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Operator: Good day, everyone. Welcome to Kosmos Energy First Quarter 2026 Conference Call. As a reminder, today's call is being recorded at this time. I would like to turn the call over to Jamie Buckland, Vice President of Investor Relations. Jamie Buckland: Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our first quarter 2026 earnings release. This release and the slide presentation to accompany today's call are available on the Investors page of our website. Joining me on the call today to go through the materials are Andrew Inglis, Chairman and CEO; and Neal Shah, CFO. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note in this presentation and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website. And at this time, I will turn the call over to Andrew. Andrew Inglis: Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our first quarter 2026 results call. I'll start today's call by reviewing progress against the four goals for 2026 that we laid out with our full year results in March. I'd then like to spend some time talking about the current market dynamics and how Kosmos is uniquely positioned to benefit by being priced of premium benchmarks before focusing on each business unit and the operational progress we've made year-to-date. I'll then hand over to Neal to talk about the financials before I wrap up with closing remarks. We'll then open up the call for Q&A. Starting on Slide 3. Two months ago, we released our full year 2025 results, and I focused on four key objectives for Kosmos in 2026, which is shown on the slide. This year, we are targeting production growth from our core assets, continued progress in cost reduction with a particular focus this year on operating costs having made significant reductions in CapEx and overhead last year, meaningful net debt reduction, and advancement of our high-quality growth portfolio with minimal CapEx this year. I'm pleased to say we're making excellent progress against all these goals. Compared to the same quarter last year, production is up around 25% and absolute operating costs are down around 22%. In addition, we've reduced net debt by around 7% from year-end 2025. I'll go into more detail on each as we move through the slides. Starting with production on Slide 4. With the ramp-up of GTA and Jubilee production, we posted record quarterly production in the first quarter, as can be seen on the top chart on the slide. This record production has come at a time when we've seen record high pricing and also record high differentials. The dark blue line on the left axis of the bottom chart shows Dated Brent pricing year-to-date. Dated Brent is the benchmark used for pricing our Ghana cargoes. In times of market tightness, Dated Brent can trade at a premium to Brent futures, reflecting the strong near-term demand for the barrels in the physical market. Dated Brent hit an all-time record high in early April and has continued to trade at a premium to Brent futures. Also worth noting are the differentials we see on those barrels. The barrels we sell typically include a differential, which is either a discount or premium to the benchmark such as Dated Brent. That discount or premium depends on factors such as crude quality, location and regional market conditions. The red line on the chart shows an illustrative differential for West African crude year-to-date. Through January and February, those differentials were slightly negative but started to grow through March into April as the Middle East conflict continued. While the data on the chart is illustrative, we've seen those differentials rise to a meaningful premium through this period of market tightness. Turning to Slide 5. This slide looks at how our barrels are priced in different geographies and the time lag we see between production and revenue. Our three core production hubs, Ghana, GTA and the Gulf of America, are all priced of premium benchmarks. In fact, across the U.S. E&P sector, Kosmos is one of the most exposed companies to international prices as a percentage of sales. Around 50% of our production, primarily Ghana is priced off Dated Brent, the dark blue line on the chart. Since the Middle East conflict broke out, the Dated Brent premium over WTI has more than tripled. Ghana cargos are typically priced off an average 5- or 10-day period before or after the cargo loading. Our March Jubilee cargo had already been hedged, so we didn't benefit from the rise in prices seen in the month, but we do have a growing amount of unhedged production as we move through the year that should capture additional upside. In the Gulf of America, we sell most of our barrels against Heavy Louisiana Sweet or HLS, which generally trades at a small premium to WTI, the red line on the chart. Production in the Gulf is typically sold on a 1-month trailing average, so we'll start to see the benefits of higher prices as we move into the second quarter. On GTA, the gas production is priced off ICE Brent, the green line on the chart, which also generally trades at a premium to U.S. prices. Production is priced at a 3-month historical average price, so we'll start to see the full benefit of higher prices in 2Q. However, the lag effect also means we'll continue to see firmer GTA pricing beyond any future price declines. So, in summary, we've seen record production, record prices and record differentials. But given the pricing structure we have in our various sales contracts, we won't see the benefit of higher prices that started in late 1Q until the second and third quarters. I'd now like to talk about each of our business units in more detail. Turning to Slide 6, which looks at the progress we're making in Ghana. This is a slide we've used for the last two quarters and has been updated for recent activity. As the operator discussed in our full year results last week, the 2025-'26 drilling campaign continues to perform strongly. The J74 well came online in early 2026, followed by the J75 well at the end of the quarter. Both wells are performing in line with expectations and gross Jubilee production for the first quarter was around 70,000 barrels of oil per day. The plots on the chart have been updated slightly since last quarter and reflect the partnership's decision to enhance efficiency by drilling a series of wells before completing them simultaneously. This means there will be a gap in new production additions during the second quarter with 2Q production expected in the mid-70s. Three new producer wells are due online in relatively quick succession in June and July as previously communicated by the operator. Each of these wells has been drilled and completion operations start shortly. Based on the logging results, these 3 wells should drive a material uplift in production of around 20,000 barrels of oil per day gross in aggregate before some natural decline is expected in the fourth quarter as the drilling campaign concludes. Year-to-date performance and the upcoming activity set continues to support the upper end of our 70,000 to 80,000 barrels a day gross oil production guidance for Jubilee this year. Looking at the bottom right of the slide, we're pleased to see the operator announce their refinancing earlier in the year, which was accompanied by a commitment to drill in '27 and '28. The partnership is aligned on securing a rig for a program of up to 10 wells, with drilling targeted to restart around mid-2027. As we previously discussed, this regular drilling program is key to sustaining the improved performance we've seen from Jubilee this year. Also worth noting is the value creation from the current drilling program, with well paybacks in a mid-cycle price environment of around six months, and a lot shorter in the current environment. Turning to Slide 7. GTA has continued to perform strongly this year, with around 2.85 million tons per annum, equivalent gross produced in the first quarter, in excess of the floating LNG nameplate capacity of 2.7 million tons per annum. 9.5 gross LNG cargos were lifted during the quarter, in line with guidance. For the year ahead, our gross cargo guidance of 32 to 36 LNG cargos is unchanged. One gross condensate cargo was lifted in the quarter, which went to BP. The second and third condensate cargos later in the year, including one this quarter, are expected to be assigned to Kosmos and the NOCs. Due to some seasonality that we flagged in the past, daily LNG production is expected to fall from higher winter levels as the sea and air temperatures warm up through the summer months. Volumes should then pick up again later in the year as cooler temperatures return. On costs, we remain on track to deliver our 50% reduction target for OpEx per mmbtu this year and see scope for further cost reductions in 2027. On the Phase 1 expansion, which should materially enhance project returns, there's been good progress on the ground in Senegal year-to-date. Approximately 50% of the land has been cleared for the onshore section of the northern segment of the pipeline, with the remaining 50% expected to be done this quarter. This northern segment will connect to the 250-megawatt Gandon power station being built near Saint-Louis. The onshore pipelines are expected to be exported from China in May, with arrival in Senegal scheduled around middle of the year. The West African Development Bank has been appointed as the mandated lead arranger to raise approximately $270 million to finance the infrastructure. The Board of Directors of the bank approved at the end of March, the first tranche of around $90 million. Turning to Slide 8. Production in our Gulf of America business unit for the first quarter was in line with expectations, with continued solid performance from our Odd Job and Kodiak fields. In April, the Winterfell-2 well was shut in pending a future intervention, and full-year Gulf of America production is now expected toward the lower end of our guidance. On the growth side of the business, we were pleased to take the final investment decision on the Kosmos-operated Tiberius project alongside our 50-50 partner, Oxy. With an expected development cost of around $10 per barrel and operating and transport costs of around $20 per barrel for the first phase, this is a low-cost, high-margin development. The first phase will be a single well tie-back that will produce into Oxy's nearby Lucius platform. CapEx is planned largely to be spent in 2027 and 2028, with first oil expected in the second half of 2028. We have commenced a farm-out process to reduce our working interest to around a third. As mentioned with our full-year results in March, we recently entered into a strategic exploration alliance with Shell in the Gulf of America and exchanged interests across multiple blocks across the North Pole play, which houses several material exploration prospects. We expect to drill the first of these, Tiberius, in the first half of 2027. Tiberius is targeting around 200 million barrels of oil equivalent gross resource. I'll now turn to Neal to take you through the financials. Neal Shah: Thanks, Andy. Turning now to Slide 9, which looks at the financials for the first quarter in detail. Production year-on-year was around 25% higher, driven by both GTA ramp-up and new wells coming online at Jubilee, resulting in record production of 75,000 BOE per day for the quarter. Realized price was slightly lower year-on-year, reflecting the changing production mix, with more gas volumes from GTA. As Andy mentioned earlier, due to the lag in pricing, we don't expect to see the full benefit of higher prices until the second and third quarters this year. OpEx of just under $20 per BOE was in line with our guidance and marks a decrease year-on-year of 47%, reflecting the continued progress we're making this year in reducing costs, having focused on CapEx ad overheads last year. Most of the other line items came in within our previous guidance ranges, except tax, which was impacted by the large mark-to-market change in derivatives. Looking ahead to Q2, we have included the usual guidance in the appendix to the slides. Q2 production is expected to be slightly lower than 1Q, largely due to seasonality on GTA we talked about, and lower Gulf of America production on the back of Winterfell-2. In Ghana, we're guiding to three to four cargos in Q2, which also includes a TEN cargo in the quarter. This also drives higher Q2 OpEx as a result of the accrued TEN FPSO lease payments prior to the agreement to purchase the vessel. OpEx is expected to normalize in the third and fourth quarters. One jubilee cargo is expected at the very end of the quarter, which is the reason for the three or four cargo range for Q2. For the full year, guidance remains unchanged. One area that we continue to monitor is tax as we incorporate higher oil prices into our actuals, and we will provide further updates through the year. Just a reminder that we only pay cash tax in Ghana at the moment, given net operating losses in the US and cost recovery at GTA. Turning to Slide 10. We've had a busy start to the year on the financing side, completing several important objectives that set us up well for the year ahead. In January, we completed a $350 million Nordic bond and repurchased $250 million of 2027 notes with the proceeds. We also paid down $100 million of the bank facility with the remainder of the proceeds. In March, we took advantage of the strong share price rally this year to raise around $200 million of equity, which was also used to accelerate our debt paydown. The company exited the quarter, with around $500 million of liquidity, post these transactions, with additional liquidity to be created from the EG sale and from free cash flow going forward. On the reserve-based lending bank facility, the banks approved a covenant waiver through the mid-year, and we are already seeing leverage drop sharply on the back of the equity raise and strong operational progress. We expect this to continue as we start to see the full benefits of higher production and higher pricing coming in over the coming months. The lending banks have also approved the sale of our producing assets in Equatorial Guinea, which we expect to close around the middle of the year, with the proceeds used to further pay down the facility. On hedging, we continue to be active, targeting more hedges in 2027 at higher floors and higher ceilings than our existing 2027 hedges. Last week, we were pleased to see Fitch upgrade our corporate rating to B-, a positive move to reflect the progress we have been making so far in 2026, but discussion ongoing with S&P as well. Despite the higher pricing we have seen so far in 2026, our capital allocation for the year remains unchanged. We remain focused on increasing our financial resilience and utilizing our free cash flow to accelerate debt paydown with deleveraging. With that, I will hand it over to Andy Andrew Inglis: Thanks, Neal. Turning now to Slide 11 to conclude today's presentation. As I said in my opening remarks, we have four key objectives for 2026: grow production, lower costs, reduce debt, and advance our quality growth portfolio with minimal CapEx in 2026. This slide highlights the targets we've set against those objectives. On production, we now expect to complete the sale of EG around the middle of the year, making that adjustment for the second half, we still feel we can achieve production growth close to that 15% target. On costs, based on year-to-date performance so far, we feel confident that we can meet and potentially exceed our 20% operating cost reduction target. So, in aggregate, we're on track to deliver a reduction of around 35% in operating cost for BOE year-on-year. On debt with the EG sale, equity raise and higher pricing, we're doubling our debt reduction target from 10% to around 20% by year-end and have made significant progress already. And we are advancing our growth portfolio with Tiberius FID, progress on GTA expansion and the exploration alliance with Shell in the Gulf of America. We look forward to delivering on these objectives to support long-term value creation for our investors. Thank you. And I'd now like to turn the call over to the operator to open the session for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Charles Meade with Johnson Rice. Charles Meade: I want to ask the first question on Jubilee. The OBN seismic shoot that you guys did at the end of the year last year, is that, are the results or insights from that, are those already informing this '26 drilling program? Or is that something where we're really going to see more of the benefit in the '27, '28 program? Andrew Inglis: Charles, no, the OBN is really going to have an impact on the '27, '28 program, yes. So, the '26 program, though, is leveraging the 4D NAS that we shot ahead of the OBN. And so, we've got the product from that, and that did influence the selection of the '26 drilling program, which is going well. So, I think the objective then is to build the results from the early products of the OBN and then the later products of the OBN into the '27 program, match that with the NAS. And so, you're getting a continuous upgrade in the quality of the seismic and therefore, the opportunity to derisk the future drilling programs. And as I said in my remarks, the, we're seeing the impact of a continuous drilling program on Jubilee in '26. Carrying that through into '27, '28 is clearly important. And these are economically good wells. In my remarks, I talked about a 6-month payback in a mid-cycle price environment. Clearly, we're doing better than that. So, a lot of, as you know, there's a lot of opportunity in Jubilee and the seismic upgrade through the 4D NAS and then the follow-on of the OBN is continuing to make a difference. Charles Meade: Right. That's what I was aiming to get at. And then the follow-up on Tiberius in the Gulf of Mexico. I think you have a point in your slide that you expect a farm-out proceeds to cover any '26 CapEx? That maybe in broad strokes, it seems to me that the farm-out proceeds to you will be on the same order of magnitude as what the dry hole cost, proportion of dry hole cost would have been. And so, it doesn't look like there's a big premium that you're looking for on this farm-out, but maybe you can tell me if that's the right read. Andrew Inglis: Yes. Obviously, I don't want to disadvantage ourselves in the process that's ongoing at the moment. Look, I think it's a great time to be in the farm-out. We clearly have a project that's underway. FID has been taken, strong alignment between ourselves and Oxy. And therefore, there's been significant interest in the opportunity. So, we're obviously looking to maximize the farm-out proceeds, and we may do a little better than we'd anticipated. Operator: And your next question comes from the line of Lydia Gould with Goldman Sachs. Lydia Gould: You target a 20% reduction in operating costs this year. Could you expand on some of the key strategic initiatives that are in place across the portfolio to meet this target, particularly at GTA? Andrew Inglis: Yes. Lydia, yes, look, it's a combination. And I think I want to emphasize the fact that we've used the opportunity to high-grade the portfolio and address some of our highest cost assets. And those highest cost assets were in Equatorial Guinea, where clearly, we are selling the asset. And also, it was on TEN because of the lease cost on the FPSO. So those, both of those are making a significant difference. Then on top of that, there is an ongoing reduction in GTA. There's an absolute reduction in operating costs as you take out some of the additional costs that were in last year because of the start-up process. But clearly, you're seeing a big impact on the per BOE number or MMBTU number because of the ramp-up in production. But the combination of those sort of ongoing processes and the asset high-grading delivers that 20% reduction in absolute operating costs that we're seeing in '26 versus '25. And I think there's ongoing opportunity. We haven't stopped there. I think there's ongoing opportunity in Ghana in '27 as you look at the ability then to sort of, you'll have the operator than having the operations of both FPSO. I think there's opportunity to create synergies there. And then there are different operating models in Mauritania and Senegal for GTA, which are being explored by BP. So, I think this is just the start of a journey of continuing to drive cost down and the big step in '26 comes from that underlying activity, but also the high grading of the portfolio. Operator: And your next question comes from the line of David Round with Stifel. David Round: A key theme in recent years has been around this cost reduction and capping CapEx actually specifically. I'm just interested in whether this commodity backdrop makes that harder to achieve and how you're thinking more generally about CapEx in '27 and beyond, please? Andrew Inglis: Yes. David, yes, good questions. We go through price cycles, yes. And I think you do see some tightening. I think it's very hard to predict today what the long-term effect is on the inflationary environment. I think it's too early to say that. But I think the things that we're doing now are just not about smarter procurement, if you like. It's about underlying changes in how you do activity. And I think that means that the cost reductions that we're targeting and the ongoing cost reductions we would target in Ghana and GTA are about changing the way you do business. Therefore, the activity changes, therefore, the cost comes down. So I think those are enduring. I don't think they sort of are simply about the procurement cycle you're in. And clearly, the high grading of the portfolio is independent of that. So I think that opportunity remains, and I don't think the magnitude may vary a little, but the opportunity remains. And then I think on CapEx, we've clearly targeted CapEx hard in both '25, '26. I think that we're focused again on ensuring that we're being very, very rigorous about the allocation of capital. I think we've been clear around the growth opportunities that we're pursuing. It is Tiberius. It is the GTA expansion, trailblazer exploration. In a timing sense of the spend flowing through, I think Tiberius is relatively low spend in '27. The biggest spend is really in '28, probably if it's $100 million on Tiberius net, it's probably 1/3, 2/3 in that sense. The GTA, it's probably overall for Phase 1 plus there really isn't any expenditure on the facilities. You can move from 430 to 630 production through the FPSO with no spend. Therefore, it's about the additional wells that will sustain the portfolio beyond the end of the decade. And therefore, the spend for that will really be in '28, '29. So we take all of that, I don't think you'll see a significant, it's early days yet, but the capital for '27 is going to be pretty tight, maybe a little higher than today for '26, maybe around $400 million. But underneath that, you've got the sustaining CapEx that we're spending today in drilling in Ghana and the Gulf. That will sort of be pretty similar in '27. And then you've got a little more growth CapEx. But that allows you then though to continue to move forward these high-quality prospects. David Round: Okay. That's very clear. A very quick follow-up then, actually, if I might. Can you just remind us if there is a specific leverage target, please? Andrew Inglis: I'll pass it over to Neal. Neal Shah: Yes. And so David, we've always talked about getting to sort of 1.5x in a normalized oil price environment. And again, I think what you'll see this year is we said we'll take off around 20% of the debt. We started this year at $3 billion, which we get into sort of the mid-2s. And then with higher oil prices, you can continue to flex that down. And then the EBITDAX of the business jumps quite largely. So last year, we did something in the $500 million to $600 million range, which should be north of $1 billion this year in terms of where we get to. And so that leverage ratio compresses quite quickly. But I think, again, from, Andy said, the capital has continued to stay a bit tight in '27, but that allows us to advance the projects and at the same time, generate free cash flow to pay down the debt. So the goal is to do both at the same time and get leverage, what we'd like to see is sort of the net debt fall below $2 billion first in terms of a milestone. So we'll make a good dent in that progress this year. And again, we're seeking to sort of maximize every dollar in terms of debt paydown. Operator: [Operator Instructions] And our next question comes from the line of Bob Brackett with Bernstein Research. Bob Brackett: I'd like to talk a bit about Senegal and GTA. You mentioned the Phase 1 plus, which I expect is a 300 million cubic feet a day gas pipeline that brings ultimately molecules up to that Gandon Power Station. Can you talk about how to think about the unit economics? You mentioned it's reducing OpEx. How do we think about the volume? Is it your 27%? And how do we think about price? Andrew Inglis: Yes, Bob, good questions. I think that the first thing is it's somewhere that the expansion of GTA, I sort of think about it being sort of $200 million rather than $300 million, yes. You can go from today, we're pushing about 430 million standard cubic feet through the FPSO. You can get to 630 million without actually spending any capital on it. If you want to go up higher than that, there is an increased demand. There are incremental spend on capital to get there, relatively modest. But if you think about the first wave being sort of $200 million, the first piece of that domestically, piece of it will be used in Mauritania, a piece of it will be used in Senegal. The first piece in Senegal will flow to the Gandon Power Station, as you said. Then the RGS, which is the pipeline company in Senegal, we'll continue to build that pipeline south from Saint-Louis to Dakar. There's actually four phases. You can look online and see what they're doing and ultimately allows you to build out that sort of power station infrastructure down towards Dakar. So it's going to be a phased process that will start to build through '27, '28, '29 and to the end of the decade. So actually, in terms of unit economics, the capital spend for us is very low, sort of de minimis is the way to think about it for that 200 million standard cubic feet. There is capital spend to sustain the profile at the back end of the decade, which is associated with more wells to keep you at that sort of 630 million, 650 million standard cubic feet. But ultimately, it is a very low-cost expansion. And therefore, the margin that you're getting from it is high. You're almost, from an operating cost perspective, there is no FLNG lease. And therefore, your margin on those versus the export is higher. Neal Shah: And again, I think the easy way to think about it, Bob, is just, again, we've said sort of Phase I OpEx is around sort of $5 to $6 per MMBTU. That's fixed cost essentially. The costs don't change with the expansion on the operating cost. And therefore, you get a sort of multiplying effect in terms of reducing that to sort of the sub four type area. So again, I think every incremental molecule helps bring down that breakeven even faster. Andrew Inglis: And then for the domestic gas, you're not paying the FLNG cost, which is part of that sort of $4. Bob Brackett: A follow-up, please. I'm seeing mixed messages in the press around Yakaar-Teranga. Can you give us an update on what's happening there? Andrew Inglis: Yes. I don't think it's sort of mixed messages, Bob. I think that the key message out of it is around the importance of domestic gas for Senegal's growth, relatively large population, growing population, reducing the cost of power, electricity is a key priority for the government. And therefore, their goal is to ensure that they can advance those projects and do that in a timely way. But at Kosmos, it was about saying we want to invest in GTA. We want to enable that source of domestic gas to be our focus. And therefore, we did relinquish Yakaar-Teranga. The government has picked it up. Petrosen, I believe, will lead that development, and it will be another source of gas for the country. But given the scale of the economic growth, I think, that can be seen basically from population growth, then it needs all the gas that the country needs all the gas that it can take. Mauritania is a slightly smaller population. So the pull for domestic gas will be lower and can be fed by GTA. So this is good for both countries. ?And clearly world events today are all about how do you create security and affordability and the extension now of both GTA and Yakaar-Teranga will enable Senegal to achieve those goals and we are fully supportive of it. Operator: Our next question comes from the line of Mark Wilson with Jefferies. Mark Wilson: I got a question from an investor to start off with. It's probably more for Neal. Just wondering about the derivative cash losses in Q1 and what we should expect in 2026. And obviously, this speaks to this maximizing of deleverage. Andrew Inglis: So yes, the cash derivatives, Neal? Neal Shah: Yes. Yes, it's clearly a large mark-to-market change. And again, we came into the year with an asset of about $50 million, and then there's a $250 million market-to-market loss, just given we got payout in January and February on those hedges, and then clearly, the market moved. From a cash perspective, it cost us about $30 million and not a ton of cash, actually. But clearly, the implied shift in the forward curve has an impact on the derivative side. Our hedges are largely sort of yes, focused on sort of the first half of this year. So we talked about we have 6 million barrels left for the rest of the year, about half of that matures in Q2, and the other half over the second half of the year. And so there's a larger exposure in Q2 and then sort of less, and then that sort of steps down again in Q3 and Q4. And so again, it will ultimately depend on sort of what the actual realized Dated Brent price is. But we feel okay with our exposure on '26 and have really been working on adding some additional downside protection in '27. And so again, I think we're good in terms of where we are. We'll have more physical exposure from a pricing perspective, as we talked about in the call in 2Q. And so there's a bigger, call it, unhedged volume that we'll be able to realize in the second quarter, with more physical volume being sold versus the hedges. So again, I think Q2 is sort of shaping up quite nicely, and then the hedging exposure comes down at least more access to the upside from the physical sale. Mark Wilson: Okay. And Andy, a slightly bigger picture question. I'm just wondering what contact you've had with, if at all, with the new management setup at BP, given Tortue is performing so well. I'm just wondering if there's any commentary you could give there. Andrew Inglis: No. Look, things change, and they don't change. For us, clearly, and for BP, ensuring that GTA runs both efficiently from a cost perspective, but equally well from a production perspective. We deliver on the cargo forecast, et cetera. So that's all going well, Mark. And we sort of see no change. Clearly, Meg, the new CEO, has significant experience of Senegal from her experience at Woodside with Sangomar. So as we bring, it's great, somebody who has deep industry knowledge and very specific knowledge actually of the, of that Pacific geography. So the real sort of answer is, as you'd expect is that we're focused on the operational side at the moment and ensuring that we deliver on the targets we've set. And actually, that's exactly what we're doing. Mark Wilson: Okay. And then just one last point, just checking on the Jubilee guidance. Is there any scheduled downtime on the vessel in the rest of the year, maintenance or anything? Andrew Inglis: I think you've asked that question before. You do like that question. The honest answer is no, okay? So none in '26 and '27. I think that's what the operator told you last time. So, no, the answer is no scheduled maintenance. And look, if I go to the essence of your question, right, are we comfortable with our guidance? The answer is sort of yes. And why? As we started the year, we were unclear about forecasting yet. But of course, now, sort of getting close to the middle of May, you have a lot of extra information. The field started the year at, we ended the year '25, at 57,000 barrels of oil per day. We've stabilized it. We've added two wells. It's delivered at 70,000 barrels of oil per day. year-to-date. So very strong performance with two wells added. We have now drilled three wells. We have all of the logging information, pressure data, et cetera. So, we're confident we're adding wells that will add an additional 20,000. So, you built a base of 70,000, and you add another 20,000. And you can see on our plot, which we showed in the presentation, the resulting production profile. So, I think to the point really, to add is, look, we're further down the process. We've clearly delivered strongly in the first 4 or 5 months of the year. We've got additional data from the wells that we've drilled, and we're now starting that completion process. So, I think as every month goes by, we're more confident that we can deliver on the guidance that we've given with no shutdowns in '26. Operator: And your next question comes from the line of Stella Cridge with Barclays. Stella Cridge: I just wondered if I could ask you for a bit more color or comments on how you're thinking about the debt profile going forward. You have taken many actions year-to-date to address many different parts of the capital structure. The RBL discussions, you said, are going to commence around a bit midyear. Could you give us any sense of what you think the lenders will be looking for there? Would it be sort of the visibility around Jubilee, for instance, in this supportive oil price environment? Neal Shah: No, I'm happy to do that. And then if you have another question, we can follow up. But yes, like I said, we've been quite busy on the financing front. And again, what we wanted to accomplish is pretty clear in terms of clearing out the near-term maturities and bolstering liquidity, sort of stabilizing the ratings and continuing to reduce the absolute amount of debt. So again, as I say, we're well on track to deliver all of that. We've cleared the '26s and most of the '27s at this point. Liquidity is $500 million and growing. And we're on our way down on the debt paydown to get into the low 2s from a leverage standpoint by the end of the year. So again, I think all that's on track. And that leaves sort of, as you referenced, sort of the next financing objective for us to work on is the extension of the RBL. Just to recall, this would be the sixth RBL extension that we've gone through or that I've been through here at Kosmos. And so again, normally, it's a 7-year facility, it doesn't amortize for 3 years, and then you end up extending the tenure every 3 years. And so, I met with the banks recently. Again, they continue to be really supportive. They are looking for Jubilee performance to continue to improve. But again, I think that process is well underway, as Andy noted. And otherwise, again, I think they want to see the same thing that our creditors and equity holders want to see, which is for us to bring the leverage down. So as we execute the plan, again, I feel pretty good about going into that process in the middle of this year. And then that will basically kick, the ultimate maturity from sort of '29 to sort of the 32, 33 time frame. Stella Cridge: And just want to ask, I thought it was very interesting in the report that they were talking about potentially you're trying to get down into the $800 million to refinance a smaller amount in the RBL. Is that something you could comment on as well? Neal Shah: Yes. And so we exited 1Q with about $1 billion drawn on the facility, with the EG proceeds coming in around $150-ish million free cash flow. Again, I think naturally, the RBL will reduce into that range from a drawn perspective. From a total facility size perspective, though, which is what will generally extend, I wouldn't expect much change. We were at a sort of $1.3 billion facility size. We probably don't need that much just because we're bringing down, the absolute amount of both bonds and bank within the capital structure. So maybe it's 1.25-ish in terms of facility size. I wouldn't expect the size to change dramatically, although again, I think the bigger focus on our side is just reducing, the actual drawn amount. Operator: Since there are no further questions at this time, I would like to bring the call to a close. Thanks to everyone for joining today. You may disconnect your lines at this time.
Hannah Jeffrey: [ Audio Gap ] projections, expectations, predictions are forward-looking statements, whether because of new information, future events or developments or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 5, 2026. And with that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer. Waleed Hassanein: Thank you so much, Hannah. Good afternoon, everyone, and welcome to TransMedics First Quarter 2026 Earnings Call. As always, joining me today is Gerardo Hernandez, our Chief Financial Officer. Our vision has been bold -- our vision has always been bold and growth-oriented. Since inception, TransMedics has been relentless in our pursuit to transform organ transplant therapy by increasing utilization of donor organs and improving the clinical outcomes of transplant patients throughout -- through technology and service innovation and by disrupting the status quo. To accomplish this, we've been deliberate yet aggressive in our strategic investment in growth initiatives. We believe that 2026 is a critical and transformational year that stands to cement TransMedics' near, mid- and long-term growth trajectories and global market position. In the U.S., we're actively engaged in growing our heart and lung franchises by advancing our enhanced heart and DENOVO lung programs to expand our clinical evidence to support broader adoption. In parallel, we are also completing the development of the OCS Kidney platform using our Gen 3.0 platform. Our OCS Kidney platform will enable us to access the largest segment of the global transplant market, which is kidney transplantation. This will happen for the first time in the history of TransMedics. We strongly believe that once regulatory approvals are in hand, OCS Kidney will drive significant growth for our abdominal franchise. And we're not stopping here. We're also actively engaged in upgrading our heart, lung and liver devices to Gen 3.0 platform, which will enable us to gain significant future operating leverage and increase clinical adoption of the OCS platform in these critical organ transplant segments. Our growth initiatives also now go beyond warm perfusion. We recently unveiled the TransMedics Controlled Hypothermic Organ Preservation System, or CHOPS. CHOPS is designed to expand our product offering to cover new segments of the transplant market best served with cold static storage. And finally, our growth initiatives now extend beyond the U.S. to important international markets. In Europe, we are undertaking a bold initiative to replicate the NOP clinical service and transplant logistics model to catalyze European OCS adoption and potentially expand our total addressable market. I will provide details on each of these exciting initiatives on today's call. As you can see from our ongoing growth initiatives, our focus remains on long-term value creation with continued investment across each pillar of our growth strategy. Specifically, I want to highlight that this is a strategic and proactive decision, and we fully expect that our financial performance over the next several quarters will reflect these necessary investments in people, infrastructure and technology development as we capitalize on the opportunities in front of us. Based on everything we know today, we are highly encouraged and inspired by what's ahead for TransMedics. We are committed to executing our plan to drive significant growth for TransMedics and for the global transplant markets broadly. As I've stated repeatedly, I truly believe that TransMedics remain in the early innings of our long-term growth opportunity. I'm excited to report that our first quarter performance that reflects a strong start for 2026. Despite the broader volatility and the transient negative impact of the U.S. Transplant Modernization Act on OPO performance and the overall donor numbers in the U.S., we managed to deliver a solid quarter to start the year. Here are the key operational highlights for 1Q 2026. Total revenue for 1Q '26 was $174 million, representing approximately 21% growth year-over-year and approximately 8% sequential growth from 4Q 2025. U.S. transplant product revenue grew by 22% year-over-year and approximately 7% sequentially to $102 million, while OUS transplant revenue grew approximately 39% year-over-year and approximately 17% sequentially to $6 million. We delivered an adjusted operating profit of approximately $18.1 million in Q1, representing approximately 10.4% of total revenue in 1Q while continuing to make significant investment to fuel our growth. Importantly, we ended 1Q with $462 million of cash and cash equivalents, while making substantial investments in the growth initiatives above. TransMedics transplant logistics services revenue for 1Q 2026 was approximately $32 million, up from $26.1 million in 1Q 2025, representing approximately 22% year-over-year growth and up from $28.6 million in 4Q 2025, representing approximately 12% sequential growth. In Q1, we maintained coverage of approximately 82% of our NOP mission requiring air transport. We expect to maintain 22 operational aircraft in the U.S. fleet throughout 2026. As we discussed, we are now focused on maximizing the utilization of our U.S. fleet and improving efficiency and capacity by double shifting a portion of the fleet to meet the growing clinical demand. We will detail key findings from this initiative at year-end. Overall, we are pleased by our strong performance that was fueled by growing OCS case volume, increased clinical adoption. Importantly, we're also encouraged that we achieved these results without any contribution of ENHANCE and DENOVO clinical programs due to the enrollment timing of these important programs. Speaking of ENHANCE and DENOVO, let me shift to provide a detailed update on our strategic initiative to unlock these 2 important clinical programs to help us grow our cardiothoracic franchise in the U.S. At the recent ISHLT conference in April, we unveiled our TransMedics Controlled Hypothermic Organ Preservation System, or CHOPS. CHOPS is a true active cooling device designed to provide a variety of temperature conditions ranging from 4 to 12 degrees Celsius to meet the users' need. This represents a unique -- unique and optimized approach that we believe is superior to the Styrofoam boxes that are used for cold static storage of organs today. These boxes use face-changing material or cold packs that are extremely variable and are nearly impossible to control or adjust preservation temperatures with. CHOPS will be an FDA-registered and regulated organ preservation device made by TransMedics and will serve as the control arm of the ENHANCE and DENOVO programs once the IDE supplement is approved. This would be a huge strategic win for TransMedics as it stands to help avoid any reliance on competitive products as we conduct our important clinical programs for heart and lungs. We plan to file the IDE supplement within the next few weeks, and we expect this to be approved and implemented in early Q3 2026. Importantly, in parallel to these clinical programs, we fully intend to file a 510(k) application to clear this device for commercial use in the U.S. Once cleared by FDA, CHOPS would expand TransMedics' platform of organ preservation technologies and enable us to address shorter preservation times for organs that may be best suited for cold storage. As we highlighted on our last call, the panic and confusion caused by the competitive reaction to our clinical programs somewhat delayed our ENHANCE Part B and DENOVO enrollment. We not only addressed this challenge by introducing CHOPS, but we are now going after the niche market with superior, more validated cooling technology and our best-in-class NOP infrastructure. Said differently, beyond facilitating our trial enrollment, we are expanding our product portfolio to ensure that TransMedics is well positioned to provide transplant programs around the world with the widest range of products to meet their clinical needs across the full spectrum of organ transplantation. We plan to accomplish this goal based on best-in-class technologies, best-in-class clinical services and with the most cost-efficient and reliable logistical network in the market. Now let me move to share the -- share update on our strategic initiatives that we see as an important catalyst for our business. First is the National Transplant Modernization Act. In March 2026, TransMedics submitted our detailed comments on CMS proposed rule-making language for the new U.S. transplant system to advance U.S. transplant modernization initiatives. Our public comments focused on several key topics. First, on the system-wide benefits of allowing new entities with proper national infrastructure that are not current OPOs to participate in the new transplant ecosystem by becoming either a multiregional or even national OPOs. This is to help maximize U.S. donor organ utilization for transplants. Importantly, it will provide a mechanism for fair competition and maximize transparency while driving cost efficiency to the U.S. transplant ecosystem. Second, on the benefit of using FDA-approved portable perfusion technologies to maximize donor organ utilization in the U.S. while limiting the use of unproven, fairly expensive and potentially detrimental techniques that were organically introduced into the market over the last several years. Third, on the benefits of enabling for-profit entities to participate so long as they are strictly adhering to all performance metrics proposed by CMS and complying with all the financial disclosure requirements. Fourth, on the benefits of allowing new entities to bid to replace as many of the decommissioned OPO regions as they can support. And finally, we highlighted the potential benefits of requiring these new participating entities to provide technology and clinical support services to existing OPOs. Again, our proposal was to -- it was intended to maximize the benefits to the U.S. transplant ecosystem in general and not just to one entity. If CMS agrees with this direction, TransMedics fully intend to submit bids for donor service areas or DSAs associated with decommissioned OPOs later this year or early next. Again, our goal is to drive efficiency, transparency, maximize patient access and organ utilization for transplant in the U.S. The second growth initiative is NOP Europe. As we've discussed, we are actively building infrastructure and staffing in Italy across 4 hubs to cover Northern and Southern Italy. Meanwhile, we're actively engaged and applying for Italian organ transplant air and ground logistics tenders for a few Italian regions as we speak. We are also actively engaged with Benelux region stakeholders to establish NOP in the Netherlands and Belgium to create NOP hubs that are staffed by a dedicated clinical TransMedic staff to manage OCS cases in these countries. Another important element to our European NOP strategy is to create the first ever dedicated and integrated transplant logistics network to cover the broad European transplant logistics demand. On that front, we announced last week that we've entered into a definitive agreement with a major European charter flight operator, PAD Aviation, or PAD to partner on creating this European air logistics network. PAD is located in Paderborn, Germany, which is within 1- to 2-hour distance from all the major transplant hubs across Europe. Importantly, they are operating a fleet of same model aircraft that we use in our U.S. fleet, Embraer Phenom 300Es. Simply stated, we're planning to replicate the success of the U.S. NOP in Europe to potentially expand or nearly double our total addressable market, increase OCS clinical adoption and provide efficient and dedicated transplant logistics service across Europe using our dedicated logistics network. The third growth initiative is OCS kidney program. As we discussed on the last call, this represents our next frontier with kidney expected to be the first organ to launch on our OCS Gen 3.0 technology platform. Gen 3.0 technology platform will comprise a completely redesigned form factor, hardware, software and perfusion system that is smaller, lighter with lower part count, purposely designed for automated assembly and high reliability. Currently, the development program is running at full speed, and we hope to introduce the final design device and potentially working device at the American Transplant Congress in Boston in late June. Looking ahead, we are still targeting early 2027 for our U.S. IDE submission for our kidney program. We are extremely excited about this program as it stands to unlock a substantial incremental market opportunity measured in tens of thousands of kidney transplant procedures globally. The fourth growth initiative is OCS Technology Gen 3.0 upgrade for both liver, heart and lung systems. This program is running in parallel to the kidney program to bring significant technology upgrade to our current liver, heart and lung systems and help catalyze our clinical adoption in these transplant segments. Again, we are intentionally developing our Gen 3 platform to gain supply chain and operating leverage with lower part counts and less reliance on critical third-party suppliers. As you can see, our growth strategy is multifaceted with catalysts lined up across the short, mid and long terms. We're excited and laser-focused on investing to ensure the successful execution of these initiatives throughout 2026 and beyond. Now let me conclude by stating that based on all the dynamics we see today, both in the U.S. transplant ecosystem and at the macro level, we are reiterating our revenue guidance for the full year 2026 between $727 million to $757 million, representing a 20% to 25% growth over full year 2025. We may revisit the guidance later in the year as we gain more visibility on the pace of ENHANCE and DENOVO enrollment and other dynamics in the U.S. transplant ecosystem. With that, let me turn the call to Gerardo to cover the detailed financial results for the quarter. Gerardo Hernandez: Thank you, Waleed. Good afternoon, everybody. I am pleased to share TransMedics first quarter 2026 results. Please note that a supplemental slide presentation with additional details is available in the Investors section of our website. As Waleed highlighted, we started 2026 with solid execution and continued momentum across our platform. Importantly, consistent with the priorities we highlighted on our previous earnings call and throughout 2025, Q1 also marked the beginning of an accelerated phase of investment and execution for TransMedics. We are advancing multiple initiatives designed to support future growth, strengthen our operating capabilities and position us to capture the opportunities ahead. These include continuous progress across our different programs, international expansion efforts, shops and as announced last week, our agreement to invest in PAD Aviation to support the development of a dedicated organ transplant logistics network in Europe that Waleed mentioned before. Together, these initiatives and these actions demonstrate our ability to move quickly and boldly in allocating capital to execute on strategic opportunities that we believe can further fuel long-term profitable growth. And as Waleed says, let me repeat, these actions are designed to further fuel long-term profitable growth. Beginning Q1, we are introducing certain non-GAAP financial measures, including adjusted R&D expense, adjusted SG&A expense, adjusted operating expenses, adjusted income from operations, adjusted net income, adjusted diluted earnings per share and adjusted operating margin. We use these non-GAAP financial measures to support financial and operational decision-making and to evaluate period-to-period performance. We believe these measures are useful to both management and investors because they provide meaningful supplemental information regarding our core operating performance, particularly as we begin to incur certain discrete expenses and because they offer greater transparency into the key metrics management uses in running the business. Examples of these discrete expenses include costs related to strategic initiatives, corporate development activities, headquarter relocation and the implementation of our new ERP. A reconciliation between GAAP and non-GAAP results is included in the supplemental materials available in our website. Now turning to our Q1 financial performance. Total revenue for the quarter was approximately $174 million, representing 21% growth year-over-year and 8% growth sequentially. Growth was led by strong liver performance, continued progress in heart and increasing contribution from our integrated logistics platform. U.S. transplant revenue was approximately $167 million, up 20% year-over-year and 8% sequentially. By organ, liver contributed with approximately $139 million, heart with approximately $26 million and lung with approximately $2 million. International revenue was approximately $5.6 million, up 39% year-over-year and 17% sequentially. International revenue growth was primarily driven by heart with smaller contribution from lung. We are encouraged by the progress we are seeing internationally as we continue to build our presence and advance our expansion plans. At the same time, the business remains at an early stage and quarterly variability is expected due to reimbursement and market dynamics. Total product revenue for the quarter was approximately $108 million, up 22% year-over-year and 8% sequentially, reflecting continued strong liver performance and modest growth in heart. Service revenue for the first quarter was approximately $66 million, up 19% year-over-year and 9% sequentially. Growth was driven primarily by logistics revenue, supported by increased utilization of the TransMedics aviation fleet. Together, these results reflect continued demand for the OCS platform and the value of our integrated NOP model. Total gross margin for the first quarter was approximately 58%, broadly consistent with recent quarters and down approximately 331 basis points year-over-year. The year-over-year decline was driven primarily by increased internal supply chain activity to replenish inventory across our hubs and position inventory in support of the DENOVO and ENHANCE programs as well as continued investment in NOP network, which together with certain onetime items impacted the margin, and we will expect this to normalize in the coming quarters. Sequentially, as mentioned before, gross margin remained broadly stable at approximately 58%. Underlying performance in the quarter was encouraging with operational improvement largely offset by ongoing internal supply chain costs to support the DENOVO and ENHANCE programs continued investments in NOP capabilities and certain onetime items that we will expect to normalize in the coming quarters, as mentioned before. Adjusted operating expenses for the first quarter were approximately $83 million, up approximately 42% year-over-year and 17% sequentially. Adjusted R&D increased approximately 45% versus the first quarter of 2025, primarily driven by the continued development of our OCS kidney program and our next-generation OCS platform. The increase also reflects ongoing product development activities in Mirandola, Italy and headcount growth as we continue to strengthen our development capability across U.S. and the Mirandola site. Sequentially, the increase in adjusted R&D was primarily driven by continued investment in OCS Kidney and our next-generation OCS platform with a smaller contribution from increased product development activity in Mirandola. Adjusted SG&A increased approximately 41%, primarily reflecting the continued investment to strengthen NOP network and IT capabilities, the initial impact of our new headquarter in Sommerville and consulting and market research in support of international expansion plans. Some of these factors also drove the sequential increase, particularly continued investment in NOP network and international expansion initiatives. Adjusted income from operations for the quarter was approximately $18 million, representing an adjusted operating margin of approximately 10%. The year-over-year decrease in operating margin primarily reflects the timing and scale of our planned investment in 2026 as well as the gross margin dynamics discussed earlier. Adjusted net income was approximately $11 million or $0.30 per diluted share. As Waleed mentioned before, we ended the quarter with approximately $462 million in cash. Cash generation from operations remained solid during the quarter, and our balance sheet remains strong and continues to provide us with the flexibility to invest in the business, support our clinical and international expansion plans and evaluate strategic opportunities that we can -- that can strengthen our platform. Now turning to our 2026 financial outlook. We are reiterating our full year 2026 revenue guidance of $727 million to $757 million, representing a 20% to 25% growth over full year of 2025. We continue to expect growth to be driven primarily by increased transplant volume supported by OCS and NOP platforms, expansion of service revenue and progress across our clinical and international initiatives. In terms of gross margin, we continue to expect our long-term gross margin profile to remain around the 60%. As I shared before, as we continue to invest ahead of growth and expand geographically, we do expect some near-term pressure. We feel confident in our long-term profitability goals. As we continue to scale the business, we expect to capture additional operating leverage while also benefiting from initiatives that are planned to be margin accretive over time, including our kidney program, our next-generation OCS -- and our next-generation OCS. Taken together, these factors reinforce our confidence in the long-term profitability of the business. And again, as Waleed said, let me repeat, taken together, these factors reinforce our confidence in the long-term profitability potential of the business. In terms of capital allocation, our focus remains on driving long-term value. We are concentrating our investment in 3 key areas: first, fueling growth through continued R&D investment, strengthening our NOP network and targeting expansion into selected international markets. Second, building a stronger foundation through enhanced systems, processes, talent and organizational capabilities to improve efficiency, scalability and execution. And third, enhance our infrastructure and strategic optionality, including our new global headquarters, manufacturing and product development upgrades and selected strategic opportunities that can further strengthen our platform. Overall, our first quarter performance reflects continued execution, disciplined investment and progress across several strategic initiatives. Several strategic initiatives that aim to expand our TAM and materially strengthen TransMedics' long-term position. We are moving with conviction and investing strategically in capabilities required to support future growth, improve scalability and drive long-term value creation. And with that, I'll turn the call over to Waleed for closing remarks. Waleed Hassanein: Thank you, Gerardo. Overall, we're proud of our success to date, but we're not stopping here. 2026 represents another critical period for TransMedics as we invest to deliver on several transformational growth catalysts. The strong financial position we've built over recent years have enabled us to pursue this multipronged approach, and we are more excited than ever for what lies ahead. In conclusion, we're humbled and proud of the significant life-saving impact of our OCS technology, NOP services and dedicated team and remain committed to our mission of expanding cases and improving clinical outcomes to patients in need for organ transplant worldwide. With that, I will now turn the call to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Bill Plovanic of Canaccord Genuity. William Plovanic: I'm going to focus on CHOPS, if I could. And just could you please help us understand the strategy behind CHOPS, the thought on cannibalizing your existing uses? And then are you still planning on hitting that 10,000 organ target? Does that include CHOPS? Or is that incremental? And then also just any thoughts on CHOPS for liver and kidney? Waleed Hassanein: Thank you, Bill. I want to clarify one thing right off the gate. CHOPS is not cannibalizing anything. CHOPS is tackling a segment of the market, specifically DBD hearts that are like 2 hours of preservation that we're not being used at today. So that CHOPS is not cannibalizing. It's additive to our market share, and it's specifically focused on these short transport runs that are currently going on static cold storage. So that's number one. Number two, the strategy behind it was to find a better way to develop the control arm with better technique than the standard Styrofoam boxes that are currently being sold for static cold storage, but also presented an opportunity for us to provide a broader product portfolio to meet those centers that are -- their volume is primarily shorter distance and they don't invest in DCD or longer distance organ procurement. Finally, our goal right now is on heart and lungs in that order. We do not see -- obviously, it will be approved for organ preservation, cold static storage for organ preservation, but we have not made a decision yet, is it going to be rolled out for liver and kidney as well. We think the kidney cold static preservation is really a disaster, and we are trying to transform all this to machine perfusion. CHOPS is specifically designed for the cardiothoracic platform. Operator: Your next question comes from the line of Joshua Jennings of TD Cowen. Joshua Jennings: Hoping to just build on discussion on ISHLT will lead and just with the ENHANCE Part A and Part B programs, optimal scenario being kind of a win-win-win potentially driving day-only surgeries for high-risk DCD Hearts showing superiority in DBD short transports and then also opening up this advanced cold storage CHOPS opportunity. And maybe just help me better understand the dynamics there, if you would, and how ENHANCE Part A, Part B can help drive stronger liver heart penetration, OCS heart penetration. Waleed Hassanein: Thank you, Josh. As we've stated before, ENHANCE was designed exactly to accomplish the goals you outlined. We wanted to give the market a safe, reproducible and effective way to do morning hour heart transplants. We wanted to give the market a better way to preserve DCD Hearts and better way to preserve long distance and long preservation time, extended criteria hearts, minimizing edema and resulting in better function and enhancing function on OCS. That was primarily the design of ENHANCE. In addition, we wanted to penetrate that segment of the market that I called earlier, DBD Hearts that are, call it, sub-4 hours of preservation, which currently the vast majority of those are being transported using Styrofoam boxes with cold packs. That's Part B of ENHANCE. So yes, the vision, the strategy of ENHANCE is still intact. Unfortunately, the competitive dynamic caused a little bit of a confusion and resulted in a little bit of a delay to launching these 2 parts, specifically Part B. And we found a solution for it and that completely make ENHANCE fully independent from any competitive dynamic. So we are as excited as always and as we've ever been on ENHANCE, and we just can't wait to get the IDE supplement approved and getting the program rolling. So again, from where we sit here, we see this as a huge opportunity for us to catalyze adoption in heart across all market segments in heart and still have an optionality for centers that are not for whatever reason, are not focused on any of the sort of expanding portion of the heart market of DCD or long-distance procurement and just are happy with the cold storage to offer a product that is, we believe, will be -- will provide them -- meet their expectation and provide them potentially better solution, but on our platform, which is CHOPS. So as you said, Josh, we look at this as a win-win-win from TransMedics perspective. We just have to be patient. We have to execute on the strategy. We have to finish the program. From where we sit, Part A is going slightly ahead of schedule. We're excited about what we're seeing. The market is giving us early feedback on how the hearts are behaving -- coming off OCS, which is exactly as we predicted it would be. But again, we need to finish the program, and then we expect good things. Operator: Your next question comes from Allen Gong of JPMorgan. K. Gong: I had a quick one on what you're seeing in the market. I know intra-quarter, you had talked to some disruption that you were seeing at OPOs, especially as they're grappling with some of the potential changes proposed in the OPTN modernization. But I'm curious to hear what you're seeing so far in the second quarter. Are you seeing the same level of challenges? Are you seeing it get better? Are you seeing it worsen? And how should we think about your growth in the second quarter in light of that? Waleed Hassanein: Thank you, Allen. The specific things that we're seeing is what everybody is seeing, which is that the overall disease donor numbers have been below expectation and below last year. And we saw that throughout the first quarter and April continued. We hope that will reverse. We usually don't pay too much attention to inter-quarter variability, but we are paying attention this year because of the dynamic with the Modernization Act. And if you remember, we predicted that we will see some volatility in diseased donor numbers, which is the mechanism that OPOs kind of register their this pleasure with the transformation. And we've seen it reverse, and we have all the confidence that it will reverse. When it will reverse, we don't know, but we're not -- we don't expect this to be a chronic thing. And we expect actually when it reverses, it will bounce -- not just bounce back to baseline, but we expect some acceleration. That's what we've seen over the history over the last 20 years. When this happens, that dynamic kind of plays out as I outlined. K. Gong: Got it. And sorry if I missed this in the prepared remarks when bouncing around. I understand that the new strategy that you are approaching for your clinical trials. Do you have an expectation for when you think you can get those IDE approvals and then how quickly you can get those trials started afterwards? Waleed Hassanein: Yes. Thank you, Allen. As I stated in the prepared remarks that we plan to file the IDE supplement within the next couple of weeks, and we hope to be in approval stage and implementation stage by early Q3. Operator: Your next question comes from the line of Ryan Daniels of William Blair. Matthew Mardula: This is Matthew Mardula on for Ryan. And I might have missed this, so I apologize, but what is the guidance for operating margins this year? And is just the operating margin growth more weighted in the second half and investments more front loaded given what we've seen in Q1? Any more color into margins and its trajectory for the second half would be greatly appreciated. Gerardo Hernandez: Yes. What I mentioned in the last call is that we're expecting up to around 250 basis points below -- operating margin below last year, which now will be really adjusted operating margin below the number that we had in 2025. I would not like to go into more details in terms of phasing because we have an investment plan that it needs to materialize for it to result in what we are seeing. So I'd rather not go into those level of details now. Operator: Your next question comes from the line of Chris Pasquale of Nephron Research. Christopher Pasquale: Waleed, I also wanted to ask about the ENHANCE, DENOVO trials. And the CHOPS program seems like a great addition to the portfolio. But previously, you were comparing OCS to established hypothermic organ storage approaches in those studies. Now by including CHOPS in the trials, you effectively have 2 investigational arms being compared against each other. So I guess kind of a 2-part question is, one, does that complicate the interpretation of the results? Do you worry at all about not having a clean outcome here in terms of physicians being able to interpret what the data says. And then two, you're theoretically introducing a harder control arm here if you really believe that you're going to do a better job controlling the temperature of those organs. And so does that make you at all concerned about the margin of improvement you're going to be able to show in the studies? Waleed Hassanein: Chris, excellent question, and thank you for asking it. So let me address it in several sections. The first segment is there's no such thing as well-established cold storage other than ice. What we've seen over the years is there's these hypotheses and claims that are being thrown out there in the marketplace by a handful of newcomers to the space that haven't been really substantiated. In fact, even the variation in temperature we've seen at the last ISHLT that did not show any significant difference than 4 degrees to 8 degrees versus 10 degrees. -- none of these hypotheses have really materialized. So for us, we don't -- we're not concerned at all that we are lowering the standard. The opposite is true. We're actually elevating the game and saying, listen, if you, as a center, wants your organ to be stored between 4 and 8, we have a device that we can validate that it's between 4 and 8. If you want it at 10, we have a device that validates it at 10. So that's number one. Number two, we've discussed the second part, which is comparing to investigational arm. The CHOPS will not be investigational by the time we interpret the trial results. That's the plan that we discussed with FDA, and I would leave it at that. Three, do -- am I worried about raising the bar in the control arm? No. I think the OCS will prove its value because, again, these programs are designed to show several value points. And again, we know that even if we deliver superiority results, there will be a segment of the market that's still focused on cold static storage just because of cost, just because of limited volume or what have you. And in this case, TransMedics would gain market share in that segment that today, we don't have a product to sell to these needs. So net-net, we are extremely focused on getting these programs executed. We are -- we believe we found the best solution out. In fact, I would -- at risk of quoting the FDA, the FDA called it a creative and elegant solution. So we will go and execute the trials, and we are confident that our strategy is going to pan out on many fronts. We just can't wait to get these programs fully activated and we get out of this confusion that was created by the panic that was thrown into the mix by our competitors. Operator: Your next question comes from the line of Suraj Kalia of Oppenheimer. Suraj Kalia: Waleed, can you hear me all right? Waleed Hassanein: Can hear you perfect, Suraj. Suraj Kalia: So Waleed, I wanted to follow up on Chris' question just with a slightly different flavor. So one of the pushbacks we got after the CHOPS announcement was, hey, how do you know this -- the CHOPS is optimally designed, i.e., it isn't really designed as an inferior product. I'd love for you to push back on that notion. This is a new product. How do you know this is optimally designed as is? Hence, you can -- I think, so Chris was looking at one side of the spectrum in terms of good outcomes of the control arm. What I'm saying is at least what the pushback we got was, what -- if it is suboptimally designed and you get bad outcomes in the control arm, hence, you automatically look good. I'd love for you to push back on that notion of thought. Waleed Hassanein: Great. Suraj, thank you for asking this important question. The opposite is true, Suraj. The thing is, again, this question implies that the market is actually working with highly scientific, highly validated technologies. The opposite is true. There are transplant -- major transplant programs are going to Home Depot and buying either YETI coolers or RYOBI coolers and they're operating with them day in and day out. And guess what, none of these coolers have been validated or designed or even FDA approved for that intended purposes. We are elevating the game. We are a company that pride itself of developing and delivering Level 1 evidence to the highest clinical standards and to the FDA standards. That's number one. Number two, as I said in my prepared remarks, and I will reiterate it again here, CHOPS is designed to be a fully registered and regulated FDA medical technology, which means, by definition, Suraj, as you know, that we have to go through an exorbitant amount and exhaustive testing to validate that the design meets the intended purpose. None of the technologies I'm talking about have been -- have gone through that. So that's a hyperbole assumption. We -- the opposite is true. We are actually -- I am with -- Chris' spectrum is the one that's more realistic that we are elevating the game on the control arm. But even then, we are not concerned because we see significant value and also we provide solutions across the spectrum of values achieved -- that would be achieved in ENHANCE DENOVO. Operator: Your next question comes from the line of Matthew O'Brien of Piper Sandler. Samantha Munoz: This is Samantha on for Matt. Also wanted to talk about the clinical trials in CHOPS. I guess, first, kind of a 2-parter. Can you first just quantify and put into numbers for us how much of the market CHOPS is expected to address? And then I'm also trying to square the design of these trials. You mentioned the superiority. So these trials are essentially trying to say that OCS is a better technology versus now cold storage and CHOPS, but then also the decision to launch CHOPS, presumably this inferior technology. Waleed Hassanein: Sure. Sam, that's an excellent question. So let me address the latter piece first. Again, as I stated earlier, we all know you, everybody on this call and the listeners know and they've spoken to clinicians and surgeons in the field of organ transplantation. You ask 10 transplant surgeons, one question, you will get 12 different answers. So we know for a fact that, even when we prove superiority, there will be a handful of centers or a segment of the market that will still prefer cold storage technique in certain cases. Why not provide them that solution and go through the effort of providing a fully FDA-approved regulated device that gives them that flexibility. So that's number one. Number two, I'm sorry, Sam, can you repeat the first part of the question again? I lost my train of thought. Samantha Munoz: No, that's okay. Waleed Hassanein: Quantification. I'll give you one example. I'll give you one example. 2025 U.S. heart transplant total volume was 4,646 hearts, okay? You need to know that 46% of that total market which is 2,131 were DBD hearts preserved less than 4 hours. Our portion of that market is measured in single digits. So that is a market that is today all going to cold storage techniques. The Styrofoam cooler, the RYOBI cooler, the YETI coolers, why not provide an answer to that? Yes, we should gain a greater portion of that by demonstrating superiority or demonstrating better outcomes. But there will be a segment of that market still out there that the surgeon or the clinicians would need access to cold storage technique. Let's provide them the solution and provide them the clinical service of NOP and the logistics associated with it. Operator: Your next question comes from the line of Daniel Markowitz of Evercore. Daniel Markowitz: Thanks for taking my question. I wanted to talk about energy prices. It sounds like you're able to pass this along to customers via surcharges. Can you just talk through the dynamic a little bit? What's the exposure here? Are you able to pass it all along? And how does this flow through the P&L? And what's, I guess, contemplated in the guidance on that front, both on the revenue and on the COGS side? Waleed Hassanein: Daniel, thank you for asking this important question, which, as we understand, has been creating this black cloud overhang over TransMedics. People forgot who TransMedics is and which market segment we deal with. We're not United Airlines or Delta. We are an organ transplant company. So you need -- everybody needs to remember that we are operating in a highly competitive environment where there are other charter operators and companies that service the same market that we are servicing from a logistics standpoint. Historically, for the last 4 or 5 decades, transplantation have survived and grown when oil prices was high, when oil prices was low. How? Because the market has a mechanism to recover the cost of these -- when the prices go up. In fact, so because of that competitive dynamic, I cannot share with you on an open mic the detail of how TransMedics is doing it. All I can share with you is I can assure you and I assure all the listeners on this call that TransMedics is doing the absolutely right thing by our customers, and we are having the ability to control our logistics and our fleet and the network effect that was created here gives us maximum operating leverage on dealing with fuel prices. I'll give you one example. We are monitoring fuel prices by hub, and we have the maximum flexibility of moving hubs and floating our fleet to make sure that we are not incurring unnecessarily higher fuel charges, so we don't pass these unnecessarily high fuel charges to the transplant program. But again, the results speaks for themselves. If fuel charges are truly that unsurmountable challenge, we would not be able to print the results we printed here. And to put everybody's mind at ease, fuel charges is a small component of our operating flight hour cost. So it is covered and our network is the most cost-efficient way to deal with this problem until it's resolved. Operator: Your next question comes from the line of David Rescott of Baird. David Rescott: I want to follow up on some of the margin commentary, gross and operating. First on the gross margin side. I think historically, Q1 is typically or has been over the past 2 or 3 years, the high watermark for gross margin. So curious, one, if that is the way that we should be thinking about the cadence for the year, if there's any maybe transient impacts there? And then I appreciate some of the comments already on the operating margin side. But just trying to get a sense maybe for some of the puts and takes that you saw in Q1 versus what you're expecting to maybe normalize or work its way out as you get into the back half of the year. Maybe CHOPS is a piece of that. Just be curious on any more color on the gross and operating margin numbers in the quarter and then for the year. Right. Gerardo Hernandez: Right. Thank you, David, for the question. In terms of gross margin, we -- as I shared in the call, we're looking and we're expecting convinced that we can -- that the right margin for the business is the 60% -- around 60%. We are investing ahead of that. And because of that, we are seeing some pressure in the margin in the short term. I saw, let's say, significant positive impact -- operational impact in the quarter in Q1 that was mostly offset by some -- a good portion of that was transient expenses. So my view is that for the rest of the year, we should see a recovery towards our long-term goal. I'm not sure we're going to get all the way to the long-term goal this year or even next year. That's why it's long term. But I see -- and I believe that this is the quarter where it should be more the floor rather than the ceiling. Operator: Your next question comes from Young Li of Jefferies. Young Li: I think you mentioned the ENHANCE Part A trial is enrolling slightly ahead of schedule. I guess I'm wondering how does that sort of inform or change your expectations for Part B enrollment timing once that restarts in 3Q, is 12 to 18 months still the right time frame for ENHANCE Part B and DENOVO enrollment? Or can you enroll faster than that? Waleed Hassanein: Xuyang, thank you for the question. I'll answer the second part first. We still are holding the 12 to 18 months time frame. That hasn't changed. I think I caution to compare Part A to Part B. There are 2 different components. But it's -- remember, it's the same centers that will be enrolling in Part A or Part B. So again, it's all about value. If the center sees the value and sees the clinical outcomes in their hand, we expect the trial enrollment to pick up. For me, right now, I'm focusing on getting the IDE supplement approved, getting the TOPs into the control arm and removing all the confusion by competitors so we can get Part B enrolled. DENOVO is actively enrolling, and we enrolled a handful of patients already despite some of the confusion, thanks to the transplant program stepping up and moving forward. But I think it will accelerate even further once CHOPS is introduced as the control arm or an option for the control arm. Operator: Your next question comes from Mike Matson of Needham & Company. Michael Matson: So just on the CHOPS devices that are going to be used in the trials, will you be getting paid for those? And then just generally, can you talk about the kind of -- what kind of pricing we should expect on that, both in the trials and then when you're selling it just kind of the customers in the open market? Waleed Hassanein: Mike, I appreciate very much the question. Unfortunately, I cannot discuss the commercial structure of CHOPS yet, the priority is to get it through the IDE process. And all I can say is this is going to be a part of our NOP service offering, and I'll leave it at that. Operator: Your next question comes from Tom Stephan of Stifel. Thomas Stephan: Apologies if this has been asked, jumping between calls. But Gerardo, maybe for you, for the 20% to 25% guidance on revenue in the core business for '26, when I look at growth over the last, call it, year or so, 40% plus growth in 1H, 30% plus in 2H and then 1Q was a bit over 20%. So like with that trend in mind, what gives you confidence that the growth rate rest of year will remain stable in the core business or even accelerate a bit moving forward in order to kind of hit that full year 20% to 25%. Gerardo Hernandez: Thank you for the question. Well, basically, when we look at the phasing and the history of the transplant volume in the U.S., we can see how the remaining of the year, it continues to strengthen. So we're not expecting any change to the global volume, except for the one that Waleed mentioned before in terms of any potential disruption due to the Modernization Act. Now we believe that we can -- that we will deliver within the 20% to 25% growth with that. And I think that's really what makes us confident. We're seeing the results. We're seeing the adoption and that together with the last year's performance, it really shows how the market trend is going. So there is nothing really that would prevent us to get to that range, at least as I see it today. Waleed Hassanein: And Tom, let me add also, again, we don't comment on penetration and market share midyear or throughout the year. As you know, we comment on it at year-end because of the choppiness of it. But we're watching our market share in Q1 despite the overall transplant numbers and donor numbers being a little bit on the low end and below last year, we're maintaining and growing our market share, which tells me that we're taking some market share in Q1. That's what gives us the confidence that just organically, without even talking about ENHANCE and DENOVO that we should be able to meet that target range that we set for ourselves. Operator: There are no further questions at this time. I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer, for closing remarks. Waleed Hassanein: Thank you all very much for spending your afternoon with us. We're looking forward to one-on-one calls. I appreciate it. Have a great evening, everyone. Operator: This concludes today's conference call. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Arcus Biosciences, Inc. First Quarter 2026 Business Update and Financial Results. After today's prepared remarks, we will host a question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. I will now hand the conference over to Holli Kolkey. Holli, please go ahead. Holli Kolkey: Good afternoon, and thank you for joining us on today's conference call to discuss Arcus Biosciences, Inc.'s first quarter 2026 financial results and pipeline update. I would like to remind you that on this call, management will make forward-looking statements, including statements about our development strategies and our expectations regarding the advantages and opportunities afforded by our investigational products, our clinical development milestones and timelines, our projected cash runway, and our financial outlook. All statements other than historical facts reflect the current beliefs and expectations of management and involve risks and uncertainties that may cause our actual results to differ from those expressed. Those risks and uncertainties are described in our most recent quarterly report on Form 10-Q that has been filed with the SEC. For today's call, please refer to our latest corporate presentation posted in the Investors section of our website. This afternoon, you will hear from our CEO, Terry Rosen, Chief Medical Officer, Richard Markus, President, Juan Jaen, and CFO, Robert Goeltz. With that, I would like to turn the call over to Terry. Terry Rosen: Thanks very much, Holli, and thanks, everyone, for joining us this afternoon. We are starting a new era for Arcus Biosciences, Inc., with full ownership of our lead program, casdatafan, our Phase 3 kidney cancer study, PEEK-1, enrolling rapidly, a clear path to win in the frontline, and the next generation of molecules for inflammation and immunology that can be advanced rapidly through development, with strategic optionality imparted by a rich portfolio of wholly owned molecules and programs. We are at an inflection in value creation for patients and shareholders that will continue to accelerate over the next 12 to 18 months. Arcus Biosciences, Inc. has proven to be a highly productive company creating and advancing a steady stream of potential best-in-class molecules for patients with cancer and inflammatory and autoimmune diseases. We believe that discovery is not a commodity, and we have built exceptional small-molecule medicinal chemistry and drug discovery capabilities. Our scientists utilize proven biology to create unmatched medicines designed to raise the standard of care. Since its inception, Arcus Biosciences, Inc. has advanced molecules from program initiation to IND filing in as short as 18 months, and through an accelerated platform and signal-seeking study, moved from proof-of-concept Phase 1 studies to randomized Phase 2 and registrational Phase 3 trials in just a few years. Today, the company is laser focused on cascadifan, which represents a market opportunity of more than $5 billion in kidney cancer alone. I want to stress that cascadifan’s efficacy advantages are underpinned by much better molecular properties and a superior pharmacodynamic profile. This profile reflects the key capabilities in Arcus Biosciences, Inc. that I described earlier. The simple fact is that cascadifan hits its target much harder in a more robust and sustained way than belzutafan, as illustrated on slide 6. This is a point we have emphasized since the data first emerged. These data are clear and they are striking. We believe this fundamental differentiation between cascadifan and belzutafan, and the limitations of belzutafan’s pharmacodynamic profile and durability of effect, are undoubtedly contributors to, if not the principal driver of, the outcome of LITESPARK-012. And the pharmacodynamic advantages of cascadifan will continue to result in improved clinical outcomes across the lines of therapy; I want to emphasize this point. This dramatic difference in profile has been evidenced since late last year. It is not at all opaque. Its manifestations in clinical outcomes are dramatic and are at the core of our differentiation. No results to date are surprising. Our top priorities for 2026 are clear. One, complete enrollment for PEEK-1, our second-line Phase 3 study, and two, initiate a Phase 3 study in the frontline patient population. With the recent outcome of LITESPARK-012, cascadifan has a clear path to consolidate a fragmented frontline setting as the first HIF-2α inhibitor in this setting. Let me spend a moment on why cascadifan is at the center of everything we do. We believe cascadifan can transform the treatment paradigm in clear cell renal cell carcinoma, and our development strategy is designed to generate evidence to secure cascadifan as a backbone therapy so that every patient has the opportunity to benefit from cascadifan across each line of therapy. PEEK-1 represents our fast-to-market strategy. This is designed to build on the clinician enthusiasm we have seen for cascadifan as an investigational agent and to generate the data to support the approval of a foundational treatment for clear cell RCC as rapidly as possible. Enrollment in PEEK-1 is accelerating, and we are on track to complete enrollment by year-end 2026. We are confident that PEEK-1 will establish cascadifan plus cabo as the new standard of care in the IO-experienced setting. The peak sales opportunity for cascadifan in this setting alone is more than $2 billion. At the same time, we are aggressively building a holistic strategy to embed cascadifan across the treatment paradigm. We have been making tremendous progress in the frontline setting with multiple IO combinations now enrolling in ARC-20 and generating data in support of our first-line strategy. These approaches offer the greatest potential for long-term survival for patients. One of our key objectives today is to make very clear our integrated development strategy for cascadifan. It is actually quite straightforward, and here is how we believe things will play out. In the first line, our bedrock therapy will be cascadifan, ipi, and anti-PD-1. We believe that we can drive the approximately 35% share of ipi/nivo to a regimen with greater than 50% of the important first-line market. While the IO regimen of ipi/nivo is the dominant therapy today, there is a segment of physicians that is always going to want to reach for a TKI, particularly for patients with a fast-growing, bulky tumor. Therefore, we will also be developing a cascadifan combination inclusive of a TKI, a TKI with a well-established track record of both efficacy and safety that will allow the patient to have cascadifan plus cabo as a subsequent regimen. Our second-line treatment, now enrolling as the registrational trial PEEK-1, will be cascadifan plus cabo, building on the standard of care in this line, cabozantinib monotherapy. Finally, we will have a third-line-plus regimen, cascadifan with another well-established TKI, and we will be investigating this regimen in both belzutafan-naive and belzutafan-experienced patients. We think this is a very important and, frankly, very cool study. We also plan to explore novel cascadifan combinations in HCC, liver cancer. I would like to emphasize that all of the clinical development plans discussed today are accounted for within our existing budget and have no impact on the guidance and runway that we have provided. We now control, in all respects, our early-stage pipeline, including our CCR6, CD89, and CD40 ligand programs, all of which are expected to report IND candidates in the next 6 to 18 months. So, while we focus our resources—capital, human, and otherwise—on the late-stage development of cascadifan, the follow-on programs in our pipeline are early but also with clear, early, and capital-efficient clinical proof-of-concept opportunity and huge commercial potential. Therefore, we anticipate low spend and short timelines to get to proof of concept that will drive disproportionate value creation. Juan will discuss these programs in more detail later on in this call. If you want to walk away with just one thing from today, it is that Arcus Biosciences, Inc. has complete control of its destiny. The core asset of the company is cascadifan. We have the strategy, data, and resources to transform the treatment of clear cell RCC and create the $5 billion-plus drug. Robert will further elaborate on the enormous commercial opportunity here. We also continue to leverage our demonstrated competitive advantage in small-molecule drug discovery—an increasingly scarce capability—to generate wholly owned and unique development candidates, advancement of which further enhances our strategic optionality. With that, I would like to turn the call over to Richard to discuss our clinical programs. Thanks, Terry. I would like to start with cascadifan. Richard Markus: As Terry described, our development plan is designed to establish cascadifan as a foundational standard of care in clear cell RCC so that all patients have the opportunity to benefit from treatment with a cascadifan-based regimen across multiple lines of therapy. At ASCO GU this year, we presented updated ORR and PFS from our four late-line monotherapy cohorts of ARC-20. As you can see here, the efficacy data continued to improve with longer follow-up at each data presentation. Moving to slide 12, we show the ORRs for the 100 mg QD cohort, which is the dose and formulation being used in our Phase 3 studies; the confirmed ORR increased from 35% at the August data cut to 45%. A 45% ORR in this late-line patient population is rather remarkable. It is twice that observed with belzutafan in LITESPARK-005, or any study in this patient population. Similarly, the confirmed ORR in the pooled analysis improved from 31% to 35%, well above the range of ORRs that have been observed with belzutafan. On slide 13, we show the Kaplan-Meier curve for the 100 mg cohort. As you can see here, the 100 mg cohort shows an impressive median PFS of 15.1 months after 17.9 months of median follow-up. On the next slide, we show the latest Kaplan-Meier curve for the pooled analysis. The median PFS remained at 12.2 months. Overall, we are seeing PFS that is two to three times longer with cascadifan monotherapy than the 5.6 months observed with belzutafan in the same setting. And, as is often discussed, while the median is an important benchmark, it is not the only metric that is important. As you can see here, and perhaps more impressive, is the number of patients still on treatment beyond 18 months and even beyond 24 months. These data clearly support the proposition that cascadifan is the best-in-class HIF-2α inhibitor, and our highest priority now is to maximize the potential of this molecule in ccRCC. Our first registrational trial, which is in the second-line setting, is well underway. Enrollment in the ongoing Phase 3 study, PEEK-1, is accelerating, and we are on track to complete enrollment by year-end. We are confident that PEEK-1 will establish cascadifan plus cabo as the new standard of care in the IO-experienced setting. With a sole primary endpoint of PFS and a 2:1 randomization favoring the experimental arm, and cabo as the control arm, we believe PEEK-1 is optimized for both probability of success and speed to data. I would like to spend some time now on the frontline setting. With the outcome of Merck’s LITESPARK-012 last month, cascadifan has the opportunity to be the first HIF-2α inhibitor option in the frontline setting. Treatment in the frontline is generally bifurcated into IO/IO or a TKI/anti–PD-1 combination. This currently leads to the conceptual trade-off between longer time to response or higher primary progression but with the potential for durable responses and long-term survival with the IO/IO option, or a faster time to response and lower primary progression but with much more treatment-associated toxicity for the TKI/anti–PD-1 options. There is currently no treatment option that has the ability to both rapidly control disease and provide the best chance for long-term survival, while also having a favorable tolerability profile for long-term use. We believe a cascadifan plus IO/IO combination in the frontline setting has the potential to deliver on both of these fronts. We are enrolling several cohorts within the ARC-20 study evaluating cascadifan combinations in the frontline setting. While the data are maturing, primary progressive disease rates have already been shown to be low—just 7%, or 2 out of 30 patients—for the cascadifan plus zimberelimab, our anti–PD-1 cohort. This rate compares favorably to published rates for anti–PD-1 monotherapy or ipi/nivo in the first-line setting, and in fact, it is close to the rate of a TKI-containing regimen but without the need for the TKI. We are also enrolling a cohort evaluating cascadifan plus zimberelimab plus ipi. Emerging data from these cohorts of ARC-20 will inform the first-line registrational strategy, with the goal of finalizing the Phase 3 study protocol and beginning start-up activities by the end of this year. In parallel, we will shortly begin to evaluate additional cascadifan plus TKI–containing regimens in the early- and late-line settings, including in patients with prior belzutafan experience. This effort contemplates the preference and, in fact, the strategic necessity to utilize alternative TKIs as patients advance from one line of therapy to the next. Near-term, we expect to have multiple data readouts for cascadifan in 2026. First, mature ORR data and initial PFS data for approximately 45 patients treated in the ARC-20 cascadifan plus cabo cohort in the IO-experienced setting will be presented at an investor event or at a medical conference, and all patients will have had at least 12 months of follow-up. Second, we will share initial data from the ARC-20 cohorts evaluating cascadifan in early-line settings, including the cohort evaluating cascadifan plus zimberelimab in the first line. We also expect updated data from late-line monotherapy cohorts, including overall survival. Before I hand it over to Juan, I would like to quickly touch on quemliclustat, our small-molecule CD73 inhibitor. CD73 is highly expressed in pancreatic cancer, and high CD73 expression is associated with significantly poor prognosis in several tumor types. In spite of this, as we recently published in Nature Medicine, in our Phase 2 study, patients with higher CD73 or adenosine activity were the ones with longer PFS and OS in response to chemo treatment. Pancreatic cancer is one of the most aggressive cancers, with an average 5-year survival rate of just 13%. In PRISM-1, our Phase 3 study evaluating quemliclustat plus gemcitabine and nab-paclitaxel versus gemcitabine and nab-paclitaxel in the frontline pancreatic setting, we completed enrollment in September 2025. Results from this study are expected in 2027, and if positive, PRISM-1 could represent the first transformative therapy for an all-comer first-line patient population in 30 years. There is no biomarker requirement, and no known resistance mechanism, and data to date have indicated that the regimen was well tolerated. Finally, we recently announced that the Phase 3 STAR-121 study evaluating our anti-TIGIT, domvanalimab, plus zimberelimab and chemotherapy versus pembrolizumab plus chemotherapy as a first-line treatment for metastatic non-small cell lung cancer will be discontinued due to futility. While these are certainly not the results we expected, the study had one important positive outcome. In addition to the assessment of domvanalimab in this trial, STAR-121 also evaluated zimberelimab plus chemo as an exploratory endpoint. Zimberelimab plus chemo performed consistently with respect to overall survival as compared to pembro plus chemo. These data are consistent with what was observed in numerous studies with zimberelimab, and this randomized dataset provides valuable support for the utility of zimberelimab as an anti–PD-1 combination partner for Arcus Biosciences, Inc. and its collaborators. I would now like to turn the call over to Juan to discuss our immunology and inflammation programs. Juan Jaen: Thanks, Richard. Arcus Biosciences, Inc. has an exceptional small-molecule discovery team. That team has demonstrated time and time again the ability to create highly effective drug candidates against difficult targets. We have been utilizing this expertise to create and develop drugs that have the potential to address very large markets in inflammation, allergy, and autoimmune diseases. In-house expertise in immunology has been a core aspect of our discovery group since Arcus Biosciences, Inc.’s founding, having been key to many of our oncology programs. Our team is addressing well understood and validated mechanisms and has implemented a two-pronged strategy in immunology. First, we leverage medicinal chemistry capabilities to design and create small-molecule drugs that regulate key cytokines therapeutically validated by existing biologics. Secondly, we target immune cell types that play key roles in human disease and have been historically understudied, such as mast cells and neutrophils. Our first molecule in the immunology area to enter the clinic will be AB-102, a highly selective, orally bioavailable MRGPRX2 antagonist. In the coming weeks, we will be sharing its preclinical profile in an oral presentation at the Society for Investigative Dermatology. The presentation will highlight the ability of AB-102 to fully block MRGPRX2-dependent activation and degranulation of mast cells. AB-102 inhibits all common human MRGPRX2 variants. We have optimized the potency of AB-102 under physiological conditions, such as in human blood and serum. Due to its potency under these conditions, we believe that AB-102 is a potential best-in-class, once-daily oral treatment for chronic spontaneous urticaria and other atopic conditions such as atopic dermatitis and allergic asthma. It is expected to enter the clinic in 2026, with PK data available shortly thereafter and potential for proof-of-concept data in early 2027. In rapid succession, we have selected an oral, small-molecule TNF inhibitor drug candidate, which is a potential treatment for rheumatoid arthritis, psoriasis, and inflammatory bowel disease, and an orally active, small-molecule CCR6 antagonist candidate as a potential treatment for psoriasis. Both of these molecules are expected to enter the clinic in 2027. We are very excited about the potential for our I&I programs to provide improved options for patients, and we are working to advance these into the clinic as rapidly as possible. I would now like to turn the call over to Robert to discuss the market opportunity for cascadifan and our financial results. Robert Goeltz: Thanks, Juan. Before I get into the quarterly financials, I would like to spend time on the multibillion-dollar market opportunity in RCC for cascadifan. Sales for RCC drugs in just the major markets are anticipated to grow to $13 billion by 2030. Historically, the market has been dominated by two classes of therapy—IO and TKIs. There have been a number of offerings in both classes, which is why the market is fragmented. In contrast, there are only two HIF-2α inhibitors on the horizon, and we believe our data have demonstrated clear advantages over our only competitor. We have a clear path to consolidate the market and entrench cascadifan as the primary backbone therapy. The development plan that Terry and Richard described is designed to accomplish this objective. If we look at the sales for the sole marketed HIF-2α inhibitor, belzutafan, which is currently approved only in late-line clear cell RCC, it is already generating annual run-rate sales of nearly $1 billion—only scratching the surface. With cascadifan, we are also targeting earlier-line settings: the IO-experienced population with PEEK-1 and the IO-naive first-line population with our next pivotal study. These earlier-line settings have larger patient populations and longer durations of therapy, both of which contribute to a much larger market opportunity. Specifically, the PEEK-1 study targets approximately 20 thousand patients in the major markets in the IO-experienced setting. We believe our commercial opportunity here exceeds $2 billion. In the first line, the opportunity is even greater. With the lack of HIF-2α inhibitor competition in the frontline, our goal is to grow the IO/IO share from roughly a third of the market to more than half by adding cascadifan. In fact, our market research indicates that oncologists overwhelmingly prefer the promise of a cascadifan plus IO/IO over a TKI-containing regimen. As Richard mentioned, we also plan to investigate a regimen with IO and TKI in the frontline to address the remainder of the market. We believe the opportunity for cascadifan in the frontline exceeds $4 billion. One point I would really like to emphasize as we think about the commercial opportunity is duration of treatment. We have seen impressive data in late-line monotherapy, with many patients on therapy beyond 18 months. We plan to share updated data later this year. As we think about earlier lines of therapy, we believe there is the potential for meaningful upside resulting from the durability of effect. Conceptually, we think strong HIF-2α inhibition holds the promise of a long-term tail effect. All in, we think cascadifan has a peak sales opportunity of $5 billion to $10 billion. As a reminder, we own all of the commercial rights to cascadifan other than in Japan and certain other Southeast Asian countries held by our partner, Taiho. Now, let us turn to the financials. Arcus Biosciences, Inc. is well positioned to advance its full pipeline with $876 million in cash at the end of the quarter. We have cash runway until at least 2028. We expect to end 2026 with approximately $600 million in cash, indicative of the declining spend we expect over the year. As Terry outlined, Arcus Biosciences, Inc. is entering a new era with more control over our pipeline investments. While we are building a plan to take full advantage of the cascadifan opportunity, we are also sequencing these investments such that any significant growth in overall spend will be largely incurred after a PEEK-1 readout. As a result of the wind-down of domvanalimab, and reduced spend on quemliclustat, together with broader spend management, we expect to significantly reduce our overall R&D spend in 2026 and 2027 compared to 2025. For example, as our late-stage efforts have become focused on cascadifan, we have decreased our headcount by approximately 10%. Let me transition to the financials for the quarter. For our P&L, we recognized GAAP revenue for the first quarter of $17 million. Our revenue continues to be primarily driven by our collaboration agreements. We continue to expect to recognize GAAP revenue of $50 million to $65 million for the full year 2026. Our R&D expenses for the first quarter are stated net of reimbursements and were $122 million and included nonrecurring workforce costs. Our actions to reduce headcount have lowered our ongoing cost structure, which we expect will result in reduced R&D expense in future periods. The discontinuation of STAR-121 and the broader reduction in our domvanalimab-related investment will contribute to a meaningful decrease in R&D expenses as the year goes on. By 2027, we expect more than 80% of our portfolio spend will be directed toward cascadifan development. G&A expenses were $29 million for the first quarter. Total non-cash stock-based compensation was $19 million for the first quarter. For more details regarding our financial results, please refer to our earnings press release from earlier today and our 10-Q. I will now turn it back to Terry. Terry Rosen: Thanks, Robert. That was excellent. Let me close by summarizing the key themes for the remainder of 2026. Cascadifan is our number one priority, and this year will be another transformative year for data and, importantly, development as we advance towards commercialization. We expect multiple data sets—cascadifan plus cabo data, initial first-line data, and overall survival data from late-line monotherapy cohorts—all of which will further reinforce cascadifan’s best-in-class profile and support our registrational strategy. PEEK-1 enrollment continues to accelerate, and we are targeting full enrollment by year-end. All of the clinical development plans for cascadifan that were discussed today are accounted for within our existing budgets and have no impact on our guidance or runway. Beyond cascadifan, our PRISM-1 Phase 3 trial for quemliclustat in pancreatic cancer is fully enrolled and on track for readout in 2027. Juan shared the exciting progress on our I&I portfolio, with AB-102 expected to enter the clinic in the third quarter and our TNF inhibitor and CCR6 antagonist following shortly thereafter. With $876 million in cash and investments, and runway into 2028, we are well positioned to execute on all of these priorities and create significant value for patients and shareholders. We are moving into a new era for Arcus Biosciences, Inc., with full ownership of our lead program, cascadifan, and a clear strategy to win and transform the frontline setting, while rapidly advancing the next generation of wholly owned molecules for inflammation and immunology. We have no doubt that we will be generating disproportionate value for patients and shareholders over the coming 12 to 18 months. Thank you all for joining us. We will now open the call for questions. Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Daina Graybosch with Leerink Partners. Daina, your line is now open. Unknown Speaker: David, can you try this today? Daina Graybosch: Specifically on the cascadifan plus TKI frontline combo, we all know Merck failed with that triplet mechanistically with belzutafan/lenvatinib/pembro in LITESPARK-012. We have the press release, but we do not know the detailed data. What could you see in that detailed data that would give you more confidence in cascadifan plus TKI plus IO, and what could you see in the Merck data that would give you less confidence in the TKI combo strategy? Terry Rosen: Thanks, Daina. I think we will see what their data say, but the data that are out there tell us a lot already. If you consider what we discussed at the beginning—that pharmacodynamic difference between cascadifan and belzutafan—not only the depth of response, but particularly the durability, and you think of that as a surrogate for its antitumor activity and a direct measure of its ability to inhibit HIF-2, you can reconcile very easily, even in the absence of the data from the study itself, that if you think about LITESPARK-011 versus LITESPARK-012, the duration of treatment you are talking about—if you think about PFS, roughly for the two different studies—is almost 2x. Belzutafan, as a surrogate for HIF-2 inhibition that directly relates to inhibition of the tumor, is clearly losing that effect with time, and dramatically. On erythropoietin production, on average, you have lost that effect within 9 to 13 weeks. So, in the second-line population, the percentage of time where it is bringing benefit is X, and then in the frontline, it is much less. Then, on top of that, if you think about the regimen, it is a pretty toxic regimen. Even pembro/lenva had about a 37% rate of discontinuation. We know that the triplet was, you know, pretty unfavorable from a patient perspective. So if you think about basically having a diminishing effect of the HIF-2 inhibitor on top of a much longer duration of an arm that has more AEs than the control arm, you are basically paying a price but getting less benefit. It is not surprising that you would end up with a hazard ratio that might not be too favorable. For us, we are going to select a TKI that we think has a very favorable profile relative to the TKIs out there. But the most important feature will be that we have a HIF-2 inhibitor that has its robust effect, and the durability of that effect is essentially the same on day one as it is on day 730. Daina Graybosch: Got it. Thank you very much. Terry Rosen: Thanks, Daina. Operator: Your next question comes from the line of Jonathan Miller with Evercore. Jonathan, your line is now open. Jonathan Miller: Hi, thanks for taking my question, and congrats on all the progress. Looking at a very broad cascadifan development plan with a lot of combinations across first-, second-, and third-line settings, one thing that is notably absent is any approach in the adjuvant setting, which obviously we know Merck is going after. I would love to hear your updated thoughts on adjuvant and why that is missing from the current development plan. And then, related to that, relatively recently you were talking about a more conservative approach to late-stage development for cascadifan—at least with respect to the number of Phase 3 trials you would want to start—and considering partnerships to ameliorate the cost of late-stage development. Obviously, there has been a bit of a shift there. But, Terry and Robert, I heard you say you do not expect to see any impact on runway or the ability to prosecute all these different programs. I would love to get a little bit more granularity on the sequencing that you are talking about and when you would start these TKI-containing and potential novel combo development efforts to enable you to pursue all these different approaches without running up against bandwidth limitations. Thanks. Terry Rosen: Thanks, Jonathan. I will let Robert handle that, and then I may have a few comments to add. Robert Goeltz: In terms of the adjuvant setting, for us, it comes down to two simple things. One is the size of the opportunity, and probably more importantly, the need. When you think about that particular setting, we think that it is around 12 thousand patients or so that get therapy in the adjuvant setting—only the high-risk patients with resection—and their treatment is capped at a year. When you do the math, we think that the opportunity, certainly from a revenue perspective, is smaller than the second line, and probably even smaller than what could be a third-line regimen with an alternate TKI, as we described. The other important part is we have had a chance to talk to physicians after seeing the LITESPARK-012 data, and the bar to add another therapy on top of pembro is considered quite high. In fact, most physicians told us that they would not add belzutafan to the regimen even in light of the LITESPARK-012 data. So we actually think it will be a minority of patients that ultimately will receive belzutafan in that setting. It is prioritization, and frankly, the other settings—first, second, and third line—are higher on the list for us. In terms of the sequencing of the spend, as we highlighted, we have PEEK-1 up and enrolling right now. Our goal is to have the study enrolled by the end of the year. The work towards launching these additional Phase 3 studies would have us in a position to move those studies forward as early as late this year into next year, with, obviously, probably our highest priority being that frontline combination with ipi and anti–PD-1. The other studies will be shortly on the heels. But if you think about the general investment profile for the studies, we will be through the bolus of study start-up for PEEK-1, and the cost profile for PEEK-1 will be starting to decrease as we get into the second half of next year. We think there will be a nice portfolio effect, and when we think about these other studies, the spend really kicks in in late 2027 and into 2028. We see a generally steady spend profile through the PEEK-1 readout as we described. Terry Rosen: And, Jonathan, Robert gave you the line of the spend along with the studies, and I will give you a bit more granularity on how we literally see the trials themselves playing out. The first study, obviously, is PEEK-1—that is enrolling. As Robert said, it will be fully enrolled by the end of this year, and then we will be waiting for readout. We are going full speed ahead and expect that ipi/anti–PD-1/cascadifan, as we have been talking about for some time, will be getting up and going by the end of this year. We will see where the TKI-inclusive regimen comes in. Without getting into all the detail now, we will be sorting through whether there are actually two registrational studies or a three-arm study is also a possibility. Finally, in the later-line study that we talk about, we will start off in ARC-20, and as you know, those are relatively small cohorts that enroll very efficiently. Another important point within those studies—and we will get the answers quickly—is that we will be looking at that combination in the third-line-plus, in belzutafan-naive as well as belzutafan-experienced patients. I think that will establish—something we think we know the answer to—but we will have those data even this year. Jonathan Miller: Excellent. Thank you so much. Terry Rosen: Thanks, Jonathan. Operator: Our next question comes from the line of an analyst. Your line is now open. Operator: Lee? Operator: Line is now open. Analyst: Hey, congrats on the progress. One question on the ARC-20 update, especially from the triplet cohort. It sounds like you are enrolling the combination with zimberelimab plus ipi. Can you clarify if we are going to see the initial data from this cohort this year? And what data points would you want to see to enable a Phase 3 frontline trial? Terry Rosen: Thanks. We do think you will get to see—probably in the fall—the initial data from that ipi/anti–PD-1/cascadifan regimen. We will get a sense of the safety data and the rate of primary progression. While there may be some early ORR data, we do not consider that critical. We are most focused on the safety. We will have an agreement with the FDA as to what safety data package they would want to see to enable us to get that Phase 3 up and going by the end of this year. Because that is the first point, but it is also an important point for that regimen, we will see the rate of primary progression. One thing to recognize about that regimen when we think about triplets, doublets, etc., is we have already talked about the rate of primary progression with cascadifan plus anti–PD-1 alone, and those initial data are quite favorable, where we saw only a 7% rate of primary progression. If you think about what the cascadifan/anti–PD-1/ipi regimen is going to look like, you basically get four cycles of ipi at the outset, of course with cascadifan and anti–PD-1, but then the duration and the bulk of your therapy is going to be anti–PD-1 plus cascadifan. So both the efficacy you are seeing with that as well as the safety of that will certainly impact the bulk of the therapy. We are excited about that regimen. We think we are well on track to be able to start the Phase 3 by the end of this year and have a good safety data package, and we do plan to share that externally this year as well. Analyst: Thank you. Robert Goeltz: Thanks, Lee. Operator: Our next question comes from the line of an analyst with Goldman Sachs. Your line is now open. Analyst: Hey, very helpful to see cascadifan’s development laid out across all the different lines of therapy. A couple of questions from me. Looking at the LITESPARK-012 failure in both triplets and the VOCAF discontinuation by AZ, and then all the frontline therapy—doublets or monotherapy—so far, what is your confidence that a cascadifan triplet of any kind, either with IO/IO or IO/TKI, could be safe enough to succeed in 1L? What do you think is the safety bar for 1L? Do those triplets have to show comparable safety profiles to IO/IO or IO/TKI for them to work? Terry Rosen: We feel very confident, based upon what we already know about our molecules, with triplets—whether it is a triplet inclusive of a TKI or a triplet with ipi and anti–PD-1. Keep in mind, while we have not analyzed in detail—and we will later this year—the zimberelimab (anti–PD-1) plus cascadifan doublet, we have not seen anything untoward with that. We know we can combine with cabo well. We believe that the ipi/nivo regimen has been extraordinarily well worked out in terms of dosing. As I mentioned in my response earlier, you are going to treat with four cycles of ipi; that is well worked out and time-tested. Most importantly, you are only going to be carrying your anti–CTLA-4 dosing for four cycles. We believe we have orthogonal AEs. We have not seen clear combination issues. With cascadifan, you are basically bringing on-target anemia and, more rarely, hypoxia. We are going to pick a good TKI. We know that cascadifan plus anti–PD-1 looks good. We think a reasonable TKI will not bring anything untoward there. Keep in mind, we have not actually seen the Merck data. Their hazard ratio must not have been good. That does not get to an intrinsic inability to have a triplet; it just says when you are bringing belzutafan on top of a pretty rough doublet, and you are treating for a long period of time, and you are undoubtedly introducing some new AEs but not having a robust long-term efficacy effect, you are probably not creating a favorable hazard ratio. We really do not know exactly how that played out, but all the data with our own molecules suggest that cascadifan is a very well tolerated and robust HIF-2 inhibitor with an orthogonal AE profile from anything that we plan to combine it with. We will have those data within the next six months or so. Analyst: Got it. And then a follow-up: Have you seen the efficacy and safety results from that VOLU/cascadifan trial before Astra discontinued it? And would that data be shared with you even if Astra does not plan to share it publicly? Terry Rosen: Thanks. We have not seen anything other than what we said at the outset. Since they did disclose, you can now know that there were nine patients. What we described was that initial safety signal that was very CTLA-4—and more specifically bolurumab—like. When they dosed down bolurumab but kept cascadifan at the same 100 mg dose, we did not see any more of it in those patients, who still continued on. In fact, the interesting thing out of that—as we have commented before—is we did not see any progression. If anything, given that it was nine patients, it is not obvious whether that was even purely bolurumab or not. What is obvious to us, as we were thinking about going forward, is that given the ipi/nivo well worked-out regimen and dose, and the fact that you are only going to be carrying your anti–CTLA-4 dosing for four cycles, it is a clear regimen for us to proceed with, all things considered, rather than running both of those activities for the duration of therapy. Analyst: Got it. Thanks. Terry Rosen: Thanks, Rich, and congrats again. Operator: Our next question comes from the line of Salim Syed with Mizuho. Analyst: This is Mike Linden on for Salim. Thanks for taking our question. Just one from us on cascadifan in frontline again. How are you thinking about patient selection for an ipi/nivo plus cascadifan combination for a Phase 3? Would these be all-comers versus poor, intermediate, favorable risk patients? And has the thinking around patient selection changed post–LITESPARK-012 failure? Thanks. Terry Rosen: Our patient selection strategy has not changed. In fact, we are thinking of all-comers, and we would also be thinking of all-comers insofar as a TKI-inclusive regimen. What we are really trying to address there is that there is clearly—based on our advisory board meetings—a strong preference for a TKI-sparing regimen. That is unequivocal, and that is the bedrock of the frontline. With that said, there is a bit of “tribalism,” as investigators would describe it. Certain investigators are very prone—particularly if there is a bulky, fast-growing tumor, but even otherwise—to want to reach for a TKI. We feel that for that overlap of a particular patient with a particular investigator, there should be a HIF-2 inhibitor–containing regimen. We think we can offer a very good one. We look at both of those to be in all-comer patient populations. The LITESPARK-012 data, for us—until we see something otherwise—simply reflect the durability of effect on HIF-2 inhibition with time, which we know is a dramatic difference between our two molecules. When we look at the choices of what to combine with, keep in mind, we have no commercial predisposition there. Essentially, the world is our oyster. In the frontline, there are a number of TKIs used; there is not one that is particularly dominant. Overall, you have probably 60% of the patients getting a TKI, but they are spread somewhat evenly. We have looked strategically at what is the smartest TKI from a safety standpoint—well used, well tested, approved, understood—that we should combine with in the frontline. We know that we are going to have cabo in the second line. We have done the same thinking about that late-line patient population with what then becomes another TKI that you would use late-line. As I said, the other important thing there is that we are going to look at that combination of cascadifan plus that TKI in belzutafan-experienced patients and establish unequivocally that you get the activity that you want to see in that HIF-2–experienced patient. Analyst: Thank you. Operator: Our next question comes from the line of Jason Zemansky with Bank of America. Jason, your line is now open. Jason Zemansky: Hi, this is Jackie on for Jason. Congrats on the progress, and thanks for taking our question. What do you think is necessary to drive broad uptake of a TKI-free regimen in first-line RCC, given how popular TKIs are overall—especially given their ability to rapidly debulk tumors—or is the goal to compete directly with dual IO therapies? Terry Rosen: We think there is strong receptivity towards this. One of the most important things we have seen to date is that cascadifan as a monotherapy, even in the late line, performs as good or better than a TKI in any line of settings. Even in the late line, cascadifan monotherapy—whether you are looking at ORR or PFS—looks quite good. The thing that is standing out, and the issue identified with belzutafan at the outset, is the rate of primary progression. That raised the question for HIF-2 inhibition: can you compete with TKI in bringing the tumor under control quickly enough that you do not have that high rate of primary progression? We believe that belzutafan was forced in the frontline to combine with a TKI to address a potential high rate of primary progression. We think that despite the fact that HIF-2 inhibition is well tolerated, it can get the tumor under control quite fast. The evidence is in combining with anti–PD-1: in 30 patients, we only saw two primary progressors—7%—very much in line with a TKI. We think there is receptivity to a TKI-sparing regimen, and the key to driving uptake will be to show that our rate of primary progression—and everything that flows from that—looks like a TKI. The last point is that TKIs are a rougher treatment; there is a linkage in people’s minds that associates “rougher” with “bringing the tumor more under control.” Keep in mind that 85% to 90%+ of clear cell RCC has HIF-2 as a key driver. You are hitting the tumor with something that really matters. With a robust inhibitor like cascadifan, you can compete with the efficacy effects of a TKI. Robert Goeltz: Just to add, the reason many clinicians prefer using ipi/nivo is it gives the patient the best chance for long-term survival. The Achilles heel, as Terry described, is the primary progression. If you could blunt that and still give patients the best chance at long-term survival—and we just saw 10-year follow-up data with 40% of patients alive 10 years later—that is a very compelling regimen, we think. Jason Zemansky: Thank you so much for the color. Operator: Our next question comes from the line of Emily Bodnar with H.C. Wainwright. Emily, your line is now open. Emily Bodnar: Hi, thanks for taking the questions. On the LITESPARK-011 data, how are you looking at your upcoming cascadifan plus cabo updated data, and what are you hoping to see to feel confident that you might have a superior profile versus what we saw in the LITESPARK-011 trial? Thank you. Terry Rosen: We already feel that confidence, and we are obviously running the Phase 3 trial. You kind of have to think of things holistically. In the end, what you are going to have is a hazard ratio, and since we are both running versus cabo, those will be directly comparable. While our data, when we share later this year, will still be early, we are going to give Kaplan-Meier curves, landmark PFS, and ORR. People will be able to extrapolate to whatever extent they want, but we will give a very holistic view. Another point we do not want lost is an interesting aspect of the data that will only be emerging as things play out by the time we have some mature data later this year. While from a regulatory standpoint PFS is what matters, we are going to have data from our monotherapy cohorts that are getting mature enough to start to get a sense of whether we bring an OS advantage there—albeit in the late line. The reason that is important is that it may give a good sense that this mechanism can not only drive enhancements in PFS, but also bring enhancements to OS. While that may not be a regulatory requirement, we certainly could see it as an important differentiation that would drive more uptake by a clinician if, in fact, we start to show OS enhancement from HIF-2 inhibition—which we believe there is no reason there should not be. Emily Bodnar: Thank you. Operator: Our last question comes from the line of Yigal Nochomovitz with Citigroup. Yigal, your line is now open. Analyst: Hi, this is Chuan Kim on for Yigal. Congrats on the progress and thanks for taking our question. A question regarding AB-102. While it is still early, is there any color you can provide on the intended proof-of-concept study design—whether you are planning on going into CSU versus AD first? Any color on primary endpoints or level of clinical signals you would need to see to give confidence to advance into a future registrational program? Terry Rosen: Juan, why do you not describe how we see ourselves going from A to B to C in the near term? Juan Jaen: At a very high level, we recognize that while we may have a better molecular profile, we have a little bit of ground to make up relative to the couple of existing clinical players. We have devised a fairly accelerated plan for establishing PK and tolerability in healthy volunteers, followed by a rapid mechanistic confirmation of biological activity, and very quickly progressing into a Phase 2 study in CSU. We think we will, in reasonable time, catch up and hopefully begin to illustrate the better profile of our drug. In parallel, we are thinking about where it might make sense—concurrently with that CSU-type Phase 2 study—to demonstrate the value of an MRGPRX2 inhibitor. Right now, our lead candidate for that additional indication seems to be allergic asthma, but that is still at a very early stage of conceptual framing. Analyst: Thanks. Operator: There are no further questions at this time. This concludes today’s call. Thank you for attending. You may now disconnect. Terry Rosen: Thanks, everybody. Goodbye.
Jaime Marcos: Good morning, everyone, and thank you for joining us for our first quarter 2026 results presentation. First of all, I would like to confirm that earlier this morning, before the market opened, we published this presentation and the related financial information on the CNMV and our corporate website. Today, our Chief Financial Officer, Pablo, will be the one presenting the first quarter trends. The presentation will last approximately 20 minutes, and it will be followed by our usual Q&A session. Without further ado, I would now like to hand over to Pablo. Pablo Gonzalez Martin: Thank you very much, Jaime. I will start on Page 3, where we show the main highlights of the quarter. Starting with our business activity, I would like to highlight that business volumes have accelerated their growth rate to over 3% year-on-year. This progress has been supported by an almost 4% growth in customer funds and supported by an increase of almost 11% in off-balance sheet funds, mainly mutual funds, where we are showing a 17% year-on-year growth, maintaining a 9% market share in net inflows. This improvement is also supported by a 2.4% growth in total performing loans, which for the second consecutive quarter continued to accelerate their growth. Turning to profitability. Net income for the quarter amounted to EUR 161 million. Both net interest income and fees showed year-on-year growth, something that combined with lower provisions more than offset the mid-single-digit increase in total cost. The adjusted return on tangible equity remained at 12%, while the cost-to-income ratio stood at 46%. Asset quality remained strong. The net NPA ratio stood at just 0.7%. The NPL ratio continued its downward trend, reaching 2% and its coverage further improved to 80%, significantly above the 70% reached a year ago. The cost of risk also showed a positive trend, declining to 20 basis points, marking one of the lowest levels in recent years and below our initial guidance. Lastly, we remain focused on value creation. Our CET1 ratio stayed stable at 16% during the quarter as we are allocating capital for shareholder remuneration and lending growth. Two weeks ago, we paid the 2025 final dividend which, together with the interim dividend paid in September reached EUR 443 million. This represents a payout of 70%, resulting in 9% dividend yield. Looking ahead to 2026, we expect to further enhance shareholder remuneration up to 95% of net income, thanks to our relatively higher capital position and also to our robust organic capital generation. Overall, our tangible book value per share adjusted for dividends was 9% higher than the previous year. In summary, all trends remained solid throughout the first quarter of 2026, confirming the recent positive momentum. We recognize that uncertainty has increased in the past couple of months, and it may be too early to provide more specific effects. Nevertheless, based on the information available so far and despite market volatility and the possible direct and indirect effects of the current geopolitical risks, we reaffirm all targets and commitments outlined in our strategic plan. The beginning of 2026 has been better than initially expected, which is obviously great news given the uncertain environment we are facing. All in all, we confirm our initial guidelines for the year. I will continue with the commercial activity on Page 5. As you can see, total customer funds increased by 3.9% year-on-year. On-balance sheet funds grew by 1.6% or 2.4% when excluding the public sector. Off balance sheet funds rose by 10.6%, driven by a remarkable 16% growth in mutual funds. It is worth mentioning that mutual fund balances have grown from EUR 14 billion to nearly EUR 17 billion over the past 12 months. On the next page, you can see the details regarding our assets under management and insurance business. As highlighted in the previous slide, assets under management increased by 11% year-on-year with mutual funds showing particularly strong growth of 17% despite challenging environment this quarter. Net inflows reached EUR 468 million, representing a strong 9% market share. On the right hand side, we show the revenues from these 2 business segments, which have risen by 4% compared to the last year and now account for 19% of total revenues. Now on Page 7. As you can see, loan volumes continue to grow. Total performing loans increased by 0.8% quarter-on-quarter and 2.4% year-on-year, reflecting a positive performance across all segments. Private sector loans rose by 1% compared to the previous quarter while corporate loans posted an increase of over 3%. Lending to individuals maintained its gradual growth trajectory. Mortgage volumes remained stable during the quarter and on a year-on-year basis, whereas consumer loans continued to expand at high single-digit rates like in the previous quarters. Overall, first quarter evolution demonstrates slightly better trends than previous quarters, driven mainly by improvement in the mortgage and SME segments, both of which showed some growth this quarter, while maintaining positive dynamics in corporates and consumer. On Page 8, you will find details regarding the new loan production. During the first quarter of 2026, new lending to private sector increased by 10% compared to the previous year, reaching EUR 2.5 billion. As we have just seen, we are delivering growth in the loan book in all main segments. You can see consumer lending maintains very good momentum Mortgages are close to our natural market share level. And in business lending, lower volumes are explained by some large tickets last year, but we are delivering a strong portfolio growth here on much better portfolio and customer management. Turning to Slide 9. We would like to briefly present some evolution of digital sales and customer acquisition. In the top left, 65% of consumer loans were granted digitally, significantly higher than the 49% in the previous year. It is also worth noting that digital consumer loans amounted to EUR 160 million, representing an 82% increase compared to the first quarter of 2025. In mutual funds, the weight of digital sales grew from 25% to 36%, reaching EUR 230 million, which is nearly 50% higher than last year. Also, as shown in the bottom right of the slide, I would like to highlight that more than 1 million clients use their Bizum with us, which is the instant payment tool most used in Spain, something that is quite relevant for the transactional business as you can only have one Bizum account per fund number. Also, it is worth noting that in the first quarter of 2026, the acquisition of new salary accounts has doubled, explaining the quarterly increase in the cost of deposit as we will see later. The commercial campaigns include an upfront compensation for the client in exchange for their formal commitment to maintain their salary with us in the future. As you can see, a strategy that is working very well to further improve the transactional business with our clients, which is one of the main commercial focus of the bank. Moving now to Slide 10. We highlight our continued progress in our sustainability strategy. We keep financing the transition and actively pushing green bond issuance. During 2025, our green bonds enabled the avoidance of 142,000 tons of CO2. Our pool of eligible projects continue to grow together with our ESG business, both green and social. We are well on track on the decarbonization targets over the lending portfolio. Overall, the evolution we are seeing is very positive, and this is clearly reflected in our sustainability ratings that show a consistent positive trend. We now continue with the review of the P&L in the next section in Slide 12. Net interest income increased by 1.3% compared to the first quarter of 2025. On the quarter, it fell by 1.2%, primarily due to the lower day count. Total fees were 1% higher than in the previous quarter and 3% higher than last year. Overall, revenues reached EUR 520 million, 1% higher than the first quarter of 2025. Total costs grew by 1% on a quarterly basis and 4.5% compared to last year, in line with our mid-single-digit growth guidance. Loan loss charges decreased by over 20%, both quarter-on-quarter and year-on-year, confirming the positive asset quality trends. Other provisions were 9% lower than last year and also significantly lower than last quarter when we booked some restructuring charges. Profit before tax stood at EUR 232 million. After accounting for EUR 71 million in taxes, which includes EUR 6 million of the banking tax, net income reached EUR 161 million, representing a 1.4% increase over last year. Now let's review the income statement in more detail. Starting with the net interest margin on Page 13. As you can see, the customer spread remained stable compared to the previous quarter, reversing a negative trend that began in the first quarter of 2024. Loan yield increased by 2 basis points, the same as the cost of deposits, which, as I mentioned earlier, grew due to the impact of our successful salary account campaigns. Net interest margin fell to 1.69% due to the volume effect, driven by higher balances in repo market activity. However, if we exclude this effect, net interest margin stayed stable during the quarter. On the following page, we show the details of the quarterly evolution of net interest income, which decreased by 1% during the quarter but was 1% higher than the previous year. The lower day count of the quarter amounted to EUR 6 million, while NII decreased by almost EUR 5 million. So, without this effect, NII would have actually increased during the quarter. As you can see in the bridge, the increase in deposit cost, mainly driven by customer acquisition campaigns and the lower lending income, which is fully explained by the lower day count, were partially offset by liquidity, ALCO, and wholesale funding. Turning to fee income, the trend observed in recent quarters was confirmed, with a slight decrease in banking fees, which is more than offset by non-banking fees growth, mainly from mutual funds and insurance. Despite the negative mark-to-market at the end of the quarter, fees from mutual funds continued to improve, increasing 19% year-on-year and nearly 4% quarter-on-quarter. Fees related to assets under management and insurance further strengthened their contribution this quarter, accounting for 53% of total fees, up from 48% last year and 43% in the first quarter of 2024. In Slide 16, we show you the details of the rest of revenues, which also show a relatively stable trend in recent quarters, with a slightly lower trading income this quarter owing to market conditions, but nothing material. Regarding total costs, personnel expenses continue to grow due to salary increases agreed with unions and new hirings. Other administrative expenses also reflect some of the initiatives needed to implement our business plan, leaving total costs 5% above the previous year, in line with mid-single-digit growth guidance. On the right-hand side, you can see our cost-to-income ratio, which grew to 46%, mainly owing to these initiatives that we expect will positively impact the future revenues. Something that going forward will help reverse this trend. All in all, the ratio remains below our 50% target. On the next page, we continue with the cost of risk and other provisions, which, in my view, are one of the most positive news of the quarter. As you can see on the left-hand side the cost of risk was 20 basis points, which is the lowest since the merger with Liberbank and below our initial guidance of less than 30 basis points for the year. The remaining provisions, including legal ones, were also lower, leaving total provisions at EUR 43 million in the quarter, which is 19% below 2025. Provisions showed a very positive evolution at the start of the year, which is obviously great news and leaves us in a comfortable position for the rest of the year. Moving now to Page 19, the bank's return on tangible equity continues its upward trajectory, reaching 10% as of March 2026, or 12% when adjusted for excess capital. As we frequently highlight, we consider the return on CET1 to be a reliable benchmark for us, as it effectively isolates the relatively larger accounting equity required due to solvency deductions, mainly from deferred tax assets. In the first quarter of 2026, the return on CET1 adjusted for excess capital stood at 17%. Lastly, on the right-hand side, you'll find the tangible book value per share plus dividends which has grown by 9% over the past 12 months. Let's move now to the credit quality section on Page 21. As you can see on the slide, positive trends remain in place. NPLs are down 20% year-on-year, with a coverage growing to 80%. Overall NPAs are also down 26% year-on-year, with coverage also improving to 79%, a very positive evolution that leaves total net problematic exposure at only 0.7%. If we now move to solvency on Page 23, you have the quarterly bridge. CET1 was very stable in the first 3 months of the year. Quarterly capital generation, including a positive contribution from the stake in EDP, was mainly allocated to shareholder remuneration and lending growth, which are the 2 main users where we plan to go toward our comfortable solvency position, leaving the CET1 stable at 16% in March 2026. On the next page, you will find our MREL position. As shown, our MREL ratio stood at nearly 27% at the end of March, providing a substantial buffer above the key requirements listed on the right, including an MDA buffer that was higher than 680 basis points. In terms of liquidity, all ratios remain among the highest in the sector with the NSFR at 159% and the LCR at 292%. Finally, our loan-to-deposit was 69% in March, summarizing the excess of retail funding of the bank that, among others, explains the size of our structural ALCO portfolio that we show on the following page. The yield of the portfolio grew from 2.6% to 2.7%, a small improvement owing to the reinvestment and active management. Duration and size also represented a modest increase in the quarter. It is also worth noting that 81% is public debt and that 83% is included in the amortized cost portfolio. Finally, as shown on Page 27, despite geopolitical uncertainties, we reaffirm our guidance for the year. We expect net interest income to exceed 2025 figure, net fees to grow at low-single digit and total cost to increase by mid-single digit. Regarding cost of risk, our initial forecast was to finish the year below 30 basis points, which we also maintained despite the strong first quarter of 20 basis points. It is obviously better than expected at the start of the year, but given the current situation, we prefer to be prudent. In terms of business volumes, we remain well on track to achieve the target of 3% growth. Finally, we confirm our expectation that net income for 2026 will surpass the EUR 632 million from last year. This concludes my quarterly update that as demonstrated, shows a continued improvement in the bank's overall financial position with a stronger commercial performance, enhanced results, consistently high solvency and very positive outlooks for shareholder remuneration. Thank you very much. And I will now hand over to Jaime for the Q&A session. Jaime Marcos: Thank you very much, Pablo. We will now begin with the Q&A session. [Operator Instructions] Operator, please open the line for the first question. Good morning, everyone, and thank you for joining us for our first quarter 2026 results presentation. First of all, I would like to confirm that earlier this morning, before the market opened, we published this presentation and the related financial information on the CNMV and our corporate website. Pablo Gonzalez Martin: Thank you. Maks. Regarding the cost of risk, as you can imagine, we are in an uncertain environment and geopolitical risks are part of our analysis, and we have considered with our post-model adjustment some impact in the quarter. So, we are quite aware that the potential cost of risk for the quarter was quite good and even below our guidelines for the year, but we want to be prudent for the year and maintain the guidelines for the time being. Jaime Marcos: The other one, the second one was related to a potential exit scheme because another competitor has announced one. Just as a reminder, in the fourth quarter 2025, we booked some restructuring charges to implement a similar exit scheme, a voluntary exit scheme. In our case, that exit scheme, it is more focused on renewal of part of the staff rather than specific cost cutting. So that was announced in the fourth quarter. It was booked in the fourth quarter, and it will be implemented throughout 2025. Pablo Gonzalez Martin: Yes. And was within our guidelines for total cost was considered this scheme. Jaime Marcos: Thank you, Pablo. Please, operator, can we go to the next one? Operator: Next question from the line of Miruna Chirea from Jefferies. Miruna Chirea: I just had 2, please, on NII and then one on the salary account campaigns. So firstly, on NII, you are maintaining your full year '26 guidance of NII greater than '25. But if I'm just analyzing your Q1 NII point, I'm already getting to a number that is more than 1% above '25. And presumably, you're also looking at some volume growth and potential further margin expansion for '26. So, it seems that there is some upside to your guidance. If you could just walk us through your expectations for quarterly NII provision? And then on the salary account campaigns, we showed the increase in your cost of deposits for the quarter. Could you give us some color on how successful the campaigns were and then some details on the pricing? I hear your comments about the upfront cost, but is there also a promotional rate? And if so, for how long does it last? And what does the rate reset afterwards? And if you could share any thoughts on the outlook for the cost of deposits for the rest of this year? Thank you very much. Pablo Gonzalez Martin: I'll try to give you some information on the NII. We maintain the guidance. If you consider the improvement compared to one year, it's only 1.3%. So, this is quite in line with what we were expecting. So, we maintain the NII. I think for the coming quarters and the expectation on a quarterly basis of what we expect, I think the first thing to mention is interest rate volatility is paramount and will have an impact mainly on 2027 and 2028. In the short term, in the quarterly, the impact of any interest rate shock is always smaller. So, our expectation remains that the first quarter was going to be slightly below last year. But if we consider the day count, it could consider the fourth quarter the bottom of NII. From this onward, our expectation is a gradual improvement, slower in the second quarter and then taking and picking up and having some momentum from the second half of the year and especially in 2027. So, we maintain that expectation, and we will see how this evolves. And regarding the salary account. I think this has been quite successful, and this is one of the reasons that we have some pickup in cost of deposits, but it's with our strategy to improve the transactional business with our customers and improve the transactional business down the line. And the overall cost of risk this quarter has been quite stable regardless of this impact. And going forward, obviously, we have higher rates on market prices, we will have some impact down the line, but within the expected beta that we have at the moment, and consider that we have only 25% of remunerated deposits in our book. Jaime Marcos: Thank you, Pablo. Please, operator, can we move to the following question. Operator: Next question from the line of Cecilia Romero from Barclays. Cecilia Romero Reyes: I have two. The first one on NII sensitivity and 1 year have moved higher again. Over a 24-month repricing horizon, how much incremental support can NII realistically receive from higher rates, including out of reinvestment at higher yield relative to the assumptions you had at the end of last year? And in a scenario where sector loan growth is affected by the macro backdrop and lending slows, will a stronger deposit growth support NII? And the second one on provisions, if the macro environment were to become more uncertain, how would that typically feed through into your provisioning models and cost of risk? I think you have a high weight in your base case. Are you thinking of changing your weight for each scenario? And do you have any overlays? Pablo Gonzalez Martin: Thank you, Cecilia. Regarding the NII sensitivity, I think as I mentioned, for the first year, any interest rate shock has very little impact since we started at the end of 2023 to lock in the level of rates for the next 2 years -- 2, 3 years. So, for this first 12 months, the impact will be very small. From a more second year impact, we think we have an impact for 100 basis points parallel movement of around mid- to high-single digit impact in NII. And this obviously, as you can imagine, will depend a lot on how customer deposits cost evolve. So, it's always with the assumptions that everything, the beta is maintained as it is now, which is -- has been quite stable. So, there's no reason to think in a different way. But obviously, we consider in this analysis that we have some renewed ALCO portfolio reinvestment, and we have also some new lending at higher rates after the shock. So, this gives us with a positive evolution in the second half of this year, a small one and then picking up some momentum from '27 onwards. Overall, I think it's important to remember that we have quite a significant NII sensitivity in the medium term due to our liability and the deposit -- the transactional deposit base that we have. And regarding the volumes in the impact of NII, we have given a more stable and constant balance sheet impact rather than dynamic impact. So, we haven't considered in this sensitivity the impact on volumes. I think in the short-term the impact of reducing expected volumes, we were expecting to have around 3% growth in volumes more or less for the year. So, if maybe anything of this geopolitical risk has an impact of some reduction in lending. Maybe we have an increase in the saving rate that support the deposit side. So, I'm not convinced this is negative or neither positive. We have some NII coming from the lending. The good news is the front book is ahead of the back book, and the deposits are behaving as expected. So, we're comfortable with the guidance that we give for the year and expect to improve next year. And regarding provisioning and how we consider -- we have a prudent approach in our model. And just to give you some color, the model of our IFRS 9 macroeconomic variables that consider our base scenario, we were expecting only 1.9% GDP growth for the year. And the last number that we have for the first quarter is we have an annualized 2.7%. So, still room for some reduction in the year in the GDP numbers. We consider the situation to have some impact, but not a very significant impact and still maintain positive momentum in the Spanish economy. And regarding the post-model adjustment and the 1-year cost of risk, I think we already have some buffer on top of this provisioning within our IFRS model, which is we already considered last year, and we mentioned that we consider geopolitical risk as one of the potential impact that our model didn't consider. So, we already have some provision last year, and we slightly increased this quarter, again, our post-model adjustment. So, we are comfortable with our guidance of below 30 basis points for the year, even in some stress scenarios as we are witnessing today. Jaime Marcos: Thank you, Pablo. Please can we move to the following question please, operator. Operator: Next question from the line of Borja Ramirez from Citi. Borja Ramirez Segura: I have 2 questions, please. The first is on the payroll accounts, if you could kindly provide more details on the volume outstanding and the average cost? And also, if you could provide details on the ongoing system competition in Spain? And then my second question would be, I understand that you have some ALCO maturities that I think it was between 80 and 90 basis points, around EUR 2 billion maturing this year. If you could kindly reconfirm this number. And I think you also have NII benefit from the maturity of an expensive bond at the end of this year, if I remember well. So, there could be some NII uplift on that. If you can this as well, please? Pablo Gonzalez Martin: Thank you, Borja. Regarding the customer acquisition campaigns, I think just to give you some color, we have spent around EUR 6 million in this quarter on these campaigns, which represent the successful of the campaigns, which is more than EUR 4 million more than the previous quarter. So, this strategy is picking up, and we pay slightly less than EUR 500 upfront with compromise from the customer to be with us at least for 2 years. And so, the impact on the cost is within those EUR 500 that I mentioned. And the amount, we gathered more than 12,000 new salary accounts for the quarter. Regarding the ALCO portfolio maturity, as I mentioned last presentation, we have for this year, slightly above EUR 2 billion. We still have remaining EUR 1.7 billion for the year, and the average cost is very similar to the number for the whole year. So, it's around 0.8%. And this has been considered when we say that we expect to have a slightly higher NII for the year than compared to last year. So, we already took this in consideration. And as you can imagine, we are reinvesting this at a higher level. Jaime Marcos: Thank you very much, Pablo. Operator, please, we can move to the following question. Operator: Next question from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So, my first question would be on cost growth. Some of the wage negotiations are coming due next year, if I'm not mistaken. So how should we think about cost growth beyond 2026, more in '27, '28? And what cost pressures do you see kind of on the horizon? And then my second question would be, could you just remind us how much DTA benefits we should be expecting every year going forward? Pablo Gonzalez Martin: I think regarding cost growth, I think as you can imagine, it's a combination of different things. As we mentioned within our strategic plan, we have a strategy to diversify our revenue sources. So in order to grow in corporate lending and in consumer lending and import/export lending and private banking and so on, this requires some deployment of IT developments process and people and talent. And we have been hiring some talent. So, you have to consider this on top of the actual salary increase that we mentioned. So, we maintain and we are comfortable with the 5%. I think to talk down the line for '27, '28 is too premature, and we will give more details on the future position for the bank. And on top of this, we have this, as I said, on top of these new hirings, we have some schemes, as we mentioned, to reduce some of our workforce. So, what we are doing is not a cost-cutting measure, but to renew and to uplift the capabilities of our workforce. And regarding your second question, Jaime, can you comment? Jaime Marcos: Yes. On the DTAs, very straightforward. I think that you can expect a run rate between 20 to 25 basis points per year of solvency generated by lower deductions from DTA at current profitability levels. That will be probably the summary. So, we can move please operator to the next question. Operator: Next question from the line of Carlos Peixoto from CaixaBank BPI. Carlos Peixoto: The first one would just be a little bit of a follow-up on fee income. Basically, you're maintaining the low-single digit growth for the year. Do you see any tailwinds here or headwinds, sorry, actually from the market -- the recent market volatility or potential hampering of your assets under management business because of this? And then the second one would be on capital distribution plans. So, you have already upgraded payout to very high levels. But I was just wondering whether there are any additional plans to distribute or to accelerate the distribution of the existing excess capital? Pablo Gonzalez Martin: Thank you, Carlos. I think on fee income, as we said, we have managed quite well the headwind coming from market volatility. I think that the market is performing quite well considering the geopolitical risk environment. And I think there's still some momentum in the Spanish and our customer base to increase their investment compared to their saving. And so, we haven't changed our expectations on off-balance sheet growth and mutual funds. This obviously will depend on how market evolves. But so far, I think the drawdown that we saw in March is almost recovered now. So, we don't think the customer and the investor base will change their attitude unless we have a more significant impact on the market that we don't foresee in the short-term. And regarding capital distribution plans, I think we have a quite generous level of 95% shareholder remuneration of net income. And just to recall, we will have a presentation in the second quarter. We will have the update of our interim dividend of 70% in the first half of the year. Then in the third quarter result presentation, we will announce how is going to be delivered, the 25% additional remuneration that we plan. And in the final year presentation, we will have the final dividend. So, we don't think we need to accelerate anything regarding shareholder remuneration, and we stick to our strategic plan. Jaime Marcos: Thank you very much, Pablo. Can we please move to the following question, operator. Operator: Next question from the line of Ignacio Ulargui from BNP Paribas. Ignacio Ulargui: About corporate lending, if you could elaborate a bit more on what has been the plan delivered in the quarter? And how should we expect growth in the future? Do you think that the strong quarter-on-quarter growth that you have delivered could be maintained or there was any specific one-off transaction that distorted the growth? And the second question is on capital linked to the previous question of Carlos. I wanted to understand whether you could use part of that capital for any inorganic growth and what will be the priorities and the capital hierarchy that you will be looking for in terms of businesses, whether you will prioritize fee-based business or whether you would like to, as the guy has been suggesting looking for diversification. Pablo Gonzalez Martin: I think I have got both of the questions, but thank you, Ignacio, for your question. I think regarding the corporate lending, although the quarter has been significantly good we think the year-on-year numbers are sustainable, and we will probably maintain this 6% growth for the coming quarters. I think you have to think that we have to catch up in terms of customer activity. We are deploying more resources for this business. And although the level is higher than the market growth, we have to do some catch-up in terms of market share in this business. And so, we still have plenty of opportunities to maintain the growth. Maybe not the growth on a quarterly basis, but the growth on an annual basis could be some guidance for how much we expect to grow in the high-single digit number, between mid- and high-single digit number for the coming quarters as well. And regarding the capital, on top of what I mentioned of shareholder remuneration, we also mentioned in our strategic plan that we will consider any bolt-on operation in M&A. And this will have a clear view on improving and accelerating our diversification of revenues that we were thinking. And as you can imagine, this diversification spans from fee business, but also in areas where we have a lower market share like consumer lending or other type of specialized lending that we have a smaller market share. So, we maintain that possibility. But I think to be clear, the whole idea of this bolt-on is not something that we need to do to deliver in our strategic plan targets. It's something that will help us to accelerate the process of diversification. But we will maintain hiring people and improving capabilities to do this diversification. Jaime Marcos: Thank you again, Pablo. Let's move to the following question, please. Operator: Next question comes from the line of Fernando Gil de Santivañes from Intesa Sanpaolo. Fernando Gil de Santivañes d´Ornellas: I hope you can hear me? Pablo Gonzalez Martin: Yes. Go ahead Fernando. Fernando Gil de Santivañes d´Ornellas: So I see headcount substantially up by 100 persons in the quarter. I just want to get a sense of how should we be thinking about headcount going into the year-end of 2026 and given that you [indiscernible] to be in Q4. Pablo Gonzalez Martin: I'm not sure I got your question properly, but I think you were looking at the headcount of employees and how this has evolved in the quarter, increasing slightly. You have to consider that we have 2 different forces. One is we are growing our capabilities in certain areas. In IT, in artificial intelligence deployment and some specialized areas like specialized lending and things like that. And on the other side, we have the redundancy, the voluntary redundancy plan. And in this quarter, we have the first impact, but we have not any impact from this plan. So, net-net, I think the headcount will be very similar, slightly up, but not very significant. So, we maintain our cost guidance of mid-single digit for the year, and this consider the employee and workforce. Jaime Marcos: Thank you very much, Pablo. Just to double check, I think that we don't have any more questions. But please, operator, can you confirm it? Operator: Yes. There are no other questions at this time. Jaime Marcos: All right. So, thank you very much, everyone. The IR team remains at your disposal. If you need further info, please do not hesitate to contact us. Thank you very much for your interest and your time. Pablo Gonzalez Martin: Thank you very much. Have a good day.
Operator: Good day, and welcome to the Willis Lease Finance Corporation First Quarter 2026 Earnings Call. Today's conference is being recorded. We would like to remind you that during this conference call, management will be making forward-looking statements, including statements regarding our expectations related to financial guidance, outlook for the company and our expected investment and growth initiatives. Please note these forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect WLFC's views only as of today. They should not be relied upon as representative of views as of any subsequent date, and WLFC undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect WLFC's financial results, please refer to its filings with the SEC, including, without limitation, WLFC's most recent quarterly report on Form 10-Q, annual report on Form 10-K and other periodic reports, which are available on the Investor Relations section of WLFC's website at www.wlfc.global/investor-relations. At this time, I would like to turn the conference over to Mr. Austin Willis, CEO. Please go ahead, sir. Austin Willis: Thank you, operator, and thank you all for joining us today to discuss Willis Lease Finance Corporation's First Quarter 2026 Financial Results. On our call today, I'm joined by Scott Flaherty, our Chief Financial Officer. We have posted an accompanying presentation on our website to give further details supporting our remarks. This morning, I'd like to start by taking a step back and discussing our industry's macro environment. Since the conflict began in Iran, we haven't seen a material impact on pricing or lease rates. Demand remains robust. We have minimal exposure in the Middle East, where the effects are being felt most acutely. Airlines are reacting to higher fuel prices and the prospect of fuel shortages by reducing capacity, in some cases, flying less frequently and in other cases, parking aircraft. Should high fuel prices persist into the fall, we expect the airlines to feel liquidity pressure. Historically, we have been countercyclical in such environments. When airlines are trying to preserve cash, they tend to opt for leasing solutions rather than overhauling engines for $10 million or more, which drives up utilization in our portfolio. We have seen this phenomenon firsthand following prior periods of macro disruption. If fuel prices remain elevated longer than anticipated, some of the parked aircraft will likely be retired, and that could lead to lower lease rates and values for midlife aircraft. We would expect changes in midlife engine values to be more resilient than aircraft as they will continue to support shop visit avoidance, as I described earlier. However, and even in spite of this, we consider ourselves to be well hedged with over 50% of our engine portfolio in modern technology, specifically the LEAP, GTF and GEnx engine types. Another way for airlines to address short-term liquidity concerns is the sale and leaseback transactions for their unencumbered aircraft and engines. Our capital strategy over the past year has positioned us well to capture such opportunities. Turning to the quarter. We ended with $4.1 billion of assets under management, approximately $1.5 billion of capital that is ready to deploy through our discretionary funds and capital through our joint ventures to include a $750 million revolving credit facility. This, combined with undrawn amounts in our recently expanded $1.75 billion revolver and our low net leverage of 2.7x, we are positioned for significant growth. As we have talked about in prior quarters, the aviation market remains increasingly engine-centric, and that dynamic is driving demand across our platform. Engine availability remains a key constraint to both delivering new aircraft and keeping operational aircraft flying. And we continue to see extended maintenance timelines and sustained pressure on spare engine supply. This environment supports strong lease rate dynamics and ongoing demand for our leasing and services offerings. Continued strong demand for our products and services helped us deliver first quarter adjusted EBITDA of $124 million and fully diluted earnings per share of $3.26 as compared to $2.21 during the same period in 2025. We have also seen strong stock price appreciation during the first quarter despite market volatility driven by geopolitical uncertainties. We attribute this primarily to the strength of our underlying business as well as investors' confidence in our growth strategy, both on and off balance sheet. This strategy will deliver synergistic benefits through fees and carried interest, along with additional advantages such as a larger asset base that we can service through our two engine MROs, our airframe MRO, our parts business and our consulting business. Let me take a few minutes to discuss the 3 key areas of our business: leasing, Willis Aviation Capital and services. First, leasing. Leasing utilization for the quarter was up to 86% from 80% year-over-year, and the lease rate factor of our on-lease assets was 1.04%. As mentioned earlier, we continue to modernize the portfolio towards the next generation of assets. And although higher in value, we are experiencing similar lease rate factors as compared to the current generation of assets. These factors led the company to experience an all-time high lease rent revenue during the first quarter of 2026, totaling $77 million, demonstrating the strength of the aviation market, demand for next-generation assets and improved lease rate dynamics. We are able to effectively optimize asset placement across global customer base through our programs such as ConstantThrust. Under ConstantThrust, operators' engines are seamlessly exchanged with fully serviceable replacements from our pool of owned and managed assets as they come off-wing. This program specifically leverages WLFC's global expertise in spare engine provisioning, technical management and maintenance and repair services to ensure uninterrupted operational performance for airlines worldwide. Earlier this year, we expanded our constant thrust program by signing a new purchase and leaseback agreement with Nauru Airlines for CFM56-7B engines. The agreement will provide Nauru with reliable constant thrust support for the airline's entire fleet of CFM56-7B engines, powering Boeing 737-700 and 800 aircraft for 6-plus years. Turning to Willis Aviation Capital, or WAC. Last quarter, we announced Willis Aviation Capital, which is a natural extension of our business and enables us to manage third-party capital alongside our balance sheet and significantly expand our addressable market. This creates a flywheel effect where greater scale drives more opportunities to deploy our services across a larger asset base, enhancing returns and accelerating platform growth. Through our partnerships with Blackstone Credit & Insurance and Liberty Mutual Investments as well as our existing joint ventures, Black now manages more than $2.7 billion of committed or deployed capital. In the first quarter of 2026, we funded approximately $90 million of finance leases through our Liberty Mutual Fund, which do not generate gain on sale as these were par sales to the fund. In April, we began selling operating lease engines from our balance sheet to the Blackstone fund. We are encouraged by the early traction we're seeing with a solid pipeline of opportunities as we move through the year. This platform is designed to generate high-quality recurring earnings through the management fees and carried interest while also driving incremental demand for our services capabilities. And finally, services. Our services businesses remain a core strength for our platform, reducing both off-wing time across our fleet and turnaround times for our own customers' assets as compared to larger MROs. As I've mentioned before, the outlook for engine shop visits remains strong through the mid-2030s and our services businesses remain a key differentiator, playing a critical role as engine maintenance demand grows. Having multiple geographically distinct hospital shops, we are well positioned to capitalize on demand across those markets since we are the low-cost alternative to more costly full overhauls. To meet growing demand for the technical and maintenance expertise of our engine shops, which contributed revenue of $10 million in the first quarter. Exclusive of intercompany sales and to enhance our vertical integration, we continue to invest in deepening our in-house technical capabilities. In February, we announced the successful completion of our first core engine restoration of the CFM56-7B in our U.S.-based Willis Engine repair center. We have branded this new capability as Willis Module Shop, allowing us to complete comprehensive core restorations that reduce maintenance cost, improve turnaround time and strengthen the control over our assets. Over time, we believe this capability will be an important driver of both operational efficiency and portfolio returns. Now to touch briefly on our capital deployment priorities. To support future growth across our platform, we have increased our financial flexibility through an amendment and extension of our revolving credit facility from $1 billion to $1.75 billion. The amended facility positions us with the liquidity and flexibility to further expand our business. Additionally, we closed 2 Japanese operating lease with call option or JOLCO transactions, totaling approximately $50 million. These transactions reflect the strength of our lender relationships and our ongoing focus on maintaining a well-capitalized flexible balance sheet. Scott will speak to the specifics of these transactions momentarily. We have also continued to invest in top talent where we see growth opportunities, particularly in the Asia Pacific region. We welcomed Marilyn Gan as Head of Origination for the region, strengthening our ability to source and execute opportunities in a key growth market. Looking ahead, we remain well positioned to deploy capital across a broad range of opportunities. We see attractive prospects across leasing and services, supported by strong long-term fundamentals in the aviation market. We also remain committed to returning capital to our shareholders as evidenced by the quarterly recurring dividend of $0.40 per share that we declared earlier this quarter. Overall, we are confident in our strategy and the progress we are making as we continue to scale our platform and deliver long-term value for our shareholders. And with that, I'll hand it over to Scott Flaherty, our CFO, to discuss our financial performance in greater depth. Scott Flaherty: Thank you, Austin, and good morning all. Another strong quarter for Willis Lease Finance. Our first quarter experienced record quarterly lease rent revenues of $77.4 million, quarterly adjusted EBITDA of $123.8 million, $36.8 million of quarterly earnings before taxes, or EBT, and $23.7 million of net income attributable to common shareholders or $3.26 of diluted weighted average income per common share. Walking through the P&L, our strong top line performance reflected solid growth in nearly every revenue channel, record lease rent revenues of $77.4 million in the quarter. 14.2% quarter-over-quarter growth in lease rent revenues were driven by a combination of increased portfolio size, utilization and lease rates. Our owned portfolio at the end of the first quarter was $2.86 billion. Our own portfolio is reflected on the balance sheet as equipment held for operating lease, maintenance rights, notes receivable and investment in sales type leases. Average utilization was up from 79.9% in Q1 of 2025 to 85.8% in Q1 of 2026, a nearly 6-point pickup. Additionally, we continue to see a solid average on-lease lease rate factor across the portfolio of 1.04% compared to 1.0% in the first quarter of 2025. Maintenance reserve revenues for the quarter were $55.5 million, up slightly from $54.9 million in the first quarter of 2025. $12.4 million of these maintenance reserve revenues were long-term maintenance reserve revenue associated with engines coming off-lease and the associated elimination of any maintenance reserve liabilities as well as the receipt of end of the lease cash payments. $12.3 million of this related to one engine coming off-lease and included both the release of a maintenance reserve and the receipt of an end-of-lease cash payment. The $12.4 million in long-term maintenance reserve revenue compared to $9.6 million in the first quarter of 2025. $43.1 million of our maintenance reserve revenues were short-term maintenance reserves compared to $45.3 million in the prior comparable period. Spare parts and equipment sales increased by $3.4 million or 18.9% to $21.7 million in the first quarter of 2026 compared to $18.2 million in the first quarter of 2025. Spare parts sales were $10 million and $16 million in Q1 of '26 and 2025, respectively, a decrease of $5.8 million. The decrease in spare parts sales reflects variations in the timing of sales to third parties and were not reflective of $7.5 million of intercompany sales, which was up from the prior comparable period and eliminated in our financial consolidation. These intercompany sales represent the added value of having a vertically integrated parts business. Equipment sales in the first quarter of 2026 were $11.4 million, up $9.2 million from the prior comparable period. These revenues reflect the sale of 3 engines that were not previously leased. The trading profit on sale of these 3 engines was $5.7 million, representing a 50% margin on these sales, validating the significant discount that exists between the book value and the market value of our portfolio. Equipment sales for the 3 months ended March 31, '25, were $2.2 million for the sale of 1 engine. Gain on sale of leased equipment, together with our gain on sale of financial assets, a net revenue metric, aggregated to $18.4 million in the first quarter, up $13.6 million from the $4.8 million in the comparable prior period. The $18 million gain on leased equipment was associated with the sale of 14 engines for $60 million of gross sales. Included in our engine sales were 5 engines sold to our Willis Mitsui joint venture. The gain on sale represents an effective 30% margin on such sales, further validating the significant discount that exists between the book value and the market value of our portfolio. The company recognized $0.4 million of gain on sale of financial assets where we sold 11 notes receivable and investment in sales-type leases for $87.1 million of gross sales, which generally reflects car sales of these financial assets. Maintenance services revenue, which represents fleet management, engine and aircraft storage and repair services and revenues related to management of fixed base operator services was $9.8 million in the first quarter of 2026, up 74.9% from $5.6 million in the comparable period in 2025. The increase reflects growth in engine and aircraft storage and repair services, especially when factoring the lack of comparable period fleet management revenues in the current period due to the sale of our BAML business in late Q2 2025. Gross margins grew to 9.3% from 4.6% in the prior comparable period. Our maintenance service offering enhance our customer program solutions and provide vertical integration to increase the profitability of our owned and managed assets. Management and advisory fees represent the fees generated through our asset management efforts. These fees include those made from our joint ventures and other managed assets as well as through our new fund strategy announced at the end of 2025. Management and advisory fees increased by $5.9 million to $7.9 million for the 3 months ended March 31, 2026, from $2 million for the 3 months ended March 31, 2025. This increase was primarily driven by $4.9 million of fees earned from our LMI or Liberty Mutual Fund in the company's role as general partner. The LMI fund commenced operations in March of '26 and reimbursed formation and other costs to the company, which flowed through both revenue and the G&A lines of our P&L. On the expense side of the equation, depreciation in the first quarter increased by $5.2 million or 20.6% to $30.2 million as compared to $25 million in the prior comparable quarter. The increase is primarily due to an increase in the size of our lease portfolio and the timing of placing acquired engines on lease, which starts their depreciation through the P&L. Write-down of equipment was $1.1 million in the first quarter, reflecting the write-down of 1 engine. There was $2.1 million of write-downs of equipment for the 3 months ended March 31, 2025, reflecting the write-down of 5 engines. G&A expenses increased by $8.9 million or 18.6% to $56.6 million in the first quarter of 2026 compared to $47.7 million for the first quarter of the prior comparable period. The increase primarily reflects a $12.5 million increase in personnel costs, which included an increase of $6.9 million in share-based compensation and an increase of $4.1 million in wages. The increase in share-based compensation reflects appreciation of the market value of the company's equity as well as share awards to new personnel to support the continued growth of the company. In January of '25, the company modified its share-based compensation program due to the significant rise in our stock price. The nearly 300% increase in the company's stock price since mid-2024 had a P&L effect as the company's historical plan was structured with predetermined share grants occurring after the achievement of specified goals or performance metrics. Generally, the share grants had a 3-year vesting, which created a noncash P&L effect over the vesting period. Our new share-based compensation plan will reduce share-based compensation expense savings, but such savings will not be fully realized until prior grants flow through the P&L. The $4.1 million increase in wages was driven by higher headcount to support the company's growth. Also contributing to the higher G&A cost was $4.9 million of costs, which were recharged to the LMI fund, with the associated revenue of $4.9 million included in management and advisory fees. Lastly, G&A also included $2 million increase in acquisition, financing and divestiture-related expenses as compared to the prior period. Partially offsetting these increases was an $11.7 million reduction in project expense due to our decision to cease investment in and pursue strategic alternatives for the sustainable aviation fuels project. Technical expense was $9.7 million in the first quarter, up from $6.2 million in the comparable period of 2025. Technical expense generally relates to unplanned maintenance, whereas engine performance restorations tend to be planned and capitalized events. Net finance costs were up $7.6 million to $39.7 million in the first quarter compared to $32.1 million in the comparable period in 2025. The increase in costs was predominantly related to $7 million in loss on debt extinguishment related to refinancings completed in the quarter. Less than $1 million of the $7 million was a cash expense as the lion's share was related to an acceleration of previously incurred capitalized issuance costs. Total indebtedness remained relatively flat at $2.25 billion as compared to $2.23 billion in the comparable period of 2025. Our weighted average cost of debt capital, inclusive of swap agreements was 5.12%. The company also picked up $3 million in ratable earnings from our investments, which include our joint ventures and fund interests. Income from investments was up 126% and most significantly influenced by our Willis Mitsui joint venture. The company produced $23.7 million of net income attributable to common shareholders, which factors in GAAP taxes and the cost of our preferred equity, which was up 52.9% from the comparable period in 2025. Diluted weighted average income per share was $3.26 per share in the first quarter, up 47.5% from the $2.21 in the first quarter of 2025. Adjusted EBITDA for the quarter of 2026 was $123.8 million, up 19.9% from $103.3 million in the first quarter of 2025. We believe that our adjusted EBITDA reflects the normalized cash flow generation of the Willis enterprise. Our adjusted EBITDA makes adjustments to our net income attributable to common shareholders for income tax expense, interest expense, preferred stock dividends and costs, loss on debt extinguishment, depreciation and amortization expense, stock-based compensation expense, write-down of equipment, acquisition financing and divestiture-related expenses and other discrete gains and expenses. Net cash provided by operating activities was up 38.3% to 56.7% in the first quarter of 2026 as compared to $41 million in the first quarter of 2025. The increase was predominantly related to increased net income, the noncash effects of stock-based compensation, depreciation and the loss on debt extinguishment expenses and a period-over-period $10 million increase in cash flows from changes in other assets. On the financing and capital structure side of the business, the company completed its seventh and eighth JOLCO financings in the first quarter, bringing total JOLCO financings at quarter end to approximately $170 million. In March of 2026, the company amended and extended its existing revolving credit facility, increasing total commitments from $1 billion to $1.75 billion and extending the maturity out to April of 2031. The expansion of our credit facility provides Willis with increased liquidity and flexibility to pursue our growth strategy. Concurrent with the $750 million expansion of our credit facility, we terminated our $500 million warehouse facility. We regularly access the capital markets as we endeavor to source competitively priced capital to help continue to grow our balance sheet and P&L. In February, we paid our seventh consecutive regular quarterly dividend of $0.40 per share. Subsequent to quarter end, our Board of Directors declared our eighth consecutive recurring quarterly dividend of $0.40 per share, payable to holders at May 11, 2026, on May 22, 2026. Our recurring dividend provides shareholders with a moderate current cash yield on their investment while not degrading the strong cash flow of our business. With respect to leverage, as defined as total debt obligations, net of cash and restricted cash to equity, inclusive of preferred stock, our leverage ticked lower to 2.68x at the end of the first quarter of 2026. We have made significant strides over the last several years to reduce leverage to position Willis to be able to access market opportunities when they become available. With that, I will hand the call back to Austin. Austin Willis: Thank you, Scott. Q1 set in motion great momentum for the year ahead as we track towards our long-term strategy. growing our portfolio on balance sheet and managed assets through Willis Aviation Capital while bringing exciting opportunities to the entire Willis platform. Thank you for joining us on our call today. And with that, I will let the operator open up to Q&A. Operator: [Operator Instructions]. We'll go to Will Waller with M3F. William Waller: Excellent looking quarter. I was wondering if you could comment a bit more on the asset management business, like the Blackstone funds and so on. What the management fee and incentive fee will look like, if there's kind of any general parameters that you could give out as it relates to that? Austin Willis: Will, thanks for the question. So in terms of the funds, we're not disclosing what the specific management fees are. But I can tell you that they're roughly in line with what's standard for discretionary funds, a percentage of the value of the assets managed and then a percentage of the profitability via carried interest. We started deploying capital into Liberty Mutual in the first quarter, and you're really going to start to see the fees from that come in when we deploy more capital over time. And with respect to Blackstone, I think you'll start to see fees kicking in here in the next quarter. And as I mentioned earlier on my prepared remarks, we started to deploy capital there in April, so just subsequent to the quarter. I think we're probably going to see about $200 million from our balance sheet into the Blackstone portfolio. So that's a good starting point and then hopefully get the remainder deployed in relatively short order. William Waller: Great. That's super useful to hear, and we think it's a very wise strategy and that you're using all your knowledge to the fullest. So we really think highly of that strategy. So thanks for that additional information. Operator: With no other questions holding, I'll turn the conference back for any additional or closing remarks. Austin Willis: Thank you very much. We appreciate everybody giving us their time today. And I guess we answered all the questions in our lengthy prepared remarks. So thank you very much. Take care. Operator: Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.
Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve Group First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Erik Randerson, Senior Vice President of Investor Relations. You may begin. Erik Randerson: Good afternoon, everyone, and thanks for joining us to discuss Revolve Group, Inc.'s first quarter 2026 results. Before we begin, I would like to mention that we have posted a presentation containing Q1 2026 financial highlights on our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements including statements related to our future growth, inventory balance, our key priorities and business initiatives, industry trends, our marketing events and their expected impact, our physical retail stores, our own brand expansion, our use of AI, our partnerships, and our outlook for net sales, gross margin, operating expenses, and effective tax rate. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption “Risk Factors” and elsewhere in our filings with the Securities and Exchange Commission, including without limitation, our Annual Report on Form 10-K for the year ended December 31, 2025, and our subsequent Quarterly Reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information including Adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions because we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information presented and prepared in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures, as well as the definitions of each measure, their limitations, and our rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Michael Karanikolas and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we will open the call for your questions. With that, I will turn it over to Michael Karanikolas. Michael Karanikolas: Hello, everyone, and thanks for joining us today. Outstanding execution by our team within a dynamic operating environment led to strong first quarter results and continued market share gains, highlighted by our net sales increasing 16% year over year, our highest growth rate in nearly four years. This growth acceleration, particularly in the current environment, is evidence that our investments in brand, technology and AI, site experience, and category diversification are paying off. In addition to our strong top line growth, diluted earnings per share increased 25% year over year despite a several-million-dollar increase in marketing investments year over year to support our growth initiatives, including the launch of Revolve Los Angeles, our first ever namesake label that we are incredibly excited about. And we generated $49 million in operating cash flow, significantly strengthening our pristine balance sheet with cash and cash equivalents increasing to $336 million at quarter end. Our core underlying business metrics illustrate our increased engagement and deepening connection with next generation consumers. Year-over-year growth in active customers accelerated in Q1 and we are generating increased revenue per active customer, fueled by our success in capturing a greater share of the consumer's wallet and a lower product return rate year over year. Beyond the numbers, I am most excited about our visible progress in longer term initiatives, such as international expansion and advancing our use of AI technology, that have become key contributors to our momentum and reinforce my confidence that we will continue to drive profitable growth in the future. Continuing with our longer term initiatives, Michael will talk about the exciting new chapter for our own brands assortment with Revolve Los Angeles, as well as an important new milestone in our physical retail expansion. We view each of these initiatives as potential game changers for our business over the long term. Our ability to invest in and execute on many exciting initiatives simultaneously underscores that our strong cash flow and balance sheet are key competitive advantages, particularly at a time when many peers with weaker financials are stuck playing defense. With that as an introduction, I will step back and provide a brief recap of our Q1 results before reviewing the progress on our longer term initiatives. Net sales for the quarter were $343 million, an increase of 16% year over year, a more than five-point sequential improvement from our 10% year-over-year growth rate in 2025. Gains were broad based as year-over-year growth rates improved across REVOLVE, FORWARD, domestic, and international compared to the year-over-year growth rates in the fourth quarter, with double-digit growth across the board. Also notable is that our dresses category net sales accelerated by 13 points compared to 2025 performance and we delivered even stronger growth in fashion apparel, validating the momentum behind our category diversification strategy. The strong start to the year puts us on a good path to our goal of double-digit revenue growth in 2026. By segment, REVOLVE net sales increased 15%, FORWARD net sales increased 17% year over year. These were our highest growth rates since 2022. By territory, domestic net sales increased 15%, and international net sales grew 20% year over year in the first quarter. We achieved these outstanding international results despite a meaningful slowdown in the Middle East that has continued into the second quarter amidst significant geopolitical uncertainty. Shifting to our bottom line results, net income was $14 million and diluted earnings per share was $0.20, an increase of 25% year over year. Adjusted EBITDA was $21 million, an increase of 9% year over year, all while investing in a number of meaningful growth initiatives including investments to position the new Revolve Los Angeles assortment for long term success. Most exciting is that our profitable growth once again converted very strongly to cash flow. Our business generated a $33 million increase in cash and cash equivalents in the first quarter alone, even while investing $11 million in January for a synergistic minority investment. Now I will conclude by recapping our progress against our longer term strategic priorities and growth vectors. We have many exciting initiatives underway, and the team has done a great job executing to position us to deliver meaningful value for shareholders over the long term. First, we continue to efficiently invest to expand our brand awareness, grow our customer base, and strengthen our connection with the next generation consumer. I could not be more excited about our recent brand wins that Michael will talk about in his remarks, ranging from the impactful and well received launch of Revolve Los Angeles to an incredible and efficient Revolve Festival held last month attended by countless A-listers. The recent launch of GrowGood Beauty, developed in partnership with Cardi B, also serves as a powerful demonstration of our brand building capabilities, one that exceeded our highest expectations, amassing several billion impressions and 140,000 Instagram followers within days of the official launch. Second, we continue to successfully expand our international penetration, highlighted by 20% growth outside of the U.S. in the first quarter. It was the thirteenth straight quarter that international growth has outpaced the U.S., and we are still very early in our journey. I am particularly excited about a strong growth resurgence in Mexico following our launch of elevated service levels and impactful new marketing playbooks in recent months. In fact, new customers in Mexico increased more than 80% year over year in the first quarter, contributing to our improved growth in active customers. Third, our first quarter results provide further confirmation that our investments to capture market share in the luxury segment are paying off. FORWARD net sales grew 17% year over year, our highest growth rate in four years, and FORWARD gross profit increased 36% year over year. Notably, at a time when the world's largest multi-brand luxury retailer is closing most of its store locations, we are rapidly expanding our customer base, attracting coveted new brand partners, and having particular success in generating increased sales from high value customers. Finally, we continue to leverage AI to drive growth and efficiency across the company, including to further elevate the shopping experience and drive higher conversion. I am pleased to report that we have successfully tested and recently launched into production our internally developed generative AI feature discussed last quarter that surfaces contextually relevant questions and answers about our products. This new feature is now live on our REVOLVE mobile channel for our vast assortment of dresses and delivering meaningful gains. The conversion lift was so compelling that our team is already hard at work to expand our A/B testing to include additional channels and product categories, consistent with our efforts to continuously raise the bar on the customer experience. Also notable, we used generative AI to significantly assist in the creation of marketing collateral for the incredibly successful launch of GrowGood Beauty that Michael will talk about in his remarks. Another great example of how we are able to leverage our data-driven culture and AI technology innovations to drive revenue and efficiency throughout the company. To wrap up, I would like to thank our passionate and innovative Revolve colleagues for their incredible efforts in driving strong results in the first quarter while also advancing our exciting longer term initiatives that further strengthen our foundation for future profitable growth. It is gratifying to see our team so energized by these growth opportunities, such as physical retail, international, and AI expansion, which we believe give us the opportunity to accelerate our market share gains. The current momentum in the business and the great progress on our initiatives reinforce my confidence in our ability to drive profitable growth in 2026 and beyond. Now over to Michael. Michael Mente: Thanks, Mike, and hello, everyone. We delivered an outstanding first quarter with strength across geographies, segments, and categories. It is gratifying to see the strong results from the investments we have been making over the recent quarters. Our top line is accelerating, brand heat is building, and customer connection is strengthening. We believe this momentum in the business illustrates our core competitive advantages that position us for continued success over the long term: our technology- and data-driven DNA and proprietary technology infrastructure, our operational excellence and agility, and our powerful brands and connection with the next generation consumer. With that as an introduction, I will focus my remarks on some of the strategic areas we are investing in and that we are especially excited about: the launch of our first ever REVOLVE label, our ninth annual Revolve Festival, physical retail expansion, and our joint venture with Cardi B. First, Revolve Los Angeles. For years, Mike and I have talked about launching a Revolve namesake label. Over the past 23 years, we have diligently focused on building Revolve as a brand — a true brand beyond just a fashion retailer. With this focus and disciplined investment, we have earned the trust and loyalty from millions of Revolve consumers, resulting in incredible brand power. We are truly unique as a multi-brand retailer that consumers completely trust to provide fashion discovery. As background, our customers rarely search for a specific brand on REVOLVE. In fact, less than 10% of products added to shopping carts on REVOLVE originate from a brand page. Instead, our community views REVOLVE as their preferred destination to discover what is new and on trend from our edits of more than 1.6 thousand brands, which is very different from other retail destinations. On countless occasions, I have met customers who are excited to share that they are wearing REVOLVE. They cannot remember which brand they are wearing, but know they bought it on REVOLVE. With that as context, we could not be more excited to leverage our brand strength, design talent, and operational excellence to provide our customers with a true REVOLVE label. In March, we introduced Revolve Los Angeles, our first ever namesake label, that features elevated apparel and eveningwear to fill a genuine gap in the market. It aligns with our expansion into physical retail, allowing customers to engage with our brand in real life and in a more permanent, meaningful way. We believe this new collection could expand our market opportunity and create a halo effect on the entire business. Revolve Los Angeles is just the beginning of a new REVOLVE-branded assortment that will extend across categories and price points over time. Since we see incredible potential for this initiative, we are investing incremental brand marketing dollars to drive its success. We have invested in elevated print, billboard, YouTube, and connected TV brand advertising featuring Revolve Los Angeles brand ambassador Bella Hadid, who perfectly embodies the brand's quintessential Los Angeles energy. We estimate that the impactful campaign has already generated more than 200 million impressions, creating one of the most powerful brand moments in our 23-year history. REVOLVE and FORWARD also sponsored the ultra-exclusive and prestigious Vanity Fair Oscar after party, where Amelia Gray impressed in a striking black gown from Revolve Los Angeles. These longer term investments are already creating favorable awareness and moving the needle. During March, consumer interest in the “Revolve” search term increased more than 40% year over year, according to Google Trends. We are also continuing to see strength in REVOLVE mobile app downloads, which increased by more than 50% year over year in March. This is particularly exciting considering that our mobile app converts at a much higher rate and app customers have the highest expected lifetime value by a wide margin. Second, Revolve Festival. On April 11, we hosted our ninth annual Revolve Festival in Coachella Valley, an exclusive experience where everything we are known for comes to life, blending fashion, community, and culture. Every year, we push ourselves to create something more immersive, more unexpected, and more iconic than the last. Our team met the challenge and again raised the bar, delivering an incredible lineup featuring Don Toliver, Kehlani, and Mustard that captivated the crowd of A-listers and kept the energy buzzing throughout. Built for the next generation of fashion consumers, Revolve Festival ensures that our brand stays connected and strong with the trend-setting young consumers who define what is next. In true REVOLVE fashion, our event transforms every detail into a story worth sharing on social media, with curated photo moments and immersive brand activations that put REVOLVE and FORWARD looks at the center of the cultural conversation. Our brand-elevating event delivered an incredible experience to our community of celebrities, brands, content creators, partners, and fans attending what one editor called the real main stage of the weekend. The impressive range of A-listers in attendance included Teyana Taylor, who looked stunning in a futuristic gown from our Revolve Los Angeles label; BLACKPINK members Jennie and Lisa; Emma Roberts; Gabriette; Becky G; members of Cat's Eye; Damson Idris; Charli and Dixie D'Amelio; members of Bini; Dwyane Wade; Paige Bueckers; Cameron Brink; Tyga; Big Sean; Thomas Doherty; Shaun White; Wiz Khalifa; Rachel Zoe; Victoria Justice; Ty Dolla $ign; Alandra Carthan; Leah Kateb; and Dylan Efron. The proof of our success is in the incredible numbers. REVOLVE generated the highest earned media value among all brands during both weekends of the Coachella Music Festival, even though our Revolve Festival was only held during the first weekend, according to CreatorIQ, an influencer marketing analytics firm. As icing on the cake, the top performing post during the entire Coachella Festival generated nearly $25 million in earned media value for REVOLVE, according to Meltwater, a media intelligence firm. Third, physical retail. We remain very excited about the growth opportunity in physical retail over the long term. As we approach its two-year anniversary, our Aspen store continues to achieve great progress on the top line and conversion gains year over year. We are especially pleased with our recent performance considering that Aspen tourism has declined year over year in recent months, coinciding with well below average snow conditions during the ski season. Our investments in the team, operations, and retail technology platform are clearly paying off and further raising the bar on our go-to-market retail strategy. While our Los Angeles store at The Grove is just getting started, several of the early metrics are encouraging. The owned brand mix of net sales at The Grove in Los Angeles is meaningfully higher than online and improving month over month. Also very exciting, even in our LA roots where the REVOLVE brand has the highest consumer awareness, we are seeing a measurable lift in ecommerce sales in the local community surrounding The Grove. This illustrates the halo effect synergies between retail stores and our core ecommerce operations and further validates physical retail as a key growth strategy for increasing brand awareness, acquiring new customers, and expanding our market share, as stores generate over 60% of global retail spend on apparel and footwear. With these positive signals and the momentum of our brands bolstering our confidence, I am thrilled to share that we have signed a lease for an incredible retail store location in Miami. We expect to open our doors by year end in what has become one of our strongest U.S. markets. At a recent Miami event held for our VIP clients, our vibrant community of local customers were beyond excited to learn we were opening a store nearby. Before I close, I will provide an update on our joint venture with Grammy Award-winning performer and global style icon, Cardi B. The partnership leverages our strong operational, brand-building, and marketing expertise with Cardi's powerful brand, trend-setting fashion and beauty inspiration, and a global audience that extends well beyond our current core target demographic. We recently launched the GrowGood Beauty assortment of hair care products with Cardi, and early results have exceeded expectations. In fact, every product sold out in less than an hour during a March presale event and sold out again in less than an hour when we officially launched the GrowGood brand in April. Cardi's and our teams did a great job driving awareness leading up to the launch, promoting GrowGood on impactful social channels, during Cardi's sold-out tour of 30 cities across North America and at Revolve Festival. The brand was also prominently featured during Cardi's appearances on the Today Show, The Tonight Show Starring Jimmy Fallon, and in press features including WWD, Allure, Essence, Marie Claire, and People. Most striking is GrowGood's rapid ascent to over 640 thousand Instagram followers in a matter of weeks. But compared to Cardi's 164 million Instagram followers, the gap underscores the brand's extraordinary untapped potential as we look ahead. The market response has been exceptional, and we are moving aggressively to scale on the back of that early demand. We are just getting started and are very excited to build on this early momentum. Wrapping up, our continued profitable growth and strong balance sheet are strategic advantages that give us the capacity to invest for long term success from a position of strength. With the acceleration in the business, it is clear that our investments are working, setting us up for our next phase of growth. We have incredible momentum, and I am more excited than ever about our many initiatives underway that we believe will enable us to gain further market share in 2026 and beyond. I will turn it over to Jesse for a discussion of the financials. Jesse Timmermans: Thanks, Michael, and hello, everyone. I am very proud of our first quarter results, highlighted by strong double-digit growth in net sales and earnings per share, and meaningful cash flow generation that further solidifies our balance sheet. I will start by recapping our first quarter results and then close with updates on recent trends in the business and guidance for the balance of the year. Starting with the first quarter results, net sales were $343 million, a year-over-year increase of 16% and a more than five-point improvement from our net sales growth in 2025. REVOLVE segment net sales increased 15% and FORWARD segment net sales increased 17% year over year in the first quarter. By territory, domestic net sales increased 15% and international net sales increased 20% year over year. Growth in trailing twelve-month active customers accelerated to 8% year over year, increasing to 2.9 million. Contributing to the strong top line was 12% growth in total orders placed year over year to 2.6 million. Average order value was $298, an increase of 1% year over year. The increase was driven by growth in average selling price, or ASP, that was partially offset by lower units per order. Consolidated gross margin was 52.7%, an increase of 68 basis points year over year that primarily reflects meaningful margin expansion in our FORWARD segment. The slight margin decline year over year in our REVOLVE segment primarily reflects a slightly lower mix of full-price net sales compared to 2025, partially offset by shallower markdowns and an increased mix of owned brand net sales year over year. Now moving on to operating expenses. Fulfillment costs were 3.1% of net sales, outperforming our guidance and a slight decrease year over year. Selling and distribution costs were 16.8% of net sales, outperforming our guidance by 30 basis points and a slight decrease year over year. Contributing to the better-than-expected result was a decrease in our return rate year over year, partially offset by higher shipping costs. Our marketing investment grew to 15.8% of net sales, an increase of 152 basis points year over year. Consistent with our guidance, we meaningfully increased our marketing investments to support exciting growth initiatives such as the launch of our Revolve Los Angeles label. For the second straight quarter, we achieved operating leverage year over year in general and administrative expenses. All while making meaningful investments in various growth initiatives. In dollar terms, G&A expense of $42 million exceeded our guidance. Most of the overage, however, reflects costs that are excluded from Adjusted EBITDA, including nearly $700 thousand in non-routine costs that were not factored in our outlook, and higher-than-anticipated stock-based compensation expense as our business momentum drove an increase in equity compensation tied to performance objectives. To align our interests with shareholders, a meaningful portion of our equity grants are performance based with vesting tied to achievement of long term targets. Below the operating line, other income increased to $2.7 million from $900 thousand a year ago. Our tax rate was 25% in the first quarter, a decrease of approximately one percentage point from the prior year. Net income was $14 million, and diluted earnings per share was $0.20, an increase of 25% year over year. Adjusted EBITDA was $21 million, an increase of 9% year over year. Moving on to the balance sheet and cash flow statement. We generated $49 million in net cash provided by operating activities and $45 million in free cash flow, an increase of 95% year over year, respectively. The healthy cash flow generation has further strengthened our balance sheet and liquidity. As of March 31, 2026, our balance of total cash and cash equivalents increased by $33 million, or 11%, in just three months compared to year end 2025, and we continue to have no debt. Inventory at March 31, 2026 was $245 million, an increase of 15% year over year, broadly consistent with our 16% net sales growth for the first quarter. Now let me update you on some recent trends in the business since the first quarter ended and provide some direction on our outlook to help in your modeling of the business for the balance of the year. Starting from the top, we are off to an encouraging start with net sales through the month of April 2026 increasing by approximately 14% year over year. For modeling purposes, I want to point out that we face more difficult prior-year comparisons for the rest of the second quarter, as net sales in April 2025 were softer than normal due to peak tariff uncertainty before rebounding into the low double-digit growth territory for the months of May and June 2025. Shifting to gross margin, we expect gross margin in the second quarter of 2026 of between 54.1%–54.6%, which implies an increase of 25 basis points year over year at the midpoint of the range. For the full year 2026, we now expect gross margin of between 53.5%–54.0%, which also implies a year-over-year increase of around 25 basis points at the midpoint of the range. The slight decrease from our prior full-year guidance reflects the first quarter results and slightly lower trending of full-price mix of net sales year over year. Fulfillment: We expect fulfillment as a percentage of net sales of approximately 3.2% for the second quarter of 2026, consistent with 2025. For the full year 2026, we continue to expect fulfillment costs of between 3.2%–3.4% of net sales. Selling and distribution: We expect selling and distribution costs as a percentage of net sales of approximately 17.5% for the second quarter of 2026, an increase of approximately 10 basis points year over year. For the full year, we continue to expect selling and distribution costs of between 17.1%–17.3% of net sales. Marketing: We expect our marketing investment to be approximately 15.7% of net sales in the second quarter, and between 15.3%–15.8% for the full year 2026, unchanged from our prior guidance. General and administrative: We expect G&A expense of approximately $43 million in the second quarter of 2026 and now expect G&A expense of between $164 million and $168 million for the full year 2026. Approximately half of the increase from our prior G&A outlook is due to increased performance-based equity compensation expense resulting from our business momentum. We are also increasing our investments in the Cardi B joint venture to capitalize on the incredible recent launch of GrowGood Beauty that we believe has tremendous upside potential. And lastly, we continue to expect our effective tax rate to be around 24% to 26% for the full year 2026. To recap, I am very excited about our strong momentum and confident in the promising growth initiatives we are investing behind and that we believe position us well for continued profitable growth and market share gains in the years ahead. We will now open the call for questions. Operator: And, again, if you would like to ask a question, press star and then the number one on your telephone keypad. And our first question comes from the line of Anna Andreeva with Piper Sandler. Your line is open. Analyst: Great. Thank you so much for taking our question, and congrats on a nice brand momentum. Jesse Timmermans: Yeah, thanks, Anna. I think you hit all of the points. First of all, for the second quarter, we are factoring in a consistent trend on what we have been seeing for the full-price mix. Second, to your point, we are seeing higher input costs both on the freight side and also on materials for those petroleum-based products that are impacting margin, and that has a bigger impact on REVOLVE than it does on FORWARD given the owned brand mix on REVOLVE. Those are the big drivers when it comes to the forecast looking forward. For tariffs, we are factoring in the current tariff rate, which is the incremental 10%. That said, as we have talked about before, we have been really successful in mitigating the vast majority of tariffs. We do not see that as a significant driver one way or another. And just stepping back, really happy with the overall results on margin with the 70-basis-point increase year on year, and particularly on the FORWARD side, which increased almost six points. So overall good results, and we are just seeing some of that increased input cost pressure. Michael Karanikolas: On your follow-up regarding the high value consumer, we think the opportunity in the high value customer segment is very large for us over time, not just at FORWARD, but also at REVOLVE. REVOLVE is a premium price point, and a lot of our top FORWARD shoppers shop significantly on REVOLVE as well. We are seeing strength across both websites with that high value consumer. We do not release a specific mix percentage publicly, and of course it depends where we put the cutoff, but we are seeing that as a real area of strength in our business. Operator: And our next question comes from the line of Rick Patel with Raymond James. Your line is open. Analyst: Thanks for taking my question. I would love any color on monthly cadence through the quarter, what you are seeing thus far in Q2, and how to think about operating expense leverage as we move through the year. Jesse Timmermans: Thanks, Rick. On the monthly cadence, as you recall, we were plus 16% for the first seven weeks of the year, and we closed at plus 16%, and that was on tempered comps. So really great progress as we moved through the quarter, and we had some really great marketing activities — Revolve Los Angeles, for example. Really pleased with the cadence of the growth throughout the first quarter. On the go forward for April, we are seeing some pressure, specifically in the Middle East regions as a result of the geopolitical uncertainty there. That definitely has an impact. That started in March, and it is continuing to have an impact in April, and likely, as you have heard, some consumer confidence and sentiment impact building as a result of that conflict. On operating expenses and leverage, we are investing in a number of growth initiatives, so that is a big driver in the Q1 results and for the full year. If you take marketing, for example, up 150 basis points year on year, that was largely due to the growth initiatives we have been driving — Revolve Los Angeles, GrowGood, etc. That impacts G&A as well. It is really impressive that we got 60 basis points of G&A leverage while investing. If you pull those growth initiatives specifically out of G&A, G&A would have been up kind of mid-single digits, call it, so we would have had more than a point of leverage on G&A. For the year, at the high end of the G&A range, it would be plus 7%, so anything north of that on revenue we would get leverage on that line item. The other line items are largely variable. In marketing, we are continuing to invest, so that will be an investment point for this year, and as we look ahead to future years, that marketing will balance out after this initial investment year. Operator: And our next question comes from the line of Peter McGoldrick with Stifel. Your line is open. Analyst: Thanks. Can you elaborate on early learnings and strategy for Revolve Los Angeles and any color on full-price mix trends? Michael Mente: On the Revolve Los Angeles brand, given the strong, beloved nature of the REVOLVE brand itself, having the REVOLVE brand will be a very powerful owned brand. This allows us to focus and attack with a strong halo that drives product sales in those zones, but also gives greater awareness and affinity for the overall REVOLVE brand, which should halo into all other categories. REVOLVE LA is really the beginning of multiple REVOLVE-oriented brands that allow us to touch a range of categories that we currently are not active in. That is very important for us over the course of the next 12 to 24 months. We will be attacking very high-margin categories that will be a whole new white space for us. This is a multiyear roadmap. If you fast forward two to three years from now, you will see this is going to be the next chapter for our business. We are super excited about this, and everything is going perfectly according to plan with that first launch. Jesse Timmermans: On the full-price mix, it fluctuates month to month and quarter to quarter, so I would not put too much weight toward any significant shift. There could be some consumer sentiment and confidence impacting that, but over time we have driven that up, and although it is down year on year, over the past few years it is meaningfully higher than it was in the pre-COVID era. It is still in a very healthy zone. We saw a double-digit increase in full-price sales and a really healthy increase in full-price customers. At this point, we feel good about the inventory composition and the mix, although it was lower year on year and a little bit lower than our expectations. Operator: And our next question comes from the line of Michael Binetti with Evercore. Your line is open. Analyst: Hey, guys. Could you expand on input cost pressures you are seeing and how returns initiatives are trending? Jesse Timmermans: Thanks, Michael. On input costs, on the product side we are seeing it both in freight and in product — any petroleum-based products are seeing increased cost, and that is just starting, so that impacts the go-forward guidance on gross margin. It is more of an impact on REVOLVE, as I mentioned, given the owned brand mix there has a more direct impact than the third parties where we are marking up. We are also seeing higher freight costs within selling and distribution. We have done a really good job managing fuel surcharges and rates with the carriers, but there have still been increased surcharges, especially international, that we are battling against right now. Offsetting that, return rate was down nicely in the first quarter — 80 basis points — on top of a 280-basis-point reduction in Q1 2025. Even sequentially, historically we see an increase from Q4 to Q1 around 150 basis points, and this year the sequential increase was half of that. We do have a number of initiatives still in play, with a couple more rolling out around the middle of this year. We will continue to work on it and try to drive that down in the right ways without impacting the experience. Operator: Our next question comes from the line of Nathan Feather with Morgan Stanley. Your line is open. Analyst: Thanks for taking the question. Could you update us on GrowGood scaling plans and any future categories with Cardi? Michael Mente: On GrowGood, the current limitation is really inventory. We have a big wave of inventory coming sequentially over the next few months, so we will definitely see a sales ramp-up there. Sales velocity is so fast that predictability will be interesting to see over time, but we have nothing but the highest momentum we have ever had for a product or a brand. We also have an extremely exciting roadmap for the GrowGood brand in product introductions and beyond. Cardi has been nothing but the best partner — as locked in as possible — so we could not be more excited. There will be an apparel brand planned for the future, which we will not get into too many details yet, but that is extremely exciting as well. It hits a zone that is a complete white space in our universe, so we are excited to do something very special there as well. Operator: Great. Thank you. And our next question comes from the line of Oliver Chen with TD Securities. Your line is open. Analyst: Hi. This is Julie Shalansky on for Oliver Chen. I am curious if you could walk us through the main drivers of the improvement in the return rates from this quarter, and how you think about that evolving as categories like beauty and owned brands continue to scale. Second, how much of the 1Q step-up in marketing is recurring infrastructure versus one-time costs for Revolve LA? Michael Karanikolas: With regard to the return rates, there are a couple of factors at play. Certainly, there are things we have been working on over the longer term to get return rates down, including some preexisting initiatives that we were able to step up in a bigger way during the quarter. You will also have some fluctuation quarter to quarter in the return rate number, just like the gross margin number, depending on category mix shift and other factors, and that played a bit of a role. On marketing expenses, I would not say there is any structural change in marketing, but to the extent that we have exciting things to launch that we think could be big growth drivers for many years to come — such as Revolve Los Angeles, which is incredibly strategic, and GrowGood, which is quite exciting as well — we are going to make sure we fuel those initiatives with the proper marketing support, and we think it will deliver nice returns. Operator: And our next question comes from the line of Janine Stichter with B. Your line is open. Analyst: Thanks so much. How are you thinking about sustaining growth from here, and any notable consumer behavior callouts? Michael Karanikolas: We have seen really nice execution the past couple of quarters in terms of delivering growth numbers, and it is certainly our intention and expectation that should continue. REVOLVE itself has huge continued opportunity in just the REVOLVE core. Our brand awareness is still relatively low compared to much larger premium brands, and we are still adding active customers at a good rate with a lot of new areas of marketing we are investing into. Category expansion is a strong driver for us. International expansion has been strong, with 13 consecutive quarters of international outpacing the U.S., and we saw strong growth internationally across pretty much every major region in Q1 despite some weakness in the Middle East. On top of that, you have physical retail, which is completely untapped for the brand and can have a huge impact on our overall TAM and revenue; Revolve LA, which opens things up from both a marketing and product category perspective; and brand partnership opportunities like GrowGood, which had an incredible launch and can be substantial in value and revenue. The core growth algorithm has a ton of upside, and we have huge opportunities on top of it, and I think we are positioned very well. Jesse Timmermans: From a consumer lens, nothing significant to call out outside of the obvious Middle East impact. We also talked about the high value customers continuing to really perform, especially on the FORWARD side, so it is more of the same. Operator: Our next question comes from the line of Simeon Siegel with Guggenheim. Your line is open. Analyst: Hey, everyone. Could you provide more detail on the $11 million minority investment and trends in AOV? Michael Karanikolas: On the $11 million minority investment, first and foremost we will be disciplined and opportunistic. In this case, we found a brand that we felt was very strategic for us in terms of the category it operated in, and we felt like it was an incredible brand with an incredible team behind it, with investment terms that made a lot of sense. Those are the sorts of opportunities we are looking for. We are really excited about the partnership and hopeful it will work out quite well. Jesse Timmermans: On AOV, it was up 1%. It was up across both REVOLVE and FORWARD. We saw a higher increase in average selling price partially offset by units per order. Looking ahead, we saw a similar trend in April, and we would expect flat to slight increase in AOV for the balance of the year. Operator: And our next question comes from the line of Dylan Carden with William Blair. Your line is open. Analyst: Thanks. How should we think about the marketing cadence versus revenue and the mix of performance versus brand? Jesse Timmermans: We had the marketing plans in place ahead of that revenue growth, and the revenue growth came through very well for us, so we are really happy with the way that played out. I would not say that we are taking excess revenue and investing it back into marketing, but when we see something working, we will continue to invest, so you could see that going forward. Most of the step-up was to support these initiatives, and it impacted both performance and brand. As we discussed in the prepared remarks, we made investments in billboard placements, connected TV, and other areas that we typically have not done in the past but have been playing out very well with a really good ROI on those incremental investments. Michael Karanikolas: On beauty, the GrowGood launch and sales did not hit the GAAP numbers for the first quarter because any sales that occurred in the first quarter were all presale. Beauty as a whole saw strong growth excluding the GrowGood launch, which was incredible, and that is really just a continuation of a trend we have seen for a number of years now, and of course we think that business has a lot more room to grow. Operator: And our next question comes from the line of Jay Sole with UBS. Your line is open. Analyst: Thanks for taking the question. Any key learnings from retail stores so far and thoughts on locations and owned brands in-store? Michael Mente: On retail, probably the most notable thing is that our customer loves our owned brands. We are pushing the limit there and pushing further. Owned brands perform better on their own for shelf space and rack space, so we will continue to ramp there. This insight has helped us invest more into owned brands, launch Revolve Los Angeles, and expand into categories that we have not historically been active in because they were more suited for physical retail versus ecommerce. Those two coming together over the long term will be incredibly powerful. Thus far, we feel quite confident on our choice of locations. We want to be very disciplined about locations that we feel are extremely de-risked. Our Miami location in Aventura is one where we are 100% positive that we will get our customer. Michael Karanikolas: On AI, there is a whole host of areas where it is impacting the business in a very positive way, enabling revenue growth and our ability to go after opportunities quickly and make better decisions. Recent launches include the new generative AI Q&A section on portions of our website. We saw really strong performance there, and it was launched only on dresses and only on a subsegment of our property, so there is a lot of room to expand and roll out. We also used AI to accelerate our ability to produce high-quality marketing collateral quickly — we mentioned that with GrowGood, but it is true across the business. AI virtual styling tools we have discussed on previous calls are seeing strong consumer reception and are not fully rolled out yet. Across the business, we are developing better internal tools and algorithms to make better decisions. You have seen a lot of gross margin gains through the years in terms of full-price/markdown ratios and margins on markdowns. We have incredible internal tools for reporting that can unlock quicker decision making. Over a multiyear period, we have rolled out AI search enhancements and improvements to merchandise and personalization algorithms — it is really impactful across the entire business. Operator: And as a reminder, it is star one if you would like to ask a question. And our next question comes from the line of Matt Koranda with ROTH Capital. Your line is open. Analyst: Hi, everyone. Could you talk about full-price mix volatility and any updates on active customer growth drivers? Michael Karanikolas: Regarding the lower mix of full-price sales, these percentages will fluctuate quarter to quarter. Over longer periods of time, we have driven that percentage up significantly, and it is extremely favorable versus a lot of the competition in multi-brand retail. It is important to note that we manage it largely algorithmically. There can be product mix shifts that affect the full-price/markdown ratio from quarter to quarter and some shifts in consumer behavior, but overall we think it is in a very healthy place. The combined business had gross margin gains for the quarter, so nothing particular of note to call out with regards to the fluctuations. Jesse Timmermans: On active customers, that plus 8% was driven by both new customers and existing customers. We saw orders per active and revenue per active go up, which shows really good engagement from existing customers. On new customers, growth was across the board: REVOLVE, FORWARD, domestic, international, full price, and markdown. It all goes back to the execution and the investments we have been making over the past few quarters, and specifically this quarter we were very active in marketing, and Revolve Los Angeles creates a nice halo effect for the entire business. Operator: And our final question comes from the line of Ashley Owens with KeyBanc Capital Markets. Your line is open. Analyst: Thanks for squeezing me in. Any additional detail on international performance and tariff refunds timing? Michael Karanikolas: On international, we saw broad strength. Every major region was up year over year, so it was not any particular one region driving growth, including the Middle East, which was up for Q1. If you pull the quarter apart, March was down for the Middle East and that continued through April, but as a whole, we saw strong growth across the board. Mexico is an outlier contributor — we are having incredible growth there as a result of service enhancements and new marketing initiatives. We are really pleased with that region, and it drove a very significant portion of overall international growth, but again, all major regions were up year over year. Jesse Timmermans: On tariff refunds, the team was very on top of this. The refund application process started on April 20, and they filed everything within a day or two of that. Claims have been filed, and we are starting to receive responses. Timing is TBD — we have heard 60 to 90 days — but there is some tiering, so we do not think we will see it all in one fell swoop. It is not included in the guidance, so that would be upside, but timing is TBD. Operator: And that concludes our question and answer session. I will now turn the call back over to management for closing remarks. Michael Mente: Thank you for joining this quarter, and a big thanks to our team for the hard work and focus. It is very clear to me that our multiyear strategic plans and investments are going exactly as planned. Continued focused execution quarter after quarter will undoubtedly result in phenomenal results. Michael Karanikolas: Excited for the next quarter ahead and the many years ahead. Thank you.
Operator: Good afternoon. My name is Ludy, I will be your conference operator today. I would like to welcome everyone to Thinkific's First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on May 4, 2026. I would now like to turn the conference over to Joo-Hun Kim, Head of Investor Relations. Please go ahead. Joo-Hun Kim: Thank you, and good afternoon, everyone. Welcome to Thinkific's First Quarter Fiscal 2026 Financial Results Earnings Call. Joining me today are Greg Smith, CEO and Co-Founder of Thinkific; and Kevin Wilson, Interim CFO. After the prepared remarks, we will open up the call to questions. During the call today, we will discuss our business outlook and make forward-looking statements that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. These comments are based on our predictions and expectations as of today. We undertake no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our regulatory filings that were filed earlier today. Our commentary today will include adjusted financial measures, which are non-IFRS measures. They should be considered as a supplement to and not a substitute for IFRS measures. Reconciliations between the two can be found in our regulatory documents, which are available on our website. In addition, our commentary today will include key performance indicators that help us evaluate our business, measure our performance, identify key trends affecting our business, formulate business plans and make similar strategic decisions. Such key performance indicators may be calculated in a manner different to similar key performance indicators used by other companies. I should also note, we have a slide deck that supports our remarks available to download on the webcast interface or on our website. And finally, all dollar amounts discussed today are in U.S. dollars, unless otherwise indicated. I will now turn the call over to Greg Smith, CEO and Co-Founder of Thinkific. Greg Smith: Thank you, Joo-Hun. Good evening, and thank you for joining us. I'm pleased to report we delivered a solid first quarter while continuing to execute on the transformation across Thinkific. I want to take a moment to welcome Leigh Ramsden, our new CFO, to Thinkific. Leigh will be joining us effective June 1, 2026. He brings great experience to the team, and I'm very much looking forward to working with Leigh on our leadership team. Kevin Wilson joining us on the call today has been serving as an exceptional interim CFO for us. I'm very grateful to Kevin and his team for the amazing work they've been doing. I also want to acknowledge that we're currently undergoing a couple of significant changes at Thinkific. The first is our shift upmarket. And as much as I remain confident in this choice and the eventual results it will bring, like most changes of this nature, the path to success is rarely a straight line. We're in the midst of that journey now. I continue to see an excellent opportunity for us to perform better having chosen this path. The rapid evolution of AI and its effects on our industry and SaaS are no less than the single greatest change we've experienced since inception. and probably in the history of technological advancements. While AI is a massive rising tide, it won't lift all boats. Some will sink. I am positioning Thinkific to be one of those that rises and potentially significantly so. We are all in on AI at Thinkific. Our entire team is now leveraging it in every role. From sales and support to go-to-market motions, I'm seeing teams adopt and evangelize the power of AI to help us go faster and deliver more value for our customers. Most importantly, in R&D, we're moving faster than ever. In this area, I have seen teams deliver in days what once took months to build. This opens a world of opportunities for value we can create for our customers and ultimately, revenue growth opportunities. But we are still in the midst of this change as well, and we still have work to do here. My specific intents for the use of AI focus around the accelerated achievement of actual outcomes, specifically prioritizing revenue growth, while EBITDA improvements are also an opportunity here. I've taken a personal role in driving this forward across the company with specific focus on R&D, where I think we can see the biggest gains. Evangelical AI adoption and use, combined with an intense focus on velocity are now absolute requirements at Thinkific. Similar to our shift upmarket, we are now in the midst of this change, and I hope to be generating improved results from both later this year. I see these two vectors of change as very complementary. I've spoken before about the need to accelerate our product road map to better serve our larger customers. AI empowers us to do exactly that. Additionally, as the AI era evolves, moving to larger customers positions Thinkific to capitalize on this evolution. Larger customers have both larger revenue opportunities and larger expense buckets. Both are areas that Thinkific can leverage AI to help them with making us inherently more valuable. I think there's fear out there about the effects of AI on software, and I'm very aware of this. At Thinkific, we are constantly asking ourselves what our moats are and what significant value we bring in a world where software is significantly easier to develop. We have identified some key areas where we'll be deepening these strengths, focusing on value we can provide that others cannot build on their own. I believe there's opportunity here for us not just to survive but ride the wave that AI is bringing to our industry to set ourselves up so that as each new model drops, we get exponentially better. Q1 marked the release of our new AI product, Thinker. As a reminder, Thinker is Thinkific's agentic product that allows any customer to create their own custom agents based on their own proprietary data and content and to deliver those agents to their customers. Thinker agents differentiate from others, and they are focused on teaching and learning. They specialize in specific topics offered by our customers, and they're customizable and are highly reliable and accurate. This accuracy is increasingly important, both to our larger customers and as learners come to expect accuracy from their agents. Unlike generalized models, Thinkific agents are trained on our customers' data and further refined by Thinkific's own large data sets. Customer feedback has been very positive, reinforcing our conviction in the direction we're taking. While the benefits of Thinker are clear, its adoption raises new considerations for our customers. Pricing is primarily outcome-based and as AI consumption scales, so do associated costs. While this means initial usage is muted, it also represents one opportunity for us to scale alongside the wave of AI advancements. We are working with our customers to design the right commercial models to ensure that token billing ties directly to financial outcomes of revenue or cost savings in order to ensure customers are happy to scale their Thinker usage to any level. Thinker is also just one product area where we're leveraging AI. There are a number of others. We continue to make steady progress in executing against our new ideal customer profiles. We continue to see larger customers at the top of the funnel and improve our ability to close those larger names that have significant expansion potential in the future. One example from Q1 is a large online real estate marketplace that selected Thinkific to support continuous learning for its broker network while maintaining a strong sense of community. The initial rollout will focus on a subset of brokers with significant room to expand over time given that their broader community is orders of magnitude larger. Notably, this opportunity came to us through word of mouth within the real estate ecosystem. Word-of-mouth referrals like this represent a strong signal for the strength of our offering. In Q1, at a customer's request, we advanced our work to ensure Thinkific aligns with HIPAA requirements. This work landed us a new and rapidly expanding customer, and it also strengthens our ability to expand in health care and adjacent segments where trust, privacy and reliability are essential. As I shared at the start, we're in the midst of two critical changes, our upmarket focus and the opportunities that AI represents. What excites me is the urgency I see in the team. We've accelerated our execution and will continue to do so. This energy and mindset shift, combined with the powerful AI tools we're leveraging present real opportunity for growth. I'm confident that Thinkific has the ability to not only capitalize on these changes, but set ourselves up to be competitive in the AI era. With that, I'll turn the call over to Kevin to walk through the financials. Kevin Wilson: Thanks, Greg, and good afternoon, everyone. Our financial performance for Q1 '26 was in line with our guided range. Our Plus segment contributed -- continued to deliver double-digit growth and commerce revenue passed over the $3.5 million mark for the first time. Adjusted EBITDA came in just ahead of the midpoint of our guided range. Overall, while we are impatient for our efforts to be reflected in stronger top line growth, we are pleased by the way Thinkific is managing through this period of strategic change and are excited by the potential of AI to create meaningful advantages for us and our customers over the coming quarters. For the first quarter of fiscal '26, revenue totaled $18.7 million, a 5% increase year-over-year. The largest driver of growth is our Plus segment, where we are seeing strong upmarket interest along with improved traction on upgrades and retention. Plus grew 12%, totaling $5.1 million for the quarter. Crossing the $5 million mark for the first time is an important milestone as we work to shift the bulk of our revenue to this larger and more durable segment. As expected, our self-serve segment continued to slow with growth coming in at 2% -- the continued slowdown of self-service is both a product of our own shift in marketing investment, along with the inherent challenges at the low end of the segment. This slowdown reaffirms we are making the right strategic decision to focus on larger and more established customers. As much of our commerce revenue is tied to self-service customer base, we are also seeing a corresponding slowdown on that front. That being said, total revenue earned from our commerce portfolio crossed the $3.5 million mark for the first time. Our depth in commerce is a key differentiator for us in the Plus space and allows us to attract a broader array of customers compared to others in our field. Gross margin was 72%, down 2 points year-over-year, but consistent with the prior quarter. The year-over-year decline was primarily driven by a shift in revenue mix, reflecting stronger growth in commerce revenue relative to total subscription. ARPU was $175, up 4% year-over-year and flat sequentially compared to the prior quarter. Subscription growth was subdued as we continue to execute on our strategic pivot upmarket. This reflects a deliberate reduction in customer acquisition spending in our traditional lower-tier creator segment, while we continue to make progress upscaling our sales team to sell larger and more complicated deals. These factors resulted in a total ARR of $61.3 million, up 2% year-over-year and up $300,000 sequentially. Commerce revenue growth was primarily driven by increased penetration of our commerce solution into our customer base as measured by GPV as a percentage of GMV, which rose to 64% from 56% a year ago. As noted in prior earnings calls, at the current levels and with our existing feature set, we believe penetration rates are approaching a plateau around the mid- to high 60% range and is expected to remain relatively stable in the near term. Take rate of 4.3% was down from 4.5% in Q1 of last year, but consistent with the prior quarter and within our anticipated range. Note that take rate will fluctuate depending on the types of commerce features being used by our customers in any given quarter. GPV of $75.7 million was up 16% year-over-year and 3% sequentially. The year-over-year growth in GPV is due primarily due to the increased penetration of our commerce solution. GMV of $117.5 million was up 1% year-over-year and largely flat sequentially. Turning to operating expenses. Total OpEx was $15.3 million, up approximately $2 million both sequentially and year-over-year. As we discussed last quarter, the increase was driven largely by a surge in AI-related investments, coupled with an increase in the depth and talent of our R&D team. As a result, R&D expenses increased to $7.1 million, up from $4.9 million in the prior year and $5.8 million in the prior quarter. We also incurred additional nonrecurring costs in G&A, primarily related to the CFO transition. Sales and marketing was flat sequentially and down almost $400,000 over last year as we continue to refine our go-to-market approach and find savings and efficiencies across the board. Adjusted EBITDA was a loss of approximately $500,000. This was driven primarily by the largely onetime investments in our engineering organization to accelerate the adoption of AI tools and workflows. These investments will drive productivity gains and support a faster pace of product innovation, allowing us to accelerate our product road map. On the balance sheet, cash and cash equivalents as of March 31 were $49.4 million, down from $50.7 million in Q4 of last year. The decrease of $1.3 million was primarily a result of the usage of $152,000 in cash flow from ops, $900,000 in cash used in the NCIB and tax remittances of approximately $115,000. I'll end with a few comments on guidance. Q2 2026, we're expecting revenue of $18.2 million to $18.5 million, representing approximately 1% year-over-year growth at the midpoint. Our revenue range represents continued stable gains in Plus subscriptions, offset by anticipated seasonal slowdown in commerce revenue. From an EBITDA standpoint, we expect similar results to Q1 with a range of minus 2% to minus 5% of revenue. While Q1 included some onetime costs related to AI investments, Q2 includes a company-wide gathering along with costs related to our CPTO transition. In closing, between shifting towards being an AI-centric organization and our transition to serve more upmarket customers, the next 12 months are going to be pivotal for Thinkific. We are not being patient and are pushing the pace of change faster every day. On a personal note, I'd like to welcome Leigh to the finance team and the broader Thinkific community. As Greg mentioned, Leigh will be a great asset to the team, and we are pleased to have him here with us. With that, we can open the floor to questions. Operator: [Operator Instructions] With that, your first question comes from the line of Stephen Machielsen with BMO Capital Markets. Stephen Machielsen: So Greg, it wasn't lost on us that you're stepping into more of a product role. Is that going to be a full-time thing? And I guess, if so, like what sort of developments or specific things do you want to see that just weren't being achieved with the previous leadership? Greg Smith: Yes, I appreciate the question, Stephen. So I don't intend to add more to the senior team here. So yes, this change is permanent for the at least foreseeable future. I do have a strong engineering leader and product leader in VP roles. And for a company of our size, it's pretty typical to have VP Product, VP Engineering and as well in some of the other -- in the other R&D design and data as well, have VPs reporting into me. So that's going to work for the foreseeable future, and this allows me to just get a lot closer to the R&D team. Part of it is just removing layers so that I can dive in and ensure we're on the right path here. Part of it is really the injection of more velocity. We're doing a really good job with AI adoption, but I think there's a huge step change I'd like to create here in terms of the process and decision-making and how we move forward at pace to really take advantage of it because AI can take us reasonably far, but there's a bunch more we can do culturally, I think, to accelerate the delivery of value for our customers. And then, yes, I'm looking at the whole road map. I think there's a lot of good in what we had planned and we're planning to do and a lot of value for customers coming and intend to complete the majority of that. There are some adjustments I'm making in part to -- between the acceleration of output and some of the adjustments to the road map, I anticipate making more room for more AI-specific value that we can deliver to customers, which the intent there, obviously, is to drive some cost savings for customers and some revenue driving for Thinkific as well. Stephen Machielsen: Very good to hear. Second question, just based on some simple ARPU math, it looks like the customer count has actually been holding up quarter-over-quarter, which is not really what we would have expected given the -- like the higher priority given to the Plus customers. I wonder if you can speak to any of the dynamics going on there? Like are you just adding more self-service customers than you expected? Or is churn lower than you expected? Any color would be great. Greg Smith: Yes. I think we've seen -- certainly, when we initially made some of those changes around the go-to-market and reducing the spend, as Kevin highlighted on the prepared remarks around the creator and bottom end of the market, we were surprised by how we did continue to add a number of customers there. I wouldn't say we're sort of through this whole journey yet. So we may still see some fluctuations there. And you're right, as we move to larger customers, it may be that the customer count comes down and we see -- but we see larger dollar value customers. And to some extent, we are seeing sort of a shift. To date, it's remained, as you said, relatively stable with not a lot of change where we're kind of shedding some of the old, bringing in the new at higher price points. Over time, we may see that number come down, though. But moving to the right type of customers. Operator: And your next question comes from the line of Gavin Fairweather with ATB Cormark. Gavin Fairweather: Maybe just to build off that last discussion, just on the Q2 guidance, it does look like there's a modest kind of top line decline sequentially. I know you talked about a bit of seasonality around commerce. But have you seen any kind of change in self-serve retention or anything on that front in the current quarter that would maybe speak to that decline? Greg Smith: I think that is more, as we said, on the commerce related. And then we're being -- we are quite optimistic here about what we can create with AI to start to unlock this, but Q2 is still in the midst of this transition and really specifically unlocking more with AI. So my hope is that we can do significantly better than this in the future, but being cautious on what we put out there in the near term. Kevin Wilson: Just to add to Greg's point. So on commerce going from Q1 to Q2, we've got obviously inherent seasonality, but the other thing that comes with the self-serve customer base, which is the majority of our commerce revenue, we get a fair bit of volatility quarter-to-quarter. And just what we're seeing thus far in the quarter leads us to be a little bit more cautious to Greg's point on Q2 as it stands right now. Gavin Fairweather: Understood. That's helpful. And then just on R&D costs, hoping you can help us out a little bit. So there are $6.6 million in Q1, $4.5 million year-over-year, $5.2 million in Q3. Kind of hard from the outside looking in to quantify how much of that was tied to the third-party kind of surge and consultants coming in versus maybe token usage and kind of driving AI into the organization. Maybe you can just help us understand what a future baseline might look like and how we should think about the timing to getting back to that baseline? Greg Smith: Yes. Maybe I can give some color and then, Kevin, you can talk more -- a little bit of baseline, and then we may make some adjustments from there as well. So the majority of that was the more onetime in Q1 there. We do have on an OpEx generally some more onetime expenses in Q2 and that we are currently actually at the offsite for the whole team. But yes, so on the R&D front, it wasn't a huge acceleration of, say, token expenditures there. I do expect us to increase the amount of token usage going forward, but a lot of that was more onetime in Q1 there. Gavin Fairweather: Appreciate it. And then just lastly for me, just on Plus, can you kind of discuss any product milestones that are coming up over the course of kind of Q2 or later bit of 2026 that you think are really going to unlock some further growth for that business? Greg Smith: One of the bigger ones is what we have actually coming out next month in May is a whole new learner hub. And so this allows our customers to bring together their Thinker AI agents, their communities and their courses and other learning experiences into one more cohesive experience. It's going to look and feel a lot different than what others have on the market. A lot of learning experiences right now are a little bit homogenized. And so this breaks us apart and put something that certainly when we've been putting in front of customers for the last few months has gotten rave reviews. So I think it creates a lot of opportunity. It also is a re-architecting of the underlying code to allow us to move faster on top of it with AI. So that's a big one I'm excited about. There's a bunch of -- we've made some big recent improvements in our mobile app and our communities experience that have gotten good reviews from customers and is actually starting to move metrics in a positive way there. And then there's more on the front of specifically what we can do for larger customers that's coming that are just a laundry list of asks that they have, whether it's to close more deals or stay with us longer. And then the piece I'm looking to inject more into the road map is how we introduce additional product to drive up ARPU and revenue opportunity with those customers because I think there's a big opportunity to do that certainly with the use of agents. Operator: And the next question comes from the line of Robert Young with Canaccord Genuity. Robert Young: A couple of questions. First one, keep extending some of the other questions, but the ARR growth implied in the guidance, if you could help me understand the moving parts there. I was trying to parse your comments and it sounds as though a lot of the decline, I guess, it's $3 million decline quarter-over-quarter at the midpoint thereabouts. Is that mostly driven by commerce that seems like that's a larger amount than would only be driven by commerce. And so how much of that would be Plus decline and how much would be self-serve decline? Can you just maybe lay out those pieces, that would be really helpful. Greg Smith: And just to be clear, you're talking ARR? Robert Young: Yes. So I'm talking about revenue, but I'm just simplifying towards, ARR. Greg Smith: I'm just trying to understand -- so first question would be ARR looks like it's going to decline in Q2 overall. And so the decline in the revenue guidance suggests that it would be larger than just a decline in commerce. I think that's what you said earlier on in the call. Is that correct? Or is the self-serve or Plus declining would ARR from those pieces decline? Does that make sense? Kevin Wilson: Yes. I can jump in there. So the seasonality that you're seeing in the change from Q1 to Q2 this year is a little bit different from Q1 to Q2 last year. So Q2 last year, Q3 last year, we had a few customers in commerce having outsized success. As I mentioned, volatility in self-serve means that sometimes customers come on, have outsized success and then retire from the business, change their business model, change something in their business that doesn't show up in the same way. And that's, to some extent, what we're seeing this year going from Q1 to Q2. So the vast majority of the decline from Q1 to Q2 is commerce, and that is larger than what we saw last year simply because last year, we had some customers having outsized success that we're not necessarily expecting to repeat this year. ARR should be in line with trends for Q2. Robert Young: Okay. So that would mean that the incremental or the added ARR in Q2 from both Plus and self-serve would be positive? Kevin Wilson: Yes. I'd say in line with trend, which has been... Robert Young: Yes. Understood. Okay. Okay. My next question would be around the token usage that you mentioned. We're trying to understand where that shows up, the cost shows up in the income statement. Does it fall into gross margins? Because I think you said that gross margin is going higher due to mix. Could you dig into that just a little bit? Kevin Wilson: Yes. I don't think you [indiscernible] if you could identify where... Go ahead. Greg Smith: Kevin can confirm if I'm wrong here, but I don't think you would see a significant impact from token usage in Q1. Q2 going forward, we'll see more. But although we have been using tokage, it's not a huge line item at this point. We are doing a pretty good job of both leveraging the best of the models and the best models to managing the spend there as well. And then where you would see that, Kevin, I'm not actually sure, is that primarily R&D or we split it entirely across OpEx based on team usage? Kevin Wilson: It's based off team usage, but obviously, the majority of it we currently expect in R&D, but I think we're learning as we go in terms of how the usage is going to differ from team to team. Robert Young: Okay. And then what elements of the pricing model are consumption based? Is it just Thinker at this point? And are you thinking that, that might expand over time? Kevin Wilson: It is Thinker, and I do think we could expand that as well. So we do have some usage-based pricing, but not on a token-by-token basis. And then with Thinker, we do, which is -- the product itself is getting really positive response from customers, very excited about using it. And we're just in the process of adjusting the pricing and the controls that customers have on the pricing, so they have some ability to either moderate what they spend on it over time or ideally pass that cost on to the end user so that they're not as at all gun-shy about turning it on to full board because most of our customers we're talking are really excited to roll it out and expand it as broadly as they can, but they want to have some confidence about an ROI, and that's something we can give them if we allow them to flow through the cost to the final user. Robert Young: Okay. The gross margin expansion due to mix, I think what is the driver of that? Is that a shift towards plus with less commerce contribution or some other driver? Kevin Wilson: Gross margin, I'll just confirm here, I think, is usually, that is a shift in mix between subscription revenue and commerce revenue. And I believe that was the case here as well, which meant a slightly lower gross margin, less than 1% lower, but a slightly lower gross margin based on that mix, if I've got that right. Greg Smith: Yes. Robert Young: Okay. So nothing to do with pricing or anything else like that. And then... Kevin Wilson: No. Robert Young: Last question for me, and then I'll pass the line. Maybe just give us a sense of the drivers behind the Plus deceleration. I know the target a few quarters ago was 30% growth, and now it's somewhere around 12%, I think it's 12%. Like what are the headwinds there given all of the effort to sort of push that piece of the business? Is it just a retooling that's also impacting the Plus growth? Or are you still aiming for 30% and think that's possible in the short run? And I'll pass the line. Greg Smith: Yes. So this -- I think this is -- I've talked about it a bit on this call and a bit on the last call, and it really kind of comes down to we've entered a new market with a different ideal customer profile. We had many of these customers before, but now that we're going heavy into it, we have realized there's some product gaps to fill. And so we're in the process of doing that with AI. I think we can fill them pretty quickly. That's largely what the road map currently is for this year is closing those gaps so that we're more competitive in that space with the larger customers while opening some new revenue opportunities. But largely, it's things we need to do to amp up the product. I've seen some really good success on our CSM account management team, support teams working with customers to do more there as well as launch and onboarding. So we're actually seeing some gains on the operations and more hands-on work that we're doing with these customers to win more deals, get them up and running, see them through success and keep them longer. The last gap we really need to fill there is on the R&D side. Operator: And the next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: I had a longer-term question, Greg. I'm just wondering if you could frame out whether it's 1-year, 3-year, 5-year, what does success look like in a transition model for Thinkific? What's the ideal customer look like? How are they using the products that you can imagine? Can you just talk us through what that may look like or what you think it could look like at this point in time? Greg Smith: Definitely, yes. And so as we look forward and we see through these transitions, good looks like to me that it is not exclusively Plus. I think that's sort of one misconception out there. Plus is a huge part of it because it's a higher price point, but I see self-serve and Plus as plans, not customers. And so there's still an opportunity of bringing in people at the self-serve price point, and we see this consistently and then moving their way through price points and many of them making their way to Plus. The ideal customer for us is generally has a team. If they're coming in at a low price point, maybe five people or more, if they're coming in at the higher price points, often 25 and up and sometimes in the thousands. They are delivering training to their customers. and often as a revenue stream for them, which can be a real differentiator because that's something that we do extremely well. And so it's really focusing on them and making sure we're meeting their needs. So it's businesses that have teams that are delivering training to customers and ideally doing it, at least in part as a revenue stream, and that sets us up well to set ourselves apart. And then how we help them is there's -- over the next few years, there's a lot we can do on the Agentic side to just roll out agents to both help with their actual OpEx while creating revenue opportunities for us. So things that may cost them currently hundreds of thousands or millions that with the tooling we have could potentially do it for significantly less for them. Thomas Ingham: Okay. And have you thought through your pricing model with, I guess, a group of agents that you're offering to your customers versus a subscription model? Greg Smith: Yes. And so Thinker being the first step in that where it is more usage and outcome-based. What's really outcome-based is what we're trying to move towards is so that as they're getting outcomes through the use of agents that it's more pay based on outcome and success. And I think that's -- it's an obvious trend in software and one we see a lot of opportunity. And if we can do more to provide better outcomes for customers that either have a revenue-driving outcome, a customer-facing outcome or in many cases, an OpEx outcome for them, there's a lot -- they're a lot more amenable to the outcome or usage-based pricing. And so I think you'll see us and more and more software move in that direction. Thomas Ingham: And then sort of last thing for me. You say you're first mover from your group of peers. But are you seeing Agentic-based competitors show up already? And if so, who are they? And what types of products are they already demoing to the market? Kevin Wilson: Yes. I mean I wouldn't name -- I don't want to throw a bunch of competitors on the call, but I would say that I do -- I think every software company out there is looking at this. And if they're not, they're already dinosaurs is we do need to be looking at agentic solutions. And so it's a huge part of the stack now that I think any software company needs to be incorporating. And so I do see it all over the place. We were pretty quick to market with Thinker with the specific functionality that it has, and I think it's still something that it can stand out on. But I think there's a lot more we can do in terms of custom agents for customers or customizable agents for customers that go well beyond what Thinker is doing today. And I think you're going to continue to see this from most of our competitors that they are offering more agentic solutions for sure. Operator: And I'm showing no further questions at this time. I would like to turn it back to Greg Smith for closing remarks. Greg Smith: Thank you all. I appreciate the wonderful questions and insight and time you take to spend with our company. As I highlighted on the call, I think we're in the midst of a couple of exciting changes where I see a lot of opportunity. And in particular, with the use of AI rolling out to the customers that we're best suited to serve, I think there's -- I'm very optimistic here that we can move a lot faster and deliver a lot more value and create more value for all of you as shareholders, us as Thinkific and of course, for our customers, which is the base of it all. Thank you. Operator: Thank you, presenters. And ladies and gentlemen, this now concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. Welcome to Tigo Energy, Inc.'s fiscal first quarter 2026 earnings conference call. At this time, participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Joining us today, Zvi Alon, CEO, and Bill Roeschlein, CFO. As a reminder, this call is being recorded. I will now turn the call over to Bill Roeschlein, Chief Financial Officer. Bill Roeschlein: Thank you, Operator, and it is a pleasure to join you today from our corporate office in Los Gatos, California. Also with us is Zvi Alon, our CEO. We would like to remind everyone that some of the matters we will discuss on this call, including our expected business outlook, our ability to increase our revenues and our overall long-term growth prospects, expectations regarding recovery in our industry including the timing thereof, statements about demand for our products, our competitive position and market share, the impact of tariffs, our current and future inventory levels, charges and reserves and their impact on future financial results, inventory supply and its impact on our customer shipments, statements about our revenue, adjusted EBITDA and non-GAAP net loss for the second fiscal quarter 2026, and our revenue for the full fiscal year 2026, our ability to penetrate new markets and expand our market share including expansion in international markets, and investments in our product portfolio are forward-looking statements and, as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors described in today’s press release and discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2026, and other reports we may file with the SEC from time to time. These risks and uncertainties may cause actual results to differ materially from those expressed on this call. Those forward-looking statements are made only as of the date they are made. During our call today, we will reference certain non-GAAP financial measures. We include GAAP-to-non-GAAP reconciliations in our press release furnished as an exhibit to our Form 8-K. The non-GAAP financial measures should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. Finally, I would like to remind everyone that this conference call is being webcast, and a recording will be made available for replay on Tigo Energy, Inc.’s investor relations website at investors.tigoenergy.com. I will now turn the call over to Zvi Alon, CEO of Tigo Energy, Inc. Zvi? Zvi Alon: Thank you, Bill. To begin today’s discussion, I will highlight key areas in our recent financial and operational performance before turning the call over to our CFO, Bill, who will discuss our financial results for the first quarter in more depth as well as provide our guidance for 2026 and the full year of 2026. After that, I will share some closing remarks, tell you about the outlook, and then open the call for questions from the analysts. Business update. We delivered a strong start to 2026 despite the typical weather-related seasonality in our end market. To be more specific, in the first quarter of 2026, we reported total revenue of $25.2 million, representing a 33.7% increase compared to the prior year period. By geography, we saw seasonally stronger performance on a year-over-year basis in the EMEA region during the quarter, which comprised 69.5% of our revenue. Recently, we also announced that our enhanced Tigo GO battery is now available in the European residential market and is expected to further strengthen our European presence, with storage capacity up to 47.9 kilowatt-hours and integrated heating for cold-weather operations. Within the Americas region, which comprised 20.9% of our revenue, we saw higher performance on a year-over-year basis but lower results sequentially as buyers accelerated purchases late last year ahead of the expiration of the residential clean energy tax credit. By country, we performed exceptionally well in Italy, which grew 140.8% sequentially, and again in APAC, in Australia, which grew 64.3% compared to Q4. We also saw strong growth in the Czech Republic and Poland, where unusually cold weather patterns during Q4 had significantly impacted solar installations. As mentioned in our last earnings call, these results were offset by seasonal softness in Germany and weaker results in the UK market, where robust growth in 2025 moderated for us in the current quarter. As we look at the energy sector as a whole, energy security is an increasingly important priority for governments, businesses, and homeowners across the globe. The recent geopolitical developments in Iran continue to highlight the importance of energy independence worldwide. As energy markets remain volatile, we believe Tigo Energy, Inc. is well-positioned to support installers, homeowners, and commercial customers seeking flexible, reliable, and intelligent solar and storage solutions. Finally, as we look toward the rest of the year, I would like to share three specific growth catalysts that I expect will drive accelerated growth for Tigo Energy, Inc. First is our partnership with EG4, which is just now beginning to kick off with the first deliveries occurring this month. This partnership is expected to provide the U.S. market with IRS 45X and IRS 48E ITC credit benefits. Second is our new line of GO ESS batteries for the U.S. and EMEA markets. This provides a compelling and complete solution for TPOs in the U.S. and addresses market requirements for storage capacity in the EMEA region. And third is the positive activity we are seeing in our pipeline for large-scale utility deals, where we believe we have a competitive advantage. I will now turn the call over to Bill for the financial results. Bill? Bill Roeschlein: Thank you, Zvi. Turning now to our financial results for the first quarter ended March 31, 2026. Revenue for the first quarter of 2026 increased 33.7% to $25.2 million from $18.8 million in the prior-year period. On a sequential basis, revenues decreased 16.1% despite improved results coming from many countries in the EMEA region, including the Czech Republic, Italy, and Spain. By region, EMEA revenue was $17.5 million, or 69.5% of total revenues, and a 3.2% sequential decrease. Americas revenue was $5.3 million, or 20.9% of total revenues, and a 43% sequential decrease. APAC revenue was $2.4 million, or 9.6% of total revenues, and a 10.2% sequential decrease. By product family for the first quarter of 2026, MLPE revenue represented $20.8 million, or 82.4% of total revenues. GO ESS represented $4.0 million, or 15.8% of total revenues, and Predict+ represented $500 thousand, or 1.8% of total revenues. Gross profit for the first quarter of 2026 was $10.8 million, or 42.8% of revenue, compared to a gross profit of $7.2 million, or 38.1% of revenue, in the comparable year-ago period. Improvement in gross margin is largely due to the absence of warranty-related charges in the most recent quarter compared to the year-ago period. Operating expenses for the first quarter increased 18.4% to $13.2 million compared to $11.2 million in the prior-year period. The increase was driven primarily by bad debt expense of $1.0 million as a result of the bankruptcy of a European distributor during the quarter. We do expect a portion of this amount to be recoverable through insurance in a future period. Operating loss for the first quarter decreased by 9.4% to $6.4 million compared to an operating loss of $4.0 million in the prior-year period. GAAP net loss for the first quarter was $1.8 million compared to a net loss of $7.0 million for the prior-year period. Non-GAAP net loss, which we are introducing this quarter and reconcile from GAAP net loss solely by excluding stock-based compensation, totaled $100 thousand compared to a non-GAAP net loss of $5.4 million in the prior-year period. We believe this measure provides investors with additional insight into our progress toward achieving consistent GAAP net income. Adjusted EBITDA loss for the first quarter decreased 76.8% to $500 thousand compared to an adjusted EBITDA loss of $2.0 million in the prior-year period. As a reminder, adjusted EBITDA is a non-GAAP measure that represents net loss as adjusted for interest and other expenses, income tax expense, depreciation, amortization, stock-based compensation, and M&A transaction expenses. Primary shares outstanding at the end of the quarter were 75.9 million. Turning to the balance sheet. Accounts receivable, net, increased this quarter to $14.2 million compared to $13.9 million last quarter, and increased from $10.4 million in the year-ago comparable period. Inventories, net, decreased by $6.5 million, or 20.7%, to $24.8 million compared to $31.3 million last quarter, and increased compared to $18.9 million in the year-ago comparable period. Cash, cash equivalents and short- and long-term marketable securities totaled $11.6 million at March 31, 2026. On a sequential basis, cash increased by $3.9 million as we successfully closed a registered direct offering of approximately $15.0 million during the quarter. In addition, we closed on a credit facility with Wells Fargo Bank at the end of the first quarter. The facility provides up to $10.0 million of availability based upon a borrowing base formula consisting of certain accounts receivable and inventory held by the company. No drawdowns were taken during the first quarter. Turning now to our financial outlook for the second quarter and full year of 2026. As a reminder, Tigo Energy, Inc. provides quarterly guidance for revenue as well as adjusted EBITDA, as we believe these metrics are key indicators for the overall performance of our business. For the second quarter ended June 30, 2026, we expect revenues to range between $30.0 million and $32.0 million. We expect adjusted EBITDA to range between $1.0 million and $3.0 million. For the full year of 2026, we continue to expect revenues to range between $130.0 million and $135.0 million. That completes my summary, and I would now like to turn the call back over to Zvi for final remarks. Zvi Alon: Thanks, Bill. We are pleased with how we have started 2026 and the traction we are seeing across our key markets. The continued predictability of our business reinforces our confidence in sustaining growth through the remainder of the year, and we expect to maintain our competitive outperformance. We enter the remainder of the year with a strong foundation and a clear path forward, and we are excited about the opportunities ahead. We will now open the call for questions. Operator: Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please standby while we roster. Our first question comes from the line of Philip Shen with Roth Capital Partners. Philip, your line is live. Philip Shen: Hi. Thanks for taking my questions. I wanted to start with the potential for the EU to ban Chinese inverters, and I wanted to understand if you could be a beneficiary of that. What have you learned about this, and how quickly could this ban become effective? It seems like it could be or may be effective already. So are you seeing a change in the business at all already? Thanks. Zvi Alon: We are aware of the change. It actually started, I would say, last year sometime, and there are a couple of countries already that are banning Chinese-controlled monitoring systems and devices. We do believe that it would increase the market share for our solutions. We see it as a positive contributor for our solutions in the market. We have been touting the security of being monitored in the U.S. for quite some time, and that seems to be working with those sentiments in the market in general. Philip Shen: Are you seeing a change in demand for your business because of this, or is it hard to discern that the demand is coming from this? Zvi Alon: It is hard to say that it is correlated right now. In general, I can tell you that we saw Europe starting to wake up towards the end of the first quarter, and from that perspective, we are fairly confident it will continue. The addition of the banning of Chinese products should accelerate it and help more. Our optimizers are doing exceptionally well in what we see in the market. Philip Shen: Can you elaborate more on that mix? You had a lot of volume, most of it from Europe, in the quarter. That mix of about 70% from EMEA—do you think that stays similar through the rest of this year? And maybe give a bit more color on which countries are strong and which have been less strong but could become stronger ahead? Bill Roeschlein: We have been trending in these percentages for a bit of time—about 65% to 70% from EMEA. It was once higher than that, but the U.S. has really picked up steam for us. With the repower initiatives that we have, and now with the introduction of our new hybrid inverter and battery solution along with the EG4 partnership for optimized inverters, we think the U.S. could be a market where we pick up a good share regardless of the macro condition there. That might drive the EMEA region to be a little bit less than 70% by the time we get to the end of the year. We will see how that plays out. Within Europe, we have historically been strong in Italy and Germany, those being the two biggest economies last year along with the UK. Germany has been, by most accounts, big but sluggish. We have had decent growth, but the areas where we have seen really outsized growth that are working in our favor—and I think it will work out this way in 2026 as well—include the UK, which was really great because we came in with almost zero market share and quickly established a good revenue base. In 2026, we are making a concerted effort to go after more of Eastern Europe where, as we have discussed before, some competitors have withdrawn or reduced their footprint. That includes Slovenia, Romania, Poland, and the Czech Republic, where we have been strong for a while but there is still additional market share to be picked up. We are expanding beyond our traditional strength in Italy and Germany and going a little more east and north. Philip Shen: You mentioned repowering. Can you give us some sense of the success you are having there? If you can quantify anything in terms of how much of your total revenue or total U.S. revenue that could be for 2026, that would be helpful. Bill Roeschlein: It more than doubled. It was about 2% to 3% of 2025 and most recently was about 20%. We believe we had some pull-in orders related to the 25D expiration that muddled the overall measurement, but we are still working with the same installers who have a brisk book of business, and we expect another year of growth coming from that side of the house. We have a very unique hybrid inverter with the right form factor, the ability to accept varying voltage levels, and minimal rewiring required. There are a lot of advantages to our solution that fits well with repower. Layer in our initiative with our GO ESS battery hybrid inverter for the year along with EG4, and I think the U.S. market could be very strong growth for us this year. Zvi Alon: On the repower, one additional point is that the more those systems age, the better it is for us. We identified this market early and have been planning for it for quite some time and gaining nice momentum. As it ages, it should be better for us. Philip Shen: Last one for me. Let us move over to the utility-scale solar opportunity. As you mentioned, there is a large pipeline of opportunity there. I am guessing this is tied to Predict+, which is a software package that you have. Is this also tied to your optimizer opportunity? Give us a little more color on what that looks like and how that could drive 2026. Zvi Alon: Yes, I did mention last time that we see an increase in activity in utility scale, and that continues. I do not want to make any premature announcements, but in general we see momentum in both Predict+ as well as optimization. On the optimization, we see two main drivers. One is new installations, and we mentioned the large installation in Spain, which is now operational, up and running next to the Madrid Airport. We won that late last year. It was 142 megawatts. We see similar-sized projects in the pipeline and a number of them, so we are excited and optimistic. Philip Shen: Great. Thank you very much. I will pass it on. Zvi Alon: Thank you. Operator: Thank you. Our next question comes from the line of Eric Stine with Cowen Capital Group. Eric, your line is live. Eric Stine: Hi, Zvi. Hi, Bill. I know you talked about the EU and the outlook in 2026, but it was more from a strategic point of view. Can you dig in a little bit on the market improvement—people are starting to talk about green shoots. You mentioned that you saw that towards the end of the quarter. Where does that stand? You mentioned softness in Germany and the UK in Q1, and those are two countries where you are starting to see indications of improvement. When do you anticipate you might start to see the benefit from that? Is it Q2? It seems like that type of expectation is not necessarily part of your outlook. When might you see it, and when do you become convinced that it is a sustainable market improvement? Zvi Alon: Thanks, Eric. We started seeing an improvement in the second part of Q1. The first part of Q1 was very sleepy, which is normal. Despite that, we still saw about 30% growth year over year. We believe that Q2, by the guidance we provided, also demonstrates nice year-over-year growth, and it is based on confidence we see in all regions, including Europe, which is our largest region. We believe we will continue to see market share gains. Bill mentioned our expansion into Eastern Europe in places where competitors have left, and we have seen good momentum. Europe for us is showing good signs despite Germany being a little slow. I will highlight that we saw Germany starting to come back to life in the second part of Q1. We are not sure if it will get back to the same full strength of last year or more, but we have seen improvement there, which causes us to be more optimistic. In addition, the success in utility-scale projects—many are in Europe. This is a new area for us based on the success in Spain and new opportunities we have identified, and we believe Europe will be a very good place for us moving forward. Eric Stine: Sticking with utility scale, you have talked several times about a number of opportunities. You have set the guidance in a spot that you believe is a good place to be—it is very good growth—but you have also talked about opportunities like GO ESS and EG4 that could mean potentially significant growth in 2026. Where would you put utility scale in that? Is that something where you are starting to see good signs that is more of a 2027 event where it really starts to impact financials, or could the timing be more of a 2026 event? Zvi Alon: Let me be very clear. The increase in our utility footprint is in 2026, and not at the end of the year. I will just leave it there. Bill Roeschlein: I would add that we do not normally talk about pipeline, but the deals we are working on are getting to the point where they are ripe for a decision. There are enough of those in our pipeline where we are at least finalists that we feel confident we will have something to talk about this year. Zvi Alon: We have been conservative for quite some time. We do not share prematurely, but our confidence is high. Eric Stine: Understood. Maybe last one for me on repowering. I know the primary focus is on the inverter side, but is that also something that potentially develops from an optimizer side as these older systems upgrade and perhaps, at ten years old, decide that they want control at the panel level? Zvi Alon: That is an outstanding question. It gives us access to two potential expansions. One is the optimizer, as you described, and the second is, since our solutions provide a hybrid inverter, adding a battery is very cost effective. By increasing market share with our solutions in repower, it gives us an opportunity to sell additional batteries at a very cost-effective level compared to other solutions. Eric Stine: Thank you. Operator: Thank you. Our next question comes from the line of Sameer Joshi with H.C. Wainwright. Sameer, your line is open. Sameer Joshi: Thanks for taking my questions. A lot of topics have been covered, but I do not think we covered the GO ESS opportunity and traction enough. It seems that with roughly $4 million in revenues, it is the highest since 2023. Are you looking at meaningful contribution from GO ESS during 2026, and is it a contributor to growth? Bill Roeschlein: We believe that with our next generation, we expect it will be widely accepted by the market. The feature functionality, price point, and size are all aligned to what customers are asking for. In the U.S., with new sales, TPO opportunities, and even repower—which is a captive market for us to get battery revenue from—and in Europe, we have addressed the market’s desire for larger storage capacity for both three-phase and single-phase markets, especially three-phase. Our new generation of battery has cold-weather functionality and expansion ability up to almost 48 kilowatt-hours. That is what the market has been asking for, and that is why we are excited to introduce it now. We expect 2026 to deliver a lot of positive momentum in both markets. Sameer Joshi: Inventory was down sequentially by $6.5 million. Should we read anything into this? And how is the supply chain? How quickly can you rebuild inventory, especially given outlook for the second quarter and second half as well as the hinted progress on utility scale? Bill Roeschlein: We are still in an eight-week factory-to-customer supply-chain environment, so we are not seeing major hurdles there. As a corporate metric, we try to keep 90 to 100 days of inventory. We were trending higher than that, so bringing it down was part of running working capital at an optimal level. We have no problem meeting any big utility win. The benefit of having an outsourced contract manufacturing model allows you to scale up and down very quickly. It is not difficult to do. We have the floor space to do it, and we can add another line if and when we need to. Sameer Joshi: Understood. Lastly, on operating expenses through the year, should we expect marginal increases, or do you have enough manpower and resources so that we will not see any meaningful increase in OpEx? Bill Roeschlein: I think we are trending in the $12.5 million to $13.0 million range for the rest of the year. With a wider lens, $12.5 million to $13.5 million, midpoint around $13.0 million. We should be able to grow this year without having to add a lot of OpEx, demonstrating the leverageability in our operating model. We have been at this level around $13 million for several quarters, so I think that is the right ballpark for the rest of the year. Sameer Joshi: Got it. Thank you. Thanks for taking my questions. Operator: Thank you. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Zvi Alon for closing remarks. Zvi Alon: Thanks again, everyone, for joining us today. I especially want to thank all the dedicated employees for their ongoing contributions, as well as our customers and partners for their continued hard work. I also want to thank our investors for their continued support. Operator? Operator: Thank you for joining us today for Tigo Energy, Inc.’s first quarter 2026 earnings conference call. You may now disconnect.
Operator: Welcome, ladies and gentlemen, to Embecta Corp.'s Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded, and a replay will be available on the company's website following the call. I would now like to turn the call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Sir, you may begin. Pravesh Khandelwal: Good morning, everyone, and welcome to embecta's fiscal second quarter 2026 earnings conference call. The press release and slides to accompany today's call, along with webcast replay details are available on the Investor Relations section of our website at www.embecta.com. With me today are Dev Kurdikar, embecta's Chairman and Chief Executive Officer; and Jake Elguicze, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides, including those referenced on Slide 2 of today's conference call presentation. Such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, which can be accessed on our website. We do not intend to update or revise any forward-looking statements, including any charts, financial projections or other data referenced in this presentation, whether as a result of new information, future events or otherwise, except as required by applicable law. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation, which are also included in the Investors section of our website at embecta.com. Our agenda for today's call is as follows. Dev will begin with an assessment of the company's performance during the second quarter and associated financial guidance implications. We will also share the progress we have made on our strategic objectives and will discuss the expected imminent closing of the Owen Mumford acquisition. Jake will then take you through our second quarter financial results in more detail as well as our updated fiscal year 2026 guidance. Dev will then conclude with our updated approach to capital allocation, and we will open the call for questions. With that, I will now turn the call over to Dev. Devdatt Kurdikar: Good morning, everyone, and thank you for joining us today. I want to start the call by addressing our second quarter performance and full year guidance revision. This was a difficult quarter for embecta. Our results were below expectations with consolidated revenues down 14.4% year-over-year on an as-reported basis or 17.4% on an adjusted constant currency basis. As a result, we are updating our full year guidance to account for the underlying factors that impacted performance during the quarter and that we expect to persist for the remainder of the year. We have a number of initiatives underway already to counteract them as we transition from our roots as a spun-out insulin injection delivery company toward a more diversified broad-based medical supplies company. We are actively laying the foundation to one day serve patients beyond those solely with diabetes. Our strategic priorities, along with our recent acquisition of Owen Mumford, will help us get there. Turning to the second quarter. While our International business performed in line with our prior outlook, our U.S. business fell short of expectations due to a combination of factors that I'm going to take you through now. The largest contributor to the lower year-over-year U.S. revenue is share loss within our pen needle product category, most of which is concentrated at a single customer. We estimate that the remainder is spread across smaller regional and independent pharmacy customers. It is important to understand that the patients switching to competitive products are likely not on payer plans where we have preferred access. That means that the revenue impact of the switching is estimated to be greater than what is indicated by an average unit price. The second largest contributor is overall market volume softness for insulin pens and pen needles in the retail channel. We believe this contributes to most of the remaining pen needle revenue decline. And as it relates to the insulin pen market, we are seeing signs of decline in overall insulin pen prescriptions. This is driven by a decline in the retail channel, but is being partially mitigated by growth in the long-term care channel. We are also seeing volume softness in longstanding accounts where we have a stable share position. Additionally, more patients choosing to acquire pen needles from channels where we do not participate or where products are lower priced is driving additional pressure on retail pen needle volumes. The remaining pen needle decline is related to inventory reductions at certain accounts and additional net pricing pressure. Finally, a reduction in syringe and safety products revenue comprised the remainder of the overall U.S. revenue decline. As a result, we are revising our fiscal 2026 revenue guidance to a range of between $1.015 billion and $1.035 billion. This reflects both the U.S. revenue shortfall in the second quarter and our updated expectations in the U.S. for the remainder of the fiscal year. International is performing as expected, and our outlook there is unchanged. Additionally, the revised range includes approximately $30 million in revenue contribution from the acquisition of Owen Mumford, which is expected to close by the end of this month. This compares to our previous guidance range of between $1.071 billion and $1.093 billion. As a reminder, during our first quarter earnings conference call, we had commented that we expected to be closer to the lower end of that revenue guidance range. Excluding the anticipated 4-month contribution from Owen Mumford, our current organic revenue outlook at the midpoint is approximately $995 million or a reduction of approximately $75 million from the low end of our prior expectations. Pen needles account for approximately 70% of the $75 million revenue guidance reduction or approximately $53 million. Given that pen needle market volume estimates can be somewhat imprecise, it is not possible to exactly calculate the individual contributions of competitive share loss and market volume softness on our product volumes. Our estimate is that share loss accounts for nearly half of the pen needle revenue reduction or approximately $25 million, while overall market volume softness is estimated to account for approximately $20 million. The remaining pen needle headwinds we are seeing are related to inventory reductions at certain accounts and additional net pricing pressure, which together accounts for approximately $8 million of the revenue guidance reduction. Turning to syringes. They account for approximately $13 million of the remaining $22 million revenue guidance reduction, most of which stems from lower syringe use associated with compounded drugs. While our decision to discontinue our swab products accounts for approximately $5 million of the revenue guidance reduction. For context, in late 2025, our sole supplier of the active ingredient in our alcohol swabs exited the API manufacturing space. Despite extensive efforts, we were unable to qualify an alternate supplier under applicable FDA standards. And while we remain committed to supporting our customers and patients through this transition, we recently made the decision to cease production of alcohol swaps. This product line had lower gross margins than our insulin injection devices. Finally, a reduction in estimated growth of safety products accounts for the remaining amount of approximately $4 million. Our guidance assumes that share loss and softness in market volumes persist throughout the remainder of the year without any further deterioration or recovery. Taken together, these are the drivers behind our performance in the second quarter as well as the full year revenue guidance revision. Considering the magnitude of the guidance reduction, we have initiated a review of our cost structure and organizational footprint. We will communicate findings and resulting actions as part of our standard quarterly reporting once that work has been completed. Now let me briefly touch on our strategic priorities. First, we continue to advance our global brand transition program during the quarter. More than 75% of embecta revenue is now represented by products commercially launched and shipped under the embecta label, and we remain on track for substantial completion by the end of calendar year 2026. Second, in terms of the development of market-appropriate pen needles and syringes, we continue to make meaningful progress during the quarter. These products are designed to compete in price-sensitive markets and may help mitigate share loss. Market appropriate syringes have launched commercially in China, and we are monitoring customer feedback. We plan to expand availability of these products in additional geographies upon the receipt of regulatory approvals. Regarding new pen needles, we have active regulatory submissions under review by the U.S. FDA, Brazilian authorities, and BSI for CE Mark certification in Europe. Third, portfolio expansion. During the quarter, we made meaningful progress on our GLP-1 B2B strategy, building directly on what we shared with you last quarter. At that time, we reported that we were collaborating with over 30 pharmaceutical partners with more than 1/3 having selected embecta as their preferred device supplier or having executed agreements in place. Three months later, the pipeline has continued to develop and now approximately 40% of our identified partners are either in active contract negotiations or have executed agreements in place. We also note that our partners have received Canadian approval and the first U.S. FDA tentative approval for a generic semaglutide injection product. Additionally, this quarter, we moved from pipeline to execution as several of our partners launched generic GLP-1 therapies co-packaged with embecta pen needles in India. That is a meaningful proof-point of our B2B value proposition and our commercial execution. Furthermore, our small pack GLP-1 retail configuration launched in Canada and Australia. These products are designed specifically to meet the needs of the growing out-of-pocket GLP-1 user population, and we expect to extend availability of such configurations into the U.S. market in the coming months to serve those patients who need pen needles to administer Zepbound in a pen injector. Regarding our fourth priority, financial flexibility, during the first 6 months of the year, we repaid approximately $75 million of outstanding principal of our Term Loan B. Disciplined deleveraging has been a consistent priority and this repayment of debt is consistent with our track record of applying free cash flow to strengthen the balance sheet and preserve strategic optionality. That financial discipline is what creates the capacity to pursue transactions like Owen Mumford. When we announced this acquisition in March, we noted that Owen Mumford had earned a global reputation for innovation, quality and patient-centered design. The more time we spend with this team in this business, the more confident we are in that view. At its core, this acquisition accelerates our transformation into a broad-based medical supplies company, one that serves both pharmaceutical partners seeking drug delivery platforms and chronic care patients across diabetes, obesity, autoimmune diseases, and the anaphylaxis markets. More specifically, we are adding a differentiated drug delivery platform designed to support pharmaceutical companies seeking a device to deliver injectable drugs. In addition, we will expand our product portfolio beyond insulin injection devices and capitalize on our global presence, thereby diversifying our revenue base. Finally, given the nature of the products being added to the portfolio, we expect to be able to leverage our core manufacturing strengths and optimize our manufacturing and distribution network, all of which is consistent with the strategy we presented at our 2025 Investor Day. Next I'll provide a brief overview of the business we are acquiring. Owen Mumford is a privately held U.K.-based innovator with a 70-year track record of developing medical devices and drug delivery technologies. OM brings a diversified portfolio of devices that serve chronic care and point-of-care testing markets, including self-injection systems, lancing devices and venous blood collection solutions. These are durable, clinically established franchises with long-standing customer relationships. Their top 10 customers have maintained relationships averaging 20 years, which speaks to the stickiness of their platform and the quality of their execution. Like embecta, Owen Mumford also has a September 30 fiscal year-end. And during fiscal year 2025, they generated revenue of approximately GBP 69.4 million with approximately 80% of their revenue concentrated in the U.K. and the United States. Their business is split between medical devices, which represents approximately 60% of revenue, and pharmaceutical services, which represents the remaining 40%. We view the pharmaceutical services business as the higher growth area of the 2, anchored by the Aidaptus auto-injector platform, which I will discuss next. Aidaptus is an award-winning next-generation auto-injector designed with a single form factor that accommodates both 1 ml and 2.25 ml fill volumes. What that practically means is that Aidaptus has a single final assembly process and was designed from the start to address customers' needs for reduced manufacturing changeovers, simplified supply chain logistics and large-scale production. We estimate the total addressable auto-injector market to be approximately $2.4 billion, growing at a double-digit CAGR. This is driven by the adoption of biologics, the emergence of generic GLP-1 therapies and the broad shift towards self-injection as a preferred modality across multiple chronic care categories. Aidaptus is well positioned to capture a meaningful share of that growth as the platform is already supporting customer clinical development programs with a commercial contract pipeline that includes secured long-term agreements with several partners. The strategic alignment with our existing GLP-1 B2B strategy is also worth highlighting as Aidaptus deepens our relevance to pharmaceutical partners who need a drug delivery device to go alongside their injectable therapy. During fiscal year 2026, Aidaptus is expected to generate a small amount of revenue as market penetration and growth are expected in future years. To that point, the acquisition of Owen Mumford was structured as an upfront payment of GBP 100 million at closing and up to an additional GBP 50 million in performance-based payments based on the net sales of Aidaptus. Regarding synergies, we have assumed a modest level of operational synergies in our financial model, reflecting opportunities to leverage embecta's manufacturing scale and infrastructure alongside Owen Mumford's capabilities. And while we have not assumed any revenue synergies in our financial model, given that OM generates approximately 80% of their revenue in only 2 countries, we believe that the commercial opportunity of pairing Owen Mumford's portfolio with embecta's presence in over 100 countries could be significant. That completes my prepared remarks at this time. And with that, let me turn the call over to Jake to take you through the financials in more detail. Jake? Jake Elguicze: Thank you, Dev, and good morning, everyone. Since Dev outlined the items impacting Q2 revenue, I will keep my comments brief. During the second quarter, embecta generated approximately $222 million in revenue, which is a year-over-year decline of 14.4% on an as-reported basis or 17.4% on an adjusted constant currency basis. Within the U.S., revenue for the quarter totaled approximately $95 million, reflecting a year-over-year decline of 29.4% on an adjusted constant currency basis. The lower U.S. revenue is attributed to the factors that Dev described earlier. Turning to our International business. Revenue for the quarter totaled approximately $126 million, representing an increase of 2.1% on a reported basis, but a decline of 4.1% on an adjusted constant currency basis. Results within International were in line with our expectations as revenue within China was lower as compared to the prior year period, given ongoing market dynamics and the broader geopolitical and trade environment. These declines were partially offset by continued strength across Latin America, Asia, and Canada. Meanwhile, from a product family perspective, during the quarter, adjusted constant currency pen needle revenue declined 20.4%, syringe revenue declined 14.6%, safety product revenue declined 2.3%, and contract manufacturing revenue declined 43.2%. GAAP gross profit and margin for the second quarter of fiscal 2026 totaled $127.8 million and 57.6%, respectively. This compared to $164.1 million and 63.4% in the prior year period. While on an adjusted basis, our Q2 2026 adjusted gross profit and margin totaled $131.8 million and 59.4%. This compared to $165 million and 63.7% in the prior year period. The year-over-year decline in adjusted gross profit and margin was primarily driven by the lower year-over-year revenue in the U.S. as well as lower year-over-year revenue in China. These headwinds were partially offset by net changes in profit and inventory adjustments and FX. Turning to GAAP operating income and margin. During the second quarter of 2026, they were $35 million and 15.8%. This compared to $62.9 million and 24.3% in the prior year period. While on an adjusted basis, our Q2 2026 adjusted operating income and margin totaled $48.6 million and 21.9%. This compared to $81.4 million and 31.4% in the prior year period. The year-over-year decrease in adjusted operating income was driven by the decline in adjusted gross profit as operating expenses remained consistent with the prior year period. Turning to the bottom line. During the second quarter of 2026, we generated a GAAP net loss of $4.1 million and a loss per diluted share of $0.07. This compared to GAAP net income of $23.5 million and earnings per diluted share of $0.40 in the prior year period. While on an adjusted basis, during the second quarter of fiscal 2026, net income and earnings per share were $16.1 million and $0.27 as compared to $40.7 million and $0.70 in the prior year period. The decrease in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed as well as a higher year-over-year adjusted tax rate driven by the lower U.S. revenue in the quarter. Turning to the balance sheet and cash flow. During the 6-month period ended March 31, 2026, we generated approximately $47 million in free cash flow, and we repaid $75 million of outstanding debt. While our last 12 months net leverage as defined under our credit facility agreement was approximately 3x. This compared to our covenant requirement, which requires us to stay below 4.75x. That completes my prepared remarks on our second quarter 2026 results. Next, I'd like to discuss our updated 2026 financial guidance and certain underlying assumptions. Beginning with revenue. On an as-reported basis, we are lowering our guidance from a range of between $1.071 billion and $1.093 billion to a range of between $1.015 billion and $1.035 billion. This new range assumes an organic as-reported revenue range of between $985 million and $1.05 billion. It also assumes that we will close the acquisition of Owen Mumford by the end of this month, which would then generate 4 months of contribution or approximately $30 million. In terms of adjusted operating margin, given the expected decline in U.S. revenue as compared to our prior projections, we are lowering our adjusted operating margin guidance from a range of between 29% and 30% to a new range of between 22.25% and 23.25%. We are also lowering our adjusted earnings per share guidance from a range of between $2.80 and $3 to a new range of between $1.55 and $1.75. The largest driver of this reduction is the impact of the lower U.S. revenue and associated gross profit, which accounts for most of this change. In addition to the U.S. revenue and gross profit impact, the addition of Owen Mumford, including the interest expense on the associated borrowings is expected to be dilutive by approximately $0.15. Over the longer term, we continue to expect that the acquisition of Owen Mumford will contribute to revenue growth in fiscal year 2027 and beyond, that OM will be immaterial to embecta's fiscal year 2027 adjusted operating income and to be accretive thereafter, that OM will be dilutive to adjusted net income in fiscal year 2027 to be immaterial to embecta's fiscal year 2028 adjusted net income and to be accretive thereafter, and that the acquisition will generate high single-digit return on invested capital by year 4 with increasing contribution thereafter. Lastly, because of the lower expected U.S. profitability, coupled with the addition of Owen Mumford, we now expect that our adjusted tax rate will increase from approximately 23% to approximately 28%, thereby reducing our adjusted EPS as compared to our prior expectations by approximately $0.10. Turning to the balance sheet and cash flow. Despite the reduction in our revenue and profitability guidance ranges, we continue to target repaying approximately $150 million in debt during 2026. Lastly, in terms of free cash flow and inclusive of the addition of Owen Mumford, we now expect to generate free cash flow of between $95 million and $105 million. This compares to our prior guidance range of between $180 million and $200 million. This updated guidance range includes approximately $40 million in one-time use of cash associated with brand transition and the Owen Mumford acquisition. That completes my prepared remarks. And at this time, I would like to turn the call back to Dev to discuss our updated capital allocation framework. Dev? Devdatt Kurdikar: Recently, our Board authorized a 3-year share repurchase program of up to $100 million and concurrently reduced our quarterly dividend from $0.15 per share to $0.01 a share. We believe that this change in our capital allocation will provide us with additional flexibility to deploy capital towards share repurchases or additional debt reduction, which are currently our primary focus areas. We expect to commence share repurchases beginning in the current quarter, subject to market conditions and our share price, amongst other factors. That completes my prepared remarks, and I will now turn the call over to the operator for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Marie Thibault with BTIG. Marie Thibault: I want to spend a little time better understanding the U.S. weakness this quarter and assumptions going forward. I think you said in your commentary that in the U.S. pen needle segment, the losses were concentrated at a single customer. I wanted to understand if that was the same customer as was referenced last quarter, where there were pricing concessions made and why, if so, the volumes weren't stabilized by that move? And then secondly, you called out weakness in insulin pen prescriptions. Can you tell us a little bit more about what's driving that? Could that be short-lived? Or is that a long-term trend? Devdatt Kurdikar: Let me start by taking the market question first on insulin pens and pen needles, and then go to the competitive loss question. So first on insulin pens, if we look at prescriptions for insulin pens, we have now begun to see a decline maybe more pronounced in the most recent quarter that we reported. That decline is actually greater in the retail channel than it is in other channels. And insulin pens are sold primarily in retail, but some in long-term care and very little in the specialty care channel. So insulin pen is mostly stored and sold in retail, and there has been a decline. That decline is greater in long-acting than fast-acting. And it seems to be driven by a decline in new prescriptions. That obviously translates into the pen needle market as well, but maybe a bit exacerbated in the pen needle market because what we are also seeing is a decline in retail that maybe is a little bit faster for pen needles than there is for insulin pens. Now some of this is likely being caused by shift in purchasing patterns from retail to perhaps lower cost channels or where pen needles are available at a lower price. We've also seen declines in accounts, as I referenced, where we believe we have a stable share position, so more indicative of market than anything else. And those are the market trends that we are seeing. Of all the variables that we try to account for in our guidance, this is perhaps the one where there is maybe more uncertainty because what we are observing is more of a recent shift than certainly what we've seen over the past several years. So that's about the market. Now with respect to the competitive loss, yes, it was the same customer that we had referred to earlier. Obviously, I don't want to talk about pricing at any specific customer or even broadly in the U.S. market. But I think what we've ended up is the share loss at that customer is a little bit deeper than we anticipated. But I want to point out a couple of factors that I referenced in my prepared remarks. So when there is a shift in share at a particular retailer, we believe that much of that share loss occurs with patients who are not on preferred plans with us. And so they can move to a different brand of pen needles and still use their insurance plan. And so when that happens, the revenue impact of that share loss is higher since if we are not on a preferred plan for that patient, obviously the rebate amount for that payer plan is less for us. Secondly, while, yes, most of that competitive loss was concentrated at the aforementioned account, we are seeing some declines in smaller regional players as well as independent pharmacies. Now with these smaller regional players and independent pharmacies, the rebates that these retailers get are obviously less than our large customers. And so that has an impact on the revenue as well. And so the competitive share loss affects us maybe at a higher rate than one might imagine just by using an average unit price. So those are the 2 factors that are impacting the U.S. results this quarter and drove the majority of the guidance revision for the year. Marie Thibault: Okay. That's helpful. And just to clarify, could GLP-1s be an impact on the insulin prescriptions? Is that anything you're seeing in the field? Devdatt Kurdikar: It's hard to definitively state what it is. But certainly, as we explored what the factors were that could be leading to market softness, right? The 2 factors that actually bubbled to sort of the top of the mind are, one, GLPs. And now you could ask sort of what's changed in GLP-1s and GLPs have been around. And we do wonder whether the increasing affordability of GLP-1 drugs certainly over the past several months could have played a factor in increasing penetration rate. Now if that were to be the case, what would result is obviously a larger number of patients sort of would try GLP-1s before they start insulin. And could that be having an effect? Certainly, that's possible, but it's hard to conclusively state that. The second thing, obviously, that occurred in December of 2025, so the beginning of our fiscal second quarter, is the expiration of the ACA subsidies. And could that be having an impact on the insured population, particularly as it affects sort of insulin uptake and doctors' visit and getting sort of progressively treated for type 2 diabetes? Maybe. Those are the 2 factors that potentially have shown an inflection point at the beginning of the quarter, Marie, but it's hard at this point to conclusively state the contribution of those factors or whether there are others. Marie Thibault: Yes. Lastly for me, and then I'll hop back in queue. I understand it's early right now. But as we think about embecta long term, beyond this fiscal year, do you envision that you can return to sales growth here from this level? Devdatt Kurdikar: Yes, absolutely. That's certainly what our intention is, that's what our target is, and that's what we believe the Owen Mumford acquisition will position us for, right? So let me zoom back a little bit. Almost 1.5 years ago, we announced the termination of the patch program. And then at the Analyst Day a year ago, we sort of conveyed our strategic intent to diversify into being a broad-based medical supplies company and really get further into chronic care drug delivery and build out our B2B segment. Prior to the acquisition of Owen Mumford, we started some initiatives. We wanted to expand our portfolio of syringes and pen needles, and you heard today about the advances that we've made over there. And we laid out a plan to really go deeper into the B2B segment and establish relationships with generic drug companies wanting to enter the generic GLP-1 market. And we, at that point, pointed out that that was a $100 million opportunity for us. Everything that we've seen since then, I think, further validates that $100 million opportunity, including the launch of generic GLP-1 therapies in India that actually have our pen needles co-packaged with them. Obviously, we noted with excitement, Canadian approvals. We still expect Brazil and China to launch generic GLP-1s as well. Obviously, timing is a little bit uncertain. China might actually end up being in 2027 rather than 2026. But certainly, the advances that we are making over there do position us to get back to revenue growth. And then on top of that, if you add the Owen Mumford acquisition, it really diversifies our product portfolio into chronic care, broad-based medical supplies. Their medical devices business is really concentrated in a few countries. And while we haven't assumed any revenue synergies in our model, certainly we are excited about the prospect of taking that bag of products and putting it into the hands of our commercial people all over the world. And then the auto-injector platform that I talked about Aidaptus, we believe that that is certainly a product that's differentiated. It allows for reducing supply chain complexity and manufacturing changeovers, which we believe pharmaceutical partners will accept. And over time, by the way, it has a list of secured customers, a pipeline that's developing, and it fits in very nicely with what has been our focus, which is establishing smaller -- deeper relationships with pharmaceutical companies that are looking for drug delivery options. I think you take that and you combine it with our efforts on developing a pen injector, certainly will leverage Owen Mumford's expertise since they have right now a reusable pen injector in their portfolio. And over time, we see ourselves as being a company that can provide an auto-injector, a pen injector and pen needles as a suite of products that will be available to pharmaceutical companies. And I think all of these initiatives absolutely are designed and with the intent of really returning us to revenue growth. One final point I want to mention, sorry Marie, is talking about Aidaptus. I mean, we certainly believe that that could be a $100 million product line for us. Operator: Our next question comes from the line of Anthony Petrone with Mizuho Financial Group. Anthony Petrone: So maybe on the pen needle contract, obviously a competitive loss there. But just wondering the length of the contract in terms of the loss there and when maybe it comes up for renewal, do you think looking ahead, whenever there is another request for proposal there, an RFP that you can look at that contract and be more competitive on the next go around. And then I'll have a couple of follow-ups. Devdatt Kurdikar: Yes. Anthony, on that, maybe it's worth clarifying. It's not like we've lost all the share. It's just our share position is reduced versus what it was. So it's not like we are out of that customer entirely. Now with respect to when we can get back, look, I mean, we have action plans right now underway to not only stem competitive losses, but also figure out ways to get back and win that share. So I don't want to sort of forecast exactly when that will happen, but I do want to convey that we are not going to be standing still waiting for contract renewals or what have you since it's not like we are completely out of those accounts. I think our share position has been reduced in those accounts, and we are certainly going to work as hard as possible to bring our share position back up. Anthony Petrone: That's helpful. I don't know, is there any timing you can put around those efforts? Is that a multiyear effort? Or is it something that you can see in a range of a 12- to 15-month time frame? Or is it, again, longer term? Devdatt Kurdikar: Yes. Look, I don't expect it to be a multiyear effort, honestly. So again, I don't want to put a specific time frame on it, obviously, for competitive and other reasons, but maybe I'll leave it at that. I don't expect it to be a multiyear effort, no. Anthony Petrone: No, all good. And then just when you think about the pressure, you kind of highlighted almost 3 areas here. There's lower-cost providers coming in. There's the GLP-1 question that Marie asked. And then just legacy, there was this pressure moving away from multiple daily injections to patch pumps as well as automated insulin delivery devices. When you think of those 3 buckets, it seems like the lower cost strategy kind of won the day here. But if you had to bucket those 3 headwinds, how would you kind of weight, if you had to put a weighted average on those 3 competitive headwinds in the pen needle business, how would you weight those? And then just a real quick one here would be, you had a trade receivables factoring agreement where there were receivables sold, I think, to Becton. It was roughly like $64 million. Just given the impacts in the business here, I want to make sure that that trade receivable agreement is intact. Devdatt Kurdikar: Yes. I'll let Jake take the trade receivable agreement. But with respect to sort of putting a weight on each of the factors, maybe there are 3 different things, I think, factors that affect the market in 3 different ways, right? The increasing affordability of GLP-1 drugs potentially affects insulin pen prescriptions. And we have seen insulin pen prescriptions trend downwards most recently. Could that be because of the increasing affordability of GLP-1 drugs? Maybe so. And what we've seen over there is the long-acting insulin, which is what you would expect the GLP-1 effect to be concentrated on, is decreasing faster than long-acting insulin. With respect to movement towards maybe lower-priced products, what it is is really maybe more a shifting of where patients are buying pen needles. So instead of the traditional retail channel and maybe they are going to retail, but maybe more patients buying sort of cash pay products or over-the-counter products or in channels where lower-priced products are available, that affects the pen needle market. And then thirdly, you asked about pump adoption. The way sort of we think about that is we look at fast-acting, right, so mealtime insulin prescription trends. And yes, while there has been a decline in fast-acting insulin, really what's driving, I believe, the total prescription decline has been the decline in long-acting. So really, pump adoption is something that, as you know, this business has been dealing with for a number of years. It's hard at this point to look at the data and say that that is the primary factor, Anthony. So I would say it's more towards a shift towards lower-priced products and potentially the 2 other factors I outlined earlier in my question -- in my answer to Marie, is that the increasing affordability of GLP-1 drugs. Could the impact of the ACA subsidies have had some impact on the overall market volume as well? Potentially. But it's going to take months, maybe a couple of quarters to really get the data. Jake Elguicze: And then, Anthony, on the receivables factoring program, this is a standard AR factoring program that we have actually with a third-party bank. So very common in the industry to have something like this. It doesn't have anything to do with Becton, Dickinson in any way. It was something, I think, that we put into effect around a year or so ago. We continue to factor receivables under normal due course, and we would continue to expect to do so in the future. So none of that has necessarily really changed by this. And in terms of liquidity and whatnot, we continue to expect good free cash flow, continue to expect to repay $150 million in debt during the course of this year, which was our original guidance assumption coming into the year. And obviously that's despite the revenue call down in the U.S. today. Operator: [Operator Instructions] Our next question comes from the line of Ryan Schiller with Wolfe Research. Ryan Schiller: I was hoping we could look out further to next fiscal year. Understanding there is no formal guidance in place, but maybe how are you thinking about the FY '27 revenue growth given all the pressure in the U.S.? Devdatt Kurdikar: Yes, Ryan, I think it's too early to comment on that. As you heard me say, right, some of the trends that we are observing now in the most recent quarter are all sort of early. So really, our plan right now is to focus on executing on 2026, closing the impending Owen Mumford acquisition, getting those products in our bag, advancing the pipeline, both on our B2B products for pen needles as well as the auto-injector platform. And really, then we'll talk about 2027. It's far too early at this point for me to comment on 2027. Ryan Schiller: Okay. And then OUS finished in line with your expectations in the quarter. I'm hoping you can give us the latest on what you're seeing in China and any updated growth outlook there? Devdatt Kurdikar: Yes, very pleased with our International performance, certainly performing per expectations. With regard to China, just as a reminder, obviously we don't disclose China separately, but we think about Greater China, which includes Mainland China, Taiwan, and Hong Kong. And over there, we sell the product to 3 or 4 national distributors that then go on to sell to sub distributors. Certainly, last year, fiscal 2025, there were significant declines and we took a bunch of steps to stabilize the situation. We are seeing early signs of sequential stability. We really reordered our sales team, that had a more price competitive pen needle that we launched over there. We will see likely some headwinds this year, but certainly it's going to be significantly less than what we saw last year. And look, over the long term, our view on China hasn't changed, right? The market is growing there in mid-single digits. We have a strong commercial and manufacturing infrastructure over there. The new pen needle that I referenced where we've already submitted for regulatory approvals, that is being developed and manufactured over there. And finally, I also mentioned in the GLP-1 generic space that there are Chinese companies that want to get into the generic GLP-1 market as well. And obviously, we want to partner with them. So for all those reasons, we continue to remain optimistic on how China will end up. Now obviously cognizant of the fact that China -- the geopolitical considerations when it comes to China can impact in the short term, but we still remain optimistic in our long-term view on China. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Dev for closing remarks. Devdatt Kurdikar: As we close the call, I just want to thank my colleagues across embecta for their continued focus and commitment. This was a difficult quarter. But I do want to be clear, we are not standing still and actions are already underway to address the issues we face. The steps that we are taking, closing the Owen Mumford transaction, reshaping our capital allocation and executing on our strategic priorities, are purposeful steps to build a stronger, more flexible company for the long term and are aligned with our strategic road map. Thank you for joining us today and for your continued interest in embecta. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to KKR's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Craig Larson, Partner and Head of Investor Relations for KKR. Craig, please go ahead. Craig Larson: Thank you, operator. Good morning, everyone. Welcome to our first quarter 2026 earnings call. This morning, as usual, I'm joined by Rob Lewin, our Chief Financial Officer; and Scott Nuttall, our Co-Chief Executive Officer. We would like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release, which is available on the Investor Center section at kkr.com. And as a reminder, we report our segment numbers on an adjusted share basis. This call will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our earnings release as well as our SEC filings for cautionary factors about these statements. So first, beginning with our results for the quarter. Fee-related earnings per share came in at $1.13. That's up 23% year-over-year. Total operating earnings of $1.47 are up 18% year-over-year and adjusted net income of $1.39 per share is up 20% compared to 1 year ago. All of these figures are among the highest we've reported in our firm's history. Now going into a little more detail. Management fees in the quarter were $1.2 billion. That's up 30% on a year-over-year basis. driven both by continued fundraising momentum alongside deployment activity really across the platform. Excluding catch-up fees in both periods, management fee growth was strong at a touch north of 20%. And as we've highlighted previously, our fee base continues to be diversified with private equity, real assets and credit each contributing approximately 1/3 of total fees over the trailing 12 months. Total transaction and monitoring fees were $253 million in the quarter. Capital markets fees were in line with last quarter at $224 million, driven by activity across PE, infrastructure and credit. And fee-related performance revenues in the quarter were $24 million. Turning to expenses. Q1 fee-related compensation was again right at the midpoint of our guided range or 17.5% and other operating expenses were $195 million. So in total, fee-related earnings were over $1 billion or the $1.13 per share figure that I mentioned a few moments ago, up 23% year-over-year. And our FRE margin increased slightly quarter-over-quarter to approximately 69% at March 31. Insurance segment operating earnings were $260 million. Now as a reminder, we report the insurance investment portfolio largely based on cash outcomes. So to give you a sense of the embedded profitability as we've done in the last couple of quarters. Our insurance operating earnings would have been slightly north of $300 million in Q1 if we included the impact of marks on investments where a significant portion of the return relates to appreciation rather than cash yield. And as a reminder, Insurance segment operating earnings alone do not capture the full economics of GA to KKR. Page 22 of our earnings release details the management fees under our investment management agreement, fees from IV-related vehicles, where we have over $60 billion of AUM that wouldn't exist without GA. Alongside GA related capital markets fees. When you take all of that together, total insurance economics over the LTM were $1.9 billion. That's net of compensation, up 14% versus the prior period. Strategic Holdings operating earnings were $48 million in the quarter, and we continue to track nicely towards our expected $350-plus million of operating for 2026 with earnings here expected to be more back-end weighted over the course of the year. So altogether, total operating earnings, which, as a reminder, represents the more recurring components of our earnings streams, were $1.47 per share, up nearly 20%. And over the last 12 months, 85% of total pretax segment earnings were driven by these more recurring earnings streams demonstrating in our view, the durability that you're seeing across our business model. Moving to investing earnings within the Asset Management segment. realized performance income was over $750 million and realized investment income was approximately $120 million, bringing total monetization activity to around $880 million, up over 50% versus Q1 of 2025. This activity was driven by a combination of public secondary sales and strategic transactions alongside of dividends and interest income. After interest expense and taxes, adjusted net income was $1.2 billion for the quarter, or $1.39 per share. Turning to investment performance. Page 10 of the earnings release details performance we're seeing across asset classes, both this quarter and over the last 12 months. Broadly, you're seeing healthy investment performance on behalf of our clients across asset classes, including through this recent period of heightened volatility. And given investment performance, importantly, total embedded gains that's comprised of gross carry together with the gains that sit on our balance sheet across asset management and strategic holdings were $18.3 billion at $331 billion. That's up 11% compared to 1 year ago and remains elevated even as we've been generating healthy monetization activity. Now as you can imagine, we've been filling a lot of questions on direct lending, so we've added a couple of pages to our earnings release. First, just to level set, if you turn to Page 20, you see the size of our direct lending platform. In total, direct lending is $39 billion or 5% of our AUM. It's an important business for us, but in the framework of KKR, it's of modest size. And with a lot of focus on redemption activity in the wealth space, we note the size of our private BDC footprint in the second bar from the right. It's even smaller, around $3 billion of AUM or 0.4% of our AUM in total. In terms of our public BDC, FSK is a little less than 2% of our AUM. FSK reports its Q1 earnings next week. We're not going to get ahead of that. It's important, though, not to conflate FSK's portfolio with other pools of capital. So looking at Page 21, you see investment performance across our institutional strategies as well as our private BDC, all vintages since 2017. You see very consistent outperformance versus benchmark. We thought the more granular framing of investment performance here across the direct lending platform would be helpful context for everyone. And then finally, consistent with historical practice, we increased our dividend to $0.78 per share on an annualized basis beginning with this quarter. This is now the seventh consecutive year we've increased our dividend since we changed our corporate structure increasing our annualized dividend over this time frame from $0.50 per share to $0.78. And with that, I'm pleased to turn the call over to Rob. Robert Lewin: Thanks a lot, Craig, and thank you, everyone, for joining our call this morning. I'm going to cover 4 topics today. First, our continued momentum around capital raising; second, our monetization activity, which has been increasing at a healthy pace in spite of the recent market volatility. Third, we have been making some important decisions around capital allocation. And finally, I'm going to go through how we think about the earnings power of our business. So let me start with capital raising. We raised $28 billion of new capital in the quarter with demand really widespread across asset classes and geographies. A real bright spot for us this quarter was in credit where we raised $15 billion across our platform. That momentum was driven by our asset-based finance business, which represents over $90 billion of AUM today. Given the current sentiment around private credit, it may be surprising that when you look at new capital raised, so this is excluding GA, this was one of our larger credit fundraising quarters. Inflows here more than doubled quarter-over-quarter, and our capital raising pipelines remain strong. Most recently, over the last few weeks, we've received meaningful inbound interest from institutions around our direct lending business with several viewing the current dislocation as an interesting entry point, given the redemption activity that exists today in the private BDC space. Another milestone for us this quarter was the final closing of our North America 14 fund at $23 billion, eclipsing the prior $19 billion fund. Across the most recent vintages of KKR's flagship regional funds, so that's Americas, plus Europe, plus Asia, we have $46 billion of total capital to invest across this vintage. We are the clear market leader in private equity. And finally, in wealth, across all of our asset classes, our K-Series suite brought in $4 billion of capital in Q1. Redemptions totaled around $250 million and AUM now stands at over $38 billion. Our performance, deployment and capital raising continue to be in line or ahead of our expectations. Given all the market noise, we were candidly surprised by the strength of flows in Q1. But we also do expect a slowdown in Q2, consistent with what we saw after the tariff announcements last year. We're still operating off of a relatively low base of AUM. And we continue to believe that this channel will be a long-term source of meaningful growth for our industry and us. Turning now to monetizations. As we have explained on prior calls, we are very pleased with the performance of our portfolio, and we are seeing the benefits of our focus on linear deployment and portfolio construction. You can see our continued monetization activity in our financial results. As Craig noted, we generated around $880 million of monetization revenue in the quarter. Realized carried interest was $720 million. That is up 120% year-on-year, and we have a healthy pipeline of realizations across strategies and regions. Over the past month or so, we have announced several encouraging transactions including the closing of the sale of OneStream Software for 4.5x our cost and the sale of CoolIT Systems, a global leader in liquid data center cooling for almost 15x our cost. We have also agreed to sell 2 of our 2021 investments despite the more challenging vintage year, 1 in infrastructure, which would generate approximately 2x multiple of money and 1 in traditional private equity at nearly 3x our cost. And most recently, we completed a secondary of our remaining shares in Hyundai Marine Solution in Korea, resulting in a 7-plus x multiple of capital for the full life of that investment. I'd like to next shift to capital allocation. It is an area of critical importance to our long-term performance and we have been making some important and deliberate decisions. As a reminder, we have focused on 4 key tools available to us to allocate our cash flow. Strategic M&A, insurance, share buybacks and strategic holdings. Each of these tools takes full advantage of the KKR ecosystem, and as a result, have the potential for high ROEs. Importantly, we do not have a framework that assigns a specific amount of capital spend into any one of these areas. Our approach here is all about how we take our marginal dollar of cash flows and drive the most amount of recurring durable and growing earnings on a per share basis. That is the mindset we have consistently taken to capital allocation, and it is one that is highly aligned with our shareholders given employees here own roughly 30% of our stock. We believe that we have delivered a lot of value to our shareholders through strategic capital allocation, and we are very confident in our ability to continue to do so in the future. So starting here with strategic M&A. This morning, we announced the closing of our acquisition of Arctos. As a reminder, Arctos is the leading investor in professional sports franchise stakes and a leader in GP solutions with approximately $16 billion of AUM and $10 billion of fee-paying AUM. If we are able to achieve our objectives in partnership with the Arctos management team, and we are confident that we will, it is hard to find a better allocation of capital. Next, in insurance. In the first quarter, we continued to see increased levels of competition here, particularly in the retail channel. Given that backdrop, alongside tight spreads on the asset side, we were disciplined around pricing and a lot more selective in that channel. That said, as spreads have widened a bit more recently, we are starting to see a more attractive entry point. On the other hand, an area where we leaned in this quarter was share repurchases where we saw attractive risk-adjusted returns given the volatility across our sector. We repurchased or retired $317 million of stock this year through May 1 at an average price of approximately $91. And our Board recently authorized an increase to our share repurchase program by an additional $500 million. Taking a step back, there is clearly a lot of noise in some of the markets where we operate. But from our seats, there is a big disconnect between perception and our long-term prospects across our diversified business model. That's why we have been leaning into buying back our stock. And you would have also seen our co-CEOs and a number of our directors buying stock personally in the quarter. Whether it's our performance in Q1 or the long-term earnings power of our franchise, our positioning stands in contrast to some of that market noise. Looking at Q1 in particular, we've grown our headline profitability metrics FRE, total operating earnings and ANI, all on a per share basis, each around 20% year-on-year. It's actually the second highest quarter we have reported in our history for FRE and OE and the third highest for ANI. And we continue to feel great about the durability of our model and the earnings power that we continue to create, which provides us with significant visibility into future earnings growth. Over 90% of our capital is perpetual or committed for 8 years or more. Today, we have $125 billion of committed but uncalled capital, nearly as much as we've had at any point in our history. Looking at our management fees and fee-related earnings over the LTM, we've grown at a high teens CAGR over the last 3 years. Alongside this growth, the quality of these fees has significantly improved as we've diversified by strategy, and geography. And finally, our embedded gains, which Craig mentioned, stand at over $18 billion, one of the highest levels in our history, and they provide a lens into the strength of our portfolio, and our ability to create meaningful outcomes in the future. So we benefit from real stability and durability of our earnings and increased visibility on how they will grow. Finally, before I'm going to hand it over to Scott, I did want to provide an update on our 2026 guidance. First, based on the underlying momentum that we are seeing across the business, we continue to feel very confident in our ability to exceed our targets for fundraising, strategic holdings operating earnings and FRE on a per share basis. Turning to ANI. As we said last quarter, following our bottoms-up budgeting process, we entered the year expecting 2026 ANI to reach $7-plus per share, assuming a constructive and more normalized monetization environment. At that level, earnings growth would be approximately 45% year-over-year. So it's clearly an ambitious target, but one that we did have line of sight to achieving. That said, the operating environment 4 months into the year has, of course, bit more challenging than what was embedded in our plan. Importantly, we are still seeing healthy monetization activity. Gross monetization revenues in Q1 were up more than 50% year-on-year. And when we look at exit since March 31 as well as signed transactions expected to close in the coming quarters, that represents over $1.2 billion of gross monetization revenue for KKR. Notably, that is the largest forward monetization figure we've discussed on a call in our history. So while we continue to generate very strong outcomes, we do have modestly less visibility today than what our budget would have suggested at this point in the year. As a result, if you were handicapping our ability to reach $7 per share, we do think it is more likely that we land below that level. Importantly, if that were to happen, any delayed monetizations that impact 2026 would not be lost as we would expect them to shift to 2027 and beyond. And stepping back, the broader portfolio remains in very good shape. Embedded gains are at or near record levels. The earnings power of the firm continues to grow at an attractive rate, and we feel extremely well positioned for the future. With that, I'm going to hand the call off to Scott. Scott Nuttall: Thank you, Rob, and thank you, everybody, for joining our call today. The first thing I want to do is welcome the Arctos team to KKR. Our new partners highly creative and entrepreneurial, and we could not be more excited to work together to build a $100 billion-plus AUM business. KKR had its 50th birthday last Friday. We are very proud of this milestone. As a firm, we are not very good at celebrating. We are, however, good at gratitude. So it was nice to be able to thank all our clients for their partnership and trust and all our people for their dedication and hard work. We would also like to thank you, our shareholders, for your partnership. We have been a public company for about 1/3 of our 50 years, a period of time that has seen significant evolution and growth in our firm, all of which happened with your support. Thank you for helping us get to where we are. So let's talk about how we see things. We asked our team to pull together some slides recently to help frame the current volatility in our stock relative to our results. simple. Just multiple years of AUM, fee paying AUM, FRE, total operating earnings and ANI on 5 pages. All of which metrics are steadily up and to the right with growth rates generally between 10% and 25% per year for the last several years. We then overlaid our stock price on those same charts, picture worth a thousand words approach. What do you see when you do that? Our operating metrics are very steady with consistent growth over a long period of time. The fact is perception of the volatility of our business and industry, is disconnected from the lived experience. And that's okay. We are focused on what we can control and executing our plan. And as we do that, we'll continue to prove out the durability of our business model, and we're confident that the volatility in our stock will come down over time. If you step back, the first quarter was no exception to our long-term trend. All of our key metrics grew about 20% in the quarter relative to Q1 last year. We raised a lot of capital, deployed a lot of capital and monetized multiple investments. And as you heard, the volatility in our stock gave us an opportunity to adjust our capital allocation priorities and buy our shares back at what we believe is a significant discount to intrinsic value which is why Joe and I had bought more stock as did multiple members of our Board. So our suggestion is don't trust the headlines. Stay focused on the fundamentals and how we are executing. That's what ultimately matters and how we are spending our time. This approach has served us well for the last 50 years, and we expect will continue to for the next 50. With that, we're happy to take your questions. Operator: [Operator Instructions] Our first question today will come from Craig Siegenthaler with Bank of America. Craig Siegenthaler: My question is on General Atlantic. So one of the big public annuity competitors pulled back in that business in 1Q and actually cited increased competition. And we know the [ alt ] models, including GA, have gained a lot of share versus the legacy players in the U.S. fixed index and fixed indexed annuity markets. So I was curious if you could update us on competition, underlying ROE potential and how we should think about the growth trajectory, especially with the institutional funding market potentially a little softer near term? Robert Lewin: Craig, it's Rob. Thanks a lot for the question. We are seeing that competition. Competition on the liability side is very high. And we know on the asset side, spreads are as tight as they've been in a very long time. And so the combination of those 2 things is putting some increased competitive pressure on ROEs. That's why you saw us also pull back on the origination front in Q1 as well. Now with that said, we think it's best to look at insurance businesses through the cycle. And where we're spending a ton of time at both Global Atlantic and KKR is making sure when there is increased levels of volatility. And by the way, when that happens, 2 things will happen simultaneously. We believe liabilities will become cheaper. And definitionally, you're going to see spreads come out on the asset side and so the ROE potential is outsized. And so what we're spending our time is how do we make sure we are best positioned for that environment. And one of the real competitive advantages that we have on our platform relative to the broader insurance space is the fact that we sit on $6 billion of dry powder equity that we can draw down to invest into that dislocation, much like you would in a private equity fund. And as a reminder, that $6 billion of equity, we think translates into $60-plus billion of buying power on the liability side. So a lot of effort here making sure we're ready to go when that volatility does come. But today, we are seeing those increased levels of competition. We also know that that's not going to last forever. Scott Nuttall: Yes. The only thing -- Craig, it's Scott. Hope you are well. The only thing I would add, I think that the narrative is exactly right in the U.S., call it, retail market, where there has been significant competition I think the recent move we've seen in spreads and kind of some of the volatility is maybe dissipating some of that a bit. So opportunities are looking a bit more interesting, as Rob mentioned in the prepared remarks. But two things I'd mention. Remember, our business has a good balance to it. We have a retail business and an institutional business. This block does flow some PRT. Not all of those markets are seeing that same level of competition that we're seeing in the retail side. So it's nice to have that diversification across the platform. And then the other thing we've talked about in prior calls, one thing that makes us a bit different is by virtue of being able to marry our origination franchise with the -- on the investment side with the origination franchise and liabilities we are emphasizing a more longer duration liabilities. And I think it's harder for other people necessarily to be able to generate the returns we think we can with those longer-duration liabilities matched with assets that we can originate. So I wouldn't pay everything with the same brush, but I think your overall comment is well placed. Robert Lewin: Yes. I'm going to jump in with one last point on the -- on gating our liabilities because I think it's an important one to get across. If you look at our Q1 originations across the franchise, approximately 80% of those originations had 7 years of duration or more. Just to contrast that relative to full year 2024. So that's the year where we made the pivot around elongating our liabilities for that full year, we were 37% 7-plus year duration. So we've almost doubled or we have doubled rather our exposure to those longer duration liabilities. Operator: And next, we'll move to Glenn Schorr with Evercore. Glenn Schorr: So I'm curious that the -- you've had better DPI and better monetization than most. You mentioned the over $18 billion of embedded gains in the markets at all-time highs. So I'm curious on the attribution of what changed and what holds back the timing and the ability to get to the ANI targets now. Is it as simple as there's a war there and it delayed things? I don't know if you can give us any attribution of parts of the portfolio that despite having these huge embedded gains, the market is just not ready to accept. Robert Lewin: Yes. Thanks, Glenn. It's Rob. I think it's all a matter of degree is the reality. And so there's a lot of really good things going on across our business today as we went through on the prepared remarks. Our monetization guidance of $1.2-plus billion is higher than it's ever been at any point in our history. But at the same time, 3 months ago, we were on this call, we said we would be very transparent on our quarterly calls around where we stood on the $7. And if we were handicapping it now, and when you look at some of the volatility that we have experienced over the first 4 months of the year, we tell you on balance that we're going to be on the other side of $7, and we wanted to share that as we noted we would and keep you all updated on our progress. Scott Nuttall: Glenn, it's Scott. The only thing I'd add, overall, as you heard, the portfolio is in great shape. I think we're seeing real benefits of our focus on portfolio construction and linear deployment diversification, all the things we've talked about on this call for the last several years. And that discipline is really coming through in the results. And so the value is there. To your point about the embedded carrying in gains, this is really a question of when do you want to monetize it. And so the IPO market feels good. We've got several companies in the pipeline. But obviously, an IPO isn't necessarily an exit per se. It can be a partial exit in the beginning of one. But another way that we exit is obviously through strategic sales. And so the one thing to your comment if you've got an asset that you've built value in for 5, 7 years. And if the backdrop in terms of war energy prices, et cetera, is a bit uncertain or uncomfortable I'm not sure you'd want to necessarily sell that wonderful asset into that environment if it's a strategic buyer and give them a little bit more time for the world to write itself. And so that's really what's happening on the margin. You heard from Rob, it didn't really impact anything in the first quarter. This is more of an expectation that if things go on for a longer period of time, there may be some things that we delay the launch of a sales process because we want that clarity in the market for the buyer on the other side. That's all we're talking about. But this is just timing. This is in magnitude. Operator: Our next question, we'll hear it from Alex Blostein with Goldman Sachs. Alexander Blostein: So really nice momentum on fundraising, obviously, despite what's been a tough backdrop and management fee growth north of 20% normalizing for catch-up fees is all good. As you think on the forward, it might be helpful just to get a mark-to-market on your expectations for fundraising for the rest of the year given the bulk of the larger flagships are now in the run rate. particular how you're thinking about Asia, I think that one is about to start. But I guess, more broadly, your confidence in maintaining this type of fundraising outlook for the rest of the year, which I think is what embedded in your FRE growth assumptions. Craig Larson: Alex, it's Craig. Why don't I start on that. And thanks for the question. I think it's probably worth beginning on the breadth and diversification of fundraising. So if you look over the last 12 months, as Rob noted, we raised $127 billion in total. So $35 billion of that roughly is from GA within our credit platform, around $35 billion in real assets, around $35 billion is the non-GA portion within credit and the balance of $20 billion, a little over that in private equity. So you're seeing a very healthy balance and diversified result in terms of our fundraising. Rob talked about that in terms of our management fee growth, where, again, you're seeing real breadth and diversification in management fees as a result of that. And I think the other point that kind of highlights this relates to flagships. So flagships were around 15% of new capital raised in the quarter, 12% over the trailing 12 months. Again, that number was very different at KKR 5-plus years ago, as I know you'll remember. And then I think on the go-forward, look, there's lots of opportunities for our fundraising team across strategies, across geographies. I think if we look in the strategies where we expect to be active in the next 12 to 18 months. In private equity, that includes Asia private equity, our private equity, tech growth, health care growth. We've got our K-Series. And then we have Capital Group as well. Within Real Assets, Global and for core infra, we have a climate strategy, Asia Infra as well as K-Series infrastructure, opportunistic real estate credit. Again, just big -- a wide group of opportunities in real assets, credit, across direct lending, leverage credit, asset-based finance. Again, you heard Rob note in our prepared remarks some of the momentum that we're feeling and seeing last quarter as it relates to high-grade ABF in particular, Asia private credit, Asia leverage credit, crack capital solutions, CLOs, K-Series as well. And then insurance, again, reinsurance co-investment opportunity. So I think that breadth of opportunity that we have is what you're hearing in the confidence when we talk about the go forward from a fundraising standpoint, what that then can mean in terms of management figure out. And again, what ultimately that can mean in terms of FRE growth. Scott Nuttall: Alex, it's Scott. I would say -- I mean, if you can't tell from Craig's list there, the fundraising feels really good. I'd say we had a lot of momentum on a number of fronts. It's global including the Middle East, which I would very much put in the business as usual category, pensions, sovereign wealth funds, insurance companies, high net worth, wealth. So it all feels really strong right now. And some of the things we've talked about on prior calls, for example, this consolidation theme that we see more and more clients wanting to do more with fewer partners is absolutely playing out, especially as they see more dispersion of results. We're heading towards more of a K-shaped industry. And so we think there's opportunity for us to continue to take share and we think the addition of Arctos to the family only adds to that as another set of asset classes, which are able to generate differentiated kind of returns. So bigger relationships and partnerships would be another theme I would point to on the back of that consolidation. But hopefully, that gives you a bit of color. Operator: And next, I'll move on to Bart Dziarski with RBC Capital Markets. Bart Dziarski: Congrats on the CoolIT realization. And I noticed you implemented a employee ownership program at acquisition. So could you maybe speak to how that program contributed to the successful outcome of that deal? And then maybe more broadly on KKR's ownership program at the portfolio company level? Robert Lewin: Bart, it's Rob. Thanks for bringing that one up. CoolIT was obviously an awesome outcome for our investors. It is not often that we exit a business at almost a 15x multiple of money. And as you noted, CoolIT is one of 85 KKR portfolio companies globally now that are part of our broad-based employee ownership programs where every employee, so it's not just senior management our equity owners. And in the case of CoolIT, most tenured employees there are going to receive roughly 8x their annual base salary at exit. So a really meaningful outcome. And deservingly given the progress and the returns that we were able to generate at CoolIT. So more broadly, if you look at those 85 businesses that I referenced, we now have approximately 200,000 nonmanagement equity owners in those businesses. And we're really proud of this initiative. We know for sure that it drives better outcomes at our portfolio companies. We see it in the numbers. You've got higher engagement scores. You've got higher retention rates, working capital efficiency is up, margins are up, and ultimately, profitability is up. And so we have developed this program in a way where we've got the full employee base at these companies feeling like owners in the business, and they're delivering better results. And because of that, they're able to share in those results. So we think it's great, and we're really proud of that across our firm. And then maybe finally, while we're on this point, I do think it's worth mentioning that we are also a founding member of ownership works. This is a nonprofit that our partner, Pete Stavros, who co-runs our global Private Equity business founded a number of years ago. And we now have greater than 100 partners alongside of us in this effort. And that's really what it's all about. We want this to become a movement beyond what we're doing at KKR. And so a big focus of what we're doing across the portfolio. And then one that we're excited to be able to hopefully share results like this with you all in the future. Operator: And next, we'll move on to Steven Chubak with Wolfe Research. Steven Chubak: So wanted to ask on strategic holdings and AI risk more broadly. Certainly encouraging to hear the operating earnings target for strategic holdings get reaffirmed. Digging into the sector exposures, about 1/3 of the last 12-month EBITDA is concentrated in the business services sector. It's an area that's viewed as being more at risk of AI disintermediation. I was hoping you could speak to just how you've underwritten AI risk in the strategic holdings portfolio and even across the border universe of KKR portfolio companies? And is there any KPIs you can speak to, to help folks better handicap that risk? Craig Larson: Steve, it's Craig, why don't I start? So just look to level set, software represents around 7% of our AUM. In private equity, it's a higher percentage. It's around 15% across our credit platform in total, it's 5%. And in Global Atlantic, that number is about 2.5% of our AUM. Now I think first, why don't we -- and in terms of that percentage of EBITDA in strategic holdings, that percentage is about the same. It's -- you're correct. It's a low double-digit percentage of EBITDA in the quarter. And then why don't I first talk about Mark's and then from the one we talk about AI and from both an underwriting standpoint and then opportunities for us. But I think in terms of the quarter, probably 2 things to note. First, software companies broadly are performing. So looking at revenue and EBITDA growth, we're still seeing healthy year-over-year revenue EBITDA growth, I think high single digits. But at the same time, obviously, in the quarter, we saw weakness across equity markets in the software space. So given the way that our valuations work, this dynamic from a public market standpoint, had a negative impact on the markets, right? So when you put those 2 pieces together, really, despite the operating and financial performance marks across the software names largely declined in the quarter. Now in terms of AI and how we're approaching AI as a firm, I think from a couple of things. One, look, the implications won't be a surprise to anybody on this call from AI are really far reaching, right? Like the barriers to adoption are low gains are real. AI can be very helpful at parts of workflows. And there will be businesses where the fundamental strategic positioning is either materially enhanced or in some cases, on the flip side could be replaced. Now from an investing standpoint, AI, we look at both from a diligence lens as well as from a value creation perspective. So from an underwriting standpoint, kind of the part of the question that you focused on. Look, we're focused on AI, how it affects margins, pricing power, workflow relevance and cash flow resilience. And so the focus is not just on AI exposure, it's really on the durability of unit and business economics, and that's through trailing lines as well as on the go forward. And how does AI impact those dynamics for us. And then I think perhaps even more importantly, in terms of value creation, look, we think we're really well positioned. Like AI at this point is deployed across 150-plus companies to automate workflows, enhanced products, drive new growth. And I'm sure we have multiple AI initiatives across every one of those companies. And so as a firm, how we're focused on this is ensuring that our operational team at Capstone, we talk about Capstone a lot is helping ensure that lessons travel across our teams and our companies. What works, what doesn't work? What's easy, what's hard. And again, as I know you know, we work in a very collaborative firm. So it's very much within the framework of our culture to help each other. I don't think that's necessarily to the same degree at every firm because a really siloed firm is not going to benefit in the same way. And then on the flip side of all of this relates to the opportunity on the investment front. So digital infrastructure remains a massive theme for us. We've deployed over $40 billion of capital KKR plus our partners across a variety of digital infrastructure themes have over a 20% gross IRR return to date in terms of that activity for us. And again, obviously, we already touched on the CoolIT example. Again, an example of an investment that, again, when everything comes together, kind of shows you the art of the possible. So hopefully, that's helpful. Operator: And next, we'll hear from Bill Katz with TD Cowen. William Katz: Thank you very much for two things, the extra disclosure and Finding Your Own Data report earnings. Very helpful. Just coming back to insurance for a moment. So doing the back-of-the-envelope math, if I take your slide, you are slightly north of $300 million sort of pro forma first quarter you get just below 11% ROE for the business, if I did the math right, a, let me know if that's right. So as you think forward, just given all the puts and takes of the business, I think you mentioned spreads widening out a little bit into 2Q. What do you think is a normalized level of ROE and maybe the time line to get to that? Robert Lewin: Yes. Bill, it's Rob. Why don't I start and maybe 3 or 4 points. as it relates to profitability and ROE of the insurance business. Point one, you hit on it was the mark-to-market benefit relative to the accrued income that's a little north of $300 million. But in the quarter, given some of the volatility we actually didn't hit our targeted return from a market perspective. So our target return is low double digits. If we had achieved that targeted return in the quarter, our run rate was probably closer to $330 million, just to give you a sense of the magnitude. Point three, I hit on this a little bit but it is a competitive market today as it relates to the asset and liability side, and we know for certain that it won't always be this way. And so how do we make sure that we really capitalize on that environment where there is volatility. And we talked earlier on how we think we're incredibly well positioned to do that. And honestly, it's a big reason why we bought 100% of GA because last time this happened, we felt like we missed it. And then finally, I would point you, as always, to Page 22 of our press release of our earnings release where you could see the all-in ROE figures that we have, but I think always instructive to take a look at that page as you're thinking about the performance of our broad-based insurance business. Operator: Next, we'll move to Mike Brown with UBS. Michael Brown: So I wanted to ask on Arctos. So $10 billion of fee paying AUM, can you just talk about the current fee rate profile there? And then any fundraising expectations over the, call it, next 12 to 24 months? And then strategically, how do you view the long-term opportunity in the wealth channel with Arctos. Is that something that could kind of feed origination into [ PayPac ]? Or over time, do you think you could even have like a dedicated sports fund or a dedicated secondaries product? Robert Lewin: Great. Thanks for the question. Let me start, and I know Craig and Scott might jump in. But just as it relates to the financials, we're not planning to disclose given the size of the Arcus business relative to KKR specific Arctos' related financial information. I think we can tell you that the profile of the business is generally pretty consistent with the profile of KKR's business. You've got, we think, best-in-class teams raising third-party capital they've done in a pretty lean way on the employee front. And with fee terms that generally look like fee terms that you would expect to see across some of the private closed-end funds here at KKR. As Arctos and what we're building in broader solutions business gets bigger, it becomes a much more material part of the firm, I can certainly see a world in the future where we're disclosing that solution-specific P&L information. But for the foreseeable future, I suspect you'll see it embedded in our private equity business line in coming quarters. Craig Larson: And Mike, it's Craig. Just on the fundraising piece. First, thanks for asking about Arctos. Scott Rob and I had a head fun this morning in our internal firm call welcoming the Arctos team to the family post-close, obviously. And look, on fundraising, it's a really exciting opportunity for us. And I think our fundraising team we know is excited both to support the distribution of existing Arctos strategies. And I think in particular, if you think of the footprint that we have and the boots on the ground that we have on a global basis, we think there's the opportunity for us to be really helpful right out of the gates. And then secondly, to your question on wealth, nothing to announce specifically this morning, but certainly lots of ideas, and we're excited to develop and think through potential new wealth solutions together with the Arctos team. This could include things like an evergreen vehicle that would include sports as well as some type of secondary/GP solutions vehicles as well. So more to come over time, but just a really exciting long-term opportunity for us. We're excited to get after it. Operator: And next, we'll move on to Michael Cyprus with Morgan Stanley. Michael Cyprys: Just wanted to ask about AI deployment across portfolio companies. Curious where specifically you're seeing AI-driven revenue uplift versus AI-driven cost savings in the portfolio? And how might you quantify that so far? And curious any expectations as you look out from here, and I was also hoping you can elaborate a little bit to your earlier point on what's been easy so far? What's been hard and any sort of lessons learned from adoption? Craig Larson: Mike, it's Craig. Why don't I start? Look, we're very early in broadly what we think the opportunity set is, I think we're seeing broad adoption of AI and the next step of that is really understanding the execution and bringing the power of AI to life, both from a revenue standpoint as well as an EBITDA standpoint. I'm sure there'll be points in time or a point in time when it will make sense for us to both talk about specific progress as well as guideposts for us. To be clear, we are seeing an EBITDA uplift broadly across the portfolio. And we think there's a lot more to do. It has been interesting to see the evolution of AI to date and how it's almost started in ways that are interesting, like I think on various language applications. It's just interesting to see really begin to disrupt that part of the landscape most broadly first. But as we think about things like broad efficiencies whether that's sales force or operating efficiencies across the platforms and workers. And there's going to be even broad businesses and opportunities in things like robotics or you think of what AI can do in terms of in terms of the health care space. There's just really long-term broad opportunities for us across the spectrum of the business, and there will be more to come from us over time. Operator: And we'll move on to our next question from Brian McKenna with Citizens. Brian Mckenna: So within our private equity business, what's the typical markup on an investment when it's realized versus the prior unrealized mark? And then is there a way to think about the incremental carry that's created in this markup. And I'm just trying to figure out at the $2.6 billion of net unrealized performance income is understated in any meaningful way. Craig Larson: Brian, it's Craig. Why don't I start. Look, in our experience, when you look at the final mark of those private equity investments that we monetize, you see a healthy markup relative to the prior quarter. And that's been our experience over time. I think it does speak to the rigor of the valuation process. Again, this is an exercise that has been very similar for us for well over a decade at this point in time. We work with third-party firms as part of all of this exercise. And so I think it speaks to the rigor and if anything, mild conservative that we have as it relates to marks as we go through this process. Robert Lewin: Yes. I think that covers most of it. I think really the only things from my seat to add on here is we've been doing these types of valuations really close to 20 years now with the advent of our vehicle that was listed on the Euronext back in 2006. There is a high degree of rigor. We feel really good with how we value Level 3s across the firm, not just in private equity, but everywhere. The vast majority of our holdings, anything of any size and scale is going to be either validated or the valuation will be created and performed by a third-party valuation agent. And then as it relates to whether our accrued carry numbers understated. I wouldn't say that. I mean we feel like our valuations are very appropriate at quarter end, given all of the information that we know. Operator: And our next question, we'll hear from Brennan Hawken with BMO Capital Markets. Brennan Hawken: Wanted to follow up on Glenn Schorr's question. So -- couldn't resist, [indiscernible] sorry. So look, the struggle with the $7 is, I think, probably not that surprising, like the environment, given where it is, you can look at consensus and saw the basically it was anticipated. But the one part that I'm sort of curious about is on the realizations and the timing. I know you guys have been a lot stronger on DPI. But how is the potential for further delays in monetization and realizations going across with the LP community. This has been an ongoing delay across the industry. And so is that leading to some frustrations and how are you managing that? Robert Lewin: Yes, sure, Brennan. I mean there's obviously a lot of nuance in that question. And -- but what I'd tell you is as we entered the year, and we talked about this last quarter, we have put together really a bottoms-up budget for how we thought the year would play out based on normalized and constructive monetization environment. And as we're 4 months into the year, I think it's fair to say that through that 4-month period of time, it's been anything but a normalized environment. And so as we thought about what needed to get sold in order to achieve our target for the year and our budget for the year, we -- today, as we're mark-to-marketing it, some things have potentially been delayed. And that's all we're trying to convey because we did really want to be transparent for how we're tracking at this point of the year. That said, I think it's also important to really understand that our DPIs remain, we think, industry-leading, certainly relative to our larger competitors. And if anything, that's accelerating. You look at our realized carry in Q1, it was up 120%. I think most importantly is our forward monetization guide of $1.4 billion plus as it relates to monetization related revenue, that is the highest we've ever had in our history. And so things feel really good on that side of the ledger. But at the same time, we're also cognizant of the environment. What that can mean as Scott noted in processes. What that could mean maybe as it relates to delayed deployment and pushing back some processes that could happen and the impact across our platform. And we're trying to give you a mark-to-market balance view on where we are at May 5 of '26. Scott Nuttall: Brandon, it's Scott. Just to add a couple of things, one, thanks for the question. I wouldn't confuse the message around we may delay some strategic exits with kind of what we're hearing from the LPs. We have, I think, in the deck, the IR deck on the website, a slide somewhere that talks about how we've given cash back from our private equity fund in the U.S. or that business, we've given more back than we called 9 out of the last 10 years. So what we're hearing from the LPs is we're like best-in-class in terms of DPI and cash back, and they know that there's more coming. So the LPs are happy with us. That's why you see a record fundraise in private equity, the $23 billion that Rob mentioned, which is just the U.S. component of our private equity business. But overall, fundraising is up, and we're finding investors want to do even more with us. And I mentioned this dispersion we're seeing across our sector. There is extreme bifurcation, and we're getting a lot of very positive feedback on how we're performing and sending so much cash back relative to others. So I wouldn't confuse the 2 topics. This is helping us grow the firm faster by virtue of the performance. Operator: And next, we'll hear from Dan Fannon with Jefferies. Daniel Fannon: I was hoping you could discuss the broader kind of private wealth backdrop given the challenges in certain private credit vehicles. How do you see that impacting the lineup for the rest of your retail or private wealth products or even the road map with your partnership with Capital Group going forward? Craig Larson: It's Craig. Why don't I start? We thought we'd get a question on this topic. We think it's important just to begin to level set, and I touched on this earlier, but really the size and breadth of fundraising, right? So over the trailing 12 months, we've raised $127 billion, in K-Series it was 12% of that. So it is an important piece, certainly, but we benefit from all the strategies and geographies where we're raising capital. We're wonderfully diversified from a fundraising standpoint. And then we think it's important to take a step back and think about K-Series and the growth in that platform. So AUM across K- series at 3/31 was $38 billion. A year ago, that was $21 billion. So think of all the volatility that we've all experienced over the last 12 months, Liberation Day, all that's unfolded with the ramp. And K-Series AUM is up 80% year-over-year, actually a little north of that. It's pretty good. So I think as we look about the backdrop for wealth and what that means for us, no change in our view of the path we're on, the long-term opportunities that we see and just feel, a, very excited about how we're positioned against this opportunity. And again, recognizing that this is just one of the pieces of the puzzle that we have given the breadth and the diversification we have across the firm. Scott Nuttall: Yes. The only thing I'd add, Dan, is this is a multi-decade build for us, and it is all about performance. If we can generate performance and keep earning the trust of the advisers and the clients, we think this can be a meaningful part of the firm. And as you know, it's early products are relatively early in the development. And I think people are learning as we go here. But in terms of your question on the other -- impact on other things we're doing, I think Rob mentioned it, we were surprised by how strong and resilient flows were in the first quarter. If history is any guide, all of the media attention will likely slow things down for a bit. I don't know what a bit is yet because it's so early. But to Craig's point, this is a relatively small percentage of how we're accessing capital today. and we're working hard to earn the right for it to be a larger and more meaningful part of the firm. In terms of your question about Capital Group, also even earlier there with respect to our partnership, which is developed extraordinarily well. And overall in terms of kind of how we think about it ahead of our expectations, but we're still very much in the product development mode and just starting to deploy different products across credit and private equity, as we've discussed before. Operator: And our next question will hear from Arnaud Giblat with BNP. Arnaud Giblat: Yes I've got a question on data centers. You mentioned earlier that you're investing actively there. I was just wondering if you could flesh out a bit more. In particular, I think you've signed a $50 billion JV with Energy Capital Partners. So how far down the pipeline of investments are you? what you -- how far process coming on board. I understand there's quite a bit of capital in the space. So I'm just wondering what the prospective returns are shaping up to look like in this space. Craig Larson: Sure. Why don't I begin. Look, it remains a massive theme for us. And I think, one, there remains a lot of interest and focus on data center, no question. And look, this focus is for good reason. Like the CapEx we're seeing out of the hyperscalers continues to be massive, if anything, it feels like it continues to accelerate. And all of that builds on what's already a pretty powerful backdrop given tailwinds in cloud. So the digital impa opportunity is massive, but it's more than just data centers, as I mentioned, because again, you're going to need massive investment alongside of data centers and alongside of all of these aspects. From data standpoint, in terms of fixed line opportunities, mobile infrastructure, at the same time, again, to support the growth in data in all the consumption. And I think when we look at our firm and how we're positioned for the past 15-plus years, we've been incredibly active across all of these themes. So we've invested over $40 billion across the digital infrastructure space broadly on data center, specifically, we've got 6 global data center platforms. In terms of your question on frothiness, look, we're going to be thoughtful in how we invest. And I think you've seen lots of capital put against this opportunity. And so you should expect to continue to see us be very disciplined as we look at opportunities. We're going to care about who our counterparties are. We're going to care about location. We're going to look to continue to be thoughtful around terms. And then I think finally, part of this also gets back to one of the reasons we think we're well positioned gets back to connectivity and culture because we do invest across these themes across a number of pools across KKR depending on geography and risk return. So that would encompass global infrastructure, Asia infrastructure, our diversified core infrastructure strategy, real estate, core private equity, wealth as well as within global landing. So we've got a number of different pools, different risk return across geographies. So lots of progress and exciting for us more to come. Operator: And our next question will hear from Crispin Love with Piper Sandler. Crispin Love: The elevated redemptions wells have been highly publicized, but curious if you can detail further what you're seeing from institutions given the noise in wealth. Rob, your comments seem positive there. So I'm curious if you can dig in that a little bit deeper, how aggressively are institutions leaning into direct lending today in other areas like ABF? And then how has that evolved in recent months, just given the sentiment shifts? Was there a pause and then started to dip in further? Just curious on that trajectory and thought process from the institutions. Scott Nuttall: Great. Thanks for the question, Crispin. Very different dialogue with institutions. If anything, I would say, 12, 24 months ago, as it pertains to direct lending institutions, we're frankly spending less time. little bit of a question of the retail flows a bit ahead of deal flow. Are spreads compressing and turns a bit less attractive. And a number of them, I think, pivoted a bit to asset-based finance as another component of private credit. And as you heard from Craig and Rob, that part of our credit business is more than 2x the size of our direct lending effort. And so we definitely saw that movement. The shift we're seeing in the last several weeks has been the institution is kind of coming back to direct lending a bit and saying, okay, I see all these headlines about wealth, that should mean that risk/reward is getting better. on new deals. And therefore, I'm going to take a fresh look at it again. So we continue to have all the ABF dialogues we've been having and the pipeline is really robust there. But the shift has been the institution is actually coming back a bit to direct lending and thinking about, well, spreads are up. Fees are up, terms are better and leverage is down. And that's what we've seen in terms of our pipeline in the last several weeks. And so on the back of that, they are more intrigued. So very, very different dialogue relative to all these headlines that you're reading about in the wealth space, which are very small dollars in the grand scheme of things. Operator: And next, we'll hear from Patrick Davitt with Autonomous Research. Patrick Davitt: Follow-up to Steven's question, been a lot of focus on software actually, but we are starting to get more incoming around the potential for AI to be a problem for Indian positions in both private equity and real assets. I think India has been a big part of your Asian investment strategy. So could you update us on the exposure there? And more specifically, have you done a scrub to identify how exposed those positions are to potential AI disintermediation of things like India outsourcing? Craig Larson: Patrick, it's Craig. I'll start. Look, I think when we go through the exercise and look across the portfolios, like again, that's obviously done on a global basis. That's both with a focus on whether that's revenue or EBITDA growth, whether that's AI exposure, whether that is the investment teams and the approach to AI from a defensive and an offensive standpoint. So I don't think of that differently based on geography. We haven't disclosed any specific portions of India. I would note that I think as we think about Asia and our footprint broadly, I think we think of Asia split broadly between the developed part and then the growing part. So India is certainly an important part of our franchise as we think about our positioning going forward. Scott Nuttall: Yes. I think -- Patrick, it's Scott. The answer to your question is yes, we have scrubbed our India portfolio. No don't have any elevated level of concern there. you're right. One thing you watch is what does this mean for employment in India, given the amount of that economy that historically has been driven by what's happened with outsourcing to that part of the world, and we have seen hiring across that part of the Indian business sector come down meaningfully, dramatically. We are not exposed to that. If anything, I think right now as we sit here today, given our focus on infrastructure, electricity grids and otherwise in India. We've been getting ready for what we see as AI deployment and the opportunity set across digitalization in that market, where as you know, we have a lot of history and expertise. Operator: There are no further questions at this time. I would like to turn the floor back to Craig Larson for closing remarks. Craig Larson: Rachel, just thank you for your help this morning, and thank you, everybody, for your interest in KKR. We look forward to following up in 90 days or in the interim, if you have any questions, of course, please feel free to reach out directly to the IR team. Thanks so much. Operator: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
Operator: Good day, and thank you for standing by. Welcome to the Neuronetics First Quarter 2026 Financial and Operating Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today. Mark Klausner: Good morning, and thank you for joining us for the Neuronetics First Quarter 2026 Conference Call. Joining me on today's call is Neuronetics' President and Chief Executive Officer, Dan Reuvers. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our business, strategy, financial and revenue guidance and other operational issues and metrics. Actual results can differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. For a discussion of risks and uncertainties associated with Neuronetics' business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K, which was filed in March and the company's quarterly report on Form 10-Q for the quarter ended March 31, 2026. The company disclaims any obligation to update any forward-looking statements made during the course of this call, except as required by law. During the call, we'll also discuss certain information on a non-GAAP basis, including EBITDA and adjusted EBITDA. Management believes that non-GAAP financial information taken in conjunction with U.S. GAAP financial measures provides useful information for both management and investors by excluding certain noncash and other expenses that are not indicative of trends in our operating results. Reconciliations between U.S. GAAP and non-GAAP results are presented in the tables accompanying our press release, which can be viewed on our website. With that, it's my pleasure to turn the call over to Neuronetics' President and Chief Executive Officer, Dan Reuvers. Daniel Reuvers: Thanks, Mark, and welcome, everyone, to our first quarter 2026 earnings call. I'll begin by sharing some perspectives on my background and why I joined the company, discuss some early observations, and then I'll walk through the key drivers of our performance in the quarter. Then I'll walk through our quarterly financial results in greater detail, and I'll conclude with my perspective on the rest of 2026 before opening the line for questions. This is my first earnings call as CEO of Neuronetics, and I'm pleased to be here. I've spent about 35 years in the med tech industry, and most of my career has been in businesses where patient impact, execution and operational rigor drive the outcome. Most recently, I served as CEO of Tactile Medical, where we grew revenue from $187 million to approximately $300 million. During that time, we expanded patient reach, grew gross margins, delivered record earnings and cash flow generation. Before that, I spent 12 years with Integra LifeScience, where I led the $1 billion Codman Neurosurgery division. And earlier in my career, I held leadership roles at several other med tech companies. There were a couple of things that drew me to this role. First, our mission to renew lives by restoring hope for patients and their families is one that I'm passionate about. It's amazing how many people have reached out to me since taking the role, sharing their stories of how they or someone they knew have either suffered from depression or better yet benefited from one of our therapies. Second, I think my background gives me a great perspective on how to move this business forward. My experience in the device space will allow me to come up to speed on the NeuroStar business quickly. And it's notable that Tactile was vertically integrated, meaning we designed, manufactured and sold our therapy solutions, but also directly build third-party payers, an experience I expect to draw on as we continue to improve efficiency within our Greenbrook clinics. Since stepping into the role, I've spent the bulk of the last month on a listening tour. I've been on the road with our field team, inside our clinics and meeting with customers. I've also engaged with shareholders, analysts and others, helping me shape my understanding of the business. My approach has been deliberate and comprehensive, intended to allow me to fully understand this business before making decisions about where to lean in, where to adjust and how we maximize the value of what we have. With that said, what I've seen in my first few weeks has reinforced my conviction in the underlying opportunity that exists for us. First, on the NeuroStar side, I see a clear opportunity to broaden how we go to market and reach customer segments where we've not historically been positioned to compete. I'll talk more about that in a moment. Second, with the Greenbrook clinics, workflows are key to optimizing profitability in our clinics, not only ensuring that patients have an efficient path to initiate their treatment and gain relief, but also to minimize operational handoffs. Revenue cycle management is also an area where I've spent time in my previous role. And what I've seen inside our clinic operations tells me there is more opportunity ahead. Lastly, we have a talented team that's focused and executing. And I've been genuinely impressed with the quality of the people and the conviction toward our mission across the organization. Now before I walk through the quarter, I'd like to briefly address 2 items. First, on our recently announced CFO transition. Steve Fansteel departed earlier this month to pursue an opportunity outside Neuronetics. We've initiated a comprehensive search to identify his successor. We appreciate Steve's contributions during his time at Neuronetics, and we'll provide updates as the search progresses. Ultimately, this allows me to select a partner that I'm confident, can help me lead our next chapter. Second, I want to share some perspective on the comments made by certain shareholders about our business. While we believe that the integrated NeuroStar and Greenbrook businesses provide us with a strong foundation to grow from, we respect some shareholders' views that the separation of the business could potentially unlock shareholder value. The Board and I are aligned on operating this business with discipline and on making decisions that create long-term value for our shareholders. I assure you that I'm evaluating this business with an open mind, and I appreciate everyone's patience as I work through my process. With that context, let me share a bit more about our performance in the quarter. Our Q1 results were largely in line with expectations, and we're making progress on the commercial and operational priorities already in motion. Starting with the NeuroStar business. During the quarter, we shipped 34 systems, up 10% year-over-year. We continue to support our installed base with the most comprehensive training and clinical resources in the category. We're also modernizing how we deliver that support with more virtual, on-demand and real-time engagement tools that provide customers with choices on how they want to be supported. We're piloting an expanded set of commercial models for NeuroStar. Customers exist with a range of needs. And while we have a history of providing unparalleled ongoing support to our customers, we also know that not all customer's needs are the same. So expanding our go-to-market menu is a priority. I'm convinced that we can compete on a broader horizon by listening to customers and responding in kind. Early feedback has been positive, and I'll have more to share in August. Now a few comments on Greenbrook. Clinic revenue grew 15% in the quarter. Growth in the quarter was driven by continued strength in SPRAVATO with treatment growth year-over-year and expansion of buy-and-bill. On the TMS side, within our clinics, volumes were modestly below prior year levels in the quarter, which we attribute in part to weather disruption across portions of our footprint during the first 2 months of the quarter. We saw patient flow normalize as the quarter progressed, and we expect to return to more typical volume trends as we move into the second quarter. Within our clinic operations more broadly, the focus remains on workflow and revenue cycle management. The team has made real progress on collections and operational efficiency, and we see continued runway. We've also leveled our marketing investment across the year rather than front-loading it, which we believe is the right cadence for the business. We acted during the quarter to better align our cost structure. These steps are expected to deliver annualized savings of approximately $2.5 million to $3 million with net savings beginning in the third quarter. Profitability and cash are top priorities and will be a focus of mine going forward. Taken together, the quarter reflects a business that's executing on the priorities already in motion while we lay the groundwork for our next phase of growth. With that, I'll walk through the financial results in greater detail. Unless otherwise noted, all performance comparisons are being made to the first quarter of 2026 versus the first quarter of 2025. Total revenue in the first quarter was $34.5 million, an increase of 8% compared to revenue of $32 million in the first quarter of 2025. The increase in revenue was primarily driven by higher U.S. clinic revenue. Total revenue from our NeuroStar business, inclusive of our system revenue as well as treatment session revenue was $12.9 million in the first quarter of 2026. This represents a decrease of 3% versus the prior year. U.S. NeuroStar system revenue was $3.2 million, an increase of 13% on a year-over-year basis, and we shipped 34 systems in the quarter, an increase of approximately 10% versus the prior year. U.S. treatment session revenue was $9.1 million, a decrease of 5%, while system treatment utilization increased 3.5%. This was offset primarily by a reduction in customer inventory levels. U.S. clinic revenue was $21.5 million, a 15% increase year-over-year. The results were driven by continued strong SPRAVATO growth and overall pricing improvement. Gross margin was 46.9% in the first quarter of 2026 compared to 49.2% in the prior year quarter. The decrease in gross margin is a result of revenue mix with clinic revenues representing a higher portion of our overall revenues. We also saw some negative impact from the increase in SPRAVATO buy-and-bill from Q1 of last year when we were still launching that offering. Operating expenses during the quarter were $25.1 million, a decrease of $1.6 million or approximately 6% compared to $26.8 million in the first quarter of 2025. The decrease is primarily attributable to savings in SG&A expenses, where we have driven and will continue to drive efficiencies. Net loss for the quarter was $10.8 million or $0.16 per share as compared to a net loss of $12.7 million or $0.21 per share in the prior year. First quarter 2026 adjusted EBITDA was negative $6.6 million as compared to negative $8.6 million in the prior year, an improvement of $2 million. Moving to the balance sheet and cash flow. As of March 31, total cash was $19 million, consisting of cash and cash equivalents and restricted cash as compared to $34.1 million as of December 31. Cash used by operations in the first quarter was $9.4 million. This compares to an operating cash use of $17 million in Q1 of 2025, an improvement of $7.6 million versus the prior Q1. As previously disclosed, in March 2026, we amended our debt agreement with Perceptive Advisors, which reduces our outstanding debt obligation and interest expense. Under the amendment, we made a one-time principal payment of $5 million to Perceptive Advisors, along with adjustments to the existing debt covenants. Now turning to guidance, which remains unchanged. We continue to expect total revenue between $160 million and $166 million, gross margins to be between 47% and 49%, operating expenses in the range of $100 million to $105 million, inclusive of approximately $8.5 million of noncash stock-based compensation. Cash flow from operations between negative $13 million and negative $17 million. As a reminder, our operating cash flow is projected to improve beginning in the second quarter and then sequentially through the remainder of the year, with operating cash flow being flat to positive during the second half of the year. And in the second quarter, we expect to see mid-single-digit growth. As we look ahead to the remainder of 2026, our priorities are clear. We're focused on disciplined execution, sharpening how we go to market and continuing to drive the business towards being cash flow positive. The pilots we have underway in the NeuroStar side of the business are designed to expand our reach and within our clinic operations, we'll continue to focus on workflow, collections and operational efficiency. We expect these benefits to continue building throughout the year. Looking further out, I want to briefly touch on COMPASS Pathways pending psilocybin therapy. The regulatory process is Compasses to navigate, but the Trump administration's recent executive order prioritizing such submissions is certainly encouraging. If approved, we believe Greenbrook is among a very small number of providers genuinely equipped to deliver it. The protocol requires certified settings, trained clinical staff and a proven back-office infrastructure for benefits investigation and prior authorization, all of which we already have in place through our SPRAVATO operations. While we will be prepared to execute if the product is approved, similar to SPRAVATO, we'd expect the revenue ramp to be measured in the first year of launch, but the narrow pool of providers capable of delivering this therapy represents a durable advantage for our business. As I mentioned earlier, my approach in these first few weeks has been deliberate. I'm committed to making decisions that balance the interest of our patients, physicians, colleagues and shareholders. And I expect to be able to share an even more grounded view of where we're headed when we report next quarter. I want to thank the Neuronetics team for the work they've put in this quarter and for the welcome they've given me. I look forward to updating you all on our progress in August. And with that, I'll open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Bill Plovanic from Canaccord Genuity. William Plovanic: So 3 questions for you, Dan, if I could. One is just clarity on the performance in the Greenbrook sites. I just want to make sure I heard that the -- was it the treatment revenue and number of treatments was down year-over-year, backing out the SPRAVATO. I just want to get -- to make sure I heard that correctly. Daniel Reuvers: Yes. Overall, we were pleased with the Greenbrook performance. We were up double digits, as we said, about 15%. The TMS volumes were off a little bit, Bill. And we think that, that was related to a couple of things. One, weather, which we -- pretty concentration up here in the Northeast. And then we were a little lumpy in our ad spend as we exited last year. So smoothing that this year, I think, is going to bring that more in line with consistency. But we also saw better performance in March than we did in January and February. So it was -- we don't think that, that was a trend as much as an event. On the SPRAVATO side, we saw growth in both the buy-and-bill and the A&O segments, double digit in both segments. And yes, buy-and-bill was up as a mix compared to Q1 of last year. But I think it's worth noting that we've also seen that kind of equilibrate over the last couple of quarters as far as mix between that and A&O. William Plovanic: Okay. Great. And then just secondly, one of the biggest challenges new executives face when they come into a company is just making sure to keep the team intact and turnover. And I just wanted to see if you could provide any color on what you've seen thus far. I know it's only been 45 days, but just kind of what you're seeing across the organization thus far. Daniel Reuvers: Yes. It's -- first of all, I've been really impressed with how much the mission permeates through the company. People are really connected with the impact that we're making on patient's lives. I mentioned in my opening comments that I was on -- I've been on a listening tour for the first month for the most part. And that gave me an opportunity to go out and spend time with folks in the field as well as having spent a good amount of time in the office. So I've met with a lot of people, have been trying to connect as best I can with things like podcasts and town halls. And so far, I've been pleased with, as I said, kind of where people's attitudes are. I think there's an anxious enthusiasm to think about how we might do things different, how we might continue to find ways to get better. So overall, I would say, quite good. And I don't -- I haven't seen anything as far as turnover spikes or anything that would have, I would say, raised an eyebrow for me. William Plovanic: Okay. I think just the last question is really elephant in the room. I mean you addressed it, but I just wanted to hit home on it. Just you ended the quarter with $19 million of cash, $13 million unrestricted. It sounds like given the guidance that would tell us you'll use $4 million to $8 million of that during the full year. I would expect most of that would be in the second quarter given the guidance that the back half would be positive. I just -- any thoughts, comments? Is that enough to get you through with working capital? And just how are you thinking about that today? Daniel Reuvers: Yes. I mean we're always evaluating the balance sheet. But I think as we shared at the midpoint of $15 million of burn for the full year, the math would lead you to $14 million at year end. So -- and you're also right in that our assumptions are that we would be flat to positive in the second half of the year. So based on the current plan, we feel like we've got sufficient headroom in the balance sheet to get us -- to take us through the year. Operator: Our next question comes from Adam Maeder of Piper Sandler. Adam Maeder: Congrats on the new role and look forward to working with you again. Two for me, one kind of housekeeping question and one bigger picture question. Just on the housekeeping item, weather. It sounded like there was an impact to TMS volumes at Greenbrook clinics. I was hoping you could kind of quantify that for us. Is it also reasonable to assume that your stand-alone NeuroStar business also saw some headwind from weather? And how do we think about how quickly these patients can potentially kind of be -- their sessions can be recaptured? And then I had a follow-up. Daniel Reuvers: Yes. I'm not going to quantify on the Greenbrook side, Adam, but we did see -- we do think that there was some of the impact there, particularly because we saw more of the weakness in January and February than we did in March. It's also worth noting on the NeuroStar side that TMS patients are coming in every single day. So trying to manage a schedule around weather is more difficult than SPRAVATO patients that are coming in more episodically and have a lot more latitude in scheduling. So I think that was one of the reasons that we saw the impact within Greenbrook. On the NeuroStar side, we think that we saw some of the same kind of impact from weather. But that said, from a total utilization standpoint, we were actually up low single digits on absolute utilization within our NeuroStar business as far as treatment sessions were concerned. We saw a little softness in the revenue [ rec ] just because we had a little bit of customer inventory on hand that folks are working through. But overall, I would say the business held up quite well in spite of the weather. Adam Maeder: Okay. Fantastic. And then for my follow-up, Dan, in the press release, you talked about significant value in the business that's yet to be fully realized. You also have a large shareholder who issued a letter last month for -- asking for a strategic review and potentially a sale of the TMS business. And you touched on it in the prepared remarks. I think I heard you're evaluating the business with an open mind. I guess I was hoping you could share a little bit more color here on your early learnings and thoughts as you think about kind of the broader makeup of Neuronetics. And one question that I sometimes get from investors is the NeuroStar business, the stand-alone business, why can't that business grow faster given the size of the total addressable market? And what are the plans to kind of catalyze that business? And sorry for the multipart question. Daniel Reuvers: Yes. Yes, no problem. So first, as it relates to the shareholder letter that we saw. As I said in my opening remarks, I mean, I really have been on a listening tour, and I've had outreach to that shareholder along with others just to make sure that I'm hearing some of their thoughts and concerns. I think there's some frustration there. And quite frankly, I appreciate it. I think that what I'm still trying to do is really look at the business through a variety of different lenses, and I'm pretty pragmatic about it. I mean I'm not wed to a predetermined conclusion, but I'm also not inclined to be impetuous and make sure that I look at the business overall. I think as it relates to what can we do to continue to demonstrate strength and growth, which under any outcome scenario adds long-term value for shareholders, it's looking at the NeuroStar business, I do think that we probably under punched our weight here lately. The opportunity to expand our go-to-market menu is one of the things that I believe is going to be a helpful catalyst for us. And we're still in pilot phases on that, Adam. But ultimately, we have taken an approach that has conveyed what I would call unparalleled support to our TMS customers. I don't think any other competitor out there comes even close to the kind of support we provide to our customers. But that said, not all customer's needs are the same. So I think it's important for us to expand our menu and allow customers to kind of establish which parts of value they want and make sure that we've got kind of a broader girth of go-to-market menus that they can select from. So we're in the midst of doing some pilots right now. I think we'll have a lot more clarity over the next couple of months, but it includes making sure that we're looking at incentive comp that it's aligned with our direction, that we have an opportunity to revisit our funnel and make sure that we've slotted those in the right spaces. So more work to do, but I think that as we continue to really reevaluate our go-to-market and with an open mind look at how we can make sure that we're matching the right level of support to that, which the customer wants to pay for. I think that's a ratio that I expect will bear some fruit. Operator: Our final question comes from the line of Danny Stauder of Citizens JMP. Daniel Stauder: Just my first one, following up on kind of the TMS question. But Dan, I wanted to ask about the commercial strategy for TMS. We know there was a realignment of the capital sales team and system sales have been strong the last 2 quarters. But as you sit here in the early days of your tenure, just broadly, how do you think about the balance between focusing on driving utilization per site versus expanding the installed base? Are there any potential strategic changes here? Or how do you think about that balance? Daniel Reuvers: I think continuing to drive utilization is an important one because whether we're on a sessions model or otherwise, it's what's the underlying creation of demand and the more utilization our customers continue to find more patients they can help. One way or another, that's going to lead to an expansion of our business. So I think we're going to continue to look to how we can expand our socket placement or placement of new capital units. I think that's one of the places where we've probably slipped a bit and focusing on new placements and expansion of capital and making sure that it's our unit that resides in those clinics. Whether regardless, I guess, of what economic model is in place, we just want to make sure that we're demonstrating the most value across the competitive landscape. And I think that between the support we provide with our account managers in the field with benefits investigation, our co-marketing, training, service, the cloud-based TrakStar utility that we've got, I just don't think anybody can compare there. And we're going to, as I said, continue to work through a couple of pilots. But the things that got us there, I think, will continue to be durable areas of value and how we structure that, I think, is some of the things that we're still titrating a bit. Daniel Stauder: Great. Appreciate that. And then just one on the Compass collaboration. Obviously, the recent update from the administration is good news. But I just want to get a sense of how meaningful this could be? Obviously, Compass is already pretty far along in terms of the approval process, but do you feel this recent update could be more important on the reimbursement pathways? I know that's been a focal point for eventual contribution. So just any thoughts you have there would be appreciated. Daniel Reuvers: Yes. Well, first of all, I think that the whole Compass opportunity and psychedelics at large represent a big opportunity for us given our footprint and our infrastructure. I was really excited in my first month to see the Trump executive order leaning into the FDA process on some of these. So I think that it probably adds or it shortens the fuse. How much? I don't know, but it probably shortens the fuse on the path to approval, which I think is encouraging for all of us that are in this space. I'm not sure how much it impacts reimbursement. I think that's probably a separate track, but certainly, the pursuit of that in tandem on Compass' behalf, all of those things sort of point to faster than slower. And as we get into 2027, we'll certainly look forward to being able to try and better quantify what we think that means to us. I think if you look at the SPRAVATO rollout from the early days, as much enthusiasm as there was, it's a bit measured in its early adoption. But I think that the momentum is certainly moving in the right direction on this one. Daniel Stauder: Great. I appreciate that. And just one last one for me. I just wanted to ask on some of the TMS coverage expansion to include nurse practitioners. I was just curious, high level, if there have been any incremental conversations with accounts on this topic? Have you seen that customers are waiting for this, maybe somewhat higher demand? Just anything more on how this could impact utilization and how you think it will play out in '26 and beyond, would be great. Daniel Reuvers: Yes. So that's the reference to the UHC and the Optum coverage policy change where nurse practice can now be eligible to deliver TMS versus licensed psychiatrists. I think it's a good move. We've got a lot of really quality nurse caregivers out there. I don't know that they were waiting for it as much because maybe they didn't -- sometimes you never know if it's ever coming, but there are 35 million covered lives in the 26 states that will be affected. And I think what it will allow us to do or has allowed us to do is go revisit some of those clinics that are managed by nurse practs where TMS just wasn't a viable option because of the reimbursement limitations. So I think it probably added a number of accounts to our target list, but still early days since we're, I think, a month in. Operator: This concludes the question-and-answer session. I would now like to turn it back to Dan Reuvers for closing remarks. Daniel Reuvers: Yes. I just wanted to thank all of our employees for a hard-fought quarter as they all are as we continue to try and restore hope to patients and their families. And I wanted to thank our shareholders for their support, and I look forward to sharing an update on our progress when we have an opportunity to share the results of our second quarter. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the OPENLANE Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Bill Wright. Please go ahead, sir. William Wright: Thank you, operator. Good morning, everyone. Welcome to OPENLANE's First Quarter 2026 Earnings Call. With me today are Peter Kelly, CEO of OPENLANE; and Brad Herring, EVP and CFO of OPENLANE. Our remarks today include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties that may cause our actual results or performance to differ materially from such statements. Factors that may cause such differences include those discussed in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations of GAAP to non-GAAP measures are provided in our earnings materials and available in the Investor Relations section of our website. Please note that all financial and operational metrics presented during this call are on a year-over-year basis, otherwise specifically noted. With that, I'll turn the call over to Peter. Peter Kelly: Thank you, Bill, and thank you, everyone, for joining the call today. I'm very pleased to report on OPENLANE's strong first quarter results and to provide you with an update on our strategy and our outlook. I'll begin with a few opening remarks, and then Brad will walk you through our financial and operational performance and our increased guidance for 2026. But before I turn to our results, I'd like to highlight that this week marks the 3-year anniversary of our rebrand to OPENLANE. As I stated at our March investor events, the rebrand was never about a new name or logo, it was about forging an entirely new company founded on a single purpose, which is to make wholesale easy so our customers can be more successful. Over the past 3 years, our investments, strategy and execution have delivered on that commitment and reinforced several key pillars of differentiation for OPENLANE, including the leading commercial off-lease solution that connects thousands of franchise dealers into our marketplace. a dealer business that is outpacing the industry and capturing meaningful market share, a high-performing finance business that is synergistic with our marketplace, an accelerating network effect of new buyers, sellers, listings and transactions and a winning culture and team that I consider to be the very best in the industry. The performance and outcomes OPENLANE is delivering are the direct result of the strategy we began executing 3 years ago. And I believe our first quarter results are further evidence to OPENLANE's strength and differentiation in the market. During the first quarter, we continued to build on OPENLANE's positive momentum, growing consolidated revenue by 15% and delivering adjusted EBITDA of $97 million, a 17% increase. We also generated $160 million in cash flow from operations. These results were led by strong performance in the marketplace business with both commercial and dealer customers and solid contributions from our finance business. In the Marketplace segment, we grew overall vehicles sold by 19%, increased gross merchandise value by 32% to $9.1 billion and delivered $52 million in adjusted EBITDA, representing a 39% increase. In our dealer-to-dealer business, we grew vehicles sold by 13%, with similar geographic dynamics to those experienced in Q4 of 2025. In the United States, OPENLANE dealer-to-dealer transactions continue to accelerate with growth in the upper 20% range. This represents a significant outperformance of the industry and a meaningful gain in market share. Our go-to-market strategy in the U.S. is working and OPENLANE's unique inventory, technology advantage and superior customer experience are expanding our dealer network and compounding our growth in transactions. In Canada, we were pleased to see some improvement in the macroeconomic and automotive retail environment. And while Canadian dealer unit sales declined versus a strong prior year comp, we did see sequential improvement over Q4 of 2025. On the commercial vehicle side, the 25% increase in vehicles sold was driven in large part by the onboarding of our latest private label customer. Even excluding that step function increase, commercial vehicle sales grew by 6% during the quarter. This reinforces that the inflection of off-lease supply has officially begun, and we expect to see year-on-year growth in off-lease volumes throughout the remainder of 2026 and beyond. Moving to our Finance segment. AFC also had a good quarter, growing average receivables managed, holding the loan loss rate to 1.6% and generating $45 million in adjusted EBITDA. Now we do believe the industry experienced a strong spring market driven by higher-than-normal tax refunds and constrained supply paired with high consumer demand, which led to high conversion rates and appreciating asset values. That said, there is no question that OPENLANE's digital operating model is resonating in the market, and I am highly encouraged by the output of our investments and our focused execution. So now let me turn to our strategy and outlook. As I mentioned at the start of the call, our strategy is delivering results, and we remain committed to advancing our three strategic priorities. First, delivering the best marketplace, expanding our depth and breadth with more buyers and more sellers and offering the most diverse commercial and dealer inventory available. Second, delivering the best technology, innovative products and services that help our customers make informed decisions and achieve better outcomes. And third, delivering the best customer experience, keeping our marketplace fast, fair and transparent, making it easy for customers to transact and making OPENLANE the most preferred marketplace. And I'll touch on each of these in a little more detail. First, in terms of offering the best marketplace, we continue to make significant gains and drove another quarter of double-digit increases in new buyers, sellers and unique vehicles listed, each of which were up over 20% in the United States. Customer anticipation for the off-lease recovery is also driving more franchise dealers from our private label programs into OPENLANE's open sale. During the quarter, we nearly doubled the number of commercial vehicles sold in this higher-margin channel versus the prior year. And on the independent dealer side, AFC new dealer registrations also increased during the quarter, each of which also presents a new dealer opportunity for OPENLANE. At the end of Q1, approximately 54% of all AFC dealers were registered with OPENLANE. From a best technology perspective, we extended our technology advantage in the first quarter with our public release of OPENLANE Intelligence. OPENLANE Intelligence unifies our human and AI-enhanced capabilities to deliver actionable insights that improve customer decision-making. We see AI as a true enabler and accelerator of our digital solutions. And during the quarter, we released several new offerings and features that leverage our AI expertise and deep data resources. In Canada, we launched our new MyLot inventory management solution. Initial interest has exceeded our expectations with hundreds of early sign-ups, and we are optimistic about the potential of this subscription-based SaaS offering. Across the U.S. and Canada, we also released our new predictive pricing feature, the only technology in the industry that provides dealers with a forward-looking 30-day, 60-day, 90-day view into the anticipated value of every dealer vehicle offered on OPENLANE. And finally, in terms of providing the best customer experience, we are also leveraging our human and AI capabilities to streamline and enhance the customer experience, improve the consistency, accuracy and speed of arbitrations and to help address dealer inquiries as quickly as possible. At the end of Q1, our transactional NPS scores across all geographies sits squarely in the excellent range with our U.S. seller NPS achieving the highest scores, indicating exceptional customer loyalty and brand satisfaction. So as we look into the remainder of 2026, while we cannot count on an industry environment as strong as Q1, there is still a lot of opportunity for OPENLANE. We are continuing to build momentum, and I'm very optimistic about our ability to execute our strategy with precision. As our 2025 go-to-market investments in dealer-to-dealer continue to ramp up towards full productivity, we remain focused on increasing market share and wallet share. As stated earlier, we expect off-lease supply to scale up throughout the year, and OPENLANE will be a primary beneficiary of this cyclical recovery. Our Canadian business is leveraging its strong market position to introduce new revenue-generating products and services. Used vehicle values significantly appreciated in Q1 and remained strong. This is a positive for the marketplace and for AFC, though any sharp decline in used vehicle values could lead to a higher risk environment for floor plan financers. And while no industry is immune to geopolitical or macroeconomic events, we have not seen a material industry impact from fuel prices, new and used vehicle affordability, chip production or any other external factors that we monitor. So just to summarize, OPENLANE remains well positioned to capture the opportunities ahead, and we're executing a strategy that is delivering results, winning customers and outpacing the industry. Because of that, I believe the key elements of our value proposition for investors remain very compelling. OPENLANE is a highly scalable digital marketplace leader focused on making wholesale easy for automotive dealers, manufacturers and commercial sellers. There is a large addressable market for our services, and OPENLANE is uniquely well positioned with commercial customers and franchise and independent dealers. Our customer surveys and third-party research indicate we are the most preferred pure-play digital marketplace in the industry. Our technology advantage is a competitive differentiator. Our floor plan finance business, AFC, is a high-performing business that is synergistic with the marketplace. We generate significant cash flow and have a strong balance sheet. And we believe our business has the capability to deliver meaningful growth, profitability and cash generation over the next several years. So with that, I will now turn the call over to Brad. Bradley Herring: Thanks, Peter. Good morning to everyone for joining us today. On behalf of our management team and all of our employees, we are very proud to report a record quarter for OPENLANE. For the quarter, we transacted more GMV, sold more vehicles, generated more revenue and produced more adjusted EBITDA than any quarter in our company's history as a digital marketplace. These results would not be possible without the tireless commitment and stellar execution of our nearly 5,000 employees that work every day to make wholesale easy for our customers. Before we dive into the financial results, I'd like to thank all of our investors and sell-side analysts that came to visit us in Fort Lauderdale for our Investor Day on March 3. During my remarks and Q&A today, I may reference selected slides we reviewed during our presentation. These slides can be found on the Investor Relations section of our website. Moving on to actual results. We reported total revenues of $528 million, which represents growth of 15%. Revenue growth in the quarter was exclusively driven by the results in the Marketplace segment, which I'll dive into more shortly. Consolidated adjusted EBITDA for the quarter was $97 million, which represents an increase of 17%. I'll talk more about our adjusted EBITDA results within the discussions about each business segment. Consistent with previous quarters, we will be discussing adjusted free cash flow metrics on a rolling 12-month basis due to the inherent volatility in our quarterly cash flow numbers. For the trailing 12 months, our adjusted free cash flow totaled $259 million, representing an adjusted free cash flow conversion rate of 75%. The 75% conversion rate is slightly above our expected range of 65% to 70% and reflects the strong cash generation of both our marketplace and financing businesses. As you may have heard, on March 26, the Canadian Parliament enacted a bill repealing the digital service tax or DST. This action resulted in a $17.3 million reduction to our marketplace cost of services. $15.9 million of the reduction represents prior period expenses that have been removed from our current quarter adjusted EBITDA calculation, while the remaining $1.4 million is reflected as an in-quarter expense savings. Moving to the performance of our business segments, I'll start with the marketplace. In Q1, we transacted GMV totaling $9.1 billion, which represents growth of 32%. GMV growth in the dealer category was 20%, representing a 13% increase in vehicles sold and a 6% increase in average vehicle values. In the commercial category, the GMV growth of 38% was made up of a 25% increase in vehicles sold with an 11% increase in average values. Auction and related revenues were $242 million, which reflects growth of 22%. The primary driver of this growth was in the U.S. dealer category, where we saw a 38% increase in auction and related fees driven mostly by the strong vehicle sold performance that Peter mentioned earlier. In addition to the growth in vehicles sold, U.S. dealer GMV growth also included a 22% increase in average vehicle values, driven by a higher mix of sales from our large dealer group customers and an overall increase in wholesale auto prices. Exclusively due to the significant increase in average vehicle values, yields for the U.S. dealer business declined approximately 60 basis points from the 680 basis point to 700 basis point baseline range that we provided in our Investor Day materials. On a per vehicle sold basis, revenue generation in U.S. dealer improved by high single digits. Complementing our performance in the U.S. dealer business, auction and related fees in our U.S. commercial business were up 42%. GMV in the U.S. commercial business was up approximately 46% due largely to the successful launch of a returning private label customer as well as improvement in the lease return waterfall. Yields in the U.S. commercial business remained largely consistent with the baseline that we reviewed at Investor Day. SaaS and other revenues in the quarter were $68 million, which is up 1% due to increases in our subscription-based revenue streams. Rounding out the revenues in the Marketplace segment, our purchased vehicle sales grew 31% to $112 million. The variance was driven by the increase in U.S. vehicles sold as well as an increase in the average vehicle values in both U.S. and Europe. Adjusted EBITDA for the Marketplace segment was $52 million, which results in an adjusted EBITDA margin of 12%. That represents growth of 39% in adjusted EBITDA and 160 basis points of expansion in adjusted EBITDA margin. The year-over-year expansion in adjusted EBITDA margin was driven by the structural scaling effects of our digital platform and a higher mix of revenues coming from our U.S. commercial business that comes with an accretive variable contribution. In our Finance segment, the average outstanding receivables managed in the quarter was $2.4 billion, which is up 3%. Growth here was driven by a 3% increase in the average vehicle values, offset by a 1% decrease in transaction counts. Net yield for the quarter was 13.6%, which is down 30 basis points. The decrease was primarily attributable to a decrease in transaction fee yields driven by slightly lower transaction counts and increasing loan values. The Q1 provision for credit losses was 1.6%, which is consistent with our results from last quarter and 7 basis points higher than the same quarter last year. While recent performance has hovered in the mid-1% range, we continue to reiterate our targeted range of 1.5% to 2.0% for credit losses. The combination of the changes in the portfolio balance, the net yield and the loss provisions are an adjusted EBITDA for the Finance segment of $45 million, which was down 1%. With respect to capital considerations, I'll refer investors to Page 75 of the Investor Day deck where we laid out our objectives for capital deployment. To summarize that message, our first and foremost priority is to fund the organic growth of our business. That will be followed by share repurchases and finally, debt repayment. In addition to our investments in go-to-market, we repurchased 964,000 shares in the first quarter at an average price of $27.20. This represents the retirement of approximately 0.7% of our fully diluted share count that includes the assumed conversion of the remaining preferred shares. As we also mentioned in our Investor Day, we are considering debt repayment options, although investors should not expect to see any material paydowns to start until later in 2026 or early 2027. From a liquidity perspective, we ended the quarter with an unrestricted cash balance of $180 million and capacity of over $400 million on our existing revolver facilities. Moving along to our guidance. We are raising our full year expectations for adjusted EBITDA from a range of $350 million to $370 million to a range of $365 million to $385 million. The entire increase is coming from our Marketplace segment and is driven mostly by strong performances in both our U.S. dealer and U.S. commercial businesses. This revision also reflects the full year impact of the repeal of the Canadian DST that I mentioned earlier. Countering the strong performance in the marketplace, we remain cautious around downstream impact of evolving and volatile macro conditions. Sustained increases in fuel prices, the impact of rising auto prices on consumer affordability and subsequent impact on our customers and the automotive supply chain challenges are all front of mind as we look into the back half of 2026. With respect to our Finance segment, we maintain our previous guided position as the volatility and macro trends are largely offsetting the decreased likelihood of any rate cuts in 2026. To summarize, we're very pleased with our quarterly results and are proud to increase our full year 2026 projections. Our revised outlook represents strong momentum in both the dealer and commercial elements of our Marketplace segment, while at the same time reflecting on some potential challenges. We are also proud of our prudent balance between growth and risk management in our Finance segment. With that, I'll turn it over to the operator for questions. Operator: [Operator Instructions] The first question that we have comes from Bob Labick of CJS Securities. Bob Labick: Congratulations on a great start to 2026. Sure. So obviously, really strong performance on commercial volumes, and you mentioned the returning off-lease customer there. Can you tell us, was there a full impact from that customer? Meaning did you have it for the full quarter? Or do you get a little incremental benefit in Q2 as well? Just trying to figure out the kind of run rate from that and the impact kind of going forward? Peter Kelly: Yes, Bob, it launched mid-January. So it's pretty much a full quarter. But I guess, if you're doing precisely, there was an extra 2 weeks that wasn't live, but it was live for 11 weeks of the 13 weeks. Bob Labick: Okay. Great. And then kind of sticking with commercial, lots of EVs coming off lease and there's pretty significant negative equity on that side. How are they behaving in the OPENLANE auctions, EVs in general? And then similarly, how are the ICE vehicles that may still have a little bit of equity behaving? Just give us a sense as we see this divergence of off-lease coming on more EVs probably this year and more ICE next year? Peter Kelly: Yes. Thanks, Bob. Let me tackle it. I'll start with just the commercial overall, and then I'll go into the EV piece of it, if that's okay. Bob Labick: Right. Peter Kelly: So listen, really good quarter from commercial. As I said, 25% growth, a lot of growth in GMV as well. With a strong spring market, used vehicle values did go up about 7% by the end of the quarter relative to January 1. So GMV was strong. The new customer also had a premium vehicle portfolio that contributed to EV. But in addition to the sort of volume increase, we also saw an improved mix relative to a year ago. So relatively fewer payoffs across the portfolio, although payoffs remain abnormally high, but they've come down a little bit in percentage terms. And corresponding to that, an increase in sort of non-grounding and open sales, which are higher revenue, higher-margin transactions for us. So we saw an improved mix through the commercial funnel. I'm talking generally here, EV and ICE combined, okay? So listen, a lot of encouraging signs there. And again, feel really good about the setup for commercial vehicles through the balance of this year and into next year and beyond. Going specifically into EVs, yes, we certainly saw an increase in EV volumes in the first quarter. The good news is they're performing very well. Conversion rate for EVs is comparable to that for ICE vehicles. It varies a little bit by portfolio, which indicates certain sellers are adopting different strategies in terms of how to remarket them. But overall, conversion rates on EVs in our marketplace is very strong. If anything, we're seeing because of the equity situation on EVs, which is more negative, as you know, we're seeing even fewer payoffs, so almost no payoffs. So those cars are flowing deeper in the funnel. So relatively higher conversion of EVs in the nongrounding and open channels, which from a margin perspective is very good for us. So we're seeing good performance with EVs. Obviously, in the quarter as well, we saw the stuff in the Persian Gulf and oil prices, that has probably boosted EV demand at the retail level a bit. So if anything, I would say that demand has strengthened late in March and into April as well. So good positive momentum on EVs. And I think the real question is the seller has to be prepared to sort of acknowledge what the value of the car is in the marketplace as opposed to what is the residual value that they might have written on a contract 2 years or 3 years ago. But absent that, I feel really good about it. And as we're looking to the future, and again, I'll say this comment is more general. as commercial volumes are generally picking up, our commercial sellers are getting more and more interested in, okay, what techniques and plans can we put in place to maximize conversion and improve outcomes in the digital channel because it is such a fast channel. It's a low expense channel, but also a high price realization channel. So we're having very constructive discussions with many of our customers running pilots and various programs to drive adoption and drive conversion of the vehicles. Operator: The next question we have comes from Craig Kennison of Baird. Craig Kennison: I wanted to go to Slide 11, if I could, and just ask you, Brad, if you could just help us understand the yield dynamic in Q1, why it dropped and what the mix issues are that impacted that? Bradley Herring: Yes, perfect. This is Brad. I'll take that. So yes, if you look at the yield, you're talking about on the commercial side where the yield drop. So it's a mix issue. If you think about -- when we talked about at Investor Day, we talked about the different yield setup for commercial across the different geographies, and we mentioned that the U.S. range was certainly lower than Canada and Europe. So if you look at the mix in the commercial space, last year, first quarter, U.S. made up about 71-ish percent of the GMV that flew through the commercial space. Q1 of this year with the ramp-up of the new customer we talked about as well as kind of the increase just from the lease returns, now that number is north of 75%, 76%. So that's a mix issue that drove that yield down from a 1.59% to 1.43%. The yields across the different categories are relatively stable. So that means it's purely mix across the geographies that's driving that. Craig Kennison: And while I have you, Brad, could you just help us understand the full year implications of the repeal of the digital service tax? Bradley Herring: Yes. The full year impact on an annual basis is $5.5 million to $6 million. It's about $1.4 million in the first quarter is what I disclosed. That's a relatively steady run rate across the different quarters. It will kind of vary a bit with volumes. But if you use a $5.5 million to $6 million impact number for the full year, you'll be in line. Craig Kennison: And are there any offsets to that, like charges or fees you may have charged to offset that, that would also go away? Bradley Herring: No, that will just -- that will be the only impacting item. Operator: The next question we have comes from Jeff Lick of Stephens Inc. Jeffrey Lick: Congrats on a great quarter. Peter, I was wondering, as it relates to the U.S. dealer-to-dealer, you said it was in the upper 20 range, which implies a little bit of a sequential improvement from Q4, which was in the 20-ish up 20%. The market was actually down a little more in Q1 than Q4, which kind of implies your spread to market is widening. I was wondering if you could elaborate on any of that? And then does the lease return business kind of have a halo effect like some kind of symbiotic effect, synergistic effect that's helping drive that? If you could elaborate, that would be great? Peter Kelly: Yes. Jeff, I appreciate that. Listen, we were very pleased with the dealer performance in Q1. in aggregate, dealer volumes grew year-on-year by a higher number than in Q4, and that was driven by the U.S. where the year-on-year growth, as I said, increased to the upper 20s. And as you point out, that was an acceleration. So we feel really good about that. We don't have a full industry picture yet, but we do know that dealer volumes of physical declined a little in the first quarter. So it definitely looks like OPENLANE had a strong performance in terms of market share and share gains based on those results. So we feel pleased about that. It also looks like an increased portion of the industry volumes move towards digital, largely driven by our volume increase, right, based on the data we have at least right now. So listen, we feel really good about that. I think it's driven in large part by the things I've talked about on many calls, our focus on the value proposition that digital offers our customers, the speed, the ease, the access to a broader network of buyers, ultimately better outcomes for sellers and for buyers, the convenience, the peace of mind, the ability to search for vehicles and purchase vehicles without leaving your dealershipments and all those types of benefits. So we're very focused on that. Obviously, we've made go-to-market investments as well, Jeff, that continue to help drive those results. To the specific question on lease, does improving commercial volumes create a halo effect? I think it probably does. I think dealers are aware that lease volumes are going up and OPENLANE is well positioned to benefit from that. And if dealers want to get access to those units, then doing business with OPENLANE would be a wise choice. So I think we're seeing franchise dealer registrations have improved. Our ability to convert dealers from private label buyers across into our open sale have improved. So I think there is some of that for sure. I think the other thing, Jeff, is there's just a network effect, right? There's a network effect in any marketplace as that you add more buyers, your marketplace becomes more valuable for every seller on the marketplace. And as you add more sellers, more inventory, it becomes more valuable to every buyer in the marketplace. So I think there's a compounding benefit that takes place over the longer term on that dimension as well, and I think we're benefiting from that. So listen, very pleased with the results. I did also say in my remarks, it was a strong spring market. Tax refunds were relatively high. Inventory remained relatively scarce. So there was a lot of demand, conversion rates were up. I would not forecast an upper 20s growth rate for the full year in the U.S., candidly. But obviously, we're going to drive our traction in the marketplace as strongly as aggressively as we can. Jeffrey Lick: And then just a quick follow-up on commercial. Did you say in your prepared remarks, commercial was up 24.6%, call it, 25% that ex the new customer, commercial would have been up 6%, implying that the new customer was 19%? Peter Kelly: Yes. That's -- well, yes, that's what I said. Commercial is up 25-ish, excluding the new customer, up 6%. So the new customer was a pretty significant step function. And maybe one comment on that. With this new customer, we're essentially handling all of their transactions, including all payoffs. And that's not always the case. In fact, I would say the majority of our customers, that's not the case. We do it for a number of others, but we do it for this one. So this customer, we're kind of indifferent to -- we're not indifferent from an economic standpoint because the economics are different. But from a transaction count standpoint, all those transactions get processed through our platform. So it was a pretty significant volume impact, but it had some -- as Brad alluded to, some mix impact because we got a bunch of payoffs and lower revenue transactions as part of that. But still, it's very good. And by the way, all of those transactions, whether it's a payoff or not, it brings a dealer to our platform to do a transaction. And that's always going to be a good thing because that's sort of a touch point where they then can launch into other parts of our services. Jeffrey Lick: And was Q1 disproportionately high because maybe there was some bottleneck units from Q4 that flow into Q1? Or will this type of similar impact flow through for the next three quarters? Peter Kelly: It's hard to say. I don't think there was a bottlenecking, Jeff. But every customer has different quarterly profiles of their maturities based on the lease programs that they ran 2 years, 3 years ago, the incentives that they ran 2 years, 3 years ago. So it will ebb and flow, but I don't think there was a bottlenecking. So I would expect a solid positive volume impact from this customer through the rest of this year. Jeffrey Lick: And I would assume, given that this is a luxury customer, most -- a greater portion of luxury leases happen in Q4, so Q4 could be even bigger? Peter Kelly: I hadn't thought of that. It's possible. I wouldn't know. I don't know at this moment. Operator: The next question we have comes from John Babcock of Barclays. John Babcock: I guess just to quickly follow up on that last one. So it sounds like that mix impact is going to continue through the year just because of this new customer. Is that fair to say? Peter Kelly: I'd say there's a whole bunch of different things going on in the mix, and Brad touched on them. If I could kind of summarize, I'd say we're seeing -- because of the new customer, obviously, a volume impact and that customer, we're handling a lot of payoffs there. So that tends to sort of have sort of, I'll say, a somewhat negative impact on yield. Offsetting that, we're seeing cars flow deeper in the funnel, more into the nongrounding dealer and open. That has a positive impact on mix. And then we're seeing our U.S. private label volumes increase relative to all of our other commercial volumes. So there's a lot of puts and takes in there that are driving that, John. Brad, do you want to comment? Bradley Herring: Yes, John, just to add on to that. I mentioned in my comments that the yields in the U.S. commercial were flat. But to kind of peel back Peter's comment a little bit, this new customer certainly was dilutive to that. It's a higher end, higher GMV per sale transaction at a lower yield because of that mix, a little bit more concentrated at the top of the funnel related to those payoffs that we're processing. On the other side of that, you actually saw some pretty substantial yield improvement on the non-new customers as those transactions have now flowed deeper into the waterfall. So what that netted out to was a yield that was essentially around flat from what we talked about at Investor Day, but it does have those two moving components embedded in it. John Babcock: Okay. That's very helpful. And now as we think about the off-lease volumes for the year, I was just kind of curious because it seems like demand is probably going to be pretty strong for those, especially with affordability challenges, and it seems like people are more willing now to take on used vehicles than pay the higher prices for new. Are there any concerns that those off-lease volumes will stay more with the grounding dealer? Or is there any reason to think that, that will happen? Or is that not necessarily a fair assumption? Peter Kelly: It's a good question, John. I think One thing we saw in Q1 was used vehicle values went up in value. Used vehicles went up in value, right, because of the supply-demand situation you talked about. What that does is that essentially increases the equity that consumers have in their off-lease volumes. So to some extent, that could delay a little bit or could impact the sort of consumer payoff percentage, and that's something we've talked about in the past. So there's a lot of sort of give and take here. But I think fundamentally, what do we know is true? Maturities coming off lease, those are going up, okay? They're going up in the second quarter and accelerating into the third and fourth. We have seen consumer payoffs come down a little bit. They were down a little bit Q1 versus Q1 of last year. So there's more cars flowing our way, and then those cars are flowing deeper in the funnel. But market conditions do drive those things, John. And I don't know if I can predict with precision all of the puts and takes on that. But I think fundamentally, I feel very optimistic and very positive about the setup for commercial, both for the balance of this year, but also looking further out into '27 and '28. John Babcock: Okay. Very helpful. And then just last question, if you don't mind. I was just kind of curious, I mean, dealer volumes were quite strong in the first quarter. Are you able to provide any sort of sense or do you have any sense as to how those volumes have done so far in 2Q? It seems like 1Q was generally a pretty good quarter overall, at least for the used market. It seems like that market was pretty tight, but just curious to what you're seeing? Peter Kelly: Yes. Well, listen, in our industry, there's normally a spring market, we call it -- that's what we call it a spring market driven by the tax refund season. The spring market usually kind of loses a bit of steam around mid-April, and there tends to be a little bit of a fallback, but not a massive one. You could look at previous year's results to see how the quarters trend. I would say this year kind of is exhibiting sort of a similar pattern to the normal seasonal pattern, nothing abnormal. And that I'd say it's still, in my view, continues to be a pretty robust market in terms of used car demand versus supply. Operator: [Operator Instructions] The next question we have comes from Gary Prestopino of Barrington Research. Gary Prestopino: Peter, I just had a question. You said your open sales in commercial doubled in the quarter, which means things are flowing down the funnel. But given that we've just seen this turn in lease returns, were you surprised at that magnitude of what's coming outside of the franchise dealers buying these cars? And what does that indicate? Does that indicate that the franchise dealers have solid used vehicle inventory and more of this is going to flow down to the independent dealers? Peter Kelly: Yes. Good question, Gary. I wasn't massively surprised by the doubling. I was expecting high growth, 50% to 100%, somewhere in that range. It's growing off a fairly small number. So there's that impact as well. But nonetheless, it was a strong year-on-year increase as we have seen for at least a few quarters in that commercial open transaction piece. Just because they sell an open, doesn't mean they sell to an independent dealer. I want to be clear about that. Like if there's a -- let's say, for example, a Ford vehicle coming through the Ford private label, well, a Honda dealer can't buy that on the Ford private label. If a Honda dealer want to buy, they've got to wait until it gets to the open sale because they don't have access to the private label. So even though they're selling in the open, there's still a high percentage of franchise dealers buying them in that channel. They're just buying them across brand. You have the large used car retail operations, buying them there too as well as independent dealers. So it's a mix of all three customer groups that represent the buyers there. So no, I think generally, listen, pleased with how it's going. We're working with many of our commercial sellers to improve their performance and drive further conversion in the open sale channel because sellers increasingly see it as very strategic to them. It's kind of their last chance to sell the car before they start incurring significant downstream expenses for moving the vehicle, waiting a number of extra weeks before they sell the car, all that sort of stuff. So we're having very productive discussions and strategies that are helping drive that performance, and we're going to be doing more and more of that in the quarters to come. Operator: The next question we have comes from Rajat Gupta of JPMorgan. Rajat Gupta: Just to follow a couple of clarifications after that. Could you quantify the open sales units that you're seeing in commercial? Any unit number or percentage number you could throw out for the quarter? Peter Kelly: Yes. We don't comment on that number, Rajat. I would say our open sale in the U.S. skews heavily towards dealer, but commercial is an increasing percentage over time. And if I look at our year-on-year growth in the open sale in the U.S., again, we said dealer grew high 20s. Commercial grew approximately double. So from that, we can determine commercial, obviously, was a bigger percentage in Q1 this year than a year ago. But we don't release that exact number. Rajat Gupta: Understood. And just on the guidance, given the strong first quarter, if you assume normal seasonality, it would imply somewhere above the upper end of the new range. I'm curious if -- and especially in light of the off-lease picking up later this year. I'm curious, is there any conservatism baked in, in the second half with regard to new car sales or anything around the macro? Is it not right to assume normal seasonality? Just making sure we're looking at this correctly. Any color would be helpful. Peter Kelly: Yes, let me comment sort of high level, then Brad can comment on maybe specifics and then let me move. Again, listen, very pleased with Q1, a strong quarter with traction kind of across the board. But as I mentioned in our remarks, there was a strong spring market in Q1. I would say a stronger spring market this Q1 than in any of the last 2 years or 3 years for sure. And that was reflected -- that was driven, I'd say, by high tax refunds and generally inventory being somewhat constrained. It was reflected in used vehicle price appreciation and high conversion rates. So one judgment is how are those going to trend going forward? Is there going to be an above-average correction from that? I haven't seen it yet, right? But that possibility would exist. And then the other thing we're mindful of is just the geopolitical and macroeconomic impacts out there, high oil prices, potential impacts from those in the markets in which we operate. Again, I can't say we've seen any material impact from that yet, except that we're seeing increased interest in EVs. But we're one quarter in, three quarters left. I didn't want to get too far out in front of our skis on what the remaining quarters could be. I'd also say, particularly in U.S. dealers, as we get into the second half of this year, we do see tougher comps on the B2B side. We're going to be lapping some bigger quarters that we had in the second half of last year. So again, I would expect some deceleration in our dealer-to-dealer growth rate in those quarters. So anyway, we've kind of reflected all of those to the best of our judgment. I would say, notwithstanding any of that, I think there's a ton of opportunity out there for OPENLANE. I'm very pleased with how our customers are responding to our offering and the feedback we're getting and the growth in the customer base. So I really feel good about the strategy we're executing and the opportunities that offers not just for the next three quarters, but for the long term. Brad, do you want to comment? Bradley Herring: Yes. I think that's a really good summary, Peter. I think the only thing I would add, look, as the quarters play out, if things change and our view of the remaining quarters of the year changes, we'll certainly be updating that in our next quarterly discussion. Operator: The next question we have comes from John Healy of Northcoast Research. John Healy: Peter, I just wanted to ask just about the relationship between lease returns and wholesale sellout. So if we're thinking about this, I think we've all kind of penciled in a growth rate based on lease returns. But how should that lease return number impact the timing through your P&L? And let's just say, hypothetically, in a quarter, off-lease grows 25% or something like that in terms of returns. Is that going to be spread out over multiple quarters? So perhaps the volume that you guys move through your platform might be elongated. I'm just trying to think about the how we should kind of think about the returns to market and dealers and then the actual flow-through to your business in terms of a processing standpoint to make sure you get the most value for your remarketing partners. Peter Kelly: Yes. John, I guess, first of all, I'll say the equation to sort of determine what volume we actually get it is very, very complex. I don't know that it really exists because there's obviously different customers in there. They have different portfolios. Sometimes a customer will execute what's called a pull ahead. I've got these leases coming off 6 months from now, but my retail market share looks a bit weaker. I'm going to try and pull these leases ahead and get those customers to buy a new in-brand vehicle now to get my market share up on the new car side. So we see that. We also see the opposite of that, lease extensions. I've got too many cars coming back. I don't want that many. I'm going to try and push some of these out and extend those leases. So there's all these things that can happen. But I guess the net-net is, I do look at the maturity forecast in aggregate, how many leases were written 3 years ago. That's the best barometer I actually have of how many leases will be returned. And generally, John, I'd say, if anything, they tend to come back a month or 2 early. So leases that you expect to come in Q3 can sometimes come in a month or 2 or maybe 3 months ahead of that. And I generally assess that the consumer that's kind of said, okay, I know my lease is up, but I've made a decision on what the new car is that I want, and I just want to pull the trigger and get that done now. So I guess, take what does all that mean? I expect -- if we look at that maturity curve, I believe off-lease volumes in the back half of this year are up around 20% to 25%. So I'm expecting that kind of volume growth in our off-lease volumes, not without the addition of a new customer, okay? So that's the kind of math I'm looking at, and it's obviously fairly robust. But I guess we'll see what happens. John Healy: Great. That's helpful. And I just wanted to ask about the AFC business. Obviously, you guys are seeing a nice bounce in the auction business. But AFC loans kind of originated in the quarter, pretty anemic growth the last few quarters. Curious if you think that gets better? And is there a desire to really grow that business? Or are you just kind of happy keeping it about the same size that it is right now? Because I would just think with the activity and the attractiveness and the network effect in your business that you talked about on the dealer car side, I'm kind of perplexed why would it also take place on the AFC side? Peter Kelly: Yes. Well, John, listen, I think, first of all, AFC is a great, great business. It's a category leader in the space, an industry leader in terms of its risk management and loan loss rate. strong return on assets, return on equity and strong EBITDA and cash flow generation for our company. So it really is a great business. It's also synergistic with the marketplace, and it is helping us drive some of the marketplace results that we've talked about on multiple calls and we talked about at our Investor Day. So I feel really, really pleased about AFC and the performance that it's delivering and the AFC team. I'll also say we don't chase growth for growth's sake. We have a somewhat conservative view. We like managing within a risk band that we've talked about 1.5% to 2%. There's obviously a lot of customers you could take that are outside of that band, but we generally try to avoid that. We like to manage it more conservatively. But that said, it is growing. We are growing the customer base on AFC. And we're seeing something interesting start to play out now, started in the first quarter, and I think we'll see it through the balance of the year. It's not maybe yet showing up in the results. But we've been driving can we get more of these AFC dealers to register on OPENLANE? Well, so that's been successful. But now we're also seeing there's a whole bunch of independent dealers on OPENLANE that haven't registered in AFC. But they see on OPENLANE, there's an AFC floor plan that they could potentially utilize if they go register. So we're seeing that sort of cross-pollination flow back the other way. So again, I think there's growth opportunity there. It absolutely is going to be more modest. We're going to manage that business for risk, but it is a great business, and it's very synergistic in helping drive our overall results. Brad, do you want to comment? Bradley Herring: Yes. I'll just add to that, John. We've talked about it. I think at Investor Day, we've always kind of seen AFC as really a low single-digit grower for those reasons. It's about staying in that risk band that we're very comfortable with and extracting the value that AFC provides some within the AFC vertical of a segment report, but also the value that manifests itself in the marketplace. And I think that's the part. When we think about the growth in AFC, we combine those two as opposed to just looking at the segment results of AFC independently. Operator: We have a follow-up question from Rajat Gupta. Rajat Gupta: [Technical Difficulty] commercial [Technical Difficulty]. You just mentioned on the previous question that you expect 20% growth in your off-lease plus the new customer. And it looks like the new customer was 20% of units analyzing that would be like 20% plus. So am I reading that correctly, the 25% plus 20% for your commercial U.S. business this year? Peter Kelly: Rajat, I guess what I said is I think the growth in maturities is a good number to take in our underlying customer base. And I believe in the back half of this year, that is in the 20-ish percent level, maybe a bit higher. So I would expect that kind of volume in our non-new customer. And then we got the new customer in addition to that. I'm not saying that new customer is going to be 20% every quarter. They have a portfolio that has its own seasonality to it, and I don't have that in front of me right now. I will say that our initial results from that new customer in volume terms exceeded our expectations. I don't know that they'll continue to exceed our expectations every single quarter, but we were surprised by the volume they had in Q1. Bradley Herring: And also keep in mind, Rajat, that new customer was a step function in January, so that will not recur -- that element of growth will not recur to that same degree in Q1 of '27, of course. Rajat Gupta: For sure. And then just a quick question. We heard from some of your larger public customers that there are some luxury OEMs that have dialed up early lease terminations to manage captive finance losses. I'm curious if that is something you've observed? Has that benefited with just like incremental off-lease inventory recently? Just curious to get your thoughts there and how we should think about implications for OPENLANE? Peter Kelly: Yes. Well, again, that's an example, as I was saying on just a question a few moments ago. Captive finance companies can put these types of programs in place from time to time. You don't really get a lot of sort of advanced warning as to when they might happen. But early terms, that's kind of a pull-ahead program. I'm not aware of that having had a specific benefit on our volumes. But that said, the new customer we launched does have a premium portfolio and those volumes are quite strong in the first quarter. So maybe there was some aspect of a pull ahead in that or an early term offer within that. It's possible, Rajat. Operator: At this stage, that was our final question. I will now hand back to management for any closing remarks. Please go ahead. Peter Kelly: Well, thanks again, everybody, for your time this morning. We really appreciate your interest in our company and your questions here this morning. Listen, very pleased with the quarter that we had and continue to be focused on our strategy and our purpose of making wholesale easy so our customers can be more successful. I'm looking forward to reconnecting with you all in 90 days where we can talk about our second quarter results. Thank you all very much. Operator: Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Operator: Morning. My name is Jason, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade Company's First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Chris Forrey, Senior Vice President of Finance and Investor Relations. Mr. Forrey, you may begin your conference. Chris Forrey: Thank you, Jason, and good morning, everyone. I would like to welcome you to Boise Cascade Company's First Quarter 2026 Earnings Call and Business Update. Joining me on today's call are Jeff Strom, our CEO; Kelly E. Hibbs, our CFO; Joanna Barney, leader of our Building Materials Distribution operations; and Troy Little, leader of our Wood Products operations. Turning to Slide two. This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC regarding the risks associated with these forward-looking statements. Also, please note that the appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA, and segment income or loss to segment EBITDA. I will now turn the call over to Jeff. Jeff Strom: Thanks, Chris. Good morning, everyone, and thank you for joining us for the earnings call. I am on Slide three. As I step into the role of CEO, I want to express my deep confidence in our company, our talented people, and our established direction. We have a strong foundation and a proven strategy that has positioned us well in the marketplace, and I am committed to building on that momentum. My thanks to our outstanding team whose dedication, expertise, and commitment to our customer and supplier partners are what drive our continued success. I am excited to lead us forward, focused on delivering sustained value for all of our stakeholders. Let me turn to our first quarter results. Total U.S. housing starts increased 1% compared to the prior-year quarter. However, single-family housing starts were off 5% for the same comparative period. Our consolidated first quarter sales of $1.5 billion were down 2% from 2025. Our net income was $17.8 million, or $0.50 per share, compared to net income of $40.3 million, or $1.06 per share, in the year-ago quarter. Our businesses delivered solid results for the quarter despite continued demand uncertainty resulting from geopolitical events, volatile mortgage rates, and severe weather. The challenges of consumer sentiment and home affordability remain the most significant headwinds for residential construction activity. In this environment, we are continuing to leverage our integrated model, which consistently demonstrates its value and resilience, particularly in challenging market conditions like these. As a follow-up to our previously disclosed legal matter that was resolved last week, this was a legacy issue involving certain hardwood plywood purchases made at a single distribution facility in Pompano, Florida between 2017 and 2021. We bought the wood from a former U.S.-based supplier that improperly imported the products. We were not involved in creating or operating the supplier scheme, but we did not follow some of our own internal processes that would have prevented us from making these purchases. We have taken responsibility for that and have strengthened our processes to prevent this from happening again. Kelly will now walk through our segment financial results, capital allocation priorities, and second quarter guidance, after which I will provide insights on our business outlook and make closing comments before we open the call for questions. Kelly E. Hibbs: Thank you, Jeff, and good morning, everyone. BMD sales in the quarter were $1.4 billion, down from the first quarter of 2025. BMD reported segment EBITDA of $48.2 million in the first quarter, compared to segment EBITDA of $62.8 million in the prior year. Selling and distribution expenses were up $8.2 million from the first quarter of 2025. In addition, gross margin dollars decreased $6.5 million compared to the prior-year quarter, reflecting lower gross margins on all product lines, particularly EWP. In Wood Products, our sales in the first quarter, including sales to our distribution segment, were $398.2 million, down 4% compared to the first quarter of 2025. Wood Products segment EBITDA was $32 million compared to EBITDA of $40.2 million reported in the year-ago quarter. The decrease in segment EBITDA was due primarily to lower EWP sales prices as well as higher per-unit EWP conversion costs. These decreases were offset partially by lower per-unit OSB costs, as well as higher plywood sales volumes and price. Moving to Slides five and six, BMD's year-over-year first quarter sales decline of 1% was driven by net sales price decreases of 3% offset partially by net sales volume increases of 2%. By product line, general line product sales increased 4%, commodity sales decreased 5%, and sales of EWP decreased 7%. Sequentially, BMD sales were up 2% from the fourth quarter of 2025. Weather had a significant impact on first quarter sales activity at our Southeast and Northeast distribution centers, as the affected locations were closed for a combined 35 days in January and February. The impacts were evident in BMD's daily sales pace during the quarter, with daily sales of approximately $21 million in both January and February before rebounding nicely in March to $24 million. Our first quarter gross margin was 14.4%, down 30 basis points year over year. The decline was driven by EWP competitive pricing pressures, as well as lower margins on general line. BMD's EBITDA margin was 3.5% for the quarter, down from both the 4.5% reported in the year-ago quarter and the 4.1% reported in the fourth quarter. Lower gross margins, coupled with the effects on our operating expense leverage from branch closures in the first quarter, negatively impacted our EBITDA margin result. Turning to Slide seven, on a year-over-year basis, first quarter I-joist and LVL volumes were down 51%, respectively. Sequential I-joist and LVL volumes were up 168%, respectively, driven by seasonal demand improvements and channel restocking ahead of the spring building season. As it relates to pricing, first quarter EWP sales prices declined about 7% year over year and remained flat sequentially. Turning to Slide eight, our first quarter plywood sales volume was 373 million feet compared to 363 million feet in the first quarter of 2025. The year-over-year increase in plywood volumes was due primarily to the restart of operations at our Oakdale mill in the fourth quarter of 2025. Sequentially, our plywood sales volumes were up 5% from the fourth quarter of 2025 as anticipated due to seasonal demand improvement. The average plywood net sales price was $343 per thousand in the first quarter, representing a 1% increase year over year and 4% sequentially. We attribute the recent improvement in plywood pricing primarily to weather-related supply constraints in the South combined with reduced imports. Notably, Brazilian imports declined by more than 60% year over year in 2026. However, following the late February Supreme Court decision that validated the use of IEPA to impose tariffs, higher import volumes are anticipated, which are expected to influence market dynamics in the coming months. I am now on Slide nine. We had capital expenditures of $40 million in the first quarter, $23 million of spending in BMD and $17 million of spending in Wood Products. The capital spending range for 2026 remains at $150 million to $170 million. Roughly a third of BMD's 2026 spending relates to growth projects across our system, with the balance of our spending in both segments attributable to business improvement and efficiency projects, replacement projects, and ongoing environmental compliance. Speaking to shareholder returns, we paid $10 million in dividends during the quarter. Our Board of Directors also recently approved a $0.22 per share quarterly dividend on our common stock that will be paid in mid-June. Through the first four months of 2026, we repurchased approximately $91 million of our common stock, including approximately $66 million in the first quarter. Since the beginning of 2024, we have repurchased approximately 12% of our outstanding shares. As of today, approximately $148 million of our outstanding common stock is available for repurchase under our existing share repurchase program. As expected, we utilized cash in the first quarter, primarily driven by seasonal working capital needs along with our planned capital investments and shareholder returns. However, the ongoing strength of our balance sheet remains in place, which positions us well to continue the pursuit of our strategic objectives. I am now on Slide 10, where we have outlined a range of potential EBITDA outcomes for the second quarter, along with the key assumptions underlying these projections. As we look ahead, end market demand remains uncertain, and certain cost inputs are volatile. For BMD, we currently estimate second quarter EBITDA to be between $65 million and $80 million. BMD's current daily sales pace is approximately 15% above the first quarter sales pace of $22 million per day. Gross margins are expected to be between 14.25% and 15%. Importantly, as our guide suggests, if our current sales pace is sustained, we expect BMD to show a healthy sequential improvement in EBITDA margin. For Wood Products, we estimate second quarter EBITDA to be between $32 million and $47 million. Our EWP order files are showing seasonal strength, and we expect sales volumes to increase mid-single digits sequentially. EWP pricing is expected to range from flat to low single-digit declines sequentially. In plywood, we expect sequential volume increases in the mid-single digits. On plywood pricing, quarter-to-date realizations were 8% above our first quarter average, with the balance of the quarter market dependent. We expect our per-unit manufacturing costs will be comparable to the first quarter, as higher volumes and early results from focused site improvement plans across our manufacturing system are expected to offset recent energy-related cost increases. I will turn it over to Jeff to share our business outlook and closing remarks. Jeff Strom: Thank you, Kelly. I am on Slide 11. Given the current environment, visibility into end market demand for 2026 is limited. For much of the first quarter, mortgage rates declined to the lowest level in over three years. However, recent geopolitical turmoil has led to volatility in Treasury and mortgage rates alike, introducing greater uncertainty on the remainder of the spring selling season. Homebuilders are responding to the cautious demand environment with thoughtful approaches to starts, home sizes, location, and inventory. As a result, maintaining our focus and staying agile remains central to Boise Cascade Company's strategy for delivering outstanding service across a broad selection of in-stock, industry-leading building materials in any operating environment. The alignment of our two business segments is evident every day and is a driving force in our world-class operations. Enhanced channel visibility supports the alignment of our production rates and inventory strategies with end market demand. Cross-divisional coordination and our strong financial position provide the security and flexibility for our teams to execute our strategy and deliver long-term value creation. We are committed to continuously seeking new opportunities to leverage our integrated model by driving greater efficiency, responsiveness, and innovation across our organization. As we consider the future of homebuilding, we remain confident in the structural drivers of U.S. housing demand, which include the persistent undersupply of housing driven by generational tailwinds, near-record levels of homeowner equity, a decade of underbuilding, and an aging U.S. housing stock with the average home being more than 40 years old. The strong fundamentals for both new residential construction, repair, and remodeling reinforce the industry's favorable outlook. Boise Cascade Company's investments throughout the business cycle give us confidence that we can outpace industry growth as these market tailwinds materialize. Thank you for joining us today and for your continued support and interest. We welcome any questions at this time. Jason, please open the phone lines. Operator: Thank you. We will now begin the question and answer session. Our first question comes from Michael Roxland from Truist Securities. Please go ahead. Michael Roxland: Yes. Thank you, Jeff, Kelly, and Chris for taking my questions. First question I had, Kelly, just in response to one of your comments regarding Brazilian import and lower tariffs. You mentioned expecting to see them in coming months. Have you started to see any increased plywood or wood flows from Brazil at this juncture? And it also seems like my second question, just EWP prices in the first quarter sort of stabilized quarter over quarter. One of your peers was showing mid-single-digit decline in pricing. Can you provide any more color around what is driving the price stability in your business maybe versus some of your peers? Kelly E. Hibbs: Yes. So my understanding, Mike, is that the true answer is yes. We are expecting to see more and more of that show up at the ports, maybe a little bit delayed because there was a phenol disruption at a manufacturing site in Brazil. But we know the wood is coming and we are seeing quotes show up in the coming months. Jeff, do you have some more color on that? Jeff Strom: I would add that there has been some that has showed up, but not significant enough that would cause any major impact. Troy Little: Yes. I mean, we were able to hold prices relatively flat since the third quarter of last year, but that is definitely not a function of less pressure in the market. It has come back. There has been more chatter. There is regional pricing pressure from our competitors still. We have the conversations with homebuilders and still a strong concern for home affordability. So right now, it is just a matter of being very strategic. It is regional conversations, making sure that we are competitive, but we are not leading with price, leading into our model and our service proposition. Fortunately, so far, we have been able to hold prices, and right now, quite honestly, our order file is strong, which allows us to be selective in how we address our pricing. Operator: The next question comes from Ketan Mamtora from BMO Capital Markets. Please go ahead. Ketan Mamtora: Good morning, and thanks for taking my question. Perhaps to start with, can you talk about freight and transportation inflation that you are seeing across both Wood Products and Distribution? If you can quantify that headwind and how you all are mitigating that? And then, when I think about the second quarter EBITDA guidance, appreciate that it is a dynamic environment. As I think about your top end versus the bottom end of the guidance range, can you at a high level talk about what that contemplates? Should I think about your current daily pace getting you to the midpoint of the guidance range in Distribution? Is that the way to think about it? Troy Little: Ketan, this is Troy. In terms of diesel prices, we are seeing that in various aspects of our business. The biggest one for us is probably in our resin costs. That is the input cost that is affected related to the increase in prices. We did have a price increase probably in the 10% range around our resin. Then we have some direct cost, if you think about fuel for rolling stock and things like that, which is not a huge spend for us, but that will be an impact. Moving veneer around the system, we see that in our wood costs. Then there is the indirect, every piece and part that comes into our system has some type of inflationary pressure around freight. We are working on our cost control on the opposite side of that to help mitigate some of that. It is hard to quantify all that, but I think we are still comfortable that we should have comparable manufacturing costs, as Kelly mentioned. Joanna Barney: And then I will jump in on the Distribution business. Diesel rose significantly during the quarter. We were paying almost double at the end of the quarter what we were paying at the beginning of it. Most of it we are able to pass on through our daily transactions with our customer base. There are some fuel surcharges, and our people have done a tremendous job of passing those along, but there has been some short-term impact to our margin on program business where freight was included as part of the original program. At times, there are delays in what we are able to go out and recoup as far as those costs. I would also add that there has been a lack of trucks and drivers due to tight immigration policies. That has impacted freight rates and the availability of trucks as well. Jeff Strom: The thing I would add on the BMD side is that every load that goes out of our warehouse every single day, we make sure that we optimize. We are sending out a full truck to spread that freight as efficiently as possible, and we have been working really hard on doing that. Kelly E. Hibbs: So, Ketan, let me take a shot at the guidance piece. I will start with BMD first and then give you a little color on Wood Products also. You kind of hit it in your question, which is we still have two months to go in the quarter. End market demand is pretty uncertain, and how much of the demand we have seen so far is replenishing the channel versus end market demand is a little hard to tell. There are unknowns and volatility around the cost inputs. That is why we draw a pretty wide range around our EBITDA forecast for both businesses. Specific to BMD, if you assume that the sales pace we spoke to so far this quarter is sustained, and our margins are at the midpoint of the range that we put out, that would get us into the midpoint of the range, into the low $70 millions. That would get us back to a really good spot in terms of a healthy improvement in EBITDA margin, into the mid-4% range. In Wood Products, it is a similar theme in terms of the challenges with forecasting. Troy spoke to good order files in EWP and pretty good order files in plywood, but we know, particularly in plywood, how quickly things can flip. Again, that is why we purposely put a pretty wide range around those results. Operator: The next question comes from Susan Marie Maklari from Goldman Sachs. Please go ahead. Susan Marie Maklari: Good morning, everyone. Thanks for taking the questions. My first question is around thinking of the environment that we are in and the increase in macro uncertainty that we saw at the end of the first quarter. Has that had any impact on the mix you are seeing between sales coming out of the warehouse versus direct? What is the overall read of your customers, and how is that influencing the guide and how we should think about the flow through to results? And within general line, can you talk about what you are seeing from your suppliers in terms of competitive dynamics and pricing over the next couple of quarters? Jeff Strom: I will take a stab at the first part. What we did see in the first quarter, when commodities started to move and prices were down to begin with, was people stepping in and buying more directs than we have seen in the past few quarters. There was absolutely a shift to that. But as we move forward, with the uncertainty that is out there, that most often creates more reliance on distribution, and we are absolutely seeing that. Our warehouse business continues to be very strong and continues to be what people want to use. Joanna Barney: On suppliers and pricing, we saw late in the first quarter somewhere in the neighborhood of 25 to 30 price increases. Some of those were surcharge-driven, based on gas and freight, but most of them were product price increases. We are seeing broader product offerings and suppliers starting to understand that there has been some strength in the market that they are pushing into, and they are starting to move their prices accordingly. Operator: The next question comes from Kurt Yinger from D.A. Davidson. Please go ahead. Kurt Yinger: Great. Thanks, and good morning, everyone. I just wanted to go back to BMD. Looking at the volume performance there, even if we strip out an assumption on hold-in, it looks pretty flat, which I would say is good in this market. Can you talk about whether it is product category or customer initiatives that seem to be bearing fruit there? And then on the gross margin line, as we move into the back half, is the competitive environment so challenging that it would be tough to get back to that 15% plus gross margin level, or is that still an attainable goal? Joanna Barney: I would say it is both product and customer initiatives. As a backdrop, we had some margin return-on-sale impacts that were either a onetime event or not expected to be permanent. To Kelly's point in his prepared remarks, we had 38 days of closures with weather. Some of that business we recaptured, some of it we lost, but our costs remained fixed, so there was an impact there. We had fuel surcharges that we passed through, but there is timing that goes on there, so there is a margin shift. Within general line, we are focused on growth of our home center special order business, which we grew by double digits, and we continue to build out our door segments, gaining market share there. We are driving top-line revenue. Tied to our door initiative, we have pushed into the manufactured housing sector and saw double-digit growth in the first quarter, with a lot of upside opportunity there. We are making strides with our digital strategy. Our e-commerce business was up 57%. On commodities, you will continue to see us outperform the market because we have built out commodity technical systems that give us early indicators and real-time views into trends, inventory levels, and market segments, so that we can move quickly across our system. Our commodity volume and footage was flat to up in the first quarter, and we actually saw margin expansion, in spite of lower pricing. We feel confident that we are expanding our market share in commodities based on the systems we have built and the educated risks we take in putting inventory on the ground, built on years of experience and the expertise of our people. That has helped us in deflationary pricing environments to hold on to our volume and expand our margins. On gross margins versus 15% plus, I think it is an attainable goal. The current demand environment is uneven and rate-sensitive. There are still a lot of opportunities, but they vary by geography, product category, and builder type. When interest rates dipped below 6%, we saw strength return pretty quickly. If rates pull back and geopolitical tensions ease, BMD could see some improvement from seasonality as commodity prices improve. We are still seeing pricing pressure on EWP, although it is abating. We have had margin impacts across a wide breadth of general line products, and we saw year-over-year commodity price deflation, but we have offset that with margin expansion. If nothing changes in rates or tensions, we would have a more measured outlook: some seasonal improvement, but not a broad-based acceleration. Operator: The next question comes from George Staphos from Bank of America. Please go ahead. George Staphos: Hi, everyone. Good morning. Thanks for taking my questions. First, is there a way that you can give us a ballpark figure for the inflation you have seen in your cost of goods on an annualized basis that you have yet to recover in pricing actions already? Second, on plywood, you said there is some wood already showing up from Brazil and South America, but it has not had a big effect. Why do you expect it might have a bigger effect? What would some of the factors be, given your experience? Kelly E. Hibbs: I will start on the first one and speak specifically to Wood Products. In BMD, we are seeing some freight increases that we will largely be able to pass through over time. In Wood Products, the big items subject to inflationary increases that we are experiencing now and did not really see much of in the first quarter are glue, natural gas, and purchased electricity. Generally speaking, that is roughly 10% of Wood Products cost of sales. To the extent we see, and we have seen, about 10% increases in some of those key inputs, that gives you a sense of the cost impact, assuming volumes remain the same. On the second question around plywood imports, Jeff? Jeff Strom: We have not seen a huge impact because there has not been a whole lot that has come in so far. Why do we expect there will be an impact? It is supply and demand. It depends on where it comes in—what port, whether it is a big plywood market or not—and how much comes in. If there is a lot and a big price advantage, imports will grab some share. We have seen that before. But with what is happening there, there has been a delay with transportation and freight coming over. It will be wait and see when it gets here. George Staphos: As a quick follow-up, what are the spreads between current market pricing and what the quotes are coming in on imports? Can you give us a sense of the arbitrage? Jeff Strom: When it first got here, if I remember right, it was about a 10% difference between the two—what the pricing spread was when it first arrived or what they are quoting. Operator: The next question comes from Jeffrey Stevenson from Loop Capital. Please go ahead. Jeffrey Stevenson: Hi, thanks for taking my questions today. How much did restocking ahead of the spring selling season contribute to the improved sequential EWP volumes during the quarter? And could you provide an update on current EWP channel inventories at this point of the year compared with both last year, when they were elevated, and historical levels? Also, could you provide an update on the new Thorsby line and how we should think about the ramp and production at the facility as we move through the first half of the year? Troy Little: Undoubtedly, the better part of the first quarter was probably a restocking story. Maybe late in the quarter there was some follow-through, so it was a combination of both. Our order file grew to a solid two-week order file, and we have carried that through April and into May. On channel inventories, there is still a reliance on two-step distribution. Talking to our channel partners, they have increased inventory, but they are not back up to the high end of their targets for this time. On Thorsby, it is largely as planned. Right now, we are testing out and getting our products certified in the various depths and series. That is expected to go through the second quarter. In terms of sellable product, we would not have sellable product until probably the beginning of the third quarter. To a degree, that is capacity we have, but demand will dictate. To the degree demand is there, we will start producing out of Thorsby; to the degree it is not, we will use that as throttle. Going into the third quarter, I would not anticipate that being a huge volume contributor right now. Operator: Our next question comes from Reuben Garner from Benchmark. Please go ahead. Reuben Garner: Thank you. Good morning, everyone. Maybe just a follow-up on EWP price-cost dynamics. I think you referenced an expectation of low single-digit sequential pricing declines. What is driving that? You mentioned a strong order file and inflationary pressures. Is it still just so competitive, or supply-related? Is there a lag from competitiveness several months ago that is flowing through now? Why would we see sequential declines when we have a strong order file and inflationary pressures? And then on the BMD side, I think, Kelly, you mentioned margin pressure in general line products. Is there something unique going on there in any specific categories driving that? And where do inventories stand today in general line, and how are you thinking about them for this year? Troy Little: It is flat to down. There is enough chatter out there that we could see continued erosion from the competitive environment—primarily on retaining business. On delivered cost, if freight increases are not fully passed through the channel, there is some impact to net sales price on the freight side. That combination may lead to a little erosion, but we are not anticipating a lot. That is why we have the flat to low single-digit range. Joanna Barney: From a margin compression standpoint, the biggest pressure we have seen has been across engineered wood, but that is abating. The rest of general line shows small margin impacts across a wide breadth of products, mostly market-based at the distribution level—nothing out of the ordinary. On channel inventories, the business starts we have seen are starting to normalize a bit. The channel is lean but relatively stable. Customer purchases have been more consistent than the start-stop we saw last year. We have started seeing price increases from multiple suppliers on the general line side as well. Jeff Strom: I would just add that single-family is such a driver for us, and single-family demand is very much muted. When it gets like that, everybody is fighting for what is out there. It is hyper-competitive right now across pretty much everything. Operator: And the next question is a follow-up from Kurt Yinger from D.A. Davidson. Please go ahead. Kurt Yinger: Great. Thanks. Troy, have you seen any derivative impact in terms of the EWP price conversations you have had, maybe specifically on floor systems, given what we have seen in dimensional lumber inflation? And then, looking at the outlook, it sounds like the order book is pretty strong. I know the first quarter benefited from some restocking, but it does not seem like much of a sequential seasonal lift in EWP volumes in the second quarter versus the first. Is that related to the restock dynamic or more of an assumption around some softening in single family as we progress into summer? Troy Little: Nothing that I am aware of on floor systems. Typically, once you get builders to convert to EWP floor systems, you do not see them convert back. On open-web truss, that is a competitive product to I-joist, and the cost inputs for those products have been quite volatile in recent quarters. But I-joists are maintaining share. We were happy to see the good sequential volume increase we saw in I-joist. Kelly E. Hibbs: On the outlook, it is a little hard to sort out exactly how much of the first quarter was end market versus channel restocking; it was some of both. As we move into the second quarter, if you read the transcripts from the national homebuilders, they are very focused on sales pace and moving spec inventory, moderating their starts pace to their sales pace. Some are talking about increasing starts, but more seem to be talking about decreasing starts and transitioning a bit more to build-to-order, given improved cycle times. That all plays into the narrative. We are doing our best to pick up the demand signal from the homebuilder channel, which suggests we are not going to see a big seasonal increase into the second quarter. Operator: This concludes our question and answer session. I would like to turn the conference back over to Jeff Strom for any closing remarks. Jeff Strom: Thank you for your continued interest in Boise Cascade Company. Please be safe and be well, and we look forward to talking to you next quarter. Thank you all. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Welcome to the analyst and investor presentation for HSBC Holdings plc First Quarter 2026 Earnings. This webinar is being recorded. I will now hand over to Pam Kaur, Group Chief Financial Officer. Manveen Kaur: Welcome, everyone. Thank you for joining. We have had another quarter of positive performance, which reflects further progress towards creating a simple, more agile, growing HSBC. Annualized return on tangible equity, excluding notable items, was 18.7%. We are confident in achieving the targets we set out to you at the full year. We are updating 2 pieces of guidance today, banking NII to around $46 billion and our expected ECL charge to around 45 basis points. I'll talk to the drivers of both shortly. In the quarter, we continued to make disciplined progress in simplifying the group to unlock HSBC's growth potential. We actioned a further $0.2 billion of simplification saves and remain well on course to deliver the $1.5 billion target. We completed the privatization of Hang Seng Bank, the sale of U.K. Life Insurance, Sri Lanka Retail Banking and South Africa. And as you will have seen, we have agreed the sale of our retail banking business in Indonesia. We expect to realize an up to $0.4 billion gain on completion anticipated in the first half of 2027. Our CIB business in Indonesia is unaffected. On outlook, the economic landscape remains complex and uncertainty will persist. Our thoughts are with all those affected by current events in the Middle East. We are fully engaged in supporting our colleagues, customers and partners across the region. We are well positioned to work with our customers and manage the uncertainties in the global environment from a position of financial strength. Let's turn first to the income statement, where I will focus on year-on-year comparisons unless I indicate otherwise. Profit before tax, excluding notable items, was $10.1 billion. Notable items this quarter include a loss of $0.3 billion on moving Malta to held for sale, a loss of $0.2 billion on the sale of U.K. Life Insurance and $0.1 billion of restructuring costs related to our simplification program. Revenue, excluding notable items, grew 4% year-on-year to $19.1 billion. This was driven by banking NII and strong growth in wealth fee and other income. Annualized RoTE was 18.7%, 0.3% higher than last year. It benefited from the removal of Hang Seng Bank minorities. Looking at capital and distributions. Our CET1 capital ratio is 14%, down 90 basis points on the quarter as expected following the privatization of Hang Seng Bank. Reflecting our strong organic capital generation, we are already back to our operating range of 14% to 14.5%. The dividend for the quarter is $0.10. We continue to target a dividend payout ratio for 2026 of 50% of earnings per ordinary share, excluding material notable items and related impacts. Let's now turn to our business segment performance. Each of our 4 businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items. This broad-based performance shows our strategy is working. I would just mention the $0.2 billion gain from a one-off property asset disposal in the Corporate Center, which is not a notable item. Moving now to banking NII. Banking NII increased $0.3 billion year-on-year to $11.3 billion. It fell by $0.5 billion quarter-on-quarter. $0.3 billion of this quarterly decline is day count. We also noted at the fourth quarter, $0.1 billion in gains that we did not expect to repeat. In addition, this quarter, HIBOR was lower in March, and we also recognized a $0.1 billion adverse one-off. We are now upgrading our full year banking NII guidance to around $46 billion. This reflects an improved interest rate outlook. I would highlight that interest rate curves have been volatile and can, of course, change further in either direction. Turning now to wholesale transaction banking. Recent economic, market and tariff situations have validated the strength of our franchise, both over the last 12 months and in this quarter. We grew fee and other income 2% year-on-year. Customers continue to turn to us to help them navigate volatility and uncertainty. Our balance sheet and franchise strength are particularly valuable in times like this. In the quarter, Securities Services grew fee and other income 11%, reflecting new mandates and higher transaction volumes. Trade grew 8%, driven by continued growth in volumes. Payments grew 3%, driven by growth in volumes across most regions. Foreign exchange fell by 1% compared to a strong first quarter last year. We continue to see growth in volumes and strong client engagement. Turning now to wealth. We grew fee and other income by 15% to $2.7 billion. I remind you that the first quarter of last year was a high base. Growth was driven by all 4 income lines, and we added 287,000 new-to-bank customers in Hong Kong. It is worth remembering there is typically favorable seasonality to the first quarter when compared with the fourth quarter. Having said that, we are pleased that the investments we are making in our wealth products, distribution channels and customer experience are translating into real results. Private Banking grew 8% and Asset Management, 3%. Investment distribution performed very well, up 21%, reflecting particularly strength in our customer franchise in Hong Kong. Insurance growth of 19% from a strong base was also pleasing, again, with Hong Kong, the standout. Our insurance CSM balance was $15.2 billion, up 19% versus the prior year. First quarter wealth balances were $1.6 trillion, up 12% or $170 billion year-on-year. Net new money in the first quarter was a strong $39 billion, of which $34 billion came from Asia. This is a broad-based and robust franchise. Our investments and focus are paying off. I will note that we saw a slowdown in flows in the early days of the conflict, but activity recovered in April across our wealth franchise in Asia. Turning now to credit. Our first quarter ECL charge was $1.3 billion, equivalent to an annualized charge of 52 basis points as a percentage of loans and advances. Given the ongoing uncertainty in the outlook, we are updating our full year 2026 credit guidance to around 45 basis points. This quarter includes a $0.3 billion charge related to the Middle East conflict. This is precautionary and related to the impact of the conflict everywhere, not just in the Middle East. We also include $0.4 billion for fraud-related secondary securitization exposure with a financial sponsor in the U.K. I will emphasize that we regard the Stage 3 charge this quarter as idiosyncratic and not representative of the risks in the wider portfolio. We have completed a full review of the highest risk areas in our portfolio and have not identified any comparable fraud concerns. We have updated our risk appetite and are incorporating lessons in our due diligence processes. This remains an area in which we are comfortable, but it is not a significant growth driver in our plan. In Hong Kong commercial real estate, we had some small recoveries in the quarter. And overall, it remains broadly stable. You will see our usual detailed breakdown on Slide 21. On Slides 15 and 16, we have also set out our private market exposure. We have made these expansive definitions to give you a full picture of our full-service business in private markets. Let's now turn to costs. We continue to take a disciplined approach to cost management. We are on track to achieve our target of 1% cost growth in 2026 compared to 2025 on a target basis. Cost growth this quarter is 3% year-on-year. This included 1% driven by higher variable pay accrual based on business performance. If you exclude the variable pay accrual, target basis cost growth was around 2% year-on-year. We manage costs on a full year basis. So looking at a quarter in isolation is not meaningful. We remind you that our simplification actions provide a cumulative year-on-year benefit through 2026. For the avoidance of doubt, our 2025 target cost baseline is $34 billion when updated for FX. Now let's turn to customer deposits and loans. Our deposit momentum continues with $99 billion of deposit growth, including held-for-sale balances over the last 12 months. CIB deposits increased $10 billion quarter-on-quarter in what is usually a soft quarter. Hong Kong was a particular driver. This corporate inflow offset a slower retail flow in our Hong Kong pillar. You will see deposit seasonality on Slide 20. Excluding the movement of Malta to held for sale, IWPB deposit growth was $4 billion. You will see on Slides 18 and 19 that we have set out additional deposit disclosure. This shows you the deposit base split between fixed term and instant access accounts. The 70% instant access proportion should help you see the strength and breadth of our deposit base across our businesses. Turning to loans. Growth picked up in the quarter. CIB mainly reflects continued momentum in GTS, higher term lending in Hong Kong and drawdowns on committed lines by high-quality borrowers in the Middle East. We are pleased to be there for our customers when they need us most. Hong Kong returned to volume growth this quarter after a period of decline. We are pleased to see borrowing appetite return as the economy grows and as residential property prices recover. Our $13.7 billion investment in Hang Seng Bank is a signal of our confidence in the opportunity in Hong Kong. We are investing across both iconic banks, and we see significant growth runway for both ahead. In the U.K., we delivered another quarter of good growth. This was both mortgages and our commercial lending book. We see good momentum in our domestic portfolio. Low levels of household and corporate debt in the U.K. provide a platform for the continued growth of our franchise. Now turning to capital. Our CET1 capital ratio was 14%, down 90 basis points in the quarter. This follows the 110 basis point impact of the Hang Seng Bank privatization and Malta disposal loss. We also saw a 12 basis points impact from the fair value through other comprehensive income bond portfolio, as government yields rose following events in the Middle East. These were offset by ongoing strong organic capital generation. We are pleased to have remained within our CET1 operating range since the announcement of the Hang Seng Bank privatization. A decision on future share buybacks will be taken quarterly, subject to our normal buyback considerations. Let's turn to targets and guidance. First, targets. We reiterate the targets we set out to you at the full year. Revenue rising to 5% year-on-year growth by 2028, excluding notable items. Return on tangible equity of 17% or better, excluding notable items each year. Dividends, 50% of earnings per share, excluding material notable items and related impacts. Finally, to guidance. Today, we are updating our banking NII to around $46 billion, given the higher rate outlook and our ECL charge to 45 basis points given macroeconomic and market uncertainty. In addition, to inform management planning, we have assessed a range of top-down stress scenarios. We have set these out for you on Slide 17. I'm happy to discuss these further in Q&A. All other guidance set out on this slide remains unchanged. To conclude, the intent with which we are executing our strategy is reflected in the growth and momentum in our first quarter. It shows discipline, performance and delivery. Discipline in the way we are applying strong cost control and investing to deliver focused sustainable growth. We are on track to achieve our target of around 1% cost growth in 2026 compared to 2025 on a target basis. And we are reallocating costs from nonstrategic or low-returning businesses towards growth opportunities, while upgrading our operating model. This includes investing in artificial intelligence to empower our colleagues, simplify how we operate and enhance the customer experience by personalizing service at scale. Performance in our earnings. Each of our 4 businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items and delivery. Our first quarter results show we are creating a simple, more agile, growing HSBC built on the strong foundations of a robust balance sheet and hallmark financial strength. This is why during periods of greater uncertainties, our customers turn to us as a source of financial strength, and we remain confident in delivering against our targets. With that, I'm happy to take your questions. Operator: [Operator Instructions] Our first question today comes from Guy Stebbings at BNP Paribas. Guy Stebbings: The first one was on wealth. Clearly, another very good performance, particularly on investment distribution, insurance. Can you talk about what you're seeing in terms of flows in the competitive landscape in Hong Kong right now? I'm sort of mindful it's been a very good story and the benchmark comparisons is getting tougher in terms of growth rates. But equally, there's sort of no evidence of let up in momentum and can see another really good performance for new business CSM, which is well above what you're actually booking through the P&L right now. And then the second question was on private markets. Thanks for Slide 15 and 16. Interested in any changes you're making in your approach to this segment. You've called out the $400 million hit in Q1, and you've not identified anything comparable in the book. One of your peers has signaled sort of partially stepping away from some exposures in this segment, as they've assessed sort of levels of financial controls. I know you said this wasn't a big growth driver of the plan, but are you changing how you're thinking about this segment in any way? Manveen Kaur: Thank you, Guy. If I take your questions in turn. On the first question on wealth, we are really pleased with the growing CSM balance and as well as on investment distribution. First quarter is always a very strong quarter for us, but I'm pleased to say that even after some slowdown in the month of March, we again see momentum coming through in April. We have a very vast range of products that we offer to our customers. So we've seen some shift in the products. So people moving from bonds and mutual funds into structured products and equities and all that obviously contributes very well to our fee income in wealth. We have an iconic brand in Hong Kong. And yes, competition is fierce. But as you can see, we are also growing new customers despite putting the fee in January, and these new customers over time also become customers from a wealth perspective, but more in the near term for the insurance business. So those are all very positive signs for us. From a private credit perspective, our overall exposure on private credit has stayed the same, as I called out at the year-end of $6 billion on the chart. And then this is both drawn and undrawn and the private credit and related exposure stays within 2% of our balance sheet. So that, again, from our perspective, is a comfortable position in terms of the concentration. Following the, what I would call, experience that we've seen in the fraud perspective, I've always said that in this ecosystem, no one is immune to second order sort of exposures, which is where we have had from financial sponsors. Clearly, as a learning, what we are working on is looking at very specifically some of the additional due diligence processes we may carry even where we are relying on the due diligence of financial sponsors. In terms of concentrations, we are also looking at any specific concentrations on individual counterparties in this space, but remain comfortable overall. And as I've said, we will not have this and it has never been a significant driver of private credit. So same as before, continue to be even more diligent where we are relying on financial sponsors related secondary exposures and their due diligence. Operator: Our next question today comes from Amit Goel at Mediobanca. Amit Goel: So 2 other questions from me. So one was just on the cost growth. So it seemed like the cost growth was a bit higher this quarter, even ex the VP than the overall target for the year. So just in terms of why you think the costs will be a bit more contained or at least the cost growth will be a bit more contained and the drivers there? And then also the second question is just on the Middle East scenario. So I appreciate the extra slide. Just curious on those stress scenarios. So what would we need to see or what would we have to see -- to be seeing some of that scenario play through and to have further impact on your ECL guidance? Manveen Kaur: Thank you, Amit. So I'll take the cost question first. So as we have said, our simplification actions will be completed by the middle of the year. And those simplification actions will give us cumulatively more savings in the second half of the year. And if we factor those in and phase out in line with our forecast and financial resource planning, we are very comfortable that we will be within our cost guidance of around 1% growth on a target basis. It is a timing of when you have the gross increase, which we said last year would be 3% and then the timing of when the 2% savings come so that you come to the net 1% cost growth. Now from a Middle East scenario, firstly, to be clear that our ECL guidance and indeed, when we reaffirm our targets, we look at all plausible downside scenarios, and we are, by nature, quite conservative in how we approach these matters. We have, in the fullness of an integrated top-down stress scenario called out a bookend stress scenario, which requires all 5 things to happen. So just to give you some perspective, in this kind of a scenario, you would expect stock markets to be down 35%. So it's pretty severe. You would also expect oil price at 145 basis points and market disruption as well as significant GDP slowdown across markets globally. So that is the context of this scenario. But as I said earlier, in terms of the right weightage of probability from an ECL perspective, that has already been factored in the 45 basis points guidance. And this scenario gets driven by not just an ECL number, but also an impact on the revenue line, and it assumes that the wealth business, which has continued to do really well even through the month of April will have a significant impact in this kind of a scenario as well as deposits, which typically in a stress position always become an inflow for large deposits. But because of the extreme market disruption, very high inflation that the deposits will come down because customers will need to get money in order to survive through a very stressful economic scenario. Operator: The next question today comes from Aman Rakkar at Barclays. Aman Rakkar: I just wanted to ask one quick follow-up on the Middle East scenario. Is there any chance -- I think just back of the envelope, it's a kind of $2 billion to $3 billion hit to PBT in terms of the mid- to high single-digit percentage on '26. Is there any chance you could just kind of round out the disclosure on that in terms of what the breakdown in that scenario is between revenues and impairments? I'm assuming it's literally revenues and ECLs and if you could just quantify that for us, that would be really helpful. The second question was just on banking NII, please. So first of all, I think you're calling out $100 million negative impact in the quarter. Just kind of adding that back in, I guess, to the underlying run rate, it looks like your Q1 banking NII is annualizing a shade above the $46 billion that you are guiding for your full year. So I'm interested in the sequential drivers of net interest income, please, from here, as you see them presumably rates not that much of a headwind and you've got some balance sheet momentum. So trying to work out what the negative is from here to offset that, please? Manveen Kaur: Thank you, Aman, for your 2 questions. So taking the first one. Firstly, to say, yes, the impact absolutely is equal between sort of revenues and ECLs broadly in this scenario and your numbers were right. I also want to say this is what I would call an unmitigated impact. In other words, it's prior to management actions. We are very comfortable that even in stress scenarios, we have a range of management actions we would be taking. And therefore, we are very confident in reiterating our RoTE targets for '26, '27 and '28. Now on banking NII guidance, as always, as you would expect, we tend to be quite conservative. We consider in the guidance all possible downside scenarios as well, at least the plausible ones. So in terms of the mathematical calculation, as you've done ex the one-off and looking at the day count, et cetera, it, of course, takes you above the $46 billion. Our guidance is around $46 billion, not just $46 billion. So that's the first point to call out. And the things that we have considered in terms of a possible plausible headwind would be, of course, there's an uncertainty on the interest rates. Also, we have seen the experience. There were a few weeks of impact of a lower HIBOR in the month of March, but I'm very pleased to note that the HIBOR has again come to the range that we are most pleased with, which is around 2.5% and obviously, there is the continuing tailwind of our structural hedge reinvestment. We've given you disclosures on that. And the deposit flow overall continues to be very strong, but we are happy to say around $46 billion with our usual conservatism. Operator: Our next question today comes from Andrew Coombs at Citi. Andrew Coombs: A couple of follow-ups from me, please. Just firstly, coming back on the private credit exposures on Slide 16. I think the exposure on which you booked the charge today falls within the $3 billion securitization financing bucket that you list on that slide. Can you just give us an idea, please, of how much of the exposure that you've taken a charge on today accounts for of that $3 billion total, please? And then secondly, coming back to wealth, it's difficult to quibble on 15% year-on-year growth, but that revenue growth does look slightly weaker than your peers. So can you just give us an idea of where you think the differences are? Is it business mix, which means you have lower transaction income benefit year-on-year? Anything you can comment on relative performance? Manveen Kaur: Thank you. So just in terms of the exposure, we have substantially provided for that exposure. And that exposure, when you can see mathematically, is not an insignificant part of the $3 billion that you've called it quite rightly, it really comes from that particular bucket. Coming back to your point on our revenue. So in terms of the revenue, I'll just bring to attention that the CSM balances have been growing, but the way they actually hit the P&L, it is really over a period of time. And therefore, what you capture in the P&L is 1/10 and that then flows through over the following years. So that is how I would look at it in terms of the fee income growth. If you ex that or adjust for that, we are very much in line or indeed ahead of peers in certain pockets. Operator: The next question today comes from Katherine Lei at JPMorgan. Katherine Lei: Pam, I would like to ask about the fraud cases. Like can we have more color about the fraud cases such as like what is our total exposure? Because the key concern is that is this $0.4 billion one-off or we were going to see more like step-up in impairment charges because of this particular case? I think this is the number one question. Number two question is like I look at the risk weighting, right? It seems like a downside scenario, now we aside, 45% versus like before the war, like, say, 4Q '25 is roughly about 15%. Can we get more color of like, say, in this scenario, would that be -- let's put it this way, under what situations do you think we will continue to see continue rise in this 45% of downside scenario? Manveen Kaur: Thank you, Katherine. So firstly, this fraud is an idiosyncratic fraud. We have gone back and reviewed all our highest risk exposures across our portfolio and specifically looked at the private credit exposures as called out on the slide, and we see no comparable fraud risks in this matter. And of course, we continue to review our risk appetite, tightened due diligence and so on. So therefore, we feel quite comfortable that this is a one-off fraud indeed, and it comes to us through a secondary exposure that we have through a financial sponsor and where there was reliance on the financial sponsor due diligence. So that's the first case. And second one, in terms of the downside scenarios, the 45% downside scenario is built also from a 30% Middle East-related specific scenario that we created, which was a fifth scenario. So we do not expect that 45% downside scenario to shift much. And I can just give you as a comparison as we went through periods of COVID, Russia, Ukraine, that's sort of a leaning on the downside scenario. It's pretty much at the top end of the downside scenarios. And then once the situation gets more normalized, we bring the scenarios back to what our normalized scenarios that you have called out. I also want to stress to you that the IFRS 9 downside scenarios factor in, what we think at this point of time, the full extent of the forward-looking guidance, as we would obviously calculate based upon what we're seeing on the ground as well as assumptions as well as the probabilities given to all the scenarios. And this is quite distinct and different from the bookend Middle East conflict stress scenario on Slide 18, which has a much holistic view and a range of things happening, including, as I called out, from very severe stock market disruptions as well as oil price distinction. So I just want to make a clear distinction between what you account for, what you have in your outlook versus what you keep as part of a planning exercise in terms of the range of scenarios that you should always be aware of as a good management practice. Operator: Our next question today comes from Chris Hallam at Goldman Sachs. Chris Hallam: Two for me. So the first, again, on wealth. So $5 billion of that $39 billion of net new money was deposits. So it feels as though sort of 90% of the flows were invested, whereas if I think about the stock of your wealth balances, it's closer to 60%. So how should we think about that? Is that a structural trend you're seeing? Are clients becoming more invested? And if so, what does that mean for fee margins and for returns going forward? And maybe just within the $39 billion, without the conflict in Iran, would that number have been higher or lower? And then second, on capital, like you said, well managed through the guidance range throughout the HSB privatization process. Obviously, this quarter, a couple of one-offs within the quarter, but the underlying business performance appears to be encouraging. So given all of that, can you comment on when you expect to restart share buybacks? Manveen Kaur: Thank you, Chris. So firstly, in terms of invested assets, we are very pleased with the growth in invested assets. But I just want to remind you, typically, Q1 is strong for investments. So there is some seasonality of money moving from deposits into investment assets into -- in Q1. We've also been very strong in terms of the new mandates we've got from private banking. So overall, wealth is a very robust story to call out, and it's very broad-based, not just dependent on one lever. In terms of the conflict, there was a bit of risk-off wait and watch in the second half of March. However, as April has come through, we continue to see high volume of transactional activity. And as I said earlier, our customers, they continue to readjust their portfolios and our strength lies in the broad range of products we have on offer. And we have really invested in this business. So going forward, from a fee income perspective, I do believe there is a huge tailwind for us in terms of how we build on this year-on-year. So coming back to capital now. Firstly, I'm really pleased that even with this very large core investment we have done in Hong Kong, which is a critical market for us where we are hugely confident about the future growth prospects, we have still remained throughout the entire period within our CET1 operating range, and that truly reflects the very strong capital generation capabilities of our business across all 4 businesses. So that is indeed very encouraging. Now in terms of share buybacks, you're right that even with all the one-offs we've had in the first quarter, we are in a good position, and I expect Q2 to be equally highly capital generative for us. But of course, a share buyback decision is done on a quarterly basis. Starting point is always capital generation, which looks strong. We have to also look at loan growth, then we have to look at our 50% dividend payout ratio, which is an important target for us and the residual is always in terms of share buybacks and distributions, notwithstanding any inorganic opportunities for which we have an extremely high hurdle rate. So we will look at it again starting from Q2. Operator: The next question today comes from Kunpeng Ma at China Securities. Kunpeng Ma: I got 2 questions for you. And the first one is about Hang Seng. I'm glad to hear the momentum in deposit and wealth management in the first quarter and the pickup in the momentum from April. But how -- what proportion of such momentum could be attributed to the synergies out of the Hang Seng deal? And also some color on future synergies, future synergy effects of the Hang Seng deal would be much more helpful for us. Yes. The second question is on HSBC's global footprint. Yes, this is out of the proposed disposal of the Indonesian retail business. I think the Indonesian market is quite important. It's not the kind of some marginal or less important market. So I want to know the HSBC's views on your global franchise. I mean, which markets are important to you or which markets and which business are less important? Yes. Manveen Kaur: Thank you, Kunpeng. So firstly, we have made a very good start on the Hang Seng privatization, but the synergies at the moment have been very little, if any, because it's just the start of the process. We have already started investing in Hong Kong, both in the red brand and the green brand in terms of technology, in terms of simplifying customer journeys and training and skilling of our colleagues. So we do expect progressively the growth from the synergies to come through starting from the second half of this year, but mainly through 2027, '28. So that's a very strong tailwind, again, to support our targets as we progress. And so far, everything is very much on plan and with a lot of engagement with colleagues on the ground, which is, I think, really important, both in terms of maintaining the momentum, the sentiment as well as reinforcing our strong optimism in Hong Kong, as you've already seen in the results as well as in the stabilization of the Hong Kong commercial real estate market. Now coming to our global footprint from an Indonesia perspective, we think Indonesia is a critical market for us from a CIB perspective. It is an important network market and the economy is significant from an Asian perspective. However, our retail business of the size and the scale it was and the scope it had was not within the strategy of our wealth business. It was a valuable business, remains a valuable business, as you've seen from the financials for the transaction that has been announced. But from our perspective, from a wealth perspective, it did not meet the high hurdle rate criteria we had. We have other markets where we are investing in a far more focused manner. Operator: Our next question today will come from Alastair Warr at Autonomous. Alastair Warr: Just a couple of follow-ups on the credit costs and on the insurance that we touched on just a moment ago. If you've got 52 basis points booked in for the first quarter on credit costs, it looks like, therefore, to get to your 45 over the rest of the year, you'd be looking at a little bit above 40 for the remaining quarters of the year? You were at 40 for the full year before. So is that just implicitly building in maybe a little bit more drag from the Middle East? Or is there anything else going on anywhere else for us to be thinking about? And just a second point, you touched on the CSM there and how it can make a difference to how you're booking your speed of growth of income at the wealth line. HSBC has been really strong on some big ticket quite short payment period and products that some of your big name peers in Hong Kong are not necessarily so keen on. So can I just confirm, you talked about 10 there -- that your release rate in years is about 10 years and that this shorter payment period thing doesn't turn up in a shorter release rate as well. Manveen Kaur: Thank you, Alastair. So firstly, on the credit costs. You're right, this quarter's credit cost of 52 basis points has 2 significant numbers in it. One is obviously the idiosyncratic one-off fraud-related. If you take that off, we are pretty much in line with where we would be in Q1 of 2025. Our books overall ex these 2 items have performed really well. The second being obviously the Middle East reserve. So if you take the Middle East reserve build of $300 million and the fraud number, then the actual credit cost would be lower than what it was in Q1 2025 at around $600 million. What we are looking -- $600 million, sorry. As we look at going forward into the next few quarters, we are always a bit conservative, and we do have a little bit of scope built in, both in terms of what happens on Stage 3s of the fraud-related item, obviously, that's a one-off, but the ex-fraud-related Stage 3 buildup increases because of a prolonged conflict in the Middle East. Also Q1 has been very benign on Hong Kong commercial real estate. We are very pleased that we are seeing the beginning of a stabilization, but we are not calling it the end of the cycle. So therefore, we keep that sort of a buffer for the rest of the year. So in terms of the CSM balances very specifically, there is no change in the accounting policy. Obviously, it's based upon IFRS 17 principles, hence, the drip feed over the 9- to 10-year period that we will see. And the key thing there is as long as with the new customers that we are onboarding, with the growth in the CSM balance, the growth in the CSM balance exceeds the P&L flow from the CSM balance because the trajectory is very positive in the growth of that business in Hong Kong. It is an iconic brand for us. So therefore, the demand for the product from a distribution perspective remains extremely strong. Operator: Thank you, Pam. We will take our last question today from Joseph Dickerson at Jefferies. Joseph Dickerson: I just wanted to ask in terms of the numbers you've given the guidance upgrade on the banking NII, is that taking into account the -- effectively marking the market for the current yield curve in the U.K. I note some footnotes around you were using rates, as I think mid-April. Does that take account of the yield curve in the U.K.? And then presumably, there's some outer year tailwind into that. And given you've got some outer year revenue growth assumptions, I'd be keen to know how that -- how any maturities at higher rates might influence the outer year revenue growth rate. Manveen Kaur: Thank you, Joe. So from a banking NII perspective, yes, we looked at the yield curves as -- at the middle of April across the currencies. So that's correct. In terms of the revenue growth projections that we gave for the outer years, they were based upon the yield curves as when we set our targets. So if the yield curves continue to be higher or grow, then everything else being equal, that will be a tailwind for revenue in future years. The banking NII guidance, as you know, we always only give for the current year. Operator: Thank you very much. That ends today's Q&A. So I'll now hand back to you, Pam, for any closing remarks. Manveen Kaur: So thank you all for your questions. As you've seen from our results, we are very pleased with our return on tangible equity of 18.7%. We have never printed a number of this size for nearly 20 years now. And that gives us a very good start in terms of where our targets are and how firmly we stand behind them for the next 3 years. Of course, there are macro uncertainties in the current environment, and we have given disclosures, which are very fulsome, both on private credit as well on extreme downside stress scenarios, bookends. So hopefully, in that context, I have answered all your questions. And obviously, if you have any more detailed questions, please reach out to the IR team. Thank you very much again for your patience and interaction. Operator: Thank you, everyone, for joining today. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the ADTRAN Holdings, Inc. First Quarter 2026 Earnings Release Conference Call. [Operators Instructions] During the course of the conference call, ADTRAN representatives expect to make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the successful development and market acceptance of our products, the ability of our third-party suppliers to supply components and products, our ability to convert our backlog into revenue, our ability to maintain current expected delivery schedules, competitive pricing and acceptance of our products, intellectual property matters, the effect of economic conditions, the impact of tariffs and trade policy, and other risk factors described in our most recent annual report on Form 10-K and in our quarterly filings with the Securities and Exchange Commission. ADTRAN Holdings assumes no obligation to update any such forward-looking statements. During today's call, management will refer to certain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP measures and certain additional information are also included in our investor presentation and our earnings release. ADTRAN Holdings has not provided reconciliations of its second quarter 2026 outlook with regard to non-GAAP operating margins because it cannot predict and quantify without unreasonable effort of all the adjustments that may occur during the period. The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website. Hosting today's call is Tom Stanton, ADTRAN Holdings' Chief Executive Officer and Chairman of the Board; and Timothy Santo, Senior Vice President and Chief Financial Officer. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN Holdings. Sir, please go ahead. And Tom Stanton, I turn it over to you. Thomas Stanton: Thank you, Kayla. Good morning, everyone. ADTRAN delivered solid first quarter results with revenue of $286.1 million, up 15.5% year-over-year, and non-GAAP operating margin of 6.9%, up 3% year-over-year. These results reflect the continued strength of our core markets and the operating leverage we have now firmly established across the business. The demand drivers underpinning our business continue to strengthen. In the U.S., broadband expansion is gaining traction and BEAD deployment funds are beginning to reach operators in a growing number of states. In Europe, high-risk vendor displacement continues to progress with momentum reinforced by legislation such as the proposed Cybersecurity Act 2.0, which would mandate the removal of high-risk vendors from critical network infrastructure. This quarter also marked a meaningful step in our growth strategy as we showcased our expanding portfolio addressing cloud and AI infrastructure connectivity. This included the introduction of the LiteWave800, a solution purpose-built for high-performance and low-power intra-data center connectivity. Optical networking solutions revenue was $97.3 million in the first quarter, up 24% year-over-year. On a sequential basis, strength from our larger customers and hyperscalers was offset by seasonal declines with smaller customers and government sales. Across our service provider base, demand remains healthy. Operators across all geographies are expanding wholesale optical capacity to support growing demand for cloud connectivity and higher bandwidth services, reflecting a broad-based trend. In Europe, high-risk vendor replacement initiatives continue to add to that demand with growing strength among our cloud and hyperscaler customers, and a positive outlook across our service provider base. We expect our optical networking revenue to build throughout the year. Access and aggregation solutions revenue was $90.5 million in the first quarter, up 2% year-over-year and 14% sequentially, driven by broad-based strength across the U.S. and Europe. We expect steady progress across our European business through the remainder of the year. In the U.S., BEAD deployment funding is beginning to reach operators in select states. And while we are seeing early orders from several customers, we expect the impact to become more meaningful as we move towards the back half of the year. Subscriber solutions revenue was $98.2 million in the first quarter, up 22% year-over-year. Demand remains healthy, supported by continued investment in fiber-to-the-home, multi-gig Wi-Fi 7 and carrier Ethernet applications. In recent weeks, our award-winning SDG Wi-Fi 7 portfolio received conditional FCC approval, exempting our platforms from covered list restrictions. We are among the first vendors to achieve this designation. And while the broader industry works through the approval process, we are already seeing service providers engage with us on competitive opportunities that this creates. Stepping back from the details for the quarter, I want to take a moment to talk about our business and the market dynamics that continue to drive demand for our solutions. Service providers are investing across transport, access and subscriber platforms to scale their networks for long-term demand and improved reliability. These investments are being reinforced by several important tailwinds, including high-risk vendor replacement initiatives in Europe, the expansion of managed optical fiber networks or MOFN to address surging demand for wholesale services from cloud providers, and continued upgrades across access and subscriber networks to support multi-gig service delivery. In addition to these network upgrade catalysts, operators are in the early stages of transforming how they operate their networks and engage subscribers through agentic AI. With the launch of Mosaic One Clarity, which recently received the FTTH Europe award for AI innovation, we are addressing the shift towards proactive and increasingly autonomous network operations. Early deployments have provided strong validation of these capabilities across both small and large operators, particularly in the areas of predictive maintenance and improving the in-home subscriber experience. Beyond our core service provider business, we continue to see meaningful opportunities to further accelerate growth by expanding our presence in both cloud providers and enterprise customers. These segments benefit from many of the same underlying trends shaping service provider networks, but they are growing at a faster pace and are driving new network architectures and requirements. In the enterprise space, we have a long history of providing secure optical and Ethernet connectivity to some of the world's largest enterprise and government customers. Demand in this customer segment is increasingly shaped by 2 important tailwinds. First, the expansion of AI workloads across secure enterprise environments is driving demand for higher capacity interconnects between private enterprise data centers. And second, growing awareness of the limitations of traditional security mechanisms is accelerating interest in quantum-safe, optical and Ethernet communications. Building on our longstanding presence in these markets, we have developed a comprehensive portfolio of quantum-safe communication solutions. While still early, we are seeing increasing engagement across a broadening base of enterprise, government and utility customers, positioning us well for longer term growth as these initiatives mature. In our cloud provider customer segment, the rapid expansion of AI compute infrastructure and the networking required to connect large-scale cluster GPU deployments is driving a surge in networking investment, making this the fastest-growing segment in our industry. Data center operators are scaling capacity to support AI workloads where power efficiency, thermal constraints and network density have become defining design considerations. We have long served data center customers through our interconnect solutions and as evidenced by last quarter's results, that business continues to benefit from growing demand for data center connectivity. Our strategy is to build on that foundation and extend our portfolio to address surging bandwidth demands from inside the data center as well. LiteWave800 is the first clear example of this strategy in action. It is purpose-built for intra-data center connectivity and high-density AI compute environments, and is designed to reduce power consumption by over 90% compared to existing alternatives. We are still in the early stages of this product family, but initial market engagement and feedback have been very encouraging. Shifting from our market opportunities to operations. Memory pricing has remained elevated industry-wide and freight costs are adding an additional layer of pressure, headwinds that are affecting the entire sector. Despite these pressures, our non-GAAP operating margin of 43% reached its highest level since the beginning of the supply chain disruption in 2020. This was achieved through a combination of disciplined cost management, pricing adjustments across the portfolio and a revenue mix that has less reliance on lower-margin CPE where memory cost pressure is the most acute. Consumer CPE represents a relatively small portion of our overall revenue. Although memory costs remain elevated and could deteriorate further, our current visibility supports gross margins in the near term, remaining broadly consistent with what we have delivered over the past several quarters. We entered the second quarter with a positive demand outlook. Fiber infrastructure investment remains active across our core business, and we continue to advance our initiatives in AI infrastructure and enterprise networks, expanding our business opportunities. Our priorities remain consistent: expanding operating margins, generating cash and converting the strong customer pipeline into revenue. With that, I'll turn the call over to Tim to review our financial results in more detail. Tim? Timothy Santo: Thank you, Tom, and thank you all for joining us today. We delivered solid results for Q1 2026 led by continued and consistent execution. We had operating margin expansion to a new level despite a seasonal reduction in revenues that remained above the midpoint of our previously issued guidance, driven by continued cost discipline and scale in the business. Our first quarter revenue was $286.1 million, up 15.5% year-over-year and returning to a more normalized seasonal pattern. Geographically, U.S. revenue was $146.2 million, representing 51% of total revenue, up 42% year-over-year and 7% sequentially. Non-U.S. revenue was $139.9 million or 49% of total revenue. Access and aggregation solutions revenue was $90.5 million or approximately 32% of total revenue, up 2% year-over-year and 14% sequentially. Subscriber solutions revenue was $98.2 million or 34% of total revenue, up 22% year-over-year. Optical networking solutions revenue was $97.3 million or 34% of total revenue, up 24% year-over-year. Turning to gross margin. Non-GAAP gross margin was 43%, up 55 basis points year-over-year from 42.5% in Q1 '25 and up 54 basis points sequentially from 42.5% in Q4 2025, driven by favorable product mix and continued progress on cost efficiency. Non-GAAP operating expenses for the first quarter were $103.3 million compared to $95.5 million in Q1 2025 and $105.1 million in Q4 '25. The year-over-year increase largely resulted from the impact of foreign currency fluctuations on our European cost base, which has had minimal impact on operating leverage due to natural hedging and continued investment in R&D and go-to-market activities. Non-GAAP operating income was $19.9 million or 6.9% of revenue. On a sequential basis, operating income increased from $18.8 million or 6.4% in Q4 2025. Year-over-year, non-GAAP operating margin expanded 300 basis points from 3.9% in Q1 2025, continuing the progression from 5.4% in Q3 '25 and 6.4% in Q4 '25. Non-GAAP tax expense in the first quarter was $4.4 million, reflecting an effective non-GAAP tax rate of 25.5%. Non-GAAP net income attributable to ADTRAN Holdings was $11 million or $0.14 per diluted share compared to $0.03 in Q1 2025. Turning to the balance sheet and cash flow. Net working capital was $253.9 million at quarter end compared to $259 million at December 31, 2025. During the quarter, inventory was $209 million with days inventory outstanding of 110 days, down 4 days sequentially. Trade accounts receivable were $215.5 million with DSO of 68 days, up 2 days sequentially due to the timing of quarter end invoicing. Accounts payable was $170.6 million with days payable outstanding of 66 days, which is flat sequentially. As revenue scales, our focus remains on improving working capital efficiency. Operating cash flow was $12.7 million for the quarter and free cash flow was a negative $3.3 million, reflecting timing of cash receipts and higher purchases of inventory. We ended the quarter with $88.3 million in cash and cash equivalents compared to $95.7 million at December 31, 2025. Turning to our outlook for the second quarter of 2026. We expect revenue to be between $283 million and $303 million, and non-GAAP operating margin within a range of 5% to 9%. This concludes our prepared remarks. Before turning the call over to Tom, I'd like to highlight that we will be participating at the B. Riley Conference on May 20 in Marina Del Rey and the Evercore Technology Media and Telecom Conference on June 2 and 3 in San Francisco. We look forward to seeing many of you there. And now I will turn the call back to Tom. Thomas Stanton: Great. Thanks very much, Tim. All right. Kayla, at this time, we'd like to turn it over to people that may have some questions. Operator: [Operator Instructions] Your first question comes from the line of Mike Genovese with Rosenblatt Securities. Michael Genovese: Tom, I'd like to hear about the LiteWave800 more about basically the strategy of launching this product, maybe bigger thoughts on getting into the data center. But more specifically, any timing or size or margin expectations for the new product that you could share would be helpful. Thomas Stanton: Yes. I probably -- I'm going to shy a little bit away from pricing on the product, although there is a lot of IP in that product and IP typically gains better gross margins. The reason I mentioned it upfront in my remarks is the market reaction to it has been fantastic. We've had some very large, very well-known customers that have been very encouraging for us to get the product out as quickly as possible. But unfortunately, there is a lot of work to be done. And I would expect that to be sometime about a year from now before we really kind of hit production level type numbers. We did show -- we do have prototypes now. We did show operating models at the recent OFC. It is a real product. It does work. It's a matter of getting it -- finalizing and then getting it to scale, which will take some time just because it's very -- it's a semiconductor type product. That is one of the products we have. We also have the Quattro, which will be coming out at the end of this year, which is a 4 by 100 product versus the 8 by 100 product. It is also a very, very power-saving product. I think it's better than anything out there on the market today. The real thing about the 800 though is it's ridiculously low power. I mean it's -- I think, 1 picojoule per bit, which is an industry first, and that's what's driven the excitement around it. Michael Genovese: Interesting. Now, when you say there's a lot of IP in it, I mean, is it fair to say that it would not be significantly dilutive to company gross margins? Thomas Stanton: It will not be dilutive to company gross margins. Michael Genovese: Okay. That's good to hear. I guess, maybe just something similar on any other new products. I mean we saw something about an announcement of an AI edge platform I'd like to hear more about. And then if I go back to OFC, I also think there was an announcement, at least where you were demoing 800 and 400ZR. So is that a product that you have, ZR? And could you talk more about the AI sort of edge platform? Thomas Stanton: Yes. The AI edge platform, I think you're talking about is still an offshoot of Clarity. So I'm not sure if there's anything else out there that we've -- at least I've seen that we announced. I'm not telling you it couldn't happen. But all of our AI products are in the Clarity family. We have an edge product that we are trialing right now, and then we have the core product for network operations that we have been trialing for some time. I will tell you the feedback here also is fantastic. I just recently had a bunch of customers in. We had 150 or so customers here in Huntsville and the feedback there just overwhelmingly positive. So good things there. On the 400ZR, we do have products coming out towards the end of this year, I think, for 400. And those are just ongoing pieces. The AI piece, now that I think about it, the AI piece you may be talking about it on Ensemble, which is the product that we were highlighting that has started to implement AI -- agentic AI in this product line. Operator: And your next question comes from the line of Irvin Liu with Evercore. Jyhhaw Liu: I also had a question related to AI infrastructure. As you target this opportunity, can you talk about any sort of R&D and go-to-market investments needed to serve this customer segment? Thomas Stanton: There is some shifting that we'll be doing throughout the year where we make sure that we have the right R&D resources and sales resources to be able to do that. But all of that is within the current operating budget that we have today. So I don't think there's going to be any significant increase. We're kind of committed to and believe that we can grow the business fairly meaningful within the budgets that we have today. Once we get north of our targeted 10% -- or excuse me, we said low-single-digit, but 10% operating income, then we'll take a look at that as well and make sure that we're investing in the right places. But right now, we don't see any problems. Jyhhaw Liu: Got it. And then for my follow-up, you've been seeing strong demand in the regional service provider customer segment. So can you talk about any sort of momentum you're seeing as it relates to your suite of software products such as Mosaic One and Intellifi? Just any color on upsell efforts and attach rates here would be helpful. Thomas Stanton: Yes. We don't have those numbers broken out, but I will tell you the uptick on Intellifi has been fantastic. Mosaic got a very good launch. We have probably close to 500 customers right now on Mosaic One. And all of those are in different levels of subscription base. But Intellifi is doing really well. I think last time we reported on, it was over 100 customers and it was -- it's been a real highlight. So we don't have those numbers broken out. Hopefully next quarter, I'll be able to talk about them. Operator: And your next question comes from the line of George Notter with Wolfe Research. George Notter: I wanted to -- you mentioned cloud revenue in your cloud business. Can you remind us what percentage of sales comes from cloud operators? Do you have a sense for that? Thomas Stanton: Yes. We don't break that out. As you know, George, we don't break out specific customer segments like that. But just to give you some color, hyperscalers actually did really good in the fourth quarter. They were, as I mentioned, a real positive in the quarter, and we would expect that to continue on through this year. I mean we've got a fairly good backlog with some of our hyperscaler customers right now that's building. So that's pretty much it. George Notter: Got it. Okay. And I assume these are -- can you just walk through maybe the product sets that you sell in there and just kind of get us for your point on what is -- what you're leading with customers. Obviously, the LiteWave product is going to come on. But is it optical? What pieces are you selling? Thomas Stanton: Yes. The biggest piece is optical, and it's -- a lot of the momentum we're seeing right now is around our 100ZR plug. George Notter: Got it. Okay. I guess I would have assumed the 100-gig ZR plug was a little bit more of a telecom application rather than a cloud application. Thomas Stanton: As you know, maybe you do know, I think you do know, George, that we have a fairly large footprint. So when you look at large data center connectivity, not in the sweet spot. That's where the 400 and 800 will play more. In the smaller data center interconnectivity spot, which some of the hyperscalers have as an architecture, it plays very well. George Notter: Okay. Super. And then the other one I had was just on the LiteWave800. Obviously, laser datacom chips are really hard to come by in the industry. And I hear what you say about the business ramping a year from now. I guess I'm just curious about where you guys are getting laser datacom chip supply. Is that difficult to come by? Is it easy to come by? Is there anything you can tell us about where you're sourcing those? Thomas Stanton: I probably won't get into direct sourcing on that. We do have some partners that we're working with on this. They do know what the supply needs are right now. We see -- depending on how aggressive that launch is, we don't see any issues in being able to supply it as we launch it. Operator: And your next question comes from the line of Ryan Koontz with Needham & Company. Ryan Koontz: I want to ask about optical demand, kind of that maybe step it up to a higher level. You talked about MOFN demand here. Can you maybe characterize where you are, where you see the biggest drivers specifically within Europe for your optical product lines and which products you're seeing the greatest success with in terms of demand? You just talked about 100ZR. I assume that's a big piece, but maybe any more color beyond that would be great. Thomas Stanton: Yes, I do think 100ZR also -- I think that the -- especially in Europe, I think that our 400 and 800-gig products are going to play very well in that upgrade path as well. The customer base that we're talking about is the customer base that you already know. It's ones that we've been doing business with for a very long period of time. And they're trying to situate their networks to be able to do more basically wholesale services. That customer is active. And then there's one here in the U.S. that you're already aware of that's also making a lot of noise around it. Ryan Koontz: Helpful. And are you seeing -- within that, are you seeing a shift away from traditional chassis-based transponders over to ZR pluggables in the telecom side as well? Thomas Stanton: It's a mix. That is dependent on the carrier size. And it also depends on whether or not they already have installed chassis. Where there's already an installed chassis there, they're going to upgrade that chassis. Where it's a footprint, even in footprint on some of the larger carriers, the operational ease that the current systems provide is actually very beneficial to them, but it's definitely a mix. Ryan Koontz: Got it. And then maybe hitting the gross margin here. Obviously, great results on the quarter. Congrats. And you talked about a lower mix of consumer CPE within your subscriber solutions. Can you maybe -- is consumer CPE, would it approach half of that number? Or you think it's maybe less than half of your total subscriber business? Just sort of quantify. Thomas Stanton: It's probably -- to be fair, it's probably -- I think it's definitely not less than a half, but it's not substantially more. And I think the reason that I was bringing it out is we have gotten feedback that customers were unclear about kind of how much the CPE margin problem is affecting us, and it does affect us. I mean there's no doubt about it. But the impact is substantially less when you take a look at it in the overall perspective of the entire company, but it is north of 50% of just the subscriber segment. Ryan Koontz: Makes sense. And maybe one last one, if I can squeeze it in. You talked about some better visibility on BEAD projects here. What sort of milestones should we look for before we start to see your revenues start to inflect for BEAD? Are we talking about permits and design and forecasts and orders? Can you maybe walk us through how we should think about the milestones that lets BEAD unfold and start to contribute for ADTRAN? Thomas Stanton: Yes. So funding is starting to flow or could flow for the -- by far, the majority of the states now. So a lot of that has been worked itself through. Now what you're seeing is kind of individual customers deciding how they want to roll out. We have some customers that have already placed purchase orders and they're rolling out and/or at least making sure that they've got supply to be able to not be a hamstrung. The smaller the customer, the easier that is. On the larger customers, the biggest pull -- long pull is going to be actually deploying the fiber itself, which is why we've been saying end of this year is probably where you start seeing that. On a local level, I mean, you can look at permitting and kind of where that is, that's kind of hard to actually get a good grasp of. At the end of the day, I'm looking for purchase orders. We're starting to see some today, but it's a trickle. It's not a lot. But we expect that -- I mean, this whole unlocking of the approval process really has accelerated. We went from, what, maybe 2 states a quarter ago, I think 3 states a quarter ago to pretty much all of the states now being able to send out funding. So I think the best visibility is actually seen in the numbers though because every carrier is going to be a little different. Ryan Koontz: And you think you'll just see nice steady improvements and '27 starts to feel like a more material number for you from being... Thomas Stanton: Absolutely. Yes. Operator: And your next question comes from the line of Christian Schwab with Craig-Hallum. Christian Schwab: Just a quick clarity on that, Tom. With '27 orders picking up indeed more materially, would you anticipate '28 being potential peak revenue for that program? Or do you think it extends beyond that? And would you be willing to quantify a revenue range of opportunity over a multiyear time frame that this program could offer you guys? Thomas Stanton: I think we've given a range before, and that math changes depending on ultimately which carrier actually is deploying where. But Tim, do you remember what that range was? Timothy Santo: We had said of that market size, there's about $1 billion to go to the industry over multi years. Thomas Stanton: So it's a 5-year program. The timing of this, we've seen programs like this in the past. I think if you pick the middle of the window, that's typically where you see the majority of the spend. And then you'll see some kind of cleanup at the very tail end when people try to make sure that they get all the funding they can get. So my guess would be the middle of the program, which would be probably towards the tail end of '27. And then you'll probably see some cleanup from that point forward. And as you get towards the end of the program, you'll typically see some kind of flush as people try to make sure they did all the work they need to do. Christian Schwab: Great. That's great clarity. And then my last question just as your largest -- one of your competitors spent a significant amount of time on their conference call talking about memory cost headwinds. I'm just wondering how you guys are navigating through that. Thomas Stanton: Yes, sure. Right now, we're doing good. So I do think that we are helped by the fact that we have a fairly diverse product portfolio. When you get into some of our larger products like some of our larger access and ag platforms, which handle thousands of customers, or you get into optical for that matter, the memory content on those products is just less of the total bill of material. So the impact is significantly less. If you get into some of the lower-end residential CPE, that memory can be a large percentage of the total bill of material. And I think that's the direct impact. If you take a look at our -- that maybe that's the direct tie through to your question. If you take a look at our CPE for residential, which is the most materially impacted, it is also the lowest cost products we sell and the lowest inherent gross margins to begin with that we sell. There's a bigger impact. When you get to some of the larger 100-gigabit platforms, 400 gigabit platforms, that memory impact is just substantially less. And I think that's the difference. Operator: And your next question comes from the line of Dave Kang with B. Riley. Dave Kang: Just the first question is regarding the Middle East conflict. Just wondering if you can talk about the impact from that. Thomas Stanton: Yes. So I think it impacts us in a couple of different ways. One is, without a doubt, it hurt us on the freight line. There are some disruptions. Our freight expense this quarter was higher than I would like it to be. Probably be higher this quarter as well, so last quarter and this quarter. And that's just a matter of being able to get capacity in the right planes. And it was a little messy last quarter, freight line. I think that's the biggest -- that's the biggest headline impact. We absolutely saw an impact though in our Middle East revenues as well. Some of that was disrupted last quarter. I don't know when that gets better. I would expect it to be a little better this quarter, but I think it hurt us both on the revenue and the cost line. Dave Kang: Are we talking like maybe 1%, 2% revenue impact? Timothy Santo: Revenue, yes, less than 5%, yes. Dave Kang: So it's definitely meaningful. I mean, material, right? Thomas Stanton: Well, especially if you talk on a -- we tend to -- we really look at EMEA as one big bucket, and that's how we manage it. And for the EMEA area, yes, it definitely hurt. But on the overall company, it was -- it was not as meaningful. I think on the freight side, it probably hurt more to be honest with you. Dave Kang: And should we expect that to be better this quarter, the... Thomas Stanton: I don't want to tell our operations guys, but I don't expect our freight to be materially better this quarter. I think it's going to be messy this quarter as well. I can't project. Go ahead. Dave Kang: Yes. Got it. So that leads me to my second question, is your operating margin guide for 2Q, 5% to 9%. Just wondering if you can go over some of your assumptions of 5% versus 9%. Timothy Santo: Yes. So we continue to think that -- I mean, if you think about it, basically we're assuming a similar freight environment in this quarter as last quarter and a similar memory impact in this quarter as last quarter. Dave Kang: Got it. And then my last question is, were you able to raise prices or any plans to raise prices to counter elevated freight as well as component costs? Thomas Stanton: Freight, we're not pushing so much on. I mean we're still very hopeful that that's transitory. Component prices on the memory prices, we have raised prices to customers to reflect the current challenges in that supply chain. Operator: [Operator Instructions] Your next question comes from the line of Tim Savageaux with Northland Capital Markets. Timothy Savageaux: I want to come back to a comment you made about optical, mainly kind of building throughout the year, which makes sense. Typically, in access and aggregation, you see kind of the opposite pattern, which is a stronger first half driven by Europe and then maybe a weaker second half. My question is, I wonder if BEAD can serve to offset that this year. So you might be able to have a similar type profile building throughout the year. And at least let's just focus on access and aggregation here as a result of that. And at this point, are you able to make an estimate for what the annual incremental contribution of BEAD might be in the second half or this year in general? Thomas Stanton: I really -- yes, unfortunately, I really can't give an estimate on BEAD because there's too many customers and too many unknowns. But your question is, do I think you would also see the typical access and ag. I think a couple of things can play into that. BEAD definitely will be helpful. I think the other thing that we expect to see, and this is still relatively early in the year, but I think Europe is going to be stronger than what we saw the last couple of years seasonally. So I think that we're -- you won't see -- the current expectations is that we won't see the same kind of falloff in the second half versus first half that we saw last year. Did that answer your question, Tim? Timothy Savageaux: Sure guys. Operator: And your next question comes from the line of Bill Dezellem with Tieton Capital. William Dezellem: Relative to the LiteWave800 and your engineering knowledge set that you have gained to reduce that power consumption by 90%, is there a carryover or an opportunity to take that knowledge and apply to other products throughout your catalog that could be materially impactful to the business? And if so, what's the timeline that it would take to have that technology or those capabilities infiltrate the rest of the product line? Thomas Stanton: I think it's relatively unique to the product sets that we're talking about. It is because of particular speeds and particular distances that we're able to actually get the power savings that we're talking about. I think the -- but I did call it a family. And I consider Quattro to be part of that same family, which is in our multi Mux family, which is very, very power savings as well. But I think the proliferation you'll see of that technology is in that pluggable space. So you're going to see first product is QSFP. We do have other products that are, let's say, I'll just say more integrated that will be coming out over time. So I think you're going to see different members of the family and similar application sets where this technology will actually play itself out. William Dezellem: And Tom, those applications are all within the data center? Or are there other short distance opportunities that are outside of the data center that I'm not thinking about right now? Thomas Stanton: There could be, but I can tell you that demand with inside the data center is worth focusing on. It is very large. At this, I think we are out of questions. So I want to thank everybody for joining us on the conference call, and we look forward to talking to you next quarter. Thanks, everyone.
Operator: Good day, everyone, and welcome to the Thomson Reuters' First Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Gary Bisbee, Head of Investor Relations. Please go ahead, sir. Gary Bisbee: Thanks, Margo. Good morning, and thank you all for joining us today for our first quarter 2026 earnings call. I'm joined today by our CEO, Steve Hasker; our CFO, Mike Eastwood; and our incoming CFO, Gary Bischoping. Steve and Mike will discuss our results, and then we'll take your questions following our prepared remarks. [Operator Instructions] Throughout today's presentation, when we compare performance period-on-period, we discuss revenue growth rates before currency as well as on an organic basis. We believe this provides the best basis to measure underlying performance of the business. Today's presentation contains forward-looking statements and non-IFRS and other supplementary financial measures, which are discussed on this special note slide. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You can access these reports on our website or by contacting our Investor Relations department. Let me now turn it over to Steve Hasker. Stephen Hasker: Thank you, Gary, and thanks to all of you for joining us today. Before I begin our prepared remarks, I'd like to recognize our colleagues at Reuters, who learned yesterday that they have won 2 2026 pullet surprises for journalism, bringing the total pullet surprises to 15 since 2008. So congratulations to Alexander and everyone at Reuters. We have had a strong start to 2026 with revenue growth ahead of our prior expectations and margins in line. Total company organic revenues rose 8%, up from 7% throughout 2025, driven by 9% growth from the Big 3 segments. We are reaffirming our full year 2026 outlook for organic growth in a range of 7.5% to 8%, including approximately 9.5% for the Big 3 segments and for our margins to rise by 100 basis points year-over-year to approximately 40%. Good momentum continues from many areas in our portfolio. This includes double-digit growth from key products, including CoCounsel, Pagero, SafeSend, SurePrep and our international businesses. We continue to invest heavily in innovation, and we remain focused on delivering against our robust product road maps. Commercial momentum across our AI-enabled offerings continues to build, highlighted by strong adoption trends for Westlaw Advantage. Later in my remarks, I will discuss why we are uniquely positioned to provide producery-grade AI and provide an update on adoption and usage trends. We also remain excited by the development of Thomson, our proprietary legal focused large language model. Thomson has begun to outperform leading frontier models on specific legal tasks and provides us with important optionality as we continue to execute our AI innovation road map. Our capital capacity and liquidity remain a key asset we are focused on deploying to create shareholder value, and we made solid progress on this during the quarter. In February, we raised our annual dividend by 10% for the fifth consecutive year. We repurchased $262 million of our shares in the first quarter. And yesterday, we completed the previously announced $605 million return of capital and concurrent share consolidation. Together, these transactions have reduced our share count by approximately 2%. We remain committed to a balanced capital allocation approach, and we continue to assess a number of inorganic opportunities with more than $9 billion of estimated capital capacity through 2028, we are positioned to be both aggressive and opportunistic. Now to the results for the quarter. First quarter organic revenues grew 8%, organic recurring and transactional revenue grew 8% and 10%, respectively, while Print revenues declined 5%, in line with our expectations. Adjusted EBITDA increased 9% to $881 million with a margin of 42.2%. Turning to the first quarter results by segment. The Big 3 segments delivered 9% organic revenue growth. Legal organic revenue again grew 9% despite softer government growth. Legal, excluding government, accelerated to 11% in Q1 from 9% last quarter. Continued momentum from Westlaw and CoCounsel Legal were the key drivers. Corporate's organic revenue grew 9% driven by offerings in our legal, tax and risk portfolios and segments international businesses. Tax, audit and accounting organic revenues grew 10% driven by CoCounsel for tax and audit, our Latin American business and SafeSend. Reuters' organic revenues rose 6%, driven by within the agency business and our contract with LSEG. Lastly, Global Print organic revenues declined 5% year-on-year. In summary, we're pleased with our start for 2026. I'll now discuss a concept we've recently coined what we call fiduciary-grade AI and provide a few updates on customer adoption and usage. The AI workflow market is evolving rapidly, and we see 3 tiers of solutions emerging. First, general purpose productivity tools that are broadly useful but lack domain depth. Second, professional grade AI built for specific fields, but operating environments where some error is tolerable. And third, the one that defines our business, which is fiduciary-grade AI. Work in law, tax and audit operates under strict regulatory and professional standards because the consequences of being wrong are severe. A small error can mean a lost case, a failed audit, a meaningful financial exposure or worse the loss of customer trust. And that's why professionals in these fields cannot rely on probabilistic answers. They need deterministic solutions that produce work that they can verify, validate and stand behind. We believe that the winners in fiduciary-grade AI will be those who train agents to automate complex work with the accuracy and accountability that fiduciary professions demand. This is a difficult standard, but one we are equipped to meet. In fact, one where we believe we have met with Westlaw Advantage because we bring 4 key assets, which set a standard that cannot be watched. The first asset is our proprietary authoritative content. Without authoritative data, you have no source of truth and thus cannot ground or validate your AI outputs. General purpose models trained on broadly available information, lack this source of truth. We have spent decades building and curating unique proprietary content repositories in legal, tax and compliance, including Westlaw, Practical Law, Checkpoint and clear. These are not easily replicable. The second asset is our deep domain expertise. We have the largest team of subject matter experts in our markets, totaling approximately 2,600 people. This domain expertise is critical. As our experts not only help create our content, but also play a key role in training our AI agents and evaluating and validating their outputs. Let me share an example. Since last July, teams have seasoned attorneys and data scientists have invested thousands of hours building the CoCounsel bench evaluation framework, a growing repository of gold standard [ onces ] to real-world legal queries. CoCounsel bench is used to evaluate and improve the performance of our AI products throughout development so that our AI solutions meet the exacting standards legal professionals require. The third is data privacy and governance. Our messaging to customers is very clear. Their inputs will not become part of our AI output. When a client's privacy is paramount, we protect their workflows, strategic approaches and confidential information. The idea that a fiduciary is training a third-party platform with their clients' confidential information is a third rail issue for the professions that we serve, which makes our commitment in this area, an important trust factor with our customers. The fourth is our customer support infrastructure. When a litigator is working through a complex research matter in Westlaw or a CPA needs help understanding intricate tax regulations as they prepare a tax return they can call our expert reference attorneys and tax analysts. We invest heavily in these capabilities to support our customers and their outcomes in real time. No frontier model or AI-focused start-up offers this. In summary, our authoritative content, train domain experts, data privacy and governance and our customer support together uniquely positioned Thomson Reuters to deliver fiduciary-grade AI solutions to the standards our professional customers demand. Let me next share a few updates on the success we're having with customer adoption of our AI products. I'll start with an update on Westlaw Advantage. As is shown on the left side of the slide, customer feedback has been strong, supporting our view that the new agentic deep research capabilities offer a meaningful step forward in performance. Through 8 months, adoption is running faster than what we have seen with the 2 prior Westlaw upgrade cycles, contributed to our revenue growth from law firms accelerating to 11% in the quarter. Last quarter, we mentioned our work on the next-generation version of CoCounsel Legal, which incorporates a similar agentic framework that has been so successful with Westlaw Advantage. We built from the ground up, it delivers on the vision we set out from the start, an AI companion that works alongside lawyers through every task and every stage of a matter grounded in the trusted sources of knowledge that they can rely on. On the right half side of the slide, we share feedback from 3 customers that have participated in the alpha development stage, which supports our optimism. We recently entered beta with a broader set of customers using the product and look forward to a full launch of next-generation CoCounsel legal in the third quarter. In February, we announced an important milestone, achieving 1 million users for the advanced AI features in our product portfolio through CoCounsel. On the topic of usage, let me share several other statistics to describe the growing customer interaction with our AI features and offerings. Firstly, monthly CoCounsel [ SKUs ] in legal have quadrupled year-over-year with strong growth in both the U.S. and international markets. Secondly, we've seen significant growth following the Westlaw Advantage launch with the number of advantage users and deep research searches, both up more than 7x in the last 6 months. And thirdly, CoCounsel for tax and audit weekly conversation volume has grown approximately 5x since September, reflecting accelerating adoption. And in summary, we remain excited about the building momentum from our AI solutions and the opportunities ahead as we execute against our innovation road maps. Before turning to the financials, I'd like to acknowledge a very important leadership transition. Our Chief Financial Officer, Mike Eastwood, will be retiring at the end of this week after 26 years with Thomson Reuters. Mike has been a trusted partner to me and the Board and has played a central role in strengthening the company's financial discipline, capital allocation and operational execution through a period of significant transformation. I want to sincerely thank Mike for his many contributions and wish him well in his retirement. At the same time, I'm pleased to welcome Gary Bischoping as our incoming Chief Financial Officer. Gary is an accomplished tech executive and finance leader who brings deep financial expertise, strong operational experience and a long and successful track record of driving growth. Gary has been working closely alongside with Mike, me and the leadership team to ensure a seamless transition. We're confident in Gary's leadership and look forward to partnering with him as we continue to execute our strategy. I'll now turn it over to Mike for a review of our financial results. Michael Eastwood: Thanks, Steve. Thanks again for joining us today. As a reminder, I will talk to revenue growth before currency and on an organic basis. Let me start by discussing the first quarter revenue performance for our Big 3 segments. Organic revenue grew 9% in the first quarter, continuing the strong trend from recent periods. Legal Professionals organic revenue grew 9% again this quarter despite the slower growth from government we discussed last quarter. Key drivers from our product perspective remain Westlaw and CoCounsel. While government slowed to 1% year-over-year growth, legal professionals, excluding government accelerated to 11% growth, up from 9% in the fourth quarter. The strength was broad-based with our large, mid and small law segments, all growing at double-digit growth rates. Our Corporate segment grew 9% organically, driven by 8% recurring and 12% transactional growth. Pagero, Confirmation, Westlaw, CoCounsel, and our international businesses were key contributors. Tax, audit and accounting organic revenue increased 10% and recurring and transactional revenues grew 10% and 11%, respectively. Our Latin America business, CoCounsel for tax and audit, SafeSend and SurePrep were key drivers. The tax, audit and accounting first quarter growth rate was impacted by 2 product updates that shifted revenue recognition towards the second half of the year. For the full year, we remain confident in our 11% to 13% revenue growth outlook, with acceleration from Q1 levels, driven by rising revenue contribution from our newer AI-driven offerings in the U.S., a key product line extension at Dominio in Brazil, and the product updates I just mentioned. Moving to orders. Organic revenue rose 6% for the quarter driven primarily by growth from the news agreement with the data and analytics business of LSEG and our agency business. The latter included $3 million of intercompany transactional licensing revenue related to Reuters News content being used for other Thomson Reuters products. Finally, Global Print revenues decreased 5% on an organic basis. On a consolidated basis, first quarter organic revenues increased 8% up from 7% throughout 2025 and slightly ahead of our expectation from a quarter ago. At the end of Q1, the percent of our annualized contract value, or ACV from products that are Gen AI-enabled was 30%, up from 28% last quarter. Turning to our profitability. Adjusted EBITDA for the Big 3 segments was $829 million, up 9% from the prior year period with a margin of 46.7%. Reuters adjusted EBITDA was $34 million with a margin of 16.1%. Global Print's adjusted EBITDA was $43 million with a margin of 38.6%. In aggregate, total company adjusted EBITDA was $881 million, a 9% increase versus Q1 2025, reflecting a flattish year-over-year margin of 42.2%. Our Q1 results included $12 million of severance expense related to our initiatives to reimagine how we work. Turning to earnings per share. Adjusted EPS was $1.23, up 10% from $1.12 in the prior year period. Currency had no impact on adjusted EPS in the quarter. Let me now turn to our free cash flow. For the first quarter, our free cash flow was $332 million, up 19% from $277 million in the prior year. EBITDA growth was the primary driver of the year-over-year increase in free cash flow. I will also provide a quick update on several capital allocation items. In the first quarter, we repurchased $262 million of our shares through the NCIB announced in February. Yesterday, we completed the previously announced $605 million return of capital and concurrent share consolidation. Together, these transactions reduced our share count by approximately 9 million shares or 2%. I will conclude with a few thoughts on our outlook. As Steve outlined, we are largely reaffirming our full year 2026 guidance. We continue to expect organic revenue growth of 7.5% to 8% with the Big 3 growing approximately 9.5%. Within the Big 3, we now expect legal professionals to grow by approximately 9% or the upper end of the prior 8% to 9% framework. We see 2026 adjusted EBITDA margins of approximately 40% up 100 basis points versus 2025, and we expect free cash flow of approximately $2.1 billion. We are raising our interest expense outlook by $30 million to a range of $180 million to $190 million to incorporate the $1.2 billion share repurchase and return of capital we announced on February 25. Inclusive of the higher interest, we expect these transactions to be accretive to our per share earnings and cash flow. We continue to expect the tax rate for the full year to be approximately 19%. I would also note, we plan to pay down the $500 million bond that matures later this month with cash and commercial paper borrowings. Turning to the second quarter. We expect organic revenue growth in a range of 7% to 8% and our adjusted EBITDA margin to be approximately 38%. As a reminder, the sequential decline in our margin into Q2 is primarily due to the normal seasonality of our tax, audit and accounting professionals business segment. I would like to thank you all for your trust and engagement over my 6 years as CFO. It has been an honor to lead such a strong team, and I am really excited for and confident in the company's future. Let me now pass to Gary Bischoping. Gary E. Bischoping, Jr.,: Thank you, Mike. I'm truly excited to be joining Thomson Reuters at such a pivotal moment in the company's evolution. Throughout my career, from my years at Dell to my CFO roles at Varian Medical Systems and Finastra and most recently as an operating partner at Hellman & Friedman, have been drawn to organizations at the intersection of innovation, transformational growth and value creation. Thomson Reuters is exactly that. What brought me here is a unique position this company holds, a trusted global content-driven technology company with strong competitive advantages, a clear strategic vision, a dynamic innovation engine and an extraordinary opportunity ahead in the AI era. I look forward to partnering with the leadership team to drive the next chapter of growth and value creation for our customers, our people and our shareholders. Now I'll turn it to Gary Bisbee for the Q&A. Gary Bisbee: Thanks. Margo,we're ready to move ahead with Q&A. Operator: [Operator Instructions] But we'll go to our first question from Drew McReynolds with RBC. Drew McReynolds: And Mike, congrats on everything, real powerhouse and appreciate all the transparency just in your role as CFO. It's been great working with you. The 2 questions that I had. I think first, maybe for you, Steve, on the legal LLM or the proprietary LLM Thomson. Can you just kind of flesh that out a little bit, just obviously getting good results from it, but how it kind of integrates into your product road map and maybe a little bit more granularity around that? And then secondly, as you look at the fiduciary-grade AI segment of the market, at a high level, obviously, in terms of potential TAM expansion within that segment as you roll out new AI capabilities, just comment on some of the moving parts and how you're doing TAM overall. Stephen Hasker: Yes. Thanks, Drew. And thanks for your comments about Mike. I share your thoughts on his transparency. So with regard to the Thomson model. So you may remember we made a very small acquisition a number of years ago, a business called Safe Sign as testing from SafeSend. And Safe Sign is a collection of of scientists working under the direction of Jonathan Schwarz who's a Google DeepMind researcher. And they're split between Cambridge and Harvard and Imperial College. And essentially, what they had done, we thought was some very early exciting work in building a large language model for legal. And Jonathan was attracted to Thomson Reuters because of the access to our data and our experts, and we are attracted to the quality of the team that Jonathan has built. And so we've really poured fuel on that fire. And Jonathan and his team, to their credit, have built a model, which as I mentioned in my prepared remarks, is outperforming the frontier -- the very latest frontier models for certain legal tasks. And I think the punchline here, Drew, is it provides us with optionality. So for example, we may -- we've built a series of AI products that are model-agnostic. So that's CoCounsel and Westlaw Advantage. We may decide to put some or all of the tasks performed by those agents across to the Thomson model, particularly if it continues to develop at the rate that it has been. So that's one option for us. I think one of a number of other options is we've attracted a significant amount of interest from our largest and most sophisticated customers. So law firms and General Counsel's office as to whether they can access models and start to use those models in conjunction with their own information. And so I think the punchline there, Drew, is we're very excited about the work that Jonathan is doing and the early results. And I think towards the back end of this year, we'll start to make some of the calls as to exactly how we're going to exercise the options I described amongst others. In terms of fiduciary-grade AI and the TAM expansion, I think for some time, as you know, we've been talking about the idea that law firms would replace their -- some of their real estate spend with increased technology spend. And then ultimately, as these tools develop and the change management within the firms starts to take hold, that they may be able to automate significant tasks, particularly at the sort of entry levels and particularly some of the research and document preparation human analysis work. And with CoCounsel Next, the next version of CoCounsel Legal, which, as I mentioned, is now in beta and is testing very, very strongly. We're starting to see, I think, that the process whereby the very high stakes work that has to be right that can't hallucinate is to understand real confidence in and around CoCounsel Next as a tool to support that. And with that, we think that the TAM expansion is just starting. I think we're starting to see it with the 11% organic growth in legal in the first quarter. And we're confident that, that is a trend that will continue for a number of years to come. And so you couple that with our product road map and the sort of change management support that we're increasingly providing to law firms into general counsel's offices. And I think our confidence is growing in the sort of organic growth characteristics of that legal professionals business and of the legal portion of our corporate business. Operator: And we'll next go to Stephanie Price with CIBC. Stephanie Price: Two questions from me. Just on the revenue guide. Hoping you could talk a little bit of the cadence of revenue here. With the Q2 outlook, it does look like H1 revenues are kind of tracking a bit ahead of the full year guide. Can you kind of think about what gets you to the top and bottom end of that revenue guide? And then my second question is just on Anthropic. Obviously, views TRI as a key client. Just curious how you think about vendor relationships here that you have with the LLM and how you envision the partnerships evolving over time? Michael Eastwood: Yes. Stephanie, I'll start and then ask Steve and Gary to supplement. I'll provide a few different viewpoints in regards to your question on the 2026 revenue guidance. First, you alluded to, our Q1 at 8% was slightly higher than the guidance that we provided in February at 7%. Two key factors there. Our legal professionals had really strong demand for Westlaw Advantage, which we launched back in August of 2025 at ILTACON. And second, we continue to have strong demand from our CoCounsel legal product. Secondly, within corporates, we had really strong growth from Pagero, thanks to Laura Clayton McDonnell, Ray Grove and the full team there, Gustav. And then secondly, within corporates, we had higher transactional revenue growth in Q1. A portion of that, we had a few million dollars that shifted of transactional revenue from Q2 into Q1. Second part of your question you alluded to in regards to Q2, our revenue guide for [indiscernible] 7% to 8% organic revenue growth for Q2. Obviously, we're pleased with the Q1 start. A couple of factors to consider for Q2. Q2 does not include any forecasted additional content licensing deals in Q2, which means more modest revenue growth for orders. And then secondly, in Q2, we expect Corporates transactional growth to moderate from the Q1 levels that we saw. That takes us into, I think, the third element of your question in regards to our total revenue guide of 7.5% to 8%. We remain very confident in delivering on that 7.5% to 8% for each of the Big 3 legal professionals, as noted in my prepared remarks today, approximately 9% Corporates, our revenue guide for the full year is 9% to 11%. And then for tax, audit and accounting professionals 11% to 13%. So for the Big 3, we remain very confident there. In regards to factors to consider, Stephanie, in regards to that range of 7.5% to 8%. Big 3, once again, is approximately 9.5% is the quarterly net sales and if you look at our quarterly distribution of sales quota, Q1 is traditionally the lowest sales quarter -- sales quota quarter, which was again Q1 2026. Q4 traditionally is our highest sales quota quarter. It will be again in 2026. So we're really pleased with the momentum of the Q1 sales. And as we go into Q2, we're very pleased with the pipeline across the Big 3. So I think that is a key factor, Stephanie, if you think about that 7.5% to 8% range. Certainly, we have transactional revenue, transactional revenue varies by quarter and also by the segment, but the biggest factor for me is the continued momentum in the net sales or bookings throughout the remainder of the year, which we have very strong confidence in. Westlaw Advantage, as we discussed in February, had a strong December, strong Q4, which helped drive that increase in legal professional revenue growth in Q1. We expect that to continue CoCounsel Legal, if you go through each of the segments, overall confidence, Stephanie. I'll pause before we go into the Anthropic question to see if that was helpful. Stephen Hasker: Yes, Stephanie, the -- so as I mentioned, our AI platforms and agents have been built to be model agnostic. And so what we do is sort of constantly evaluate the latest frontier model releases to see which are best suited. And currently, we think for products like Westlaw Advantage and CoCounsel Legal that that the Anthropic Board models are best suited. But as I said, we can and we are model agnostic and we can and have in the past change the models out. So we've been -- Anthropic are an important vendor to us. We were one of the earliest enterprise customers to Anthropic and continue to work closely with them in terms of the co-development and our products. But we have a level of independence there as we go forward. Operator: And next, we'll go to Kevin McVeigh with UBS. Stephen Hasker: Kevin? We might come back to Kevin. Operator: We'll next go to Vince Valentini with TD Cowen. . Vince Valentini: Congrats to Mike as well on well deserved times been great working with you. Stephen, everything seems so good that the overall results seem strong. You obviously are going to call out areas of the business where you're doing well and where there seems to be a lot of them. Is there anything that's worrying you these days? Do you see any customers who have left your platform, either in legal or in tax? And if so, have you done exit interviews to sort of say what are you leaving for anybody going to [ Parvi or Lavoro ] or maybe just a native AI service like Quad and thinking that's good enough. Are you seeing any -- I don't know with the opposite of a green shoot a dark shoot here of anything that worries you that if more customers started doing that, it could be problematic in the future? Or is it just simply nothing and you're still winning across the board? Stephen Hasker: Yes. Yes. Thanks, Vince. It's a great question. So everything worries me. The team here will tell you paranoid a lot of things. So I won't bore you with everything there. But what I would say is a couple of things. As you know, we've been focused on retention since the change program. And I think we're finally starting to see the green shoots and things tick up in terms of our customer retention. And that's across -- across the different segments. But we're seeing a broad-based positive signs in terms of retention. So there is nothing new or worrying in terms of customers moving away from our content-driven technology products across the Big 3. What I would say is I think we're at a phase where there's lots of law firms trialing lots of different tools. So if you speak with a law firm, they'll be running a trial of or they'll have implemented CoCounsel or they implemented 1 or 2 other tools. And I think that's why we're so excited about CoCounsel Next. We think that it's a big step forward, and it represents the combination of content, expertise, data privacy and support in ways that none of our competitors can match. And so we're increasingly confident that as we pull that into full release and scale it up in the U.S. and beyond, that will start to accelerate from some of the competitors that exist. Vince Valentini: Okay. Fair enough. And I just try to clarify something. I'm not sure I understand the 7x and the 5x figures you gave, both Westlaw Advantage, Deep Research and the CoCounsel for tax were not available a year ago. So I assume that's not a year-over-year figure, and it wouldn't be relevant if you measured it from day 1 to now, it's obviously going to increase exponentially, but I assume you wouldn't have given us the number, if there wasn't some relevance to it. So can you just help me unpack... Michael Eastwood: You want to expand the starting of this. . Gary E. Bischoping, Jr.,: Yes. Vince, so on the Westlaw advantage, what Steve mentioned was over the last 6 months. And so that began a few months after launch. And for CoCounsel tax and audit, it was the number of customer conversations in the product has gone up 5x since September. Stephen Hasker: Yes. And let me sort of expand on it, Vince, to explain why we mentioned those stats and why we're excited. I think to an earlier question, we see the TAM expanding from law firms, from general counsels from tax and audit firms for different reasons, but basically spending more on technology and starting to get to levels that are comparable with other professions in terms of the percent of revenues that is spent on technology. We think over the next few years, they're going to start to approximate or at least get within the same ZIP code as some of the other professions. So that's the first sort of TAM expansion. I think the second is we've talked since our last Investor Day about AI being the means with which Thomson Reuters can play a larger well success of our customers. And if you take something like -- okay, if you take something like prior versions of Westlaw, which was the leading sort of point solution for litigation research, and you compare that to Westlaw and Practical Law integrated in CoCounsel. We envisage a world where the first thing a lawyer does when they get into the office in the morning is switch CoCounsel alone. And it's a companion throughout the entire day, whether they're doing litigation research, whether they're drafting, whether they're drafting a motion to compel or a motion to dismiss, whether they're doing an SEC filing, whatever it might be, and are similar with ready to review and ready to advise in the context of our tax accounting business. So we really do believe this is the vehicle for a pretty significant increase in the number of touch points with our customers and the users. And that, I think, is an exciting growth vector that we plan to fully explore in terms of the product road map in the coming couple of years. Operator: We'll next go back to Kevin McVeigh with UBS. Kevin McVeigh: And let me add my congratulations, Mike. You've obviously done an exceptional job helping set you folks on the path today, and I wish you well. I guess, maybe can we talk about the AI-related ACV, you've seen pretty good momentum there. I think the number is 30%, which is up from last quarter. Any sense of where that ultimately settles? And I guess the spirit of my question is, I think there's been so much concern, which we think is overdone. We think there's a real big opportunity beyond the core. So maybe talk about just the ACV growth? And then ultimately, Steve, maybe some of the other addressable markets, whether it's mid- to down market, you can really start to focus on with the technology. Michael Eastwood: Kevin, happy to start there, and thank you for your kind remarks there. I'll just go back in time 5 quarters ago, we introduced the AI-enabled ACV metric. We were at 15% 5 quarters ago. As you said, we're now at 30% as of March 31, 2% increase versus year-end. We expect that to continue to increase each month, each quarter, Kevin. We'll continue to provide that on a quarterly basis. Gary will there. We think that's a really important signal for us. As we've discussed in the past, Westlaw, Westlaw Advantage the high end of Practical Law, CoCounsel Legal, CoCounsel tax and audit or some of the drivers there. As we launch CoCounsel Next later this year, we think that will be a further seamless for this AI-enabled metric. Also, I think we mentioned in prior quarters, some of our products, especially in the ONESOURCE array or a suite of products as they become AI-enabled. At some point in time, I speculate, Kevin, there's going to be more of a step change. Right now, we're seeing 2 to 3 percentage points increase on a quarterly basis. I think that certainly continues to increase over the time horizon. We're very encouraged on our product pipeline, innovation pipeline. And as that continues to go forward, the underlying ACV metric will continue to increase. You specifically asked, Kevin, about maybe a point in time orders to get to. I think it just continues to increase over time on a quarterly basis. Stephen Hasker: Yes. Let me talk about the sort of -- some of the dynamics to your point, Kevin, about mid- to down market opportunities. I'd point to a couple of things. So typically, when we put out a new version of Westlaw, it was the most -- it was the largest firms with the biggest budgets in the most sort of one of a better term sophisticated procurement organizations, whether that was a Chief Knowledge Officer or a CTO that would evaluate the tool and and adopt it first. And then we'd sort of grow the ACV number as it penetrated further and further down market. If you look today at CoCounsel, we get sold litigators and sold transaction attorneys in the Midwest of the U.S. and in Canada and Australia, the U.K. elsewhere. We'll take one look at it and say, okay, sign me up. And Aaron Rademacher, who runs the small law segment, Lucy Mackin, who runs mid law, have done a wonderful job of getting these tools in the hands of customers of all sizes. And that's a fundamentally new dynamic, and I think it's starting to contribute to that growth acceleration that we saw in the first quarter. So that's the first one. I think the second one is at the very most sophisticated end, you have sort of legendary litigators and transaction attorneys who litigator, whose entire sort of profession has been based on sitting in conference rooms with the collection of peers partners and refining their arguments over hours or even days in advance of a trial. Those same attorneys are increasingly using Westlaw Advantage for that process and decreasingly spending the time of their partners. And that has certainly exceeded my expectations in terms of the sophistication of the products that we're putting into the marketplace and the kind of the sophistication of work that we're able to, in a sense, automate and supplement. And then I think in the tax space, we're seeing the same thing. Typically, it was the largest firms with the biggest budgets. But with products like ready to review and ready to advise, these are appealing at least in the early going, and it's still early for those products, these are appealing to the smallest firms that have a collection of clients in one particular geography. So AI, as I said, I think the TAM is growing on the back of these firms spending more money on technology, but it's also growing in terms of the, as you said, the mid- to down market opportunities and the opportunity at the very top end. So we see sort of multiple vectors of growth, as I said, that we're planning to to explore in the coming years. Operator: And next, we'll go to Tim Casey with BMO. Tim Casey: Could you talk a little bit about EBITDA margins going forward? And when you kept the guide stable. Just wondering about the balance between operating leverage and business mix and so forth. And as a follow-on, how should we think about transactional revenues? Are they similar margins to recurring revenues? Or are they lower margin? Michael Eastwood: Yes. Kevin, Tim, I'll start with each of those. First, in regards to EBITDA margin. I'll share a few comments in regards to both Q2 but for the full year. In regards to the Q2 margin, as noted in my prepared remarks, 38% EBITDA margin for Q2, we remain confident in our full year outlook for 100 basis points margin expansion, 2 key drivers there, the underlying operating leverage that we continue to have and achieve. And second is the growing benefits from our efforts to reimagine how we work through AI-driven automation. Andrew Pearce, Liz Bank, Jason Win, Mike Goddard, Kirsty Roth various leaders within our business, continue to drive our productivity initiatives in regards to reimagining how we work. So if you look at the full year, Tim, that's why we're confident in 100 basis points. If we look at just Q2 separately, 3 factors to consider. We do have increased LLM cost. Second, we have some modest M&A dilution in Q2, and as I mentioned in my prepared remarks, the tax, audit and accounting professional business led by Elizabeth Beastrom, has seasonality there. So then that takes us naturally into H2 and why are we confident with higher margins for the second half of 2026. One, we have continued productivity from the AI automation, reimagining how we work that I just mentioned, that is building in Q1, Q2 that continues to build and have an uplift in Q3, Q4. Second, the M&A dilution that occurred both in Q1, Q2 and that begins to lap in Q3, Q4, meaning it goes away. And then the third item I would mention is the LLM cost. We saw LLM costs begin to increase in August of 2025 with the launch of Westlaw Advantage. As we go into Q3, the degree of increase for the LLM cost lessens because it, in essence, begins to lap and begins to normalize there. So hopefully, Tim, that was helpful, in regards to really the evolution of our margin in Q2, and there will be a step up in Q3, Q4, which we have line of sight on, as I mentioned, which gives us confidence to deliver the 100 basis points improvement for the full year. Your second question related to transactional revenue. Transactional revenue profitability does vary areas like professional services will traditionally have a lower margin than some other products, say, some of the AI content licensing revenue that we have in borders would be at the high end. And then if you look at the continuum on the left side, the lowest piece would be things like professional services. On the right side, the high end would be Reuters AI content licensing revenue and then you have a distribution across that. So there is a pretty good wide distribution on the transactional revenue, Tim. Hopefully, that was helpful. Tim Casey: Yes, Mike, just a follow-up. What -- is there not a concern that LLM costs will continue to increase as you lean into your proprietary Thomson model? Michael Eastwood: With the LLM cost, as we have more and more AI offerings, certainly, that increased on a variable basis. But if you look at LLM costs, although they're increasing, they remain a relatively small for all cost for Thomson Reuters. So we have it appropriately factored into our forecast and in our guidance. Steve talked about the Thomson LLM earlier. As we go through the end of '26 into '27, could that be an avenue to help us manage the LLM cost? The answer is yes there, but I'll emphasize the LLM costs overall for total TR is a relatively small cost. But what's happening is why I mentioned it for Q1 and Q2, it began in Q3 of 2024 and is building. Steve, anything to add? Stephen Hasker: No. I think as I said, the optionality around the Thomson model is twofold. One, the quality and accuracy that model, given that it's been specifically created the legal task. And secondly, the fact that we can run it on a per unit basis at a fraction of accessing a frontier model. So those 2 things are attractive, and we're going to keep investing in it as we have been, and update you as we go. . Operator: And next, we'll go to Andrew Steinerman with JPMorgan. Andrew Steinerman: I just wanted to know within the revenue guide, particularly for legal professionals for the year, what's assumed in terms of the government practice as we move through '26. And then also overall for the '26 revenue guide, are you assuming a contribution from CoCounsel Legal Next? Michael Eastwood: First, in regards to government, Andrew, we expect the growth to remain subdued near term. We are optimistic regarding the reacceleration of government revenue led by Pat Eveland. Once we lap the losses and downgrades that occurred last fall, so we'll see as we approach the end of 2026, an uptick in the overall government revenue. So we have assumed when we think about legal professionals overall that the government growth rate remains subdued near term, and then begins to increase towards the end of 2026, and then that will increase as we go into 2027. And can you repeat the second part of your question, Andrew? Andrew Steinerman: Sure. I just was asking in the 2026 revenue guide, are you assuming any revenue contribution from the new product CoCounsel Legal Next? Michael Eastwood: Yes. Certainly, we're very pleased with the progression of CoCounsel Legal. And when it's launched sometime in Q3, we're very optimistic with the sales momentum there. So it will provide some degree of revenue for us in the latter part of 2026. But the larger contribution from CoCounsel Next will happen in 2027, just with the revenue recognition. I would call out Emily Colbert and Rawia Ashraf in regards to the work that they're doing on it, very pleased with beta. I think now we're in the third week of beta for CoCounsel Next. So good momentum and progress there. And we expect really good sales momentum, Q3, Q4, Andrew, but then the rev rec really beginning to take hold as we go into the latter half of '26 and then '27. Operator: And next, we'll go to Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: Wanted off of my best to Mike as well, an outstanding tenure as CFO from my vantage point. All the best, Mike. And just wanted to start on the capital allocation side. Obviously, you announced a sizable buyback and return of capital. Is it -- correct me if I'm wrong, you bought back $262 million worth of shares as of March 31. Am I correct in assuming there haven't been any more utilization of that block since the remaining $340 million or whatever, since April? And then perhaps generally your view on stepping that up. I mean the companies that have seen setoffs in their stock, including some of your comps have announced more sizable buybacks and you certainly have the flexibility to do that. I wanted to get your thoughts on that. Michael Eastwood: Sure, Aravinda, multiple questions there. First, just a reminder, we did complete the $605 million return of capital yesterday with the cash distribution being executed. Your question in regards to the NCIB, we have not done any additional purchases beyond the $262 million that occurred in Q1. We do plan Aravinda to complete the remaining $338 million in the second quarter. That is our intent. In regards to our overall balanced capital allocation approach, certainly, we have the annual dividend increase 5 years in a row now of 10%, still focused on strategic M&A. And that leads to your point in regards to the optionality to consider additional capital returns. It is something that we will continue to discuss with our Board. The next meeting is in June, followed by September. So certainly, with the very strong balance sheet that we have, Aravinda, is something that we will continue to have discussions with our Board with no specific commitments today to announce or to discuss but we agree that it is certainly an option for us to consider additional NCIB share backs. We agree that they are accretive today and we certainly have to balance it with strategic M&A opportunities. Aravinda Galappatthige: And just a quick follow-up, smaller question on Westlaw Advantage Deep Research. I forget, Mike, if you had given any numbers on adoption there, any targets or any sort of recent adoption numbers that you've quoted. I was wondering if you can speak to that. Michael Eastwood: Yes. We have not quoted specific adoption numbers on Westlaw Advantage. 5 quarters ago when we pivoted to the overall GenAI enabled metric. We thought that was more encompassing of our total portfolio. I can't share some additional points on Westlaw Advantage. It is definitely trending faster that being the ACV penetration, trending faster than the prior to Westlaw upgrade cycles that we had there. We're certainly very encouraged with the fast start on sales and very strong customer usage there. I can confirm again, very strong sales for Westlaw Advantage in the first 8 months since it was launched August of 2025. And as I look at the pipeline for Q2, whether it be global Westlaw, midsized firms or small law, very strong pipelines. We would anticipate and forecast that Westlaw Advantage continues to have a strong Q2 and a strong 2026 overall and 2027. Very encouraged with the progress there. I think Steve may have mentioned Mike Dahn earlier, Emily Colbert, who lead Westlaw Advantage, just a hell of a job there. Operator: And next, we'll go to Jason Haas with Wells Fargo. . Jason Haas: I'm curious, was there any negative impact to sales cycles or anything from the conflict in the Middle East in 1Q? . Stephen Hasker: es, go ahead, Mike. . Michael Eastwood: No negative impact, Jason, in regards to the conflict. Stephen Hasker: It certainly -- it's certainly amongst other global events caused an uptick in the Reuters subscription business. And I think put the spotlight on the quality of that coverage, Jason, but as we've described over the years, our business, we're fortunate enough to have a business that is largely immune to the cycles. Jason Haas: Okay. That's great to hear. And then just as a follow-up, on the tax, law and accounting professionals business, can you just share why that was slower at 10% organic growth in 1Q and what drove the deceleration through the year? Michael Eastwood: Sure. I'll take each of those, Jason. First, in regards to tax, law and accounting, 10% organic growth in Q1. It was impacted by revenue recognition timing shift or 2 products that will normalize in H2. In simple words, we had some revenue recognition that shifted from Q1, Q2 into Q3, Q4. If you look at it on a full year basis, it normalizes or harmonizes, that was the biggest factor. If you look at the full year in regards to why we're confident, once again, Elizabeth Beastrom and team drives that, we're confident in delivering the 11% to 13% range that we have previously provided. I would emphasize 3 factors: First, the revenue recognition timing that I just mentioned, that normalizes. Second, Adrian Fognini has a key product line extension with our Dominio business in Brazil. I can confirm that Dominio continued to grow approximately 20% again in Q1 but with the key product line extension and launch for Dominio, that will provide incremental growth in revenue internationally for the TAP portion of business. And then thirdly, Jason, is the newer AI-driven offerings in the U.S. will provide additional lift as we go through this year. But once again, very confident in achieving 11% to 13% for the full year. Operator: Next, we'll go to Doug Arthur with Huber Research. . Douglas Arthur: Yes, Mike, just staying with tax and accounting for a second. The costs in the quarter were up quite a bit. I know you had mentioned that on the fourth quarter call. Was that partly or mostly the SafeSend acquisition impact? Michael Eastwood: We had 3 factors, Doug. First, we had some modest dilution from the Additive acquisition that we closed last fall. Second, we made some additional investments in our product line in Dominio that I just mentioned that has an upcoming launch. And then thirdly, a portion of the $12 million of severance that are referenced for total TR that impacted TAP. So the convergence of those 3 factors was the reason for the lower margin for TAP in Q1. Operator: And next, we'll go to Maher Yaghi with Scotiabank. Maher Yaghi: Great. And congrats, Mike, on great tenure at Thomson. I wanted to ask you, I know you disclosed the ACV on GenAI, but could you provide some KPIs that prove that AI is lifting net revenues and not just increasing usage example like Westlaw Advantage upgrade attachments versus CoCounsel paid expansion into new horizontal segments of the market something that can give us some sense of that AI is adding top line revenue growth, not just on your existing subscription basis that you used to have in the past, but expansion into new segments of the market. Michael Eastwood: Yes. I think, Maher, the most prominent metric that I provide both Steve and I mentioned in our prepared remarks, legal professionals or law firms revenue, excluding government, 11% organic growth in Q1, up from 9% in Q4 really speaks to the penetration that we're getting across every segment of legal professionals and law firms, that's led by Raghu Ramanathan and his team there. We had double-digit organic growth in global large law firms, midsized firms and small firms. And we have the highest growth ever in each of these segments in Q1. I apologize if that's overly simplistic, Maher, but driving that 11% growth in Q1, up 9%. I think it's a pretty tangible metric for us to just continue to monitor. And we have confidence as we go into Q2 and the full year in regards to that 11%. Maher Yaghi: Okay. Great. And just one follow-up question on the margin expansion in the second half. Can you give us maybe some -- like a bridge that helps us understand where the improvement in the margins year-on-year will be coming from in the second half? Is it all from do we imagine how we work business productivity improvement that you have? Or -- some of it can also come from AI revenue growth? Michael Eastwood: Yes. Certainly, as we continue to expand our overall revenue growth, that will help us in margin, just given the significant operating leverage that we have. Secondly, I'll just reemphasize the work that we're doing and reimagine how we work, that will accelerate as we go into Q3, Q4. So that continued operating leverage, higher revenues, the benefits from reimagining how we work. And then also just sorry to be repeated, if I mentioned earlier, the M&A dilution laps or decreased in the second half of 2026. That also helps us. And then also LLM calls since we had them last year also helps when you do it year-over-year. And if you look at a bridge on the full year margin expansion. . Operator: Next, we'll go to Toni Kaplan with Morgan Stanley. Toni Kaplan: And I'll add my congrats to Mike. It's been really terrific working with you over the years. So all the best. Steve, wanted to go back to your comment that many customers are utilizing multiple AI and technology tools, which is something we've seen as well. And I see the advantage of having your AI product utilizing the Westlaw Legal data and research. And so I guess my main question is, if you have the strong AI product, which I think you do. And I guess, why isn't it more compelling that -- and you are seeing success, so I don't want to take that away. But I guess it seems like a natural that someone would want to choose strong AI product with the really strong legal research. And so I just wanted to understand why this hasn't taken off across the top 100 law firms, for example. Stephen Hasker: Yes. Toni, I think as we recently published, we've got to 1 million CoCounsel users across various instances of the product. So we're proud of that, we're sort of happy with this, if you like, the starting point as we sit here today. I think, though, back to Vince's questions to what worries me. I think if I were giving this a hard grade I would say that within the legal realm, it has taken us too long to really unleash the sort of power, if you like, in the authority of our content, Westlaw, Practical Law and so forth and our experts. And that's why we're excited about CoCounsel Legal. We think it's a big step forward. It's fully agentic. It's a deep research built product. It's been built by, in large part, the same engineers and data scientists that did Westlaw Advantage. And I think for the first time, what the market is going to see is an agentic legal assistant that is grounded in that authoritative content. The prior versions in the legal realm were built on the case text methodology without full access to our content. And so you could critique us for taking a while to do that, but we wanted to get it right, and we think we have. And certainly, the early beta testing suggests that we have. So we'll keep refining it. We'll keep learning and investing and scaling it. But Toni, I think that explains why you've got a pretty sort of fragmented market with multiple tools being measured and why we're increasingly confident going forward. Operator: Next, we'll go to Curtis Nagle with Bank of America. Curtis Nagle: Great. Maybe just staying on that topic, Steve, just elaborate a little bit more on the feedback you're hearing from clients on next-gen version of CoCounsel underlying demand. And I guess just how material of an upgrade cycle do you think we could see? And to what degree that is factored in guidance, so don't sound like me at this point. Stephen Hasker: Yes. I mean, Curtis, we're -- I think we've got to sort of look at exactly where the marketplace is at. And in my view, and this is a view that's shared by many of the managing partners that I interact with on a daily basis. The tools, including ours, and we think especially ours now that we've got CoCounsel Next in the marketplace, are ahead of the change management within the firms, right? It's one thing to sort of give a lawyer access to one of these tools and have him or her save a few hours in place many hours a day. It's another thing to rewrite the basis on which a young attorney produces a work product, run that up the chain, gets feedback, refines it and eventually it goes from a partner to a client for review and discussion, that process, I think, is just beginning. And that's why from a revenue standpoint, we -- as I said, we're proud of the 1 million users. I think we're off to a good start, CoCounsel, the next version of Legal is a really exciting step forward for the entire industry in our view. But it's going to take the change management to sort of mirror that for this sort of virtuous circle to really kick in. And as that happens, we are confident in the revenue and the growth prospects and we like the margin profile, but it's -- I think it's still fairly early days. Operator: And next, we'll go to George Tong with Goldman Sachs. Keen Fai Tong: I'll add my congrats, Mike, on your retirement. In terms of the legal ex government organic growth acceleration from 9% to 11%, can you discuss how much of that acceleration came from volumes versus sell versus pricing? Michael Eastwood: George, I don't have at my fingertips the breakdown between those 3 components like reiterate is that we had really strong performance across all of our segments. As I've mentioned before in prior releases of new versions of Westlaw, we would see first the traction in the large law firms and then it would begin to evolve in the mid and small with Westlaw Advantage, we're seeing consistent track across large law, mid low and small wall. And we're seeing the retention rates continue to hold there, George. I think that given seeing strong performance across -- and I should also mention John Shotwell in Europe across all geographies, across all segments of legal professionals and law firms we're seeing really strong adoption of Westlaw Advantage and CoCounsel Legal, and that's what's driving that 11% for legal, excluding government. Keen Fai Tong: Got it. That's helpful. And as a follow-up, can you share how legal government performed in the quarter? Michael Eastwood: Legal had a 1% growth in Q1. That was down from Q4. As I mentioned in the February earnings call, we had the cancellations and downgrades in government in the second half of 2025. So we also indicated in February that Q1 would have a lower growth rate for government in Q1 given that rev rec impact. And as a follow-up to one of the questions I received earlier as we go into Q3 and Q4, and we began to lap those cancellations and downgrades, we're very confident that Pat Eveland team will drive accelerated organic growth for government and the latter part of '26 and then into '27. . Operator: And at this time, I'd like to turn the call back over to Gary Bisbee. Please go ahead. Gary Bisbee: Yes. Thanks, everybody. We're around if you want to follow up. Have a good day. Thank you. Operator: Okay. Thank you. And this does conclude today's call. We thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Cipher Digital's business update for the first quarter of 2026. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Drew Armstrong. Please go ahead. Thomas Armstrong: Good morning, and thank you for joining us on this conference call to address Cipher Digital's business update for the first quarter of 2026. Joining me on the call today are Tyler Page, Chief Executive Officer; and Greg Mumford, Chief Financial Officer. Please note that our press release and presentation can be found on the Investor Relations section of the company's website where this conference call will also be simultaneously webcast. Please also note that this conference call is the property of Cipher Digital, and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contain forward-looking statements. These statements include, but are not limited to, Cipher's financial outlook, business plans and objectives, and other future events and developments, including statements about the market potential of our business operations, potential competition, and our goals and strategies. Forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures, and you are encouraged to examine those reconciliations, which are filed at the end of our earnings release issued earlier this morning. I will now turn the call over to our CEO, Tyler Page. Tyler? Rodney Page: Thanks, Drew. Good morning, everyone, and thank you for joining us today. I'm Tyler Page, CEO of Cipher Digital, and I'm pleased to welcome you to our first quarter 2026 business update call. 2026 is the year of execution for Cipher, and we kicked the year off with a strong first quarter. We signed our third data center campus lease with an investment-grade hyperscale tenant, completed a $2 billion high-yield bond offering for Black Pearl, fully funding the project through completion, closed a $200 million revolving credit facility from a syndicate of leading global financial institutions and made substantial progress on the construction of our Barber Lake and Black Pearl HPC data centers. Execution, that is what defines this quarter and what will continue to define the rest of this year. When we rebranded to Cipher Digital, we did so with a declaration, "We are Built for Hyperscale." That phrase carries real meaning for us, and I want to spend a moment on what it means in the context of this quarter's results. Built for Hyperscale is not a marketing tagline. It is a description of the foundation of this company and the best-in-class team we have built, in-house power origination, engineering, construction management, and operations, all purpose-built to deliver bleeding-edge data center infrastructure at the speed and precision hyperscalers require. Each quarter, we add another point of proof. Our first lease at Barber Lake was proof of concept. Our second at Black Pearl was the proof of repeatability. Our third lease this quarter is proof that Cipher Digital itself is a leading development platform Built for Hyperscale. As we move through 2026 with 2 data centers under construction, a third preparing for mobilization and an extensive pipeline behind it, our differentiation will become increasingly visible to the market. Slide 4 provides a snapshot of Cipher Digital as it stands today. We are a vertically integrated developer and operator of industrial scale data centers built to serve the world's leading companies. Our in-house capabilities support the delivery of power dense, large-scale facilities to exact hyperscalers specifications at speed. As of today, we have 907 megawatts of operating and contracted capacity, anchored by 3 signed data center campus leases with world-class hyperscalers. That portfolio carries approximately $11.4 billion in contracted revenue across base lease terms of 10 to 15 years, providing Cipher with durable, high-quality, and long-term cash flows. Beyond that, we have an approximately 3.3 gigawatt pipeline of grid capacity, providing an extensive runway for future growth. The quality and scale of our pipeline is a competitive advantage that is difficult to replicate, representing years of disciplined power origination work. We are no longer an aspirational HPC developer. We are a company with signed contracts, billions of capital raised, and multiple data center construction projects progressing toward completion. Zooming out, Slide 5 shows the full geographic reach and scale of our development platform. Our portfolio consists of approximately 4.2 gigawatts of grid power across operating, contracted, and pipeline sites. Roughly 78% of that capacity represents pipeline HPC opportunities with the remaining balance split between our existing contracted capacity, our newly contracted capacity from this quarter's third lease, and our operating Bitcoin mining site at Odessa. The geographic concentration in West Texas is intentional. For years, the conventional wisdom in the traditional data center industry was that hyperscalers would not venture outside major metropolitan areas and that our sites were, as I described once before, at the edge of the known world. We disagreed and the market has proven us correct. West Texas has become one of the most sought-after regions in the country for large-scale AI infrastructure development, and Cipher is well positioned to execute on this unique opportunity. The addition of our Ohio site at Ulysses reflects our intentional geographic diversification. Major hyperscalers require data center capacity across multiple markets and power grids. Our ability to offer sites in both ERCOT and PJM strengthens our value proposition as a development partner for tenants with multi-market capacity requirements. This portfolio, the scale of it, the quality of the sites, and the geographic reach is the product of years of on-the-ground sourcing work. It cannot be assembled overnight, and it will continue to be a source of competitive advantage as demand for large-scale data center capacity continues to intensify. Let's now turn to the future trajectory of Cipher's contracted cash flow profile. Our 3 executed data center campus leases are expected to generate approximately $787 million of average annualized net operating income from October 2026 to September 2036. In 2035, we expect to have approximately $892 million of contracted net operating income. The addition of our third lease this quarter further strengthens this profile of contracted cash flows and adds meaningful net operating income to our projections. As a reminder, this is contracted net operating income, not a projection based on assumed future leases, not a model dependent on speculative outcomes. These are signed long-term agreements with investment-grade counterparties that create visible, stable contractual growth over the next decade. This slide shows the fundamental change in the financial character of this company. We are a business defined by stable long-term cash flows. The leases are signed, the financing is in place, and the construction is underway. The cash flows on this chart are not aspirational. They are contracted. Let me now walk through the specific highlights that defined our first quarter. On the corporate side, we accomplished 3 significant execution milestones that speak directly to the strength and maturation of this platform. First, we signed our third data center campus lease, a 15-year initial term agreement with an investment-grade hyperscale tenant. This is now 3 consecutive long-term leases with world-class counterparties in the span of approximately 8 months. We also completed a successful bond offering for $2 billion at a 6.125% coupon, fully funding the build-out of Black Pearl through delivery. The offering was significantly oversubscribed, and it included a reimbursement of approximately $233 million to Cipher for our prior equity contributions to the site. And finally, we closed our inaugural $200 million revolving credit facility, supported by a syndicate of leading global financial institutions. This was a landmark moment for Cipher. For the first time in our history, we now have a corporate level committed credit facility, a reflection of the maturation of our platform, the quality of our contracts, and the confidence of the world's strongest institutional lenders in Cipher. On the physical execution side, our results are equally impressive. At Barber Lake, we had over 1,100 daily active workers on site in April with more than 1,400 expected in May. More importantly, we have exceeded 1 million cumulative labor hours on site with 0 lost time incidents. That is an extraordinary safety record for a project of this scale and complexity, and it reflects the culture of operational discipline we have built within our construction team. At Black Pearl, we completed the demolition of the existing Bitcoin mining infrastructure for the Phase I retrofit within 1 month of kickoff. Phase II broke ground just 3 months after design kickoff. With both sites tracking, we have entered the second quarter with significant momentum. Now let's take a more detailed look at our current development portfolio. At Barber Lake, construction is well advanced, and the focus is entirely on delivery. I am pleased to report that Barber Lake is tracking well. In April, the building officially topped out, marking the completion of the primary structural steel. From the first column to the last structural beam, it took 127 days to stand up a roughly 800,000 square foot structure. This achievement is a testament to the quality of our construction management team and the depth of our supply chain relationships. Mechanical, electrical, and networking work fronts are now progressing in parallel, and the project continues to track toward meeting all contractual early access and substantial completion milestone dates. From a procurement standpoint, we have secured approximately 99% of the equipment required to complete this project. Equipment delivery schedules are aligned to support our construction completion targets, which means the risk of supply chain disruption to our timeline is minimal. Our design is 100% complete. All design milestones have been achieved on schedule, which eliminates another meaningful source of construction risk at this stage of the project. The next slide gives investors a visual representation of what has been accomplished at this site, and I encourage you to take a moment to look at it closely. Slide 10 shows an aerial photograph of the Barber Lake campus taken last week. Look at this image carefully because I think it captures something that numbers and bullet points cannot fully convey. Eight months ago, this was an open field in West Texas. Today, it is one of the largest data center structures under active construction in the United States. The scale of what this photograph shows is immense, a facility built to deliver 207 megawatts of critical IT load for some of the world's most sophisticated technology companies rising from the ground with a speed and precision that we believe is unmatched in this industry. When I think about how we got here, the years of site sourcing, lease negotiations, the financing work, the design and engineering, the procurement, the construction management, and I look at what stands on this site today, I am genuinely proud of every member of this team. This is what Built for Hyperscale looks like in practice. We look forward to welcoming our tenants to the campus later this year. Similar to Barber Lake, Black Pearl is progressing with the same level of discipline and velocity. The decommissioning of Bitcoin mining infrastructure is complete. The site has fully transitioned to data center development mode. Phase I of the retrofit is progressing well with mechanical, electrical, and networking work fronts in full swing. Crews are actively working to install the cooling and electrical infrastructure to enable the legacy building to accommodate the new HPC equipment. On the procurement front, approximately 93% of Phase I equipment is secured and delivery schedules are aligned to support our completion targets. On Phase II, site layout and earthwork began in April, just 3 months after design kickoff. We have also secured approximately 80% of Phase 2 equipment and delivery schedules are aligned to support our completion targets. The project is tracking to meet contractual early access and rack ready dates across both phases, and we remain confident in our ability to deliver this campus on schedule. Slide 12 provides a first look at construction progress at our Stingray site in Andrews County, Texas. As a reminder, this site has 100 megawatts of gross capacity fully approved with a target energization date in the fourth quarter of 2026. Development activity at Stingray began during the first quarter. Earthwork and pad preparation are currently in progress. Electrical work for the substation has commenced, consistent with our Q4 2026 energization timeline. We look forward to providing further updates on this site as construction mobilization progresses. Odessa continues to mine Bitcoin and the site performed well in the first quarter. As a reminder, Odessa's fixed price power purchase agreement at approximately $0.028 per kilowatt hour continues to position Cipher among the lowest cost Bitcoin producers in the industry. Today, we are operating 207 megawatts of capacity, generating approximately 11.6 exahash per second of total hash rate at a fleet efficiency of approximately 17.2 joules per terahash. In the first quarter, we mined approximately 346 Bitcoin at Odessa. Our mining operations remain fully self-funded. We do not anticipate additional capital investment in this part of the business as we continue prioritizing our platform towards HPC. Odessa continues to generate healthy cash flow as our data center leases ramp towards revenue commencement later this year. Let's now shift to an update on our development pipeline. Turning to Slide 15. I want to walk through the specific sites in our near-term pipeline and give investors a sense of where each stands today. Reveille and Ulysses represent our most advanced precontracting opportunities and are both fully interconnection approved. Reveille, located in Cotulla, Texas, has received ERCOT interconnection approval for 70 gross megawatts, and substation development has been initiated. We are in active and advanced discussions with multiple potential tenants for an HPC hosting lease at this site. Given Reveille's capacity falls below the threshold that would trigger ERCOT's batch process and given that its interconnection is already approved, the site's energization timeline of Q3 2027 is not subject to batch process uncertainty. The load is firm, the approvals are in hand, and we are actively converting this site into a contracted asset. Ulysses, our 200-megawatt site in Southeastern Ohio, has all necessary approvals to participate in the PJM market, and we are similarly in advanced discussions with prospective tenants for an HPC hosting lease here. This site is Cipher's first in PJM, and it is well suited for HPC data centers. We are targeting energization in Q4 2027 and remain highly confident in that timeline. Looking beyond these near-term sites, we have McLennan, Mikeska and Colchis. Each is advancing through the ERCOT interconnection process and tracking well. We continue to push all required workflows forward, fund all deposits on schedule, and ensure these energization timelines are preserved. All 3 sites are expected to energize in 2028, and all 3 sites are expected to be in batch 0 of the new ERCOT batch process. We have strong conviction in the quality of our pipeline positioning and continue to engage proactively with prospective tenants at each of these sites. Slide 16 brings the entire portfolio together in one view and illustrates the depth of the platform we have built. On the left, our current operating and contracted capacity, 207 megawatts of Bitcoin mining at Odessa, 300 megawatts contracted at Barber Lake with FluidStack and Google, 300 megawatts contracted at Black Pearl with Amazon Web Services, and 100 megawatts contracted under our newly signed third lease. Together, that totals 907 megawatts of operating and contracted gross capacity today. On the right, the pipeline capacity timeline tells the story of what comes next. In the 2027 window, Reveille and Ulysses together represent 270 megawatts of near-term pipeline capacity. In 2028 to 2029, Mikeska, McLennan, Milsing, and Colchis add up to 2.5 gigawatts of additional pipeline capacity. And looking to 2030 and beyond, an additional 500 megawatts at Barber Lake represents a further upsized opportunity at an already contracted and operating site. Altogether, this represents up to 4.2 gigawatts of total portfolio capacity from the grid. Our conviction has only strengthened over the past quarter. We believe Cipher is among the best positioned companies in the world to continue converting this pipeline into contracted long-term cash flows, and we look forward to demonstrating that over the quarters ahead. I'll now turn the call over to our CFO, Greg Mumford, who will walk through our financing activities, capital structure, and financial results for the first quarter. Greg? Greg Mumford: Thanks, Tyler, and good morning, everyone. Over the past year, Cipher has taken significant steps to reshape the financial profile of the company, transitioning from a start-up Bitcoin miner to an institutionally backed digital infrastructure platform with long-term contracted cash flows and a purpose-built capital structure. In the first quarter, we continued to strengthen that financial foundation in ways that meaningfully derisk execution and improve forward visibility. We entered 2026 focused on strategic capital allocation, isolating construction risk via nonrecourse financing, and improving our corporate liquidity. In Q1, we successfully completed 2 additional financings, the $2 billion Black Pearl project level financing that fully fund our second data center campus through completion and a $200 million revolving credit facility. This revolver marks the first of its kind amongst our peer group, securing multi-year committed liquidity from leading financial institutions, including Morgan Stanley, Goldman Sachs, JPMorgan, Wells Fargo, Santander, and SMBC. Each of these transactions highlights the continued maturation of Cipher's platform. The Black Pearl financing represents our third successful project-level bond issuance, demonstrating repeat access to the capital markets and a growing diversified institutional investor base following our story. We achieved highly competitive pricing while maintaining structural flexibility through a callable format, which we believe positions us to actively manage and optimize our capital structure over time. The revolving credit facility supported by a broad syndicate of leading global banks further underscores the increasing confidence of institutional lenders in Cipher as a scaled and creditworthy counterparty and provides the liquidity foundation to support our continued growth. Turning to Slide 18. I want to walk investors through our full capital structure and liquidity position as at March 31, 2026. At the corporate level, we have a 4-year committed revolver for $200 million and 2 unsecured convertible notes. Revolving facility bears interest at SOFR plus 125 to 175 basis points, subject to the company's total debt-to-market capitalization ratio. This facility was undrawn at quarter end, but provides us the flexibility to support working capital, issue LCs, and fund growth initiatives. At the project level, we continue to pursue nonrecourse financing through construction, reflecting our disciplined approach to capital allocation. Cipher Compute LLC, the entity that holds the Barber Lake lease, carries approximately $1.7 billion of 7.125 senior secured notes due November 2030. These notes amortize aligning debt service with the cash flows generated by the lease. Black Pearl Compute LLC carries $2 billion of 6.125 senior secured notes due February 2031. Both bonds are currently trading at a premium to par, reflecting investor confidence in our ability to execute on both projects. In aggregate, total principal outstanding on our debt was approximately $5.2 billion. Unrestricted cash and cash equivalents stand at $715 million, providing substantial corporate liquidity in addition to Bitcoin totaling $76 million and our undrawn revolver availability. Restricted cash of approximately $3.5 billion includes approximately $1.8 billion at Cipher Compute or approximately $1.5 billion net of DSRA and interest-bearing construction accounts and approximately $1.8 billion at Black Pearl Compute or approximately $1.5 billion net of DSRA and interest-earning construction accounts. Both projects remain sufficiently capitalized through construction based on our current estimate to complete. This capital structure is purpose-built and our liquidity position is sufficient to fund our near-term development pipeline without requiring additional equity, providing clear visibility into execution. Importantly, the majority of our debt is nonrecourse and tied to contracted assets, isolating risk through construction and aligning debt with cash flow. Let's now turn to review of our financial results for the first quarter of 2026. Revenue for the first quarter was $35 million, down from $60 million in Q4, reflecting the planned wind down of mining operations at Black Pearl and our transition toward contracted data center revenue. Mining at Black Pearl was fully decommissioned in February. For the quarter, we reported a GAAP net loss of $114 million or $0.28 per diluted share compared to a GAAP net loss of $734 million or $1.85 per diluted share last quarter. The Q1 loss was primarily driven by a decrease in revenue from the planned wind down of mining operations at Black Pearl, the decrease in the fair value of our PPA, and the increase in interest expense from our new debt facilities. The Q4 loss was primarily driven by noncash and onetime items, including the embedded derivative revaluation on the 2031 convertible notes and mining asset write-downs. Cost of revenue for the first quarter was $18 million, down from $24 million in Q4, reflecting the transition to Odessa as our sole operating site. Compensation and benefits were $35 million in the quarter, in line with last quarter. Year-over-year compensation increased from $14 million, primarily reflecting headcount growth and equity-based compensation associated with scaling the platform. We increased headcount from 50 people in Q4 to 70 in Q1, and we're starting to normalize and slow hiring around 85 full-time employees. General and administrative expenses were $12 million, up from $10 million last quarter, primarily reflecting increased legal and professional fees associated with our lease negotiations and financing transactions. Depreciation and amortization decreased to $19 million from $52 million last quarter, primarily due to mining asset sales and decommissioning associated with the Black Pearl retrofit. The change in fair value of our power purchase agreement was a $28 million decrease this quarter compared to a $12 million decrease last quarter. As we've consistently noted, this is a noncash item. The value of the Luminant contract lies in its long-term fixed price power, supporting industry-leading power costs of approximately $0.028 per kilowatt hour, among the lowest in the industry. Moving below to the operating line. We generated $32 million of interest income in the quarter, up from $19 million last quarter, reflecting higher average cash balances following the Black Pearl financing. Interest expense was $59 million, up from $33 million last quarter, reflecting our project level financings. The change in fair value of our warrant liability was $44 million noncash gain this quarter compared to a $13 million loss last quarter, reflecting the changes in the value of the Google warrants associated with the Barber Lake lease. Turning to our balance sheet as of March 31, 2026. Total assets grew to $6.4 billion at quarter end, up from $4.3 billion last quarter, primarily driven by the Black Pearl project financing reflected in growth in both property and equipment as well as restricted cash. Cash and cash equivalents were $715 million. Restricted cash ring-fenced at the project entities and dedicated to construction spending totaled approximately $3.5 billion across current and noncurrent portions, including proceeds from the Black Pearl financing. Property and equipment net of depreciation grew to $1.3 billion from $633 million at year-end as a result of ongoing construction across multiple projects. On the liability side, borrowings totaled approximately $4.7 billion. Accounts payable grew to $198 million at quarter end from $40 million at year-end, consistent with the ramp-up of construction activity and normal timing of vendor payments. Balance sheet reflects the company in an active investment phase, deploying capital across multiple large-scale construction projects with associated contracted revenues ramping as assets come online. We are executing in line with plan, and we remain well positioned from a liquidity and capital allocation perspective to execute on our commitments and scale the platform. Before we open the call to questions, I want to take a moment to reflect on the full picture of where Cipher Digital stands as we close out the first quarter of 2026. We have executed 3 long-term data center campus leases, generating approximately $11.4 billion of contracted revenue over the base lease terms. We have 2 data centers under active construction, both tracking well. We have a third site where we will begin mobilizing construction in Q2. We have a strong balance sheet and have demonstrated a repeatable ability to finance construction projects competitively. We have retained flexibility in our financings and our capital structure will continue to evolve over time. Finally, we have approximately 3.3 gigawatts of additional capacity in our pipeline that positions us for continued growth well into the back half of this decade. We remain firmly committed to disciplined execution, capital efficiency, and delivering long-term value to our shareholders. The next 12 months will be defined by construction milestones, revenue commencement, and the continued conversion of our pipeline into contracted assets. We look forward to updating you on each of those fronts throughout the year. Thank you for your continued support. Tyler and I would be pleased to take your questions. Operator: [Operator Instructions] Our first question comes from Paul Golding with Macquarie. Paul Golding: Congrats on all the progress on the sites. I just wanted to ask, first off, around pricing. It seems just doing the back of the envelope math that the incremental Stingray lease, the NOI seems to be per megawatt at least, an improvement on the other 2 on average. Just wanted to ask as you're engaged in these incremental conversations with prospective tenants, how pricing is trending? Is it continuing to trend in a positive direction relative to your existing deals? And then as a follow-up, I just wanted to ask, in general, given the strength of these leases and lease negotiations, how you're thinking about compute? Is that sort of a business that you're considering at all? Has your thinking changed there? Or is the leasing environment for colo just so strong that you're sticking with that for now? Rodney Page: Thanks, Paul. Let's start with pricing. So I think it's hard to give a one-size-fits-all answer for leasing because it's a dynamic question that's really linked to speed to market, speed to availability. I think when you've got a site that is already energized or energized in the very near future, there's no question it trades at a premium as far as what it can get for a lease. I think as you continue to demonstrate the ability to build things at an accelerated pace like we are capable of doing, that also makes those timelines more realistic and gives you more pricing power. So yes, fair to say we continue to see premium pricing in our negotiations. But that's also because we have had sites that are available in the near term. So we still have 2 sites that we are currently marketing in Reveille and Ulysses that I would consider near-term availability that have a fair amount of interest. And I expect our pricing power to maintain there. Based on the conversations we're having, I do not see lease rates going down for premium sites with good timelines. And then I guess related to that, on the compute question, it's interesting. I think we have said historically, we -- if you are getting those premium lease rates for colocation, it's just a better business than owning the GPUs or TPUs or whatever chips you're running. I'd say we are looking at an interesting test case at Reveille. Given that Reveille is still a big data center at 70 megawatts, but maybe below the targets of the kind of massive colocation tenants, we are looking at a variety of business models at Reveille, including ones where we may participate in the ownership of the computers. There are some interesting trends going on right now with credit support for Neoclouds. There's a variety of larger, more creditworthy supporters of Neoclouds that will provide credit support to try to ensure their success. And so at Reveille, we are looking at, given its scale, it is an attractive site for Neoclouds. Those Neoclouds can now get investment-grade support or other forms, whether it's a guarantee or in the form of prepayment, et cetera. And so we are considering potential structures where we would also participate in owning and operating the compute at that site. I think on a risk-adjusted basis, the returns there could be very favorable because we could get some support participating in that side of the business. And at that scale, the returns can become pretty interesting. So I think that's our test kitchen site. We have had inquiries also at Ulysses on that. I think our appetite may be more the scale of Reveille if we were going to participate in the compute side of the business. But in general, we favor -- when you can get very elevated lease rates, we favor the colocation business. Paul Golding: That's really interesting. Do you see that decision being more prospective counterparty led or internal business model driven? Rodney Page: I mean it's a little bit both. If you're speaking to Neocloud, in general, they're trying to leverage the credit support that they can get because these are expensive data centers as they try to ramp up. And they're not the really big Neoclouds that have access to broader capital markets that are kind of in the on-deck circle to become large or go public in the future or whatever. They may live in the ecosystem of an NVIDIA or an AMD or someone like that. And our understanding from those conversations is they have plenty of compute offtake ready to go. Like, they've got their 5-year contracts for compute offtake lined up if they can find a good site within a good time window. So as far as it goes for our discussions, it's kind of -- it's a whole mix of factors as we look at it because we're talking about things like what kind of credit support makes a smaller Neocloud attractive as a tenant. Obviously, full backstop from an investment-grade supporter is kind of a gold standard. Prepayment of fees, if you stretch it out, we've seen and heard anecdotally some larger prepayments coming through, which significantly derisked the project. And then it really comes down to math. I mean when you look at enough prepayment or a strong enough credit support, that can influence our willingness to participate in the compute side. I mean, I think high level -- that business has not been as attractive because while you can get a compute offtake agreement that will pay back the computers in 5 years, typically, there is a debt overhang on the data center after 5 years. And so you're taking this either extended life risk on how long is the useful life of today's machines. Obviously, those numbers have been really favorable recently. But as we know from our past lives with ASICs, that doesn't necessarily hold consistent forever. And then the other question is sort of how much debt overhang are you comfortable with if in 5 years, you're done with your compute tenant and you have a not fully paid for data center, which is why I often say like the risk-adjusted returns are just extremely compelling in colo, when you get higher lease rates and longer contracts, you have a fully paid for asset at really attractive returns. And then frankly, it ties into our broader thesis about places like West Texas, having a ton of terminal value in those sites that the market does not fully appreciate yet. So it's a complex mix. I guess, it's a long-winded way of saying we want to get the best risk-adjusted returns for shareholders. And so as credit support developments have evolved in that space, it has become more interesting for us to potentially participate in owning the computers at a site like Reveille. Operator: Our next question comes from Joseph Vafi with Canaccord Genuity. Joseph Vafi: Congrats on all the great progress, really great to see. Maybe, Tyler, any update on the Odessa PPA? Obviously, the market is really strong, and I'm sure that this is a top-of-mind issue. And then I have a quick follow-up. Rodney Page: I mean, look, I'll tell you this, Joe, it's lovely to have the cheapest cost of electricity in the Bitcoin mining space because we make nice margins there every day as we mine Bitcoin, and that's locked in at a really low rate for the next 14 months or so. We do have a lot of interest in Odessa. We have a hyperscaler interest in that site. I think I've mentioned before, we would be interested in potentially evolving that site much like we did Black Pearl from a Bitcoin mining site to an HPC campus. That will involve several counterparties because, of course, we have to renegotiate that PPA, and we'll be working with the counterparty there. So the PPA continues to be one of our very strong points that we negotiated a long time ago. And look, it certainly gives us a very strong bargaining chip as we think about what the future of that site may be. By the way, the future of that site could be that we decide to mine Bitcoin there for the next 14 months and make lots of money in Bitcoin mining there. We don't have to be in a rush because we're very favorably situated because of the low price. Joseph Vafi: Sure. That make sense. And then just sticking to the behind-the-meter theme. I know, Tyler, in previous calls, you've mentioned exploring behind-the-meter options. I mean, clearly, you got a big power portfolio, but an update on your strategy and what you're thinking on behind-the-meter opportunities. Rodney Page: Yes. So this has been a spot where we've had some of our best people spending most of their time in recent months. I think the potential for behind-the-meter on-site generation is extraordinary for us and our sites given where they are. We have access to a tremendous amount of cheap natural gas at our sites in West Texas. Pulling together all the pieces that need to be pulled together for a successful behind-the-meter generation data center is challenging. You've got to sort of solve some of the engineering challenges given the nature of the load profile for an HPC data center. Bringing your own generation will not have the same characteristics and consistency as grid-connected power. So you've got to solve some engineering challenges. You've got to solve sort of the gas infrastructure piece. You typically are going to have IPPs involved where you're going to have to pick a source of generation, potentially get air permits, finance the whole thing, guarantee power purchase agreements for billions of dollars. And so, it's complicated. I think the good news is we are in the kitchen with the best shifts, and we have all the ingredients to make a Michelin 3-star meal. It's just pulling all those pieces together has pretty much not been done. I mean, Elon has done it, and I'll put him in his own special category of having sort of dictatorial powers over the entire ecosystem, whereas the rest of us mere mortals have to deal with real-world humans from these different disparate parts of the ecosystem. And so it is an engineering challenge, a financing challenge, an emotional intelligence challenge, et cetera. I think we are extraordinarily well positioned for that opportunity. And it may be the most upside convexity potential in our stock, frankly, because, again, theoretically, there is gas that could power gigawatts of generation that we're not even talking about in our presentations because it's just early. But the potential is exciting enough and the tenants are interested enough that we're spending a lot of time on it. So stay tuned. Operator: Our next question comes from Brian Dobson with Clear Street. Brian Dobson: So congratulations on the new contract. Can you give us any color, are there any potential options to expand on the initial 100 megawatts? Rodney Page: So it's just 100 to start. But as I mentioned, we've got -- all the sites certainly are located above an entire ocean of natural gas. And we own lots of land, and we're in favorable locations. So stay tuned to see if there's a continuing behind-the-meter story there. But as per the contract, no, it covers the 100 megawatts. Brian Dobson: Okay. Excellent. And then as you're looking out over the next few years, do you see a point where you could exit Bitcoin mining entirely? And what do you think the business looks like, call it, by 2030? You spent some time talking about the long-term goals of Cipher. Rodney Page: Yes. I mean -- so look, it's a great question that keeps me up at night because I'm so excited about the potential. So first of all, I see Bitcoin winding down. As I mentioned, we do not plan to deploy further CapEx into Bitcoin mining. We have an operational site that could run until the end of July 2027 with really favorable economics. So we're not in a rush to turn it off. It brings in positive cash flow every month, several million dollars. So we're happy to have that. That said, that is kind of an outside date for that, either we may repurpose that site or alternatively have it run down in the next 14 months and say thank you. Probably, we are also liquidated of our Bitcoin position, I would imagine, this year. We're not in any rush. We continue to sort of manage the inventory down. We have not been aggressive sellers at low levels because, frankly, we're reasonably bullish on Bitcoin here. We collected a fair amount of premium by selling some calls above the market price of Bitcoin at different times in the first quarter because we'd be happy to sell at higher prices, and if not, we collect a premium. So we're prudently managing that down. I think Bitcoin will not be a part of our story by 2030, like you said, I mean, I would say by 2020 -- end of '27 at the latest, if not sooner. And it's already sort of dwindling as you look at the NOI that will be coming in from the leases, it will become immaterial as far as our financials go before it is completely wound down. Now by 2030, I mean, this is where you get really exciting about the upside. We are anxiously awaiting the results of ERCOT's batch process. I think we tried to be very clear that we feel we are in a very strong position with our sites to be in batch 0 there. And again, I view the HPC business as a bit of a flywheel where you're signing leases, demonstrating excellence in the execution of the quality of what we're building, the quality of our relationship management, the timeline on which we are delivering, the ability to finance at the best rates in the space. I checked our debt for the 2 projects this morning, and I think the yields were about 6.2% and 5.7%, both trading above par. So clearly, the debt investors of the world believe in our ability to construct and deliver on time. That positivity and access to finance then begets the ability to do more big data centers, and we've got that pipeline and those tenant relationships continue to flourish. I don't think any of our competitors has the tenant relationships we have. And so by 2030, to answer your question, I expect to have high-quality long-term leases with the best tenants in the world at all of the sites in our portfolio. And I would hope that we'll be operating 4 gigawatts plus of HPC at really attractive colocation rates. A lot of work to do between now and then. That's aspirational, but I'm very positive this team can do it. Operator: Our next question comes from Michael Donovan with Compass Point. Michael Donovan: Congrats on the progress. Can you discuss what equipment remains outstanding for Black Pearl's Phase I and II? Rodney Page: Sure. So for most of the equipment that is outstanding, it's -- that has not been acquired. It is all sort of on the expected procurement timeline that we laid out at the front end, and it tends to be commodity-like items. So I think we said in the presentation, we've got 93% of the Phase I equipment secured and 80% of the Phase II equipment secured. What remains outstanding are not the, like, long lead time items that tends to be stuff like, again, cable, office furniture. I think there are some like miscellaneous mechanical equipment, et cetera. Michael Donovan: Great. That's helpful, Tyler. And then a follow-up. As your contracted backlog has expanded, has your view changed on how far in advance of expected site energization you would sign a new lease? Rodney Page: Yes. So that's a good question. I think having the interconnect in hand is an important piece of that. So we're watching the batch process in ERCOT very carefully. If we end up where we think we're going to end up and have interconnects at a couple of large sites that we expect to energize in 2028, I think we'll proceed with lease negotiations reasonably quickly. Frankly, a gigawatt site is just so attractive that -- and you need enough time to build it. That -- I think that would be well within the window to begin fast-paced lease construction. So -- but I still think having the interconnect has tended to be a proof point that tenants need to see because I think there's like 1,000 people that are suddenly data center developers and have a site somewhere. And when you kind of diligence just how far along and reliable the grid connection is, it often falls through. We see this as we look at corporate development opportunities, when we look at site acquisitions, fair to say to go through the rigors of a lease negotiation with a hyperscaler, you're going to have to have a really buttoned-up timeframe on your interconnect. So I still think that factor is probably what drives it. And then look, it's construction timelines. I think for us, a huge advantage we've got is our ability to deliver quickly. We have a little bit of a different setup here than a lot of folks. I mean, we handle procurement in-house. We have a team of experts, ex-hyperscalers or the construction firms that serve them. And I think that's one of our biggest advantages to manage supply chain move quickly and control our own destiny. I think that's why we're in such a good position at our sites. I mean, at this point, I think we are more likely to deliver a site ahead of schedule than behind schedule. That's how strong our timeline management is. So hopefully, we'll have some upside surprises before too long. But at any rate, I think managing that is one of our greatest strengths. And I see that playing into the flywheel, as I described earlier. Operator: Our next question is from Ben Sommers with BTIG. Benjamin Sommers: So you mentioned earlier on the inquiries you've gotten to potentially own your own compute at Ohio at Ulysses. I guess kind of just zooming out here, curious on the broader demand you are seeing for the site. And is there anything to call out here given that it is in a different power market than the rest of the portfolio? Rodney Page: Yes, sure. I mean I think we have had inquiries, but we've also had inquiries and live discussions with multiple hyperscalers for that site. So I think fair to say if we're going to dip our toe in the compute ownership business, it's probably more likely to happen at Reveille just given the size and the risk exposure there. That said, never say never. If credit support continues to evolve among amazing counterparties for Neoclouds and that touches owning the computers, and we can make a better return for shareholders, we'll do it. But given that Ulysses has also interest from really great names just for traditional colocation, that's -- I mean, at this point, that's probably more likely. Stay tuned. As far as being a different power market, like PJM is a market we have targeted for a long time. So we're excited to have a site there. I visited the site 2 weeks ago. It looks great. We're very excited about the potential. So I think a high degree of interest in the site, a little bit closer to a traditional location given that it's in the Greater Columbus area, sort of extended, which is a popular traditional data center market. So I think there's also a pretty big demand in PJM because you asked about the nature of the markets. As a broad generalization, there are higher deposit requirements there than ERCOT. So I'd say it's a little more demanding. So it's sort of harder, I'd say, to get an attractive site in PJM. So that's another thing that puts a bit of a premium on that site. There's not as many opportunities. Benjamin Sommers: Awesome. Super helpful. Then on to the financing side, just kind of curious if there's anything to call out on potentially project level financing for the new 100-megawatt contract. And I guess just anything you're seeing kind of the project level financing for colocation contracts that you want to call out? Rodney Page: Greg, do you want to handle that one? Greg Mumford: Yes, happy to jump in. And thanks for the question. So look, we've raised 3 successful project level bonds now. I think we've really demonstrated the ability to access capital markets. We have a diversified institutional investor base that's now following the name. I'm very confident that if we were to go out and doing another bond that looks similar to what we've done today, we would be very successful and price at similar, if not better terms. We're comfortable with that, and we're happy with how we finance to date. At our stage of growth, I really want to emphasize the fact that maintaining flexibility in our capital structure is so critical to us right now. I think the way that this whole industry evolves over time still remains to be seen. So noncallable long-duration financings can look great from a headline number, but I think you could trap cash and limit your ability to optimize assets over time. So I think what we're focused on is flexibility in the capital structure kind of up and down. We're focused on nonrecourse financing to really isolate construction risk through construction. And then we're focused on optimizing the capital structure as we grow and we add more assets to the portfolio and more stabilized assets that provide collateral. So every time we look at financing, we'll kind of put everything on the table, and we'll evaluate it, and we'll pick what the best option is. But we're confident that we'll be pursuing something with similar or better terms than what we've seen to date. Rodney Page: Judging from the pace of calls from investment bankers to Greg eager to do more debt financing for us, I'm confident there is an extraordinary appetite for our paper out there. Operator: Our next question comes from Mike Grondahl with Northland. Mike Grondahl: See, I'm going to assume Reveille and Ulysses are pretty baked here. And I kind of want to look at McLennan, Mikeska, and Colchis. Tyler, what are the major hurdles or challenges to get those 3 energized? And then what does demand look like today for that 2028 power? How is those conversations going? Rodney Page: Sure. Thanks, Mike. So the challenge here is that ERCOT is going through this batch process where they're doing constant meetings, considering all the final tweaks to how they want to implement it. There was a meeting yesterday that was several hours that we participated in. So we are -- what we have done at those 3 sites and the reason why we highlight them is that we have done everything that has been laid out to us to have those sites qualify for what will be in this batch 0 approval as it winds its way through ERCOT, which should be done next month. Given that, we believe -- and again, this has been like an evolving process, right? ERCOT has changed requirements and they've delayed the batch process as we've gone along. So we're trying to be as transparent as possible. We believe we have done everything, but until we have the final okay, we won't have the interconnect. As I mentioned earlier, having that interconnect is probably the gateway to rapidly advancing tenant discussions. So again, we have a great team that is following this and participating, and I feel like we have our ear to the ground very well with what's going on with the evolution of the batch process. We are confident that these 3 sites have done what is necessary, and they have been done for a while. So from a sort of chronological ordering perspective, they are in a good spot. We are hoping for a good outcome from the finalization of that batch process in June. And then I think we then flip to the next question, which is, okay, so if you've got about 1.5 years, you're going out to 2028, what's the level of interest. Historically -- well, by historically, I mean the last year or so, as you get into that kind of 1.5 years out window, there has been the greatest level of interest from tenants. That starts to be squarely in their wheelhouse where they can match up demand forecasts for what they need. I have every reason to believe that there will be significant demand. And when you're talking about sites that have a gigawatt at the site or 500 megawatts, those are really big attractive sites. They're in Texas, which is data center friendly. We've got kind of really NIMBY issues across the country. We're managing those very well in Texas at our existing sites. Texas is set up for a favorable outcome on those kinds of issues. So I am just very, very, very bullish on the level of appetite for those sites once we get through the final unknown of the ERCOT process. And then hopefully, there's lots of upside stories to report in the coming months. Mike Grondahl: Got it. Yes, a month isn't that far away. And then maybe just a follow-up. How should we handicap the odds that on your pipeline slide at, say, year-end 2026, there's new sites that you've acquired on there. Would you say that's low, medium, high? Rodney Page: That one is really hard to say. I'd say we have seen quite an amount of inbound opportunities, I think, as we've gotten better known and people do channel checks on our tenants and the success of our construction projects and see our financings. That said, most of the opportunities we've seen that are coming in are way far out, and they haven't made as much sense for us. So an opportunity in 2030 or something like that. What I would say will be interesting, is that with the advance and finalization of the ERCOT process, a big part of that will be putting down large deposits. Historically, we've acquired a lot of our sites from less well-capitalized speculators that find a good spot, but they're not prepared to really develop it or pay double-digit millions of dollars in deposits to show how real they are, which is part of the test in ERCOT. So it's hard to answer your question, but I'm actually cautiously optimistic that the finalization of this process may produce some opportunities where we have inbounds from people we know and follow in that ecosystem of kind of smaller developers that may be looking for a partner. So I can't give you an exact forecast. All I can say is we're looking at site opportunities all the time. I think we may have a wave of them coming in an area where we have historically had a lot of success. So it's another stay tuned. That said, working on building the 4-plus gigawatts we've got will definitely keep us busy in the meantime. Operator: Ladies and gentlemen, this does conclude the Q&A portion of today's program. I'd like to turn the call back over to Tyler for any further remarks. Rodney Page: Just to say thanks again for everyone for dialing in and your continued support. We are really excited about what's going on, and look forward to talking to you again soon. Cheers. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.
Operator: Good morning. Welcome to USA Compression Partners, LP First Quarter 2026 Earnings Conference Call. During today's call, all parties will be in a listen-only mode. At the conclusion of management's prepared remarks, the call will be open for a question and answer session. If you would like to ask a question during this time, please press 1 on your telephone keypad. To withdraw your question, please press 1 again. Thank you. And this conference is being recorded today, 05/05/2026. I would now like to turn the call over to Clint Green, President and CEO. You may begin. Clint Green: Good morning, everyone, and thank you for joining us. With me today is Christopher M. Paulsen, Senior Vice President and CFO; Christopher Wauson, Senior Vice President and COO; and other members of our leadership team. This morning, we released our operational and financial results for the quarter ending 03/31/2026. Today's call will contain forward-looking statements based on our current beliefs and certain non-GAAP measures. Please refer to our earnings release and SEC filings for reconciliation and definitions of non-GAAP measures and related risk factors. As we discuss performance, please note that the JW acquisition closed on January 12, and therefore, Q1 earnings exclude the impact of revenues and expenses for JW Power for the first eleven days of the quarter. Before we get into the quarter, I want to take a moment to recognize our team on safety. Our people go to work in the field every day, working around complex equipment, driving millions of miles a month, and the way they return to their family matters more than any financial metric we report. In 2025, our combined TRIR finished at 0.39, a 50% reduction from 2024 and well below the BLS industry average of 0.70, a benchmark we have now beaten for twelve consecutive years. We are proud of these results, and we remain committed to continuous improvement. Moving to the quarter, which included two integrations that established upward momentum for the company. First, we kicked off the integration of JW Power at a time when horsepower lead times continued to extend. Customer discussions commenced immediately upon closing, starting the process of onboarding new customers to the USA Compression Partners, LP platform. As of early March, we have integrated the combined operations organization and established a new reporting structure. Second, on February 1, our integration of legacy USA Compression data into a new ERP system was completed. Our respective integration teams worked long hours to enable a smooth transition of both, and I cannot be more appreciative of their efforts. Throughout it all, we have maintained our operational momentum while delivering DCF and leverage metrics that show meaningful year-over-year improvement to our unitholders. The company is now broadly diversified across every major basin, horsepower class, and customer type. In the last few months, we have contracted over 90% of our 2026 horsepower, which will more than double the new horsepower deployed in 2025. Additionally, we have continued the momentum in our small horsepower class with utilization up nearly 10% year over year. The introduction of JW Power's manufacturing capabilities is enabling us to manage a dynamic compression market differently than in the past. Certain new engine lead times have recently tripled from 50 weeks to approximately 150 weeks. And while historically we might hesitate to commit to the full horsepower cost that far in advance, we are now able to directly acquire highly marketable engines with optionality to package for our own internal contract compression needs or future resale to third parties. Engine costs represent approximately 25% to 40% of the total skid cost, with just a fraction of that cost provided as a deposit. In the event of an unexpected contract compression market shift over the next several years, we believe we could also divest those engines for other use cases, further reducing any unlikely downside exposure. Additionally, the diversity of our manufactured compression products, including mid-sized large horsepower, electric, and high-pressure gas lift, supports more competitive pricing for our customers while enabling us to adapt to the ever-changing marketplace. So far, the oil-directed rig count remains flat this year, but producers are showing more optimism looking out over a twelve-month horizon than we have seen for some time, reflecting a much improved commodity backdrop. The twelve-month oil strip has significantly lagged physical spot prices and arguably is underpriced for an immediate and permanent ceasefire, much less a long-term conflict. We believe spot natural gas prices do not reflect the LNG risk associated with the Strait of Hormuz. Finally, 2026. I will now turn the call over to Christopher Wauson, our Chief Operating Officer, who will provide additional insights to our current operations and our out-year growth plan. Christopher Wauson: Thanks, Clint. As of today, the operations and commercial organization have been integrated with both JW employees and legacy USA employees under new reporting structures consistent with a best-in-class approach, the longer-term result will be streamlined route optimization, customer contracts, vendors, inventory, safety protocols, and systems. As discussed in the prior quarter, we expect $10 million to $20 million of annual run-rate synergies by year-end 2027, and we are still tracking towards those estimates. The current new compression lead times have presented a new challenge for near-term business continuity and long-term planning for both contract compression and manufacturing. As a result, we have already placed orders for engines and package components for 2027 and engines for 2028 and a portion of 2029. Package component lead times remain well inside of engine lead times, but we will continue to monitor and place these orders when needed. These advanced planning efforts should enable new contract compression growth to stay largely consistent with 2026, in excess of 100 thousand horsepower each year. As far as our manufacturing book is concerned, we have some specialty horsepower slated for resale, but the vast majority is expected to go into our fleet. Our 2028 orders are nearly entirely weighted to large 3,600 series engines, which are the most desired by our compression customers while also having substantial optionality for sale should the market shift. We continue to have robust conversations across our diverse customer portfolio and, as Clint mentioned, we have contracted more than 90% of nearly 110 thousand new horsepower expected to be added to the fleet in 2026 and are presently in the middle of multiyear strategic planning discussions with some of our strongest customers to shore up our 2027 book. Notably, we experienced lower churn rates than expected in Q1, which is a reflection of the tightness in the current market. This backdrop, coupled with the idle units acquired from JW, positions us for outside horsepower growth in the back half of the year and into early 2027. Finally, while oil prices have moved up significantly in the last month, we are focused on minimizing cost increases tied to lubricants. If oil prices were to remain at current levels, we would expect much of that increase to show up in the second half of the year as our lubricant contracts renew. I will now turn the call over to Christopher M. Paulsen to discuss our financial results in detail. Christopher M. Paulsen: Thanks, Chris. For basis of comparison, our quarter and year-ago financials exclude the benefit of JW that closed on January 12. For Q1 2026, our income statement reflects the results of JW's contributions for 79 days in the quarter, and therefore our non-GAAP financial numbers, including EBITDA and DCF, reflect the same. By contrast, our non-GAAP operating metrics tied to horsepower, including utilization, average revenue per horsepower per month, and average active horsepower, are calculated based on month-end and therefore fully reflect JW's horsepower contribution for the quarter. As we highlighted in our December 1 deal announcement, while JW provides meaningful near-term accretion and immediate deleveraging, the company in aggregate also has lower gross margin than our legacy asset base, in part due to the manufacturing and AMS operations that contributed approximately 10% of legacy EBITDA. Turning the page to Q1 results, we increased pricing to an all-time high averaging $22.73 per horsepower, a 5% increase in sequential quarters and an 8% increase compared to a year ago. Average active horsepower ended at 4.438 million. Our first quarter adjusted gross margins came in at 64.4%. Regarding the consolidated financial results, our first quarter 2026 net income was $38.3 million, operating income was $91.4 million, net cash provided by operating activities was $86.1 million, and cash interest expense, net, was $47.1 million. Our leverage ratio at the end of the fourth quarter was 3.74 times. Turning to operational results, our total fleet horsepower at the end of the quarter was approximately 4.931 million horsepower, adding approximately 1.037 million horsepower as compared to the prior quarter, largely tied to the JW acquisition. Our average utilization for the first quarter was 91.9%, a decrease compared to the prior quarter after incorporating JW. First quarter 2026 expansion capital expenditures were $26.4 million and our maintenance capital expenditures were $9.2 million. Expansion capital spending in Q1 primarily consisted of new units, while maintenance capital activity was deferred for a few weeks in February due to the implementation of SAP on February 1. For the remainder of the year, most growth capital will be focused on new horsepower and reconfiguration, while maintenance capital will normalize towards our full-year projections. We continue to maintain our full-year adjusted EBITDA range of $770 million to $800 million, distributable cash flow range of $480 million to $510 million, maintenance capital range of $60 million to $70 million, and expansion capital range of $230 million to $250 million. As Christopher Wauson noted, we are nearly fully contracted for 2026 and are placing advanced orders to maintain full utilization of our manufacturing complex for several years. As stated in February, our near-term target is to maintain a 3.75 times debt to EBITDA, and we made significant progress towards this goal in Q1. While we hit this target for the quarter, we anticipate it will tick higher in Q2 as we take delivery of new horsepower, then trend back lower by year-end. Energy high-yield markets remained open and very resilient throughout the Iran conflict. Our improved leverage metrics put the company in a strong position to access capital markets later this year to the extent we want to provide more consistency in our debt tranche sizing and duration. This quarter was a whirlwind of activity for our operations and finance teams as we implement new systems with new assets and new faces. The execution was nothing short of exceptional as we laid the foundation for more acquisition opportunities to come. We will stay disciplined and evaluate opportunities that fit with our financial goals and core competencies. In the near term, our business will be improved through a gross margin push, working to improve structural cost and the efficiency of the JW organization in the face of an inflationary oil environment. And with that, I will turn the call back to Clint for concluding remarks. Clint Green: Thanks, Chris. This business demands that we stay close to our customers every single day, understanding their needs, anticipating where they are headed, and making sure we are ready when they call. The discipline does not change with the commodity cycle. What is changing is the opportunity in front of us. The demand for natural gas, both to move it and to power the infrastructure around it, continues to grow, and we feel very good about our position in that story. The relationships we have built with our suppliers combined with our manufacturing capabilities give us a real advantage in an environment where equipment lead times remain extended. We intend to use that advantage. We are bullish on contract compression overall, and I am excited about where we are headed. We will now open the call for questions. Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press 1 again. Your first question comes from the line of Nate Pendleton with Texas Capital. Please go ahead. Nate Pendleton: Good morning, and congrats on the record results. So you had a really strong quarter across the board. Can you talk for a moment how this compared to your internal expectations following the JW integration? And then maybe your decision to keep the guidance the same here in lieu of those results. Clint Green: Yeah, Nate. Thank you for that. I mean, I feel like we are in line with where we thought we would be as we put this model together late last year and decided to move forward with the acquisition. We have already worked through some of the operational changes in the structure. We are working hard on our routing and ways to save going forward. But overall, we are really happy with where we are at in the process and excited about where we are headed by year-end and then through the future. Nate Pendleton: Got it. Thanks, Clint. And this is my follow-up maybe for Christopher M. Paulsen. I believe last call, you talked about looking for a distribution coverage expanding beyond the 1.6 times marker as sparking some conversations. With coverage now over 1.7 times, can you talk about how you weigh adding to an already strong distribution versus other uses of capital? Christopher M. Paulsen: Sure, Nate. Just before that, just to add a little bit to Clint's comments as it relates to the JW transaction as well. I think we mentioned this before, but we have been generally very pleased with the sophistication of their operations. As we start to embark upon another SAP implementation for their operations in particular, we are seeing some things that we want to adopt in our own, which is fantastic and which is probably expected from a company that has been doing it for 60 years. So there are areas of manufacturing that are done exceptionally well, areas as it relates to customer interaction and outreach that have been done exceptionally well, the retail side of the business. So I will just point to that as well. But as it relates to your distribution question, we were pleased to see that number tick up to 1.72 times. Part of that relates to the fact that we had a bit of a partial quarter. We ultimately had lower maintenance expenditures. That was due to the SAP implementation itself. We did a couple weeks of paper stacking as it relates to the transition. We really had kind of a quiet period for about a week and a half where we told our folks to limit their maintenance expenditures, and so as a result, our maintenance expenditures were down, and therefore, DCF ticked up. Now that being said, we also did not account for the DCF over those eleven days while fully accounting for maintenance capital. So I think net-net, we feel really good about setting up for a durable and really a disciplined approach to distribution over time and our distribution policy. We want to see something sustained for a period of time and continue to hit our financial metrics in terms of leverage, but also continue to see and repeat these types of numbers before I think we would begin to approach the conversation about any change in distribution policy. Nate Pendleton: Understood. I really appreciate all the detail. Congrats again. Clint Green: Thanks, Nate. Operator: The next question comes from the line of James Rollyson with Raymond James. Please go ahead. James Rollyson: Hey, good morning, gentlemen. Clint, you talked about lead times stretching out again. It is pretty remarkable to see how that has spread to numbers we have never seen before, and it seems you are pretty well ahead of the game by placing orders for engines out multiple years. I am curious how you are seeing your customers and maybe even competitors in terms of how they are set for planning out this far in advance. Because it was not long ago that customers were caught by surprise when, a couple years ago, lead times were beyond a year, and now we are almost three years. So I am just curious how you think the customer base and the industry is set for planning on these extended time horizons. Clint Green: Yeah. It was a little bit of a surprise at one point with the lead times. We were running around 55 to 70 weeks just depending on the day, and then overnight, Cat went to 100 weeks or 108 weeks, and that is when we got in gear pretty quickly to try and figure out how we were going to cover that. So we got creative for 2027 and were able to pull some stuff in, and then for 2028 we decided to go ahead and make that engine order. The customers, I think they are dealing with it just like we are. Thankfully, we are able to provide for our customers with our plans for the future. And competition, I have not really heard what they are doing on any front. I am sure they are trying to figure it out just like we are. I think our capital program has gone from a one-year program to probably a three-year outlook and taking pieces of it at a time as we have to order engines. Now, a lot of it is driven by the generator orders, because you see that Ariel and cooler manufacturers, those lead times are still at 25 to 30 weeks. They are not stretched way out. So I think everybody is taking it in stride, and we are trying to make sure our customers are taken care of. James Rollyson: Yeah, well, kudos for being ahead of the game. Then I guess there is a follow-up. Maybe you guys can talk about OpEx, or mainly higher oil prices that will drive lube oil and fuel costs up to some extent in the second half if oil prices stay up here. Curious how you think about your ability to pass that on given how tight the market is and maybe the lag effect of being able to price that on. Obviously, you did not change your guidance, so it is not impacting your margins at this point, but just curious how you are all thinking about it. Christopher Wauson: Yeah. No. Thanks for that. One thing with inflation, with oil prices, all of our costs are going up. So we are continuing to drive efficiencies in the organization to protect that margin. And as contracts expire and renewals come up, we do plan to address that accordingly. So it is kind of twofold. We are going to manage it as best we can and continue to drive for efficiencies. That is the biggest win here. James Rollyson: Appreciate the color, guys. Thanks. Operator: The next question comes from the line of Elias Max Jossen with JPMorgan. Please go ahead. Elias Max Jossen: Hey. Good morning. Just wanted to start on the outlook for new unit procurement. It seems like you have got orders placed for the next several years. So how should we think about the cadence of unit additions over these next couple of years? I know some of your peers have given an outlook through the decade, but just curious how we should think about new units in the fleet. Thanks. Christopher Wauson: One thing we are trying to do is stick to that 100 thousand-ish horsepower of growth year over year, maybe even up to 125 thousand, just depends on how things shake out. But that is the beauty of our manufacturing business. We can control that a whole lot better now. It is a lot more optionality. It enables us to really make those decisions and do what is best for our customers and the organization. Clint Green: Yeah. Hey. This is Clint. I want to add on that. I talked about a three-year capital program, and we are really only talking about the cost of the engine for that three years. We have the engines ordered, but we will wait and monitor lead times on compressors and coolers, and that way, we can order those, you know, within 40 weeks or something like that to have them in time for the engines to arrive. So I want to make sure everybody understands we are not committed to the full compressor cost going out three years. It is just a deposit on the engine so far. Elias Max Jossen: Got it. That is a helpful clarification. And then maybe shifting over to some of the stronger pricing we saw this quarter as well as the utilization noise from the JW integration. Can you help frame run-rate levels on both of those metrics going forward? Should we expect continued pricing growth, and how will fleet utilization, you think, ultimately shake out once you are fully integrated? Thanks. Christopher M. Paulsen: Hey, Eli. So as it relates to the first part of that question, on the utilization front, the utilization is reflective of the fact that we brought in over a million horsepower and essentially got that optionality, I think, on the cheap. As we mentioned in our acquisition call, we noted that we felt like there were 900 thousand-plus readily deployable. We have taken the initial pass through that fleet, and that is why you see the over a million horsepower within our total count. We will continue to review that and look more deeply into that total capacity. And part of that will be as we continue to increase orders, increase our small horsepower utilization—as we noted, we increased it over 10% year over year—we see that potential to improve from here. Those are some of those units that we will evaluate. So presently, the horsepower utilization that you see, I think, is a baseline for new run-rate. I think it can only improve from here, both in terms of small horsepower and also as we dig deeper into some of that capacity. We may ultimately decide that that capacity is no longer deployable within our operations but can be used on other operations elsewhere. As it relates to the revenue side of the question, the revenue has continued to improve as we know—5% to 8% in terms of revenue relative improvement. We see that continuing to improve consistent with the way in which we have approached it in the past. As we see cost increase, many of our contracts, and I should say most, are CPI-U based. We have seen CPI-U tick up almost 100 bps from not very long ago. So one, we will have the CPI-U support as it relates to revenue. But two, we are partnering with our upstream and midstream companies. We always do just that. They understand through any cycle that there is a give and take, and we recognize that too and have partnered as it relates to the business and would anticipate that as our costs increase, there will be some relative cost increase on the other side of that. We just need to have constructive conversations. And that is a big part of having great relationships within the business and being around since '98 and having nearly two decades of relationships with our top 10 customers. Elias Max Jossen: Got it. Super helpful. Leave it there. Thanks. Operator: And once again, if you would like to ask a question, please press the star 1 on your telephone keypad. The next question comes from the line of Douglas Irwin with Citi. Please go ahead. Douglas Irwin: Hey, team. Thanks for the question. Maybe one on JW Power here. It sounds like the manufacturing business is already maybe changing the way you approach your growth backlog a little bit. Just curious, now that you have had a bit more time with these assets under your belt, if there may have been any other opportunities or surprises you have been able to uncover with regard to synergy opportunities that maybe you did not fully appreciate beforehand? Clint Green: Yeah. This is Clint, Doug. Thanks for your question. I mean, we fully expect to—or we hope to—find some diamonds in the rough that we were not expecting. Definitely, the manufacturing business, the capacity there is between 100 thousand and 125 thousand horsepower in that facility, which is kind of what we expect to grow or plan to grow—maybe a little north of that—over the next few years. So we feel like that will give us a lot of flexibility. The operations side of it—being in every basin now and having facilities that are across the road from each other in several spots—there may be some synergy opportunities there. We think there is more to come. We are just trying to dig through all the opportunities and figure out which ones really come to life. Douglas Irwin: Got it. That makes sense. And then maybe just a higher-level one as a follow-up. Looking at Slide 4 here in your slide deck, you call out a need for over 10 million incremental horsepower by 2030, which is obviously a huge number. Just curious what you see as your role in meeting that demand moving forward. Do you potentially see a need to lean even further into growth relative to what you already messaged here over the next couple years? And if you can, maybe talk about what basins on that map you see yourselves as having the biggest advantage in? Christopher M. Paulsen: Yeah. This is Chris. Great question. As it relates to that, part of it is what is the right forecast? We are always actively reviewing the overall forecast for natural gas, understanding the LNG markets and data center markets—they are exceptionally fluid, as you well know. Ultimately, we feel really good about the forecast that was put forth on that particular slide and the forecast as it relates to those basins. It is all related to the relative natural gas price as well. Ultimately, the Rockies, for instance, is an area that we would say at a higher gas price would probably be in a flattish range, whereas I think the rest of those areas are well established in terms of their growth trajectories at current pricing, if not above. As we think about our place in this trajectory, we want to be in a position to maintain our current standing and our current market share. We know that in areas like the Northeast, we have an outsized market share, and it is an area that has returned to growth. There are really fundamentally sound measures that support that 5 to 7 Bcf. I think if we see coal-to-gas switching, that number increases from here. That is really based on announced projects, and there is still probably more to come there. As it relates to the Gulf Coast and the Permian that are going to make up more than half of that, we are well situated there. We are a big player in the Permian. We are a huge player in the Gulf Coast and Mid-Con, and we want to maintain our market share, if not grow it, in those respective areas as well. Douglas Irwin: Awesome. Thanks for the time. Clint Green: Thank you. Operator: And the next question comes from the line of Analyst with Stifel. Please go ahead. Analyst: Thank you. I just wanted to follow up on that last question. Listening to the Energy Transfer call, they were talking about the U.S. becoming a preferred supplier to the global outlook when everything settles out from the war. As you think about that, should we expect to see an acceleration of your business? Clint Green: We fully expect so. This is Clint. If you look at the market, there is 15% to 20% of the LNG capacity effectively locked in because of the Strait of Hormuz right now. JKM prices yesterday were at $16, and U.S. gas prices are at $2.80 to $3. If you back up to January and February of this year, JKM was $9 to $10 and U.S. Henry Hub pricing was $2.80 to $3.20. So even though JKM has gone up, we have not seen the pricing increase here in the U.S. Part of that is takeaway capacity. By the end of the year, we are going to have a lot more capacity coming out of the Permian. There are several LNG facilities either expanding now or under construction. If you look at the U.S. Department of Energy’s website, they show five of those facilities will be online within the next 24 months. With all that said, if gas takeaway is able to get out of the Permian and get to the facilities on the Gulf Coast, and is able to get on boats and go across the ocean, the demand for U.S. natural gas is going to go up. We could not be more excited about the natural gas story right now, whether it is dry basins or the Permian or wherever. Any of that growth, with us being in all the basins, means that we have to grow with it. So we are super excited about the prospects of the future here. Analyst: Appreciate that. And then let me ask you about the extended lead times. When you look at the 3,600s and you are talking, I believe, 2.5 thousand horsepower and up, is that all being driven by AI backup power or primary power, and so you are competing against that? Is that what is really taking the lead times up, or is it something else? Clint Green: Well, it is both. It is natural gas-driven engines that are generators that are driving that market up significantly. A lot of people are ordering generation. Then you have folks ordering natural gas compression engines to supply the gas to the generators. Cat really does not have big plans to expand their manufacturing facility in the near future for the 3,600 series, which is the 4.5 thousand up to 5 thousand horsepower. Those are the drivers behind it. I think we are to the point now where we are starting to look at other engine manufacturers' options, whether it is domestic or international, because I believe there is a hole that we have got to start filling in the future if this is going to continue out. Operator: Thank you. And there are no further questions at this time. I would like to turn it back to Clint Green for closing remarks. Clint Green: Thank you all for joining our call today. As always, we are deeply appreciative of our employees and the stakeholders that enable us to conduct our business every day. With that, we want you all to have a great day. Thank you for joining, and see you next time. Operator: Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.
Operator: Greetings. Welcome to Ball Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brandon Potthoff, Head of Investor Relations. Thank you. You may begin. Brandon Potthoff: Good morning, everyone. This is Ball Corporation's conference call regarding the company's first quarter 2026 results. During this call, we will reference our first quarter 2026 earnings presentation available through this webcast and on our website at investors.ball.com. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. We assume no obligation to update any forward-looking statements made today. Some factors that could cause the results or outcomes to differ are described in the company's latest Form 10-K, other SEC filings and in today's earnings release and earnings presentation. If you do not already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of today's earnings release. In addition, the release includes a summary of noncomparable items as well as a reconciliation of comparable net earnings and diluted earnings per share calculations. I would now like to turn the call over to our CEO, Ron Lewis. Ron Lewis: Thank you, Brandon. Today, I'm joined on our call by Dan Rabbitt, Senior Vice President and Chief Financial Officer. I will provide some brief introductory remarks and discuss first quarter 2026 financial performance and our outlook for the remainder of 2026. Dan will touch on key metrics, and then we will finish up with closing comments and Q&A. As we begin, I want to start with the big picture because it continues to matter how we think about Ball and our long-term value creation. We believe Ball is positioned to win and the fundamental supporting that belief remained firmly in place. Packaged liquid volume is continuing to grow globally, and aluminum cans are taking share as consumers, customers and retailers increasingly prioritize convenience, performance and sustainability. That dynamic creates a durable long runway of demand for our products. Within that growing market, Ball is executing at a high level. Across our regions, we continue to leverage long-term customer partnerships, a well contracted portfolio and an unmatched global footprint. Our utilization levels are strong, reflecting both disciplined capacity management and consistent commercial execution. We are pairing that execution with financial strength. We delivered solid results to start 2026, supported by a healthy balance sheet and a capital allocation framework grounded in EVA. Our focus remains on deploying capital where it earns returns above our hurdle rate and on continuing momentum as we move through the year. Operationally, our teams are performing well. Standardization, cost discipline and the Ball business system are driving improved profit per can and reinforcing our ability to generate operating leverage as volumes grow. While we are proud of the progress we continue to see opportunity ahead. When you bring together attractive industry fundamentals, disciplined execution, financial strength and an operating system built for continuous improvement, Ball remains exceptionally well positioned, not just for this year, but for the long term. Our strong start to the year underscores the resilience of our business, particularly in a complex geopolitical and macroeconomic environment. Our strategy is clear, consistent and grounded in our 4 strategic pillars, and that strategy is working. First is executing exceptionally in our core business. That discipline shows up in how we operate every day across our plants and regions, and it underpins our ability to deliver solid Q1 results in an uncertain world. Second, we stay close to our customers and maximize our global network, long-term partnerships strong service levels and a well-balanced footprint allow us to respond quickly and reliably. Third, we continue to accelerate the substrate shift to aluminum and expand categories. Aluminum, sustainability and performance advantages matter, reinforcing demand and long-term growth opportunities. And fourth, we manage complexity to our advantage. Our scale, standardization and systems enable us to remain focused on execution rather than distraction. The Ball business system brings these pillars together, connecting commercial excellence, operational excellence and continuous improvement. At the center are our people and our culture. Low ego, high collaboration and a shared commitment to doing the right things the right way. This is what makes our business resilient, supports strong Q1 performance and positions Ball to continue delivering disciplined execution and long-term value creation regardless of the external environment. The Ball business system is how we operate, and EVA remains our North Star. Together, they drive disciplined execution and capital allocation, enabling us to deliver results. That discipline showed up in our first quarter performance. We executed well and stayed focused on the levers we control, earning returns above our cost of capital while maintaining flexibility. This approach underpins a growth algorithm of 10-plus percent comparable diluted EPS growth, strong free cash flow and consistent returns to shareholders. The results we delivered this quarter are a direct outcome of this operating and financial discipline, and they set up the discussion on our performance in the quarter. Turning to our first quarter performance. We had a good start to 2026. Global volumes were up nearly 1% year-over-year, reflecting slightly stronger-than-expected volumes in North America and in-line performance in South America, partially offset by volumes in EMEA. What stands out is our execution. Comparable operating earnings grew 10% year-over-year, exceeding our 2x operating leverage objective for the quarter. That performance flowed through to the bottom line. with comparable diluted EPS up 22% year-over-year, driven by strong operational execution, cost discipline and capital allocation. The first quarter performance reinforces our confidence in delivering 10-plus percent EPS growth for the full year. We also remain focused on shareholder returns and are on track to deliver in the range of $800 million to shareholders in 2026. Operationally, we continue to advance our priorities, including completing the Benepack acquisition to expand EMEA capacity and making good progress at our Millersburg, Oregon facility, which remains on track towards full ramp up in 2027. Overall, this was a solid first quarter that reflects the resilience of our business, disciplined execution and the strength of our operating model. With that outlook in mind, I'll let Dan walk you through the details of our first quarter financial performance and provide more color on our current expectations for 2026. Over to you, Dan. Daniel Rabbitt: Thank you, Ron. Before walking through our first quarter 2026 performance, I want to spend a moment on the changes we made to our financial reporting this quarter. As you saw in the earnings release this morning, we updated how we report our segment financials. As Ron and I stepped into our roles, we took a fresh look at how we measure performance and align accountability across the organization. It became clear that we needed to more clearly distinguish between operating decisions made within the businesses and financing decisions made at corporate level. As a result, we amended our definition of comparable operating earnings to exclude such items as factoring fees interest income and other impacts driven by corporate financing activity rather than the underlying operations. Importantly, these financing-related items remain included in comparable net earnings in comparable diluted EPS. So there is not a material change to how we measure or report overall company earnings. In addition, we moved our beverage can plants in India and Myanmar into the EMEA segment, which has had management and P&L responsibility for those operations for several years. We believe these changes provide a clearer view of underlying operating performance by segment, while continuing to give investors full transparency into our consolidated financial results. And to be clear, these changes do not materially impact comparable net earnings or comparable diluted EPS. Additional information can be found in notes of the earnings press release as well as on investors.ball.com under financial results. With that context, I'll now walk you through our first quarter 2026 financial performance. Overall, the business delivered a good start to the year. Global ship beverage volumes increased approximately 1% year-over-year, low single-digit volume growth in North America and EMEA, partially offset by lower volumes in South America. Despite ongoing geopolitical and macroeconomic events, our teams executed well across the business. Comparable operating earnings increased 10% year-over-year. That performance translated into comparable diluted earnings per share of $0.94, up 22% year-over-year. This first quarter performance reflects the strength and resilience of our operating model and is consistent with the financial framework we've laid out for 2026. In North and Central America, segment comparable operating earnings increased 2.5% in the first quarter. Volumes increased low single-digit percent year-over-year, reflecting slightly stronger demand, particularly in energy drinks and nonalcoholic beverages. The team continues to execute at a high level, supporting customers, managing costs and navigating a dynamic operating environment. As we look to the remainder of 2026, we continue to expect volume growth at the low end of our long-term range of 1% to 3%. As previously discussed, we anticipate $35 million of start-up costs related to the Millersburg facility and U.S. domestication of ins to begin later this year. While these costs represent a near-term headwind, they support long-term volume growth and operating leverage. In EMEA, segment comparable operating earnings increased 20% in the first quarter. Volumes were up low single-digit percent year-over-year. The team continues to perform well operationally and during the quarter, we completed the Benepack acquisition, further strengthening our European footprint and expanding capacity in Hungary and Belgium. As we integrate these assets, we see meaningful opportunity to drive both volume growth and operating leverage as capacity is filled. For 2026, with the inclusion of Benepack, we continue to expect volume growth above the top end of our long-term 3% to 5% range, along with operating leverage of 2x. In South America, segment comparable operating earnings were flat in the first quarter. Volumes declined mid-single-digit percent year-over-year, reflecting customer timing and inventory position coming into the quarter. Despite lower volumes, the team remained disciplined on cost and execution supporting earnings and positioning the business well as growth normalizes in the next 3 quarters. Looking ahead, we continue to expect volume growth at the low end of our long-term range of 4% to 6% in 2026 with operating leverage of 2x. Focusing on modeling details for 2026. As Ron noted, with the resilience of our business and our pass-through models, we continue to expect to be on track with our algorithm of 10% plus comparable diluted EPS growth. We anticipate free cash flow of greater than $900 million in 2026. Our 2026 full year effective tax rate on comparable earnings is expected to be slightly above 23%. Full year 2026 interest expense is expected to be in the range of $320 million. CapEx is expected to be in line with GAAP D&A in 2026. Full year 2026 reported adjusted corporate undistributed costs recorded in other nonreportable are expected to be in the range of $175 million. We anticipate year-end 2026 net debt to comparable EBITDA and to be around 2.7x, and we will repurchase at least $600 million of shares, which will bring our total capital return to shareholders to $800 million in 2026. And last week, Ball's board declared its quarterly cash dividend. With that, I'll turn it back to Ron. Ron Lewis: Thanks, Dan. Overall, our strong first quarter results reflect exactly how we intend to run Ball. Amid ongoing geopolitical and macroeconomic factors, our teams stayed focused on what we control, serving our customers, running our operations with discipline and allocating capital through an EVA lens. The Ball business system and our strategic pillars are not theoretical. They are driving resilience in our business and translating into earnings, cash generation and returns for shareholders. We had a good start to 2026 and just as importantly, we are executing in a way that reinforces our confidence in the year ahead. Thank you. And with that, we are ready for your questions. Operator: [Operator Instructions] Our first question is from George Staphos with Bank of America. George Staphos: Question for you first. With the performance, are you seeing any effects that you could call out from the Middle East tensions in terms of increased costs that won't necessarily be passed through real time this year, any effects on volume, particularly as regards to Europe, was there any effect on the segment's volumes related to the conflict that you could call out? And then a couple of follow-ons. Ron Lewis: George, thanks for the question. Nice to talk to you. From the impact on the Middle East, First, it's important to note that we do not have any direct business in the Middle East. And as a rule of thumb, we maintain supply chains that are as short as possible. So there's no supply assurance impacts either for our business or for our customers. It is a fact, however, the cost of all things, commodities that are affected by the conflict in the Middle East to have affected our business like others, especially aluminum. And that's where our resilient business model comes to the 4. The way that our contracts work generally is we pass on the cost of aluminum to our customers on an immediate basis, and then they choose how they will manage that cost impact. So thus far, the can is winning. The can is winning in every region we operate. And EMEA is no different than that of North America or South America. Our volumes are actually accelerating as we begin the second quarter of the year across all of our businesses. and EMEA is no different from that. George Staphos: Okay. I appreciate that, Ron. Maybe the related question did European volume perform as you expected? Were there any one-off factors that might have led to better or worse performance related? Are there any important contracts qualitatively that we should at least have in the back of our mind that you'll be managing against and to renegotiate for 2027. And then lastly, with Europe with the contracts. The last point being, we appreciate all the detail you're giving us and the granularity and getting back to basically operating performance within the segment. Are there any other metrics that you would call out that you're using as a guide point or a North Star user term for the segment in terms of profitability over time beyond the 2x leverage? Ron Lewis: Thanks, George. So any one-offs related to our EMEA volume would be specifically, we purchased the business known as Benepack, the 2 plants, 1 in Belgium and 1 in Hungary. And we purchased that from basically the beginning of February, we assumed that we would have it from the beginning of the year. So that probably affected what we had versus what we had planned. The second thing is, we sold a business in Saudi Arabia called UAC. And that business was reported previously in our other segments and with the change in our segment reporting, that's now from a comparable perspective, Q1 of last year is reported in our business. So that shows up as a headwind in our business. Those 2 things probably would have been some one-offs for us. But the core of our Europe business, we believe we're in line with market. We're within our algorithm that we talk about in the 3% to 5% growth, and we feel pretty good about how we started the year there. basically as expected. You asked about contracts. It gives me a moment to just say that for this year, we are fully contracted. And we actually are volume constrained in North America, as you know, and we have been volume-constrained in Europe because it grew so fast last year as did North America. And those 2 things why we are building a plant in North America and why we acquired the Benepack plants. So we're sold for 2026. For 2027, we're more than 90% sold and out through the end of the decade, we are basically 50% sold. So no, we don't have any specific contracts that we are concerned about. We've got long-term contracts in place. And that's just the nature of this business, which makes it a wonderful business to be in because we're able to establish some great long-term relationships that help our customers win and win with they can. As it relates to what metrics we would like point you to, it would probably be operating earnings per can. And that's why we've had the segment changes that we did. And I'm sure we'll get questions about that as well. But it's basically we want to have the most transparent cleaner for you all that analyze and comment on us and advise on us. We want you to have the cleanest looking Canada. So the operating earnings per can would be the metric that we would point you to. Operator: Our next question is from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess just picking up on the last question from George. So if I have this right, it looks like 1Q was pretty much in line with your expectations on a volumetric basis, but was really the operating leverage that was quite strong. And if that's accurate. Can you just give us the specifics, Ron, on what drove that improvement in operating earnings specific to the first quarter? Ron Lewis: Yes. Ghansham, nice to hear your voice. Thanks for the question. I would say, yes, we were largely in line with what we expected from a volume perspective, even with our South America business down year-on-year. We were probably a little bit ahead of what we expected in North America. And we were a little bit behind in EMEA. And let me just take a moment to talk about volume. While we were down in South America -- well, how did we compare versus the market? We think we were in line with market in North America. We think we were in line with the market in EMEA, and we were obviously below the market in South America given what our competitors have already already publicly stated. As we begin Q2 at an enterprise level, our volumes as we finished April were up mid-single digits. Again, that's as we expected them to be. And importantly, our South America business is up 20% April on April, and that erases all of the declines we saw in Q1, and we're back to flat volume for the year. So we are very confident in our predictions for how our business will finish on a volume basis for 2026. We expect to finish in our 2% to 3% towards the top end of our range of the 2% to 3% volume at enterprise level, and we expect North America to be towards the bottom end of our range because we are capacity constrained. We expect EMEA to be above the 3% to 5% commitment that we've made because of the inorganic acquisition that we made as well as a business that's performing in line or better with market. And in South America, we expect to still achieve the 4% to 6% volume growth as it relates to our long-term commitment. Now as for the operating leverage, maybe I'll give Dan Rabbitt a moment to reflect on that for us because I think I want to hear his voice in this meeting, and I think you do, too. Daniel Rabbitt: Yes. Thank you, Ron, and Ghansham, thanks for the question. We are -- as we've been speaking to a lot of you all very focused on trying to improve the profitability. And that is why Ron really highlighted the the growing importance of our metric of profit per can. We measured in profit per 1,000 being manufacturers, but regardless, it's profit for can focus. And I think the business is responding very well to how to this focus. And you've seen -- we saw good performance, good cost management, good pass-through of our cost really on top of our game that came through to deliver that 10% growth on operating earnings quarter-over-quarter. Ghansham Panjabi: Okay. Fantastic. Very comprehensive. And then just on the resegmentation, if you will, and just moving the plants in India and Myanmar to the EMEA segment, should we take away from this that you're just going to focus on North America, Europe and Latin America and not so much on the emerging markets, including those regions? Or is it just an interim move, if you will, before before you start looking at capital deployment in the other regions, the emerging markets outside of South America. Ron Lewis: Let me start with that question, Ghansham. Thank you for it. And I know we probably have some follow-up work to do with you and others after this call. But number one, the reason we made this segment operating change is this is the way we manage our business. It really is. We -- the management team that manages our EMEA business is also the management team that manages those plants that we've now included in our EMEA business. So we're doing it for the way that we operate our business. We want you to look at us and advise on us the way we operate our business. Number two, we want it to be as clean as possible for you and others to analyze us from an operating earnings perspective. So it's about transparency for us, both the way we operate internally and the way that we want you to look at us. the 3 regions in which we operate, including those regions that we've now added to our EMEA business are our core business, and we are the market leader in North America, South America and what is our EMEA business, the footprint that we have there. And we're very excited about our EMEA business. It's a growing business, especially those parts of the world that we just added. India is growing high teens and has been for years, and you saw us add capacity and announce additional capacity adds to India and you see our competitors looking to add capacity there. So it's a great market, and there are other great markets out there. I wouldn't take from this that we are focusing only and solely on the markets we operate in. And maybe, Dan, if you wouldn't mind commenting a bit on the other segment changes. Daniel Rabbitt: Yes. As far as the segments goes, the other thing that we did noteworthy really and was taking out the financing, the treasury-related items of the businesses to allow for better transparency on how the businesses are performing. And we really like our prospects in all 3 regions. And as you know, we measure everything from how we want to grow this company through the lens of EVA, and we see great opportunities in all 3 of our regions. And -- so I think now you have a better picture on how they're performing. And really, if the changes may be contrary to what people might think is actually were slightly negative, but the operating earnings would have been higher had we not made them on the quarter. I think over the long haul, we see this as a de minimis change. And again, reinforcing that the net earnings really have not changed. We're really materially the same place where we are when you look at the bottom line. Operator: Our next question is from Anthony Pettinari with Citi. Bryan Burgmeier: This is Bryan Burgmeier on for Anthony. Just wanted to ask about tariffs. Curious if there's any impact to Ball from sort of the latest changes announced early last month, specifically just thinking about covering some of the derivative products or applying the tar value to the whole value of the product and conversely, maybe some changes to Mexican beer. Just not sure if that alters the Dew for Ball at all. Ron Lewis: Bryan, thanks for the question. again, the tariffs that manage and govern the aluminum ecosystem and industry are Section 232. That's what's most impactful on aluminum cost and pricing. And the recent changes I think they're de minimis for our business. There's a slight positive for products that can come to the U.S. filled products, be they impact extruded aerosol packages or, as you said, beverage packages that are filled. So net-net, it could be slightly positive. But we're focused on serving our customers. And when they look for supply from us, that's what we're intending to do. And yes, so far, so good. Bryan Burgmeier: Got it. Got it. And then you touched on India already, but just wanted to follow up there. You've seen maybe some reports like energy shortages or material shortages. Just curious if that region has been impacted at all by what's going on in the Middle East? And it seems like a pretty good growth outlook over there. But Yes, if you could just maybe share some details on the near term and long term for India. Daniel Rabbitt: Thanks, Bryan. India, for sure, is an exciting place. That's the real story is that we've seen multiple years of high teens plus 20% growth. So the can industry is really moving quickly to establish supply locally as we are. As I noted, we've recently added capacity to 1 of our 2 plants there, and we've announced the adding of capacity to the second of our plants. So that's the real story of just managing growth in a high-growth market with with capacity constraints. There are continuing to be imports into that country because we cannot, as an industry manage to fulfill all the demand locally and there are some minor supply chain disruptions in that market that are, I think, come and gone. So we're running our plants and our plants at capacity. So if there there's any -- there was no material impact and nothing to note really to talk about on this call, and we're excited about the long-term prospects of India. Operator: Our next question is from Phil Ng with Jefferies. John Dunigan: This is John on for Phil. I just wanted to start on EMEA. The comparable EMEA earnings came in quite a bit better than we expected. It sounded like Benepack wasn't much of a contributor, at least compared to where you were thinking it was going to close. But you did note that the FX actually supported the earnings in the segment. Could you just maybe give us a little bit more detail on what drove some of the higher year-over-year comparable EBIT in the quarter? Daniel Rabbitt: Sure. This is Dan. I mean, I think we have to start with is that the business performed really well. We're again, focusing very much on improving profit. This region really has probably the most runway to improve profit and indeed, they're doing that. So I think it's a credit to that. But when you look at the overall puts and takes that Ron previously had talked about. The driver of this region is the EMEA segment, as you've always heard about at the last few years. It is performing very well. We're getting good now with the India plants and the Myanmarr plant coming in. Those 2 are showing growth and good operating leverage as well. So I think the 2 inorganic opportunities that we took on buying Benepack and selling the UAC really kind of neutralize each other. So I think really mostly what's happening is good performance in this segment. John Dunigan: Great. And maybe you could just quantify how much the FX supported earnings in 1Q? And then my second question is just on the corporate undistributed cost. It sounds like they stepped up. Maybe that was just a factor of some of the recasting that you did, but going up to $175 million, I think you said. Could you just tell us what's going on there? Daniel Rabbitt: Yes. Well, a lot of the positive FX now is moving out of the segment reporting for what we did. So -- but for the company as a whole, I think we probably had about $15 million of positive earnings from the translation and a lot of that is the euro when you compare it year-over-year from the first quarter because it was at a low point a year ago and now it's kind of, I don't know, about 0.15 higher on the foreign exchange. Ron Lewis: As it relates to EMEA specifically, John, I think it was less than half of the gain in operating earnings in our EMEA business was related to FX. John Dunigan: Great. And then the corporate undistributed? Ron Lewis: That's what I think Dan referred to earlier, which was the $15 million. John Dunigan: I apologize. Ron Lewis: So there's a corporate undistributed. That's where we put the FX gains and losses as the translational impact on EMEA was less than half of the operating earnings gain, and that's what you heard from from others in the industry as well. Operator: Our next question is from Edlain Rodriguez with Mizuho Securities. Edlain Rodriguez: I mean clearly, I mean, one, we are clearly in an inflationary environment globally. Like how do you expect this to impact consumer mood and ability to spend. And if there is any impact, like in which region would you expect to kind of start seeing that first? Ron Lewis: Thanks for the question. Well, first of all, the can is winning in every single region in which we operate, and it continues to take share from other substrates. That was true last year and the year before, and it's true this quarter, and we believe it will be true for the foreseeable future. So the can is winning. And we can -- you see the same data we see, and we're really pleased for that. And why is that? It's because of the unique nature of the can. It provides a robust transportation. It provides a robust shelf life. The can has a shelf life of the year. It provides a great billboard effect. You could sell it a singles multiples. I mean, I can talk for for hours about the benefits and the filling your product in an aluminum beverage package and especially one made by Ball. So that's what makes it unique and helpful. As it relates to inflation on the consumer, I mean, all inflation -- all costs are going up. And all I can say is our customers are excited about winning with the can as well. Every time I go to one of our plants, I see new promotional activity coming into summer, especially in the Northern Hemisphere. So every one of our plants is running and most of those labels are promotional labels. And I think our customers will continue to lean into the can as a means of helping them to support the consumer as they seek value. Daniel Rabbitt: And Ron, the only other thing to add is that as consumer really is in place -- has headwinds, it tends to kind of retreat to doing more home consumption. Ron Lewis: And that's been the reason why it's remained so strong. Edlain Rodriguez: Now clearly, that's the case. And 1 quick one. In terms of like the past to make and assume you have for aluminum and other costs, can you remind us how -- like is there a lag? And how much is that lag in terms of like how quickly you pass to those costs? Ron Lewis: Okay. Well, let me do very quickly on aluminum, it's I say immediate, and our other cost pass-throughs are formulaic in nature, and usually, they pass through on an annualized basis. Is there more detail you'd like to add to that, Dan? Daniel Rabbitt: Yes. I think the 2 areas I would add on to that is that really we're talking about higher energy costs and how does that impact us. Ron covered the aluminum, so I won't go back to that. It's really about the customer often pays for the freight, more often at pace for the freight, too. So that's a pass-through to and that's a fairly immediate pass-through in many circumstances. And then when we look at the year, we always look at trying to hedge and lock in our energy cost. And so we're in a pretty good position from what it takes to run our plants right now, too. Ron Lewis: And we do those hedging to align with our customer contracts so that we want to be valued for the additional values that we add to the aluminum that we buy and make into aluminum beverage cans and ends and bottles for our customers. Operator: Our next question is from Mike Roxland with Truist Securities. Michael Roxland: Congrats on all the progress. First question I had is, Dan, you just mentioned in response to John's question that the EMEA business has the most runway to improve profit and they're doing that. That segment was already achieving operating leverage target, whereas North America is. And so I'm just wondering what you see in terms of potential for EMEA and why it has the most runway relative to other businesses. . Daniel Rabbitt: Yes. Thanks, Michael. I think the main thing to do is when you take a look at the profit per can, MEA is our lowest, okay? So for the regions. And they actually have been focused for several years and making the biggest strides on it. And as far as the profit per can. So that's why I highlight that there's the most opportunity and the most progress has been made, too, as we think about that from them. Your question about North America, really, right now for the last quarter or 2, we see North America on target for trying to -- for the 2x operating leverage. It's been pretty close to that number. As we measure it this quarter and last. So I think good things are happening in North America as well. And it is also increasing its profit for [ CAM2 ] as we look at it. Ron Lewis: And if you don't mind, Dan, I'd like to add a few things, Mike, thanks for the question. How are we going to improve our -- why do we believe we can improve our operating earnings in Europe? It comes back to our operational excellence platform. Number one, we need to implement manufacturing standards in our business, and we're doing that. Number two, we need to manage our network well and adding 2 new plants in countries where we didn't operate in Belgium and in Hungary are certainly going to help us. And we're investing in our people and our systems. So those are the things that I think will -- that give us confidence that we can continue to compete and operate our plants and our network well. I would say the other thing is Europe, we always talk about it as a land of opportunity. There is still significant opportunities for can penetration. So we know there's a lot of runway to go. We're really proud of our ability to deliver our operating leverage this quarter. We delivered and then some across the enterprise, we certainly delivered it and then some in our EMEA business. We delivered flat op earnings in South America despite the volume declines in North America. We achieved our operating leverage there as well in the quarter, although for the enterprise for the full year, we expect to do more or less operating leverage as compared to our volumes at 2x. That's what we're planning to do. Daniel Rabbitt: And Ron, I think I'll use this as an opportunity to reiterate the outlook for North America. We've been talking about the $35 million of ramp-up costs for Millersburg and the domestication of some in production as well. And that was not in the first quarter. So as we start to think about the rest of the year, you're going to see those costs come in later in this order and heavily in the third quarter, possibly a little in the fourth quarter as well. So that's going to distort some of that operating leverage. And that's why we've been saying all year long, you're going to have to make some adjustments for those, and you will see the operating leverage on the base business. Michael Roxland: That's perfect. And if I had just one quick follow-up. In terms of some of the incremental costs you're experiencing, obviously, they're believed to be transitory of freight, chemicals, energy, and I think I know the answer is going to be but going to ask the question anyway. What levers do you have available to you internally to offset those higher costs? I'm assuming operational efficiencies, deploying best practices, the bold business systems, some of the things you mentioned on your commentary. But are those are the levers that you have in your wheelhouse to basically offset incremental costs and to even potentially drive margins higher when those costs recede. Ron Lewis: Mike, I think you're thinking about it the right way. We have to be operationally excellent every day, and that's the first pillar with our strategy. So that -- those are the primary means by which we offset those costs. And they're real. So -- and then the second thing is we are a resilient business model. We are rewarded for and paid for making cans, bottles and ins as efficiently as possible. . And the cost that we manage on behalf of our customers are generally passed on to them in a formulaic way, be it freight, be it other direct materials, be it aluminum through various means. So that's what makes us a very resilient business in a very resilient industry. Operator: Our next question is from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I just wanted to get your thoughts on maybe the contracting environment. You guys are adding capacity in North America and Europe and and elsewhere. So presumably, supply and demand is relatively tight in all regions. But are you expecting to -- given that tight capacity, would there be any pricing opportunities over the next few years? I mean how should we still expect about 1/3 of your contracts roll over every year? Or maybe you can just kind of help us frame those kinds of opportunities as well. Ron Lewis: Arun, thanks for the question. I would say you saw the industry grow significantly the last few years. Certainly, last year, Ball, we grew more than 4%, so above our long-term algorithm. And we used up a lot of the latent capacity that we had. So strong growth in the last several years has led to a relatively tight supply demand scenario. We, as a business, are operating certainly at asset utilization levels in the mid- to high 90s depending on the region on a percentage basis. So the supply and demand is relatively balanced to tight. The next thing I would say is the long-term nature of our business is also reflected in the long-term nature of our contracts with our customers. So I mentioned earlier on the call, we are sold out for this year. We are more than 90% sold for next year, and we're more than 50% sold for the balance of the decade. We have a heavy capital deployment in our industry. So it requires that level of commitment from a customer for multiyear contracts. So we're well contracted. You said there's roughly 1/3 of our volume turnover every year just based on those numbers, it's significantly less than that. Is there an opportunity for us for pricing, I would say, we want to be fairly rewarded for what we do. including down to all of the value-added things that we do, whether it be a different type of specialty can or a special special promotion or a different type of ink. Those are the things that we deserve to and get rewarded for when we're able to bring that sort of innovation to the market. the market will be what it will be, and we just know that we need to be operationally excellent to compete in it. Thank you, Arun. Arun Viswanathan: Okay. And then if I could ask a follow-up. Just curious on if you will be putting in more capacity here in North America. Obviously, you have the Millersburg plant, but Presumably, that will only bring you down to the low 90s and maybe even in the mid-90s. So is that -- would you be adding more capacity? And what are your customers, I guess, when you do go through this process, you kind of presell the plant out? Or is it kind of more done in the future? Ron Lewis: Yes. Thanks for the question, Arun. It gives us a chance to talk about Millersburg, which will be commissioning late this year, and it will bring material volume to our network next year. It will allow us to remove some supply chain inefficiencies because we do not have capacity in the Pacific Northwest and the U.S. So that will help us and our customers. The most important thing about that plant that you should know is it comes on the back of a long-term offtake agreement with one of our most strategic customers. So that plant is -- capacity is spoken for, for many, many years to come when we build it. And that is the second thing that you said, the case for any plant that we would build, we will not build a plant unless we have a long-term offtake agreement filling essentially all of the capacity for that plant. So we're excited to bring new capacity to North America, but we only bring it on the back of a customer's commitment to us because they see the growth of the beverage can. Maybe a specific comment, for example, the energy drink category, as you know, and we all know, is growing and continues to grow unabated. And as it grows, we're excited to help our customers in that regard. And we have potential to build another plant on the East Coast at some point before the end of the decade, but I wouldn't get too excited about it because it won't be in the next several years. But we have intentions to build a plant in the East Coast in North Carolina because of the growth of one of our more -- most strategic customers as well. And we'll do that when it's appropriate. And hopefully, that gives you a sense of how we deploy our capital related to our customers. Thank you. Operator: Our next question is from Hilary Cateno with Deutsche Bank. Unknown Analyst: Could you talk about what you're seeing from the CPGs and in terms of promotional activity? Are you seeing them be more promotional than they have been in the past? Any color on that would be helpful. Ron Lewis: Hilary, thanks for your coverage of us. We appreciate it. Yes, it's great. Our customers, we've really them and look to them for guidance on how they view the consumer. They're much better at this than us, and we really appreciate the insights they provide us. Based on what we know and we hear from them, I'm going to talk specifically about the summer coming up. When I go into our plants and our factories around the world, be it in Europe, in South America or in the U.S., at least one of the lines is running a World Cup label. So that's exciting. Everyone is excited about the summer's World Cup coming up. And if you're walking through one of our plants in North America, I can almost guarantee you, you will also see another rhine -- line running America 250-year celebration labels as well. So clearly, our customers are looking forward to taking advantage of some exciting consumer-driven marketing activity this summer. And it should be at least -- it will be no worse than neutral, and we think it will be a net positive for us. We couldn't put a number on it right now. We're just pleased that our customers continue to see the value that I spoke about earlier of the beverage can. It provides an amazing billboard for them to talk about that promotion. They can use it as a multipack or a single different sizes and the robustness of the package means that they can lean into the can as opposed to other packaging substrates because of the shelf life and the quality that, that can provides for their product. Unknown Analyst: Got it. That's helpful. And then just a follow-up question. The EVA framework really seems to be working well in setting a clear guideline and goals on the corporate level. So could you just talk a little bit about how the EVA framework is being used to like incentivize employees at the plant level and to make operational decisions and is that what's driving operational efficiency on the corporate level as well. Ron Lewis: Thanks for the question, Hilary. I'll let Dan say a few words in a moment about EVA, but it just gives me a chance to say, EVA is our North Star. It hasn't for a long, long time, and it will continue to be for the foreseeable future. So how we deploy capital, running a cost-efficient business, that's what acting like an owner means. So as it relates to our plants, all of us are rewarded for delivering EVA dollars, every single person in this company. And maybe, Dan, could you give some nuance around how we're thinking about EVA operationally? Daniel Rabbitt: Yes. Yes, the nice thing about having EVA is it's been here longer than Ron and I have. And so it's really ingrained in the culture. We do like to have everybody included in these plans. And what we're really focused on now is breaking EVA down from this financial concept into what they can actually do to improve EVA. So we're making it much more personal. And that's one of the key items we're doing to improve the profitability of the company right now is really getting much more granular and breaking down EVA. Operator: Our final question will be from Matt Roberts with Raymond James. Matthew Roberts: I got a couple of messages clarifications on first April. I know you said that was up mid-single digits. What region was that? Or was that enterprise wide? I believe South America, you said April up 20%. How much of that 20% was the catch-up from 1Q? Ron Lewis: Thanks for the question, Matt. So enterprise-wide, we started the quarter, the month of April, up mid-single digits as an enterprise. Within that enterprise, South America, April volumes were up 20%. How much of it was catch-up from Q1? Well, what I can say is that April volume made up for all of the declines we saw in the first quarter. And it gives me a moment to just say what happened in the first quarter. What happened in the first quarter for us was you saw a really strong volume for us, high single digits in Q4 2025. So we came into the to Q1 with a pretty healthy sales of cans to our customers who had built a strong inventory. The peak season in South America, weather wasn't probably as good as on average that it would normally be. So it was a little weaker than average, but the -- coming out of peak, the weather has been quite good. And we're seeing a strong pull through as we come out of that peak selling season in South America. And we think that's some of what's happening. And it wasn't asked, but we delivered flat operating earnings in the region, which we're really proud of. And how we did that was we actually got to a position where our inventory levels were a bit lower than we expected. So we were able to build back our inventory, which helped us to deliver the P&L in South America. And also, we had some good size mix and country mix there as well that helped us deliver flat operating earnings while we had volumes down a bit. So hope that answers your question about the volume and a little bonus on color on South America. Okay. Thank you very much, Matt. And Sherry, I think that's our last question. So I just wanted to thank everybody again for your interest in our company. our analysis of our company, your partnership in helping us tell our story. We really appreciate that very much. We look forward to talking with all of you more and sharing our story. So we're excited about how we delivered the first quarter of 2026. We're confident in how we're going to complete 2026. And importantly, we're confident in the long-term nature and the resilient business that we have the privilege to run. So thanks again, everyone, and we look forward to talking to you very soon. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Greetings, and welcome to Jacobs Solutions Inc.'s fiscal second quarter 2026 earnings conference call and webcast. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Bert Subin, Senior Vice President, Investor Relations. Thank you. You may begin. Bert Subin: [inaudible] Robert V. Pragada: Solid year-over-year margin expansion and continued robust sales activity. I will quickly highlight a few key takeaways. First, adjusted EPS grew 22% to $1.75 supported by 9% organic net revenue growth, outpacing the 8% growth rate in Q1, and 70 basis points of year-over-year margin expansion. Second, our backlog grew 22% to $27 billion, setting another new record, with a trailing 12-month book-to-bill of 1.4x on gross revenue and 1.2x on net revenue. And third, we completed the acquisition of PA Consulting, which we celebrated together by ringing the closing bell at the New York Stock Exchange in March. In summary, we are exiting Q2 with significant momentum, and the strong first half of the year gives us confidence to increase our FY 2026 outlook for the second time in two quarters, which Venk will walk through shortly. Turning to slide four, we provide a detailed overview of the quarter. We are very pleased with Q2 results as strong operating performance, paired with our lower share count, drove the fifth straight quarter of double-digit growth in adjusted EPS. During Q2, we also delivered another quarterly book-to-bill above 1.0x with both gross and net coming in at 1.2x. The addition of the net revenue book-to-bill metric will provide useful context for our investors and analysts and reinforces the strength in our bookings over the last 12 months. Turning to slide five, I would like to highlight a few notable project awards from the second quarter. But before I do that, I want to recognize a major achievement. Jacobs Solutions Inc. has been ranked the number one design firm by Engineering News-Record in their newly released 2026 Top 500 report, marking the seventh time in the last eight years we have held this ranking. Our strong organic growth profile helped us earn this honor, and I want to thank our 47 thousand colleagues for delivering leading solutions to our clients every single day. Now moving on to Q2 awards. In Water and Environmental, Jacobs Solutions Inc. was selected by the San Francisco Public Utilities Commission to deliver the Southeast Wastewater Treatment Plant, a landmark investment in environmental protection for the San Francisco Bay. The project will upgrade San Francisco's largest wastewater facility, positioning the plant as the first major discharger to proactively meet new nitrogen limits for the Bay. This highlights another significant award in one of our fastest growing sectors, and positions Jacobs Solutions Inc. for similar regulatory-driven investments emerging across Northern California, the Pacific Northwest, and the Great Lakes. Also within Water and Environmental, Jacobs Solutions Inc. and PA have secured a two-year economics and policy consultancy contract with Ofwat, the UK water regulator. The engagement brings together industry-leading expertise across water regulation as well as financial, technical, and strategic consulting. Our solution will be delivered to support pricing, performance oversight, and policy development tied to substantial investment across the AMP8 cycle and beyond. In Life Sciences and Advanced Manufacturing, we had multiple wins with hyperscalers and other data center customers spanning the full project lifecycle—from advisory, design, program management, and digital solutions, to full EPCM. This includes our recently released data center digital twin developed using the NVIDIA Omniverse DSX Blueprint. Our strategic partnership with NVIDIA continues to gain momentum as we work to expedite the delivery of AI factories with compute load requirements rising substantially. Last year at our Investor Day, we laid out a roadmap for how we believe our data center business would evolve, and the combination of our deep domain expertise, our full asset lifecycle model, and the expansion of AI investment has accelerated that journey. We grew our data center business by more than 100% year-over-year in Q2, and we see very strong runway to build on that success in the second half of the year. And it is more than the data center sector. We are seeing rising demand in semiconductors, water, and energy and power as the technology and infrastructure go hand in hand. This is bolstering total revenue growth, with our backlog and pipeline indicating the investment cycle is still in the early stages. Moving on to Critical Infrastructure, Jacobs Solutions Inc. was selected as lead designer at Dallas Fort Worth International Airport as part of the Terminal F expansion. The project involves existing bridge span operations essential to allow for up to 16 additional gates and support the airport's growing demand. Combining bridge design expertise with the unique challenge of maintaining operability of the Skylink people mover during all phases of construction, we are modernizing the infrastructure while keeping passengers moving. Jacobs Solutions Inc. is ranked as Engineering News-Record’s number one firm in aviation, a sector where we continue to see significant growth in demand for terminal upgrades and new builds. In summary, we continue to build on our industry leadership in sectors like wastewater, aviation, and data centers, securing key awards that position us for growth in the second half of the year and into FY 2027. Now I will turn the call over to Venk to review our financials in further detail. Venkatesh R. Nathamuni: Thank you, Bob, and good afternoon, everyone. Please turn to slide six where I will walk through our results for Q2. Gross revenue increased 27% year-over-year, and adjusted net revenue, which excludes pass-through revenue, grew by 9%. These both represent the highest consolidated growth rates for the company since the separation of our government services business in 2024. Q2 adjusted EBITDA was $327 million, growing more than 14%, with our margin coming in at 14.1%, up 70 basis points year-over-year driven by good operating discipline. This resulted in adjusted EPS rising 22% year-over-year. Consolidated backlog was also up 22% year-over-year to a record $27 billion, with a trailing 12-month book-to-bill at 1.4x. Book-to-bill was strong again in Q2, driven by good awards activity across our end markets. Additionally, on a year-over-year basis, net revenue and gross profit in backlog increased 12% and 15%, respectively, during Q2. We are demonstrating faster organic growth in the business today, and our strong bookings position us well as we look out to fiscal year 2027. As you have seen since the separation of our government services business in fiscal year 2024, our earnings quality has been improving. However, as a result of the PA transaction, which we have previously communicated, there was a wider than normal spread between GAAP and adjusted EPS in Q2, and we anticipate a more normal differential between GAAP and adjusted EPS in Q3 and beyond. Regarding our performance by end market, please turn to slide seven. At a high level, we continue to see strong growth rates in Life Sciences and Advanced Manufacturing as well as in Critical Infrastructure. Focusing on Life Sciences and Advanced Manufacturing, net revenue grew 12% in Q2, our highest growth rate since we began reporting end markets in late 2024. Combining acceleration in advanced manufacturing with continued solid performance in the life sciences sector has resulted in a double-digit top line increase for the end market, and we expect revenue growth will likely exceed Q2’s level in the second half of the year. Shifting to Critical Infrastructure, net revenue increased 9% over Q2 2025. Critical Infrastructure continues to be led by strong growth in the transportation sector, where our rail, aviation, and ports businesses grew double digits, as well as in the energy and power sector on the heels of high demand for transmission and distribution services. Net revenue growth in our Water and Environmental end market came in at 2% as strength in water, which continued to grow in line with our target, was offset by softness in the environmental sector. Performance for our environmental business is on track to show meaningful year-over-year improvement as we reach Q4. In summary, we saw diversified strength across our end markets during Q2. Moving now to slide eight, I will provide a brief overview of our segment financials. In Q2, I&AF operating profit increased 11% year-over-year, or just over 8% on a constant currency basis. PA Consulting operating profit increased 19% as revenue grew 17% and operating margin came in strong at 22%. On a constant currency basis, operating profit grew 12%. PA has seen demand tailwinds from national security and public sector work in the UK. The business is well positioned to help advise on European defense strategy as well as implement digital solutions across the entire region. Combined with Jacobs Solutions Inc.’s proven history of delivering complex manufacturing and national security infrastructure, we see a compelling opportunity to augment growth in the sector. Focusing on the second half of the year, we believe PA will continue to grow revenue high single digits on a constant currency basis. Now moving on to slide nine, we provide an overview of cash generation and our balance sheet. For Q2, we had an adjusted free cash outflow of $272 million, partly as a function of a favorable Q1 cash timing item that reversed in Q2. This brings our first half adjusted free cash flow to $93 million, a solid increase over fiscal year 2025. I just want to note we are highlighting an adjusted free cash flow figure as we have to account for a portion of the PA transaction proceeds in operating cash under US GAAP reporting guidelines. These entries impacted Q2 reported free cash flow by approximately $233 million and will impact Q3 reported free cash flow by just over $100 million. It is important to keep in mind these amounts were already included as part of the upfront consideration paid in connection with the transaction. Focusing on capital returns, we remained aggressive repurchasers of our shares during Q2 to take advantage of the value of our stock. Consequently, our total repurchases in the first half of the year were $472 million, which puts us ahead of our annual target of returning at least 60% of free cash flow back to our shareholders. Our balance sheet is in good shape following the acquisition of PA Consulting, with net leverage of 2.1x ending the quarter, and we plan to return to below 2.0x by year end. Additionally, our weighted average interest rate has declined to around 5% following the successful refinancing of our debt stack and issuance of new bonds to fund the acquisition. Net leverage is roughly half a turn above our target range, but the increase in EBITDA from the full inclusion of PA as well as our strong outlook for cash generation positions us to lower our net leverage ratio back toward 1.5x during fiscal year 2027. Please turn to slide 10 for our updated fiscal year 2026 outlook. Inclusive of our acquisition of PA Consulting, we are increasing our forecast for adjusted net revenue growth, adjusted EBITDA margin, and adjusted EPS relative to our guidance from last quarter. We are increasing our FY 2026 organic net revenue growth range to 8% to 10.5% year-over-year, adjusted EBITDA margin range to 14.6% to 14.9%, and adjusted EPS range to $7.10 to $7.35. We continue to anticipate adjusted free cash flow margin will range from 7% to 8.5%. Notably, our outlook for FY 2026 now implies 18% year-over-year growth in adjusted EPS at the midpoint. As it pertains to Q3, we expect our adjusted EBITDA margin to be approximately 15% with year-over-year net revenue growth of approximately 7.5%. This implies a margin above 16% in Q4 on double-digit top line growth inclusive of the extra week we will have this year during that quarter. Additionally, we expect our adjusted effective tax rate will be in the 27% to 28% range in Q3 and in Q4. We have good line of sight to achieving our updated fiscal year 2026 targets, and we are pleased to be trending well ahead of our initial outlook for the year. Now turn to slide number 11 for a few updates to our fiscal year 2029 targets. We are reaffirming our range of 6% to 8% organic growth on a five-year compounded annual growth rate basis for net revenue. Combining our fiscal year 2025 result and the midpoint of our fiscal year 2026 guidance, we would be ahead of the midpoint in the first two years. Adding this to our central positioning in the buildout of AI infrastructure, and the potential for growing revenue synergies with PA, leads us to believe we will meet or exceed a 7% compounded annual growth rate. As it pertains to adjusted EBITDA margin, we are increasing our target 100 basis points to 17%+ for fiscal year 2029. This is due to the implementation of gross margin and G&A initiatives that are well underway as well as the acquisition of the remaining stake in PA Consulting, where we currently see opportunity for at least $20 million in annual cost synergies. This implies at least 75 basis points of identified annual margin improvement from fiscal year 2027 through fiscal year 2029, in addition to the 200 basis points we are expecting to deliver over the course of fiscal year 2025 and fiscal year 2026. And lastly, our high-margin expectation and working capital management give us confidence we can now reach or exceed an 11% free cash flow margin, also up 100 basis points from our prior target. At our forecasted growth rate, that implies $1.2 billion to $1.3 billion of annual free cash generation by fiscal year 2029. We are off to a great start just about one-third of the way through our strategy cycle. With that, I will turn the call back over to Bob. Robert V. Pragada: Thank you, Venk. In closing, we are tracking very well heading into the second half of the fiscal year, with strong Q2 performance enabling us to increase our full-year outlook for the second consecutive quarter. We are seeing momentum in our growth rate, margin, and bookings trajectory, all of which give us confidence in our outlook. Operator, open the call for questions. Operator: We will now open the call for questions. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Steven Fisher with UBS. Your line is open. Please go ahead. Steven Fisher: Thanks. Good afternoon, and congrats on the quarter. I just want to ask you at a high level, how much of the raise is driven operationally by, say, better-than-expected demand or operational performance versus bringing the rest of PA Consulting in? We had done some calculations that maybe it would be about a $0.10 to $0.20 increase from PA Consulting. Maybe our math was off. But just curious how much was operational and, if so, where within the segment did you see that upside? Robert V. Pragada: Yes. So, Steve, maybe I will start and then I will hand it over to Venk. At a high level, it is purely based on our operational performance. The drive we are seeing in our bookings and how that is translating into our run rate drove the top line. Venkatesh R. Nathamuni: Yes. Thanks, Steve, for the comment. As Bob mentioned, pretty solid performance on the I&AF side of the business. We got a little bit of a tailwind from PA from an FX perspective, but the bulk of our operational performance is driven by the I&AF section. In addition, from a margin perspective—and I alluded to this in my prepared remarks—a lot of operating discipline in terms of keeping tight controls and, in conjunction with some of the margin improvement that you saw, that is what drove the true outperformance. Steven Fisher: Okay. That is very helpful. And then just talking about AI and digital enablement, can you give us an update on what the customer receptivity has been in the past few months to your digital tools and anything AI-enabled? And to what extent are you seeing incrementally more margin opportunities coming from that and when might we see some of that coming through more materially? Robert V. Pragada: Yes. Steve, thanks for asking the question. AI is absolutely driving our business in what is going on with the AI infrastructure buildout. We are seriously at an inflection point, and it is accelerating our entire business. I will quantify what that means. Within the data center space, which right now represents between 3% to 4% of our overall business, that is growing at 100% year-over-year. Now the AI ecosystem—which would include all the way from the beginning to the chips, through the power and energy requirements, and then how that is feeding the data center world—represents, in its entirety with our diversified offering, between 10% to 11% of our overall business, and that is growing in excess of 40%. So you are talking about a significant part of our business that is growing at a very fast rate, all centered around the AI infrastructure build. Then it is having an indirect effect on AI in drug discovery and what is happening with sectors that would not traditionally be affiliated with AI. We are well positioned in the AI CapEx and AI infrastructure world, and our enablement internally is helping us become more efficient and deliver to that demand. Thank you. Operator: Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open. Please go ahead. Sabahat Khan: Thanks, and good afternoon. Extending the line of questioning that Steve started, one of the themes we are discussing a lot is the visibility to these types of projects for suppliers and vendors like yourself. Can you talk about demand? It sounds like it is growing at a very high clip, but what is the line of sight to projects? Is it six months, 12 months, multiple years? Please talk to us about near- to medium-term visibility in that end market specifically. Thanks. Robert V. Pragada: Yes. Saba, just to clarify, specifically around the AI infrastructure build, or are you talking broadly across all of our end markets? Sabahat Khan: More specifically the data center and the 100% clip you talked about—the growth in that end market. Robert V. Pragada: Absolutely. Let me quantify it first, Saba. Our AI infrastructure pipeline—the data center component of that—has gone up 400% year-over-year. We have visibility well through 2027, going into 2028. Our long-term, relationship-based client model is gaining share of that client spend. These are the top hyperscalers as well as now the neo-cloud providers that are being supported. What is backing that visibility is our relationship with NVIDIA—our work on the digital twin, the work we are doing around the plan of record, and then as that is evolving with the next-generation chip. Now we are talking about Rubin, and we are in the middle of developing that plan of record. It is tying us back into these AI players, so the visibility is strong. Sabahat Khan: Great. And then maybe just a question for Venk. On the balance sheet side, assuming you are at 2.1x, just above your targeted year-end range, can you help us think through the likelihood of buybacks? Is it going to be more opportunistic, and how are you thinking about broader capital allocation given the free cash flow and the leverage for the rest of the year? Thanks. Venkatesh R. Nathamuni: Yes, Saba. As we highlighted during the press announcement, we did take on some debt to fund the acquisition. We are about 2.1x, but we have a clear plan to delever pretty quickly, and we said we will be below 2.0x by the end of fiscal year 2026, which is just a quarter and a half away. We have also been very aggressive in terms of our share repurchases. We are big believers in the value of our stock and will continue to maintain the share repurchase activity. We will modulate the quantum based on market conditions, but our goals are to continue to reduce our leverage—as I said, we can get to 1.5x in fiscal 2027—as well as repurchases of our stock. One thing to note is that our second half tends to be very seasonally strong from a free cash flow perspective. We are expecting $600 million to $700 million of free cash flow in 2H, so that helps us delever fairly quickly. We have a lot of optionality and the ability to do both the buyback as well as delever without straining the balance sheet. Sabahat Khan: Thanks very much. Venkatesh R. Nathamuni: You are welcome. Operator: Your next question comes from the line of Michael Dudas with Vertical Research. Your line is open. Please go ahead. Michael Stephan Dudas: Good afternoon, gentlemen. Hey, Bob, you have had five years of insight into what 100% ownership of PA Consulting means for Jacobs Solutions Inc. What areas should we look for over the next six to 12 months that might show up and help not only bookings, or be more lifecycle-driven, or maybe even better on the margin front as you move through the plan of the combined company? Robert V. Pragada: Yes, Mike. I would probably segregate it into two parts. One is a capability set that we have been working on over the course of that runway of five years together and the relationship we have had. And then second, applying that to the adjacencies where we have already got a track record by end market. On capabilities, over the last five years we have really built out our digital capability set. This spans everything from software developers through to digital platforms and digital products that are enabling innovation within our clients’ businesses, as well as our own. Together, we have nearly 2 thousand digital experts, and we are integrating that as one company platform. For end markets, in Europe we are seeing activity in national security and the public sector. In the US, energy and utilities, and transport. In Europe, with a more independent defense posture, PA’s deep entrenchment—not just with the UK MOD, but also now with sovereign nations in Europe building up their own defense posture—is turning into defense infrastructure. That asset lifecycle is something that we are primed as a combined entity to deliver, as well as increased digitization enablement in government where PA is in the middle of it. In the US, it is really around energy and utilities and transport—end-to-end from transport advisory through to delivering complex programs and projects. With the combined digital capability and driving that in energy and utilities, again driven by the AI infrastructure we just talked about, we are excited about the future. Michael Stephan Dudas: My follow-up: Critical Infrastructure is showing very strong growth this quarter. It has been chugging along quite well and probably gets lost in the headlines given all the data center and advanced facilities work. Do you continue to see very solid opportunities in the second half and into 2027? And any additional thoughts on IIJA 2.0 and whether your clients are concerned about potential issues if there is a delay with Congress and changes? Robert V. Pragada: Mike, I will separate that into two as well. We are proud about the Critical Infrastructure piece. That is being driven by two primary areas. One is global transportation. We are seeing strong high single-digit, and in certain geographies double-digit, growth within transportation. That is around continued buildout of the aviation sector as well as ports and maritime, which is a strong subsector for us. These have long-tail design-and-build cycles, and we are really starting to see the fruits of that. Second, in the US, on IIJA and what happens with the election this year—we have modeled every scenario. In each scenario, we see at a minimum a continuing resolution, which would be good for us. Then what happens on the extension of IIJA—whether there is a new bill—looks promising, but it is too early to speculate. Even on a continuing resolution, these are long-tail programs, and we are only about 50% outlaid on the current IIJA. So things continue to look solid. Thank you, Michael. Operator: Your next question comes from the line of Adam Bubes with Goldman Sachs. Your line is open. Please go ahead. Adam Bubes: Hi. Good afternoon. Can you help us parse out the new, more universal guidance? Is there a way to frame what incremental EBITDA in the new guide is coming from the acquired stake in PA Consulting and how much of the incremental EBITDA uplift is underlying? Venkatesh R. Nathamuni: I will take that, Adam. I will separate it into fiscal year 2026 guidance and the fiscal year 2029 targets. In fiscal year 2026, we increased our adjusted EBITDA margin range from 14.6% to 14.9%. That is primarily driven by the full consolidation of PA, but there are additional measures and initiatives we are putting in place that drive margin expansion. On fiscal year 2029, it is not just the PA consolidation but also multiple identified initiatives in terms of gross margin drivers, how we engage with the commercial model, and the increased use of AI, and our global business and global delivery model. The vast majority comes from operational improvements across both the commercial model and delivery, and that is progressing well. We are also making a commitment to continue to drive operating leverage such that we will grow OpEx at a substantially lower rate than revenue. It is not one thing—it is a multitude of tools we have to drive continued margin expansion. Adam Bubes: Great. And can you update us on how you expect your AI-integrated offerings to evolve over the next 12 to 16 months? Any incremental investments or opportunities on that side? Robert V. Pragada: Adam, on incremental investments, we do not see the need. We have been investing in digital enablement for the better part of seven years. I do not see us needing to make a huge investment to continue on our current trajectory. The way it is evolving is that it is being pulled from the market with the acceleration we are seeing in our end markets. What we are doing for our clients and for ourselves is in full gear and accelerating. Again, AI infrastructure—which is the virtuous cycle—is driving that, and we are centrally positioned for that entire buildout. Adam Bubes: Great. Thanks so much. Operator: Your next question comes from the line of Analyst with KeyBanc Capital Markets. Your line is open. Please go ahead. Analyst: Great. Thank you so much. Bob, can you give us an update on the Middle East and what you are seeing there in terms of activity levels, and how your folks are handling the situation? Robert V. Pragada: First and foremost, we have been acutely focused on the safety of our people. From the beginning until now, every single day we have crisis management teams stood up and are doing not just daily, but hourly, check-ins on our people, and they continue to be extremely resilient. Second, we have been very deliberate and vocal about focusing on time-based, mission-critical programs and projects in the Middle East—predominantly in Saudi and in the Emirates. Those have continued, centered around transportation as well as water and time-based venues, and those have not stopped. I would characterize it as minimal disruption, and the team has been extremely resilient in delivering, including from the confines of their own home. Just today, we went back into a work-from-home scenario. The backbone of this, as Venk has talked about several times before, is our global delivery model. We are delivering services for our clients not only with folks in-country and in-region, but also from around the world. That has really been highlighted and has served as a strength. Analyst: Great. That is super helpful. And then I know we have talked about data centers on this call, but can you tell us what you are seeing in life sciences and advanced pharmaceuticals, and if there is any appetite to reshore even further back to the US? Robert V. Pragada: Absolutely. The life sciences business is, in real-time pipeline, up 81% year-over-year. A lot of in-flight pursuits where we have been in the early stages are soon to be going into the field. That business—into the field in the US—remains strong, and we are now starting to see a bit of a build going on in Europe as well. It goes through different phases, so some of that reshoring activity that started a year or two ago will start to mature in the field over the course of the next few quarters. Analyst: Thank you so much. Operator: Your next question comes from the line of Jamie Cook with Truist Securities. Your line is open. Please go ahead. Jamie Cook: Hi. Good evening, and congrats on a nice quarter. Venk, I am looking at the EBITDA margin trajectory implied in the back half of the guidance. I think you said Q3 approximately 15%, Q4 approximately 16%. Understanding it is PA Consulting and maybe an extra week, but structurally there seems to be margin improvement. Given where the margins are implied in the back half, what is the setup for fiscal year 2027? It does not seem like the Street is factoring in margins implied in the back half. Are we missing the margin opportunity potential? Thank you. Venkatesh R. Nathamuni: Jamie, thanks for the question. As you pointed out, we guided for 15% in Q3, which would represent about a 90 basis point sequential improvement, which is pretty good. That would imply 16%+ in Q4. As I have talked about, we are investing in some programs that are margin-accretive in Q4. We have identified them and are ramping those investments for delivery in Q4. The fact that we have executed on that gives us good visibility to 16%+ in Q4. We feel pretty good about the margin trajectory. Looking beyond Q4, there is still substantial margin improvement ahead of us. To put things in context, fiscal 2025 and 2026 together would deliver about 200 basis points of margin expansion, and then we are guiding for another 75 basis points per year. Some of the other margin drivers apart from gross margin initiatives include global delivery and mix. As we combine PA Consulting and Jacobs Solutions Inc., the opportunity to deliver on the entirety of the asset lifecycle, and the fact that PA margins are substantially higher, gives us the option to upsell those margins as well. Lots of room to continue to execute on margins, and we feel pretty good about our guidance. Thank you. Operator: Your next question comes from the line of Jerry Revich with Wells Fargo. Your line is open. Please go ahead. Jerry Revich: Yes. Hi. Good evening. Nice to see the really strong bookings performance. Do you have the resources on hand, from a capacity standpoint, to ramp up to potentially double-digit organic growth—the extra week notwithstanding in the fourth quarter? And if you do get to that level of growth, what are the implications for additional margin beyond what you laid out? Robert V. Pragada: Absolutely. The short answer is yes, we do have the capacity. This goes to what we have been talking about and highlighted in our strategy—the global delivery model. Year-over-year, the growth in what we call global delivery is well into the double digits. Our ability to access talented labor delivering at a very high level has been very strong. Our resourcing to meet what is in our backlog, coupled with the progress on those programs and engagements, is strong, and it is driving the margins. So it is yes on the margin front as well. Jerry Revich: Super. And then on reshoring, one area where we are seeing significant progress is in semis, and the industry group is talking about a return to 2024 highs of CapEx for semis into next year. Is that consistent with the opportunities you see? Is there potential for additional projects to move forward beyond what the group is looking for in 2027? Robert V. Pragada: Jerry, yes and yes. We are seeing that investment in the semi sector, and we see that cycle transcending well into 2027. What is important is what is driving it, and it goes back to the earlier comments around the AI infrastructure. Where we are positioned right now on high-bandwidth memory manufacturing facilities is putting us on the front end of what then translates into the utility sector and eventually into the compute load in the data centers. Seeing it across that ecosystem is what is driving our business right now. The relationships we have with high-bandwidth memory manufacturers, as well as ASIC and other logic providers, are coming through. Jerry Revich: Thank you. Operator: Your next question comes from the line of Andrew John Wittmann with Baird. Your line is open. Please go ahead. Andrew John Wittmann: Thanks for taking my questions. On the longer-term margin outlook—the 75 basis points a year—you have talked about the various areas: commercial models, global delivery, etc. Are those out-year drivers any different from the ones you have been realizing over the last two very strong years? And are the benefits in those out years going to come from basic blocking and tackling, or do you have to launch new initiatives to achieve those things? In other words, is that going to cost you cash to implement changes? Venkatesh R. Nathamuni: Thanks, Andy. The margin trajectory—200 basis points over fiscal 2025 and 2026, and then 75 basis points per year thereafter—is a combination of several things that are well underway. In the first year, I would characterize it as mostly driven by operating line benefits from the separation of the CMS and C&I business and rightsizing. Everything thereafter has been driven by specific initiatives—gross margin actions, the global delivery model increasing in pace, scope, and scale, and operating leverage. On the enterprise side, how we run functions like finance and legal, deploying AI, is also driving margin expansion. On CapEx, our investments have been about 1% of revenue, and we are reallocating capital—traditionally in SaaS software—now more to AI-based tools. That is giving us productivity improvements without having to raise our CapEx numbers. Andrew John Wittmann: Thanks for that. For my follow-up, you alluded in your prepared remarks to the unusually high level of transaction costs. I am guessing some of the consideration you paid for PA was required to be recognized as operating cash rather than investing cash—that is probably most of it. Was there anything else in there? And because you mentioned there will be a fiscal third-quarter cash outflow in addition to the substantial cash outflow recognized this quarter, does that mean the exclusions next quarter might be relatively high as well? I know you commented it was mostly contained in the second quarter, but I am trying to get a sense of the balance of the year and then that “nirvana state,” hopefully in Q4, where these kinds of exclusions will not be as apparent. Venkatesh R. Nathamuni: Andy, you are exactly right. The accounting treatment necessitated that part of the consideration be included in cash flow from operations as opposed to investing or financing, and that is why you saw the exclusion. Roughly $235 million of it was compensation expense acceleration for the vesting of shares. In Q3, we called out about $101 million to $105 million of employee benefit trust payments, and then we are done. Even with Q3, that is already imputed in the P&L, so it is only a cash flow item in Q3. One other point: over the last couple of years, we have been steadily decreasing our restructuring cost, and we are on track to be substantially lower in fiscal 2026 compared to fiscal 2025. Andrew John Wittmann: Great. Thanks for that. Operator: Your next question comes from the line of Natalia Bach with Citi. Your line is open. Please go ahead. Natalia Bach: Hi. Good evening. Congrats on a nice quarter. Now that PA is 100% under Jacobs Solutions Inc., can you frame for us the potential for sales synergies accelerating? Robert V. Pragada: Very high. We had certain elements—mostly UK regulations around conflict of interest—affecting visibility into each other’s sales pipelines. The way I described the joint opportunities before—expanding the shaded area of the Venn diagram—now that restriction is gone. The pipeline has really increased with joint go-to-market opportunities. The innovation and delivery across the entirety of the asset lifecycle, which we did collaboratively when we had the majority, will also accelerate. It will increase the operating TAM. The main areas: defense infrastructure and national security in Europe, and in the US, transportation and energy and utilities—again feeding the AI infrastructure. Natalia Bach: Got it. Much appreciated. And then on the cost synergy side, any low hanging fruit opportunities in the near term? Venkatesh R. Nathamuni: Yes. In terms of cost synergies, when we closed the transaction a few weeks back, we announced roughly £12 million to £15 million of synergies. We have now identified specific opportunities from a cost perspective and see at least $20 million in annual cost synergies as we scale through fiscal 2027. Operator: There are no further questions at this time. I will now turn the call back to Bert. Bert Subin: Thank you, Kara. I know we got cut off in the beginning—we lost about a minute due to audio challenges. I want to mention that I refer you to slide two of the presentation for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. I apologize for the technical difficulties. I will now pass it over to Bob for some closing remarks. Robert V. Pragada: Thanks, Bert, and thank you, everyone, for joining our earnings call. We look forward to engaging with many of you over the coming days and weeks. Have a good evening, good day, and good morning, depending on where you are joining from. Thanks, everyone. Operator: This concludes today’s call. You may disconnect.