, and we would expect to see, obviously, more redemptions out of that just natural behavior and maturity of the block. And -- we do expect and always strive to have net positive flows, right? And -- to the question earlier about the $4.3 billion of flows in a quarter, I'd like to think of our business as a $5 billion of quarter gross flows through various cycles, right? So you're looking at a circa $20 billion annuity book on an annual basis. And we feel that the maturity of the block and as business flows out, that will generate a steady stream of net positive kind of flows to our book. And that's how I would think about it versus looking at any given quarter, but that's -- so we do expect a heightened. But it's natural maturity of the business, not necessarily any type of unexpected behavior from our policyholders. And -- so -- and there's no -- to your -- I think the other question you had was around surrender charge revenue. There's no unexpected, I would say, revenue or headwind tied to that in our business right now. Wesley Carmichael: Got it. That's helpful. And I guess just second question on the insurance company cash distributions in the quarter. I think that was nearly $650 million when you exclude the VA proceeds. And that's up nicely sequentially and year-over-year. Do you kind of view that as indicative of a new run rate? Was there anything in the quarter that maybe favorably impacted that? Marc Costantini: Yes. So I think I'll offer a comment, and then I'll hand it to Chris. I think we had heightened flows from the insurance companies in Q1, and I would expect the run rate to be lower. But Chris, maybe you want to give some color there? Christopher Filiaggi: Yes, sure. Thanks, Wes. Appreciate the question. So first, let me reiterate our guidance on the insurance company dividends. So our expectation was that we would have insurance company distributions at around $2.3 billion in 2026. That does include the dividend to the final $300 million from the Benra Bulls transaction. So that leaves us with about $2 billion of normalized insurance dividends. We did accelerate a portion of our dividends in 1Q. So directionally, you should expect dividends to be lower for the rest of the year, more in the $450 million to $500 million range. Operator: Next question comes from Cave Montazeri with Deutsche Bank. Cave Montazeri: Both of my questions are going to be on the Marc's comment on making [indiscernible] the easiest company to do business with. The first one is on this newly created customer council, the initiatives that they're working on -- are they mainly digital initiatives? Or does that go beyond technology? And maybe can you share some of the quick wins you've identified that you want to start working on next? Marc Costantini: Okay, Cave. I appreciate that question. And we are striving to be the easiest company to do business with. So I appreciate you spiking that out. And yes, so when we launched and rolled out the win with customers, I would say that win with customers was always part of the fabric of corporates and AIG Life and Retirement business. And I think the separation, obviously, to precedents and priorities. So it was always there in the DNA. And when we launched it internally and we communicated this broadly to our employees that we had a mentsense of excitement across the organization to to pivot to and pivot back to this kind of focus. So -- and it was as part of that, that this idea of forming a customer council is that we have a significant, I would say, members of our senior leadership for participating. So now what are they up to -- so they're sharing best practices, they're sharing ideas, they're implementing, to your point, right? And I would say that you saw in some of my prepared remarks there, that we've deployed capability and a lot of it is through digitization to answer your question, right? A lot of it is how do we make the lives of our distributors, of our plan sponsors and our customers easier when they do business with Corebridge, how do we make it more predictable. So -- and I think as you saw there, we are deploying some digital assets and new infrastructure to help employers through payroll deductions and distributions on the Group Retirement side. We are facilitating more straight through processing on the life insurance side, and we are digitizing some of the interactions on the annuity side. And that I'm getting over a cold here, but -- so that's kind of the things that we've been doing, I guess, I would say, Cave. Cave Montazeri: Great. And then my follow-up, somewhat linked to this is, and obviously, merging with Equitable is going to help you be an easier company to do business with, you have more products, et cetera, to offer. But there could also be a bit of a nightmare in terms of integrating the different platforms, IT systems, et cetera. So do you guys plan on kind of trying to run all of the back office for like a better terms separately for a while and just to make sure nothing breaks. Or is there a plan to really just integrate everything under one umbrella as quickly as possible in order to just really optimize the data that you guys have and that they have and really just offer kind of the best experience for the customers going forward. Marc Costantini: Yes, Cave, that's another very good question. And I would say when we worked very closely with our Equable colleagues as part of the identification of the $500 million of run rate synergies, kind of platform kind of what we did with the platform, how they came together and how we pick the best platform on a go-forward basis to best serve the customers was a key part of the -- some of the outcomes here. And there's a lot of dollar investments tied to that, that were planned for. And the teams right now are working through the details of that. And I think as with anything that comes with this type of territory, every business and every function and every infrastructure will be a bit different. And the idea will be to enhance the customer experience, but not be disruptive to the customers as well, right? So I think it's kind of the -- it will depend -- depending on the business and the product line, how we approach it. But the spirit of what you're saying is definitely what we're aiming to achieve over time. But it won't happen day 1, as you can imagine, given the nature and intricacy of the model we need to operate under so. Operator: The next question comes from Joel Hurwitz with Dowling & Partners. Joel Hurwitz: I wanted to touch on variable investment income. Can you just provide some color on on what flows through other variable investment income that was negative in the quarter? And then are you seeing any rebound thus far in Q2? And maybe talk about what you're expecting for VII in the second quarter. Marc Costantini: Yes, I'll have Lisa answer that one. Unknown Executive: Joe, nice to meet you. Thanks for the question. So as Chris went through on VII, we -- in the quarter, we had a bit lower in [indiscernible] in the non-- that was really just nonrecurring marks on otherwise fixed income assets that are held in vehicles. And so it gets marked through operating income versus OCI. That has reversed. So we're not expecting to see that again. In addition, as we look forward into second quarter, in general, we're seeing VII slightly better. We still think second quarter could be below expectations, just given the volatility in the market. Joel Hurwitz: Got it. That's helpful. And then just on buybacks, you have a nice liquidity cushion at the holdco versus your needs. I guess just any commentary on your willingness to significantly draw that down in this open window and particularly if AIG comes to the market with the rest of its stake? Marc Costantini: Yes, Joe, it's Marc. Thanks for the question. So as you noted, obviously, we did $1.25 billion of buybacks in Q1 before, obviously, we went quiet because of the the proceedings that took place with Equitable. As I mentioned in my remarks and as we -- as part of our 8-K filing not too long ago, as we file our proxy, and we expect to later today, we do plan obviously in concert with Equable to go back in the market to do buybacks between the, obviously, the filing and the mailing of the proxies. And we won't guide us to the amount we'll do, obviously, in the market. And -- and we can certainly not speak to what AIG will be -- I know their CEO, I guess, and as part of their year-end call said that the they would like to be out of their holdings of Corebridge by year-end, but we have no insight otherwise, to provide here and know would it be our place to do so. So -- but we -- as we said, we will be active in the market between the the filing and the mailing. And obviously, we intend to be in the market as well after the vote later this summer. So -- and we do have liquidity to deploy, as you say. But we've guided obviously to how much we would do over the course of the year, and we're going to hold to that guidance right now. Operator: Your next question comes from Jack Matten with BMO Capital Markets. Francis Matten: Maybe one on group retirement. I know it's been in transition. I guess, can you help us frame the time line for when Corebridge expects earnings to stabilize in that business? Are we getting close to that point now? Or do you think it's more likely maybe after the merge closes and you see some synergies from that combination? Marc Costantini: Jack, thanks for the question. Our expectation is that there's another 12 to 24 months for this transition to take place. So we we feel that we are trying to pivot this business and are providing this business from fee spread spread business to fee business. And we're seeing green shoots there. As Chris mentioned in his prepared remarks, obviously, we had some very good flows into that business. We're getting to the $20 billion point in terms of fee-based businesses. But there's still room to make headway there. And obviously, the spread level income on that business is heavier than the fee-based, which is why it creates that, obviously, headwind that will take 12 to 24 months from here to work true. To your comment and question, as we try to make that dividend cross-sell and upsell to the participants. Obviously, the merger presents opportunities here in terms of the discussion we had earlier about the Equitable advisers and teaming up with that platform and those individuals to further penetrate our plans. Now -- do I expect that to happen day 1 after the close, No, right? It takes some time for the teams to get together as we mentioned earlier, before we close, we operate independently, right? So we can plan, but we can execute. So -- so I suspect that execution will take place in the first half of 2027, and then we see the green shoots appear afterwards across the various platforms, including this one. So that's kind of our perspective on that. Francis Matten: That's helpful. And then maybe a follow-up on the annuities marketplace. I guess, is your view that the competition is still intensifying in any of the product categories where you currently focus? Or do you think the market is settling in to do a new equilibrium at this point? And then maybe gives you kind of cogen some spreads stabilizing by the end of this year. But I think you said earlier that higher surrenders could potentially persist into next year or 2028. Just looking for any color there. Marc Costantini: Yes. So sure. So 2 perspectives there in your question. The first one was the -- how intense the competition is. And I always find that a very interesting question because I never felt any quarter there was no competition. So the intensity of the competition ebbs and flows depending on who wants to pick their spots where. And you are correct that there's -- at the low end of the curve, there is a lot more capital being deployed there. And as you in our sales, we're being judicious on how we allocate that capital, and we typically redeploy it to our institutional markets business, and you saw us do obviously $1 billion plus of gigs in Q1. And that's how we kind of judge the allocation of capital, but that's what I would say about the market competitiveness of the business. In terms of spreads, we continue to believe that our spreads on the IR business will level off towards year-end. And then given where we are in the interest rate cycle and where spreads are that we will basically expand from that point on. So we still expect, let's say, this year and or thereabouts to be where they would level off and then start growing and we would still guide to what we have set out there last quarter about that business as well. Operator: Your next question comes from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Given the combined scale of Corporate and Equitable and the investments you plan to make in wealth. Is it possible to accelerate the goal of making the wealth business self-clearing? If I'm recalling correctly, this would add quite a bit of margin and I'm estimating over $100 million of annual wealth earnings. So any color you can provide there on the plans? Marc Costantini: Yes, Wilma, thanks for the question. I think you're primarily referring to Equitable's Wealth Advisors business that is not self-clearing yet, and obviously, scale gets you there. And I'm not going to offer a view yet. I'm not -- we're not informed enough to really have any view on that. I understand the economics we're referring to and the potential benefits, but we're not ready to guide to that. And I will wait again to what we do tied to any Investor Day or [indiscernible] about our view on that business and how we think we will continue to grow it. And as I said -- as I mentioned earlier, we are very, very bullish on this business and it's one that's core to our future. Wilma Jackson Burdis: Makes sense. And -- we looked at the commentary that you all have given on capital and tax benefits and calculated that you sort of back calculated it implied about $500 million to $1.5 billion of capital freed up, just the synergies between the 2 companies. Just wanted to check if that estimate is in the ballpark or if there's anything that we are missing or any other directions on [indiscernible]. Marc Costantini: Yes. thank you for that follow-up. I would say that we have not guided to specific capital and tax benefits. I think we've guided to the fact that we think we'll have 10-plus percent EPS accretion run rate after 2028, which will be a combination of factors, which will include those you're mentioning. But more to come on all of that, including the revenue synergies, and I would point back to the discussion with Tom earlier about Investor Day and Robin and myself and others coming to all of you with more specifics across all of that. But we do firmly believe the transaction will be double-digit accretion over the next 24 months, for sure. Operator: Your next question comes from Mike Ward with UBS. Michael Ward: So I was just wondering about kind of the Corebridge brand in the merger scenario. It's certainly younger than the equitable brand. Just wondering based on what you guys saw coming out of AIG, thinking through any kind of shock lapse. Is that kind of done with? Or could there be a temporary uptick post-merger. Marc Costantini: Yes, Mike, thank you for the question. So yes, so we have decided that we are going to go forward with the [indiscernible] brand post merger. Obviously, the [indiscernible] has an incredible history in legacy, a 167-year-old brand. We are obviously going to continue to maintain and invest in the Alliance Bernstein brand, on the asset management side, that brand itself has an incredible cache across all our markets. And which means that we are moving on from the Corebridge brand. And it was not that easy of a even though it's a 3-, 4-year old brand, a lot of people associated with Corebridge had a lot of pride in the brand, and we're a purple very proudly. I think -- but having said so, it's a 3-, 4-year old brand versus a 167-year-old one. So the right decision is to move forward with the [indiscernible] brand, which we will do probably as a combined company. So -- and we don't expect any business ramification out of bringing the brands together, and we actually think it will be value add to represent the collective firm with Equitable and go-forward basis. Michael Ward: Okay. And so -- and then on the -- these proposed changes to the RBC factors for CLOs and collateral loans. Just I was wondering if you guys had any early reads on the potential impact for you? Unknown Executive: Mark, this is Lisa. Nice to meet you. Thank you for the question. Regarding the changes for CLOs, where is going to have incrementally more capital charge for the lower rated tranches and less for the upper -- all our indications are it's going to be a minimal impact to us given the structure of our CLO portfolio. So we're pretty comfortable with that. Operator: We have run out of time, and therefore, we have reached the end of the Q&A session. This does conclude today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the OPENLANE Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Bill Wright. Please go ahead, sir. William Wright: Thank you, operator. Good morning, everyone. Welcome to OPENLANE's First Quarter 2026 Earnings Call. With me today are Peter Kelly, CEO of OPENLANE; and Brad Herring, EVP and CFO of OPENLANE. Our remarks today include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties that may cause our actual results or performance to differ materially from such statements. Factors that may cause such differences include those discussed in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations of GAAP to non-GAAP measures are provided in our earnings materials and available in the Investor Relations section of our website. Please note that all financial and operational metrics presented during this call are on a year-over-year basis, otherwise specifically noted. With that, I'll turn the call over to Peter. Peter Kelly: Thank you, Bill, and thank you, everyone, for joining the call today. I'm very pleased to report on OPENLANE's strong first quarter results and to provide you with an update on our strategy and our outlook. I'll begin with a few opening remarks, and then Brad will walk you through our financial and operational performance and our increased guidance for 2026. But before I turn to our results, I'd like to highlight that this week marks the 3-year anniversary of our rebrand to OPENLANE. As I stated at our March investor events, the rebrand was never about a new name or logo, it was about forging an entirely new company founded on a single purpose, which is to make wholesale easy so our customers can be more successful. Over the past 3 years, our investments, strategy and execution have delivered on that commitment and reinforced several key pillars of differentiation for OPENLANE, including the leading commercial off-lease solution that connects thousands of franchise dealers into our marketplace. a dealer business that is outpacing the industry and capturing meaningful market share, a high-performing finance business that is synergistic with our marketplace, an accelerating network effect of new buyers, sellers, listings and transactions and a winning culture and team that I consider to be the very best in the industry. The performance and outcomes OPENLANE is delivering are the direct result of the strategy we began executing 3 years ago. And I believe our first quarter results are further evidence to OPENLANE's strength and differentiation in the market. During the first quarter, we continued to build on OPENLANE's positive momentum, growing consolidated revenue by 15% and delivering adjusted EBITDA of $97 million, a 17% increase. We also generated $160 million in cash flow from operations. These results were led by strong performance in the marketplace business with both commercial and dealer customers and solid contributions from our finance business. In the Marketplace segment, we grew overall vehicles sold by 19%, increased gross merchandise value by 32% to $9.1 billion and delivered $52 million in adjusted EBITDA, representing a 39% increase. In our dealer-to-dealer business, we grew vehicles sold by 13%, with similar geographic dynamics to those experienced in Q4 of 2025. In the United States, OPENLANE dealer-to-dealer transactions continue to accelerate with growth in the upper 20% range. This represents a significant outperformance of the industry and a meaningful gain in market share. Our go-to-market strategy in the U.S. is working and OPENLANE's unique inventory, technology advantage and superior customer experience are expanding our dealer network and compounding our growth in transactions. In Canada, we were pleased to see some improvement in the macroeconomic and automotive retail environment. And while Canadian dealer unit sales declined versus a strong prior year comp, we did see sequential improvement over Q4 of 2025. On the commercial vehicle side, the 25% increase in vehicles sold was driven in large part by the onboarding of our latest private label customer. Even excluding that step function increase, commercial vehicle sales grew by 6% during the quarter. This reinforces that the inflection of off-lease supply has officially begun, and we expect to see year-on-year growth in off-lease volumes throughout the remainder of 2026 and beyond. Moving to our Finance segment. AFC also had a good quarter, growing average receivables managed, holding the loan loss rate to 1.6% and generating $45 million in adjusted EBITDA. Now we do believe the industry experienced a strong spring market driven by higher-than-normal tax refunds and constrained supply paired with high consumer demand, which led to high conversion rates and appreciating asset values. That said, there is no question that OPENLANE's digital operating model is resonating in the market, and I am highly encouraged by the output of our investments and our focused execution. So now let me turn to our strategy and outlook. As I mentioned at the start of the call, our strategy is delivering results, and we remain committed to advancing our three strategic priorities. First, delivering the best marketplace, expanding our depth and breadth with more buyers and more sellers and offering the most diverse commercial and dealer inventory available. Second, delivering the best technology, innovative products and services that help our customers make informed decisions and achieve better outcomes. And third, delivering the best customer experience, keeping our marketplace fast, fair and transparent, making it easy for customers to transact and making OPENLANE the most preferred marketplace. And I'll touch on each of these in a little more detail. First, in terms of offering the best marketplace, we continue to make significant gains and drove another quarter of double-digit increases in new buyers, sellers and unique vehicles listed, each of which were up over 20% in the United States. Customer anticipation for the off-lease recovery is also driving more franchise dealers from our private label programs into OPENLANE's open sale. During the quarter, we nearly doubled the number of commercial vehicles sold in this higher-margin channel versus the prior year. And on the independent dealer side, AFC new dealer registrations also increased during the quarter, each of which also presents a new dealer opportunity for OPENLANE. At the end of Q1, approximately 54% of all AFC dealers were registered with OPENLANE. From a best technology perspective, we extended our technology advantage in the first quarter with our public release of OPENLANE Intelligence. OPENLANE Intelligence unifies our human and AI-enhanced capabilities to deliver actionable insights that improve customer decision-making. We see AI as a true enabler and accelerator of our digital solutions. And during the quarter, we released several new offerings and features that leverage our AI expertise and deep data resources. In Canada, we launched our new MyLot inventory management solution. Initial interest has exceeded our expectations with hundreds of early sign-ups, and we are optimistic about the potential of this subscription-based SaaS offering. Across the U.S. and Canada, we also released our new predictive pricing feature, the only technology in the industry that provides dealers with a forward-looking 30-day, 60-day, 90-day view into the anticipated value of every dealer vehicle offered on OPENLANE. And finally, in terms of providing the best customer experience, we are also leveraging our human and AI capabilities to streamline and enhance the customer experience, improve the consistency, accuracy and speed of arbitrations and to help address dealer inquiries as quickly as possible. At the end of Q1, our transactional NPS scores across all geographies sits squarely in the excellent range with our U.S. seller NPS achieving the highest scores, indicating exceptional customer loyalty and brand satisfaction. So as we look into the remainder of 2026, while we cannot count on an industry environment as strong as Q1, there is still a lot of opportunity for OPENLANE. We are continuing to build momentum, and I'm very optimistic about our ability to execute our strategy with precision. As our 2025 go-to-market investments in dealer-to-dealer continue to ramp up towards full productivity, we remain focused on increasing market share and wallet share. As stated earlier, we expect off-lease supply to scale up throughout the year, and OPENLANE will be a primary beneficiary of this cyclical recovery. Our Canadian business is leveraging its strong market position to introduce new revenue-generating products and services. Used vehicle values significantly appreciated in Q1 and remained strong. This is a positive for the marketplace and for AFC, though any sharp decline in used vehicle values could lead to a higher risk environment for floor plan financers. And while no industry is immune to geopolitical or macroeconomic events, we have not seen a material industry impact from fuel prices, new and used vehicle affordability, chip production or any other external factors that we monitor. So just to summarize, OPENLANE remains well positioned to capture the opportunities ahead, and we're executing a strategy that is delivering results, winning customers and outpacing the industry. Because of that, I believe the key elements of our value proposition for investors remain very compelling. OPENLANE is a highly scalable digital marketplace leader focused on making wholesale easy for automotive dealers, manufacturers and commercial sellers. There is a large addressable market for our services, and OPENLANE is uniquely well positioned with commercial customers and franchise and independent dealers. Our customer surveys and third-party research indicate we are the most preferred pure-play digital marketplace in the industry. Our technology advantage is a competitive differentiator. Our floor plan finance business, AFC, is a high-performing business that is synergistic with the marketplace. We generate significant cash flow and have a strong balance sheet. And we believe our business has the capability to deliver meaningful growth, profitability and cash generation over the next several years. So with that, I will now turn the call over to Brad. Bradley Herring: Thanks, Peter. Good morning to everyone for joining us today. On behalf of our management team and all of our employees, we are very proud to report a record quarter for OPENLANE. For the quarter, we transacted more GMV, sold more vehicles, generated more revenue and produced more adjusted EBITDA than any quarter in our company's history as a digital marketplace. These results would not be possible without the tireless commitment and stellar execution of our nearly 5,000 employees that work every day to make wholesale easy for our customers. Before we dive into the financial results, I'd like to thank all of our investors and sell-side analysts that came to visit us in Fort Lauderdale for our Investor Day on March 3. During my remarks and Q&A today, I may reference selected slides we reviewed during our presentation. These slides can be found on the Investor Relations section of our website. Moving on to actual results. We reported total revenues of $528 million, which represents growth of 15%. Revenue growth in the quarter was exclusively driven by the results in the Marketplace segment, which I'll dive into more shortly. Consolidated adjusted EBITDA for the quarter was $97 million, which represents an increase of 17%. I'll talk more about our adjusted EBITDA results within the discussions about each business segment. Consistent with previous quarters, we will be discussing adjusted free cash flow metrics on a rolling 12-month basis due to the inherent volatility in our quarterly cash flow numbers. For the trailing 12 months, our adjusted free cash flow totaled $259 million, representing an adjusted free cash flow conversion rate of 75%. The 75% conversion rate is slightly above our expected range of 65% to 70% and reflects the strong cash generation of both our marketplace and financing businesses. As you may have heard, on March 26, the Canadian Parliament enacted a bill repealing the digital service tax or DST. This action resulted in a $17.3 million reduction to our marketplace cost of services. $15.9 million of the reduction represents prior period expenses that have been removed from our current quarter adjusted EBITDA calculation, while the remaining $1.4 million is reflected as an in-quarter expense savings. Moving to the performance of our business segments, I'll start with the marketplace. In Q1, we transacted GMV totaling $9.1 billion, which represents growth of 32%. GMV growth in the dealer category was 20%, representing a 13% increase in vehicles sold and a 6% increase in average vehicle values. In the commercial category, the GMV growth of 38% was made up of a 25% increase in vehicles sold with an 11% increase in average values. Auction and related revenues were $242 million, which reflects growth of 22%. The primary driver of this growth was in the U.S. dealer category, where we saw a 38% increase in auction and related fees driven mostly by the strong vehicle sold performance that Peter mentioned earlier. In addition to the growth in vehicles sold, U.S. dealer GMV growth also included a 22% increase in average vehicle values, driven by a higher mix of sales from our large dealer group customers and an overall increase in wholesale auto prices. Exclusively due to the significant increase in average vehicle values, yields for the U.S. dealer business declined approximately 60 basis points from the 680 basis point to 700 basis point baseline range that we provided in our Investor Day materials. On a per vehicle sold basis, revenue generation in U.S. dealer improved by high single digits. Complementing our performance in the U.S. dealer business, auction and related fees in our U.S. commercial business were up 42%. GMV in the U.S. commercial business was up approximately 46% due largely to the successful launch of a returning private label customer as well as improvement in the lease return waterfall. Yields in the U.S. commercial business remained largely consistent with the baseline that we reviewed at Investor Day. SaaS and other revenues in the quarter were $68 million, which is up 1% due to increases in our subscription-based revenue streams. Rounding out the revenues in the Marketplace segment, our purchased vehicle sales grew 31% to $112 million. The variance was driven by the increase in U.S. vehicles sold as well as an increase in the average vehicle values in both U.S. and Europe. Adjusted EBITDA for the Marketplace segment was $52 million, which results in an adjusted EBITDA margin of 12%. That represents growth of 39% in adjusted EBITDA and 160 basis points of expansion in adjusted EBITDA margin. The year-over-year expansion in adjusted EBITDA margin was driven by the structural scaling effects of our digital platform and a higher mix of revenues coming from our U.S. commercial business that comes with an accretive variable contribution. In our Finance segment, the average outstanding receivables managed in the quarter was $2.4 billion, which is up 3%. Growth here was driven by a 3% increase in the average vehicle values, offset by a 1% decrease in transaction counts. Net yield for the quarter was 13.6%, which is down 30 basis points. The decrease was primarily attributable to a decrease in transaction fee yields driven by slightly lower transaction counts and increasing loan values. The Q1 provision for credit losses was 1.6%, which is consistent with our results from last quarter and 7 basis points higher than the same quarter last year. While recent performance has hovered in the mid-1% range, we continue to reiterate our targeted range of 1.5% to 2.0% for credit losses. The combination of the changes in the portfolio balance, the net yield and the loss provisions are an adjusted EBITDA for the Finance segment of $45 million, which was down 1%. With respect to capital considerations, I'll refer investors to Page 75 of the Investor Day deck where we laid out our objectives for capital deployment. To summarize that message, our first and foremost priority is to fund the organic growth of our business. That will be followed by share repurchases and finally, debt repayment. In addition to our investments in go-to-market, we repurchased 964,000 shares in the first quarter at an average price of $27.20. This represents the retirement of approximately 0.7% of our fully diluted share count that includes the assumed conversion of the remaining preferred shares. As we also mentioned in our Investor Day, we are considering debt repayment options, although investors should not expect to see any material paydowns to start until later in 2026 or early 2027. From a liquidity perspective, we ended the quarter with an unrestricted cash balance of $180 million and capacity of over $400 million on our existing revolver facilities. Moving along to our guidance. We are raising our full year expectations for adjusted EBITDA from a range of $350 million to $370 million to a range of $365 million to $385 million. The entire increase is coming from our Marketplace segment and is driven mostly by strong performances in both our U.S. dealer and U.S. commercial businesses. This revision also reflects the full year impact of the repeal of the Canadian DST that I mentioned earlier. Countering the strong performance in the marketplace, we remain cautious around downstream impact of evolving and volatile macro conditions. Sustained increases in fuel prices, the impact of rising auto prices on consumer affordability and subsequent impact on our customers and the automotive supply chain challenges are all front of mind as we look into the back half of 2026. With respect to our Finance segment, we maintain our previous guided position as the volatility and macro trends are largely offsetting the decreased likelihood of any rate cuts in 2026. To summarize, we're very pleased with our quarterly results and are proud to increase our full year 2026 projections. Our revised outlook represents strong momentum in both the dealer and commercial elements of our Marketplace segment, while at the same time reflecting on some potential challenges. We are also proud of our prudent balance between growth and risk management in our Finance segment. With that, I'll turn it over to the operator for questions. Operator: [Operator Instructions] The first question that we have comes from Bob Labick of CJS Securities. Bob Labick: Congratulations on a great start to 2026. Sure. So obviously, really strong performance on commercial volumes, and you mentioned the returning off-lease customer there. Can you tell us, was there a full impact from that customer? Meaning did you have it for the full quarter? Or do you get a little incremental benefit in Q2 as well? Just trying to figure out the kind of run rate from that and the impact kind of going forward? Peter Kelly: Yes, Bob, it launched mid-January. So it's pretty much a full quarter. But I guess, if you're doing precisely, there was an extra 2 weeks that wasn't live, but it was live for 11 weeks of the 13 weeks. Bob Labick: Okay. Great. And then kind of sticking with commercial, lots of EVs coming off lease and there's pretty significant negative equity on that side. How are they behaving in the OPENLANE auctions, EVs in general? And then similarly, how are the ICE vehicles that may still have a little bit of equity behaving? Just give us a sense as we see this divergence of off-lease coming on more EVs probably this year and more ICE next year? Peter Kelly: Yes. Thanks, Bob. Let me tackle it. I'll start with just the commercial overall, and then I'll go into the EV piece of it, if that's okay. Bob Labick: Right. Peter Kelly: So listen, really good quarter from commercial. As I said, 25% growth, a lot of growth in GMV as well. With a strong spring market, used vehicle values did go up about 7% by the end of the quarter relative to January 1. So GMV was strong. The new customer also had a premium vehicle portfolio that contributed to EV. But in addition to the sort of volume increase, we also saw an improved mix relative to a year ago. So relatively fewer payoffs across the portfolio, although payoffs remain abnormally high, but they've come down a little bit in percentage terms. And corresponding to that, an increase in sort of non-grounding and open sales, which are higher revenue, higher-margin transactions for us. So we saw an improved mix through the commercial funnel. I'm talking generally here, EV and ICE combined, okay? So listen, a lot of encouraging signs there. And again, feel really good about the setup for commercial vehicles through the balance of this year and into next year and beyond. Going specifically into EVs, yes, we certainly saw an increase in EV volumes in the first quarter. The good news is they're performing very well. Conversion rate for EVs is comparable to that for ICE vehicles. It varies a little bit by portfolio, which indicates certain sellers are adopting different strategies in terms of how to remarket them. But overall, conversion rates on EVs in our marketplace is very strong. If anything, we're seeing because of the equity situation on EVs, which is more negative, as you know, we're seeing even fewer payoffs, so almost no payoffs. So those cars are flowing deeper in the funnel. So relatively higher conversion of EVs in the nongrounding and open channels, which from a margin perspective is very good for us. So we're seeing good performance with EVs. Obviously, in the quarter as well, we saw the stuff in the Persian Gulf and oil prices, that has probably boosted EV demand at the retail level a bit. So if anything, I would say that demand has strengthened late in March and into April as well. So good positive momentum on EVs. And I think the real question is the seller has to be prepared to sort of acknowledge what the value of the car is in the marketplace as opposed to what is the residual value that they might have written on a contract 2 years or 3 years ago. But absent that, I feel really good about it. And as we're looking to the future, and again, I'll say this comment is more general. as commercial volumes are generally picking up, our commercial sellers are getting more and more interested in, okay, what techniques and plans can we put in place to maximize conversion and improve outcomes in the digital channel because it is such a fast channel. It's a low expense channel, but also a high price realization channel. So we're having very constructive discussions with many of our customers running pilots and various programs to drive adoption and drive conversion of the vehicles. Operator: The next question we have comes from Craig Kennison of Baird. Craig Kennison: I wanted to go to Slide 11, if I could, and just ask you, Brad, if you could just help us understand the yield dynamic in Q1, why it dropped and what the mix issues are that impacted that? Bradley Herring: Yes, perfect. This is Brad. I'll take that. So yes, if you look at the yield, you're talking about on the commercial side where the yield drop. So it's a mix issue. If you think about -- when we talked about at Investor Day, we talked about the different yield setup for commercial across the different geographies, and we mentioned that the U.S. range was certainly lower than Canada and Europe. So if you look at the mix in the commercial space, last year, first quarter, U.S. made up about 71-ish percent of the GMV that flew through the commercial space. Q1 of this year with the ramp-up of the new customer we talked about as well as kind of the increase just from the lease returns, now that number is north of 75%, 76%. So that's a mix issue that drove that yield down from a 1.59% to 1.43%. The yields across the different categories are relatively stable. So that means it's purely mix across the geographies that's driving that. Craig Kennison: And while I have you, Brad, could you just help us understand the full year implications of the repeal of the digital service tax? Bradley Herring: Yes. The full year impact on an annual basis is $5.5 million to $6 million. It's about $1.4 million in the first quarter is what I disclosed. That's a relatively steady run rate across the different quarters. It will kind of vary a bit with volumes. But if you use a $5.5 million to $6 million impact number for the full year, you'll be in line. Craig Kennison: And are there any offsets to that, like charges or fees you may have charged to offset that, that would also go away? Bradley Herring: No, that will just -- that will be the only impacting item. Operator: The next question we have comes from Jeff Lick of Stephens Inc. Jeffrey Lick: Congrats on a great quarter. Peter, I was wondering, as it relates to the U.S. dealer-to-dealer, you said it was in the upper 20 range, which implies a little bit of a sequential improvement from Q4, which was in the 20-ish up 20%. The market was actually down a little more in Q1 than Q4, which kind of implies your spread to market is widening. I was wondering if you could elaborate on any of that? And then does the lease return business kind of have a halo effect like some kind of symbiotic effect, synergistic effect that's helping drive that? If you could elaborate, that would be great? Peter Kelly: Yes. Jeff, I appreciate that. Listen, we were very pleased with the dealer performance in Q1. in aggregate, dealer volumes grew year-on-year by a higher number than in Q4, and that was driven by the U.S. where the year-on-year growth, as I said, increased to the upper 20s. And as you point out, that was an acceleration. So we feel really good about that. We don't have a full industry picture yet, but we do know that dealer volumes of physical declined a little in the first quarter. So it definitely looks like OPENLANE had a strong performance in terms of market share and share gains based on those results. So we feel pleased about that. It also looks like an increased portion of the industry volumes move towards digital, largely driven by our volume increase, right, based on the data we have at least right now. So listen, we feel really good about that. I think it's driven in large part by the things I've talked about on many calls, our focus on the value proposition that digital offers our customers, the speed, the ease, the access to a broader network of buyers, ultimately better outcomes for sellers and for buyers, the convenience, the peace of mind, the ability to search for vehicles and purchase vehicles without leaving your dealershipments and all those types of benefits. So we're very focused on that. Obviously, we've made go-to-market investments as well, Jeff, that continue to help drive those results. To the specific question on lease, does improving commercial volumes create a halo effect? I think it probably does. I think dealers are aware that lease volumes are going up and OPENLANE is well positioned to benefit from that. And if dealers want to get access to those units, then doing business with OPENLANE would be a wise choice. So I think we're seeing franchise dealer registrations have improved. Our ability to convert dealers from private label buyers across into our open sale have improved. So I think there is some of that for sure. I think the other thing, Jeff, is there's just a network effect, right? There's a network effect in any marketplace as that you add more buyers, your marketplace becomes more valuable for every seller on the marketplace. And as you add more sellers, more inventory, it becomes more valuable to every buyer in the marketplace. So I think there's a compounding benefit that takes place over the longer term on that dimension as well, and I think we're benefiting from that. So listen, very pleased with the results. I did also say in my remarks, it was a strong spring market. Tax refunds were relatively high. Inventory remained relatively scarce. So there was a lot of demand, conversion rates were up. I would not forecast an upper 20s growth rate for the full year in the U.S., candidly. But obviously, we're going to drive our traction in the marketplace as strongly as aggressively as we can. Jeffrey Lick: And then just a quick follow-up on commercial. Did you say in your prepared remarks, commercial was up 24.6%, call it, 25% that ex the new customer, commercial would have been up 6%, implying that the new customer was 19%? Peter Kelly: Yes. That's -- well, yes, that's what I said. Commercial is up 25-ish, excluding the new customer, up 6%. So the new customer was a pretty significant step function. And maybe one comment on that. With this new customer, we're essentially handling all of their transactions, including all payoffs. And that's not always the case. In fact, I would say the majority of our customers, that's not the case. We do it for a number of others, but we do it for this one. So this customer, we're kind of indifferent to -- we're not indifferent from an economic standpoint because the economics are different. But from a transaction count standpoint, all those transactions get processed through our platform. So it was a pretty significant volume impact, but it had some -- as Brad alluded to, some mix impact because we got a bunch of payoffs and lower revenue transactions as part of that. But still, it's very good. And by the way, all of those transactions, whether it's a payoff or not, it brings a dealer to our platform to do a transaction. And that's always going to be a good thing because that's sort of a touch point where they then can launch into other parts of our services. Jeffrey Lick: And was Q1 disproportionately high because maybe there was some bottleneck units from Q4 that flow into Q1? Or will this type of similar impact flow through for the next three quarters? Peter Kelly: It's hard to say. I don't think there was a bottlenecking, Jeff. But every customer has different quarterly profiles of their maturities based on the lease programs that they ran 2 years, 3 years ago, the incentives that they ran 2 years, 3 years ago. So it will ebb and flow, but I don't think there was a bottlenecking. So I would expect a solid positive volume impact from this customer through the rest of this year. Jeffrey Lick: And I would assume, given that this is a luxury customer, most -- a greater portion of luxury leases happen in Q4, so Q4 could be even bigger? Peter Kelly: I hadn't thought of that. It's possible. I wouldn't know. I don't know at this moment. Operator: The next question we have comes from John Babcock of Barclays. John Babcock: I guess just to quickly follow up on that last one. So it sounds like that mix impact is going to continue through the year just because of this new customer. Is that fair to say? Peter Kelly: I'd say there's a whole bunch of different things going on in the mix, and Brad touched on them. If I could kind of summarize, I'd say we're seeing -- because of the new customer, obviously, a volume impact and that customer, we're handling a lot of payoffs there. So that tends to sort of have sort of, I'll say, a somewhat negative impact on yield. Offsetting that, we're seeing cars flow deeper in the funnel, more into the nongrounding dealer and open. That has a positive impact on mix. And then we're seeing our U.S. private label volumes increase relative to all of our other commercial volumes. So there's a lot of puts and takes in there that are driving that, John. Brad, do you want to comment? Bradley Herring: Yes, John, just to add on to that. I mentioned in my comments that the yields in the U.S. commercial were flat. But to kind of peel back Peter's comment a little bit, this new customer certainly was dilutive to that. It's a higher end, higher GMV per sale transaction at a lower yield because of that mix, a little bit more concentrated at the top of the funnel related to those payoffs that we're processing. On the other side of that, you actually saw some pretty substantial yield improvement on the non-new customers as those transactions have now flowed deeper into the waterfall. So what that netted out to was a yield that was essentially around flat from what we talked about at Investor Day, but it does have those two moving components embedded in it. John Babcock: Okay. That's very helpful. And now as we think about the off-lease volumes for the year, I was just kind of curious because it seems like demand is probably going to be pretty strong for those, especially with affordability challenges, and it seems like people are more willing now to take on used vehicles than pay the higher prices for new. Are there any concerns that those off-lease volumes will stay more with the grounding dealer? Or is there any reason to think that, that will happen? Or is that not necessarily a fair assumption? Peter Kelly: It's a good question, John. I think One thing we saw in Q1 was used vehicle values went up in value. Used vehicles went up in value, right, because of the supply-demand situation you talked about. What that does is that essentially increases the equity that consumers have in their off-lease volumes. So to some extent, that could delay a little bit or could impact the sort of consumer payoff percentage, and that's something we've talked about in the past. So there's a lot of sort of give and take here. But I think fundamentally, what do we know is true? Maturities coming off lease, those are going up, okay? They're going up in the second quarter and accelerating into the third and fourth. We have seen consumer payoffs come down a little bit. They were down a little bit Q1 versus Q1 of last year. So there's more cars flowing our way, and then those cars are flowing deeper in the funnel. But market conditions do drive those things, John. And I don't know if I can predict with precision all of the puts and takes on that. But I think fundamentally, I feel very optimistic and very positive about the setup for commercial, both for the balance of this year, but also looking further out into '27 and '28. John Babcock: Okay. Very helpful. And then just last question, if you don't mind. I was just kind of curious, I mean, dealer volumes were quite strong in the first quarter. Are you able to provide any sort of sense or do you have any sense as to how those volumes have done so far in 2Q? It seems like 1Q was generally a pretty good quarter overall, at least for the used market. It seems like that market was pretty tight, but just curious to what you're seeing? Peter Kelly: Yes. Well, listen, in our industry, there's normally a spring market, we call it -- that's what we call it a spring market driven by the tax refund season. The spring market usually kind of loses a bit of steam around mid-April, and there tends to be a little bit of a fallback, but not a massive one. You could look at previous year's results to see how the quarters trend. I would say this year kind of is exhibiting sort of a similar pattern to the normal seasonal pattern, nothing abnormal. And that I'd say it's still, in my view, continues to be a pretty robust market in terms of used car demand versus supply. Operator: [Operator Instructions] The next question we have comes from Gary Prestopino of Barrington Research. Gary Prestopino: Peter, I just had a question. You said your open sales in commercial doubled in the quarter, which means things are flowing down the funnel. But given that we've just seen this turn in lease returns, were you surprised at that magnitude of what's coming outside of the franchise dealers buying these cars? And what does that indicate? Does that indicate that the franchise dealers have solid used vehicle inventory and more of this is going to flow down to the independent dealers? Peter Kelly: Yes. Good question, Gary. I wasn't massively surprised by the doubling. I was expecting high growth, 50% to 100%, somewhere in that range. It's growing off a fairly small number. So there's that impact as well. But nonetheless, it was a strong year-on-year increase as we have seen for at least a few quarters in that commercial open transaction piece. Just because they sell an open, doesn't mean they sell to an independent dealer. I want to be clear about that. Like if there's a -- let's say, for example, a Ford vehicle coming through the Ford private label, well, a Honda dealer can't buy that on the Ford private label. If a Honda dealer want to buy, they've got to wait until it gets to the open sale because they don't have access to the private label. So even though they're selling in the open, there's still a high percentage of franchise dealers buying them in that channel. They're just buying them across brand. You have the large used car retail operations, buying them there too as well as independent dealers. So it's a mix of all three customer groups that represent the buyers there. So no, I think generally, listen, pleased with how it's going. We're working with many of our commercial sellers to improve their performance and drive further conversion in the open sale channel because sellers increasingly see it as very strategic to them. It's kind of their last chance to sell the car before they start incurring significant downstream expenses for moving the vehicle, waiting a number of extra weeks before they sell the car, all that sort of stuff. So we're having very productive discussions and strategies that are helping drive that performance, and we're going to be doing more and more of that in the quarters to come. Operator: The next question we have comes from Rajat Gupta of JPMorgan. Rajat Gupta: Just to follow a couple of clarifications after that. Could you quantify the open sales units that you're seeing in commercial? Any unit number or percentage number you could throw out for the quarter? Peter Kelly: Yes. We don't comment on that number, Rajat. I would say our open sale in the U.S. skews heavily towards dealer, but commercial is an increasing percentage over time. And if I look at our year-on-year growth in the open sale in the U.S., again, we said dealer grew high 20s. Commercial grew approximately double. So from that, we can determine commercial, obviously, was a bigger percentage in Q1 this year than a year ago. But we don't release that exact number. Rajat Gupta: Understood. And just on the guidance, given the strong first quarter, if you assume normal seasonality, it would imply somewhere above the upper end of the new range. I'm curious if -- and especially in light of the off-lease picking up later this year. I'm curious, is there any conservatism baked in, in the second half with regard to new car sales or anything around the macro? Is it not right to assume normal seasonality? Just making sure we're looking at this correctly. Any color would be helpful. Peter Kelly: Yes, let me comment sort of high level, then Brad can comment on maybe specifics and then let me move. Again, listen, very pleased with Q1, a strong quarter with traction kind of across the board. But as I mentioned in our remarks, there was a strong spring market in Q1. I would say a stronger spring market this Q1 than in any of the last 2 years or 3 years for sure. And that was reflected -- that was driven, I'd say, by high tax refunds and generally inventory being somewhat constrained. It was reflected in used vehicle price appreciation and high conversion rates. So one judgment is how are those going to trend going forward? Is there going to be an above-average correction from that? I haven't seen it yet, right? But that possibility would exist. And then the other thing we're mindful of is just the geopolitical and macroeconomic impacts out there, high oil prices, potential impacts from those in the markets in which we operate. Again, I can't say we've seen any material impact from that yet, except that we're seeing increased interest in EVs. But we're one quarter in, three quarters left. I didn't want to get too far out in front of our skis on what the remaining quarters could be. I'd also say, particularly in U.S. dealers, as we get into the second half of this year, we do see tougher comps on the B2B side. We're going to be lapping some bigger quarters that we had in the second half of last year. So again, I would expect some deceleration in our dealer-to-dealer growth rate in those quarters. So anyway, we've kind of reflected all of those to the best of our judgment. I would say, notwithstanding any of that, I think there's a ton of opportunity out there for OPENLANE. I'm very pleased with how our customers are responding to our offering and the feedback we're getting and the growth in the customer base. So I really feel good about the strategy we're executing and the opportunities that offers not just for the next three quarters, but for the long term. Brad, do you want to comment? Bradley Herring: Yes. I think that's a really good summary, Peter. I think the only thing I would add, look, as the quarters play out, if things change and our view of the remaining quarters of the year changes, we'll certainly be updating that in our next quarterly discussion. Operator: The next question we have comes from John Healy of Northcoast Research. John Healy: Peter, I just wanted to ask just about the relationship between lease returns and wholesale sellout. So if we're thinking about this, I think we've all kind of penciled in a growth rate based on lease returns. But how should that lease return number impact the timing through your P&L? And let's just say, hypothetically, in a quarter, off-lease grows 25% or something like that in terms of returns. Is that going to be spread out over multiple quarters? So perhaps the volume that you guys move through your platform might be elongated. I'm just trying to think about the how we should kind of think about the returns to market and dealers and then the actual flow-through to your business in terms of a processing standpoint to make sure you get the most value for your remarketing partners. Peter Kelly: Yes. John, I guess, first of all, I'll say the equation to sort of determine what volume we actually get it is very, very complex. I don't know that it really exists because there's obviously different customers in there. They have different portfolios. Sometimes a customer will execute what's called a pull ahead. I've got these leases coming off 6 months from now, but my retail market share looks a bit weaker. I'm going to try and pull these leases ahead and get those customers to buy a new in-brand vehicle now to get my market share up on the new car side. So we see that. We also see the opposite of that, lease extensions. I've got too many cars coming back. I don't want that many. I'm going to try and push some of these out and extend those leases. So there's all these things that can happen. But I guess the net-net is, I do look at the maturity forecast in aggregate, how many leases were written 3 years ago. That's the best barometer I actually have of how many leases will be returned. And generally, John, I'd say, if anything, they tend to come back a month or 2 early. So leases that you expect to come in Q3 can sometimes come in a month or 2 or maybe 3 months ahead of that. And I generally assess that the consumer that's kind of said, okay, I know my lease is up, but I've made a decision on what the new car is that I want, and I just want to pull the trigger and get that done now. So I guess, take what does all that mean? I expect -- if we look at that maturity curve, I believe off-lease volumes in the back half of this year are up around 20% to 25%. So I'm expecting that kind of volume growth in our off-lease volumes, not without the addition of a new customer, okay? So that's the kind of math I'm looking at, and it's obviously fairly robust. But I guess we'll see what happens. John Healy: Great. That's helpful. And I just wanted to ask about the AFC business. Obviously, you guys are seeing a nice bounce in the auction business. But AFC loans kind of originated in the quarter, pretty anemic growth the last few quarters. Curious if you think that gets better? And is there a desire to really grow that business? Or are you just kind of happy keeping it about the same size that it is right now? Because I would just think with the activity and the attractiveness and the network effect in your business that you talked about on the dealer car side, I'm kind of perplexed why would it also take place on the AFC side? Peter Kelly: Yes. Well, John, listen, I think, first of all, AFC is a great, great business. It's a category leader in the space, an industry leader in terms of its risk management and loan loss rate. strong return on assets, return on equity and strong EBITDA and cash flow generation for our company. So it really is a great business. It's also synergistic with the marketplace, and it is helping us drive some of the marketplace results that we've talked about on multiple calls and we talked about at our Investor Day. So I feel really, really pleased about AFC and the performance that it's delivering and the AFC team. I'll also say we don't chase growth for growth's sake. We have a somewhat conservative view. We like managing within a risk band that we've talked about 1.5% to 2%. There's obviously a lot of customers you could take that are outside of that band, but we generally try to avoid that. We like to manage it more conservatively. But that said, it is growing. We are growing the customer base on AFC. And we're seeing something interesting start to play out now, started in the first quarter, and I think we'll see it through the balance of the year. It's not maybe yet showing up in the results. But we've been driving can we get more of these AFC dealers to register on OPENLANE? Well, so that's been successful. But now we're also seeing there's a whole bunch of independent dealers on OPENLANE that haven't registered in AFC. But they see on OPENLANE, there's an AFC floor plan that they could potentially utilize if they go register. So we're seeing that sort of cross-pollination flow back the other way. So again, I think there's growth opportunity there. It absolutely is going to be more modest. We're going to manage that business for risk, but it is a great business, and it's very synergistic in helping drive our overall results. Brad, do you want to comment? Bradley Herring: Yes. I'll just add to that, John. We've talked about it. I think at Investor Day, we've always kind of seen AFC as really a low single-digit grower for those reasons. It's about staying in that risk band that we're very comfortable with and extracting the value that AFC provides some within the AFC vertical of a segment report, but also the value that manifests itself in the marketplace. And I think that's the part. When we think about the growth in AFC, we combine those two as opposed to just looking at the segment results of AFC independently. Operator: We have a follow-up question from Rajat Gupta. Rajat Gupta: [Technical Difficulty] commercial [Technical Difficulty]. You just mentioned on the previous question that you expect 20% growth in your off-lease plus the new customer. And it looks like the new customer was 20% of units analyzing that would be like 20% plus. So am I reading that correctly, the 25% plus 20% for your commercial U.S. business this year? Peter Kelly: Rajat, I guess what I said is I think the growth in maturities is a good number to take in our underlying customer base. And I believe in the back half of this year, that is in the 20-ish percent level, maybe a bit higher. So I would expect that kind of volume in our non-new customer. And then we got the new customer in addition to that. I'm not saying that new customer is going to be 20% every quarter. They have a portfolio that has its own seasonality to it, and I don't have that in front of me right now. I will say that our initial results from that new customer in volume terms exceeded our expectations. I don't know that they'll continue to exceed our expectations every single quarter, but we were surprised by the volume they had in Q1. Bradley Herring: And also keep in mind, Rajat, that new customer was a step function in January, so that will not recur -- that element of growth will not recur to that same degree in Q1 of '27, of course. Rajat Gupta: For sure. And then just a quick question. We heard from some of your larger public customers that there are some luxury OEMs that have dialed up early lease terminations to manage captive finance losses. I'm curious if that is something you've observed? Has that benefited with just like incremental off-lease inventory recently? Just curious to get your thoughts there and how we should think about implications for OPENLANE? Peter Kelly: Yes. Well, again, that's an example, as I was saying on just a question a few moments ago. Captive finance companies can put these types of programs in place from time to time. You don't really get a lot of sort of advanced warning as to when they might happen. But early terms, that's kind of a pull-ahead program. I'm not aware of that having had a specific benefit on our volumes. But that said, the new customer we launched does have a premium portfolio and those volumes are quite strong in the first quarter. So maybe there was some aspect of a pull ahead in that or an early term offer within that. It's possible, Rajat. Operator: At this stage, that was our final question. I will now hand back to management for any closing remarks. Please go ahead. Peter Kelly: Well, thanks again, everybody, for your time this morning. We really appreciate your interest in our company and your questions here this morning. Listen, very pleased with the quarter that we had and continue to be focused on our strategy and our purpose of making wholesale easy so our customers can be more successful. I'm looking forward to reconnecting with you all in 90 days where we can talk about our second quarter results. Thank you all very much. Operator: Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Carrie Gillard: Good morning, and thank you for joining Shopify's First Quarter 2026 Conference Call. I am Carrie Gillard, Director of Investor Relations. And joining us today are Harley Finkelstein, Shopify's President; and Jeff Hoffmeister, our CFO. After their prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and, therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements. We undertake no obligation to update or revise these statements, except as required by law. You can read about these assumptions, risks and uncertainties in our press release this morning as well as in our filings with the U.S. and Canadian regulators. We'll also speak to adjusted financial measures, which are non-GAAP and not a substitute for GAAP financial measures. Reconciliations between the 2 are provided in our press release. And finally, we report in U.S. dollars, so all amounts discussed today are in U.S. dollars, unless otherwise indicated. With that, I will turn the call over to Harley. Harley Finkelstein: Thanks, Carrie, and thanks to everyone for joining us. We've got a lot to talk about today. Commerce is moving at lightning speed right now and so is Shopify. So first, let's kick off with the headlines. Q1 GMV was $101 billion, that is up 35%. I'll say that again, Q1 GMV was $101 billion. That is the second consecutive quarter our merchants have done over $100 billion in sales. Now that is commerce at a truly vast scale. Our revenue was $3.2 billion for the quarter, that is up 34%. And our free cash flow was $476 million, delivering a 15% free cash flow margin. That means we've now put up 4 straight quarters of 30% or more revenue and GMV growth alongside mid- to high teens free cash flow margins every single quarter. There are very few publicly traded companies today that are able to make that claim at anything like the scale. It is a very small club and that is something we are very proud of. And the reason is actually very simple. We've never lost sight of our mission to help our merchants win. And that is why every day, we are seeing new businesses light up with their very first sale. And in tandem, we're seeing more of the world's biggest brands migrating to us from all corners of commerce. In Q1, we signed 3 legends of luxury, Mulberry, BevMo! and LVMH. And in fashion, we welcomed Ragan Bone, luxury outlets, the Outnet and RooGuilt Group and the iconic Lands End. BevMo!, one of the largest liquor store retailers in the U.S., has brought us into power all of their locations with Shopify point-of sale. And Orvis, the outdoor brand that was founded in 1856 is moving to Shopify for a full unified commerce solution. Meanwhile, Q1 saws go live with incredible brands like The Benetton Group, Victoria's Secrets, Body, Epic Shop by Vail Resorts and Reitmans. And here's the best part. We're not just winning the retail legends of today, we're powering the retail legends of tomorrow, and it's happening really fast. We'll get into some real merchant stories later because the velocity we're creating is important to understand. Okay. Let's step back for a second. There's a lot of noise around what AI will mean, at an individual level, at a company level and at a cultural level. Now here's our perspective. First, we're not approaching a new era anymore. We are already in it. In 2026, AI is now Shopify's native language. We bet early on AI and forced its adoption. It's embedded in everything we do, the products we build, the channels we power, the way every single person on the team operates. AI has become an exoskeleton for everyone at Shopify, giving them a virtual team of agents and that makes room for rapid experimentation. It allows them to pursue multiple ideas at the same time and then double down on the winners. And here's what else we believe to be true. No group benefits more from AI than entrepreneurs. The logic is simple. AI is making entrepreneurship dramatically more accessible and in fact, accelerated. That means we're going to see more entrepreneurs, and they're going to scale more easily. AI-powered shopping democratizes discovery. Reach is not just influenced by budget anymore, it is influenced by relevance, which benefits both merchant and buyer. And the right products fund the right shopper at the right moment. And this is enormous potential for new and scaling merchants. And because we win when they win, it also has enormous potential for Shopify. So let's just say the thing. There's always going to be some market confusion when we see a significant shift like we're seeing right now with the rise of AI. We've seen it before. I'm sure we'll see it again. And every single time the world gets more complex, Shopify gets more valuable. We absorb more of that complexity into our systems and become more valuable to merchants. So when we look at this new era of commerce that we're in, there are really 3 core principles that [indiscernible] by Shopify is in such a strong position. That's what we're focused on, and that's what we're going to talk about today. The first principle, Shopify has a huge advantage that is about to compound. We have 20 years of commerce data. We have data on purchase intent across millions of merchants, hundreds of millions of buyers and billions of products. And in a world where real-time information is now table stakes, the edge is the insight beneath it. And that requires a depth, not just access but experience. We've seen merchants start, stall, pivot and scale millions of times across every category and geography. It allows us to build on the real behavior of commerce and to keep shipping products grounded in insights only we have. Deep experience applied at speed. That is very hard to replicate and it compounds. Every capability we add embeds merchants further into the platform and grows the value of being on Shopify. And Sidekick is the perfect example of this. As a reminder, this is our intelligent assistant, which is trained on our knowledge base, payer with completely personalized Intel, it has it each merchant's particular business. Now last quarter, we told you the numbers were encouraging. Well, that was just the beginning. The number of weekly active shops using Sidekick in Q1 was up 4x year-over-year. We saw over 12,000 custom apps created in Q1 alone using Sidekick. And nearly half of all Shopify flows generated in Q1 were built with Sidekick. And Theme Edits just from last quarter are in the multimillions, growing over 1,000% in a single quarter. Every app built, every automation created, every task completed is the merchant getting more done with less and running a smarter and a more productive business on Shopify. In a world where discovery is changing faster than ever, where AI is reshaping help buyers find products and how information surfaces, these merchants are moving faster using Sidekick to keep pace with where commerce is going. And then there's Pulse. Sidekick's smart suggestions feature, which proactively delivers personalized recommendations for merchants using market trends and data from their store, which Sidekick then executes on the merchant's behalf. And I'll give you a great example that I just saw the other day. It was an accessory brand, and Pulse noticed that this brand was getting attention in the right places. Its products were being endorsed by fashion publications and showing up on celebrities' Instagram profiles. So it proactively suggested that the merchant create a social proof page on their website to build trust and validation. And once the merchant agreed, Sidekick created that page on the merchant's behalf, and it was already all within minutes. Now just a few months ago, that process multiple specialists, marketing design, copywriting and often an incremental cost to the merchant and likely several weeks from start to finish. And now it is happening autonomously in minutes at 0 incremental costs to the merchant. And that is just one of the smart recommendations being served up to that merchant as part of their daily operations. This is our compounding advantage. Commerce intelligence, power smart tools that drives merchant success, which in turn, powers more commerce intelligence. Now that leads nicely into the second principle, which is the demand conversion flywheel. It should be getting more obvious that every quarter that Shopify is no longer just the platform to convert demand, we are becoming the platform to create it to. And that end-to-end position is a major advantage for merchants. First and foremost, online GMV growth accelerated year-over-year. This is our DNA, the core of our business. The online store is not going anywhere. In fact, we believe that new and emerging and AI channels places like ChatGPT, Microsoft Copilot, Google AI Surfaces and Meta will be a tailwind to driving e-commerce growth and penetration over time. So let's talk about these channels. We are the only platform that enables discovery and selling inside ChatGPT, Copilot and Google, all from one single system of record. And the early signals on AI channels are really compelling. And in the first quarter, AI-driven traffic to Shopify stores has grown 8x year-over-year, while orders from AI-powered searches have increased nearly 13x. And within this, new buyer orders are occurring at nearly twice the rate of other channels. Okay. Now let's talk about Shopify's catalog because this really, really matters. To date, we've structured more than 1 billion products with clean attributes, real-time pricing and accurate inventory. So AI agents can surface the most relevant products in seconds, and the results speak for themselves. Traffic from catalog-powered AI searches convert 2x more than traffic from general AI searches where the agent is working from scraped or often outdated information from across the web. That is the value Shopify brings. Okay. I'll give you another example of driving demand. Campaigns, which is one of our ad products, finding new customers one of the hardest things we're running the business. Paid marketing has historically been expensive, complex and simply out of reach for smaller merchants who don't have the budget or the expertise to compete with larger brands. Well, campaigns is changing that. In Q1, the number of merchants with a live campaign was up 3x year-over-year. That is not a small signal, that is a product that is starting to have a true impact on our merchants. And what I love is the impact this is having on SMBs, in particular, because a lot of them would not otherwise have had access to performance marketing at this level. For some of the smaller merchants, shop campaigns is contributing as much as 1/4 of their total GMV. That is not a nice to have. That is a growth engine. Shopify is giving them economies of scale that were previously only available to the largest brands. And with new channels added in Q1, including ChatGPT, Pinterest and Microsoft monetize, we're bringing more services and more reach and more buyers into the ecosystem. Here's another example of driving demand, the Shop App. Shop App had a strong Q1. GMV was up 70% year-over-year, a clear signal that the buyer network is deepening and shop is becoming a meaningful commerce destination in its own right. Monthly active users grew over 40% year-over-year and unique buyers purchasing directly on Shop grew over 50% compared to Q1 of last year, meaning more new shoppers are discovering and buying through the Shop app than ever before. And remember, the Shop app is just one facet of shop, which is the buyer-facing side of Shopify. Sign in with Shop is our user verification tool, which recognizes buyers across devices, stores and surfaces with no sign in friction. And usage is growing steadily. We are up 3x year-over-year, and it is now enabled across nearly our entire merchant store from base. In an agenetic world, this really matters. Agents need to know who they are buying for and we are ready. This is the Shopify flywheel. We're not just converting demand, we're also intelligently creating it by surfacing the right products, personalize the right shoppers at exactly the right time. Our compounding advantage, the billions of data points we've collected over 20 years of commerce, powers our demand conversion flywheel, which is moving faster every quarter. These are not small things. These are the principles that will power the future of commerce. Okay. The third principle I'll leave you with is what I call invisible complexity. Here's the thing. The hardest parts of commerce are the parts that nobody sees, and this is where Shopify thrives. We saw it when the online DTC boom happened and everybody wanted to build their own stack. We saw it when social commerce started to take off and people predicted storefronts would migrate into their social feeds. And we've been seeing it again this year with some uncertainty around what AI will mean for commerce. But commerce is massively complex. We just spent 2 decades making it look easy. Merchants bring their product and we handle everything else. And every time the world gets more complex, that role becomes more valuable. And the industry agrees, as you might have seen with the latest news on the Universal Commerce Protocol, or UCP, which we co-developed with Google. UCP is an open protocol that makes agentic commerce work at scale. It enables the full commerce journey, product discovery, checkout, payment post purchase across any platform with any payment processor. We codevelop UCP because we believe the future of commerce runs an open standards, not closed systems. And then we created the UCP Tech Council, the technical body, that steers the protocols direction to ensure it evolves to meet the needs of businesses, platforms, developers and consumers. We are now seeing the biggest and most innovative companies across essentially the entire industry coming together around UCP to help push agentic commerce forward. And last month, Amazon, Meta, Microsoft, Salesforce and Stripe all join the counsel, committing their expertise in Internet scale transaction processing to build one universal protocol for commerce. The companies that power how the world shops are now building on one standard, and Shopify is at the center of how commerce gets done in the age of AI agents, and this is what it looks like in practice. Payments is another perfect example of invisible complexity. It's designed to feel simple, but under the hood, it's anything but fraud detection, tax calculation, compliance across dozens of markets, currency conversion, identity verification, payment authorization, all working together invisibly at lightning speed. Shopify Payments is built on top of all that comprehensive tooling, designed to ensure merchants can sell easily across every channel, including a agentic without adding incremental complexity. And for small businesses, especially, this matters enormously. Managing and reconciling multiple payment processors is a distraction no merchant needs. And we do not do this alone. We work with the best-in-class partners, Stripe, Affirm, Globally, PayPal, local payment methods all over the world, all integrated and all available and all managed in one place. Merchants get the breadth of a global payments ecosystem with the complexity of managing it themselves. This is the Shopify difference. In Q1, Shopify Payments processed $67 billion of GMV, up 41% from last year, reaching 67% penetration. That number keeps moving up every quarter because merchants trust the full platform, not just the check at moment. And then, of course, their Shop Pay, the Internet's favorite checkout, because we believe it is simply the easiest way to buy anything anywhere, one tap, done. All the complexity of payments completely hidden. In Q1, Shop Pay processed $35 billion of GMV, up 59% year-over-year. Outside the U.S., Shop Pay GMV in Q1 grew over 70% as we continue to expand into more markets, supporting major local payment methods all over the world. making it not just the Internet's favorite checkout, but one that feels native to buyers wherever they are. In fact, international is another perfect example of massive, but almost invisible complexity. Q1 delivered international GMV growth of 45% with cross-border GMV representing 16% of total. We are consistently rolling out new updates and products to grow our international footprint. In Q1, we quietly shipped updates that individually may not make headlines, but together are steadily making Shopify more native to more places. Things like merchant billing, which is now in 7 new European currencies or capital now available in France or smart market and smart language recommendations where merchants get relevant recommendations based on the markets they sell into. Every quarter, we build more. And we removed more barriers for merchants all over the world to choose Shopify. Now let's talk enterprise because there's perhaps nowhere that this idea of invisible complexity shows up more clearly. Custom stacks and legacy platforms were built for a world that no longer exists. They're slow to adapt, expensive to maintain and increasingly unable to keep pace with how buyers shop today, let alone tomorrow. Our value proposition is straightforward, better conversion, lower total cost of ownership and a unified commerce system that actually works at a speed and a price point legacy platforms cannot match. You see this shift most clearly in heritage retail, brands like Orvis, Mattel and Hunter Douglas. These are companies that built their names over decades, or in some cases, centuries. They know retail. What they're grappling with is the technology underneath, legacy systems that are costly, slow and holding them back. And they're not just coming to Shopify for an online store. We're in the room for a much bigger conversation. Unified Commerce, POS, Payments, B2B, agenetic surfaces, the full picture. And once they join, they stay. More products, more surfaces, more of their business running on Shopify. But enterprise growth is not just about brands choosing Shopify, it's also about brands growing up on Shopify. Groons, for example, the gummy supplement brand that launched in Shopify in 2023, well, last month, they were acquired by Unilever for over $1 billion. In just over 2 years, they scaled to hundreds of millions in revenue. So the opportunity here is large and growing, and we're continuing to go after it. In just the last 2 years, the total number of large merchants doing $100 million or more in GMV on Shopify has nearly doubled. That is real growth. And it's coming from merchants that are scaling into that category as well as those that are already there and looking to modernize for what's next. And all of this puts us in an incredibly strong position to continue driving this part of the business. On our last call, I said we'll see more billion-dollar brands born in the next 10 years than the last 100. And a lot of people thought that was hyperbole. It was not. Groons is a perfect example, and everything we're building is designed to make this happen faster. So when I zoom out, this is what I see. Over 2 decades, we've collected deeper commerce knowledge than almost anyone else on the planet. We've used that knowledge to build a platform that makes it not just possible, but common for a single entrepreneur to become a massive business in a couple of years, if not less. And we're now moving into an era that will benefit entrepreneurs more than any other group. There is simply no job that will be more accelerated by AI than entrepreneurship. That means there are about to be a lot more entrepreneurs, and that means more people that need the Shopify platform. And in the meantime, we're continuing to deliver strong and durable growth. real operating leverage, fast product velocity and a platform advantage that keeps compounding. And with that, I'll turn the call over to Jeff. Jeff Hoffmeister: Thanks, Harley. Q1 reflects strength across all dimensions of our business, not just any one in isolation. Our growth is broad-based across geographies, merchant sizes and channels. International, enterprise, off-line and BB are all scaling. Underneath all of this, the cohort dynamics continue to compound. I believe that remains one of the most underappreciated characteristics of our business. Each quarter's results are an aggregation of successes over many years of merchant cohorts. Each new cohort stacks on top of the prior one and our newer cohorts are larger than the ones before them, a reflection of the breadth of merchants we are attracting. But what's incredible is that the older cohorts, even the merchants who have been on Shopify for many years, are not plateauing. They continue to grow. As an example, in Q1, almost 90% of our revenue was from merchants who have been on the platform for more than a year. The driving force is our platform and product velocity. That's the structural advantage of Shopify. We give you everything you need by operating across the entire commerce stack. It's not the power of any 1 element of the platform. It's how they all work together to help merchants accelerate their success. It's a knowledge and expertise readily available through Sidekick. It's the speed, context and simplified complexity behind checkout. It's the ability to sell across every channel, every surface and every geography from day 1. Internally, we are making every function faster, sharper and more productive. An output per employee is improving through deliberate AI usage. The result is that we are building more, shipping more and serving more merchants. The leverage we have and continue to deliver is what funds ongoing investment. In AI infrastructure, global reach and platform death. That discipline is what we have demonstrated consistently. We will always lean into growth because as we grow, we invest more in driving success for our merchants and for Shopify. Now let's take a closer look at our GMV. Unless otherwise specified, all growth rates are presented on a year-over-year basis. Q1 GMV was $101 billion, marking our second quarter with GMV over $100 billion, representing growth of 35% or 30% on a constant currency basis. Diving deeper into different GMV perspectives, let's first look at merchant size. In recent quarterly calls, I've talked about 3 strata, merchants doing up to $2 million in GMV, those doing $2 million to $25 million in GMV and those doing more than $25 million. We saw strength across merchant GMV bands consistent with recent trends. The $2 million to $25 million GMV band added the most incremental revenues year-over-year, but the other 2 segments were not far behind. And the greater than 25 million band merchants are growing the fastest. Further, when we look at just our merchants doing more than $100 million in annual GMV, we see a consistent and accelerating growth story. The share of our revenue coming from that segment has grown each year, up over 200 basis points in the last 2 years. This is a multiyear view playing out exactly as we expected. Moving to regions. Europe maintained its momentum with European GMV up 48% or 35% in constant currency. 2025 was an outstanding year in Europe. So delivering continued mid-30s growth in constant currency against that backdrop reflects years of deliberate investment in that market. North America accelerated from an already strong Q4, demonstrating the continued durability of our core market. That is, of course, on significantly higher GMV levels, demonstrating our ability to not only grow well in our largest market, but also further tap into the immense opportunity outside of the U.S. Regarding same-store growth and new merchant acquisition, the contribution from each was relatively balanced, a split that has remained consistent for multiple quarters now. Finally, turning to channels. Two channels to call out this quarter. Offline GMV was up 33% and accelerating from Q4. The fastest-growing slice within off-line remain merchants operating more than 20 stores, which this quarter had location growth of 50% year-over-year. B2B GMV grew 80% in Q1 with broad growth across both new and established merchants. In Q1, we made several other features of our B2B offering available to most of our standard subscription plans, given these merchants the ability to manage their wholesale and D2C's needs side-by-side in 1 place. Now turning to revenue. Q1 revenue grew 34% or 32% on a constant currency basis, fueled by the GMV outperformance. North America grew 33%; Europe, 42%; and Asia Pacific, 30%. The pace of growth in Europe speaks to the opportunity that remains ahead. And while growth internationally continues to outpace North America, North America had its strongest quarterly growth rate in over 4 years. Merchant Solutions revenue grew 39%, driven primarily by the strength in GMV and increased penetration of Shopify payments. $67 billion of GMV was processed on Shopify Payments in Q1, that's 41% higher than the prior year and 67% of GMV, 3 points higher than Q1 of 2025. We see a clear path for the rate to continue moving higher, stemming from deeper penetration across all geographies, growing adoption in the 15 European countries in Mexico where we launched payments last year, expansion into new countries beyond the 39 where we are today and continued Shop Pay momentum. Near term, Europe will be a headwind to Global Payments penetration metrics, given the recent launches of payments in numerous countries last year, but that should prove to be a tailwind for us over time. Subscription Solutions revenue grew 21%. The incremental year-over-year revenues were fairly balanced across 4 elements: monthly subscriptions for our plus plans, monthly subscriptions for our standard plans, variable platform fees and lastly, revenue from apps, themes and domains. The growth in our plus and standard monthly subscriptions reflects 2 things working simultaneously, new merchants coming on to the platform and existing merchants upgrading as our businesses scale. Both are driving the growth. The growth in variable platform fees reflects 2 primary factors. The average VPF rate has increased and plus merchants this past quarter grew faster than our overall merchant base. The growth in our revenue from apps, themes and domains reflects both the quality of our developer ecosystem, with thousands of apps extending the capabilities of our platform and changes to our developer revenue share terms that created a favorable comparability dynamic, which it largely normalize as we progress through the year. Q1 MRR grew 16% year-over-year with continued growth across standard, plus and point of sale. As a reminder, Q1 was the final quarter where our year-over-year growth rates in MRR are impacted by our rollout of 3-month trials in our largest markets in Q1 2025. That headwind is behind us. Plus MRR represented 35% of MRR for the quarter, up from 34% a year ago. Q1 gross profit grew 32%, coming in slightly ahead of our expectations, driven by the outperformance in revenue. Our gross profit has now grown in a compounded annual growth rate of 29% over the past 3 years. Gross profit for Subscription Solutions grew 21%, with gross margin coming in at 80%, in line with Q1 2025. Economies of scale and efficiencies and support were partially offset by increased LLM cost, driven by growing merchant usage of our AI products, most notably Sikik. We expect this dynamic to continue. The more merchants use these products, the more data we have and the better the outcomes we can deliver. And the better the outcomes, the more deeply embedded they become in the platform. Additionally, changes to our developer revenue share terms I mentioned earlier also contributed a tailwind to gross profit dollars. With the biggest benefit expected in Q1, normalizing as we progress through the year. Merchant Solutions gross profit grew 40% with gross margin coming in at 39%, essentially flat year-over-year. No specific items to call out as similar dynamics played out as we have seen in prior quarters. Operating expenses were $1.2 billion for the first quarter or 37% of revenue, a 4-point improvement from Q1 last year. We continue to drive operating leverage through 2 key elements: growing gross profit dollars and delivering continued headcount discipline. Both of these allow us to invest in further AI usage internally and our returns-based marketing, which in turn helps fuel more growth, R&D, sales and marketing and G&A as a percentage of revenue each improved year-over-year. Transaction and loan losses came in at 3.7% of revenue, up from 3.2% in Q1 2025. As a reminder, the dollar amounts here tend to scale with volumes in our payments, capital and credit products. Each of these products continues to grow well. So the goal, of course, is to keep loss rates low as we scale merchant adoption. Payments revenues continues to grow very nicely. As I mentioned earlier, and our loss rate in payments in Q1 was below Q1 of last year. Credit was the largest component of the year-over-year increase. Q1 free cash flow was $476 million or 15% of revenue, in line with our outlook. As previewed on our last call, these results reflect a slightly higher effective tax rate. One item to note before turning to outlook. Beginning in the second quarter, we are adopting an accounting treatment for our merchant cash advances. That will match the accounting for our capital loans. This transition was prompted by some regulatory changes in Canada and related subsequent changes to our merchant cash advances product in Canada. For Q2, relative to our current accounting, this change is expected to be a tailwind of approximately 0.5 point to free cash flow margins. With that, let's move to our outlook for Q2. We expect Q2 revenue growth in the high 20s year-over-year. The expected sources of growth are consistent with the drivers that we saw in Q1 with the one key difference being that our Q2 revenue guidance assumes approximately 0.5 point of FX tailwinds versus the more than 2 points of FX tailwinds that we saw in Q1. We expect our gross profit dollars to grow in the mid-20s. The differential in the revenue versus gross profit growth rates is driven by the continued mix shift between the growth rates of Merchant Solutions and Subscription Solutions, which is expected to narrow compared to 2025 and the continued strength of payments. We expect operating expenses in Q2 to be 35% to 36% of revenue, an improvement from the 37% we delivered in Q1 and a meaningful step forward from the 38% we delivered in Q2 of last year. Turning to free cash flow. For Q2, we expect free cash flow margins in the mid-teens. In summary, Q1 continued the momentum of an outstanding 2025. We delivered the highest quarterly revenue growth rate in over 4 years, both for the business as a whole as well as the U.S. specifically. Strength was broad across merchant sizes, channels and geographies. Gross profit has compounded at 29% annually over the past 3 years, and our commitment to these free cash flow margins remains unwavering. The business is durable, our position is unique and our conviction is that the investments that we are making today in AI infrastructure, in the merchant-facing surfaces being built on top of it and the data advantage that comes from powering a meaningful share of global commerce will further strengthen our position. As entrepreneurship enters a new era shaped by AI, we sit here today with the platform, the scale and the momentum to be at the center of it. With that, I'll now turn the call back over to Carrie for your questions. Carrie Gillard: Thanks, Jeff. We will now take your questions before turning the call back to Harley for some final words. [Operator Instructions] Our first question comes from Justin Patterson of KeyBanc. Justin Patterson: Great. It seems like there's a natural flywheel between AI supercharging product velocity and Sidekick effectively driving uptake of new features. How should we think about that flywheel playing out and what it means for KPIs? And then just a quick one for Jeff. How do you balance the benefits of AI versus rising token costs? Harley Finkelstein: Thanks, Justin. Next for the call. It's Harley. I'll start with the first part. Look, I mean, Sidekick is really becoming a merchant's co-founder. It's becoming the new way merchants run their business. This is not a tool that they open occasionally, but this is this active presence that shows up every day. It now with Pulse, it proactively suggest ways to improve their business and then execute it on their behalf. And so numbers in Q1 were not just encouraging, I think are remarkable. Weekly active shops are up 385% using Sidekick. We saw 12,000 custom apps built in Q1, which is up like over 200% quarter-over-quarter. And if you look at Shopify Flow, which is really used for business processes for our largest merchants, nearly half of all Shopify flows generated in Q1 were actually built with Sidekick. So this is a huge compounding advantage. This allows us to not only leverage our 20 years of commerce insight, and this incredible data set we understand about how businesses operate, but also to pair that with the specific needs and the specific use cases of what a merchant requires. So I think how merchants are using it is important. The early signals really matter here. And we're seeing these. Merchants that are just starting to play with it really become power users very, very quickly. So roughly half the conversations are about store setup, design and theme configurations. And then once they gets set up, it's about growing the business faster. So it is something that we knew would be well received by merchants, but I think the efficacy and the efficiency of driving value is something even we are incredibly surprised by. It's amazing. Jeff Hoffmeister: Yes. I mean -- and I'll pick up on that very point in terms of where Harley left it. The impact that we're seeing, not only in terms of how our merchants are using Sidekick, but how we're using it internally has been super impactful. Harley in his comments talked about the exoskeleton, which we give our not only our engineers, but really everyone throughout the organization in terms of how they can do more with AI and it's proven to be very, very impactful. So it's really not even a question of where are we using AI, but where aren't we using AI? Because it's been an extensive usage in pretty much all departments within the company. So we're, of course, mindful of the right tool for the right problem, and we were mindful of the cost and we think through that. But this is something we're seeing significant benefits in terms of how employees are deploying it and how merchants are getting value out of it. Harley Finkelstein: Yes. I think actually, AI right now writes well over 50% of our code today, and that number is going up significantly, not down. But I think more than any other company, AI, Shopify's native language. Carrie Gillard: Thank you for your question, Justin. Our next question comes from Bhavin Shah at Deutsche Bank. Bhavin Shah: Great. Harley, as you think about expanding your product capabilities and how you can better serve merchants, how do you approach building versus partnering more broadly? And how might that differ from more software like solutions versus some that are more fintech-related? Harley Finkelstein: Yes. Look, I mean, Shovel's philosophy around partnership has, I think, been long study, but we partner where we can get massive leverage and where we think there's a company out there that's doing a really great job we can plug into. And when we think there isn't something out there that is 10x better than what we can do ourselves, we just build it. And that's always been the case, particularly when it comes to even the app ecosystem, you're seeing at the same time more merchants using Sidekick to build these custom features for their shop. But at the same time, you're seeing more app developers build for Shopify's ecosystem than ever before. In fact, we've now put the app approval process on rails using incredible AI testing so that we can get more apps into the app store faster. And if you talk to partners and particular app developers that are building for commerce or retail, for the most part, Shopify's and our app stores become their default go-to-market. It is the place where they build for. So that will continue. And just in terms of how we think about generally, these larger-scale partnerships, obviously, there are these amazing new surface areas. We talked -- obviously talk about agentic quite a bit, whereby it should be incredibly clear that Shopify's at the epicenter right now, this AI era. And so we are currently the only platform on the planet powering, selling inside of ChatGPT, Copilot and Google, all from one system of record. So when we see these opportunities to work with other companies, we show up with a catalog, we show up with all the functionality and the right APIs and so that they can move faster too. And I think that's the reason why Shopify has been uniquely positioned as one of the best companies to partner with an all of tech. Carrie Gillard: Thank you. Our next question comes from Dominic Ball at Redburn Atlantic. Dominic Ball: So 2 questions on as AI is lowering the barriers to entrepreneurship, are you seeing acceleration in SMB merchant sign-ups? And second question is with integrations with Claude, ChatGPT, does AI risk pushing Shopify sort of back from a merchant's UX perspective? Harley Finkelstein: Yes. I'll take the second part and then Jeff can talk about the first part of that question. Look, agents do not buy pass Shopify, just the opposite. In fact, they write right into Shopify. I mean, I think you saw in sort of recent headlines that merchant store fronts really matter. You saw ChatGPT move to in-app browsers for their checkouts. So it's literally the Shopify store front within the chat. And again, when a buyer is shopping in ChatGPT, they're browsing Shopify's incredible catalog. So the momentum on agentic has been amazing. We're always trying to find new ways for merchants to have an easier time to build their company -- their businesses better, faster. We have more integrations even announced yesterday, where Shopify now make store building and management as easy as having a conversation where you can sort of effortly connect your existing store right to your favorite chat agentic application and then chat to add products or just inventory across locations. But this idea of combining Shopify's incredible platform and the product the way that we think more entrepreneurs are looking to build, we think, put Shopify and pull position when it comes to the agenetic entrepreneurial evolution. And I think Jeff will talk a bit about ads, but I think there is no -- let me say this actually in the most simple terms, and there is no job that is more AI safe than entrepreneurship. And I think there's also no place that you're going to see more acceleration with AI than maybe entrepreneurship in general. And I think as Shopify is the entrepreneurship company, I think that's going to be great for entrepreneurship in general, that's also be great for Shopify. Jeff Hoffmeister: Yes. I think that's the perfect launch point to your first question, Dominic, just in terms of what we're seeing in merchant additions and kind of whether this is going to accelerate some of the things we're seeing, especially on the SMB side. Harley alluded to it, like we do think there will be tailwinds here. I think from our vantage point, you look this -- and you see this in the growth numbers, right? The growth that we delivered in Q1 was exceptional. One of the things I made it -- one of the points I made in my comments was it essentially evenly split between same-store sales growth and new merchant acquisitions. And so you can see that in terms of what we're doing at the top of the funnel, merchant adds more broadly. It's true across geographies. You see this in some of the data. There was some U.S. census bureau data in terms of the number of startups that you see on a monthly basis. So we're seeing some signs of it. It's early to say, "Hey, AI was the thing that was the specific spur of additional activity in terms of start-ups." But the pipeline looks as healthy isn't as strong as we've ever seen it. Carrie Gillard: Thanks, Dominic. Our next question comes from Nick Jones at BNP. Nicholas Jones: You put out some really great kind of statistics or growth rates for Pulse and Sidekick. As we think about AI investments from here and maybe how it translates to margin expansion. How are the AI investments in terms of kind of creating structural advantages versus maybe keeping up with table stakes that we're hearing across maybe other platforms to make SMB's lives easier, more efficient that makes sense, I guess, kind of what is kind of a structural advantage and what is increasingly maybe table stakes that folks are looking for as businesses deploy AI across their platforms? Harley Finkelstein: I mentioned earlier that I think Shopify is internal, like AI is now Shopify's native language. What I mean by that is that we bet really early and we force its adoption across our company. And I think AI has given this exoskeleton everyone at Shopify, where effectively every single person on the team has this virtual team of agents that creates incredible opportunity for these like rapid experimentation. It allows them to pursue multiple use at the same time then double down on what's winning. And I think I mentioned in previous answer that AI now writes well over 50% of our code and that number is going up. But what that actually means is that our best engineers aren't writing a few lines of code or doing less. It means they're operating at this much higher level. They're directing reviewing and making calls that we're able to provide -- we're able to do because of 20 years of context. So AI handles the execution and they handle the judgment. And I think the output proves that. We shipped over 300 new products and features last year alone. We kept our flat headcount, which we're very proud of. And that's only possible because something has changed fundamentally. I know Tobi has been taking a bit about river, which is a perfect example of it, but it's this AI coding partner built right into Slack for the entire team where they can pull into any threat, any conversation and do, frankly, a remarkable amount of the engineering work. And we built it because we needed it and now it's deeply embedded in how we operate. So I think more than any other company, Shopify is very much leveraging AI in an incredible way. Carrie Gillard: All right. Our next question comes from Michael Martin at MoffettNathanson. Michael Morton: Harley, you've had a lot of success with the enterprise over the last 2 years. I wondered if you could talk a bit about your learnings with your go-to-market strategy, if you see any opportunities for tweaks? Or if you're really happy with the product market fit and it's just more of an execution game. And then quickly one for Jeff. Just on OpEx growth. You've been really tight with headcount management. And any additional color on the destination and duration of the investments you're making in OpEx lines would be really helpful. Harley Finkelstein: Let me start with our enterprise and Jeff could jump into OpEx. I mentioned this on the call, but I'm going to repeat it because I think it's important. The number of merchants doing over $100 million of GMV on Shopify has nearly doubled in the last 2 years. I think we have now -- we're in the right to be in every serious enterprise conversation, and that's the shift. Our go-to-market engine sort of runs 2 tracks in parallel. Obviously, SMB is all about velocity and the enterprise is really more about depth. And we've built this dedicated team and professional services that embeds into that enterprise motion. Product is unequivocally a major driver. When we show up, we show outcomes. We show speed, we show cost, we show conversion, we show simplicity. And I think more and more with these very large brands that are coming on, brands that I mentioned on this call, they're looking for this unified commerce platform. They're looking for basically the last migration they're ever going to have to do. And so when Shopify shows up, with this global scale this unified platform, but also allowing them to sell right away across ChatGPT and Copilot, our differentiation is frankly quite structural. And I think at our scale, that compounds. I think that advantage will grow over time. And we can also move at this incredible pace, which works well. So I think generally, the strategy is working really well. We're focused now on just faster execution. We've also learned that -- I think the enterprise is human executive trust unequivocally moves deals. This is an area I'm personally spending a lot of time in myself. And I think our installed base on the enterprise is a flywheel. I think growth begets more growth. And if you look across every vertical or product category, the fact that we now have and are adding the top merchants and top brands across every vertical, that means that flywheel is speeding up. And there are places where we are improving pricing clarity, making the ROI way more obvious. There are some edge cases that we're already closing the gaps where potentially deals take longer than they should. But the strategy is really, really working in a way that I think you're -- I mean, you're seeing the results now. So now it's about execution and consistency. I think now it's about turning more consideration into more winning when it comes to the enterprise, and that's where I'm spending a great deal of my time and I'm incredibly optimistic about that. Jeff Hoffmeister: Yes. And Michael, to your question on OpEx and where that's going, overall, things remain exactly as we've been talking about in terms of the discipline we're delivering on free cash flow margins. You saw this in the significant growth that we had in That, of course, drops more gross profit dollars down, and that gives us the opportunity to continue to invest like we have been and find the areas where we can continue to drive that top line itself. You referenced headcount. We've obviously been disciplined for 3 years now. We're -- on any given year or in fact, slightly down from the year before. I don't see that changing. We've talked a few times in terms of already on this call in terms of how we're using AI internally and the efficiencies, the acceleration that's giving us, and we expect that to continue. And as we spend, as you can tell from some of the marketing efforts that we've done, marketing, and I mentioned this on the call that sales and marketing as a percentage of revenue is down year-over-year as was G&A as well as R&D. So we can continue to drive those down as percentages, but marketing dollars themselves will be up year-over-year, but we're just getting better and better and better on the marketing spend. And I mentioned on the last call that roughly 40% of our marketing dollars was in Europe in the performance marketing side. We continue to see success in Europe on this piece. One of the things we've actually seen on the marketing spend in Europe because we spent a little bit more the granularity we get has been meaningfully increased. The signal value we get has allowed us to be much more effective in Europe than even though we've been historically on the marketing spend. And we've increased the percentage of marketing spend which is performance. So the pieces which were not core, hardcore performance marketing we've reduced. So we're really in a spot where I think we can do some really interesting things on OpEx. The only difference, and I talked about this a little bit on the last call, the only difference really between last year and this year is going to be a little bit on the taxes in terms of what we're seeing on the effective tax rate. But we're at a spot now where that should level off. So from our vantage point, we feel really good about driving the gross profit dollars growth, which allows us to do everything we need to and obviously have the dollars left to do the share repurchase among other things. Carrie Gillard: Our next question comes from Rob Wildhack at Autonomous. Robert Wildhack: Harley, I wanted to ask about the demand creation principle you highlighted in the prepared remarks. We hear you loud and clear on the products and tools that Shopify offers merchants to create demand. I was wondering if you could compare that to what a non-Shopify merchant can do or is doing to get themselves discovered by LOMs. Like what are the table stakes there? What are some of the savvier non-Shopify merchants do? Because I think that would be really interesting context for the Shopify agentic toolkit. Harley Finkelstein: Yes. I mean, as I mentioned, on sort of demand creation, I think we're making a lot of progress on the sort of customer acquisition piece. I think there's now -- started with one way, now there's multiple ways for buyers to discover our merchants, job campaigns. Shop app and obviously some of the agentic discovery. But in terms of some of the stuff we're doing with the agentic plan, for example, again, that rolled out early March. That mean that any brand and any platform can now sell across AI channels via Shopify catalog and no Shopify stores acquired. It's remarkable. Everyone -- pretty much every merchant, every brand retailer in their Board meetings are talking about how they get it discovered. And so what we're seeing now is that ultimately, it is -- obviously, we have a way to help them with that. And I think we've now made it clear that Shopify is sort of at the center of this. Again, I mentioned earlier, but I'll say it again, we're the only platform powering selling inside of ChatGPT instead of Copilot and inside of Google all from one system. And what we're seeing already in terms of the proof points is that orders from AI searches are up nearly 13x. AI-driven traffic to Shopify stores has grown 8x year-over-year. And new buyer orders from AI searches are actually occurring at nearly twice the rate of traditional organic search. The big thing though with catalog is that I think a lot of non-Shopify merchants are seeing that catalog is actually doing a much better job of organizing and syndicating their products across every agentic surface versus sort of the old scraping thing that was happening prior to catalog. So it's doing 2 things. One, it is unequivocally getting Shopify connected with a lot more non-Shopify merchants per se beginning those conversations, which, again, may lead to them joining the agentic plan or ultimately may lead them to come into Shopify for their entire migration, which obviously is our plan and our hope. But even if they just want to be part of catalog and just be part of the agentic plan on its own, that already is a massive lift to them relative to everything else. I mean Shopify catalog is now the authoritative source for product discovery. There's now 1 billion products across millions of merchants. The data is structured, the pricing gets accurate. There's real-time inventory, clean attributes, and OpenAI and Microsoft are already using the catalog to power discovery. But so I think generally, this plan, this agentic idea, agentic plan idea is working really well for us. And I think the retail industry has certainly taken notice. Carrie Gillard: Our next question comes from Samad Samana at Jefferies. Samad Samana: So I wanted to pull on the agentic commerce thread. I think Stripe sessions was last week, and they're obviously a very close and successful partner of Shopify's. And they are all that several kind of new updates that allow whether that's agents to buy directly with the product catalog that someone's using and/or native checkout inside of Facebook by partner with Meta. I'm just curious as you see the surface area of commerce expanding. Can you just help us understand that if a Shopify merchant has these alternative channels where they're checking out, how the monetization still works and if the economics change? Because, obviously, you guys sit at the center of all this and are partnering with everybody, but I think investors are just trying to understand how monetization economics look as the surface area expands. Harley Finkelstein: Let me start on your first question. So I feel like I need to say this very clearly, but Stripe and Shopify are really incredible, long-standing partners that -- and I think we've been building the future of commerce together. We've partnered with them now for over a decade across payments and financial products. And I think what you're seeing is both companies are very serious infrastructure companies that are working together. The key to the -- I think the key to this is the partnership is actually deepening. Stripe recently joined our UCP Tech Council alongside Amazon, Meta, Microsoft and Salesforce, we were the founding member. And just to kind of be clear about this, UCP is now becoming the industry standard. And Shopify built it. It is the only standard that covers the full commerce journey end-to-end. And UCP, whether -- does all the work from discovery to transaction to fulfillment. We now have about 20 retailers and platforms that are part of the UCP. Stripe has now joined the UCP Governing Council, with us in Google, which is the overarching governance body for the protocol. But this is what it looks like when an open standard wins. Now in terms of agentic generally and just to kind of be very clear about kind of checkout and how that operates, I think it's really important. So I said this earlier, I'll say it again. As you saw recently, merchant store fronts really matter. So you -- when you saw ChatGPT move to an in-app browser in their checkout that is literally the Shopify storefront right within the chat here. And so it functions exact same way from an economic perspective as it would if any consumer is buying on a Shopify store. It's just a new surface area. Back to my point earlier that I'll repeat because think it's important is that every merchant, obviously, wants to have recurring customers. They pay for the customer, they want to see more of that. But the idea that now some of these agentic services now introducing new consumers, like net new consumers to Shopify merchants through services, we think, is an incredible thing as it allows our merchants to expand their total addressable market and, therefore, Shopify's as well. So generally, it's going really well, but we're really, really happy with where we lined with UCP. The relationship with Stripe is fantastic. We presented at Stripe session as well to your point here. But we compete where 2 serious companies naturally wood, but we also partner where our merchants need us to. And every time a new frontier opens, whether it's stable coins, or agentic commerce or financial products, we really do build alongside each other, and that's been true for over a decade. Carrie Gillard: ; Our next question comes from Colin Sebastian at Baird. Colin Sebastian: I guess, Harley, I mean, at a high level, I mean just the rapid market share gains we're seeing here on a same-store GMV basis. I know there's a lot of focus on ultimately what the impact will be from agentic commerce. But I mean you're assuming -- we're assuming e-commerce growth accelerates, do you envision Shopify taking even more share or share at a faster rate going forward? And then a quick follow-up. I'm curious on how you're thinking about the role of the App Store, especially with all the activity in Sidekick. Is there as much utility from the external app store? Is there an opportunity maybe to allow merchants to extend what they're building out to the broader community? Harley Finkelstein: Actually, it's a great question. Merchants that have built, specifically some of the larger merchants, the midsize and enterprise merchants that have built custom apps on Shopify. We've actually seen them at some point, decide to shift from just being a merchant and -- a merchant and as an app developer, some of them have actually discovered this incredible tooling. They're building for their own business and then put in the App Store as well. But in terms of what Sidekick is doing, like Sidekick actually, we see as a real supplement to the App Store, not a replacement. In fact, if you're -- you probably have noticed that we're spending a lot more time without app billers than ever before. hosted a town hall a couple of weeks ago with thousands of our biggest app developers. We have additions dot dev happening in Toronto this summer, which is in person with our app developer community, which has already sold out. actually, we think there's never been a better time to build on Shopify App Store. The applications that are being built by Sidekick are really very specific nuanced feature sets for particular merchant businesses. And so for most of them, it really is just for the individual merchant. We see them we see those -- the opportunity for the app developers just to continue. That being said, though, what is happening that is super interesting is that now merchants who may have had to spend weeks or even months building a feature either internally or hiring an agency to do so. They're able to do so much more work themselves using Sidekick and that means they're able to go much faster. So the first part of your question sort of around e-commerce in general. Remember that e-commerce in the U.S. is still sub-20% of total retail. And what we're seeing is a part of the reason why the stat around this kind of proof point new buyer orders from AI searches are occurring at nearly twice the rate of traditional organic search. The reason that is so important is because what we're seeing is that merchants are now discovering new buyers on these genetic services that they may not otherwise have seen. So we do think it's going to pull more consumers into e-com who may have been laggards. We also see that it may introduce new on e-com native shoppers to start doing so on a more regular basis. Net-net, though, we think that's going to mean more GMV for merchants. And certainly, our business model is predicated on the more money our merchants make, the better Shopify does. Jeff Hoffmeister: Yes. And Colin, the only other point I'd add is just think about, again, the quarter we just posted in terms of what that means to the momentum of this business. Like the strongest growth rate we've had in the U.S. in 4 years, the strongest growth rate we've had in our business overall in 40 years. we're believers in what's happening here. Carrie Gillard: And our last question will come from Richard Tse at National Bank. Richard Tse: Yes. Thank you. There were some recent reports that you guys are considering moving deeper into financial services. Like I'm wondering if you can maybe comment on that and then potentially how that would impact some of your existing partnerships. Jeff Hoffmeister: Yes. I mean I would say, as you know, Richard, we've had -- if you think about financial services, the first product we really had was capital, and that product is roughly 10 years old. That's something that we've had for a while has worked really well. there's other suites of products that we provide in kind of financial services more broadly. This is 1 of the areas where we have seen merchants, and this is one of the things which is classic core Shopify, which has helped merchants and situations, which they either face complexity or they face opportunities where we can help them do that. And that's one of the things we found in our capital business where we've been really thoughtful in terms of how we do lending and to help them accelerate their business. So as that capital business has continued to grow, some of the things you've had on balance and credit have continued to grow. And so that's something that we want to support. And that's one of Harley and I have been just as we've talked about the growth levers of this business and all the things are going to provide durable growth over the years. This is one of the things that we've talked about. There has been -- to your point, there's been some stories out there in terms of some of the money transfer licenses and some of the flexibility that would give us to help us accelerate the growth for merchants, and that's one of the things we're going to continue to do. We're going to go to where we think we can add the most value to merchants, and this is 1 of those segments. Harley Finkelstein: You look at capital, I mean, capital continues to expand more markets, smarter offers, better pricing, look at balance, balance is now deepening its utility for merchants and their data operations. I think financial services is just becoming more embedded in a more valuable part of the Shopify platform. And it's not a [indiscernible] product, it's embedded in the platform that merchants already trust, and it's -- We think there's a lot more to do there. Maybe before we just hang up here, a couple of sort of final things before we close the call that I think might be helpful. I just want to start with this. I just want to say how proud I am of this team and the current execution that we're into this company. I'm coming up to over 16 years at Shopify, and I think this is Shopify operating at its best. It's important to remind everyone that the numbers that we're putting up this quarter, they are not an accident. They are the result of a very, very clear strategy that is being executed exceptionally well. We're almost halfway through 2026. And I think AI is certainly Shopify's native language. We bet early on it and we force this adoption. And now it is as reflexive inside our company as any company, it's embedded in everything we do and the products we build and the channels we power, the way every single person on the team operates. And I think it's become this incredible exoskeleton for this company. Finally, I'm going to say this again because it's important. The AI era is not coming, it is absolutely here. And we think there's simply no job that will be more accelerated by AI than entrepreneurship. In fact, it may be the most AI safe job out there, which -- and what that means going forward is that there will be more entrepreneurs, and we think that means there's going to be way more demand for the Shopify platform. We think tomorrow's billion brands are being born today. They're being board on Shopify and just incredibly proud of the team. This is Shopify at its best. Carrie Gillard: With that, this concludes our first quarter 2026 conference call. Thank you for joining us. Goodbye.
Jacob Johnson: And we'll provide financial guidance for the full year 2026. Join us on the call today are Repligen's President and Chief Executive Officer, Olivier Leo; and our Chief Financial Officer, Jason Garland. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risks related to our business is included in our quarterly reports on Form 10-Q, our annual report on Form 10-K, our current reports, including the Form 8-K that we are filing today and other filings that we make with the Securities and Exchange Commission. Today's comments reflect management's current views, which could change as a result of new information, future events or otherwise. The company does not oblig or commit itself to update forward-looking statements, except as required by law. During this call, we are providing non-GAAP financial results and guidance, unless otherwise noted. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website and on sec.gov. Adjusted non-GAAP figures in today's report include the following: organic revenue and/or revenue growth, cost of goods sold, gross profit and gross margin; operating expenses, including R&D and SG&A, income from operations and operating margin, other income or expense, tax rate on pretax income, net income, diluted earnings per share, EBITDA, adjusted EBITDA and adjusted EBITDA margin. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to best reflect the performance of our ongoing operations. With that, I'll turn the call over to Olivier. Olivier Loeillot: Thank you, Jacob. Good morning, everyone, and welcome to our 2026 first quarter call. We are delighted to share our first quarter 2026 results. Great execution once again by our team enabled us to deliver 15% reported revenue growth or 11% organic and 160 basis points of adjusted operating margin expansion. Mid-teens top line growth, coupled with disciplined cost management resulted in margins outperforming expectations. In addition to our strong financial performance in the quarter, we advanced several key strategic priorities. This includes the launch of our transformation office, the associated sale of the polymer business and a new partnership in China. This OEM relationship advances our strategy in the country where we are seeing significant growth again. I'll touch on each of these initiatives in more detail shortly. As I reflect on our end markets and company today, it's encouraging to see the strength we are seeing across all of our customer segments. The talented and experienced team we have assembled is executing fiercely on our differentiated strategy. This has resulted in a very rich high probability opportunity funnel that just needs to be coupled with faster customer decision-making. We did see encouraging signs in the first quarter, and remain convinced that capital equipment tap will open. We delivered $194 million of first quarter revenue, driven by healthy demand across our broad portfolio and all geographies. Analytics led the way with 50% plus growth, but all of our franchises grew nicely again in the first quarter. Consumables, including protein, grew double digit which was coupled with solid capital equipment growth and services remained a standout with 30% plus growth. Capital equipment demand benefited from strength in Analytics, mixers and easier comps. We also saw growth across our diversified customer base in all geographies. Order trends were solid in the first quarter with a significant pickup in March and included some conversion of our robust capital equipment funnel. Our first quarter results and these recent order trends reinforce our confidence in our full year revenue outlook. Jason will provide more details. We are reiterating our expectation for 9% to 13% organic growth, while updating our reported revenue guidance to reflect the sale of our noncore and low-margin Polymem business. This reduces our full year revenue outlook by $7 million, but improved our margin outlook. In addition, given our strong first quarter performance, while increasing our adjusted earnings per share guidance for the full year. We remain excited about our differentiated product portfolio, the global team we paired and the strategy we're executing. As we look ahead to the next several years, we see a number of opportunities across our portfolio that position us for robust growth and allow us to continue to outpace the market. Looking at our performance by end market, we saw widespread strength across our customer base. CDMO revenues grew mid-teens with similar growth across both Tier 1 and Tier 2. Biopharma revenues also grew despite a very difficult comparison. We saw notable growth outside of large pharma, including 20%-plus growth from emerging biotechs. We continue to be encouraged by growth from this customer base, though demand remains below historical levels. OEM and integrated demand was very robust given growth in fleet management. From a geographic point of view, we saw strength across all regions led by Asia Pacific. This included a near doubling of revenues in China with our best revenue quarter in the country in over 2 years. This is a testament to the team we've put in place. Asia Pacific remains a key strategic region and I will discuss the progress on our strategy in China shortly. As expected, new modalities were dilutive to growth given the gene therapy headwind we previously discussed. We continue to see healthy growth in cell therapy and also in gene therapy when excluding that specific headwind. I wanted to update you on the following 3 strategic initiatives: First, as we have emphasized recently, we are committed to expanding margins, while banking the efforts needed to support future growth. In an effort to accelerate both of our Fit for Growth journey and our path to 30% adjusted EBITDA margin by 2030, we've formed a transformation office that will ensure with the right prioritization and resources focused on these critical initiatives. Key focus areas under this program include a force to optimize our manufacturing footprint for increased cost efficiency, improving the profitability of certain product lines through targeted productivity and rationalization, continuously improving service to our customers and efforts to capture the value of our differentiated products; and finally, acceleration of our IT modernization and AI implementation across all functions. Jason will walk you through more details. But in terms of financial impact, we estimate this effort should result in at least one point of annualized margin benefit by the end of 2027. We remain committed to our goal of doubling the business and expanding margins while further progressing our Fit for Growth capabilities. The transformation office will enable us to achieve and accelerate all of these. So most of these initiatives have just picked off, we're happy to share that as part of this effort on March 30, we divested the Polymem operation in France for nominal proceeds. While this facility was a key contributor to Repligen's ability to supply product during the pandemic, the business has since reverted to noncore sales outside bioprocessing and has operated at a net loss. In 2025, Polymem generated $7 million of revenue and an adjusted operating loss. The new owner will offer synergies in the common market in which they operate. Second, we remain more excited than ever by our growth opportunity in Asia. In fact, Jason and I recently returned from a week-long visit to the region where we met with both key customers and our Asia leadership team. We are building a great team and continuing to gain traction with key customers in the region. We are also thrilled to announce that while in the region, we signed a critical partnership to expand our capabilities and local presence in China. The partnership outlines an OEM relationship that will increase our competitiveness and access to local manufacturing beginning in 2027. It will be a multiphase and multiproduct arrangements that we expect to expand over the coming years. After our trip, we have more conviction than ever that China will be a meaningful player in biopharma for years to come. Finally, I want to comment on our IT investments and digitization journey. On our last call, we mentioned investment in our IT organization in 2026 as part of our Fit for Growth journey. We have made key additions to our team this year, including new data management and AI experts. We have implemented AI across a variety of functions including, but not limited to legal, commercial and supply chain. And as part of our transformation office, we are also working to further optimize our data infrastructure which will allow us to better implement AI in the coming years. To support our customers, our analytics franchise is well positioned for an increasingly digital environment. Our PAT product portfolio allows for the collection of both upstream and downstream data in real time. We have integrated our FlowVPX into our downstream filtration system and are working to replicate this on the upstream side. We announced a partnership with Novasign last year and are working to integrate their digital twin capabilities into our next-generation small-scale filtration systems. We see digitization as a multiyear journey, and it [indiscernible] a key strategic focus area for our company. Before I turn the call over to Jason, I'll provide some more detail on our franchise level performance. Starting with situation. Revenue grew mid-single digits on a reported basis in the quarter, driven by Fluid Management, ATF and other consumables. Excluding the gene therapy headwind, this franchise would have delivered double-digit growth. With the sale of Polymem, we now expect filtration growth to be roughly mid-single digits in 2026 on a reported basis. This also contemplates a moderated ATF outlook in 2026 due to customer-specific timing dynamics that are expected to be a tailwind in 2027. As a result, we see ATF returning to strong growth in 2027 and beyond, and we continue to see overall healthy consumable demand across our portfolio. We remain extremely confident in our process identification leadership position. After over a decade of seeding our ATF technology, we have built a high amount of trust from the biopharma industry. We will continue to prioritize further innovation and advancements that will allow us to remain the industry's partner in process in densification. Chromatography revenue increased over 25%, driven by growth in OPUS columns. We continue to win new customers globally as they appreciate the plug-and-play convenience of prepacked columns. Given the traction we are seeing in OPUS we now expect 20% plus growth in chromatography in 2026. With this outlook, we do expect a slightly higher mix of chromatography revenue versus our initial expectations. It was a great quarter in proteins with mid-teens growth on top of a very strong prior year comparison. We saw healthy demand across our offerings, led by our ligands, reflecting the benefits of the strategy we put in place to control our own destiny in proteins. We expect protein growth of at least low double digits for the year. Our Analytics franchise had another phenomenal quarter with 50% plus growth. This was led by notable strength in our downstream analytics offering, which had a record quarter. This benefited from strong demand for our SoloVPE PLUS, including new placements and upgrades. We continue to assume Analytics growth of 20% plus given momentum in downstream demand and a growing contribution throughout the year from our upstream Analytics offering. To wrap up, we are very pleased with our start to 2026. We delivered 11% organic growth in the first quarter, which is right in line with the midpoint of our full year guidance. This coupled with operating expense discipline has reinforced our confidence in our full year revenue outlook and enabled us to increase our adjusted earnings per share guidance. In addition, we made tangible progress on our strategic priorities, which positions us well to drive robust growth and margin expansion in coming years. Now I'll turn the call over to Jason for the financial highlights. Jason Garland: Thank you, Olivier, and good morning, everyone. Today, we are reporting our financial results for the first quarter of 2026 and providing updated guidance for the full year 2026. Unless otherwise noted, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we delivered first quarter revenue of $194 million, reported year-over-year increased 15%. This is an 11% organic growth, excluding the impact of acquisitions and foreign exchange. Foreign currency contributed 3 points of growth and we had 2 months of inorganic contribution from our upstream Analytics acquisition. As Olivier offered details on our product franchise performance, I'll provide more color on our regional performance. Starting with quarterly revenue mix. North America represented approximately 46% of our total. EMEA represented 37% and Asia Pacific and the rest of the world represented approximately 17%. North America grew mid-single digits, driven by OPUS and Analytics. EMEA grew more than 20%, driven by proteins in OPUS. In Asia Pacific grew more than 25% driven by ATFs, mixers and Analytics. And as previously mentioned, we had very strong growth in China. Transitioning to profit and margins. First quarter adjusted gross profit was $108 million and adjusted gross margin was 55.5%. This was 180 basis points of margin expansion versus last year. The year-over-year increase was driven primarily by volume leverage, pricing execution and favorable product mix, all of which more than offset inflation and tariffs. The favorable mix was driven by growth in our Analytics business and certain accretive filtration products. In addition, first quarter gross margin also benefited from cost absorption timing associated with production levels required to support the sales ramp through the year. We expect this benefit to normalize over the remainder of 2026. Continuing through the P&L, our adjusted income from operations was $30 million in the first quarter, up 28% year-over-year on a reported and organic basis. OpEx grew 11% on an organic basis. We remain thoughtful about balancing investments in the business while expanding margin. We expect some additional investment in the second quarter. This translated to an adjusted operating margin of 15.4% in the first quarter, which was an increase of 160 basis points year-over-year on a reported basis and 200 basis points of margin expansion, excluding M&A and the impact of foreign currency. Adjusted EBITDA was $40 million in the quarter or just under 21% adjusted EBITDA margin. Moving to the bottom line. Adjusted net income was $27 million, a 22% year-over-year increase. Higher adjusted operating income was offset by slightly lower interest income on declining interest rates. Our first quarter adjusted effective tax rate was 22%, which starts the year on the low end of our full year guidance, which remains unchanged. Adjusted fully diluted earnings per share for the first quarter was $0.48, compared to $0.39 in the same period in 2025 or an increase of 23%. Finally, our cash and marketable securities position at the end of the first quarter was $785 million, up $17 million sequentially from the fourth quarter. This was driven by $20 million of strong cash flow from operations, offset by $5 million of CapEx in the quarter. We remain focused on optimizing our working capital to drive improved cash flow conversion. I will now speak to adjusted financial guidance. As Olivier mentioned, we are reiterating our organic growth guidance for full year 2026, while updating guidance for the sale of Polymem and our first quarter results. Our guidance also assumes a couple of million dollars tariff surcharges in 2026. We are now guiding $803 million to $833 million of revenue or 9% to 13% growth on both a reported and organic basis. Our updated guidance now reflects only one quarter of revenue from Polymem which removes approximately $7 million of revenue from the full year, previously included in guidance. This continues to assume just under one point of benefit from foreign currency, which we realized in the first quarter. Our reported growth of 9% to 13% assumes the following: mid-single-digit growth in Filtration, greater than 20% growth in Chromatography, Proteins growth greater than low double digits and 20% plus growth in Analytics. We now expect 110 to 160 basis points of gross margin expansion for the year. This assumes a slight benefit from the divestiture, partially offset by higher Chromatography mix and limited impact from the conflict in the Middle East. With the strong Q1 performance, the sale of Polymem and judicious management of OpEx, we are raising our adjusted income guidance. We now expect $124 million to $132 million of adjusted operating income. This implies 160 to 200 basis points of operating margin expansion which represents a 30 basis point increase at the midpoint versus our prior guidance. Continuing through the P&L, we now assume $90 million of adjusted other income and continue to assume a 22% to 23% adjusted effective tax rate. Putting this together, we expect adjusted fully diluted earnings per share to be between $1.97 and $2.05, this is up $0.26 to $0.34 versus 2025 or up 18% at the [indiscernible] and $0.04 higher than our prior guidance at both the low and high end of the range. To assist with the quarterly cadence, we expect Q2 organic revenue growth to be similar to the first quarter. As a result, our guidance does not require a second half acceleration to achieve the midpoint of our full year outlook. We expect second quarter gross margin to be slightly below our full year guidance range and OpEx to pick up slightly sequentially following our disciplined OpEx control in the first quarter. We expect second half OpEx to be similar to 2Q. As a result, we expect solid operating margin expansion in the second quarter, while the third quarter will likely represent the lowest margin quarter of the year. Our balance sheet remains strong as we ended the first quarter with $785 million of cash and marketable securities. We will remain prudent in our spending while maintaining substantial dry powder for potential acquisitions. We expect CapEx spend to be approximately 3% to 4% of 2026 revenue. Before we wrap, I wanted to briefly follow up on the transformation office that Olivier shared earlier. We are thrilled to establish a team of both internal and external experts to drive focus improvements in areas that will drive our fit for growth capabilities and margin expansion. This is a change in mindset that reinforces the structured framework is required to drive margin expansion beyond volume leverage. As Olivier shared, we expect to see meaningful benefits from the initiatives. We are still finalizing the detailed scopes and benefits, but expect to generate at least one point of annualized margin benefit by the end of next year and continue into 2028 and beyond. We will see benefits in both gross margin and at the EBIT and EBITDA level. We see this effort accelerating our path to our 2030 EBITDA target. In other words, our path to reaching 30% adjusted EBITDA margins will be less weighted to the out years than previously communicated. We expect nonrecurring charges of approximately $5 million to $6 million through 2027 associated with this effort. These will be excluded from our adjusted non-GAAP results. Finally, Olivier and I would like to thank our Repligen teammates for delivering a strong start to 2026. We continue to be energized by the opportunities ahead, and we are focused on advancing our strategic efforts in 2026. With that, I'll turn the call back to the operator to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Dan Arias with Stifel. Daniel Arias: Jason, nice start to the year on the op margins there. Obviously, you went through some of the moving parts, but can you just maybe summarize what within the quarter was sort of incidental, I guess, you could call it mix elements, timing of cost items versus more of a reprioritization that sounds like maybe it's starting to be in play here? And then like along those lines, the transformation office impact, I know you said you're still working through the moving parts there, but is the right way to think about that, the normal 1 to 200 bps of annual op margin expansion that you've been talking about, plus the impact of transformation, is that like [ 100bps ] to fiscal '27? Or are you kind of run rating by the time you get to the year at the end of the year at 100 bps. I just want to make sure that we get the modeling element of that whole exercise right. Olivier Loeillot: Olivier here. I'm just going to kick it off and then let Jason give you more details. I mean we're obviously extremely happy about how we delivered on margin expansion in quarter 1, but beyond quarter 1, obviously, being able also to have line of sight of further improvement towards the rest of the year as well. And yes, you're right, the transformation office is an initiative like we've been thinking about for a long period of time. Now that we have the right people on board, we said that's the right time to kick it off. And as you'll hear from Jason in a few seconds, it's really a mix of getting acceleration on the fit for growth side, but also accelerating margin improvement. But Jason, yes? Jason Garland: Yes. So Dan, great 3 questions, a lot of pieces, and there we'll go through it. So yes, I'm really happy with the first quarter gross margin and overall margin performance. I think to your question, the driver really was volume, volume leverage price. So continuing to execute that. And to your point, strong mix really from Analytics growth as well as a few of the, I'll say, product lines within our overall filtration franchise. There was a timing element to your point on a little bit from timing of cost absorption that will unwind through the year. But overall, it sets us up for well and high confidence in our guide for expanding gross margin by about 110 to 160 bps for the year. From a profile perspective, Yes, we do expect 2Q to be lower than 1Q. 3Q may step down slightly from that as well. And then fourth quarter back higher as we grow on volumes through the end of the year. Most of that change will be driven by the mix phasing. So here's what I'd say, though, on a total year versus -- a total year, a full year versus full year basis year-over-year, mix is still a neutral dynamic for us. But for the first quarter being positive, we'll see some mix headwinds in the second and third and then again, fourth quarter steps back up mostly on higher Chromatography sales. And to your point, again, that cost absorption unwind. So again, a real great start and puts us right on track to our guide, lifted it up a little bit with Polymem. On the transformation office, yes, again, great questions as well. Look, I'll start by, it's really about creating the structure program where we allocate the right resources to our priorities. So there's a a real heavy fit-for-growth execution and developing the capabilities we need and then the margin expansion side. That one point of annualized margin expansion by end of '27, think of that as more in the run rate, we'll have various settlements and projects that will, I'll say, come into initiation over several months, right? We haven't assumed anything in 2026 yet but there may be some benefits that we'll share later in the year if they come in early, but we're really expecting a run rate to start by the end of '27 and then kind of seeing full benefits in '28. To your point, that's going to be on top of our normal run rate. And that was the message that we tried to share and here as well. Again, we've talked a lot about this path to 30% EBITDA target by 2030, but that we would be more weighted towards the back end. We think this initiative helps us to be less weighted in those out years, which brings some incremental in the earlier. So I'm really excited about all this. Great start to the year. Operator: Your next question comes from the line of Doug Schenkel with Wolf Research. Unknown Analyst: This is Madeline Mollman on for Doug. Just a question on equipment. You mentioned that there was a pickup in equipment in March. Where was the strength most notable? Was it by category and customer type? And did that help you in the quarter? Or was it more the order book? And then I think last quarter, you mentioned that there were some RFPs you were waiting on. Have you started to hear back on those? Or do you feel that pharma companies are still digesting some of the MFN deals? Olivier Loeillot: Yes, good questions. I mean capital equipment increased year-on-year in quarter 1 on what was pretty easy comp to be very open. And that was mostly driven by strength in both Analytics and mixers as well. We've partly seen a nice pickup of mix of demand in China, which is one of the reasons why China did so well for us in quarter 1. And similar to peers as well, we've seen orders increasing in the quarter. I mean, after what was maybe a bit of a slower start in January up to mid of February, we've seen a real acceleration of order intake towards the second half of the quarter and partly on the capital equipment side. And we realize pharmacy taking their time, but it was good to see indeed finally some answers coming and positive answers. And to your last point on RFP wins, yes, we start to win some of the RFP. We answered two towards the end of last year, which is for us very encouraging. As I mentioned previously, we didn't really have seat at the table before. So overall, very encouraging and we would like to see further acceleration of decision-making, but definitely going in the right direction right now. Operator: Your next question comes from the line of Matt Larew with William Blair. Matthew Larew: You called out 20% growth from emerging biotech, and that comes off a very -- 3 very strong quarters to end 2025. You did reference it's still below historical levels. We're now working off the back of two straight quarters of strong funding data. There's been some positive clinical updates. You're going to be escaping the one large customer headwind. So Olivier, just curious for your take on sort of what's remaining to get emerging biotech back to strength and how you feel about the momentum over the last couple of quarters? Olivier Loeillot: Yes. obviously, very happy to see the fourth quarter in a row of very significant growth for that customer segments. I mean, I've said like we've seen in each of the segments coming back one after the other, and that was the last one. to be still fair. I mean, quarter 1 comps were pretty easy still. So I want to see quarter 2 still showing exactly the same growth. But overall, it sounds like this market segment is back to a much more normal type of behavior. And you're right, the customer -- the biotech funding numbers also look very good. I mean, quarter 1 was almost double what it was last year. And April was very strong. I mean I think I've seen numbers around USD 10 billion funding in April. So the good news is we've seen really a nice rebound, we're still of the opinion that the money that has been injected has not reached yet all of these guys fully to the extent that they are spending much more money. So to your point, yes, what we've seen should hopefully be very sustainable, and we're hoping to see a similar type of growth over the next few quarters for emerging biotech. But definitely something that we are very excited about fourth quarter in a row, very nice growth here. Operator: Your next question comes from the line of Philip Song with Leerink Partners. Unknown Analyst: Two question. This is Philip on for Puneet. You mentioned China nearly doubled in Q1 [indiscernible] low base after just 2 quarters of growth in the second half. And I think, 2% to 3% revenue contribution. I was wondering if you could just unpack this some more just how much impact was from the OEM partnership kind of what's the composition between large pharma and CDMOs? And I guess, how would you characterize how much was order timing versus sort of genuine demand acceleration? Olivier Loeillot: Yes. Philip. Absolutely delighted about the way quarter 1 played out for us in China. I mean you've heard me talking about it quite a lot over the last several quarters and it was actually also to almost see a doubling of our sales in China in quarter 1. You're right, it was on very low comp. What I'm even more excited about, to be honest, is our funnel looks really very strong. I mean Jason and I were in the region recently, we spent almost a week with the team down there, and we're seeing a funnel that looks really very strong across all of China right now, and that's very exciting. By the way, talking about China, all of Asia did very well. I mean that was our fastest-growing market geographically in quarter 1. But obviously, to your question about the OEM partner, I mean this has no impact yet. I mean, we literally just signed the agreement a couple of weeks ago. So we're going to take transfer different part of our portfolio, particularly on the filtration consumable side, and we expect those guys, those partners to be up and running probably towards the beginning of next year. But it's never really black and white. And where you're somewhat probably clear asking the question is, it's a good strong signal we're giving to customers in China that we are back and that we're going to really reclaim our market in China with that partner, but also we really want to be part of that huge upcoming market growth we're seeing in China over the next several years. So there might be already a little impact that people feel like, wow, Repligen is going to become really indeed a very strong actor in China for China. And that's why we're delighted about that agreement. It is just a first step, Philippe. I mean we are looking at expanding that collaboration and potentially with other partners as well in China over the next several years, but very excited to be back in China. Operator: Your next question comes from the line of Casey Woodring with JPMorgan ahead. Casey Woodring: So you had a one point organic beat in 1Q and expect similar growth in 2Q, but you kept the low end of the full year guide unchanged. Maybe just talk about how much of that is driven by the moderated view for ATF in the second half versus the rest of the business? And then on ATF, could you provide more color on the customer timing dynamics that are driving that more moderated view in the second half. I think in the past, you had talked about a second half ramp in ATF consumables tied to one of the blockbusters you expect in 2. So is that really just a function of a customer commercial launch? And then what gives you confidence that things will pick up in '27? Olivier Loeillot: Yes. So, first of all, I mean, we're obviously very happy we started quarter 1 at the midpoint of our full year guidance. As you heard us saying we estimate quarter 2 will probably be about the same. So obviously, it will set us up very well for the guidance we've given at the beginning of the year. And the midpoint would assume at this stage like there is no need for any acceleration towards the second half of this year, which is probably a little bit of a Repligen, specific situation that we are very happy to be in right now, it's a really high comfort zone for us from that point of view. So we would be disappointed if we would land at the low end because that would somehow imply a softening of the market that we're actually not seeing today. So we are more hopefully looking at [indiscernible] the high end. And in order to reach the high hand, we would need some type of acceleration both of our Consumable business, and you mentioned ATF, I'll come back to that in 10 seconds. But also said that some of these equipment orders we've been receiving now in the last couple of months, would also be potentially delivered this year, which is not a given yet because we need to hear about our customer site preparedness to be able to accommodate that or not. So that cannot really the way to look at the guidance for this year. We're quarter into the year with a very strong start with a couple of more calls, we'll know much more about how the year is going to play out by the end of July when we report out on quarter 2. In terms of ATF, yes. I mean, we have always been very transparent. I mean, we were transparent last year about what happened with that specific gene therapy program, we said we're going to be transparent has got a huge runway for the next several years. I mean I can tell you, we are more bullish than ever. A couple of our customers came to us beginning of this year, explaining as they were managing inventory this year on a couple of commercial drugs that have been using ATF now for a few years. This is not something unusual for what is still a pretty new technology where at the beginning, people built a little bit more stock maybe than they will need finally. We know it's going to be a real tailwind for us from '27 onwards because these are 2 commercial drugs, that will require more because the drugs themselves are growing very nicely. So it's really just a temporary inventory management that we are facing. What we think about those two customers is, in fact, they are implementing ATF across many more products than this specific commercial drug I was talking about, which is why we know next year, it's going to be a real tailwind for these customers for the commercial drugs themselves, but also across the new one, they are implementing ATF right now. Operator: Your next question comes from the line of Daniel Markowitz with Evercore. Daniel Markowitz: I wanted to follow up on emerging biotech. It's good to see 4 quarters in a row, if I heard correctly, of growth from this customer segment. And I wanted to talk about the benefit from biotech funding recovery, which seems like it could flow through to back half this year and help in back half in 2027. Can you help frame the potential timing of when this benefit might occur? Remind us your exposure to this customer set and help us understand what the contribution could look like once we start to see that benefit? Olivier Loeillot: Yes. I think you nailed it already pretty well. I mean fourth quarter in a row of very significant growth. I mean, I would say, very significant growth in quarter 1 was above 20% of growth. This being said, the activity level still remains slightly below historical level. So that's why we're saying it's probably a little bit too soon to call it a trend. But maybe to be a bit more specific, we mentioned in previous call, like we some of the growth coming from some of the small biotech getting acquired. That was particularly the case in quarter 2, quarter 3 of last year. It's fair to assume that some of the funding that we started to improve towards quarter 3 of last year, has maybe started to reach some of these company toward the end of last year and probably a little bit more in quarter 1. I do expect it to become real stronger tailwind from quarter 2, quarter 3 onwards to be confirmed, but that's what we could expect, we would expect looking at this much better biotech funding environment we've been experiencing. And to answer your specific question, I mean, it's still lower than 10% of our total sales. I won't say more into the 8% to 9% vicinity in quarter 1, but probably trending back to the 10% that we experienced in the past -- in the next few quarters, I would [indiscernible]. Daniel Markowitz: That's helpful. And then just a follow-up. Can you talk about the ATF opportunity more broadly? Like how penetrated is this market? And how would you frame the potential impact from competitive product introductions? Olivier Loeillot: Yes. No. I mean, again, let me start by saying ATF grew in quarter 1, both, by the way, in capital and consumable as well. And we've just decided to moderate our expectation for 2026 because of this transitory headwind that we've been hearing from the 2 specific customers. But apart from that, I mean, we are still extremely bullish. I mean we were getting our products designing in multiple new products, multiple new modality as well. I mean we've talked about successes we've had on the cell therapy side, and that has become a very significant tailwind for us over the last several quarters. We are also very heavy on innovation. And I tell you, I'm very, very confident about the fact that were going to be leading the process intensification for the next several years. I mean I have 0 doubt about that. And we've got a lot of innovation being worked out right now with several launches that we expect to happen probably towards one toward the beginning of next year and then 1 or 2 others towards mid or end of next year. So we are absolutely very bullish. And as the runway on ATF is still absolutely very strong. Operator: Your next question comes from the line of Mac Etoch with Stephens. Steven Etoch: Maybe just following up on some of the previous order related questions. Just looking at what you called out during March, can you just unpack what specifically changed in the order environment at that point? Was it tied to improving customer decision-making, budget releases, increased activity within certain [indiscernible] like maybe Analytics or upstream systems? And how is that exit rate carried in April at this point? Olivier Loeillot: Well, it's a little bit of all of that, to be honest with you, but maybe let me take one step back. So you're right. I mean we had a little bit of -- well, taking two steps back a fantastic quarter 4 in terms of order intake. And then really when I say fantastic, I mean, it was like in [indiscernible], we have not seen like for probably the previous several years and so on. So it was somehow pretty expectable that the beginning of quarter 1 would be a little bit softer. But then towards mid of February, we started to see a really significant acceleration that has enabled us to deliver a very strong order intake for the full quarter 1 really in the right zip code in terms of book-to-bill like what we expect for the previous several quarters. So really across the board, very healthy quarter 1, thanks to what happened in March. What's more important, honestly, than order because we said it can be somewhat a little bit lumpy. As you know, what's tracking our funnel. And I won't say we are really extraordinary discipline on the way we are tracking our funnel. And one part of the funnel, I'm looking at myself on a weekly basis what we call the high probability funnel, which is a probability that is above 50% closing orders within the next 2 to 3 quarters. And I mean, probably at the highest level ever. In fact, I just made the exercise a week or 2 ago, looking at how it looked versus what it looked like a year ago, and it's significantly higher than what we've seen a year ago. So from that point of view, we are very confident about the way things are going to play out for the next several quarters. what we're not still controlling fully is decision-making. And that's maybe where indeed, I would still see a bit of a difference between consumables and equipment, both look really good for this year. I mean, in terms of guidance for the full year, we see like both grew double digits in sales. But obviously, most of the headwinds we've talked about are going into consumable, as you know, meaning the gene therapy program on one side and then these two ATF customers on the other side. So it means like consumables are still doing extremely well. On capital equipment, it's fair to say like Analytics and mixers have been leading the pack. We would like to see a real acceleration of what we call the bigger type of CapEx equipment. We started to win some of these RFPs. As I mentioned earlier, if the tap of capital equipment really opens, this is going to be a massive opportunity for all of us. And I'd say Mac because the water is just waiting for the tap to open, and then it's going to become like a totally different story for tool provider. So that's kind of really a long answer to a short question, but across the board how we're seeing order intake and how we're seeing a different part of the business between consumable and hardware. Operator: Your next question comes from the line of Paul Knight with KeyBanc. Paul Knight: When you look at the China market right now, is this domestic demand or is it multinationals expanding their bioprocess capabilities in that market? Olivier Loeillot: Paul, yes, I have to say at this stage, the vast majority, and I say last majority, at least what I have a good line of sight of is really China, local demand market that's coming back. And we've had a lot of successes. I mentioned mixers already a couple of times. But beyond mixers even on our filters, consumable and so on, we're seeing a lot of these customers coming back now. As you know very well, we are facing much more competition than we were before, which is why we've been pushing and now implementing that strategy that I think it's very different, very differentiating as well versus what others might have been doing, where we are really going to capitalize on local company to help us gaining our market back. I've said several times, the China market today is totally different than it was 5, 5 years ago, even maybe 3 years ago, even to a certain extent, you want to subsidy in China, you have to appear to be much more really Chinese than you were before, and that the only way you're going to be able to defeat competition locally. We found a part that we like a lot because we know the management team pretty well, but also they are still in the early phase of growth. And I've seen so many of these companies being successful over the last several years that collaborating together, we feel we have got an incredible runway over the next several years. But the demand is really from Chinese company Chinese local demand, which we know is going to grow very significantly over the next several years now with all of the money that has been injected into the China ecosystem. Operator: Your next question comes from the line of Brendan Smith with TD Cowen. Brendan Smith: I wanted to actually ask just another one on the transformation office a bit. Any more granularity on what kinds of margin optimization efforts you really have going on there? I guess are you focused on certain segments more than others? I know you mentioned some AI process involvement. So I guess just wondering if there's any potential for some of the relative margins across your different segments and maybe close ranks a bit from some of the historical spread we've seen? Olivier Loeillot: Yes, Brendan, good question. So we highlighted kind of 4 buckets. One is manufacturing footprint in terms of how to optimize that. So that, of course, will hit either different product lines or help us drive efficiencies across the overall network. The other piece, to your point is really this improving profitability on certain product lines. So that's examples of where do we look at our portfolio? What's dilutive to the overall average? And how can we look at design changes? How can we look at manufacturing efficiencies, to your point, how do we look at the the product SKUs that we have to try to raise that overall. And then it's things like Polymem, again, where we saw that a noncore product, not even within bioprocessing and not only dilutive at the margin, but a loss at the bottom line. And so that's fairly unique, though. So just to caution you in terms of opportunities at that level, but it's absolutely about finding the below-margin products and then increasing those. The other pieces is also around how do we serve our customers better, how do we get more value. So again, you might see that within the product lines. And then the other big bucket is this topic of IT modernization as well as AI. And we kind of keep them connected but also have a very different path on each of those. We've talked a lot about the need to to upgrade our IT infrastructure. It's data, I'll say, optimization -- it's looking at the -- when you look at the number of applications and vendors we have for our size company, we can rationalize that. That's the type of thing that actually drives synergies and cost savings. But always bring, how do we leverage SAP, our ERP as well to to get more out of that. And then from an AI perspective, it's a balance of looking at the tools that are available, but then also going back into each process and function understanding the problems that we're solving and the use cases for those AI, I'll say, solutions. And so incredibly exciting for us. Again, this is about allocating the right resources focusing internal experts as well as bringing external experts to help us accelerate that. And again, it's just another example of kind of the long game that we're playing on both margin expansion as well as being able to grow in scale. Operator: Your next question comes from the line of Matt Stanton with Jefferies. Matthew Stanton: Maybe just one in the context of the order commentary and then the kind of high probability funnel that you laid out, Olivier. Can you just remind us in terms of your equipment portfolio and the order book there, how quickly you turn that? I think historically, you had kind of talked about earning 2/3 of the order book in 6 months or less. I think it would be helpful to kind of get an updated number on that given the evolution of the portfolio as it relates to about what could maybe show up in orders today and income and revenues in the back half of the year versus 27. It sounds like mixers, analytics, some of those are maybe shorter cycle type equipment than the larger projects you talked about late but would just be helpful to kind of level set the order book, how quickly you think you can turn that today and how that maybe has evolved from a couple of years ago. Olivier Loeillot: Matt, I think you answered your question very well. So I'll try to add some more details here. But you're absolutely right, like we've got very different type of hardware in our portfolio. So the 2 you mentioned, you're right, both mixers on the one side and analytics on the other side, turnaround time is very short. I mean, in fact, for analytics, typically you can even turn around an order within a couple of weeks. So for mixers and here, I would differentiate what we call the stainless steel mixers, which is what we acquired when we 5 years ago from the single-use mixes, this time are slightly different. For the stainless steel side, we are like below 3 months. for the single-use mix, we would probably be a little bit more than 3 months. And so there is a slight difference here. and then comes what we call well, even within the larger scale type of hardware, there is still a difference. For ATF, system very often we are capable to turn around delivery in 3 months or even less some time if we've got no customization to achieve for downstream system, whether TSF or Chrome system, it really depends again whether it's catalog type of product or whether it requires some customization. If it's catalog, turnaround time can also be in the range of 3 months. also if it's custom probably more into the 5 to 6 months range. But what's becoming probably more important than our own lead time is really customer preparedness. And especially now that we start to enter into these onshoring projects more and more we will see probably very different cases where people already have brownfield or people need to build everything from scratch. And then this is what we don't control fully where our lead time might be absolutely enabling us to recognize those revenues this year it might well be that those sides are only ready by mid of 27% or even maybe second half also. And as you know, when I mentioned about the blockbuster, we had -- we won a couple of years ago now on ATF, I mean it's a specific example where the customer size is still just being finalized right now. So what we don't control fully is customer preparedness and especially with ensuring that, that's something we're all going to have to figuring out better in the upcoming few quarters here. Operator: Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Matthew Hewitt: A great start to the year. Analytics is becoming a much bigger demand area for your customers, whether it's the CDMOs or the pharma companies. You're seeing increased demand. You're speaking to some of the growth that you're seeing there. From an investment standpoint, -- where do you see opportunities to invest in that area, whether it's real-time monitoring or taking some of the data that you're capturing and kind of helping your customers identify areas for improvement. Is this an area that you're investing internally is an area that you see from an M&A perspective, maybe augmenting some of your existing capabilities? Any discussion there? Olivier Loeillot: Yes, Matthew, great question. I mean, obviously, as you mentioned, we're really excited about the traction we're seeing on process analytics. I mean, 50% growth in quarter 1, 40% organic credit, downstream analytics. I mean we've never seen that before. In fact, historically, quarter 1 was always a weaker from a seasonality point of view. So that was really obviously an incredible performance. And you're asking absolutely the right question, what are we doing to make sure we capitalize on that and we even can double down on that over the next several years. So first of all, you know, we said that upgrade cycle is just still at the beginning. So going to be a tailwind for us for the next several quarters, if not probably several years. But beyond that, and I didn't talk so much about the PAT side, the PAT has got huge traction as well. I mean -- as you know, we launched our FlowVDX in-line protein concentration technology 1.5 years, 2 years ago, so which has got incredible traction while working on multiple other PA technologies product grade or product launches that will happen over the next 1 to 2 years. So talking about investment and talking about organic investment, we're investing a huge amount of money on the R&D side to make sure we've got many more products on our shelves over the next several years. but both from an app line but also from an in-line point of view, and you will hear us tell talking about that massively over the next several quarters and years. And then, yes, in terms of M&A, absolutely. I mean, as you know, capital spending top priority #1 for us is on the M&A side. I mean we ended quarter 1 with $785 million of dry powder. So we are looking at several opportunities, and it's the right Polymem on the Analytics side to complement our offering further so on, we would be very interested. So the last piece I would mention and services are benefiting from that grandly as well. I mean our service business grew more than 3% in in quarter 1. And the good news is we've got a very nice attachment rate of service to our analytical equipment. So that's another area we're investing into quite a bit and then partially for that piece that is linked to the analytical business here. Operator: Your next question comes from the line of Justin Bowers from NJ. Unknown Analyst: It's Deutsche Bank, but I'll squeeze a multiparter into one. So on the proteins, pretty strong quarter, especially against a tough comp. Can you talk about some of the drivers there? And then -- is that more of a shorter cycle business, i.e., how much visibility do you have into that? And then over the next 2 to 3 years, is that a franchise that you believe can continue to grow above Fluid average. Olivier Loeillot: Justin, Happy to have a question on protein because that's another business. I'm so happy about the progress we're seeing here. So yes, you're right, I mean, meeting growth lapping on what was a very strong quarter 12025 was a really great positive surprise for us. And honestly, we got demand across all our offerings, but partially on the legal side. I mean I mentioned in the past we've really become closer and closer with Purolite. We work really very much hand-in-hand together they have fantastic traction, and we are very happy about the way we collaborate together. That has been one of the reasons why protein did so well. So we are in the long-term type of business here because beyond that specific collaboration the fact also we have our date in our hands for all of the non monocular antibody side of the business is also very encouraging because we are winning multiple and we say multiple is really multiple designing. And it's a business that takes a little bit of time because where you first need to get designed in and then you start to deliver some first pilot quantities. And then hopefully, some of these products are either making it to the market or if they are already on the market, people are -- our customers are going to put the trigger to switch from one supplier to us. But with all of the designing we've been working on, and we've got a dedicated team that is going on the market, getting fantastic response from the market because they've never seen a company capable to develop a new lean in 3 months and month. I'm absolutely very bullish about that market for the next several years. I think the best is still to come here for sure. Operator: We have reached the end of the Q&A session. I will now turn the call back to Olivier Loeillot for closing remarks. Olivier Loeillot: Thank you all for joining our call today. We had a very great first quarter, and we're executing against the plan we've outlined which is outpacing market growth, delivering margin expansion, and Jason gave you a good number of details about what we're achieving on that side; and finally, making tangible progress on our strategy. I really want to thank all of our Repligen teammates. We have an incredible team, and we are delivering a fantastic start of the year and looking forward to talking to you again in a quarter from now. Thank you all.
Operator: Good morning, and welcome to the Vornado Realty Trust First Quarter 2026 Earnings Call. My name is Rocco, and I will be your operator for today's call. This call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporation Counsel. Please go ahead. Steven Borenstein: Welcome to Vornado Realty Trust First Quarter Earnings Call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement. Please be aware that statements made during this call may be forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening remarks are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth. Steven Roth: Thank you, Steve, and good morning, everyone. Business at Vornado continues to be excellent, and it's getting better and better. We are riding the wave of strengthening more and lasting landlords market. And New York is by far and away the strongest real estate market in the country. Michael will get into the details shortly. But today, I have different fish to fry, and I will ask the first question. question. What do you make of the spat between Mayor Mamdani and Ken Griffin and how will it affect your 350 Park Avenue development? Answer, let me begin by saying that I do not and cannot speak for Ken but I do unambiguously stand with him. And notwithstanding the mistakes and bad form of the recent video that went viral, we are pulling for Mayor Mamdani to succeed. Let me establish my credentials. Vornado was a New York company and I am in New Yorker, born in Brooklyn and attended [indiscernible] public high school in the Bronx. Both Vornado and I are lucky to be New Yorkers. My daughter and three granddaughters live in the Bronx. And my son and his family have in Brooklyn. My wife of 56 years, and I lived and worked in Manhattan. We follow the rules, and we pay our fair share. Vornado will pay $560 million in real estate taxes this year, and I'm pretty sure that's in the top 3. And that doesn't begin to count the personal income taxes that I and our Vornado population paid to the city and state of the York. We work our asses off, and we are not [indiscernible]. We are very proud of our lifetime of achievements. We are the company that is investing billions to transform the PENN district. New York is a union town, and we are a union shop, employing thousands of hard-working New Yorkers in our buildings and on our construction sites. The ugly unnecessary video stunt is personal to Ken and sort of personal to me too. You see Vornado and I as the developers of both 220 Central Park South Residential building and the 350 Park Avenue Citadel Tower. We are all shocked that are young Mayor would pull this stunt in front of Ken's home and single him out for ridicule. This was both irresponsible and dangerous. As I said, Vornado was the owner of the 65-year-old building on the Park Avenue [indiscernible] front that will be raised to make way for the Citadel New York [indiscernible] tower, which will employ thousands further cement in New York at the financial capital of the world, that pay significant taxes and on and on. This building is being designed by the same enforcer and partner architectural team that designed JPMorgan Chase's new headquarters down the block. This is now the if-we-move-forward project. Now a project of this scale takes years, and we have already worked with two prior city administrations, both of whom have recognized the benefits and have been enthusiastically welcoming and supporting as evidenced by the rare unanimous [ ULIP ] approval for this project. Demolition began literally days ago, and we at Vornado are ready to go. I must say that I consider the phrase "tax the rich" was spit out with anger and intent by politicians, both here and across the country to be just as hateful at some discussing racial slurs and even the phrase "from the river to the sea". What these [indiscernible] calls seem to be saying is that the rich are evil or the enemy or the targets or maybe even just suckers. But the rich home the politicians are targeting, started [indiscernible] on the epitome of the American dream. They are our largest employers and largest philanthropist, and it is the 1% that made 50% of New York income taxes. They are at the top of the great American economic pyramid for a reason. They should be praised and thank. Ken, our partner and friend, is the best of the best. So where are we now? As we discussed last quarter, Ken exercise this option to enter our development joint venture and build a new 1.9 million square foot tower with Citadel as the anchor tenant. We have until the middle of July to decide whether to participate with Ken in the venture or to sell there. It's a good bet that we will go all in. This fund cannot be amended by a short-term insincere private apology. What I beg my Mayor to do is to begin every day being business welcoming and business friendly as his first priority. That's the only way to get the growth and financial way that will accomplish these programs, some of which I must say are interesting and balance, both with safety schools, child care, clean streets, housing affordability, homeless programs, et cetera. The election is over and now is the time for hard work and management not show boating. New York is an enormous enterprise with a city budget of $120 billion and a state budget of $250 billion. If there is a $5 billion or $10 billion budget shortfall shortly, that can be found -- that money can be found by managing rather than by taxing. It is interesting to note that high tax New York spends more than double per capita that low tax or no tax Florida or Texas. There is a lesson here. Maybe something good can come out of this blunder. Maybe we can draft tend to become active and lead an effort to educate New York voters and to elect right-minded candidates. Ken can do it. He's the one who could galvanize the entire business community. Here is an interesting fact for us. The members of the partners in to New York City alone deploy 1 million voters. Hundreds of our business leaders with Lion up to support Ken, I would be first in that line. I was taught and I believe that -- I believe in America, where after an election, all slides get behind us and support the winning candidate for the greater good. Our Mayor is young, smart and energetic. With a little tweak and a little tweak there, his leadership could make this great city even greater. He will learn over time that growing the tax base is a winner, and raising taxes is a loser. I will say it again, he will learn over time that a growing tax base is a winner, and raising taxes is a loser. And that's a hard-working 1% are allies, not enemies, but learn from them this mistake and move upward. Turning to Vornado. We now have a lineup of assets and in-process projects, which I am confident will deliver the highest growth in our industry. Executing on all this is now our singular focus. In this year, 2026, we will complete the heavy lifting of leasing at PENN 1 and PENN 2, as Michael and Tom have already been saying quarter after quarter, our published numbers will reflect all this by the end of 2026 and going into 2027. As part of our focus on enhancing our portfolio and making great deals, we announced last week the acquisition of a 49% interest in Park [ and ] Plaza a 1.2 million square foot Class A office building along the prime stretch of Park Avenue. This asset is directly across the street from our 350 Park Avenue project. The building is 99% occupied by blue-chip tenants with an 11-year weighted average lease term and rented a 40% to 50% below market. Prime Park Avenue AAA assets rarely trade, and we believe we made an excellent purchase. We're buying the asset at $950 per square foot, which is 65% to 70% discount to replacement cost. And we are inheriting a fixed rate -- a sub-3% loan through 2031 to leverage off an enhanced return. We expect the transaction to be approximately $0.10 accretive in on a full year basis in the first year. We are happy to be partnering with the Fisher family who owned other 51% of the assets. We have a long relationship with the Fisher family. They are first-class operator who think much like we do. With Park Avenue Plaza, our recent acquisition of 623 Fifth Avenue and the pending development of 350 Park Avenue, we will be adding [indiscernible] 2 million square feet at share of the very highest quality prime asset [indiscernible] portfolio. at very accretive economics. Speaking of 623 Fifth Avenue, our 383,000 square foot assets, which we are redeveloping to be the premier boutique office building in [ Baha ]. We are far along in our design and planning. We are receiving outstanding reaction from the market and already have active tenant interest at or above our underuse. Demand for our retail assets is robust and accelerated. We have a handful of assets for sale in the market. I covered share buybacks in my recently posted shareholders ever. To date, under our $200 million share buyback program, we have repurchased 7 million common shares at an average of $25.80 per share totaling $180 million. Last week, our board authorized an additional $300 million buyback program. Now to Michael. Michael Franco: Thank you, Steve, and good morning, everyone. First quarter comparable FFO was $0.52 per share compared to $0.63 per share for last year's first quarter. This decrease is consistent with our comments from the prior quarters is primarily due to the reversal of previously accrued PENN 1 ground rent expense in the prior year's first quarter to higher net interest expense, partially offset by higher FFO resulting from the execution of the NYU master lease at 770 in the prior year. and strong income growth at PENN 1 and PENN 2. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release and on Page 6 of our financials. . We now expect full year 2026 comparable FFO to be slightly higher than 2025, ramping up each quarter due to GAAP rents coming online, lower interest expense after June 2026 bonds are repaid and some seasonality relating to our sites. As previously indicated, we expect there to be significant earnings growth in 2027 as the positive impact from PENN 1 and PENN 2 lease-up takes effect as well as the positive impact of the recent acquisition of Park Avenue Plaza. Turning to leasing. The Manhattan office market is head and shoulders the best in the country and is off to its strongest start to a year in over a decade. Manhattan leasing volume reached nearly 12 million square feet, the highest first quarter level since 2014. There is a significant supply-demand imbalance in the $180 million Class A better building market in which we compete, as the availability rate in the prime submarkets in Midtown and the West side has tightened significantly, and there's a little new supply coming for the foreseeable future given the significant cost and duration to build. This is all resulting in tenants competing for space and rents rising aggressively. The landlords market we have been long predicting is very much here. While the macro environment we offer today operate in today, has gotten even more complicated in our last call. And the geopolitical volatility is as high as we've seen in some time. The U.S. economy just continues to chug along as it does in New York. While there is a risk of the Middle East conflict last much longer and has a greater economic impact, to date, we have not seen any change in [indiscernible]. Moreover, while there has been a lot of AI fear monitoring out there, and while we are respectful to risk, we believe it is overblown. Over the past 50 years, office-using jobs have continually evolve based on new technologies. From the computer revolution of the 1980s and personal computers and water processes were introduced to the 2000s and the Internet transform workflows and the way we communicate and now with AI improving efficiencies and increasing productivity. In every example, office-using jobs were not reduced, but they shifted from clerical based functions to knowledge-based rules. And each new revolution spurred productivity and economic growth with new businesses and net positive jobs created. There will be winners and losers by industry, a job function and by geography. But make no mistake, New York and San Francisco will be winners as the intellectual and innovation capitals of the country, where talent will continue to aggregate and in the best buildings. At Vornado, we are coming off our second best leasing year in our company's history, where we leased 3.7 million square feet with 960,000 square feet of New York office in the fourth quarter. Business continues to be very good, and the momentum from last year has continued during the first quarter of 2026. In the first quarter, we released 426,000 square feet of office space overall, including 311,000 square feet in New York. Our metrics were very strong. Average starting rents in Manhattan were $103 per square foot with mark-to-markets of positive 11.7% GAAP and positive 9.7% cash and an average lease term of 9 years. Our New York office pipeline is robust and has over 1 million square feet of leases in negotiation in various stages of proposal. Turning to the capital markets. The financing markets continue to be strong and liquid for Class A New York office assets. though pricing has widened a bit given the current geopolitical environment. The investment sales market continues to heat up as well with a broadening set of buyers keenly focused on New York City. We are very active in the capital markets in the first quarter most of which we covered on the last call. Given we've dealt with almost all of our 2026 and 2027 purities, we don't have any significant financings we need to complete for the next 18 months. We do still have a few loans that we need to order through at lenders over the next 2 to 3 years. Finally, our liquidity remains strong at $2.6 billion, which is comprised of cash of $1.2 billion and our undrawn credit lines of $1.4 billion. With that, I'll turn it over to the operator for Q&A. Operator: [Operator Instructions] First question comes from Stephen Sakwa at Evercore ISI. Steve Sakwa: Steve, thanks for your opening comments on the city and the administration. I guess maybe going to Michael's commentary on just the pipeline of the 1 million feet. I didn't know if Michael or Glen could maybe expound a little bit on how much of that is for upcoming lease expirations, how much of that is for kind of vacancy within the portfolio? And I guess most of that's probably in New York, but maybe discuss kind of the New York versus Chicago versus San Francisco demand trends. Glen Weiss: Stephen, it's Glen. So our pipeline is extremely well balanced of the 1 million feet. It's right down the middle, 50% new expansion, 50% renewal. The other thing I'll note is on renewals due to the lack of quality state available in the market, we're seeing many of our tenants coming to us early on renewals since they can't find quality alternatives, which is a key indicator of a rising landlord market. As it relates to City to City, San Francisco is coming on very strong. While we have some vacancy, as you see from the first quarter numbers, we have tremendous activity on all the vacancy. Our deals in the Tower 555 are now north of $160 a foot. Volume in San Francisco overall is strengthening week-to-week. And certainly, everyone out there is doing a lot better and deals are happening in a very rhythmic pace. Chicago is starting to come on demand is improving. The deals are tough, but there are certainly tenants coming new to the market, and we're seeing a lot more foreign proposals coming at the mark as we go into the second quarter and into the summer. Steve Sakwa: Great. And then maybe just as a follow-up. We did notice that in terms of lease commencements, the Verizon lease kind of had a little bit of a change in status. And I'm just wondering if you could maybe talk about kind of what their, I guess, ultimate status is with the building? And did that lease kind of start earlier? And is that a benefit to the '26 earnings growth? Thomas Sanelli: Stephen, it's Tom Sanelli. I'll take the first part of it, and I guess, Glen, you could talk about the status. So [indiscernible] Verizon told us they're not going to build out their space and they put them a sublet market, GAAP allows us to start revenue recognition early, so you'll see that flow through all of 2026. It started in the first quarter. Glen Weiss: On the leasing front, the block of space is excellent. It's 200,000 feet and includes 30,000 feet of outdoor space. We're in a great position. We have a rise in public parent guarantee for the entire week to begin with great credit. We continue to show this pace as does Horizon. There's very good action. And whatever the outcome, Vornado in a great spot as it relates to that position. Operator: And our next question today comes from John Kim at BMO Capital Markets. John Kim: Steve, really appreciate your opening remarks and really provide a lot of clarity on how you're thinking about moving forward. But I wanted to ask you about your statement that you're all in at 350 Park. Are you all in even if Citadel would not commit to the building? And how should we think about the put option you have in July? . Steven Roth: I didn't hear the last part. Michael Franco: How should we think about -- how should we think about the put options as you said, John? John Kim: Yes, that's right. Is that something that you'll let pass? Or is that something that could be -- the day could be extended? Steven Roth: The answer is that can exercise to go ahead. We have until the summer to decide whether we are a participant or a seller. And I expect that we will take all of that time, which is the smart and correct thing for us to do. There are still some documents and other details to be hired now. But my remarks that I say where I expect we will be all in, I do expect we will be all in, but that's not a legal commitment at this time yet. John Kim: And that's all in with or without Citadel's commitment? Michael Franco: No, the answer is -- the question is, is it all in regardless of whether Citadel is committed or not from a lease standpoint? Steven Roth: Just -- Citadel has to be committed. They will be committed. So I mean, this whole deal is based upon the fact that [indiscernible] will be the anchor tenant taking no less than 850,000 square feet, although we expect more. And [ Ken Griffin ] is the 60% partner, we are a 36% partner and the [ Rudi ] family is a 4% partner. That's the state of play. This whole thing Ken has committed to start this whole thing will all come together and become very clear in the mid-summer. John Kim: Okay. And then I wanted to ask about the $200 million of signed leases not commenced figures that you provided last quarter. If there's an update to that figure in terms of dollar value timing? And if there's any offsets through known move-outs during that time frame? Michael Franco: I would say the number is still in that general neighborhood. It's probably a touch larger today, but it's generally in the same ballpark. And I think in terms of thinking about it, probably 10% to 12% comes in per quarter over the next couple of years from a pacing standpoint, there are some offsets whether it's expiries, vacancies, et cetera. I think, Steve, on the last call sort of said from a modeling standpoint, assume $0.40 a share flow through to the bottom line. So we're going to stick with that for now, but that will give you a sense in terms of the pacing of that $200-ish million, and that started this first quarter. Operator: Our next question today comes from Floris Van Dijkum with Ladenburg. Floris Gerbrand Van Dijkum: I appreciate some more color on that large [ SNO ] pipeline. Could you maybe just expand on that a little bit, what percentage of that [ SNO ] pipeline is in the PENN District. And how much of your -- does it include retail leases, you've done some leasing on Upper Fifth Avenue in particular. Maybe you could give us a little bit more color of the PENN District versus other areas in your portfolio? Michael Franco: Floris. That number is pretty much all office. So I can't give you the retail number as we sit here right now. obviously, the lease with Meta is a big positive. And in terms of the $200 million in terms of PENN versus others, I would say it's probably 2/3 in it should not be imposing given the lease-up of PENN 2 and the balance in PENN 1. Floris Gerbrand Van Dijkum: And maybe my follow-up question, as it relates to your Park Avenue Plaza acquisition, I mean, what caused that deal to happen? Why did the Fisher Brothers, I guess, sell out? It looks like it's like a 6%, 7% yield on cost, if I'm not mistaken, to get to the $0.10 accretion, that seems pretty attractive. Is that a cash yield or is that a GAAP yield? And how much of a mark-to-market -- how much more growth in terms of earnings do you expect to get from that property going forward? Michael Franco: I can remember everything you asked here, Floris. Look, we're thrilled about the acquisitions. These types of assets don't trade very often on Park Avenue. It's certainly one of the best assets on Park Avenue. And in terms of the yields on a cash basis, given the in-place debt, it's roughly 8% on a GAAP basis, it's well in the double digits. And as Steve said in his remarks, rents are well below market here, probably at least $50 a foot below market. So over time, things are not static. There's action with tenants, we'll capture that and that's without rents growing. So if rents go further, that gap should widen. So we're excited. The Fishers did not sell out. They remain -- they still hold their 51%. And I think their track record of performance on the asset is stellar. It's a blue-chip set of tenants, at least long term. They're quite effective at signing long-term leases with high-quality tenants and that's reflected in this asset. So -- and the tenants, some of which we spoke to about their experience, couldn't have raved anymore about the quality of the asset, and they have grown over time there. So -- we're excited about the asset. We think there's tremendous value to be created over time. And so I think I addressed all your comments, questions. Operator: Our next question today comes from Alexander Goldfarb at Piper Sandler. Alexander Goldfarb: Steve, yes, echoing I appreciate your comments upfront, just crazy. But thank you for your statements. Michael, just following up on Floris' question. The two items in the '26 guidance. One, the $0.10 accretion for Park Avenue, was that the GAAP impact or that's the cash just as we think about FFO? And then the second part of that guidance question is, there was an item about the master lease changing at 350 and just want to know how that impacts the earnings for this year. That's my first question. Michael Franco: Park Avenue Plaza the $0.10 is a full year run rate. So obviously, we're not going to have that for '26. That's a GAAP number. And on the 350, the change there was done given Citadel wanted to kick off the development. They want to vacate. We couldn't start demolition without defusing the old CMBS loan. And so that along with the fees as you saw in our Q, the master lease was modified, there were a number of changes made in the documents. And so that was a negative to '26 earnings, which when we talked about it given our comments. Steven Roth: Alex, the deal always contemplated that when Citadel vacated the building so that the building would be demolished that the rent would be reduced. Unknown Executive: Or even go away. Steven Roth: The earnings sting by that reduction, much of it will be made up by capitalizing interest, et cetera. So while the earnings what exactly is going to happen. Glen Weiss: So in 2026, for the next few months until we decide whether we're going into the JV, there's a wash. There's no earnings coming out of 350. Once we make that decision, assuming we go into the JV, we're going to start capitalizing interest in cost. We start seeing... Steven Roth: Will that equal or exceed or be less than the [indiscernible] at? Alexander Goldfarb: Initially be a little less and then eventually over '27, '28, '29, basically equates to what we were getting. Michael Franco: Like for 5 or 6 months, there's a negative thing given the master lease. But again, that's previously communicated out. Does that satisfy you, Alex? Alexander Goldfarb: That's awesome. Second question, Steve, is big picture. With regard to Citadel and the whole attention with the Mayor, back in 2019, Amazon wanted to open in Queens, they were a bust. But I don't recall this amount of instant negativity in political nervousness today, it's clearly escalated a lot quicker. What do you think has changed? I mean certainly, politics have become more left, more progressive here. But why do you think can this time the politicians seem to be much more eager to make this everyone be happy versus Amazon, the city and the state seemed happy it wasn't even a ripple when Amazon walked from Queens, it doesn't seem that. What's the difference now versus then? Steven Roth: Yes, I don't know. But you're correct that the body politic doesn't seem to have any remorse about losing Amazon. On the other hand, the body politics thinks that the civil team is important and an enormous contributor and there is a significant feeling amongst the political leadership and the business leadership that this was a mistake which I described as a blunder and this is something that should be repaired. And we'll see where it goes. Operator: Our next question today comes from Dylan Burzinski at Green Street. . Dylan Burzinski: Michael, I think you mentioned that pricing has widened given some capital markets volatility associated with the Warner on. Curious if you can just provide more color on that. And then maybe if you can sort of flavor in some commentary around, I think, last quarter, you guys mentioned looking to put assets in the market. Just sort of any sort of color you can provide on sort of how that -- those processes are going? Michael Franco: On the financing markets, financing markets were incredibly strong in the last year, beginning of this year as tight as spreads as we have seen in some time. Given the volatility, it's back off a little bit, like there's still depth in the market. Deals still can get done, particularly for high-quality assets. I wouldn't call it a huge impact, but the reality is, look, treasuries are probably up 30 basis points or so, and spreads have widened out a little bit. So that makes the borrowing costs a little wider, but not wildly different. Just -- this is still a very functioning marketplace for high-quality assets, but off maybe 40, 50 basis points. I'm glad we did what we did when we did it. So we're not really dealing in today's markets, but again, you can get deals done. On the asset sales side, where -- I think Steve referenced, we're working on some asset sales. And that is true. And when we have some rate of announce, we'll announce. But the answer is, we got a few things that are meaningful in the pipeline. We're in active discussions with potential buyers. I would say the interest in New York City. As I said in my remarks, continues to expand in terms of the type of buyer. I think there is consensus on New York being head and shoulders best market. Assets are -- rents are rising assets at a discount or placement cost, it's a recognition, there's not a lot of supply coming. And so I think Global Capital has a lot of comfort in it. I think one of the things we're hearing from capital sources around the world is the U.S. remains the safest, most liquid market, particularly given everything going on around the world. And I think you're going to continue to see capital M&A from other parts of the world to come into the U.S. I mean, New York City is going to get a heavily disproportionate share of that. So that's what we're seeing. And when we have specifics to announce, we'll announce it, but we're encouraged by what we're working on. Dylan Burzinski: And then just on the rent growth piece, I think several quarters ago, I asked 20%, 25% rent growth if you saw that over the next 5 years, what were your thoughts to be on that, Steve, I think you mentioned like while that's good, that would be disappointing given everything you're seeing on the supply and demand imbalance, especially for high-quality office. I mean can you guys just talk about how far rent growth could go in your mind? And has your thoughts around that cumulative rent growth that you changed at all? Michael Franco: I think we'd still be disappointed in that, Dylan. Look, as I think we've said in the last couple of calls, right, the backdrop for of is as favorable as it's been in a long, long time. And it's very difficult to add supply here, which at some point, we're going to meet. So there's going to be a building a year maybe as we get into the next decade. But that's very little. At the same time, we have supply coming out of the bottom end of the market. So the fundamentals are great companies, as we've said, continue to want to grow here. We're seeing still significant activity from the financial service sector, law firms, accounting firms, frankly, AI has picked up more recently. So I think all that results in rents continue to rise. So I don't know that it makes sense to give you a prediction, but we'd be disappointed at 25% over a I don't know if you want to add any comments on what you're seeing from... Glen Weiss: I mean, look, a tenant, rent sensitivity is not even high on the list right now, tenants want to be in the best buildings with the best landlords. And if you think about our leasing performance, $100 a foot become a norm for us, because of the quality of our product. When over the PENN [indiscernible], our average starting rent is $100 a foot, that's a great trend. So as we go on here and the way we're shaping the portfolio, with the addition of 623 Park Avenue plus of the New 350 Park. And we think rents are going to continue to spike. And the way we're balanced on the west side and on Park Avenue, and we're really excited about that. We think we're in a perfect position for what's to come on rents and tenant demand. Operator: Our next question today comes from Jana Galan with Bank of America. Jana Galan: Congrats on the strong start to the year. Michael, I appreciate your comments on the 2026 FFO now expected to exceed [ $25 million ] just curious if that's primarily from the Park Avenue Plaza closing in 2Q or also from 1Q being slightly ahead and carrying throughout the year? Michael Franco: I'd say it's the latter. Jana Galan: Great. And then maybe on 555 California, if you could give some update on kind of demand, leasing and rents there? And are AI tenants becoming a bigger part of the pipeline there and in the New York pipeline as well. Glen Weiss: So rents in San Francisco are rising a lot. As I said earlier, our rent in the tower have now gone north of $160 a foot, for substantial leases, 50,000 feet and great are not small deals. So we are leading the market by far at 555 [ Cal ]. We're also seeing a lot of really good activity at 315 Montgomery in the campus, with more technology, AI type tenants. So certainly, that activity we're seeing at our projects that are complex as well. But other than tech and AI, Financial services is growing in San Francisco, something we've kept a very keen eye on as well as law firms. So it is in just AI, although it's helping a lot as the city improves, but the other industry sectors are really coming on strong. And the city overall feels great. I was out there a few months ago, walking the streets, meeting with people. It's really feeling good out there, and people are already positive again in San Francisco. Operator: Our next question today comes from Anthony Paolone with JPMorgan. Anthony Paolone: You talked about having some assets out in the market for sale. But if we think about just whether it's 350, 54th Street and then Fifth Avenue, some of these projects that are going to be on the pipeline. How are you thinking about just your pro rata leverage level over the next couple of years and whether there's going to likely be a bigger disposition program or whether you think you'll just use project financing and take on a bit more leverage? Michael Franco: Tony, we've got the capital earmarked for all these opportunities in our cash forecast. We've got some asset sales in the works that -- like we obviously have a lot going on between these investments that we've made recently, 623, Park Avenue Plaza, the buybacks, some of the future developments. And I would say about the future development, something like the 350. The bulk of our equity is coming from our land contribution, right? So any incremental capital is really not required from Vornado for probably close to 3 years. So we've got ample time to plan for that and so forth. So when you look at our sort of capital needs, if you will, over the next few years, it's fairly well laddered. But at the same time, as we execute hopefully, on some of these asset sales, that's going to give us some additional firepower, frankly, beyond just we're talking about in term of these developments. Steven Roth: If you look at our history, with respect to capital planning, we have three or four things that we have historically done. Number one, we generally hold $1 billion-plus cash balance. The second is that we almost always prefund well in advance of our capital needs. So for example, we loaded in, I don't know, $2 billion, $2.5 billion of capital 2 years before we started the PENN 1 and PENN 2 developments. So that notwithstanding the fact that the capital markets got a little bit rough and volatile when we were actually building, we have the capital on our balance sheet. So that's what you can look at for what we do. The other thing is that we like to operate with lower rather than higher debt levels for the obvious reason. The last is that our philosophy is that we like nonrecourse project level debt as opposed to unsecured credit, which basically makes the entire corpus. I guess you could say personally liable, so we like nonrecourse project level debt, which is the majority of the way we finance our business. Anthony Paolone: Okay. Got it. And then just follow-up question on the leasing side. I think there's about 600,000 square feet in the fourth quarter that comes up. Is there anything larger in there that's a known vacate. I just can't remember if there's any big deals in that mix to watch out for? Glen Weiss: There is two larger tenants ties in the second half of this year, and we believe both will renew their leases. So we feel good about our exploration, and as you would expect, we're all over the '27, '28 expirations as well. But 26, we're pretty well taken care of. We feel good about what's going to happen. Operator: Our next question today comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess first one, given all the kind of activity you've had with all the PENN assets. Any update on Hotel PENN and PENN [indiscernible] Mall in terms of users, monetization, et cetera. Steven Roth: No update. Vikram Malhotra: Okay. And then just on the earnings side, you mentioned 2027 FFO, nice pickup. I'm wondering two things. One, are there any offsets we should be thinking about for '27? And then in particularly FAD, given the ramp in FFO, I'm assuming there's still going to be elevated TI into' '27. So should we think about FAD really perhaps picking up on 2028? Michael Franco: Vikram. On the... Steven Roth: I would make one comment, okay? I can't wait for the free rent to burn off. That's when this business will get to be real fun and will generate substantial positive cash, that happens over the next year or 2. I can't wait for that. Now go ahead, Michael. So Glen, take note of what I say. Michael Franco: So on the Fed side, Vikram, your comment is right, right? There will be continued elevated TIs this year, next year, even on deals we've committed this year, tenants on don't call those for a while. So that will go into next year. And then we expect to see that drop materially and cash flow be much higher. So I think your general direction is accurate. On the earnings side, there's always ins and outs. So there's always offsets. I can't tell you specifically what those are, but in the history of Vornado, I think we've given you as much guidance as we can give you with respect to next year in terms of what the bottom line is going to be. Operator: Our next question today comes from Nick Yulico at Scotiabank. Nicholas Yulico: I just wanted to go back to 350 Park and just be clear on a couple of things. One, in terms of the new $16 million annual rent versus the old rent, did that already happen in the first quarter? Is that a second quarter accounting impact? And then I also want to be clear on that new rent that's being paid. Does that -- what is the maturity on that lease? Is that concurrent with the debt, the new mortgage that matures next year? Or does it extend beyond that? Michael Franco: Nick. So on your first question, new rents started -- I mean there are a few days in March where it started. But by and large, it will be second quarter. So I don't know, maybe 15 days in the first quarter where the new rent was reflected. Steven Roth: Because the new rent is coterminous with the execution of the new mortgage. So I don't know what that data is, but it's a couple of weeks or 3 weeks ago or whatever. Michael Franco: Yes. So that's a new lease runs until early your question why is that? Because there be a resolution on the other. The venture will be formed, we'll put the asset, something will happen prior to that maturity. Nicholas Yulico: Okay. So the rents and new rents is only in place until the point at which the mortgage matures. There's no rent being paid beyond that date under the new agreement? Michael Franco: Correct. But there'll be a resolution or A or Board B before that, which the rent have gone away anyway. Steven Roth: There's no building for the tenant to pay rent for. Nicholas Yulico: Got it. Okay. I just wanted to be clear on that. And then I guess second question is, obviously, I mean, you've talked a lot about giving some of the bread crumbs on 2027, how to think about that. It is also 2027 FFO is a piece of the executive comp per the proxy plan. So I guess I'm just wondering like if you -- any new thoughts on this, Steve, about finally giving earnings guidance. You're at the point now where the tide is turning, you're being measured by that from a comp standpoint. Why not give formal FFO guidance at some point? Steven Roth: Oh Lord, how do I answer that question? The two sides of it is that we have a simple business which has complexity, and the numbers are moving. It's very -- I mean, we find that it's sort of difficult to guide and counterproductive. So Warren Buffett, who's not a friend of mine, but an acquaintance of mine. He didn't guide for his whole career. So that's one thing. And the big bank guy, he doesn't guide either. So -- but all of our competitors seem to be able to guide to what's wrong with us. But right now, we have no plan to guide other than the snippets that we put in these calls here and there, which I think -- I hope you find helpful. Now what I think you're saying is that if our earnings are slow up with, why don't we just take a pad on the bed for that and guide to that. So that's something that I'm going to put under my pillow and think about because that sounds like maybe it's a good idea. But as of right now, our policy is we selectively in a limited way guide, but we don't give full guidance. And I think you could probably guess that, that's going to continue for the future Tom, what do you think? Thomas Sanelli: I agree. Steven Roth: Tom saying he's happy doesn't that the guide. Operator: Our next question today comes from Seth Bergey at Citi. Seth Bergey: In the annual shareholder letter, you kind of referenced the no sacred cows policy again. It sounds like the New York office trends market is improving. You mentioned possible kind of inflows given it's a liquid market in the U.S. is just safety. How do you kind of think about potential asset sales. Should we think about those being more noncore dispositions or any core asset sales that you're kind of thinking about? Michael Franco: Some asked the questions for me. It's come -- mentioned you add it in no sacred cows. Is that just New York or is that some other assets we should think about noncore dispositions. Steven Roth: I mean I don't want to shock you, but basically, I'm in it for the money. And so therefore, there are no sacred cow. There are assets that are critical to the business. There are assets that are important to the business. There are assets that we love more than other assets. But based upon price economics and business strategy, there are no sacred cow. Now what does that mean? There's a handful of assets that we actually have already determined that we don't want in the business mix, and those assets are for sale. Our intensivity, if that's a word, to liquidate those assets, rises and falls with the market. But over a short period of time, there's a handful of assets that will not be part of our portfolio. Now getting to the rest of it, there are assets that we hold near India that we think are very valuable that we underwrite as being much more valuable than apparently the stock market underwrite it. Even those assets, if I think [ San ] say that Garth [indiscernible] phrase the Godfather bid, it's some very aggressive bid came in for one of those important assets we would execute on that because that would be the right thing to do, that's the right thing for us for the management to do, and more importantly, it's providing to the shareholders. So there are no sacred assets. There are prices that are critical. But in terms of whether we would execute on selling something, it's over a function of what the price is. Seth Bergey: Great. And then for my second question, I guess, how do you think about kind of incremental potential acquisitions versus accelerating the share buyback and balancing that versus your current leverage levels? Steven Roth: So there's three things inherent in that question. There's acquisitions versus stock acquisition and leverage levels. So the answer to that is, is that we think -- no, let me rephrase that, we are certain that we can basically do over it. We are certain that we can buy selectively important assets that come up in the bulls-eye location of our heartland. We are certain that we can -- we have the capital to buy back our stock in a measured way. And we are also certain that we are able to keep our leverage in -- through a measure of the control level. So we think we can do all of that, and we have some things that are in process that will augment all of that. So our two most recent acquisitions of 623 Fifth Avenue which we think -- I mean I've written about that, we think is a terrific deal. And the Park Avenue Plaza acquisition that we just announced a couple of weeks ago, we think is equally terrific deal. And we think buying back our stock is $30 a year is a terrific deal as well. So we're doing all of that. And I hope that answers your question. Operator: Our next question today comes from Caitlin Burrows at Goldman Sachs. Caitlin Burrows: Maybe just on the pricing side. I realize the reported leasing spread drilling on a second-generation space. So first, I was just wondering if you can go through your expectations today of portfolio mark-to-market across New York, San Francisco and the mark? And then also whether you expect that portion that gets included in the spreads to increase as in like could downtime become smaller? Glen Weiss: It's Glen. So on the question of mark to markets, we expect to continue the performance we've had over the past couple of years, which are positive, positive and positive. During the last 2 years, we've only had 1 quarter negative, which we like, and we expect to continue. Many have been in the double-digit positives. We expect free rent to continue to reduce and even TIs are starting to come down. So we're working hard on that piece, of course. And San Francisco is the same. With the rents we're achieving, the mark-to-markets will continue to improve. Chicago, as I said, is still most challenging, although demand is picking up. renter same firm, concessions are high in Chicago, those have yet to break downwards, but demand is certainly improving. Steven Roth: I mean think about just economics at or macroeconomics, focusing on New York for the moment. I mean we've said and I've written about that we compete in a subset of better building Class A space, which is under 200 million feet. So the fact that there may be 400 million feet in New York is relevant because we really compete in a market which is about half that size. The availabilities of space in that market is evaporating very quickly. I mean somebody used the analogy of an ice cube at a microwave. We are getting -- I mean, we know that because we are a key factor in the market. We know that because the incoming calls from brokers looking to place for their clients deciding to get more access and even more desperate. So as the availability of space shrinks, obviously, the price goes up. Now there's something else going on, which is equally important, and that is the cost of a new building has gone from whatever to somewhere around thickener $2,500 a foot. Interest rates and the cost of capital has gone from 0% to 2% to 5%, 6% and 7%. So the rent that has to be achieved to make a new building economic are well into the $200 a foot and even touching $300 of it. That's never happened before. So obviously, rents on older buildings, which are still great buildings and great locations are going up because of scarcity and because of the cost of new supply coming on the market. So this is just basic economics 101. The next bottom is that I believe and my team can speak for themselves. I believe that we are in a long, long, long-term landlord market where these dynamics will continue. Why is that? Because there's nothing in the short term that can change that other than if interest rates dip down to 2% or something like that, which you can make your own judge whether that might or might not happen. So if that happens, basically I'm not in a big rush to rent space at today's prices because I think tomorrow's prices are going to be higher and maybe even a are a lot higher. Caitlin Burrows: I guess maybe just to follow up on that last point. I know leasing volume in the first quarter was relatively low. So would you just say that that's lumpy. Is it more about that you're not in a rush because rents could be rising or something else? Steven Roth: Glen is in the business of lending space as quickly and aggressively and as hungry as he can be. So if there is any falloff in volume, it's not because I direct the led to get out of the market. Glen's in the market every day working his ass off. Thank you, Glen. Operator: Our next question today comes from Ronald Kamdem at Morgan Stanley. Ronald Kamdem: Okay. Great. Just two quick ones. Just number one, I think last call, you talked about some guidepost for occupancy over the next 12 to 18 months and thinking sort of mid-90s on a lease basis. Just wondering if you could provide an update both on the lease and on a physical occupied basis. What that occupancy target to look like over the next 12 to 18 months again? Michael Franco: Look, we've historically run our portfolio in the mid- to high 90s, and we expect to get back there. So that probably is over a couple of year period. But that's -- and again, I think given all the dynamics that Steve alluded to and we've talked about in the market and the lack of space availability, that's going to happen. So obviously, leasing up 10% is a key part of that. But -- and I think one of the analysts picked up this quarter that our occupancy actually went up 70 basis points, not the 40 because we took 350 Park out of service. So that's what we expect in it. I can't tell you exactly what quarter it's going to be, but over the next couple of years or so, that's where we expect to get back to. Steven Roth: But there's a couple of things to focus on. There is a couple of buildings that we are not winning. Why is that? Because they are overleveraged and underwater, and we -- it's uneconomic for us to rent bases in those buildings which really -- they're almost owned by the banks. And if we put TI into those buildings, it's basically burning money. So if you take those -- as we have chosen, I don't know whether this is a good decision or not, we've chosen to leave those in the aggregate statistics with some of the folks in our industry have taken those buildings out of the numbers, which makes their occupancy higher. So if you take those numbers -- those buildings out of our numbers, our occupancy goes to what something like that, 95% -- 94%. So we know that number, although we don't publish that number, and maybe we should. Although right now, I'm publishing. So that's the first thing. The second thing is that I look upon in a landlords market like this, I look upon vacant and available space as it has been because that will -- as we ramp that space, and we will with 100% certainty that will grow our earnings. So when you think about investing, maybe the best company to invest in a company that does have available space in this market as opposed to a company that has a space already rented. You can make out of that whatever you will. Ronald Kamdem: Really helpful color. And then my second one, if I may, was just a lot of the footnotes in the supplement. Just on -- I guess on PENN 1, any idea when that litigation will be -- just in terms of timing, obviously, can't comment either way, but just in terms of timing, is that something that can be done this year? And also the change in retail from the base of the office buildings being put in the office segment, just the thinking there. Steven Roth: I'll take the litigation. I have absolutely no comment on anything having to do with that litigation other than I'm optimistic. What about the retail? Glen Weiss: Yes. So we didn't change our segment reporting. Obviously, we have two segments in New York and other. This is a subsegment. Ron, what we did here is we tried to align the subsegment more on how we view the assets. So we grouped over retail assets together and the office assets. So the base of 1,290 retail is now included an office as opposed to being in retail. And any ancillary office space that's in a retail building is obviously in the retail subsegment. And it's all disclosed, obviously, in the supplement, and we give you the exact buildings that are in each subsegment, so you could follow along. I think this is the better way of looking at it. as opposed to the way we would do in previously. Operator: Our next question today comes from Brendan Lynch at Barclays. Brendan Lynch: First one on Sunset Pure Studio. Is there any interest in the current term tenants and converting to longer-term leases? And just some update on that? Glen Weiss: It's Glen. There's great interest in Sunset and the studios. We're at least right now place is great. unbelievably great, I would say, best in a great location. We have very good activity, long-term folks looking short-term folks looking. So we expect to of the project once this year's leases expire. But it's off the chart. The reception has been plus what we expect to do really good things are on the leasing. Steven Roth: But a direct answer to your question, I would definitely prefer to be in the long-term leasing business with that asset rather than in month-by-month leasing in that asset. So the answer is the ownership of that asset prefers to be in the long-term leasing if the market gives us that opportunity. Brendan Lynch: Okay. That's helpful. And then a follow-up on the Verizon space at PENN 2. Can you just walk us through if they find a subtenant versus you finding a tenant and how we should think about potential termination fees? And any accounting around the TIs that you might still be responsible for if it's just a sublease instead of a cancellation in new lease. Steven Roth: Glen, for first ad, I don't talk about it. Go ahead. Glen Weiss: As I said earlier, we're in a great spot to matter how it comes up out. And we will only be opportunistic to make money on this space. We have a very good lease position, and we'll see how it plays out, but that's as much as I think I want to talk about it for now. Steven Roth: What do we have? It's basically a 19- or a 20-year lease. So we have a long-term lease with a super credit, that lease will -- we will never terminate that lease under any conditions. So the only thing that might happen is around the dynamics of a subtenant coming in because Verizon wants to reduce their liability. But we don't have anything to say other than that long-term credit lease is not something that we are going to terminate or monkey with. Operator: There are no further questions at this time. So I'd like to hand it back to Steven Roth for any closing remarks. Steven Roth: Thank you all very much. I mean, the -- I think the team and I are delighted with our activity over the last 3, 4, 6 months, we are excited. We think we -- and I didn't make the statement in my remarks this morning. that I am certain that over the next year or 2, we will have the highest growth performance of any company in our sector. And we're excited about that. We've got a lot of great stuff going on and thank you for participating. We'll see you next quarter. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 DENTSPLY SIRONA Inc. Earnings Conference Call. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Wade Moody. Please go ahead. Wade Moody: Thank you, operator, and good afternoon, everyone. Welcome to the DENTSPLY SIRONA Inc. First Quarter 2026 Earnings Call. Joining me for today's call are Daniel T. Scavilla and chief executive officer and Michael Pomeroy, interim chief financial officer. I would like to remind you that an earnings press release and slide presentation related to the call are available on the Investors section of our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we may make certain forward-looking statements that reflect our current views about future performance and financial results. We base these statements on certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10-K and any updated information in subsequent Form 10-Q or other SEC filings list some of the most important risk factors that could cause actual results to differ from our predictions. On today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance, and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted. A webcast replay of today's call will be available on the Investors section of the company's website following the call. And with that, I will now turn the call over to Dan. Daniel T. Scavilla: Thanks, Wade, and good afternoon, everyone. Q1 marked the start of executing the DENTSPLY SIRONA Inc. return to growth action plan. Our results reflect a business in transition, and do not yet capture the actions underway intended to drive sustained profitable growth. We are strengthening execution, investing in key growth areas, positioning the company for improved long-term performance. From my perspective, we are where we expected to be at this early stage. We are executing the plan as intended and remain focused on improving speed and accountability. As I said last quarter, we are going deeper, moving faster, and being bolder to improve our business while placing the customer at the center of all we do. That mindset is taking hold across the organization. Near-term performance is still being affected by external pressures and the timing of our investments, while the underlying market remains stable. We are monitoring geopolitical and macro factors closely while making strong progress on the areas within our control. Regardless of market conditions, we will remain focused on executing our plan and improving our performance over time. We are engaging with our customers more, accelerating innovation, and optimizing our cost structure. These actions are already gaining momentum and are expected to contribute more meaningfully as the year progresses. During the quarter, we advanced our commercial restructuring in the U.S., expanded clinical education and sales force training, and continued to drive innovation across the portfolio while implementing a restructuring to redirect funds to fuel commercial and innovation growth. We are also seeing early encouraging traction with our distribution partners and I will share more detail on that shortly. We remain confident in our strategy, and are maintaining our full-year 2026 outlook. On today's call, Michael will review our first quarter 2026 financial performance and key drivers. I will then provide an update on our strategic progress, including the actions we are taking to support the five pillars of our return to growth action plan. With that, I will turn the call over to Michael. Michael Pomeroy: Thanks a lot, Dan, and good afternoon, and thank you all for joining us. As Dan noted, first quarter results are in line with what we anticipated at this stage as we execute on our plan to continuously lean down our OpEx structure and drive sustained profitable growth. Before we begin, we announced today a change to external reporting for our regions from U.S., Europe, and Rest of World to Americas, EMEA, and APAC. This update creates a more efficient reporting structure and better reflects how we manage and evaluate the business internally. The results being reported today reflect this change. A recast of prior comparative regional information has been provided along with today's press release. Let's move to Q1 results on Slide 4. Our first quarter revenue was $880 million, representing an as-reported sales increase of 0.1% over the prior quarter. On a constant currency basis, sales declined 6.7%, based in part on the impact from Byte and a strong Q1 2025 treatment center sales comparison not repeated in 2026. Adjusting for these one-time headwinds, Q1 2026 sales on a constant currency basis were down 4.5%. On a constant currency basis, sales highlights in the quarter included double-digit growth for EDS and APAC, favorable SureSmile performance in EMEA, and growth in Wellspect Healthcare. These improvements were offset by declines in EDS outside of APAC, CTS, and OIS. Adjusted EBITDA margins declined 430 basis points, resulting from a 560 basis points decline in gross profit, driven by lower volumes, sales mix, and tariff impacts. While OpEx experienced a headwind on an as-reported basis, from a constant currency perspective, OpEx was down $20 million, reflecting benefits from our return to growth OpEx restructuring and overall cost control management. In line with what we communicated in our last earnings call, we increased our spend in R&D year over year as we support the return to growth action plan and invest in bringing innovation to market. Adjusted EPS in the quarter was $0.27. In the first quarter, operating cash flow was $40 million compared to $7 million in the prior year quarter. The year-over-year increase is primarily attributable to improvements in working capital with lower accounts receivable. This is an early sign of progress as we focus on improving working capital over the balance of the year. We finished the quarter with cash and cash equivalents of $190 million. Our Q1 net debt to EBITDA ratio was 3.3x. During the quarter, we retired $79 million of debt. We continue to prioritize debt reduction over time and remain committed to maintaining investment grade credit metrics. Let's now turn to the first quarter segment performance on Slide 5. Starting with CTS, constant currency sales declined 2.9%. We saw a high single-digit decline in E&I, as declines in imaging equipment and treatment centers were driven by a tougher comparison versus the prior year quarter. When adjusting out the one-time institutional installation, CTS was flat in constant currency. Our global CAD/CAM business was flat year over year, with growth in APAC offset by a decline in EMEA, which was driven by softness in the Middle East and Central Europe, partially offset by double-digit growth in the UK, Spain, Turkey, and Denmark. We saw increased demand for mills in the U.S., along with bright spots in APAC. Overall, U.S. distributor levels for CAD/CAM and imaging products remain below historical averages. They are a trend we expect to continue. Turning to [inaudible], sales declined 7.2%, driven by lower volumes in Americas and EMEA, partially offset by growth across all three product categories in APAC. Moving to OIS, sales in constant currency declined 13.5%. Adjusting for the year-over-year impact from Byte, OIS declined 7.6%. IPS declined high single digits in the quarter, driven by lower implant volume across all three regions. SureSmile, our clear aligner offering, declined low single digits in the quarter, with a high single-digit decline in the U.S., partially offset by 11% growth in EMEA. Wrapping up with Wellspect Healthcare, constant currency sales increased 3.4%, led by 4% growth in EMEA and the continued strength of new product and execution of the business. Now let's move to Slide 6 to discuss our outlook for 2026. As Dan shared earlier, we are maintaining our 2026 outlook for net sales of $3.5 billion to $3.6 billion and an adjusted EPS in the range of $1.40 to $1.50. With the uncertainty and fluidity of the current macro and geopolitical environment, we are applying a thoughtful, risk-aware approach to our guidance while remaining focused on executing initiatives to drive sustainable growth. With that, I will turn the call back to Dan. Daniel T. Scavilla: Thanks, Michael. As I mentioned in my opening comments, our focus remains on disciplined execution, and we are making progress against our plan. The management team and board are closely aligned. Priorities are clear, and the organization is engaged and motivated. I also want to recognize the strength of our leadership team, particularly our U.S. commercial leaders. Several competitive hires joined recently who bring deep dental experience and are already making meaningful impact. While it is still early, what we are seeing gives me continued confidence that we are on the right path. My leadership team and I have been spending more time in the field and at local customer events, gaining valuable firsthand perspectives. Customers are noticing a shift in how we show up. Most importantly, we are consistently putting the customer at the center of our decisions and actions with a clear focus on improving both the experience and outcome for the dental practitioners we serve. We are in the early stages of expanding our clinical education and sales force training programs with increasing structure and scalability. Early feedback is encouraging, and the teams are responding well to greater clarity, investments in their development, and increased accountability. This work is strengthening our foundation as we prepare for more consistent execution in the second half of the year. At the same time, we are strengthening our processes to ensure solutions are grounded in real-world customer needs. As part of this effort, we are establishing a CEO advisory board comprised of dentists to provide direct and ongoing customer insights. Returning the U.S. to growth remains our top priority. The actions we are taking to strengthen talent, execution, expand distribution, and improve customer engagement are beginning to show early traction. At the same time, we are reinforcing the key drivers of our long-term growth. A central priority is sharpening our focus on the implant business. While recent performance in this segment has been challenging, we continue to benefit from strong underlying assets and a deep heritage in the space. To build on this foundation, we initiated a disciplined set of actions to improve performance and position the business for sustainable growth. I will provide more detailed updates in future earnings calls. Innovation also remains central, supported by increased R&D investment with a clear focus on our highest value opportunities. Let me share a few of our recent launches as seen on Slide 7 in the earnings presentation. We just announced the launch of SmartView Detect, the first FDA-cleared and CE-marked AI-enabled diagnostic aid that automatically identifies potential inflammation at the root tip in 3D scans. Integrated into the DS Core platform, the solution works with both new and existing systems, enabling seamless adoption. In clinical evaluation, SmartView Detect increased detection sensitivity by approximately 46% relative to unaided review, helping reduce the risk of overlooked findings while improving workflow efficiency. This innovation not only enhances diagnostic confidence, but also supports clearer patient communication, reinforcing our commitment to advancing connected, high-quality dental care. In endodontics, we introduced the Reciproc Minima File System and the X-Smart Go cordless endomotor, both designed to simplify workflows and improve efficiency. Reciproc Minima enables treatment of narrow and complex canals with a one-file approach, while X-Smart Go enhances mobility and performance through cordless operation and integrated intelligence. Together, these solutions reflect our focus on practical, evidence-based innovation. In imaging, we announced FDA clearance of our dental-dedicated MRI, representing an important step forward in expanding our capabilities in soft tissue diagnostics. The system has been validated in clinical settings, and is expected to support broader collaboration with leading academic and research institutions, consistent with our strategy to build clinical evidence and drive adoption. It also complements our existing imaging portfolio. Beyond dental, Wellspect continues to show solid momentum. Adoption of Sureti for females is expanding, supported by ease of use, discretion, patient comfort, and encouraging feedback from both patients and clinicians. Building on this, the recent launch of the male version extends the portfolio to a broader patient population. Finally, we are making progress in expanding and strengthening our U.S. distribution network. As announced yesterday, we signed an expanded agreement with Atlanta Dental Supply, adding our connected technology solutions portfolio effective August 1. This marks our fourth new distributor agreement this year and enhances our regional coverage, improving access and service levels in an important market. The other distribution agreements announced in the first quarter are beginning to build traction and expand our commercial reach. Early traction includes Benco installing its first CEREC system under the new agreement, an important milestone achieved ahead of schedule. To lead DENTSPLY SIRONA Inc. into its next phase, we are strengthening our foundation with better tools, more integrated systems, and increased automation. This builds on the strength of our existing teams, while enhancing capabilities in transformation, operations, and financial performance. Our transformation office continues to drive execution of the return to growth action plan, with a focus on embedding lean operating principles, simplifying processes, and improving how work gets done across the organization through the customer's lens. In parallel, we are advancing our enterprise AI strategy to drive efficiency and support innovation across both commercial and operational areas. In Q1, we began deploying AI-enabled tools in select workflows to improve productivity, with a broader rollout planned throughout the year. Within finance, we are strengthening capabilities while maintaining continuity as we actively progress on our search for a permanent CFO. Michael continues to be a strong partner in his interim role, ensuring stability and focus on execution. We are simplifying and optimizing the operating model to improve efficiency and scalability. The restructuring program remains on track to deliver $120 million in annual savings, with benefits building through 2026 and becoming more meaningful in the second half of the year. Key actions include cost optimization, organizational simplification, and supply chain efficiencies, along with reducing complexity across legal entities and IT systems. Through these actions and by driving lean principles further into the organization, we will improve our speed, competitiveness, and the customer experience. Early proof points are visible, including a reduction of approximately $20 million in operating expenses during the first quarter. These savings are being reinvested into growth areas such as R&D, clinical, and commercial capabilities, while we continue to manage external headwinds. A disciplined approach to capital allocation and balance sheet management remains a priority. During the quarter, we reduced debt by approximately $80 million, reflecting our commitment to deleveraging. Capital allocation priorities remain focused on debt reduction and share repurchases, supported by improving working capital and free cash flow. With the dividend eliminated during the first quarter, we have increased flexibility in how we deploy capital, and as performance improves, we expect to be in a position to evaluate the timing of share repurchases later this year. In closing, progress is encouraging, execution is improving, cost discipline is in place, and we are building the capabilities needed to drive sustainable growth. Early proof points are emerging across the business, and visibility should continue to improve as the year progresses, particularly in the second half. We remain confident in the strategy and focused on delivering long-term value for shareholders. I believe the potential for DENTSPLY SIRONA Inc. has never been greater, and we have at our fingertips everything we need to achieve this. Thank you. Now let us turn to Q&A. Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We kindly ask that all attendees limit their questions to one primary question and one follow-up question. Our first question comes from the line of Allen Charles Lutz of Bank of America. Please go ahead. Allen Charles Lutz: Thanks for all the details, Dan. On the return to growth action plan, there is a lot of good steps there. You talked about new distribution relationships and expanding ones you have already had, investing in clinical education, and then new product investments. So there is a lot of things on the plate. How do you think about the timing of these benefits? I think at the top of the call, you alluded to maybe some benefits happening toward the second half of the year. As we think about all those things that you are spending time on or that you have done so far, is this something where we should start to expect more material benefits in the back half of this year? Or is this effectively more of a two- or three-year roadmap? We would love if you could just give us a sense of how you are thinking strategically about the timing of some of these investments you are making in that return to growth plan. Thanks. Daniel T. Scavilla: Thanks, Allen. I appreciate the question. And I think you kind of answered it, right? When we first rolled out the return to growth plan, we called it a 24-month plan, recognizing that you cannot move fast enough, but at the same time, cannot change this in the speed that all of us would wish. Q1 was the beginning where we established the plan, built the teams, and did all the reorganization. This is really us out of the gate in the first quarter. As we begin some of the restructuring that is occurring in the first and second quarter, you will see some of those cost benefits come through more in the fourth quarter than you would in the first half of the year. As you look at the commercial cadence and what we plan to drive, again, I would think we will begin to see some things in the fourth quarter, but I really do believe that more of the improvements will be seen as we get into 2027 and certainly into 2028. Allen Charles Lutz: Appreciate all the color there. And then we would love to hear an update on some of your early conversations with DSOs. Where within your portfolio is the most interest, and how can X-ray benefit help you at those? Daniel T. Scavilla: Thanks. Again, great question. There is a lot of great activity currently occurring with DSOs. It is something we had begun into the last quarter of last year. If you look at who we are and what we offer, you have this incredible strength of a broad portfolio. Whether you want to actually build out new dental suites—we can provide all of that—or you want to get into longer plans for consumables and pull-throughs, we can do that as well. We are really talking with several concurrently, and we are looking to have a more active plan again toward the second half of this year and into next year. I think the strength is in the broad offering we can give them as a one-stop shop, and therefore bring all of the leverage bundling together for the best impact for them and ease of doing business with us. Operator: Our next question comes from the line of Jonathan David Block at Stifel. Please go ahead. Jonathan David Block: Maybe just the first one. I would say the trends with the consumer are certainly a watch with the geopolitical backdrop, and you guys are so global in nature that I figured I would take the opportunity. When you look across your book of business, anything to call out between Americas and EMEA and APAC when we think about March or April trends, whether that would be weakening or maybe even something to call out in terms of more resilience than maybe you expected considering what is going on in the world? Daniel T. Scavilla: Great question, Jonathan. There are certainly a lot of moving parts here. We did not really call out the Middle East. We will keep our eyes on that. It is a low single-digit impact for us right now. The continued struggle in Central Europe with Russia certainly has its weight, something that we have built into our forecast. As of now, we stay with what we planned in our initial business plan, and should we see some of these risks changing or shifting, we will take more action after we get through the second quarter. Jonathan David Block: Fair enough. And maybe the second question—and maybe a half question here—can you talk to us on where you are with the drop-ship model with the distributors? You talked to more distributors coming on board, but what more needs to be done there? Maybe if you want to talk to the receptivity. I mean, I think for them, it is not tying up their cash. And if you feel like it is giving you a greater voice with the distributors. And then admittedly, a completely unrelated question would just be the cadence throughout the year—do we think about the exit EBITDA margin in 4Q, which might help us bridge from 1Q to 4Q? Thanks. Daniel T. Scavilla: No problem. A couple of things. The transition into the new capital model really applies to some of the existing dealers, not necessarily new ones. We will provide this for everybody, but when we talk about the inventory build or the change in inventory that you were referring to, that is a little more of a Patterson and Shine dynamic than all of the new players who would start at zero anyway. The first quarter did not include any of that burn-through of the inventory. We expect to see that from Q2 through Q4. It is well received. It is built into all of our agreements. It is honestly not a negotiating point with us because the benefits are for both sides and pretty easily accepted that way. I will refrain right now from giving you what we think Q4 guidance is. It is not something we do. We want to get a couple of quarters under our belt with all of the moving parts we have, and it will really help you determine what is the best way to set up your 2027 model. Operator: Thank you. One moment for our next question. Our next question comes from the line of Jeffrey D. Johnson with R.W. Baird. Please go ahead. Jeffrey D. Johnson: Yes, thank you. Good evening, guys. Dan, I wanted to start with Wellspect. That business showed through very consistently and nicely this quarter. OIS and CTS, we know there is a lot of moving parts there. On the EDS side, I think that was probably the biggest surprise to me from a segment performance, just the down 7%. The comp got a little bit tougher, but the switch from plus to minus this quarter—what was driving that shift? The markets seem like they have held in fairly consistently. What was the underlying driver of that fall off? Thanks. Daniel T. Scavilla: I would tell you we looked at a little bit of softness in the fourth quarter, and we saw that carry into the first quarter. I trace that down to specific markets. I will not call them out right now. While we believe some of it is destocking of dealers, especially those that may have gone into a little more PE-based approaches, we are working through the program for a better understanding of where that is. Right now, it really looks like there was a bigger shift in Europe than we would have anticipated. The U.S. is kind of in line where we thought. Even within Europe, there are probably about five different markets that we are taking a look at to understand what is being driven there. Our current estimates and assumptions are there is some continued destocking that we felt in the fourth quarter and in the first quarter. As you noticed, we have not called off of our number. We think that this is a timing issue as we stand today, but we will look to see how we can prove that true. Jeffrey D. Johnson: Understood. And then as my follow-up question, you mentioned again tonight returning the U.S. to growth by maybe later this year. Europe is actually a bigger segment for you guys geographically. Maybe the consumables thing you were just referencing there drove that European number down to down 5.6% this quarter. But as you focus on the U.S., I would assume you also plan or hope or are working towards getting that European number more consistently to growth as well. Help me understand how you are thinking about Europe over the next few quarters and eventually getting that return to growth as well. Daniel T. Scavilla: Of course we want Europe to get back into growth. It is foundational. The U.S. stays on track; we are happy with that. In Europe, you talked about EDS, which I would agree with. Keep in mind that treatment centers were fairly large last year as well. As Michael called out, that is an academic-type thing where they come in blips, not really something you can easily forecast and see. We want to make sure we do not overstate the change because of that one-time headwind. A strong Europe and APAC are needed as well as continued growth in the Americas, and we are focusing on it. The vast majority of what we are doing to return the U.S. to growth is applicable throughout the world. Operator: Thank you. One moment for our next question. Our next question comes from the line of Michael Anthony Sarcone of Jefferies. Please go ahead. Michael Anthony Sarcone: Just wanted to start on gross margin. You talked about 550 basis points of contraction. Maybe you can give us a little more color on what is driving those in 1Q and then how we should think about the cadence of gross margin through the year? Michael Pomeroy: A big piece of the headwind in gross margin is tariffs. When you are looking year on year, tariffs did not exist to the extent they do now, so that is a pretty big piece. We talked about EDS 2025, which comes off the balance sheet. It is inventoriable, therefore capitalized, and that was a negative hit as well. As far as going forward, everybody knows what is happening with tariffs. We will start seeing the adjustments from the SCOTUS decision and then down to the Trump 10% in Q2. So that piece is going to look a lot better. Dan talked about what we are working on as far as Europe—getting the destocking behind us, which we believe it is. And the third piece is tariffs down the road. But just pure apples to apples, I would think we should be gaining 300 basis points at a minimum back in the Q2–Q3 timeframe. Michael Anthony Sarcone: Okay. That is helpful. And on macro and geopolitics from an input cost standpoint, what are you seeing in terms of higher oil and freight prices? Daniel T. Scavilla: You were breaking up a bit, but I think I got it. Yes, we are seeing some headwinds with freight and oil. We will continue to monitor that and understand if it is something we can offset, absorb, change, or have to adjust. I want more than one quarter under the belt before we make that decision. Operator: Thank you. One moment for our next question. Our next question comes from the line of Analyst from Piper Sandler. Please go ahead. Analyst: Hey, guys. This is Joe Donahue on for Jason Bednar. Thanks for taking the questions. Starting on consumables more broadly, we are seeing a continued mix shift toward private label. Strategically, how are you thinking about navigating this shift? And do you read the private label trend as still having runway, or is it starting to plateau in the current environment at all? Daniel T. Scavilla: It is a fair question. Private label is something that has been around and will continue to be around. It is something that we will obviously look at and, where it makes sense, compete against. We have several programs in development to make this a meaningful and worthwhile approach with customers. I am not going to lay those out just yet for competitive reasons. I want to get them launched before we discuss them. But it certainly has our attention and the need for us to penetrate the market with more creative ways to get our products into the hands of dentists. Analyst: Thanks. And then to push a little more on pricing with input costs here—do you feel you have incremental ability to pass through price to offset these pressures? What is your appetite throughout the year and what might be included in the guide for pricing versus how much more you could possibly take? Daniel T. Scavilla: We took some minor pricing last year, more on capital than anything. Our intent is not to change that right now, and I do not see anywhere where we would benefit from price increases of any significance. Right now, it is really about us staying focused on return to growth and executing in a way that is beneficial to the customer. I do not think there is a significant price play that would get us where we need to get to. Operator: Thank you. One moment for our next question. Our next question comes from the line of Elizabeth Hammell Anderson with Evercore ISI. Please go ahead. Elizabeth Hammell Anderson: Hi, guys. Good afternoon. Given the R&D spending in the quarter and your focus on new products, and at some recent dental shows, can you talk about the new product contribution in the quarter and how you are seeing that progress over the course of the rest of the year and maybe 2027? Daniel T. Scavilla: Thanks, Elizabeth. We do not disclose that level of detail. We do monitor it, and it is something that we have our eye on. I will hint that we need to see those metrics improve for our investment in R&D, and I think there is an execution plan that should allow us to do that. It is not something I would put out publicly in terms of contributions for this year or next. Elizabeth Hammell Anderson: But would you agree that it is a ramping contribution as we go into next year, really starting to step up maybe in 2027–2028? Daniel T. Scavilla: I would agree with that. Operator: One moment for our next question. Our next question comes from the line of Michael Aaron Cherny with Leerink Partners. Please go ahead. Michael Aaron Cherny: Afternoon. Thanks for taking the questions. I know we have touched on a lot of the different segments. I just want to dive in a bit on implants. As you think about the next couple of years of go-to-market, where do you think you are in your combination of product reboot, sales reboot, and how to factor that into that component contributing to the return to growth opportunity? Daniel T. Scavilla: It is a fantastic question. While we talk about geographically focusing on the U.S. as a return to health—which it is—implants are one of the top priorities. I have commissioned a team of dental KOLs to work with us and get the voice of the customer. We are working on several approaches with the team to come back with more holistic programs. I want to get them formed and launched before I speak about them. Implants are an area of focus. We are not happy with our performance to date. We recognize we have some of the best offerings in the market, and we simply need to execute in a better way and utilize those assets more strongly. Michael Aaron Cherny: And relative to your comments about the buyback, as you think about the evaluation to the end of the year, what are the moving pieces that are going to impact your decision on a go/no-go evaluation? Daniel T. Scavilla: Not many, to be honest. There was an opportunity by removing the dividend and redeploying it. We had some near-term debt coming due that made sense to retire. I wanted to put the funds there first because it will help us deleverage, especially as EBITDA gets stronger. It did not make sense to carry that forward. In the second half of the year, we will look at the option to remove stock. At this price, I am anxious to do it. I think it is going to be a great one to remove. I am going to get the debt in line first. I want to preserve our credit ratings the way they are, then move into removing shares in a way that makes sense not only in the second half of the year but ongoing thereafter. Operator: One moment for our next question. Our next question comes from the line of Lilia-Celine Lozada at JPMorgan. Please go ahead. Lilia-Celine Lozada: Maybe I will start with guidance. You beat by quite a bit on the top line on a reported basis, but reiterated the guide. I appreciate it is still early, but what is the thinking behind that? Why not flow through the beat? And are there any offsetting dynamics in Q2 through Q4 that we should be keeping in mind? Daniel T. Scavilla: It is a great question. It is my style that I am bringing into DENTSPLY SIRONA Inc. I did the same thing back at Globus. I am not going to make a call after one quarter. I like to see at least two before we do. Regardless of it, I would not have brought it up or down. It is not a concern. It is just more of a style. I would rather be appropriately conservative than anything else right now. That is all it reflects. Lilia-Celine Lozada: Got it. Makes sense. Then I was hoping you could dig into CTS a little bit more. That came in nicely higher than what we were thinking. Can you talk a bit more about what drove that strength and what you are seeing in terms of appetite for capital in this environment? Daniel T. Scavilla: There are a lot of moving parts. Having expanded the dealers and working on programs with them—we called out through Michael’s script—we are seeing some strength in the U.S. Again, one quarter does not make a trend. We will continue to execute and, after a couple of quarters, see how that is shaping up. I would attribute the CTS strength more to activity occurring in the U.S. through our partners. Operator: Thank you. One moment for our next question. Next question comes from the line of Analyst at UBS. Please go ahead. Analyst: Thanks for taking my question. Dan, I appreciate the lift that you have here operationally and all the things that you have initiated internally. When you think about the growth initiatives, which segments or geographies do you think catch up or get to growing faster than the market? What products do you think you can get to quickest? Can DENTSPLY SIRONA Inc. grow faster than the market, in line with the market, or better than market in implants or something to that effect? What are you most excited about, or where do you think you can return to market growth or better, and what segment is fastest? Daniel T. Scavilla: I will refrain from giving segment-by-segment growth expectations. We have been working on that, and there will be an investor day probably toward the end of this year or beginning of next, and we will do that along with the strategic plan. I believe that this organization, with the right structure and focus, can grow at or above market over time. We need to work our way through that in 2026 and into 2027, but that is the target. The U.S. has to return because of its size. Within that, through the actions we have taken with dealers, it has to be about the right placement of capital. It has to be, in my mind, implant-focused, EDS-focused, and with our enhanced R&D, we need deeper penetration into the ortho market. All of those are in play. I want to get them functioning first before I commit anything in particular. Among those, we should be at or above market as we get into a healthy cadence. Analyst: And a quick follow-up. You are talking about capital deployment and share buybacks. Presumably there is not likely a focus on M&A, but if there was, in Wellspect or in dental, is there an area where a tuck-in or something more material might enhance the product portfolio or be more synergistic or needed? Daniel T. Scavilla: I do not think there is anything needed. I am looking at M&A because even if we decide not to do it over the next few quarters, we are going to go back to that and sustain. We have a plan in place already. We have established an independent board with Wellspect and will announce that as we finalize. It is going to focus on hypergrowth within Wellspect so that we drive way above market and penetrate deeper. Should we find adjacencies there that are bolt-on or can be fast in closing out a gap, that would be one area of interest. In the non-dental area, we have several conversations currently with longer-term potential. Within dental, I want to refrain from specifics right now. I am looking for an accelerated way to differentiate ourselves in certain areas. Some of it would be CTS to help penetration. As far as implantable products themselves, there is nothing we are chasing down at this time or have interest in. Operator: Thank you. One moment for our next question. Our next question comes from the line of Steven James Valiquette at Mizuho Securities. Please go ahead. Steven James Valiquette: Great. Thanks. Good afternoon. We heard one of the global dental distributors today talk about some lower industry pricing trends on scanners or other digital equipment, primarily from newer market entrants. I am curious what you are seeing on the competitive landscape front in IOS, and what this might mean for PrimeScan or your other offerings. Daniel T. Scavilla: I think your data is correct. There are new entrants at low cost. We have to look at our current model versus what could be market appropriate in this changing dynamic, and that is where our size and breadth of portfolio come into play. We are doing a few things. One is looking to become more competitive in that area, probably through more structured programs that not only have a scanner but the pull-through effect of it—things some of the lower-cost entrants will not be able to compete with without bundling up. We are going to use our portfolio in a bundle strategy that will allow us to accelerate some of the penetration we are seeing and be more market appropriate today. Operator: Our next question comes from the line of Erin Wilson Wright at Morgan Stanley. Please go ahead. Erin Wilson Wright: Great, thanks. You highlighted in the deck as well as your prepared remarks a lot on innovation in terms of specific products and areas of focus. What could really move the needle? Would you call out a couple that could be significant that we should pay attention to going forward from an innovation perspective? Daniel T. Scavilla: Only among the ones discussed on the call, I like the AI detection as a way to further enhance the DS Core offering to our current and future customers. That one excites me. I have been a fan of Wellspect, and I see the potential of this business. The Sureti launches into an entirely new area for them and into new geographic markets. Both of those are exciting. I think the MRI is a much longer, more clinical long-term play. I do not see that as a large revenue generator over time, but rather something that will lead to future products or approaches that can be very interesting. Reciproc Minima using one file is a great approach that can reduce cost and speed up time, with what appears to be great outcomes for patients. I like them all. I think they all have potential to move us forward. Erin Wilson Wright: And on macro and input costs, you did say you are seeing an impact now. Can you quantify that? Is it material right now? And just remind us—do you have anything embedded in your guidance, or do you think you can mitigate it? Why not make any changes on that front just to be conservative? Daniel T. Scavilla: I will make it simple. We are not going to disclose specifics. I am creating freedom to move if we see escalation or unforeseen things. If something material occurs, we would have to react and share adjustments, whether we can absorb them or not. There is nothing material today; otherwise we would have disclosed it. In a changing world, should that change, we will come back and update your assumptions. Operator: One moment for our next question. Our next question comes from the line of Analyst at Citi. Please go ahead. Analyst: I want to go back to implant volume. You mentioned that across all regions, implant volumes were a little bit lower than expected. Curious if you can bifurcate between premium and value demand, realizing that the significant majority of your portfolio is premium. Is there any significant differentiation by region? And you kind of alluded to this in your prepared remarks, but can you provide a little more detail on the strategy to stem some of that lower demand and the timing of those benefits? Daniel T. Scavilla: We are down in both value and premium for the quarter. For value—MIS in particular—it is simply underutilized. To stem that, we need to position it differently as a brand that can really drive, which I feel has not been fully implemented by the company. We are working on that. Astra is still one of the best products out there. Clinical education and rep education are all parts of that to drive improvements. I feel implants are more of an execution issue than a product issue. We have the right portfolio. We have to improve education to execute better. We will have market-appropriate or competitive programs forming in the second quarter, but I will refrain from details until we get them implemented. Analyst: As a follow-up, last quarter you guided to a $30 million headwind in the first half of this year due to the inventory sell-through underneath the new drop-ship model. Was much of that realized this quarter? And can you quantify on a basis point basis how it impacted gross margins? Michael Pomeroy: None of it was realized this quarter. It still is in our line of sight to happen, consistent with our previous guidance, but it is going to be more of a late Q2 and then second-half impact. Operator: Thank you. One moment for our next question. Our next question comes from the line of Brandon Vazquez at William Blair. Please go ahead. Brandon Vazquez: Great, thanks for the question. Maybe I can ask a portfolio question from the opposite side. As you are in the seat another quarter here, as you are looking at the portfolio, is there anything you think that maybe DENTSPLY SIRONA Inc. is not the right home for? Anything on the rationalization side that might help improve the P&L? Daniel T. Scavilla: Great question, Brandon. My answer is no, not yet. I want to see how the market responds to our return to growth plan. I want to look at these from a different light. I do not like the position we are currently in, and I want to stabilize and get them growing. Then we say what makes sense or not. We announced the creation of the Growth and Value Committee. With that, I have the board working with me to look at potential M&A and whether it makes sense for something to be set up as a divestiture. My ask of them—and right now everybody is aligned—is to get through the execution phase before we evaluate where that makes sense. I am not afraid to do it. I just do not have the right facts or positioning to do that in what I think is the best interest of all of us. Brandon Vazquez: Makes sense. And as a follow-up, within CTS and EDS, APAC was highlighted as an area of strength while there are some other pockets of weakness. Could you spend a minute on APAC and why things are doing relatively well there for this portfolio compared to the other regions? Daniel T. Scavilla: I would point to the leadership and structure. They are strong and well educated, and they spend well on clinical education. Everything I am saying I am bringing into the U.S. was started there, and I think that is one of the drivers. With APAC as well, we are looking at doing a similar thing. It is more of a long-term investment growth. Again, I would point out the strength really based on the execution of a team with a good plan, and one that we can learn from and spread throughout the world. Operator: This concludes the question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to Telesat First Quarter 2026 Financial Results. [Operator Instructions] I will now hand the conference over to James Ratcliffe, Vice President of Investor Relations. Please go ahead. James Ratcliffe: Thank you, Jericho. Good morning, everyone, and thank you for joining us today. Earlier this morning, we filed our quarterly report for the period ending March 31, 2026, on Form 6-K with the SEC and on SEDAR+. Our remarks today may contain forward-looking statements. There are risks that Telesat's actual results may differ materially from the results contemplated by the forward-looking statements as a result of known and unknown risks and uncertainties. For a discussion of known risks, please see Telesat's annual report and updates filed with the SEC. Telesat assumes no responsibility to update or revise these forward-looking statements. I would now like to turn the call over to Dan Goldberg, Telesat's President and Chief Executive Officer. Daniel Goldberg: Okay. Thanks, James, and thank you all for joining us this morning. I'll start with a few words about the business, and then I'll hand the call over to Donald, who will speak to the numbers in more detail. We'll then open the call up to questions. My opening remarks this morning are relatively short since it's been only 7 weeks since we reported our full year 2025 numbers. I am pleased with our performance in the quarter, during which we made significant strides in developing and commercializing the Telesat Lightspeed constellation. The development of the satellites themselves continues to move ahead, and we're also making good progress on a number of related fronts, including user terminal and software development and the development -- I'm sorry, and the deployment of our ground station network. We continue to expect to start full global commercial service around the end of the first quarter of 2028. I'm also pleased with the progress we're making on the commercial front for Telesat Lightspeed. Last month, we signed a contract with Northwestel for Lightspeed service to provide broadband connectivity to communities across the territory of Nunavut in the north of Canada, and we see attractive commercial opportunities across our target verticals. I'd note we're seeing a very positive response to our incorporation of the military Ka-band capacity to Telesat Lightspeed from allied government customers who are keen to leverage the benefits of an advanced secure and resilient LEO satellite constellation operating on frequencies these users have long used for mission-critical operations. A number of allied governments are currently evaluating plans to secure Mil?Ka satellite services in LEO, and so adding this capability to Telesat Lightspeed is both important and timely. As you know, late last year, the government of Canada announced that it selected Telesat and MDA to deliver a multi-frequency satellite network called The Enhanced Satellite Communications Project – Polar or ESCP-P to meet the communications requirements of the Canadian Armed Forces in the Arctic. Since that announcement, we've been engaged with the government to finalize the contractual arrangements for a significant portion of the ESCP-P program. which we anticipate will be concluded in the coming months, recognizing, of course, that there can be no assurance an agreement will ultimately be reached. Assuming we do finalize these arrangements and recognizing that ESCP-P is a material opportunity for the company, our intention is to update our financial projections at that time so that investors can take into account the expected impact on our business. In our GEO segment, first quarter results came in largely as we had expected, with most of the year-over-year decline coming from nonrenewals and lower revenue renewals in our broadcast activities and to a lesser extent, reduction in services for fixed broadband customers. That was partially offset by new contracts for broadband services to commercial airlines. Even though GEO is a largely fixed cost business, we remain focused on reducing costs where possible, and that effort was visible in the quarter with adjusted operating expenses, excluding costs related to our debt refinancing, down 11% year-over-year. As noted in our release, we're reiterating our full year 2026 guidance for GEO revenue and adjusted EBITDA and for total LEO investment. One other note regarding our GEO segment. Last month, we changed the name of our GEO operating subsidiary from Telesat Canada to Telesat GEO Inc. In an effort to reduce confusion between our public entity, Telesat Corporation and the GEO operating subsidiary. Now things should be clearer the Telesat Lightspeed business is in our Telesat LEO subsidiary and our legacy GEO business is in the Telesat GEO subsidiary with both subsidiaries ultimately being wholly owned by Telesat Corporation, our publicly listed entity. Finally, I'd note that we continue to work closely with our advisers last quarter on refinancing the Telesat GEO debt that begins to mature in December of this year, something that remains a high priority for the company. So with that, I'll hand over to Donald, who will speak to the numbers in more detail, and then we'll open the call up to questions. Donald Tremblay: Thank you, Dan, and good morning, everyone. My prepared remarks today will focus on highlights from this morning's press release and filings. In the first quarter of 2026, Telesat reported consolidated revenue of $87 million and adjusted EBITDA of $35 million. Consolidated net loss for the quarter was $151 million compared to $51 million loss for the first quarter in 2025. The negative variation of $100 million was principally due to noncash impairment of goodwill and lower adjusted EBITDA of our GEO business. I'll cover the performance of our GEO segment in more detail in a few minutes. Interest expense for the quarter totaled $50 million, down from $57 million in the first quarter of 2025 as we benefited from lower interest rate on our floating rate debt. Interest expense on our USD-denominated debt was also positively impacted by a stronger Canadian dollar during Q1 of 2026 versus the same period in 2025. Interest relating to Telesat Lightspeed totaling $14 million during the first quarter of 2026 was capitalized to the project compared to $3.5 million for the same period last year as the amount outstanding on the Telesat Lightspeed financing is increasing. The result of our GEO segment was in line with our expectation in Q1. We generated $86 million in revenue during the period, down 26% or $29 million compared to the same period last year. Most of the revenue decline was in our Broadcast segment, driven by expiration of contract for service on Nimiq 4 and Anik F3 satellites in 2025 and lower capacity and rate as part of renewal of contract on Nimiq 5. In our Enterprise segment, the decline was primarily driven by lower revenue from our Xplore contract renewed in October 2025, which did not impact materially our operating cash flow as the contract was mostly prepaid at inception. These declines were partially offset by contract added in 2025 in our Aviation segment. The utilization of our satellite was 55% at the end of Q1, and the backlog of our GEO segment was just below $800 million at the end of March. Our adjusted EBITDA of GEO segment was $55 million for the first quarter, down 37% year-over-year. The decline was primarily driven by lower revenue. Our first quarter 2026 expense excludes approximately -- include approximately $7 million in costs related to our debt refinancing process, up approximately $3 million compared to the same period last year. Adjusting for these expense, our GEO adjusted EBITDA would have been $62 million during the period. Turning to the cash and liquidity position of our GEO business segment. Cash on hand at the end of Q1 was just over $200 million, largely unchanged from the end of 2025. We believe the combination of this cash on hand and the cash flow generated by our GEO assets in 2026 to be sufficient to meet all the company's obligation prior to the Telesat GEO debt maturity in December. As a result of this performance, we are reiterating our GEO business segment guidance for the year of revenue of $300 million to $320 million and adjusted EBITDA of $210 million to $230 million, excluding debt refinancing expenditure. We invested $170 million in the Telesat Lightspeed program during the first quarter of 2026, including $152 million in capital expenditure and $19 million in labor and other operating costs. We continue to expect full year investment in the program to be between $1 billion to $1.2 billion as we announced earlier this year. In the LEO segment, we ended the quarter with almost $300 million in cash on hand. This cash, combined with $1.72 billion in availability under our Telesat Lightspeed financing and USD 325 million from our vendor financing is expected to be sufficient to fully fund the Telesat Lightspeed project until it achieved global commercial service around the end of Q1 2028. Our backlog for Lightspeed totaled approximately $1.1 billion as of the end of Q1. Note that this does not include the recently signed agreement with Northwestel. Before I conclude my prepared remarks, I would like to confirm that we are in compliance with all the covenants in our credit agreement and indenture. I'll now turn the call back to the operator for the Q&A. Operator: [Operator Instructions] Your first question from the line of David McFadgen with ATB Cormark. David McFadgen: Let me just start off by asking you a little bit more about the ESCP-P program. Given the government's committed to lend you over $2 billion in capital and the government wants military Ka-band capacity, isn't it logical? Or isn't the deal going to be that the government -- the Canadian Armed Forces is going to license a lot of the military Ka capacity from you off Lightspeed? Daniel Goldberg: David, it's Dan. So I guess the first thing I'd say is I don't, in my own mind, connect the $2 billion loan to future business with the government of Canada. The government of Canada whether that's Department of Defense or other government satellite users, they're always going to choose the solution that represents the best value prop for them and the taxpayer. So I mean that's just what I've seen in my years doing business with them. It is the case that one of the ESCP-P requirements is for military Ka-band capacity in the Arctic. The other requirements are for UHF and [ X-band ] capacity in the Arctic. And it is the case that, as we said on our last call, we've incorporated Mil?Ka in Telesat Lightspeed, and it serves the globe, including the Arctic. So it could be a good fit for the government, but -- we can't get out ahead of this process. As I mentioned in my remarks, we're engaged with the government now on getting the contractual arrangements in place for the overall program. And so stay tuned. What I also did say, though, is, look, it is a material contract for Telesat. And if and when we conclude the arrangements with the government for ESCP-P, and again, our expectation is that will happen later this year, we will organize an investor call and update our financial projections so that everyone can, yes, appreciate the impact it's going to have on the business. So anyway, that's something that we're committed to do. David McFadgen: Okay. And just a follow-up on that. I mean I was kind of surprised to hear that because if you're licensing or you're allocating 25% of the network to Mil-ka, then you're losing that commercial opportunity, right, on the 25% you give the Mil-ka. So I would have thought that the TAM or the forecast will kind of be the same, but you're kind of implying that the forecast will actually be higher. Is that what you're implying? Daniel Goldberg: Well, I'd say stay tuned. We do believe that the market that the Mil?Ka addresses is a very large market. There as I again noted in my remarks, there are a number of governments around the world right now that are evaluating how to get a military Ka-band capability in LEO, and we're out there engaging with a lot of those folks now. Look, we think that ESCP-P, again, assuming we close the contract, will be meaningfully accretive to the company and our business plan and our outlook. And so once that -- once those arrangements are done, yes, we want to get that out there and share it with the market. Operator: Our next question comes from Edison Yu with Deutsche Bank. Xin Yu: I wanted to just clarify when you say an update on financial projections, is that basically you're going to give an update to those numbers you gave back in 2023, where you had like this Lightspeed annual revenue EBITDA. Is that what you mean that you're going to provide an update when you say that? Daniel Goldberg: So I'd say two things, Edison. One, we'll update our guidance for the year to the extent that ESCP-P is impactful on the numbers for this year. So that's number one. Number two, to the extent that Lightspeed is used in connection with ESCP-P, then yes, the financial projections that we have already made available to the market for Lightspeed, we would update those to the extent that the ESCP-P project incorporates Lightspeed capability. Xin Yu: Understood. And then a follow-up, just higher level, if I think back to actually that same presentation on the TAM, so more high level, you obviously -- you had this huge, huge piece. I think it was $320 billion of enterprise. And I think the government part was actually a very, very small piece of that. And I guess if we look at the situation now, would you say that, that government piece, just from a TAM perspective, regardless if you add or subtract anything on your own, we think that TAM is actually substantially bigger than you thought 2.5 years ago? Daniel Goldberg: Yes. I'd say a couple of things about that. I can't remember just because I don't have that material in front of me, I can't remember what we had estimated the government sort of defense TAM to be. But for sure, I bet almost anything because that was done probably 24 months ago or something like that. For sure, I got to believe that TAM will be meaningfully higher. And when we update our numbers, we'll also be able to talk to investors about our expectation in terms of how the future revenue is going to be distributed across the various applications, government, aero, maritime, fixed broadband. And my recollection is that the current plan has our kind of government defense revenues around 15% in the out years of that forecast. And my expectation is when we update it, given what we're seeing in the market, given the change to military Ka-band for Lightspeed that those government defense revenues will be a much more meaningful portion of our projected Lightspeed revenues in light of the changes that we're seeing and the addition of Mil-Ka to the network. Operator: [Operator Instructions] Our next question comes from Chris Quilty with Quilty Space. Christopher Quilty: Dan, what are your thoughts on the Globalstar Amazon tie-up? Are you impacted in any way directly or indirectly? Daniel Goldberg: I don't think it -- I mean, we certainly watched it with interest, and there were certainly a lot of rumors in the market before the deal was announced. It's more tangential, obviously, to what we do. We certainly weren't surprised by it. And it certainly puts Amazon kind of more on that same trajectory in terms of focus as the moves that Starlink has made with their recent spectrum purchases. So -- but I don't think it's something that really has a direct impact on our business, Chris. Christopher Quilty: Fair enough, and I'd agree. The other thing I wanted to dial into was your terminal strategy. We've seen some activity in the market. AllSpace was just acquired by York and Stellar Blu by Dot before that. When you look at your strategy in terms of using either Telesat supplied modules and then having ODMs to manufacture them, do you feel like you're in the right place now given the timing of the constellation? We've seen challenges certainly with OneWeb and their launch of having terminals available timeliness? Daniel Goldberg: Yes. No, it's a great question. And the short answer is -- I mean, frankly, there's a very long answer, but I'll try to give you the short answer. The short answer is I think we're in an excellent spot right now. And frankly, I think having gone after OneWeb, for instance, we've probably captured some of the hard work that they had to do having come out a little bit earlier. So maybe just a couple of things. The terminal strategy is overwhelmingly flat panel antennas for the user, number one. The different verticals that we're serving will, for the most part, have different flavors of those flat panel antennas, maritime, aero and then there'll be different antennas for commercial aero and for commercial jets. The government users will have a range of antennas and some of those might be hardened to look after their requirements. And then, of course, there'll be terminals for kind of terrestrial fixed broadband connectivity. So what we've announced to date, we've announced cooperation with Intellian and Intellian has done -- back to OneWeb, they've done good work already establishing a very capable factory line for producing flat panel antennas for the OneWeb constellation. And we've obviously been working with them to adapt the products for Ka-band. We've announced something with [indiscernible], and they're a very innovative provider as well. And then Farcast, we've made an investment in Farcast and so have others like Gogo and Lockheed Martin. They've got a very innovative technology where they interleave the transmit and receive capabilities, which allows for a smaller form factor. And so -- and they're making great progress. So all to say -- and then you mentioned AllSpace. What's interesting about them is the government users are quite familiar with them, and they've got capabilities. everything that I talked about just up until now has all been about Ka-band, including Mil?Ka in many instances. The AllSpace antennas can do a range of frequencies, which some of the government users will prioritize for certain of their applications. So anyway, all to say, yes, we feel good about it. And again, our strategy is we'll work with a couple of the antenna manufacturers, and our focus is to try to get the volumes up as high as possible because the higher the volumes are, the lower the unit cost for the flat panel antennas. But it's also the case that the network is open. And so government users, for instance, if they have their own desired user terminals, we can certify those to operate on the network as well. So they're not in kind of a closed ecosystem where we limit their choices in terms of who they can work with. Christopher Quilty: Got you. And final question. I know you said the gateway build-out is sort of on track. But I think in the past, you had talked about potentially looking at ways to bring in third-party financing for the ground segment. Can you give an update on that? Daniel Goldberg: I'll just say that our -- the base case plan that we're executing on is that we fund our gateway rollout and the financing that we have in place is sufficient to fund the landing stations around the world to support the network. So that's the base case. And that's what we've been doing up until now, and we've announced some of the gateways in Canada, in Europe, and Australia, and we've got more in the pipeline. But it is the case that we would consider working with a third-party company to change the model a little bit where they would fund some of that, and we would just simply become a customer. I mean it's already the case that all of us whether that's OneWeb or SpaceX or Amazon, all of us are using, to some extent, third-party sites, right? So whether we own the -- whether these companies own the antennas at that site, that's one thing. But it's almost always the case that all of us building out these global gateways are working with third parties at some level to host antennas, to host racks of equipment and whatnot. So then the next question is, would we go a step further and actually work with a third party who would fund some of those components, the antennas and whatnot. So I'd say that's something that's still under consideration. We would only do it. Obviously, if we had confidence that a third party could deliver the capabilities at the level in terms of reliability, security resiliency that we require for the network, number one. Two, if it's obviously somebody that has to have a strong financial wherewithal and then somebody that can meet other considerations around sovereignty, security, that sort of perspective. So that's where we are right now. But to date, it's been just as originally conceived, we're doing it on our own right now. Operator: Our next question comes from James Bratler with New Street Research. James Ratzer: Dan, I question is interested about the kind of growth buildup for Lightspeed kind of outside of Canada and outside of the military opportunity. I'd just be really interested to hear you talk about kind of when you go out and start speaking to customers, how are you seeing the kind of competitive dynamic with other offerings out in the market from people like Starlink, kind of Amazon Leo, TerraWave. What feedback are you picking up in the market about the competitive dynamics? Daniel Goldberg: So maybe a couple of things. For sure, Starlink is, at this point, far ahead of everyone else in terms of having a highly capable LEO network that's serving these various verticals in many the same ones that we're focused on, plus they do obviously B2C as well. So when we're out there in the market, I'd say they've become, in many instances, a benchmark for the users in these different verticals, which is -- and I think it's a great network and that they have a great service. So the market is competitive. Amazon Leo is coming. They're out there in the market promoting their services and their capabilities. They're not as far along as Starlink in terms of service readiness. But there -- we're seeing and hearing them out in the market. And they won an important Arrow deal within the last quarter. They won an opportunity with Delta. So -- and I'd say TerraWave, that's not really a network that we're hearing a lot about at this moment in time out there in the market. So I'd say the good news about Starlink being out there is they've demonstrated how impactful an advanced LEO network is. And as a result, there is significant receptivity to having other players in the market, more competition and whatnot. And then I'd say beyond that, what we're hearing is, look, and we know this, in order to be successful, we're going to need to compete on some mix of quality of service, price and customer support going forward. And then there are some other features in our network. So we're out there offering a Layer 2 service that is absolutely compatible with the mobile network operators and the telcos standards in terms of metro MEF standards and the like. And we've developed our APIs in a way that makes it very seamless for the telcos and the mobile network operators to integrate our capability kind of with their network backbone and whatnot. So what we're hearing is a significant amount of receptivity to Telesat Lightspeed, provided that it's cost competitive and we can meet all these service capabilities that they're looking for. I will say maybe one other thing is because we're not a B2C provider as well. We're not seen as a competitor in these markets. I think when some of the operators show up, they're oftentimes competing with the incumbent operators in these different countries. They're taking rural broadband subs. Their direct-to-device networks might end up competing for mobile network subscribers as well. That's not our posture when we come into these markets. We're really looking to be a supplier to the incumbent operators and just trying to help them be more competitive in what's a very dynamic, fast-moving market. Donald Tremblay: Yes. And I'd say that deal that we announced with Northwestel last month is an indication of how Lightspeed can offer a service that's transformative for rural broadband users, but working with a long-standing telco that's been operating in that case, in the market of Nunavut for decades. So we think it's a model that works. Operator: There are no further questions at this time. I will now turn the call back to Dan Golberg for closing remarks. Daniel Goldberg: Okay. Well, thank you, operator, and thank you all for joining us this morning, and we look forward to speaking with you again when we issue our second quarter numbers. So thanks again. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Harley-Davidson 2026 First Quarter Investor and Analyst Conference Call. Please be advised that today's conference call is being recorded. I would now like to hand the call over to Shawn Collins. Thank you. Please go ahead. Shawn Collins: Thank you. Good morning. This is Sean Collins, the Director of Investor Relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at the Harley-Davidson Investor Relations website. As you might expect, our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in today's earnings release and in our latest filings with the SEC. Joining me for this morning's call are Harley-Davidson, Chief Executive Officer, Artie Starrs; and Chief Financial and Commercial Officer, Jonathan Root. With that, let me turn it over to Harley-Davidson, CEO, Artie Starrs. Arthur Starrs: Thank you, Shawn, and good morning, everyone, and thank you for joining us today for our Q1 2026 financial results as well as an introduction to our new strategic plan, which we're calling back to the bricks. I'll begin with an overview of our Q1 performance. Jonathan will then provide additional financial commentary before we turn to our strategy. Before I get into it, I'd like to take a moment to acknowledge our deeply committed and passionate Harley-Davidson employees, who worked tirelessly to bring Harley-Davidson alive across the world. Thank you, Team HD. Starting with retail sales. We're pleased with our performance this quarter. North America delivered a 14% increase versus the prior year, contributing to global retail sales growth of 8% in what remains a challenging consumer environment. These results reflect the impact of the actions we've taken to drive demand and improve execution. As noted on the Q4 earnings call, dealer health and inventory levels remain a key focus for the company. During the quarter, we reduced global inventory by 22% year-over-year as we continued to prioritize dealer inventory sell-through and aligning wholesale shipments with retail demand. We'll share more detail on this in our strategy discussion. Strengthening dealer relationships has also remained a priority. We recognize the critical role our dealer network plays in the Harley-Davidson ecosystem, and we're encouraged by the renewed sense of partnership and momentum across the network. This will be an important driver as we move forward into our next chapter. During the quarter, we also formally reopened our Juno Avenue headquarters in Milwaukee, Wisconsin. Affectionately referred to by our Harley-Davidson Community as the bricks with our employees at headquarters returning to the office for the first time since 2020. Finally, we've been encouraged by the early reception to our new marketing platform, Ride. I'll speak more about the brand platform and the value we believe it will bring as part of our strategy presentation. With that, I'll turn it over to Jonathan. Jonathan Root: Thank you, Artie, and good morning to all. I plan to start on Page 4 of the presentation, where I will briefly summarize the financial results for the first quarter. Subsequently, I will go into further detail on each business segment. Let me start with our consolidated financial results for the first quarter of 2026. Consolidated revenue in the first quarter was down 12% and driven primarily by HDFS revenue being down 54% as it moved into a new capital-light model after the closing of the HDFS transaction, where we sold a significant part of the retail loan book and agreed to a forward flow in which we expect to sell approximately 2/3 of future originations. Consolidated operating income in the first quarter came in at $23 million compared to operating income of $160 million in Q1 of 2025. This was driven by a significant year-over-year decline in operating income at both HDMC and HDFS as we expected. The operating loss at LiveWire was $18 million which was in line with our expectations and $2 million favorable to a year ago. In Q1, earnings per share was $0.22, which compares to $1.07 in Q1 of 2025. Now turning to Page 5 and HDMC retail performance. In Q1, North American retail sales of new motorcycles were up 14% versus prior year with approximately 24,000 motorcycles sold. In Q1, retail sales of new motorcycles outside of North America were down 4% versus prior year with approximately 10,000 motorcycles sold resulting in Q1 global retail sales of new motorcycles being up 8% versus the prior year with a total of approximately 34,000 motorcycles retailed. While we are relatively pleased with the start to the year, particularly in the U.S., we remain mindful of the global consumer discretionary landscape, which remains uneven. We are aware that pricing continues to be on the top of customers' minds given the current global setup that includes inflationary pressures, interest rates that continue to run above recent historical lows and global geopolitical uncertainty. In North America, Q1 retail sales were up 14%, where U.S. retail sales were up 16% and Canada retail sales were down 8%. Results were driven by continued strength in our Touring and Trike models as consumers reacted well to our new 2026 Motorcycle Launch and targeted customer incentives. This translated into a significant market share gain with Harley-Davidson reaching 38% of the U.S. 601 CC+ market, up 2 percentage points year-over-year. Dealer inventory in North America declined 21% year-over-year, reflecting a more balanced setup as we enter the main riding season. In EMEA, Q1 retail sales posted a modest decline of 3%. In the quarter, performance reflected a subdued economic environment in Europe, although supported with early model year 2026 product momentum across the continent, as evidenced by the quick sell-through of new units that began arriving later in Q1. The Rev Max platform continued to outperform the broader portfolio led by adventure touring, which showed strong growth year-over-year. In addition, from a market share standpoint, we moved from 2% to 4% of share in the European market in Q1. In Asia Pacific, Q1 retail sales declined by 9%. In the quarter, we experienced modest declines in the core portfolio, including touring, strike and soft tail reflecting broad-based pressure across Japan, Australia and China, partially offset by positive results in our noncore motorcycle portfolio with strength in adventure touring. In Latin America, Q1 retail sales delivered another strong quarter with retail up 21%, where both Brazil, our largest Latin American market and Mexico were up, while other Latin American countries were down modestly year-over-year. Touring and Trike were the standout categories in the market. Dealer inventory at the end of Q1 of 26 was down 22% versus the end of Q1 of '25. Specifically, North American dealer inventory was down 21% and dealer inventory outside of North America was down 23%. This has allowed Harley-Davidson dealers to start the upcoming 2026 writing season with a largely appropriate setup. In addition, the quality of dealer inventory is healthier today than 1 year ago as it is more current from a model year standpoint. At the end of Q1, North America dealer inventory was comprised of approximately 2/3 of current model year 2026 motorcycles. In comparison, in the prior year period, a little less than 1/2 of all dealer inventory was current model year. We expect this improvement in healthy dealer inventory to pay dividends in future periods and believe it sets Harley-Davidson and our dealers up for greater success. Before we get into revenue, let's conclude with some information on wholesale shipments. From a wholesale shipment perspective, in Q1 of 2026 and we delivered approximately 37,300 units compared to 386,000 units in Q1 of 2025, which is down 3% year-over-year. As we are now beginning the prime riding season in North America, we have recently heard from dealers that they could benefit for more inventory with regard to particular places, models, entrant levels. This is a good sign, and we expect to ship more units on a year-over-year basis in Q2 and Q4, while running lower in Q3 in comparison to the prior year period. We expect this will get us to a more even shipment cadence across the quarters in comparison to what we have delivered in recent years. Now turning to Page 6 and HDMC revenue performance. In Q1, HDMC revenue decreased by 2%, coming in at $1.1 billion. We point out that from a business line standpoint, motorcycles came in at $836 million C&A plus apparel came in at $200 million and licensing and other came in at $20 million. The drivers of overall revenue at HDMC included lower volume or shipments and lower net pricing and incentive spend. These were partially offset by favorable foreign currency. Now turning to Page 7 and HDMC margin performance. In Q1, HDMC gross profit came in at 25.3%, which compares to 29.1% in the prior year. The year-over-year decrease was driven by the unfavorable impacts of increased tariff costs of $45 million in Q1, which will be covered in more detail in the next slide, net pricing and incentive spend due to effective sell-through of prior model year dealer inventory. Product mix, lower volumes and higher-than-expected supply management costs as we work through a unique supplier situation. These were partially offset by the positive effects of tariff recovery settlement from prior years and favorable foreign exchange. In Q1, operating expenses totaled $248 million which was $49 million higher compared to prior year. This falls into two broad buckets. The first piece is a restructuring expense of $15 million, driven by costs incurred related to strategic changes, including the company's decision to eliminate certain roles, resulting in onetime employee termination benefits and other recurring charges. The second piece consists of $34 million of additional costs in the quarter specifically due to higher warranty spend due to select product recalls, select people costs, primarily related to executive team changes on a year-over-year basis, increased marketing spend as the marketing development fund matures, and limited other discrete expenses to operate the business. In Q1, HDMC had operating income of $19 million, which compares to operating income of $116 million in the prior year period. Turning to Slide 8. In 2026, the overall global tariff regulatory environment continues to evolve. There are a number of factors at play in the space, including the potential for increased tariff recoveries and evolution in the application of IIFA Section 122 and updates to Section 232 steel and aluminum tariffs. In Q1, we saw the most significant year-over-year impact in tariffs we expect to experience this year. This is a result of the increased tariff levels, which were initially put in place beginning in Q2 of 2025. In Q1 of '26, the cost of new or increased tariffs was $45 million. As tariff policy changes, there are lags associated with the various tariff levels as these adjustments work their way through our parts inventory imported prior to the current Section 232 pronouncement. We continue to pursue mitigation actions where possible and pursue tariff recoveries when viable. We note that recent U.S. administration tariff regulation announced in early April, included an exemption on certain motorcycles and for parts and accessories for the use in the manufacturing promoter cycles. We would note that Harley-Davidson is a business very centered in and around the United States. 3 of our 4 manufacturing centers are U.S.-based and 100% and of our U.S. core product is manufactured in the U.S. This change will serve in helping mitigate the impact to tariffs to Harley-Davidson and enable us to strengthen our commitment to U.S. manufacturing. At this point in time, we expect the cost of increased tariffs to be in a range of $75 million to $90 million for the full year 2026, which is favorable to what we guided to in our prior quarter. From a cadence perspective, our expected tariff amount will decrease consecutively as we work our way across the remaining quarters in 2026. Turning to HDFS on Page 9. At Harley-Davidson Financial Services, Q1 revenue came in at $112 million, a decrease of 54% driven by lower interest income due to the decline in retail receivables related to the sale of loan assets as part of the new HDFS transaction. Other income within HDFS revenue was favorable year-over-year due primarily to new servicing fees, investment income and new gains on third-party loan sales. HDFS operating income was $22 million, representing an operating income margin of 19.9%. On the expense side, interest expense and the provision for credit loss expense were both significantly lower, which was due to the decreased size of the retail loan portfolio and related debt on a year-over-year basis and as expected. With the change in strategy associated with the HDFS transaction. The HDFS team continues to manage expenses prudently with operating expenses decreasing by $1 million versus prior year. Turning to Page 10. In Q1, HDFS' annualized retail credit loss ratio on managed loans was 3.6%, which compares to 3.8% in the year ago period. We are pleased with HDFS loan origination activities as total retail loan originations in Q1 were up 14%, coming in at $671 million in Q1. We Total gross financing receivables were $2.5 billion at the end of Q1, where retail receivables were $1.3 billion and commercial receivables were $1.2 billion. Now turning to Slide 11 for the LiveWire segment. For the first quarter of 2026, LiveWire revenue increased 87% over prior year driven by increases in electric motorcycle and static brand electric balanced bank units. Consolidated operating loss decreased by 11% and resulting from improved gross profit and lower selling, administrative and engineering expenses. In turn, this drove an improvement of over 25% in net cash used by operating activities in Q1 of '26 compared to Q1 of '25. For 2026, LiveWire's focus is heavily geared around the imminent launch of its F4 Honcho products, in particular, continued network expansion cost savings and improvements and product innovation and development focused on products that will be profitable and positive drivers of cash flow. Now turning to Slide 12. We wrapping up with consolidated Harley-Davidson, Inc. financial results. We had net cash use of $228 million from operating activities in Q1 and which compares to $142 million of operating cash in the prior year period. Operating cash flow was lower than the prior year due to reduced cash inflows at HDMC on lower wholesale shipments. Also at HDFS, the operating cash flow decreased due to reduced interest income and due to new originations of retail finance receivables under the forward flow arrangement that were classified as held for sale, which is classified as an operating activity under U.S. GAAP. As a result, the originations to be sold to our strategic partners or outflows reduced cash flow from operations as there were no comparative retail finance receivable originations classified as held for sale in the first quarter of the prior year. This was partially offset by the inflows from the proceeds from the sale of retail finance receivables classified as held for sale. This will remain a distinct year-over-year item as we move through 2026 as a result of the HDFS transaction, which concluded throughout the second half of 2025. Total cash and cash equivalents ended Q1 of 2026 at $1.8 billion compared to $1.9 billion a year ago. As part of our share buyback strategy, in Q4 of 2025, we entered into an accelerated share repurchase agreement to repurchase $200 million of the company's common stock. As part of the ASR agreement, we received $160 million or 80% of the notional worth of shares or 6.3 million shares delivered to us before December 31, 2025, with the remainder expected to be delivered in early 2026. On February 12, 2026, our ASR was concluded, and we received an additional 3.1 million shares on February 13 2026. These shares had a value of $64.7 million, considering the share price during the ASRs performance period. Beyond the ASR, the company also repurchased another 3.5 million shares on a discretionary basis for $63.3 million in the first quarter of 2026. Therefore, in Q1, we repurchased a total of 6.6 million shares worth $128 million on a discretionary basis. We note that since our Q2 of 2024 earnings announcement, where we also announced a plan to repurchase $1 billion worth of our shares through 2026 that we have repurchased a total of 26.8 million shares. That is a total value of $726 million of Harley-Davidson shares purchased. We are pleased with the performance and have decided to conclude reporting on this program as we look forward to aligning our capital allocation approach with the updated strategy that Ed and I will walk through shortly. Share buybacks remain an important part of our capital allocation strategy, and you will hear more on this, including a refreshed and updated approach to capital return to shareholders. As we enter the main riding season, we remain pleased with our dealer inventory levels and leading market share position in the U.S., new model year '26 motorcycle launch, including the new limited touring motorcycles and the all-new redesigned trike models. We are also pleased with the reception to a number of new, more affordable motorcycles, which have a focus on critical price points to help stone demand. While we are not changing our financial guidance, we would note that our optimism on the year has increased. This is due in large part to our retail results in North America, and we are also pleased with the early action of our cost reduction. For the full year 2026, the company reaffirms its guidance and continues to expect at HDMC retail units of $130,000 to $135,000 a and wholesale units of 130,000 to 135,000. We believe that global dealer inventory levels are healthy, and therefore, we expect retail and wholesale to have a largely one-to-one relationship in 2026. In line with my earlier comments versus prior year, we expect shipments to be higher in Q2, relatively flat in Q3 and then up again in Q4. At the same time, we continue to expect production units at HDMC to be lower than wholesale units shipped in 2026 as we work to prudently manage overall company inventory levels. For 2026, we expect this will have a deleverage impact, which will put pressure on operating leverage and operating margin, but we expect to come into alignment by next year. In addition, we still expect to face a greater overall cost for incremental tariffs in 2026 compared to 2025 and which we covered in detail previously. As a reminder, in full year 2025, we incurred a cost of $67 million in new or increased tariffs. And in 2026, we forecast a cost of between $75 million to $90 million of new or increased tariffs based upon current tariff levels and versus the 24 baseline. This is an update to the prior range we provided of $75 million to $105 million. At HDMC, we expect operating income of positive $10 million to a loss of $40 million. At HDFS, we expect operating income of $45 million to $60 million. As a reminder, the new business model at HDFS, given the HDFS transaction, where Harley-Davidson Financial Services now employs a capital-light derisked business model and has significantly changed financial earnings profile relative to before the transaction. For LiveWire, we are forecasting an operating loss in the range of $70 million to $80 million. And with that, I'll turn it back to Artie to cover our strategic plan. Arthur Starrs: Now turning to our strategic plan for Harley-Davidson. On behalf of our Harley-Davidson community, Jonathan and I are excited to introduce our Back to the Bricks plan. Designed to reignite brand enthusiasm with riders around the world while driving profitable growth for our dealers and shareholders. It is grounded in the work we've done since October. We've spent significant time assessing the business, engaging deeply with dealers and riders and most recently, through a global road show where we connected directly with the majority of our dealer network in all of our global dealer advisory councils. The Back to the Bricks plan will restore Harley-Davidson and position the company for growth. First, we are intensely focused on leveraging Harley-Davidson's competitive advantages, specifically brand, diversified revenue channels and most notably, P&A and financing products and our dealer network. Second, we are leaning into a true win-win model with our dealer network. Our dealers are not only our retail channel, but the frontline builders of our rider community. They are the true source of strength and a competitive advantage when our dealers win the enterprise wins, and so do our shareholders. Third, we have already taken immediate actions to recapture share by better serving the large and community of riders, where Harley-Davidson has a clear right to win. Fourth, we're doing this from a position of strength and plan to leverage our balance sheet, bolstered by cost and restructuring actions to enable both investment in the business and returns to shareholders. We are executing against a clear path to strong and growing free cash flow and EBITDA margin. And lastly, we brought on some great leadership talent to support the business as we enter this new chapter for the company. Moving to Slide 3. There are really three things that define Harley-Davidson. First, we are a 123-year young brand that designs and manufactures the best motorcycles in the world. combining iconic design, precision engineering and a look, sound and feel that is unmistakably Barley Davidson. Second, through our best-in-class dealer network, we serve a global community across segments. We've helped define over decades. Our riders show up in powerful ways through hog chapters, rallies, events and by giving back to their local communities. And third, maybe most importantly, is the culture of riding. Since starting at the company, I've spent time with riders and dealers at events, rallies and swap meats. And what stands out is the emotional connection riders talk about their motorcycles, their rides and their community in deeply personal ways. For them, riding isn't just about getting somewhere. It's about the experience itself. The ride is the destination. Turning to Slide 4. We're in the midst of a bold restoration of the business to drive value for shareholders. What's clear is that our heritage remains a powerful advantage, not something to preserve, but something to build from. It starts with our portfolio. Taking a step back over the last several years, we leaned heavily into touring and electric. Going forward, we are shifting to a more rider-centric portfolio, one that is more accessible, more customizable and better aligned to the needs of the full spectrum of our riders. Touring will always remain our core. We're building clear pathways into the brand that support long-term touring growth. While also addressing other writing occasions and styles. Importantly, we can do this using our existing platforms, moving from too many of too few to a more balanced lineup. We're also adopting an enterprise profitability model, recognizing that our success is directly tied to the success of our dealers. When dealers win, we win. By aligning Harley-Davidson and dealer economics, we can create more value for riders, stronger profitability for dealers and more dependable cash flow for shareholders. I'll come back to this in more detail shortly. Another key pillar is parts and accessories. Customization is at the heart of Harley-Davidson. It's how riders make each bike their own what we often think of as freedom for the sole or more personally freedom for our so. We're reestablishing parts and accessories as a core growth driver, one where we have a clear right to win, and in alignment with dealers as this is an important component of their profitability. We're also reinforcing motor clothes and apparel, growing from the core of the brand. On promotions, as inventory has normalized, we are shifting to a more targeted and disciplined approach, one that supports volume while protecting margins. An expanded portfolio will play an important role here as well. From an investment standpoint, we continue to see upside in existing platforms, particularly within touring, but our near-term focus is on executing better with the platforms we already have rather than introducing entirely new ones. By leveraging our existing platforms and powertrain to bring new motorcycles to market, we are operating with a more capital-efficient model. Finally, we've taken important steps to refocus our brand around our community as reflected in the launch of the ride marketing platform. Taken together, we believe these actions position us to revitalize the business by leaning into what has always made Harley-Davidson strong and executing with greater clarity and discipline. As you can see on Slide 5, a we've experienced a decline in retail volumes, and that's had a direct and meaningful impact on both company and dealer performance. At the core of this is a loss of relevancy with riders, most notably with the exit of iconic motorcycles like the Sportster, which limited accessibility and contributed to lower volumes. Additionally, we are excited to introduce Sprint the perfect entry for many to the Harley-Davidson brand. At the same time, as volumes declined, our cost base remained largely fixed putting pressure on margins and driving a greater reliance on broad-based promotions, particularly on higher-priced motorcycles. And importantly, lower throughput at has had a direct impact on our dealers, reducing traffic, compressing profitability and limiting the performance of key revenue streams like parts and accessories and service. All of this reinforces a critical point. restoring profitable volume is central to improving overall performance. And that's exactly what our strategy is designed to address, making the brand more accessible through a combination of portfolio changes, more targeted pricing and promotions and improved operational execution. Moving to Slide 6. While recent performance has been impacted, the underlying market opportunity remains significant. We see meaningful white space in existing markets, areas where Harley-Davidson has strong legacy equity and a clear right to win. Across new motorcycles, used motorcycles, parts and accessories and apparel, there is share of wallet that we were capturing as recently as 2019 that we are no longer capturing today. That creates a very direct opportunity to regain market share and do so in segments where our brand is already strong. Importantly, this strategy is not about entering new categories where we lack a competitive advantage. It's about doubling down in the categories we know where we have credibility, scale and deep rider connection. We believe this positions us to regain lost share while driving meaningful volume growth over time. Now turning to our strengths on Slide 7. The foundation of Harley-Davidson is its legacy, an unparalleled brand with unique American heritage, as recognized recently by USA TODAY as part of their 50 iconic brands that shaped America Series. Underpinned by a best-in-class dealer experience, deeply committed riders and craftsmanship that delivers something truly unique. When I first joined the company, those advantages were immediately clear. And as we've looked more closely at the data, they've only become more compelling. We are one of the most recognized and esteemed brands in the category and in many ways, we help define it. Our dealer network is a true competitive advantage, consistently delivering a best-in-class customer experience and serving as the frontline of our brand. Our riders have an incredible affinity for Harley-Davidson. They don't just buy our products, they live our brand. It's a level of loyalty and engagement that is difficult to replicate. And all of this is anchored in superior craftsmanship and quality that continues to resonate strongly with our riders. Taken together, these strengths provide a powerful foundation as we execute our plan and move the business forward. Now turning to our strategic road map on Slide 8. Against the backdrop we've just discussed, we've developed a plan for the next several years that unfolds in three clear phases. First is the reset. This phase is already underway and focused on taking cost out rightsizing dealer inventory, strengthening our dealer relationships and rolling out the ride marketing platform. We're making progress across all these areas, and today, we'll provide an update on that momentum. Second is the growth phase. Beginning next year, you'll see a more expanded and balanced portfolio designed around what riders want, while leveraging the full life cycle of the motorcycle to unlock additional revenue streams. Parts and accessories will play a much larger role both in dealerships and as a core revenue driver. At the same time, we're refining our promotional approach to be more targeted, driving traffic and volume while preserving profitability. And third is the acceleration of value creation. As the portfolio becomes more accessible and better aligned to needs of our full spectrum of riders, we see opportunity to deepen ridership engagement. This includes greater participation in the used motorcycle ecosystem as well as further driving adjacent areas like apparel and licensing. With the foundation established in the first 2 phases, we believe we are well positioned to drive more sustainable enterprise growth in wider economic enterprise benefits. Turning to Slide 9. What are we doing right now? We've already begun putting this plan into action, and we're encouraged by the early momentum. As part of Phase 1, our actions on cost and inventory have been swift and effective. We've moved quickly to reduce head count and take cost out of cost of goods sales, creating room to reinvest in key growth areas like parts and accessories. As we previously outlined, we expect to deliver at least $150 million in annual run rate cost savings that will impact 2027 and beyond versus 2025 levels. At the same time, we've made meaningful progress on inventory. Global retail inventory is now at a much healthier level, down significantly, 22% year-over-year. So we still see opportunity to improve assortment and allocation at the dealer level. Importantly, these actions are starting to translate into results. we're seeing sales momentum return with retail growth and market share gains, including an 8% increase in global retail sales in Q1 2026. Now turning to our dealers on Slide 10. The Harley-Davidson dealer network is a clear competitive advantage, and our strategy is intentionally designed to support and strengthen their profitability. I firmly believe this company will go only as far as our dealers take us. That's why dealer profitability is a central pillar of our plan. Since joining, I've spent a significant amount of time with dealers, along with the broader leadership team, listening and learning directly from them on the ground. Our focus is on earning their trust and ensuring they're confident and excited about the path forward. We've already taken action through inventory rightsizing, better alignment on promotions and structural improvements to dealer programs. And we're not done. There are additional actions ahead that we expect to further strengthen dealer economics. Our objective is clear: to materially improve dealer profitability over time, supporting a stronger, more stable network and enabling long-term growth. As shown on the slide, we are targeting a meaningful step-up in dealer profitability over the next several years. Moving to Slide 11. It's important to understand the role dealers play in the Harley-Davidson ecosystem. Dealer profitability is nonnegotiable and ultimately a win for shareholders. At the core, brick-and-mortar economics and frontline enthusiasm are directly linked. When our dealers are profitable, they can invest in their business, delivering a better rider experience at the point of interaction with our brand. Stronger dealer economics also reduced the need for discounting and OEM promotional support, helping preserve the premium positioning and long-term health of the brand. Dealers are not just our primary sales channel. They are a powerful marketing engine, building the brand and local communities at scale. When they are successful, we unlock the ability to invest more in rider growth through initiatives like Riding Academy, HOG engagement and events that deepen connection to the brand. And importantly, healthy dealer profitability attracts capital, bringing more investment into the network and supporting long-term rider-centric growth. Moving to Slide 12. I want to spend a moment on the lens through which we're now viewing growth and profitability. We've done significant work to better understand how we make money as one enterprise, Harley-Davidson and our dealers together. What's clear is that focusing solely on wholesale and retail motorcycle margins is an incomplete view. A motorcycle generates value over its entire life cycle across parts and accessories, service finance and insurance and ultimately, the used market. And importantly, Harley-Davidson and our dealers participate in that value at different points in time across multiple revenue streams. So going forward, we're managing the business against this broader enterprise economic model. By increasing new motorcycle volumes, we not only drive profit at the point of sale, we also expand the base of motorcycles in the market, which fuels downstream revenue across all of these channels. We believe this will create a more stable diversified and sustainable earnings profile over time. It also changes how we think about the portfolio. We intend to bring motorcycles to market in a way that supports the full enterprise profit model not just the economics of an individual launch for motorcycle. We expect this to reduce pressure on any single product and lead to more balanced performance across cycles. And importantly, the portfolio changes we're making, particularly around accessibility and customization play directly into this model by supporting higher volumes and stronger life cycle value. Over time, we plan for this to become a compounding growth engine. The return of Sportster and the introduction of new models like Sprint are great examples of how this approach will create value across the system. We're really excited to announce that our iconic Harley-Davidson Sportster will be returning in 2027. This has been the most requested motorcycle from both our riders and our dealers, and we're bringing it back better than ever. Sportster is a perfect embodiment of back to the bricks, and it fits naturally within our enterprise economic model. For context, Sportster has historically been a middle weight highly customizable motorcycle with an air cooled powertrain and accessible starting price point, making it an important entry to the Harley-Davidson brand. While it was discontinued in 2022, it has remained incredibly strong in the used market, often retaining value at or above original MSRP, which speaks to its enduring appeal. With its accessibility, we expect Sportster to drive higher volumes. And with its customization potential, we expect strong attachment to parts and accessories as riders personalize their motorcycles. Beyond the motorcycle itself, Sportster also creates opportunity across apparel, licensing in the broader wider ecosystem. Importantly, it demonstrates how our strategy generates value across the full life cycle from the initial sale to entry into the used market. Taken together, Sportster is a critical part of our plan to restore volume, strengthen our portfolio and drive long-term enterprise value. We look forward to sharing more specifics later this year. Additionally, we're excited to bring Sprint to market beginning in the back half of 2026. This lightweight, customizable and accessible motorcycle provides a great entry to the brand for many riders. We are excited to be returning to a space that we haven't been in since the 1960s. And we believe that the Sprint will provide a great starting point for riders to enter the brand as they progress through the portfolio. Over the coming periods, we will be providing more detail on how this aligns with our portfolio planning and lifetime value creation. Moving to Slide 15 and zooming out to a broader view of the portfolio, we are taking deliberate steps to realign the portfolio. Making it more rider-centric and better positioned to replicate the value creation cycle we just discussed across more models. Over the past few years, pricing and portfolio decisions reduced accessibility for some riders which contributed to lower volumes and ultimately, pressure on profitability. We're addressing that directly. Going forward, you'll see a more balanced lineup across price points. while still maintaining our premium positioning. We're also expanding the use of blank canvas motorcycles, which we know is a key differentiator for Harley-Davidson. Giving riders more opportunity to personalize their motorcycles through genuine parts and accessories. These changes are informed by deep analysis of the used market, direct dealer engagement and what we've learned from recent promotional activity. Importantly, we see clear gaps in the portfolio that we can address efficiently without starting from scratch. We're leveraging our existing platforms in Powertrain, where we see significant room for growth, allowing us to expand the lineup without incremental capital investment. Taken together, this positions us to deliver what riders want, improve accessibility and drive stronger volume and life cycle value across the portfolio. Now turning to parts and accessories on Slide 16. This is one of our most important revenue channels and a significant growth opportunity. We believe there is a potential to drive 20% to 30% sales growth over time. We also recognize that we've under-invested in this area in recent years. Customization is at the core of the Harley-Davidson experience and a key driver of dealer profitability. No two Harley-Davidson motorcycles on the road are the same and that's exactly how riders want it. So we've laid out a clear road map to rebuild our leadership in parts and accessories, leveraging our dealer network and existing manufacturing and supply chain capabilities. That starts with expanding our assortment, including reinstating approximately 30% of SKUs that were previously eliminated. We're also refocusing on core categories where Harley-Davidson has historically been strong. Like seats, exhaust, lighting, windshields and handlebars and pairing that with an increased emphasis on blank canvas motorcycles that are designed for personalization. Importantly, we're integrating parts and accessories into the motorcycle launch process, ensuring availability at launch, supported by HDFS financing and aligned dealer incentives. As we execute this, we expect stronger dealer performance, increased attachment rates and ultimately both revenue growth and margin expansion over time. Turning to Slide 17. We're also refining our approach to promotions. Historically, our promotional activity has been broader and less targeted. More recently, we used promotions to help reset elevated dealer inventory. Which, while necessary, put pressure on profitability. Now with inventory at healthier levels, we're shifting to a more disciplined and targeted approach. Focused on driving traffic and conversion at a lower cost. An important enabler of this is our expanding portfolio, which allows for more value-based messaging across a broader range of products. rather than relying on heavy discounting on a narrower mix. We're also strengthening our capabilities with recent hires who bring deep experience in performance marketing in automotive retail. And the launch of our marketing development fund in 2025 is a key step in better aligning scale with more effective localized dealer messaging. Together, these efforts are improving how we manage incentive spend, driving more predictable growth while recognizing that many riders don't require heavy promotion to convert. The result is a more efficient model. which we believe will support volume recovery while protecting margins. Now turning to our marketing approach on Slide 18. Last month, we launched our new brand platform, Ride, which really brings everything together. It's built on a simple but powerful insight, joy and Swagger. At its core, Ride celebrates the experience of riding and most importantly, our riders themselves. They and their motorcycles are the stars of the show. This reflects a broader shift in how we show up as a brand. We're moving toward more authentic, rider-focused storytelling that reinforces the community and culture at the heart of Harley-Davidson. We're also reallocating our marketing investments. moving away from a heavier e-commerce spend and toward top of funnel, brand-building efforts to drive awareness and engagement. You may have even seen us recently on Wheel of Fortune. At the same time, we're making better use of tools like the marketing development fund, while upgrading our digital platforms and programs to support both global scale and local activation. And perhaps most importantly, the power of ride is that it gives us a single unified voice while still allowing flexibility for riders and dealers around the world to bring the brand to life in their own way. It connects all aspects of Harley-Davidson from product to community to marketing under one cohesive platform. And as you can see on the slide, it creates a clear and flexible framework for how we bring the brand to life across riders, dealers and markets around the world. Over time, we expect this to drive stronger engagement, deeper relevance and ultimately growth. Now I'll hand it over to Jonathan to take you through the financial section. Jonathan, over to you. Jonathan Root: Thanks, Artie. Now turning to our financials on Slide 21. All of the facets of the strategy we've just laid out support our financial growth trajectory over the next few years. We believe we have a clear path to achieving $350 million plus EBITDA in 2027. The path to get there is clear and execution-driven anchored by roughly $150 million in fixed cost reduction, better alignment between wholesale and retail volumes the full impact of Sportster and Sprint, targeted expansion in high-margin parts and accessories and more effective disciplined promotions. Beyond 2027, the story doesn't stop. We expect continued strong growth driven by further cost absorption, a broader P&A and motorcycle portfolio, incremental product improvement and smarter incentive execution. The bottom line is, this is a structural step change in profitability with clear levers and meaningful upside ahead. Now on Slide 22, we'll take a closer look at how we get there. This bridge outlines the key initiatives that will drive EBITDA improvement. In the near term, the focus will be on cost reduction and operating leverage, which we see as the primary drivers of performance. With these actions already underway, we have a clear line of sight to achieving $350 million or more. Beyond 2027, a Drivers for continued growth will include, but not be limited to, improvements in motorcycle margins and volume supported by growth in parts and accessories. Turning to our medium-term targets on Slide 23. We expect to return to sustainable growth across key metrics. We expect to achieve mid-single-digit retail unit growth over the medium term. As Artie discussed, this return to growth will be driven by the significant actions we are taking across our business. Furthermore, we expect the momentum in retail units and other enabling actions to drive mid-single-digit growth in P&A and AML. Combined with the ongoing inventory rightsizing, we expect this return to growth to have a significant impact on dealer health. From a margin standpoint, we expect to drive significant improvement in gross margins approaching 30%, while operating expenses as a percentage of sales decreased to less than 20% and from the 25% in 2025. Over the midterm, we expect CapEx to remain broadly in line with recent expenditure levels. In totality, we expect to deliver attractive top line growth and drive towards a 10% to 12% EBITDA margin over the medium term. These targets reflect a more balanced and resilient business model underpinned by the Back to Brick strategy. I'll now touch briefly on HDFS on Slide 24. We believe that the business remains a highly strategic asset. Following the transaction, we have transitioned to a more capital-light model while maintaining HDFS' role in supporting motorcycle sales and dealer financing. We recently held a call to discuss the HDFS business in greater detail but at a high level, we expect HDFS to see improved returns while reducing capital intensity. We expect to continue to strengthen HDFS' leading position in powersports and intend to expand our high-value finance and insurance product suite with optimized offers supporting motorcycle sales. In connection with our enhanced P&A offerings, plans to leverage additional financing to drive P&A sales. Lastly, we are also better training dealers to maintain the best-in-class penetration rate of HDFS. With all this in mind, we are targeting $125 million to $150 million in operating income for the business by 2029. Turning to capital allocation on Slide 25. Our priorities remain consistent. We will reinvest in the business where we see opportunities to drive growth across the key initiatives of our strategy. We also remain committed to returning capital to our shareholders through share buybacks and dividends. Additionally, we remain open to opportunistic value additive M&A. And with that, I'll hand it back to Artie. Arthur Starrs: Thank you, Jonathan. To conclude, Harley-Davidson is built on a strong foundation, an iconic brand a deeply loyal rider base and a differentiated dealer network. We're excited about the path forward. Our dealers are energized, and we're seeing real enthusiasm from the rider community around back to the bricks. This strategy is intentionally grounded in our core strengths, and we're doubling down on what makes Harley-Davidson unique, especially our dealer network. Importantly, execution is already underway and we're seeing early signs that our actions are delivering results. We're doing this from a position of strength with a solid financial foundation to support both investment in the business and returns to shareholders. And we have the right team in place. energized and equipped with the experience needed to deliver on this plan. We remain committed to working closely with our dealers every step of the way to create value for our riders and ultimately for our shareholders. Thank you for your time this morning. And with that, we'll take your questions. Operator: [Operator Instructions]. We'll take our first question from today, and that is from the line of Robin Farley from UBS. Robin Farley: Two questions, if I may. First is -- just wondering what medium term is 2029 medium term just to kind of put a finer point on thinking about the targets? And then the other question is a little bit with tariffs, some of the bridge to your 2020 EBITDA is from, I guess, lower tariffs lumped in with some other things. And so if you could just help us think about that what you're expecting, what's factored in, in terms of tariff refunds into that? And your full year was unchanged, but tariffs seem a little better, so maybe there's an offset there. And then just -- I don't know if the manufacturing for Sprint, if you're assuming tariffs on that, if that's going to be outside the U.S. and potentially tariffs. So I know that's a lot of tariff balled up into one, but just whatever you want to address. Arthur Starrs: Great. Robin, thank you. It's already -- appreciate the questions. I'll take the first one, and then I'll let Jonathan handle the tariff specifics. When we said medium term, we mean 3 to 5 years. So hopefully, that helps on the tariff piece of Jonathan? Jonathan Root: Yes. So from a -- so thank you, Robin. From a tariff standpoint, I think when you look at our 2026 estimate, we obviously have a midpoint of $83 million on that, if you look within the first quarter, we had $45 million in tariffs that were paid. That leaves $38 million, again, just using the midpoint for simplicity for the balance of the year. Our viewpoint is that, that tariff amount will consecutively decrease by quarter as we benefit from the current tariff structure that we laid out on our slides. So in effective Q2 as we got into April, there were some changes from an overall tariff philosophy perspective that were put out there. You see the benefits of those. Obviously, that sort of accrues over time. we think that, that sets us up for 2027. We're not providing 2027 guidance at this point. But at 2027, that is arguably more attractive than where we are from a 2026 perspective. So you can infer and use some of your own judgment on where that lands. From a tariff refund perspective, there's obviously a tremendous number of companies large and small across the United States that are working on tariff refund and approach to tariff refund right now. Obviously, we will be working and following all of the guidelines that we need to from a tariff refund perspective, but a little difficult for us to talk through some of the specifics on timing. And when all of those dollars will hit throughout the year, we certainly have a little bit of benefit baked into our expectations, but it's not a tremendous driver for us. It's really more as we look, what are the current tariff rules that are in place how do we think that will accrue and you see the benefit that we've put in place from a guide perspective versus what we originally guided to for 2026. Operator: Our next question comes from the line of James Hardiman with Citigroup. Your line live. James Hardiman: So two questions on sort of the back to bricks opportunity. I guess, first, when we talk to investors, the 1,000-pound gorilla fair or not is sort of the demographic backdrop, right, specifically lower popularity of motorcycling if you think about younger generations maybe relative to their baby boomer counterparts. Artie, obviously, that's something that you've had to consider how does the back to the Bricks address that? Obviously, you've got some market share recapture goals that are pretty aggressive. Is there any concern that market share gains could be offset by category declines if those demographic headwinds persist? And I did have a follow-up if we could. Arthur Starrs: We can, James, thanks for your question. I think -- the biggest thing in this strategy back to the Bricks is we're prioritizing rider needs in a rider-centric portfolio. So we specifically called out. Two examples of how we're doing that. The Sportster, one of our most iconic motorcycles as recently as 5, 6 years ago, the market for that motorcycle is 35,000 to 40,000 plus on a global basis. Our riders and many younger riders and our dealers have expressed it is the #1 universal request from the motor company to deliver around a great Harley-Davidson Sportster and what we're talking about today is the 83. And so when I look at the demographics, how young people have always entered our brand, over 123 years. It has been motorcycles like the Sportster and over the last 30 or 40 years, the sports there has been a critical entry point to the brand. The second motorcycle is the Sprint, we have not had a motor cycle like the Sprint in some time. We see it filling an important need in Riding Academy, as someone who recently went through Ride Academy, being able to get on a motorcycle and then buy that same or a similar motorcycle is a gap in our current portfolio, which we're extremely enthusiastic about what this print is going to do. And I'd remind you that the number of designations at least in the United States right now, it's quite strong, as strong as it's been. And we see the opportunity for us as we present the brand as you look at the marketing campaign, this concept of Joy and Swager is something that we believe is and will resonate with young people. It's core to bringing young people into the brand over many, many years, which the brand had done successfully. So I'm quite optimistic. And the portfolio of motorcycles we're bringing forward, I think, addresses this well. James Hardiman: That's great. And it's a great sort of dovetail into sort of my follow-up question. Obviously, as we think about your medium-term target, of mid-single-digit retail growth, most specifically, I think if investors felt comfortable with that number alone, this would probably be a $40 or $50 stock, right? But help us understand that target while factoring in the return of sports there and the introduction of Sprint, how much of that retail growth is coming from those items? I'm just trying to understand sort of the organic versus the inorganic contributors to that mid-single-digit retail growth. Can you get to a place where the organic piece is also growing at a nice clip? Arthur Starrs: Sure. So thanks for the question. The Sportster is an important part, and Sprint obviously complements it as well. I referenced the volumes on Sportster historically. I'll go back to we feel that if we meet our riders where they're at, we can grow at these levels and beyond. I'm not going to give a specific number in terms of how much Sportster constitutes the amount of growth. But just based on historical numbers of Sportster that have sold and a projected number of Sprint, we believe that a significant portion of the growth will come from there. In addition to that, this concept of decontented or blend canvas motorcycles that we referenced in the presentation is something our dealers have been asking for. And it does a couple of things. Number one, is it leverages existing platforms and powertrains that we have and provides more accessibility across Touring and soft tail. Which is extremely exciting. And I'll remind everybody that some of these things were in Q4, we took action with things like our solo introduction, they're already working. So some of the retail success that we saw in Q1, we've effectuated in these plants. So I'm very enthusiastic about growth in both cruising and touring with a more distributed and accessible portfolio of motorcycles. Sportster is a big part of it. And given what's sold historically in Sportster, I'm quite confident and what's happening in the used marketplace on Sportster, if you look up in some of the used market channels, it's extremely exciting to see residuals maintain, and it's difficult to get your hands on an 83 right now, which means there's a real need. That's great color. Jonathan Root: James, the one piece that I would add to is, as you refer back to what was in the strategy deck, there's a page in there that talks through the multiyear view of motorcycle and the ancillary revenue streams. And so as you listen to Arty talk through changes to that portfolio, some of the kind of early wins that we've been seeing with solo models and some of the benefits that our price point focus is beginning to drive. That obviously has showed up in the first quarter from a retail standpoint. So inside of Q1, we've demonstrated the benefit to the approach that has been laid out. And then from an overall strategy standpoint, as we think through a life cycle and lifetime view, we can really envision people moving through the portfolio. We can see the benefit that accrues to both Harley-Davidson and our dealers that aligns with what Art talked through, and that's what gives us so much confidence in where we're going with the midterm targets and what's been laid out there. Operator: Our next question is from the line of Joe Altobello with Raymond James. Joseph Altobello: A couple of questions on the category expansion here. You talked about Sportster talked about Sprint. It sounds like those are smaller bites. Are there other sort of subcategories that you're looking to expand into as well, just beyond smaller CC engines? And then second question, there's a reason why Sports or was discontinued, right? It was hard to make money. So how is the economics of that bike changed? Arthur Starrs: Great question, Joe. Thank you. Let me take the second one first. So our team has done an extraordinary job over the last couple of years working on this project. And we have the cost at a place that we're extremely comfortable against the expected MSRP that we referenced. More importantly is this enterprise profitability model that has been just a fantastic way for us to communicate with our dealers. And when you think about the value that a motorcycle like Sportster Brings to Bear, it's very exciting when you look at the parts and accessories relevancy and opportunity. When you look at the service revenue that it brings through our dealerships, when you look at the used market that it feeds and maintain such strong residual values. So we're comfortable with the profitability of the motorcycle itself. However, we're extremely excited about how it juices the economics for the overall enterprise. To your first question, as it relates to other additions inside the portfolio, you can expect to see and the slide in the materials that references some of the current holes in the portfolio, those are examples of where our dealers via our riders have specifically asked for motorcycles from us that they expect. They expect from us and have gotten in the past. Some of these include maybe a little bit more content, and many of them include less content. But once again, within existing families and with existing platforms and powertrains, and I'll I can't give much more detail than that. I will share [ one teas ] with you, which you may have seen on social media, which you can expect from us to continue to do, and that's to get feedback from riders at the Mama Tried Show here in Milwaukee, subsequently at Daytona and then the MotoGP race in Austin, we teased a modern expression of our iconic Cafe racer. And it's got an extraordinary buzz and feedback from our riding community. And I think that would be the type of motorcycle that is still large in terms of large displacement powertrain that you can expect us to get feedback from riders, and you might see that from us and the market. But we're very excited about the response to it. Joseph Altobello: That's very helpful, Artie. I can just quickly follow up on that. The U.S. market for you has outpaced international for quite some time. Is the sports there is the Sprint part of that strategy to grow your international business? Arthur Starrs: The Sportster is number one request from global dealers. If you walked into our dealership in Shanghai, if you walked into our dealership in Louisville, Kentucky, if you walked into a dealership in Frankfurt, Germany. And you asked the deal or the sales team lead in those dealerships, what can Harley-Davidson do for you, you would hear bring back to Sportster. So yes, but it's global truth in terms of the enthusiasm around that bike. Operator: Our next question is from the line of Andrew Didora with Bank of America. Unknown Analyst: Just kind of change gears a little bit to HDFS, Jonathan, the $125 million to $150 million op income target. I guess, what kind of -- I know the business has changed here. I guess what kind of receivables balance you kind of anticipate growing to over. Through that time frame? And then more importantly, just the revenue breakdown of HDFS, how should we think about maybe just interest income contribution versus the more kind of fee-based services income as the segment grows. Arthur Starrs: Okay. Andrew, thank you for your questions. I'll start with a little session that we put out a couple of weeks ago on HDFS that really walked through that business, the different revenue streams of that business in a little bit more detail. than obviously what we've covered here in earnings. That's probably a good refresher in terms of where that business goes as we move forward and what we're seeing. Obviously, from a revenue stream perspective in terms of where we are -- we have -- we did at the end of last year, sell off the back book as we've covered. And then on a go-forward basis, we continue to service those loans, so important that we are continuing to make sure that we are retaining the customer focus on the interaction and then a lot that we think we can do as we think through how we move those customers through the portfolio over time in the way that we're marketing to them. On a near-term basis, we obviously will make sure that for any originations that we have from this point going forward, we retain 1/3 of those originations on our balance sheet and then 2/3, we have the ability to sell off to our partners. We continue to service all of those loans. So over time, the fee income associated with servicing is something that continues to grow. We also retain the revenue streams fully relative to protection products we also retain the revenue streams fully relative to card products and what we do from a card perspective, and then we also fully retain everything from a wholesale and commercial loan standpoint. So dial in or tune into the recording that's available on our IR website that will walk through that in more detail. A couple of other pieces that I would call out from an HDFS standpoint, we're really pleased with what we're seeing on our managed annualized retail credit losses. So we have a page inside of the Q1 deck that highlights the year-over-year-over-year improvement in credit losses. So pretty excited that we have Q1 '26 kind of back below where we were not only in Q1 of '25, but Q1 of '26. So overall, I think the dynamics of the business are performing pretty well. We obviously have provided the $125 million to $150 million guide with the viewpoint that, that is a more capital-light model versus the way that we've run historically. So while the operating income is at a different level. We're really excited about the return that, that generates for our shareholders and obviously, frees up a lot of capital for us to remain committed to the shareholder priorities that we put out there from a capital allocation standpoint. So hope that helps. Unknown Analyst: Okay. And then I know, Jonathan, you mentioned in your prepared remarks, like interested in opportunistic M&A. Just curious kind of what could that entail? Is that more on manufacturing capability or brand side? Just curious there. Arthur Starrs: Yes, Andrew, it's Artie. I think we would look at any M&A as something that would accelerate the core areas of growth that we've laid out in the strategy. So anything that could drive dealer profitability would certainly be of interest. Parts and accessories would certainly be on the table. It was listed as the third thing right now. So it's not a top priority for us. But we do want to call out that anything that would make us stronger and allow us to drive the strategy faster, we would consider. Operator: Our next question is from the line of Molly Baum with Morgan Stanley. Unknown Analyst: I kind of wanted to ask maybe one or two about the affordability dynamics right now for your customers. You made a comment in the prepared remarks about how many riders aren't requiring have or don't require having promotion to convert. So can you maybe talk about you as it for motorcycle buyers at present and what you were seeing from a promotional standpoint in 1Q and maybe even right after you cleared through some of the heavy inventory levels? And then just how you're thinking about affordability more broadly in the current environment and going forward. Arthur Starrs: Thanks, Molly. Yes. On affordability, I really look at it as accessibility. So it's certainly price is a part of it, but also meeting riders where they're at and filling their needs with our portfolio. So when we look at Q1, we were pleased certainly with how the promotions restored the dealer network to healthier inventory levels, and that was focused on model year '25 touring. But we were also pleased with motorcycle sales that weren't promoted. And it demonstrated to us in some of the maybe more modest tweaks we made with the 26 launch an action in Q4. And going forward, having more options available to riders is important. Certainly is price, but also features and benefits. The freeze I'm using internally is we've had too many of too few models on dealer floors. And by using and leveraging existing powertrain existing platforms, we can have a much broader assortment of motorcycles to present across, certainly, Sprint and sports are good examples, but even within legacy cruising and touring. And what excites me about this is we're going to be more nimble as it relates to promotional activity. If you think about the promotions in Q1, we had a challenge. We actioned it on a model year '25 touring. But going forward, we will have more diversity within the touring lineup, where we can be a bit more surgical and segmented on which motorcycles we may have to promote at various points in time and maintain healthier margins on the balance, so to speak. It's something dealers have asked for and we're going to be delivering on that as part of our go-forward plans. Unknown Analyst: Great. And maybe if I could ask one follow-up on the dealer profitability piece. You had talked a little bit about last quarter about some immediate changes you made with the fuel facility model adjustments, changes to e-commerce strategy. you kind of talk about how much of the doubling profitability by '26, doubling again by 2019. How much of that is kind of improving the cost base, getting excess inventory to the system versus how much is structural from these strategy changes that you're making? Arthur Starrs: What we put in place in Q4 and what is in place currently we believe is appropriate. There's always the chance that there's small adjustments that we would align with our dealers on. But the Back to the Bricks plan and the targets that we put forward do not contemplate a change in the structural arrangement with our dealers. The e-commerce strategy that we made tweaks to in Q4 as part of the go-forward plans. We instituted a marketing development fund, which is in place right now. So there's no structural change that no material structural change that's contemplated in driving the profitability. It's inventory. It's the right motorcycles at the right time with a rider-centric portfolio. and certainly leaning into this marketing campaign, we think is going to pay a lot of dividends. Jonathan Root: I think, Molly, the pieces worth adding on the dealer profitability side of the equation to is that, obviously, volume and throughput makes a pretty meaningful change in their bottom line. So as we think through the -- again, going back to the strategy and the page that we built out that really helps you envision all of the different revenue streams for both Harley-Davidson and our dealers. That's a pretty important page to envision the way that we're running the business as we move forward. And so through that, the targets that we have on the mid-single-digit growth rates that you're seeing, are really, really important for us and the benefits that accrue to our shareholders, and they are equally important for our dealers. And then in addition, as you see us really double down on our growth surrounding P&A. Not only do you see P&A benefits from an overall revenue and margin standpoint. But inside of the dealer side of the equation, it does also drive some really nice service growth. So we're pretty excited about the way that we actually get our dealers back to something that we think is a much healthier and much better way to run their business. Operator: Our next question is from the line of Tristan Thomas-Martin with BMO Capital Markets. Tristan Thomas-Martin: I just want to kind of circle back to two questions I was asked previously. First, just in terms of the Sprint, my understanding is it's being built overseas. So how do kind of reason tariff changes regarding imports potentially impact pricing on that? And then have you -- did you provide a breakdown of your medium-term retail CAGR like your expectations for U.S. versus global markets. Arthur Starrs: Sure, Tristan. I'll take -- I guess I'll take both of those. As it relates to Sprint, we're finalizing the specific production plans. We did call out that Sportster, U.S. Sportster will be made in New York and our York, Pennsylvania facility. And obviously, we're pleased with the revised guidance that we put forward on tariffs for 2016, and we do contemplate based on current expectations that we have some favorability in tariffs going into '27 across the portfolio. And I'm sorry, the second question was the CAGR in terms of CAGR on U.S. versus international, we're not breaking that out. I will tell you that there's not a material change, U.S. versus international, primarily because the motorcycles that we're talking about here and the rebalancing of the portfolio and filling in the holes are similar globally. So we generally have the same portfolio around the world right now. As I mentioned, the dealer request and enthusiasm around Sportster in particular, and motorcycles that are raw blank canvas and allow for parts and accessories, genuine parts and accessories additions to them are globally wanted. And so we don't have, I'd say, a material difference in the growth trajectory by market. Tristan Thomas-Martin: Okay. And just one follow-up on kind of the aftermarket plan. I'm not sure if I'm reading between the lines correctly, but are you -- is there going to be more focus on dealership kind of aftermarket add-ons versus factory aftermarket or kind of factor add-on you mean parts and accessories in our dealerships and some customization at the dealership level? Arthur Starrs: Yes. Yes. So what we're saying is we expect to have more motorcycles in the portfolio that are maybe more approachable from a price perspective and have less accessories on them. And then our dealerships would be equipped with the P&A to personalize them for the riders which is consistent with what the brand has done over many, many years. So it's frankly leaning into a legacy strength where P&A has maybe not been as a focus for us with many of our motorcycles, in particular large touring motorcycles, having a fair amount of content. Operator: Our next question is from the line of David MacGregor with Longbow Research. David S. MacGregor: I guess the question is on LiveWire and just the rules that LiveWire plays in this product portfolio in vision. And just if it is sort of something you can -- are considering staying with just how we should think taking maybe that 3- to 5-year outlook you'd expressed earlier, just with the use of cash for that business over the next 3 to 5 years? Arthur Starrs: Yes, David, thank you. This is Artie. The first thing I'll say is we're excited about LiveWire team's efforts this year and the pending launch of the Hangzhou bike, which is, I think, an interesting and exciting addition to the portfolio, and we'll be monitoring that closely rest of the year to see how that does. But we're very excited to see how that comes to market. I'll repeat what I shared on previous earnings as it relates to LiveWire. We funded the loan in the back half of 2025. And that's our outstanding capital commitment, and we don't have intentions to fund the business directly from Harley-Davidson at this point in time. David S. MacGregor: Is there a way that you can influence demand. I mean you're talking about creating a higher level of interest back to James' questions with demographics. And I'm just wondering if there's a way that you can shape demand as well on the electric front or you feel like there's steps you could take to maybe at a higher level of engagement. Arthur Starrs: Yes. We're focused on this back to the Bricks plan and driving dealer profitability and getting the portfolio in a place that we think riders want from us. Cream and his team are focused on the electric side of the house at this time. Jonathan Root: Yes. And David, one piece that I would add, David, on the kind of demand influences that through what you would have seen with what we delivered in Q1 we certainly believe that when we get the right alignment on marketing promo and kind of how we run that, we can drive traffic to dealers, and we can drive higher close rates. As you heard already talk about, I think one piece that always fits with me from an RD perspective is too many of too few. And you heard him reference that earlier on the call today when we think through where the portfolio is going and some of the pieces that we have, the ability to drive, we're really excited as the product portfolio becomes a little bit more nuanced in terms of what we're putting into market. We can lean into a lot of the strategies that we've really demonstrated some good success with and do that in a much more targeted way. So pretty excited about where we're going from the midterm as we think about both what we've demonstrated within Q4 of last year, Q1 of this year. And then with what we've lined up from a strategy perspective, where we're going. So excited to see that kind of demonstrated ability that we've put in market so far and how that aligns with the strategy that's built out. David S. MacGregor: Do you have goals in place for building dealer support for LiveWire? Jonathan Root: The LiveWire team is certainly working on their approach to how they manage their dealer relationships. Operator: Our next question is from the line of Brandon Rolle with Loop Capital. Brandon Roll?: First, just on the dealer profitability improvement. Would you be able to size the headwind from maybe a more standardized rebate program to HDMC margins? Arthur Starrs: Thanks, Brandon. You're talking about HD-1 rewards in the holdback? Brandon Roll?: Yes. I think under the previous management team, they had kind of made the rebate program or rewards program a little more difficult to pull back some margin into the company. So it seems like that's going back out to dealers. And I was wondering if you're able to size the headwind, if any, to or HDMC margins. Arthur Starrs: Yes. I would characterize the headwind as modest over medium-term period. The previous holdback was variable. So it was based on sales targets, and this is fixed. I wouldn't characterize it as it's not the primary driver of the profitability improvements that we're experiencing or forecast. I think it's a small amount on a year-over-year basis, but it's not the primary amount. The larger impact which I heard consistently from our North American dealers, both in the fall and again on a recent road show was the predictability was so important. Predictability of having the fixed holdback was critical in terms of staffing levels, being able to project cash flow throughout the year. And I think it's just an example of us understanding our dealers businesses. and respecting what they need to run their business well and service our riders well. And so I'm pleased where we are and where we are today is precisely what we've modeled going forward. Brandon Roll?: Okay. Great. And just one last one. On your U.S. dealer network, how do you feel about the current size of the network? Obviously, there's been a lot of dealer consolidation over the last few years. Do you feel like you have the dealer networks at the right size? Or are you going to continue to kind of, I guess, move away from inefficient dealers and, I guess, not shrink the dealer network, but maybe make it stronger. Arthur Starrs: We're always looking for ways to make the dealer network stronger, and we love the fact that we have individual maybe smaller dealer owners, dealer principles in certain markets. And we also feel privileged to have some larger entities that own groups of dealerships. And I think the -- the strength of our brand is a balance of both. One of the amazing things about Harley-Davidson dealerships is we have dealerships along these iconic rides. Where families in some cases, have owned these dealerships for decades, in some cases, 70, 80, 90 years and extremely proud of that. And at the same time, we had recent acquirers in the market where some of our largest and some of our most profitable dealer owners are getting bigger in the system and I love them all. We're committed to having a healthy dealer network, and we're not precious about size. We're precious about dealers that are enthusiastic about our brand and serve riders well. Operator: Thanks for your question. Ladies and gentlemen, we have time for a final question from the line of Jamie Katz with Morningstar. Jaime Katz: I will make it quick. I get most of the profit improvement that you guys have, a lot of it looks like it's coming from leverage within SG&A. But can you talk a little bit more specifically about the top opportunities that are being targeted for cost reduction this year? Just so we can get a better idea of where that low-hanging fruit is coming from. Arthur Starrs: Jamie, thank you for your question. Yes, so it's obviously a balance of some head count and then obviously some non-headcount-related costs and then also some cost of goods related actions. Our teams are -- have done a fantastic job in Q1 at identifying areas. We've obviously done a significant amount of both competitive benchmarking, but also what's the right thing for Harley-Davidson and ensuring that we can grow going forward. We're not going to provide detail beyond that at this time, but we're very confident and the targets that we put forward and specifically the $150 million plus that we've earmarked for 2027 and beyond. Jaime Katz: Okay. And then just quickly, I know there was some gross margin impact by pricing and mix. Is there any way to think about how those are trending over the remainder of the year just sort of from where you stand today? Arthur Starrs: Yes, Jamie, I'll let Jonathan take that one. Jonathan Root: Okay. Thank you, Jamie. So as we look at pricing and mix and sort of compare that to relative stability, I think, as we look through Q2, Q3 and Q4, you did hear in the Q1 financial comments, a little bit more information relative to timing. So take a listen to that call in terms of how we talked about year-over-year quarters and what you see there. So from an overall pricing mix perspective, pretty flat to kind of a little bit of favorability in the balance of the year. As we look at what's coming, we're pretty excited about what we're going to be introducing, and you'll see some of the impacts from that. Please take a listen to what we talked about from a timing standpoint, that will be important as you're thinking through what our trajectory is going to look like for the year. And then you will see a little bit less of an impact from incentive-related activity. So as we've talked about, we were pretty aggressive in what we did from Q1 from a Q1 standpoint, we're really pleased with where we landed dealer inventory. And so we think that really set us up for a very successful balance of the year. And hopefully, that sort of helps address your question. Operator: Thank you for your questions. And ladies and gentlemen, that will close down our Q&A session for today. Artie, I would like to turn it back over to you for any closing comments. Arthur Starrs: Well, thank you, everybody. I appreciate you participating in today's call. And hopefully, you can tell how enthusiastic our team is, and I am in particular about our path forward, and we look forward to updating you on our progress, and we'll talk to you next earnings. Thank you. Jonathan Root: Thank you.
Operator: Good day and welcome to the Alamo Group, Inc. First Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ed Rizzuti, Executive Vice President of Corporate Development and Investor Relations. Please go ahead. Edward Rizzuti: Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3746 and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (855) 669-9658 with the pass code 1646754. Additionally, the call is being webcast on the company's website at www.alamo-group.com and a replay will be available for 60 days. On the line with me today are Robert Hureau, President and Chief Executive Officer; and Agnes Kamps, Executive Vice President and Chief Financial Officer. Management will make some opening remarks and then we will open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachment to our earnings release. Before turning the call over to Robert, I would like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: adverse economic conditions, which could lead to a reduction in overall market demand, supply chain disruptions, labor constraints, competition, weather, seasonality, currency-related issues, geopolitical events and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Robert Hureau. Robert, please go ahead. Robert Hureau: Thank you, Ed. I'd like to thank everyone for joining our first quarter earnings conference call. We appreciate your continued interest in the Alamo Group. Overall, we're pleased with the first quarter financial results. We made good progress with many of our key initiatives. In particular, the Vegetation Management division reported solid improvement in terms of both sales and profitability. I'll turn the call over to Agnes to review our financial results in detail. When she's finished, I'll come back and discuss the performance of each of our divisions and make some remarks regarding our long-term strategic priorities. Agnes? Agnes Kamps: Thank you, Robert. Good morning, everyone. Net sales for the first quarter of 2026 were $417.1 million, an increase of 6.7% compared to the first quarter of 2025. Gross profit for the first quarter of 2026 was $104.8 million compared to $102.8 million for the first quarter of 2025. Gross margin for the first quarter of 2026 was 25.1%, down 118 basis points compared to the first quarter of 2025. The year-over-year decline was primarily driven by Vegetation Management division reflecting lower net sales in our municipal mowing business and certain manufacturing facilities, which are continuing to ramp up in terms of efficient throughput. Importantly, Vegetation Management margins improved meaningfully on a sequential basis as we exited the quarter reflecting operational progress in both facilities. While there's still work to be done, we are encouraged by the traction we are seeing and expect continued improvement as the year progresses. Selling, general and administrative expense or SG&A expense for the first quarter was $57.8 million, up 6.3% from the first quarter of 2025. SG&A expense in the first quarter of 2026 included approximately $3.5 million related to acquisition and integration costs, restructuring costs and the addition of Petersen and Ring-O-Matic acquisitions. SG&A expense, as a percentage of net sales in the first quarter of 2026, was 13.8% compared to 13.9% in the first quarter of 2025. Net interest expense for the first quarter of 2026 was $3.1 million compared to $2 million in the first quarter of 2025, higher year-over-year as a result of Petersen acquisition. The effective income tax rate was 25.3%, in line with our current and longer-term expectations. During the first quarter of 2026, we recognized $2.5 million of acquisition, integration and restructuring expenses. These costs included $0.6 million primarily related to acquisition and integration of Petersen Industries and $1.9 million in restructuring expenses. Approximately $1.6 million of this cost was recorded in SG&A and $0.9 million in cost of sales. All of these amounts are treated as adjustments for certain non-GAAP measures as shown in the press release. Adjusted EBITDA for the first quarter of 2026 was $59.3 million or 14.2% of net sales compared to $58.3 million or 14.9% of net sales in the first quarter of 2025. On a sequential basis, adjusted EBITDA improved significantly from the fourth quarter of 2025 when it totaled $44.8 million or 12% of net sales. Adjusted earnings per share on a fully diluted basis for the first quarter of 2026 were $2.56 compared to $2.70 for the first quarter of 2025 and compared to $1.70 for the fourth quarter of 2025. Now I'll share some comments regarding the results of each of the divisions. Net sales in the Industrial Equipment division for the first quarter of 2026 were $241.7 million, an increase of 6.5% compared to net sales of $227.1 million in the first quarter of 2025. Excluding acquisitions, net sales declined $2.4 million or 1% compared to the first quarter of 2025 largely due to timing of orders in our snow group. Adjusted EBITDA in the Industrial Equipment division for the first quarter of 2026 was $39.7 million or 16.4% of net sales compared to $37.4 million or 16.5% of net sales for the first quarter of 2025. We are pleased with the continued strong performance in this division and particularly with the successful integration of Petersen acquisition. Net sales in Vegetation Management division for the first quarter of 2026 were $175.4 million, an increase of 7% compared to net sales of $163.9 million in the first quarter of 2025. The increase is a result of operational improvement in our facilities and modest support from the agricultural end market offsetting weakness in municipal mowing. Adjusted EBITDA in the Vegetation Management division for the first quarter in 2026 was $19.6 million or 11.2% of net sales compared to $20.8 million or 12.7% of net sales for the first quarter of 2025. Moving on to the balance sheet and cash flow. Cash provided by operating activities for the first quarter of 2026 was negative $23.5 million due to strong sequential growth especially in the Vegetation Management division where the net sales increased by $36.7 million or 26.4% in the first quarter of 2026 compared to the fourth quarter of 2025. The operating cash flow on the last 12-month basis was $139.8 million or 138.2% of net income. Cash used in investing activities for the first quarter of 2026 was $169.8 million and reflects cash used for the acquisition of Petersen Industries in January 2026 and $4.5 million used for capital expenditures. We funded Petersen acquisition with $120 million draw on our revolver and approximately $50 million cash on hand. We're excited about the acquisition of Petersen given its leadership position, attractive margins and commercial synergies. As of March 31, 2026, our gross debt was $290.5 million and we had $195.2 million in cash on the balance sheet resulting in net leverage ratio of less than 1x. Total liquidity remains very strong, positioning the company well to continue pursuing disciplined M&A opportunities. To conclude, I would like to emphasize our commitment to delivering long-term value to our shareholders. We are pleased that our Board has approved a quarterly dividend of $0.34 per share. As we move forward, we remain focused on driving growth and optimization of our operations. Thank you. I'll turn it back over to Robert. Robert Hureau: Thank you, Agnes. Let me start by providing more color on the operating performance for each of our divisions. First, the Industrial Equipment division. As Agnes mentioned, net sales in the Industrial Equipment division increased by about 7% during the quarter. The increase in net sales during the quarter was driven primarily by our acquisitions, including the Petersen acquisition, which closed earlier in this first quarter and Ring-O-Matic acquisition, which closed during the middle of 2025. Net sales in our excavator and vacuum business performed well during the quarter. Net sales in our sweeper and safety business, excluding the effects of the Petersen acquisition, were flattish. And net sales in our snow business declined compared to the prior year. The decline in net sales in the snow business, as we've discussed, was due to the change in our sales strategy and our placing more emphasis on the quality of its earnings. We believe this strategy is and will continue to prove successful. As for profitability, the adjusted EBITDA margins in the Industrial Equipment division in the quarter were good at around 16%. This was roughly level to the adjusted EBITDA margins in the same quarter in the prior year and reflects positive pricing, procurement savings and the inclusion of the Petersen business given its above-average margin profile partially offset by material inflation, including tariffs and various investments we're making in the division to support long-term growth. As for the Petersen business, although it's still early, we're very pleased with the initial financial results, the integration activities, the leadership team and the progress related to both the commercial and operational synergies. We'll keep you posted on the performance of this acquisition as it continues to evolve. The book-to-bill in the Industrial Equipment division for the first quarter of 2026 was around 1x. Net orders for the Industrial Equipment division during the first quarter of 2026 were down 11% compared to the prior year. Net orders in the snow business were robust, up double digit year-over-year again this quarter. This strength reflects the continued end market demand and the strength of our brands, commercial organization and our customer partners. Net orders in the excavation and vacuum business were down. Within the excavation and vacuum business, we're seeing strong order growth in the European markets, which bodes well for our expanded manufacturing facility in France, with softer activity in the U.S. Net orders in our sweeper and safety business, excluding the newly acquired Petersen business, were down but reflect an unusually large multiyear order in the first quarter of 2025 making comparability challenging. Lead times in all the businesses within the Industrial Equipment division are in a good competitive position. Today, our Industrial Equipment division represents 58% of our total net sales. As a reminder, the products in the Industrial Equipment division serve end markets, including public works, utilities, infrastructure and construction. These are very attractive long-cycle markets. As I mentioned during our last call, net sales in this division and its end markets have been very robust, growing in the high teens over the past few years and were fueled in part by various government-driven investments in infrastructure. Looking forward, we expect the rate of growth in several of these end markets to slow in 2026 as the near-term effect of those prior external investments and the overall rate of construction spending slows before normalizing and then returning to steady long-term growth. Now the Vegetation Management division. Net sales in the Vegetation Management division increased 7% compared to the first quarter of 2025. This is the first year-over-year increase in quarterly net sales in the Vegetation Management division in 9 quarters. This is a very positive development and it is another data point indicating certain end markets might be settling. The 7% increase in net sales was due to several factors including the ramping of our production activities in certain key manufacturing facilities, the improvement in underlying demand in certain end markets and favorable pricing partially offset by continued weakness in other end markets. Net sales in our North American ag business were positive reflecting a slightly more constructive end market and ramping manufacturing activity. Net sales in our tree care business were also positive. Performance in the North American portion of this business reflect improved manufacturing efficiencies not necessarily a recovery in the end markets. On the other hand, performance in the European markets reflect improving end market demand and overall strong commercial and operational performance by that team. Net sales in our municipal mowing business were down in the first quarter of 2026 reflecting continued cautiousness we're experiencing with dealers and the related state DOT offices that use our products as they navigate their fiscal budgets. As for profitability, the adjusted EBITDA margins in the Vegetation Management division in the first quarter of 2026 were about 11%. This is up significantly from the second half of 2025 and just shy of the margins in the first quarter of 2025. This is a positive development. The adjusted EBITDA margins of 11% compared to the first quarter of 2025 reflect volume leverage and favorable pricing offset by material inflation including tariffs and various investments we're making to support long-term growth. While there's much more work to be done, we're pleased with the margin progression during the quarter. The book-to-bill in the Vegetation Management division for the first quarter of 2026 was 1x. Net orders for the total division during the first quarter of 2026 were up 5% compared to the prior year. Net orders in the North American and European ag businesses were strong. Net orders in tree care were soft reflecting the state of those end markets including the U.S. housing market, which remains weak. And net orders in municipal mowing were down for the reasons I previously highlighted. Today, our Vegetation Management division represents 42% of our total net sales. As a reminder, the products in the Vegetation Management division serve end markets, including tree care and recycling, agriculture, public works and landscape maintenance. As I mentioned on our last call, net sales in this division and its end markets have declined over the past few years rolling over a period of significant growth that occurred between 2021 and 2023. Looking forward, we expect the rate of decline in the end markets to slow. While we're pleased with the improvement in net sales in the Vegetation Management division during the quarter, we would not necessarily expect the end markets to support this level of year-over-year growth over the balance of the year. I'd now like to share some comments regarding the broad framework of our long-term strategy. As mentioned before, there are 4 pillars of the strategy, which will focus into both resources: first, people and culture; second, commercial excellence; third, operational excellence; and fourth, capital deployment. Within each of these strategic pillars, there exists a series of prioritized initiatives on which our teams are working. We made good progress on all initiatives during the quarter. Today, I'd like to provide an update on our product innovation activities. Over the past 2 calls, we highlighted a few exciting new products. As a reminder, these included: first, our new non-CDL vacuum truck that can be purpose-built as a hydro excavator or a sewer combo cleaner providing greater appeal in the urban and rental applications due to its compact size and the operator not needing to hold a commercial driver's license. This product was engineered for efficient manufacturing and economical international shipping. Interestingly, this product is already sold out in 2026. And second, our next-generation hybrid sweepers that run on diesel, CNG or electric chassis globally and use a proprietary electric sweeping architecture delivering superior efficiency, safety and performance. We have a smaller NiteHawk hybrid air sweeper that's already in commercial production and generating significant customer interest. And we have a larger Schwarze hybrid mechanical sweeper that is smashing performance standards in testing in advance of a commercial launch in the second half of 2026. Operators love these products. Today, I'd like to highlight our new Wide Wing System introduced by our snow business. This innovative snow plow operates an extendable side wing system attached to a tri-drive chassis offering a clearing capacity up to 27 feet, which is roughly 80% greater than standard large plows. This dramatically improved productivity, lowered total cost of ownership and increased operational flexibility is a game changer for state DOTs and road maintenance contractors. In addition, its technology is patent protected in both the United States and Canada demonstrating once again our first-mover advantage. This product is quickly becoming the industry standard in the heavy-duty category and will eventually obsolete the traditional tow plow approach to snow removal. We highlight this and the other products today not necessarily to support or help you forecast what sales might be in coming quarters, but simply to provide color around and share a vision regarding how Alamo Group and all our wonderful brands will revolutionize the vocational truck and land maintenance segments through our engineering expertise, adaptive technologies and entrepreneurial culture over the next 3 to 5 years. Much more to come in future calls. In summary, I'd like to express our thanks and appreciation to all our employees who work tirelessly to produce, sell and develop the very best brands of vocational trucks and mowing and tree care products in the industry. I'd also like to thank our customers and our investors for their trust and support. This concludes our prepared remarks. Operator, please open the lines for questions. Operator: [Operator Instructions] Our first question comes from Chris Moore of CJS Securities. Christopher Moore: Maybe we can start on the Industrial side. So Industrial organic growth declined 1% in Q1. You said book-to-bill was about 1. I guess the question is what are the puts and takes to doing that 5% organic growth for Industrial in '26? Robert Hureau: Yes. I think maybe we can start with net sales expectations and then move into end markets and orders. Overall, Chris, I think as we said in the past when we take a look at the industrial business and we look out over the course of the year, we think the year is likely to be excluding acquisitions kind of a flattish year, anywhere between flattish to up very low single digits and then acquisitions on top of that. The basis in part for that is as we reflect over the last several years as we mentioned a number of times, really extraordinary growth over the past few years; 17%, 18%, 19% year-over-year growth for nearly 8 quarters in a row. We simply think it's going to be really difficult to keep that pace. Although we think the markets are constructive and healthy, that order pattern is going to slow in 2026 and that's going to result in roughly flattish net sales over the course of the year and then of course adding acquisitions on to that. We think the end markets are really constructive long term. This is a place we're going to continue to invest particularly around M&A. We like the end markets. It's just that this year is going to be a little bit of a transition year coming off the robust highs of the prior 2 years, if you will. Christopher Moore: Got it. Very helpful. And maybe just 1 on Vegetation. So it sounds like some of the challenges in the plant consolidation, you could see significant improvement as the quarter ended. Just trying to get a feel for how we should be thinking about Vegetation operating margins for the balance of '26. Robert Hureau: Yes. So the first comment would be or the first response to that would be that we made really good progress during the quarter. We're not where we want to be. The margin profile and the sales performance in the quarter were roughly in line with expectation. We've done well. We've got more work to do to get those margins where we want. But generally speaking, we were fairly pleased with those overall results. With respect to the Vegetation business and as we think about it long term, kind of conversely to what I said about the Industrial division, the Vegetation business has been declining for the last few years having come off those really highs of '21 and '22. We think that rate of decline is going to slow over the course of 2026. That's likely to put us in a place where over the course of 2026, Vegetation end markets are flattish, maybe still down a little bit; but definitely sequentially improving, if you will. Versus where we were a few months ago when we last talked, I would say we're a bit more cautious on Vegetation despite the good quarter, despite the 7% year-over-year growth. And for that, we point to some of the third-party data that's out there certainly with respect to inflation. We know fertilizer cost is rising. Those input costs at farmers and ag are rising. Freight is rising. We've seen retail tractor sales in that 40 to 100 horsepower range decline for the last few months. So while we still think 2026 is a stabilizing year, I would say that we're a bit more cautious today than we were a few months as we look out. Nonetheless, pleased with good performance during the quarter and expect continued margin progression as we move forward over the course of 2026. Christopher Moore: Very helpful. I was going to ask you about inflation and interest rates on Vegetation. You answered it already so I will leave it there. I really appreciate it. Operator: Our next question comes from Mike Shlisky of D.A. Davidson. Michael Shlisky: I want to start off on the snow business. I think your comments, Agnes, were about delayed orders and you've been kind of rolling out a single-family of brand strategy, if you will, or that's what it seems like in the marketplace as Alamo snow in general as opposed to Tenco and Henke separately. Are the delayed orders due to the changeover in strategy or are there budget release or something else? I guess I'm kind of wondering if your comments, Agnes, and your comments, Robert, are related to each other. Robert Hureau: Well, we'll step back and we'll cover a couple of pieces here on snow just to make sure we're aligned on some of the things we've said. The first comment again is just to remind everybody that the year-over-year sales decline in the snow group, if you will, is really a function of us not chasing every last single dollar of sales. In the past we would do so even if that meant outsourcing the upfitting then drives a much lower margin profile and so we've deliberately stopped that. We're being a bit more selective on the orders we take, if you will. The order pattern is good, it's strong, it's growing, it's healthy. Importantly, our lead times are in a good competitive spot. We actually think we're in a much better position in terms of lead times relative to our competitors and so that kind of gives us confidence that this strategy is still the right strategy. And so what you're going to see as a result is top line pressure year-over-year not a tremendous amount, but you're going to see top line pressure, but we'll at the same time see improved profitability over the course of the year. Again, the robust order pattern really speaks to the health of the brand, the innovation, the commercial team, the end market demand. Again the lead times are better positioned we feel than our competition and so we're not concerned about the growing backlog in that business. Does that help, Mike? Michael Shlisky: Yes. I guess I also just wondering about operationally your sales strategy has changed it seems and how that was going? Robert Hureau: Yes, it's working well. I mean I think we're not going to share the level of granularity here in the call. But when you look at the profitability of that business, it's definitively moving in the right direction and we're pretty pleased with that. Agnes Kamps: Mike, maybe if I could add just the reference that I had made about timing of orders. I mentioned that revenue was down due to timing of orders, but that just means when those orders are placed and revenue recognized. The order intake is actually very strong in our snow business. Michael Shlisky: Got it. Outstanding. Just also want to move on to Vegetation quickly as well. Was there -- in the first quarter, I think you mentioned you were getting production ramped up. If I'm wrong, correct me there. But just give us a sense as to the overall dealership inventory levels in that business. Did you increase throughput to meet inventory demand or end user demand in the quarter? Robert Hureau: Yes. I would say that overall, speaking broadly, the inventory in the dealer channel is in a reasonably good spot. In the ag business, it's fairly low. In the tree care space, it's reasonable. In municipal mowing, it's low and in the European markets, it's in a reasonable position. So we feel good about that. We have in the U.S. ag business strong orders. We've had strong orders now for several quarters and that's continuing. The ramping of production in both the U.S. ag business and the tree care business really reflect the ramping of the manufacturing efficiencies which, as you know, we struggled with during the third and fourth quarter, therefore delivering orders that were in backlog, if you will. But at the same time, continuing to refill that backlog with robust order patterns. So the comments we made in the prepared remarks, I would say the end markets are still very -- moving in a very positive manner for U.S. ag and Europe ag, but the sales were driven in part by delivering on those orders that we had from prior quarters. Something similar with the tree care space although I would say that there really isn't a recovery yet in the end markets in the tree care space. We drove positive sales performance in tree care because the team there -- the new team there really drove that the manufacturing productivity improvement and throughput during the quarter and we're pleased with that. That will be very helpful as we continue over the balance of the year. Operator: The next question comes from Mig Dobre of Baird. Joseph Grabowski: It's Joe Grabowski on for Mig this morning. So I wanted to start off asking about Petersen. You've owned it for about 90 days and you talked a little bit about it in your prepared remarks. But maybe just flesh out any early impressions you have and how the integration is proceeding and maybe any updated thoughts on the commercial and operational synergies you see. Robert Hureau: Yes. Overall, really pleased and impressed with the team at Petersen. I think as you may know as we may have mentioned as the founders exited the business, we put in a leader from our group; somebody who's very strong, very familiar with that business. The integration of that leader and the team has been really positive, smooth. The culture is strong. We've been working on the back end of the business, the systems, things of that nature. That has all gone well. Initial impressions now having owned it for a few months as we look at the commercial opportunities and the operational opportunities, I would say 2 thumbs up. We know where there are commercial opportunities meaning dealers particularly on the West Coast of the United States where we have presence, but Petersen doesn't where we think there's an opportunity to roll those products out. As we said, we're making investments certainly on the commercial side to drive those sales to capture that share. So we're really enthusiastic about that. And we also see and have validated the operational synergies, particularly around chassis and what we can do there, leveraging the broader Alamo purchasing power, if you will. So overall, really pleased, no hiccups, should be a good year for us. Joseph Grabowski: All right. That sounds great. And then my last question, you mentioned tariff impacts a couple of times. Obviously tariff levels and calculations have been moving around a lot lately. Any change in your outlook for the impact from tariffs maybe versus where we were last quarter? Robert Hureau: No, not really. A few things maybe just to highlight for folks. On a year-over-year basis of course no tariffs in Q1 of 2025. They're in there in our operating results in Q1 of 2026. So on a year-over-year basis, that would have been a margin headwind. We've also said that in the aggregate on a 12-month basis, tariffs should generally be running somewhere slightly short of 1% of sales, if you will, something in that zip code. We've done the math and we've looked at what the impact of the IEA tariffs rolling off and the new ones coming in. We think generally we're in about the same spot. But by business unit, depending on where the country of manufacturing is, we might see some differences now with the new rules by business unit and between divisions generally. But overall, the overarching theme is we're still in about that same spot at 0.8% or 0.9%, something like that as a percentage of sales. Operator: [Operator Instructions] Our next question comes from Greg Burns of Sidoti & Company. Gregory Burns: So I just wanted to kind of little better understand the positive revenue and order trends you've seen in recent quarters around ag versus your more cautious outlook maybe given some of the macro data points you're seeing. Are you seeing it anywhere in your -- that caution, are you seeing it anywhere in your business yet or is it just looking at the market and assuming maybe there could be a little bit more caution amongst dealers and end customers given what you're seeing in the future? Robert Hureau: Yes. I would say there wasn't a lot of impact in the first quarter that we experienced in our financial results. I would say that we're starting to see higher levels of freight costs from the rise in fuel costs, et cetera. We are looking at a number of third-party data that would suggest things might be a little bit more negative than where we were 2, 3 months ago prior to the war. The other internal data point would be as we speak with customers, those conversations would validate that a slightly more cautious tone at this point is warranted. Now that said, we still see really robust year-over-year order growth in the North American ag business and in the European ag business. Just the tone is changing slow here over the course of the last 30 days or thereabouts and so really just cautious. That's all. Gregory Burns: Okay. When we look at your longer-term consolidated margin targets that you laid out a couple of quarters ago, obviously volume will benefit there and the integration of some of the more recent acquisitions. But can you maybe outline some of the other maybe internal initiatives that you're putting in place to bridge the gap from where you are now in terms of maybe EBITDA margins versus what those -- where your kind of medium-range goals are? Robert Hureau: Yes, definitely. So let me back up and remind everyone of what some of those goals were and how we intend to get there and then, Greg, just point us in the direction where you want to drill down deeper. So we have said that long term through the cycle, we have a number of financial objectives and targets. That is 10% plus growth in terms of sales, 15% adjusted operating margins, 18% plus adjusted EBITDA margins and free cash flow as a percentage of net income of 100%. Today, I would say as we think about where we are and the initiatives that we have over the next several years, those financial targets are still intact. We still have a high degree of confidence of getting there. It does importantly require a recovery in the Vegetation end markets. As we've said, we're starting to see that. Things are moving in the right direction. First quarter was a very positive sign of that. We've also outlined those 4 strategic pillars: culture and engagement, commercial, operational and capital deployment. Within commercial and operational, there are 3 things that we think will help drive 300 basis points or thereabouts improvement in the operating and adjusted EBITDA margins, if you will. And for simplicity's sake, you can say equal weight between the 3. Procurement savings, we've launched a company-wide project. That is well under -- Phase 1 is well underway. In fact the work that's being done not only is it validating what we think is out there, but there appears to be some upside. So the procurement initiative is a big and important one. Secondly, we expect continued investment in our manufacturing, our lean team, our continuous improvement team to drive manufacturing efficiencies, some robotics and automation added on where we need, upgrading technologies within the plants and continued manufacturing footprint optimization. We think long term there's another 100 basis points there. And then the third one that falls within the commercial pillar is around parts and sales. We ran in 2025 somewhere in the neighborhood of 16% of sales. We believe we are underweight. We know we're down on a year from prior years. We think there's good opportunity there. A simple 200 basis point to 300 basis point improvement of that overall mix should drive 100 basis points of margin improvement. That project is just getting started. We're making the investments. We're working with the business units to get that going. That's a longer-term project. But all 3 of those we think are the foundation for driving margin improvement over the next several years. One caution I would put there is on the procurement side. Given the level of inventory, we don't really expect to see much improvement until the latter part of 2026. We need to burn through that inventory, which the business units are doing. So those are some of the drivers that get us to those 15% and 18%. The gap, if you will, if you're doing the math quickly and based on what I said; the gap really is the recovery in the Vegetation business. We ran 11% adjusted EBITDA margins in the quarter. We need to get that 200 basis points or 300 basis points up more, which we think will come as that Vegetation division and its end markets settle and begin to grow again. We think it's very achievable. We're very encouraged with the progress that we're making so far. And perhaps the last thing I would say, all of that is underpinned by creating a wonderful place for the nearly 4,000 employees here at Alamo Group to work and that speaks to the culture and engagement pillar that I alluded to. That was a long-winded answer, sorry about that. But hopefully, it provides the color you're looking for. Gregory Burns: Perfect. That's exactly what I was hoping for. Thank you for that and good luck. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Robert Hureau: Thank you. Again we appreciate your support and interest in the Alamo Group and look forward to speaking with you on our next call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to Solventum Corporation's first quarter fiscal year 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, please press 1 on your telephone keypad. I would now like to turn the conference over to Amy Wakeham, Senior Vice President of Investor Relations, Finance, and Communications. You may begin. Amy Wakeham: Thank you. Good afternoon, and welcome to Solventum Corporation's first quarter fiscal year 2026 earnings call. Joining me on today's call are Chief Executive Officer, Bryan Hanson, and Chief Financial Officer, Wayde McMillan. A replay of today's earnings call will be available later today in the Investor Relations section of our corporate website. The earnings press release and presentation are both available there now. During today's call, our discussion and any comments we make will be on a non-GAAP basis unless they are specifically called out as GAAP. The non-GAAP information discussed is not intended to be considered in isolation or as a substitute for the reported GAAP financial information. Please review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers. Our discussion on today's call will include forward-looking statements including, but not limited to, expectations about our future financial and operating performance. These statements are made based on reasonable assumptions; however, our actual results could differ. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. Following our prepared remarks, we will hold a Q&A session. For this portion of today's call, please limit yourself to one question and one related follow-up. If you have additional questions, you can rejoin the call queue. And with that, I would now like to hand the call over to Bryan. Bryan Hanson: All right. Great, and thanks, Amy, and to all of our shareholders and everyone else following the Solventum Corporation story, I just want to say thanks and welcome to our first quarter 2026 earnings call. I am going to start by addressing our Solvers around the world because I am pretty sure that a few of them are listening in today. I just want to say thank you, and thank you once again for delivering on your commitments in our fast-paced transformation environment. I know it is not easy with the amount of change, but the results that we are sharing today just do not happen without you and your hard work. I am extremely proud of not just your dedication but the results that you continue to deliver. This team's ability to drive outcomes while navigating ongoing separation efforts, ERP implementations, and acquisitions and divestitures is a testament to the strong talent we have in the organization. It is a testament to you, and it is a testament to the culture that we have already built. So again, to our global team members, thank you very much for making it happen. Now let us get into it. We delivered first quarter results ahead of our plan and ahead of expectations. Organic sales growth and EPS both exceeded our plan, again reflecting very strong execution across the organization and the momentum that we have already built. We saw solid performance across all segments driven by strong commercial execution and new product launches, and thanks to positive volume, mix, and continued progress in our savings initiatives, we also achieved better-than-expected performance on margins as well. This is a clear reflection of the discipline and rigor we have built into how we manage this business. Q1 is a clear indication that we are well on our way to delivering our 2026 guidance and, importantly, our go-forward LRP objectives. Our transformation journey is working; we have rebuilt our commercial engine with clearer accountability, needed specialization, and stronger leadership, and now innovation is reinforcing the commercial momentum that we have built. We expect to have close to 20 new products launched over the next two years, and as you would expect, a meaningful portion of them will be within our growth driver areas. This will be additional fuel for that new and enhanced commercial team. On operational efficiency and the separation from 3M, we have made meaningful progress on our ERP cutovers as well as the overall separation process, and I can tell you that the team continues to execute against these milestones with purpose. That said, we cannot wait to get to 2027 and put the majority of the separation work behind us. We expect the resources and bandwidth we free up to create significant value, and that is exactly what our Transform for the Future program is designed to capture. As a reminder, our Transform for the Future program is a multiyear $500 million savings program. It is our way of proactively reshaping our operating structure while freeing up resources to invest for the long term. We are streamlining systems, increasing automation, and optimizing our global footprint while repositioning spend toward the highest-return areas of our business. This program is already paying dividends and will deliver more meaningfully in 2027 and beyond. On our portfolio optimization program, we have moved rapidly with clear proof points of our ability to execute, ranging from SKU rationalization to the sale of the P&F business to the acquisition of Acera. And we are just getting started. We see portfolio optimization as a perpetual lever for value creation here at Solventum Corporation. As we said in our original Investor Day, we will continually assess our businesses for strategic and financial fit, and when we determine that someone else can offer more value for a business we divest, or we see another path to increase shareholder value, we will act decisively just like we did with the purification and filtration business. Relative to our SKU rationalization, we are more than halfway through this process and expect to finish by the end of this year. Our separation of P&F is on track and progressing well, and Acera—although it is early—the performance reinforces our ability to identify, close, and effectively integrate attractive assets in our space. In fact, Acera is another great proof point that portfolio optimization is not just a strategic priority; it is a value creation lever that we absolutely know how to pull. We targeted the right asset, a fast-growth business aligned to our existing call points and, as a result, immediately beneficial to our combined commercial teams. Importantly, we see Acera as just the beginning. We have a target-rich environment for additional tuck-in acquisitions and a balance sheet that gives us the flexibility to pursue them while also returning capital to shareholders. As you probably remember, we have board approval for up to $1 billion in share buybacks, and given the substantial value we see in our shares and the quality of our business, one should expect that we will accelerate execution of that approval. Moving to our three operating segments, I will start with MedSurg, which is our largest business. We continue to see strong underlying performance in our growth driver areas. Negative pressure wound therapy was led by ongoing demand for traditional and single-use therapy, continued expansion of our VAC Peel & Place dressing, and our specialized sales force. With Acera, it opens the door to the fast-growth acute care synthetic tissue space and really slots perfectly into our advanced wound care infrastructure. We are early in integration, but the thesis is playing out. The team is executing, the product portfolio is resonating with our customers, and we expect Acera to be a meaningful contributor to reported growth as the year progresses. In our infection prevention and surgical solutions business, Tegaderm CHG remains a consistent performer as our team successfully upsells this important clinical solution, and we are encouraged by the adoption of the recent Attest sterilization product launches as well. Both of these areas are benefiting from our specialized sales teams. In Dental Solutions, we are building on the momentum we saw in 2025. Our Clarity brand relaunch, Filtek EasyMatch, and Clarity Aligners Pro Clear are resonating with our customers and benefiting again from a more specialized sales team. As we exited 2025, this team made significant strides in improving backorders, and our customers are noticing. I want to thank our supply chain and the dental teams for making it happen. Moving to our Health Information Systems business, we continue to benefit from the strength of our revenue cycle management sub-business. Inside RCM, our autonomous coding offering continues to gain traction in both outpatient and inpatient settings. Our international expansion is providing a strong tailwind as well. Relative to AI and autonomous coding, I will reiterate what I said on our last call. We see AI as a helpful tool to deliver better outcomes when it comes to autonomous coding, but what differentiates the outcomes is the data, the rules, and the rigor behind them. We are differentially able to leverage AI thanks to our unique ability to efficiently and effectively train it. We built deep rules and algorithms designed to assure accurate and compliant reimbursement coding, and this, combined with our vast datasets and proprietary workflows, allows us to more effectively train and maximize AI and, ultimately, deliver autonomous coding that our customers can trust. The economics of autonomous coding are compelling. Our customers benefit by improving productivity, eliminating FTE cost infrastructure, and improving revenue capture thanks to increased accuracy. That is a powerful value proposition: reduce cost, improve productivity, and capture more revenue. Shifting gears to tariffs, we continue to expect the annual headwinds to be in the range of $100 million to $120 million. From the very beginning, our supply chain teams have been actively working on mitigation strategies since we first saw tariff headwinds emerge. Our Transform for the Future program gives us additional firepower to offset these headwinds, and as a result, we have committed to expanding operating margins 50 to 100 basis points in 2026, and we absolutely intend to do so. Zooming out, going into Q1, we had people ask whether we could maintain the momentum we saw in 2025. We did triple our comparable annual sales growth in 2025, but that was before the full benefits of our recent product launches, our pipeline innovation, and the commercial enhancements that we made in 2025. For our full year 2026 expectations, excluding SKU exits, we represent continued progress on that ramp. As I have said in the past and will say again, it is not a question of whether we get to our LRP targets of 4% to 5% organic sales growth; it is a question of when. To summarize the key messages: number one, our underlying commercial momentum is real and continuing, and our new product pipeline will be the fuel that momentum needs to continue from here. Number two, our operational programs—the Transform for the Future program, programmatic supply chain savings, and the separation progress—give us additional confidence in the margin expansion story for the full year and beyond. Number three, we have moved with speed and, importantly, impact on portfolio optimization, but we are not finished. We will continue to actively shape this portfolio for the long term. Number four, the ramp toward our long-range plan is happening, it is real, and it is happening faster than most people thought possible. I will now turn the call over to Wayde to walk through our financial details, and then we will open it up to questions. Wayde, go ahead. Wayde McMillan: Thanks, Bryan. We are off to a great start in 2026, delivering first quarter results that were ahead of our plan and expectations on both sales and earnings. As usual, I will begin with an update on separation progress and portfolio actions, then walk through the quarter, and conclude with a review of the full-year outlook. Our separation from 3M continues to progress; we have exited approximately 50% of the transition service agreements and are on pace to exit over 90% by the end of 2026. We have also migrated approximately 75% of over 1,200 system applications, which captures the recent and successful ERP cutover in Asia Pacific, including China. We are now looking ahead to our next wave of ERP cutovers, which includes the U.S. and Canada, planned for Q3. There was also meaningful progress across our facilities with the move of our Saint Paul, Minnesota facility from the legacy 3M campus to our new standalone facility in Eagan, Minnesota, and we achieved a meaningful milestone with the completion of our site migration activities covering several hundred sites around the globe. We also finished a strategic expansion of our manufacturing facility in South Dakota, which enhances our supply chain's flexibility to support existing product growth and new product launches. With further work to streamline our distribution centers, we are now down to 54 worldwide. Regarding recent portfolio activities, we continue to make progress on the P&F divestiture, with a majority of transition service agreements to be completed in 2027, and the Acera integration efforts are tracking to plan while maintaining strong momentum of the commercial team. Now turning to our first quarter results. Starting with top-line performance, sales of $2 billion increased 2.1% on an organic basis compared to prior year and decreased 3% on a reported basis. Foreign currency was a 270 basis point benefit to reported growth, while the net impact of acquisitions and divestitures was a 780 basis point headwind to reported growth. Growth in the quarter was driven by stronger-than-expected performance across all segments, primarily from volume, while pricing remained within the expected range. Our SKU rationalization remains on track with a 100 basis point impact in the quarter, tracking in line with our full-year expectation. Organic growth on a normalized basis would have been approximately 4% when taking into consideration separation-related timing benefits that accelerated sales volume of approximately 70 basis points from Q2 into Q1, along with the difficult year-over-year comparison and SKU headwinds, all before the contribution of Acera, which would have added another approximately 40 basis points. Moving to the segments, MedSurg delivered $1.2 billion in sales, an increase of 1.2% on an organic basis. Within MedSurg, Advanced Wound Care grew 2.1%. Negative pressure wound therapy performance was driven by strong brand, new product launches, and commercial enhancements. Acera contributed $28 million to reported sales, which is reflected in the Advanced Wound Care business. Infection Prevention and Surgical Solutions grew 0.6%, reflecting improved commercial alignment and continued customer demand, as well as the separation-related timing benefits previously mentioned. As a reminder, IPSS growth in the prior year was just over 8%, as the primary beneficiary of order timing related to customers buying ahead of ERP and distribution center moves and SKU exits. Our Dental Solutions segment delivered $354 million in sales, an increase of 3.4% on an organic basis. Growth was driven by innovation as well as separation-related timing benefits. Core restoratives led overall performance, driven by strong underlying demand and commercial execution leveraging new product launches. Our Health Information Systems had another strong result with $342 million in sales, an increase of 4.7% on an organic basis, driven by strength across revenue cycle management and performance management solutions, offset by expected double-digit declines in clinician productivity solutions. Combined with strong customer retention, the pipeline activity and backlog conversion continue to support confidence in our sales growth. From an operational standpoint, we made further progress in supply chain execution during the quarter. Backorders across the portfolio continued to improve, reflecting improved manufacturing performance and the benefits of ERP and distribution actions. Looking down the P&L, even in the face of tariffs and inflation, our gross margins of 56.4% improved 80 basis points over prior year, driven by favorable programmatic savings, portfolio moves, as well as sales leverage and mix. We were above our expectations as typical first quarter seasonality was more than offset by benefits from additional sales, favorable mix, and higher programmatic savings. Operating expenses decreased versus prior year although were 100 basis points higher as a percentage of sales. This reflects the impact of portfolio moves, partially offset by the benefit of our savings programs, including Transform for the Future, outpacing investments. In total, we delivered adjusted operating income of $392 million, or an operating margin of 19.5%. Similar to last year and consistent with our expectations for a sequential seasonal decrease, operational improvements mostly offset the impact of tariffs and inflation. Net interest expense decreased year over year primarily due to a lower average debt balance following the paydown of debt in our third quarter 2025 using proceeds from the [inaudible]. Our tax rate of 20.4% was within our full-year guidance range expectations. Altogether, we delivered earnings per share of $1.48, or 11% growth, ahead of expectations. Shifting to our balance sheet, we ended the quarter with $561 million in cash and equivalents and net debt of $4.5 billion. From a free cash flow perspective, we finished ahead of our expectations mainly due to timing within the year. We had several expected demands on cash flow in Q1, including higher separation costs and tax payments related to the P&F divestiture, as well as normal seasonality for annual compensation and expense timing. Like last year, we expect Q1 to be the lowest quarter of the year. Looking ahead, free cash flow will improve, with Q4 representing the strongest quarter due to step-down of separation-related costs, timing of tax and interest payments, and the outlook for improved operating results as we exit 2026. On our fourth quarter earnings call, we indicated the separation costs and P&F divestiture transient headwinds will mostly complete in 2026, and we continue to expect significant improvement in 2027. We also started the first quarter of our share repurchase program and repurchased approximately 923,000 shares for total consideration of $67 million for the three months ended March 2026. Our balance sheet strength is well positioned for us to execute our balanced capital plan, inclusive of share repurchases and tuck-in acquisitions. Regarding our full-year 2026 outlook, we delivered a solid first quarter performance benefiting from commercial execution, increased contributions from innovation, and portfolio moves. Our confidence in underlying growth and operating performance continues to increase, and we are off to a great start with important ERP and separation milestones still to go while navigating an elevated macro headwind environment. As a result, we are maintaining our full-year organic sales growth and free cash flow guidance as provided on our fourth quarter call, and following the better-than-expected start to the year, we now estimate that our earnings per share will be toward the high end of our initial $6.40 to $6.60 range. We also want to provide some added insights about sales phasing as it relates to the last large ERP cutover, which is planned for the U.S. in Q3. We estimate over $100 million of sales timing benefit in Q2 that we expect will reverse in 2026, mostly in Q3. The additional sales phasing is an important part of our mitigation, and we will update you on our Q2 and subsequent calls on the eventual impact. Turning back to the full year, we continue to estimate a foreign exchange benefit of approximately 100 basis points on sales growth, and we are holding operating margin in the range of 21% to 21.5%, an increase of 50 to 100 basis points over prior year despite significant headwinds from tariffs annualizing and inflationary impacts. There is no change to our tax rate of 19.5% to 20.5%. In summary, we delivered a strong start to 2026. Business momentum is improving, the work in the portfolio is having a positive impact, and our execution is creating a clearer path to margin expansion and cash conversion. We will now open the call for questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. As a reminder, please limit yourself to one question and one follow-up. Your first question comes from Brett Adam Fishbin with KeyBanc Capital Markets. Your line is open. Brett Adam Fishbin: Hey, thank you so much for taking the questions. I wanted to start with the phasing commentary around the ERP event. Could you flesh out where you expect to see the benefit relative to the different segments in Q2 from a modeling perspective? Wayde McMillan: Sure. Hey, Brett. As we called out in the prepared remarks, we are estimating over $100 million of additional sales in Q2 as we work with our customers and distributors to advance orders before we begin our Q3 cutover of ERPs in the U.S. and Canada. This will mostly impact IPSS and Dental, to your question. This is a key mitigation strategy to ease the number of orders and shipments in Q3 as we ramp up on new ERP functionality. Keep in mind, the U.S. is a very different region in that the majority of our sales go through distribution, and this helps mitigate any challenges with ERP cutovers with advanced orders into the distributors. Importantly, when we eventually report Q2, we will provide the amount of orders shipped in advance and then adjust our second half accordingly. As we have shared previously, it is difficult to predict advanced orders and volume. Therefore, we are giving you a heads-up here on magnitude, not precision. The key is we are not adjusting our full-year guide. We expect all Q2 advanced orders will be offset in 2026, mostly in Q3, and the good news is that we are nearing the end of our heavy lift on ERPs from 3M. This will be the last large cutover, and we plan to be done with ERPs and 90% of the TSAs by the end of the year. Bryan Hanson: I might just draft off of that too. It sounds a little messy—it is big numbers—but we feel pretty confident on this one. We are lucky because it is the biggest region we have in the ERP cutover, and we feel like the mitigation efforts are fantastic. It puts us in a really nice position to have almost all of our business run through distribution in the U.S., and because we can stock up those distributors, even if we have a challenge, we can cover our customers and continue to recognize revenue, which is great. In addition, this is our last one, so the team has gotten pretty good here. We have a tuned-up team and a really strong contingency program. Brett Adam Fishbin: Thanks, that is super clear. A quick related follow-up: thinking about Q2 and that $100 million benefit, on an underlying basis, is there any reason to think that the ex-ERP benefit run rate would not be somewhere within the 2% to 3% current guidance range? Wayde McMillan: That is the intent of calling out the heads-up on this advanced ordering. We do think it will be a larger magnitude than we experienced last year. We are not giving quarterly guidance, but you should assume that given the strong performance in Q1, we should continue that momentum in and through the rest of the year. Bryan Hanson: Good way to look at it. Thanks, Brett. Operator: Your next question comes from David Roman with Goldman Sachs. Your line is open. David Roman: Thank you. Good afternoon, everyone. In your prepared remarks, you talked mostly about the contribution to revenue growth coming from volume and mix versus price. Can you give us more flavor on the volume versus mix contribution, and what you are seeing from a new product launch perspective year to date? Bryan Hanson: I will start with the new product launches. As I referenced in my prepared remarks, one of the biggest catalysts we have right now is the commercial enhancements, but now we are feeding that commercial machine with some really nice product launches. I talked about those, and they are definitely helping us, with more coming—about 20 new products over the next two years. It is a combination of the enhanced commercial organization, the focus we have in growth drivers, and we are peppering in some really nice product launches as well. Wayde McMillan: On volume, mix, and price, the way to think about it is our price continues to be in that plus/minus 1% range. That means the majority of our growth is volume-based, with a significant contribution from volume and a modest positive mix. David Roman: Very helpful. As a follow-up, this is the first quarter you initiated the share repurchase program, and it was another quarter with macro-related volatility. How did you think about deploying the buyback in the quarter? Were there competing considerations for capital that drove the amount to be where it was, or should we expect this to ramp over the course of the year? Wayde McMillan: We are very happy to have our share repurchase program kicked off in Q1. We have multiple layers to it. The first layer is to repurchase shares to offset dilution of stock-based comp and to hold our share count flat. Then we also have an opportunity to buy if we see value in the shares, and we certainly see a lot of value in the stock where it has been trading more recently. We will balance that with our M&A plan. It is a balanced plan for us—when we launched the authorization program, we also launched the first acquisition of Acera. We will continue looking at tuck-in acquisitions where we can drive value, and we will also be looking at our share repurchase program with a minimum of anti-dilution and being opportunistic where we see value. Operator: Your next question comes from Ryan Zimmerman with BTIG. Your line is open. Ryan Zimmerman: Good afternoon, and thanks for taking the question. Following up on the ERP cutover dynamics: you called out about a 70 basis point impact from some order pull forward. As you think about what occurred in Asia with the ERP cutover, what did you see in terms of impact when you did that cutover that informs the U.S. plan? And how much of that 70 basis points was reflective of preparation for the Asia ERP cutover? Wayde McMillan: Great questions. Our primary objective is always to ensure product availability for our customers. The good news is we had a very successful ERP cutover in Asia Pacific, including multiple countries plus China, and that is in the rearview mirror now. We started with Europe, moved to Asia Pacific, and now we are moving to the U.S. The 70 basis points we called out was related to volume purchased ahead of mostly SKU exits and some of the separation work we are doing, not necessarily ERPs. There is a little ERP element, but given that the U.S. ERP cutovers are not until Q3, the majority of that is other separation activity. Think about countries where we have a couple of months without registrations as we cut registrations over from 3M to Solventum Corporation, so we shipped some advanced orders to keep customers stocked as we transition. To clarify, the 70 basis points in the quarter is volume we would have normally seen in Q2 that moved into Q1. Ryan Zimmerman: Understood. Looking at margins, gross margins came in well ahead of consensus. I do not believe there is any refund activity in there. Your comments suggest you are still holding the line on tariff assumptions for the year. Where is your head at on tariff refunds or potential changes in tariff rates through the year? Wayde McMillan: On gross margin, we had a benefit from sales and mix as well as higher programmatic savings. We normally expect some seasonality headwinds in Q1; we saw those, but they were more than offset, which drove the 80 basis points of margin expansion. We also benefited from portfolio moves—the P&F divestiture and the Acera acquisition are both accretive to gross margins. On tariffs, it is a fluid situation. We are monitoring and managing it closely, but without clarity at this point, we are holding our estimate in the $100 million to $120 million range for the year. Our Q1 came in at the high end of that range on a quarterly basis. We have not booked any potential refunds in our results yet; like most companies, we are in process on refunds, but nothing has been recognized. Bryan Hanson: On the gross margin side, since it came up, maybe you can provide any color for the rest of the year, Wayde? Wayde McMillan: Yes, thanks. We do expect the rest of the year to be slightly below Q1. We think closer to 56% gross margin is a good estimate for the coming quarters. So, strong Q1 a little above 56%; for the rest of the year, just under 56% would be a good estimate. Operator: Your next question comes from Jason M. Bednar with Piper Sandler. Your line is open. Jason M. Bednar: Hey, good afternoon. I am going to layer onto the ERP cutover topic from a different angle. You sound confident around the planning. What does this big U.S. ERP change mean for your OpEx savings plans? When do you begin realizing cost savings from this switch—later this year, early next year? And is that wrapped into your restructuring cost savings program, or are these distinct items? Bryan Hanson: Maybe I will quickly say on the mitigation plan, I want to call out the team because everyone is working really hard on the ERP cutovers. It is a very large cross-functional group that is just flat out right now. The mitigation process we have gone through is probably the best I have ever seen, so I feel very confident coming into Q3. On whether this opens up margin opportunity, Wayde? Wayde McMillan: The primary objective here is separation from 3M. Because we were in a separation situation, there was not a lot of preplanning around ERP cutovers to drive OpEx benefits immediately. So OpEx does not benefit significantly from the ERP cutovers at this time. However, Transform for the Future is designed to pick up on the systems we have and drive savings going forward—system benefits, automation, efficiencies—hand in glove with the rest of the Transform for the Future work, including structural areas. On operating expenses this year, we had $740 million of OpEx in Q1, which is lower in dollars but higher as a percentage of sales. Some of that was due to seasonality—higher compensation-related and other timing of expenses in Q1. We expect operating expenses to step down from Q1 into Q2, Q3, and Q4, which helps us increase operating margins as we move through the year. Jason M. Bednar: Thanks for the extra modeling color. As a follow-up, Bryan, you mentioned almost 20 new products over the next couple of years. Can you break out by segment, cadence of launch activity, contribution to growth, and whether these are brand-new products versus relaunches? Bryan Hanson: You remembered exactly—almost 20. It is mainly new products. There are some relaunches in certain areas where we will do capacity expansion to meet demand and then relaunch globally, but the large majority are new products across each of our businesses. The cadence is steady and will accelerate through the two years, but it is not back-end loaded—nice cadence this year and the same next year. They are dedicated to our growth driver areas, with some outside of that, and span each of our businesses. We think about the portfolio as singles, doubles, and triples—not relying on one home run—so it reduces risk. The combined portfolio launches on a cadence that is digestible for the organization and gives the new commercial team the fuel they need to hit our LRP targets and, hopefully, beyond. Operator: Your next question comes from Travis Lee Steed with Bank of America. Your line is open. Travis Lee Steed: Thanks for taking the question, and congrats on the good quarter. Following up on the portfolio comments in the prepared remarks: do you have any signs that someone else might be willing to pay a higher value than public investors are valuing parts of the business at? And on timing, is there anything that might slow that down, or could something happen fairly quickly? Any other color on the portfolio side? Bryan Hanson: We expected interest here because we are leaning in on this as a vector of value creation. The good news is where we are from a perspective—after a spin, there are considerations outside of typical transaction factors, and the further the spin gets in the rearview mirror, the more flexibility we have. That itself indicates where we are. Then it is the simple formula you mentioned. I do not want to lean one direction or the other, but when others view our businesses as either strategically more relevant to them or financially attractive, we will pay attention. We will unlock shareholder value whether via transaction or other methods. On timeline, I do not want to set expectations. We are constantly looking at this the right way—both exits and additions. Acera is a great example of exactly the type of deal we are looking for on the add side: great growth, squarely in our business, lower risk because we know the space, and synergistic with our commercial infrastructure. Expect more of that, and we can do those while also returning cash to shareholders. We feel in a good position. Operator: Your next question comes from Rick White with Stifel. Your line is open. Rick White: Hi, good afternoon, Bryan and Wayde, and nice to see another excellent quarter here. It is hard to resist coming back to the second quarter. Consensus is a shade over $2 billion for Q2 coming into the call. Do you feel like that adequately reflects a reasonable midpoint given all the puts and takes? Wayde McMillan: It is worth coming back to this dynamic. We are not commenting on quarterly guidance, but number one, nothing changes for the total year—our guidance stays the same. Our recommendation would be: do not change your Q2 models. When we get to Q2, we are going to overachieve because of a certain amount of advanced ordering. It could be higher or lower than $100 million. When that number lands in Q2, we will call it out and then give you a clear read-through of our numbers without that advanced ordering, and we will take that same amount out of the second half, mostly in Q3. It is great that we have a higher amount of product through distribution in the U.S.; it gives us a nice mitigation strategy for the ERPs here. Bryan Hanson: If you think about it, you can expect Q2, on a normalized basis and not guiding to it, to be in the range of the growth guidance we have given, and then on top of that, Q2 is going to come in substantially higher due to the phasing. We just do not want you to try to model the phasing precisely because it will be wrong. When we get to Q2, we will give you the actuals, and as Wayde said, we will provide the information to help with your models in Q3 and Q4. Rick White: Understood. Talking about Q2 EPS then—you nudged your range toward the upper end. If consensus is $1.65 for Q2, leave it alone even with Acera contributing more, more new product, more cost reduction, and the extra $100 million revenue and leverage? Conceptually, what do we do with that? Wayde McMillan: If we set aside the phasing and look at the business: yes, we should see improvement in EPS in Q2 because Q1 is our lowest operating margin quarter, and we had a very tough comp in sales in Q1. In Q2, we should see good sales growth, higher operating margins, and that should drive improved EPS. Bringing phasing back in, if you just do the math on an extra $100 million of sales, we are not increasing investments tied to that phasing, so you will see a clear drop-through in gross margin and EPS. We will wait to see the precise mix and the exact amount—higher or lower than $100 million—but as a simple view, about 5% extra sales with roughly 30% drop-through on EPS. Again, I would not recommend precision there; it is a large magnitude, but not finalized. Net: Q2 looks like another strong quarter with improved EPS, plus additional drop-through from phasing. Rick White: Shifting to Health Information Systems, can you approximate your current mix of full AI autonomous coding versus primarily traditional computer-assisted coding? If not revenue, maybe from a customer adoption standpoint? Bryan Hanson: Great question. The good news is our team’s confidence is increasing in how much coding can eventually be fully autonomous—now talking 80% to 90% of all coding, inpatient and outpatient. In practice, it takes time to implement, so today there is a definite mix—some customers using autonomous in certain aspects, others not yet, and we continue to proliferate. A good view we can share: during the current strategic plan period, our assumption—given our progress and the trust customers have in our capabilities—is that we could get close to 50% of our customers moving over to autonomous coding. Within those hospitals and systems, we will continue to increase the percentage of coding that is autonomous over time, expanding from initial swim lanes. The value proposition—FTE infrastructure reductions, faster productivity and speed to reimbursement, and improved revenue capture from fewer mistakes—is compelling. We are moving rapidly but safely given the compliance and revenue implications. Operator: And your last question is a follow-up from David Roman with Goldman Sachs. Your line is open. David Roman: Thank you. I hate to come back to the Q2 dynamic, but there is confusion. Is the message to leave Q2 the same, you will beat Q2 and then lower the back half to right-size that? Or is the message that, on an underlying basis, Q2 would improve and there will be some unknown upside that may or may not come out of the back half? Wayde McMillan: We debated whether to give a heads-up for over $100 million of phasing or just wait for Q2. We thought the heads-up would be more helpful. To restate: our recommendation is do not change your Q2 models. Whatever the advanced orders are in Q2, we will take the mirror image out of the second half, mostly in Q3. If you want a simple approach, do not change anything now. When Q2 happens, we will disclose the phasing amount, and we will mirror that out of the second half. Separately, we do see momentum in the business. We expect our growth rate to strengthen off the tough Q1 comp and our operating margin to improve seasonally off Q1, which should support EPS improvement irrespective of phasing. David Roman: Very helpful. Lastly, when all is said and done, you would expect 2026 growth to improve versus 2025 and continue to put you on a trajectory toward the LRP targets you issued? Wayde McMillan: Absolutely. We expect improvement across all segments on an underlying basis. They all have growth drivers, commercial improvements, and innovation improvements. Dental had a significant improvement in the second half last year in backorders, so you have to look at Dental on an underlying basis without that tough comp, but otherwise, yes—improvement across 2026 for all three businesses, keeping us on track toward the LRP. Bryan Hanson: I think that was the last question. Before I pass it to Amy to close us out, I want to publicly compliment our team and make sure they get credit. Almost 100% of the LTE and 60% of our XLT are new to the organization, and we made those changes with very little disruption. We completed our first global restructuring—the Solventum Way—with over $100 million in savings, putting a structure in place to drive our new culture. We created a new mission and value system, and 90% of team members understand it and are energized by it. We scored above benchmark on our first global employee survey despite a challenging, changing environment. We completely revamped our R&D team and process. We increased our accounting depth and moved R&D from 2% to the mid-teens, significantly increasing pipeline value. We identified our primary markets and growth drivers and specialized over a thousand reps globally to drive those growth drivers—a significant commercial change. We completed more than half of our complex separation from 3M, including multiple and concurrent ERP cutovers, plus concurrent manufacturing and distribution center changes, closures, and openings. We implemented a multiyear SKU rationalization program. We sold and began separating our P&F business for $4 billion, which is one of the best multiples in the sector. We paid down half the original $8 billion debt we had at spin. We acquired and began integrating Acera. We announced and started implementing a $1 billion share repurchase program. We kicked off a multiyear global cost savings program aimed at $500 million of savings. All of that while this team has tripled comparable sales growth from our starting point. This is not possible without a deeply connected and experienced team. To our global team members: thank you. Amy Wakeham: Thank you, Bryan. Thank you, everyone, for listening, and to our analysts for your questions. As a reminder, if you have any follow-ups or need anything else, please contact the Investor Relations team directly. This concludes our first quarter fiscal year 2026 conference call. Operator: Thank you. The conference has now concluded.
Operator: Good day, and welcome to the AGCO 2026 Q1 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead. Greg Peterson: Thanks, and good morning. Welcome to those of you joining us for AGCO's First Quarter 2026 Earnings Call. We will refer to a slide presentation this morning that is posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix of the presentation. . We'll make forward-looking statements this morning, including statements about our strategic plans and initiatives as well as our financial impacts. We'll address demand, product development and capital expenditure plans and timing of those plans, and our expectations concerning the costs and benefits of those plans and timing of those benefits. We'll also cover future revenue, crop production and farm income production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates and other financial metrics. All of these forward-looking statements are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks are further described in the safe harbor included on Slide 2 in the accompanying presentation. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31, 2025, and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements, except as required by law. We will make a replay of this call available on our corporate website later today. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer; as well as Damon Audia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead. Eric Hansotia: Thank you, Greg, and good morning, everyone. AGCO delivered very solid results in the first quarter, reflecting effective execution against our strategy and the growing impact of the actions we've taken over the recent years to streamline our cost structure. Net sales were approximately $2.3 billion, up 14% year-over-year. driven primarily by stronger performance in [indiscernible] compared to the challenging prior year period. With differing industry conditions across regions, the year-over-year improvement highlights our ability to perform consistently and deliver solid results across varied demand environments. Operating income increased more than 60% year-over-year to $80.7 million with reported operating margin expanding 100 basis points to 3.4%. On an adjusted basis, operating margin improved 50 basis points to 4.6% driven by better volume leverage and ongoing benefits from business optimization initiatives, partially offset by higher cost inputs, including tariffs. These results underscore the pragmatic focused manner in which we are operating the business. Over the past 2 years, we have taken deliberate actions to simplify and focus our operations and sharpened execution, including a leaner cost structure, more disciplined production planning and improved channel alignment. The performance delivered this quarter supports the increased durability and resilience of our earnings model. While near-term demand remains uneven across regions, we continue to believe the business is operating around the trough of the cycle, with inventories normalizing and underlying conditions beginning to set the stage for the next phase of recovery. Adjusted operating income increased nearly 30% and adjusting EPS more than doubled year-over-year to $0.94, highlighting the operating leverage inherent in the business from lower cycle levels as well as a lower adjusted tax rate in the quarter. We also continue to emphasize structured working capital management and inventory alignment. Dealer inventories improved in the first quarter. positioning us in a more balanced position to support customers while maintaining better operational stability through the remainder of the year. We are encouraged by the progress delivered this quarter and remain fully focused on executing our plans to drive sustainable margin enhancement, cash generation and long-term value creation. Slide 4 details industry unit retail sales by region for the first quarter. While fleet ages continue to increase, farmer purchasing activity reflects a measured and thoughtful approach shaped by the current macro environment, trade policy dynamics, higher interest rates and input costs tighter credit conditions and currency volatility are influencing buying decisions globally, particularly for larger equipment. In North America, overall industry tractor volumes trended lower relative to the prior year with the most pronounced weakness in higher horsepower tractors. Farmers continue to defend more capital-intensive purchases amid current farmer economics, evolving grain export demand and elevated input costs. In Western Europe, industry tractor sales increased compared to softer prior year period with growth across most of Western European markets. Combined demand; however, remain cautious as farmers wave financing conditions and capital allocation decisions. In Brazil, industry retail demand moderated across both tractors and combines with larger equipment most affected by higher interest rates, credit availability and currency effects, while demand for smaller and midsize equipment remain relatively more resilient. Against the evolving macro backdrop, farmer purchasing decisions remain deliberate with customers balancing operational requirements, alongside financing costs and broader economic conditions. Investment activity continues to prioritize solutions that deliver clear productivity gains and cost benefits, including precision agriculture and technology upgrades while larger equipment replacement decisions are sequenced thoughtfully. This environment continues to support disciplined production planning and inventory alignment across the industry. AGCO's factory production hours are shown on Slide 5. First quarter production hours increased 15% year-over-year, reflecting a lower level of production in the first quarter of 2025. The year-over-year increase was driven primarily by Europe, where production levels rebounded from a particularly reduced first quarter 2025 base. Importantly, first quarter 2026 production was aligned with our operating plan and reflected intentional timing and product mix rather than a change in underlying demand trends. Full year 2026 production hours are still planned to be broadly flat to modestly lower than 2025. We are executing a deliberate and measured step down in production as the year progresses. This approach reflects our continued focus on inventory optimization in North America and Latin America, active support of dealer destocking and close alignment of output and market demand. Turning to regional inventories. In Europe, dealer inventory months of supply improved modestly to just under 4 months aligned with our target. This reflects effective execution across the channel with sent operating below the regional average in MessyFerguson Valter modestly above. This well-balanced position provides operational flexibility across product categories and supports continued focus on margin quality and mix optimization in our largest and most profitable region. In Latin America, dealer inventories moved to 4 months of supply from 5 months at year-end, continuing progress toward our 3-month target. Dealer inventory units declined approximately 10% during the quarter, reflecting disciplined coordination of shipments and production with a slightly softer industry outlook. In North America, dealer inventories closed the quarter at approximately 7 months of supply, consistent with our year-end levels and slightly above our 6-month target. Large egg units decreased sequentially and but were offset by the normal increase in the low horsepower segment this quarter in anticipation of the spring retail selling season. Production continues to be managed intentionally with a clear priority on channel health, and long-term stability. Slide 6 highlights our strategy to outpace the market and drive margin improvement to our adjusted operating margin target of 14% to 15% at mid-cycle over time. What is increasingly evident is that AGCO is delivering stronger and more resilient financial outcomes across a range of demand conditions compared to prior cycles. The structural actions implemented over recent years are translating into a more durable margins, improved earnings stability and higher quality cash generation, demonstrating the effectiveness of our evolved operating model. Our 3 growth levers: high-margin products, technology-driven differentiation and a growing higher-value aftermarket business continue to provide meaningful support in the current environment. each lever contributes distinct value and together, they reinforce a business model that is less reliant on unit volumes and more centered on value creation. This foundation underpins our ability to consistently deliver mid-cycle adjusted operating margins in the 14% to 15% range over time. It reflects a structurally improved AGCO more focused on higher-value revenue streams, more disciplined on costs and investment and increasingly driven by technology solutions and services. Importantly, this operating model also supports strong cash generation with free cash flow conversions of approximately 75% to 100% through the cycle. That financial flexibility enables continued investment in innovation and business advancement, while supporting capital returns to shareholders as evidenced by our recent increased dividend and share repurchase announcements. Taken together, these elements highlight why AGCO is operating today from a more favorable and resilient position and why our business is well positioned to deliver consistent performance across future market cycles. Turning to Slide 7. We are seeing a series of tangible strategy wins as we execute against our farmers first priorities. These actions demonstrate how we're building a durable competitive advantage by combining engineering leadership with increasingly advanced digital and enabled capabilities. Our approach reflects a focus on prioritizing growth while also delivering efficiency, as we apply AI where it delivers measurable value for farmers and strengthens business performance through better decisions and execution. AI is increasingly becoming a significant enabler in that road map and across the organization to support long-term value creation and differentiation. AI solutions on the farm and in our products are designed to help farmers to achieve more with fewer inputs such as land, labor, fuel and chemicals. Solutions, including Symphony Vision use intelligent cameras intended to optimize precision application in real time, improving effectiveness and helping to reduce waste. At our PTX Winter Conference, we introduced AI-enabled innovations, including Symphony Vision Dual and AROTube to advance real-time precision applications and automated seed placement. These innovations reinforce our position in high-value technology-enabled solutions. We use AI in customer support and service to connect machine data, customer needs and AGCO expertise to reduce downtime and strengthen long-term customer relationships. It is transforming how we work with thousands of parts leads generated for dealers and tools like product information assistant to more closely connect dealers and farmers. And third, AI inside AGCO is improving efficiency, quality, cost and speed. Use cases range from AI-powered financial forecasting to AI-driven market analytics that automate used equipment price analysis and free up experts to focus on more value-driven actions. These capabilities are being deployed in a structured and purposeful manner to support margin expansion and growth. We are seeing strong and growing demand from our employees to leverage and deploy VVI solutions to better support our dealers and farmers. We view this momentum, along with our project reimagine run rate cost savings as a clear opportunity to drive measurable efficiency gains and productivity improvements across the organization over time. In short, we are taking an enterprise view with AI using human in the loop oversight and aligning with the evolving regulatory frameworks to support trusted, responsible and scalable usage. On Slide 8, we also continue to see strong external validation of our innovation and technology leadership. Our outrun mixed fleet retrofit technology are in the prestigious Davidson Prize for the second consecutive year. This time for them is tillage, reflecting our step-by-step progress towards our ambition for full firm autonomy by 2030. Our AGCO Parts shop received the Digital Engineering Award for a next-generation unified B2B platform that improves dealer efficiency, order accuracy and visibility at scale, which supports aftermarket growth and reinforces our farmer first focus on uptime. As EGCOPower's Core [indiscernible] 0 was named Diesel Engine of the Year, reinforcing our continued leadership in efficient powertrain innovation. The family of core engines were designed to run on an array of fuel options, helping them deliver the performance our farmers' demand around the world. I want to recognize and thank the teams across AGCO whose work continues to set a high bar for our industry. With that, I'll turn it over to Damon to walk through the financial results for the quarter. Damon Audia: Thank you, Eric, and good morning, everyone. Slide 9 provides an overview of regional net sales performance for the first quarter. Net sales increased approximately 5% in the first quarter compared to the prior year period, excluding the favorable impact of currency translation. By region, the Europe/Middle East segment delivered a 9% increase in net sales on a constant currency basis, higher sales resulted from increased unit volumes compared to the first quarter of 2025, which included dealer inventory destocking. Sales growth in Germany and the United Kingdom was partially offset by lower activity in Turkey and France. The increase was driven by strong growth in high horsepower tractor sales. North American net sales also increased 9%, excluding currency impacts. Higher unit sales compared to the prior year, together with positive share growth supported the increase. The most significant gains were in high-horsepower tractors, hay equipment and sprayers highlighting continued customer investment in productivity-enhancing solutions. Net sales in Latin America were 30% lower on a constant currency basis, reflecting very measured purchasing activity across virtually all product categories as the environment in Brazil and Argentina remain challenging in the quarter. Asia Pacific Africa net sales increased more than 20%, excluding currency impacts, driven by higher sales in Australia and South Africa partially offset by lower sales across most Asian markets. Consolidated replacement part sales were approximately $447 million in the first quarter, increasing 3% year-over-year on a reported basis and down nearly 6%, excluding favorable currency translation. Results reflected wet weather in Europe early in the quarter that limited parts consumption. And in North America, where dealers remain focused on inventory optimization amid continued cautious farmer sentiment. Turning to Slide 10. Adjusted operating margin was 4.6% in the first quarter, an improvement of 50 basis points year-over-year. This reflects strong execution in the Europe, Middle East region, once again, combined with continued operational and cost discipline across the broader organization. By region, Europe, Middle East income from operations increased by over $104 million compared to the first quarter of 2025 with operating margins exceeding 16%. These strong results were driven by sales growth, a richer mix and increased production compared to the prior period. North America income from operations reflected an approximately $27 million year-over-year reduction with operating margins remaining below breakeven. Results heavily reflect the year-over-year impact of tariff-related costs along with factory under absorption associated with our disciplined approach to reduce production levels. Latin America operating income decreased roughly $47 million year-over-year with results below breakeven, driven by several factors, including significantly lower sales volume and negative pricing. Asia Pacific Africa operating income increased about $7 million in the first quarter, supported by higher sales and increased production during the quarter. Slide 11 outlines our first quarter cash performance and full year estimated free cash flow. Free cash flow represents cash used and are provided by operating activities less purchases of property, plant and equipment. Free cash flow conversion is defined as free cash flow divided by adjusted net income. We used $455 million of cash in the first quarter of 2026 reflecting the normal seasonal inventory build, consistent with our operating cadence. The prior year quarter reflected unusually low production levels, mainly in Europe that limited inventory investment and reduced cash usage. Our 2026 production schedule reflects a return to our typical seasonal patterns, resulting in higher inventory investment and cash usage early in the year. This profile was fully aligned with our plan and remains consistent with achieving free cash flow in a targeted range of 75% to 100% of adjusted net income for the full year. Our approach to capital allocation remains disciplined and consistent, prioritizing reinvestment in the business, maintaining an investment-grade balance sheet, pursuing targeted acquisitions that accelerate technology adoption and returning capital to shareholders. This framework continues to guide both our decision-making and the sequencing of capital deployment. As part of this approach today, we announced that we are evolving our long-standing AGCO Finance U.S. and Canadian joint ventures to better align with increasing regulatory and compliance requirements on enhancing capital efficiency. On April 30, the company executed various agreements with wholly owned subsidiaries of Rabobank to sell AGCO's 49% equity interest in its U.S. and Canadian joint ventures for approximately $190 million, while establishing new financing framework agreements that are intended to strengthen the strategic and commercial benefits of these partnerships. AGCO Finance remains the predominant financing partner for AGCO and our customers. This structural evolution strengthens AGCO's farm refer strategy by ensuring continued access to competitive finance offerings. These actions optimize regulatory capital deployment, strengthen our commitment to providing competitive financing solutions to our farmers and dealers and bolster our financial flexibility. The proceeds from these transactions are incremental to free cash flow and are being used to support capital returns to shareholders. Building on both our record free cash flow generation in 2025 and these proceeds AGCO has increased our capacity to return capital to shareholders. We continue to execute share repurchases under our $1 billion authorization. Following the initial $300 million announcement in October last year, we are initiating an additional $350 million in repurchases during the second quarter of 2026. In addition, the Board of Directors also improved an increase in our regular quarterly dividend to $0.30 per share, up from $0.29. At this rate, annualized dividends would total [ $1.20 ] per common share. Collectively, these actions demonstrate a continued focus on disciplined capital deployment, balancing enhancing near-term shareholder returns with long-term financial flexibility. Turning to Slide 12, which summarizes our 2026 market outlook across our 3 major regions. Global agricultural markets entered 2026, reflecting conservative purchasing behavior shaped by high borrowing costs, extended margin compression and evolving policy and trade dynamics. Recently, geopolitical developments have contributed to higher fertilizer and fuel costs, reinforcing cautious behaviors across the industry. Current conditions point to a gradual and uneven recovery, rather than a near-term rebound. We are maintaining our forecast for North America and Western Europe and adjusting our Latin American forecast from flat to down modestly in 2026. In North America, farm income dynamics and increased input costs continue to shape demand, particularly for large equipment. Deal activity continues to focus on managing used inventories and limiting new commitments, which is weighing on large tractors and combined purchases. Higher fertilizer and diesel cost tied to recent geopolitical developments have added to grower caution heading into the planting season, further limiting discretionary capital spending. Smaller equipment continues to demonstrate relatively stable demand compared to large ag supported by livestock and hay related demand. While performance has improved year-over-year, early year activity has been more modest than anticipated amid recent macro events, reinforcing our views that upside remains limited for the remainder of the year. Overall, we expect the North American large ag equipment market to be down around 15% below 2025 levels with the small ag segment modestly higher. In Western Europe, near-term demand has demonstrated select areas of strength. At the same time, confident remains fragile. Farmer profitability challenges, increased input costs evolving regulatory uncertainty and prudent capital spending behavior continue to weigh on sentiment. Recent geopolitical developments, including the development in the Middle East have added to this environment, particularly around energy cost despite near-term demand strengths. Subsidy frameworks and relatively favorable interest rate dynamics continue to provide a stabilizing foundation for the region. Taken together, we still expect Western Europe to be up modestly in 2026. In Brazil, in broader Latin American region, interest rates and tighter credit conditions continue to influence purchasing patterns, particularly for large machinery. Increasing input costs and financing dynamics are guiding investment decisions, contributing to equipment demand variability. Brazilian retail tractor volumes in '26 are now projected modestly below 2025 levels, but with long-term fundamentals remaining relatively constructive. Overall, the agricultural equipment cycle in '26 reflects discipline, selective purchasing and delayed replacement activity. As financing conditions normalize, input cost pressures moderate and grain prices improve, the aging fleet and structural foundation supporting recovery remain in place with regional timing varying by market and segment. Slide 13, highlights the key elements underlying our full year 2026 outlook. Global industry demand in 2026 is now positioned in line with prior year levels, operating at approximately 86% of mid-cycle demand, consistent with the stabilization phase of the cycle. Our sales plan reflects continued market share gains, pricing in the range of 2% to 3% and roughly a 3% foreign currency benefit. While pricing helped moderate the impact of material inflation and tariff-related costs, the incremental increases in these pressures from events in the first quarter will now more than offset pricing actions resulting in margin dilution and lower profitability in 2026. Inventory management remains a priority in 2026, particularly in North America and Latin America, supporting our ongoing dealer inventory alignment and a balanced demand-driven go-to-market approach. Our outlook reflects the current tariff environment and our established mitigation actions, including cost initiatives and pricing. Since the fourth quarter earnings call, the tariff environment has evolved with the Supreme Court ruling related to EPA tariffs as well as new guidance on the calculation methodology related to Section 232 tariffs. We now expect tariff costs of approximately $135 million in 2026, which is around $90 million increase from 2025 and $25 million higher than our previous estimate. These estimates could change as things evolve during the year. Our adjusted operating margin and earnings per share outlook do not assume any refunds related to the [ EPA ] tariff. We are currently evaluating the impact to our business and the ultimate timing and amount of any potential refunds remain uncertain. We are prepared to adjust our outlook should tariff or trade policy conditions change. Engineering expense is planned at around 5% of sales in 2026, representing an increase of nearly $40 million year-over-year, supporting innovation across the portfolio while maintaining investment discipline. Operational efficiency initiatives are increasing and we now expect them to deliver approximately $60 million to $70 million of benefit in 2026, up from $40 million to $60 million, reinforcing our ongoing transformation progress. Production hours in 2026 are expected to be flat to slightly down compared to 2025 with a measured step down as the year progresses to support inventory normalization and demand alignment. Based on these assumptions, adjusted operating margin is still targeted in the range of 7.5% to 8% reflecting structural portfolio improvements and cost actions, partially offset by price cost pressures, increased tariff costs as well as increased freight costs. Finally, although our effective tax rate was 24% in the first quarter, we still expect our effective tax rate for 2026 to be in the range of 31% to 33%. Turning to Slide 14 for 2026 outlook. We have modestly tightened our full year net sales outlook to $10.5 billion to $10.7 billion, reflecting improved performance in certain regions slightly higher foreign exchange effects and continued execution, partially offset by ongoing market volatility. Adjusted earnings per share are targeted at approximately $6 supported by continued strong cost discipline and execution consistency. This revised outlook reflects our strong first quarter performance, along with the incremental tariff costs and other cost headwinds I mentioned previously. The current earnings per share outlook also assumes approximately $0.15 per share benefit associated with the share repurchase announced today. Capital expenditures are planned at around $350 million, positioning the company for future demand while preserving investment discipline. Free cash flow conversion remains targeted at 75% to 100% of adjusted net income, supported by strong working capital management and ongoing inventory efficiency. Second quarter net sales are targeted between $2.7 billion and $2.8 billion. Second quarter earnings per share are targeted between $1.35 and $1.40, reflecting the alignment of production with demand cost execution and timing of efficiency initiatives. The second quarter EPS target excludes any impact from the potential [ IEP ] tariff refunds or the sale of our equity interest in the AGCO Finance U.S. and Canadian joint ventures. The AGCO Finance transaction in North America will accelerate cash flows from the existing portfolio and result in a second quarter earnings lift. However, for the full year, we do not expect a meaningful change in the portfolio's earnings contribution. Slide 15 outlines the details for our 2026 tech data be held near Chicago, Illinois. A strategic business update will be held on October 6, followed by a live field demonstration of our precision agricultural stack and farmer core initiative on October 7. We look forward to hosting you just outside of Chicago. With that, I will turn the call over to the operator to begin the Q&A. Operator: [Operator Instructions] The first question is from Jamie Cook with Truist. Jamie Cook: I guess 2 questions. Damian, just unpacking how we think about -- I mean we had losses in North America and in Latin America in the first quarter. Just trying to understand, in particular, it was like the restatement with Mexico, how do we think about the full year potential loss in cadence, I guess, of earnings throughout the year, I guess, would be my first question. And then my second question, can you just dig a little deeper on some of the pricing commentary that you referred to like by region. You know what I mean, I guess I was impressed that we actually held the 2% to 3% price increase. Unknown Executive: Sure. So I think if we look at the cadence here with the incremental tariff costs that we alluded to in the scripted remarks, we're going to see North America sort of stay at this sort of the mid-teens margin loss for the balance of the year here. despite the solid pricing, that incremental $25 million is going to really be concentrated in North America, as you would expect. It will fluctuate a little bit in the quarter with volume here. But generally, you're looking at sort of an earnings kind of in that negative 10%, negative 12% for the full year. South America, we had a challenging first quarter -- or at -- excuse me, we had a challenging first quarter see that sort of rolling into the second quarter here with a slight breakeven, the slight loss likely in Q2. And then as we hopefully see the industry recover, we've talked about the election year some of the incentives as we get to the FINAME funding in the middle of the year, we see that turning certain positive. I think net for the full year, when you look at the first half headwinds second half opportunities probably closer to a breakeven business for Latin America as we look at the full year. I think, Jamie, on the second question on pricing, again, we did reaffirm the 2% to 3%. When I look at how pricing panned out in the first quarter, overall, I would say total company, it was modestly a little bit better than what we had expected. Now we saw stronger performance in pricing in North America and in Europe and then we saw a significantly weaker pricing in the Latin American region. So for total company, again, I still feel good that we're in that 2% to 3% range. But as I look at how things are unfolding, so far, I would say it's going to be a little bit stronger coming from North America and Europe and a little bit weaker coming out of the Latin American region, at least to start the year. Operator: Next question is from Kristen Owen with Oppenheimer. Kristen Owen: Damon, you walked through a lot of puts and takes on the guidance. It's easy to look at it and say, okay, you beat by $0.50 in the first quarter, so we're going to raise the guidance by $0.50. But it sounds like there's a lot more to it than that. So maybe just help us with the bridge on the updated guidance, what got better, what got worse? And then I have a follow-up on some of the cost-related items. Damon Audia: Yes. Sure, Kristen. So I think if you look at our prior guidance, we were $5.50 to $6. So we'll use the midpoint there. We rolled through the $0.50 beat in the first quarter. I alluded on the call, tariffs are around a $25 million incremental headwind, so call that around $0.25 of a headwind. Kristen, we tweaked our volumes, our industry outlook for South for Latin America and a little bit, I would say, in Eastern Europe, Turkey mainly. So the industry being a little bit softer for the balance of the year, that's around a $0.20 headwind. We've had incremental freight costs as we look at diesel fuel, ocean freight charges, other costs that we're seeing given the Middle East conflict, that's around a $0.20 headwind flowing into our cost of goods sold. To offset that, we included the share repurchase. We've estimated that at around $0.15 of a positive for the full year. And then we've also increased our restructuring savings outlook, which was $40 million to $60 million. We now have that at $60 to $70 million. So that, coupled with a little bit of other cost of goods sold savings opportunities, that's around a $0.20 positive relative to our original outlook. And so when you put those together, you get around $6. Kristen Owen: Fantastic. So the restructuring savings then the $40 million to $60 million now, $60 million to $70 million. In some of the prepared remarks, you talked about some of the internal initiatives. Can you maybe help us understand how much of that is just an acceleration or maybe a pull forward of the bridge that gets us to 14% to 16% by the end of the decade? Or how much of that is sort of incremental upside that maybe gives you greater confidence in that mid-cycle margin target? Damon Audia: Yes. So I'd say, Kristen, it's probably about 50-50. So we did have some savings that was planned more into the Q3, Q4 time frame. Given the industry, we've been able to pull as we did a little bit last year, we pulled some of that ahead. So if you remember on the fourth quarter call, we said we were run rating at around $190 million. I would tell you now after the end of the first quarter, we're run rating just a little bit over $200 million. So part of that was pulling some things ahead. But in this environment, as we leverage technology, more of the teams are seeing more opportunities. So there is some incremental long-term savings. So again, for this year, I would say it's kind of split between a pull ahead and an incremental. So that will carry over to some incremental savings as we get into 2027 given the annualization. But generally, I'd say we're run rating a little bit north of $200 million now. Operator: The next question is from Mig Dobre with Baird. Unknown Analyst: This is Peter Kalanarian on for Mig this morning. I guess I have one on Europe here. How confident are you in the relative strength in Europe holding through the remainder of the year? It's my understanding that EU farmers maybe don't preorder their inputs to the same extent as we see in North America. So could you maybe help me understand the dynamics there, what you're seeing in terms of farmer health? And then second part of the question on margin progression for Europe, I believe it's previously been a pretty steady mid-teens through the year. Is there any change there that we should be aware of? Eric Hansotia: Yes, I'll start off with that answer. So if you think about the crops that are planted in Europe, the biggest crop planted is wheat, and it's often -- it's a winter wheat predominantly. So that's planted in the fall. It starts growing over the winter and then it continues to grow in the spring and in the summer and is harvested early summer. So the cycle is a little different than what we think about in North America of most of the planting happening in the spring because of the mix of grains that they put in. So that's one dimension. They still do prebuy a fair amount, not quite as much as North America, but a fair amount. And so I think it really comes down to how long is this war going to last and how big of an impact is the increase in cost for fertilizer. Fertilizer is up somewhere between 35% and 50%, but it all depends on if that lasts through the rest of the year. Most predictions right now, of course, this is unpredictable, but many folks are using the assumption that this war is not going to last in terms of quarters, it's going to last in terms of several more weeks in terms of cutting off the street. So if that's true, then flow can normalize in time for the next big use of fertilizer in the Northern Hemisphere, which is more weighted toward the fall. Damon Audia: And then, Peter, if I -- in answer to your second question about the European margins and the cadence, again, Europe continues to be very strong for us if I think about the margins. generally speaking, likely in the mid-teens for each of the remaining 3 quarters, a little bit lower here in the second quarter as we'll have some of that incremental engineering expense. Remember, we have a high concentration of engineering expense in Europe. I'd say probably closer to flat to last year's margins and then picking up modestly here in the back half of the year as we introduce some new products and some of that new product pricing kicks in. But generally speaking, kind of in those mid-teens here for the balance of the year. Unknown Analyst: Awesome. And then a quick follow-up here on Latin America. How many -- do you have the pricing in place you feel to clear the channel here in the next couple of quarters? Or do you think that price will have to come down even further -- and I guess, tangential to that question, how many quarters of destock do you think we have left before inventory can get down to that target level of, call it, 3-ish months? Damon Audia: Yes. I think, Peter, for us, we're always looking market back from a pricing standpoint and our relative value to the farmers and also relative to the competition. I don't see a significant change in pricing, but again, subject to market conditions. I think we're trying to be much more proactive on our side. We will have inventory -- production will come down probably around 20% year-over-year in Q2 as we look to better adjust the production schedule. We made great progress on the dealer inventories this last quarter. As I mentioned in my part of the remarks, units were down around 10% -- so we are taking the units out. We're reducing the production here. We'll reduce it again another 20%, trying to get closer to that 3-month target here, hopefully by the end of the second quarter. But again, remember, for us, when we give you the dealers' month of supply, that's a 12-month forward look. So as that industry is changing either positively or negatively, that 12-month forward calculation can also influence even though the units may come down. So I feel good about what the team is doing in managing a very challenging situation. We know South America is likely the most susceptible to the diesel fuel cost, the fertilizer increases that Eric just alluded to. So the team is doing a good job sort of managing the production schedule to try to keep the retail and production as closely aligned as possible, but at the same time, getting the dealer inventory levels down, but still servicing the demand we're seeing. So a lot of work down there, but we feel good about how the team is managing it. Eric Hansotia: Maybe one more thing on Brazil. It's a very, very tight presidential race. And last week was AgrShow. There was a lot of talk at AgrShow about favorable terms coming into the market from the government. Unfortunately, there's no detail on what those terms are going to be, but certainly a lot of talk about they're coming. And so farmers, I think, to some degree, are a bit on hold until they get clarity on what that environment will be. But if you anticipate the chapter we're in right before an election is probably going to be something positive for farmers. Just don't have any clarity on it yet. Operator: The next question is from Steve Volkmann with Jefferies. Stephen Volkmann: I apologize if I missed this, Damon. I think you said that '26 production hours are going to be flat to slightly down, but it sounds like they're going to be down quite a bit in the second quarter, and you obviously reduced inventory in the first. So is the cadence that we're going to have like some big increases in the second half? Just how does that sort of play out? Damon Audia: Yes, Steve. So we had the big increase here in the first quarter. It was heavily in Europe because of the year-over-year comparison. It wasn't that we were running in excess. If you remember last year, we had a slow start as we were sort of destocking a little bit in Europe. If I look at Q2 here, you're looking at North America is likely going to be relatively flat to year-over-year. The big change will be the South American market. We'll be slowing production there in Q2 and likely in Q3 based on the current industry outlook. But as Eric just alluded to, such a volatile market or uncertain market there, we manage it one quarter at a time. But at least our outlook right now, this flat to down guide assumes more underproduction in the Latin American region, but relatively stable production in Europe and in North America for the balance of the year. Stephen Volkmann: Okay. I see. And then just anything to call out relative to your view of kind of how Precision ag sales kind of flow this year? Is there any upside or downside to your views there? Damon Audia: I don't think there's any upside or downside. Again, the first quarter was very much in line with our expectations. I think the sales for PTX as a whole were relatively flat year-over-year. So I think, Steve, when you look at the industry being down here in North America, down in the challenge in South America, the fact that PTX delivered relatively flat sales year-over-year is a testament to the retrofit market and how well that business is doing. For the full year, we still expect it to be flat to modestly up for the full year. Operator: The next question is from Joel Jackson with BMO Capital Markets. Joel Jackson: I wonder if you can provide any -- like we're talking about traversing the bottom here, things getting better as the year progresses. Do you have any updated views on what you think this cycle will look like in the next year or 2 as we get back into growth and maybe compare that to prior cycles? Eric Hansotia: Yes, it's a pretty uncertain environment we're in, but I would say we expect that -- you look at what are the drivers of cycles. And the primary one I'd look at is the age of the existing fleet in the farm. And in all of our regions, it's at peak levels. So when the farmer looks out into their machine shed, they see old equipment and they see a lot of technology coming into the market. And so there's a draw or replacement demand. that's going to happen. And there's other turbochargers that could happen and could boost that. Brazil is putting a lot more of their corn into ethanol. The U.S. ethanol blend may move from 10% to 15% may move to year around. I don't know yet, but that's under a heavy discussion. Biofuel policy and sustainable aviation fuel are getting a lot of attention right now. There's more protein demand with Li and the GLP drugs. So you combine all of those things, and those all give us -- those are the ones we've been talking about for several years. Those are natural tailwinds for this industry to recover tactically because of the fleet age and more strategically because of these macro drivers. And we see all of those as playing for the farmer. They need some more certainty. They need the straight to open up. They need their cost to settle back down and they need the trade flows to open up, which is a relatively short-term thing. Once that happens, I think the cycle will progress like it usually does. We've been 2 to 3 years now at the bottom, and then it usually works its way back up. It's depending on the situation, 7- to 10-year overall cycle. So we expect a migration back up to mid-cycle volumes and then hopefully above mid-cycle after that. Joel Jackson: Going in the background. I apologize for the noise. And just my second question, the buyback less announced, would that be very upfront like the buyback last year or more spare? Damon Audia: Yes, normally, we do the buyback in the form of an ASR. There is a portion that is directly done with TaFI, our largest shareholder. So you can assume that 85% of it directionally is done through the form of an ASR and then the balance comes from Tafi at a later date. Operator: The next question is from Kyle Menges with Citigroup. Kyle Menges: This is Randy on for Kyle. It would just be great to get some more color on some of the changing tariff dynamics as it relates to your outlook, maybe bifurcating between impacts from the IEPA overturn, the new Section 232 ruling. And then any color on how you're thinking about what potential Section 301 impacts could be would be helpful. Damon Audia: Yes, Randy. So with the IEPA ruling, we have now taken that out of our guidance and factored in the new cost calculation for 232. When we look at the net of those 2, that's around a $24 million headwind relative to our prior guidance. And so that's sort of been factored into our outlook. as I mentioned in my pre-scripted remarks, we've not assumed any refund or anything related to the IEPA in our current EPS outlook. If something was to be monetized, that would be incremental. As it relates to the pending 301 tariffs, again, we have not assumed anything beyond what's currently in place today into our outlook. I think it's important to remember, though, as if there is something that comes as a result of 301, the question of when do those take effect when do they hit our inventory and then when does that flow through cost of goods sold. So as we think about something maybe coming this summer, the reality of that hitting 2026 is quite low, just given the flow of inventory and finding its time to our cost of goods sold. So again, we're monitoring the situation. The teams are doing a great job in trying to mitigate these tariffs, looking for offsets or ways to ship directly to Canada, which historically we would have flown those European products into the U.S. and then up to Canada. So looking for ways to avoid some of these where possible to limit the impact on our dealers and our farmers. But overall, as I said, around $25 million is the net headwind this year. Operator: The next question is from Kevin from Wells Fargo. Unknown Analyst: Can you talk about what you're seeing in terms of used inventory destocking in North America during the quarter? And what do you expect in terms of the pace going forward? Damon Audia: Yes, Kevin, I think overall, we don't have as much visibility as maybe some of our competitors do on the used. But overall, generally speaking, it's not as big of an issue for our dealers versus the new. We're probably directionally about maybe a month in a better position than we are in the news in the new. So overall, not a huge issue, but something that we're watching closely. Unknown Analyst: Got it. And then maybe switching gears, how should we think about the sales of the stake in the joint ventures in terms of the impact on the equity income line on a go-forward basis? Damon Audia: Yes. I think the -- so Kevin, thanks for asking the question. I guess the way to think about this is the $190 million of cash that I mentioned is reflective of the equity value and the cash flow considerations of the existing portfolio as of April 30. So if you think about that, the transaction, it's going to accelerate the cash flows from the existing portfolio, and that's what's going to result in this Q2 earnings benefit. But on the full year basis, the contribution from the portfolio hasn't really changed. So that's the way to think about it here in 2026. As I think about '27 and beyond, what's happened that equity and earnings is now going to disappear for those 2 entities, and you're going to see that show up at a smaller percentage, but show up as a reduction in sales discount. So it will be slightly accretive to the operating margin and a little bit negative from an earnings per share perspective. Operator: The next question is from Angel Castillo with Morgan Stanley. Angel Castillo Malpica: This is Esther on for Angel. I just had a question around North America market share. Can you unpack a bit more about what you're seeing in North America and just provide a little bit more color on the market share gains? Also curious to know if farmers are telling you anything that's driving the switch of brands and whether there are any particular regions in the U.S. where you're seeing this? Eric Hansotia: Yes, I'll take that one. So globally, we had our highest market share. We grew again market share in quarter 1. We've now got our all-time record highest market share for the company globally. And a big driver of that is North America. We're getting market share gains in both of our brands, Massey Ferguson and Fendt in terms of machinery brands. And essentially, we've gone through a few phases here. The first phase was getting our parts and service performing at a record level, and that's been done for several years now. Then getting our product portfolio to the best in the industry. We've got that in place solidly. And now we're working with our dealers to really raise their performance. That's the focus of this chapter, working with all of our dealers to implement farmer Core, which is a changing of the distribution model where they do the work on the farm. They move from reactive to proactive, monitoring the machinery on the farm and doing everything proactively instead of having the customer having to come to the brick-and-mortar store, we come to the farmer, way more convenient, way more proactive. So this establishment of the world's best products has been done. Now we're working on the world's best distribution and service support that can be delivered to the farmers. And we're seeing once farmers experience that. They love it. They love the convenience of having everything done with them and on their location. So that's the primary thing. It's more of a large ag focus. You asked kind of where is it happening? It's more large ag than small ag because it's -- that's the focus of Farmer core. But it's geographically, I wouldn't say that there's a specific area in the country. Did I capture all your points? Or was there anything... Angel Castillo Malpica: Just like a quick follow-up. Just like what you laid out, is there any concerns about any like aggressive pricing from competition just due to the market share gains that you're seeing? Eric Hansotia: Well, we always have to keep our eyes on that. But in general, I think we're all public companies, disciplined players and working on generating value as opposed to trying to take margin hits to go after price discounts. We've not seen that in the past on any kind of broad scale, not saying it can't ever happen, but we haven't seen it in the past, and we're not seeing it now. Operator: The final question today is from John Peter with Bernstein. Unknown Analyst: This is filling in for Chad. Can we double-click on your order book by region, please? Damon Audia: Yes, sure. I'll take care of that. So for North America, our order board is kind of in the range of 2 to 4 months depending on the product type. I would say for the lifestyle or the rural lifestyle, so the lower horsepower, we're about 2 months. As I mentioned in my remarks, we're into the spring selling season right now, so very customary to see the order board at the low point. For Fendt, we're probably closer to 4 months. In Europe, we're at 3 to 4 months, so relatively consistent to where we've been for the last several quarters. And in Latin America, if you remember, we only opened the order board up 1 quarter in advance. And so we're sitting at around 3 months of orders in South America. So again, fairly consistent as to where we've been in the last few months -- last few quarters, excuse me. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks. Eric Hansotia: Thank you for joining us today for our continued -- and your continued interest in AGCO. The first quarter highlights our continued progress in building a more focused and resilient AGCO, executing with discipline and staying anchored to what we control while advancing our Farmer First strategy. The performance delivered this quarter reflects the effectiveness of actions taken over several years, including portfolio sharpening, execution enhancement and improved earnings durability. We remain focused on delivering for all of our stakeholders. For our farmers, we continue to invest in practical innovation spanning precision agriculture and AI-enabled solutions, service and uptime. -- all designed to help them operate more productively and profitably. We've achieved the highest Net Promoter Score for quarter 1 in the history of our company and have a record high market share globally with big gains in North America. For shareholders, our record 2025 cash generation enables balanced capital deployment, including increased dividends and ongoing share repurchases alongside continued investment. Looking ahead, we remain focused on cost management, production alignment, technology advancement and market share growth, positioning the company to perform effectively through the current environment and capture opportunity as demand grows over time. Thank you for your continued support for AGCO. We value your partnership and look forward to building long-term value together. Operator: Thank you for joining the AGCO earnings call. The call has concluded. Have a nice day.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lucid Group First Quarter 2026 Earnings Conference Call. Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker for today, Nick Twork, Vice President of Communications. Please go ahead. Nick Twork: Thank you, and welcome to Lucid Group's First Quarter 2026 Earnings Call. Joining me today are Silvio Napoli, incoming CEO; Marc Winterhoff, our Interim CEO; and Taoufiq Boussaid, our CFO. Before handing the call over to Silvio, let me remind you that some of the statements on this call include forward-looking statements under the federal securities laws. These include, without limitation, statements regarding the future financial performance of the company, production and delivery volumes, vehicles and products, studios and service networks, financial and operating outlook and guidance, macroeconomic, geopolitical, policy and industry trends, tariffs and trade policy, company initiatives, leadership changes and other future events. These statements are based on various assumptions, whether or not identified in this communication and on the predictions and expectations of our management as of today. Actual events or results are difficult or impossible to predict and may differ due to a number of risks and uncertainties. We refer you to the cautionary language and the risk factors in our annual report on Form 10-K for the year ended December 31, 2025, subsequent quarterly reports on Form 10-Q, current reports on our Form 8-K and other SEC filings and the forward-looking statements on Page 2 of our quarterly earnings presentation available on the Investor Relations section of our website at ir.lucidmotors.com. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as required by law. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is available in our earnings press release issued earlier this afternoon as well as in the earnings presentation. With that, I'd like to turn the call over to Lucid's incoming CEO, Silvio Napoli. Silvio, please go ahead. Silvio Napoli: Thank you, Nick. Good morning, everyone, and thank you for joining. This is my first earnings call with Lucid and as already had the opportunity to share with many of you, I'm extremely pleased to be here and part of the Lucid team. With not even a month with the company, I'm still at a very early stage, so I'll keep my remarks brief. Let me start by reiterating why I'm here. Lucid brings together state-of-the-art technology, a premium product platform and a unique opportunity to build a strong, enduring position in a transforming industry. And that combination is compelling. That is the reason that brought me here. Today, 3 weeks into the journey, I'm even more convinced that this is the case. In my first days, I've had the opportunity to meet with our teams in Newark, our headquarters and in some of our key markets. In fact, on the very first day, I traveled to visit a factory in Arizona, the heart of Lucid. Last week, I traveled to Saudi Arabia to witness a strong brand recognition in this fast-growing market and to see firsthand the progress of our new factory under construction. As you know, this manufacturing center is an essential part of our commitment to drive scale, profitability and to position Lucid on the world stage. While there, I've also been meeting with employees, shareholders and with local stakeholders. And everywhere I go, I'm focused on listening and beginning to understand where we are strongest and where we need to improve. And what stands out immediately is the incredible domain competence and outstanding motivation of the Lucid team and the strength of our product. At the same time, it's clear that realizing Lucid's full potential will require sharper focus and consistent execution, particularly around simplification, prioritization and speed. My near-term priorities are straightforward: recenter all our activities around our customers, ensure the organization operates with clarity and accountability, focus resources on the highest impact areas and embed a stronger culture of cost and capital discipline across the business. A central objective over time is to build a more self-sufficient company, one that progresses towards funding its own growth. And that means being rigorous in delivering on our commitments and how we allocate capital to few vital priorities. In simple words, this means making clear choices on where to invest and just as important, where not to. At the risk of stating the obvious, I'm not in the position to comment on results reached prior to my joining. Accordingly, I trust you will understand that today I will not comment on any specifics, including the outlook. My goal over the coming weeks is to deepen my understanding of the business so I can engage more fully with you in the future discussions. With that, I'll turn the call over to the team to walk you through the Q1 results. Thank you. Marc Winterhoff: Thank you, Silvio, and good afternoon, everyone. Let me start with the key takeaways. We expanded our Uber partnership to at least 35,000 vehicles, raised over $1 billion in new capital and ended the quarter with a clear cost reduction program underway. The foundation is solid, and we are building on it. We have made meaningful progress on each of these fronts. Among the highlights. First, we expanded our partnership with Uber to provide a minimum of 35,000 robotaxis, up from 20,000 previously announced and increased their investment to $500 million, up from $300 million, improving our visibility into long-term demand and revenue in a new and growing market. Further reflecting the strengthening relationship between our companies, Sachin Kansal, Chief Product Officer at Uber, has been nominated for election to Lucid's Board of Directors. Second, we significantly strengthened our financial position, raising approximately $1.05 billion, including $550 million investment from the Public Investment Fund through a private placement, reaffirming their continued support and long-term commitment to Lucid. We maintained approximately $2 billion of undrawn commitment under the DDTL after drawing $500 million of cash in April, further enhancing our financial flexibility. Pro forma for the capital raise and the DDTL increase, liquidity at quarter end would have been $4.7 billion, providing ample flexibility to continue to support development of our Midsize platform and the continued build-out of M2. Third, we continue to execute to deliver scale and profitability, delivering $282 million in revenue. Despite the unforeseen geopolitical tensions and logistical obstacles in the region during Q1, our M2 construction never stopped, and we continue to install capital equipment and work towards start of production. The plan remains to ramp up Midsize vehicle production in 2027, and we launched an aggressive cost reduction program targeting cost savings across all areas of the organization in all geographies. Let me walk you through the key updates of the execution of our strategy in detail. Following the framework we laid out at our recent Investor Day, the Lucid Air and Gravity continue to anchor our near-term growth. And our focus here remains execution, quality, delivery and customer experience. Operationally, we produced 5,500 vehicles in Q1, up 149% year-over-year. Despite a temporary disruption, which elevated costs, we exited the quarter trending back toward our cost targets. We delivered 3,093 vehicles, which was flat compared to Q1 2025. When Gravity deliveries were temporarily impacted by a supplier issue, we acted quickly, resolved it and resumed deliveries with additional quality controls. As deliveries resumed, we saw improving momentum through the quarter, including the highest March deliveries in Lucid history, up 14% year-over-year. We also experienced a strong rebound in order intake, up 144% in North America in March from February, with Gravity driving the majority of demand. In March, we regained our position among the best-selling EVs in our segments. We also continue to make progress on our partnerships for our international distribution, including the official launch of our first retail partnership in Europe, which allows us to scale more quickly in a capital-efficient way. We expect the delivery trajectory to improve through the year. Near-term demand signals are mixed, but we see tailwinds building into the second half. Apart from seasonality, which historically drives greater deliveries in second half, there are numerous other factors which may deliver a lift, including high gas prices, which tilt demand towards vehicles with more attractive operating costs, competitive dynamics, including exits from the Air and Gravity segments, lease cycles, Lucid software updates, potential tariffs on European imports and potential improvements in macroeconomic and geopolitical conditions. As a result, we continue to expect a back-end weighted delivery profile for 2026, but are confident in the long-term trajectory of demand. Our priority now is consistent and predictable conversion of production into deliveries. Central to our framework to scale and drive profitable growth is the Midsize platform. The Midsize platform brings Lucid's signature range, efficiency and driving experience to a much larger TAM and broader set of customers and is key to unlocking scale, affordability and improved unit economics. At our recent Investor Day, we provided a clearer view of the future product portfolio with the expected pricing starting below $50,000, reinforcing Lucid's entry into a more accessible segment of the market. I'm pleased to be able to share that our BOM cost position remains favorable, still tracking below our initial cost estimates. During the quarter, construction on M2 and installation of capital equipment continued, and we remain on track for production ramp-up of the Midsize in 2027. Turning to our third priority, autonomy. In mid-April, we announced the expansion of our partnerships with Uber, increasing their total investment to $500 million and expanding the planned deployment to at least 35,000 robotaxi vehicles. This represents a meaningful increase in both scale and long-term visibility for the program, which generates a new revenue stream through a partnership approach that enables rapid speed to market in a new and rapidly growing market with minimal CapEx. I'm excited to share that we have met all milestones so far in our joint project with Nuro to provide autonomous Lucid Gravities to Uber for commercial launch by the end of the year, and remaining milestones are on track. We delivered 75 engineering vehicles and testing and mileage accumulation is ongoing in several cities throughout the U.S. Starting in mid-April, Uber and Nuro employees are now able to test the end-to-end customer experience, including ordering a robotaxi within the Uber app and choosing from select destinations for drop-off. Our partners at Nuro have also received approval from the California DMV for driverless testing of the Lucid Gravity in the state, making it one of the only a handful of vehicles that have received such approval. This is a key step in paving the way for launching commercial autonomous operations later this year. Looking forward, we are targeting the following milestones as we track toward commercial robotaxi operations in late 2026. This quarter, Lucid will start our production validation builds, which are intended to reflect our production intent design and some of the key robotaxi features like exterior beaconing for customers, interior cameras and consumer interfaces. This build is expected to be completed in Q3 and allows us to begin more comprehensive end-to-end testing with our partners as well as homologation testing and validation. And following the completion of testing in Q3, we anticipate starting regular production of robotaxi vehicles for commercial sale in early Q4 at M1. As you can see, we are well on our way to achieving our goals with our robotaxi program and commercial launch is on track for late 2026. In parallel, we continue to expand advanced driver assistance features across our consumer vehicles. Over time, we expect these features to become an increasingly important source of recurring revenue with subscription-based offerings being launched starting in 2027. In closing, Q1 highlighted areas where we still need to improve execution, and we are taking clear actions to address them. I'd like to close with a few personal words. It has been a privilege to serve as Interim CEO. We delivered 2 years of consecutive record quarters when it comes to deliveries until the end of 2025. We ramped the Gravity throughout 2025, resulting in a production increase of about 100% last year. We've navigated real headwinds and the team's ability to keep moving through them is something I'm proud of. We sharpened and expanded our strategy with a clear and capital-efficient approach to provide leading autonomy solutions, both for robotaxis and personally owned vehicles. We made meaningful progress across our partnerships, including expanded commitments from both PIF and Uber. I'm confident in this team and Silvio's leadership and in where Lucid is headed. And I'm looking forward to continue to contribute as Chief Operating Officer. With that, let me hand over to Taoufiq. Taoufiq Boussaid: Thank you, Marc. I will walk you through the financial results for the quarter, the structural drivers behind them and how recent actions position us to execute against the framework we laid out at the Investor Day. Q1 was disrupted by a temporary stop sale, but the underlying business held and in March, orders and deliveries rebounded. With roughly similar units delivered and lower regulatory credit sales, revenue grew by approximately 20% year-over-year to $282 million in Q1, driven primarily by mix and pricing effects from Gravity. Let me give you the context that makes this number more useful for thinking about Q2 and the rest of the year. We produced 5,500 vehicles in the quarter but delivered 3,093. This gap reflects a combination of the impact of the temporary Gravity stop sale during which finished vehicles sat in inventory pending validation rather than converting to revenue and segment contraction. A key highlight of the quarter was Uber's expanded vehicle commitment and increased investment in Lucid. It matters for 3 reasons. It improves long-term revenue visibility. It derisks the volume ramp into the Midsize era, and it validates our vehicle platform as the reference point for commercial autonomy deployment. This is a durable addition to the capital structure and to the revenue outlook, not a onetime transaction. Gross margin for the quarter was negative 110.4% versus negative 80.7% in Q4 and negative 97.2% in Q1 a year ago. I want to be precise about the walk because the composition matters more than the headline. Three factors drove the sequential decline, lower delivery volume against a largely fixed manufacturing cost base, underabsorption of fixed cost and large regulatory credit revenue in Q4 that didn't repeat in Q1. Partially offsetting these were IEEPA tariff refunds and the lower inventory write-down versus the prior quarter. These costs were tied directly to the stop sale. With that resolved, they don't carry forward. What remains and what we are focused on is the structural trajectory, which includes, as shared at Investor Day, an average of 50% to 60% reduction in unit cost over the coming years. While we saw unit cost spike during the quarter driven by temporary disruption, it trended back towards the targeted trajectory in March. As volume scale into the second half and with the launch of the Midsize vehicle platform, we expect continued structural improvement in unit economics. I want to be clear, the underlying midterm trajectory of unit cost improvement that we described at Investor Day remains intact, and Q1 does not alter it. Turning to operating expenses. This totaled approximately $678 million for the quarter. R&D was $336 million, down sequentially from $361 million, reflecting program level sequencing even as we continue to fund the Midsize platform and our autonomy stack. SG&A increased $22 million sequentially to $304 million, primarily driven by discrete items, including a prior quarter provision reversal. Excluding these items, underlying SG&A was broadly stable. Year-over-year, SG&A increased $92 million with the comparison impacted by a $35 million noncash benefit in the prior year related to the reversal of stock-based compensation. These numbers also don't yet capture the $500 million in savings expected from our recently announced headcount actions over the next 3 years with the near-term impact most significant. Taken together, our posture on operating expenses is straightforward: protect the investments that build long-term competitive advantage, Midsize, autonomy, software and drive discipline everywhere else. Net loss for the quarter was approximately $1 billion compared to $366 million in the first quarter of 2025. The increase reflects the gross margin dynamics we discussed, continued investment in the business, particularly the Midsize platform and higher SG&A with the year-over-year comparison impacted by a discrete benefit in the prior year. Importantly, a significant portion of the year-over-year change is driven by noncash and nonoperating items, including a $274 million unfavorable change in the fair value of derivative liabilities related to movements in our stock price as well as lower interest income and higher interest expense. And as mentioned, it does not reflect the benefits of our recent headcount actions no more recently launched cost takeout initiatives. Net loss in any quarter reflects noncash and nonoperating items that move significantly with our stock price. The operating loss and cash consumption metrics give a cleaner read on trajectory. Our focus remains on improving operating leverage as we scale volumes and continue to drive cost discipline across the business. Turning to liquidity and capital structure. We ended the quarter with approximately $700 million in cash and cash equivalents and total liquidity of approximately $3.2 billion. Subsequent to quarter end, we executed a series of transactions that strengthened our balance sheet, $200 million of equity investment of common stock from Uber, $300 million from a registered common stock offering and $550 million in convertible preferred stock from PIF. In addition, PIF and Lucid announced an amendment to our delayed draw term loan, providing greater flexibility and approximately $2 billion of available liquidity following a $500 million draw on April 1. Giving effect to the capital raise and DDTL increase, total liquidity would have been approximately $4.7 billion at quarter end. This extends our operating runway into the second half of 2027 and gives us the flexibility to fund Gravity ramp, M2 construction and launch preparation and continued investment in the Midsize program and autonomy stack. On the question of dilution, which I know is on investor minds, the recent financing was structured deliberately to balance liquidity needs against dilution considerations. The convertible preferred structure with PIF reflects that balance as does the sizing of the common equity component. We will continue to evaluate all financing options, including the public markets when the appropriate conditions materialize. And our bias is toward disciplined capital deployment and with opportunistic raises. The strategic stockholder base around this company, anchored by PIF and now meaningfully reinforced by Uber gives us a structural advantage in how we think about capital over the medium term. Now on working capital and inventory. We also expect to see benefits to cash flow driven by improvements to working capital. Inventory stood at approximately $1.47 billion at quarter end, up from approximately $1.1 billion at the prior quarter and elevated by the stop sale buildup. As deliveries normalize through the year and we draw down that inventory, you should expect a higher conversion into cash. Beyond the stop sell normalization, we are tightening production to delivery alignment as an ongoing operating discipline. The new production reporting methodology, which I will cover in a moment, supports that by improving transparency on the conversion step. We took over $200 million in inventory impairments in Q1. Going forward, we expect those to decline. And as inventory reduces through the year, we expect to benefit from impairment releases. Now I mentioned our new production reporting methodology. I want to take a moment on this change to how we report production. Starting this quarter, we are moving our production metric to a process complete definition, meaning we count a vehicle once it has completed the factory gating process, regardless of whether it ships as a complete unit or in a semi-knockdown form. This change better reflects true quarterly production and reduces the volatility that the prior methodology introduced due to shipment logistics. It has no impact on inventory or days on hand reporting, both of which remain based on finished deliverable vehicles. The effect for investors is greater comparability with peers and a cleaner signal on underlying operational cadence. Under the new methodology, the normal auto industry seasonality, Q2 strongest based on working days, Q1 and Q4 softer due to holidays and planned shutdowns will appear more visibly in our reported numbers. Now let me address our outlook and guidance. With Silvio now on board and conducting his review of the business, we are suspending our prior guidance and we provide a full updated outlook at our Q2 earnings call. I want to be clear, this is a governance decision. Near-term demand conditions remain uneven, and we are managing our production cadence accordingly. Our 2026 objective is unchanged. We continue to work to closely align production with demand to avoid excess inventory. We are not constrained on capacity. We are constrained by our own discipline not to build inventory ahead of demand. As market conditions develop, we will scale production accordingly. We have launched a company-wide program to sharpen operational efficiency, reduce costs and concentrate capital on the highest-return opportunities. Q1 cash performance was affected by the stop sell action and the associated inventory reset, which we expect to normalize as we move forward. We are focused on restoring consistent cash generation and building a more durable operating foundation. Production of our first Midsize vehicle is expected to ramp throughout 2027. And our Lucid Gravity robotaxi program in partnership with Uber and Nuro remains on schedule for launch in late 2026. In closing, to put the quarter in perspective, we strengthened our balance sheet, expanded the strategic partnership that improves long-term visibility and are implementing reporting changes that improve transparency. A temporary stop sale in February was resolved, and we have taken action to address the root cause. The Investor Day framework holds. The path to profitability runs through scale from Midsize cost reduction through M2 and improved mix and operating leverage. Q1 does not change that trajectory. It reinforces the importance of disciplined execution, and that is where our focus is. The fundamentals of this business, the technology, the product and the strategic position we have built are intact. We are managing this period with discipline, and we intend to emerge from it in a stronger competitive position. With that, let me turn it over to the operator for your questions. Operator: We will now begin the question-and-answer session by taking questions submitted through the Say Technologies platform. Nick Twork: Our first question comes from [indiscernible]. How does management plan to restore shareholder confidence and address concerns about bankruptcy or potential take-private scenario? Marc Winterhoff: First, I want you to know that we hear your frustration and restoring your confidence is of our utmost importance to us. We are focused on rebuilding your confidence through disciplined execution, transparency and measurable progress against key operational and financial milestones. The business is moving from a period of heavy investment toward a phase where we can begin to leverage those assets at greater scale. We ended 2025 having scaled production, improved unit economics and maintained liquidity. And yes, we've been hit with an unforeseen operational disruption in Q1, which we solved and deliveries and orders have rebounded towards the end of the quarter. We are focused on translating operational progress into more predictable financial profile. To your specific concerns, we do not speculate on market rumors or hypothetical strategic alternatives. Our focus is on executing the plan we laid out, strengthening the company and creating long-term value for our shareholders. Nick Twork: All right. Our next question comes from Robbie S. When is Lucid going to turn a profit? What is the plan? Taoufiq Boussaid: At our Investor Day, we laid out a clear path to profitability. The target is gross margin breakeven in the midterm, building towards the mid-teens by late decade. And on cash flow, we expect to reach positive free cash flow on a similar horizon. The levers to get there are straightforward. It starts with improving fixed cost absorption as volume grow, continuing to bring down bill of material and manufacturing costs, scaling Gravity, launching the Midsize platform and developing higher-margin recurring revenue from software, ADAS and autonomy. On the Midsize platform specifically, this is a meaningful expansion of our addressable market. And importantly, it has been designed from day 1 with cost, scale and manufacturability at its core. Nick Twork: All right. The next question comes from Crystal M. Based on your current cash burn rate, how many quarters of runway does Lucid have without raising additional capital? And what specific milestones must be met before then to avoid dilution? Taoufiq Boussaid: Based on our current cash burn and the recent financing activities we have taken, including the capital raise and the extension of the DDTL, we have funding runway into the second half of 2027. That gives us adequate flexibility to support the Gravity ramp, progress M2 construction and continued targeted investments in both the Midsize platform and our autonomy software. During this period, our focus is on executing the operational milestones that moves us towards breakeven and reduce our reliance on dilutive capital. That means disciplined execution of the Gravity launch, continued manufacturing efficiency gains, measured advancement of M2 aligned with demand and sustained momentum on the Midsize program. At the same time, we are actively pursuing top line diversification through higher-margin software and services particularly around ADAS. On dilution, we are deliberate in how we approach capital raising. We have consistently favored structures that limit near-term dilution and preserve optionality. The use of preferred convertibles being a good example of managing both timing and impact. But ultimately, the strongest answer to dilution is accelerating our path to breakeven because this is what opens up a much broader range of financing alternatives. Nick Twork: That concludes the questions from the Say Technologies platform. Now I'll turn it over to the operator for live questions. Operator: [Operator Instructions] Our first question comes from the line of Michael Ward with Citigroup. Michael Ward: Can you share any volume targets for M2 for 2027? It sounds like it's going to be a gradual type launch throughout the year. And I'm just wondering if the launch is better than expected, does that liquidity take you into 2028? Marc Winterhoff: The targets on the volume, we actually revealed at the Investor Day, and they have not changed. They have not changed. No, no. We are really laser-focused on that ramp. Michael Ward: Okay. And then the second thing I would ask is, as it relates to the robotaxis, are the volume deliveries to Uber depending on them getting certified? Or is there some sort of a schedule for those volume numbers to start to accelerate? Marc Winterhoff: Well, it's basically actually Nuro getting the certification. As we just mentioned, we make very good... Michael Ward: Nuro? Marc Winterhoff: Yes, very good progress on that. So we are on track with this. I mean still we have to have final certification to be able to do this, for instance, when we start in the Bay Area here in California. But so far, even all the development and the certifications are moving as we expected. Operator: Our next question comes from the line of Andrew Percoco with Morgan Stanley. Andrew Percoco: Maybe if I can start out on the free cash flow expectations and just your general commentary around having sufficient liquidity through or at least until the second half of 2027. Can you just maybe help provide a little bit more context around what some of the underlying assumptions are within that? I understand that you guys are pulling the delivery guidance for the year for some governance reasons, but there's anything you can kind of provide in terms of what your underlying assumptions are around demand, that would be super helpful. Taoufiq Boussaid: Andrew, I think that the first answer to your question is that you need to recall that there is a typical seasonality in the company and that we see a significantly improved cash flows during or on the back end of the year. So we shouldn't do any read-through of the cash performance as of Q1 because of 2 specific events. The first one is the stop sales, so which has led to higher cash burn, and we are saying that we will be recovering that. And the second element that you need to take into account is the typical seasonality with a step-up in the sales towards Q3 and Q4, which is helping us to manage the cash burn. So we haven't guided specifically for the cash burn. We have guided for the runway. The statement still remains unchanged. So we will be providing more visibility on that when we reaffirm the guidance in Q2. Andrew Percoco: Okay. Understood. And maybe just my follow-up is just around the commodity cost environment. A lot of your OEM peers are continuing to highlight some pressures there this year and into next year. Can you just maybe provide an update in terms of what you're seeing? I think you guys in the past have said that you've at least hedged or contracted out some of that commodity exposure. But to what extent are you seeing any kind of incremental pressure there? And might that impact that path to profitability? Marc Winterhoff: Actually, right now, that is very limited. I mean yes, there have been increases over the last couple of months on certain raw materials like aluminum. But very recently, for instance, we haven't actually seen an increase. And the other topic is the DRAM, which hits the whole industry. But even that, I mean, is compared to the rest of the BOM cost of the vehicle, a small amount. So we don't see a major impact compared to where we ended end of last year right now. Operator: Our next question comes from the line of Ben Kallo with Baird. Ben Kallo: Just maybe the first one, could you maybe talk more about the sales partnerships, which I guess will be very important, especially as you introduce the Midsize vehicle. You mentioned one in Europe. Marc Winterhoff: Yes. I mean what we're doing there is we're basically extending our approach there from a pure direct-to-consumer model into also partnering either with dealerships in an agency model, for instance, within Germany, so in areas where we already have a D2C network or with importers in new markets that we are entering right now. And we are in the midst of all this process and recently launched the first agent in addition to our D2C outlets in Germany, which gives one day to the other 2 additional cities to cover. And we have numerous LOIs. I think the recent number is like 12 LOIs that are -- we're pushing forward and hopefully get to a contract situation and launch very soon. But it allows us to much faster grow within the areas and the countries we are already in, for instance, in Germany or in the Netherlands or expand into new countries through an importership where you then use existing infrastructure and existing business relationships of those importers to scale much faster. Ben Kallo: Great. And then just on the review, Silvio's review, could you maybe talk, if possible, just about the timing or when we should expect another update? Or is there not a lot of certainty in that for now? Silvio Napoli: Thank you, Ben. I think at the moment, I'm getting to the position. I would say, as of Q2, we should start somehow getting a sense of where we are. Now in terms of by when I'll be ready to give a plan, et cetera, this, I think, is something I'll discuss with the Board at the earliest opportunity. Operator: Our next question comes from the line of Andres Sheppard with Cantor Fitzgerald. Andres Sheppard-Slinger: Congratulations on the quarter and just wanted to maybe take a brief moment to thank Marc and congratulate him on all his great efforts over the past 2 years. First question, I just wanted to clarify on the guidance. So just to be clear, you'll give us an update in Q2 regarding the production guidance as well as the CapEx guidance. But just to be clear as well, the Midsize timing, robotaxi timing and also the medium-term goals, those are all on track and unchanged. Just wanted to clarify. Marc Winterhoff: On the Midsize, this is also what we guided before. So that is also subject to the suspension right now. But I think what is important to understand is that what really counts is the ramp-up in 2027, and that's what remains unchanged. As I said in the beginning, the volumes that we're looking at is unchanged. On the start of production, that's something that we will guide after review with Silvio and the team then by the end of Q2. I also want to point out that when we talk about the start of production, that is less impactful actually than the ramp. I mean we've seen this, you probably remember with the Gravity where we had an SOP, but then we weren't able to ramp as we intended to. And that is something that we definitely absolutely want to avoid, and that's why we want to review everything and make the right decision for the business. Andres Sheppard-Slinger: Wonderful. Okay. That's super helpful. And maybe just as a quick follow-up. I wanted to touch again on the second production facility, the one in Saudi. Just given the geopolitical conflict still going on, do you foresee any bottlenecks or any issues to the time line for the construction there? Or is that on track? Just any update there would be helpful. Marc Winterhoff: Well, so far, I mean, it is going and we have never stopped doing it. I mean we had a few delays when it comes to arrival of equipment to be installed, but our team was able to mitigate that. And so yes, on that as well, we will update at the end of Q2. But so far, we haven't seen any impact. Operator: [Operator Instructions] Our next question comes from the line of James Picariello with BNP Paribas. Thomas Scholl: This is Jake on for James. First, could you give us some idea of the split between the Gravity and Air deliveries in the first quarter? And approximately how many units were pushed from the first quarter into the second by the stop sale? Marc Winterhoff: I mean as we said in the past, so the majority of our deliveries are now the Gravity. We don't give a direct projection on that. I mean on the average selling price, you maybe can reverse engineer the math somehow. When it comes to how many sales are being pushed into the second quarter, that's actually a number that I don't have handy right now. I mean the numbers of deliveries and orders rebounded in March significantly. But that exact number, I don't have handy. Thomas Scholl: All right. And then thinking a little bit longer term, you guys are targeting breakeven free cash by the end of the decade. Right now, your $4.7 billion in liquidity gets you into the second half of 2027. Is there any way to think about your total liquidity need to get from the second half of 2027 until 2029 or 2030? Taoufiq Boussaid: James, you asked us the same question during the Investor Day. I understand that it's a very important point for you. So again, the key data points that we have. So we have a trajectory of how we will be rebuilding the gross margin and how we'll be progressing over the years. So it's a very important data point for you to assess. We have also communicated the details around the different levers for us to reach the breakeven and the rough timing to get there. I think that our historical and future delivery of the key milestones will allow you to do a calibration of what it would mean, and it will help you estimate the additional capital requirement, which is required. Having said that, I would like to reemphasize 2 very important points. So what we have said is that the important component of the cash burn is related to the CapEx in M2. So we have also shared our trajectory in terms of CapEx reduction. We will have a steep decline after 2027. And as a consequence of that, we will see a significant reduction of the cash requirements that will be needed for the plan. So over time, the cash burn profile in itself will have to change and evolve. So again, I'm sharing some of the important data points. We have not historically been in a position to provide the exact quantification. We obviously have a plan. What is really important is the milestones and how we're executing against some of these important targets, milestones, be it in gross margin, be it in terms of reducing the CapEx and accelerating the trajectory to the breakeven. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good 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.
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: 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.
David Cohen: Good morning, everyone. Welcome to Gartner's First Quarter 2026 Earnings Call. I am David Cohen, SVP of Investor Relations. [Operator Instructions] After comments by Gene Hall, Gartner's Chairman and Chief Executive Officer; and Craig Safian, Gartner's Chief Financial Officer, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. This call will include a discussion of first quarter 2026 financial results and Gartner's outlook for 2026 as disclosed in today's earnings release and earnings supplement both posted to our website, investor.gartner.com. On the call, unless stated otherwise, all references to revenue are for adjusted revenue, and all references to EBITDA are for adjusted EBITDA, in each case, excluding the divested operation and with the adjustments as described in our earnings release and supplement. Our contract values and associated growth rates we discuss are based on 2026 foreign exchange rates. All growth rates in Gene's comments are FX neutral, unless stated otherwise. All references to share counts are for fully diluted weighted average share counts, unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward-looking statements. Forward-looking statements confined materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2025 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. I encourage all of you to review the risk factors listed in these documents. Now I will turn the call over to Gartner's Chairman and Chief Executive Officer, Gene Hall. Eugene Hall: Good morning. Thanks for joining us today. First quarter insights, revenue, EBITDA, adjusted EPS and free cash flow were ahead of expectations. New business with enterprise leaders was strong in the first 2 months of the quarter. Due to changes in the geopolitical environment, client decisions slowed somewhat in March. Year-over-year contract value growth accelerated in the first quarter. We were agile in managing expenses, and we continue to deliver unparalleled value to our clients. Gartner's strategy is to guide executives on their journeys to achieve their mission-critical priorities. Our clients are the senior most executives and their teams who lead every major enterprise function. For example, Chief Information Officers and Senior IT leaders, Chief Supply Chain Officers and Heads of Logistics, Chief Financial Officers and Corporate Controllers and more. These roles are enduring regardless of change in the world. The executives who lead these roles will always have priorities that are mission critical to the success of their enterprise, their functions and their personal careers. Priorities that are mission-critical tend to be long, complex journeys. They take time and effort to achieve. Executives want and need help. In today's environment, most executives face information overload. It could be challenging to differentiate authoritative sources from others. Trust is at a premium. Gartner is the best, most trusted source for the help executives need to achieve success. We proactively deliver insights that guide smarter decisions and stronger outcomes on mission-critical priorities. Gartner insights are derived from a vast pool of highly proprietary data. Every year, we hold more than 0.5 million 2-way conversations with more than 80,000 executives across every major function and in every industry. We conduct more than 27,000 briefings with the executives from technology providers. We also leverage data from proprietary surveys, tools, models, benchmarks and more. This gives us a deep understanding of what executives care about most, what's working and what isn't. Our insights are independent and objective. They reflect the latest information and situations our clients are experiencing. They're continually updated and they're available exclusively from Gartner. A large part of our value comes from helping clients see around corners. We help leaders understand issues and approaches they're often not aware of. We help them identify blind spots, prioritize issues and avoid costly mistakes. Our insights are forward-looking. We guide clients on how the world is likely to change and what they should do to thrive in uncertain environments. We deliver unparalleled client value through both digital and human interactions. Clients can access our written insights, budget quadrants, pipe cycles, critical capabilities, ignition guides, toolkits for procurement and governance and many more. In addition, through inquiry, clients can tap into the deep expertise of our world-class analysts that goes beyond what's in our written insights. They can get personalized support from experienced practitioners. Through our conferences, clients can interact in person with analysts, peers and technology providers. They can validate decisions through the Gartner Pure community, which has more than 100,000 executives from nearly every enterprise function. And of course, they can use AskGartner to go even deeper into specific topics. No one else does what we do at our scope and scale. Retention is foundational to our success. Clients who engage frequently with our insights, receive greater value and retain at higher rates. To support more frequent client engagement, we've been transforming our business and technology insights organization and processes. I covered the dimensions of this transformation on last quarter's earnings call. They are impact, volume, timeliness and user experience. Today, I'll give you an update on how we're doing. We measure progress in a number of ways. I'll highlight just a few examples for simplicity's sake. Starting with impact. Our objective is to ensure insights are always on the topics our clients care about most right now. We've increased the number of high-impact documents by 22%. The second dimension is volume. The number of documents in our insights library is up 19%. The third dimension is timeliness. With the accelerating rate of change in the world, we've introduced insights that are published the same day important events occur. The number of these documents has more than doubled. A recent example includes recommendations for heads of software engineering in response to the dramatic change in the security landscape posed by Anthropixs Mythos. And of course, we continue to make improvements on the user experience. For example, we've added the ability to create downloadable PowerPoint presentations directly from within AskGartner. Clients can ask questions in 25 languages, and we continue to integrate additional proprietary data sources. The programs we have underway are driving increased client engagement, which should result in higher retention and additional new business. AI continues to be one of the most requested topics across all the roles we serve. Gartner sits at the nexus of CIOs and IT organizations, business leaders and AI technology providers. This gives us a full proprietary perspective that includes all the major players. We also have comprehensive independent and objective guidance on all aspects of AI, strategy, ROI, ethics and governance, workforce readiness and more. We cover the full range of issues leaders need to address to be successful with AI. And we are world-class users of AI internally. No one is more capable or better positioned to guide leaders along their AI journeys than Gartner. Our people drive our success. I just returned from one of our sales recognition events, where I had the opportunity to spend time with hundreds of our most successful salespeople. They continue to demonstrate unwavering dedication to their clients, and are incredibly excited at the future of our business. In closing, Gartner has an unparalleled and enduring value proposition. We're transforming our business and technology insights organization and processes to deliver even more client value. Clients who engage frequently with our insights receive greater value and retain at higher rates. Gartner is the best source for clients looking to achieve success on their AI journeys, and our teams are incredibly optimistic about our future. Looking ahead to the rest of the year, we expect contract value will accelerate. We will continue to drive strong free cash flow that we can put to use to drive incremental shareholder value, and we expect to deliver adjusted EPS on a compound annual basis above 12% over the next 3 years. With that, I'll hand the call over to our Chief Financial Officer, Craig Safian. Craig Safian: Thank you, Gene, and good morning. First quarter contract value, or CV, grew 1% year-over-year. This was an acceleration from the fourth quarter. Insights revenue, EBITDA, adjusted EPS and free cash flow in the first quarter were better than expected. We are increasing our EBITDA, adjusted EPS and free cash flow guidance for the full year. In the first quarter, we reduced our share count by about 4%, buying back $535 million of stock. And we expect to generate significant free cash flow and have fewer shares outstanding over the course of the next several years. First quarter revenue was $1.5 billion, up 2% year-over-year as reported and down 1% FX neutral. In addition, total contribution margin was 72%, EBITDA was $395 million, up 6% as reported and 1% FX neutral. Adjusted EPS was $3.32, up 11% from Q1 of last year. And free cash flow was $371 million, up 29% year-over-year. Rolling 4-quarter return on invested capital was about 27%. Insights revenue in the quarter grew 3% year-over-year as reported and was about flat FX neutral. First quarter Insights contribution margin was 78%, up about 120 basis points versus last year. Contract value was $5.3 billion at the end of the first quarter, up 1% versus the prior year and an acceleration from year-end. Excluding the U.S. federal government, CV growth was 3.5%. At March 31, we had approximately $114 million of U.S. Federal CV. Q1 is normally a higher-than-average renewal quarter and our seasonally lowest new business quarter. The second quarter is a smaller renewal quarter and a larger new business quarter than Q1. We had more than $200 million in new business in the first quarter as there continues to be considerable interest in Gartner's proprietary unbiased insights. As you recall, new business dollars increase each quarter as we move through the year. Driving engagement is critically important to retention. As Gene discussed, through both digital and human interactions, we understand our clients' mission-critical priorities, and we are proactive in helping them to address those priorities. This ongoing engagement helps drive client success and strong retention. We've increased license user engagement levels over time. In each month of the first quarter, they are higher than they've been in any of the same months over the past 3 years with consistent engagement improvements in both digital and human interactions. Derived from analyzing monthly active users, overall engagement in Q1 was up over 170 basis points compared to the prior year quarter. Digital engagement improved by more than 160 basis points year-over-year. Human interactions increased more than 80 basis points year-over-year through improvements in the usage of analyst inquiries. Global Technology Sales contract value was $4 billion at the end of the first quarter, up versus the prior year. GTS CV for both enterprise leaders and tech vendors increased by more than 3% year-over-year ex Fed. Wallet retention for GTS was 97% for the quarter. Ex Fed, wallet retention was 99%. GTS new business was down 4% compared to last year and down about 3% ex Fed. As Gene noted, new business was tracking ahead of the prior year through February and was affected a bit in March due to the geopolitical environment. Global Business Sales contract value was $1.3 billion at the end of the first quarter, up 3% year-over-year. Ex Fed, GBS CV grew 5%. Growth was led by the sales, supply chain and legal practices. Wallet retention for GBS was 98% for the quarter. GBS new business was down 2% compared to last year. Again, as Gene noted, new business was tracking very favorably through February with some client decision-making slowing down in March. Conferences revenue for the first quarter was $78 million. On a same conference basis, revenue growth was around 9% FX neutral. Contribution margin was 39%. We held 10 destination conferences in the first quarter as planned. Q1 consulting revenue was $119 million compared with $140 million in the year ago period. Consulting contribution margin was 31% in Q1. Labor-based revenue was $90 million. Backlog at March 31 was $201 million. In contract optimization, we had $147 million of revenue on an LTM basis, about flat compared with Q1 of 2025. On a 2-year CAGR basis, revenue was up about [ 15%. ] As you know, our contract optimization revenue is highly variable. EBITDA for the first quarter was $395 million, up 6% from last year as reported and 1% FX neutral. We outperformed expectations in the first quarter through effective expense management and a prudent approach to guidance. Adjusted EPS in Q1 was $3.32, up 11% compared to Q1 last year. We had 70 million shares outstanding in the first quarter. This is an improvement of about 8 million shares or approximately 10% year-over-year. We exited the first quarter with 68 million shares on an unweighted basis. Free cash flow remained strong in the first quarter, up 29% year-over-year. Free cash flow on a rolling 4-quarter basis was $1.3 billion. Adjusting for several items detailed in the earnings supplement, free cash flow was 20% of reported revenue, 79% of adjusted EBITDA and 145% of GAAP net income. At the end of the first quarter, we had about $1.7 billion of cash. This includes about $500 million for running the business and around $1.2 billion available to deploy on behalf of shareholders. Our March 31 debt balance was about $3 billion. Our reported gross debt to trailing 12-month EBITDA was under 2x. We repurchased $535 million of stock during the first quarter, reducing our share count by more than 4%. Last week, the Board increased the buyback authorization to about $1.2 billion. We expect the Board will refresh the amount as needed. We are updating our full year guidance to reflect recent performance and trends, including FX. For Insights revenue in 2026, our guidance reflects Q1 contract value. The revenue outlook is operationally unchanged as we had modeled in the NCVI performance we saw in the quarter. We increased the outlook for FX. For conferences, we are basing our guidance on the 56 in-person destination conferences we have planned for 2026. We have good visibility into current year revenue with the majority of what we've guided already under contract. For consulting, we have reflected a prudent view for the balance of the year based on the Q1 results. Contract optimization has had several very strong years and the business remains highly variable. For 2026, we expect consolidated revenue at or above $6.405 billion, which is updated from last quarter and is FX-neutral growth of 1%. We now expect full year EBITDA at or above $1.545 billion, up $30 million from our prior guidance. This reflects full year margins at or above 24.1%, also up from last quarter. We expect 2026 adjusted EPS at or above $13.25, an increase from last quarter that primarily reflects the increase in the EBITDA outlook and a lower share count. For 2026, we expect free cash flow at or above $1.16 billion. This reflects a conversion from GAAP net income of 137%. Our guidance is based on 69 million fully diluted weighted average shares outstanding, which incorporates the repurchases made through the end of the first quarter. We exited Q1 with about 68 million fully diluted shares. For Q2, we expect EBITDA at or above $425 million. Our profit and cash flow results in Q1 were ahead of expectations, and we've increased the EBITDA, adjusted EPS and free cash flow guidance for 2026. Contract value ex Fed grew 3.5% in the quarter and total CV growth improved from the fourth quarter of 2025. We are positioned to accelerate CV growth in 2026, and we expect to deliver adjusted EPS on a compound basis above 12% over the next 3 years. We'll also deploy our capital on stock repurchases, which will lower the share count over time and on strategic value-enhancing tuck-in M&A. With that, I'll turn the call back over to the operator, and we'll be happy to take your questions. Operator? Operator: [Operator Instructions] First question comes from the line of Jeff Mueller with Baird. Jeffrey Meuler: Yes. So it makes sense that the selling environment would be tougher in March. Can you give any perspective on if that has started to convert in April, the things that kind of slipped out of March by some indications, maybe the environment is getting a little bit better. And then just any differentiation on new business sales trends between new logo versus upselling in the base, which I think had been lagging? Eugene Hall: Okay. Jeff, it's Gene. I'll get started. So in terms of -- again, as I said in my prepared remarks, we had really good January and February, March decision slowed down. By and large, clients and prospects told us, we still want to buy from you, but we can't make a decision today. To your point, as a role to April, we're seeing many of those deals actually closed where clients delayed in March, but actually be came through and closed in April. Craig Safian: And then Jeff, on the mix between new logo and existing client growth, the what we saw through the first 2 months where we did see nice year-over-year growth that was broad-based across both new logo and with existing clients. And then with the challenging -- more challenging environment in March, it was also broad-based across new logo and existing clients. And so as we continue to see some of those things, as Gene just mentioned, come through, it's a mix of new logo growth and growth with existing accounts. Jeffrey Meuler: Got it. And then on -- good to hear overall engagement of both in person and digital. Just anything you can give us on the evolution of AskGartner, either usage statistics or any meaningful changes in, I guess, user experience, either from something new with the foundational models that underpin it or any adjustments that you've been making to it? Eugene Hall: Yes. So as Gartner is just one part of our value proposition. Obviously, there's a whole lot of other pieces of Gartner like people buy. We have a start and it's important we will make it competitive. The client usage continues to increase and the amount of repeat client usage continues to increase. And so we're seeing increasing engagement with AskGartner. We do a new release every 2 weeks. Clients -- we have a telesales you want a button on there and they do, plus we do market research. And every 2 weeks, we have new releases. As Craig and I mentioned in our remarks, we've added sort of support for 25 languages. You can now create PowerPoints directly from the from with AskGartner, and there's all series of other kinds of upgrades. And we're upgrading every 2 weeks, so it's too numerous to actually talk about over the course of the quarter. Craig Safian: Yes. And Jeff, it's a common -- those upgrades are a combination of feature enhancements and incremental proprietary data that the tool is going from as well. And so we are very quickly rolling out new features, as Gene mentioned, every 2 weeks, and we'll continue to do that as there's demand for it, as the models improve and as our clients give us feedback on what they want from the tool. Operator: Our next question is from Faiza Alwy with Deutsche Bank. Faiza Alwy: Yes. I wanted to follow up on the geopolitics comment. And I'm curious if you could give us some regional color. Did you see slowing sort of across the board? Or if there was any differentiation regionally? I'm assuming maybe you saw some slower decision-making outside the U.S., but just would love some additional color there. Eugene Hall: So there was a slowdown across the board by by industry. It was worse in some places than others. So if you could imagine, with airlines and transportation companies, it was worse in financial institutions, for example. And. It was worse in the country's directly impact such as the Gulf Cooperation Council countries than it was in places that were less impacted like in the U.S. Faiza Alwy: Okay. Understood. And then I'm curious if you're reevaluating any pricing strategies, maybe just thinking about the overall price point just as virtually every company is trying to figure out AI, but maybe they can't afford your services at -- or your subscription at the price point that it is. So just curious how you're thinking about any changes around pricing. Eugene Hall: We talk to our clients a lot about price and understand how they think about pricing, weather we're priced appropriately or not. And the feedback we get from our clients today is that their pricing is very appropriate where they expect. They're very comfortable with it. We have different price points. So if a client -- we have our community guide the products was the highest price than our guided products and our advisory products and our reference products. And when clients have price sensitivity, we give them an option they can go for a different level of service. So same content with a different level of service with those, and that's what clients choose to do. As we look within each of those groups, we feel like we're priced at property. Again, we talk we bench work with clients to see if that's the case. We also look when clients say I'm not going to buy a price is a major issue. And price is not the issue, it's potentially, if they're not going to buy, the CFO said, we have to cut all expenses 50%. And so whether we're at 4 points or 8 points higher isn't tissue at all, it's kind of a broader cost cutting that organization is going through. Craig Safian: And Faiza, it's important to remember who we're targeting and focusing on from a go-to-market perspective and a strategy perspective, which is really the top of the org chart and each of the functions that we serve. And so again, we are going in and targeting the CIO, the Chief Information Officer or the CFO or the Chief Supply Chain Officer, et cetera, and their teams. And so we're starting at the top of the pyramid where there tends to be much less price sensitivity around those things. And again, we have, as Gene articulated, an architecture where if there is price sensitivity, there are offerings that we can provide to the clients if they're not willing to sign up for a guided product. They'll go to adviser product. If they're not willing to go with the adviser product to go with the reference pros and so on. Eugene Hall: And the other thing to think about is that, it's a very small part of their budget. So even our smallest clients would have $100 million of revenue. And so individual executive likes to have a $10 million budget and their service card might be $100,000 out of that $10 million budget. So the -- whether it's $100,000 or $104,000 isn't big issue, it's about the value they had. Operator: Our next question comes from the line of Andrew Nicholas with William Blair. Andrew Nicholas: I wanted to ask on the U.S. federal government business, in particular. I think it was 250 basis point headwind in the quarter. Maybe a little bit more than I would have thought because I thought you had lapped most of that. Can you just level set for us where you sit in that kind of renewal cycle post kind of some of the government approach changes early last year? And maybe at what point would you expect that headwind to alleviate as we move through '26? Craig Safian: Andrew, it's Craig. On the U.S. Federal side, as we talked about through most of last year, the DOGE impacts, we really didn't start feeling them until March of last year. And so Jan and Feb were, let's just say, semi normal month from a selling environment perspective. And then when the DOGE activities kicked in, that was really March and April and then forward from there. And so I think as we roll into Q2, we really do start to then lap the significant challenges that we had there. From a U.S. federal CV perspective, we exited Q1 with about $114 million worth of U.S. federal CV spread across GTS and GBS, the bulk of that actually in GBS -- GTS, I'm sorry, the bulk of that in GTS, I should say. What we saw from a renewal rate perspective in the quarter was obviously a significant improvement on a year-over-year basis. we are renewing a lot of business. We are writing new business, but we really do start to lap the significant challenges starting in Q2 with the U.S. Fed clients. Andrew Nicholas: Perfect. Very helpful. And then for my follow-up, I just kind of want to go to the headcount growth. I think you had outlined low single-digit growth for GTS and in mid-singles for GBS as kind of your targets for this year. Is that still the case? And any color you could give us on the cadence of the slope of that ramp would be great. Craig Safian: Yes, Andrew. So the target still remain. You articulated them correctly. That is what we are gunning for over the course of the year. We typically do see a little bit of a step back in the numbers in Q1 just because we do a lot of our promotions in the first quarter from a frontline seller to manager. It does -- we try and get ahead of that from a hiring perspective, but it often does take a little bit of time to catch up on some of that hiring. As we noted, the hiring we're doing in 2026 is really about 2027 and 2028 and beyond. We've got ample capacity in 2026 to deliver on that CV acceleration that we've been talking about. The other note I'd mentioned is we are hiring more incremental new business developers than AEs. It's not one or the other, but we definitely have a bias towards hiring incremental BDs right now as opposed to hiring incremental account managers going forward. And that's baked into those year-end numbers you talked about, and that's all baked into our OpEx guide as well. Operator: Our next question comes from Jason Haas with Wells Fargo. Jason Haas: I'm curious for the ex federal government CV, did that accelerate from the 3.5% that you reported for 1Q in April? And how are you expecting that to trend through the year? Do you expect an acceleration in ex federal government CV growth? Craig Safian: Jason, it's Craig. So we're not giving any stats on April yet. We've barely closed the books on that. So I can't quite comment on that. I think the answer on the CV trend is we expect the whole CV base to accelerate over the course of 2026 and then continuing onward, which would be a combo of the U.S. Fed recovery and then also the non-U.S. Fed base accelerating as well. Jason Haas: Okay. Great. And then do your pre-existing long-term targets still hold? Or are those no longer in place? Craig Safian: That's a great question. So there's no change to the medium-term objectives. I would say those objectives really do apply to a normal operating environment, and you can still find those medium-term objectives in our Gartner 101 presentation, which is on the Investor Relations site. I do think as we think about where we are today, and both Gene and I articulated this, we expect in the current environment for our CV growth to accelerate. We're committed to driving compound annual growth at or above 12% to our EPS number. We continue to have a great and very large addressable market and a compelling client value proposition. Those 2 things are unchanged. We've rebaselined the EBITDA margin now based on our updated guidance of 24.1%, and we would expect our margins moving forward over the medium term to expand from there. And then obviously, with the great free cash flow engine that we have, we expect to generate a significant amount of free cash flow. As CV growth accelerates, we'll get more towards the higher end of our typical conversion levels of net income to free cash flow or EBITDA to the free cash flow. And obviously, we'll have all that free cash flow to put to use on behalf of our shareholders as well. Operator: Our next question, it comes from Surinder Thind with Jefferies. Surinder Thind: When looking ahead, when we think about the acceleration in CV growth, any color there where you can maybe disaggregate the drivers? Is the expectation maybe a bit more new business development? Or should we expect wallet retention to continue to improve and maybe a bit more upsell at existing clients? And then maybe I assume it's also underpinned by just normalized annual price increases that are normally embedded. Eugene Hall: The reason we're expecting CV to accelerate is, we're expecting -- so we're making a bunch of changes in visit we talked about. So Craig talked about how we're driving engagement, and we expect engagement to go up. And in fact, engagement has been rising just as Craig outlined. We expect that to continue because we've got a big focus on it. When we get more engagement, we expect that our retention will increase as well. And so our CV retention will increase with our increased engagement. In addition to that, we're making a bunch of changes in BTI and I articulated all the changes we're making. And we expect that's going to lead to more and better insights that again leads to even more engagement and also help support new business growth. And so as we look forward through the year, we expect that our new business growth and our retention both improving as we go through the year. Based on all the changes we're making and the leading indicators, which Craig and I talked about that indicates that these things are causing increased engagement with our clients, which ultimately should result in more more business, more retention and higher growth. Craig Safian: And Surinder, you should see that come through, obviously, in the CV growth rate but also in the lot retention number, which is the measure of net growth from clients that stay with us. And so the more that clients stay with us, the more new business opportunities we have with that. The more that they stay with us, the more opportunity we have to expand the relationship and so on and so on. So we would expect the CV acceleration to read through both, obviously, to the top line CV growth, but also on the [indiscernible] retention line as well as we will be selling more new business to existing clients over that time frame as well. Surinder Thind: Got it. And then just on the management of costs, can you maybe provide a bit more color there just relative to your expectations versus just kind of normally being conservative when you initially guide, just any update where maybe there's a bit more benefits from even if it's AI or just other things that are going on and the opportunity for any potential structural change in the outlook for margins at this point? Or is it just one small step forward each quarter at this point? Craig Safian: Yes, it's a great question, Surinder. So as we look at the OpEx number, I'd say a couple of things. So 1 is we're obviously very focused on making sure that we're delivering on our commitments from both EBITDA profitability perspective and a free cash flow perspective, and we are tuning our OpEx model as we go. The second thing I'd say is we're very focused on making sure that we keep our run rates aligned with our CV growth expectations, which are essentially what drive future revenue growth. And again, we want to make sure that we not only deliver strong earnings and free cash flow in current year, but that we're setting ourselves up to continue to do that into the future. Third thing I'd say is we are always focused on continuous innovation and continuous improvement and driving operational efficiencies through the business. we can leverage AI for some of that. We can leverage other technologies for other things. We can improve processes as well, and we will continue to do that. And then the fourth thing I'd say is we're doing all that while also making sure we're making investments that we believe will drive future medium- and long-term growth for us. And so under the covers, we'll be investing in places and we may be harvesting benefits and efficiencies in other places so that we can reinvest in the places that we know drive value. So we know we need analysts in our business and technology insights business. We're not going to stop investing there. We know adding QBH drives long-term growth we're going to be adding there. It may mean that we are driving significant operational efficiencies in other areas, and we'll continue to do that so that we free up the appropriate resources to invest in the things that we believe will drive long-term growth. Operator: Our next question comes from Josh Chan with UBS. Joshua Chan: I guess, as we think about sort of the selling environment on a year-over-year basis, it's obvious that in Q1 it was worse than last year. But as we go into Q2, you lap Liberation Day in the prior year, et cetera. How do you think about the year-over-year selling environment comparison as we kind of go through the rest of the year? Eugene Hall: So what I'd say, Josh, is it kind of depends on how the world evolves. As I sit here today, as I mentioned, a lot of the deals that clients in March said, let's wait and revisit this in a couple of weeks actually closed in April. In fact, one of the things that will an interesting is that a lot of these companies think airline shipping companies, other energy-intensive industries and geographies. And basically that normally a functional leader like a CIO, which have [indiscernible] decision, when times are tough, what will happen is I'll say we're going to escalate that maybe even the CEO depending on how have the decision with the company. And so we saw more of those kind of escalations. They got escalated, they said you the values there and then they closed. It just took longer to close. And so I think that what happens in the rest of the year is going to depend on kind of what the environment looks like. Craig Safian: The one thing I'd add, Josh, though, is we pride ourselves on adapting. And so yes, the environment is crazy and continues to remain a little bit chaotic, but we're making sure that our sales and our service people are armed with the right tools, contracts back up, et cetera, to be successful in any sort of environment. We'll see how the world evolves, but we're going to make sure that we keep -- we're going to make sure that sales and service from our perspective are armed to deliver value, highlight the value for prospects, continue to deliver the value for clients, et cetera, moving forward. Eugene Hall: Yes. To build on Craig's point, one of the things that I talked about both the last and on this call is we made more change in the last year than we've ever opened Gartner in terms of increasing value to clients. And those -- the [indiscernible] speed farm is going to be tough going forward. And we want to make sure we're resilient in that environment. And I think what we're seeing here is that selling cycles are longer, but they're still buying. And so that's kind of what we saw happen in March. So again, January and February, actually, we had great very robust new business growth that is Greg and I talked about. Decisions then took longer starting March. And so I think there are good signs overall for what the selling environment, but it's probably going to take longer decision cycles if the environment continues to have the uncertainty in does today. Joshua Chan: Sure. Sure. That makes a lot of sense. And I appreciate the color there. And then maybe on your EPS CAGR outlook, can you talk about the drivers behind that 12%? I mean, obviously, revenue growth, at least currently is not probably at that level, so you're going to need some margins or buybacks. Can you just talk about what contributes to that level of EPS growth? Craig Safian: Yes, Josh, happy to. So again, over a 3-year period, where our expectation is CV growth will reaccelerate, which will drive future revenue growth. As we noted earlier and have noted for a while, we're committed delivering strong margins and margin expansion over time as well. And then obviously, on top of that, we have significant capital to put to use on behalf of our shareholders. Over the last 12 months, I think we've bought back like $2.4 billion, $2.5 billion worth of stock, reducing the share count significantly. And obviously, our intention will be to continue to do that, and that's obviously, one of the bigger drivers to that EPS CAGR as well. Operator: Our next question comes from Toni Kaplan with Morgan Stanley. Toni Kaplan: Gene, just a strategic question. A number of the other info services firms have been starting to use large LLM providers as like an additional distribution channel. And I know your business is different being more weighted towards advisory, but you still have proprietary data that people want. And so I was wondering if -- is there a sort of broader data distribution that you would consider? Or do you think that, that dilutes your value proposition too much because, obviously, a lot of the value isn't talking to the research analysts and the network and everything like that? Eugene Hall: Yes. Toni, I think you're at the nail on the head, which is what clients rule out us for is for us to proactively go to them and say, given your mission-critical priorities, here's the things you should be worried about, things you may not have thought of, things that you might be surprised by. And so what they rely on us for is to be very proactive as opposed to wait and answer a question. So that's not our plan to work with us. That's not our value proposition. And then in addition to that, there's a big human component, and so we have our executive partners, which can function as advisers to our clients, with our analysts, which are world-class experts. And while they publish, obviously, a lot of content and insights, the kind of rule that we have, that's only like 5% of what they know that could be active and valuable. It's our -- when they do it an inquiry with our analysts, clients get access to that other 95% that actually isn't -- we have a vast content library, but again, that's only a portion of what our analysts actually know. And then we have our conferences that they go to which clients get to interact live, we have peer interactive. And so if you think about it, the -- that piece of it is just a small piece of our overall value proposition. And so we want to focus on what clients want from us the most value, which is a whole tell us what I'm not seeing, help you see around corners, tell how world is going to evolve so that I can be successful in this uncertain environment. And that doesn't really fit well with feeding into an LLM that is really answering questions, which is we have as Gartner. That's not the majority of what we do that's all my clients [indiscernible]. Toni Kaplan: Yes. That makes sense. I wanted to shift to consulting. I know both the labor-based and contract optimization was down a bit year-over-year, and contract optimization can be volatile and the comp was tough. But on the labor base, any -- do you just attribute the slowdown there to just normal macro slowdown? You mentioned a lot that March was slower, or do you think that there's something structurally worse going on right now given AI? Eugene Hall: Yes. Toni, I don't think if there's something structurally worse. And again, this is a different behavior than we saw in Q4. So it's not something that has been kind of a long-term thing. I think basically, it's what you said, which is the American environment changed a lot, and that affects both the -- it effective differently, both the labor part of the business as well as CFC -- FX CFC, because if a client was going to buy something, and they postpone that decision. We get paid when they buy something. And so with CFC, you had both a very tough comp, as Greg went through. In addition, if clients, and we saw this, say, "Hey, I was going to do that big software deal. I've decided to push the decision of for a month," that puts us getting paid off as well. Operator: Our next question comes from the line of George Tong with Goldman Sachs. Keen Fai Tong: I wanted to take a step back on CV performance. Can you provide more details on the reasons why CV growth is coming below historical levels in the high single, low double-digit range? Specifically, can you outline how much of the slower growth is due to tariff affected industries, government spending, the macro environment and other potential unnamed factors? Craig Safian: George. So I think; one, the first obvious headwind is the U.S. federal business, which we talked about in detail and is a 250-basis-point headwind in the quarter alone. That business, we believe, is rebaselined. Our current assumptions are for it to be flat in 2026 and grow from there going forward. And so that is a temporary headwind. Obviously, we've been dealing with it for since really March of last year, but that certainly remains the most dominant headwind that we have going forward, or that we have had that have impacted the results and should write itself going forward. In terms of the other areas, I think it's a combination of -- the macro has been really, really, really challenging over the last several quarters and whether it's the DOGE impacts that started in March of last year, josh referred to Liberation Day, which I remember was April 2 of last year to lots of other geopolitical challenges over the course of the year to where we sit today. I think the short answer is, we fully expect our CV growth rate to accelerate over the course of 2026. As I mentioned earlier, we expect it to increase across the board. So yes, we expect the U.S. Fed growth rate improve as we lap some of the more challenging areas, but we also expect the non-U.S. Fed business to accelerate. That includes tariff affected and nontariff affected, that includes software companies and IT services companies, et cetera. And so I think from where we sit today, we expect CD growth to reaccelerate over the course of 2026. And again, we believe the combination of that CV growth reacceleration, our operating expense management, our ability to invest in the right areas that drive and support future growth will allow us to drive significant free cash flow and earnings per share growing at a 12% compound a growth rate. Keen Fai Tong: Got it. That's helpful. And then following up on the CV growth expectations. So you noted acceleration over the course of the year. What are your CV growth expectations exiting the year? And do you expect the improvement to be relatively linear from 1Q? Craig Safian: So we don't guide to CV growth, George, and we're going to continue to not do that. What I can tell you is we expect to accelerate over the course of this year. I did note in my prepared remarks that Q1 happens to be a heavy renewal quarter and our smallest new business quarter. As we roll into Q2 and Q3, we see increasing levels of new business dollars, and we just have less CV that is up for renewal in those quarters. And so that certainly helps. CV though, is a rolling 4-quarter number. And so we expect to continue to see improvements across the year. And we don't believe that we're done at the end of this year. But right now, we're focused on making sure we're driving engagement, making sure we're delivering on all the transformations Gene outlined, and all those things should lead to CV growth accelerating over the course of this year. And again, that should benefit us as we roll forward in 2027 and beyond. Operator: Our next question is from Jeff Silber with BMO Capital Markets. Jeffrey Silber: You mentioned a couple of times your goal to have compounded adjusted EPS growth, I think, over -- at or above 12% over the next 3 years. What kind of headcount growth do you need to get there both from a sales force perspective and an analyst perspective? Craig Safian: Yes, Jeff. I mean, I think it's all baked into our ability to drive the margin to get the desired results that give us that 12% CAGR. Our operating model with QBH or sales headcount, is unchanged, so grow at roughly [ 300 ] bps slower than what we're growing or our expectation around CV growth. That framework still -- we're still operating with that framework going forward. And on the analyst side, it's really demand-driven. And because we've got such a good finger on the pulse of what our clients are most interested in, we're actually able to predict where that demand is and make sure that we've got the appropriate analyst levels and analyst count to handle that. And so it's not a specific number. And we'll do all that while also driving efficiency and improvement across the rest of the business. And so the combination of those three things is what gives us the [indiscernible] the operating result levers to get to that 12% EPS CAGR over time. Jeffrey Silber: Okay. That's great. And just to clarify something, the base here that you're talking about, is that 2025 or 2026? Craig Safian: That base year is 2025. It's a great question. Thanks for clarifying that, Jeff. Operator: And our next question is from Jasper Bibb with Truist Securities. Jasper Bibb: Again, I know you don't guide for CV, but I think you've mentioned on a couple of earlier questions that CV should reaccelerate those total and ex fed through the year and helpful context to around the seasonal payments of renewals and new business. I just wanted to clarify, like, do you think we see a reacceleration in the ex Fed CV growth number next quarter? Or maybe are we still a little bit further away from the acceleration in ex Fed CV? Craig Safian: Jasper, so all I'll tell you without getting into too many details is we expect the CV growth rate to accelerate over the course of the year. We're not going to get into the details of expectations by segment of business per quarter. We'll tell you all about that when we report our Q2 results. but the headline should be that we expect CV growth to accelerate. Jeffrey Silber: Got it. And then maybe following up on the early pricing question. I think there was some speculation intra-quarter if sales teams have made offers to sign on below the normal $50,000 ASP for new LUs, I guess can you just clear up kind of in response to that, like if there's anything that's changed on your approach to pricing or offering discounts? Craig Safian: Yes. So we do not offer discounts. Our pricing strategy and focus and mechanics are unchanged. We put through our normal annual price increase on November 1 of last year. That has been in place since then. And we are -- despite -- well, of course, you may be hearing, I could assure you we are not -- there's no change in our discounting posture or philosophy. Operator: And our next question comes from Scott Wurtzel with Wolfe Research. Scott Wurtzel: Just one for me. Just wondering if you can talk a little bit about just the puts and takes on client versus wallet retention in the quarter with client retention ticking down a little bit, but wallet retention ticking up. Just wondering if there was any incremental, I guess, price realization or upsells that drove that expanding wallet retention will client ticked down? Craig Safian: Yes. Scott, great question. I think it's largely a function of those are both rolling 4 quarter numbers. In the first quarter, as I noted earlier, it's our smallest new business dollar quarter, which implies it's our smallest new business enterprise quarter as well. And so we added new enterprises there. But as always, there is a lot of churn within our small tech clients. That's -- it's improved over the last couple of years, but that's still the most significant impact on that client retention number. And because those are typically lower spending clients, does not have as big of an impact on the wallet retention number. With wallet also, we are lapping some of the challenges from last year, but also we are holding on to more dollars than we have historical -- than we did last year as well. And so I think that's manifesting itself in that modest improvement in the wallet retention number as well. Operator: And our next question is from Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: I just wanted to focus on the tech vendor conversation. I was wondering if you could provide any color on that front, how is that trending? And also, if you could talk about some of the challenges that software companies are facing, has that influence any of that conversation? Craig Safian: So on the tech vendor side, I think what we're seeing is consistent with what we saw in the last couple of quarters where our business with software companies and services companies is growing at high single-digit growth rate, and other elements of our tech vendor client universe are not performing as well, most notably, I'd say, hardware providers and telecom carriers, which we classify as part of that that tech community. But the bulk of our CV sits with software and services and the software and services business continues to grow at high single-digit growth rates. Ashish Sabadra: That's very helpful color. And then on the quota-bearing headcount, I just wanted to follow up on the prior comment around hiring more incremental new business developers than account managers. How should we think about the overall QDH growth going forward, but also how do we think about that mix shift going forward and influence on productivity. Craig Safian: Yes, it's a great question. So again, it's not binary 1 or the other. We're obviously -- as we are successful with our BD and they sell more new business, we do need to hire account managers to catch that business, retain it and going forward. But what we've been doing is driving productivity and efficiency out of our account management teams by adding incremental clients to their territories. And again, we've studied this really intently to make sure that we're not going too far on any of those, and we feel really good about the productivity gains we've driven there. And what that does is free up incremental for us to invest in business developers. And when you think about the size of the addressable market opportunity, the fact that there are roughly 140,000 enterprises that we think to be clients of Gartner, and we're currently doing business with 14,000 of them, the way we capture that market -- that incremental market is really through business developer investment. It's a slow shift in mix, though, because, yes, the bias is towards hiring incremental BDs, but it's not like a student body left or a student right. And so that mix will move moderately over time but we think it's the right combination of being able to manage, retain and grow the existing client base while having the right-sized engine to be the new logo addition and incremented growth going forward as well. So we think we've got the right mix there going forward, and we'll continue to update our investors and the investment community on that incremental investment and the mix of that investment going forward. Eugene Hall: The vast majority of our sales force today is account executives. They do a lot of new business growth as well, and we expect that to continue. And even given with our accounts executives under the covers, we changed territories all the time. So if there's less demand in the U.S. federal government, then what we'll do is reduce territories there and move those over to places where there's higher demand. And so there's more change when under the covers to actually improve productivity as well. Operator: And our last question comes from Wahid Amin with Bank of America. Wahid Amin: Just one for me. On an earlier remark, you talked about sometimes clients and budgets are tight, maybe the selling environment is much longer than expected. How would you classify the customers that want to keep a Gartner subscription, but may consider down selling or using a different user experience? Are you seeing a huge influx of that? Eugene Hall: It's a great question. So in all times, we have some clients that are upgrading some upgrading, there are some that are downgrading clients. Because while there's more concern today because of so much political things. Any time there's always clients, sometimes they are doing well and some that aren't. And so to your point, we often see clients that are doing really well, so they want to upgrade and get more value. They try it at lower price points and more value. Similarly, we often see clients say, "Hey, my CFO says cut half expenses, I won't keep Gartner, so let's go with the lower service level unless we still keep partner. Those things actually tend to balance out. And so we see about as many upgrades as downgrades, which is why we don't talk about it that much because it actually -- the 2 balance out almost exactly. Operator: Ladies and gentlemen, this will conclude the Q&A session. I will pass it back to Gene Hall for closing comments. Eugene Hall: Well, here's what I'd like to take away from today's discussion. Gartner has an unparalleled and enduring value proposition. We're the best, most trusted source for executives who want to succeed with their mission-critical priorities. We're transforming our business and technology insights organization processes to deliver even more client value. Clients engage ritually with our insights receive greater value and retain higher weights. Gartner is the best source for clients looking to achieve success upon their AI journeys. We are incredibly optimistic about our future. And looking ahead to the rest of the year, we expect contract value will accelerate. We will continue to grow our strong free cash flow that we can put to use to drive incremental shareholder value. And we expect to deliver adjusted EPS on a compound annual basis above 12% over the next 3 years. Thanks for joining us today, and I look forward to updating you again next quarter. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
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.