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Operator: Hello, everyone. Thank you for joining us, and welcome to the Finance of America First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Michael Fant, Senior Vice President of Finance. Michael, please go ahead. Michael Fant: Thank you, and good afternoon, everyone, and welcome to Finance of America's First Quarter 2026 Earnings Call. With me today are Graham Fleming, Chief Executive Officer; Kristen Sieffert, President; and Matt Engel, Chief Financial Officer. As a reminder, this call is being recorded, and you can find the earnings release and related presentation on our Investor Relations website at ir.financefamericacompanies.com (sic) [ ir@financeofamerica.com ]. Also, I would like to remind everyone that comments on this conference call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations and are subject to the safe harbor statement for forward-looking statements that you will find in today's earnings release. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors, including those that are described in the Risk Factors section of Finance of America's annual report on Form 10-K for the year ended December 31, 2025, filed with the SEC on March 13, 2026. Such risk factors may be amended and updated in our subsequent filings with the SEC. We are not undertaking any commitment to update these statements if conditions change. Please note, today, we will be discussing interim period financials for our continuing operations, which are unaudited. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures to the extent available without unreasonable efforts in our earnings press release and presentation on the Investor Relations page of our website. Now I will turn the call over to our Chief Executive Officer, Graham Fleming. Graham? Graham Fleming: Thank you, Michael, and good afternoon, everyone. The first quarter of 2026 was an outstanding quarter, with operational momentum in originations driving an acceleration of volumes, excellent profitability in our Portfolio Management segment, and steady improvement in our financial results, liquidity, and capital position. On our call today, I will take you through the highlights, then spend a moment commenting on the market opportunity in reverse mortgages, which we believe is significant; Kristen will dive into our originations performance; Matt will comment on the financials; and then we will take your questions. To start with, if you turn to Slide 5 of the accompanying presentation, Finance of America generated net income of $35 million and adjusted net income of $26 million, or $1.10 per share, up 112% from last year's first quarter results. This powered a strong increase in tangible equity to $268 million, or approximately $15 per share. These results are consistent with the guidance we have issued for 2026, which Matt will update you on in a moment. From a production standpoint, we funded $596 million in the quarter, up 6% year-over-year. As you will recall, we talked about operational enhancements to our platform, driving an inflection point in results, and we are starting to see that in the March and April fundings, consistent with the volume guidance we have shared with you. Separately, I'm excited to see us rolling out a new second-lien reverse mortgage line of credit, which is a great product to help seniors tap directly with the timing and amounts that precisely suit their needs. Regarding the previously announced PHH transaction, the transaction has been modified to close in 2 distinct phases. The first phase, consisting of the origination, marketing of our products and subservicing components, is expected to close in May. The second phase, which includes the purchase of HECM servicing rights, will follow as we continue to work with our primary regulator, Ginnie Mae, on the related approval. Additional information can be found in today's 8-K filing with the SEC. Before turning the call over to Kristen, I would like to spend a moment on the opportunity in reverse mortgages, which are typically viewed as a niche product in the broader mortgage universe, and in our experience are not well understood by investors missing the growth potential. If you turn to Slide 6, let me share with you a snapshot on current industry volumes. As you can see from the top chart of this slide, government-insured reverse mortgages, or HECMs, have been running roughly flat for the last 3 years at approximately $4 billion per year, down significantly from the boom experienced during the pandemic, driven by refinance activity. What is noteworthy, but is somewhat hard to see given the lack of consistently available industry data, is the market expansion related to proprietary products. This is one of the reasons we believe the equity markets have been slow to pick up on the opportunity. These proprietary products significantly expand the market by making reverse mortgages available to borrowers aged 55 and older in certain states, compared to age 62 for government-insured products, and by offering jumbo balances and a range of product structures, including first liens, second liens, and lines of credit. For example, Finance of America's second-lien products can provide a solution for borrowers who want to access home equity while maintaining a low rate primary mortgage. These products are really important to watch because their increasing origination volumes demonstrate the growing mainstream acceptance of reverse mortgages by American seniors. Finance of America has been the market leader in proprietary reverse products for over a decade. These products have been a significant and accelerating driver of our growth over the last 3 years as they continue to gain acceptance from our customers and from our investors alike. With this thought in mind, if you will turn to Slide 7, I will end my prepared remarks by reminding you that American seniors control a massive amount of home equity, approximately $14.6 trillion. And this equity is expected to continue to grow as homes continue to appreciate and as the population ages. Between 2024 and 2026, census data shows that over 11,000 Americans turn 65 every day. Now these are big numbers, making the addressable market more than 100x greater than the size of the entire reverse mortgage population outstanding today, and not everyone is going to become a reverse customer. However, as the proprietary product set continues to expand and American seniors turn to home equity for an ever -widening set of use cases, we believe there is a massive multiyear growth opportunity shaping up for Finance of America. And with that, I'll turn the call over to Kristen. Kristen Sieffert: Thanks, Graham, and good afternoon, everyone. Last quarter, I said we were reaching an inflection point in the platform. What we saw in the first quarter reinforces that view, and we can see it clearly in the numbers. Turning to Slide 8. Overall originations were up 6% year-over-year, and first quarter submissions reached a new high of $918 million, which is up 20% year-over-year. Submissions represent customers who've completed their application and provided all supporting paperwork. They're one of our clearest leading indicators of future funded volume and why we remain confident in our volume guidance. Our volumes reflect a mix of both HECM and proprietary products across first and second liens. I specifically call out our HomeSafe Second, which reached a high watermark in the quarter, increasing 32% year-over-year. And as Graham mentioned, we rolled out a new line of credit option for HomeSafe Second, further expanding the use cases for our customers. Finance of America has long been a leader in proprietary products supported by our understanding of the customer and strong capital markets relationships, which continue to support growth across both our retail and wholesale channels. While HECM is structured to a one-size-fits-all approach, FOA's industry-leading product development and partnerships allow us to better target the various and bespoke needs of our massive customer base, which will lead to continued profitable growth. Turning to Slide 9. At the top of the funnel, momentum exiting the quarter was strong. Inquiry volume in March was up 84% versus the 2025 average, while cost per inquiry declined 19%. Opportunities, defined as qualified warm transfers to loan officers, also reached a new high in March, up roughly 58% over 2025 levels. Further down the funnel, we're seeing equally strong progress in early conversion. Borrowers opting into our digital prequalification experience more than doubled sequentially, and submissions per loan officer in March reached the highest level in the history of our retail channel, up 47% compared to 2025 levels. These improvements are being driven by the operating model we've been building. Helix is our proprietary, industry-first, end-to-end platform that connects how we acquire, evaluate, and move customers through the process, with Joy operating as the AI layer across that system. The deployment of AI is helping us in 2 ways: first, by allowing us to more consistently match customers with the right solution and improve their overall experience; and second, by improving our top-of-funnel marketing and resulting cost per lead. Incorporating AI across the platform is driving meaningful improvements that will compound as we grow and scale. Helix and Joy give us a competitive advantage over peers who rely on vendor systems, and I look forward to updating you on our progress as we build out new capabilities. Stepping back, this is happening in a market that remains significantly underpenetrated. As Graham mentioned, today, there's less than $100 billion of reverse mortgage volume outstanding compared to an estimated $14.6 trillion of senior home equity. As the category leader with approximately 30% market share, our scale, product breadth, and operating model position us to capture more of this underpenetrated opportunity, supporting better outcomes for customers in retirement, and strengthening the durability and scalability of our earnings. With that, I'll turn it over to Matt. Matthew Engel: Thank you, Kristen, and good afternoon, all. Graham already gave you the headline results, so I'll give you some added color for the quarter, which you can find in today's earnings release and summarized by segment on Slide 11. As mentioned, we generated $35 million of net income and $26 million of adjusted net income. Adjusted earnings per share of $1.10 was up 112% year-over-year. Starting with Retirement Solutions, which represents our originations platform, adjusted net income was $14 million, down from the fourth quarter due to the typical seasonality in originations, but up substantially year-over-year, in fact, up by 56%. Driving these results was the higher conversion rates Kristen mentioned, as well as improved revenue margins, which increased year-over-year, reflecting the strong execution we are seeing as proprietary production continues to grow. Portfolio Management delivered strong results for the quarter, generating $28 million in adjusted net income. Performance was driven primarily by $1.7 billion of securitization activity across both proprietary reverse and HECM buyouts. Results benefited from favorable market conditions, including tight spreads and relatively lower interest rates, as well as the timing of execution within the quarter. While timing can vary quarter-to-quarter, our results reflect the strength of our platform and our ability to consistently identify and execute on attractive capital markets opportunities. Corporate segment adjusted earnings, which reflects overhead and interest expense on our nonfunding debt, was materially in line with prior quarters, reflecting reduced nonfunding interest expense, offset by investments in technology. Overall, these results drove a sequential increase in tangible equity to $268 million, or approximately $15 per share. With respect to our valuation, we believe the growing origination and earnings power that we continue to demonstrate will, over time, warrant a higher multiple on both an earnings and tangible equity basis. Turning to key balance sheet metrics on Slide 12. You can see that our cash balances increased from $90 million at the end of 2025 to $108 million at the end of the first quarter, and are up by 108% year-over-year. During the quarter, we generated $58 million in cash flow from our originations and capital markets activities, and utilized $40 million to complete the repurchase of Blackstone's equity position. At this time, we view our plan to retire the $150 million balance of our senior secured corporate notes later this year as the most prudent use of our liquidity and capital in the near term. This deleveraging plan will create a very strong balance sheet, which we view as an appropriate foundation for the valuable operating franchise we have built. Having said that, given the strong results we posted this quarter, we also see considerable value in our own shares. We expect to revisit capital allocation priorities as we make progress against the deleveraging plan. If you turn to Slide 13, I'll conclude my prepared remarks by giving you an update on our guidance. For 2026, we are maintaining our funded volume outlook of $2.8 billion to $3.1 billion. We're also increasing our guidance for full year adjusted earnings per share above our previously stated range to between $4.50 and $5.00 per share, reflecting the strong first quarter performance and the momentum we are seeing in our business. With that, I'd like to ask the operator to open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: Congrats on the quarter. So on origination volume, it sounds like March was a pretty strong month. And I was wondering if you could add some color as to maybe why March was stronger than February and January. And if that volume that was seen in March persisted through April and into the beginning of May? Matthew Engel: Tim, I think a couple of things. One, I mentioned there's some normal seasonality. So our lead generation capabilities in November and December has always curtailed a little bit just from the holiday periods at the end of November and the end of December, of course. So that will lead naturally to some lower fundings in January and February. But as you start to get into the new year and start to crank that engine back up, you start to see a lead flow come in, which really starts to kick in February-March. That's just kind of normal seasonal stuff. I'll maybe let Kristen expand on the improved performance we're seeing from that marketing spend as well. Kristen Sieffert: Yes, I touched on Helix, and really what we saw in March was the work that we've been doing actually producing the results that we expected it to, starting to come together in March. So we really started to hit a different speed as it relates to our origination volume in March as a result, and we expect that to continue for the year. Timothy D'Agostino: And then on the funded volume by product, especially thinking about the first quarter, obviously it's shifted more towards that proprietary product. But I guess regarding originations in the first quarter from the HECM product and the proprietary product, was there any changes in demand or any color you can provide on how homeowners are interacting with each product? Is the proprietary product gaining more traction? Just any color on how homeowners are interacting. Kristen Sieffert: Homeowners typically choose a product that best suits their needs, which in most cases is a function of the amount of proceeds relative to the debt that they have and their home value. So where we see proprietary as natural fits are more of the jumbo home sizes on our traditional suite. But the difference for us in Q1 is we're really starting to see our second-lien product increase in originations. And those products are for people that really have a different use case in the sense that they're happy with their first mortgage, typically a low interest rate, they can afford that payment, but they have a tremendous amount of home equity that they'd like to tap and can't afford or don't want another payment to impact their cash flow. So for a HECM versus HomeSafe on the traditional side, it's typically a function of which product provides the customer access to the most funds and dependent on property value. And then on the HomeSafe second-lien, it's based on what I just described, borrowers looking for a different alternative. Operator: [Operator Instructions] And we have a follow-up question from Timothy D'Agostino from B. Riley Securities. Timothy D'Agostino: Let's take the third question here. I just wanted to see if you had any more updates or just touch on anything else regarding the PHH acquisition. I know in the slide deck it was mentioned that it was progressing, but I don't know if there was any additional color you could provide. Graham Fleming: Yes. All the additional information, Tim, will be in the 8-K that we filed after the market today. So as I said in my remarks, we've bifurcated the transactions and the originations, the marketing of our product, and subservicing, which we expect to close here in May. We have a small pool of HECM MSR in front of Ginnie Mae, which we'll work with Ginnie Mae on gaining the appropriate approvals and then close on that when the timing is correct, and we receive that approval. Operator: We have reached the end of the Q&A session. I will now turn the call back to Graham Fleming for closing remarks. Graham Fleming: Yes. Thank you. The takeaway from the first quarter is straightforward. We're seeing clear improvement in the underlying drivers of the business, and that improvement is starting to translate into stronger production and financial results. And with that, we look forward to updating you in August with our Q2 results. So thank you, everybody, for joining the call today. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Graphic Packaging Holding Company First Quarter 2026 Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Melanie Skijus, Vice President of Investor Relations. [ Mom ], the floor is yours. Melanie Skijus: Good morning. Thank you for joining Graphic Packaging's First Quarter 2026 Earnings Results Conference Call. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings. We have with us today, Robbert Rietbroek, President and Chief Executive Officer; and Chuck Lischer, Senior Vice President and Interim Chief Financial Officer. During this call, we will reference our first quarter 2026 earnings presentation that can be found in the Investor Relations section of our website at www.graphicpkg.com and company-directed slides if you are participating today through the webcast. Now let me turn the call over to Robbert. Robbert Rietbroek: Thank you, Melanie, and good morning, everyone. As many of you know, Melanie has just rejoined Graphic Packaging as Vice President, Investor Relations, and we are excited to benefit from her leadership in the role. Over the past 4 months, I've been getting to know the team visiting our facilities both domestically and abroad and meeting with many of our customers around the globe. Separately, I'm pleased to report that we have now completed our 90-day review of the business. Our review has confirmed several important conclusions. First, our foundation is strong in points that is consistently validated during by site visits and in discussions with our major customers. Second, we have talented experienced teams, including world-class operators support growth with customers. And lastly, our integrated high-quality asset base and production footprint, enhance our service capabilities, expand innovation opportunities and provide a competitive advantage. All in, we see meaningful opportunity ahead. We're taking decisive focused actions to strengthen our operations and position the business for improved profitability. In the first quarter, we delivered strong performance at the high end of our expectations. Net sales were up 2% year-over-year to $2.2 billion. Volumes were up 1% compared to last year. with volume performance improving as the quarter progressed. Adjusted EBITDA was $232 million. Adjusted EBITDA margin was 10.8% and adjusted EPS was $0.09. While adjusted cash flow was a negative $183 million in the quarter, this represents a significant year-over-year improvement from negative $442 million in the same period last year. As we look at the demand environment this quarter, scanner data across our markets continues to reflect a more selective and value-conscious consumer, our innovative packaging solutions that span the grocery store from the center of aisle to the perimeter and on-the-go foodservice items meet consumers wherever they go. As we proceed to the first half of the year, we are encouraged to see customers increasingly taking actions to store volume growth. Looking across our end markets, Food and Health & Beauty were bright spots for us during the quarter, with higher packaging volumes from value products and consumption of every essentials. Bars, refrigerated ready meals and yogurt continue to perform better due to more protein products entering the market to satisfy consumers' desire for higher protein diets. Health & Beauty, which is primarily an international business for us, delivered strong growth consistent with the trends we saw in the second half of 2025 as consumers continue to prioritize small indulgences like skin care and perfume. Our beverage business remains stable, while food service and household reflect ongoing consumer affordability trends. Now I will provide an update on the results of our 90-day review of the business. The decisive actions we have begun taking to achieve our strategic priorities and an update on our views and expectations for 2026. As I walk through each of these topics, you will note that we are focused on accelerating the pace of execution across our business. That means enhancing operational efficiency and generating free cash flow to drive shareholder value in an evolving market. While we are taking swift action and implementing tactical improvements to drive efficiency, there is still significant work ahead. Our path forward is clear. We're focused on advancing our 5 near-term strategic priorities. First, we are committed to disciplined organic growth and providing exceptional customer service. Second, we intend to drive profitability improvements through cost initiatives, operational efficiencies and select pricing actions. Third, we will continue to optimize operations, footprint and portfolio mix to better focus on our core competencies. Fourth, we will generate free cash flow through inventory rationalization and reduced capital spending. And finally, free cash flow will be used to pay down debt and return capital to shareholders. Over the last 4 months, I have spent time at our Atlanta and Brussels offices, world-class mills and manufacturing facilities, met our talented teams across the globe and witnessed our technical capabilities and commitment to sustainability in action. I visited four of our five paperboard mills and several packaging facilities. Waco in Texarcana in Texas, Stone Mountain, Berry and Macon in Georgia, Elk Grove in Illinois, Kalamazoo, Michigan, Cholet, France and Bristol, England. I have met face-to-face with 6 global CPG customers in North America, Belgium, Switzerland and the Netherlands and engaged with leading QSRs and retailers who deeply value our long-standing relationships These customers have confirmed the value that Graphic Packaging brings as a trusted partner. We are one of the world's most innovative paperboard packaging companies and hold a leading position with a large addressable market, supported by sustainability trends. With the comprehensive 90-day review completed, we are taking decisive steps to optimize our operational footprint, reduce structural costs and impose discipline across capital and operating decisions. I will walk you through our key takeaways, actions and where we will continue to focus our efforts. Strategically, our review has reinforced our commitment to the core North America and European markets, and we will make selective disciplined moves to optimize our portfolio while maintaining our scale advantage. That means expanding with customers in our core markets and driving new growth opportunities through innovation. With regard to our portfolio, we have started to simplify and streamline our business and organization. We recently reached an agreement to divest our noncore assets in Croatia. We are in the final stages of the transaction which we expect to complete in the second quarter. Operationally, our transformation office is driving continued improvements in both our operations and cost structure. We are executing this transformation in real time with a focus on network optimization, disciplined capital allocation and aligning our commercial teams to highest value opportunities. To increase efficiencies and better align with the business environment, we have taken actions to streamline our global workforce and eliminated over 500 roles. The majority of these roles were salaried, including both employee separations and eliminating vacant roles. These were difficult decisions but the changes we have made are based on structural improvements and element to business needs, while maintaining vital frontline operations. Importantly, these actions will not impact our commitment to customer service and growth-focused initiatives. Reductions represent less than 3% of all global roles. Though they account for over 10% of global full-time salaried roles. We are instituting a rigorous capital spend process. One that demands every dollar of spend be justified against our highest priorities. As we continue to progress, we are confident we will deliver on our full year 2026 capital spend commitment of approximately $450 million. To further enhance productivity and operational efficiency, we are deploying AI to streamline areas of our inventory management and procurement processes. We are also utilizing remote monitoring of machine usage and performance, leveraging machine learning to generate predictive analytics and enable proactive maintenance, reducing unplanned downtime. I am confident all these actions will deliver the $60 million in cost savings announced last December and enhance our agility and decision-making, enabling us to move faster, reduce complexity and empower our teams. Continuous improvement is an ongoing effort and we are actively pursuing opportunities for additional cost savings. We will operate with fewer layers, increased focus, more accountability and clear priorities. Concentrating on what drives the greatest impact for our customers, our people and our business. Our efforts and the many actions underway Graphic Packaging, reflect a company focused on value creation. We are committed to strong financial discipline, building a more resilient cost structure and accelerating free cash flow. Chuck will elaborate on this further. I would like to focus now on the aspect of our business that I'm very passionate about, our partnership with our customers. We are focused on driving disciplined organic growth by building on our strong customer relationships and capturing new business through our commercialization efforts. In the face of changing customer growth strategies, we are strengthening our position across categories and have recently reorganized our commercial team to better align globally with customers and to support them through different ages and market conditions. Our customers continue to experience a dynamic consumer environment. While demand is relatively resilient, we recognize that consumers are continuing to prioritize value with about 47% of global shoppers now considered value seekers. Shoppers are switching to private label options, opting for value packs or sizing down to smaller pack sizes at lower price points. To appeal to this value-seeking population, consumer brands and retailers are investing in their product quality and value perception. Leveraging price pack architecture and novel pack designs while also focusing on selling through value-oriented channels. Consumer preference for store brands continues to grow creating meaningful opportunities for our retail partners to enhance their private label strategies and drive sustainable packaging solutions. Recently, we partnered with one of the world's largest retailers to produce packaging for its private label butter using our PaceSetter Rainier recycled paperboard. This is a great example of how we are helping our customers address consumer preferences for more sustainable packaging. By replacing bleached paperboard with 100% recycled alternative the large retailer is making measurable progress towards its sustainability objectives without sacrificing print quality. The private label butter is expense to reach store shelves in the coming weeks and we are proud to support that journey. Our customers are also looking to drive volume growth and gain market share. We continue to see customers selectively upgrade to our premium packaging solutions as our innovative differentiated designs, allow their products to stand out and win on the shelf. We recently partnered with Keurig Dr Pepper to create a premium package for their coffee collective take-up launch. They wanted a premium unboxing experience for consumers to match the elevated coffee blends. We created a custom 2-piece box set utilizing our unbleached paperboard for stiffness and applied mat and glass coatings and foil stamping to enhance the look of the carton and differentiate it on the shelf. This example highlights our innovation, operational capabilities, and commitments to helping customers achieve their goals. In addition to CPG customers, QSR brands are increasing promotional activity and limited time offers in an effort to drive foot traffic and bring consumers back into the restaurants. We are supporting a number of our QSR customers across multiple geographies in these initiatives. My experience leading and growing CPG companies and their brands will supplement and strengthen the team efforts to be an even stronger partner to our customers. We are supporting our customers' pursuit of meeting consumers where they are in order to grow volume and expand market share. There are many ways we partner with our customers to successfully elevate their brands. Customers rely on us to lead with innovation and accelerate their adoption to more sustainable packaging solutions preferred by consumers. A broader understanding of customer economics and their decision-making processes will enable our team to better anticipate customer needs and leverage insights to drive commercial and innovation engine. Graphic Packaging has a unique ability to partner more effectively on pack design, brand architecture and growth. And we are actively strengthening partnerships, taking a proactive commercial strategy and having conversations with top CPGs, QSRs and retailers around the globe. We continued to build on our strengths and had an exceptional quarter driving packaging innovation. We filed 13 new patents, adding to our portfolio of approximately 3,100 patents. Looking ahead, we remain committed to growth of intellectual property and extending our competitive advantage in serving customers. Our capabilities in sustainable packaging are truly differentiated and position the company for continued leadership. Graphic Packaging is seen as the premier sustainable packaging partner by the brands we serve. We are differentiated with our scale and capabilities, superior innovation and technical expertise and talented people. With a broad portfolio and a strong innovation engine, we are partnering with customers to bring even more innovative products to life. From our childproof laundry pod box to our double wall cups have retained heat and cold to our produce pack [ puts ] for fruit and vegetables. Our addressable paperboard packaging market opportunity is an estimated $15 billion with roughly 85% of it plastic to paper packaging conversion. Representing opportunities we have solutions for right now. Over time, we anticipate regulatory retailer, consumer and NGO scrutiny on the use of single-use plastics and foam packaging to increase with the continued customer focus and innovation and an evolving regulatory environment, this market opportunity is expected to grow and will be an area of differentiation for us. We recently commercialized an innovation in partnership with a health focused emerging brand. We are supporting their transition from plastic to a more sustainable paperboard multipack to better align the packaging with their environmentally conscious consumer base. We developed a custom carton solution for the 10-pack SKU and seasonal formats. The structure optimizes in-store merchandising. The plastic back to box transition is available today on shelves at leading retailers. As customers increase commitments and their desire to move to more sustainable packaging, they often evaluate solutions that move away from plastic or greatly reduce its usage. These packaging transitions to paperboard alternatives can increase brand equity without compromising product performance or shelf life. We are proud to help these advancements and for the recognition we have received for our leadership and support of customers on their sustainability journey. In January 2026, two of our solutions earned World Star Best of the Best Awards. PaperSeal Shape deployed with leading European retailers delivers roughly an 80% reduction in plastic per tray while maintaining full shelf life performance and runs on existing customer lines. Our produce Pack Pet tray was also recognized for replacing PET with renewable recyclable paperboard, eliminating more than 17 million plastic trays annually in a single retail application. In addition, Enviro [ Club Duo ] received an award of distinction at the PAC Global Awards for sustainable packaging design, reflecting our continued ability to replace plastic bile-preserving functionality and shelf appeal. This award was one of 8 PAC Global Awards we received. From an operational standpoint, this quarter was marked by a number of wins. At Waco, we continue to make meaningful progress ramping production. Commercial performance is meeting expectations, and we are ahead of plan with customer qualifications. This positions us to better penetrate new geographies and more efficiently support existing geographies while taking advantage of available recovered fiber streams in our Texas triangle. In parallel, we are completing our cogeneration plant projects, strengthening power supply assurance while helping to advance our customers' sustainability goals. We expect Waco to be a durable competitive advantage for us over time. We are excited to help prepare our customers for promotions through the 100 days of summer at large events select the upcoming World Cup. 24 brands across our food and beverage customer base are running promotions for the World Cup and our customers are planning for increased demand from spectators advance. For large global events like these, customers rely on a consistent, trusted partner who can deliver to time-sensitive deadlines can execute critical graphic changes. We are prepared to provide the excellent customer service Graphic Packaging is known for. We also took a significant step forward in our renewable energy strategy. Finalizing a virtual power purchase agreement with NextEra Energy Resources. This agreement increases renewable electricity coverage across our North American operations and supports disciplined execution against our long-term emission targets. The 250-megawatt solar energy plant in West Texas is expected to begin commercial operations at the end of 2027. This agreement better positions us to support our customers, the world's leading consumer brands and making progress towards their sustainability goals. We continue to build an award-winning culture and be recognized for our values in the way we do business. In March, we were recognized as one of the world's most ethical companies by Ethisphere. This recognition alongside our placement on the 2026 ranking of America's -- most -- just Companies by -- just Capital and Fortune World's -- most Admired Companies shows that others recognize the values our people put into action every day. Finally, as we build on our strong foundation, we are also strengthening our team with highly selective new hires to ensure that we have the right talent and leadership roles as we drive performance across our business. As I mentioned at the start of the call, I'm excited that Melanie Skijus has rejoined Graphic Packaging to lead Investor Relations. Additionally, we recently appointed Randy Miller to serve as Vice President of Treasury and Capital Finance, Randy will lead global treasury with a focus on cash flow generation and capital structure optimization. We just announced that Daniel Fishbein will join as General Counsel in June. Daniel brings more than 2 decades of legal experience having spent his career as a corporate attorney focusing on strategic transactions, corporate governance and securities law matters. He most recently served as Executive Vice President and General Counsel of Corpay, where he oversaw the company's global legal and regulatory function. These leadership appointments and talent upgrades support our priorities. Starting with our commitment to enhancing shareholder value. We aim to deliver greater returns for shareholders by harnessing the significant cash generative business we operate with our immediate priority to reduce leverage and strengthen the balance sheet while continuing to return capital to our shareholders through our established dividends. Our progress gives me confidence in our strong market position and the many expansion opportunities ahead. Our first priority is to strengthen the balance sheet. We are utilizing our strong capabilities to drive sustained growth through a robust proactive commercial strategy and commitment to innovation. You can expect future investment in growth to be more disciplined and focused on the highest return opportunities. Looking ahead, we have an opportunity to reduce our operational complexity and improve accountability by focusing on driving profitability and business excellence, including the ramp-up of Waco. We expect to reduce our capital spend to 5% of sales or less and reduce our inventory from 20.5% at the end of 2025 to between 17% to 18% of sales this year toward our long-term goal of 15% to 16% of sales. We will also continue to innovate and develop world-class products for our customers. We remain on track to generate $700 million to $800 million of adjusted free cash flow in 2026. Moving forward, I am encouraged by the opportunity to grow alongside our customers and partner with them to achieve their goals. We are uniquely positioned with our broad product portfolio, strong innovation engine and integrated network, we are on offense. Now I will turn it over to Chuck to provide more details on our financials. Charles Lischer: Thank you, Robbert, and good morning, everyone. I'm pleased with our performance in the first quarter, including the strengthening of packaging volumes we experienced as we progressed through the quarter. Total volumes were up 1% from the same period in 2025. Top line growth and higher packaging volumes are a direct result of the resilience of our business, the markets we serve and the execution of our team. Sales increased 2% year-over-year to $2.2 billion, driven by the volume increase and a $50 million benefit from favorable foreign exchange. Partially offsetting these gains, price experienced a decline of 2% in the quarter. The pricing decline reflects third-party index changes and bleach paperboard that occurred in the fourth quarter of 2025 along with the continuation of unusual competitive packaging pricing experienced in the last few quarters of 2025. Innovation sales growth was $42 million in the quarter, reflecting the strength of our innovation pipeline, continued strong partnerships and engagement with customers. Adjusted EBITDA in the first quarter was $232 million, including a $6 million foreign exchange benefit. This represents a $133 million decline from the first quarter of 2025. Price volume and mix combined were a $46 million headwind and again were a result of the unusual competitive price environment. Commodity input and operating cost inflation of approximately $37 million was roughly $10 million higher than we were expecting. Unfavorable net performance in the quarter of $56 million was driven by several factors. Severe weather in January across the Central and Eastern United States and the domestic disturbances in Mexico during the quarter caused an approximately $25 million impact from disruption and downtime in our facilities. In addition, heavier scheduled maintenance in the quarter and our decision to curtail production, produce inventories resulted in additional costs of $20 million each as compared to the year ago period. Robbert discussed, we are executing cost reduction and efficiency initiatives, which drove about $10 million of savings in the quarter. And though these savings were offset in the quarter by the factors mentioned, we will swing to positive overall contribution to earnings from net performance later in the year. Adjusted EPS in the first quarter was $0.09 and included a higher tax rate due to the vesting of employee equity awards during the quarter. We still expect the full year tax rate to be approximately 25%. In line with historical seasonality of cash flow and working capital, first quarter adjusted cash flow was a negative $183 million which is an improvement of $259 million from the first quarter of 2025. First quarter adjusted cash flow results included heavier capital spending than we expect for the rest of the year. Attributed to the work to complete our recycled paperboard mill in Waco, Texas. We ended the quarter with $5.6 billion of net debt and net leverage of 4.4x. As Robbert alluded to, our environment remains dynamic with geopolitical uncertainty and inflation impacting the business. During the quarter, we experienced incremental commodity cost inflation resulting from the conflict in Iran which embedded our logistics, energy and resin spend. With energy, we're about 60% hedged for both natural gas purchased in North America and electricity purchase in Europe and have commodity cost recovery mechanisms embedded in many of our contracts. However, these recovery mechanisms can experience lags due to contractual terms. We are proactively addressing the inflation and working on initiatives to offset it. On April 9, we announced a $60 per ton price increase for bleached cup stock effective May 8. While this price increase will be realized in Q2 for non-index-based paperboard sales, most of our affected contracts require price recognition by the industry's third-party index before we can pass it through our packaging business. Looking ahead to second quarter. From a volume standpoint, our expectation for Q2 is consistent with our full year range of down 1% to up 1%. We see pricing similar to Q1 and expect foreign exchange to be a slight benefit. With adjusted EBITDA, we anticipate certain commodity costs to stay elevated in Q2 before moderating towards the end of the year. Accordingly, we estimate a sequential $10 million incremental inflationary impact in the second quarter versus the first quarter totaling $30 million of incremental inflation in the first half of 2026 compared to our original expectations. Q2 adjusted EBITDA is now expected to be in the range of $230 million to $250 million. We are reaffirming 2026 guidance. Many initiatives that we laid out today in addition to the contractual recovery mechanisms to be realized in the second half of the year and our pricing actions are expected to help offset the incremental inflationary impacts throughout the remainder of the year. As a result of these efforts, we remain confident in our ability to deliver 2026 adjusted EBITDA in the range of $1.05 billion to $1.25 billion, in line with our prior guidance. Our 2026 adjusted free cash flow outlook remains unchanged in the range of $700 million to $800 million, a significant step-up from 2025. Cash flow generation is back-end weighted, consistent with the seasonality of our business, timing of capital expenditures and timing of inflationary cost recovery. We intend to pay down approximately $500 million of debt in 2026 and remain committed to our dividend. We understand that our dividend is important to many of our shareholders and also reflects the confidence that we have in the future cash flows of the business Capital expenditures in 2026 are expected to be approximately $450 million. As a result of our completed 90-day review, we identified certain projects and investments that no longer align with our operational priorities, so we canceled them. One of these projects, the automated roll warehouses at Texarkana and Kalamazoo resulted in a onetime primarily noncash write-off of approximately $40 million. Importantly, this decision avoids approximately $200 million of capital spending over the next few years and is a prudent move given the project no longer yields the original return thresholds since we will be operating with less inventory. In conclusion, we are moving out of a heavy investment cycle to a cash harvesting cycle. This is an exciting and much anticipated phase. The past few years have been characterized as building years with capital investments and acquisitions made to differentiate our packaging and service offerings in the marketplace and position the company for long-term growth. Now we are focused on optimizing our footprint and operations, executing disciplined capital allocation, expanding profitability in the business and to my prior point, delivering the free cash flow we committed to. 2026 will be a foundational year for Graphic Packaging, and we are excited about what our future holds. With that, I will turn it back to Robbert. Robbert Rietbroek: Thank you, Chuck. To conclude, we see a clear line of sight to long-term value creation, supported by the value we are generating from our near-term strategic priorities. Our confidence is grounded not in aspiration, but in a clear path to execution and operational excellence. We look forward to taking your questions and continued engagement to hear your perspectives as we continue to enhance and streamline the business. Let me take this opportunity to thank our dedicated team around the world for their hard work in delivering a strong start to 2026. With that, operator, let's open it up for questions. Operator: [Operator Instructions] Our first question today is from Ghansham Panjabi with Baird. Ghansham Panjabi: First off, welcome back memory -- Melanie, we look forward to working with you. I guess first off, on the heat map on Slide 5, can you touch on if you're actually seeing any sort of inflection in food or just easy comparisons from several quarters of just minimal growth? Just trying to get a sense as to what you're seeing in that market, specifically to that category, which has been weak for several years at this point? And then second, as it relates to the realigned commercial teams, can you just give us a bit more insight into what's going on there? Robbert Rietbroek: Yes. Thank you, Ghansham, and thanks for welcoming Melanie back. We're very happy to have you back, Melanie. With regards to your first question on food, let me just reflect on the macro environment for a second, and I'll zoom in on food. What we're hearing from our customers continues to be a focus on growth, gaining share investing in product quality that specifically applies to food and value perception, pack size and pricing promotions and there is an increased emphasis on overall across the categories of price pack architecture as well as novel pack designs and obviously, a localized, reliable supply chain. And the consumer environment of which food is a part remains very value driven, and there is a focus on affordability. And we are seeing stable demand signals, Ghansham, with certain pockets of strength and we're seeing select growth across larger customers and key segments, particularly in what we call everyday essentials. So food is performing rather well with strength, particularly in protein-driven categories like yogurt, bars, refrigerated meals, and that really reflects underlying consumption trends. If you look at some of the other categories like Health & Beauty, that's performing well as consumers continue to prioritize small indulgences like skin care, perfume, beverages is stable, and foodservice was a little slow due to the weather and consumer affordability trends but is expected to gain momentum throughout the year. So that's how we see food as part of the broader macro environment. With regards to the realigned commercial organization, we are seeing a big need to serve our customers better both at the national level, in some cases, international level where we see more and more procurement team centralized in locations like Switzerland or the Netherlands or even Ireland, so we are organized now in a way where we can serve both the global procurement organizations of our large CPG customers as well as domestic customers with a slightly enhanced organization. And we feel very good about the leadership we put in place under Jean-Francois Roche who is really doing a great job in getting me in front of customers as well. I've met 6 global customers across different geographies in the first quarter and in the last month as well. And that's really given me a good perspective on how our commercial organization is now organized and how well we are serving customers. Ghansham Panjabi: Okay. And then just for my follow-up question. On the EBITDA reconciliation in the press release, what is the $71 million add back specific to the first quarter of '26, just quite a bit higher than the first quarter of last year. And then just to clarify, as it relates to the commodity cost comment, are you expecting a sequential moderation in commodity costs? Is that what you're assuming in that $30 million incremental impact in the first half? And what would that number be comparable in the second half? Charles Lischer: Yes. Ghansham, this is Chuck. I'll take those. So on the -- what we have in the special charges bucket, I mentioned on the prepared remarks, the $40 million from the automated roll warehouse write-off. So that was the biggest component of it. We also had severance from the actions that we took that we talked about in the quarter, that's about $20 million. And then for the Croatia business that we're divesting, we had about a $13 million write-off of assets, and that's primarily for intangibles that we had acquired with the AR Packaging acquisition. So those components are the majority of what you see in the quarter. On the inflation, so yes, what we called out is $10 million of incremental inflation in Q1 $10 million incremental to that in Q2. So for a total of $30 million versus our original expectations in the first half. And then at this point, we see about the same number, about $60 million to $65 million of incremental inflation for the full year. That environment, of course, remains very fluid and dynamic, so changes every day. But what you see us doing is pulling several levers to offset that inflation. We talked about on the call, the contractual recoveries and pass-throughs, and that will account for about 1/3 of it. I talked about the cup stock price increase, and then we're further evaluating some packaging price increases. And then as Robbert mentioned, we're looking at other cost savings, procurement initiatives to provide a further buffer. So with all of those offsets, we're confident that we can neutralize the inflationary impact that we see. Operator: Our next question is coming from Mark Weintraub with Seaport Research. Mark Weintraub: Chuck, just a point of confusion for me. So the -- I think that $71 million, that was on adjusted EBITDA. Was the warehouse and Croatia, were those not noncash write-downs primarily? Or maybe if you could just clarify for us? Charles Lischer: Yes, it's primarily noncash, but just in the add back to get to the -- effectively the number that the EBITDA is, of course, an all-in number. It does include depreciation and amortization, but it does include noncash charges before you adjust for them. Mark Weintraub: Okay. And then second, and I know you were kind of answering this in Ghansham's question as well. So basically, you have about $200 million of improvement in the second half of the year to the first half of the year. If you'd be willing, would you kind of share in terms of the way you provide those buckets, volume, price, the big drivers, where the majority of that $200 million would be shown up? Charles Lischer: Yes, happy to do that. So broadly, we see the year playing out similar to what we laid out in the original year-end call other than inflationary impact that I already talked about. But if you look at first half to second half, as you mentioned, there's a step up second half versus first half. Think about a few things. So first of all, our first half includes several unfavorable items as we talked about the January weather that caused facilities downtime that we don't expect to recur in the second half. Second, our first half has a larger unfavorable impact from several items, including scheduled higher maintenance and then also the market downtime that we're taking to lower inventory levels is higher in the first half. And then finally, the second half has a bigger impact from some of the positive items that we're seeing. For example, we mentioned the contractual cost recoveries, the packaging price initiatives and some of the procurement and other cost savings initiatives. So several moving parts. But of course, with our current expectations for inflation, we are confident that we'll be able to hit our full year EBITDA guidance. Mark Weintraub: Okay. Super. I mean any chance getting a little bit more granular? I think you talked about weather being $25 million in the first quarter. I think on the last quarter's call, you -- roughly downtime would be about $50 million -- inventory-related downtime about $50 million lower. Are those numbers about right? And then so if we're kind of left with like $125 million in the drivers you were providing kind of just round numbers to where they might come from, it's not understood, but just trying to get a bit more granular. Charles Lischer: Yes. I'll just give you a couple of more nuggets and then we can talk more offline. The phasing of the cost savings that we called out $10 million in Q1. It will pick up a little bit in Q2, but then the majority of that will be back-end loaded. You mentioned the downtime. That, of course, is something that we'll be taking more market downtime in the first half than the second half. So we can work through it more offline. Operator: Our next question is coming from Hillary Cacanando with Deutsche Bank. Hillary Cacanando: So just the breakdown that you were just -- you were talking about to get to your guidance. Last quarter, you actually had guided to $100 million incentive compensation impact for 2026, and I didn't see that in today's presentation. Is that included anywhere and maybe in like net performance in the first quarter? And like what type -- what phasing should we expect for incentive compensation through the year? Charles Lischer: Yes, that's all included within the original numbers that we had expected and all included in what we've reported, so we didn't talk about it again. It is a year-over-year factor in that performance. Hillary Cacanando: It's all included in the first quarter. So there's -- we're not -- you're not expecting any additional incentive comp this year for the remainder of the year? Charles Lischer: Of course, it will roll throughout the year. It's the Q1 impact that we had expected recorded in Q1. Hillary Cacanando: Okay. And then -- and then how much should we expect for the remainder of the year? Charles Lischer: Again, we embedded about the $100 million in our full year guide. Hillary Cacanando: Okay. Got it. And then just on pricing, I know you had asked for price increase. Does that have to go -- like is [ RISI ] involved in this? Or do you have is it pretty fast? Like is it just between you and the customer? Or is it really involved? Like is it like -- is it going to depend on what they come up with -- in terms of like what the final number will be or if there will actually be an increase? Charles Lischer: Yes, a couple of components of our price. Specifically, what I talked about in the prepared remarks was an increase in cup stock paperboard price, and that is something that will impact our open market business more quickly than it would pass through our foodservice packaging business. That will be once [ RISI ] recognizes it and then whatever the contractual period is before it starts getting reflected. And so that is on that side. Then on the other packaging price increases, those would go into effect in our, let's say, around $1 billion of revenue that we have that's not under direct pricing contract. Operator: Our next question is coming from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess maybe I can just clarify maybe the walk on free cash flow. So it looks like you have kind of harvested some amount of working capital and inventory. But does that maybe reverse as you take some downtime? And then maybe next year also, would you have to kind of rebuild those inventories? And do you expect kind of less contribution from work capital and then related to that point, just kind of curious if you still expect kind of an $80 million uplift from Waco and is that being offset by maybe some downtime at Kalamazoo? Charles Lischer: Yes. So I'll start with the last part. First of all, on Waco, what we're seeing there is the business case for Waco is indeed playing out in terms of the variable cost. What we -- the benefits we have recommitted to the specific benefits number because until we're able to cover the fixed cost with the volume that we -- then that's when you'll see the additional impact of the fixed cost. But as Robbert talked about on the call, the operations are running well. The ramp-up is going well and everything overall is going very well. And in terms of the first part of your question, inventory will not be rebuilt in next year as we talked about or as Robbert mentioned, we expect to get the 17% to of inventory -- inventory as a percentage of sales this year on our way towards our longer-term target of 15% to 16%. So we will continue to see some working capital benefit in next year from lower inventory. And then also 2027, if you think about 2027's cash flow, that will continue to benefit from lower cash taxes and then, of course, lower interest expense. So some of the items will come back. And then as we talked about at the year-end call, we still see the post 2027 free cash flow number of $700 million plus. Arun Viswanathan: And then if I could ask on supply/demand. So obviously, there's been some changes in SBS. Our understanding is, I guess, that may not necessarily have the impact as to reduce supply to tighten up that market enough to get pricing power. Would you agree with that? And are you still kind of facing some pricing headwinds in SBS? And is that weighing on CUK and CRB as well? Maybe you can just comment on kind of potential pricing in those -- across the different substrates to cover inflation. Robbert Rietbroek: Yes. Let me take that question. With regards to the paperboard grades, the 2 grades that really matter most to us, as you know, are recycled and unbleached because that's what we primarily use. And both of those markets are in good balance. With regards to the cross-category dynamics, we're not necessarily seeing a lot of impact of bleached on recycled with regards to cannibalization. So we're not seeing recycle lose volume to bleached, but it does have to respond to price competition. So switching is rare. And with our new PaceSetter Rainier grade, that matches bleached printability, but it's 100% recycled and cheaper to make. And we continue to believe that PaceSetter Rainier will take volume from bleached over time. And when it comes to the balancing of supply and demand, I just want to remind you that we closed Tama, Iowa, which was a CRB mill in '23. We decommissioned our K3 machine in Kalamazoo in '23, and we closed Middletown, Ohio, which was a CRB mill in '25. Then we closed East Angus in Quebec in '25 and '26, and we sold the Augusta mill, as you know. So bleached continues to be oversupplied, but accounts for the smallest part of our business. And we have been very proactive in our approach to supply whilst others have added capacity, as you know. So what we do here is we actively match our internal supply with our demand profile, and that's supported by our integrated system and our portfolio as a result is structurally advantaged. Operator: Our next question is coming from Anthony Pettinari with Citi. Anthony Pettinari: Just following up on, I think, Hillary's question. If you look at your total tonnage, is it possible to say what percentage is on a [ RESI ] index versus like a custom index, maybe what the lag is in terms of price increases if it's realized in RESI versus you see it in a custom index and then how much of your volumes would be covered by that cup stock price increase that you talked about earlier? Charles Lischer: Yes, this is Chuck. I'll take that. So in our bleach business, we have more of our packaging tied to [ see ] than we do in our other models. And so the majority of our packaging volume is indeed tied to [ res ] that's for the cupstock business, a couple of hundred thousand tons and generally would be recognized in price 3, 6 months after it's recognized by [ RISI ] depending on the timing during the quarter that is recognized by RESI. Robbert Rietbroek: Okay. We don't disclose exact details around the percentage of our contracts that are tied to [ RESI ], but Chuck did refer to the $1 billion of noncontractual sales, and we do have a cupstock business as well where we sell a big part of that on the external market. So that should answer your question. Anthony Pettinari: Got it. Got it. And then I guess, fiber is up, diesel is up. You've indicated that you're not seeing big cannibalization of SBS into CRB. I mean, obviously, you can't talk about forward pricing or anything like that. But can you just talk about maybe your philosophy on pricing? Do you expect graphic to be a price leader? How do you think about it? We've seen price improvement in other containerboard graphic paper grades this year. Can you just talk to us kind of how you think about pricing generally? Robbert Rietbroek: The majority of our business is converted to finished product packaging. So -- and the majority of that is either recycled or bleached. And so -- unbelieve, sorry. And so we are not necessarily spending our entire day thinking about paperboard pricing, graphic, and we continue to focus on customer service, operating excellence and taking share and growing our business by delivering better products, better finished products, which are essentially converted finished packages. That is how we think about pricing. Operator: Our next question is coming from Phil Ng with Jefferies. Philip Ng: Robbert, I appreciate the 90-day post review, volumes are up, so that's great. You got some headwinds this year that you are going to work through, but it sounds like destocking inventory could potentially still be a drag when we think about 2027. So with some of the levers that you may have a better appreciation now, is there a path where you could grow EBITDA next year with our prices going high? I just want to think through that just because, obviously, it's a big earnings reset this year. Robbert Rietbroek: Yes. Look, I just -- thank you for raising the 90-day review. I just want to give a little bit of color on that, and then I'll talk a little bit about how it's all going to impact EBITDA. We have we have concluded that review and confirmed that we have a strong foundation, an opportunity to drive better financial and operational performance as we talked. And we've taken 500 roles out of the organization. As Chuck talked about, that's going to primarily impact the second half of this year. We are advancing some of these capital efficiency initiatives where we're prioritizing higher return opportunities. We've reorganized the commercial team. We've deployed AI. So we are very confident that the work we're doing is going to allow us to deliver on the cost reduction commitment that we have, which is $60 million. Now there is some inflation, as you know, we have mitigation actions in place, which include contractual cost recovery mechanisms, those have some timing lags. There are some target price actions in the noncontractual business that we just discussed. And then we just announced a recent price increase on [ cut ] stock and primarily cost reductions and operational efficiency actions. With that and the fact that we're taking obviously an EBITDA hit this year to reduce our inventory and we are resetting the base because we're reinvesting in incentives for our associates. That's the walk that Chuck talked us through. We will continue to rely on productivity and category growth and share growth to drive top line and therefore, EBITDA Philip Ng: Okay. So it sounds like you feel like you got enough lease to grow next year from an EBITDA standpoint, Robbert? Just quickly summarize or... Robbert Rietbroek: We're not in guidance for next year at this point. It's early, we're still early days in 2026. So give us a couple of months to get a better understanding, but we're doing all the right things and the right work to set ourselves up for a great 2027. Philip Ng: Fair enough. A question for Chuck. Your guidance you reiterated, which is encouraging. Certainly, you're seeing some inflation here. Your guidance, does that embed the SBS cup stock sticking? Granted there is a lag, I don't know how impactful it's going to be. And then some of the packaging price increases that are not tied to research some of these contracts? Is it embedded that you get price? I asked just because in your prepared remarks, you mentioned you've seen some unusual price declines in packaging prices, right, not necessarily in [ SBI ], the other grades. Have you seen that component like stabilize? Like what are you seeing on some of that packaging price in the last few months? Charles Lischer: Yes. A couple of things there. So we don't embed anticipated [ RESI ] moves until they are announced. And so any impact to that on our [ track ] from our [ Cove ] would not be reflected we will embed what we see in the open market business, of course. From time to time, we would have bet packaging prices, but right now, we're still working through exactly the size of all of that. And -- and so we'll embed that as we go. So that's what we see on the price. Philip Ng: Have you seen a stabilization there, Chuck, on the packing price? What you've said that it's been unusual coming the year? Charles Lischer: What we see there is our customers, however, there's geopolitical uncertainty that the assurance of supplier becomes a bigger deal to our customers and they talked about local supply and our integrated model really sells well to them. And so it certainly gives us the opportunity to stop in negative trends or to introduce the idea of a packaging price. Operator: Our final question today will be coming from Gabe Hajde with Wells Fargo Securities. Gabe Hajde: Robbert, I'm curious if we can go back to the cup stock announcement. I find it interesting, I think, in the slide that you gave us, it's the 1 category that decelerated, it was pretty strong over the last 2 quarters. So I guess is there something unique about that supply-demand dynamic in cup stock that would afford you all to the industry to get price or maybe something unique about the input cost structure that makes it such that you can recover costs faster than maybe some of the other [ two ] grades you participate in? Robbert Rietbroek: Yes. On the -- there is a higher input cost, of course, that cup stock is barrier coded with resin. And so there's a an impact when you see [ resin ] prices increase. And so yes, a higher input cost. And then cup stock has historically been a strong grade for us and so down had a lot of excess capacity. Gabe Hajde: Okay. And then as you have conversations with your customers, I mean, you are trying to reduce inventories. Maybe they were looking around the corner at oil above 100, and we might envision some price increases. Do your sales folks in using any sort of prebuying activity that happened into the summer? And then one last one on CapEx. It sounds like the entire $200 million that you called out is specifically associated with that 1 discrete or those 2 discrete winder projects I've seen remember there were some, I guess, greenhouse gas initiatives later in the decade, and it seems pretty hard right now to get some projects still on the drawing board? Robbert Rietbroek: Yes. Let me take the one on customers, and you could talk, Chuck, about the -- how we got to the $200 million capital investment reduction and what that [ entails ], that's one project or more projects. So the question around customer stock is a good one. We haven't really seen a lot of stocking in Q1 as a result of anticipated price increases. We are having a lot of conversations with our customers regarding surety supply or assurance of supply. That's primarily related to having multiple sites producing their packaging, so that they're not relying on one side in case of a natural disaster, more so than anything related to oil and gas right now. And as Chuck said, they do really value our integrated business model. But the customers, they want value, they want to balance costs. They want to see the best performance especially in our beverage sector, you need certain properties in the packaging. They want sustainability. And most recently, there's more and more discussion on [ assurance ] of supply, as I discussed. And they are focused on cost can and are looking for ways to optimize packaging formats, reduce material usage and improve cost. So those are most of the things we're seeing, Gabe. Charles Lischer: And then, Gabe, I'll build on the I'll build on the CapEx. The $200 million that we called out, that was those two projects specifically, but that was over the next several years that, that $200 million would come out not primarily this year that the $450 million is the number that we had originally guided to for this year and clearly we've gone in and shored up our path to get there, and we'll continue to look for opportunities to even cut further. Robbert Rietbroek: So with regards to capital, we are implementing a very rigorous and disciplined capital spend review and approval process. We will be evaluating and prioritizing investments that promote safety and fulfill regulatory obligations. We will continue to consider investments that announce cost-efficient season to [ generate ] the right returns for our portfolio. So that's how we're viewing this. And there are obviously a number of projects in the future that we are currently evaluating, including the ones that you're referring to. Operator: Ladies and gentlemen, this does conclude today's Q&A session and also our call. You may disconnect your lines at this time. Have a wonderful day, and we thank you all for your participation.
Operator: Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead. Michael Hara: Thank you Stephanie. Good afternoon everyone and welcome to Hercules conference call for the first quarter of 2026. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Hercules financial results were released just after today's market close and can be accessed from Hercules' Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations web page following the call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including, but not limited to, the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC's website. Any forward-looking statements made during this call are made only as of today's date, and Hercules assumes no obligation to update any such statements in the future. And with that, I'll turn the call over to Scott. Scott Bluestein: Thank you, Michael, and thank you all for joining the Hercules Capital Q1 2026 Earnings Call. In the first quarter of 2026, Hercules delivered another strong quarter of record originations, record total investment income and stable credit performance. During the quarter, we navigated through a period of significant market volatility. This was driven by a sharp pullback in certain parts of the equity and credit capital markets, macro concerns largely centered around the conflict in the Middle East as well as industry-specific concerns surrounding across private credit and the long-term impact from AI disruption. Since our first origination over 21 years ago, Hercules has maintained a disciplined credit first model that has served our shareholders and stakeholders well through a variety of market conditions and multiple cycles, and that will remain our focus going forward. Our balance sheet and liquidity position is strong. Our portfolio credit performance remains stable and our investment portfolio continued to generate net investment income in Q1 that comfortably covered our base shareholder distribution by 120%. Coming off a record-breaking year in 2025 for both originations and fundings, our momentum accelerated in Q1 with all-time record originations of over $1.81 billion. This is consistent with the guidance that we provided on our Q4 earnings call in February and the release that we put out in early April. The strong new business activity in the first quarter helped to deliver a new record for total investment income despite operating in a declining rate environment since late 2024. Driven by the growth of both the public BDC and our private credit funds business, Hercules Capital is now managing approximately $6.1 billion of assets. An increase of 21.8% from a year ago. To manage our growing asset base and expanded platform. We currently have 65 investments in credit professionals, over 25 finance and accounting professionals and 120 dedicated full-time employees in total at Hercules. As we entered 2026, we noted on our last earnings call that we continue to expect higher-than-normal market and macro volatility, and it certainly has played out that way. Aside from the general market volatility experienced year-to-date, largely from AI disruption fears and the conflict in the Middle East, the results have been enhanced focus on liquidity and redemption across the broader private credit space. These particular issues are concentrated largely in the non-traded BDC segment where the investor base is predominantly retail and the shareholders hold quarterly redemption rights. Hercules is different. 100% of the equity capital that we manage in the publicly traded BDC is true permanent capital that is not subject to redemption. Our investment adviser subsidiary manages exclusively institutional GP LP funds with predetermined long-term or evergreen investment periods, no retail investors, no non-traded BDCs, no near-term redemption risk. This capital structure is deliberate and we believe it allows us to execute a long-term strategy through cycles without unpredictable redemptions and without forced asset sales. We remain confident in the strength and stability of the Hercules platform and our ability to continue to generate strong operating results irrespective of the market backdrop. With the expansion of our platform capabilities over the last several years and our expectation for continued market volatility, we continue to expect a robust new business environment for Hercules in 2026. Our platform scale, balance sheet and liquidity allow us to play offense during market volatility, which should position us to see a robust pipeline of high-quality companies throughout the year. As we have done over the last several years, we will continue to manage our business and balance sheet defensively, while maintaining the flexibility to take advantage of market opportunities. This includes continuing to enhance our liquidity position as needed, further tightening our credit screens for new underwritings, staying focused on asset diversification and maintaining our higher-than-normal first lien exposure, which was approximately 89% in Q1. Let me now recap some of the key highlights of our performance for Q1. In Q1, we originated record total new debt and equity commitments of $1.81 billion and gross fundings of over $706 million, which led to $298 million of net debt investment portfolio growth. We generated record total investment income of $141.5 million and net investment income of $88.1 million or $0.48 per share. We generated a return on equity in Q1 of 16.9%, and our portfolio generated a GAAP effective yield of 12.8% and a core yield of 12.2% and which was consistent with our guidance. We expect core yield to remain relatively flat in Q2, given that the Fed is holding interest rates steady. As we have consistently communicated throughout 2025, we have increased leverage to support our continued growth and return effectives, allowing us to continue to focus on what we believe are high-quality originations versus chasing higher-yielding assets with more risk. While delivering record new originations in Q1, we still maintained a conservative and defensive balance sheet. Consistent with our objectives, GAAP leverage increased to 115.4% in Q1, up from 104.4% in Q4. Our Q1 GAAP leverage was at the high end of our typical historical range of 100% to 115% but still below the average of our BDC peers. We ended Q1 with over $1 billion of liquidity across the Hercules platform. The current market volatility is creating a very favorable capital deployment environment for Hercules and we want to ensure that we are positioned to opportunistically take advantage of that for the long-term benefit of our shareholders and stakeholders. The focus of our origination efforts in Q1 and was on maintaining a disciplined approach to capital deployment while emphasizing diversification across the asset base. Our Q1 commitments and fundings activity was weighted slightly towards life sciences companies. which reflects a more defensive posture. In Q1, approximately 56% of our commitments and 60% of our fundings were to life sciences companies. while approximately 44% of our commitments were to tech companies. We funded debt capital to 34 different companies in Q1, of which 13 were new borrower relationships. During the quarter, we were again able to opportunistically increase our commitments and fundings to several portfolio companies that have continued to demonstrate strong performance. As it always has been, being able to continue to support our portfolio of companies as they scale is an important part of our business and a key differentiator of our expanded platform capabilities. Our available unfunded commitments increased slightly to $397.4 million from $385.6 million in Q4, still maintaining a more defensive positioning of the portfolio. Coming off a record Q1, we expect originations to moderate in Q2 and be more back-end weighted. Since the close of Q1 and as of May 1, 2026. Our investment team has closed $79.2 million of new commitments and funded $32.3 million. We have pending commitments of an additional $506.1 million, in signed, nonbinding term sheets, and we expect this number to continue to grow as we progress in Q2. We will maintain a high bar for new originations. Our investment teams are continuing to update our modeling assumptions, structuring and underwriting criteria given the rapid pace of change that we are seeing across the technology ecosystem. The volume of deals that we are screening and passing on remains elevated, and we intend to continue to remain disciplined, patient and focused on the long term while being aggressive where we believe it makes sense. Early loan repayments of $225.8 million came in at the higher end of our guidance for Q1. For Q2 2026, we expect prepayments to increase materially and be in the range of $350 million to $500 million, although this could change as we progress in the quarter. The increased guidance on prepayments in Q2 is being driven largely by M&A. And we believe that this positions us well to redeploy this capital in what we expect to be a more favorable originations environment. Our net asset value per share in Q1 was $11.90 a decrease of 1.9% from Q4 2025. We had $31.1 million of net unrealized depreciation from debt investments during the quarter approximately $23.2 million or 75% of which was attributable to market yield adjustments associated with the general market volatility. In addition, we had $12.3 million of net unrealized depreciation attributable to valuation movements in publicly and privately held equity positions. Again, largely associated with the general market volatility experienced during the quarter. We ended Q1 with solid liquidity of $454.5 million in BDC and over $1 billion of liquidity across the platform. With healthy liquidity, a low cost of debt relative to our peers and 4 investment-grade credit ratings we remain well positioned to compete aggressively on quality transactions, which we believe is prudent in the current environment. Credit quality of the debt investment portfolio remained strong quarter-over-quarter. Our weighted average internal credit rating of 2.11 was stable relative to the 2.20 rating in Q4 and remains within our normal historical range. Our Grade 1 and 2 credits increased to 70.5% compared to 66.6% in Q4. Grade 3 credits decreased slightly to 28.6% in Q1 versus 31.7% in Q4. Our rated 4 credits decreased to 0.8% from 1.7% in Q4 and we had 1 rated 5 credit at 0.1%. Our loans rated at 4 and 5 as of Q1 were a combined 0.9% which is the lowest that we have reported since Q2 2022. In Q1, the number of companies with loans on nonaccrual remain the same with a single loan on nonaccrual with an investment cost and fair value of approximately $10.7 million and $3.7 million, respectively, or 0.2% and 0.1% as a percentage of our total investment portfolio at cost and value, respectively. As of the most recent reporting that we have, 100% of our debt investments that are on accrual are current with respect to the payment of scheduled principal and interest. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level but our portfolio monitoring remains enhanced given the continued volatility in the markets. We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we do will continue to serve us well. Our asset base is intentionally diversified with approximately 50% of our assets in our life sciences vertical, and approximately 50% of our assets in our technology vertical. No single subsector makes up more than 25% of our total investment portfolio and our bet investments are spread across 139 different companies. Consistent with our historical experience as of the end of Q1 -- the average loan duration across our debt portfolio was approximately 21 months. While we remain pleased with the exit activity that we saw in our portfolio during the quarter, we are seeing that in certain parts of the market, there appears to be some ongoing pricing and process discovery. The sharp pullback in equity valuations year-to-date in certain technology sectors has slowed some ongoing M&A discussions as buyers look to establish what the new norm may be for exits, particularly with respect to valuation and exit multiples. This is something that we will monitor over the coming quarters. In Q1 and Q2 quarter-to-date, we've had 4 new M&A events in our portfolio, which included 1 life sciences company, and 3 technology companies announcing acquisitions. We also had 2 portfolio companies file registration statements for their IPOs with 1 of those companies completing their IPO in April. We view this as a positive sign for our ecosystem. Based on current market conditions and volatility, we continue to expect M&A exit activity to accelerate in 2026, although with more uncertainty with respect to valuations and process timing. In Q1, PIK declined meaningfully as a percentage of total revenue. falling to approximately 9.1% from 10.5% in fiscal year 2025. And we expect that figure to continue declining in the near term as loans pay off and accrued PIK is collected in cash. The most important point on PIK, however, is its source. Approximately 91% of our Q1 PIK income came from PIK that was part of the original underwriting, not of the result of any credit or performance-related amendment. This is PIK by design, not PIK by distress. Reinforcing that point, more than 98% of our Q1 PIK income came from loans rated 1, 2 or 3 and excluding a single convertible loan, every loan with a PIK component on accrual status is also paying cash interest. Cash collections support the same conclusion. We collected $15.3 million in cash payments on accrued PIK during Q1. And because the majority of our PIK bearing loans were originated in 2024 and 2025, we expect strong cash collections to continue throughout 2026 as those loans approach their expected duration. We continue to use PIK judiciously and where we do, it is typically a small component of the overall deal economics. Our investment and credit teams continue to monitor the impact of AI on our portfolio and the broader markets. The pace of change is rapid and we expect the disruption we are seeing to play out over several years. Our most recent reporting and our ongoing dialogue with our companies and their investors continue to be constructive. Many companies across our portfolio have been embracing AI as a competitive differentiator and are experiencing tailwinds from AI adoption, greater operating efficiency and faster cycles of innovation and go-to-market. Those companies that are more aggressively integrating AI into their core product offerings are benefiting from increased adoption and AI acceptance. We continue to expect AI to disrupt numerous industries over time and that there will be both winners and losers. Over the coming years, business models will change, margin profiles may change and in many cases, companies may actually become more efficient and innovative. Our investment teams will continue to pursue software transactions as part of our origination efforts, and we will remain disciplined and conservative in terms of our approach to financing the sector. Venture capital investment activity in Q1, again, paralleled what we experienced in our deal flow and originations. Q1 2026 investment activity was the highest quarter on record at $267.2 billion according to data gathered by PitchBook and VCA. While the aggregate data remains strong, it again needs to be noted that the deal value was extremely concentrated and that over 88% of the Q1 deal value involved AI and machine learning companies. Q1 fundraising improved and totaled $47.8 billion, across 172 firms. The capital was heavily concentrated among a few established managers. M&A exit activity remained consistent with Q4 but exit value in Q1 was extraordinary at $311.7 billion compared to $143.9 billion for all of 2025. Consistent with the aggregate data for the ecosystem. During Q1, capital raising across our portfolio reached an all-time high with 21 companies raising approximately $3.4 billion in new capital. Despite the market volatility year-to-date, we have not observed a pulled portfolio. Subsequent to quarter end, we have had an additional 10 companies raised over $900 million in new capital. Given our strong sustained operating performance, we exited Q1 with undistributed earnings spillover of $149.1 million or $0.80 per ending shares outstanding. For Q1, our net investment income covered our base distribution by 120% and our full distribution, including our $0.07 supplemental distribution by 102%. This is our 23rd consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. Finally, I would like to highlight our recent announcement on May 4 regarding the expansion of our leadership team. Effective May 18 and Seth will become President of Hercules. Seth and I will continue to work closely on scaling our platform and enhancing our operational capabilities to ensure that we continue to deliver long-term value for our shareholders and stakeholders. Succeeding him as CFO will be Andrew Olson, who is returning to Hercules after working most recently at Revelation Partners, and prior to that, SVB Capital. Andrew's experience and track record in finance, alternative assets and private credit is strong, and I welcome him back and look forward to working with Andrew again. To continue to build on our success and position Hercules for its next phase of growth. As we set our sights on the continued growth and scaling of our platform, I believe that this expansion of our leadership team will best position us for continued long-term success. In closing, our scale institutionalized lending platform and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. Our continued success is attributable to the tremendous dedication, efforts and capabilities of our 120 employees and the trust that our venture capital and private equity partners place with us every day. We are thankful to the many companies, management teams, and investors that continue to make Hercules their partner of choice. I will now turn the call over to Seth. Seth Meyer: Thank you, Scott, and good afternoon, ladies and gentlemen. Q1 2026 was another all-around strong quarter for Hercules Capital, building on the record-setting pace established in 2025. As communicated by Scott, our strong business momentum continued into the first quarter as we delivered all-time records for both new originations and total investment income. We delivered strong growth across both the BDC and our wholly owned RIA managed private credit fund business, which continues to provide us with significant capital flexibility and capacity. Notwithstanding a more volatile and challenging market backdrop in Q1, the Hercules platform delivered strong and stable financial results. We continue to maintain strong available liquidity of $454.5 million as of quarter end in the BDC and more than $1 billion across the platform, including the advisers funds managed by our wholly owned subsidiary, Hercules Adviser LLC. As previously disclosed, during the quarter, we strengthened our liquidity position even more by issuing $300 million of institutionally backed 5.35% unsecured notes due in 2029. In addition, we raised over $50 million in accretive capital via our ATM to help support our nearly $300 million of net debt portfolio growth during the first quarter. Finally, based on the performance of the quarter, Hercules Adviser delivered another quarterly dividend of $2.1 million to HTGC which, when combined with the expense reimbursement of $4.6 million resulted in approximately $6.7 million of NII contribution to the BDC for the quarter. These points in mind, we'll review the income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and finally, the financial outlook. Turning first to the income statement performance and highlights. Total investment income in Q1 was a record $141.5 million, an increase of 3% quarter-over-quarter and 18.4% year-over-year, supported by our continued debt portfolio growth. Core investment income, a non-GAAP measure, increased as well to a record $134.9 million compared to $133.3 million in Q4 and was up 16.8% on a year-over-year basis. Core investment income excludes the benefit of income recognized because of loan prepayments. Net investment income was $88.1 million or $0.48 per share in Q1, an increase of 1.3% quarter-over-quarter and 13.8% year-over-year. Our effective and core yields were 12.8% and 12.2%, respectively, compared to 12.9% and 12.5% in the prior quarter. The decrease in core yield was near the midpoint of our communicated range, in line with our guidance and driven by the continued impact of rate reductions in the second half of 2025. Although as noted previously, this impact has been progressively muted. As of quarter end, more than 75% of our prime-based loans were at the contractual floor and thus the impact of any future rate reductions will continue to be muted. First quarter operating expenses were $58.1 million compared to $54.9 million in the prior quarter. Net of costs recharged to the RIA, our net operating expenses were $53.4 million. The increase in operating expenses was largely driven by increased compensation tied to record quarter for new originations. Interest expense and fees increased to $30.8 million compared to $28.2 million in Q4 due to the growth of the business and corresponding increase of leverage to support our record origination activity. SG&A increased to $27.2 million, just above my guidance on the growth of the business. Net of costs recharged to the RIA, the SG&A expenses were $22.6 million. Our weighted average cost of debt remained stable at 5.1%. Our ROAE or NII over average equity increased to 16.9% for the first quarter compared to 16.4% in Q4, and our ROAA or NII over average total assets was 8.1% compared to 8.2% in Q4. Switching to NAV unrealized and realized activity. During the quarter, our NAV per share decreased by $0.23 to $11.90 per share or 1.9% quarter-over-quarter. The main driver was net unrealized depreciation on investments, primarily reflecting broad-based increases in market yields during the quarter. Our $45 million net unrealized depreciation was primarily attributable to $31.1 million -- excuse me, of net unrealized depreciation on debt investments, approximately $23.2 million of which was attributable to market yield adjustments associated with market volatility in the quarter. There was also $7.9 million in fair value markdowns of 2 previously impaired loans. Additionally, $12.3 million of net unrealized depreciation was attributable to valuation movements in publicly and privately held equity and $1.9 million of net unrealized depreciation was due to reversals of previous quarter appreciation upon a realization event. This was partially offset by $0.3 million of net unrealized appreciation attributable to valuation movements in public and privately held warrants. Hercules had unrealized losses or net realized losses of $0.6 million in Q1, primarily due to losses on legacy equity investments. Turning next to leverage and liquidity. In line with our previous guidance, our GAAP and regulatory leverage increased to 115.4% and 99.7%, respectively, compared to 104.4% and 88.6% in the prior quarter due to the growth in the balance sheet being financed primarily by leverage to support our record originations activity. Netting out leverage with cash on the balance sheet, our net GAAP and regulatory leverage was 113.5% and 97.8%, respectively. We ended the quarter with $454.5 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of available liquidity as of quarter end. The strong liquidity positions us very well to support our existing portfolio companies and source new opportunities. As previously disclosed, the quarter -- during the quarter, Hercules Capital raised $300 million of institutional 5.35% unsecured notes due in 2029. As a final point, we continue to opportunistically access the ATM market during the quarter and raised approximately $52 million in the first quarter, selling 3.5 million shares. The ATM usage was driven by our record new business originations and which drove very strong net debt portfolio growth in Q1. Finally, on the outlook points. For the second quarter, we expect our core yield to again be in the range of 12% to 12.5%. As a reminder, 98% of our debt portfolio is floating with the floor. And as of today, more than 75% of our prime-based portfolio is at the contractual floor. Although difficult to predict, as stated by Scott, we expect $350 million to $500 million in prepayment activity in the second quarter. The expected elevated prepayments in Q2 will provide us with significant flexibility and optionality and with respect to liquidity and capital raising. We expect our second quarter interest expense to increase compared to the prior quarter based on the debt portfolio growth. For the second quarter, we expect SG&A expenses of $27.5 million to $28.5 million and an RIA expense allocation of approximately $4.5 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter. In closing, we have started 2026 with record-setting momentum, delivering all-time highs in originations and total investment income while navigating meaningful market volatility. Our balance sheet, liquidity position and credit discipline positions us well to continue scaling our platform and capitalizing on opportunities throughout the year. As Scott noted, effective May 18 I will be transitioning to the role of President at HTGC where I will continue to work closely with Scott and the rest of our senior leadership team to further scale and diversify the Hercules platform. During my 7-plus years at Hercules, the company has delivered exceptionally strong operational and financial performance as well as record platform growth. And this expanded leadership team positions us for continued success. I look forward to working closely with Andrew and the rest of the Hercules Capital team in my new role. I will now turn the call all over to the operator to begin the Q&A portion of the call. Stephanie, over to you. Operator: [Operator Instructions] We'll take our first question from Brian McKenna with Citizens. Brian Mckenna: Okay. Great. Hope everyone is doing well. And congrats, Seth, on the new role. So given your focus on the venture market, it's not shocking you have more exposure to "software" but your portfolio is really one of the best, if not the best performing BDCs in the market today based on ROE and credit quality. It would be helpful to get your perspective on why there's such a big disconnect between the reality and fundamentals of your business relative to perceptions? And then from your seat, what are the biggest drivers of your portfolio delivering such strong results despite all the recent volatility. Scott Bluestein: Yes. Thanks for the question, Brian. I think it's sort of consistent with what we talked about on the last call that we did in February. Underwriting and venture in growth -- in growth -- venture in growth stage market is fundamentally different than traditional underwriting. If you look at how our investment teams underwrite software loans specifically, and we talked about this extensively on the last call, we are generally targeting to be under 1x debt to ARR. We are generally targeting to be sub 20% LTV. We are generally targeting to be debt to invested equity of less than 30% so there is significantly more equity cushion beneath our debt across the majority of our software companies. We've also said consistently we are very confident in our portfolio. We're not perfect. We've made mistakes before. I'm sure we will make mistakes again. But from everything that we are seeing to date, we continue to feel pretty good about how our portfolio is holding up. I would also emphasize that our portfolio is highly diversified. 50% of our investment portfolio is in our life sciences vertical, and then a significant portion of our technology portfolio is not in software companies. Many of the non-software industries are performing incredibly well in the current environment, and that gives us confidence that the portfolio as a whole will continue to perform well. Brian Mckenna: That's helpful, Scott. And then I appreciate the commentary around prepayments for the second quarter. I mean, it is a significant amount of capital coming back to you and ultimately, that's going to get redeployed. Two questions here. How should we think about fee income in the second quarter? And then how do all-in yields and spreads on new deals today compare to the investments tied to the prepayments? Seth Meyer: Sure. So a couple of things there. On the prepayment side, we did increase our guidance pretty significantly for prepayments in Q2. I want to emphasize that we view that as a positive indicator of the quality and strength of our portfolio. The majority of that increased guidance is coming from known M&A events that have either already happened or that we expect to happen in Q2 and that gives us confidence in the overall portfolio quality that will lead to slightly higher fee income in the quarter. We're not going to give any specific guidance on what that will be because that still has to play out? And then with respect to the second part of the question on spreads, I would say a couple of things on this. So first, in the midst of the most volatile parts of the last 4 months, which I would sort of highlight as late February and early March, we did see probably 50 to 75 basis points of spread widening on new originations. I would caveat that by saying that over the last 30 days or so as the volatility has decreased -- we've seen some of that come back in. So while we are seeing some spread benefit, I would sort of say 25-ish basis points relative to where we were at the beginning of the year. I think the most important thing that I would highlight is actually not on the spread, but it's the fact that we are very focused on enhancing structure across the underwriting on new loans. And that will continue to be our priority going forward versus pushing or fighting for an incremental 25 to 50 basis points of spread. Operator: We'll take our next question from Crispin Love with Piper Sandler. Benjamin Graham: This is Ben Graham on for Crispin Love. I'm just wondering if you could discuss the deployment backdrop for 2026. I know you've touched on how market volatility can create a favorable backdrop for you and just wondered if that's continued for the most part. And if there's been heightened deployment in any particular sector such as tech or life sciences? Scott Bluestein: Sure. Thanks, Ben. So with respect to just deployment, a couple of comments. Number one, we're going to continue to focus on diversification. We think having a diversified portfolio on the asset side has been critical to our historical success and we think that it will be critical to our go-forward success. So continuing to try to find the right balance between life sciences and technology. From a big picture perspective, I would tell you that we continue to be very optimistic about originations in 2026. Our Q1 activity was a record-breaking for us at $1.8 billion of commitments. We've closed an additional approximately $79 million of commitments quarter-to-date, and we have another $506 million of signed nonbinding pending commitments. And as I said in my prepared remarks, based on the current pipeline, we expect that number to continue to grow. And our investment teams are continuing to stay very focused and patient and disciplined with respect to capital deployment. But given the volume of deal flow that we are seeing given how we've positioned our business in terms of having appropriate liquidity and conservative balance sheet, we feel pretty optimistic about what that will translate into for 2026 capital deployment. Operator: We'll take our next question from Cory Johnson with UBS. Cory Johnson: I was wondering if you can maybe square '08. So you guys have had or having quite a bit of M&A in your portfolio when the M&A market is a bit slow, I guess, at the moment. So I guess what maybe are you seeing in your portfolio, what type of companies are you seeing the M&A market where you're able to see the success and have upcoming higher prepayments and such? Scott Bluestein: Thanks, Cory. I think honestly, the credit goes to our investment teams. I've said this consistently over the last several years. I think our investment teams do an incredible job at identifying, selecting and underwriting deals for the best companies that are out there. And they've done a great job over the last few years, finding companies that we think are very attractive M&A targets for both strategic and financial buyers. Year-to-date, we've had, as I mentioned in my prepared remarks, we've had 4 new companies announced M&A events that covers both life sciences companies and technology companies. I would also emphasize that we are aware of several additional companies in our portfolio that are in active M&A discussions and so I think that gives us confidence that we'll see continued strong M&A activity for the remainder of 2026. I would sort of caveat that statement by saying and reiterating what I said in my prepared remarks is that we are seeing some, I would say, increased variability with respect to timing and valuation, and that's something that we'll continue to monitor over the coming quarters. Cory Johnson: And then just one other thing, going back to the structural changes that you mentioned that you've been able to see in the terms of your underwriting. You also had mentioned earlier about how there was a significant decline in PIK. Is that decline in PIK that you're expecting, is that just to do with the payoffs? Or are you sort of more leaning a way towards PIK. Is that something that's possibly changing in the terms that perhaps you might not have to give as much on that end as perhaps you did before to win deals? Seth Meyer: Sure. Great question Cory. And I would sort of say 2 specific things. So first and foremost, the majority of the deals that we underwrote with PIK occurred in 2024 and 2025, and that was consistent with our public guidance about moving into larger, later-stage, more mature companies where PIK is a little bit more prevalent. Given the fact that our average loan duration has tended to be roughly 18 to 24 months over the last several years, we expect, and we're currently seeing many of those loans now come up for prepayment. As those loans prepay, the accrued PIK is satisfied and paid in cash. So we saw significant activity related to that point in Q1 and we expect to continue to see significant activity over the next several quarters in that regard. The second element is also what you just asked, which is we are intentionally deprioritizing PIK on new investments. And so it's really a combination of those 2 things. But the largest driver of the decrease has to do with the fact that we had significant cash collections, and we expect that to continue in 2026. Operator: We'll take our next question from Casey Alexander with Compass Point. Casey Alexander: First of all, congratulations, Seth, on the new posting. And Andrew, welcome back to the publicly traded BDC marketplace. I'm struck by -- that's a really healthy amount of prepayments that you're suggesting. And to my knowledge, at least one of them is a really good-sized software prepayment and I'm just wondering, this gives you -- does this give you a chance to kind of influence and restructure the portfolio a little bit and move off of software some or Hercules' history has been to kind of fly into the wind when things get turbulent, and that's where better results have come from? Seth said, there's higher optionality coming from these repayments. And I'm just kind of curious as to how you think you might use that optionality to influence the portfolio? Scott Bluestein: Yes. It's a great question, Casey. And again, we did increase the guidance pretty considerably, and we feel very confident with that increased guidance because of either already occurred or known M&A events and you identified one, which is a large software loan that has already repaid as a result of M&A. We view it very favorably and it does give us the opportunity to reposition the portfolio on a go-forward basis. That does not mean we are deprioritizing software. That does not mean that we are running from software companies. And I said that specifically in my prepared remarks, our team is continuing to look at, evaluate, identify what we think are very strong, attractive software loans, and we're going to continue to pursue that. Having said that, all of that recycling gives us the ability to also redeploy that capital into other parts of our technology book, space tech, defense tech, network communications, business services, et cetera. And so I would expect to see a repositioning of the portfolio as that capital comes in from payoffs and as our teams get to redeploy it. We are focused on identifying what we think are the most attractive debt opportunities irrespective of specific subsector allocation. Casey Alexander: Okay. Great. My follow-up to that is, I would imagine that if there's a software deal being done, that spreads are considerably wider, but most participants that we've heard from thus far have said that as health and happens, when there's volatility and considerable widening of spreads deals just kind of dry up in that sector. Is there stuff that can actually be done? Are there deals that are actually getting done that are out there because some of the other participants in the market have said that it's really short. Scott Bluestein: Yes. So it is certainly less than it was, but it has not dried up. So we are continuing to see, we are continuing to evaluate, we are continuing to talk to venture and growth stage software companies. I would say that the volume right now is lower than it was, for example, in the second half of last year, but I would absolutely not characterize it as having dried up. The ones that we are speaking to in our team's opinion, are of a very high quality and deals that we would feel very comfortable underwriting. Whether we can get to a point where a deal makes sense for us and them is still TBD, but that's certainly not slowing down our capital deployment, as evidenced by the fact that we have between closed quarter-to-date and pending quarter-to-date over $580 million of signed term sheets. Operator: We'll take our next question from John Hecht with Jefferies. John Hecht: I think this is just sort of an extension of the last discussion, and that is when you are getting to the table to do a new debt deal or with a software company or somebody that might be in the thesis of vulnerable to changes from AI. What are -- you guys are getting consistent terms well covered, which is consistent with what you guys have had forever. What are the -- I'm interested in the other side of that equation are the venture capitalists, when they're adding more capital to the businesses, are they taking a different approach to valuation or how they think about deploying their capital back into these businesses? Scott Bluestein: Yes. Thanks for the question, John. A couple of things. First, with respect to new investments, I want to emphasize again -- as we think about underwriting in this environment, we are choosing to prioritize structure over pricing. So rather than pushing for an additional 20, 25, 30 basis points of yield, our teams are pushing for tighter structure, stronger covenants and better overall underwriting. Whether you ultimately close a deal with a 12% yield or a 12.25% yield, not going to make a big difference. You closed the deal that's not structured appropriately and it results in a loss it's going to make a big difference. So that's what we are emphasizing. That's what we are prioritizing with respect to new originations. John Hecht: Okay. And then -- you mentioned -- I mean this is consistent with what everything you would say, but a little bit more in bioscience and less in tech and the time frame given what you just said. Anything worth calling out in life sciences that is an interesting development that you guys are sort of following and think could be the big new wave of opportunity? Scott Bluestein: Yes, it's a great question. I think the key for us is portfolio balance, right? We tend not to overreact to a material degree in either direction. For the last several quarters, we have been slightly more weighted towards life sciences, but we're talking about 55%, 60% allocation versus our sort of traditional 50-50 target. We're seeing high-quality opportunities on both life sciences and technology. I think specifically on the life sciences side, I would sort of note a couple of things that we think are ultimately tailwinds. Number one, there's obviously been a fair amount of disruption and turmoil with the FDA. I think that has caused a lot of what we believe to be very strong companies to want to be positioned from a balance sheet strength perspective. And so we're seeing companies that maybe historically where the FDA was a little bit more sort of consistent and reliable. We're seeing those companies want to strengthen their balance sheet and get ahead of that. So I think that's working in our favor. Obviously, we're watching the developments at the FDA pretty closely. But we have continued to see companies produce strong positive clinical results. We have continued to see companies get drugs approved. So we're very optimistic about what the life sciences ecosystem looks like on a go-forward basis. And I do just think these companies right now, given some of the FDA uncertainty and volatility want to strengthen their balance sheets and get ahead of that, and that's working in our favor. Operator: We'll take our next question from Christopher Nolan with Ladenburg Dolman. Christopher Nolan: Scott, on your comments on prioritizing structure over yield, given AI right now is everything is in flux for these companies, and it could result in replacing a lot of headcount. Is the structure about expense -- income statement related items, more so than in the past? Scott Bluestein: Yes, Chris, I certainly appreciate the question. I'm not going to give our road map on a public call, just given that we're doing some very specific things right now on the underwriting and structuring side, and we want to keep that internal and proprietary. I will say that we have made some changes with respect to how we are thinking about structuring these deals that involves duration that involves structure that involves covenants. It really involves the totality of things. And there's no one size fits all. There's no cookie cutter for us. We try to custom tailor a solution for each individual company that we think gives us the best risk-adjusted returns. Christopher Nolan: Great. And then as a follow-up on the increased M&A activity, how much of this is being driven by AI just companies looking to exit? Scott Bluestein: Very little of it, to be honest. There's a balance -- our increased guidance reflects the balance of life sciences and technology companies. In the majority of those, there's really no correlation at all to AI. On a couple of the larger M&A events, you could argue that strategics are trying to get ahead of the AI curve, but we would not attribute the increase to anything specifically with respect to AI. Operator: [Operator Instructions] Our next question from Ethan Kaye with Luca Capital Markets. Ethan Kaye: I'll keep it relatively short here. You mentioned, just a follow-up on the PIK conversation. You mentioned you're deemphasizing pick on new investments. I guess I'm just curious what's the motivation for doing that? We've heard kind of many peers over the last several years defending the virtues of PIK usage. I guess I'm curious whether something has changed in your view on that topic? Scott Bluestein: It's a good question. Nothing has changed outside of -- we were pretty consistent that we did not want PIK to become a significant part of our income. Towards the end of last year, our PIK as a percentage of revenue increased to approximately 10.5%. That was close to sort of the self-imposed limit that we have put internally. So I think naturally, we just want that to slowly work its way down. And I would also say in the current environment, we are not finding a need to use PIK as frequently as we were over the course of '24 and '25. And all else being equal, we would certainly prefer cash versus PIK income. Operator: I'm showing no further questions. I would like to now turn the call back to Scott Bluestein for any closing remarks. Scott Bluestein: Thank you, Stephanie, and thanks to everyone for joining our call today. We look forward to reporting our progress on our Q2 2026 earnings call. Thanks, and have a great rest of the day. Thank you. Operator: This does conclude today's Hercules Capital First Quarter 2026 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.
Mark Flynn: Good morning, everyone, and once again thanks for joining us. We'll cover a couple of things today with Nova Eye. Obviously the March quarter results. We'll cover the record April sales release that we've put out to the ASX and our guidance today as well. And also, we'll give you an update on how the U.S. business is scaling up at this present time. Quick reminder, this session may include some forward-looking statements. So please refer to the ASX release and the investor presentation for full details. As always, if you like to ask a question, please use the Q&A function in Zoom and we will try and get to as many as we can. I have received a number of questions ahead of the meeting. So thank you to those that have sent those through. But with no further ado, I hand you straight over to Tom. Thomas Spurling: Thanks, Mark. Thank you very much, everybody, for tuning in today. I'm always very pleased with the number of people that take the time to listen to our story. I think we've got a good story again for the quarter to 31 December -- 31 March 2026. As our disclaimer, just a reminder, it's about pressure. Glaucoma is about pressure and us intervening in the disease to open up blockages and reduce that pressure. Next slide. The messages from today, we address, Nova Eye products address a genuine and growing clinical need. So we're not trying to make people do something they haven't done before. The disease is real. The customer base is real. There is competition, but that just means that we have -- and we have an offering that participates very well. Our revenues are now up near $23 million annually and growing at 25% plus year-on-year. And they reflect that real market demand. This quarter showed that we can grow revenue while also improving profitability. I've been saying that too for a while. We were just $75,000 short, just 1% of revenue away from breakeven in Q3. We were EBITDA positive if you include our strong December in the 4 months to March, and we're forecasting EBITDA positive in Q4. So that's EBITDA positive in the second half in total. We are delivering the outcomes we committed to, and that's what I'm pleased about. We have a company with 20-plus percent growth and profit at the bottom or EBITDA. Record sales were achieved in April. We saw the need to upgrade our sales guidance as a result of that. And on the -- just a USA surgeon, I received this e-mail randomly, just general feedback about how good iTrack is, performs better with its canaloplasty than other devices. As such, it is not critical to perform a concomitant goniotomy, which is a tearing of the trabecular meshwork. There's less likelihood of postoperative blood. And for premium IOL patients, it's good. You don't want to have someone that's just had a cataract surgery, spend a lot of money on a premium IOL and come out of that surgery with blood in their eye. I hear that from a lot of surgeons, and this is just another example. Next one. A reminder about the interventional glaucoma market. It means the active surgical engagement to change the disease trajectory and remove the patient's reliance on drops. I encourage you to have a look at Glaukos. Glaukos made an investor presentation today or released it to the market. I looked at it, they give a very good definition of interventional glaucoma and how important it is. And we are part of that market. Nova Eye is part of that market. That cataract link, 1 in 5 patients also have glaucoma gives us a reason for patients going into the OR, let's fix your cataract and get you off those drops. Our stent-free tissue preserving repeatable product is what puts us in the game. We are a required part of the business, interventional glaucoma market globally and in particular in the United States. Next slide. Just a quick summary of our -- a number of you have seen this. We have an FDA-cleared product, of course. We have a good reimbursement, which is stable. That reimbursement gives economic value to all the participants in the surgery, the surgeon, the facility hosting the surgery and us. Why do doctors choose iTrack Advance, well, we're talking about restoring the natural systems of the eye. It's implant-free and tissue sparing with a single pass with now the beautiful Green Light passing around the Canal of Schlemm, gives us the advantage over other devices that call themselves MIGS devices or are MIGS devices giving that doctors can choose from. And there are many -- I have all sorts of -- we've had all sorts of slides in the past about that. But at the heart of the matter is the tissue sparing natural method of action. Next slide. Here's our sales quarter-on-quarter compared with the PCP, USD 5.8 million. There were 2 new additional sales reps in the U.S. to service the growing demand we have there. This is, that's okay. I prefer to look at the next slide, which is our trailing 12 months revenue. It's a better picture of trends. And you can see 26% globally, 27% sales excluding China. We only do that. We started doing that because of the difficulties with tariffs. Remembering we're selling from the U.S. to China. And we were -- at the commencement of this financial year, there was a lot of uncertainty associated with that. So we just measure ourselves on sales excluding China at the moment. That doesn't mean China isn't being worked on. It just means that for guidance, we go to sales excluding China. And the sales guidance was lifted $21.7 million. We had guided to $21 million minimum a week or 2 ago. We have now passed that. So we've upgraded our guidance as a result of the very strong sales in April in all markets. Very pleasing. The drivers of that sales growth, our brand and product awareness by doctors was on display at the recent Australian -- American ASCRSA (sic) [ ASCRS ], American Society of Cataract and Refractive Surgeons in Washington, D.C. We have great trade booth presence and great booth attendance by doctors. We have sales team productivity, which I challenge is up with any ophthalmology company in the U.S. The release during the quarter of our proprietary Green Light technology to provide a clearer view for better navigation of the catheter through the Canal of Schlemm. I guess it's kind of goes without saying that a Green Light with -- is better seen in the case of any blood in the operation. And the release also of our Shear Clear technology, iTrack advanced with Shear Clear technology. This is also our technology transforms the cohesive viscoelastic into a low viscosity fluid during canaloplasty. You'll recall that viscoelastic is really a biocompatible hydraulic fluid that we flush, that we push through the canal. By virtue of our delivery system, it is thin and that thin viscoelastic circulates more freely into the ocular structures, the Schlemm's canal and the outflow pathway. And after a period of latency, regains viscosity and therefore holds open those structures. We're very pleased with the Shear Clear, the outcome of -- the addition of Shear Clear to our technology. There are some surgeon videos on YouTube that are highlighting the impact of this technology on their surgical outcomes. That is why sales are going up. We have a great product. We've got a good team, and we've got a lot of awareness of our brand and, well, to be honest, a little company. Next slide. China remains -- we made our first sales in February to China of iTrack Advance. And in that regard, I draw your attention or we draw your attention to the opportunity in China compared to the U.S. The same dynamic, 1 in 5 cataract patients present with concurrent glaucoma, and the opportunity to grow our business in China is very strong. It is a big opportunity. It will take time. But we think it is very exciting. Next slide. This slide, we've had a question about dips in sales reps. Well, I also get questions about dips -- sorry, revenue per rep. So what we've got is sales growth in the United States by quarter. What I like about this slide is that I have not made any change to the scale on the left-hand side to exacerbate the growth rate. It is a commendable growth rate of 6% a quarter. What we take away from that is despite our sales, we were maintaining a very strong revenue per rep. I'm often asked, how long does it take for reps to get to $1.6 million a quarter, $1.8 million and $1.9 million. I consider our whole pool of reps as an asset. And on average, we have managed over time to keep that quite high. Sales growth, keep it quite high. And therefore, that -- the sales rep expense is quite high. So that is a driver of productivity. Sales in the quarter, on that graph, look flat quarter-on-quarter. That could be, say Nova Eye has flat sales in the United States. January and February were materially affected by winter storms and surgery. And quite possibly, those surgeries were caught up in April, quite possibly. So we have had a great April, as we said, which augers well for Q4. So we will continue to push when we find the right people because there are territories in the United States which are underserved. We will continue to look for reps that we believe can be added to our team and maintain at $1.6 million, $1.7 million, $1.8 million per rep and therefore drive the bottom line productivity as well as sales growth. Our operating result here, I call out our investment in clinical data because it doesn't actually impact the current operating leverage as they call it. You can see I'm not resiling from the fact that we're EBITDA negative. I am pointing out that we're EBITDA positive for 4 months, but not for 3 months because we had a good December. That's a small loss in a -- as a percentage of total revenue, and it's heading in the right direction. The leverage -- the gross margin is pleasing as we improve our production -- constantly improving production processes, but also pricing of our product increasing, particularly in outside the U.S. markets where we're still only transitioning in some cases, from iTrack 250A to the more expensive, for us being a more expensive -- higher price, sorry, iTrack Advance. So I think this highlights the trends in quarterly EBITDA. I draw your attention to the green arrows which show Q4 relative to Q3 for the last couple of years. So we think our outlook for Q4, if that trend continues, is very strong. A couple of periods of very close to breakeven performance, and we're forecasting an improvement that to continue during the month of -- during the April, May and June. Cash flow, we continue to invest in working capital. There was a lot of marketing expenditure upfront that we had to make. Our cash receipts will flow through. And as we said, our existing cash and debt facilities provide sufficient runway for the continued execution of our mission, which is a mission to cash to EBITDA positive, cash flow positive will follow. Next one. Recapping our guidance. There's an update from $21 million to $22 million to $22 million to $23 million. People may say that's not much, but I'm excited by it because we're proud of the work we're doing. We're only a little company, and we are delivering what we want, what we said we'd deliver. So there's some FX things there. I tend not to worry about Australian dollars, but I have to give the -- just a reminder, we have no Australian dollar revenue. We do not sell in Australia. So it's U.S. dollars for us. Next one. And that's the same, our guidance that continued targeting breakeven with a small positive in H2 FY '26 and positive EBITDA from operations that removing the effect of clinical data and ongoing improvements in cash flows. We are generating cash in the U.S. I don't want to say the U.S. is a business on its own, but because it's a very global integrated business. But all our cash is coming in euros in the U.S., which the appreciating Australian dollar doesn't help when you turn it into Australian dollars. Okay. So thank you for that. Mark Flynn: Thanks, Tom. A couple of questions coming through. One live is that the Green Light, which we've announced and is currently in use in the U.S., will that supersede the red light or will both lights remain available for surgeon choice? Thomas Spurling: It will stay the same. And that's actually our choice because doctors, we are not making it -- if someone has a red light and they ask for it and they're a good customer, well, we are not trying to build to, the better production planning thing is just to deliver green is the answer. Mark Flynn: A question from Nick Lau at Taylor Collison in regards to those U.S.A. sales. You did cover it there and also the revenue per rep, which sort of dipped a little bit. What are the factors the sales rep are seeing that may have contributed to this? And I know you mentioned the weather. Thomas Spurling: Yes. So I know the weather sounds a lot like the dog ate my homework. But in the end, the Northeast of the U.S. in January and February, which seems like an eternity ago, but to me it's not because we're still seeing the effects on our P&L account where there was -- our reps were shut down, surgeries were shut down and surgeries were canceled. That impacts. It impacts doctors bimonthly and so it impacts. The revenue per rep, it's a vexed issue. I get equally the number of times people say, put on more reps, why don't you put on more reps? Well, when we put on more reps, there must be a dip naturally because you can't get all those sales in the first month the person is there. We try and split the territories, give the person a lot of leads. But we put on reps because we know in that 2, 3, 4 months' time, we'll get back up to the [ $1.678910 ], $1.6789 million per rep, which we know drives our bottom line result. And as I said, 20% growth, 20% plus top line growth and EBITDA. That seems to me like an achievable target for our business. Mark Flynn: The sales adoption by new or established surgeons, are you able to comment on the sales pattern? Thomas Spurling: Well, you can -- that requires a lot of analysis. We are a small business, but it also -- we'd like to think that our competitors don't need to tell -- we don't need to tell our competitors about new accounts. We just deliver our sales information. I know so many people have how many facilities, what's new, what are new accounts, what are old accounts, why are the old -- why are facilities dropping off? Why are new facilities not buying if they just bought a -- in month 1, they're not buying in month 2. There are so many combinations of analysis that we could do. And they are compromised by doctors moving around between facilities, by -- in particular that and the idea that some accounts have more than one facility and more than doctor doing it versus some accounts just having one doctor. So we believe that our EBITDA, operating revenue per rep. Increasing top line sales is our goal, and we have our internal guidance as to how we're doing at each account. Mark Flynn: You mentioned Glaukos and a bit of a comparison. So I know Glaukos leads in stents and drug delivery, but where do they sit with in competition against us? Thomas Spurling: Well, it's interesting, I refer you to some of the videos that have been posted by surgeons where there is a combination going on now where there seems to be doctors are deciding to team iTrack with Glaukos products, which is interesting. And we think that we don't have any clinical evidence around why that would do it, but that's up to doctors to do what doctors do. Glaukos' investor webinar today gives a very rosy outlook for interventional glaucoma. And I know it's to service their own needs, but it does describe very well the trends. And we think that we are -- if you like, we could be on the coattails of some of those trends. I mean the trends are real. I think that's what -- a review of the Glaukos investor presentation will show you, that we have -- that Nova Eye Medical is in a real market with a real growth thing. Mark Flynn: China, I know we do exclude China, but when do you believe or when do you think that sales there will become material? Thomas Spurling: I'm just starting. We've decided corporately to just be cool on that decision and let them flow through. So we're not giving any more guidance than what we have. Operator: Thank you. We've got one here. In regards -- we haven't mentioned the manufacturing facility or clean room in Adelaide. Just a short update on that. Thomas Spurling: Yes. So we have quietly and with conviction to lower our production costs, insourced some parts into, establish Nova Eye cleanroom facility and insource some parts to lower production costs ultimately. And it also provides a test bed for new manufacturing techniques and new product testing. The Shear Clear and the Green Light are as a result of that. So it's a good capability we have here in Adelaide. And compared with other parts of the world, Adelaide is a low-cost domain. So it's good. Mark Flynn: Always a reminder that there's new people joining our webinars and asking why don't we sell this product in Australia. Thomas Spurling: So simply put, we have presented data to the U.S. Medicare and it has accepted that data as meaningful in saying that, yes, canaloplasty does work, and therefore we will reimburse patients who need it or reimburse, yes, patients effectively. In Australia, the data, they have a different level -- different standard. They don't -- they believe more data is required. The size of the Australian market does not warrant our investment in getting that clinical data, just a standalone. We do have some clinical data in the pipe, which may help, but we see the investment in an additional rep in the U.S. helps us get to our 20% plus growth, EBITDA positive down the bottom, far better than just selling in Australia, unfortunately. Mark Flynn: Thanks, Tom. I think that covers all the questions. Any final questions come through now or as always, Tom and my details are on the screen. Please send through any questions. Happy to have a phone call as well. Look forward to staying in touch. But great news from Nova Eye today, and welcome any further questions. So thanks very much for joining. Thank you, everyone.
Operator: Thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer, Inc. Third Quarter 2026 Earnings Call. With us today are Charles Liang, Founder, President and Chief Executive Officer; David Weigand, Chief Financial Officer; and Michael Staiger, Senior Vice President of Corporate Development. [Operator Instructions] I would now like to turn the conference over to Michael Staiger. Please go ahead. Michael Staiger: Good afternoon, and thank you for attending Super Micro's call to discuss financial results for third quarter fiscal 2026, which ended March 31, 2026. As you know, with me today are Charles Liang, Founder, Chairman and Chief Executive Officer; David Weigand, Chief Financial Officer. By now, you should have received a copy of the press release from the company that was distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the Investor Relations section of the company's website under the Events and Presentations tab. We've also published management's scripted commentary on our website. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, future business outlook, including guidance for the fourth quarter of fiscal year 2026 and the full fiscal year 2026. These statements and other comments are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause actual results or even events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. You can learn more about these risks and uncertainties in the press release we issued earlier today, our most recent 10-K filing for fiscal '25 and other SEC filings. All of these documents are available on the IR page of Super Micro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to the company presentation or to our press release published earlier today. The non-GAAP measures are presented as we believe that they provide investors with the means of evaluating and understanding how management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from as a substitute for or superior to financial measures prepared in accordance with U.S. GAAP. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts. Our fourth quarter fiscal 2026 quiet period begins at the close of business Friday, June 12, 2026. And for now, I will turn the call over to Charles. Charles Liang: Thank you, Michael, and thank you all for joining today's call. We had significant business value growth with our technology leadership and market expansion. However, before I discuss the specifics of the quarter, I want to provide an update on the recent development regarding the indictment of certain individuals formerly associated with the company. I must be clear, Super Micro is not a defendant nor a target or a grand jury investigation and Super Micro has zero tolerance to any employee who violated the federal law and regulation. I am personally shocked and saddened by this alleged action, which in no way represents the value or ethics of this company. We took immediate action by terminating our relationship with the defendants and are helping and cooperating fully with the U.S. government. Additionally, our independent directors have launched a thorough independent investigation with top forensic and legal firms to ensure we continue to maintain the highest standard of integrity. We are not waiting for this process to finish. We have further strengthened our global trade compliance program under expert leadership. Not only is Super Micro fully committed to protecting advanced American technology and following the highest and business standard, but continue to expand our manufacturing footprint right here in United States. Again, the alleged actions of a few individuals do not define us. Our focus remains on doing extraordinary work for our customer and partner and leading the industry with transparency and excellence. Now let's talk about the quarter. This was a quarter defined by value and focus for Super Micro. Despite the industry-wide shortage of key components, including CPU, GPU and memory, our business continues to grow and expand. Indeed, our back order is now in another record high. We advanced and optimized the orders data center infrastructure using our leading direct liquid cooling DLC technology. Our focus remains on delivering the fastest time to online, TTO, in the industry, ensuring our customers can scale their AI factories quickly and most efficiently. While our fiscal Q3 revenue of $10.2 billion was impacted by customer site readiness delay, our business fundamentals are stronger than ever. This is purely a short-term delay. Several customer sites were not yet equipped with the power and networking required for their cloud deployment, and we expect to capture this revenue in the coming quarters. One of the most significant achievements this quarter was our gross margin recovery, which increased significantly to 10.1% non-GAAP, representing a 58% improvement over the 6.4% non-GAAP reported in the previous quarter. We are committed to achieving a sustainable double-digit gross margin model by increasing our focus on enterprise market and our DCBBS business. Here are some key growth drivers. First, market strength. Business remains very strong in the NeoCloud, sovereign AI and Agent AI segment. We have been aggressively fostering the traditional enterprise and storage business for about 1 year, and we start to see strong growth -- growing opportunities. Our Data Center Building Block Solutions, DCBBS, continue to attract old and new customers' interest and create new profit streams. By offering a total data center solution that includes complete liquid cooling facility, management software, networking and service, we are providing much more value to our customers as they commit to our total solutions, product mix and efficiency. We improved our product mix with some more unique value products in this quarter and thereafter. We also advanced our design of manufacturing, DFM, and more automation in our factories to build products faster with higher yield rate and quality and supply chain. We successfully managed inventory through a dynamic supply environment and took actions to reduce tariff-related cost pressure. These efforts help improve our flexibility, protect margin and support the customer delivery time line. Here is the bigger story. Super Micro is evolving from a U.S.-based server designer and manufacturer into a total data center solution provider. We expand our business to help customer planning, building, deploying and servicing data center infrastructure for global enterprise and NeoCloud provider, especially. Our DCBBS business is essential to this transformation, providing almost everything a customer needs to build an AI factory, including cooling units, networking, power cell, battery backup, management software and many other data center subsystems. Our DCBBS business continues to grow exactly as what we plan, showing a consistent and accelerating contribution to our top line and bottom line quarter-over-quarter. And I believe our DCBBS will soon contribute more than 25% of our total profit in the coming few years. As an IT technology leader for more than 30 years, we have consistently turned industry disruption into innovation and new strong opportunities. One of the key value and drivers of our DCBBS business is our data center end-to-end management software. We see significant demand for the Super Micro data center and cloud software suite. including our SuperCloud Composer that manage tens of thousands of systems or racks in real time. It provides comprehensive control over system and rack level power usage, cooling status, safety condition and device utilization alongside many other critical features. Our management software feature also include advanced CPU and GPU workload orchestration, which is a critical function for today's AI data center. The revenue from this new software product line is finally growing at a tremendous pace, increasing from less than $10 million per quarter just a few quarters ago to $34 million last quarter, and more than $46 million booked for this quarter. By bundling subscription-based software and service alongside our hardware, we are strengthening our customer relationship and improving our long-term profitability. We expect DCBBS, including software and service to continue its rapid growth and to become a major part of our key value mechanism. We continue to grow and expand our partnership with many key suppliers. Especially with NVIDIA, we are currently shipping many SKUs of the latest rack scale systems, including GB300 NVL72, [ MNB-300 HGXQ ], B200 NVL4 and inferencing application optimized RTX product lines. And we are preparing to be among the first to market with the new Vera Rubin systems, including the NVL72 SuperCluster. We continue to build on strong momentum of our AMD MI350 platform as we prepare for the next generation of AMD Helios solutions, featuring EPYC Venice and MI400 series of products. In addition, we are working closely with Intel and Arm on the development of upcoming Xeon 6+ platforms and a new addition to our portfolio, including Arm AGI GPU-based solutions. This system will deliver exceptional performance per watt, specifically optimized for the growing demand of agentic AI workloads. By leveraging Super Micro's system building block solution right and data center scale building block architecture, we can efficiently support a wide variety of compute platform and optimize them for different business verticals. Moving on to our footprint. We are expanding our global production capacity with new facility to better support AI demand across the world. Our site in Taiwan, Malaysia and Netherlands are all ramping up aggressively. Domestically, we recently announced our largest U.S. site to date, a new DCBBS campus in Silicon Valley, just 1 mile away from our headquarter. This brings our total Bay Area footprint to nearly 4 million square feet, featuring 8 new buildings optimized for innovation, design, production and validation of our next-generation end-to-end data center total solutions. Within this new campus, we are building multiple large-scale validation and production facilities. Some of them including a clean room specifically to support our new DLC-2 subsystem and next-generation networking solutions, including advanced optical photonics-based device. With these expansions, we are on track to produce more than 6,000 of the world's most powerful [ AOR ] rack per month. In closing, Super Micro continue to scale our revenue and scale up value. We have strengthened our governance, delivering a meaningful margin recovery and expanded DCBBS growing in both volume and value through software, networking service and more. Our leadership in DLC technology pave our ability to deliver large-scale total solution at the industry's fastest time to online will continue to fuel our strong growth, keeping Super Micro at the center of our AI revolution. With that, I remain very bullish about our growth in the AI and data center market. For the fourth quarter, we target $12 billion, given stable supply conditions. For the full year, we target $40 billion. I will turn this over to David. David Weigand: Thank you, Charles. Fiscal Q3 FY '26 revenue was $10.2 billion, up 123% year-over-year and down 19% quarter-over-quarter. As Charles mentioned, the Q3 revenue was impacted by data center and customer readiness together with industry-wide supply chain constraints. We expect to recognize the deferred revenue in the upcoming quarters. Orders and backlog remains strong across our customer base, driven by AI infrastructure demand with AI GPU-related platforms contributing over 80% of revenue. During Q3, the enterprise channel revenue totaled $2.8 billion, representing about 28% of revenue versus 15% in the prior quarter. was up 46% year-over-year and up 45% quarter-over-quarter. The OEM appliance and large data center segment revenue was $7.4 billion, representing approximately 72% of Q3 revenue versus 85% in the last quarter. This was up 183% year-over-year and down 31% quarter-over-quarter. For Q3 FY '26, we had 2 existing customers, each representing more than 10% of revenues, one large data center customer at 27% of revenues and enterprise customer at 10% of revenues. By geography, the U.S. represented 69% of Q3 revenue; Asia, 13%; Europe, 7%; and Rest of World, 11%. On a year-over-year basis, U.S. revenue increased 154% Asia grew 1%, Europe grew 146% and the Rest of World increased nearly 500%. On a quarter-over-quarter basis, U.S. revenue decreased 36%, Asia increased 17%, Europe increased 105% and the rest of the world increased 392%. The Q3 non-GAAP gross margin was 10.1%, up from 6.4% in Q2. Gross margins were ahead of expectations, driven by our customer and product mix, together with lower tariffs, expedite and inventory reserve charges. Q3 GAAP operating expenses were $393 million, which was up 34% year-over-year and up 21% quarter-over-quarter. On a non-GAAP basis, operating expenses were $278 million, up 29% year-over-year and up 16% quarter-over-quarter. Both GAAP and non-GAAP operating expenses were up quarter-over-quarter due to higher headcount-related expenses. Non-GAAP operating margin was -- for Q3 was 7.3% compared to 4.5% in Q2. Other income and expense for Q3 totaled a net expense of $15 million, reflecting $49 million in interest and other income, offset by $64 million in interest expense related to convertible notes and the revolving credit facilities. The tax provision for Q3 was $127 million on a GAAP basis and $156 million on a non-GAAP basis, resulting in a GAAP tax rate of 20.8% and a non-GAAP tax rate of 21.1%. The Q3 GAAP diluted earnings per share was $0.72 compared to guidance of at least 52% -- $0.52 and non-GAAP diluted EPS was $0.84 versus guidance of at least $0.60 due to higher gross margins. The GAAP fully diluted share count decreased sequentially from 694 million in Q2 to 692 million in Q3, while the non-GAAP share count was largely flat at 709 million in Q3 compared to Q2. Cash flow used in operations for Q3 was $6.6 billion compared to $24 million used in the prior quarter. Operating cash flow was impacted by a reduction of $10 billion in accounts payable and by an increase in inventory of $581 million. These factors were only partially offset by higher net income and a reduction of $2.6 billion in accounts receivable. The Q3 closing inventory was $11.1 billion, up from $10.6 billion in Q2. CapEx for Q3 totaled $80 million, resulting in negative free cash flow of $6.7 billion for the quarter. At quarter end, our cash position totaled $1.3 billion. Furthermore, $2.7 billion of accounts receivable collections expected in March were received in early April. Our bank and convertible note debt was $8.8 billion, resulting in a net debt position of $7.5 billion compared to a net debt position of $787 million in the prior quarter. In addition to using our existing U.S. revolving credit facility and nonrecourse AR sale facility, we set up and commenced usage of a $1.8 billion Taiwan revolving credit facility to further support working capital requirements. Turning to the balance sheet and working capital metrics. The cash conversion cycle increased from 54 days in Q2 to 106 days in Q3. Days of inventory increased by 43 days to 106 days versus 63 days in the prior quarter. Days sales outstanding increased by 36 days to 85 days versus 49 days in Q2, while days payables outstanding increased by 27 days to 85 days versus 58 days in Q2. Now turning to the outlook for Q4 fiscal year '26, which ends June 30, 2026. We expect net sales in the range of $11 billion to $12.5 billion. We expect GAAP diluted net income per share of $0.53 to $0.67 and non-GAAP diluted net income per share of $0.65 to $0.79. We expect gross margins to be in the range of 8.2% to 8.4% based on expected customer mix. GAAP operating expenses are expected to be around $433 million, which include approximately $114 million in stock-based compensation expenses that are excluded from non-GAAP operating expenses. The outlook for Q4 of fiscal year 2026 fully diluted GAAP earnings per share includes approximately $95 million in expected stock-based compensation expenses, net of tax effects of $30 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense, to result in a net expense of approximately $36 million. The company's projections for Q4 fiscal year '26 GAAP and non-GAAP diluted net income per common share assume a GAAP tax rate of 19.4%, a non-GAAP tax rate of 20.4% and a fully diluted share count of 695 million shares for GAAP and 712 million shares for non-GAAP. Capital expenditures for Q4 are expected to be in the range of $30 million to $50 million. For the full fiscal year 2026, we expect net sales to be in the range of $38.9 billion to $40.4 billion. Michael, we're now ready for Q&A. Michael Staiger: Great. Before we begin Q&A, I just like to remind everyone that the purpose of this call is to discuss our third quarter fiscal '26 financial results. As such, we ask that you focus your questions on the results we announced today. Thank you in advance. And Christa, let's begin. Operator: [Operator Instructions] And your first question comes from Ananda Baruah with Loop Capital. Ananda Baruah: Congrats on the progress with the gross margin. It's great to see that. Yes. A couple, if I could. I guess the first one would be just on some of the stuff that's been sort of press released by you guys throughout the sort of during the quarter. I guess, specifically, could you give us an update on the indictment? Any more insight to any company employee involvement? Do you think you'll have to restate earnings? Are you on track to file your 10-Q, things like that? And then I guess, part and parcel with that, on the Board investigation that you guys announced, if you could talk to the opportunity that, that could have to strengthen the organization sort of -- and what those opportunities might be, that would be awesome. And then I have a quick follow-up. David Weigand: Okay. Thanks, Ananda. So the company was surprised and disappointed to learn of the alleged diversion to China of certain of our products. As we've previously announced, we're taking this matter seriously. The alleged conduct would violate our export control policies and procedures, and we're fully cooperating with the U.S. government to address this situation. In addition, our independent directors have retained an outside law firm, Munger, Tolles & Olson and a forensic firm, AlixPartners, to conduct an independent investigation into these events. The investigations are ongoing, and we can't give you any final information at this time. So based on what we know so far, though that could change as the investigation progresses, no one from the company other than those named in the DOJ indictment was involved. As to your second question on restatement of earnings, based on everything we know at this moment and considering the independent investigation is ongoing, we do not believe we will need to restate. And lastly, on the 10-Q, again, the independent investigation is ongoing and any filing will be subject to BDO review. But based on what we know at this moment, we are planning to file our 10-Q and are preparing accordingly. And I think your last comment about -- certainly, we will be taking to heart the results of the independent investigation, and we will look at that as an opportunity to grow and strengthen. Ananda Baruah: And I guess my follow-up would be sort of dovetailing off of that, you guys are probably aware sort of one of the top questions on investors' minds is in lieu of these sort of aforementioned dynamics, is there a potential for customers to get a little skittish and move away to other server vendors, Gen AI server vendors. So to the degree that you have any context that you could offer there, that would be greatly appreciated. And that's it for me. Charles Liang: Yes. Thank you for the question. Indeed, we are growing our customer base, like last few quarters I shared. Now we have many more large customers and midsized customers. And from our experience, work with customers, communicate with customers, most of the customers indeed feel pretty solid to continue our business and continue to grow together. So at this moment, I personally don't feel a negative feeling. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Manmohanpreet Singh: This is MP on behalf of Samik Chatterjee. For my first one, I just wanted to ask, in your last call, you mentioned DCBBS contributions to profits during first half of about 4%. Can you please update how did it track during the quarter? And how much of a driver was that relative to gross margin improvement that you saw during the quarter? And I have a follow-up. Charles Liang: Yes, a very good question. Yes, our DCBBS indeed continue to gain more and more traction from our old customer and new customer. So it's a very good value-add to our hardware and also enhancing our relationship with the customer. So the customer who use our DCBBS continue to grow. And we believe this growth will continue strongly. In next 2 years, I personally expect at least 20% of our net income will be from DCBBS, including the management software. Manmohanpreet Singh: Okay. And then for my follow-up, I just wanted to ask on capacity additions, which you've done during the quarter. Can you please help us quantify the revenue capacity that it helped to add for the company? Charles Liang: Yes. Also a very good question. Again, our capacity now is very huge, but we continue to grow our capacity because we like to make sure ourselves ready for a new generation of data center need for the industry. For example, a much higher density in power and computing density and also in photonics technology and new generation of switch. So we are preparing all of that. And some of the new facility indeed was paired with clean room. So to make sure we are able to provide exactly the best liquid cooling, the best communication bandwidth and minimize the power consumption for the new generation data center need. So although our capacity is already big, but we continue to build more capacity. Operator: Your next question comes from the line of Victor Chiu with Raymond James. W. Chiu: I just wanted to follow up on the first question that was asked. Does the investigation around the -- that may potentially impact your relationship with NVIDIA, subsequently, your allocation or supply of GPU and other components? Because I think that's another really frequent point of concern that we get from clients these days is how that impacts your relationship and whether or not that's -- the dynamic there has changed at all. Charles Liang: Our relationship with vendor have been very long time, right, including NVIDIA, AMD, Intel, Broadcom. So at this moment, we feel our partnership will stay strong and if not stronger, at least as strong as before. And we continue to work together for a lot of new projects. So we also share with our vendor is some -- a few employees' individual case. So I hope there are no impact basically. David, you want to add something to that? David Weigand: Yes. I mean our understanding is that there has been no change in allocation. W. Chiu: That's very helpful. And just a quick follow-up. The investments that you previously noted that you made in engineering support and services, have those mostly kind of peaked now? And is that contributing to the margin expansion at this point? David Weigand: I'm sorry, could you repeat that? W. Chiu: The investments that you've noted previously regarding engineering support services, have those kind of peaked now at this point? Or I guess, where are we along progress of those investments? And how is that contributing to the margin dynamics going forward? Charles Liang: Yes. I mean a very good question. Indeed, our service business, including data center planning, designing or deploying or other build-out services continue to grow. So we continue to grow that service team, consulting team and revenue continue to grow. Yes, in this segment, the profit is much better than our average hardware for sure. David Weigand: Yes. But I would say in no ways has peaked though. I mean it's really -- we're just gaining traction. Operator: Your next question comes from the line of Asiya Merchant with Citi. Asiya Merchant: If I could -- on just the supply constraints, there's been a lot of talk about CPU-based shortages. So just the guide that you're providing, are you constrained in any components here? And would there be a number if the supply issues were resolved? Basically, were you constrained by supply? And then if I can squeeze in one more as well on the data center. Clearly, you're seeing traction here. Relative to where you were last quarter when it was just starting to kick through, can you help us understand what kind of customers -- if you're seeing any change in the customers, whether it's from a vertical perspective or a geography perspective, where you're seeing traction with these Data Center Building Block Solutions? Charles Liang: Thank you. Yes, in terms of shortage, I believe it's a global common problem. So in the last 6 months, as you know, on the memory SSD price grow so much, double, triple, more than triple and some CPU shortage, especially from Intel. So -- and also even some GPU shortage, right? So we -- like other competitors, other system company, yes, we suffer a lot from those shortage. And those shortage may continue for -- we don't know how long, like memory and SSD. But we have a very good relationship with our vendors. So we continue to work with them and try to gain more long-term support. As to our customer base, yes, as what I shared last time, we start to gain more -- many more enterprise customer globally and NeoCloud. So we add more large customer and we add a lot of midsized and small-sized customers. And we will continue this direction to support more customers. Operator: Your next question comes from the line of Katherine Murphy with Goldman Sachs. Katherine Murphy: I was wondering if there was any onetime items that impacted gross margins in the quarter? And anything you could share there specifically to quantify? I think you mentioned tariffs, expedite fees and then inventory reserve charges. That would be helpful. And then I have a quick follow-up. David Weigand: Sure. So with the tariffs, as you know, were reduced by the Supreme Court. And there were some replacement tariffs that came in. So we are hopeful that tariffs will be down net on a net basis going forward. So whether I look at that as a temporary or ongoing thing is based on optimism. But the other thing regarding expedite fees, we had a very large deployment in our March quarter, which -- I'm sorry, in our December quarter, which ended up incurring a lot of expedite charges. So we -- those did not recur in the March quarter. So therefore, we expect that to be incrementally up going forward as to the supply constraints, as Charles mentioned, were -- it was especially troublesome in the last 6 months, but we expect some challenge going forward, but not like we incurred over the last 6 months. Katherine Murphy: That was very helpful. And then in terms of just thinking about the revenue miss in the quarter being related to a delivery that was delayed because of customer readiness, and that deal was contemplated in your prior guidance for a margin benefit that was modest quarter-over-quarter. Was that deal that flipped or was otherwise delayed a drag on consolidated gross margins? And how should we think about the impact to margins as the revenue from that deal gets recognized in the coming quarters here? David Weigand: Yes. So we think that some of the large deals that we talked about in the past have been incrementally beneficial to Super Micro because of our reputation, the reputation that it brings for us in deploying large-scale installations to some of the best sites in the world. And so what we noticed now is that we're -- as Charles mentioned, we're not only getting more -- larger engagements, which gives us a diversified customer base, but we're also getting better margins from those sales. And so we're actually -- we actually had more diversification this quarter, and we see that going into the current -- into the June quarter as well. So we think on a net basis, some of the strategic decisions that we made on large installations have been beneficial. Operator: Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: I've got 2. The first one is a clarification on revenues and gross margins. David, you mentioned that there was some pushout of revenue into future quarters. Can you help us quantify how much of that is coming back in, in the December quarter versus how much will be in future quarters? And on the margin side, can you help us clarify how you're thinking about the margin decline from fiscal 3Q to fiscal 4Q? I think you guided 8.3% gross margin on higher $11.8 billion of revenue. So what are some of the factors impacting gross margins between fiscal 3Q and 4Q? And I have a follow-up. David Weigand: Sure. So regarding the deferred revenue, it really comes down to when the customers are ready and when their data centers are ready, Ruplu. So we're always optimistic that we can ship right away, but that sometimes depends on the customer readiness. So we have to wait and see if -- how much lands in the June quarter and how much lands in the September quarter. As to margins, the -- our margin mix is determined by which customers that we sell to and which products we sell. So that's really the biggest dynamic in affecting our margins. But what we -- so therefore, what we see is a good upward trend to that 8.2% to 8.4% range, and -- but it will depend on which customers ultimately we sell to. Ruplu Bhattacharya: Got it. Can I ask a follow-up on working capital? In the past, when we've had GPU transitions, you've had to spend some working capital and time and money as customers qualify these new racks. So I'm thinking as NVIDIA releases new GPUs and when the transition happens from the overall rack to a new fiber rack, do you -- how are you thinking about your working capital needs? And is there a chance that you might have to come to the capital markets again to raise capital for working capital? So just your thoughts on investments required as new GPUs and new rack designs come out. Charles Liang: Yes. Very good question. Basically, we are diversifying our customer base and also improving our product value. Now we have more and more partnership that we not just build the AI server, not just the storage, but we have customer deployment and build a whole data center with DCBBS total solution. So indeed, our business will be more diversified and more kind of smooth ride in terms of revenue dynamic and also profit margin change. So in terms of those concerns, we are improving in a very positive direction now quarter after quarter, basically. Ruplu Bhattacharya: Okay. And in terms of working capital, David, any thoughts there? David Weigand: Yes. So Ruplu, what I would say is I always hope that we need to go back to the markets for more money because... Charles Liang: If we grow a lot. But if we grow more steadily, our capital should be pretty enough. So it depends. David Weigand: It depends on how fast our growth rate is, Ruplu. Charles Liang: Yes. If we try to double again revenue, then we may need some more help in terms of capital. But if we grow a little bit humble, then I believe we are pretty enough because now our business model is improving. Operator: Your next question comes from the line of Nehal Chokshi with Northland Capital Markets. Nehal Chokshi: Congratulations on the strong gross margin. Charles, you mentioned that over the next 2 years, targeting 20% to Data Center Building Block Solutions, 20%. Was that gross profit? Or was that revenue? Charles Liang: Profit. Nehal Chokshi: Okay. Very good. And I can't remember, David or Charles, you gave a percentage or a dollar number of DCBBS in the quarter and the quarter ago period. Can you just repeat that again real quickly? David Weigand: We didn't give that percentage out, Nehal. But our gross margin did increase on our data center sales, but I don't have the percentage of our gross profit that, that represented. Charles Liang: Yes. When the DCBBS percentage continue to grow, we may quickly provide that kind of percentage change. Nehal Chokshi: Okay. And so thinking about the significant improvement in gross margin, would you bucket that more towards DCBBS ramp or more towards a reduction in your 10% customer going from 63% to 27% in that -- from the December to March quarter? Charles Liang: Yes. I guess there are 2 factors. We will continue to improve our gross margin. One is DCBBS solution. With that segment, our profit margin most of the time are more than 20%. And the other segment is the enterprise customer focus. We start to grow many more enterprise customer, and we will continue that direction. So that will improve our gross margin and net margin as well. Nehal Chokshi: Okay. And then included in the guidance is the expectation that this customer that was 27% of revenue in the current quarter will continue to be a 10-plus percent customer? Charles Liang: Yes, we will have many more NeoCloud kind of midsized cloud customer and even small-sized cloud customer. And for sure, we will continue to support a large cloud customer as well. But more NeoCloud, small cloud, enterprise cloud. So overall, our margin will continue to improve. Operator: Your next question comes from the line of Quinn Bolton with Needham & Company. Neil Young: This is Neil Young on for Quinn Bolton. So I was hoping you could touch on maybe what drove -- you did a little bit, but maybe touch on what drove the strong quarter-over-quarter increase in enterprise. And then are you expecting to see healthy growth from enterprise again here in the next quarter and through fiscal year '27? Or should we think about the revenue split by channel more closely reflected in 2Q? And then I have a follow-up. Charles Liang: Yes. We don't provide the detail, but the direction is there very strongly. I mean improve many more enterprise customer, and we see a lot of customers really like to work with us. And then at the same time, DCBBS help us to engage with more and more new cloud and enterprise AI data center customer. So long term, we feel pretty comfortable in this direction. Neil Young: Okay. That's helpful. And then I just wanted to go back to gross margin one last time. Can you help us think about sort of what level is sustainable as we do look into fiscal year '27 as it seems like large AI deployments will most likely trend towards being a bigger mix of revenue in the coming quarters? Charles Liang: Yes. We believe we will continue to grow in a very healthy way because we are growing customer base, we are growing our product line. We are growing total solution, including software and service. So we are getting to a much mature, much high-value partner to the market. Operator: Your next question comes from the line of John Tanwanteng with CJS Securities. Jonathan Tanwanteng: Really nice quarter. I was wondering if you could just address a little bit more on the export violation issue and if that might impact your ability to finance growth or the cost to finance growth going forward. And I don't know if you talked about the cost of remediation or addressing the violations and preventing them from happening again. But if you could help disclose that, that would be helpful as well. David Weigand: Yes, John, I think I'll go back to the comments that I made earlier that we -- the company was not named in this. And so therefore, we take these things very seriously. But we -- and we're conducting our own internal investigation, as you know. And I don't want to add any more to that. Charles Liang: And also kind of based on what we know so far, though there could be a change as the investigation progresses, no one from the company other than those named in the DOJ indictment was involved. So we have a very good confidence with our integrity. Jonathan Tanwanteng: Perfect. And then I have a follow-up, if I could. You mentioned record backlog and strong orders. And I was wondering what that indicates heading into the back half of this calendar year. Just from a growth perspective, number one; and number two, if the supply environment can support growth over the first half? Charles Liang: Yes. Basically, we are a faster-growing company, as you know. So we can grow much faster if we accept lower margin business. So we try to be balanced in between the growth and the gross margin and net margin. So basically, we are in good shape. I would like to say we can control and decide the ratio of the balance. Operator: Your final question comes from the line of Mark Newman with Bernstein. Mark Newman: Congrats on the gross margin. On the gross margin and the mix, it sounds like that the gross margin rebound is driven partly by some of these, what you call expedition charges reducing. But also it sounds like, if I get it right, the enterprise mix is also helping. I wanted to ask just to clarify if that's right. And within enterprise, is that AI server? Or is this more traditional server? I have another question also on the revenue as well. Charles Liang: Indeed, both. Kind of for AI enterprise, I mean, a lot of gen AI kind of inferencing application. So we see a very strong demand there. And for traditional server and storage, even IoT, we also start to greatly support and expand this market, and we see a very good progress. So we will continue overall enterprise business. Mark Newman: Okay. Great. And then on the revenue, it sounds like the reason for the slightly light revenue was this 63% customer last quarter now pushed out a little bit, which is, I believe, the 27% customer. As that customer comes back, presumably, if that customer rebounds a little bit because some of that revenue has been pushed out, is that not going to be a bit of a drag down on the margins in the coming quarters? And also just one more quick question. You mentioned record backlog. Any clarity on that? I didn't hear any actual numbers on what the backlog is and how that's changed over time. David Weigand: Yes. So we don't give out our backlog number. So we just make general comments about the fact that it's very strong. But we are -- as I mentioned earlier, we've diversified our pipeline extensively. And so we have -- as Charles mentioned, we have a number of large deals from new NeoClouds and Cloud Service Providers, which we are expecting to increase both our footprint, our customer diversity as well as our margins, along with our DCBBS and enterprise expansion. Operator: Thank you. Ladies and gentlemen, that does conclude today's conference call. Thank you all for your participation, and you may now disconnect.
Operator: Good afternoon, and welcome to Skyworks Solutions, Inc.'s second quarter 2026 earnings conference call. This call is being recorded. At this time, I will turn the call over to Rajvindra S. Gill, Vice President of Investor Relations for Skyworks Solutions, Inc. Mr. Gill, please go ahead. Rajvindra S. Gill: Good afternoon, everyone, and welcome to Skyworks Solutions, Inc.'s second fiscal quarter 2026 conference call. With me today for our prepared remarks are Philip Gordon Brace, Chief Executive Officer and President, and Philip Carter, Chief Financial Officer and Senior Vice President. This call is being broadcast over the web and can be accessed from the Investor Relations section of the company's website at skyworks8.com. In addition, the company's prepared remarks will be made available on our website promptly after the conclusion of the call. Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are, or may be considered, forward-looking statements. Please refer to our earnings press release and recent SEC filings, including our Annual Report on Form 10-Ks, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. Additionally, today's discussion will include non-GAAP financial measures consistent with our past practice. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. With that, I will turn the call over to Philip Gordon Brace. Philip Gordon Brace: Thanks, Raji, and welcome, everyone. Let me begin by highlighting a few key developments. One, we secured a significant multigenerational design win with a leading Android OEM expected to generate over $1 billion in revenue through 2030. This win reflects our expanding footprint in premium AI-enabled devices, validating our RF content platform and our technology differentiation. Two, we introduced a range of new product innovations, including BAW filters targeting early 6G FR3 spectrum and next-generation RF front-end solutions supporting frequencies above 7 gigahertz. We also expanded our timing portfolio with new clock buffers addressing data center, wireless infrastructure, and PCIe Gen 7 applications. Moreover, we are actively engaged with customers in early Wi-Fi 8 programs, positioning us well for the next upgrade cycle. Three, regarding the Qorvo combination. Regulatory reviews are progressing as expected. We have entered Phase II of the China SAMR review and are maintaining constructive dialogue with the relevant antitrust authorities. While our formal guidance remains an expected closing early in calendar 2027, we are increasingly hopeful that we could close in late 2026. We continue to make good progress in our integration planning and remain confident in our ability to realize the anticipated synergies of $500 million or more. Finally, in accordance with our operating covenants in our merger agreement, we supported Qorvo's $400 million share repurchase during the quarter, reflecting what we believe to be a prudent and efficient deployment of capital. Our confidence in the strategic and financial logic of this combination remains as strong as ever, and we look forward to closing and delivering its full value to shareholders and customers. With that, and consistent with prior practice, we will not be discussing the transaction further on today's call and will focus on our second fiscal quarter results and June outlook. Skyworks Solutions, Inc. delivered strong results, driven by upsides in both mobile and broad markets. We posted revenue of $944 million, roughly $20 million above the high end of our guidance range, delivered earnings per share of $1.15, [inaudible] above the high end of our guidance range, and paid $107 million in quarterly dividends. We continue to see solid demand across the portfolio, with strength spanning mobile, Wi-Fi, data center, and automotive. We are mindful of the ongoing industry discussion around memory supply and pricing. Consistent with what we observed last quarter, we have not seen an impact on our business to date. Demand across mobile and broad markets has remained solid, channel inventories are lean, and our portfolio is weighted toward premium, high-complexity solutions where demand tends to be more resilient. We will continue to monitor the environment closely, but our current outlook remains supported by what we are seeing across the customer base today. In mobile, we again outperformed expectations, supported by healthy sell-through and strong execution on new product launches at our key customers. We remain bullish on the long-term RF content opportunity. A stronger unit backdrop and potential for increasing RF complexity driven by AI workloads continue to support our growth outlook. Stepping back, the long-term driver of this business is the steady expansion of a more connected wireless world, with physical AI emerging as the next wave of growth. Future growth is going to be driven by four converging forces. One, more units: the installed base of wireless devices continues to expand globally. Two, more RF content per device: next-generation standards, including 6G, Wi-Fi 7 and beyond, and satellite connectivity, will drive more bands, more antennas, and more filters into every endpoint. Three, AI-driven workloads: edge inference is placing higher demand on wireless performance, particularly uplink, latency, and power. And finally, four, new form factors: robotics, autonomous platforms, and edge AI devices are emerging as a new generation of connected endpoints. Turning to broad markets. We have nine consecutive quarters of growth, approximately $400 million in quarterly revenue, and double-digit year-over-year growth. Our three growth engines—Wi-Fi, data center, and automotive—accounted for nearly two thirds of our broad markets business and collectively grew 30% year over year. Let me briefly talk about these three growth engines. One, Wi-Fi. Wi-Fi 7 adoption is accelerating as AI workloads push toward the endpoint. Strong design engagement, solid backlog, and early collaboration with customers on Wi-Fi 8 position us well for continued growth into the next cycle. Two, automotive. The connected car and infotainment are driving growth today, with power and connectivity expanding our footprint further into FY '27. We are engaged with global OEMs and Tier 1 suppliers on multiyear vehicle programs. Three, AI data center. While still modest in absolute terms, the segment is expected to grow nearly 50% this year. The structural shift to higher data rates and rack density is driving demand for precision timing and advanced power delivery. Skyworks Solutions, Inc. is well positioned across 800-gig and 1.6-terabit platforms with leading hyperscalers, global ODMs, and infrastructure OEMs, as the industry transitions to 400-volt and 800-volt HVDC architectures. Together, these three engines are reshaping the mix of our broad markets business and driving the diversification thesis we have been executing on. In summary, strong quarterly execution and broad-based performance across both mobile and broad markets, with nine consecutive quarters of growth in broad markets and double-digit year-over-year gains. Our outlook remains solid. Customer demand is healthy, channel inventory is lean, and our portfolio is positioned in segments with structural tailwinds. The Qorvo transaction is proceeding as expected. The regulatory process is on track, and we are confident in delivering the shareholder value. Finally, the long-term setup is compelling: more endpoints, more content per device, AI at the edge, and exposure to secular growth areas like data center, Wi-Fi, satellites, and more. We believe we are well positioned for what comes next. With that, let me turn the call over to Philip for a discussion of last quarter's performance and outlook for Q3 fiscal 2026. Philip Carter: Thanks, Phil. Skyworks Solutions, Inc. delivered revenue of $944 million, exceeding the high end of our guidance range. During the quarter, our largest customer accounted for approximately 60% of revenue. Mobile represented 58% of total revenue and came in higher than our expectations, driven by healthy sell-through at our top customer and product execution. Broad markets also outperformed expectations, representing 42% of sales, and grew 10% year over year, driven by growth across Wi-Fi, data center, and automotive. Gross profit was $425 million with gross margin of 45%, in line with the midpoint of guidance. Input costs remain a modest headwind to gross margin, but we continue to do a good job of containing those pressures through cost controls and selective price adjustments. Operating expenses were $236 million, in line with the midpoint of our guidance range. Operating income was $189 million, translating to an operating margin of 20%. Other income was $3 million, and our effective tax rate was 10%, resulting in net income of $173 million and diluted earnings per share of $1.15, [inaudible] above the midpoint of our guidance. We ended the quarter with approximately $1.4 billion in cash and investments, and $1 billion in debt, maintaining a strong balance sheet and ample flexibility to support our strategic and financial priorities. Looking ahead to Q3 2026, we expect revenue to range between $900 million and $950 million. We anticipate mobile to decline approximately low single digits sequentially, consistent with normal seasonality. We expect broad markets to be up modestly sequentially, representing 43% of sales and up high single digits year over year. Gross margin is projected to be approximately 44.5% to 45.5%, flat sequentially, reflecting seasonally lower volume and higher input costs. We expect operating expenses to be between $235 million and $245 million, as we continue to fund key R&D initiatives while maintaining tight control over discretionary spending. Below the line, we anticipate approximately $4 million in other expenses, an effective tax rate of 10%, and a diluted share count of 151 million shares. At the midpoint of our revenue outlook of $925 million, this equates to expected diluted earnings per share of $1.03. With that, I will turn it back to Phil for closing remarks. Philip Gordon Brace: Thank you, Philip. Before we wrap up, a heartfelt thank you to our employees, customers, and partners. And to the Qorvo team, we deeply respect what you have built, and we are energized by the opportunity ahead of us. Your dedication fuels our success and sets the stage for continued leadership and growth. We will now open the call for questions. Operator, please open the line. Operator: Thank you. Star-1-1 on your telephone and wait for your name to be announced. As a reminder, given time constraints, please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Timothy Arcuri with UBS. Your line is now open. Timothy Arcuri: Thanks a lot. Can you talk a little bit about your content trajectory at your largest customer? I know you talked about this big Android win, and you have talked in the past about feeling like content would be pretty flat on a blended basis this fall. How do you feel about content looking at the next year? With this win, does this bode well for your content at your largest customer? Philip Gordon Brace: Yes. Look, I think we talked about this in our last call. Thank you for the questions. On our last call, we talked about generally holding share where we needed to hold share. In general, when we look at our content position there, we feel good about it. There has been some industry chatter around different seasonality and things, and we are not seeing anything unusual with respect to that. We feel good about our content, and I think the win at the premier Android segment really emphasizes our technology play and the value proposition we can offer. So I think it bodes really well. I am excited about it, I am proud of the team for what they did, and I am looking forward to the future. Timothy Arcuri: Thanks. As a quick follow-up, September is typically up, usually like 13% to 14%, but the market had been a little weak last year. Are there any puts and takes you would call out for the third calendar quarter that it would be any different than the usual up 12%, 13%, 14% sequentially? Philip Gordon Brace: We are only really guiding one quarter in advance. But what we see so far, book-to-bill remains above one. Our inventories are lean. We are keeping a close eye on it. We hear lots of chatter about it. But right now, we do not see anything that would not be otherwise seasonal for the back half of the year, and we will continue to monitor it closely. Operator: Thank you. Our next question comes from the line of Chris Caso with Wolfe Research. Your line is now open. Chris Caso: Yes, thanks. Good afternoon. The first question is with regards to this Android win. If you could give us a little more color behind what this means. Would you expect that this represents share gain for Skyworks Solutions, Inc.? Is it something as a follow-on of an existing platform you have, or would you consider this to be incremental? Philip Gordon Brace: It is a good question. I am going to be careful answering given the confidential nature of it. It is obviously a customer we have been working with in the past. I do think it represents incremental business for us going forward. It is in the premium part of the segment, and we think the gross margins will reflect that. I think it represents a really good technology statement for us across multiple generations. It is really a testament to the technology we have, but also collaboration with the customer. They would not have done that if they did not think that we could deliver sustained value generation over generation, and that is really what we have done here. Philip Carter: As a follow-up with regard to gross margins—so as we look at the back half of the year, typically, gross margin is down from Q2 to Q3 on average 70 basis points over the last five years, and we are guiding flat. We are seeing some input costs increase as we are going through the current quarter—incurring expedite fees, looking at gold prices, things like that. But we are actively pursuing cost reductions where we can—fab optimization, utilization rates. We do see a slight increase in broad markets, and that does help a little bit as we look into the next quarter. Operator: Thank you. Our next question comes from the line of Edward Francis Snyder with Charter Equity Research. Your line is now open. Edward Francis Snyder: Thanks a lot. Okay, so you got an incremental Android win. It is going to be a billion dollars between here and 2030, which means it is not Apple. You have played with Google before, it sounds like you are winning there, and everything you described suggests that maybe that is a win. In the past, they would bounce between you and Qorvo. I am just trying to get a handle on how sticky this is. I guess the 2030 guidance gives you some answer to that. Do you expect—especially with the merger—there will not be many other choices once this gets done? Or even if the merger did not go through, would you still think you would have a billion dollars there? Philip Gordon Brace: It really has absolutely nothing to do with the merger or the opportunity in front of us with Qorvo. I really cannot comment much more than what I said before. It is a multigenerational design with significant RF content. It is a really great opportunity for us, and that is really all that I can say. On the stickiness of it, I would not say anything out to 2030 unless I was confident about the stickiness of it. Edward Francis Snyder: Very good. My follow-up: you have done a very good job—memory is not affecting you—through the entire industry. Obviously, that is because you decided years ago to exit the China market and focus on your largest customer, and they are not as affected by it. Is there anything out there that would suggest that you would change that strategy? It has gotten much worse. You decided to leave China around 2019, and not playing a big role at Samsung for a reason. I do not think it is competitive; I think you decided not to be there because of the pricing problems at Samsung. Are you looking out there—is there any reason why you would change that strategy of maybe reentering high end in China or trying to compete for the Galaxy more aggressively at Samsung after the merger with Qorvo? Philip Gordon Brace: In general, our strategy is to continue to grow our business and do so in a way that grows our business profitably. We will deliver products to any customers—be it Android, iOS, or others—in a way that customers are willing to pay for our value proposition and we get compensated accordingly, and that is what we will continue to look at. It is in our strategic and financial best interest to do so. What is not in our best interest is to engage in designs that are extremely dilutive, in some cases negative. So we will continue to be prudent about how we allocate our resources to maximize the return and benefit for our customers and our shareholders. Operator: Thank you. Our next question comes from the line of Thomas O'Malley with Barclays. Your line is now open. Thomas O'Malley: Hey, thanks for taking my questions. First, a follow-up on content. When you gave a little guidance earlier, you talked about phone generation over phone generation. Can you give us an update on how content has trended since then? Traditionally, you have some early design wins late in the year, and then the board really gets set around April. Has anything changed since we last talked at earnings? And then the follow-up is, it seems like you are pointing to normal seasonality for September and December. Historically, when you look at larger customers, you get a yearly forecast, but then as you get a little bit closer, those things change. Could you talk about what type of lead times you have on changes in order patterns there, so people get comfortable around the idea that you would not see any sort of change as we get closer? Philip Gordon Brace: Thank you. On the content, we will go back to what we said before. We feel good about our content position. We cannot really comment and front-run our customers, and frankly we do not really know what models are going to sell and how that is going to work. We feel good about our content position, and we will see how that plays out. We do not see anything today that would suggest anything other than normal seasonality. Our lead times are actually quite long, but customers change forecasts all along—we are dealing with some of that now. In general, we do not see anything that suggests abnormal seasonality. Our book-to-bill is above one, our inventory is low, and we continue to get strong demand signals from pretty much across our customer base at this point. It is something we are keeping an eye on, but at this point, we feel really good about it. Operator: Thank you. Our next question comes from the line of Christopher Rolland with Susquehanna. Your line is now open. Christopher Rolland: Thank you for the question. Following on that last question about supply and lead times—if you could elaborate there. And also how it might play into pricing. In your prepared remarks, you talked about select pricing adjustments. If you could talk about that—what that might mean for gross margin as well—that would be great. Philip Gordon Brace: I will make some high-level comments, and then pass it over to Carter for details. We are dealing with a very dynamic environment. If I look back about twelve months and think about the number of black swan events that we have all been managing—it has been pretty challenging, and the current supply environment is challenging. We are definitely seeing effects of input price increases pretty much across the board. Our team has done a good job of figuring out ways to keep costs down and manage other things, and we are certainly, where we can, sharing some of the price increases with our customers and trying to be balanced to help offset some of these price increases that we are seeing. It tends to be targeted, and we are trying to manage both the short-term volatility and the long-term sustainability of the business. We are taking a prudent approach. Philip Carter: Just to add to that, some of the long-life products allow us to increase price and pass those costs on. Over the longer term, we are sticking with our long-term model of 50% to 55% gross margin post-combination with Qorvo. We do see a path to gross margin expansion in terms of favorable mix shift, lower cost structure through fab optimization, and higher utilization. We are excited about the future, the roadmap, and margin improvement. Christopher Rolland: Excellent. Perhaps a follow-up on the Android win. Could you talk about how you got that win, how this product is differentiated in terms of getting the pricing that you wanted? And does this make you rethink the Android opportunity longer term, or is this more of a one-off opportunity rather than a category? Philip Gordon Brace: We were able to offer a technology-advantaged solution that we believe will enable our customer to make a very competitive product. By having a multigeneration design win with that customer, it enables us to focus engineering resources to deliver generation over generation. We think that is very competitive, and the customer supported that. With respect to longer-term opportunities, as I reiterated earlier, it is in our strategic best interest to continue to grow the business where we can. We are experts in RF wireless communications. To the extent that we can develop solutions and products that customers want to buy at economics that make sense for both of us, we are going to continue to do that. When the economics are upside down, that is when it does not work. We will continue to be financially disciplined about allocating our resources, R&D, technology, and capability to things that provide customer benefit and deliver financial return for us and our shareholders. Operator: Thank you. As a reminder, if you would like to ask a question, please press 1-1 and wait for your name to be announced. Our next question in the queue comes from the line of Cowen. Your line is now open. Analyst: Hi. Thanks for taking my question. I have two of them. What is your total China revenues roughly this year? And within that, is the China handset revenue really small, like less than $10 million a year right now? Philip Carter: Looking at China, our overall business annually would be less than $200 million, and handset would be less than $20 million. Analyst: Got it, thanks. As a quick follow-up, on the broad market side, if I remember right, your data center revenues are still under $100 million and your auto revenues are probably around $250 million a year. Is that still the right ballpark? And how do you expect that to grow as we look forward? Philip Carter: Yes, those are about right from a number standpoint. We see really good growth, as Phil mentioned in the prepared remarks, around those areas. In terms of ranking, data center is growing a lot stronger than our automotive business, but auto is a great, healthy business where we are getting good design-win traction. We are excited about both, and we see good bookings in those areas. Operator: Thank you. Our next question comes from the line of Peter Peng with JPMorgan. Your line is now open. Peter Peng: Thanks for taking my question. When you think about that Android customer—the $1 billion over the next couple of years—should we think about it as being linear in terms of revenue opportunity, or is it rising each year from generation over generation? Any color on how we should factor that into the model? Philip Gordon Brace: We expect it to be rising year over year. We expect it to be a tailwind to growth from now through 2030. Peter Peng: Got it. And then just on RF content per device at your largest customer—I think it has been kind of stagnant for a number of years. Looking out the next couple of years, and you talked about some of the drivers—AI at the edge driving higher demand—can you talk about RF content potentially accelerating and growing? Philip Gordon Brace: Absolutely. As we look at next year, we expect blended content to be roughly flat, with potential for some tailwinds as they migrate toward the internal modem, which opens up some new opportunities for us. It is difficult to predict different models and how that is going to work, but generally we feel good about our content. Going forward, we are seeing more RF complexity driven by an increased number of bands, increased MIMO capability, increased power requirements, and smaller devices. We are seeing that across the board, and that should be a tailwind for content. As we zoom out and look at the mobile business in general, there will be more units out there; the more units put out there now, the more come up for refresh. There is more RF content coming, then we get into 6G. We have new form factors and shortening refresh cycles. We have a lot of tailwind we are excited about. We will keep monitoring that and keep executing our playbook. Operator: Thank you. Ladies and gentlemen, that concludes today's question and answer session. I will now turn the call back over to Mr. Philip Gordon Brace for any closing comments. Philip Gordon Brace: Great. Thanks, everybody, for joining the call today. We look forward to seeing you at upcoming conferences throughout the quarter. Operator: Ladies and gentlemen, this concludes today's conference call. We thank you for your participation, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Qualys First Quarter 2026 Investor Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Blair King, Investor Relations. Please go ahead. Blair King: Thanks, Michelle. Good afternoon, and welcome to Qualys' First Quarter 2026 Earnings Call. Joining me today to discuss our results, Sumedh Thakar, our President and CEO; and Joo Mi Kim, our CFO. Before we get started, I would like to remind you that our remarks today will include forward-looking statements that generally relate to product capabilities, future events or future financial or operating performance. Actual results may materially differ from these statements and factors that could result -- and factors that could cause results to differ materially are set forth in today's press release in our filings with the SEC, including our latest Form 10-Q and 10-K. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. And as a reminder, the press release, prepared remarks and investor presentation are all available on the Investor Relations section of our website. So with that, I'd like to now turn the call over to Sumedh. Sumedh Thakar: Thanks, Blair, and welcome to our first quarter earnings call. I'm pleased to report we delivered another quarter of strong revenue growth and profitability. With the accelerated progress of new frontier models, discovering vulnerabilities and writing experts autonomously, the number of detections is going to go up significantly while the exploit window is going to shrink dramatically. The need for organizations to know their true risk to effectively prioritize and auto-remediate riskiest vulnerabilities in less than a day has never been greater. This is why we innovated with the ETM enterprise tourist management platform, which implements an AI rock risk operation center so customers can get the risks remediated instead of relying on dashboard tourism with siloed products that increase their exposure. Given our #1 rating in the GigaOM Patch Management radar with over 150 million patches deployed and over 40 million of these delivered autonomously in the last year with a Six Sigma accuracy organizations are turning to Qualys as the trusted solution to help them move from current broken manual remediation processes to high-impact, low-risk autonomous remediation workflow at scale that go beyond patch management. And that's exactly where we are focused. With exploitable vulnerability volumes surging 6.5x and average time to expect collapsing to under a day as adversaries weaponized vulnerabilities before Patches even exists, security teams focus on theoretical exposure are overwhelmed. Just finding more and more vulnerabilities doesn't equal risk. Real risk is determined by whether an adversity can successfully execute and explore path in an organization's live environment. That's why I'm pleased to report that our most recent addition to our agent AI marketplace agent Vail is now generally available, powered by TruConfirm within our ATM solution agent well delivers closed-loop exploit validation and autonomous remediation directly to the rock. Using autonomous exploit validation at scale, we remove the guest work for customers by running safe exploits over the network to confirm whether attackers will succeed in their breach attempts while enabling security and IT teams to focus on the less than 1% of threats actually exploitable in their production environment. In doing so, we have closed the gap between theoretical and actual exposure and believe set a new adoption standard in the industry, while traditional ETM solutions take days to pull scan telemetry from scanning tools and rely on theoretical risk scores ignoring, mitigating security controls, ETM and its agentic AI workforce takes a fundamental different approach. Inside a continuously functioning loop, it detects vulnerabilities, validates exploit, quantifies real risk, automate remediation and revalidate the exploit, optimize and integrated with leading LLM and SLM this end-to-end approach empowers organizations to be laser-focused on prioritizing only exploitable threats for the next logical step, which is autonomous remediation, leveraging agent era and TruRisk eliminate. Underpinning our risk eliminated solution is our new AI-powered batch reliability score, a model trained our own proprietary data set of hundreds of millions of deployed patches, which predict patch induced outages before they happen, giving customers the confidence to deploy with certainty or positive purpose while setting a new standard for predictive operationally aware patch management. With an umbrella of remediation solutions, including matching and other competing controls, with less than 10% rollback rate. The AI native rock accelerates streamlines and demoralizer security outcomes, so transforming from, we think, to know it's being fixed at machine speed. In the context of the newest frontier AI models giving attackers the ability to soon discover diverse -- zero-day vulnerabilities, generate exploits in near real time and develop autonomous attack agents, unlike anything the industry has seen, the feedback to our get it fixed in our approach from many of the CISOs I met at our decent [ Rocco ] EMEA event in London has been very positive. They shared their excitement about the rapid pace of new capabilities we are delivering their deployment agenda and their ability to now autonomously monitor, measure and confidently remediate actual risk in multi-vendor environment in an era where just generating visibility dashboards is increasingly unacceptable. Our industry-leading capabilities are gaining broader recognition among our customers, partners and third-party analysts. Specifically, our total cloud solution was recognized as a leader in CNAPP in the Q1 2026 Forrester Wave report, and subsequently won the 2026 SC Award for the Best Cloud Security Management solution. Both underscore our capabilities in delivering unified visibility with real-time detection and response at run time across hybrid environments. It was also positioned as a leader in 2026 GigaOM report for cloud and entity and title management and following our dual pan awards late last year, our third research unit has again demonstrated its impact with the discovery of Track Armor uncovering critical app armor vulnerabilities that can lead to root-level compromise and container escape across millions of Linux systems worldwide. This, alongside with our recently released research on the broken physics of remediation further demonstrate Qualys' commitment to fortified security operations and raising the bar on adversaries. The net result is that we have distinctly unified CTM exploit validation cyber risk quantification and remediation into a single AI-driven risk fabric that continuously senses alerts reasons and acts across hybrid environments on with these capabilities and growing rock momentum that will soon autonomously trigger ITSM workflows. We remain laser-focused on accelerating ETM adoption throughout our vulnerability management and detection response customer base and positioning Qualys for larger upsell opportunities over time. Turning to our business update. We have established a long history of converting operational challenges into strong competitive advantages demonstrated by customers spending $500,000 or more growing 9% from a year ago to 2021 -- [ 2020 ] months. That's why one of my favorite wins in Q1 was with an existing global 1,500 customer despite strong foundational visibility that teams struggled to operationalize risk reduction across the growing mix of on-prem multi-cloud environment, silo tools fragmented telemetry, a growing population of LLM and millions of vulnerabilities with limited business contacts. This customer recognized the traditional severity-based prioritizing methods were not long -- are no longer sufficient and launched a strategic initiative to unify risk signals across their environment and operationalize the rock. Leveraging AI for security and security for AI, they expanded the Qualys footprint by adopting ETM and total AI in a mid-6-figure annual upsell. By consolidating disparate signals into the Qualys platform, this customer now has a unified orchestration layer that delivers end-to-end visibility across the attack surface, including deep scans on their assets across binaries, open source libraries and dependencies with centralized risk quantification, prioritize remediation workflows and measurable outcomes aligned with business risk tolerance. This win reflects broader ETM momentum as more and more customers turn to Qualys for evidence-based export validation and remediation while benefiting from the efficiency and scale of AI-native -- automation. Partners remain a key pillar for our growth agenda. In addition to a growing list of nearly 2 dozen certified MRO partners beginning to actively launch new services we are seeing momentum build across all geographic theaters with a strong focus on AI and native rock. For example, one of our largest MRO partners is now in the process of bringing the case-ready AI-native rock to market powered by our ETM and automated remediation solutions. Additionally, to our strategic alliances initiatives, we continue to drive deep technology integrations, co-selling opportunities and demand generation programs. to drive innovation in security research through the latest -- models. We have partnered with open AI in their crystal access for cyber program and anthropic in their cyber verification program to advance our vulnerability and threat intelligence and allow customers to ingest these findings into ETM for further detection and remediation. On the cyber insurance side, we are also pleased to announce a new strategic partnership with Converge Insurance, leveraging the quality team solution to help their customers demonstrate strong security hygiene and qualify for meaningful premium reduction, advancing our vision of tying cybersecurity to business outcome for CECL. Further supporting our growth trajectory in Q1, we continue to expand data testing of Flex designed to help customers accelerate and broaden their adoption of the Qualys TTM platform. Based on strong early engagement and positive feedback we're planning to build on this momentum by proactively identifying opportunities to extend [ Keflex ] to select customers and partners with a go-live date planned for later this year. And finally, as the federal government seeks to garnish greater efficiency and replace outdated and costly on-prem deployments from years past with modern cloud-native risk management solutions we are especially excited to host our third annual [ Pedro ] conference in Washington, D.C. towards the end of this month. We have made good progress growing our federal business and advancing our fed ramp high status with large federal agencies, and we continue to believe this market will fuel a new leg of growth for the company over time. In summary, we are pioneering a new category in pre-breach risk management by bringing autonomous exploit validation, risk quantification and zero-day remediation together within a single AI-driven risk fabric that redefines how enterprises operational as cyber risk. Complementing frontier model discover vulnerabilities. Our platform leverages proprietary domain data, real-time telemetry and deep operational context using sensors and agents behind the firewall to continuously discover assets, validate exposures, quantify risks, remediate threats and enforce company-specific policies, which are unavailable in the public domain. This is driven by our 2 decades of processing petrabytes of structured telemetry, combined with industry-leading threat intelligence in a closed-loop system that compounds across thousands of customer environment every day. printer models are powerful and accelerated back path analysis and triage. However, they need to be paired with a highly reliable control plane to consistently enforce accurate policy and compliance outcomes across live hybrid environments. This is where the unique value proposition for Qualys customers live, and it requires deterministic auditable, repeatable and trusted execution with effectively zero tolerance for error with attacks moving and machine speed and increasingly requiring defenses start to learn and respond in real-time closed-loop agents orchestration, driven policy and harness by flexible model choice act as a force multiplier further enabling precise risk quantification, safe remediation and even faster and more doministic outcomes at scale. For Qualys, this means our massive data context, LLM and SLM integration and trusted execution serve as the system of record for pre-beach cyber risk management and translate AI into a packaged Rock automation platform that delivers customers measurable risk reduction, zero-day remediation, government outcomes and immediate ROI. With that, I will turn the call over to Joo Mi to further discuss our first quarter results and outlook for the second quarter and full year 2026. Joo Mi Kim: Thanks, Ned, and good afternoon. Before I start, I'd like to note that except revenues all financial figures are non-GAAP and growth rates are based on comparisons to the prior year period unless stated otherwise. Turning to first quarter results. Revenues grew 10% to $175.6 million. The channel continued to increase its contribution, making up 52% of total revenue compared to 49% a year ago. Revenues from channel partners grew 17%, outpacing direct, which grew 3%. As a result of our strategic emphasis on leveraging our partner ecosystem to drive growth, we expect this trend to continue. IGO, 15% growth outside the U.S. was ahead of our domestic business, which grew 6%. U.S. and international revenue mix was 55% and 45%, respectively. In Q1, as expected, there was no meaningful movement in our net dollar expansion rate, closing the quarter at 104%, and slightly up from 103% last quarter. More importantly, we'd like to turn to a new metric that we plan to disclose going forward on a quarterly basis. net dollar expansion rate of customers with prior year purchase of ATM or CSAM subscriptions. We believe that this metric is currently the best indicator of success of our ATM strategic initiatives. With ATM innovation having stemmed from strong customer demand. We anticipate ATM adoption to drive higher net dollar expansion rate. However, given that ATM adoption is still in its early stages, we have decided to include CSAM customers in this cohort so that the metric has more wait to it. In addition, as a reminder, ATM is essentially an upgrade from CSAM. So we believe that this is an appropriate baseline to track and measure going forward. In Q1, the net dollar expansion rate of ETM CSAM cohort was 107%. As more customers move into this cohort. We hope to see consistent and meaningful improvement to our overall net dollar expansion rate and thereby driving accelerated revenue growth. Moving on to product mix. Our differentiated new products continue to drive growth. First, ATM, CSAM combined made up 11% of total bookings and 14% of new bookings on an LTM basis in Q1, up from last year's 8% and 9%, respectively. Next, past management made up 8% of total bookings and 15% of new bookings on an LTM basis in Q1. This compares to 7% and 16%, respectively, in Q1 of last year. Lastly, total cloud made up 5% of total LTM bookings in Q1, unchanged from a year ago. We believe that these differentiated products, combined with increased contribution to bookings in 2026 and given our opportunity to increase market share and maximize share of wallet. Reflecting our scalable and sustainable business model, adjusted EBITDA for the first quarter of 2026 was $83.3 million, representing a 47% margin, same as last year. Operating expenses in Q1 increased by 8% to $67.5 million, driven by investments in sales and marketing, which grew 17%. With this strong performance, EPS for the first quarter of 2026 was $1.95 per diluted share and our free cash flow was $93.6 million, representing a 53% margin compared to 67% in the prior year. In Q1, we continued to invest the cash we generated from operations back into Qualys including $1.7 million on capital expenditures and $53.9 million to repurchase $505,000 of our outstanding shares. Please commencing our share repurchase program in February of 2018. We've repurchased 11.2 million shares and returned $1.3 billion in cash to shareholders. As of the end of the quarter, we had $306.6 million remaining in our share repurchase program. With that, let us turn to guidance, starting with revenues. For the full year 2026, we now expect revenues to be in the range of $721 million to $727 million, which represents a growth rate of 8% to 9%. This compares to prior guidance of $717 million to $725 million. For the second quarter of 2026, we expect revenues to be in the range of $177.5 million to $179.5 million, representing a growth rate of 8% to 9%. While we believe our approach to pre-breach, cyber risk management provides some installation and this ongoing macro volatility. This guidance continues to see no material change in our net dollar expansion rate. With moderate growth contribution from new business in 2026. Shifting to profitability guidance. For the full year 2026 we expect EBITDA margin to be in the mid-40s, implying mid-teens increase in operating expenses and free cash flow margin in the low 40s. We expect full year EPS to be in the range of 7.44 to 7.65, up from the prior range of [ 7.97 ] to 7.45. For the second quarter of 2026, we expect EPS to be in the range of $1.73 to $1.80. Our planned capital expenditures in 2026 are expected to be in the range of $8 million to $12 million and for the second quarter of 2026 in the range of $1.2 million to $3.2 million. As the impact of the macro economy is still unfolding, we are closely monitoring the business environment and adjusting our priorities accordingly. That said, considering the long-term growth opportunities ahead of us and our industry-leading margins and plan further room for investment. We intend to continue to responsibly align our product and marketing investments to focus on high-impact initiatives -- driving more pipeline, accelerating our partner program and expanding our federal vertical. As a percentage of revenue, we expect to prioritize an increase in investments in sales and marketing with more modest increases in engineering and G&A. With that -- I would be happy to answer any of your questions. Operator: [Operator Instructions]. The first question will come from Patrick Colville with Scotiabank. Patrick Edwin Colville: In your prepared remarks, I mean, I think you did a really good job of conveying why risk quantification, I guess, testing whether an asset exploitable with run time context the ability to kind of patch and revalidate all make Qualys at low risk of AI disruption in the enterprise. But what I want to ask, though, is there's a lot of hype around anthropic Claude, [ Midos ], OpenAI, GPT 5.4, Cyber. Are they leading to more inbounds? And if so, like how will those inbounds and that kind of surge of interest translate into the financial model in 2026? Sumedh Thakar: Yes, that's a great question. And I think our customers who are in this day in and day out, they understand pretty well that this is going to lead to more disclosures of patches and vulnerabilities from multiple vendors that they use. And I think the challenge is going to be more about -- as -- I mean on the positive side, I think these models are helping companies get better with finding these vulnerabilities themselves versus waiting for a tapers to find them, but it also means that they're going to lead to more catches being announced by our multiple vendors that the customers will have to deploy. And I think the challenge is going to be more that once the patches come out, attackers leveraging AI can reverse engineer those patches and find the exploits. And so it really becomes a game of how quickly can you apply the patch that the vendor is giving in a matter of hours and not wait for days and weeks as it happens right now? And -- that's where a lot of the conversations that we have had with our customers, we're seeing a lot of CISOs and customers reaching out to understand how our patch management capability and the remediation capability and exploit validation capability is really going to be helpful for them because they all need to provide an update to their Board in terms of how they are going to fight against the AI-induced attacks that are coming from these models getting better and the response cannot be we are going to do more manual remediation. They need to have a response that anchors themselves in fighting autonomous AI attacks with autonomous remediation. And they see us as a trusted vendor having deployed 150 million patches already and 40 million of those already fully autonomously deployed. And so a lot of those conversations are positive right now. But of course, it's in early stage, and we need to work through to see how they take out of the conversations, how they go back to their boards to their IT teams partnered with the IT team. So happy with the activity, but a little too early right now to talk about how the impact is going to be on the pipeline and outlook. As Joo Mi said, we're not considering any change from where we are right now in terms of the guidance. But we are happy to see the engagement that we are seeing from the inbounds that we're getting from customers trying to understand how basically can respond to this. Patrick Edwin Colville: Very clear. And can I just -- I mean just to touch on that point. So I mean, Joo Mi, you very kindly last quarter provided us a soft guidance for 7% to 8% current billings growth in 2026 is the point you were trying to make in the prepared remarks that remains the case. No change to that level even with the strong 1Q performance and I guess, the positive vibes that Sumedh was just talking to? Joo Mi Kim: Yes, that's correct. I think that if you take a look at our Q1 performance, it was a solid start to the year. We're very pleased with the Q1 outlook as well as what we anticipate for the rest of the year. However, we don't see any material kind of meaningful change for the full year today. So given that the baseline still remains at 7% to 8% for the current billings for the full year. Operator: And our next question will come from Roger Boyd with UBS. Roger Boyd: Sumedh, it was a strong quarter from a new customer add perspective, and particularly for 1Q, which is typically seasonally a little bit lower. Can you just talk about what's working right from a new logo perspective? And then everything you just kind of mentioned from a patch management remediation standpoint, to what degree is that sort of impacting the new customer conversation, any metrics you can give around attach rate of patch management or TruRisk eliminate would be great. Sumedh Thakar: Yes, great question. And I think we kind of talked about right now where we are with patch management, sort of 8% of LTM overall bookings and 15% of new bookings, right? And I think definitely good execution by the team. Focused execution is key there. If you kind of recall our what we talked about at RSA, and a little bit before that, our focus on agent I agents as we went into last year. I mean, if you look at today, what everybody is talking about is how can we very quickly autonomously remediate things. And this is not accident that we are here right now. We have been delivering capabilities around patching, going beyond patching the exploit validation. And those messages have been resonating with customers. And so I think -- this is leading to better conversations with customers as they look at. We are encouraged with the conversations we are having around ATM. I mean the thing is, look, at the end of the day, risk measurement and risk management is going to be critical because it's the number of patches that you have to deploy, explores as a company cannot just deploy all the patches. And so anchoring it back to risk is very important. So eliminating the right risk and the minimum amount of risk is important and to be able to get there, so you're not matching and fixing everything, creating more risk from an outage then becomes very important because ETM is the one that does the hyper prioritization. And for ETM to be successful, you need high-quality detection capabilities. I think one of the concerns that customers have brought up after these models have come out has been the question of false negatives, right? If you're using Tier 2 scanners, the time it takes to get signatures out and find the findings versus scanner like Qualys, where we are getting signatures of multiple times a day, we are adding capabilities to detect things to reduce the false negative is becoming very important. And I think that -- those conversations are culminating in positive conversations for ETM, which is still early and ETM and eliminate conversations typically they do go hand-in-hand many times. And so I think while it's still early for ETM, we are encouraged by the conversations that we are having at this point. And so again, we have to work to continue the execution. Very happy with how Q1 went. But we're going to continue to work on executing with the opportunity that's in front of us. And like we said, our partners are working with us closely and we look forward to continuing our partners, bringing us additional sort of new logos and working with our existing customers with the MRO services which can get more value for existing customers through our partners to make sure that our upsell also continues to pick up. Patrick Edwin Colville: That's really helpful. And then maybe just a quick 1 for Joo Mi. On Q-Flex, you talked about kind of building out this pipeline and identifying a customer pipeline to extend that procurement model to. Can you just talk about kind of the customers that you see as a good fit for Q-Flex, and any thoughts on when that kind of push could start this year? Joo Mi Kim: Yes. So mostly, Q-Flex is targeted towards our enterprise customers who need that flexibility to potentially cover the forecast that they have anticipated for the full year. So as an example, what they're looking for is -- given that we continuously enhance our products and come out with newer products throughout the year, they want the comfort of having to prepurchase or pre-clinic to a higher amount that they might necessarily think that it's absolutely needed for the year. we've been talking with the select group of customers that have the budget that are willing to pre-commit to a higher credit with Qualys, with the ability to swap out different products and offerings and try out newer solutions throughout the year, we're pleased with the momentum that we have today, and we do plan to go GA with Q-Flex later this year. Sumedh Thakar: And I would quickly activate that this is right now with what is happening is a good example of where a Q-Flex model will be helpful for a customer because we didn't have exploit validation earlier last year. But now that we have that, and we have with us driving more focus on patching Q-Flex customers through the year will have more flexibility in being able to use those credits to suddenly pivot towards patching more because there is a particular event that has come up. and not have to sort of keep going back from a procurement perspective. So like Joo Mi said, exciting early conversations with these large customers, and we look forward to working through with them this year and then kind of getting towards the GA by the end of the year. Operator: And the next question will come from Kingsley Crane with Canaccord. Unknown Analyst: Med, I guess just to start off, I'm kind of curious how important is access to something like Midos preview just for your business at all? And then just in general, talking about the growing marketplace of genetic AI solutions, we've seen a pretty significant jump recently, even with just modeled GPT 4.7. But what is the future of that type of integration with agents for the platform? And like how relevant is inference is a line item for Qualys, if you look like 3 years out? Sumedh Thakar: That's a great question. I think it's less about a particular model and more about the direction that these models are going, right? And so I think for us, it is -- we have been leveraging other open source models as well, and we're excited to now be part of the TAC program from OpenAI, which gives us access to 5.5 cyber, which is an equivalent model for the most parts to Midos as an example and also part of the verification program. And we have -- since we have really been doing a lot of exploit and validity research ourselves, these type of models, whether it be these 2 front end models or other open source models that have been using in my mind, are definitely something that help us do a better job of figuring out exploits that we can safely create for our customer environment. So that the customers can really test the exact scale through the Qualys platform. It also helps us do a much better job at figuring out the right patches or the right mitigations. One of the key things that we have done at Qualys, has really put a lot of research energy into coming up with mitigations that don't need a patch, people whether your patches, but we reverse engineer patches to figure out maybe there are other mitigations that can be leveraged to make sure that these mitigations can help the customer deploy a compensating control on the machine without having to deploy an immediate patch, which is extremely valuable for them. When they only have a few hours to make a decision on mitigating a highly exploitable vulnerability. And that research is definitely what we have been doing, as the models are progressing, these partnerships definitely help us accelerate and cover more and get more options to help our customers go through that. So I see that leveraging these models, either whether it's through research or integrating with them to pull findings from these models, so customers can actually take their core findings and run it through the millions of Qualys agents that they already have installed to find the actual instance of that. or whether it is overall our own Agentic AI solutions, we use different small language models, large language models to optimize the outcomes for whether it's chat, whether it's an AI agent that is taking action, I think that is something that we look forward to continuing to partner with whether it's open source or these frontier models. And I do think that for any solution that is going to be important to make sure that they leverage some form of AI capabilities. It's just that because we uniquely do the exploit validation and patching, we have a very interesting use case for use of these models. Unknown Analyst: That's really helpful. And for Joo Mi, it's great to see the continued efficiency in the business. You've talked about R&D growing a bit more modestly than sales and marketing this year. So a 2% growth year-over-year, is that about what we should expect for the rest of the year? And just like speaking bigger picture in such a dynamic time for the cybersecurity market, I mean what would get you to invest more in that line item? And then I understood that you're already very efficient there operationally. So I can appreciate that. Joo Mi Kim: Yes. Currently, what we're forecasting is OpEx growth in the mid-teens. Sales marketing continued to grow well, up to 15% mark. Last quarter, it grew by 18% year-over-year. This quarter, 17% year-over-year. So with sales and marketing potentially ramping in the second half of the year, rest of it that we've allocated for the R&D for the most part. We do anticipate a significant investment -- we think that could be justified from a return perspective, especially with the AI investments that we continue to make in the business. So given that, we're guiding to mid-40s EBITDA margin, which is implied by mid-teens growth in OpEx. Operator: And the next question will come from Jonathan Ho with William Blair. Jonathan Ho: I just wanted to better understand sort of the breach risk management opportunity, how maybe this changes from prior approaches? And what makes maybe Qualys better positioned than other competitors to offer this solution. Sumedh Thakar: Yes, that's a great question, Jonathan. I think it's not that it changes from the prior approach from a Qualys perspective, we have been building and innovating around the ETM platform and the concept of -- Operations Center, the last couple of years almost in preparation for something like this where we will see significant number of vulnerabilities coming our way, but you cannot fix anything in an operation. And you cannot play a vulnerability -- you're trying to jump from one way over to another. So the idea of creating a risk operation center and elementing that with ETM has been to make sure that we are creating an outcome where things are fixed for the customer in a matter of hours. And I think that's an approach that's different than a CSAM solution, which is waiting for collecting data from different scanners and then creating some reasoning, but then they don't actually do the patching. They pass it off to somebody else to do the patching, which again loses time as an example. And so what I think we are seeing is the opportunity here is having created sort of this end to end. I mean what's interesting is you look at our demo that we did at RSA agent well, Agent well went from finding the vulnerability, validating the exploit, applying a mitigation and then revaluating the exploit that it is fixed in under 15 minutes. I don't know if any CSAM solution can really do that where you get an outcome of something being fixed. And then with ETM, we are focused on the CRQ aspect of it as well, right? Just because the vulnerability and patch count goes up significantly, customers still need to think of this in terms of the business and the budget that they've allocated as how much of a risk to the business do these vulnerabilities carry so that they can make better decisions on prioritization. And that's, again, the other aspect of our ETM solution being integrated now with a cyber insurance company, where if you have a good score on your a good score that demonstrates you are actually doing the right cadence of fixing your vulnerabilities. You can actually get a premium reduction for your cyber insurance, which is a positive thing for your business. And so ETM really has been about taking the businesses modification, the CSAM, the traditional CSAM component but also pairing that with extra validation and remediation giving an end to an outcome. I think what we are seeing now more is the customers who have been interested in this are now feeling like this is the time that they really need to look at this more deeply because of the number of liabilities that are going to come their way. They feel like they're looking at a risk operation center ETM and the ability to maybe some of the resistance that people have had in the past against autonomous remediation or patch management. in the initial conversation that we have had in the last couple of weeks, we're seeing a bit of a change in the way people are thinking about this as given that the threat landscape has changed. So in that sense, it's a positive outcome for us to say that instead of other solutions where somebody else is scanning, somebody else is pulling the data and somebody else is patching the ability to go from detecting, validating, fixing and revalidating under 15 minutes is something that is really desirable. And doing that at -- accuracy is very desirable for our customers. So I think it's more that the platform really was innovated and designed for this. And now we're excited to see sort of these early conversations we are having with customers that are more interested in looking at this now because of the push coming from these front-end models, detecting more vulnerabilities. Jonathan Ho: Excellent. Just 1 quick follow-up. Does Mitas potentially expand the number and types of assets that you would also cover as well as maybe accelerating sort of this adoption of more products on the platform to deal with increased complexity? Sumedh Thakar: Yes. I think these models will be able to find vulnerabilities in any core base, right? And so I think that's where the comprehensive nature of the Qualys sensors, whether it is detecting vulnerabilities on network assets, right, like, let's say, the traditional assets which have agents on laptops and other servers, expanding that into network assets or network-based assets like firewalls and VPN devices or cameras that are on the network or IoT devices. We already covered that. And then of course, we also cover cloud and container security and a lot of these. And so I think what we are going to -- what we are seeing right now is that customer interest in covering as much as possible more natively so that they can get quick scan results and not have to wait for hours to pull these scandals -- if they can do more and more of those natively. So I think given that the threat, whether your server is running on-prem or in a data center or if the server is running as a container in the cloud, the threat from a quick vulnerability exploitation coming your way, is similar the conversations do lead themselves to -- and in a way, the way team is designed, it is designed to pull data from all kinds of different capabilities, whether it's cloud or containers or others. And so there is more willingness from customers to say, today, they are doing dashboard tourism. They have a separate dashboard for cord scanning, a separate dashboard for cloud, a separate dashboard for on-prem separate dashboard for endpoint. If there is a way to operationalize and consolidate all of these different types of assets into more of a unified workflow where agent AI is looking at it and making autonomous decisions by looking at the previous enterprise context and then minimizing and then executing the minimum remediations, that is really where the focus of the customers is. So I think, again, how these conversations proceed will be interesting, but it does lead customers to say I don't have necessarily the time now to go to look at 8 different individual risk management dashboards when it comes to previous bridge management, if there is a way for me to pull different things, normalize all of that and quickly focus on the ones that matter the most and then actually validate with exploits and remediate those. That is the ideal solution. Operator: And our next question is going to come from Rudy Kessinger with D.A. Davidson. Rudy Kessinger: I guess I'm curious just on the ETM sales so far. Are you getting that full $1 uplift on those early sales so far? And then if we think about the 107% net expansion rate with those customers, I feel a little foggy on that you're saying that includes customers who purchased ETM in the past. I guess, does that expansion percentage include the upsell from the purchasing ETM? Or if you could just break down that number a bit further? Joo Mi Kim: Yes. It's a little too early for us to comment on how much of the uplift actually is illustrative dollar uplift is based on more of a list price, the cohort of customers that have subscriptions to ETM is too small today. And so given that, what we decided to do was, the number that we disclosed, 107% that actually includes customers who purchased CSAM or ETM. And so the way that we calculate that number is 1 year ago from today, so Q1 of 2025, which customers had ETM or CSAM subscriptions. We took those customers and then the revenue that they generated in June of 2025. So that would be the denominator, but the same cohort of customers in Q1 of 2026 and looked at the revenue contribution from that group. And so we calculate that percentage, it doesn't just include the ETM or CSAM subscription. It's a total spend spent by those customers. So what we're thinking is our hypothesis is these customers theoretically whether they have CSAM and then eventually later upgrade to ETM because ETM is essentially an upgrade from CSAM or they start to purchase ETM, these Florida customers will help to drive the total net dollar expansion rate eventually because they see the value in it they'll be stickier with us, and then they will -- a higher upsell. So that's part of the reason why we're tracking this metric internally to make sure that. one, we're successfully upgrading CSAM customers to the ETM consumers. And two, is that really generating the type of upsell that we're looking for. Rudy Kessinger: Got it. That's really helpful. I must have misheard it earlier on. And then secondly, how should we what does sales productivity look like? How has that been trending in the last few quarters? And just given the increases in sales and marketing expense outpacing the revenue growth, is there a lot more marketing dollars in there? Or where is that investment going in sales and marketing? Joo Mi Kim: Yes. Majority of the increase in sales and marketing is still driven by headcount. So if you take a look at our headcount growth, it was over 10% for the sales and marketing the ETM side last year. A part of the reason is because we do see a huge upside in the business. And because we are focused on moving the business from direct to indirect, as we work closely with our partners, we have different sales teams, whether it be a sales team focused on direct sales or sales team focused on ETM sales or sales teams that they are really focused on the channel management or relationship there. And so we do anticipate continued growth and continued investment in that team. And so as a result, the productivity is not necessarily the traditional SaaS feel of it, it's not exactly where we think it will be in the future. We're working on it right now. There's room for increase in efficiency. I'm not seeing it there yet, like you pointed out, especially because we do see this is a time for us to invest more versus making sure that we scale that based on the productivity metric that we see today. Operator: And our next question will come from Joseph Gallo with Jefferies. Joseph Gallo: I believe you mentioned that your guidance today reflects NRR kind of stays flat. The ETM NRR is 107% and expected to grow. So how should we think about the potential time line for acceleration of total NRR? And is there any pressures or offsets that we should think through that might keep that number flat over the next couple of quarters? Joo Mi Kim: Yes. Our NRR has been around the 103%, 104% range for the last couple of quarters. And the reason why we're still assuming for the baseline, that to be the case, it's because ETM is still in the early stages. We don't anticipate a significant ramp in terms of the adoption of ETM that will result in the total company and our ROE to be ticking on materially this year. So for this year, our baseline is that taking into consideration the macro factors, geopolitical conditions today, we do see some potential headwinds could be fully offset by the tailwinds that Sumedh had mentioned earlier, with the increase in demand given that our customers are willing to spend more with us increase in cybersecurity risk that we can definitely help to remediate. But with that said, all in all, our guidance assumes baseline case growth more or less in line, definitely from the current billings perspective, revenue, we've increased slightly just because of the beat that we saw in Q1. But overall, nothing has changed from the case that we saw earlier in February. Joseph Gallo: No, that's super helpful. And just as a follow-up. I mean you mentioned kind of geopolitic pensions. I think you made a comment in your opening remarks about closely monitoring the business environment and adjusting priorities accordingly. Is there any way to quantify, I guess, what you're seeing, is that mostly related to the war? Is there anything in terms of customer budgets and they're prioritizing AI spend today and not necessarily cyber. I'm just kind of curious what the actual math was behind some of those comments you made on macro? And if anything has changed over the last 90 days? Joo Mi Kim: Yes. The way we're monitoring the situation is basically stemming from the conversations that we're having from our existing customers as well as new prospects. So when we're discussing potentially coming over to call us as a new customer or increasing their spend with us, whether in quarter cycle or at a quarter cycle. There could be disruptions during that discussion. So as an example, I would say that any announcement from OpenAI or entropic could be a disruption as we're talking through it. It could be a factor. Now that could result in increase in sales from us, but it could increase the sales cycle. And so that's why we're taking a look at the scenario, there will be puts and takes. There will be some gains. There will be some offsetting factors. And that's why we thought that the baseline if you model it , the way we view it today is more or less fall in that range that we had calculated at the beginning of the year. Sumedh Thakar: Yes. So far in terms of budgets, we haven't seen any real changes there from customers or any conversations directly when it comes to cyber, I think it's stayed roughly the same. But as Joo Mi said, just being prudent at sort of what potentially could -- we should look at in the future. Operator: And the next question come from Shrenik Kothari [indiscernible]. Shrenik Kothari: Yes. Thanks -- so in light of the Frontier AI, a cache explosion and now at agent Vail to more broader remediation, you also emphasize the pathways patching which are -- remember, we've been specializing in and talking about in the past. So I know you talked about early customer conversations. Just really appreciate if you would let me point to some anecdote some proof points, how that can -- or it's become a real budgeted sort of operating priorities for customers over and above, typically as the products customers like conceptually, but just what's really changing and anything you can point to and I had a quick follow-up. Sumedh Thakar: Yes. Like I said, I think I gave that example of we had -- we have been having quite a few customer conversations in the last few days, and I had a CEO a very large bank in Canada sort of got on the call and is like to basically look our challenge right now is to get things quickly key scanner right now and how -- who should we partner with for patching. And when I was able to explain to them we already do the eliminate part immediately, he was excited about that so that he would go talk to his board that they're partnering with a solution that is going to help them have the ability as needed to rapidly fix and patch things and not wait for the teams patching solution to take days and weeks to patch things. And so that led to an immediate conversation of starting an immediate POC as an example, right? So again, it's early days. That's an anecdotal example. But we are seeing that pushback or resistance that we had for integrated patching and autonomous patching. In the early conversations is coming with -- like where they are asking, hey, do you have a patchy capability because that's what I need to be able to explain not that I'm finding more and scanning more or I'm taking my scanning and I'm passing it off to some other patching solution, which is taking even longer. So that is an example of a good conversation that we had where our customers quite excited to have the ability to quickly find remediate -- quickly find exploit it verify it, patch it. in a matter of hours and be done so they can show that level of success rather than just finding more things. So that would be an example of just something that happened 2 days ago. Shrenik Kothari: Great. That's super helpful, Sue. And just July, a quick follow-up. Just following up to Joe's question on NRR. And I just wanted to hear your thoughts on what sort of moves the needle for kind of this next leg of growth? I mean it still appears to be guiding off sort of a base case with no real assumed NRR movement, you, of course, have agent Vail and GA, there's better ETM mix, the continued strength in channel, international. So can you help us understand, is it mainly just prudent about the sales cycles as you mentioned, and you still need more proof points on monetization? Or there's also some legacy mix drag, which is playing a role in addition to you accelerating higher value attach or? Joo Mi Kim: Yes. It's based on a historical track record of what we've been able to see. One of the reasons why we thought that this was the best metric that we could share with the investors today is because if you people look at our historical products, whether it be CSAM or otherwise, it does take a bit of time for our newer product to take to our customers. So as an example, CSAM wasn't actually launched in 2021. And if you take a look at the percentage contribution to bookings, ETM plus CSAM, currently make up 11% of bookings on an LTM basis. So you can understand that looking at the CSAM conversion or upgrade to ETF will likely take some time since ETM just went live, and it's been in GA for a little over a year. So given that, we're assuming that this will take time for more of our customers to adopt ETM, and that will translate to increase in spend that's meaningful enough for the total revenue growth. Operator: And the next question will come from Brian Essex with JPMorgan. Brian Essex: I guess maybe one for you, Sumedh, on the back of the increased capabilities of foundation models in the security space, and thinking about where you're seeing vulnerabilities across the spectrum where you have operating systems, infrastructure, both package as well as custom applications and then OT environments. The spectrum of flexibility, if you will, across those different types of areas is -- can be materially -- particularly for hardware, some of it can't be patch it might have to be replaced, custom apps that have to be maybe need to be refactored. From your experience and what you're seeing from the foundation model companies, where is their expertise best placed for vulnerability discovery and potential exploitation? And how does that change the risk profile of your customers and how they may utilize your platform to mitigate those risks? Sumedh Thakar: Yes. Great question. I think helping software developers find more vulnerabilities in their code is definitely one of the key things there that these models bring and which will definitely lead to more disclosure. But in theory, right, you could say that, well, if all software developers are able to find these vulnerabilities using the models, then you kind of don't necessarily have a 0-day problem because all these software developers who find them the code themselves before the attackers do and they will create patches, right? And then customers just have to focus on applying those patches. I think the other capability, the frontier models are doing well is the ability to change low-level vulnerability exploits that maybe have a lower CVSS score and the customer might not have fixed those in the past because their score was low, but being able to chain a few of those to create an exploit. And that's where the advantage of the TruRisk platform is very solid because our true risk scoring, and we have demonstrated this multiple times that we are actually scoring low-level CVS vulnerabilities as very high, about 40 days before they get added into CSAM as an example. So having the customers have that intelligence that we are bringing and to the environment to say, look, this is a low-level vulnerability, but it is prone to be used in an attack and making sure that, that is mitigated becomes important. Now the third piece of what you mentioned is, I think it's perfectly fine to say that I'm not going to patch this because my risk is low. And that's a very individual organization level conversation that needs to happen, which, again, with ETM in the tourist platform, we are helping customers understand the context in their environment, understand the exploitability and make the determination that maybe it's perfectly valid to say we're not going to pass this because we have mitigating controls in place. And that's where we were, again, ahead of the curve when a couple of years ago, we introduced the concept of patch list patching is the ability to deploy mitigations for some of these environments where, yes, you cannot necessarily patch an OT asset immediately like you would normally do, but maybe -- or even the regular assets with operating systems and packages but providing them a way to say, look, I think if you just delete this old DLL, which our agent can do for you. Deleting a DLL or making a change to a registry key or something simple like that can actually prevent exploit from running in that particular environment. And so that is the third piece of it, which is perfectly valid with ETM to say a lot less than 1% of the vulnerabilities that are actually exploitable in your environment. And then these are the ones we don't need to fix because we validate it, they're not exportable, but then to also be able to say we actually have a way to mitigate this with a compensating control without deploying a patch makes it very interesting. In fact, one of the popular ones with our customers is we provide them the ability to see that the package that has the vulnerability is actually not being used on an asset for the last 18 months. So on installed is actually a better option than trying to patch it. So it's -- that's why I call it the eliminated buffet, which gives customers multiple different choices because that's the goal is not a patch. The goal is to remediate and eliminate the risk. That's why the TruRisk eliminate with prioritization validation becomes so important. Brian Essex: Great. That's super helpful. And maybe if I could squeeze one in for Joo Mi on Q-Flex. It sounds like that the program is targeted at large enterprise customers are already spending a meaningful amount on the platform. But are you -- is there any potential for existing customers who may be ripe for migration to ETM where you could actually accelerate that migration by offering them Q-Flex as well? Joo Mi Kim: There is. And so we are working with customers today. So we are working with a solid group of customers to -- so that they have an option of adopting Q-Flex today. And so it's not stopping. It's just that we are planning to go broadly GA with it by the end of the year. So we think that there is definitely a potential where that could help us to drive growth. Sumedh Thakar: And we do have those conversations with customers who are looking to do ATM. We start the conversation with Q-Flex, which is well received, especially given this environment where so many new capabilities are coming, things are changing fast and they need the flexibility, even if you're not the largest enterprise you still need the flexibility to be able to move things around pretty quickly. And in fact, enterprises that don't necessarily have a cyber budget that is the size of the GDP for a small country actually have the most value in many times from being able to do these kind of automations and say like, I don't need to fix all these things because I've validated they're not relevant in my environment, no matter what different your model says. Brian Essex: Right. Makes a lot of sense. Operator: This is all the time that we have for questions. We want to thank you for your participation. This will conclude today's conference call, and have a good evening.
Operator: Hello, and welcome to the Expro Q1 2026 Earnings Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand it over to Dave Wilson, Vice President of Investor Relations. Please go ahead. Dave Wilson: Thank you, operator. Good morning, everyone, and welcome to Expro's First Quarter 2026 Earnings Call. I'm joined today by Mike Jardon, CEO; and Sergio Maiworm, CFO. Both Mike and Sergio will have some prepared remarks, after which we'll open the call for questions. In association with today's call, we have an accompanying presentation and supplemental financial information on our first quarter results. Both of these are posted on the Expro website, expro.com, under the Investors section. Before we begin today's call, I'll remind everyone that some of today's comments may refer to or contain forward-looking statements. Such statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These statements speak only as of today's date, and the company assumes no responsibility to update such forward-looking statements. The company has included in its SEC filings, cautionary language identifying important risk factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which can be obtained on the SEC's website, sec.gov, or on our website, again, expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measures in our first quarter 2026 earnings release, which was issued this morning and can also be found on our website. With that said, I'll turn the call over to Mike. Michael Jardon: Thanks, Dave. Good morning, good afternoon, everyone, and welcome to Expro's first quarter 2026 earnings call. I'll begin by reviewing the first quarter of 2026 financial results from today's press release. I'll then comment on the overall macro environment, provide some insight into our Middle East and North Africa region, talk a bit about our exciting news today with our Enhanced Drilling acquisition announcement, then revisit our outlook for the year ahead. And finally, I will then conclude with some operational highlights for the quarter. Sergio will then provide some further details on our financial performance by geographic region and address the company's ongoing capital allocation framework. Let's begin on Slide 3. During the quarter, the company experienced the usual first quarter seasonality we have in our business. And as a reminder, this seasonality is a result of winter weather in the Northern Hemisphere, which slows offshore activity due to ongoing winter storms and rougher than normal season. Additionally, the seasonal dip is also a result of our customers' CapEx and operational spend cycle that tend to be lower at the start of their annual budget cycles. This is generally more typical with our NOC customers. Additionally, our first quarter results were only marginally impacted by the conflict in the Middle East. I'm pleased to report that local emergency response plans were implemented quickly and the efficiency in which these actions were taken, and that all of our employees still in the region remain safe. I will go into more detail regarding our MENA region in a moment. But from an overall perspective, the disruptions to our Middle East business late in the quarter only had a minor impact on our operational and financial results during the quarter. For the quarter, the company generated $368 million of revenue and $63 million of adjusted EBITDA, representing a 17% margin. Adjusted free cash flow for the quarter was $3 million and was affected by changes in working capital, which Sergio will comment more on later in the call. Now taking an assessment of the current environment, we, like others, see a global energy market that is increasingly influenced by the heightened geopolitical tensions, commodity price volatility and an expanding focus on long-term energy security. At some point, the uncertainties will subside with the expectations that oil prices will reset and begin to stabilize once these disruptions ease. However, there is still a significant amount of disruption that will continue to have global implications in terms of not only near-term supply and demand dynamics, but also over the medium- and longer-term as countries and companies around the world look to prioritize energy security and what will be needed to achieve that. There has been intensified interest in strengthening supply resilience and geographic diversification, trends that could develop and will likely shape industry behavior longer-term. It is our fundamental view that the new normal will look different than it did before the Middle East conflict. Many believe it will still take some time before the industry returns to a more normalized state of operations, and we believe that it will be the end of the second quarter before we have a sense of complete clarity. We remain optimistic that resolution of the situation could begin sooner than that, but we'll adapt our operations appropriately. One industry behavior that we are confident with that we do not believe will change is that of capital discipline. In this light, we see offshore and deepwater developments remaining attractive, not only by providing stable, lower-risk growth pathways, but also from an energy security standpoint as well. We expect such projects will continue to drive demand for Expro's well construction and well management businesses. Additionally, brownfield optimization continues to see a growing focus as operators look to enhance production from existing assets to reduce capital risk. We believe this industry trend also presents an opportunity for Expro's technologies and services as well. We still expect activity to strengthen in the second half of the year, and with Expro's strong offshore and international positioning, along with its production optimization capabilities, believe the company is well positioned to manage near-term uncertainty and benefit from increased activity in the coming quarters and years. To summarize, Expro maintains a constructive outlook for 2026 and beyond, allowing us to continue supporting customers throughout the full life cycle of their assets. Moving to Slide 4, which reflects our MENA region. Oftentimes, when the MENA region is discussed, the focus is heavily on the Middle East portion, which is certainly understandable, and we have received our fair share of questions related to our exposure to countries in that region. Having lived and worked in that part of the world earlier in my career, I think it's helpful to give our stakeholders some more clarity on how Expro is exposed in the region. I'll look to address that really in 3 fundamental ways. First, for Expro, there's more of a balance between our Middle East and North Africa operations in terms of financial contribution, and there has been no disruption to our operations in North Africa. Second, to the countries in the Middle East, while we do have some exposure to countries like Qatar, Kuwait and Iraq, they do not carry as large of a contribution to our revenue or EBITDA generation. The biggest contributor in those regards is Saudi Arabia and to a lesser extent, the Emirates. And while there were some interruptions in those countries' operations, we have continued to have more normal operational cadence. Third, given the timing of the commencement of the conflict in the Middle East, there was only 1 month affected during the first quarter, so that too lessen the overall impact. Now moving to Slide 5. We're very excited to announce Expro's acquisition of Enhanced Drilling. Enhanced Drilling is an industry and technological leader in managed pressure drilling, or MPD, really focused in the deepwater offshore operations. For Expro, this acquisition adds a critical technology solution that is proven and is increasingly gaining traction within the industry. As structured, this acquisition will be immediately accretive to cash flows and EBITDA margins, and it adds over $275 million of order backlog. We see a lot of growth opportunities in the service line going forward, especially as part of the Expro platform. Due to our size and breadth, we are able to bring services and technologies acquired into new markets around the world. We have a proven track record of doing this with our most recent example of Coretrax acquisition that we completed back in 2024. Currently, Enhanced Drilling is operating primarily in offshore Norway and in the Gulf of America. And we see opportunities in the Caribbean, West Africa, Brazil and Australia, where this technology could benefit customers tremendously. Turning to Slide 6. Here's a quick summary of the transaction from a financial perspective. The purchase price is NOK 2 billion, which is currently equating to roughly USD 215 million. We expect some final adjustments to the purchase price based upon customary and working capital adjustments as the transaction is finalized and closed. Expro will utilize a combination of cash on hand and borrowings under the revolving credit facility to fund the acquisition. Current projections are for Enhanced Drilling to add more than $50 million to our annual run rate adjusted EBITDA. Additionally, with adjusted EBITDA margins over 30%, this acquisition will contribute to further EBITDA margin expansion. Finally, we anticipate that the transaction will close in the third quarter and based upon our understanding at this point, will likely be some time in the early part of the quarter. The next few slides provide a little bit more detail on Enhanced Drilling and some of its services and offerings along its riser-based and riserless solutions. We have provided these slides for informational purposes. Now let's jump ahead to Slide #10. On Slide 10, we're providing our 2026 financial guidance based upon what we currently see in the global market. In essence, this means no change to our previously established annual guidance for 2026. With the continued global conflicts, uncertainty still exists, which adds to the complexity of providing forward guidance. That said, however, we believe that current industry optimism is tangible, particularly towards the back end of 2026 and especially as we go into 2027 and beyond. We remain constructive and confident in our second half of 2026, and the associated ramp in revenue and adjusted EBITDA, seeing sequential improvements in each subsequent quarter. With regards to the impact of the Middle East conflict on our future results, assuming a resolution to the Middle East conflict by the end of the second quarter, we would expect the impact on our second quarter results to be in the $10 million to $15 million revenue range. Including the first quarter and projected second quarter, impact of the Middle East conflict would equate to approximately 1% of total company revenues for the year. It is also worth noting for the second quarter, those revenue impacts carry elevated decrementals for EBITDA calculations. In other words, the impacts are disproportionate on the revenue versus the costs. Regarding our confidence and the ramp-up for the back half of the year, there are a few aspects I'd like to highlight. We see opportunities in our North and Latin America region with subsea well access and well flow management projects in the Gulf of America, tubular sales and well intervention and integrity work in Colombia, all of which should contribute a healthy amount to the projected increases. In our Middle East and North Africa region, besides assuming a resolution in the Middle East by the end of the second quarter and a return to more normalized activity, we still expect increasing contributions from our North Africa operations, particularly around a sizable production solutions project. For the back half of the year, in our Asia Pacific region, we see our well construction and well management businesses in Southeast Asia contributing incrementally more, along with some subsea equipment sales in China. Additionally, we expect incremental contributions from our Coretrax product line across our geographic regions. In Europe and Sub-Saharan Africa, while we do not expect much incremental growth in the back half of the year, we still expect operations there to be steady and be a sizable contributor to overall revenue and EBITDA. Finally, as we have mentioned before, we intend to expand our margins this year with the full year benefiting from our Drive 25 initiative and to improve our capital efficiency and wallet share with existing customers. Before moving on to our customer and technology highlights, I want to revisit a few attributes that we believe set Expro apart. These are included on Slide #11. Due to our breadth of services and technologies across the well lifecycle, we see opportunities to expand our wallet share with existing customers. Expro can leverage our installed base to provide additional services and technologies to customers, which adds value to their operations, while at the same time, helping to expand our underlying margins. Another thing that we see as distinct is our innovation and technology offerings. They are emblematic of how we see the industry evolving. Our technologies and our ability to address unique customer challenges place Expro as the vendor of choice for many of our customers and adds to the company's relevancy and longevity with those same customers. In addition to our service and technology breadth, we also have geographic breadth. Our global footprint enables us to leverage services and technologies, whether those are developed internally or acquired through M&A to be deployed in multi geographies where we operate. For example, as we've mentioned before, our acquisition of Coretrax in 2024. That business was operating in circa 15 countries at the time of the acquisition, but now we are deploying those technologies across over 31 countries. We plan to use a similar blueprint with the Enhanced Drilling acquisition, both in terms of integration, but also in terms of market expansion. Now moving on to our customer technology highlights for the quarter on Slide #12. During the first quarter, Expro continued to demonstrate its innovative technological capabilities with additional deployments and introduction of new technologies into the market. Similar to last quarter, we had several examples to choose from, but only a few to quickly highlight. In Norway, Expro successfully delivered a world-first fully remote completion joint makeup with a downhole control line and clamp without a single person in the red zone. The combination of these disruptive technologies enhances safety, increases execution and operational efficiency, and delivers consistent and repeatable outcomes. Another achievement during the quarter was Expro's iTONG offering, reaching a significant industry milestone. We have now successfully run and pulled over 1.2 million feet of casing and tubing in field operations since the technology was first deployed. This achievement underscores the iTONG growing momentum in the market with an increasing number of clients adopting the technology and experiencing its operational safety and performance advantages. Also during the first quarter, we launched Solus, a single shear-and-seal valve that replaces conventional 2-valve subsea well access systems. This technology reduces the complexity, operational risk, time and cost during subsea intervention and decommissioning operations. The last example I want to highlight is the successful deployment of our MultiTrace gas tracing technology for a customer that enabled accurate flow measurement on a large diameter flare system. This technology overcomes significant process challenges caused by the highly transient conditions surrounding the flow of gas and fluctuating gas consumption. MultiTrace allows accurate measurement of the flare gas in complex conditions, helping operators understand emissions and improve compliance without disrupting operations. At the heart of all these innovation examples and a common thread with all of them was the value creation for our customers. Before turning the call over to Sergio, I'd like to briefly revisit Expro's long-term strategic pillars, those we focus on to drive value for our shareholders. These are included on Slide #13. Expro's long-term strategy is to build a large diversified company that has increasing relevancy to our stakeholders, particularly our customers and our shareholders. Our relevancy to customers is built upon our service offering, including our innovative technologies, execution capabilities and market leadership positions. For shareholders, we continue to move forward, building a company that is able to generate healthy levels of free cash flow, which will be used to achieve our various capital allocation goals, all of which Sergio will expand on in his following comments. One of the pillars of the strategy that we have talked a lot about is our commitment to improve the company's financial profile. We have seen evidence of this over the last several years with EBITDA margin expansion and increasing free cash flow generation. These will remain in focus moving forward, and we expect to achieve further improvement through cost efficiencies and reducing our capital intensity. Another pillar and an important component of our strategy is our technology and innovation and how those are deployed into the market. We continue to develop and deploy new technologies into the market across our global footprint. Our expansive footprint also enables us to internationalize or globalize technologies, particularly those that we acquire through acquisitions that have limited geographic exposure, which leads to another component of our strategy, and that is to grow the company through scalable acquisitions like today's Enhanced Drilling announcement. The company has a strong track record of execution with acquisitions that we have made over the last several years. For these acquisitions and potential ones in the future, Expro looks to add to its services and technology offerings. In general, we seek opportunities with international and offshore exposure that have adjacent product offerings and are accretive to the company's financial position, again, very characteristic of today's announcement of Enhanced Drilling. Due to the slate of service offerings across the full well lifecycle, we have multiple avenues to pursue when looking at potential acquisitions. Our focus will continue to be on pursuing those that we believe will increase relevancy with our customers and shareholders. With that, I'll turn the call over to Sergio, to review our first quarter results in detail. Sergio Maiworm: Thank you, Mike, and good morning to everyone on the call. As we reiterated on our last call, Expro's quarterly results reflect the normal seasonality we experienced during the first quarter of the calendar year, caused primarily by -- as Mike mentioned -- the winter weather in the Northern Hemisphere and a slow start to customer spending. Again, this is normal seasonality and expected every year during the first quarter. With this backdrop, the company executed well on its operational and financial results. Both revenue and adjusted EBITDA reflected the relative midpoints of the ranges we previously provided. Specifically to Q1, our adjusted EBITDA was $63 million with a margin of 17.1%, which is a decline from the previous quarter, but again, reflects the seasonality of the first quarter, and we expect sequential improvement for the remaining quarters of the year. Slide 14 illustrates our annual margin growth for the past few years. Even with these results and noting the ongoing situation in the Middle East and the modest headwinds those have created for us, we remain focused on expanding our margins in 2026, and the drivers of margin expansion for us remain the same. In the near term, those are reflected on Slide 15, and they are the full year impact of our Drive 25 cost efficiency initiative, increasing customer wallet share at higher margins and to continue to internationalize services and technologies acquired in previous acquisitions, spreading those into new geographic areas. The Enhanced Drilling acquisition we announced today will further help expand our margins. Not only is the margin in that business already greater than 30%, but the internationalization of that technology will expand our margins even further. In the medium term, we expect to increase our top line revenue, continue to gain customer wallet share and more fully utilize services and technologies acquired across our geographic areas in order to achieve the next milestone goal of adjusted EBITDA margins greater than 25%. Also acknowledging that possible future M&A may play a factor as well, which we have executed on with today's announcement regarding the Enhanced Drilling acquisition. We're also keenly focused on cash flow generation. And in Q1, Expro reported quarterly free cash flow generation of $3 million on an adjusted basis. This was admittedly light based on our own expectations, but was really driven by working capital changes that worked against us this quarter. Those changes were roughly $20 million more than what we had expected and was primarily driven by the increase in our accounts receivable balance and prepaid amounts included in our other asset balances. This phenomenon is just timing-related. And in fact, subsequent to the quarter end, we have already seen most of Q1 related collections being received, and we already experienced a significant improvement in our working capital balances. I personally expect the second quarter to be a very good collections quarter. Considering the already seen improvements in our working capital, our operational outlook and anticipated CapEx for the year, we still believe we'll generate a good level of adjusted free cash flow this year, in line with our annual guidance. Now quickly turning to the liquidity position. We have included this on Slide 16. The company closed the quarter with $517 million in total liquidity. That includes $171 million in cash on the balance sheet. At quarter end, we had $79 million outstanding on our revolving credit facility, which was consistent from the previous quarter and put the company's net cash position at approximately $92 million. Now obviously, with the Enhanced Drilling acquisition, those numbers will change as we are funding the acquisition through a combination of cash on hand and borrowings under the credit facility. At the end of the day, we're still in a very strong financial position with substantially less than 1x net debt to adjusted EBITDA. Having and maintaining a strong balance sheet positions the company well to execute on its other capital allocation priorities. These are highlighted again on Slide 17. Our capital allocation framework is designed to maximize long-term value creation. As we have mentioned before, there are 4 equally important capital deployment priorities: invest in the business with CapEx, providing organic growth that enhances our core capabilities, improves efficiencies and/or supports technological innovation across our service offerings. As a reminder, the vast majority of our capital expenditures are geared towards specific projects with known return profiles that meet or exceed our standards. I would reiterate, these are not speculative investments. Another capital allocation priority is to deploy capital to inorganic growth. Just like today's announcement, through M&A, Expro can and has completed acquisitions that add to the company's complement of services across the well lifecycle. Our M&A strategy is focused on opportunities that offer clear industrial logic, scalable technologies and synergies and the potential to expand our presence in attractive markets. We maintain a highly selective approach when looking at M&A to ensure only the value-accretive opportunities are pursued and pursued at the right price. Another key aspect of our capital allocation framework is a commitment to return cash to shareholders. As we have already stated, during the first quarter, we repurchased approximately 1.2 million shares for roughly $20 million. This puts us on a really good path to meet or exceed our current year target of returning at least 1/3 of free cash flow to shareholders. On the final leg of the stool in terms of capital allocation is something that I have already covered, and that is maintaining a strong balance sheet. In doing so, we have the financial flexibility and resilience to act on our other capital allocation priorities. For example, even with an unexpected subpar free cash flow generation during the quarter, we were still able to make significant process on our share repurchase target for the year and still maintain the company in a healthy net cash position. This last example also reflects our ability to manage our capital allocation priorities dynamically with one not dominating the ranking. Along those lines, it's important to note that even in a seasonally weak quarter, we were able to execute across all of these capital allocation priorities recently. We invested organically in our business through CapEx. We returned cash to shareholders. We executed on accretive M&A, and we maintained a strong balance sheet. Before turning to our segment performance, I do want to reiterate and summarize our financial outlook for 2026, as Mike previously addressed in Slide 10. Overall, we remain very optimistic with the industry outlook for the second half of 2026 and beyond. Our current projections assume the adverse impacts of the Middle East conflict we seen in the second quarter with no lasting impacts for the third and fourth quarters. And Mike alluded to several real and live opportunities across the regions that we see providing tangible sequential increases in the back half of the year, which when combined with the more favorable working capital changes will result in more significant free cash flow generation. Now I'd like to quickly address our segment performance this quarter. These are covered in Slides 18 through 21 in the accompanying presentation. Turning to regional results. For North and Latin America or NLA, first quarter revenue was $128 million, down just $2 million quarter-over-quarter, reflecting various puts and takes comprised of lower well flow management revenue in Guyana and reduced well construction revenue in the U.S. and Brazil, partially offset by higher subsea well access revenues in the U.S. and increased well flow management revenue in Mexico. Segment EBITDA margin at 20% was down compared to prior quarter at 24%. This decrease was primarily attributable to a less favorable activity mix in the region due to normal seasonality during the quarter. For Europe and Sub-Saharan Africa or ESSA, first quarter revenue was $114 million, also down just $2 million on a sequential basis due to lower well flow management revenues in Angola and Bulgaria and lower subsea well access and well construction revenue in Ghana, partially offset by higher well construction revenue in Ivory Coast. Segment EBITDA margin at 28%, was down sequentially, also reflecting an unfavorable product mix relating to a reduction of higher-margin projects given the normal 1Q seasonality. The Middle East and North Africa region, or MENA, though impacted to some extent by the Middle East conflict that began late in the quarter, still delivered a fairly solid quarter. Revenues of $82 million were down sequentially from the previous quarter of $93 million. The decrease in revenue was primarily driven by lower well flow management revenue in Algeria, Saudi Arabia and Iraq, together with reduced well intervention activity in Qatar due to the ongoing conflicts in the Middle East. MENA segment EBITDA margin was 29% of revenues, decreasing from 39% in the prior quarter. The decrease in the segment EBITDA margin is consistent with the decrease in revenues and change in activity mix experienced during the quarter. Finally, in Asia Pacific or APAC, first quarter revenue was $44 million, a modest increase of $1 million sequentially. Here, the increase was a result of the puts and takes relating to higher subsea well access activity in Malaysia and increased Coretrax-related activity, partially offset by lower well flow management and subsea well access activity in Australia. Asia Pacific segment EBITDA margin at 16% of revenues was consistent with the prior quarter. With that reviewed, I'll turn the call back to Mike for a few closing comments. Michael Jardon: Thanks, Sergio. As we conclude our prepared remarks and before opening the call for questions, I'd like to conclude with the following comments. We share the industry's increased optimism over the medium and long-term, though recognizing it has come at a cost, both from a financial perspective, but also at a human level. I remain confident in the company and that our employees will continue to provide value-added services to our customers, which we intend to translate into value for our shareholders. As part of that, we continue to demonstrate our ability to execute across multiple capital allocation priorities and we'll continue to do so in the future. We thank our employees, customers and shareholders for their continued support and look forward to building on our momentum in the quarters and years ahead. Finally, I look forward to welcoming all the folks at Enhanced Drilling into the Expro family. We are very excited about the opportunities that we can jointly pursue. With that, we can open up the call for questions. Operator: [Operator Instructions] Our first question for today comes from Caitlin Donohue of Goldman Sachs. Caitlin Donohue: Can you walk us through your anticipated growth prospects with the acquisition of Enhanced Drilling, just the strategy of how you anticipate to further expand Expro's wallet share in certain geographies of existing services with the portfolio expansion with MPD? Michael Jardon: No, Caitlin, thank you for the question. And we're -- first off, we are so excited about the Enhanced Drilling acquisition. I mean, this is one we've been looking at and we've been working on for a while, and we've been able to get this closed out here over the last few weeks. And this is -- this really is beyond wallet share expansion for us. This really is a market share expansion opportunity. The technology has tremendous application. It's only in offshore, particularly deepwater, allows operators to drill more complex casing strings and those type of things because it's a dual gradient technology. So the predominant deepwater basins are really where this is going to have application. And as we talked about in the earlier and we've highlighted in the press release, today, it's really -- on the market penetration really has been in Norway and in some here in the U.S. Gulf. So places like Guyana has tremendous application. Brazil, especially with the sub-salt new applications, you start to move into West Africa, the Ghana, the Angola, Australia, I mean, this is a tremendously positive advancement for us that really allows us to expand our service offering into much more of the managed pressure drilling services. So the good thing for us is it's a very similar playbook to how we rolled out the technology from Coretrax. And so our ability, both from an integration standpoint as well as from a market penetration standpoint, we think we'll be able to do that. But I think over the course of the coming few months, we'll be able to get some good penetration into some of those key geographies and in particular, Guyana, to be frank. Caitlin Donohue: Just one more on my end. For the Drive 25 initiatives, bringing down costs over the long-term is a continued goal. Can you give some color on the progress there, particularly as now you have this Enhanced Drilling acquisition, some growth that you might now see from the expanded portfolio? Sergio Maiworm: Caitlin, this is Sergio. I'm happy to address that. So I mean, we are continuing with our cost outs, and we're continuing to make sure that we're getting as efficient as we can as a company. So this is a bit of an ongoing process, the efficiency gains, et cetera. I would say from a Drive 25, we've achieved way more than what we had set out to achieve initially. If you remember, at the beginning, we said that we wanted to take out about $25 million of costs per year. Then we actually increased that to $30 million per year. I think we're close to $40 million now, and a lot of those projects have already been completed. So you should see the full impact of that Drive 25 in our 2026 numbers and beyond. So all of those increased efficiencies, which means that we're taking some of these structural costs out of the system. This is not just we removed a number of people, given the level of activity that we have, but then we will have to bring those costs back into the system if the activity increases. These are sticky cost removals or meaning these are structural cost reductions that will give us a lot of operational leverage as we continue to see the market picking up in the second half of '26 and into '27. That will allow us to grow the top line without actually any meaningful increases in our -- or any increases to be frank, to our support cost structure. So that gives us a lot of incremental torque in the business and cash flow generation with that. Operator: Our next question comes from Eddie Kim with Barclays. Edward Kim: So obviously, the world has changed since your last earnings call. Are you seeing any noticeable change in your customer conversations? And if so, any specific products or business lines where you are seeing or where you expect activity to pick up meaningfully as a result of what's taken place over the past 2 months that's different from your expectations at the very beginning of the year? Michael Jardon: No, Eddie, and thanks for the question. Thanks for joining. I guess so. I was just in Asia here recently. And the Asia market is really -- there was an awful lot of customer conversation and dialogue around more production type projects, more OpEx-related type things, kind of incremental oil. So I think that's -- I think we're going to see that start to strengthen up. But also, quite frankly, both in Asia as well as other customer conversations I've had, there is much more of a situational awareness today around energy security. I think it's going to go well beyond the kind of phenomenon we saw in Europe to begin with, with the Russia-Ukraine conflict. I think there's just a lot more situational awareness around that. So I think that's going to translate into especially some of the deepwater basins, those have got very efficient breakeven costs at this point in time, I think can help add to energy security. And frankly, that means what we're going to see is more drilling and completions type activity. And that's really kind of a sweet spot for us today with our well construction product line, with our subsea product line. And that's one of the reasons that I'm so excited about Enhanced Drilling, because I think you've even heard commentary from the drilling guys here over the course of the last couple of weeks. The second half of 2026, I think if 60 days ago, we thought it was going to be at x level. I think what we see now globally, it's going to be x plus some margin in the second half of the year. I think it's going to kind of step up and ramp up. More drilling activity means more well construction activity means more completion activity. And I think we're really well positioned for that. I think it just sets up 2027 and beyond to be even more robust. Edward Kim: Great. My follow-up is just on the Enhanced Drilling acquisition. Adoption of MPD has picked up a lot over the past several years. Do you have a sense of what the overall market penetration is of MPD globally? Just of the -- I don't know -- 130 deepwater rigs today, how many rigs are utilizing MPD today? And for this Enhanced Drilling acquisition specifically, is it more about market penetration into rigs that don't have MPD currently? Or is it more about replacing incumbents? Michael Jardon: Yes. No, Eddie, it's a really good question. I can say it's part of what we spend an awful lot of time trying to make sure we had a good understanding of as we went into the acquisition. So of those kind of 130-ish floating assets today, there's probably roughly 100 of those have MPD on them today. And with Enhanced Drilling, we've probably got less than a 10% market share today. All 130 of those rigs have an application, have an opportunity for Enhanced Drilling. The difference with this technology is because it's a dual gradient, it allows the operators to drill more complex geology, more complex reservoir pore pressures, also allows them to have different casing designs. They can run larger casing designs to much deeper in the well. So it's going to help them enhance them from a safety, from an operational type standpoint. So we really see of those 130 rigs, you could run this dual gradient technology on all 130 of them, probably not required on all 130 of them, but it's required on an awful lot more than a 10% market share we have today. So long answer, but it's more around displacement of current MPD techniques with this particular technology. Operator: Our next question comes from Keith Beckmann of Pickering Energy Partners. Keith Beckmann: I want to say congrats on the acquisition. Obviously, MPD is not bad to get into if the floater market plays out like we all hope it does. But I wanted to kind of think about the technology side of things, given it's tech day. So I was wondering if maybe given maybe improved 2027 thoughts, maybe how are you thinking about the timing of potentially rolling out technologies? And if you could just kind of talk through how you plan to capture the value and the deployment of those technologies. Michael Jardon: No. Keith, thank you. It's really so much of our innovation focus and our engineering efforts really today is on creating additional operational efficiency. I mean, the things we've done around Drive 25 and really trying to make sure we have sticky cost efficiency, cost-out efforts, we're trying to do the same thing from an operational standpoint. We're trying to reduce the number of personnel that are required. We're trying to make things more autonomous, to make things more repeatable and more -- just more efficient. And so some of the technologies I highlighted earlier around our remote clamp installation system, it really does that, reduces personnel, makes things more efficient. Our iTONG technology allows us to reduce the number of personnel, reduce personnel in the red zone. And we're trying to do the same thing with our well flow management, our well testing operations as well. We're moving to more automation. You're talking about a technology that's been in the industry for 70 years. We've been doing it for 50 plus, and we're actually bringing some efficiency to it. We're reducing the number of personnel that are required, and that brings more efficient operations, but frankly, also helps us with being able to redeploy those personnel to other operations. So it's really kind of that same mantra of efficiency, both from a cost standpoint, but also from an innovation, engineering, technology deployment standpoint as well. Keith Beckmann: Awesome. The second question that I wanted to ask was just around slight Middle East headwinds in 1Q, 2Q. But really, the thing that I wanted to hit on was, how do you expect that you guys could potentially participate in a recovery once the conflict is essentially over? Are there ways that you've identified or you think in particular, you could try to capitalize on potentially in the event that the Middle East needs to start producing a lot more? Michael Jardon: Yes. I mean, it's -- we've had a lot of conversations around the Middle East. Several of us internally have lived and worked in the Middle East earlier in our careers. And I think what we're going to see is we're probably going to observe a different customer and operating dynamic in the Middle East than what we have historically. I think we saw that starting with the Emirates now announcing that they're going to exit from OPEC. They've already been kind of not staying consistent with their production quotas and those kind of things. I think we're going to see much more of a drive for enhanced production and enhanced operations out of the Middle East. So I think that's going to allow us to participate because an awful lot of that is going to be around drilling and completions. And especially on the drilling side for our well construction portfolio, we think that's something we can continue to expand in that marketplace. I just -- philosophically, I mean, right now, our assumptions are that we've come back to kind of more of a normalcy in terms of security and those kind of things in the Middle East here in the second quarter. I think we're going to have to see how that plays out. It seems to be we get one message in the morning and then we get a different message in the afternoon with how things are progressing from a geopolitical standpoint from the Middle East. So we'll continue to be flexible and adaptable with our business and our operations. Short-term, we'll see how that plays out. I do think medium and long-term, the reservoirs are so prolific in the Middle East. They're going to have to play a really strong role in future global production. So I think it will be tremendous in the medium and long-term. We'll just have to kind of see with this choppiness, how that plays out here in the coming weeks and months. And hopefully, we're not talking quarters. Operator: Our next question comes from Josh Jayne of Daniel Energy Partners. Joshua Jayne: You highlighted no logistical issues today as a result of the conflict, but maybe you could just go into a bit more detail on how you're positioning yourself to not be impacted in the event that this goes longer than we all think it may. Michael Jardon: Yes, Josh, thanks for joining us. I think it's -- today, especially for our activity in the Middle East, the vast majority of our revenue and our service intensity comes from services. It doesn't come from product sales. So we're less dependent upon the ability to transport equipment and gear into the region. So in the short-term, it hasn't had a significant effect on us. But frankly, we go beyond weeks and months and we start talking about quarters of conflict, it will become a little bit more of a constraint for us just because we actually have to be able to ship in M&S supplies for maintenance and those type of things. Those tend to be smaller volumes, smaller items that can come in via land, they can come in via air. So right now, we just don't see a significant impact in it. But if this goes on for an extended period of time, and frankly, I personally don't see anything that makes me think that this is going to go on for an extended period of time, we could get to the point where we would have an impact. But today, it's just not because of the makeup of our business and our activity in the Middle East, much more service related, just not having a tremendous influence today. Joshua Jayne: Okay. And then I just wanted to touch on the acquisition one more time. You talked about expanding it geographically as it's obviously relatively well concentrated today. You mentioned Guyana as an opportunity, for example. Maybe just could you go into a bit more detail on how long -- how long it may take once you're fully on board? Do you think it takes to really start to see diversification in the business and just how you're thinking through that a bit more would be great. Michael Jardon: No. I mean, Josh, it's another -- it's a good question. I appreciate you following up. I mean, this is one where the playbook that we've gone through for Coretrax is we've been very intentional on we're going to go to country A first. We're going to go to country B, second. We're going to go to country C, third. We did it in a very specific order because we wanted to maximize the market penetration. We want to maximize the pricing, and we'll go through that same type of process with Enhanced Drilling. The good thing here is, from a technology standpoint, this is so critical and really brings so much value to the operators that it almost sells itself. I think part of the challenge and part of why that management team is so excited to be part of a bigger platform is we've got more channels. We've got more customer engagements. We've got more opportunities to do that. So I think one of our -- and I don't want to call it limitation, but I think one of our throttling mechanisms here is going to be really our ability to -- from a CapEx standpoint to deliver additional incremental systems. We've got a certain number in flight right now, and we'll have to go through and reevaluate which markets we think we can get penetration in. So it's going to be the deepwater basins. We're going to focus on those. It brings efficiency. It brings additional safety. And frankly, I think brings -- could potentially bring an overall cost reduction element to the operators as they can start to change some of their casing designs, I think that brings some tremendous flexibility. So long answer, lots of things to say there, but I think it's part of what you'll really be able to hear from us over the course of the next few months as we start to move that thing forward, get it closed and then being able to really start to action and implement it. You'll hear a lot more about our plans on some of those things. Operator: Our next question comes from Derek Podhaizer of Piper Sandler. Derek Podhaizer: Sorry if I missed this before, I jumped on a little late here, but hoping to get some more color around the 2Q guidance. Just trying to think through it. We obviously, get the seasonal rebound, some margin expansion, but then trying to interplay of the $10 million to $15 million impact from the current Middle East conflict. You said that's going to come with fairly high decrementals, but just also just trying to think of the shape of the recovery as you maintain the full year guide and the big -- the sharp step-up in the second half of the year. So maybe just some help on second quarter would be great. Sergio Maiworm: Derek, this is Sergio. Happy to answer those. So I mean, as we've mentioned before, even before the conflict began and now it's even more so, this is going to be a stair step type of results, right? So second quarter results are going to be higher than first, and third is going to be higher than second and et cetera. So that is the shape of kind of how we should think about kind of revenues and EBITDA and cash flow generation throughout the year. So just kind of just using that as a starting point, as we talked about second quarter will have about $10 million or $15 million impact on our revenue generation in the Middle East because of the conflict. That comes with pretty high decrementals. So you shouldn't assume that there is a pretty significant EBITDA deficiency on that as well. So if you think more about a little bit of the third quarter is a bit of the fulcrum here. So if you think there's so much kind of EBITDA and cash flow that we need to generate throughout the rest of the year and assuming that second quarter is going to be better than first, but not quite as high as the third. So that kind of gives you a little bit of that shape of the recovery there, if that helps you. Derek Podhaizer: It does. Maybe just a bit of a holistic question, just given the Enhanced Drilling acquisition, which was pretty accretive. But just thinking about consolidation in the offshore space, we've seen it on the floater side. We've seen it with support vessels, decommissioning, P&A, obviously, Enhanced Drilling with you guys more through a technology lens. But just given we're entering this what appears like a multiyear up cycle in offshore, what else could we expect from the markets from a consolidation lens to keep up with the demand of these upstream customers that are about to deploy multiyear development projects? Just maybe some thoughts around what you could see when we look out over the next few years from a consolidation standpoint. Michael Jardon: Yes. Derek, it's Mike, and thanks for the question. I think it's -- you're asking the really key important element there. And it's -- for us, we're more relevant today post the Enhanced Drilling acquisition than we were yesterday. We need to continue to become more relevant to our customers. And if we're more relevant to our customers, I know we can be more relevant to investors. I think we need to continue to have consolidation in the market. I think especially offshore, international type areas, I think we need to continue to start to try to see that. We're active in it every day of the week. This is another acquisition. I think some of you heard me refer before that I really like the -- my 7-year-old grandson math. This is another one of those. My 7-year-old grandson can do the math to figure out this one is accretive. So we continue to look for those kind of opportunities. We continue to try to do things that help us be more relevant for our customers. I'm going to be particularly excited to talk to customers about Enhanced Drilling, because I think it's going to be like some of the other acquisitions we've made, it's going to make perfect sense to them why that brand under the Expro umbrella is really going to make a lot of sense. So we continue to be active in it. We continue to -- we're not just trying to become big for bigger sake, but we're trying to become more relevant to our customers. And I think that's where we'll continue to have our efforts. Some of it's going to be technology focused. Some of it's going to be market expansion focused. Some of it's going to be geographic expansion. It's all those kind of things that we continue to really put a lot of emphasis on internally. Operator: At this time, we currently have no further questions. Therefore, that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
Lluc Sas: Welcome to Sabadell's results presentation for the first quarter of 2026. Joining us today are our CEO, Cesar Gonzalez-Bueno; and our CFO, Sergio Palavecino. The presentation will follow the same structure as in previous quarters. Our CEO will begin by highlighting the key developments of the quarter and discussing the most relevant topics. Then our CFO will review financial results and the evolution of the balance sheet. The presentation will conclude with closing remarks from our CEO, after which we will open the floor for a live Q&A session. So Cesar, over to you. Cesar Gonzalez-Bueno Wittgenstein: Thank you, Lluc. Good morning, everyone. I will begin by outlining the 4 highlights of the quarter, which we will discuss in more detail during today's presentation. First, the sale of TSB is now complete. Therefore, we will pay the extraordinary cash dividend of EUR 0.50 per share at the end of May. Second, as we already anticipated, Q1 will mark the bottom of our core revenues. We expect these items to increase in each quarter over the course of the year. Third, we have launched an early retirement plan, which would improve efficiency in '26, but mainly in 2027. Fourth, we commit our full year guidance. Indeed, beyond the ups and downs of any given quarter, we have a sound, secure and proven growth strategy to deliver a 16% return on tangible equity in 2027. Slide 5 shows the key financial messages for the quarter. Just to remind everyone, all figures and results presented now exclude TSB. Supported by strong commercial momentum, performing loans and customer funds recorded year-on-year growth in the mid-single digits. In this context, core revenues are expected to have reached in this quarter their lowest point of the year. We see core revenues improving going forward as repricing pressures on NII ease and fee performance normalizes. Recurrent costs performed well in the quarter and reached EUR 569 million. We recorded one-off costs in the quarter of EUR 55 million related to the early retirement program underway. Our fundamentals remain solid. Our recurring return on tangible equity stood at 14.1%, and our capital position remains strong with a core Tier 1 at 13.2%. This performance is underpinned by strong asset quality that keeps on improving. Cost of risk and total NPAs both showed a reduction year-on-year. We continue to build up our Stage 3 coverage, which now stands above 70%. Finally, as I said before, we will distribute EUR 0.50 per share as an extraordinary dividend by the end of May. In parallel to this cash dividend, we keep executing our share buyback programs. We have already completed EUR 267 million out of the approved EUR 800 million. On Slide 6, financial implications of the now completed TSB transaction. Let me start with the sale proceeds. The initial agreed price was GBP 2.65 billion. This figure was agreed to be increased by the tangible net asset value generated since April 25. Taken together, this results in a final sale price of GBP 2.9 billion. Now let me emphasize the strategic and financial merits of the transaction. Firstly, the sale has generated significant value for shareholders. Transaction multiples are above both peer transactions and Sabadell's own trading multiples. In addition, the transaction is expected to generate more than 400 basis points of capital. This is driven by capital gains of more than EUR 300 million and the deconsolidation of risk-weighted assets. As approved at the Extraordinary General Meeting held last August, we will return this capital to shareholders. Accordingly, we will pay an extraordinary dividend of EUR 0.50 per share on the 29th of May. To conclude, following the sale of TSB, Sabadell now represents a more focused and simplified equity story with a clear strategic profile centered in Spain. In Slide 7, we see the details of the early retirement plan. We executed our last efficiency program as you remember, back in 2022, which included an early retirement plan. Since then, circumstances such as the demographics of our workforce prevented us from executing additional early retirement plans. Circumstances have changed and a structured early retirement plan is already being implemented in 2026. Importantly, this approach supports workforce optimization in line with the evolving business models and digital transformation. In terms of financial impact, we will incur in one-off costs in 2026 of approximately EUR 90 million. Meanwhile, we will generate gross annual savings of approximately EUR 40 million. Approximately 1/3 of these savings are expected to materialize in 2026 as the program is rolled out with a full run rate savings achieved in 2027. On Slide 8, we talk about new lending. Starting with mortgages, new lending decreased by 24% year-on-year. We remain focused on managing new lending through risk-adjusted return on capital, ensuring that growth is delivered in a profitable manner. As a result, we have continued to reduce our market share in new mortgage lending over the past months as front book yields have compressed. Origination of consumer loans decreased both year-on-year and quarter-on-quarter. We introduced changes to the application process this quarter, which temporarily impacted on conversion rates. We have already improved the process again and conversion rates and origination volumes are picking up again. Quarterly new loans and credit facilities granted to SMEs and corporates increased by 1% year-on-year and by 5% quarter-on-quarter, while working capital performance was more subdued. Overall, as we share on the next slide, these volumes of new lending allow us to continue growing our loan book. On slide 9, we see the loan book and starting with Spain on the left-hand side of the slide. Performing loans increased by 0.8% on the quarter with positive growth across all segments. Performing loans in Spain increased by 4.3% year-on-year. Our international operations are experiencing good momentum as well with performing loans rising by more than 7% quarter-on-quarter and by double-digit figures year-on-year. Overall, our total loan book showed a positive trend during the quarter, growing by 1.6%. Annual growth rate reached 5.6%. Moving on to customer funds on Slide 10. First, on balance sheet, customer funds ex-TSB remained broadly stable quarter-on-quarter and increased by 4.3% year-on-year. The Spanish perimeter showed an increase of 4.7%. Second, our balance sheet funds also remained broadly stable in the quarter, as market volatility has had a dampening effect on net subscriptions. We posted an increase over 10% on a year-on-year basis. All in all, total customer funds grew by 5.9% year-on-year. Looking at on-balance sheet funds breakdown on the right-hand side of the slide, non-remunerated deposits reached EUR 83.9 billion. Those non-remunerated deposits are almost completely located in Spain. This highlights the high proportion of low-cost funding within our deposit base. The cost of customer funds stood at 78 basis points in the quarter in the ex-TSB perimeter. Let me note that this includes higher yields in U.S. dollars and Mexican pesos. Therefore, the cost of customer funds in Spain was significantly lower and stood at 59 basis points. On Slide 11, we make a summary of our quarterly results. We recorded a net profit of EUR 284 million or EUR 347 million, including the contribution from TSB. Let me emphasize two points. Firstly, as I had previously explained, revenues have bottomed out with improvements expected in the coming quarters. Secondly, Quarterly results include EUR 70 million pretax in one-off charges, nonrecurring costs related to efficiency initiatives and FX hedge on the proceeds from the sale of TSB. Underlying profitability remains solid and recurring return on tangible equity stood at 14.1%. This keeps us on track to reach our full year guidance of 14.5%. And with that, let me turn it over to Sergio. Sergio Palavecino: Thank you, Cesar. And good morning, everyone. Let's move on to the financial results on Slide 13. Before going through the different lines of the P&L, I would like to explain the extraordinary items that Cesar has just mentioned. First, within the trading income line, we recorded an expense of EUR 14 million related to the foreign exchange rate hedging of the full proceeds from the sale of TSB. Once the sale has been completed, next quarter, we will record only EUR 5 million corresponding to the month of April. Second, we recognized EUR 55 million of nonrecurring costs related to the early retirement program in Spain. Overall, recurring ROTE stands at 14.1%, which is in line with our expectations and our year-end target of 14.5%. We will now review the main P&L items in more detail, focusing on Sabadell's performance, excluding TSB. Starting with NII on Slide 14. NII bottom out this quarter as expected, decreasing by 2.5% quarter-on-quarter and by 3.5% year-on-year, which is mainly explained by the final headwind of lower interest rates repricing as well as the seasonality of Q1. On the top right-hand side of the page, you can see the drivers that explain the quarterly evolution. Moving from left to right, customer NII had a negative contribution of EUR 8 million due to lower customer margin. This was driven by loan book repricing at lower rates and a slightly higher cost of deposits following the success of the last digital current account campaign. Then the day count effect on customer NII resulted in a EUR 6 million negative impact. Regarding ALCO liquidity and wholesale funding, we have seen a net impact of also minus EUR 6 million, mainly attributed to liquidity, reflected increase in borrowing in dollars and Mexican pesos, which carry higher interest rates. Going forward, this will no longer be a headwind and we are expecting tailwinds from customer NII as explained in the next slide. Indeed, looking ahead on the left-hand side of the Page 15, the expected quality evolution throughout 2026 is shown. As anticipated, after reaching a low point this quarter, we now expect NII to grow at a low single-digit rate quarter-on-quarter. From there, NII should increase steadily over the year, ending the fourth quarter of 2026 with a mid-single-digit increase compared with the fourth quarter of last year. This outlook is based on the current macroeconomic environment where we are assuming interest rates will stay at higher levels than we had previously expected. The slightly higher rate environment, together with ongoing uncertainty and volatility may affect loan volumes. We now expect growth to be slightly below our initial plans, but still at mid-single digits. At the same time, on balance sheet customer funds are expected to grow between 3% to 4%. Higher interest rates should support loan yields with a steady quarter-on-quarter improvement starting from the beginning of the second quarter already. Regarding deposit costs, we now expect a lower pass-through compared with our existing book, which should support customer spread. Overall, customer spread is expected to improve quarter-by-quarter and reached levels above 290 basis points by year-end, slightly better than initially forecasted. Finally, noncustomer NII, which includes ALCO, wholesale funding costs and the liquidity contribution is expected to remain broadly stable around current levels. Taking all of this together, we are maintaining our NII guidance and continue to expect more than 1% year-on-year growth in 2026. Moving on to fees. posted a quarter-on-quarter decrease, mainly driven by the absence of success fees recorded in the previous quarter by seasonality and by a one-off cost in the payment service business. Looking ahead, we expect this line to improve, supported by increasing activity, particularly in the Payment Service business and in Corporate and Investment Banking, which has already been seen in March. In Asset Management, we also expect a continued positive trend in net inflows. To sum up, while we acknowledge a lower quarter than expected, we believe this marks a trough that will serve as an inflection point. Looking ahead, we expect fees to increase and land at the lower end of the mid-single-digit growth range. Moving on to cost. The key developments this quarter is the launch of the new efficiency initiatives in Spain. However, let me first focus on the underlying evolution of recurring costs. Total recurring costs decreased by 3% quarter-on-quarter when excluding EUR 55 million of nonrecurring costs and for comparability purposes, also excluding the reclassification related to the end of the agreement to sell the merchant acquiring business at the end of last year. On a year-on-year basis, total recurring cost increased by 3.4% mainly driven by inflationary pressures on personnel expenses as well as higher amortization and depreciation costs, which already reflect the current quarterly run rate. Looking ahead, as Cesar mentioned earlier, we expect that circa 1/3 of the total savings from the efficiency initiatives will fit through in 2026. Overall, this evolution is fully aligned with achieving our year-end targets. On the next slide, we covered the cost of risk, which remains at contained levels supported by solid underlying asset quality despite the increased uncertainty. Total cost of risk for the quarter was 38 basis points which includes all provisions and impairments across all categories. Looking specifically on loan provisions, the credit cost of risk was 27 basis points. Turning now to the bridge of the different components of total provisions for the quarter shown on the top right-hand side. We booked EUR 94 million of loan loss provisions after reviewing carefully the macroeconomic scenarios. Then we had EUR 4 million of provision reversals driven by the real estate asset disposals at a premium. In addition, we recorded EUR 23 million in NPA management costs and EUR 19 million in other provisions mainly related to litigation. Overall, the quarterly evolution of total cost of risk is fully aligned with our year-end target of around 40 basis points despite the increased uncertainty. Moving on in the next section, I will walk you through asset quality, liquidity and solvency. On Slide 20, we see a continued improvement in both the NPL ratio and coverage levels. The NPL ratio reached 2.55% representing a reduction of 10 basis points compared to the previous quarter. We can also see that Stage 2 exposure declined by more than EUR 1.2 billion year-on-year. Finally, the coverage ratio calculated as total provisions of Stage 3 exposures continued to improve and reached 71%, rising by more than 1 percentage point during the quarter. In terms of total NPAs in Slide 21, you can see the continued reduction of foreclosed assets. We have sold 24% of the stock of foreclosed assets in the last 12 months at an average premium of 8%. At the right-hand side of the slide, we can see that the ratio of NPAs as a percentage of total assets declined to just 0.7% which is a record low. Turning now to Slide 22. All liquidity ratios remain comfortably above requirements with a net stable funding ratio at 135% and the liquidity coverage ratio at a strong 186%. Credit ratings remained stable during the quarter. All rating agencies have assigned a stable outlook, except for S&P, which maintains a positive outlook, reflecting the possibility to achieve further uplift based on ALAC. I will also highlight that Moody's upgraded our deposit rating in April, and it has reconfirmed our Baa1 long-term rating following the application of the new EU depositor preference regulation. Finally, year-to-date, we have issued EUR 500 million in covered bonds. Given the sale of TSB, this 2026 will be a year with lower MREL funding needs. And therefore, less affected by potential market volatility. To conclude this part of the presentation, let me walk you through the evolution of our capital ratios during the quarter. This time around, this slide includes both the quarter-on-quarter variation and the expected impact of the TSB sale and the extraordinary dividend on the CET1 ratio. We will start by reviewing the quarterly evolution. This quarter, the CET1 ratio increased by 7 basis points, while generating 32 basis points before accounting for the dividend accrued. This includes 42 basis points from organic generation after deducting 81 coupons, minus 4 bps from fair value reserves adjustment in the fixed income portfolio due to higher interest rates at the end of the quarter and minus 6 basis points from higher risk-weighted assets, mainly driven by volume growth in our international businesses, where loans carry higher density. The accrual of a 60% dividend payout ratio had a negative impact of 26 basis points, bringing the CET1 ratio to 13.18%. Now looking at the capital effect of the sale of TSB. The transaction will unlock more than 400 basis points of capital for shareholders, as already anticipated when we announced the transaction. The sale generates a positive capital impact of 369 basis points this year driven by the release of risk-weighted assets, a net capital gain of more than EUR 300 million and the reduction of intangibles. This will be offset by the extraordinary cash dividend distributed to shareholders which represent a reduction of 378 basis points, bringing the pro forma CET1 ratio to 13.09%. Finally, the release of operational risk-weighted assets over the next 2 years will add a further 36 basis points, lifting the pro forma fully loaded CET1 ratio to 13.45%. With that, I will hand over to Cesar, who will conclude today's presentation and probably say goodbye after 5 very successful years leading Banco Sabadell. Cesar Gonzalez-Bueno Wittgenstein: Thank you, Sergio. Continuing after that phenomenal waterfall is very interesting. So to conclude this presentation, I would like to briefly review the bank's transformation journey over the last few years. Our growth strategy has proven to be successful and has structurally transformed the bank. First, we are delivering lending growth while reducing the cost of risk. Performing loans have increased by more than EUR 11 billion since 2021, while the cost of risk has declined by more than half. This improvement reflects stronger underwriting standards and a higher quality loan portfolio. Second, the bank is showing a consistent increase in capital generation. Indeed, we are delivering high and sustainable profitability, along with strong capacity to remunerate shareholders. In this context, we have committed to distribute EUR 2.5 billion of ordinary remuneration over the next 2 years, representing an average yield of more than 9% when adjusted for the upcoming extraordinary dividend. In short, a solid performance supported by 2 key levers. We have gradually shifted the organization towards profitability-focused metrics, and we have significantly transformed our risk processes and models. The benefits of these 2 elements will continue to gradually improve the quality of our loan book over time. Finally, let me emphasize our full commitment to delivering the full value of this plan through 2027 as we enter a new phase under a new leadership. We are well positioned to create long-term shareholder value. To conclude my last quarterly results presentation at Sabadell, I would like to share some words on a more personal note. Looking back at the last 5 years, I am honestly proud of the results we have achieved. Sabadell was going through difficult times in late 2020. During this 5.5 years, we, as a team, have managed to deliver on our strategy. We have deployed the profound transformation of the bank, which has enabled our financial turnaround. And now I would like to thank you for the interactions we have had during this period. The team and I feel we have been treated with utmost fairness and respect and I honestly thank you for that. I will now hand it over to Lluc start the Q&A section. Lluc Sas: Thank you, Cesar, for your commitment and for everything you have accomplished this year. We will now open the Q&A session. I would kindly ask you to limit your participation to a maximum of two questions. So operator, could you open the line for the first question, please? Operator: First question is coming from Cecilia Romero from Barclays. Cecilia Romero Reyes: I have two, one on volume growth and the second one on cost. On the first one, on the asset side, loan growth in Spain has been modest quarter-on-quarter. While some peers point to raising competition in both corporate SME deposits. And how are you seeing competition evolve across SMEs and corporates? And how are you balancing pricing, funding costs and returns? And how do you think about your appetite to compete in mortgages where cross-selling helps the economics? And finally, how do you see growth evolving across segments to deliver mid-single-digit growth this year? And then on costs, following the restructuring announcement and the EUR 40 million expected annual savings, could you help us understand how this fits within your current cost targets? Are these savings incremental or already factored in your 2027 guide? Cesar Gonzalez-Bueno Wittgenstein: Thank you very much. So on -- let's go one by one. On Corporates and SMEs, I think if you look at it, we've increased by 5% quarter-on-quarter and 1% year-on-year. And looking ahead, loan demand from Corporates and SMEs remains solid. We keep a strong pipeline of medium- and long-term loans. Therefore, we are confident that growth will accelerate back to mid-single-digit levels and the front books and yields and spreads remain stable. You have to understand that the change in model is a long-term element. So the cost of risk going forward will be much lower. There has been a phenomenal transformation in the strategy of the bank. In terms of mortgages, to your question, the average front book yield on new Spanish mortgage lending is currently below swap rates, as you all know. And pricing conditions remain very competitive, even after taking potential cross-selling benefits into account. Therefore, we have intentionally reduced our market share of new mortgages lending from approximately 9% at the end of '24 when the yields were positive to below 6% this quarter when our natural market share is around 7%. And we will continue to adjust our appetite according to market pricing as we have done over the past year. On the consumer lending, I mentioned before that during the quarter, we introduced changes in the application process. And although the demand -- the upfront demand remained stable and strong, we had lower conversion rates. We have adjusted for these new changes and now conversion is back to where it was, and we expect healthy growth from now on. And in the cost of deposits and in the deposits, I think we've grown healthily in deposits, and that has been somewhat on the back of the growth of the digital account. We have been very successful in the growth of the digital account during the quarter. And as we have mentioned many times, this is not to increase the volume of deposits. This is to attract new customers that then become transactional and that allow for further growth. More than 60% of our acquisition is now through digital accounts when it was 0 a few years ago. And these clients behave well. They have strong transactionality, more than 50% have payrolls, 45% use payments every month and 40% use Bizum through Sabadell, which is a big sign of being engaged with us. And despite the fact that we have done this campaign at a high rate, it has been at the rate that we could obtain in the wholesale market. So it makes lots of sense. I will let Sergio to develop a little bit more on the cost side. But I think we are not -- just to make it very brief, I don't think we are adjusting our forecast now despite this one-off. Of course, that would imply that there is some room as the year progresses to review. But for the time being, we leave it untouched. Sergio Palavecino: Thank you, Cesar. A couple of comments to the first one, Cecilia. The first quarter is typically because of seasonality, probably one of the sort of slower in terms of volumes. In any case, we've been able to grow a little bit the loans and a little bit the deposits. And when you look at the year-on-year growth rate, it's at 5.6%. So it is actually absolutely in line with our expectations. And as Cesar mentioned, the pipeline is good. So regarding volumes. As of today, there isn't anything that makes us think that we're not going to grow in line with expectations. And then as per the cost to your question, this efficiency initiative, so the early retirement, the EUR 40 million in 2027 was not included in our guidance when we detailed the guidance of 2027 by the different lines. We think it's early to update guidance per lines in 2027 given the different changes that we're seeing in the market. Of course, this is a positive because then it allows us to have a buffer and then we see how inflation plays out in the different lines of the cost. But again, I think it's a buffer, and we feel optimistic about it. Lluc Sas: Okay. So operator, could you switch off the microphones when the analysts are asking the questions because we've been told that there's some feedback that analysts cannot hear the questions when they do the Q&A. So we can jump to the next question. Thank you. Operator: Next question is coming from Francisco Riquel from Alantra. Francisco Riquel: Yes. So I just wanted to say goodbye to Cesar and congratulations for the last 5 years' performance. So my first question is on NII. You maintain your guidance of plus 1% in '26 but Euribor rates are now higher than expected, and you used to have a positive sensitivity. So I wonder if you can elaborate on NII dynamics in coming quarters? And what is the offset to the higher Euribor rates? And in the case, the margin uplift is delayed, if you can update on the risk to your '27 NII guidance as well? And my second question is capital distributions, the EUR 90 million of restructuring charges that you will book in '26, I wonder if that is compatible with your distribution targets? You did not specify how much of the EUR 2.5 billion will be paid out in '26 and '27. So I wonder if top-up share buybacks will be postponed to '27 after the winding of operational risk-weighted assets or not? Sergio Palavecino: Thank you, Paco, for your questions. Regarding NII, NII sensitivity, you're absolutely right, it's a positive one. So when interest rates go up, we expect NII to be higher. Actually, for 100 basis points immediate uplift in all rates, then we expect a 6% increase in the second year. And the first year is less. So the first year is somewhat more stable. So the first year is more stable as said. Looking at the evolution of NII, we initially expected NII to grow by more than 1% and keep on growing into next year. And that was basically based on volume growth, while rates were expected to be stable. This time around, what we are seeing and when we look at the yield curve to update our expectation, the yield curve was reflecting two hikes from the ECB. So now we have updated our model with two hikes. So the ECB at 2.5%, which is definitely a higher rate. For the first quarter and the second quarter, volumes are not changing in our view. They are absolutely in line to our expectations. And then I think the question mark is whether at some point at the end of the year may be somewhat less volume. And as particularly, we are growing a little bit less than expected in mortgages because we want to be really prudent with prices, particularly in this environment. So the movements that we are seeing are not going to affect 2026, cost of deposits, the market looks good. In the past, this rate have had a very gradual pass-through into the deposit cost and from everything that we're looking at, this seems to be the case this time around. So the pass-through at the beginning is less than the pass-through that we have in the book, which is close to 30%. And then for 2027, we feel positive, but it's a bit early to say. Definitely, the higher yields is going to be a tailwind and then remains the question mark on volumes that we had expectation for a continuous mid-single digit at so far, we maintain, but I think we need a bit more time to have visibility in 2027 and also cost of deposits, although we feel very comfortable for cost of deposits. So I think those are the moving pieces that taking all that into account, we feel that the outlook is solid for this year. And then for next year, as said, we feel somewhat optimistic, but it's early to be precise. And regarding capital distributions, EUR 90 million is the one-off cost. But already in the period, we are expecting the benefits -- part of the benefits, EUR 40 million in 2027, EUR 15 million, almost EUR 15 million in 2026 million. So that combined is EUR 55 million. The net is only EUR 35 million, which net of taxes, is less than EUR 25 million. So yes, it's going to have a bit of an effect, but we are talking about less than 1% of the distribution. So we think that at this point moment in time, there might be some organic capital generation that can offset that small deviation. So we maintain the target of the EUR 2.5 billion distributions, which we have always seen them being higher in 2027 than 2026. In 2026, we have the extraordinary of the TSB distribution, EUR 0.5. We're actually distributing a little bit more than what is generated in 2026. So it's -- I think the balance between timing of the distributions are also quite sensible. Lluc Sas: Perfect. So let's take the next question, please. Operator: Next question is coming from Maks Mishyn from JB Capital. Maksym Mishyn: All the best to Cesar in the new chapter. Two questions from my side. The first one is, maybe I've missed it, but on the digital campaign for the deposits, could you give us a bit more color on pricing and volumes you were able to achieve with the campaign in the first quarter? And the second question is on cost of risk. Have you updated your macro models in the quarter? And can you provide us with some comfort that macroeconomic turbines may not push your cost of risk higher? Cesar Gonzalez-Bueno Wittgenstein: Thank you very much. So I think we have never been too transparent on the numbers of the digital account. It's quite successful. And we have now more than 600,000 digital customers. And what I could say is that it has increased overall by around 2 basis points to cost of deposits in the quarter. And let me leave it at that. It has been quite successful. We are very happy, and it is fulfilling all its purposes. Lluc Sas: And then we also had the questions on cost of risk and macro models. Cesar Gonzalez-Bueno Wittgenstein: Yes. Thank you, Maks, for your question. Regarding cost of risk and the macroeconomic models, we have, of course, reviewed carefully the scenarios and taking into account what is going on, the conflict and the uncertainty. For the basic scenario, we have kept it unchanged. We are -- we built this scenario during the second half of last year, and we built it on a quite a prudent basis. In our base scenario, we're assuming GDP to grow, in Spain, 1.7%, unemployment to be a little bit above 10% and what consensus is delivering today is an expectation of growth above 2% in Spain and unemployment below 10% while the price of real estate will not be declining. That is the consensus. And we feel that we have seen that the assumptions in our macroeconomic base scenario are actually more prudent than what we're seeing in the market. Of course, this only affects Spain, which is our home market. So we have not changed the base scenario. What we have done is we have changed the probabilities of the upside and the downside scenarios. You know that under IFRS 9, you have the base at the downside and the upside, and we have a shift 5% probability from the upside to the downside. And with this, this has triggered a EUR 20 million provision that has been already incorporated in the EUR 94 million of credit loan provisions. So this actually 10% in the change of probabilities. And for the time being, we will monitor the situation and the development. But for the time being and as long as the GDP expectation in Spain is maintained at a growth of around 2%, we feel that the scenario is going to be good. Lluc Sas: Okay. So let's jump to the next question, please. Operator: Next question is coming from Ignacio Ulargui from BNP Paribas. Ignacio Ulargui: All the best of luck for you, Cesar, in your new adventures. I just have one question on fees and one questions on the deposit and one on interaction with lending. So on fee income, I mean how should we expect the improvement in coming quarters? Is it mainly driven by an acceleration of the asset management net inflows because you are launching a new product campaign or how should we think about fee progression basically coming in the coming quarters? And the second one on the loan to deposit. I mean do you have any target for loan-to-deposit ratio in the long run or in the medium term? Cesar Gonzalez-Bueno Wittgenstein: Yes. On the fee side, I think we are expecting an improvement in the recovery of CIB activity. There were quite a few things in the pipeline that are probably delayed. I think the payment business is also going to do better and certainly, the net inflows in asset under management. And we have already seen a recovery in the first two months -- I mean, in the first two weeks of March. Sergio Palavecino: Yes. So if I follow up on those, natural actually, we expect the credit services and assets under management, we expect the 3 of them to grow from this level. Services, the different business lines are working well. We had this one-off in the first quarter and seasonality. Seasonality affects very much our payment service business. And then we mentioned also the Corporate & Investment Banking, which simply was slow in January and February, and then is not picking up in March and therefore, the second quarter is expected to be good in terms of activity. So we also expect growth coming from that business line that is going to affect or is going to affect positively the credit, the services and then finally, the asset under management because of the growth in balances. And per the loan-to-deposit is 92%, very stable. It's been very stable already for many quarters where we've been able to grow mid-single digit in loans and sort of 4% in deposits with a higher base of deposits. So at the end of the day, quite stable. If we were in a situation where we had the opportunity to grow the loan portfolio, I think growing up to a loan-to-deposit in the range of 90% to 100%, it could be no problem. So we would also feel that, that's not an issue. However, our -- in our plan, we will try to grow as balanced as possible. Lluc Sas: Thank you much for your questions. Let's jump to the next caller, please. Operator: Next question is coming from Borja Ramirez from Citi. Borja Ramirez Segura: Thank you very much for taking my questions. I have two, please. Firstly, on the net interest income, I saw that your ALCO portfolio grew by roughly EUR 2 billion quarter-over-quarter. If you could kindly provide details on the yields at which you bought new bonds? And then also on NII, I would like to ask, I think it was mentioned in the previous results call that you had you're going to decrease the cost of digital accounts from 2% to 1%, and there was a EUR 30 million positive NII benefit on a -- basis from this. If you could kindly confirm this number? And then my second question would be, it is noted regarding the change in the scenarios of the IFRS 9 models. I would like to ask if you could kindly remind me the macro relay provision. Sergio Palavecino: Sure. May I start with the ALCO question? Thank you, Borja. Yes, we have increased a little bit our ALCO portfolio, in line with our plan. The ALCO, the size of the ALCO book is related to mainly the ALM, the hedging that we do, the size of our current accounts and deposits, which have been growing. And then on top of this year with the sale of TSB at the TSB level, we are selling the TSB MREL bonds at the ex-TSB and replacing them with cash from the transaction. So we wanted to put that money to work partially. So that's why we wanted to increase the portfolio this year. And we have invested in the typical investments that we do that mean Spain and other core European sovereigns with durations up to 10 years, some of them hedged. So at the end of the day, the duration of the portfolio that we buy is between 5 to 6 years and with yields above 3% and in the current environment, actually very close to 3.5%. And then as per the online current account, you are absolutely right. We have the intention to cut the remuneration on the previous campaigns from 2% to 1%. We did, and that took place in the month of March. So it was only one month in the first quarter and the benefits will keep on coming. The very good news is that -- the very good news is that after this cut, we're seeing a lot of stability in the balances. So I think it's working the strategy of buying customers and then keeping the balances. And finally, regarding your question on the macro provision, I think I mentioned that it was EUR 20 million, the provision that we took after changing the probabilities. And Cesar, I don't know if you'd like to add something? Cesar Gonzalez-Bueno Wittgenstein: I think you were spot on. I think on the digital account, what we said is exactly that there will be a EUR 30 million saving from the portion of that portfolio that we brought from 2% to 1%. And of that, we have seen 1 month and that EUR 30 million is over the course of the year. And as you mentioned also the very good news, as expected, is that the loss of volumes is low. And this proves again that this is a transactional account. It's not deposits. It's not to maximize returns. It's to have a full current account that, at the same time, has low costs and full services and at the same time, yields something that is above 0. And that is exactly what has happened. And now there are different tiers, and that is the strategy around this account, there are different tiers. Some for acquisition because to create the excitement to move the account, you need a slightly higher rate, but then everybody understands that the current account with a decent remuneration of 1% is attractive enough and they are becoming transactional. So as I mentioned before, we are very satisfied with the progress of this strategy. Lluc Sas: Operator, could we have the next question, please? Operator: Next question is coming from Ignacio Cerezo from UBS. Ignacio Cerezo Olmos: Two follow-ups on lending growth. The first one is on the SME and corporate book, the Spanish one. I mean you've got peers basically growing, I mean, significantly above that 2% so I just wanted to follow up a little bit actually on what do you think explains that gap right now? Is it risk profile, risk appetite by Sabadell? Is the fact that the incumbents in Spain have stepped up the pace. Is it related to the fact that your customers are requiring less credit than other type of corporates. So just a little bit of color basically on that. And then the second one is whether you're seeing actually the international book ex-TSB as a bit of an offsetting factor against and that we're seeing some degree of acceleration, especially in Miami and the foreign branches actually. So do you think there is a little bit of an offsetting actually coming from international book and the Spanish book or you treat those books completely separately? Cesar Gonzalez-Bueno Wittgenstein: I think reducing the probability of default by 50%, as we have done in new lending, of course, strengthens our asset quality. But for a period of time, makes the volumes slightly more subdued. And it makes a lot of sense to do that, but it's a transition in which we are still somewhat immersed. You have to take into account that, that probability of default improvement has a long tail it will take more than 4 years to see the full benefit in the SME portfolio, 7 years in mortgages and more than 2 years for consumer loans. And for sure, it's very difficult to separate off all the different factors that make that demand a little bit more subdued, but it is our impression that this is the main factor that reducing the probability of default of being more demanding on the quality, on the risk quality of the new loans is having certainly somewhat of a slowdown, which will fade over time. And regarding the growth abroad, not really. We have good business units abroad, Miami, Mexico in particular and we do what's right. And whenever we find the right project, so the right returns on capital with the right risk, then we're able to do it, and we are seeing an environment with a lot of activity and project finance, in structured finance and the corporate, our corporate customers that are doing business abroad. So we are taking advantage of that activity, but it's not really like that we see sort of offsetting. We don't look things that way, no. Lluc Sas: Let's go to the next question then. Operator: Next question is coming from Pablo de la Torre from RBC Capital Markets. Pablo de la Torre Cuevas: I have a couple of follow-ups on cost and distribution. So the first one was on cost. I just wanted to understand the phasing of any remaining one-off costs in 2026 and whether the plan as it stands now considers any further actions in 2027? And the second one was on distributions. I know you reiterated the EUR 2.5 billion in distributions for this year and next. But I just wanted to check that you also reconfirmed the previous dividend guidance of 2026 being above EUR 0.204. And then the last one on fees also, if you just can comment on the previous guidance of double-digit growth in asset management and insurance fee income growth from this year. I think that's growing only at 4% in Q1. Cesar Gonzalez-Bueno Wittgenstein: So you will complement to that. But on cost, we don't see further actions at this point in time in '27 and there will be a progressive deployment during '26, and we will accelerate it as much as possible. So we have incurred already in EUR 55 million of the EUR 90 million, and you should expect the greater start to happen relatively soon. And for '27 at this point in time, there's no expectation. That doesn't mean that there couldn't be later on. But at this point in time, there are no further expectations. And for the distribution, I think we have -- we are confirming everything, everything that we said in terms of distribution almost 6.5% of the total of the 3 years, the EUR 2.5 billion ordinary, the EUR 0.50, everything, I think, is being confirmed. Sergio Palavecino: Indeed. Yes. And finally, Pablo, I think you were asking for fees, which I think we've been discussing and the fee development -- I mean the expected performance of fee remains unchanged to what we said in the first -- at the beginning of the year, and for the year. So we expect fees connected with assets under management to grow linked to volume, but then we also expect a higher contribution from the different businesses that we run and in the presentation, we are acknowledging a slower start than expected. We were sort of expecting maybe a figure similar to the one that we have in the first quarter of last year. And the difference, which is some EUR 7 million is half that one-off and half a slow January and February in the import and export business and corporate and investment banking which has already get back on track from March. And with all this, what we are seeing is that we keep on targeting growth that might be close to the mid-single-digit range, probably the lower range -- the lower part of that range. So we are targeting close to 4% overall growth in the fee line for 2026. Lluc Sas: Let's go to the next question please. Operator: Next question is coming from Carlos Peixoto from Caixa Bank. Carlos Peixoto: Just a couple of questions from my side as well, basically focus on NII. I'd like to have a follow-up there. The first one is that your NII guidance is based -- or the above 1% growth is based on NII that was provided last year, excluding TSB or on the statutory NII that we now have? Just to understand the basis for the growth. And then delving into NII, just if you could remind us what type of savings you might be getting going forward from MREL instruments that you had to issue at the group level to finance the size of the group or when it includes the TSB and now with the sale you could have some savings on those instruments from maturing the instruments, basically, what -- how much could it be? And what will be the time line for those to kick in? Cesar Gonzalez-Bueno Wittgenstein: Thank you, Carlos, for your questions. Regarding the second one, MREL. We were done streaming an equivalent to EUR 1.4 billion of MREL to TSB, which is the MREL related to its risk-weighted assets. And that is the MREL that, therefore, we will be saving at the group level in the wholesale capital market, so EUR 1.4 billion. And that's why we're saying that we will not be active in the debt capital markets in 2026 as we don't need to get that. So if you apply the spread on the senior nonpreferred and senior preferred to that figure, it's something close to EUR 20 million per year that may take place already -- I mean, gradually from the second quarter of 2026, as we will not be issuing and we will have maturities. And then I think the first question, not sure if I got it fully right. I think you are asking about the perimeter for the NII, and we are trying to be comparable. So it's going to be the ex-TSB perimeter is the one that is going to remain. So that's the one we're being guiding on to try to make it -- [ PLs with PLs ]. Hopefully, that was your question, and I hope I answered otherwise, we can follow up on it. Lluc Sas: Thank you, Carlos. And then we have got one final question. So operator, please. Operator: Last question is coming from Britta Schmidt from Autonomous Research. Lluc Sas: Britta we cannot hear you. No? Well, so probably he's jumped to another call because we know that it's a busy day for you, so thank you for your understanding. And that concludes our presentation for today. Thank you, Cesar and Sergio, and thank you all for participating. If you have any further questions, the Investor Relations team remains available for any follow-up or additional information. Have a great day. Thank you. Cesar Gonzalez-Bueno Wittgenstein: Thank you.
Operator: Greetings, and welcome to the Atlas Energy Solutions First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kyle Turlington, Vice President of Investor Relations. Thank you. You may begin. Kyle Turlington: Hello, and welcome to the Atlas Energy Solutions Conference Call and Webcast for the first quarter of 2026. With us today are John Turner, President and CEO; Blake McCarthy, CFO; Tim Ondrak, President of Power; and Bud Brigham, Executive Chair. John, Blake and Bud will be sharing their comments on the company's operational and financial performance for the first quarter of 2026, after which we will open the call for Q&A. Before we begin our prepared remarks, I would like to remind everyone that this call will include forward-looking statements as defined under the U.S. securities laws. Such statements are based on the current information and management's expectations as of this statement and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially. You can learn more about these risks in the annual report on Form 10-K filed with the SEC on February 24, 2026, and our quarterly report on Form 10-Q for the first quarter and current reports on Form 8-K and our other SEC filings. You should not place undue reliance on forward-looking statements, and we undertake no obligation to update these forward-looking statements. We will also make reference to certain non-GAAP financial measures such as adjusted EBITDA, adjusted free cash flow and other operating metrics and statistics. You will find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, I will turn the call over to John Turner. John Turner: Thank you, Kyle. Before turning to the quarter, I want to frame where Atlas stands today. On the sand and logistics side, the West Texas market is turning. Trucking rates have moved meaningfully off their lows. Logistics margins expanded from low single digits in January to mid-teens by March. Completion activity is building and our mining operations are effectively sold out. On the power side, we have signed a global framework agreement with Caterpillar securing 1.4 gigawatts of generation capacity, and we have just announced our first private grid power purchase agreement, a 120-megawatt deployment drawn from our initial 240-megawatt November order with Caterpillar. The strategic and commercial momentum heading into the balance of the year is the strongest it has been in some time. Turning to our first quarter results. Atlas generated revenue of $265.5 million and EBITDA of $28.4 million, representing an EBITDA margin of 11%. Results were impacted by severe winter weather, elevated maintenance at our Kermit facility and higher third-party logistics costs. Each of these items has been resolved, and we expect underlying margins to normalize beginning in the second quarter as the headwinds roll off and contracted volumes ramp. The clearest signal of the demand recovery is in our bone book of business. Customer volumes have moved our mining operations to a sold-out position for the second quarter at current production rates. And we expect our plants to remain very busy for the balance of the year. As contracts roll off or if we elect to increase production, additional sand sales this year should come at higher pricing. The macro backdrop is supportive. WTI is hovering near $100 a barrel and the 2027 strip has moved higher, but we want to be clear that our outlook is anchored in customer commitments and completion activity we can see today, not in any single price level holding. While the West Texas sand and logistics market has been in a rut for the better part of 2 years, Atlas never stopped investing in our infrastructure. When the markets get tight, our investment in our plants, logistics network and last mile equipment reinforce our position as the most reliable supplier in the Permian. Now let me turn to power, where we are deploying capital with the same operating discipline that built our sand and logistics franchise and where we believe Atlas' industrial capabilities translate directly. We have intentionally structured our power strategy differently from some peers by pursuing full scope power purchase agreements in which Atlas owns and operates a complete solution, including balance of plant. This creates stickier, longer-term customer relationships, provides significant advantages at contract renewal, delivers superior reliability compared to the grid in many cases, allows for greater pricing flexibility once equipment costs are recovered and creates high barriers for competitors due to the sump cost and complexity of the facility. With grid constraints likely to persist for years, we believe this PPA model is the right long-term strategy for our shareholders. In November, Atlas placed an initial order with Caterpillar for 240 megawatts of power generation equipment, sized in response to specific customer projects. As commercial momentum built early this year, we recognize the generational nature of this opportunity and entered into a separate global framework agreement with Caterpillar that secures an additional 1.4 gigawatts of power generation assets for delivery between 2027 and 2029. Together, with the initial 240-megawatt order, these commitments support our objective of owning and operating more than 2 gigawatts by 2030. The announcement of a global framework agreement immediately elevated our commercial position. Our commercial team went from hunting deals to being hunted. With power generation equipment in short supply, our secured supply chain and our ability to offer surety of delivery have moved us from medium-sized industrial projects into serious contention for data center deployments. On April 1, we announced our first private grid power purchase agreement, a 120-megawatt deployment that will be supplied from the initial 240-megawatt November order. The PPA carries an initial 5-year term with 2 additional 5-year extension options. Equipment delivery and construction are expected to begin later this year with commissioning targeted for the first half of 2027. We expect this 120-megawatt deployment to generate approximately $50 million to $55 million of adjusted free cash flow on an annualized basis once fully deployed. To support the customer during construction and commissioning, we have already begun providing bridge power with mobile generators. The combination of these bridge deployments and other recently executed microgrid deployments is expected to contribute approximately $35 million in incremental adjusted EBITDA over the remaining 9 months of 2026, weighted toward the back half of the year as deployment ramp. Finally, in April, we successfully priced $450 million of 0.5% convertible senior notes due 2031. Concurrently, we entered into a capped call transaction with initial cap price of $22.32 per share, a 28% premium over last Thursday's closing price of $17.38. We used a portion of the $386 million in net proceeds to pay down our outstanding balance under our ABL and outstanding advances under our master lease agreement and interim funding agreement. We intend to use a portion of the remaining net proceeds to finance the initial 240-megawatt order. On a cash coupon basis, this transaction reduces cash interest expense of this quantum of capital from high single digits to 0.5%. The cap call meaningfully mitigates dilution up to the cap price, though we recognize residual equity optionality remains embedded in the structure. In summary, Atlas is well positioned to grow our power business from expected deployments of roughly 550 megawatts next year to approximately 2 gigawatts by the end of the decade. Combined with a recovering sand and logistics business, this trajectory would meaningfully transform our cash flow profile and create substantial long-term value for our shareholders. With that, I will now turn the call over to our CFO, Blake McCarthy, who will review our financials in more detail and provide an update on our sand and logistics operations. Blake McCarthy: Thanks, John. At the time of our Q4 call, we were probably a bit more bullish about the prospects for oil than most industry prognosticators, as we are forecasting global oil supply and demand coming into balance later this year. Regardless, we are aligned with most forecasts that call for slightly flat to down U.S. activity levels in 2026. Well, as is par for the course in the oil field, the backdrop has changed in a hurry. The turmoil in the Middle East and its impact on global oil trade flow have led to a rapid recalibration of oil prices. While none of us are sure how the current conflict will end, hopefully, peacefully and quickly, we're increasingly confident that the floor on oil prices over the medium term has risen significantly. The commodity markets are signaling an increase in the call on U.S. unconventional production. While we've seen some signs of customers bringing activity schedules forward, the number of true completion crew additions in the Permian remains in the low single digits thus far. The potential recovery in West Texas activity in 2026 will likely look quite different from the recovery post-COVID. Customers aren't sitting on a massive inventory of DUCs like they were coming out of the pandemic. And honestly, the service industry doesn't have the ready-to-go idle equipment stock it did at that time. Instead, ramping production will require rig additions, rigs that will need to be recruited, completion spreads that will require crew-ups, and likely capital upgrades and ancillary services will need to be secured. Current pricing levels for all of these just don't justify the investments service providers will need to make to meet incremental customer demand. Thus, we are likely at the front end of a pricing recovery across the North American services complex. It's still very early, and the wild volatility we've seen in the commodity tape based on who's tweeting what certainly doesn't inspire extreme confidence, but the realities of the impact that current geopolitical events are having on physical global inventories are becoming increasingly self-evident, and the strip always eventually responds in kind. While we expect the larger operators to take a more cautious approach to activity additions in the near-term, the universe of smaller operators will likely front run the big boys as they historically have always moved to maximize their value capture during both markets. The West Texas oil patch is a small community that thrives on industry chatter, and we're starting to hear the right things about activity increases in the second half of the year. Thus far, we have seen a few operators take advantage of an elevated strip to accelerate what remains at their drilled uncompleted inventory, which directly led to us adding 1 million tons of incremental allocated volume through year-end. The limited response by most public E&Ps to date is not all that surprising, as they will likely evaluate the 2027 curve around midyear prior to making capital allocation decisions. It's not going to take many crew additions for the sand supply to get tightened. Today, we estimate approximately 75 frac crews operating in the Permian. Due to the increase in sand intensity of completion processes over the past few years, we believe a 10% increase in frac activity would conservatively add north of 7 million tons of incremental sand demand. Based on what we know about the market, it's going to be tough for the industry to produce enough to meet that demand, much less transported to the well sites. While we haven't seen meaningful improvement in pricing just yet, you can feel the stage is getting set. While we remain cautiously optimistic on higher mine gate pricing, we have already witnessed higher logistics pricing. Last year was the perfect storm for poor logistics pricing. Post liberation day, we saw both falling activity in the Permian, along with weakening trucking rates nationally. Adding the impact of the June Express ramping midyear, and trucking rates fell below the levels we saw during COVID in the second half of last year. Margins for third-party trucking rigs turned negative in the fourth quarter. That rubber band finally snapped in early January as a small ramp in activity exposed the fragility of the logistics network in the Permian. We saw a spike in trucking rates even before the Iran conflict, and late February, higher diesel prices led to another round of rate increases. In the over-the-road market nationwide, tender rejection rates in March were approximately 14%, defined as typical of seasonal dips. This signifies a tighter, more expensive freight market with rates holding more than 800 basis points higher than 2025 levels. Rising rates nationally will pull rates higher in West Texas as carriers must now keep up with the over-the-road market. Although there is always a lag in passing those higher rates through to our customers, we did witness mid-teen logistics margins in March compared to the low single-digit margins in January and February. Higher trucking rates can also be a tailwind for higher mine gate pricing. Disadvantaged mines that are several mileage bands further away from activity sites are less competitive when hauling rates normalize. Higher rates also make the value proposition of the Dune Express even more obvious. Trucking rates in West Texas likely have more room to run as rates in the Permian are still about 10% below national over-the-road rates. Historically, Permian trucking rates are usually at a premium to the over-the-road market due to the wear and tear of driving on lease roads. Increased logistics pricing typically front runs increased mine gate pricing, so the improvements we are seeing now are very welcome. Moving to our financials. First quarter 2026 revenue of $265.5 million broke down to the following: proppant sales totaled $105.6 million, power equipment sales, $3.3 million; logistics, $139.1 million, and power rentals added $17.5 million. Total proppant sales volume was up sequentially to 5.7 million tons, which does not include approximately 130,000 tons of third-party sand purchases. Our logistics business set a quarterly delivery record of 5.5 million tons. Our average sales price for proppant for the first quarter was approximately $18.19 per ton, not including shortfall revenue of $1.9 million. For the second quarter, we expect volumes to be up sequentially, with the average sales price to be slightly below $18 per ton. We are effectively sold out for Q2. First quarter cost of sales, excluding DD&A, were $214 million, consisting of $74.7 million in proppant plant operating costs, $2.1 million for power equipment costs, $127 million of service costs, $5.9 million in rental costs, and $4.3 million in royalties. For the first quarter, per-ton proppant plant operating costs were approximately $13.86, including royalties, up sequentially from the fourth quarter. Higher expenses related to maintenance activities following the winter storm at our flagship current facility were the primary driver of the elevated OpEx per ton. Q1 cash SG&A, excluding litigation and nonrecurring items, was $23.3 million. SG&A, excluding litigation expenses, is expected to average approximately $21 million to $22 million for the remainder of the year, per quarter. Growth CapEx for the quarter was $7 million, the majority of which was tied to our Power segment and maintenance CapEx of $24.6 million. Q1 will represent the high watermark for capital spending in our Standard Logistics business for 2026, as spending was primarily tied to essential equipment and preparatory work ahead of the Twinkle dredge deliveries. We are adjusting our 2026 CapEx guidance to approximately $350 million to $375 million due to bringing the 240-megawatt purchase on the balance sheet with the recent convertible offering. Maintenance CapEx of approximately $45 million is planned, with approximately $305 million to $330 million dedicated to growth, the vast majority of which is tied to the build-out of our private grid power business. Looking ahead to the second quarter, we are forecasting sequentially improved sales volume. We are effectively sold out of our productive capacity for the second quarter, as the step-up in production would likely require incremental personnel that current sand prices do not justify. Additionally, our visibility to second-half activity levels and, consequently, volumes is improving rapidly. Due to the increased fixed cost absorption and improved production efficiency, OpEx per ton is forecast to climb in the second quarter to approximately $12.75. OpEx per ton is expected to continue improving over the remainder of the year as new operating processes have begun bearing fruit at our fixed mines. In the first quarter, our logistics business was impacted by a spike in third-party trucking rates and a late-quarter increase in diesel prices. However, as mentioned, logistics margins improved progressively throughout the quarter from low single digits in January to mid-teens by March. We are currently forecasting mid-teens logistics margins for Q2. Additionally, as previously mentioned, Atlas's power business is building contracting momentum rapidly. During the first quarter, the company executed multiple contracts spanning upstream and midstream microgrid projects and bridge power deployments in the commercial industrial market. We expect to generate approximately $35 million in incremental adjusted EBITDA over the remaining 9 months of 2026 from bridge and microgrid deployments. Looking at the current run rate for March EBITDA and with the incremental contributions coming from our Power segment, we expect Q2 EBITDA to be approximately $50 million. I will now hand the call over to our Executive Chairman, Bud Brigham, for some closing remarks before we turn the call over for Q&A. Bud Brigham: Thank you, Blake. First, I'm going to start with some context for my comments. It was 35 years ago as a young geophysics that I sit out on my own with a small amount of capital and founded Brigham Exploration. Our plan was ambitious to leverage cutting-edge technology to out-innovate the competition and create lasting value for shareholders. By hiring exceptional people, aligning them tightly with our investors and empowering them in an entrepreneurial innovative culture, that model delivered 3 IPOs and numerous successful exits. Along the way, our E&P companies drove several industry-transforming advancements. In the 1990s, we pioneered the use of 3D seismic, delivering unprecedented exploration success rates, leading to our first IPO in 1997. In 2004, we were an early mover with horizontal fracking in the oil plays and built a position in the Bakken. In 2007 and 2008, we began outperforming peers in the Bakken, in part by increasing frac stages. In 2009, we completed the first successful 2-mile-long lateral with over 20 frac stages, which extended the Bakken play more than 70 miles to the west and accelerated development across all the major U.S. shale basins. And in 2014 and '15, Brigham Resources successful wells extended the Delaware Basin significantly to the south. Then in 2017, we founded Atlas and brought that same innovative spirit to oilfield services with 4 more first. First, our team designed, permitted and built the industry's first and only long-distance sand conveyor system, widely believed impossible at the time, which reliably delivers premium proppant 42 miles into the heart of America's most prolific producing region. We were also the first to autonomously truck proppant, the first with double and triple trailer configurations in U.S. oil fields and the first and only company to dredge mine proppant in the Permian Basin. As John and Blake have shared, we're only getting started. Our proven ability to innovate and execute large complex infrastructure projects gives us a unique advantage in addressing today's energy challenges. And of course, over that 35-year career, I've experienced many cycles and disruptions, but I've never seen demand inflections as powerful as the ones we're witnessing today. As the largest premier proppant and logistics provider in the world, we stand ready to respond. We are exceptionally well-positioned to support the delivery of incremental oil supply to meet global demand, demand which has only intensified with the recent Middle East disruption. As in the prior up cycles, we are positioned to deliver strong cash flow growth via proppant and logistics over the next several years. But what makes this cycle strikingly different for Atlas is that we're also optimally positioned to help meet America's rapidly expanding power needs. Our recently announced power contract, combined with the global framework agreement we just signed with Caterpillar, gives us both surety of supply and the scale to be a leading player in the fast-growing private power market. With these milestones and those still to come, we are clearly signaling our capabilities to both investors and customers facing acute grid constraints across Texas and the United States. The future for Atlas and Power is here, and I believe we're emerging as a leader in this critical market. Thank you for joining us today. I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] The first question is from James Rollyson from Raymond James. James Rollyson: John, maybe start with you on a question on power. If we go back just a quarter ago, you were kind of focused on the commercial and industrial space, obviously targeting a specific customer with the original 240 megawatts. And as you've upped that ante by a pretty large amount with the global framework agreement with Caterpillar, and you guys mentioned that people are now calling you instead of the other way around. I'm curious if that end customer has shifted over to the data center guys or not just given the magnitude of the power you guys are looking to add. John Turner: Yes. Thanks, Jim. I'll start, and then, Tim, you can add to this. Yes, Jim, you're right. I mean the GFA or the global framework agreement has had a profound impact on Atlas' commercial opportunity set. Before the agreement, our pipeline was weighted towards smaller industrial deployments. The combination of secured supply and access to the premium equipment from Caterpillar has changed the customer conversation that's really been overnight. Both the size of deployments we're being invited into and the quality of the counterparties has significantly changed as well. And then like I mentioned on my call, I mean, reverse inquiries are now active. We're having a lot of reverse customer inquiries now on a daily basis. And that's a meaningful part of why we're so optimistic about our path forward with power. Tim, do you want to add anything to that? Tim Ondrak: Yes. I think as John mentioned, we're getting a lot of inbounds. And the goal of signing the global framework agreement was to secure power for the opportunity sets that we had in front of us, which were heavily weighted towards as John mentioned, smaller industrial deployments. And when I say small, they're 50 to a couple of hundred megawatts. And since signing the global framework agreement, we've started to get some inquiries from some of the bigger data center projects. So, I think our queue going into that as far as an opportunity set was roughly 4 megawatts or 4 gigawatts. And I would say, since signing that agreement, that queue has grown to somewhere between probably 8 and 10 gigawatts. And these are quality projects where we've gone through a stage of vetting to see if they're real and have determined that as the project moves forward, we would like to participate. James Rollyson: It sounds like you can place a lot of equipment with a smaller number of customers. And then maybe as a follow-up, kind of switching gears over to the sand and logistics business. Blake, you talked about incremental opportunities and kind of how -- we've heard this earnings season, some of that early indication of recovery of activity in the U.S. land and obviously, the Permian will be part of that. But I'm curious, as you think about incremental sand volumes where you're sold out today, what kind of price level do you need for sand to actually consider adding to your capacity, mining capacity to actually provide that sand? Blake McCarthy: Yes, that's a good question, Jim. And I think that, that question basically assumes that at any one point, a player has control over the price of sand, which, as you know, I mean, it is such a hyper volatile commodity where, as we talked about in the past, right, supply gets a little bit over demand just on a macro basis, and it quickly falls to that marginal price of production for the industry, which is where it's been at for over 18 months now. And the thing about sand is though it is the critical raw material to the completion process. It gets a little bit undersupplied and it doesn't just move $3, $4. It moves up in a hurry. I think that as the largest player, right now, there hasn't been a lot of movement in price. We've seen some stuff around the margins. I think one encouraging thing we've seen is some of the more astute operators have tried to move forward their RFP processes where typically, we're not talking about this stuff until November. And some of the smarter guys are doing exactly what I would do, which is like, hey, the writing is on the wall on this, things are going to tighten up. If I could lock in now, that sure be good for my well cost come '27 and going forward. I think that where we stand is like, hey, we're more than happy to help you secure your volumes, but we're not going to lock in these prices for the long-term. So that's a bit of give and take. In terms of adding production, for us, like if you look at where we're at now versus what our nameplate is, like there's still some upside. But that really would require adding ships and probably some minimal capital investment. And it's just something that we're not really going to be doing until you get to north of that $23 to $25 range on sand pricing because that's really where the industry starts earning its cost of capital. In a perfect world, we keep sand in those type of normalized prices. That's really a sweet spot for Atlas, and it doesn't encourage incremental supply. But sand always moves -- when it goes down, it goes down in a hurry, when it goes up, it usually goes way higher than we ever expect. So, it's something that we're watching very closely. John Turner: Yes. I think one thing to note is back in 2021, sand was around $20 per ton. We got to March of '22, it was north of $30 on its way to $40 a ton. So, like Blake said, I mean, sand prices swing wide. I mean, they're obviously very volatile. So, it's just something that -- when that supply-demand balance when we're undersupply, when that shifts, it shifts quickly. Operator: The next question is from Derek Podhaizer from Piper Sandler. Derek Podhaizer: So encouraging to hear all the comments around the logistics margins going from the low-single digits to about the mid-teens here and guiding that for the next quarter. On the trucking rates specifically, how should we think about what a 10% uplift in the Permian activity would do to those trucking rates, which appear to be already tightening. Blake, I think you said they're still 10% below the national average. So maybe just some additional color around where you think trucking rates can go if we do get an uptick in activity here. Blake McCarthy: Yes. That's a great question, Derek. Apologies in that trying to pin down where trucking rates are right now is like trying to hold on to Greece pig. There's a lot of moving variables. Yes, as I mentioned in the prepared remarks, the typical relationship with over-the-road, like over-the-road national freight right now versus Permian rates is inverted. Typically, you need rates at like a 10% to 20% premium to over the road to incentivize drivers and truck owners to beat up their assets in the oilfield. But currently, Permian rates are still at a discount. The other thing that we're really watching is diesel. That's a direct hit in the wallet for trucking owner operators. And while most of our customers have been quick to work with us on passing those costs through, we have heard quite a few anecdotes that certain operators refusing to accept those pass-throughs or only accepting a percentage of that. In my opinion, that's really shortsighted as trucking margins were already razor thin across the industry. So if not in the red for the smaller trucking companies. So, forcing them to eat the rapid diesel inflation just invites a trucking crunch. And we're starting to see that as industry watchers can tell you that several trucking companies are choosing to park assets versus operating at a loss. That's continued tightening in the trucking market. That's something we're certainly watching as the higher trucking rates go, the more important the location of your mines and the breadth of your logistics network, the more important that becomes. So, the combination of our mobile mines in the Midland Basin and of course, logistical advantages provided by the Dune Express for our fixed mines that service the Delaware, that puts Atlas in a really strong position versus many of our competitors' mines and actually probably adds to our ability to push mine gate pricing. In terms of what it means in terms of like, hey, you see a 10% move in trucking rates and what that does to our margin profile. That advantage, that margin advantage provided by the Dune Express, that just throws gas on that fire, right? Because if you're taking those trucking rates are being forced by cost inflation to the owner operators, yes, we get hit on that on the final haul from like end of line or from the state line facility to the well site, but it's such a smaller percentage of the overall logistical haul because of how much of that chunk of that haul is covered by the Dune Express. And so, it becomes -- it really starts to push our incrementals. We were encouraged to see the improvement from the low-single digits into the mid-teens. We're watching that now and expecting it to kind of be in that mid-teens margins through this quarter. But as we move into the back half of the year, it's certainly something we're going to start pushing. John Turner: Yes. And I think the diesel prices, I mean, that's obviously a big tailwind on the Dune Express because that's electric, moving that sand 42 miles via an electric conveyor that's also big. And I also think there's also a shortage of trailers lead time on those trailers. Now a lot of your trailer manufacturing comes from Mexico, there's a tariff on it. So, I think you're going to start seeing shortages in a lot of places here as we move through the -- as we move into the rest of the year. Derek Podhaizer: That's all really helpful color. Right. So, we talked about the demand is not a problem. Maybe thinking about the supply side. I think in previous calls, we've talked about the Tier 2, Tier 3 sand mines out there. I think we've had something around like 20% of supply coming out of the market. But if there's going to be this call on demand around, I think you said 7 million tons for this year if we start adding completion crews back. How do you think about those mines being incentivized to come back to the market? Because when these mines shutter, they never truly shutter or come out of the market and they can come back to life pretty quickly. So, have you surveyed and kind of looked around the supply stack to see which mines have the ability to come back, maybe some that have been truly taken out of the market? Just maybe some comments and color around the supply stack as you see it today and what it could -- and how it could respond if there is a big call on demand. John Turner: Yes. I can start with that. I mean we can only go by experience of what we've seen in the past back when prices really started when we saw this change flip in the supply and demand balance. I think a lot of -- a number of mines that had been open, had closed were slow to open their doors and commit a lot of capital until they had longer-term contracts. And so I think that's really going to impact that. I also think your proximity mines are going to be a lot more advantaged position here because of where diesel rates are and where the trucking rates are. Do you want to add anything? Blake McCarthy: Yes, that interplay between just the logistics haul, right? Like it's not just their cost to produce at the mine, but it's also how mines that are located at the kind of the fringes of the plays. If you got a mine that's to the extreme south or something like that, like with what you're seeing in terms of diesel inflation, those haul become really cost prohibitive. And so, you really need to see mine gate pricing move in a big way to incentivize those mines to really to gear up. And like John said, like it's it'd be a little foolhardy to do it like without, hey, I can get a spot sale here at this price, which would -- if I extrapolate that out 2 years, it incentivizes that capital investment. But if you don't have a contract, that's a heck of a bet. Bud Brigham: And related to all that, we should also mention personnel. I mean, it's a real challenge to find labor that can operate these plants. And so that's going to be a challenge as well. John Turner: And really, the data center boom that's going on in what I would call Central Texas, maybe Central West Texas a little bit, around Abilene and places like that, is really pulling a lot of workers out of the oilfield right now. And so, because there's all this construction trades and things like that, that's typically where we go to pull our manpower from. It's making it difficult to hire. So, there are a lot of other factors going on here than there were back when these mines opened in 2022. I mean, there's a lot more going on. Operator: The next question is from Sean Mitchell from Daniel Energy Partners. Sean Mitchell: Maybe turning back to power, can you guys talk about the specific equipment that CAT is providing to you in this global framework agreement and why these units are probably well suited for the private grid versus other options? Tim Ondrak: Yes. Sean, this is Tim. I'll take that question. The assets we're purchasing from CAT are really two engine platforms. One is a medium-speed engine, one is a high-speed engine. Those are both designed to operate in continuous duty. The medium-speed is a 4-megawatt unit. The high-speed engine is a 2.5-megawatt engine. And we feel like these are assets that we want to own and operate for decades. They each have different characteristics that help support our customer needs. So, it's really kind of project-specific on what units we would put on specific projects. But our confidence is not only in the history of those engines -- I think one of them has not had a design change in 20 years, which tells us it's out doing the work and will continue to. And the other has had some design changes, there are some different models available to us under that agreement. And we can use those models to match customer demand just depending on load requirements on an operating basis. But what excites us about both of those is that they come from probably the most respected OEM in that space, and really in several spaces, in Caterpillar. The backing we get from that helps us predict maintenance costs, helps us to address issues quickly if they arise, and ultimately supports a Tier 1 portfolio of assets that we operate for customers. Operator: The next question is from Scott Gruber from Citigroup. Scott Gruber: Maybe turning to the OpEx side on your sand production business, I want to double check the OpEx per ton guide embedded in the Q2 EBITDA guidance. I think I heard $12.45 per ton, so I want to check that. And then obviously improvement will come with the new dredges, where do you think OpEx per ton lands now on a normalized basis, and when do you think you can get there? Blake McCarthy: So a correction on that, Scott, the OpEx per ton guide for Q2 -- embedded in the Q2 guide is $12.75. Yes, thanks for clarifying. I have a tendency to trip over my own tongue. Yes, I think that we're obviously, it's a fixed-cost absorption business. And so, the more - now that we're starting to get closer to sold out, that is sold out for Q2 at the current production capacity, that's obviously a tailwind. We're still in the process of commissioning the new dredges at the flagship Kermit mine. Once we get those on, that's going to lower our variable cost, and that will start to flow through in terms of operating leverage. As we push forward through the year, that will continue to trend down. We'll probably get an 11-handle on it towards the September–October timeframe. Obviously, that continues to be based around volume. But longer-term, our mines have been operating at elevated OpEx for a while now, but we still got -- our goal is to get back to the high 10s on a full run-rate basis once we get them optimized across the company. And we've got -- I think there's a lot of stuff going on under the hood that we're very excited about in terms of process improvements at the plants, more efficient maintenance, and things like that. And we're really making some real headway there. And so, I think it would continue to be a positive trend as we work through the rest of the year. Scott Gruber: I appreciate that. And then turning back to logistics, obviously encouraging trends on the trucking side, and you mentioned how that will -- is there a positive influence on Dune Express pricing? I'm wondering kind of the timing around that poll. Are your Dune Express volumes, is the pricing on those volumes locked in for the year, or could those reset at some point this year? Blake McCarthy: A lot of those contracts have either biannual or quarterly pricing visits. Right now, like I said, it's still early, so you haven't seen much movement in terms of actual sand pricing. You have seen movement in trucking rates. With the Dune Express volumes, we really look at those kind of as a total cost of delivered tons. So, like, yeah, we add those together, and it's through the lens that we want the operator to look at, because that's certainly going to be to our advantage as we move through this cycle. It's probably more, you know, as later in the year, it might be a slight tailwind. For those bigger contracts, it's going to be a bigger tailwind as we move into '27. John Turner: But our trucking pricing resets a lot more frequently than sand pricing does. Yeah, it's quarterly on the sand pricing. I mean, on the trucking prices, sorry. Scott Gruber: Yeah, I got you. But those kind of integrated deliveries, the upside really comes next year on the margin front. Blake McCarthy: That'll probably be the biggest lever. Operator: The next question is from Keith Mackey from RBC Capital Markets. Keith MacKey: Maybe just sticking on the sand price theme, can you just comment on your contract durations and contract amounts? Roughly how much of your sand could reprice between now and the end of the year based on the contract or agreement schedule that you currently have in place? Blake McCarthy: Yeah. We tend to try to contract as much of our sand as possible through the RFP process. I think that there's probably in terms of stuff that's fully free float to spot. If you look at the back half of the year, we could probably reprice up to 20, 25% of our contract portfolio. On top of that, as people look to lock in tons for '27, that probably opens the conversation to, hey, let's move the entire contract to move levels there. So, there is some upside to pricing as we move through the rest of the year, but it's really to reprice the entire contract portfolio. It's going to be kind of as you move into that full 2027 RFP season. Keith MacKey: Okay. Makes sense. And then can you just run us through a little bit more on the dredge implementation and the timelines there for the new twinkle dredges that you've got coming in? And just how does that align with the OpEx per ton guidance that you've been running us through, Blake? John Turner: On the timing, the first twinkle dredge on location, it's built. They're expanding -- they're big in the pond right now. We would expect that dredge to be floated probably by the end of the quarter, when I say quarter -- into the second quarter. The other -- the second dredge arrives here, I believe, starts arriving here probably in June sometime. And then I think they've got to construct the dredge on site. And I would say that we probably won't see a full impact on our -- from the dredge probably until end of the year, fourth quarter, maybe. I mean, because I don't think we -- while they'll both be floated probably in the third quarter, I think it's going to be -- give some time for us to commission them and get them running where they need to be. So, I mean, the guidance that we've given, I don't think it incorporates this. Blake McCarthy: So, there's no impact from that in Q2. And then the way to think of that from a model mechanic standpoint is that right now, that variable cost of sand is closer to $5.50 to $5.75. When those dredges get running, that number gets -- has a four handle on it. And so that really starts to flow through in terms of, like I said, the variable cost operating leverage. Operator: The next question is from Don Crist from Johnson Rice. Donald Crist: On the global framework agreement, I just wanted to ask about the delivery schedule. Is it pretty constant over the '27 through '29 period? Or is it more back-end weight? Just kind of any color around the delivery schedule on that GSA? Tim Ondrak: Yes, Don. So, the delivery schedule on 2027 is kind of last three quarters of the year. We've still got 120 megawatts from our first order kind of pre-framework agreement that we expect to be able to slot in there. And then in 2028, it's fairly constant and accelerates as far as overall size of megawatts in our delivered slots. Blake McCarthy: Yes. So, I think it's more weighted to '27 and '28 with a lesser commitment in '29. But as Tim and John talked so enthusiastically about, like as we move forward and actually start to contract some of these assets, we'll probably be looking -- we have the ability to upsize that commitment at the later stages of the contract and it's something that we're going to be exploring. Donald Crist: And just from a kind of contract timing, would your -- and I know it's very fluid and these things have to go through boards and all kinds of things. But just are you -- is your goal to have that contracted, that incremental capacity contracted, say, nine months before it is delivered or is that too aggressive? John Turner: I think what we found out and obviously, what others have found out is that talking about timing on these contracts is very difficult. But our goal is to get it contracted as soon as we can. But I don't want to put out any timelines out there because they take time. And these are very complicated transactions, complicated contracts and it takes a while for negotiation because we're talking about 15- to 20-year power agreements with counterparties. And so, we don't want to put a timeline on that what our goal is. I mean we just want to make sure that it's contracted when we start deploying it. Blake McCarthy: Yes. The one thing I will say is that compute power is a real bottleneck. And so, there is a lot of urgency to move from this customer base. And so obviously, there's urgency on our end is like, hey, we want to get these contracts. There is a lot of urgency from them that's like, hey, I need this power and I need this timeline. And there is a considerable construction runway where you actually go from, hey, we signed a contract to where they're actually providing power or getting -- we're providing power to them. And so, it is to both parties' advantage for these negotiations to move as quickly as possible. But as John said, they're really complicated negotiations big contracts. And so, each one is like an M&A transaction. And so -- and when you're signing contracts of this term, it's infrastructure. You want to make sure you get it right because you got to live with those contracts for a very long time. Tim Ondrak: Yes. And I think the other element that has kind of changed the dynamics around those discussions is just the number of inbounds we've gotten and the counterparties. And so, when we look to build a contracted business that's 15-, 20-year commitments, I think we did a great job on asset selection in the global framework agreement. I think we've got a great team. And the other part that makes a good deal is a good counterparty that we want to work with for that period of time. And so given what's in our pipeline and how quickly it's expanded, we're in a very fortunate position where we've got a little more say in who our counterparties are going to be for those contracts. And so obviously, something we're all looking forward to, and we'll share details as they come. Donald Crist: I appreciate the color. When a 500-megawatt contract can be well over $2 billion. It's understandable that it takes a while to get across the finish line. So, rooting for you. Operator: There are no further questions at this time. I would like to turn the floor back over to John Turner for closing comments. John Turner: Yes. Thank you, operator. And I want to thank everyone for all the questions today. And before we close, I want to step back from the quarter and tell you why I believe Atlas looks fundamentally different 2 years from now than it did or than it does today. Start with what we announced last month, the 120-megawatt power deal, the power purchase agreement that we signed on April 1, which is expected to generate $50 million to $55 million of annual adjusted free cash flow once it's fully deployed. Returns on individual contracts will vary. They will depend on the customer and the market, term length, contract structure, et cetera. We would not expect every megawatt across our portfolio, our broader portfolio to deploy at these same economics. But this contract is a meaningful proof point of what the model can produce, and it represents a small fraction of the 2 gigawatts we expect to own and operate by 2030. We're not a company adding power at the margin. We're building a long-duration contracted cash flow stream on top of the sand and logistics franchise that is self-inflected at this time as well. And we are doing it with secured supply from Caterpillar at a moment when -- and obviously, Caterpillar is a great counterparty. And it's at a moment when generation equipment is one of the scarcest assets in the U.S. economy. And the logistics business is the engine that funds this transformation. And that engine is accelerating. We're effectively sold out as we've talked about for the second quarter. We talked about our logistics margins are now running in the mid-teens with that strength expected to carry through the second quarter, and we are guiding to approximately $50 million of EBITDA in the second quarter, which is roughly 76% sequential increase from the first quarter. The conditions Blake described, limited completion crew availability, tight equipment and rising trucking market rates, historically, we're the most reliable supplier in the basin and that is Atlas. And we've seen that in the past. We've also recently positioned our balance sheet to fund this growth without compromising returns. We talked about that through the convertible pricing and which, I guess, -- and then as Bud noted, in his 35 years in the industry, he has never seen two demand inflections of this magnitude converge at the same time, surging global oil demand on one side and then the acute U.S. power constraints on the other. And Atlas is positioned itself to serve both of those. And we have the assets, the contracts, the supply chain and the capital to deliver, and we intend to. Thank you for your time and your questions and your continued support. We look forward to updating you guys on our progress next quarter. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2026 First Quarter Earnings Conference Call. This call is being recorded. [Operator Instructions] Thank you for participating in Tennant Company's 2026 First Quarter Earnings Conference Call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin. Lorenzo Bassi: Good morning, everyone, and welcome to Tennant Company's First Quarter 2026 Earnings Conference Call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Huml, President and CEO; and Fay West, Senior Vice President and CFO. Today, we will review our first quarter performance for 2026. Dave will discuss our results and enterprise strategy, and Fay will cover our financial. After our prepared remarks, we will open the call to questions. Our earnings press release and slide presentation that accompany this conference call are available on our Investor Relations website. Before we begin, please be advised that our remarks this morning and our answers to questions may contain forward-looking statements regarding the company's expectations of future performance. Such statements are subject to risks and uncertainties, and our actual results may differ materially from those contained in the statements. These risks and uncertainties are described in today's news release and the documents we file with the Securities and Exchange Commission. We encourage you to review those documents, particularly our safe harbor statement, for a description of the risks and uncertainties that may affect our results. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items. Our 2026 first quarter earnings release and presentation include the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results. I'll now turn the call over to Dave. David Huml: Thank you, Lorenzo, and good morning, everyone. Thank you for joining our Q1 2026 earnings call. This morning, I will begin with an overview of our first quarter performance, highlighting the key takeaways from the quarter. I will also provide an update on our North America ERP recovery, discuss progress in our AMR business and TNC robotics venture, share our outlook for the year and outline how we think about capital allocation more broadly. Fay will then walk through the quarter's financial results in greater detail and cover our full-year guidance. With that, let me start with our performance in the first quarter of 2026. Orders totaled $327 million, an increase of 10% year-over-year, demonstrating demand momentum. Growth was broad-based and driven by increased customer demand, execution of our enterprise growth strategies, and continued strength in robotics. Backlog increased approximately $32 million from year-end to $109 million. This growth provides clear evidence that our customer relationships remain strong and end market demand is healthy. Overall, our performance underscores the strength of our foundation and reinforces that our portfolio, service model and growth strategies are resonating as execution has stabilized. Net sales increased almost 3% year-over-year with pricing realization and favorable currency largely offsetting North America volume declines. As operations stabilized in North America, customer activity and fulfillment improved meaningfully in February and March, consistent with our expectations following the January inventory shutdown. As anticipated, gross margins were pressured in the first quarter, driven by incremental labor, freight and expediting costs associated with ERP recovery efforts earlier in the period. Importantly, margins improved sequentially each month as execution and throughput strengthened. The gross margin exit rate on an enterprise level was approximately 40%, and this supports our confidence for continued gross margin recovery as the year progresses. The gross margin improvement flowed through to EBITDA and reflects improving operational momentum. Fay will further walk through the details and outlook in her remarks. Next, let me spend a few minutes on our ERP recovery, which was the central operational focus of the quarter in North America. Our top priority entering 2026 was to stabilize our North America operations, restore reliability for our customers and reestablish a solid operating foundation following the ERP go-live disruption. The actions we took in the first quarter were deliberate and aligned with that goal and are reflected in the operating performance I just highlighted. By the end of the quarter, core workflows, including order management, production scheduling and fulfillment, were stable and operating at scale. Stabilization was the first phase, not the end state. With the system operating reliably at scale, our focus has shifted from fixing functionality to driving efficiency and optimization. The work underway today is centered on addressing the friction points identified during the stabilization phase, phasing out remaining manual workarounds and strengthening end-to-end execution across the business. As we move through the second quarter, the emphasis is on improving throughput, labor productivity and system-enabled performance. These efforts are already underway and the steady improvement we saw through the first quarter, including a stronger exit rate in March, supports our confidence in continued efficiency gains and gross margin recovery in the second half of the year. The lessons learned from our North America ERP implementation are informing how we approach the remaining phases in EMEA, which were originally scheduled for early 2026. We have intentionally pushed the EMEA implementation beyond 2026, allowing the organization to remain fully focused on recovering North America execution before advancing to the next phase. As our plans continue to evolve, we will keep you updated on timing and expected costs as we gain greater clarity. I want to thank our customers for their continued partnership and patience as we work through this transition. I also want to recognize the extraordinary effort of our employees across the entire organization. This was truly a company-wide effort with teams working together every day to support our customers and restore reliable execution. The dedication of our people and the strength of our customer relationships are 2 of the reasons I remain confident in the path ahead. I now want to provide an update on the exciting progress we are driving in our robotics business. Since 2018, we have earned the trust of the largest, most forward-looking flagship customers globally. We have shipped over 11,500 robots cumulatively. We have built a growing and profitable U.S.-based robotics business and established ourselves as a world leader, driving the robotic cleaning disruption. I'm proud of what we've built, but I also believe we're just getting started. The signals from the market today are clear. We are seeing double-digit market growth rates and increasing demand from customers across vertical markets around the world who are serious about adopting robotics. In Q1, our AMR sales, inclusive of equipment and autonomy service fees, were approximately $27 million, representing 9% of total net sales in the quarter and 85% year-over-year robotics growth. We see the inflection point in customer interest, and we are acting decisively to capture near-term growth and drive this market towards the tipping point in adoption. More specifically, I would like to highlight 5 key activities this quarter. First, we are ramping our TNC robotics venture by hiring and onboarding new roles and activating our growth strategies. We're operating with the speed and urgency of an entrepreneurial start-up to accelerate AMR growth by leveraging the full power of our $1.2 billion global core business. Our proven product portfolio, preferred brands, extensive channel reach, 4,000-plus employees, including 1,000 field service technicians, position us to drive a winning disruption of our own core industry over the long term. Second, we delivered another defining milestone by extending our exclusivity arrangement with Brain Corp until 2029 with an evergreen notice period. This preserves Tennant's exclusive access to the BrainOS autonomy platform in our category, strengthens our partnership alignment and reinforces our clear division of responsibilities. Leveraging the strengths of each partner, Tennant owns the customer relationship, equipment design, direct sales, service and life cycle support, while Brain Corp advances the foundational AI, spatial intelligence and software that power our portfolio. With exclusivity secured, we have the conviction to invest aggressively, and we plan to bring 10 new AMR products to market over the next 24 months. This is the power of 2 global leaders joining forces to aggressively drive tangible results. Third, the strength of this partnership was demonstrated with the launch of BrainOS Clean 2.0 and SelfPath AI. SelfPath enables advanced autonomous navigation, allowing machines to independently generate and continuously adapt cleaning routes in real time, eliminating the need for manual route training and retraining. This increases customer adoption, improves deployment efficiency and optimizes performance in the real-world applications. Together, these capabilities represent platform-level innovation and a compelling example of physical AI delivering measurable value in dynamic commercial environments. Fourth, we significantly expanded our addressable market with 2 strategic product launches. The X16 SWEEP, our first robotic sweeper, is an industrial-grade machine built for rugged, reliable performance in demanding warehousing, logistics and manufacturing environments. This launch is another growth catalyst. Sweeping is a broad-based need across nearly every industrial vertical. And because pre-sweeping is required before scrubbing in most cases, the X16 expands our robotics portfolio from best-in-class scrubbing to adjacent sweeping use cases. Our customers made an industrial robotic sweeper a clear priority. The X16 SWEEP meets their needs and early demand signals are very strong. We also introduced the X2 ROVR, our small format scrubber that brings superior cleaning performance, ease of use, competitive value proposition and unmatched maneuverability through robotic cleaning of small shared spaces in retail, grocery, schools, convenience stores, and the tight spaces inside larger facilities that bigger machines simply cannot reach. This positions us to further expand our addressable market and capture share in this high-growth segment. Together, the X16 SWEEP and X2 ROVR extend our robotic cleaning benefits to more customers, more verticals and more applications, accelerating our growth trajectory and reinforcing our leadership position in robotics. Fifth, we are aggressively expanding our channels to market for Tennant robotics. We are launching new products, programs and compelling offerings specifically designed to accelerate adoption with building service contractors and grow with our distributor partners worldwide, making it simpler and more rewarding for them to promote our robotic solutions. Our new X2 ROVR is tailor-made for these channels and their end customers in vertical markets like retail, grocery, schools and convenience stores, customers they already support every day. And we're not building this from scratch. Tennant already has deep established relationships with BSCs and distributors across the globe. One thing that truly differentiates us and is highly valued by building service contractors is our unmatched support ecosystem, over 1,000 factory direct service technicians worldwide who can service and support our robots like no competitor can. That is a significant competitive advantage that gives our partners and their customers total confidence to adopt and scale with Tennant robotic cleaning. The global robotic cleaning market is dynamic, and we remain closely attuned to the competitive landscape. Our focus is on what we can control, the proven strength of our business, the entrepreneurial agility of our T&C venture and a robotic product portfolio that continues to expand. Our market coverage is broadening. Our partnership with Brain Corp is stronger than ever and the demand trajectory we are seeing reinforces our conviction. Taken together, these advantages give me real confidence and genuine excitement in delivering our target of $250 million in AMR revenue by 2028. Turning to the remainder of 2026. Our first quarter performance, strong order momentum and continued ERP progress support our confidence in the full year plan, and we are reaffirming our 2026 guidance. Before I turn the call over to Fay, I want to briefly frame how we think about capital allocation more broadly because it is a core part of how we create long-term value. Our capital allocation framework is straightforward. We invest first in the business to drive durable, profitable growth. We maintain a strong balance sheet and ample liquidity. We pursue strategic M&A opportunities that enhance our portfolio, and we return excess capital to shareholders. Strong execution and disciplined working capital management have supported solid free cash flow and the flexibility to advance our priorities. While operating cash flow has been temporarily impacted by the ERP disruption, we expect that impact to be transitory, and our overall free cash flow profile continues to support both growth and shareholder returns. We prioritize organic growth investments, particularly in R&D and operational improvements that strengthen our competitive position and enhance long-term returns. On average, we invest around 3% to 3.5% of sales in R&D and spend between $20 million and $25 million annually on CapEx, and we expect these levels to continue in the near term. We also manage liquidity and leverage with discipline so we can navigate market conditions and act decisively when opportunities arise. We remain within our stated leverage target of 1 to 2x adjusted EBITDA, and we intend to keep our balance sheet position to support both shareholder returns and strategic growth, including M&A. Returning capital to shareholders remains central to our capital allocation strategy. We intend to continue our long record of disciplined competitive dividend growth, and we also repurchase shares opportunistically when we believe the return profile is compelling. In the first quarter of 2026, we accelerated buybacks amid an event-driven dislocation in our share price that we believe was tied to the ERP implementation and not reflective of our core performance. We deployed $60 million to repurchase approximately 950,000 shares or 5% of beginning of year shares outstanding at an average price of $63 per share, an intentional high conviction decision we believe represents an attractive return for shareholders and is fully aligned with our stated capital allocation priorities. To execute this opportunity, we utilized a portion of our borrowing capacity, which increased leverage, but we remain within our targeted leverage range of 1 to 2x adjusted EBITDA. Importantly, we expect leverage to trend back toward the lower end of that range by the end of 2026, and this action does not preclude us from continuing to invest in organic growth or pursuing other strategic initiatives, including M&A as opportunities arise. As a result of our share repurchasing activities, we expect an approximately $0.15 net positive impact on EPS on a full-year basis. Reflecting our continued confidence in Tennant's strategic direction and commitment to disciplined capital return, our Board recently authorized a new 2 million share repurchase program. Together with shares remaining under our existing authorization, this brings total repurchase capacity to approximately 2.56 million shares or roughly 15% of basic shares outstanding, providing meaningful flexibility to continue returning capital opportunistically. M&A remains an important lever within our framework. Recent tuck-in acquisitions of distributors in EMEA have strengthened our portfolio and expanded capabilities, and we continue to evaluate opportunities that meet our strategic and financial criteria. Taken together, these actions reflect a disciplined and balanced approach to capital allocation, investing to drive long-term growth, maintaining financial resilience, pursuing strategic opportunities and returning capital when we see an attractive risk-adjusted return. We believe this approach positions us well to create long-term value for shareholders. With that, I will turn the call over to Fay for a deeper discussion of the financials. Fay West: Thank you, Dave, and good morning, everyone. Before walking through the quarter, I want to briefly address the impact of the North America ERP implementation on our first quarter financial results. As Dave noted, operational performance improved meaningfully as the quarter progressed. However, we estimate that the ERP disruption reduced first quarter net sales by approximately $23 million and gross margin by approximately $17 million. Of the lost sales, roughly 1/3 relates to parts and consumables and service, which we do not expect to recover. The remaining 2/3 relates to equipment, which we believe we can recover within the year. The net sales impact was driven primarily by a 2-week manufacturing and distribution shutdown in January to complete a full physical inventory count. The gross margin impact is comprised of approximately $11 million due to the lost volume from the shutdown, and approximately $6 million from elevated labor, freight and expediting costs during the post-implementation ramp-up. With that context, I'll now turn to our first quarter financial performance. In the first quarter of 2026, Tennant reported GAAP net income of $0.2 million compared to $13.1 million in the prior year period. The year-over-year decline was driven by gross margin compression associated with ERP recovery efforts and shifting customer mix, coupled with higher operating and interest expense. Operating expenses increased year-over-year, driven by unfavorable foreign currency, legal and financial advisory costs, higher compensation and benefits, and increased software subscription fees. Interest expense net was $3.4 million compared to $2.3 million in the prior year period, reflecting higher average debt balances, including borrowings to fund share repurchases, partially offset by lower average interest rates. Income tax expense declined year-over-year, reflecting lower operating income. For the quarter, our effective tax rate increased to 80.5%, primarily driven by discrete tax costs related to share-based compensation as a percentage of pretax book income. This elevated rate in Q1 is largely due to timing, and we continue to expect our full year effective tax rate to be within our guidance range of 24% to 29%. Adjusted diluted EPS was $0.58 for the quarter, down from $1.12 in the prior year period, reflecting lower operating performance as just outlined. I'll now provide some additional color on our non-GAAP items for the quarter. ERP project spend totaled $8.8 million in the first quarter. This included $5.6 million of implementation expense that were reflected in S&A and $0.6 million of ERP amortization. The remaining $2.6 million of costs were capitalized. We also recorded $2.9 million of legal and financial advisory costs related to the cooperation agreement with Vision One and $0.8 million related to restructuring, legal contingency and acquisition integration costs. Let's now look at the quarter in more detail. Consolidated net sales totaled $297.9 million, up 2.7% year-over-year. On an organic and constant currency basis, sales declined 1.9%, driven primarily by lower North America volumes early in the quarter related to the 2-week plant shutdown in connection with the physical inventory count. As a reminder, we group our net sales into the following categories: equipment, parts and consumables, and service and other. In the first quarter, equipment sales increased by 3.1%, parts and consumables decreased by 4%, and service and other sales increased by 10.6%. Equipment growth reflected continued momentum in our commercial product portfolio, including strong contributions from recently launched models and our growing AMR product portfolio, along with continued strength in our distributor and strategic account channels. This was partially offset by lower industrial equipment volumes in North America tied to the ERP-related plant shutdown earlier in the quarter. Parts and consumables declined year-over-year with the shortfall driven primarily by North America, where the 2-week plant shutdown delayed parts shipments in the quarter. Outside of North America, underlying parts and consumables demand was resilient, benefiting from disciplined pricing realization and continued strength in our distributor channel. Service and other growth was driven primarily by increased autonomy subscription revenue associated with our AMR products. The core service business experienced growth in EMEA and Latin America as we continue to make progress filling open service routes, gaining productivity across our field service organization and benefiting from prior year pricing actions. The strength of service and other, reflects the durable recurring nature of these revenue streams and the underlying growth of our installed base, including our expanding AMR fleet. Shifting to regional performance. On an organic basis, performance across the regions was mixed. In the Americas, sales declined 3%, driven primarily by lower volumes in North America due to ERP impacts earlier in the quarter. This was partially offset by continued pricing realization, reflecting the benefit of tariff-related pricing actions implemented last May. Latin America delivered a strong quarter with net sales up 9% organically, driven by volume growth and favorable mix. We continue to see strong commercial execution in Brazil and Mexico, including the rollout of the T260 and the expansion of our rental and strategic account programs. EMEA grew 1% organically, reflecting our second consecutive quarter of volume growth in the region. Growth was supported by disciplined price realization and strong equipment sales in France and Germany, where volumes increased at a double-digit rate, highlighting the strength of our commercial execution and the resonance of our products. In APAC, organic sales declined 2%. Growth in India and Korea continued and Japan returned to modest growth, but these gains were more than offset by ongoing softness in China due to excess manufacturing capacity and pricing pressure in mid-tier product categories as well as softer demand and project timing in Australia and parts of Southeast Asia. Gross margin in the first quarter was 38.1%, a 330 basis point decline compared to the first quarter of 2025. Sequentially, margin improved 350 basis points from the fourth quarter of 2025. Approximately 3/4 of the year-over-year decline was driven by incremental labor, freight and expediting costs associated with our ERP recovery efforts. The remaining 1/4 came from a shift in customer mix towards strategic accounts, which carry a different margin profile. Tariff and other inflationary pressures were fully offset by price realization and cost-out initiatives. Adjusted S&A expense for the first quarter was $88.2 million compared to $83.2 million in the prior year period. The increase was driven primarily by unfavorable foreign currency of approximately $3.4 million, higher compensation and benefits and higher software subscription and license fees. As a percentage of net sales, adjusted S&A was 29.6% compared with 28.7% in the prior year period, reflecting deleverage from these cost increases. Adjusted EBITDA for the first quarter of 2026 was $29.1 million or 9.8% of net sales compared to $41 million or 14.1% in the prior year period. The year-over-year decline primarily reflects gross margin compression, coupled with deleverage in S&A expense. Turning now to capital deployment. In the first quarter of 2026, Tennant used $31.2 million of cash for operating activities compared to $0.4 million of cash in the prior year period. The year-over-year decline in operating cash flow reflects 3 primary factors. First, lower operating performance in the quarter. Second, an increase in accounts receivable, driven in part by the timing of collections as receivables built in the first quarter from the strong shipment activity in March, while collections in the period reflected the lower shipment volumes from the fourth quarter of 2025. And third, a build in inventory and other working capital movements as we ramped production to serve demand. We expect operating cash flow to improve meaningfully through the balance of the year as receivables normalize, inventory levels rebalance and operating performance strengthens in line with the sequential improvement we are guiding to. We continue to view the first quarter dynamic as transitory and remain confident in our underlying free cash flow profile for the year. Liquidity remains strong. We ended the quarter with $82.6 million in cash and cash equivalents, and approximately $289 million of unused borrowing capacity under our revolving credit facility. We ended the quarter with a net leverage ratio of 1.78x trailing 12-month adjusted EBITDA, maintaining a strong balance sheet and financial flexibility. Moving now to our 2026 guidance. Based on our first quarter performance and the momentum exiting the quarter, we are reaffirming our full year 2026 guidance. Specifically, we continue to expect net sales in the range of $1.24 billion to $1.28 billion, reflecting organic sales growth of 3% to 6.5%. Adjusted EBITDA in the range of $175 million to $190 million, representing an adjusted EBITDA margin between 14.1% and 14.8%. GAAP diluted EPS of $4.05 to $4.65, and adjusted diluted EPS of $4.70 to $5.30, which excludes ERP modernization costs and amortization expense. Capital expenditures of approximately $25 million and an adjusted effective tax rate between 24% and 29% also excluding ERP modernization costs and amortization expense. As we indicated on our last call, we continue to expect results to be weighted towards the second half of the year with sequential improvement in each quarter. The first quarter results are consistent with that framework. Gross margin is expected to expand progressively as we complete our ERP activities, realize the carryover benefits of our pricing actions and drive productivity and cost-out initiatives across our supply chain. We continue to actively manage the evolving tariff landscape and believe our pricing and cost-out actions position us well to navigate that environment within the guidance ranges we have provided. We are also monitoring the situation in the Middle East and its potential effects on freight and input costs. While we do not anticipate a material impact on demand, we have factored the potential cost implications into our outlook and believe our current guidance range appropriately reflects that risk. Our confidence in the full-year outlook is further supported by the strong order momentum and expanded backlog entering the second quarter, along with the continued acceleration of our AMR and robotics portfolio. While we recognize there is still work ahead, we are appropriately positioned to deliver on our full year commitments. With that, I'll turn it back to Dave. David Huml: Thank you, Fay. Before we move into the Q&A section, I want to close with a few simple messages. Our first quarter results reflect meaningful progress on the issues we discussed on our last call. We entered the year focused on stabilizing our North America operations, restoring service to our customers and delivering on the commitments we made to our shareholders. We are executing against all 3. At the same time, the underlying fundamentals of our business remain strong. Order momentum is robust and broad-based. Our international regions continue to execute well, and the momentum in our autonomous and robotics portfolio continues to build. Our balance sheet is healthy. Our capital allocation priorities are clear, and our teams are focused. I want to once again thank our employees for their resilience and dedication through a demanding period and our customers for their continued partnership. We remain confident in our path forward and in our ability to deliver on our 2026 outlook. With that, we'll open the call to questions. Operator, please go ahead. Operator: [Operator Instructions] And our first question comes from the line of Tom Hayes with ROTH Capital Partners. Thomas Hayes: Dave, maybe starting with a multipart question on the order environment, real solid results in the quarter. I was just wondering, one, was there maybe some catch-up on the order growth from Q4 when you guys sort of had some challenges? And then maybe could you talk about the order growth momentum for robotics within that order growth? David Huml: Yes. I'd be happy to, Tom. So your first question about was there any catch-up from Q4? We talked about growing some backlog as we exited Q4 in the $15 million range. And obviously, we serviced that in the quarter and added additional backlog as we came through Q1. So I don't think we can attribute much of the order volume in Q1 based to -- based on sort of carryover or catch-up from Q4. We have been working very closely with our customers, especially those that have been impacted in North America by the ERP transition, to make sure that we are servicing their demands and meeting their requirements as we strove to drive system stability, but then also support them through this period of ERP disruption. Robotics did contribute materially to our order demand. And I think it's worth noting that our robotics demand in Q1 is in large part due to the efforts of the entire company over the last 6 months to a year as we've been developing a very robust funnel of opportunity for robotics. Strong orders from robotics in the quarter. We referenced in the script, $27 million in robotic equipment sales, inclusive of the ARR from autonomy subscriptions, represents an 85% year-over-year increase, and robotics represented 9% of our enterprise sales in the quarter. And I think that we had a strong pipeline. I think we began to capitalize on that pipeline. We articulated in the script really 4 to 5 really key actions we've taken in the quarter in standing up our TNC robotics venture, launching 2 new exciting products in the X16 SWEEP, which starts shipping in Q2 and the X2 ROVR, which starts shipping in Q3. We solidified our exclusivity agreement with Brain Corp through 2029, which really allows us to focus on those areas that we are both strongest at, and aligns us towards the singular goal of driving unit volume growth and tipping -- driving towards a tipping point of adoption in robotic cleaning equipment. So I think we've got a number of specific actions that we've taken in the quarter to help drive demand not only in the quarter, but also as we proceed through the year. Thomas Hayes: I appreciate the color. Maybe a little bit on Brain Corp. And then I think one of the things that I thought was interesting was I'd like to get your thoughts on how it kind of continues to differentiate you from the competitors. Just the new release of the BrainOS, that seemed to be kind of a big deal. I just want to get your thoughts on that. David Huml: Yes. It's a really big deal, and it's really the next evolution of our partnership with Brain and the operating system that is embedded in our market-leading robots. We released Clean 2.0, which is really the next-generation navigation autonomy software. And within that Clean 2.0 platform, we specifically introduced SelfPath AI. And when you think about the SelfPath AI feature, software, what allows the robots to do is really self-train themselves, self-train the cleaning paths within their environment. So it has dynamic self-training of the cleaning paths within an environment. So as opposed to teach and repeat where we showed the robot where to go and it would reliably repeat that specific path. These robots with SelfPath AI embedded on the machine actually learn the entire store, the entire environment and optimize the cleaning paths within that environment. It's a big difference. And the customers notice the difference in the performance on the ground. Another benefit of SelfPath AI is faster deployment, because we don't have to trace every square inch of the facility to show the robot where to clean, we can just go through the major pockets of floor, it can learn the space. We can greatly reduce the deployment time that it takes to deploy a new robot. I'm talking about like a greater than 50% reduction in time, which makes it easier and faster for us to deploy robots at scale as well as for our customer, if they change their store layout or if they want to train it themselves, retrain it themselves, they can do it much more quickly than they could before. I think the other key point I would talk about on SelfPath AI is around obstacle detection. Our older operating system was great at obstacle detection. With SelfPath AI, we moved from detection to identification. So now we don't -- the robot knows not only is the path blocked, but what is -- what the path is blocked by, whether it's a human or its box of inventory or it's a forklift in industrial applications. And then it makes real-time decisions on the floor in front of the object depending on what gets identified, whether it should slow down, it should pause, it should wait or should just leave and return later to that path. So it's much smarter about not just detecting obstacles, but identifying what the obstacle is and responding accordingly. So we think all in, this Clean 2.0 is really the next generation sets us apart from competition and especially those that have had any exposure to our robots in the past are going to see a marked difference in performance in real-world applications. And really sets us up to continue to drive not only our existing X4, X6 Series product, but now the new X16, X2 and more new products to come. All in, the SelfPath AI and Clean 2.0, the new product launches, the TNC robotics, the new amendment with Brain really gives me confidence that we can deliver the $250 million in AMR revenue by 2028. Thomas Hayes: I appreciate the color. And maybe just one last one on the margin outlook. And maybe I missed the details. Did you indicate you put in pricing actions so far? And if so, when? And can you quantify the size of those price actions? David Huml: Yes. Let me dimensionalize price as a contributor to our margins. And then Fay, you can put some color on sort of the margin trending in the quarter, if you'd like. We did an annual list price increase like we normally do at the beginning of a calendar year. And though we sell those in, we did great realization on that. That was a global effort. I think the -- in addition to that, what you're seeing bleed through in North America is an incremental impact from pricing action we took in May of 2025, which was tariff-driven. If you recall what was going on in the market back then, tariffs were layering post-Liberation Day. So now we're lapping a quarter that did not have that tariff-driven price increase benefit in 2025, and we're bleeding that through in our Q1 2026 results. Fay West: Yes. And if you just look at Q1, Q1 gross margin was 38.1%, which was 350 basis points better sequentially than Q4 of 2025. We exited March at approximately 40% at the enterprise level. And so we expect gross margin to expand as we go throughout the year and we complete our optimization in the second quarter, and continue to realize those pricing benefits that Dave just recognized as well as continue to capture cost-out activities and productivity initiatives. So this implies that the second half gross margin embedded in our full-year guidance will be in the low 40s, which is consistent with our long-term framework with Q2 stepping up sequentially from Q1 as the optimization work progresses and as some of those period expenses that I identified in our -- in my prepared remarks no longer carry through to Q2. Operator: And our next question comes from the line of Steve Ferazani with Sidoti. Steve Ferazani: Appreciate all the detail on the call. Certainly, a lot of numbers and I just want to make sure I'm thinking about this right. And I do want to follow up with the final responses to the last question, just in terms of your expense and gross margin. So you said you exited the quarter, which is [Technical Difficulty]. Fay West: We did [Technical Difficulty] related to just decreases. And so we saw improvement in margin from January, February to March. And on the enterprise level, we exited at roughly 40%. But when you look at margin year-over-year and the 350 basis point increase that we outlined, approximately 3/4 of that decline was related to, I'll just say, ERP recovery efforts that I just highlighted. The remaining 1/4 is really a shift in customer mix towards strategic accounts, as you mentioned, and also just a mix between -- mix away from industrial, when we look year-over-year. We do believe that tariff and other inflationary pressures that we recognized in the quarter were really offset by price realization and cost-out activities. Steve Ferazani: Got it. And so when I think about what you believe the long-term gross margin should look like because over the last couple of years, obviously you had the backlog pick up and then that normalized. So it's harder to kind of figure out what do you think a normalized Tennant gross margin on an annual basis should look like, and that may change over the years. But how do you think of that right now? Fay West: Yes. I think it's going to change within quarters, mix and other things do impact that. But I would say roughly 42% is kind of a gross margin target. And we've been there, Steve. I mean when you look at how we exited Q3 of last year and performance in other quarters, we think that that's a good range. Certainly, we'll strive to make that higher as we look to expand our margins, and we do believe that we are investing in our business to differentially take cost out, and to optimize our operations and still remain price disciplined. So I think 43% is a good level, but we will always look to see how we could improve upon that. Steve Ferazani: Of course. As we've gotten into earnings season, we've had a lot of companies raise top line, but not raise EPS primarily because of incoming inflationary pressures, which some expect may get worse. How are you thinking about that? Fay West: So when we -- so there's certainly a couple of macro headwinds that we are facing along with all other companies, and that is including kind of increased costs related to what's happening in the Middle East, if you think about potential kind of increase in freight charges and other costs. We've baked that in and think that it's not going to be very material at this point. We'll see how the landscape evolves. But we think that we're covered within our guidance range, certainly from an EBITDA margin perspective, to absorb those costs. And so I think that we've got enough flexibility that we could absorb that within our guidance range. Steve Ferazani: Got it. And when I think about your guidance range, given the significant share repurchase, which I'm guessing wasn't in there to begin the year. I mean, if I looked at it, if you hit the midpoint of all your other guidance that went unchanged, that puts your EPS at the upper level. David Huml: Correct. Yes, that's fair. I think we mentioned during the prepared remarks, Steve, that we expect roughly $0.15 coming from the net impact of share repurchase. Remember, we do some debt. So there's a positive accretive effect of share repurchase based on additional interest expenses, but that $0.15 gets covered within the range. Steve Ferazani: Got it. That's helpful. If I could get one more in. Dave, when you talked about the new Brain agreement, the extension of 3 years, you mentioned an evergreen notice. Can you explain that? David Huml: Yes. So typical in arrangements like this, rather than having to redraft an entire agreement every 2 or 3 years, we built in an evergreen -- I'll call an evergreen clause, and I'm not a lawyer, but I'll just tell you how it works. We kind of mutually agreed that if this is still working for both parties, then we would continue as is without having to redraft and renegotiate an entire agreement. And there's a notice period. The notice period really just gives us each an opportunity, if we were to assess this arrangement and decide that we wanted to exit in some period, it gives us each a lead time to prepare for that exit. So nobody can sort of -- neither party can kind of leave in the dark of night without letting the other one know about it. Where we would then align around ongoing support going forward. It's a lengthy notice period that gives us each plenty of time to adjust our business accordingly. So I think it's pretty standard in agreements of this type, and it really just reduces or eliminates the need to renegotiate entire agreement or contract over time. I think the fact that we got to this exclusivity extension to 2029, and an evergreen clause with the notice period, these are signals that the partnership is really strong, that we're both aligned and committed and motivated to go out and drive this disruption in this cleaning robotics business. Steve Ferazani: And where are you now with -- I think you noted when you formed the robotics group, the importance of channel expansion. Can you talk about your progress there? David Huml: Yes. We're making great progress. And so I think if you look back at our history, we've done really well integrating robotics in with our strategic accounts, for example, channels and direct channels as well where we sell on direct basis, whether it be strategic account commercial customers or industrial customers. Where we're starting to lean in more heavily is, and I mentioned it on the prepared remarks in the script, we're leaning in more heavily to building service contractors and our distribution channels. Let me put a little color on that. Building service contractors, their business is largely based on labor, right, and cleaning labor. And so it's been challenging for them to consider how to integrate robotics into their offering to their end customer in a profitable way, in a meaningful way, and adopt it in a way that delivers real value to their end-use customers. And so we've been -- we've had some success with building service contractors, some of them more forward-thinking and progressive, but they've kind of had to figure it out along the way. We think that the demand for robotics and building service contractors is accelerating. And we think with some of our new product launches and the feature sets of our new products as well as our support ecosystem, we are better positioned than ever to go help building service contractors adopt robotics. At the same token, our distribution channel, we have sold robots through our distributor partners. And we have a vast distribution network around the globe, 35% of our revenue goes through distributor partners. We just haven't fully cracked the code on how to leverage that channel to grow robotics differentially. And so one of the actions that the TNC robotics venture leads into was working with our distributor partners to understand what would it take to accelerate robotics adoption through a distribution channel. It's partially a product solution. You got to have the right product that fits that channel, the ease of moving the product and setting the product up, to successfully deploying, as well as a price point and a value proposition that's going to meet the type of customer that most distributors call on, because they want to sell something as a complementary product to customers that already service and support. There's also a pricing component. Any time you're 2-stepping product to market, you've got to build in room for your channel partner to participate and drive some acceptable profitability. And there's an aftermarket service component. If our distributors offer direct service themselves, we've got to be able to train and equip them to service the robots. And if they don't offer direct service, they need to rely on Tennant service. We need to have the ability for the distributor to sell the service contract that we then honor with the end-use customers. So there's some interesting opportunities that we had to design our products and our programs and our value proposition to make sure that we have a winning pitch when we more fully engage our distribution channel. When you look at the products we're launching, the work we've done around our value prop, the aftermarket support, I think we are going to make meaningful progress in 2026, penetrating that existing channel and maybe earning some new distribution partners as well with our robotics platform. Operator: [Operator Instructions] And our next question comes from the line of Aaron Reed with Northcoast Research. Aaron Reed: Just a couple of questions here. So on demand, so orders grew 10% in the first quarter with backlog building at $32 million. Help me think about this, how much of that order strength is underlying demand versus customers placing orders earlier because of the earlier lead times? And just a quick little follow-on to that. How should we think about the conversion of the backlog through the balance of the year? David Huml: Yes. So really proud of the results we delivered. I'm going to stick on orders for a minute. 10% order growth is really a great way to start the year. That's our highest quarter since Q1 -- first quarter since Q1 of 2022. And so for this business, it's a really strong start to the year, $327 million enterprise-wide. There is some of that order book, and some of the backlog is future orders out of the period. I'm estimating around 1/3 -- 1/3 of it is customers that gave us an order because they know they want the product in Q2 or Q3 of this year. It's large strategic accounts who are planning for large store deployments across multiple stores, and they want to make sure that they've got the production slot paced to their rollout schedule. So that's really just the customer planning their business. It's not induced by our performance, our output from the plants, our ERP challenges or anything that we're doing. The rest of the order volume that we saw is really customer demands turned on for our products and our services. And so I think it's real and it's durable. And then we can point at the specific growth strategies we've invested in to drive that order volume in the quarter. Aaron Reed: Super helpful. And then the second follow-up question here is switching gears on capital allocation. So you repurchased about 5% of shares outstanding in the first quarter. So at an average price, I think I thought it was at $63 or around there. And the Board just authorized an additional $2 million for additional or 2 million share repurchase. Where are you on leverage in the ERP recovery? And how should we think about the appetite for any further share buyback versus M&A through the rest of the year? Fay West: So Aaron, I think when you think about the Q1 activity and the buyback, we really view that as an opportunistic really high conviction decision that was in response to what we think was an event-driven dislocation in our share price, following the ERP disruption. It was not reflective, we believe, of the underlying value of Tennant. Going forward, repurchases will continue to be opportunistic. As you mentioned, we have ample authorization, including the $2 million increase that was just provided by the Board, share authorization. And we will continue to deploy capital where we think that there is an attractive return. We continue to invest in our business. We'll continue to pay dividends and we'll continue to pursue M&A, and that's all in line with our capital allocation framework that Dave spent time discussing earlier in the call. We did end the quarter with net leverage of about 1.78x trailing 12-month adjusted EBITDA, which is within our targeted range of 1 to 2x. And so we're comfortable at that level. We have strong liquidity with about $290 million of unused borrowing capacity under our revolver and cash of roughly $83 million on the balance sheet, which gives us meaningful liquidity and flexibility. And so we do have room for additional opportunistic activity, but our framework prioritizes maintaining flexibility and also looking at other options within our framework as we've outlined. Operator: And since there are no further questions at this time, I would like to turn the call back over to management for closing remarks. David Huml: Okay. Thank you for your time today and your continued interest in Tennant Company. This concludes our Q1 earnings call. Hope you have a great day. Operator: Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Tempus AI, Inc. First Quarter 2026 Financial Results Conference 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. I will now turn the conference over to Elizabeth Krutoholow. You may begin. Elizabeth Krutoholow: Thank you. Good afternoon, and welcome to Tempus AI, Inc.'s First Quarter 2026 Conference Call. This afternoon, Tempus AI, Inc. released results for the quarter ended 03/31/2026. The press release and overview of the quarter and our latest presentation are available on our IR website. Joining me today from Tempus AI, Inc. are Eric Lefkofsky, founder and CEO, and James Rogers, CFO. Before we begin, I would like to remind you that during this call, management may make forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of these risks, please refer to our 10-K and other filings with the SEC. During the call, we will discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Definitions of these non-GAAP financial measures, along with reconciliations to the most directly comparable GAAP financial measures, are included in our earnings release, which is available on our IR page. I would now like to turn the call over to Eric Lefkofsky. Eric Lefkofsky: Thank you, and welcome, everybody. We had a great quarter. Revenue was $348.1 million, up a little over 36% year-over-year. Our diagnostic revenue was $261.1 million, representing almost 35% growth, driven by particular strength in our oncology business, which had unit growth of about 28%. It was strong across the board with our solid tumor and liquid biopsies performing well, and our MRD volume performing even better. Hereditary slowed down a bit, which was to be expected given that we are lapping some extreme growth rates from a year ago. We expect that business to return to mid-teens in the second half of the year. Our data applications business did extraordinarily well, $87 million of revenue representing 40.5% year-over-year growth with particular strength in our data licensing and modeling business, Insights, which grew over 44%. This is our third straight quarter of bookings north of $100+ million with TCV rising and visibility in the best place it has been for our data and apps business in quite some time. So all in, the business is doing extremely well. Our main businesses are performing at or above plan. We are on track for a great year and, as a result, increased our guidance to now a range of $1.59 billion to $1.60 billion for the year, with adjusted EBITDA of about $65 million. With that, happy to take questions. Operator: As a reminder, to ask a question, please press star then one. If you would like to withdraw your question, press one again. We do request for today’s session that you please limit yourself to one question only. We will now open the call for questions. Your first question comes from the line of Kallum Titchmarsh with Morgan Stanley. Your line is open. Kallum Titchmarsh: Great. Thanks for the question, guys. Eric Lefkofsky, I wanted to start with Insights just given some of the recent updates. Can you maybe just talk about how discussions with pharma customers have been trending so far this year, particularly as interest in AI appears to be evolving? And I am curious where de-identified data is sitting in the hierarchy of needs. And investors are obviously cognizant of contract closing and renewal dates for your large agreement, so really looking for your latest thoughts on longevity and extension potential here. Thank you. Eric Lefkofsky: Yes. I would say that all of our core big data relationships are very strong. We have a long history of renewing these agreements at or above where they historically stood. We feel great about that trend continuing. And I think, equally important, if not more important, is that we are now adding some really big new names to that prestigious group. This quarter alone, we added Merck, who signed a very large strategic collaboration with us. We expanded our relationship with Gilead. We are in late stages on others. So we just have a really strong and robust pipeline. And as I called out in the letter, I do not think anyone thought our data and modeling business would get to this scale, would be growing this quickly at this scale, or would be this durable. To me, one of the most amazing parts is to get to these very large levels where people are signing $100+ million agreements with you to license your de-identified data over multiple years. It would be impressive to do that with one pharma, even more impressive with two, but we now have almost half a dozen folks at that level where people are signing these very large strategic agreements, with more coming. I would suspect over time that becomes the vast majority of all big biotech and big pharma. We are seeing this migration where people are not just licensing our data; more and more they are actually building models with us, whether those are foundation models as in the case with AstraZeneca, or they are building smaller models leveraging our data. We have a very large database now in excess of 500 petabytes of data. It is all connected to this analytics and model-building platform that is now connected to not just CPUs, but GPUs. People are increasingly building proprietary models to get smarter about their own internal R&D programs, and that trend seems to be up and to the right. Operator: Your next question comes from the line of Ryan Michael MacDonald with Needham. Your line is open. Analyst: Hey, thanks for taking the question. This is Matt Shea on for Ryan. Eric Lefkofsky, maybe just jumping off on that last point, is there anything in terms of either the recent Gilead or Merck deal that you would call out in terms of size or scope that is maybe different from some of your other strategic collaborations, or just anything notable to call out with those two wins in particular? And then, James Rogers, as we layer the Merck and Gilead wins on top of the $350 million of TCV that was earmarked for revenue in 2026, how much visibility and confidence do you have in hitting the implied $410 million of data revenue guidance? And what are the potential levers for upside there? Eric Lefkofsky: Yes, I can start. Merck was a very large strategic data and modeling collaboration. We have very large collaborations with people like AstraZeneca and GSK and BMS. It is another very large collaboration of that magnitude. It is unique in that there are only so many of these that we have, but it is, as I mentioned a minute ago, far more than others. It is nice to see people getting to that size and scale where they are really leaning in at a strategic level with dedicated teams and lots of data and broad access and AI model building and all the great stuff that you want to see for a long-term, sticky relationship. Gilead is a bit different. It is quite large—smaller than Merck—but quite large. What is cool is it represents a very significant step up from their historic levels. We are monitoring two things: we want to get to a point where we have $100+ million agreements with as many big pharmas and big biotechs as we can, but we also want to see the growth of these accounts. We typically do not get to that strategic level upfront; it takes time. We tend to start with one project, maybe in one subtype, then a few subtypes and a few different projects. Eventually people realize they can use our data to be far more intelligent in terms of which compounds they actually want to interrogate, how they design phase one and phase two trials for the greatest likelihood of success, how they ultimately enroll patients and make sure their product is fit for commercial viability. They are using our data across that entire spectrum, and it takes time to get people comfortable. It is nice to see someone like Gilead stepping up in such a big way from their historic levels. James Rogers: And then in terms of the visibility, obviously we mentioned at the year-end call that we had about $350 million of TCV that was related to 2026. That gave us a tremendous amount of visibility into the guide. On top of that, we had visibility into a very strong pipeline, and Merck and Gilead are part of that pipeline that closed in the first quarter. That increases the level of visibility, and the pipeline remains strong as well, as Eric Lefkofsky noted. So the Insights business is really performing incredibly well at this stage. We have never been at this point in the year with this level of visibility into the overall number, and it is exciting for 2026, but also for 2027 and beyond. As Eric Lefkofsky noted, our TCV actually increased in the first quarter, which is incredibly impressive considering you are delivering $80+ million of revenue and still growing that backlog that will contribute to revenue for the balance of the year and over the next several years to come. Operator: Your next question comes from the line of Subhalaxmi T. Nambi with Guggenheim. Your line is open. Subhalaxmi T. Nambi: Hey, guys. Thank you for taking my question. One for James Rogers: Are there any updates on your XF FDA submission? I know it was reiterated that it was submitted, but any realistic timeline for an ADLT pricing update on this test? And then second, could you break down for us what percentage of your data licensing comes primarily from oncology and what has come from other areas like rare disease or cardiovascular? Longer term, where do you see that mix shaping out? James Rogers: Yes, thanks, Subhalaxmi T. Nambi. I will start with the FDA submissions and then Eric Lefkofsky can take the question on the data breakdown. I would say no update on the XF submission that was made earlier this year; we are awaiting feedback there. As we previously noted, we do not expect that to have any impact on pricing or ASPs in 2026. The other thing that we called out in our letter relates to an amendment that we are making to our XT FDA-approved assay, or the submissions we made—an amendment that will cover tumor-only, so cases where we do not get a normal sample. That will allow us to accelerate the migration over to the ADLT version of the assay. We are expecting a decision there imminently. Those are the updates from an FDA standpoint. Eric Lefkofsky? Eric Lefkofsky: Yes. In addition to driving ASP higher on the diagnostic side, on the data side the vast majority of our data licensing today is oncology and almost entirely comes from our therapy selection business. We basically built a de-identified data business off the combination of matched clinical-molecular data, predominantly from therapy selection—our liquid biopsy test or solid tumor profiling test. That database, which sits at over 500 petabytes, drives the vast majority of our data business. It has been nice to watch some recent wins in neurology. In particular, we were just engaged to begin building a multimodal model on Alzheimer’s disease. That was a multimillion-dollar project that we are in the middle of right now and will finish up in the middle of this year. So we do have people starting to tap the database in other areas, but for us that represents really significant long-term growth drivers. We can see the data and modeling business in the U.S. getting to multi-billions of dollars. As we get into other disease areas, there is all kinds of opportunity there just in the U.S. alone, let alone international. So lots of leg room. Subhalaxmi T. Nambi: Thank you, both. Operator: Next question comes from the line of Daniel Gregory Brennan with TD Cowen. Your line is open. Daniel Gregory Brennan: Great. Thank you. Maybe just one on cash flow in the quarter. How do we think about cash flow from operations—it was down about $70 million, plus or minus? I think you guys said free cash kind of approximated EBITDA, which was, I think, a $3 million loss. How do we think about the progression of free cash as we go through the year? And then maybe just one unrelated. You have XT FDA approved; you are going to seek to get XT, XR FDA approved. Does that change at all the ability to bill both separately to your local MAC if, for whatever reason, jurisdiction changes and you have both of those FDA approved? How do we think about the durability of that going forward? Thank you. James Rogers: I will take the first one, and then Eric Lefkofsky can take the second one. In terms of free cash flow, it was a little bit elevated in Q1, which is pretty typical for us over the last couple of years. A few things going on: timing of payables plus bonuses get paid out in Q1. As we noted in the letter, we would anticipate a significant improvement in Q2 driven by, one, normalization of those payables, and, two, a number of our large Insights contracts that had prepayments or revenue that was burning down flip over to quarterly payments. We would anticipate significant improvements in the second quarter and then, from there, continued improvement as adjusted EBITDA improves. With that, I will turn it to Eric Lefkofsky for the second. Eric Lefkofsky: We are in a good spot given that we are expecting to generate about $65 million of positive EBITDA, with every quarter significantly improving performance. We are now, I do not even know, five, six, seven, eight quarters in a row of every quarter improving EBITDA pretty dramatically on a year-over-year basis. We feel great about our cash position. We do not need more cash. We do not need to do anything. So for us at this point, the quarterly fluctuations of cash flow are not that critical. We are going to generate cash. We are going to be EBITDA positive. We do not need alternative financings in terms of funding the business. We are in a pretty good spot. As it relates to XT, XR, and XF, I would suspect that over time all of our main assays are FDA approved. We have one approved today, we are expanding, as James Rogers mentioned, in solid tumor profiling. We have another that is in front of the FDA now in liquid biopsy. We will take our ADLT as well. I do not think these things will impact how the tests are ultimately ordered or billed. They are ordered and billed on an individual basis, and based on medical necessity. When they are ordered and billed, they get paid for how they get paid for. We do believe that ASPs are likely to rise over the coming years by virtue of the fact that our current ASP sits at around $17.40—somewhere in that range, $17.20. We would suspect there is about $500 worth of incremental ASP lift over the next year or two as we get all these things FDA approved. From everything we can see, nothing about the current trend is anything but significantly positive. Operator: Next question comes from the line of Bradley Bowers with Mizuho. Your line is open. Bradley Bowers: Great. Thanks for the question. I just want to get to oncology genomics trends. We see more news headlines from competitors on companion diagnostics status wins. What is the impact to Tempus AI, Inc. as therapy selection gets more widely, formally included into labels as companions to pharmaceuticals? Maybe just an update on what inning of adoption we are in on therapy selection and whether there is still a rising tide for all companies, or do you need some more formal partnerships to keep driving that 20% volume growth on that business? Appreciate it. Eric Lefkofsky: Yes. We have seen no impact. CDXs have been part of selection for years. There are many of them. They have had no impact on physician ordering in the U.S., by virtue of both how drugs are paid for in the U.S. and how diagnostic tests are ordered. In other markets where you cannot get the drug without that particular companion being ordered, it may have an impact. But in the U.S., we do not have a system set up that way. In fact, the migration has been the other way, where people have been looking to move away from companions as a precursor to ordering. I would suspect that whether we win more CDXs or not, regardless of who wins CDXs, it will not have any impact on the amalgamation of companies that represent the vast majority of external sequencing. I would suspect we will all be just fine. The differential in growth rates—the fact that we are growing faster than others or most others in therapy selection—is predominantly related to the technology platform we built, which is comprehensive and allows physicians to do their job well. We see no sign of that slowing down, and I think CDXs will not have an impact. In terms of where we are, it still feels to us like we are maybe early to the middle of the game in terms of therapy selection. There has been some research published recently that shows a significant volume of physicians still are not ordering comprehensive genomic profiling when treating cancer patients. There are lots of patients historically that have not been profiled. I would suspect there is pretty decent unit volume growth for the industry over the next three to five years. I think we will grow faster because of all the advantages we have built into our platform, but it does feel like it is a healthy space in terms of solid tumor profiling, liquid biopsy, and then even healthier on the MRD side given that it is still fairly new. Operator: Next question comes from the line of Analyst with Canaccord Genuity. Your line is open. Analyst: Thanks for the questions. Can you talk about how important Rare is going to be to the hereditary testing business getting back to the mid-teens? And then on that note, can you elaborate on the growth profile of XG that grew 50% year-over-year in Q1, I think? Thanks. Eric Lefkofsky: Yes. The XG assay for us—the percentages are meaningful, but it is small. Our MRD assay grew 500%. It was only 6.5 thousand tests. It is awesome, but percentages can be a bit misleading. The vast majority of our HCT volume is obviously on the Ambry side, given the amount of volume they do in hereditary. Because the units are so high, nothing Rare can do will move the unit volume metric. It moves the revenue metric because you get reimbursed significantly more per test, but it is hard to move the units. The fact that we expect to get back to mid-teens is a function of the business historically being a mid-teens grower. It is lapping periods of much higher growth last year, when that assay was growing at ~40%. It is a bit lumpy. Their growth has been lumpy, and when you are lapping periods of lumpy growth, it is still lumpy. I suspect as we get into the back half of the year, the growth rates will return to mid-teens. I think Rare will also do well. We had a slower start to the first half of this year. As GeneDx called out, they migrated a bunch of volume to whole genome, which has some ASP impact for them. We were a bit later to get that product in market. For us, it has been more of a volume issue; we have not been selling a bunch of tests. As our product enters market, we expect some volumes to pick up. Even at ~$3 thousand ASP, it is still going to be ASP accretive to us. I would say the back half of the year looks much better for our hereditary business as we are lapping slower periods of growth last year and as Rare starts to really take hold. I would bet that by the end of the year, that business is feeling pretty good. Operator: Next question comes from the line of Mark Schappel with Loop Capital Markets. Your line is open. Mark Schappel: Hi. Thank you for taking my question. Eric Lefkofsky, it was highlighted in the prepared remarks that you have roughly a 40% attach rate for your algos on your solid tumor assays in oncology. Could you break down a little bit further which products are driving the higher attach rates there, and what gives you confidence in expanding that within the next 12 months or so? Eric Lefkofsky: Yes. We have a variety of algorithms that we have built over the years. Some of them—for example, our homologous recombination deficiency algorithm; our tumor origin algorithm, where in about 5% of cancer patients we do not know the site of primary diagnosis—off our transcriptomic assay, or RNA assay, we can actually predict that with super high fidelity. We have an immune profile score that basically refines what is typically a litmus test like tumor mutational burden. If you were TMB high, you would get a checkpoint inhibitor; if you were not, you would not. That test is not perfect, and our immune profile score refines that test. It turns out that there is a significant population of people that would actually do well on immunotherapy that do not get it, and likewise a population that looks like they would respond to immunotherapy that does not. So we can predict that. As these algorithms get more pervasively ordered, they are another tool in the overall bag of technology-enabled assets that physicians increasingly rely on. They can do all kinds of things that they cannot do with others. We called this out years ago. We said we would experience significant growth rates over time. A couple years ago people said they did not see it, but now it is in the rearview mirror. As we called out, technology was going to drive a bunch of ordering behavior. We have demonstrated that. Physicians are overworked, they are seeing a ton of patients, they do not have time in the day to do their job, and those companies that can help them make decisions, analyze real-time data, get to the right answer, and so on—they are going to flock to that platform, no different than you and I flock to Amazon. If it is convenient and easy and I get everything I need, that is going to drive my behavior. We do not see that trend slowing down. One of the reasons that we entered the MRD space and the hereditary space is we believe that will hold true across all major assays in oncology—from “Is my patient at risk?” to “How should I treat them when they get disease?” to “How do I monitor them post-treatment?” We want to be comprehensive, embedded within the workflow, and help physicians make real-time, data-driven decisions, all of which is driving higher growth. Operator: Next question comes from the line of Casey Woodring with JPMorgan. Your line is open. Casey Woodring: Great. Thank you for taking my questions. Maybe a related one to Daniel Gregory Brennan’s earlier question, but you are guiding to adjusted EBITDA to hit $65 million this year. This quarter, it was negative $3 million. Maybe walk us through how you see EBITDA progressing over the course of the year and the cadence of gross margins and operating expenses? And then secondly, on MRD, I would be curious to hear your latest thoughts on when you really expect that to start ramping up in terms of volumes. Thank you. James Rogers: I will start on the adjusted EBITDA and then Eric Lefkofsky can take the MRD question. Similar to last year, phasing will be growing throughout the year. We had about $13+ million of improvement year-over-year in Q1, and we would expect similar trends in Q2. The back half of the year is a bigger period for data, which leads to expanded margins, and more of that drops down to the bottom line. As we highlighted at the beginning of the year, we are fortunate that we are generating a lot of gross profit dollars that allow us to make many of the investments that generate long-term growth, but we want to continue to show improvement in operating leverage, and we feel like we are set up to do that. Eric Lefkofsky: In terms of MRD, the growth is really, really robust. As we called out, we are generating these kinds of results with a very small sales force dedicated to MRD. We have not unleashed this to our entire sales machine, which is hundreds of people. In part it is because the unit economics, until reimbursement is better, are challenging, and roughly 97% of our tests are tumor-informed. Personalis is really carrying the burden of that reimbursement. They have a few indications approved. They are in the midst of getting many more. As they get a more rounded reimbursement package that looks and smells and feels a bit closer to an LDT market leader, the unit economics will improve. If we were to 10x our MRD volume tomorrow, our cash burn would go up a lot. So we have to meter it, which we are doing in close coordination with them. As reimbursement improves over time, you will see us roll that out more aggressively. You can do the math—if we really put a bunch of wood behind this, we would be a very, very formidable MRD player in the United States. Operator: Next question comes from the line of Daniel Anthony Arias with Stifel. Your line is open. Daniel Anthony Arias: Hi, guys. Thanks for the questions. Eric Lefkofsky or James Rogers, I am looking at your slide deck, and you have one that talks about expecting 25% top-line growth over the next three years. You also have a slide that talks about ASPs potentially being 30% higher. I know it is illustrative, and I think the point is to emphasize the EBITDA trend. What is either an underlying volume trend or just a revenue trend that takes into account these ASP items that we should think about? Is that 25% that you are talking about inclusive of some ASP increase? Eric Lefkofsky: Yes. We always have puts and takes. One of the things that is great about our business—and for those that have been tracking us for three or four years—is that now our guidance is around $1.6 billion, and three or four years ago we were doing $300–$400 million. We were quite small. We have had significant growth that we have been able to manage. For a long time, we have called out our guidance—now we have a small range; historically, just a number. The reason we can be relatively precise is we have a highly durable business with lots of levers we can control. Some go our way, some do not. We have never had a quarter where everything goes our way. Something always does not go our way. The good news is, in the aggregate, more things are up and to the right than are not. That is the benefit of having a diversified business with lots of different growth engines and growth levers. We felt comfortable enough to say we expect 25% growth not just in one year, but over three years. At our scale, that is not a small number. I have not done the math, but $1.6 billion goes to something like $2.0 billion, $2.5 billion, and $3.0 billion. There will be ASP lift. There will be unit and volume lift. Some things will go our way; some will not. There will be trends, weather, this and that. In the aggregate, we have built a business that is durable across a comprehensive portfolio in diagnostics that touches lots of different areas—from hereditary to therapy selection to MRD; other disease areas like rare—and a very robust data and applications business. We feel pretty good that we can sustain good growth. James Rogers: The only thing I would add, Daniel Anthony Arias, is there is nothing implied by those slides from a volume perspective, given the upside we do have in reimbursement. Obviously, the increases in reimbursement are difficult to pinpoint exactly when they will occur, and our volume trends continue to be very strong. There is nothing contradictory implied by those two statements in the deck. Operator: There are no further questions at this time. I will now turn the call back over to Elizabeth Krutoholow for closing remarks. Elizabeth Krutoholow: Thank you all for joining us today. We look forward to speaking with you again in a few weeks at our Investor Day. Have a great day. Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining, and you may now disconnect.
Operator: Greetings, and welcome to the Alkermes First Quarter 2026 Financial Results Conference Call. My name is Carrie, and I will be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Sandra Coombs, Senior Vice President of Investor Relations and Corporate Affairs. Sandy, you may now begin. Sandra Coombs: Good morning. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter ended March 31, 2026. With me today are Richard Pops, our CEO; Joshua Reed, our Chief Financial Officer; Todd Nichols, our Chief Commercial Officer; and Blair Jackson, our Chief Operating Officer. A slide presentation, along with our press release, related financial tables and reconciliations of the GAAP to non-GAAP financial measures that we'll discuss today are available on the Investors' section of alkermes.com. We believe the non-GAAP financial results in conjunction with the GAAP results are useful in understanding the ongoing economics of our business. During the quarter, we closed the acquisition of Avadel Pharmaceuticals plc. The financial results announced today reflect the mid-February closing of the transaction and the integration of Avadel into our business, including 6 weeks of contribution from LUMRYZ, Avadel's once-at-bedtime sodium oxybate for the treatment of narcolepsy. Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see Slide 2 of the accompanying presentation, our press release issued this morning and our most recent annual report filed with the SEC for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments. After our prepared remarks, we'll open the call for Q&A, and I'll turn the call over to Richard for some opening remarks. Richard F. Pops: Thank you, and good morning, everyone. So, we had an excellent financial first quarter with another strong period of commercial execution and business performance. The quarter was consequential in other ways. Perhaps most significantly, we completed the acquisition of Avadel, a key element of our strategy to become a leader in the sleep medicine space. With LUMRYZ, we add a new differentiated medicine to our portfolio, one that's early in its commercial life and has significant potential for growth. LUMRYZ addresses a clearly defined patient need and fits logically into our portfolio, consistent with our focus on medicines delivering meaningful clinical benefit to patients. From a financial standpoint, the acquisition further enhances our financial growth and provides additional resources and flexibility to advance our development portfolio. Beyond the financial consideration, the acquisition allows us to establish a commercial footprint in sleep medicine now, well in advance of the potential approval and launch of Alixorexton. This early presence enables us to engage directly with sleep specialists and other key stakeholders critical to ensuring access to prescribed medications. Building these relationships now provides a strong foundation to accelerate our potential launch trajectory for Alixorexton. Another consequential event occurred at the very end of the quarter with the announced entry of Eli Lilly into this therapeutic space. This is an important external validation of the breadth of the scientific and commercial potential in developing new medicines targeting the orexin pathway. I think it underscores important aspects of this emerging therapeutic class, namely the limited number of competitive entrants and the scarcity of available intellectual property around the chemistry as well as the broad potential clinical and commercial opportunity. It starts with diseases of hypersomnolence and extends beyond that to a range of potential conditions in neurology, psychiatry and other rare diseases. For Alkermes, we believe Alixorexton and our other development candidates represent substantial opportunities to advance patient care and drive significant value for shareholders. We have a clear strategy, and we're well positioned to advance these programs. Blair and I will provide an update on our development efforts at the end of the call. But first, I'll turn to Todd and Joshua to review our commercial and financial performance for the first quarter. Todd? Todd Nichols: Thank you, Rich. Good morning, everyone. I'm pleased to report that we're off to a strong start to the year with first quarter performance ahead of our expectations and solid execution across the commercial organization. It is exciting to note the evolution of our commercial team as our portfolio of commercial products expands. We now have commercial capabilities in 3 distinct categories: in addiction with VIVITROL, in psychiatry with ARISTADA and LYBALVI and now following the closing of the acquisition of Avadel and sleep medicine with LUMRYZ. The integration of Avadel commercial team is progressing well, and we entered the second quarter with the combined team fully in place. Looking ahead with clear strategic priorities, a seasoned commercial team and a portfolio of important medicines in addiction, psychiatry and sleep disorders, we are in a strong position to deliver on our performance goals for 2026. Turning to our first quarter results. Net sales from our proprietary product portfolio increased 38% year-over-year to $338.1 million, reflecting solid demand across our psychiatry and addiction portfolios and certain favorable gross to net adjustments during the quarter and 6 weeks of commercial contribution from LUMRYZ. Starting with VIVITROL. Net sales in the quarter were $112.4 million. VIVITROL performance continued to be driven by our ability to capitalize on highly localized market dynamics in certain states and payer systems. Looking ahead, we continue to expect VIVITROL net sales for 2026 in the range of $460 million to $480 million. For our psychiatry franchise, in the first quarter, net sales for the ARISTADA product family were $93.8 million, reflecting solid underlying demand. In 2026, we continue to expect ARISTADA net sales in the range of $365 million to $385 million. LYBALVI net sales grew 32% year-over-year to $92.4 million. Underlying TRX growth was 21% year-over-year, driven by sustained momentum in new patient starts and continued expansion of prescriber breadth. Gross to net adjustments were approximately 33%, which we expect will continue to widen into the mid-30s during the course of the year as we continue to build on our market access profile. For the full year, we continue to expect LYBALVI net sales in the range of $380 million to $400 million. The first quarter results for these products benefited from gross to net favorability of approximately $14 million, driven primarily by favorable patient mix. Approximately 2/3 of this favorability related to VIVITROL and the remainder related to ARISTADA and LYBALVI. Across the brands, inventory levels in the channel were relatively stable in the first quarter of 2026. As a result, we expect Q1 to Q2 growth trends to generally track end market demand. Turning to our sleep franchise. We are now 10 weeks post close of the acquisition of Avadel. As we build on our commercial presence in this space, we are pleased with feedback from the sleep medicine community regarding the LUMRYZ commercial organization, the utility and expected durability of the oxybate class and the differentiation of LUMRYZ within this category. The LUMRYZ team is off to a strong start since joining Alkermes. For the first 6 weeks following the close of the acquisition in mid-February, we recorded LUMRYZ net sales of $39.5 million. For the full quarter, LUMRYZ generated approximately $72 million of net revenue. We exited the quarter with approximately 3,600 patients on therapy and with solid momentum in new patient enrollments, which we expect to build on as we move through the year. For the full year, we expect LUMRYZ to generate total net sales in the range of $350 million to $370 million. Of this, we expect Alkermes to record $315 million to $335 million, reflecting the period since the mid-February close of the transaction. In sleep medicine, our near-term focus is on driving growth and executing against the LUMRYZ opportunity while advancing our broader strategy in the space, including preparation for the potential launch of Alixorexton. Narcolepsy and idiopathic hypersomnia represent multibillion-dollar market opportunities. And our goal is to establish Alkermes as the leader in sleep medicine based on deep expertise in this disease area and differentiated and competitively positioned product portfolio. With solid performance from our established franchises and the recent addition of LUMRYZ, we are operating from a strong position of increasing scale and diversification. As we move forward, our focus remains on disciplined execution, driving demand across our brands and advancing our strategy in psychiatry, addiction and sleep medicine. The first quarter was a strong start to the year, and we are well positioned as we work toward achieving our 2026 objectives. With that, I will pass the call to Joshua to review the financial results for the quarter. Joshua Reed: Thank you, Todd. In the first quarter, we delivered financial results that reflect continued growth across our proprietary product portfolio and the initial contribution from LUMRYZ following the close of the Avadel acquisition. Post acquisition, our financial profile is further enhanced and diversified. We manage the business to drive significant operating cash flow and maintain a strong balance sheet, and we do so now with increased scale and flexibility. We are in a strong position to invest in the expanding development pipeline that will shape the future of our business. Turning to our financial results. During the quarter, we generated total revenues of $392.9 million. These results provide a solid foundation for the year. Today, we are updating certain noncash elements of our 2026 financial expectations to reflect refinements to the purchase price accounting for the acquisition of Avadel. These adjustments improve our full year expectations for GAAP net loss and EBITDA. For our portfolio of proprietary products, we generated net sales of $338.1 million, ahead of the expectations we outlined on our fourth quarter call. As we move into the second quarter, we expect Q2 net sales from our proprietary portfolio, including a full quarter of revenues from LUMRYZ in the range of $385 million to $405 million. Manufacturing and royalty revenues were $54.8 million for the quarter, including revenues of $27.3 million from VUMERITY and $18 million from the long-acting INVEGA products. Turning to expenses. Cost of goods sold were $61.6 million, which includes the purchase price accounting of LUMRYZ inventory. Recall that at closing, LUMRYZ inventory held by Avadel was marked to fair market value. Net of the LUMRYZ inventory step-up charge, cost of goods sold would have been $48.9 million in Q1 of this year compared to $49.2 million in Q1 of the prior year. In the second quarter, we expect COGS to be in the range of $85 million to $95 million, reflecting a full quarter of LUMRYZ sales and associated inventory step-up charge. R&D expenses in the quarter were $103.3 million compared to $71.8 million in Q1 of the prior year, reflecting the initiation of the Alixorexton Brilliance Phase III clinical program in narcolepsy, which began in the first quarter, the ongoing Vibrance-3 Phase II study of Alixorexton in idiopathic hypersomnia and the Phase I studies and development efforts for our next Orexin 2 receptor agonist candidates, ALKS 7290 and ALKS 4510. In the second quarter, we expect R&D expenses to be in the range of $110 million to $120 million. SG&A expenses were $264.6 million for the quarter, which included approximately $55 million of costs associated with the closing of the acquisition of Avadel, including transaction expenses and share-based compensation. Excluding these onetime expenses, SG&A would have been $209.4 million compared to $171.7 million in Q1 of last year, primarily reflecting the addition of the Avadel commercial infrastructure mid-quarter. As we look ahead to the second quarter, we expect SG&A expense to be in the range of $210 million to $220. During the quarter, we also recorded amortization of intangibles of $11.7 million and net interest expense of $12.4 million. In Q1, we generated GAAP net loss of $66.5 million and EBITDA of minus $30.1 million. We also generated positive adjusted EBITDA of $80.3 million, well ahead of our prior Q1 expectation of adjusted EBITDA of $30 million to $50 million due to higher-than-expected revenues and the timing of R&D expenses. Looking ahead to the second quarter, we expect adjusted EBITDA to be in the range of $100 million to $120 million. Turning to our balance sheet. We ended the first quarter with approximately $538 million in cash and total investments. To finance the acquisition of Avadel, we used approximately $775 million of cash from our balance sheet and entered into term loans totaling $1.525 billion due in 2031. We expect to pay down this debt quickly with cash flows from the business. During the quarter, we also deployed $28 million to repurchase approximately 1 million shares at an average price of approximately $28 per share. We continue to have $172 million of remaining share repurchase authorization. As I mentioned, in connection with the purchase price accounting related to the Avadel acquisition, we have refined our expectations for several noncash expense items, including the inventory step-up charge, which flows through cost of goods sold and the amortization of intangible assets associated with LUMRYZ. These changes have a net positive impact on our 2026 expectations for GAAP net loss and EBITDA. We now expect to expense approximately $105 million of LUMRYZ inventory fair value step-up in 2026 compared to a prior estimate of approximately $150 million. As a result, our 2026 cost of goods sold is now expected to be $320 million to $340 million, an improvement from our prior estimate of $365 million to $385. For amortization of intangible assets, we now expect full year amortization expense in the range of $75 million to $85 million compared to our previous estimate of $95 million to $105 million. For income tax, we now expect no income tax expense or benefit for the year from our prior estimate of an income tax benefit of $20 million. Taken together, these purchase price accounting adjustments improved our expectations for GAAP net loss, which is now projected to be in the range of $70 million to $90 million as well as for EBITDA, which is now expected to be in the range of positive $105 million to $135 million. All other components of our 2026 outlook, including adjusted EBITDA, remain unchanged. Taking a step back, with a strong start to the year, and we look forward to carrying this momentum into the second quarter and beyond. With that, I'll now hand the call back to Rich. Richard F. Pops: Thank you, Joshua. So, the commercial and financial elements of the business are strong. With expected revenue of more than $1.7 billion and adjusted EBITDA of more than $370 million, we have the financial resources to invest aggressively in our pipeline and generate significant cash flow. I think it's becoming increasingly clear that our orexin program has brought us to the threshold of substantial value creation. To date, we've developed and shared with you comprehensive clinical data sets across the first area of focus for this therapeutic class, disorders of hypersomnolence. That data set reflects the design and execution of a broad Phase II program, randomized, controlled, multicenter, multiweek across multiple doses and indications using established clinical endpoints as well as additional measures such as fatigue and cognition that relate specifically to the brain circuitry that we're activating. At the same time, we're broadening our development efforts beyond disorders of hypersomnolence, leveraging our portfolio of Orexin 2 receptor agonist candidates. In this area, more than most, we believe that chemistry-based intellectual property represents an important strategic asset. Blair will speak in more detail about our expansion strategy and development plans. But first, I want to update you on where we are with Alixorexton. This year, our focus is on continuing the momentum we built in Phase II to enroll the Phase III Brilliance studies in narcolepsy. Phase III for us is all about execution. We're on the path now to potential registration. The Brilliance Phase III program is now open for enrollment in narcolepsy type 1 and type 2 with site initiation and patient screening underway. Because of the strength of the Phase II results, investigator interest in the studies is strong. We're working to enroll these studies quickly with a sharp focus on quality and execution to support the strongest competitive positioning. From an operational perspective, the duration and scale of the Vibrance Phase II studies generated important and proprietary data that inform the design of our Phase III program. With Alixorexton, we're building a broad and robust clinical data package across narcolepsy and idiopathic hypersomnia. In June, we'll present data from the Vibrance-2 narcolepsy type 2 study at the Annual Sleep Meeting in Baltimore. We reported the positive top line in November, so much of the data set will be familiar to you. Along with the positive outcome of the study, Vibrance-2 is important because it's one of a very small number of clinical studies ever conducted exclusively in patients with NT2. As such, it provides a depth of insight into the characteristics and variability of this population that is largely absent from the existing literature. The Sleep Meeting gives us an opportunity to share the data with a broader sleep community. One-on-one engagements with clinicians and investigators over the last several months have already given us a clear sense of the treatment community's high level of interest and excitement about these data. For idiopathic hypersomnia, or IH, our Vibrance Phase III -- I'm sorry, our Vibrance-3 Phase II study is ongoing and on track to be completed in the fourth quarter of this year. We've initiated enrollment of a split dose cohort of approximately 30 patients across sites in both U.S. and Europe, with patients randomized to Alixorexton or a matching split dose placebo. As a reminder, in IH, the Epworth Sleepiness Scale and the idiopathic hypersomnia severity scale are the established and preferred clinical and regulatory endpoints. In addition to those measures, Vibrance-3 also includes mean sleep latency assessed by the maintenance of wakefulness test, which will help us to characterize the durability of wakefulness over the course of the day. The clinical development program for Alixorexton has been deliberately designed to support strong competitive positioning, both in the quality of the clinical data generated and the breadth of potential dosing options and regimens being evaluated to address individual patient needs. We believe this approach positions Alixorexton, if approved, to become the orexin of choice across both narcolepsy indications. Importantly, Alixorexton has the potential to be the first-in-class in narcolepsy type 2, and our lead in development in NT2 continues to widen. In the meantime, while the orexin development story in narcolepsy continues to mature, with LUMRYZ, we now have an important new medicine being used in current clinical practice. Later this quarter, we expect to announce top line data from the LUMRYZ Phase III REVITALYZ study in IH. Data from this double-blind, placebo-controlled randomized withdrawal study, which enrolled approximately 150 patients would serve as the basis for an sNDA submission with a potential launch in early 2028, if approved. This represents a potential growth opportunity for LUMRYZ in an underserved patient population, and we look forward to data this quarter. So now I'll turn the call over to Blair to provide an update on our expanding development work in orexin portfolio. Beyond central disorders of hypersomnolence, there are many adjacent disease areas that may benefit from modulating the orexin pathway. We identified this opportunity early on, and we're moving aggressively with new molecules. Go ahead, Blair. Blair Jackson: Thank you, Rich. As we outlined earlier in January, this year, we are expanding our orexin development programs into disease areas outside of sleep medicine. We are doing so with 2 new molecules from our portfolio, ALKS 7290 and ALKS 4510. Each of these Orexin 2 receptor agonists has been advancing through single and multiple ascending dose cohorts in healthy volunteers, and we're pleased with the profiles we have observed to date. This year, our development plans take us into patient populations in ADHD and fatigue. Early on, based on our emerging data and feedback from clinical investigators, we identified attention deficit hyperactivity disorder as one of the most compelling initial opportunities for Orexin 2 receptor agonists outside of sleep medicine. ADHD is a common neurodevelopmental disorder characterized by persistent difficulty in maintaining attention and concentration and is frequently accompanied by hyperactive and impulsive behavior. Despite the availability of some treatment options, many patients continue to experience residual symptoms: functional impairment, tolerability issues and adherence challenges even when receiving current standard of care treatment. Against that backdrop, Alkermes is working to advance the evidence base supporting the potential use of Orexin 2 receptor agonist in ADHD. We have established a foundation of data from validated preclinical behavioral models, assessment of neurotransmitters and human EEG that support our conviction in this program. Based on this foundation, we are initiating our first clinical studies of ALKS 7290 in adults with ADHD this year. The first is a Phase Ib randomized placebo-controlled proof-of-concept study designed to enroll approximately 50 adult patients. Participants will receive 2 weeks of treatment with ALKS 7290 or placebo. In this study, we will assess the safety and tolerability of ALKS 7290, along with the effects of treatment on translational measures where we expect to see more rapid changes, including quantitative EEG and certain neuropsychological performance measures. These assessments are designed to evaluate sustained attention, vigilance and impulse control in a shorter duration study. For exploratory purposes, we'll also assess changes from baseline on established clinical ADHD scales. Results from this Phase Ib study are expected in the fourth quarter of this year, and we will provide the first clinical data generated with the Orexin 2 receptor agonist in patients with ADHD. Enrollment in that study is already underway with the first patients dosed in April. As enrollment in the Phase Ib study progresses, we plan to initiate a well-powered Phase II study in adult patients with ADHD this summer. This randomized double-blind study is expected to enroll approximately 300 patients and will evaluate ALKS 7290 versus placebo over a 4-week treatment period. The primary endpoint will be change from baseline in the adult ADHD investigator rating scale. Data from this study, which we expect to complete in 2027 may serve as the foundation to advance to a potential registrational program in ADHD. We are excited to be the leaders in this exciting area of clinical development, and we look forward to updating you on our progress. For ALKS 4510, we are advancing in single and multiple ascending dose studies in healthy volunteers and plan to initiate a multi-dose Phase IIa study later this year in patients with fatigue associated with multiple sclerosis and Parkinson's disease. Fatigue is one of the most common and burdensome symptoms in neurodegenerative disorders and remains a significant unmet need in MS and Parkinson's. Our interest in fatigue in these populations is also informed by observations from our Phase II narcolepsy studies, where we saw improvements in patient-reported fatigue that appeared distinct from effects on sleepiness or wakefulness alone. Fatigue represents a novel area of pharmaceutical development, and we'll provide more details regarding the design of the development program as the Phase II study opens later this year. As we advance through the development program, our strategy will be stepwise, data-driven and informed by interactions with regulatory authorities as we seek to make a meaningful contribution to patient care. Taking a step back, the potential utility of Orexin 2 receptor agonist across a broad range of indications is a significant and striking opportunity. This will be the year that we generate a substantial new increment of data to the clinical evidence base supporting these potential opportunities. With that, I'll turn the call back to Sandy to manage the Q&A. Sandra Coombs: Thanks, Blaire. We'll now open the call for Q&A. Operator: [Operator Instructions] And our first question will come from David Amsellem with Piper Sandler. David Amsellem: So, on the orexin programs beyond sleep wake, in ADHD, can you talk about your thought process regarding development as monotherapy versus adjunctive therapy in ADHD? And how you -- what preclinical data you can point to that gives you confidence that a monotherapy approach makes sense? And then regarding the fatigue program, it might be a little early to talk to this, but can you talk about endpoints that you're exploring? And I realize this is going to be informed by your discussions with regulators, but what are you going to be looking at in terms of early outcome measures on fatigue? Blair Jackson: Sure. David, it's Blair. So, with regards to ADHD, we have a substantive amount of data with regards to orexin agonist in this space. And in fact, it's probably the most tangential of the indications out there for the next place for us to go. We did a lot of preclinical work looking at neurotransmitter release, looking at behavioral models, EEG. We saw increased levels of acetylcholine in the prefrontal cortex, which is a high indication of activity and attentiveness. We also use what's really a highly translatable model within the preclinical testing where it's called the 5-choice serial reaction test. And our initial hypothesis was exactly where you started was what if we did an adjunctive therapy perhaps with a non-stimulant, would that provide a really beneficial outcome. But when we did that model, what we found is across all our studies, we were performing as well as or better than stimulants themselves as a monotherapy. So, we feel that both in the attention and the impulsivity aspects of those programs that we have a really good opportunity here. And our clinical studies that we're kicking off are actually designed to look at just that. So, we'll be looking at monotherapy across a broad population, both intention and impulsivity. And I think the 2 studies that we've set up are going to be really well positioned to give us a full idea of how this could proceed moving forward. With regards to fatigue and that program, we're moving into the clinic with a drug called ALKS 4510. And that's a really interesting area. And we are looking very carefully at the scales to be used within those studies. So, we're going to be testing this in MS fatigue patients and Parkinson's disease patients. And one scale that we're going to use is the PROMIS Fatigue Scale. This is a scale that we used in our NT1 study, where we showed a really strong benefit within the NT1 patients, taking them really from severe to normal on that scale. And that hasn't been shown very widely within clinical literature. We also saw similar outcomes as we moved into the NT2 patient population. So that bodes well as we go to an intact orexin tone system. But the other thing to keep in mind is a lot of these disease areas, they also have their own scales that have been developed as part of that patient population. So, we're going to be testing those 2 and trying to understand best how the different characteristics of the scales work and also how these drugs perform within different subcategories of fatigue. Operator: Our next question will come from Umer Raffat with Evercore ISI. Umer Raffat: I have a 2-part question. And clearly, there's been a ton of interest, strategic interest in the orexin space. And what I'm wondering is twofold. Number one, can you lay out time lines for indications beyond narcolepsy? Because I feel like that aspect of the value has not been captured by much of the valuation numbers that have been thrown around so far. And I ask that in particular because it seems like Lilly's early interest in Centessa was perhaps not even on the lead program. And number two, more importantly, is Alkermes and the Board open to the idea of asset sale rather than a whole company sale if that were to be a possibility at any point? And I'm thinking back to examples like Biohaven. Richard F. Pops: Maybe I'll start and then I'll hand over to Blair as well. Yes, I think Blair just referred to it in the prepared comments, which is the 2 most immediate adjacencies to the hypersomnolence are fatigue and ADHD. We're enrolling patients right now in the first ADHD study, that translational study in adult patients. So that will be a 50-patient study. We'll get data this year on ADHD. So, give us our first sense. And we won't even wait for those data before we light off a bigger proper Phase II program, which we'll light off this summer in ADHD because we feel like the preclinical evidence in that space is quite compelling. And the enrollment in the fatigue studies in Parkinson's and whatever, that starts this year as well. So, we're right on the threshold of new data sets that expand the understanding of the pharmacology in patients without demonstrable orexin deficits. And as you know, the first hints of that come from our NT2 data and our IH data that we've already developed. So, with regard to the second question, our company and our Board, we are a public company. We react to whatever circumstances present themselves. But we feel like right now, we're right on the threshold of major valuation changes as we mature this program. And I think Lilly coming into the market underscores the fact that there's more than just hypersomnolence here at play. This circuitry is directly associated with human wakefulness defined broadly. And I think that opens up a whole bunch of adjacencies. And we start with hypersomnolence and we go from there. Blair, any other thoughts? Blair Jackson: No, I'd just reiterate what Rich said, which is we're in a process right now. We're going to be turning over a lot of cards with regards to a number of these clinical areas, and we're looking to really execute and drive value over the next couple of years. So, I think it's a little premature to talk about any potential sale process. Operator: And moving next to Paul Matteis with Stifel. Julian Pino: This is Julian on for Paul. And I guess just to piggyback again on the orexin program and the pipeline, it would be great to hear about, for this larger Phase II that you're kicking off this summer, what types of patients are you hoping to enroll? And can you just talk a little bit about the translatability of what you'd expect based on past clinical data literature in terms of success on the primary endpoint and how may that translate to a larger randomized Phase III? And I guess, in comparison, how large are Phase III studies relative to the Phase II that you plan on kicking off? Blair Jackson: Yes. Thanks for the question. I think with regards to the ADHD, as we said -- as I said earlier in the call, we saw pretty broad activity in some of our early models with regards to this asset and this mechanism. And so, as we look to enroll our patients in the Phase II study, we think a broad base of patients will be beneficial from this. So, we're not going to look at individual subtypes. Our key primary endpoint for this is the [ ACERs ], which is the adult tool that's been used widely in the industry. And what we're really looking to do is see the relative effect size across the patient population. And just to give an idea of what people have seen in the past, there's typically -- it kind of breaks into 2 main areas. You typically see the nonstimulants and they typically have Cohen effect sizes that are kind of 0.3 to 0.45 or so. And then what you see is a very different result with stimulants. Stimulants typically can be 1 and above with regards to Cohen's d, but it comes with trade-offs. And so, what we're really looking to see is how we perform on that over a 4-week period. That study, as we said in the prepared remarks, is going to be about 300 patients. And that's roughly the size that you see in some of the Phase III programs. And you go a little longer. Usually, you're looking at 6-plus weeks on the primary endpoint. But we'll determine that, and we'll indicate more of that after we see the data in the Phase II. Richard F. Pops: I just want to add a couple of things on that. Number one, what we did in narcolepsy is what we want to do in ADHD, i.e., have a significant amount of clinical data before we launch the Phase III program and run a Phase II program that almost mimics the Phase III program. That's a major risk mitigator in the program. Second thing is we're going to start using the tools that exist, just like we did in narcolepsy. But what's interesting about this pathway is it is activating the brain in different ways than the stimulant activates the brain. And I think with the benefit of additional clinical data, we'll be able to dial into some of the differential efficacy potential of an orexin agonist compared to just a stimulus, which is revving up the brain in a more general way. Julian Pino: And sorry, just one quick question, if I may as well. I think you said you'd be completing the IH study in 4Q, Rich. Are we expecting data this year? Or could it potentially run into next year? Richard F. Pops: That's the translational study, the first study where we're looking at more -- I'm sorry. I'm sorry. Yes, the IH Orexin study, we'll complete that in Q4, and we'll get the data as fast as we can thereafter. It could be right at the end of the quarter or right in the beginning of the second quarter according to the current plan. Operator: And moving next to Jessica Fye with JPMorgan. Jessica Fye: Just a question on LUMRYZ and your guidance for that product this year. Can you just talk about what's embedded as it relates to your expectation for any potential net price pressure as non-AG generic sodium oxybate gains traction in the marketplace? Todd Nichols: Yes. Yes, sure. I'll take that one. So, at this point right now, as I stated, we're guiding to $350 million to $370 million. We had a really solid first quarter, and so we feel really good about that heading into Q2 and for the remainder of the year. At this point, we haven't seen any impact on multisource generics for Xyrem. Again, the most important point is this is a multisource generic for Xyrem, not for LUMRYZ. So, we haven't seen any impact on demand, any impact on physician behavior, any change in payer behavior at this point. A really solid part about the LUMRYZ story is really the diverse patient mix. We get a sizable portion of patients from new to oxybate, from returning oxybate and from the switch market. So, it's a very durable product. So, it's something that we're watching very closely. We're going to have to see how it plays out. But with our full year guide, we do incorporate a range of gross to net scenarios. Operator: And our next question will come from Ben Burnett with Wells Fargo. Benjamin Burnett: I wanted to ask about the Vibrance-3 data that you will provide in the fourth quarter or thereabouts. I guess what dose cohorts will be included in the update? And will this include split dosing at therapeutically relevant doses? Sandra Coombs: Yes. We expect to have top line results from the entire study when we read out the data from that, which would include the split dose arm. Benjamin Burnett: Okay. Fantastic. And can I ask, the split dosing that's being tested, how is that split? Are they evenly split? And are you testing sort of higher total doses in the split dosing cohorts relative to the single-dose cohorts? Richard F. Pops: We haven't disclosed the specifics on the split dose strategy either for the IH study or for the other studies as well, partly because we feel like we've learned so much from our clinical program that is proprietary that we're going to keep that close to our vest until we have the data. Operator: We'll go next to Marc Goodman with Leerink Partners. Marc Goodman: Yes. On LUMRYZ, can you talk about the net patient starts that got you to the 3,600 patients that ended the quarter? And then now that you own the asset, can you give us an update of how you plan to develop valiloxybate? Todd Nichols: Yes. Mark, I'll take the first part of that. So overall, as I said in my prepared remarks, the brand in Q1 realized 3,600 patients on therapy. We actually think that total patients on therapy is the best metric. That's a 28% year-over-year growth overall. That's really the durable part of the brand. That really incorporates any type of demand perspective, access and also persistency. So, our focus is really on total patients. We're always going to be focused moving forward on growing net patient adds, and we feel really good about the enrollment trends we saw coming at the end of the quarter, which is going to set us up very well for Q2 and beyond. And that's really based upon just the overall strength of the mix between new to oxybate switch and also returning. So, we feel good about the patient mix that we're seeing. Blair Jackson: Mark, this is Blair. I'll take the valiloxybate question. So that's an asset that came over as part of the Avadel acquisition, and that's an opportunity for us to potentially develop a no-salt once-nightly product for patients. And so, our plan for that is to take multiple formulations into the clinic and really try to assess a rapid development program. And this is really right up our wheelhouse. As you know, we're a formulation company at our roots and especially when it comes to PK/PD relationships. So, we right now have multiple formulations that are in the clinic and being assessed. And as we have more data later in the year, we'll share that. Marc Goodman: Blair, do you think you're going to have to do a full -- like a full Phase III study? Or will you be able to do like some type of bridging study that is quicker? Blair Jackson: Well, that will really depend on the clinical data that we generate. So, our hope is that we can do some bridging. But again, we'll have to see how this asset performs in the clinic. Operator: And Rudy Li with Wolfe Research has our next question. Rudy Li: Can you talk about your current understanding of the competitive landscape for orexin agonist? And specifically, what key endpoints being measured in your Brilliance Phase III trial that could provide additional label differentiation? Richard F. Pops: I think the major differentiating feature in the orexin space now is the fact that Alkermes has the only program that has a range of doses that have been credentialed in large randomized Phase II studies. And in so doing, we've been able to explore other domains other than just the classic maintenance of wakefulness test and the cataplexy scale by extending into fatigue and cognition. So, while we don't expect fatigue and cognition data to be in our initial label, what we do expect to have a clinical data set that encompasses all those features of the treatment. So when we come to market, if the drug is approved, we expect to come to market for NT1 and NT2, which differentiates us from the first market entrant as well as a range of doses across NT1 and NT2 both as once a day as well as in split dose formats, which further differentiates us from the first market entrant. And I think following the acquisition of Centessa, I think our lead in NT2 as well as NT1 continues to grow. So, we're really happy with the competitive positioning, and we think this is going to open up the beginning of a brand-new class of pharmaceuticals that will continue to grow from the diseases of hypersomnolence. Operator: And we'll go next to Luke Herrmann with Baird. Luke Herrmann: One on 7290 in ADHD, you laid out the effect sizes we've seen across different standards of care. So based on the preclinical data, do you think the more likely outcome as a monotherapy is sort of a more tolerable asset that sits in the middle of stimulants and nonstimulants in terms of efficacy? Or do you think efficacy could actually exceed what we've seen with stimulants? Blair Jackson: Well, again, what we've seen in our preclinical data is we performed as well or better than stimulants in our early models as monotherapy. So obviously, if we're able to achieve that clinically with the tolerability profile that we see with this class of drugs, that's a great outcome for us. But I think there's a wide range of market opportunities regardless of what we see in the clinic, but our goal will be to get the strongest efficacy possible. Luke Herrmann: Great. And then just one follow-up on the Alixorexton Phase III studies. I believe you commented on the high level of patient interest. Has this exceeded what you anticipated? And would this maybe lead to more expeditious enrollment? Richard F. Pops: The difference between Phase III and Phase II for us is that when you go into Phase II, no one's used your drug before. And now we go into Phase III with a major data set that's been presented at major meetings and a buzz about this program. What mitigates against the rate of enrollment, though, is the control and the rigor that we learn from Phase II about which sites to use and how to select patients and how to make sure that you're not just enrolling for the sake of enrollment numbers, but to enroll the finest cohort you can over the period because those data become your label. So, the quality of that study is sacrosanct. So, we expect to enroll the study correctly at the rate that we'll determine as we activate sites, and we'll keep you guys posted as we go on that. Operator: We'll hear next from Joseph Thome with TD Cowen. Unknown Analyst: This is Jacob on for Joe. I was wondering if you were planning on studying LUMRYZ in combination with an OX2R agonist in the future? And if so, what would a trial for that look like? Richard F. Pops: Yes. Jacob, it's something we're hearing so frequently from clinicians now that we've completed the acquisition. And we'll go to the sleep meeting in Baltimore, representing both once-nightly oxybate with extended efficacy as well as the Alixorexton program. And so we will be harnessing that energy into a clinical program over time. We won't -- we're not going to start that right away. We need to finish some other things first, namely the registration program for Alixorexton as monotherapy. But I think there's increasing interest in understanding both the nighttime and the daytime aspects of the disease. Operator: We go next to Ami Fadia with Needham & Company. Ami Fadia: I've got 2. Just with regards to Vibrance-2 that's going to be presented at the sleep meeting in Baltimore. What additional data on top of what you had announced at the initial data readout that we can expect at the meeting? And with regards to the LUMRYZ study that's expected to read out in the second quarter, maybe talk about your expectations for what that profile is likely to look like, the market opportunity and what you're doing in terms of preparing for a potential launch of that indication? Richard F. Pops: Ami, it's Rich. I'll start. As I mentioned, we presented most all of the data on the Vibrance-2 study in November, and that's available on the website if people want to look at that again. But we will give a bit more sleep in 2 principal domains. One, we'll try to give a little bit more dimensionality to the efficacy effect that we saw. And the other is we do have data from the extension phase now that we can tack on to the double-blind phase. And that's always instructive to see what happens as patients stay on therapy for a longer period of time. And of course, at the sleep meetings, those data are presented by investigators and you have the ability to talk to people who actually have hands on in the use of the drug. Your second question was about LUMRYZ in IH and the market opportunity for that. I'll start and then I'll ask Todd to comment on that. What's interesting is that the competitive product is Xywav the principal growth of that drug now is driven by the IH indication. And part of the reason we went into IH for Alixorexton was talking to patients and patient advocacy groups, there's a huge unmet need for new medicines in IH. And we just had a thought leader here at the company yesterday saying that he thought oxybates at this moment are probably the best treatment for idiopathic hypersomnia, which is interesting. I think that's underappreciated. So, we will be able to enter this market with LUMRYZ in 2028. So, we have some time to prepare for that type of launch if it's approvable. But we're quite excited about that as a life cycle growth tool for LUMRYZ. Todd, do you... Todd Nichols: Yes. The only thing I would just add a couple of things. We continue to validate all of the research that we've done, listening to the community, listening to HCP. We believe it's a really underdeveloped category right now. There's 40,000 patients that are diagnosed. We think that's underrepresented. And there's only one FDA-approved product on the market. We think that LUMRYZ has an opportunity to be the second product. And we know how well LUMRYZ is received in the community now for narcolepsy. So, our expectations are very high on what the opportunity is for LUMRYZ in IH. As Rich said, as the data is presented, as we go through the approval process, we'll be continuing to build what our launch plan looks like, but it's something that we are very excited about. Operator: And we'll go next to Jason Gerberry with Bank of America. Chi Meng Fong: This is Chi on for Jason. Just on ADHD, can you talk about what's unique about the molecule PK or dosing profile that could help you mitigate insomnia or urinary frequency, the class of adverse -- class adverse events you have observed in narcolepsy patients? And would you expect the ADHD patients to be more or less sensitive to these class AE so far? And just a quick follow-up on Vibrance-2. Would you provide any sort of kinetics on weekly MWT data to better contextualize data comparison relative to a key competitor of yours, which had 2-week data, and you've talked about observation of tachyphylaxis in the past with Vibrance-2. Blair Jackson: Chi, it's Blair. I'll start with ADHD, and then I'll get Rich to answer you on the Vibrance-2 stuff. So, with regards to ADHD, I think a couple of things I want to make sure we're clear on. One is the adverse events that we typically see with this class of orexin agonist. It's a very wide therapeutic window. As you saw from our programs in NT1 and NT2, we have a really nice AE profile overall. There's -- the main effects associated with this class are really [ polyuria ] and some transient insomnia that we see at the beginning of the study. As we talk about the ADHD program and the PK dosing profile, I think with regards to any of the new programs that we move outside of narcolepsy, we're developing them with new drugs. So ALKS 7290 is its own unique molecule. It's been designed by itself specifically. It's optimized for the patient populations that we're going after. And so, it will have its own unique PK and dosing profile that will match that patient population. As you know, what we saw in our NT2 program is that patients who have an intact orexin system, so who have natural orexin tone, we tend to see a very mitigated overall AE profile due to that fact. And so again, I think we're well positioned to test a wide range of doses within that patient class. Rich, do you want to do... Richard F. Pops: Yes, the Vibrance-2 data at sleep, you will see time course data on a multi-week basis for the ESS score. And I just want to make the point that there is no competitive data that's been presented so far. There's only one company that's shown multi-week successful data in NT2 and that's Alkermes. Operator: And we'll hear next from Akash Tewari with Jefferies. Anastasia Parafestas: This is Anastasia on for Akash. So, when you previously talked about NT2, you've kind of segmented the pop into a couple of buckets of patients. You have the ones who would benefit from BID dosing and then the ones with kind of a more modest effect size. So how are you thinking about that dynamic as you consider orexins working in other indications where patients have more normal hypocretin levels at baseline like ADHD or fatigue? Richard F. Pops: We just think overall, dosing flexibility will be a really important thing because people have different physiologic set points for their base orexin tone and they have different lifestyle expectations, whether they want to stay up until 10:00 at night or they want to go at 7:00 p.m. So, our feeling is that we've established in data so far in NT2 patients as well as IH in early stage that patients with normal orexin tones can benefit from an orexin agonist. So then that degree of that benefit will be determined by each individual set point, as I just described. So, the prerequisite for addressing that commercially is just a range of doses with data supporting those -- that range of doses in the label, which is exactly why we've designed the pivotal study, the Brilliance study to include once-daily dosing, split dosing across that range of doses that we elaborated in Phase II. Operator: Moving next to Ash Verma with UBS. Unknown Analyst: This is [ Ho ] on for Ash. Our first question is for the pending LUMRYZ IH study. How do you think about the placebo arm here given the patients may have some bias knowing that sodium oxybate works in IH? And our second question is, so it's good to see the decent beat on VIVITROL. Can you help us understand your latest thoughts on how the VIVITROL revenue trajectory could be in 2027 and beyond as Teva Generic enters? Richard F. Pops: I'll take the first and Blair and Todd talk about the second. The LUMRYZ -- just understanding the LUMRYZ IH Phase III study is a randomized withdrawal study. So, patients would have all been on the oxybate. So, there's no blinding issue. And then it's withdrawn on a blinded basis. So, this is the same design that Jazz used with their Xywav study. Blair Jackson: Yes. And I think with regards to VIVITROL, as we move into 2027, there's a number of interesting scenarios in front of us. Obviously, we have the potential entrant of Teva into the space in the beginning of 2027. And we're looking at a lot of scenarios related to that, including some scenarios where Teva actually doesn't -- isn't able to make it into market. What we don't expect, though, is to have a really dramatic impact on VIVITROL as these -- as the new entrant comes into the place. VIVITROL is a unique asset. It requires a lot of manufacturing capability. It requires a lot of commercial infrastructure and handholding with patients and physicians. And Todd can give you a little more on that. Todd Nichols: Yes, absolutely. Just to kind of reiterate, we have really 2 key priorities right now, and that's delivering for 2026 for VIVITROL. We're right on track to be in the range of our full year guidance, really driven by the alcohol dependence indication. And to reinforce what Blair said, we've been working on this for a number of years. We have a range of scenarios that we're playing through, and our research continues to reinforce that we don't see this as a typical erosion if Teva were to make it into the market, it's a durable product. And so, we'll be prepared regardless of what those scenarios are to flex our resources if we need to and also be prepared to compete. Operator: Our next question will come from Uy Ear with Mizuho Securities. Uy Ear: So maybe -- apologies for missing this, I dialled in a little bit late. Could you maybe just help us understand if there's a reason or not on why the patient mix may change going through the year given the nice patient mix that led to better-than-expected gross to net? And the second question is on ADHD, is there anything else in terms of potential differentiation other than efficacy? Todd Nichols: Yes. I'll take the first one regarding patient mix. We did see some favorability, some Medicaid favorability in the first quarter of the year. We don't expect -- we don't actually forecast on favorable patient mix. We do expect that for the full year that we would see the access profile for LYBALVI expand. So, we do have better line of sight to what that profile would look like. We're always in active negotiations with payers and our full year range actually assumes that, that could play through. But that's the real logistics of the business right now. We're just not forecasting any additional favorability for the remainder of the year. Blair Jackson: And then with regards to ADHD, look, we're looking for differentiation both on efficacy and tolerability. I think if you look at the ADHD market and how it's evolved, it really was started around the stimulants and the amphetamine use within adults and children. And that comes with significant trade-offs. It comes with side effects. It comes with potential abuse. And I think people have been really looking for more tolerable agents that are maybe nonstimulant for a long time. And up until now, really the efficacy of those agents really just hasn't matched what you've seen in the stimulant class. So, I think the really holy grail for this indication in this area is to create an asset that has the efficacy of a Vyvanse or something like that, but also is really well tolerable. And the orexin agonist class has the potential for that. It's a new mechanism of action. It operates on the alertness centers in the brain. We've seen attention and impulsivity benefits in preclinical models. We've seen the right neurotransmitter release and profile as we look at these assets. So we think there's a real opportunity here to really thread that needle and provide a new benefit to this patient population. Operator: And our final question will come from David Hoang with Deutsche Bank. David Hoang: I just had 2. Maybe first with the Vibrance-3 IH study. When we do get that data for the split dosing arm, I guess, ideally, what would you like to see for that split dose versus a single dose to help validate your hypothesis? And I guess do you just have any sense of in the real-world setting if a split dose or a single dose would be preferred? And then on the LUMRYZ opportunity in IH, if LUMRYZ is approved for IH, how do you think about where your patients may come from? Do you think that would be mostly oxybate naive in IH? Or would you think that there'd be a good proportion of switches from Xywav as well? Richard F. Pops: David, it's Rich. I'll take the first. The hypothesis for the split dose in IH is driven by the observations that we saw in the NT2 study. And so the simple readout would be to look at the MWT and see whether we're extending the later time points and elevating the latencies in the later time points, recognizing that it's almost a laboratory measure that we're using in the IH population because the MWT is not a preferred endpoint for IH, but it's simply a way for us to demonstrate the pharmacodynamic effect of the split dose and to confirm our dosing assumptions. In the real world, we've talked to a lot of different folks in the course of market research. I think that the once daily will continue to be probably the modal approach that patients use. But over time, as the category continues to mature, I think we analogize it's the ADHD space where there's a whole range of dosing alternatives and people can tailor their dose to their lifestyle. And that's why we think there will be a real virtue to having a suite of once-daily doses as well as accompanying split doses that people can then dial in to the level of wakefulness that matches their lifestyle and their disease. Todd Nichols: Yes. And in terms of the IH opportunity for LUMRYZ, we clearly see a high unmet need here, and we think there's a significant opportunity for expansion potential as we think that the market right now is very modest, even with one product approved, there's only a very modest penetration. So, we see market expansion opportunity, which will be a new patient start opportunity that LUMRYZ will have the ability to tap into. That's what we've seen with narcolepsy. But at the same time, it's also going to create another market, which is a switch market. And that's what we've seen with narcolepsy. So, we think that it will mimic kind of the patient patterns that we've seen in narcolepsy, which is new to oxybate patients, switch patients and returning patients. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Sandra Coombs for closing comments. Sandra Coombs: Great. Thank you, everyone, for joining us on the call today. Please don't hesitate to reach out to us at the company if we can be further helpful. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good afternoon. My name is Joe. I will be your conference operator today. At this time, I would like to welcome everyone to Live Nation Entertainment, Inc.'s first quarter 2026 earnings call. I would now like to turn the call over to Ms. Amy Yong. Thank you, Ms. Yong. You may begin. Amy Yong: Good afternoon and welcome to the Live Nation Entertainment, Inc. first quarter 2026 earnings conference call. Joining us today is our President and CEO, Michael Rapino, and our President and CFO, Joe Berchtold. I would like to remind you that this afternoon's call will contain certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ, including statements related to the company's anticipated financial performance, business prospects, new developments, and similar matters. Please refer to Live Nation Entertainment, Inc.'s SEC filings, including the risk factors and cautionary statements included in the company's most recent filings on Forms 10-Ks, 10-Qs, and 8-Ks for a description of risks and uncertainties that could impact the actual results. Live Nation Entertainment, Inc. will also refer to some non-GAAP measures on this call. In accordance with SEC Regulation G, Live Nation Entertainment, Inc. has provided definitions of these measures and a full reconciliation to the most comparable GAAP measures in our earnings release. The release and reconciliation can be found under the financial information section on Live Nation Entertainment, Inc.'s website. We will now open the call for questions. Operator? Operator: Thank you. The first question comes from the line of Brandon Ross with LightShed Partners. Please proceed. Brandon Ross: Hey, guys. Thanks for taking the questions. First, you call out timing shifts in fan count due to venue mix in the release. Can you first explain why this year looks different than most, and then how that translates to AOI phasing throughout the year? Joe Berchtold: Sure, Brandon. What is going on with timing is we have very strong growth globally in stadiums and strong growth in amphitheaters in the U.S. Those tend to skew more towards Q3 from a calendar standpoint. Most of the summer months are in Q3. We were calling out that as you think about the weighting of the different quarters this year, while we have strong growth across all of the pieces, that growth is really going to come more strongly in Q3 than it would in previous years. That will translate into stronger AOI for Q3 and, on the margin, also shape up to have a very strong Q4. Brandon Ross: Okay. And then speaking of amphitheaters, I guess the big stumble last year was in AMPs really on the supply side, and it seems that you have made up or more than made up for that this year. How sure are you that the demand is there on the AMPs to fill that supply? The leading indicators seem great, but AMPs are more of a real-time purchase, and every time there are elevated gas prices, there is a little more worry about amphitheater performance. And there have also been some cancellations late as there are every year, but if you could address that too. Michael Rapino: Let us start with cancellations and work backwards, because I know that I saw some of those articles. This year will be no different than any other year. We always have a few cancellations. To give you perspective, we tend to have a 1% to 2% cancellation rate historically, both at Ticketmaster across the industry and at Live Nation Entertainment, Inc. We are tracking slightly below the industry, so we see no challenges at all in that. To give you perspective, we have about 15 thousand shows on sale; 100 will be canceled. That would be typical. We see nothing about cancellations in the 2026 full calendar that would be extraordinary. There is always a tour or two that does not work out. On amphitheaters, as you said, we are having a strong 2026, focused the team on the supply to make sure we have the show count. We definitely have that this year. And we know sitting in May, on the demand side, we would know by this time of the year how we are filling up for the summer. It is not last minute. It is on sale, and as you see from the numbers in our release, we are tracking ahead of last year on show count and on ticket sales, up over double digits. We see a strong year in amphitheaters. We think they are a great product; demand will always be there. They tend to be lower priced than arenas and stadiums, a lower cost entry point to come in. It is a volume game, and on-site just started. We are days into the season; we see positive numbers so far. Our premium sales, our on-site, and our demand indicate we are going to have a strong 2026 in AMPs. Operator: The next question comes from the line of Analyst with Goldman Sachs. Please proceed. Analyst: Hey, guys. Thanks for taking the questions. Michael, maybe just broaden out the question around supply this year. In the release you highlighted concert bookings pacing up across stadiums, arenas, and AMPs. Would be curious if you could talk a little bit more about how touring activity is shaping up for this year, where in the slate you are seeing the strongest inflections year-over-year in supply, and then where there might still be opportunity to add event supply as we make our way into the summer concert season over the next couple of months? Michael Rapino: If we step back, as we discussed in our Investor Day on supply, there are more bands on the road on a global basis, so the pie is growing. Our job is to keep making sure we maintain our market share and grow with that expanding pie of supply. We are seeing this global supply of artists continually grow. That will mean ultimately more bands on the road. They will be filling all levels from the club up to the stadium, which we are seeing this year. Most of the supply is coming from the growing market on a global basis across all levels of supply. We think that will happen for many years to come as the world has flattened and bands from all over—from Latin America to K-pop to Colombia to India—are now on the road and able to travel and tour in all of the different venues and festivals around the world. We are seeing strong supply across the globe right now. Our international business is strong, maybe even stronger than America in terms of growth. Latin America is on fire, small to big to festivals. We are seeing great global supply and demand, as we predicted in our Investor Day, coming to life this year. Analyst: That is great. Thanks for that. And then, Joe, maybe on regulatory, I think this is the first time we have connected since the settlement on the federal side and then the ruling on the state case. Could you provide an update on where we stand today in that process, where you feel like your views still differ from how the rulings played out, and how investors should expect the process to play out from here? Joe Berchtold: There is a day in court on Thursday where there will be a discussion on the process. Three key elements here: one is we have a few motions that we made as it related to some of the evidence and how that proceeds, and we need a ruling on that. Two is the judge determining the process for the review of the settlement with the Department of Justice. And third is the remedies portion of the trial that just concluded. We have views on how we think it should proceed, but the judge will decide that, and that will define the timing and the exact pieces. Until then, we have to wait and see how he lays it out. Operator: The next question comes from the line of David Karnovsky with JPMorgan. Please proceed. David Karnovsky: Hey, thank you. Joe, in the 10-Q, there is some detail on a venue securitization transaction. Could you walk through the structure at a high level? And then how does this play into your Venue Nation plans over the long term as far as buying or building locations? Joe Berchtold: Sure. This is a great vehicle that the team developed to think about how we fund the venue side of the business going forward. I have talked before about how, in my mind, there is a little bit of a propco/opco two-business model that we have here, and there is an opportunity with the propco to effectively have a synthetic component of the balance sheet, while still keeping it all under one roof for flexibility and control. Effectively, think about it as having a propco that you can have more leverage on, which is collateralized by all your venue holdings. We have an initial raise that we did of just over €600 million using some of the venues as collateral. As we grow the venue portfolio, we can take the venues that we add and put those in as additional collateral, which lets this component of our balance sheet continue to grow as we build out the venue portfolio. That is being kept separate and not being used to securitize the more opco side of the business. This is an innovative financing that we came up with, which we think works very well in giving us the first step to really enable our funding and continue to build out the venue side of the business. David Karnovsky: Okay. And then maybe just sticking on Venue Nation. Earlier this year, you announced in Argentina an agreement with Club Athletico for certain booking and naming rights as it relates to the stadium there. I am curious how replicable this model is—meaning partnerships with sports teams in Latin America or even other regions where you are expanding venues—where maybe there are existing properties sitting there in need of capital or a refresh that you can enter as partner? Michael Rapino: We love that deal, and we absolutely think on a global basis it is something we can replicate. Lots of these stadiums around the world are not NFL-activity kind of venues, so they do not have as much activity going on. We are a great partner to help make sure we can put some shows in there, bring some sponsorship expertise, and some capital if we have to. We have a similar arrangement in Argentina with River Stadium. On a global basis, we like building arenas, but on the stadium side we like partnering with them. It is less capital intensive but locks up a lot of the revenue streams. Operator: The next question comes from the line of Cameron Mansson-Perrone with Morgan Stanley. Please proceed. Cameron Mansson-Perrone: Two on the ticketing business, if I could. Michael, could you update us on what you and Sam are focused on from a product perspective with Ticketmaster? And then in the past, you have talked about driving ancillaries at Ticketmaster. Do you see that as an increasingly important factor for that business going forward given what seems like increased sensitivity around fees? And then one more. Michael Rapino: I will start, then Joe will jump in. We are thrilled in general with our new hire, a strong product engineer. Joe and I have ongoing dialogue with him on the product roadmap on a global basis, how to inject AI in the consumer side and the B2B side. Our top priority is to make that on-sale smooth, more transparent, and to drive as much consumer confidence as we can in the process. He is doing a lot of work on that right now—identifying and building out our face value exchange program to be much more robust for artists to use, giving them more tools in general for the on-sale. That is our biggest pain point. We have made great progress in the last few years and are the best in the business at it, but we will continue to make that a better process with more tools for artists and fans. That is the front end. Joe will fill you in on the wider perspective. Joe Berchtold: On the back end, the biggest unlock that Sam is bringing is how we think about a lot of the new markets we are going into. The strategies he has been developing for Latin America and Asia, particularly for Japan, figure out how we are not locked into some of our legacy constraints of great platforms built in a time before we needed the flexibility we need today. In part using some AI tools and other innovative approaches, he is rapidly accelerating the pace at which we are moving into those markets with the ticketing solution. That is the big back-end piece. And then, absolutely, we are continuing to be very focused on how we use the platform to continue to drive additional economics from the scale of what we are doing. We know that the venue clients we have that are really keeping the bulk of the service fee will continue to keep the bulk of the service fee, and we need to continue to find ways that we can build value off the platform and keep our fair share of that. Cameron Mansson-Perrone: Thanks. That is helpful and interesting. My follow-up was on headwinds you call out in terms of the mid-single-digit headwind at the ticketing segment this year. Could you remind us what exactly is incorporated in that, and any guidance or expectation with regard to how you see the legal expenses that are running through ticketing? Should we expect that run rate through the remainder of the year, or any color there would be helpful? Joe Berchtold: Those mid-single-digit headwinds are really talking about steps that we have taken in the secondary, that we announced earlier—some pretty dramatic steps that limit the broker inventory being put on the Ticketmaster system—that we said would be a step down, a structural step down, that would have that level of impact. That is a one-time thing. As we grow to offset that this year and still expect to have some growth at Ticketmaster for the year, that weight we comp and it is no longer an issue as we move forward into the future. As it relates to some of the one-time expenses, I do not think we will continue to have this level of elevated expenses. We will continue to have some expenses on the legal side related to the FTC and some other activities. They should moderate over the next few quarters from where they are today. Operator: The next question comes from the line of Analyst with Wolfe Research. Please proceed. Analyst: Hi. Two for Joe, if I may. One on the velocity of new venue openings. In the last three years ending in 2025, your CapEx rose from $400 million a year to $600 million to $1 billion last year. It would be equal or higher this year. I am wondering about the dollar value of venues opening in 2026 and 2027. Are we right to assume that 2027 ought to be a bigger opening year, in terms of dollar value and revenue, than 2026 was? And then a longer-term question about your cash flow: if the business were not expanding capacity, what do you think Live Nation Entertainment, Inc. could generate in terms of free cash flow as a percentage of EBITDA? What do you think the free cash flow margin of this business is at steady state? Joe Berchtold: Algebra test in real time. I am not going to try to give you exact numbers. If we stopped investing this $1 billion and stopped buying venues, we are going to be able to throw off a lot of cash. The Ticketmaster business today is an extremely high cash flow conversion business. We have been using a lot of that cash to drive growth on the venue side, but it would be throwing off a tremendous amount of cash. On the concert side, maintenance capital is really only a couple hundred million dollars, so you would be throwing off pretty healthy cash on the concert side as well. That said, we still see a long runway of opportunities for venues. We do expect to see acceleration in their opening. I am not going to give you the exact 2027–2028 timing. The venues that we have under construction are all multiyear construction projects. The ones that we started last year and this year will take a few years, and we are opening a couple great amphitheaters this year, as well as a number of other theaters and other venues. We expect that to accelerate as we get out into 2027 and 2028. Operator: The next question comes from the line of Batya Levi with UBS. Please proceed. Batya Levi: Great. Thank you. Follow-up on the ticketing side: adjusting for that legal spend, it looks like margins were up nicely year-over-year. Can you talk about where the outperformance came from? Are you seeing benefit of these AI tools already flowing through? And on the concert side, can you talk a bit about the outperformance despite tough comps that you had in LatAm? Any regions that you would call out for the rest of the year? Joe Berchtold: I will start with the ticketing side. We are giving you the volume here: ticketing sales are up nicely. We continue to grow the business notwithstanding some of the headwinds on the secondary side because of the actions we have taken there. A lot of the growth on the Ticketmaster side is coming from additional concert tickets being sold. The business operationally and its fundamentals continue to be in good shape. We are adding more clients globally and selling more tickets. The underlying business is working very well and setting this up nicely as we go into the latter part of this year and into next year. On the concert side, there is a lot of bouncing around quarter to quarter. It was a very good quarter in Latin America, which drove both concerts and sponsorship performance. Some festivals there did well. Going forward, we see both North America and international markets performing very strongly this year. Michael talked earlier: stadiums are up globally, up in the U.S. despite a very strong year last year, and up strongly in international markets. Amphitheaters and arenas are up nicely in the U.S. That should drive solid growth throughout North America. You have Latin America, Europe, and parts of Asia; we are seeing very strong global demand for concerts, which is then translating into the sponsorship and ticketing businesses. Operator: The next question comes from the line of Ian Moore with Bernstein Research. Please proceed. Ian Moore: Hi, thanks. The secondary ticketing business is clearly undergoing a number of changes to further mitigate scalping and bot activity. In the past, you have sized secondary as a low double-digit percent of fee-bearing GTV. But given the sustainability of primary ticketing growth, where do you see secondary share of fee-bearing GTV going as those changes play out? Is it high singles or mid singles? Joe Berchtold: I think it is probably a gradual decline. Notwithstanding some of the changes we are making this year, there will be a structural drop, and I think over time primary will win. Content will control its tickets, and it will be a slow decline. We have long said we consider this to be a feature, not a standalone product. While secondary is being offered, we want to make sure fans can come to our site for a safe exchange and get tickets they know will be delivered. It is there because it is part of the ecosystem, and we do not have a strategy to grow it. If we are successful, it will decline into the single digits over the next several years. Operator: The next question comes from the line of Kutgun Maral with Evercore ISI. Please proceed. Kutgun Maral: Thanks for taking the questions. First, I know Live Nation Entertainment, Inc. is really a supply-driven business, but I did want to follow up on the demand side given investor focus. Underneath the surface, are you seeing any differences by geography, income cohort, venue type, or price points? And given the broader macro and geopolitical volatility, including the disruption in the Middle East, is there anything you are seeing in either the U.S. or international markets that could affect demand, routing, or fan behavior as we move throughout the year? Second, I wanted to ask about premium hospitality within Venue Nation. The release called out the ongoing rollout of the Vinyl Room, for example, with on-site spending at the Hollywood Palladium already over $100 per fan, which is encouraging. How applicable is that playbook across the broad venue portfolio, and as you scale these types of premium hospitality concepts globally, how meaningful can they become as a driver of per-fan monetization and Venue Nation AOI over the next few years? Michael Rapino: I will start with the Middle East since you brought it up. It does not affect our business today. The Middle East is a very small touring market overall, so it would have no material effect on our business. We expect that over the long term it will be a touring region, but it does not affect routing today. We had no tours or shows planned in that market right now. On the demand side, we have ongoing reports; we understand fan demographics and who is coming to our shows. It is very broad, as you can imagine. Concerts appeal from 12 to 90 years old depending on the artist and where they are playing. We see no slowdown in any genre or demographic. Whether it is an amphitheater in Indianapolis or an expensive stadium show in New York, we have seen no demand pullback anywhere. Same thing in the rest of the world—from Argentina to Milan to Singapore—we do not see any pullback. Consumers still consider the live show very important in their social calendar for the year. Whether they are going to one, two, or three shows a year, it is paramount that they get to that show. We have seen broad, strong demand across the board on all genres at all venue sizes. On premium, we think in general the music business, venues, and festivals can do a better job of providing a better service and product. Historically, the concert has been about 99% GA and 1% premium. We now see that people will pay for a better experience. I was in a building meeting this morning looking at two new arenas we are building, and our goal there is to have up to 30% of that house in a premium capacity so we can have a better experience where fans want to come to the night and upgrade and sit in a better suite or box or have better hospitality. A lot of the CapEx we spend at our amphitheaters is doing that. We have outfitted three this summer—Indianapolis and Dallas—where we took the existing business and added upscale premium offerings like a Vinyl Room that we have scaled or similar clubs like the Back Lot. We are taking those amphitheaters from 1%, 2%, 5% premium up to 25% premium. It is a long haul to get there; it is easier when you are building from scratch. We believe there is a lot of opportunity in premium and a better experience. It is not just about being premium. Consumers will pay for a shorter line, better parking, better hospitality. We are looking at that much like sports arenas have done over the last 10 to 15 years. Operator: The next question comes from the line of Jason Bazinet with Citi. Please proceed. Jason Bazinet: I remember back in November when you gave the Venue Nation fan count of 5 million and it sort of disappointed folks. I think in the release today you took that number up. Is that M&A happening more rapidly or building happening more rapidly, and should we take the 2029–2030 numbers up, or is it more a function of front-loading the Venue Nation fan count relative to what you said in November? Joe Berchtold: We said we are expecting to grow the Venue fan count this year by double digits. Previously it was 5 million on 65 million, so 65 million to 70-plus million tells you it is going to be somewhat more. It is probably pretty evenly distributed between increased performance at our existing venues that we are operating and what we have been adding. We feel good about this year. I do not think we are ready quite yet to start contemplating exactly what we are going to add in 2027, 2028, and 2029, but we think this year shows the power of what we are doing with the venue strategy. Michael Rapino: I agree. Operator: Thank you. Ladies and gentlemen, this concludes the question and answer session. I would like to turn the call back to Michael Rapino for closing remarks. Michael Rapino: Thank you, everyone, for your support. We are looking forward to a great summer, and we will talk to you in August. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2026 Earnings Call. [Operator Instructions] Mr. Eliason, you may begin your conference. Nic Eliason: Thank you, and welcome to our first quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our first quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements, except as may be required by law. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website. I will now turn the call over to Javier Rodriguez. Javier Rodriguez: Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. DaVita's foundation is clinical excellence, driven by operating rigor that produces durable results. We have consistently delivered exceptional clinical outcomes and strong financial performance, and this quarter is no exception. To ensure we sustain and build upon this foundation, we're actively investing in our future capabilities. In a rapidly evolving landscape, we're taking a pragmatic approach to expanding our IT systems and digital infrastructure. These targeted technology investments are designed to empower our clinical teams and serve as a backbone for our next chapter of clinical and operational excellence. Today, I'll walk through our first quarter performance, share how technology is enhancing our operations, provide an update on ACA Plans and finish with our outlook for the remainder of the year. But first, I'll start as we always do with a clinical highlight. This quarter, we're highlighting the continued momentum of Integrated Kidney Care, or IKC, our value-based care business. In the latest results from CMS' Comprehensive Kidney Care Contracting program, or CKCC, we delivered year-over-year improvements across all 3 key measurements, which are gross savings rates, total quality score and high-performing status. Clinically, this means our IKC care model, together with our physician partners is improving the health and well-being of our patients. Economically, we generated the highest total aggregate savings of any participant driven by our 4.5% improvement in gross saving rate since the beginning of the program. This is a clear example of how IKC clinical rigor paired with data-driven insights is delivering better outcomes for our patients and a more sustainable model for the future of Kidney Care. Turning to the first quarter. We delivered strong financial results ahead of our expectations with outperformance from each element of our U.S. dialysis trilogy; treatment volume, revenue per treatment and cost per treatment. This balanced outperformance reflects the strength of our team and our focus on consistent execution. I'll touch on a couple of key metrics that contributed to the quarter and will help shape the remainder of the year. Starting with volume. In the first quarter, our treatment volume was slightly ahead of forecast. Quarter-end census was ahead of plan as a result of better-than-forecasted mortality, partially offset by lower-than-forecasted admits. Census also benefited from patient transfers in related to ongoing clinic closures by Fresenius. Although negligible in the first quarter volume, we anticipate that these transfers will contribute to positive treatment growth over the remainder of the year. As a result, we're raising our volume growth expectations for the full year from flat to a range of 25 to 50 basis point increase. Approximately half of the increase is from better underlying performance and half is related to transfer in from Fresenius. Switching to labor. Q1 was ahead of plan, primarily from better productivity, which we expect to sustain over the balance of the year. Let me turn to our technology strategy and the investments we're making to strengthen our operations and ultimately, our clinical outcomes. We're taking a disciplined approach to AI that we've been building towards for years, and we're seeing that groundwork translate into real impact. Our strategy has 2 parts. First, we've modernized our data infrastructure. This means standardizing and integrating high-quality data across the enterprise through systems like our proprietary EMR platform. That work gives us a differentiated foundation to power AI applications at scale. Second, we're actively deploying AI solutions across clinical, operational and business use cases with a focus on supporting our caregivers, improving how we operate and drive measurable impact. One example is [ ScheduleHub ], a new tool that dynamically processes changes in each center's patient census, capacity and teammate availability to recommend optimal patient and staffing schedules in real time. Given the complexity of the center scheduling, we expect this will reduce administrative burden for our facility administrators and enhance teammate experience while supporting patient care. This is one of many examples where our sustained IT investments translate into tangible scale benefits across the enterprise. We're still early in our AI journey, but given the strength of our data foundation, and the pace of our deployment, we are well positioned to outperform both clinically and operationally as technology evolves. Next, on ACA Plan enrollment. Based on what we know today, ACA open enrollment is trending towards a slightly favorable outcome relative to our prior expectations of an approximately $40 million headwind in 2026. This favorability will be partially offset by more patients selecting lower-level bronze plans, which translates to higher out-of-pocket costs and a modest RPT headwind. We will gain greater clarity on the enrollment outcome and mix impact as we get deeper into the year. I will conclude my remarks with our financial outlook for the remainder of the year. With our first quarter results, we're off to a strong start for the year. As a result, we're raising and narrowing our guidance for adjusted operating income to a range of $2.15 billion to $2.25 billion. Similarly, we're raising our adjusted EPS guidance to a range of $14.10 to $15.20 per share. The increased guidance is primarily the result of our higher volume forecast for the year and lower patient care costs. I will now turn the call over to Joel to discuss our financial performance in more detail. Joel Ackerman: Thank you, Javier. Today, I'll provide details on our first quarter results, then give you some more context on the update to 2026 guidance that Javier shared. First quarter adjusted operating income was $482 million, adjusted earnings per share from continuing operations was $2.87 and free cash flow was $140 million. Adjusted operating income came in about $50 million ahead of our forecast. Approximately half was the result of performance ahead of plan and the other half, the result of timing. Starting with detail on the U.S. dialysis segment. Treatments declined about 20 basis points versus the first quarter of 2025 and treatments per normalized day increased 40 basis points versus Q1 of 2025, approximately 20 basis points ahead of our expectations. As Javier mentioned, we are increasing our full year volume forecast to 25 to 50 basis points. As a reminder, this represents our forecast for treatment growth. This translates to 50 to 75 basis points of growth in treatments per normalized day because of the year-over-year treatment per normalized day headwind in 2026 compared to 2025. Revenue per treatment declined approximately $5 sequentially, primarily as a result of the typical first quarter headwind from patient-pay responsibility. Year-over-year RPT growth was approximately 4% in the quarter. We still expect full year RPT growth in the range of 1% to 2%. Patient care cost per treatment were about flat to the fourth quarter. This was primarily the result of a seasonal decline from high health benefit costs in the fourth quarter, offset by typical increases in wages and other cost growth. Patient care costs were lower than expected, largely as a result of better-than-expected productivity improvements. U.S. dialysis G&A costs declined $16 million from the seasonally high fourth quarter, although growth versus the first quarter of 2025 was about $37 million or 13%. This growth is the result of continued investment in technology. Turning to our other segments. In the first quarter, international adjusted operating income was $30 million, and IKC had an adjusted operating loss of $19 million, both in line with our expectations. Regarding capital allocation, we repurchased 3 million shares during the first quarter, and we repurchased an additional 2 million shares since the end of the quarter, which includes the shares bought from Berkshire Hathaway pursuant to our repurchase agreement. At the end of the first quarter, our leverage ratio was 3.34x consolidated EBITDA, well within our target leverage range of 3 to 3.5x. Below the operating income line, other income was $4 million, a sequential increase, primarily as the result of no longer recognizing losses from our investment in Mozarc. Debt expense in the first quarter was $145 million. As an update to our guidance, we now expect quarterly debt expense for the remainder of the year to be similar to Q1 due to higher share repurchases and higher interest rate expectations resulting in full year debt expense about flat to last year. For 2026 guidance, as Javier described, we are raising our adjusted operating income guidance range by $40 million at the midpoint. The largest driver of the increase is our expectations for higher treatment volume. The second factor is an expectation for continued labor efficiencies within patient care costs. Regarding the phasing of our guidance through the balance of the year, we currently expect adjusted operating income to be about evenly split across each of the 3 remaining quarters, which assumes Q4 weighted IKC operating income. Our expectations are that the seasonal pattern we saw in 2025 are not typical, and we expect to see phasing more in line with 2024. Moving to EPS. We are also increasing our adjusted EPS guidance consistent with our updated guidance range for adjusted operating income. That concludes my prepared remarks for today. Operator, please open the call for Q&A. Operator: [Operator Instructions] Our first caller is Kevin Fischbeck with Bank of America. Kevin Fischbeck: I wanted to dig in a little bit to the volume commentary. I guess, is there any way that you can kind of break out whether weather had an impact, how much that was? And then the improved mortality? Is there a way to kind of break that into what was maybe just a light flu season year-over-year versus underlying trends you're trying to think about how durable the better mortality for the rest of this year? Joel Ackerman: Yes. Thanks for the question, Kevin. On weather, weather came in exactly as we expected. As you would imagine, we build weather into our forecast. It can range from year-to-year. It was, as I said, in line with forecast. I'd call it, about 10 bps better than last year. In terms of flu overall, again, came in line with our forecast. What we had said at the beginning of the year was we were building in a flu season that looked like 2 years ago. And while the pattern was a little different quarter-over-quarter, the impact for us was about what we expected. As we think about flu, we focus on cumulative hospitalizations, which you can find on the CDC website as the main driver of volume impact for us, and this year is in line with what we saw 2 years ago. In terms of splitting out the mortality coming in a little better than expected, it was probably not about the flu because flu came in as expected. It was more around the underlying mortality. Kevin Fischbeck: Okay. Great. And then can you just give a little more color on the rate update? Why was the rate so strong in Q1 relative to your guidance for the year? Joel Ackerman: Yes. So rate -- RPT was up a little more than 4%, so call it $17.50. I would say 2/3 of that was normal stuff in terms of rate increases and mix shifts, about, call it, $6, I would attribute to timing. Part of that was negative timing in Q1 of '25 and part of it was positive timing this year. We see timing -- we call it out frequently around RPT. And for the year, we're sticking with our 1% to 2% guide. Kevin Fischbeck: Okay. So nothing unusual there around like drugs or binders or anything like that kind of skewed the number? Joel Ackerman: No, nothing unusual. Kevin Fischbeck: Okay. And then maybe just the last question. Can you talk a little bit more about the ACA impact and how you're thinking about it? It sounds like you're saying it was coming in better, but it sounds like the guidance hasn't changed yet for the year to get that right. And then how are you thinking about the timing? Is it that Q1 came in better? Now you're assuming it's going to ramp? Or did you always assume Q1 was going to be a little bit lighter relative to the year, thoughts there? Javier Rodriguez: Yes, Kevin, it's a great question. And the reality is that it is very early. So just to repeat, Q1 was pretty flattish to Q4. So it has performed better than we expected. That said, the reality is that we haven't seen the effectuation rate and the affordability play out, and so it's too early. We have to see payments and we have to see enrollment over time. And that's why we're thinking it's a little premature to change our numbers. But the reality is that we will need -- the real data point that we want to see is the mix of our future incidents. And that is, of course, too early to tell. So we're holding to that $40 million number. Although right now, we would be trending -- $40 million number, we're trending a little better than that. Operator: Our next caller is Andrew Mok with Barclays. Andrew Mok: Hoping you could provide more color on what you're doing to position yourself to capture market share and the visibility you have into those share gains at this point to raise guidance, specifically to the clinic closures? Javier Rodriguez: Look, at the end of the day, we, of course, are in a very competitive market. The centers that are being closed, you can assume are small centers, and you can also assume that Fresenius and anyone that closes a center would work hard to try to keep those patients in their own network and with their same physicians, et cetera. And so we are, of course, making sure that the market is aware of our share availability and our physician access and all the things that one would do. And then, of course, the patients and the physicians will make their choice. Andrew Mok: Great. And then I just wanted to follow up on the mortality comment. I appreciate that flu wasn't necessarily the driver. But any color on the underlying mortality performance would be helpful considering that's an important metric for building consensus on volumes for the balance of the year? Joel Ackerman: Yes. It is an important metric. You're absolutely right about that, Andrew. I would say the changes are rather small, and we're not ready to call out any significant underlying trend. That said, we did up the volume guidance, and it's captured in there. Andrew Mok: I guess how are you able to isolate that it was mortality versus some of the other dynamics in the market with flu and clinic closures? Joel Ackerman: Clinic closures are a separate issue because they are about admissions, and we've got a lot of visibility on patients coming in and patients leaving. In terms of mortality, as we've said before, it can be a hard variable to know in real time, but we feel pretty good about what we saw from Q1 now that we're sitting here in May. Javier Rodriguez: Andrew, I think let me try and be helpful with this because you're asking the right question. And there are several inputs that go into treatment. As you can imagine, you've got seasonality, you've got mortality, you've got admissions, you've got missed treatments, you've got transfers, but they're all pretty small. And so what we're trying to do is instead of going into a world of small numbers, give you a range that handicaps all of those variables. Operator: Our next caller is Pito Chickering with Deutsche Bank. Pito Chickering: Just a follow-up on the treatment commentary. Can you just talk about the new starts to dialysis in first quarter? And as you think about Fresenius scaling in from their closures, is this an immediate ramp in sort of 1Q, 2Q and then normalize in the back half of the year? Just want to make sure that as you're increasing your treatment growth guidance here that we're also modeling where you guys go from 2Q and then where you guys finished the year in fourth quarter? Joel Ackerman: Yes. So on the admit side, I don't think we've got a lot of color to go in. We're talking about basis points of change and then to go to the next level and bifurcate that among all the inputs that Javier mentioned, I think, gets us to a point of false precision. In terms of timing on the new starts, we saw what I would guess is about half the new starts from Fresenius that we would see by the end of the first quarter, we would guess the other half will come in Q2. So if you're thinking about how to model them, I would say we'll get probably 2/3 of a year worth of those new starts. Pito Chickering: So does -- when we pull together with the new starts, in the mortality and the Fresenius, kind of where should we be ending the fourth quarter from a treatment -- organic treatment growth perspective? Joel Ackerman: Yes. I think the way we're thinking about it is treatments per normalized day, which we think takes out the quarter-to-quarter and year-to-year noise associated with the different number of days in a quarter and the different mix of Monday, Wednesday, Friday, Tuesday, Thursday, Saturday. So what we would expect is the normalized treatment per day count to grow over the course of the year. It's sitting today at about 40 bps positive, and we would expect that to grow over the course of the year. Just to make sure everyone's following how we're thinking about this, our new guide for treatment volume is plus 25 to 50 bps. Because there's a 25-day headwind in the year on normalized treatment days, our guide for the year would be plus 50 bps to 75 bps of normalized treatments per day. So that's 40 bps now getting to that average of 50 bps to 75 bps for the year ending somewhere higher than that. Pito Chickering: Okay. Great. And then a follow-up here on the revenue per treatment. If you pull out the $6 you're talking about from a timing perspective, gets us to $4.11 to $4.12, typically, 2Q ramps, $4 or $5 as you burn through the deductibles and then we see continued ramp in the third quarter and then obviously, fourth quarter, we get the update with the new Medicare rates. I guess, I'm trying to figure out how we're still getting to 1% to 2% revenue per treatment guidance growth, even pulling out at $6 in the fourth quarter -- from the first quarter because of normal seasonality you guys see in the interim treatment? Joel Ackerman: Yes. So I think there are 2 dynamics. One is normal variability. So the quarter was a little higher, and you take that out. The second dynamic is around mix and the enhanced premium tax credits. What we would expect is commercial mix to decline over the course of the year, and that will put pressure on RPT, which would help you bridge from a higher number in Q1 to the 1% to 2% for the year. Pito Chickering: Okay. But at this point, through April, you haven't seen that negative hits that you're guiding to, you're just sort of just assuming it comes until later on in the year? Joel Ackerman: That's correct. Pito Chickering: Great. And then last question. Your G&A per treatment, you talked about was up 13% due to tech investments. Where does it end the year? And kind of -- should we think about this declining linear throughout the year as those investments were made or just any color around how we should be modeling G&A treatments for -- G&A cost per treatment throughout the year as the tech investments begin to decline? Javier Rodriguez: Yes. I appreciate the question on G&A. And I want to reassure you that we are looking at this incredibly diligently. And if one looks at G&A independently, that line is growing at a faster rate than revenue. And so I think it's worthwhile to let you know our philosophy on it, which is we look at G&A as a piece of the total cost. In other words, we're not trying to optimize G&A, but rather not worry about the geography of the expense as long as the sum of the parts add up to a good number. So if you look at the last 5 years CAGR on our total cost, which includes patient care costs, depreciation and amortization and G&A, that CAGR is 2.6%. And so we spend a lot of time trying to make sure that we optimize the cost, and we worry less about the geography on the P&L. So I think that our guide will stand on our cost, which is that 1.25% to 2.25% we gave at the beginning of the year. Pito Chickering: Great quarter, guys. Appreciate it. Operator: [Operator Instructions] Our next caller is Justin Lake with Wolfe Research. Dillon Nissan: This is Dillon on for Justin. Just a couple of quick questions. What did commercial mix do in the quarter? And then also curious on the Medicare Advantage side, can you speak a little bit about what the growth in share was as well? Joel Ackerman: Yes. Thanks, Dillon, for the question. The answer is pretty much the same on both. They were pretty flat relative to last quarter. Operator: Next question is from A.J. Rice from UBS. Albert Rice: Maybe just to ask on a couple of items that are mentioned in the press release, whether there's anything significant to call out. You talk about a decrease year-to-year in health benefit expense, pharmaceutical cost, and then on the G&A line, professional fees, was the -- was that sort of as expected? Or was there anything unusually positive that happened there? Just asking. Joel Ackerman: Yes, A.J., it was as expected. We'll often see the decline sequentially from Q4 to Q1, especially in health benefits. So nothing unusual there. Albert Rice: Okay. And then I appreciate the comments about the technology investments and some of the use cases you're looking at. Is there any way realizing even if you get savings, you may choose to reinvest it in other ways. But is there any way to sort of size some of the opportunities you see? And are those being reflected now in operating results? Or what is your thought about how long it may take for the sum of this to impact operating performance? Javier Rodriguez: Yes. I appreciate the question. I think the way we look at it is the long-term view that we, again, are trying to ensure that we are putting our clinicians in the best position and that we're making the trade-off on efficiency for the long term to make sure that we sustain 3% to 7% OI growth over time. And so as you know, right now, technology is moving at a very quick pace. And some of these will be a lot of user experience, i.e., we're just enhancing the experience. And some of these will be helpful toward the bottom line. And it's a little early, and I don't think we want to get into the timing of it, but rather the sustainability and the outperformance of it. Operator: Our next caller is Ryan Langston with TD Cowen. Ryan Langston: Nice to see the operating income guide up, EPS guide up as well. I noticed the free cash flow guide did not change. I think this was a similar dynamic last year. Just wanted to confirm that's normal course and nothing specific to read into? Joel Ackerman: Yes. Ryan, you're thinking about it the right way. There's just more variability in a wider range with free cash flow, so we didn't move the number despite the increase in OI. Ryan Langston: Okay. And then this administration is really focused on fraud, waste and abuse. It seems to me dialysis might be a little better insulated versus other types of providers. Just any general thoughts on this administration's focus on that FWA and what this could mean potentially for DaVita or maybe not mean for DaVita or even just more broadly for dialysis in general? Javier Rodriguez: Yes. Thanks for the question. It's tough for us to comment on the broader environment. But what I can say is we take compliance incredibly seriously. And number two, what we do have a little help in is that dialysis is not a controversial diagnosis. So there's not like, "Oh, should I go get this treatment or not" controversy, so that makes it easier. And then the fact that it is a bundle in a single DRG, in essence, simplifies some of the compliance issues. But again, we are internally focused on making sure we do right by the government. Operator: At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments. Javier Rodriguez: Okay. Thank you, Michelle, and thank you all for joining the call today. I would wrap up with 3 takeaways. First, our most recent clinical initiatives are beginning to gain traction, and we're seeing early signs of the benefits for our patients. Second, our business is performing well as we continue to achieve our clinical goals. This drives our strong financial results. And finally, we maintain a long-term view on our business, and we'll continue to invest in our future. Thank you all for joining this quarter. Be well, and we look forward to seeing you next time. Happy Cinco de Mayo, everyone. Operator: Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
Operator: Hello, everyone. Thank you for joining us, and welcome to Accel Entertainment, Inc.'s Q1 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. Star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Scott D. Levin. Scott D. Levin: Welcome to Accel Entertainment, Inc.'s First Quarter 2026 Earnings Call. Participating on the call today are Andrew Harry Rubenstein, Accel’s chief executive officer; Brett Summerer, Accel’s chief financial officer; and Mark T. Phelan, Accel’s president and chief operating officer. Please refer to our website for the press release and supplemental information that will be discussed on this call. Today’s call is being recorded and will be available on our website under Events and Presentations within the Investor Relations section of our website. Some of the comments in today’s call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release available on our website as well as other risk factor disclosures in our filings with the SEC. Any projected financial information presented in this call is for illustrative purposes only and should not be relied upon as being predictive of future results. The inclusion of any financial forecast information in this call should not be regarded as a representation by any person that the results reflected in such forecasts will be achieved. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the non-GAAP measures, as well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website. Following management’s prepared remarks, we will open the call for a question and answer session. With that, I would now like to introduce Andy. Please go ahead. Andrew Harry Rubenstein: Thank you, Scott, and good afternoon, everyone. Accel Entertainment, Inc. delivered a strong start to 2026, the company’s highest-ever Q1 adjusted EBITDA result. First quarter revenue increased 9% year over year to $352 million, marking an all-time quarterly record for the company. Adjusted EBITDA also grew 9% to $54 million, reflecting solid underlying performance across the business. These results reflected the continued strength of our distributed gaming model, ongoing momentum in our developing markets, and our team’s disciplined execution across each of our businesses. We ended the quarter operating 4,540 locations and 28,353 gaming terminals nationwide, representing year-over-year increases of 3% and 4% respectively. Turning to our core markets, Illinois remains the foundation of our business and continued to deliver strong results in the first quarter. Total Illinois revenue, excluding Fairmont Park, increased 6% year over year to $242 million. Our distributed gaming operations in the state continue to benefit from strategic location optimization and new machine placements, with total average location hold per day increasing 9% year over year to $962. This performance underscores the effectiveness of our ongoing strategy to improve route quality and concentrate investment in higher-yielding placements, even as we maintain broadly flat VGT counts in this mature market. Our rollout of ticket-in, ticket-out technology in Illinois, or more commonly referred to as TITO, continues to progress well. With all of our terminals now TITO-enabled, we are beginning to realize the benefit of TITO. We expect that benefit to build through the remainder of 2026 as players become accustomed to the convenience of TITO. Chicago represents one of the most exciting near-term growth opportunities we have seen in some time. The Illinois Gaming Board is actively processing applications from Chicago establishments as we continue signing up locations while waiting for final regulatory approvals. As the market leader in Illinois, with 2,678 locations and 15,413 gaming terminals, and an established platform of infrastructure, people, and relationships, we believe we are uniquely positioned to move quickly and efficiently when the market opens. We currently anticipate the first Chicago locations could go live in late 2026 or in 2027. We will continue to provide updates as the process unfolds. Montana delivered steady performance in the first quarter, with total average location hold per day increasing 5% year over year. In addition, our Grand Vision Gaming subsidiary continues to develop exciting and engaging new content that enhances margins through exclusivity while supporting our broader business. Across our developing markets, we continue to build momentum. Nebraska delivered outstanding results with revenue increasing 57% year over year and total average location hold per day up 57%, supported by new machine placements. We continue to see the benefit of our operating leverage with the business growth and market density. Georgia also delivered strong growth, with revenue up 43% year over year and total average location hold per day up 14%. In Nevada, we grew locations 27% and terminals 28% year over year, reflecting the significant footprint expansion from the Dynasty Games acquisition and our new route partnership with Rebel Convenience Stores. Mark will discuss Nevada in more detail shortly. Louisiana continued to grow with revenue up 12% year over year, and our bolt-on acquisition pipeline remains active and attractive. At Fairmont Park Casino and Racing, we are excited to have launched live dealer table games last month, including blackjack, roulette, and novelty games, marking a significant step in Fairmont’s evolution into a full-scale gaming and entertainment destination. Reflecting our continued confidence in the long-term value of Accel Entertainment, Inc. shares and our commitment to returning capital to shareholders, we repurchased approximately 1.1 million shares of our common stock for $12 million in 2026 to date. Our balance sheet remains strong, with $274 million in cash and net debt of approximately $306 million, representing net leverage of approximately 1.4x. Our $300 million revolving credit facility remains fully undrawn, providing significant financial flexibility as we continue to evaluate organic growth, tuck-in acquisitions, and capital return opportunities. I want to take a moment to address the broader macroeconomic environment and the resilience of our business model. We are operating in a period of heightened uncertainty brought on by tariffs, inflation, and geopolitical instability. I want to be clear about why we believe Accel Entertainment, Inc. is well positioned in this environment. Our business is fundamentally hyperlocal. We operate gaming terminals in neighborhood bars, restaurants, convenience stores, and truck stops—the kinds of places people visit in their daily lives. Our customers are local players engaging in local entertainment, and that behavior has proven remarkably resilient across economic cycles. We also believe the current environment may be driving incremental trade-down activity toward local, convenient, and affordable entertainment options. This is exactly the kind of experience our location partners provide, and which we view as a stabilizing tailwind for our business. Our cost to serve allows us to flex, which means we have the ability to manage our business efficiently even in periods of softer consumer demand. Tax refund season provided its typical seasonal tailwind as we moved through the quarter, and we continue to monitor the broader consumer environment for any signs of impact on player activity. Continuing through the beginning of the second quarter to date, we have not observed any material impact to our business. On the contrary, volumes remain strong. We believe our distributed, local, and community-rooted business model represents one of the most resilient profiles in the gaming space. Lastly, before I turn the call over to Mark, I want to briefly touch on our leadership transition. As we announced in February, I have stepped into the chairman role, and Mark will assume the chief executive officer role effective August 7. I am incredibly proud of what this team has built over the past seven years, and I have full confidence in Mark and the entire Accel Entertainment, Inc. leadership team to continue to grow this business and capitalize on the significant opportunities ahead. With that, I will turn the call over to Mark to review our operations in more detail. Mark T. Phelan: Thank you, Andy. From an operational standpoint, Q1 2026 reflected continued disciplined execution across each of our markets with a focus on route quality, hold-per-day improvement, and targeted growth investment. In Illinois, our team remained focused on improving location mix, redeploying underperforming assets, and deploying capital into higher-yielding machine placements. Illinois location count declined modestly year over year as we continued our deliberate strategy of optimizing the route rather than growing for the sake of location count. The result of that strategy is clear in our hold-per-day performance. Illinois location hold per day increased 9% year over year to $902 per location, which is a strong result and reflective of the quality improvements we have made across the route over the past several years. In Chicago, our team has been actively preparing for the market opening. We have been working closely with city leadership to support the development of best practices and an efficient regulatory framework. We have begun signing up Chicago locations and are well positioned to mobilize when the Illinois Gaming Board begins issuing approvals. In Nevada, our focus in Q1 2026 was integration and building out our newly expanded footprint. As a reminder, we completed the acquisition of Dynasty Games in December 2025, adding 20 locations and approximately 120 gaming terminals across Northern Nevada. We also launched our route partnership with Rebel Convenience Stores in January 2026, adding 55 locations and over 400 gaming machines across Southern Nevada. That rollout was executed efficiently. Our team has been working to elevate the gaming experience at these Rebel locations with new machines and proprietary content, and we are encouraged by the early increases in play we are seeing. We expect those trends to continue building through the back half of the year. We now operate in Nevada across 450 locations and 3,348 gaming terminals, representing a market we continue to be excited about for the long term. The Nebraska team delivered exceptional results. Revenue was up 57% year over year, driven by new machine placements featuring our proprietary content and ongoing investment in the market. As our terminal density increases in Nebraska, we continue to see strong operating leverage. In Georgia, we continue to expand our footprint, with locations up 28%, terminals up 35% year over year, and hold per day up 14%, reflecting Accel Entertainment, Inc.’s continued development of this market. In Louisiana, we continue to execute our bolt-on acquisition strategy. The pipeline of opportunities remains active. We believe we remain the buyer of choice in this market given our size and track record of accretive integration. At Fairmont Park, the property continues to evolve. Casino operations remain the primary driver of performance, with hold per day continuing steady upward growth. We launched live dealer table games in April 2026, including blackjack, roulette, Ultimate Texas Hold ’Em, and baccarat, marking a significant step in Fairmont’s evolution to a full-scale gaming and entertainment destination. Importantly, revenue from these new gaming positions is being reinvested in the racing product. For the 2026 season, we increased total purses by $500,000, which is already attracting larger field sizes and more competitive racing. Our second racing season is now underway, and we are watching customer behavior closely as the season builds. We continue to evaluate the timing and scope of the overall Fairmont investment as we gain more operating experience in the property. For the meantime, we are pleased with its contributions and prospects for further growth of the live table games. Across all of our markets, our operational approach remains consistent: disciplined capital deployment, service excellence at the location level, data-driven decision making, and strong local relationships. That operating discipline underpins our financial performance and supports our ability to generate growing free cash flow over time. Before I turn it over to Brett, I want to share a broader thought on where we see this business heading. When we think about what Accel Entertainment, Inc. is building, we increasingly view it less as a logistics business and more as a gaming and hospitality business. A logistics business competes on efficiency, scale, and cost. A gaming and hospitality business competes on experience, content, relationships, and differentiation—and it commands meaningfully better economics as a result. Everything we are doing, including new exclusive content in Nebraska and Georgia, table games launch and increased purses at Fairmont, the TITO rollout that improves the player experience in Illinois, the quality upgrades at our Rebel locations in Nevada—all of it is oriented around delivering a better, more engaging entertainment experience for our players and a more valuable relationship for our location partners. That is a key driver of our next phase of margin expansion and profitability growth at Accel Entertainment, Inc., and it is what gets me most excited as I prepare to step into the CEO role later this year. With that, I will turn the call over to Brett to review the financial results in greater detail. Brett Summerer: Thank you, Mark, and good afternoon, everyone. I will begin with our first quarter results and then provide additional detail on cash flow, the balance sheet, and capital allocation. As Andy mentioned, for the first quarter, total revenue increased 9% year over year to $352 million, an all-time quarterly record for Accel Entertainment, Inc. Growth was broad-based with strength in Illinois, Nebraska, Georgia, Nevada, and Louisiana. Net gaming revenue increased 10% year over year to $331 million, which was the primary driver of our top-line performance. Operating income for the quarter was $27 million compared to $26 million in the prior-year period. Net income was $15 million, essentially flat year over year, as higher operating income was offset by higher depreciation and amortization associated with our growing asset base, and also the timing of our purse expense, as I will discuss later. On a per-share basis, diluted EPS was $0.17 for both Q1 2026 and 2025. Adjusted EBITDA for the first quarter was $54 million, an increase of 9% compared to the prior-year period. Our underlying operating performance was solid, and growth was essentially in line with our strong revenue performance. It is important to note that adjusted EBITDA and net income were impacted by the timing of our purse expense accrual in Fairmont Park. This was a $2 million shift in the timing of how our Fairmont Park purse expense accrual is recorded. In 2025, our first year of racing operations, purse expense was recognized as races were conducted, which concentrated expense in Q2 and Q3. In 2026, we determined it was more appropriate to accrue this expense in line with revenue recognition, as revenues are generated throughout the year and contribute to the annual purse obligation. As a result, expense is now being recognized earlier in the year and more evenly across periods. This change impacts the timing of expense recognition by quarter, but does not impact full-year results other than the $500,000 strategic increase to the purse that Mark referenced earlier. Excluding this item, adjusted EBITDA and net income would have been approximately $2 million and $1.5 million higher, respectively, to enable easier comparison to prior periods. Turning to capital expenditures, total CapEx in the first quarter was $23 million, down from $27 million in the prior-year period. We continue to expect full-year 2026 CapEx to be in the range of $60 million to $70 million, which compares to approximately $89 million in 2025, which included elevated investment in Fairmont Park. The majority of our 2026 CapEx is maintenance-oriented, with growth capital concentrated in our developing markets. It is worth noting that our maintenance capital spending is not like other companies. There is an incremental return on this investment with a reasonable payback. From a cash flow perspective, operating cash flow for the quarter was $43 million. We used approximately $23 million in investing activities, primarily for CapEx, and $42 million in financing activities, reflecting debt repayment, share repurchases, and other items. I also want to highlight free cash flow as a metric we intend to discuss more regularly going forward, as we believe it best reflects the underlying cash generation strength of our business. We define free cash flow as net cash provided by operating activities less CapEx net of PP&E disposals. With CapEx normalizing in 2026 and our developing markets scaling profitably, we expect free cash flow to continue to grow and view this as a key priority. Given our adjusted EBITDA of $54 million and our free cash flow of $20 million, we have a cash conversion of 38%. Moving to the balance sheet and liquidity, we ended the quarter with $274 million in cash and cash equivalents. Total debt, net of debt issuance cost, was $581 million, resulting in net debt of approximately $306 million and net leverage of approximately 1.4x on a trailing twelve-month adjusted EBITDA basis. Our $300 million revolving credit facility remains fully available. We entered into a new interest rate collar on 01/30/2026, which replaced our prior interest rate cap arrangement. The collar establishes a cap rate of 4% and a floor of 2.92% on our term loan and matures in September 2029. This instrument is designed to provide continued protection against interest rate volatility while optimizing our cost of capital. As of 03/31/2026, we repurchased a total of 18.7 million shares under our share repurchase program that began in November 2021, at a total purchase price of approximately $195.6 million, leaving approximately $151.2 million remaining under the current program authorization. Our board has historically been thoughtful about the share repurchase program authorization, and we will evaluate next steps in the context of our broader capital allocation priorities. Our capital allocation framework remains disciplined and return-focused. We continue to evaluate each dollar of capital across our organic investment, bolt-on strategic acquisitions, debt reduction, and share repurchases, always with an eye toward generating the highest risk-adjusted return for our shareholders. Looking ahead, our recurring revenue model, disciplined capital deployment, and continued operating leverage position us well to convert earnings into free cash flow and fund our growth initiatives while maintaining a strong balance sheet. We remain confident in our ability to continue delivering on our commitments in 2026 and beyond. With that, operator, please open the line for questions. Operator: We will now open the call for questions. 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. Your first question comes from the line of Patrick Keough with Truist Securities. Your line is now open. Please go ahead. Patrick Keough: Great. Hey, guys. Thank you so much for taking the question. Sorry, am I echoing? Okay, great. Apologies. So early days with TITO, obviously, in Illinois, but could you give any color on early player adoption metrics and any impact you are seeing on cash-handling costs thus far? Thank you. Brett Summerer: Yes, sure. So a couple different things to set the table. When we initially thought about TITO and what it could mean for us, we had some internal estimates, and we have talked a little bit about it in the past—potentially up to around that 20% mark. What we are seeing so far in adoption is around 13%, and it has not fully tapered off yet, so there is still potentially upside there. If we think about what it can mean for us, I wish it were a simple answer. As you can probably appreciate, our overall play is increasing, and because our overall play increases, the amount of cash that is out there on the street is higher for us to go pick up. So that actually drives additional cost, but it has nothing to do with TITO. On the flip side of that, TITO is helping us reduce that. It is happening organically. As you can probably appreciate, we do our cash routes and pickups on a weekly basis. We have some automation behind it, but ultimately, it comes down to humans and the practices that we have throughout the organization. As cash gets to certain collection levels, we are picking it up and taking it off the street. So it is not a one-time cash benefit or a one-time cost reduction that we are going to see. It will be something that plays out over time. I would just caution that we only got to 100% fully TITO-enabled a handful of weeks ago as well, so again, more to come on that. It is just a piece of the overall picture, and teasing it out specifically is going to be difficult, but you should overall see a little bit of a benefit in terms of additional cash in our banks as well as in our cost structure. Patrick Keough: Okay. Understood. That is very helpful. Thank you. And for my follow-up, the JCAR recently approved the Illinois Gaming Control Board’s vertical integration rules. From your perspective, could you talk a bit about what this entails and if you see yourself as the best beneficiary as these are enforced? Thanks so much. Andrew Harry Rubenstein: Hi, Patrick. Although that rule was passed by JCAR, it has recently been contested by some of the operators in circuit court, so we are going to wait to see how that plays out before we draw any conclusions. Operator: Your next question comes from the line of Steven Donald Pizzella with Deutsche Bank. Your line is now open. Please go ahead. Steven Donald Pizzella: Hey, good afternoon, thank you for taking our questions. Maybe we can start with some of the recent trends. It looks like from the data we can see out of the IGB, January and February were very strong, then slowed down a little bit. March was still solid. What did you see in terms of April? I know, Andy, you mentioned potential benefits from a trade-down effect, the tax refunds potentially maybe offset by some gas prices. Then I guess just on that latter point, as you look at your history, to what extent has your customer base been sensitive to gas prices? Thank you. Andrew Harry Rubenstein: From our perspective, we really have not seen any noticeable impact from gas prices yet. Historically, it has not been a major factor, and I am speaking mostly from the Illinois market. Our players actually need to travel less to reach our establishments, as opposed to going to a regional casino. So we tend to benefit when the player wants to stay closer to home. Whether it is going to impact their overall budget for entertainment spending, we are unsure, but we do know that they will be spending less on gas to come play at our establishments. So we may get a benefit where they will elect to play with us even though they have less dollars in their total budget. Operator: Your next question comes from the line of Jordan Bender with Citizens. Your line is now open. Please go ahead. Jordan Bender: Hey, everyone. Good afternoon. Thanks for the question. Maybe to start with the pruning in Illinois—another quarter in which you took out a good amount of locations and units. Can you maybe just update us on where we stand there? And then, related to that, are the units or locations that you are going to take out today or going forward going to have less of an impact versus maybe some of the low-hanging fruit that we saw over the last two years? Thank you. Mark T. Phelan: Hey, Jordan. The strategy on pruning is really just opportunistic. When we see opportunities to reduce locations that actually burn our cash, we tend to do it. I do not think there is particularly low-hanging fruit that is still out there. We are always mindful of that, and we are also mindful of our organic revenue that is coming online. So it is a balance between new revenue and revenue that is actually costing us. Jordan Bender: Understood. Thanks. And just a follow-up: the plans for the permanent at Fairmont—you kind of said there is nothing to maybe report today. I think the original expectations were maybe there would be some sort of plan in ’26. Is there some sort of timeframe or plan when we might be able to hear more about something definite there? Mark T. Phelan: We are still in the maturation stage of the temporary. As Andy mentioned, we rolled out table games about a month ago, and we just had over 700 people at the Derby Day on Saturday. We are still contemplating and trying to figure out what the optimal size looks like. When we do figure it out, we will obviously let everyone know. Operator: Your next question comes from the line of Chad C. Beynon with Macquarie Capital. Your line is now open. Please go ahead. Chad C. Beynon: Andy, Mark, Brett, thanks for taking my question. Wanted to ask about legislative momentum or just any traction that we saw in the first quarter. I know there was a bill in Virginia that was vetoed by the governor. Wondering if you could talk about all states so far this year where we have seen some progress where there could be changes in ’27 or beyond? Thank you. Mark T. Phelan: Hey, Chad. Unfortunately, again, this is all us handicapping, but it appears that there is not going to be a lot of legislation that progresses legalization of video gaming terminals or skill games in the United States. You mentioned Virginia—the governor did veto that. There is some life still left in that bill, but its life is slowly eking out as time moves on. So we are not particularly optimistic about any sort of legislative movement in 2026. Chad C. Beynon: Okay. Thank you. Turning to Nevada opportunities, great to see the unit growth sequentially and year over year as a result of the two items that you talked about. When you think about more acquisitions, just from a quantitative standpoint, is Nevada still the biggest growth market, or are some of these emerging markets becoming bigger in terms of the absolute impact to the Accel model? Thank you. Mark T. Phelan: Nevada actually includes some opportunistic model changes where we are doing space leases instead of revenue shares with participation bars. In terms of our individual markets, we are optimistic about all of them in terms of acquisitions. We have talked a bit about Louisiana. It is a mature market, but we have a great partner down in the state, and we think we can grow that market accretively as well as with significant volume over time. Illinois is always an opportunity to acquire routes at accretive prices, and in most of our other markets, we are always on the lookout. So I would say all markets are aligned toward growing potentially through acquisitions. Operator: Your next question comes from the line of David Bain with Texas Capital Securities. Your line is now open. Please go ahead. David Bain: Great. Thank you. First, based on your observations of the licensing process in Chicago—maybe discussions with city council and your overall distributed experience—how is that process going? Is it at the pace you would expect? Is it a little slower? Can you maybe help us with locations blessed before the end of the year and next—just trying to get an idea as to how we are looking? Mark T. Phelan: Hey, David. We feel good about the Illinois Gaming Board processing applications, but the city has yet to promulgate any rules around VGT gaming, and that is a wild card. We would imagine it would be done in the next, call it, quarter, but that is me just handicapping it. David Bain: Okay. And then assuming that begins to ramp, my secondary question would be: you mentioned Louisiana valuation rationalizing, and with Chad, you spoke to Illinois still being a good M&A market. Are there valuations moving around perhaps in Illinois, maybe going higher as we get closer to Chicago licensing locations? Does it make it more of an exciting market heading into that? Or how are you thinking about M&A there? Mark T. Phelan: We are really excited about the market. I would point to our multiple. We are the only public company in this industry, and we are certainly not going to buy anything that is not accretive to us. So you can use that as a benchmark as to what we see in terms of acquisitions and multiples. Operator: A reminder. Our next question comes from the line of Maxwell James Marsh with CBRE. Your line is now open. Please go ahead. Maxwell James Marsh: Hi, thanks for taking my question. Maybe to approach gas prices from a different angle—I think it is fairly intuitive that your hyperlocal customer is resilient to gas prices broadly—but is there or could there be a localized impact on the truck stop part of your business, specifically looking at Louisiana with its higher proportion of truck stops through Toucan? Andrew Harry Rubenstein: The reality of the truck stop business is it is not truckers; it is local people that play at the truck stop because it is a more gaming-focused venue than going into a tavern. People who want to play and have a true gaming experience enjoy playing at the truck stops. In Louisiana, that is even more in focus because the Louisiana truck stops have up to 60 games; it is really like a small casino. Because those establishments are in proximity to where these people live, they tend to thrive in environments where people are watching their entertainment dollars. Instead of driving a greater distance to a regional casino—which they have throughout Louisiana—they tend to stay closer to home, either in the tavern market or, in this case, the truck stop market. So although they may have reduced disposable income, we may get a bigger share of their entertainment wallet. Mark T. Phelan: Max, I would just add that truck stops are a bit of a misnomer in terms of who plays there. That is usually local people, not truck drivers. In Louisiana, they are probably benefiting from the increase in energy prices and natural gas particularly, so we do not necessarily view that as a vulnerable part of our portfolio. And the offshore drilling industry is a major source of employment in Louisiana, so those individuals probably have more dollars in their pocket than they do in a normal situation. Maxwell James Marsh: Okay. Understood. Thanks for that clarity. And if we could just touch on EBITDA margins quickly—approaching 16% this quarter when we adjust for Fairmont’s purse expense—following a really strong 4Q. Could you take us under the hood on EBITDA margins and how to think about that going forward? Brett Summerer: Since it is forward-looking, I cannot really talk too much about it, but I would point you to two things. One, look at the EBITDA margins that we have delivered in the past. What you saw last year is Q4 was a little higher, and Q1, Q2, and Q3 were all in the mid-15% range. So there is some seasonality associated with that, which you can see play out. The other thing to be thoughtful about—in our earnings release, we have a gross margin table that shares the gross margin within each of our business pieces. In the “all other” space, which we do not disclose the individual components for, you can see the overall movement of the non-regulated markets increasing. I think that is the right way to think about where this is going and our performance year on year. Operator: Your next question comes from the line of Gregory Thomas Gibas with Northland Securities. Your line is now open. Please go ahead. Gregory Thomas Gibas: Great. Good afternoon, Andy, Mark. Thanks for taking the questions. In terms of capital expenditures, how much was allocated for Fairmont this year out of your $60 million to $70 million outlook, and how much is more maintenance? Brett Summerer: Thanks for the question. We do not usually talk about the forecast and how we break down the different pieces of it. What I will say is, year over year, the primary piece of lower capital is because Fairmont construction is not in there—in at least not in a big way like it was last year. So the vast majority of about a 20% decline in capital is because we are investing less into Fairmont, because we have most of the hard structure out of the way. On maintenance versus growth, we also have what I would consider to be non-return maintenance capital, which is like most businesses—but in our business, we really do not have much of that. The way that I look at it is: growth capital is generally stuff that pays back within a year—adding a machine to a place that does not have a machine. The maintenance capital has a return on investment—depends on the market and the machine and other factors—but call it a two- to three-year payback, which is still a good project to invest in. That is separate and distinct from, you know, fixing the walls when somebody backs a truck into them. Most of our capital this year is in the maintenance bucket, so you are going to get that kind of payback, which is in that two- to three-year timeframe, but it is still a very high IRR and well in excess of our WACC. Gregory Thomas Gibas: Okay, great. That is helpful. And as it relates to the tuck-in acquisition strategy, is Louisiana still maybe the top priority relative to other markets, and how does your pipeline of potential opportunities look in that market? Mark T. Phelan: Louisiana is definitely a focus of ours in terms of M&A. That has always been our thesis there, and the pipeline is good. We are excited about that state growing. But as I said earlier, there are other states that also have very accretive acquisition candidates that we are always viewing and reviewing. Operator: We have reached the end of the Q&A session. I will now turn the call back to Andrew Harry Rubenstein for closing remarks. Andrew Harry Rubenstein: Thank you, operator, and thank you to everyone who joined us today. We enter the remainder of the year with a clear set of priorities. We have a strong balance sheet and what we believe is one of the most compelling near-term growth opportunities in our company’s history with the pending launch of the Chicago VGT market. As always, I want to thank our employees, whose dedication and execution make these results possible; our location partners, who trust us to help grow their businesses; and our shareholders for their continued support and confidence in our team. We look forward to updating you on our progress when we report our second quarter results in August. Thank you. Operator: This concludes today’s call. Thank you for attending. You may now disconnect.
Operator: Good day, everyone, and welcome to the Mercury Systems, Inc. Third Quarter Fiscal 2026 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the company's Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo. Tyler Hojo: Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, William L. Ballhaus, and our Executive Vice President and CFO, David E. Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing is posted on the Relations section of the website under Events and Presentations. Turning to slide two in the presentation, I would like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury Systems, Inc.'s financial outlook, future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on slide two in the earnings press release, and the risk factors included in Mercury Systems, Inc.'s SEC filings. I would also like to mention that, in addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, during our call we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release. I will now turn the call over to Mercury Systems, Inc.'s Chairman and CEO, William L. Ballhaus. Please turn to slide three. William L. Ballhaus: Thanks, Tyler. Good afternoon. Thank you for joining our Q3 FY '26 earnings call. We delivered Q3 results that were ahead of our expectations, with significant year-over-year growth in backlog, revenue, and adjusted EBITDA. Strong demand signals and solid execution contributed to better-than-expected organic growth and margin expansion this quarter. Today, I will cover three topics. First, some introductory comments on our business and results. Second, an update on our four priorities: performance excellence, building a thriving growth engine, expanding margins, and driving free cash flow. And third, performance expectations for the balance of FY '26 and longer term. Then I will turn it over to Dave, who will walk through our financial results in more detail. Before jumping in, I would like to thank our customers for their collaborative partnership and the trust they put in Mercury Systems, Inc. to support their most critical programs. I would also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge. Please turn to slide four. Our Q3 results reflected robust organic growth and margin expansion. Record bookings of $348.3 million and a 1.48 book-to-bill resulted in a record backlog approaching $1.6 billion; revenue of $235.8 million, up 11.5% organically year over year; adjusted EBITDA of $36.1 million and adjusted EBITDA margin of 15.3%, up 46% and 360 basis points, respectively, year over year; and free cash outflow of $1.8 million, meaningfully outperforming our expectations. We ended Q3 with $332 million of cash on hand. These results reflect ongoing focus on our four priority areas, with highlights that include solid execution across our broad portfolio of production and development programs; backlog growth of 18% year over year and a sequential increase of twelve-month backlog of 10.3%; a streamlined operating structure enabling increased positive operating leverage and significant margin expansion; and continued progress on free cash flow drivers with net working capital down 4.1% year over year. Please turn to slide five. Starting with our four priorities and priority one, performance excellence, where we are focused on sound execution on development programs, accelerating deliveries for our customers broadly across our portfolio, and ramping the rate on numerous programs transitioning to higher-volume production. We accelerated progress across a number of programs and generated approximately $25 million of revenue, $15 million of adjusted EBITDA, and $25 million of cash all primarily planned for the fourth quarter. This acceleration, enabled by our efforts to align our supply base to yield faster backlog conversion, contributed to top-line growth, adjusted EBITDA margin, and free cash flow that exceeded our expectations for Q3 and will also factor into our outlook for Q4, which I will speak to shortly. Our strong bookings and record backlog combined with our ability to more rapidly convert backlog is translating into organic growth exceeding our expectations coming into FY '26. Notably, our domestic revenue, representing 88% of our Q3 revenue, generated 17% year-over-year growth. Beyond this solid performance, we progressed on a number of actions in the quarter to increase capacity, add automation, and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency. Notably, we added capacity to our highly automated manufacturing footprint in Phoenix, Arizona, and initiated operations within our additional 50,000 square feet of factory space to support ramped production for our common processing architecture programs and to allow for efficient scaling. In the quarter, we also completed the acquisition of critical manufacturing process technology provider integral to a number of our key ramping programs. These are among a number of actions we have taken, along with prior investments across a number of critical technology developments that are driving our ability to accelerate delivery of vital capabilities to our warfighters and our allies. Please turn to slide six. Moving on to priority two, driving organic growth. We believe that our near-term organic growth will be driven by increased volume on existing production programs and the ongoing transition of a number of development programs to production. Additionally, we expect possible upside tied to potential tailwind from customer-driven acceleration and increased quantities across a broad set of production programs in our portfolio. Lastly, we are excited about new development programs and the potential of the production volume associated with those wins. In Q3, we delivered a record quarter with $348.3 million of bookings resulting in a book-to-bill of 1.48 and a record backlog approaching $1.6 billion. Our trailing twelve-month bookings are a record $1.23 billion. Q3 bookings were driven largely by follow-on production orders reflecting strong customer demand across core franchise programs. This bookings mix reflects the transitioning of our business toward higher-rate production and we believe does not meaningfully capture the potential incremental tailwinds we see in the market. The largest bookings in the quarter were across several missiles, C4I, and space programs. In addition, the quarter featured the strongest bookings of the fiscal year for solutions that leverage our common processing architecture. Finally, we secured a follow-on development award on a strategic program that has the potential to proliferate across multiple platforms. Beyond our backlog growth, we continue to see the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. I remain optimistic that these potential market tailwinds may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond. Please turn to slide seven. Now turning to priority three, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low- to mid-20% range, we are focused on the following drivers: backlog margin expansion as we convert lower-margin backlog and add new bookings aligned with our target margin profile; ongoing initiatives to further simplify, automate, and optimize our operations; and driving organic growth to increase positive operating leverage. Q3 adjusted EBITDA margin of 15.3% was ahead of our expectations and up 360 basis points year over year. Gross margin of 29.3% was up 230 basis points year over year, consistent with our expectation that average backlog margin will continue to increase as we convert legacy lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses are down year over year, both on an absolute basis and as a percent of sales, reflecting our focus on continuously driving cost structure efficiencies to enable significant positive operating leverage as we accelerate organic growth. Please forward to slide eight. Finally, turning to priority four, improved free cash flow. We continue to make progress on the drivers of free cash flow, and in particular, reducing net working capital, which, at approximately $4.344 billion, is down $18.7 million year over year. Net debt was $259.7 million at the end of Q3. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning, and supply chain management will continue to yield a strong balance sheet that provides sufficient flexibility for us to pursue and capture potential market tailwinds. Please turn to slide nine. Looking ahead, I am very optimistic about our team's performance, strategic positioning, the market backdrop, and our expectation to deliver results in line with our target profile of above-market top-line growth, adjusted EBITDA margins in the low- to mid-20% range, and free cash flow conversion of 50%. We believe our strong year-to-date results show meaningful progress toward this target profile, with an aggregate 1.3 book-to-bill, 9% top-line growth, 15% adjusted EBITDA margins, 400 basis points of EBITDA margin expansion year over year, and free cash flow of $39.5 million. Coming out of Q3, we are raising our expectations for FY '26. We believe our efforts to stage material earlier have improved revenue linearity and increased forecast visibility, and that progress is now reflected in our updated expectations for FY '26. As a result, our outlook incorporates backlog conversion that historically may have materialized in accelerations and results above forecast. Our Q4 bookings have the potential to be the strongest of the year, based on a pipeline of opportunities that is more robust than our Q3 pipeline, which we believe could be an indicator of increased top-line growth and further margin expansion beyond FY 2026. We now expect annual revenue growth for FY '26 approaching mid single digits, up from low single digits. We expect full-year adjusted EBITDA margin of mid teens, up from approaching mid teens. Finally, with respect to free cash flow, we expect free cash flow to be positive for Q4. In summary, with our positive momentum year to date, and coming out of a very solid Q3, I expect FY '26 performance to deliver a significant step toward our target profile. Additionally, I am gaining optimism regarding the potential tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize and drive upside bookings to our plan over time. With that, I will turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave? David E. Farnsworth: Thank you, Bill. Our third quarter results reflect continued solid progress toward our goal of delivering organic growth and expanding margins. We still have work to do to reach our targeted profile, but we are encouraged by the progress we have made and expect to continue this momentum going forward. With that, please turn to slide 10, which details our third quarter results. Our bookings for the quarter were approximately $348 million, with a book-to-bill of 1.48. A record backlog of nearly $1.6 billion is up $240 million, or 17.9%, year over year. Revenues for the third quarter were nearly $236 million, up approximately $24 million, or 11.5% organically, compared to the prior year. During the third quarter, we were again able to accelerate progress on a number of customers' high-priority programs worth approximately $25 million of revenue primarily planned for FY '26. Gross margin for the third quarter increased approximately 230 basis points to 29.3% as compared to the same quarter last year. The gross margin increase during the third quarter was primarily driven by lower net EAC change impacts of nearly $2 million and lower net manufacturing adjustments of approximately $4 million. These increases were partially offset by higher inventory reserves of approximately $3 million. As Bill previously noted, we expect to see an improvement in our gross margin performance over time as the average margin in our backlog improves and through our continued focus to simplify, automate, and optimize our operations. We expect average backlog margin to continue to increase as we convert lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses decreased approximately $11 million, or 14.3%, year over year. The decrease in operating expenses was driven primarily by lower restructuring and other charges, selling, general and administrative expenses, and research and development costs of approximately $5 million, $4 million, and $1 million, respectively. These decreases reflect the efficiency improvements and headcount actions we have previously discussed to align our team composition with our increased production mix, driving improved operating leverage. GAAP net loss and loss per share in the third quarter were approximately $3 million and $0.04, respectively, as compared to GAAP net loss and loss per share of approximately $19 million and $0.33, respectively, in the same quarter last year. Adjusted EBITDA for the third quarter was approximately $36 million, up $11 million, or 46.2%, as compared to the same quarter last year. The increase was partially driven by enhanced execution and improved operating leverage. Adjusted earnings per share was $0.27 as compared to $0.06 in the prior year. The year-over-year increase was primarily related to our improved execution and increased operating leverage in the current period as compared to the prior year. Free cash flow for the third quarter was an outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. As we noted last quarter, we did expect to see a free cash outflow in the third quarter; however, we were able to successfully mitigate a large portion of that outflow through improved collections on billed receivables. Slide 11 presents Mercury Systems, Inc.'s balance sheet for the last five quarters. We ended the third quarter with cash and cash equivalents of $332 million, which represents an increase of approximately $62 million, or 23%, from the same period in the prior year. This increase was primarily driven by the last twelve months' free cash flow of approximately $73 million, which was partially offset by $15 million of shares repurchased and retired from our share repurchase program earlier this fiscal year. Billed and unbilled receivables decreased sequentially by approximately $10 million and $4 million, respectively. We continue to expect to allocate factory in the fourth quarter to programs with unbilled receivable balances, which will help drive free cash flow with minimal impact to revenue. Inventory increased sequentially by approximately $12 million. The increase was driven primarily by work in process as we bring product to its final state in support of our increased proportion of point-in-time revenue on many of the company's production programs. Prepaid expenses and other current assets decreased sequentially by approximately $10 million primarily due to insurance proceeds and normal operating expenses. Accounts payable decreased sequentially by approximately $2 million, driven primarily by the timing of payments to our suppliers. Accrued expenses decreased approximately $3 million sequentially, primarily due to the payments of a legal settlement and restructuring activities we announced earlier this fiscal year. Accrued compensation increased approximately $2 million sequentially, primarily due to our incentive compensation plans. The amount due to our factoring facility decreased sequentially by approximately $18 million, primarily due to the timing of payments from our customers due back to our counterparty. Deferred revenues decreased sequentially by approximately $11 million, primarily driven by execution across a number of programs during the period. Working capital decreased approximately $19 million year over year, or 4.1%. Our continued working capital improvement year over year, which is evidenced by our strong balance sheet position, has enabled us to make a $150 million payment against our revolver during the fourth quarter. This continues to demonstrate the progress we have made in reversing the multiyear trend of growth in working capital, resulting in a reduction of approximately $225 million, or 34%, from the peak net working capital in Q1 fiscal 2024. Our balance sheet provides sufficient flexibility for us to pursue and capture potential market tailwinds. Turning to cash flow on slide 12. Free cash flow for the third quarter was a slight outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. We continue to expect free cash flow to be positive for the year, with positive cash flow expected in the fourth quarter, as Bill previously noted. We believe our continuous improvement in program execution, hardware deliveries, just-in-time material, and appropriately timed payment terms will lead to continued reduction in working capital. In closing, we are pleased with the performance in the third quarter and the higher level of predictability in the business. With that, I will now turn the call back over to Bill. William L. Ballhaus: Thanks, Dave. With that, operator, please proceed with the Q&A. 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 1 to raise your hand. To withdraw your question, please press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kenneth George Herbert. Your line is now open. Kenneth George Herbert: Good afternoon, Bill and Dave. Really nice results. Bill, maybe just to start on implied margins in the fourth quarter. Seasonally, you typically have a nice step up into the fourth quarter. The revised outlook for the full year implies more modest margin expansion into the fourth quarter. Maybe you can just talk about some of the puts and takes into the fourth quarter and then, I guess more importantly, not to get too far ahead, but how much of the move towards the longer-term target up into the low 20s could we expect to see in fiscal '27? David E. Farnsworth: Hey, Ken. If it is okay, I will start, and then Bill can jump in. As far as the sequential growth in margin, we have seen that in the past, and it is accompanying a real significant change in the linearity of our business. As you recall, in the fourth quarter, we have typically seen a higher level of revenue, and the mix has been a bit different. One of the things we have been able to do this year is start to flatten out that linearity a little bit. So a stronger Q3 and with stronger margins accompanying Q3 as well. Where in the past we have seen a step up of potentially a couple hundred basis points, it was from a much lower starting point normally. We do not expect to see that rate of a jump up in the fourth quarter—more of a gradual trend—but we feel good about the total year. And as Bill said, mid teens around the margin for the year. We do feel we are headed in absolutely the right direction and in keeping with our expectation of getting towards our target margins. William L. Ballhaus: What I will add is what Dave highlighted just reflects this smooth transition of the business from this high mix and concentration of development programs a couple of years ago, to completion of those programs, transition into low-rate production, and then increased levels of production. What we have been expecting to see as we have evolved was a combination of increasing top-line growth and then further acceleration of the bottom line. If you adjust for some of what we pulled forward from last year into Q4, what that has translated into is a relatively smooth progression to mid single-digit top-line growth last year and now to high single-digit top-line growth, with nice margin expansion on the bottom line, and some recent indicators of that continuing as we move forward. A couple of things that I would point to would be the growth in our domestic business in Q3, which was up 17% year over year, and then in the quarter, a really nice step up in our next-twelve-months backlog, up 10% from Q2 to Q3. So more than anything, Ken, I think Dave's point around linearity is that we are just seeing a nice smooth progression of the business. Kenneth George Herbert: That is great. Appreciate that, Bill. Maybe for either Dave or Bill, as we think about the strong bookings in the quarter—you called out missiles, C4I, and some space programs—are there any particular programs within those broader buckets you are comfortable calling out or you would specifically highlight as significant sources of bookings? William L. Ballhaus: One of the real strengths of our business is the diversification across our portfolio—no real concentration. No one program makes up more than 10%. The strong bookings really just reflect strong demand across our portfolio in areas like space, C4I, and missile defense, and we think that is a real strong attribute of our business. No single program, no real lumpiness in the bookings—just a strong indication of demand across our broad portfolio. It really is, as we have been talking about— David E. Farnsworth: As we look, there is not one area that we would say is an area you would not focus too much energy on because it is either declining or flat. All the areas from a bookings standpoint are seeing solid activity, and it is in keeping with what the market is doing. To a large degree, these are the production efforts we have been talking about, and this is gearing up more production on those same programs that we have been working. William L. Ballhaus: It really reflects, again, that transition from a heavy concentration of development to the follow-on production, with a nice progression in the quarter. Operator: Thank you for your question. Your next question comes from the line of Peter John Skibitski. Your line is now open. Peter John Skibitski: The book-to-bill, which is really strong this quarter, and it seemed like just the tone of your commentary was more positive in terms of the sales outlook. You have raised the guide here to the mid single-digit range. Even looking at that guide, the fourth quarter revenue looks like it would imply to be down year over year. I just wanted to know if there is continued conservatism there in the guide or if there is just a large percentage of unbilled receivable-type work in the fourth quarter relative to the third quarter. Or maybe something else? William L. Ballhaus: One way that you could think about it is, aside from the $30 million that we accelerated from FY '26 into Q4 of last year, the year-over-year growth comparison in top-line growth looks pretty consistent with what Q1, Q2, and Q3 look like. Again, it more reflects a steady progression of our business to mid single digits last year and then high single digits this year, with some real positive indicators again based on the book-to-bill, the continuing growth of our backlog—which we expect to continue to grow—and then, in particular, the portion of our backlog that we expect to convert over the next twelve months. Peter John Skibitski: And then just on the unbilled receivables, they were down only modestly this quarter. What is the right way to think about that? Does that mean some of these cycles are just going to take a lot longer? I am a little confused as to why we did not see a bigger step down in the receivables. David E. Farnsworth: Some of what is reflected in there and in our inventories is a bit of the up cycle we are seeing in terms of production coming in. There is always a bit of a timing phenomenon. There was a much more significant decline, but there were things added in as we were ramping up on new activities. Nothing more than the timing of things; I would not read anything else into it. We are still focused on burning down some of our older unbilled balances. But as we ramp up revenue, there will be new unbilled balances—certainly better than the terms were in the past—but there will be some from a timing standpoint. Nothing different than what we have been saying. We are still focused on working through the older balances and getting them cleared from our books, so we have the capacity to do all the new work that we see. William L. Ballhaus: There are definitely more dynamics under the hood than you would see if you just looked at the quarter-to-quarter number. And then, Pete, the other thing that I would point out is close to 12% growth year over year and the net working capital coming down year over year despite that growth, which reflects the progress that we are continuing to make and the increased efficiency of our net working capital. Operator: Thank you for your question. Your next question comes from the line of Austin Moeller from Canaccord Genuity. Austin, your line is now open. Austin Moeller: Hi. Good afternoon. Are you looking at the IBAS defense industrial base investments within the fiscal year 2027 budget? And do you see any opportunities to get incremental investments from that program to expand your capacity? William L. Ballhaus: Hey, Austin. Thanks very much for the question. We have had interactions with IBAS. We have programs that are funded by IBAS, and that continues to be an area where we look for opportunities to go after things that they are interested in investing in and that we think can increase our capacity, our efficiency, and our innovation. So, yes, definitely something that is in front of us. Austin Moeller: Great. And just my next question, do you see more contract opportunities within Golden Dome or within the Defense Autonomous Working Group within the fiscal year '27 budget request? William L. Ballhaus: We definitely see opportunities across the board. That is not only in our existing portfolio of programs but also tied to administration priorities like Golden Dome, missile defense, and armaments—across the board right now we are seeing opportunities. We feel like our capabilities are really well aligned with the administration's priorities broadly. One of the things that we have said before and think is unique about our positioning is we have exposure to a broad set of tailwinds across the market. That is what we are focused on capturing right now. Austin Moeller: Excellent. I will pass it back there. Thank you. William L. Ballhaus: Thanks, Austin. Operator: Thank you for your question. Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila, your line is now open. Analyst: Hi, guys. This is Egan McDermott on for Sheila. Maybe just building off of the missile questions that have been asked. Curious, one, if you could sort of size how big Mercury's missile exposure is as a percent of sales, even roughly, and two, with a few large LTAMDS contracts out there of late—you know, thinking like the $8 billion FMS to Kuwait—how would you think about what an order of that magnitude means for your business? William L. Ballhaus: Thanks very much for the question. We do not size up the missile portfolio publicly, but we do have a number of programs with exposure to missiles for sure. Relative to LTAMDS, we typically do not comment on any one program or go into much detail. I will say that it is publicly available that there are conversations around increased demand and increased quantities on LTAMDS, and that really has not factored into any of our bookings to date, but certainly would be a positive if there were increased quantities and accelerations of deliveries. It is one of the potential tailwinds that we are keeping our eye on as we are looking forward. Analyst: Thank you. And maybe just a follow-up on that. Is it fair to think that margins on an order like that out of Kuwait or other FMS would differ from U.S. orders at all or be at all higher? David E. Farnsworth: For us, it is typically something that we work with the prime on, and so we would work with them as to what pricing makes sense and how it makes sense. Typically, the higher margin rates are on foreign direct versus FMS contracts at the prime level. I think that is something you would have to have that conversation broadly with the prime. Operator: Thank you. Analyst: Thank you. Operator: Thank you for your question. Your next question comes from the line of Jonathan Frank Ho from William Blair. Jonathan, your line is now open. Analyst: Hi. This is Garrett Berkham on for Jonathan, and thanks for taking the question. It is nice to see the strong results, and it sounds like demand is strong and relatively broad-based across the board. Are there any areas where you see the most opportunity for reordering and restocking over the near term, just given the ongoing geopolitical conflicts? Thanks. William L. Ballhaus: Thanks for the question. To break down our growth vectors, first and foremost, the primary driver of our near-term organic growth is the transition of our business from a really high concentration of development programs—and it is dozens of programs, not one or two—to the low-rate production phase and then the higher-rate production phase. We are seeing that start to manifest in '25 to '26 and expect our organic growth to continue to accelerate based on those programs ramping up. That really does not have anything to do with tailwinds that we see in the market. Beyond the existing portfolio, we are continuing to win new development programs that are really exciting, where we are bringing together technology and innovation across our portfolio, doing things that nobody else can do and winning new development programs that, over time, are going to add to that production content. Beyond those two items, we do see a number of potential tailwinds tied to a number of different factors: the size of the domestic budgets, the size of the global budgets, and other tailwinds like Golden Dome and rearmament of munitions. We are starting to see those tailwinds manifest in the form of multiyear strategic agreements at increased quantities and increased deliveries with the primes. Right now, none of those tailwinds are reflected in any of our bookings, and we view them as all additive to the target profile that we have talked about and are converging on. We have said for a couple of quarters now that we think that some of those tailwinds could start to manifest likely by the end of calendar 2026 but potentially as early as our fourth quarter, which is our current quarter. We are watching those items as they progress in our pipeline with a lot of excitement. Beyond that, there is a broad set of demand and a lot of tailwinds that we have exposure to, and we are looking forward to seeing how that all plays out over the next quarter and beyond. David E. Farnsworth: On the current business—what we are executing on today—when you look at the queue, you will see the areas that have significant growth in the revenue. Space is up significantly for us. Radar is up, as you would expect. Other sensors and effectors—if you think effectors—that is up significantly in our revenue so far this year. Those are things that the customer needs delivered as fast as possible. You will see that across our entire portfolio of roughly 300 programs. William L. Ballhaus: One of the best indicators of that is, again, if you look at our domestic business, how it is up 17% year over year. A couple of years ago, this is where a lot of our development programs existed in the portfolio, and you can really see now the phenomenon of us having completed the development programs, transitioning into low-rate production, and now starting to ramp up. There are a lot of things that we are seeing in the portfolio and the business that we are excited about. Analyst: That is great. Thank you. Operator: Thank you for your question. At this time, we would like to remind you, if you would like to ask a question or an additional follow-up, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. There are no further questions at this time. Oh, pardon me. Next question comes from the line of Peter J. Arment from Baird. Peter, your line is now open. Peter J. Arment: Hey. Thanks. Good afternoon, Bill, Dave, Tyler. Nice results. Tyler Hojo: Hey. Peter J. Arment: Bill, it has been a common theme the last few quarters that you have talked about the ability to stage material earlier and better align your supply base that is leading to better performance on the top line. Could you give a little more insight into that staging or a little more color around it? William L. Ballhaus: I think it has been one of the big improvements in the business, and we are not done—we still have work to do on this front—but you can see the impact of our efforts in this quarter, the linearity, and our outlook for the year. If we go back close to three years ago, we really swung the pendulum hard on our material focus to a just-in-time delivery model. This was largely because of the buildup in our net working capital and our need to address that. We swung the pendulum hard, and the upside is we have been able to reduce our net working capital by about $250 million over the last couple of years. But it introduced some constraints in being able to accelerate our backlog conversion. It was not so much that availability of material or items in our supply chain were hard to get; it was that we staged the delivery to the right because of the net working capital buildup in the business. Over time, we have worked to accelerate the delivery of material, which has led to accelerations that we cited into past quarters. But that led to a bathtub in the future quarters that made it hard for us to forecast what those quarters would look like because we had a lot of unknowns associated with filling the bathtub and trying to accelerate more material. Over the last several quarters, we have focused on pulling our supply chain to the left—bringing the due dates for material ahead of our need date—so that we have more flexibility and more degrees of freedom in how we convert our backlog. That has translated into a higher organic growth rate and our ability to convert backlog faster than we thought we would be able to coming into the year. It is a great shift in the business. We are really excited about it. We have more work to do, but for future quarters it gives us much better visibility into our deliveries, and we can incorporate that into our forecast. That is a pivot and a transition that we have made this quarter. Hopefully, that is helpful in explaining the dynamics. Peter J. Arment: Very helpful. And you mentioned you had the strongest bookings quarter for the CPA—the Common Processing Architecture—so it sounds like momentum is really building there. What other color can you give us around the CPA that you are seeing with customers? William L. Ballhaus: We have a number of different degrees of freedom to drive there. We have always said that as we increase production, the follow-on bookings would come, and we certainly are seeing that—this quarter was evidence of that. We are seeing strong demand for our current products, and this is an area where we have differentiation in the market. There are certain security standards that we are the only ones that can meet, so we have a nice moat around this business. As we have made progress on the development programs, it has given us the opportunity to focus on the next set of innovations we want to bring to the market. That is showing up as higher performance for our current form factors—getting the latest processing and memory capabilities into the hands of our customers with our common processing architecture wrapped around it. Maybe even more exciting, we are driving into smaller form factors and secure chiplets, which we think opens up a big TAM for that capability. There has been a lot of progress over the last couple of years on our development programs and our technology. The production follow-on orders are coming as a result of that, and we see a lot of room to run into different form factors to open up the market. Eventually, over time, as we take our mission-critical processing to the edge and increase performance while driving to smaller form factors, we see ourselves providing the compute infrastructure needed to have AI distributed across the battlespace. That is where we see being able to take this capability in the future. Operator: There are no further questions at this time. I will now turn the call back to William L. Ballhaus, CEO, for closing remarks. William L. Ballhaus: With that, we will conclude our call. We really appreciate everybody's participation and interest and look forward to getting together next quarter. Thank you.
Operator: Ladies and gentlemen, welcome to BWX Technologies First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host Chase Jacobson, BWXT's Vice President of Investor Relations. Please go ahead. Chase Jacobson: Thank you. Good evening, and welcome to today's call. Joining me are Rex Geveden, President and CEO; and Mike Fitzgerald, Senior Vice President and CFO. On today's call, we will reference the first quarter 2026 earnings presentation that is available on the Investors section of the BWXT website. We will also discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the safe harbor provision found in the investor materials and the company's SEC filings. We will frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in the appendix of the earnings presentation that can be found on the Investors section of the BWXT website. I would now like to turn the call over to Rex. Rex Geveden: Thank you, Chase, and good evening to all of you. We had a great start to 2026 with very strong first quarter results. Revenue grew 26%, 11% of which was all organic. Adjusted EBITDA grew 14% and earnings per share grew 22%, all ahead of expectations. Outperformance in the quarter was driven by improved throughput, favorable pacing of work and exceptional operational execution across our business lines. We ended the quarter with a backlog of $8.7 billion, up 77% year-over-year and 19% sequentially. Supported by robust bookings in government and consistent backlog in commercial, providing clear visibility to future growth. Demand for commercial nuclear power components and services continues to accelerate across the U.S., Canada and Europe. As projects launched, we believe that localized manufacturing capacity will increasingly differentiate BWXT, making the establishment of U.S. commercial manufacturing footprint to complement our Canadian operations a strategic priority. To that end, in April, we announced the acquisition of Precision Components Group, PCG, a U.S.-based manufacturer of complex heat transfer components for the U.S. naval and commercial nuclear markets with 2 facilities in more than 400 highly skilled employees, PCG represents our first step toward building domestic U.S. commercial nuclear manufacturing capacity. While most of PCG's current revenue and backlog is related to naval programs, its facilities have immediately available capacity that we intend to utilize for the commercial market. With products such as reactor internals, pressurizers, heat exchangers and reactor head assemblies. Beyond the PCG acquisition, we intend to expand our U.S. commercial manufacturing footprint likely with a greenfield plant at our Mount Vernon, Indiana site on the Ohio River. This facility will be capable of producing larger heavy nuclear equipment, including steam generators and reactor pressure vessels. Ultimately, our goal is to build scalable U.S. commercial nuclear manufacturing operations that can serve U.S. and global SMR and large reactor projects. By adding domestic capacity, we are positioning BWXT to meet rising commercial demand while creating meaningful synergies with our existing U.S. operations. Beyond commercial power, we are making disciplined growth investments across the portfolio, supporting existing businesses, adding new technologies and capabilities and pursuing opportunities in advanced nuclear and other national security applications. Turning to segment results and market outlook. Government Operations revenue was up 4% and adjusted EBITDA was up 1% in the quarter, slightly ahead of our expectations. We had strong bookings, including $1.4 billion from the second portion of the pricing agreement for Naval reactors awarded last year and long lead material procurement contracts for out-year production. This led to segment backlog of nearly $7 billion up 25% sequentially and 93% year-over-year. In naval propulsion, we are driving operational efficiencies in our plants, which contributed to our good margin performance in the quarter. We anticipate continued revenue growth with a steady pace of Virginia-class production, growth in the Columbia class and early work on the next Ford class ship set. The President's FY '27 budget request supports these programs and ship building generally, further reinforcing our confidence in longer-term growth rates. In special materials, our legacy programs delivered solid results and our defense fuels enrichment and HPDU programs are progressing in line with early program schedules. Specific to defense fuels enrichment, we completed construction of the Centrifuge manufacturing development facility earlier in the year and have begun prototyping the first units. In April, we engaged with the NRC regarding our plans to build an HEU enrichment facility in Erwin, Tennessee. This engagement is an important milestone as it creates alignment with regulators in the NRC approval process. For our new large HPDU contract, we are organizing the supply chain and preparing for construction of the new facility in Jonesborough, Tennessee. That program will ramp through 2026 and continue over the next several years before transitioning to commissioning and production. The growth potential in special materials is exciting, and we continue to pursue new scopes with existing customers and evaluate entry points to new markets. Technical Services has delivered strong equity income growth over the past few years with multiple strategic wins. We are pursuing new opportunities in the DOE market and in other new markets with the next wave of contract awards expected over the next 12 to 18 months. Moving to microreactors and advanced nuclear fuels, the market is evolving rapidly in land-based defense, commercial and space markets. We continue to see strong demand across the board, including TRISO fuel for demonstration reactors and future commercial projects with multiple reactor developers. Of note, Kairos with whom we have a collaboration agreement on TRISO recently began construction of its Hermes 2 reactor for Google in Oak Ridge, Tennessee. Finally, we are continuing our close engagement with the Army on the Janus Program. Turning now to commercial operations. Results in the quarter were well ahead of our expectations. Organic revenue grew 39% and total revenue rose 121% with robust double-digit growth in commercial nuclear and medical and contribution from Kinectrics. While the outperformance was partially due to timing of outage work and progress on large component manufacturing, we also improved operational performance with accelerated throughput and reduced lead times. Following an 85% increase in backlog in 2025, backlog was flat sequentially in the first quarter, but still up 33% year-over-year, supporting our expectation for low teens organic growth in commercial power this year. The outlook for new build nuclear projects remains very positive. Notably, the U.S. and Japan announced plans to invest up to $40 billion to build up to 3 gigawatts of GE Hitachi, SMRs in the Southeastern United States. Our role is the reactor vessel supplier on the first GE Hitachi BWRX-300 SMR in Canada puts us in a good competitive position for these future projects. Given BWXT's industrial scale and engineering and design capabilities, customers are increasingly coming to BWXT to supply critical nuclear components for their current and future SMR and large-scale nuclear projects, which should lead to further backlog growth over the next 12 months. Kinectrics continues to exceed the acquisition business case having delivered another very strong quarter. A key highlight in the quarter was Kinectrics being selected as the design and fabrication partner for a U.K. Tritium loop facility, which will be the world's largest and most advanced tritium fuel cycle facility. This presents an entry point for engineering services and specialty equipment manufacturing and the exciting nuclear fusion market. With that, I will now turn the call over to Mike. Michael Fitzgerald: Thanks, Rex, and good evening, everyone. I'll begin with total company financial highlights on Slide 4 of the earnings presentation. First quarter revenue was $860 million, up 26% year-over-year with 11% organic growth. Strong performance in commercial operations was complemented by steady growth in Government Operations. Adjusted EBITDA was $148 million, up 14% year-over-year driven by robust growth in commercial operations and modestly higher Government Operations, partially offset by higher corporate expense relative to an unusually low level in last year's first quarter. Adjusted earnings per share were $1.12, up 22%, reflecting strong operating performance and approximately $0.08 of higher nonoperating contributions. Our adjusted effective tax rate for the quarter was 15.8%, benefiting from timing of stock compensation. Our updated full year tax rate guidance of less than 21.5% is modestly higher than last year's rate, reflecting strong growth in international earnings, mainly from Canada. First quarter free cash flow was $50 million, a strong result for what is typically our seasonally weakest quarter, reflecting solid earnings and effective working capital management. Capital expenditures in the quarter were $43 million. We continue to expect our full year capital expenditures to be around 6% of sales. However, it is possible that CapEx may exceed that level in future periods as we advance targeted growth investments including expansion of U.S. commercial nuclear manufacturing capacity and advanced nuclear and fuel capabilities given the significant business we expect to capture. We are carefully balancing these strategic investments with our financial return metrics as we evaluate the numerous growth initiatives across the business. Moving to the segment results on Slide 6. In Government Operations, first quarter revenue was up 4% with growth in special materials and naval propulsion offsetting lower microreactor volumes. Adjusted EBITDA in the segment was $118 million up 1%, resulting in an adjusted EBITDA margin of 20.4%, has better revenue, solid operating performance and timing of technical services income benefited margin. Given first quarter performance, we now expect government operations margins to exceed 19% for the year. Turning to Commercial Operations. Revenue was up a robust 121% including 39% organic growth, reflecting increases in both commercial power and medical and contribution from Kinectrics. Growth exceeded expectations due to increased throughput on large commercial nuclear component projects, mainly associated with the Pickering life extension and better-than-expected performance from Kinectrics. Adjusted EBITDA in the segment was $36 million, up 162% from last year. Adjusted EBITDA margin in the quarter was 12.9%, with higher sales and strong execution, offsetting the impact of growth investments as we continue to scale the business. Turning to our 2026 guidance on Slides 7 and 8 of the earnings presentation which I will note does not include contribution from the recently announced PCG acquisition. We expect revenue of at least $3.75 billion, up high teens compared to 2025. In Government Operations, we expect low teens growth with over half coming from the defense fuels and HPDU contracts. In Commercial Operations, we increased our revenue growth expectation to approximately 30%, driven by low teens growth in commercial power, high teens medical growth and a full year of contribution from Kinectrics which as mentioned, has outperformed our expectations to date. For adjusted EBITDA, we are increasing the guidance range by $5 million on each end, resulting in revised adjusted EBITDA guidance of $650 million to $665 million. Regarding the cadence of operating earnings, we continue to expect our full year results will be slightly more back half weighted than usual with about 55% of full year EBITDA anticipated in the second half, and we expect second quarter EBITDA to be roughly in line with to slightly below first quarter levels. These assumptions lead to non-GAAP earnings per share guidance of $4.60 to $4.75 with the increase driven by higher operating earnings. We expect free cash flow of $315 million to $330 million, inclusive of mid- to high teens operating cash flow growth supporting continued reinvestment and long-term shareholder value creation. Regarding the recently announced acquisition of PCG, the business generated approximately $125 million of revenue with low double-digit EBITDA margins in 2025, and we anticipate mid-single digits revenue growth in 2026. The acquisition, which will be included in our Commercial Operations segment, is expected to close in the second half of the year. As such, our annual financial guidance does not include contributions from PCG at this time. Overall, we're off to a strong start in 2026. Our robust backlog provides us great visibility for the remainder of the year, allowing us to focus on margin expansion cash generation and capturing new high-value contracts across the defense and commercial nuclear markets. With that, I will turn it back to Rex for closing remarks. Rex Geveden: Thank you, Mike. It is an exciting time at BWXT. We are delivering on our commitments to customers and shareholders in driving value through process optimization, technology adoption and disciplined growth investments. Our 2026 guidance supports meeting or exceeding the medium-term financial targets, we introduced at our Investor Day in February 2024. We look forward to providing an update at our next Investor Day this fall. As I wrote in a recent Washington Times op-ed, BWXT is not betting on a horse. We are betting on the race. We participate across the nuclear value chain in defense and commercial markets and as a merchant supplier and a technology provider, enabling us to win across a broad range of competitive outcomes. We have record backlog, unprecedented demand and the financial strength to continue investing for growth. We intend to build on our market-leading position in nuclear solutions for defense and commercial nuclear markets, thereby driving long-term shareholder value. And with that, we look forward to your questions. Operator: [Operator Instructions] Our first question comes from Matt Akers from BNP Paribas. Matthew Akers: I may have missed this, but did you say how much you're planning to pay for PCG. And then I guess another, just a question on the sort of footprint build-out because you mentioned this is sort of the first step towards building out the footprint. And sort of how should we think about what's left? Is it more kind of capacity driven? Is it technology? Is it head count? And just kind of what -- how to think about that? Michael Fitzgerald: Yes. Thanks, Matt. So from a purchase price standpoint, we didn't put it in the public release, but it was roughly around $200 million. So in line with the multiples that we've seen in some of our more recent acquisitions. And so ultimately, depending on the time line, we'll see when that will close out this year, but fully expect that to move along pretty rapidly. I would say when you look at this from a kind of first step, there's a couple of different ways to think about this. One, we like the capabilities. We like the workforce. We certainly need the square footage from a capacity standpoint. However, this is going to be primarily focused on manufacturing of certain aspects. It's not going to be able to handle some of the large, heavy, very large scale components that we need to manufacture. So we're looking at kind of a multiple approach step, which we announced in our last earnings call, the potential for a new facility may be adjacent to our Mount Vernon location which could handle some of the heavier large components. And so we're looking at this both from a capacity and workforce standpoint. Matthew Akers: Great. I was wondering if you could touch a little bit on kind of the space end market and the opportunities that you're seeing there. I saw you just added Dan, to the Board recently, you remember from Maxar. But just curious what you kind of think of it as kind of the opportunities coming up in the pipeline there. Rex Geveden: Yes. So I kind of -- this is Rex. So kind of divided into 2 areas. There is a civil space opportunities and NASA seems interested in really 2 things: nuclear electric propulsion and then also efficient surface power for a lunar based. And then there's a long-term commitment to nuclear thermal propulsion according to the NASA Administrator, Jared Isaacman. And so we have opportunities to play in all of that. Certainly on the fuel side and on delivering a reactor for any of that. So interesting -- it's an interesting opportunity. It's an interesting market for us. It's kind of a one-off market in the sense that you do one of those systems typically. I think probably the more fertile ground for us is national security space. I believe we'll see more applications for power and propulsion there, and we're locked in on that opportunity. Operator: Our next question comes from Jeffrey Campbell from Seaport Research Partners. Jeffrey Campbell: Congratulations on the strong quarter. My first one is, would your new commercial facility, the one that you have not yet reached FID, and would it have any limitations regarding components that it could build for customers such as, again, Hitachi Westinghouse or Rolls-Royce? Michael Fitzgerald: No limitations at all. I mean I think when we look at our demand signals, we're certainly seeing some capacity constraints even in our Cambridge facility as we look out multiple years. The other thing that I think we're finding is that being kind of localized in the U.S. creates a competitive advantage, and we're excited to add some of those capabilities to make sure that we have a U.S. presence and we think that, that's a differentiator when we look at it from a market standpoint. So ultimately, the idea is to set up potentially centers of excellence, where you would have certain facilities that are focused on things like reactor internals and tanks and pressurizers and you would have other facilities that would be focused on kind of the large steam generators, reactor pressure vessels, those types of things. And so we would think of it there, but we would ultimately make that across multiple customers and multiple platforms. Jeffrey Campbell: Okay. Great. I appreciate that color. My other question is you've made the case for PCG's acquisition for the budding U.S. commercial activity. I just wondered if the acquisition has any positive effects for your naval business as well? Rex Geveden: Yes, I think it could, Jeff. It's a nice business in the sense that it has an existential qualified nuclear workforce. It has plenty of capacity, as we alluded to in the script, and we'll make immediate use of that capacity. But I think the more important thing is nuclear manufacturing credentials are rare and hard to get. So you have to go through certifications to get stamps for it to get things like N stamps and NPT stamps and U stamps. These are ASME certified factories that also have nuclear quality systems. And so that's hard to get, and it's an immediate capability for us. And so certainly beneficial to our Navy customer, which has been using that -- has been using that capability for a long time, but more importantly, I think, is the commercial case because as we expand into the U.S., we need that kind of manufacturing capacity capability, and we'll get going with it right away. Operator: Our next question comes from Bob Labick with CGS Securities. Bob Labick: Congratulations on the results and the exciting outlook as well. I just wanted to expand on the questions on kind of U.S. capacity build-out. Have you decided yet? Or do you know how much capacity do you want to add? And could you give us a sense of the capital needed for a U.S. greenfield and how long that might take to build out? Rex Geveden: Yes, Bob. We're going -- we're presently going through a 60,000 square foot capacity expansion at our Cambridge plant. And the capacity we're looking for in Mount Vernon would be 50%, 60% more than that, let's rough it out at 100,000 square feet and then to outfit that factory. So now the expansion that we're doing in Cambridge is brownfield this would be quasi greenfield. And so it will be more expensive than our Cambridge build-out. But that -- the reason we're attracted to the Mount Vernon site is because we've got rail spur there, we've got crane capacity 1,000 metric ton crane pass, radiography facilities. So there's some natural cost synergies that would go with our Navy business that's there, not to mention workforce that's nuclear qualified in a plant next door. So that's kind of the thesis behind it. In terms of budget, it would be -- think of it as kind of twice what we're doing at Cambridge in rough terms. Bob Labick: Okay. Great. And then there's obviously so much demand out there, and it just seems to keep growing and growing. Is there any thought about, I guess, exploring customer funding for commercial capacity growth? Or how do you derisk building out incremental capacity on the commercial side versus on the government side? Rex Geveden: Yes, I'd say we have got the balance sheet to do what we need to do in terms of capacity. Operator: Our next question comes from Pete Skibitski from Alembic Global. Peter Skibitski: You talked, I think, in both segments about improved throughput. I was just wondering if you could put some color to that, if there's certain initiatives you have in place to help with throughput or if it's just net hiring or something? Rex Geveden: Yes, Pete. We did have formal initiatives in-house called Driving Performance Excellence is what we call a DPX, that's our -- that's sort of our name for operational excellence. And we've had that kind of process going on in the plants for a long time. We've now expanded across the entire enterprise. So we're using things like supply chain and human capital and other areas. But yes, we do have some dedicated throughput projects, including, for example, the Pickering steam generators, TheraSphere, we had an important throughput project in our Lynchburg plant last year, having to do with an area called -- that we call higher tier. So yes, we're highly focused on that because of this basic fact, we need more capacity than we have, and we can get capacity in 1 of 2 ways. We can get capacity from increasing our throughput, which is the cheapest and best way to do it or we can get it by adding square feet. Doing acquisitions or doing brownfield and greenfield plants. We're doing all of the above because we need so much capacity. But that's how we're thinking about it, and that's the reason we focused on throughput. Peter Skibitski: Okay. Okay. Great. And last one for me. I guess Air Force DIU had this recent ANPI awards, Radian, Westinghouse and Antares. Just was wondering, were you guys disappointed you didn't get an award here? Are there going to be further ANPI opportunities? Or is the focus really more so on Janus and on your BANR reactor. Just wondering if you could kind of -- these initiatives seem to have some relationship to each other. So I was just wondering if you could kind of sort it out for us. Rex Geveden: Yes, sure, Pete. So no disappointment because we didn't pursue those opportunities. Those were more about some smaller scale reactors for lower power output. And none of those reactors is transportable like our Pele reactors. So we have our transportable Pele reactor that fits certain use cases, and it's very interesting, but not for those particular opportunities. And then we have commercial derivative of Pele, you might say that's called BANR, which is a 20-megawatt electrical output, a much larger microreactor than you see out there in most case and that one fits a completely different use case. So that was -- those competitions weren't really for us. We are focused on Pele follow-on work. We're focused on Janus, and we see plenty of opportunities for microreactors and for microreactor fuel for TRISO fuel. Operator: Our next question comes from Marc Bianchi from TD Cowen. Marc Bianchi: Maybe Rex, following up to the last point there on TRISO. There's been some more focus on it now with some other companies that are involved in manufacturing coming public. Can you talk a bit about your process there and how you think your competitive positioning would stack up over time? I know currently, you're doing it. So that's a good sign. But maybe just as you think about the next few years and stamping out your competitive position? Rex Geveden: Yes, I'll try and put some color on that one. Yes, we are the only producer of TRISO at any scale at this point. We're producing hundreds of kilograms a year, we made all the fuel for our Pele reactor. We're making fuel for Antares and some other clients we haven't disclosed yet. So we're in the commercial business on TRISO. I would say that, that is sort of the limit of our capacity now, a few hundred kilograms a year. So there's only so much you can do with that. In order to scale that, we are considering brownfield and greenfield opportunities. And we've talked publicly about doing something on a larger scale in Wyoming. And that's what the market needs. We need a very large-scale plant so that we can drive down the cost on TRISO to help make these reactors commercially viable. I will just maybe add to that point that I think this is a really interesting place to be in the market to be able to be in the fuel side of microreactors and small modular reactors is a pretty nice place to be. I said it in the script, but we're betting on the race, not on the horse and that posture enables us to win in a variety of competitive outcomes. And for TRISO, we're positioned exactly where we want to be, which is we produce it for our own purposes, but we also produce it for the market, and we intend to do that in the future. Marc Bianchi: Okay. And then the other one I had was just on the Japan announcement, the $40 billion for GE Hitachi, when would it be realistic for awards to be made to the market for that equipment? Like just -- I know you still need to win it, but just in terms of thinking of a time line for when that could potentially be added to backlog. Rex Geveden: I think it's -- I mean I think of this one and the AP1000 one is fairly near term as far as nuclear projects go, I'm in touch with the top leadership of GE, and we're in touch with the top leadership of Westinghouse. And these deals are being negotiated at a -- with urgency is the way I would put it with the Department of Commerce. And so I think -- I said it on prior call, it wouldn't surprise me if we started to receive orders this year related to those large -- to those sort of bulk reactor buys. But there's a lot of things that -- a lot of hurdles that need to be cleared between now and then. Operator: Our next question comes from Jeff Grampp from Northland Capital Markets. Jeffrey Grampp: Rex, it seems like conviction and proceeding with the commercial expansion at Mount Vernon, I'm curious how long might something like that take to get operational from when you ultimately decide to move forward there? And how important do you guys sense is having something like that operational to winning U.S.-based business? Rex Geveden: Yes. You said a couple of key things there, Jeff. So on the time line, that's something that will take us 2 or 3 years to complete. And that should be in the right time frame for being able to take some of these large orders and get going. But you made a key point there on the end, which is around how important it is to have U.S. industrial capacity. I do believe that localization of supply chain is kind of going to be the way it is in nuclear. It's certainly a strong emphasis in Canada where we play strongly and we have local capabilities in there. I think you'll see the same thing play out in Europe. I think they're going to favor local supply because of the economic development impacts. And so I do believe that localization in the U.S. will matter. And I think it will particularly matter on some of these government projects like the 10 AP1000 and up to 10 X-300s. And that's one of the reasons we're doing it. We don't have orders yet, obviously, but we're trying to skate to where we think the puck is going because these are such long cycle projects and you have to have the capacity, the existential capacity when the order comes. So that's how we're thinking. We're very bullish on it. And by the way, I don't think in the long run about 10 reactors or 4 reactors at Darlington. If you think about what the global industrial base did -- nuclear industrial base did in the 70s, 80s and 90s, it built 600 large reactors. And I think if we're going to decarbonize the grid to meet the energy needs of AI, meet the energy needs of electrification, we're talking about hundreds and hundreds of reactors globally, large reactors, translate that into thousands of small modular reactors. And so that's the kind of opportunity set we think about. And so we're very bullish on that outcome, and we're building capacity in advance of the orders. Jeffrey Grampp: Super helpful detail. I appreciate that. My follow-up is on the enrichment side. Can you just give us maybe a high-level flavor for kind of, I guess, general timing or progression points on the Centrifuge Manufacturing Facility, that NRC licensing engagement, things like that? Just anything we should kind of keep our eyes peeled for to gauge kind of moving that project forward? Rex Geveden: Yes, I think I've said publicly that, that will progress over the next few years. We've obviously completed our Centrifuge Manufacturing development facility in Oak Ridge, Tennessee. We are outfitting it and working on prototypes right now, that will progress. So the technology transfer from Oak Ridge National Laboratory to BWXT occurs over the next few years. The licensing for the HEU part of it should progress normally over the next few years. I think the more interesting part of it is when we get into Centrifuge Production, which we need to do for the high enriched uranium cascade. And I think in the long term, what will be interesting for us is how do you fill the gap for low-enriched uranium and high-assay low-enriched uranium. That gap is very evident and fundamentally very interesting from a business development perspective. Operator: Our next question comes from David Straus with Wells Fargo. Joshua Korn: This is Josh Korn on for David. I wanted to ask about Medical. I think you had said strong double-digit growth in the quarter. I just wanted to ask about any specific products or markets to call out kind of the outlook there. And then any update on the Tc-99? Rex Geveden: Yes, we didn't give much detail on the script on medical, but that's still a good news story for us. We've got good growth all across the board. And following 3 years of 20% compounded growth, we're forecasting high teens growth this year and we see strength in strontium. We see it in germanium. We see it in TheraSphere. Actinium-225 is growing at an outsized pace, but that's off a pretty small revenue base and we're ramping up production of stabilized isotopes with ytterbium 176. That production is going quite well. And we've got some new therapeutic products in the pipeline like lead-212 and other products that are interesting. Tc-99 is progressing. There's fundamentally no different news on that. We mentioned on the last call that we're evaluating some approaches to the market based on the particularities of our product. And we don't have -- we don't have anything in the 2026 forecast for Tc, but we're continuing to push that towards the finish line. Joshua Korn: Okay. And then wanted to ask on defense. You had been a recipient on the SHIELD contract for Golden Dome. So with all of that money in the '27 budget, kind of what -- if you could provide any color on what that -- what your work may involve and then kind of what the addressable market is for you? Rex Geveden: Yes. We are a Golden Dome contract recipient awardee. That's not uncommon. They certainly awarded to several hundred companies, as I recall it, ours was for some broad infrastructure scope, which I think is pretty interesting for us because of the nuclear capabilities that we have. So to the extent that Golden Dome would need microreactors to drive missile defense sites or radars or whatever it is, distributed power even up to small modular reactors we could play there as a fuel supplier, I think there's a lot there for us potentially in the future, but it's pretty undefined at this point for us. But we've got sort of -- we've sort of got a license to go hunting and we'll turn it into something. Operator: Our next question comes from Scott Deuschle from Deutsche Bank. Scott Deuschle: I think Kinectrics brought with it some revenue connected to the broader power and grid infrastructure space, including in areas like high-voltage testing and cable commissioning. Would you be able to give us a sense as to how big of a business that is for them and what the growth outlook is there? Rex Geveden: Yes, it's about 10% of the total Kinectrics business right now and growing faster than a lot of the parts of that portfolio. That -- yes, that's a very interesting business super high voltage capability, testing components for the grid for component supplier to the grid, kind of an underwriters' laboratory type of thing. But I think the real shoots of -- the real green shoots of growth are around cable testing for wind power in Europe. We have some portable test sets, and we've invested in some more portable test sets, and we've got a nice share of that market, and it's growing smartly. So pretty interesting business obviously exposing us to a different market than we had before, and we like where that's going. Scott Deuschle: Do they have any direct exposure to the data center build-out given these high-voltage data centers that are now coming up? Rex Geveden: Yes. I don't know the details on that. I suspect that we do. Scott Deuschle: Okay. And then Mike, when you talk about CapEx potentially exceeding 6% of sales in the future, is there a maximum threshold you could share with us as to what that excess might be? Like would it still be less than 8% of sales? Or could it exceed that as well? Michael Fitzgerald: No, I think that's about it, that's about right. I mean we feel pretty comfortable with the 6% for what we're seeing for 2026, the comment is really just if we make the decision to have a greenfield facility for another kind of large-scale manufacturing component facility in the U.S. we may exceed that 6%. But I would see it somewhere around the 7%-ish range. What we don't want to do is go back to closer to the kind of 9%, 10% that we saw over the last decade and we were going on a large kind of CapEx spend. So we're going to keep it pretty reasonable, but I could just see it going up in the maybe 7% range. Operator: Our next question comes from Jed Dorsheimer with William Blair. Jonathan Dorsheimer: Good job pronouncing that name. So Rex, I guess, if I read between the lines here, it sounds like Mount Vernon is a bit more of a signal on -- I mean I know the administration's meeting with supply chain companies, including yourself, and it sounds like you're a bit more balanced, not that you're ever imbalance, but a bit more balanced in terms of AP1000 versus SMR. So I guess my question is, how are you thinking about the E&C part of the equation, where you build out or spend the CapEx to build out the capacity. And in terms of the labor to get these things stood up, which I know Scott over GE has talked about one of his concerns. So a broad question, how are you thinking about this whole supply chain and kind of the pieces of the puzzle and am I thinking about this correctly in terms of the body language on around Mount Vernon and AP1000? Rex Geveden: Yes. So if you're talking, Jed, broadly about delivery risk for nuclear projects, I do think that is an existential and important risk. And I think it's probably the biggest risk in the market just to be able to deliver those projects and we've got some poor examples of project delivery Vogtle and others. That said, the counterpoint to that is the refurbishment projects in Canada, both at the Bruce site and at the Darlington site so far have delivered ahead of schedule and under budget. So there are some examples we can point to where the industry stood up and delivered the project according to the plan, and I'm hoping that the industry can get to that point. If you're talking about the sort of the construction delivery risk of a project like Mount Vernon, we've demonstrated the ability we can do that. We are doing very well with our Cambridge project that will come in under budget. It will come in on time. We delivered the Centrifuge Manufacturing Development facility, which, by the way, a hell of an impressive facility from the first shovel in the ground until the completion of it, and that was in 7 months. And so I think we've got a -- we really got sort of a high skill set for being able to deliver projects that are internal to the need of BWXT. Now that's apart from the complexity of the nuclear power plant, but we can build our facilities with a good risk posture. Jonathan Dorsheimer: Yes. That's fair. My question was for the former, not the latter in terms of more industry not worried about you standing up Mount Vernon and getting that burn and getting that on time. And so I guess just to the broader -- so far, we've seen the LPO. We've seen the administration kind of through EOs. What would you think would help solve the -- one of the key components in terms of -- it sounds like you're going to get -- the supply chain is getting stood up. Is it just a sequencing or do you see something else in terms of how the government could step into trying to assuage risk here? Rex Geveden: Again, you're talking about delivery risk for the balance of plant in the nuclear island, Jed. Jonathan Dorsheimer: To the other question, specific to BWX have already been asked. So I'm just curious, using my second just to think from a more macro broader perspective, given that you are in late-stage discussions with -- or I'm assuming that. Rex Geveden: Yes. So maybe I'll break it into 2 pieces. I think the supply chain risk is manageable. I think we're demonstrating BWXT as a company that we can deliver the components on schedules that our customers need reactor pressure vessels, steam generators, whatever it is. We're organizing around that. And I think the industry can stand up and do that. And of course, I'll remind you that we've delivered 420 roughly small module reactors to the nuclear Navy. So we know how that's done. I do think -- I agree with you that the bigger risk is on the engineering procurement and construction side, and that's a problem that the Bechtels and the Fluors of the world are going to have to solve. They're just going to have to do it. And I think it's going to require the injection of higher levels of talent. Maybe AI can help on the planning side of it, maybe even on robotic construction in the long run, but it's something the industry has to address. It's not a thing, I don't think BWXT can address, but I do recognize it as a gating item for the success of the nuclear resurgence. Operator: Our next question comes from Peter Arment with Baird. Peter Arment: Rex, Mike, Chase. Nice results. Rex, could you give us maybe the latest update or your thoughts on overall schedules? I know OPG just recently had an update on Darlington at the end of March. And there was also an update regarding the foundation or the basement module getting installed. So how does that line up with your first reactor pressure valve delivery schedule and if everything tracking according to plan there? Rex Geveden: You're talking, Peter, about the small modular reactor at Darlington? Peter Arment: Correct. Correct. Correct. Rex Geveden: Yes. I don't have detailed insight to how that project delivery is going, but I hear that it's reasonably on track, and I have the expectation that the following units will -- order for those will be coming relatively shortly. Peter Arment: Okay. And when -- and just as a reminder, when the delivery is, for your first pressure valves there? Rex Geveden: Let's see, next year, as I recall it. Yes, I think it's next year. Peter Arment: Okay. And then just, Rex, at a high level, kind of Department of War and Department of Energy budgets out in detail. Anything that stood out to you, whether it's on microreactors or enrichment or anything to call out that you're encouraged by? Rex Geveden: Yes. I'm encouraged by all of it, Peter. Good support for Pele, good support for defense fuels, there's some long lead procurement in there for a couple of extra Columbia-class submarines. So I think we're starting to hear about adding Columbia units to the submarine force. And I think that's pretty encouraging. So when you add AUKUS in additional Columbia, I think our naval nuclear propulsion program looks more robust and more interesting than it did even a couple of years ago. So yes, I'm very excited about what I'm seeing. Operator: Our next question comes from Ron Epstein with Bank of America. Ronald Epstein: Have you seen any changes on the front with doing work for the Koreans on some sort of Korean nuclear submarine? Rex Geveden: No, we haven't seen anything on that, Ron. Are you talking about submarines? Ronald Epstein: Yes. Right. At some point there was some talk about the Korean doing something nuclear and my guess would be right that you guys have helped them, maybe not, I don't know. Just survey. Rex Geveden: Yes. Again, yes, yes, certainly, there's a discussion between the White House and the Koreans about having nuclear-powered submarines. The Korean ambitions are real. I think they will have nuclear-powered submarines, There's, let me call it, sovereign intent there. I think the question is, where do they source their fuel. I think that probably comes from the U.S. And if it does, I think maybe there's something interesting there for us but super early days, and we'll have to get that demand signal from our customer at naval reactors, should that ever come. So yes, I like the possibility of that, but I would say it's very immature at this point. Ronald Epstein: Got you. And then on the M&A front, it seems like you still -- you guys still have a dry powder? Is there any areas that you're particularly interested in today? Or if you could give us a sense of what you might be thinking about? Rex Geveden: I'm sorry, Ron, the audio was a little weak. What was the front end of the question? Ronald Epstein: M&A. Rex Geveden: Yes, lots in the pipeline there. Mike, do you want to take that one? Michael Fitzgerald: Yes. I would say -- I mean we started the year off really focused on the expansion of capacity and that continues to be a priority. But we also are looking at a number of other adjacent opportunities really to expand our capabilities. I think when we look at this, we want to focus on driving opportunity set within the full life cycle of nuclear and how we support our customers from end to end. And so anything that would continue to enhance our capabilities there, we're very interested in. Operator: Our next question comes from Andre Madrid with BTIG. Andre Madrid: I wanted to refocus on PCG for a second. I know initially, it seems like the customer sets, mainly government and navy focused, but the capacity is highly fungible. I mean just can you provide us some context to how quickly you can pivot that mix to more commercial? And maybe what the margin or utilization uplift could look like as a result? Rex Geveden: Yes, Andre, I'll start with that and maybe Mike will add to it. First off, it's about 70-30 maybe in commercial nuclear at this point, and scattered across 2 sites, New York, Pennsylvania and Florence, New Jersey. Both of them are good sites. There's a lot of manufacturing capacity and we mentioned in the script that there are 400 employees there. There's more capacity, there's plenty of available capacity. So one of the things that we can do right away is we can move some work that we've been outsourcing from our commercial business right into those plants. And in so doing, we can capture the profits that are otherwise going to the supply chain. And so that's an immediate opportunity for us. And let me also say, we're absolutely going to satisfy the needs of our existing customers with the Navy and other government -- the government customers. We're under contract to deliver. We will absolutely deliver, no question about that. But over the course of time, we'll probably change the complexion of the portfolio in that business more toward commercial because that's where we need the capacity. Mike, do you have? Michael Fitzgerald: Yes. So Andre, just the way I would think about it, we have roughly -- we believe about 50% capacity that can be utilized. Now the reality is it's going to take some time to ramp up and hire the workforce. You've got 400 people. Let's assume that we can hire a few folks per week. I mean it's still going to take a few years to get to kind of a whole ramp. So I think there's some -- as Rex mentioned, there's some immediate opportunities for us to move some things in-house, and I think that will be accretive from a margin standpoint. But when we looked at the business case, we looked at kind of a longer ramp and just making sure that, that still made sense financially and it certainly did. I think on margin side, we disclosed it's low double-digit EBITDA margins today. We certainly think as we have opportunities to increase that slightly as we increase scale and we focus on kind of in-sourcing certain aspects of -- from a supply chain perspective where we can capture that margin as well. So there's certain opportunity to expand over time. Andre Madrid: Got it. That's really helpful. I think you also mentioned AUKUS. It's been a while since we've heard a more fleshed out update there. Any color you can provide us on the conversation that you're maybe having and how you're gearing up to support the effort. I know you kind of have a lot of shots on goal there. Michael Fitzgerald: I don't think there's anything really new to disclose. I would say we continue to -- our build from an infrastructure standpoint to support from an AUKUS. We've seen good funding support for that. And so we continue those capacity build-outs and we're anxious for future awards. But a lot of good support for its continuing, but I don't think anything else to really disclose at this point. Operator: There are no further questions at this time. I will now turn the call back over to Chase Jacobson for closing remarks. Chase Jacobson: Yes. Thank you, and thank you, everyone, for joining us today. We look forward to speaking with many of you and seeing you at upcoming investor events we will be on the road and at a few conferences over the next month or so. If you have any questions, feel free to reach out at investors@bwxt.com. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Shoals Technologies Group's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Matt Tractenberg, VP of Finance and Investor Relations. Matt, please go ahead. Matthew Tractenberg: Thank you, Christine, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos. On this call, management will be making projections or other forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties and should not be considered guarantees of performance. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's first quarter press release for definitional information and reconciliations of historical non-GAAP measures to the nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investor Relations section of our website at investors.shoals.com. With that, let me turn the call over to Brandon. Brandon Moss: Thank you, Matt, and thanks to everyone joining us on the call. First quarter revenue was above our guidance at $141 million, up 75% over the prior year period. Our commercial team continued their strong performance by adding approximately $151 million of new orders in the period. This resulted in another company record backlog and awarded orders, or BLAO, of $758 million, an increase of almost 18% year-over-year. As of quarter end, approximately $628 million of our BLAO has shipment dates in the upcoming 4 quarters for Q1 of 2027. For adjusted gross profit percentage came in slightly below our expected range at 29.6%. This was driven by product mix, tariffs, increased freight costs and some temporary labor inefficiencies as we train additional employees to meet the strong demand on new business lines in our factory. We believe that this is the low point of gross margin and that it will improve as we make our way through the year. SG&A, including all legal expense, was $31 million, representing 22% of revenue, a 500 basis point decline as compared to 27% last year and highlighting the operating leverage inherent in our business model. First quarter adjusted EBITDA of approximately $21 million came in at the high end of our guided range and grew 56% year-over-year. We've also seen some positive movement on our IP infringement case against Voltage. Last week, the International Trade Commission declined to review any contested issues in the ALJ's initial ruling. The commission is still expected to issue its final determination in early June, but it's encouraging news for our shareholders and U.S. manufacturers in general. We are pleased with how the market is evolving and our competitive position of strength and as a result, are increasing both our revenue and adjusted EBITDA guidance for the year. Dominic will step through the updated guidance later in the call. Briefly turning to our various business lines. The first quarter was another strong period of growth within our core utility-scale solar market. Our quote volume in the quarter exceeded $1 billion of unique projects, adding to our strong pipeline. I'm also encouraged by the progress we are making in key international markets like Australia, as evidenced by our increased quote activity and customer engagement. International BLAO now totals almost $100 million, driving continued growth and diversification in 2027 and beyond. Our community, commercial and industrial, or CC&I, business, which remains a small piece of our overall mix, continues to perform well. Our OEM business continues to provide a stable and visible revenue stream, growing at 33% on a year-over-year basis. And finally, we added approximately $9 million to BESS BLAO in the quarter, which ended the period at $75 million. You may recall that we announced a recent partnership with ON.energy in the last quarter. ON.energy is rapidly assuming market leadership in AI data center power infrastructure with its first-of-a-kind medium-voltage AI UPS. That architecture is being deployed in what will be the largest battery project of an AI data center in the U.S. Shoals is very proud to be a partner in this project. In Q1, we celebrated the first of these units produced in our new facility, recognizing more than $1 million in revenue and paving the way for a healthy ramp through Q2. We're excited about increasing production and gaining visibility as we continue to build this business. Overall, the quarter played out as expected, but the year appears to be stronger than we anticipated on our February call. New orders in Q1 for 2026 delivery were very strong, and we have not seen significant project delays thus far. We are executing well, finishing the move into our new facility and expanding capacity and capabilities. The underlying demand drivers remain intact, and our competitive position has strengthened. Our business is in a great place today. Dom, I'll hand it to you for a deeper dive into our financial performance and guidance. Dominic Bardos: Thanks, Brandon, and greetings to everyone on the call. Revenue increased by approximately 75% year-over-year to $140.6 million. The increase was largely driven by strong demand from both new and existing customers within our core U.S. utility-scale solar market. Gross profit was $41.0 million compared to $28.1 million in the prior year period, an increase of 46%. Our GAAP gross profit percentage was 29.2% and adjusted gross profit percentage was 29.6%, slightly below our expectations and impacted by product mix, higher freight costs, tariffs and temporary labor inefficiencies as we start new lines and train new employees to meet the very strong demand we see ahead. Product mix, freight and tariffs accounted for approximately 200 basis points of margin compression versus our anticipated outcome. As Brandon stated, we believe this quarter is the low point for gross profit percentage and that it will improve as we make our way through the year. As a reminder, our product mix plays an integral role in the gross profit percentage, and that may vary from quarter-to-quarter. The same mix that is driving higher revenue growth and contribution dollars negatively impacts the margin percentage but delivers higher profit dollars. Ultimately, we are focused on driving incremental profit dollars through the P&L as that strategy will create shareholder value. Selling, general and administrative expenses, or SG&A, was $31.0 million or $9.3 million higher than the prior year period, driven by an additional $6.2 million of ongoing legal expenses. This breaks down to $4.1 million related to our ITC litigation, $1.2 million related to our case against Prysmian and a little under $1 million related to the shareholder class action suit. As you may have seen last week, we have announced a proposed settlement to the shareholder class action suit. The vast majority of the settlement is covered by insurance. Income from operations or operating profit was $7.7 million or 5.5% of revenue, growing at 79% year-over-year. This compared to $4.3 million during the prior year period. Net loss was $297,000 compared to a net loss of $282,000 during the prior year period. The net loss was driven by the class action settlement net impact of approximately $5 million. Adjusted net income was $12.1 million, an increase of 112% as compared to $5.7 million in the prior year period. Adjusted EBITDA was $21.1 million compared to $13.5 million in the prior year period, representing 56% growth year-over-year. Adjusted EBITDA margin was 15% compared to 16.8% a year ago, driven primarily by the impact of product mix. Adjusted diluted earnings per share of $0.07 was $0.04 higher than the prior year period. Operationally, we consumed $41.4 million of cash in the first quarter, driven by the higher inventory balances needed to satisfy the strong demand signals we are seeing in our markets. We have taken inventory positions to protect our customer delivery time lines for the next 2 quarters, and we intend to reduce inventory levels throughout the back half of the year. As such, we do not currently anticipate interruptions to project delivery schedules due to the conflict in the Middle East or projected trade policies. We ended the quarter with cash and equivalents of $1.9 million and net debt to adjusted EBITDA of 1.6x. Our net debt was $179.9 million, an increase over the prior quarter, driven by an increase in inventory in both our new BESS business and our core utility scale solar market. As we enter this period of exceptional demand, our intention is to moderately expand the capacity on our revolving credit facility. Over time, as collections normalize with production, we will resume deployment of excess cash towards reducing the outstanding balance and maintain leverage below 2x adjusted EBITDA. Backlog and awarded orders ended the first quarter at a record $758.0 million, a sequential increase of $10.4 million. Backlog constitutes $390.3 million of the total BLAO, providing us with confidence that the growth projections we have for the upcoming periods can be achieved. The strength of our book of business supports our decision to increase both our full year revenue and adjusted EBITDA expectations. As of March 31, $627.6 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters through Q1 of 2027, with the remaining $130.4 million beyond that. Turning to guidance. For the quarter ending June 30, 2026, the company expects revenue to be in the range of $150 million to $170 million, representing 44% year-over-year growth at the midpoint. And adjusted EBITDA to be in the range of $28 million to $33 million, representing 25% year-over-year growth at the midpoint. For the full year 2026, we now expect revenue to be between $600 million and $640 million, representing year-over-year growth of 30% at the midpoint. And adjusted EBITDA to be in the range of $118 million to $132 million, representing year-over-year growth of 26% at the midpoint. In addition, for the full year, we still expect cash flow from operations in the range of $65 million to $85 million, capital expenditures in the range of $20 million to $30 million and interest expense in the range of $8 million to $12 million. With that, I'll turn it back over to Brandon for closing remarks. Brandon Moss: Thank you, Dominic. The U.S. market appears to be extremely resilient, and our capacity expansion could not have come at a better time in our history. We are preparing Shoals to be ready and agile in our production capabilities in a growing demand environment. We are in an exceptional position today from both a commercial and operational perspective. The strategic plan that we constructed and the process improvements we've implemented have begun to yield tangible results. We want to thank our shareholders and our customers for their continued trust in our employees for their hard work and dedication. Operator, we are now ready to take questions. Operator: [Operator Instructions] Your first question comes from the line of Philip Shen with ROTH Capital Partners. Philip Shen: Congrats on the strong result. I wanted to talk through the tax equity pause that we've read a fair amount about. I was wondering if you guys are seeing that flow through any of your business or any of your conversations and then maybe talk through with the healthy bookings from this quarter, do you expect that booking strength and greater than 1 book-to-bill to sustain in the quarters ahead? Brandon Moss: Phil, thanks for the question. Related to the tax equity piece, well aware of what's going on in the market with some of the larger banks financing projects. I would say that we have not seen that trickle down into our order book. I think there is available financing for projects that still exist in the marketplace, and we are not seeing an impact to that as evidenced by a really strong quote log again in Q1 of over $1 billion, and that's been really consistent with the quoting strength we've seen for the last few quarters, honestly. As it relates to future book-to-bill and booking strength, it is always our goal to have a positive book-to-bill. We see a lot of strength in the marketplace. The market is accelerating and not slowing. We have fortunately strung together a number of quarters now with positive book-to-bill, and that's always our intention to do so. Philip Shen: Great. And coming back to margins for a bit here. Q1 was a little bit lower. I know you guys talked about that being the low point in the year. I was wondering if you could share what like Q2 and Q3 might be heading towards with your guidance raise, the EBITDA margin for Q1 was 15%, but full year is 20%, suggesting you really have to drive that much higher later in the quarters or later this year. And while maintaining the EBITDA guide, you also kept cash flow from operations unchanged. So I was wondering if you might be able to address kind of some of the situation there. Brandon Moss: Yes. Thanks. So multipart question there. I'll tackle the front end and maybe turn it to Dominic. As it relates to gross margin, again, we commented we had about a 200 basis point impact in the quarter versus our expectations. The biggest driver of that for us is always product mix. And then obviously, we had -- as we're moving our facility from our former 3 sites into our new factory, we've got some disruption related to that move, a little bit more so that is anticipated. We moved about 250 pieces of equipment or slightly more over a 60-day period in the quarter. And obviously, that led to some level of disruption. Dom, maybe pass it to you to expand upon that. Dominic Bardos: Yes. So I think, Phil, one of the things you asked was also a little bit of the pacing of what we might see from margins. And we do expect that the first half as we're still moving into the facility. So Q2 will still have lower margins. We just don't believe it's the low point that we saw in Q1 as we've been communicating. And then there will be a ramp in the back half as we move into the -- we're going to be completely move into the facility, and we will also have the ability to start realizing some of the efficiencies of being in one vehicle new facility. So the pacing will still be a little bit lower on the margins in Q2 and then improving, but everything should be sequential improvement quarter-over-quarter. And with regards to the cash flows from operations, our working capital, we took very specific inventory positions to make sure that we can meet the demand that we see in the coming quarters. But we will have the ability to reduce that. So I would characterize that as a timing issue. We do see very strong business. We see very positive cash flows this year and our ability to drive that cash is heightened this year because we're not doing some of those large things like the warranty remediation, which is largely in our rearview mirror at this point. So I would characterize that as a timing issue. We're very confident in the year and very excited at the book of business that we have in front of us. Operator: Our next question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Look, maybe just to kick things off, I would love to hear a little bit more about the battery BESS adoption trends as well as any other end market adoption here. Again, I know the Street is very fixated to hear on your quarterly BESS trend. Obviously, stronger start to the year here overall. But I'm curious on how you would suggest cadence and adoption is going given what we're seeing in that end market. Brandon Moss: Julien, I appreciate the question. We are very excited about our BESS business. As we indicated in the prepared remarks, we started our BESS line in Q1 and recognized about $1 million of revenue. Those specific units, again, are going to the data center market, which we're very bullish about, and we will be on the largest battery paired AI data center site in the country, which is very exciting for us here at Shoals. What is also exciting for us in the first quarter is we added $9 million to our book of business related to BESS. Maybe to peel that back a little bit, as you may recall, we've got 3 specific end market use cases for our recombiner products, one being data centers, 2 being grid firming and 3 being your common solar and storage paired applications on our traditional solar sites. About 2/3 or more of our bookings in the quarter came from grid firming and solar plus storage applications, which is exciting for us as we are seeing penetration across all 3 markets. As we've talked about in the past, we see the data center AI space as being probably the strongest and largest driver of the product line, but it's also great for us to show strength in the other markets as well. Julien Dumoulin-Smith: Got it. And then not to needle too much on this margin backdrop, but you lowered the margin guide here slightly here. What's driving that here? Can you comment on the logistics side of things, the tariff angle? I know you commented a little bit here, but I just want to make sure I'm hearing that right, especially given the ramp that my peer who was talking about a second ago. Can you just comment about what you're seeing on that margin guide? I think people are very fixated here on the cadence of the year and ensuring that you see that overall recovery materialize. Dominic Bardos: Yes. There's a few things that I want to point out, Julien. And first is that we're still moving into the facility, and we did have some disruptions and inefficiencies in Q1. They were a little bit worse than we anticipated with the disruption of all the movement. But we're completing that move in Q2. And also with the unrest in the Middle East or the conflict, we are seeing pressure on oil prices and the derivative products from oil. Freight charges are certainly higher, and some of our cost of goods are certainly going to have the potential to be impacted. And some of the pricing has already been set. Some of those things -- it's kind of like when things change in a rapid fashion, once we've already agreed to a price, we might have some times when we can't quite recover the full cost of goods increases. So we want to just be cautious and give a prudent guide with margins. We do see improvement every quarter, as we mentioned, sequentially, and we're very optimistic that the product mix will be favorable for us for the balance of the year. Operator: Our next question comes from the line of Praneeth Satish with Wells Fargo. Praneeth Satish: Maybe not to belabor the margin question too much, but I guess, so you mentioned 200 basis points in Q1 from product mix, tariff and freight. And then you also had this impact from moving equipment to the new facility. Maybe if you could just kind of isolate how much of the margin was weighed down because of that transition to the new facility? And then also on product mix, is that -- of the 200 basis points, how much is product mix? And kind of what's the outlook there? Because I assume the tariff and freight, those will kind of persist potentially for a few more quarters, but just kind of trying to isolate the variable pieces. Dominic Bardos: Yes. So Praneeth, that's a pretty packed question there. So let me break it down a little bit. So of the 200 basis points that we saw, we kind of bucketed into about 1/3, 1/3, 1/3 of some of the major drivers. We definitely had some tariff impact that was still a carryover, but the IEEPA reduction is certainly going to help us. The 232 tariff environment, we've now actually encompassed that into our pricing. So that shouldn't be as big of a drag going forward. We do still have some inventory that has capitalized tariffs in it. We do still have to burn through that in the second quarter. Once again, that informed our second quarter margin guide. With regards to the freight, we did have some air freight and the cost of fuel for freight has gone up. So we had some surcharges there. But fundamentally, these things are largely transitory or at the point where we can now factor all that into the pricing. As I mentioned with Julien's question, sometimes when things change rapidly, we may already have guaranteed pricing or contract pricing, and we can't quite go back and recover all of that. So the margin issue aside, we're very pleased to be raising our EBITDA guide for the year. We're going to continue to get the leverage on our OpEx, and we're very excited about our book of business. Praneeth Satish: Got you. That's very helpful. And then maybe just switching gears, your other kind of product in development here, the data center BLA product. Has anything changed there in terms of timing for UL certification? And I know we're not going to see sales this year, probably next year. But I guess, when should we anticipate potentially seeing some bookings? Do you think it's possible we could see something towards the end of this year? Just trying to get an update on that. Brandon Moss: Yes, Praneeth, great question. We did a market launch of that product at Data Center World a few weeks ago, which we are very excited about. We have filed our patent portfolio for that particular product, which is also very exciting for us. There's a lot of interest in the product right now. As you mentioned, we do not expect to recognize revenue in calendar year '26. Our goal this year is to have proof of concept operating live in a facility, and we are working towards that. So bookings in '26, potentially, we're talking to a variety of developers about including that product in their portfolio of projects, but nothing on the books as of yet. I would probably say in '26, bookings would be minimal for that product line as we begin to ramp it in 2027. But exciting product and really strong market feedback thus far. Operator: Our next question comes from the line of Colin Rusch with Oppenheimer & Co. Colin Rusch: Could you give us an update on sales traction outside of the U.S. on both US solar and BESS? And then if there's anything in particular that you guys see you can optimize from an OpEx perspective, I'd love to get a little bit more detail on that side. Brandon Moss: Yes. Thanks, Colin. We are excited about our prospects internationally. Our backlog and awarded orders continues to rise. We reached $100 million now to date after actually deploying 3 projects last year. So we are continuing to generate bookings to offset not only shipments, but grow that order book, which is exciting for us. Our prospects in Australia seem like a fantastic opportunity for us. The pipeline is very strong, and that's where some of the additions to the order book have come from. So that has been a key priority for us to diversify end markets, not only product, and we're pleased with the progress thus far. Your other question was around operating expenses, I believe. Dom specifically, what are you looking for... Colin Rusch: Yes. So we're seeing a number of folks able to optimize using some AI for just cleaner, more efficient OpEx. And just wondering if there's some of that, that you're going to be able to start flowing to the organization over the next year or 2. Dominic Bardos: Yes. It's a great question. So we absolutely are engaged with some trials of artificial intelligence and what we're trying to do to improve some of our systems and operations. Our focus initially is actually with manufacturing and commercial as our process flow. We have some opportunities there that we're working with. We are in discussions with our Board all the time about how the next -- where we can improve our processes, which are largely manual as a small company is growing. So we are looking to that. I would suggest that our SG&A is relatively lean. We don't have a tremendous number of salaried headcount. As you see in our filings, it's less than 200 people that are salaried in this business. So I'm not looking to AI to truly rip out SG&A expense as much as I am to enable growth going forward. We see significant growth going forward for this company. We want to make sure that we're positioned to scale, and that's truly where we're going to focus our AI efforts, at least initially. Operator: Our next question comes from the line of Mark Strouse with JPMorgan. Mark W. Strouse: I think on the last call, you talked about there were some -- I believe they were BESS projects that you weren't sure if they were going to hit in late 4Q or maybe early 2027. Has that timing now firmed up? And is that part of the guidance raise here? Or should we think about that as a potential catalyst for further upside if that does firm up as we go along here? Brandon Moss: Mark, I appreciate the call. Yes, we do have project visibility in '26 and '27 that is incorporated in our current backlog and awarded orders. As mentioned earlier, the significant driver for our growth in that business is going to be around the data center AI landscape. And obviously, we've got visibility to a quote funnel and are confident in our ability to add to our order book in that particular use case. So we are very excited about the future of battery energy storage products here at Shoals. We have built a manufacturing line to handle and provide a significant amount of capacity for us. So more growth to come in that space for us in the future. Dominic Bardos: And Mark, I may just add that as we gave the guide last quarter, we did talk about there are some projects in Q4 that still have to be firmed up. But what I would characterize our raise on the revenue side is really due to book and turn business in the core solar markets. We've seen some incredible strength in demand, and that's truly what's driving that. And that's -- I just want to position that one because it's a fantastic market for us. We do still have some potential for projects to hit in Q4 from the BESS side, but that wasn't a preliminary driver of the raise. Mark W. Strouse: Okay. Very helpful. And then you've had several questions already about kind of the margin trajectory this year. Dom, I just want to give you the opportunity to kind of talk about beyond this year. Are you still viewing 2026 as the trough here? Dominic Bardos: Yes. Well, certainly, it is because of all the move disruptions and starting the BESS line from scratch and training all the new employees. I mean those are some transitory headwinds that will get done in this year. We think we're a very attractive business, driving gross margins in the 30s like we are. It's a fantastic business. We're going to continue to get OpEx leverage. We'll see EBITDA margin expansion and much higher cash flow contributions next year. So I'm very excited about next year. While we're not fully guiding to that, we do believe this is a trough year on the gross margin side, but really looking forward to expanding operating profit margins and EBITDA margins in 2027 and beyond. Operator: Our next question comes from the line of Sean Milligan with Needham & Company. Sean Milligan: So to start off, I was curious, Brandon, if you could provide some more context around like your BESS quoting pipeline in terms of sizing of projects, specifically on the AI data center side. I guess you've been in the market now for a few quarters there. And I was curious if there's any change to what you're seeing in terms of the size of projects you're quoting. Brandon Moss: Yes. Thanks, Sean. I think we've communicated in the past that, I guess, first, bookings for this particular product line will be a bit lumpy because of the size of the projects, right? I don't think our assumptions have changed at all, where we look to use our 4000 amp recombiner product line and data center AI applications. That market is probably about $50 million to $60 million per gigawatt. We've got great visibility to pipeline and also future projects. And again, very bullish about our prospects to penetrate that market and very excited about our partnership with ON.energy, who we believe has taken market leadership in pairing battery storage with these large-scale AI centers. So couldn't be more excited about the prospects of that business. Sean Milligan: Okay. And just a follow-up on revenue contribution in the quarter. With C&I, international BESS, you kind of gave the BESS number, but I'm curious like how much revenue is now coming from kind of outside the core BLA business? Dominic Bardos: Yes. So we have -- the OEM business was second to our domestic utility-scale solar projects in the quarter. BESS, we were very pleased to have started the line early. As you recall from last year, we were guiding that we didn't expect to have revenue in Q1 at all because of our time line. So we're very pleased to have gotten that line stood up and operational as quickly as we did. But largely, the Q1 revenue stream was utility scale solar that's domestic, followed by our OEM business, which had 33% growth, I believe, year-over-year. So other than that, we did not have a lot of international revenue and the CC&I still remains a relatively small portion, but we do have CC&I sales every quarter. Brandon Moss: Dom, maybe to add to that, just the focus on our domestic solar markets. Just to reiterate, we believe we are operating in an unbelievably strong market environment. And I think our market leadership position as a preferred solution continues to be proven by our record backlog and awarded order growth. A lot of our growth, I know there's a tremendous amount of focus on battery energy storage. But as we've communicated in the past, our goal is to diversify both products and markets, and we're doing that. What is very exciting for us in 2026 is about 1/5 of our revenue will come from new products. BESS is obviously included in that number, but many of the new products are in our traditional solar space. So we've put a big focus on accelerating innovation here at Shoals. And that is playing out with increased bookings and obviously, revenue recognition for 2026. So again, a lot of focus on BESS, always a lot of questions about BESS. I want to reiterate the strength of our domestic utility scale solar business. Operator: [Operator Instructions] Our next question comes from the line of Vikram Bagri with Citi. Vikram Bagri: I have sort of like a 2-part question. I think last quarter, you mentioned spooling had a meaningful impact on margins. I was wondering if you can share what the run rate impact of spooling was on this quarter's margin? And what percentage of customers have requested spooling? And related to that, obviously, tariff, logistics and commodity prices have changed a lot since last quarter. Our understanding was that tariffs baked into the previous guidance were conservative. I was wondering if you can also identify where you see some puts and takes in this ever-changing environment in terms of tariff, logistics and commodity prices, if the current environment is fully baked in? Or do you see some level of sort of like downside or upside from these 3 factors? Brandon Moss: Vik, great question. We have talked about spooling in the past, probably more generally just packaging in general. There are different packaging requirements for some of our newer customers and also product mix related to those specific to our long-tail BLA product. That is adding significant revenue potential for us in the future and is being recognized still in 2026. It adds $0.005 to $0.008 a watt to our projects, which is exciting for us to be able to expand our wallet share. So we do have some packaging costs that are baked into the guidance for the year. I'll let maybe Dominic expand on that. But before I do, just I'll comment on your question about tariffs. Obviously, the tariff landscape has changed dramatically in the last, I don't know, 18 months now. And for us to try to predict what that's going to look like in the future, we would be fools to try to do so. Having said that, the change with IEEPA and Section 232, we view as a net neutral to positive change for us. And that is being baked into our thoughts about margin and guidance for the rest of the year. Dom, maybe I'll turn it to you for specifics around packaging and margin. Dominic Bardos: Yes. As Brandon mentioned, Vik, it's largely -- when I talk about product mix, that's where it's coming from. Not all of our products require spooling, but the longer-run products do. And things like the long-tail BLA is incorporated in the margin. And so when I talk about product mix and a large percentage of customers now preferring the long-tail solution to centralize their low-grad disconnects by the inverters, that is something that increases our share of wallet, but it carries a lower margin percentage. The spooling cost, the packaging, the handling of all that is incorporated into that, but that's why the product mix is so important to the margin percentage. It is driving increased flow-through dollars, which is fantastic. We're going to keep doing that business. We're responding to the changing environment of our customers, what they're looking for, and we now have a full suite of products to really meet those needs. Things like our SuperJumper, which may have been originally developed for international markets are really showing some popularity here in the United States as well. But once again, you have much longer run. So we've factored all that in. It's part of our product mix, and that's why I always caution folks when we talk about a percentage of margin, we need to kind of consider where the mix is going as well. Operator: Brian Lee with Goldman Sachs. This will be our last question. Brian Lee: Sorry, I dialed in a little bit late, so not sure if you covered some of these things. Maybe just on the guidance, kudos on the strong execution here to start the year and for the revenue and margin uplift. But adjusted EBITDA guide is up a bit less than revenue guide at the midpoint for 2026 in the new outlook. Is that conservatism? Or are you seeing more mix shift issues or incremental tariffs than originally expected? Just curious, maybe this is nitpicking, but the EBITDA uptick in the guidance is a little bit more tempered than the revenue outlook. So any color there would be appreciated. Dominic Bardos: Sure, Brian. Yes, we've covered a little bit of this. So -- but I'll repeat a few of the things that are driving that. First and foremost, product mix is certainly driving that. We are seeing popularity of some of the new products which do have a lower margin percentage and flow-through. So while revenue is going to be increased, the margin percentage is not going to be quite as high. We are seeing a little bit of disruption in our move into the new facility here. It was a little bit more than we anticipated and allowed for as folks are moving -- as we moved over -- I don't remember, Brandon, 200 machines. Brandon Moss: 250-plus machines in 60 days. Dominic Bardos: Yes. And we're still moving into the facility this quarter. So a little bit of disruption there, and we are expecting to see with our mix anticipation for the rest of the year, some uptick in gross margin as well. But there were some reasons why we did that. We also have 2 trials set for later this summer in August. With legal expenses, I've learned to be a little bit cautious on the estimations. We want to make sure we represent the shareholders properly in our cases. And if that means experts and additional legal expense, we're going to cover that. And one of those cases is not adjusted out. It's our IP case as part of our earnings. So we just want to make sure that we give a good cautious number that allows us to meet our expectations for. Brian Lee: Yes. Fair enough. Makes sense. And then I'm sure you covered a little bit in this and maybe you covered all of it. Just with respect to tariffs, can you level set us as to what tariffs you are specifically subject to starting the year off 232 copper, steel, aluminum, et cetera? And then does the April 3 ruling on kind of the changing thresholds impact you? And again, maybe level set us as to are you importing copper from foreign sources and what percent of the [ indiscernible ]? And is that impacting your margin outlook for this year? Or are you contemplating any mitigation efforts this year or into next year? Just trying to get a level set on the copper exposure here, if you could speak to that a bit. Dominic Bardos: Sure. Sure, Brian. I'll jump in on that one. There's a few questions in there, so let me unpack it. Yes, for the first couple of months of the year, we still had IEEPA. And those, of course, were stopped collected at the end of February, around the 24th or so of February. And so that right now is going to be a favorable tariff environment. With regards to 232, yes, there was a couple of things. We do have a very wide book of suppliers, approved vendors and some of which are international in nature and are subject to 232 import tariffs, both on the aluminum and copper side. We do work with customers on some things. If they have a preference, we can certainly go for certain domestic suppliers. If they have a preference for international, we can do that as well. So we are subject to 232. Now as the rules change and the tariff rate went down, it's also now on the full purchase price. But net-net, it should be slightly favorable for us in terms of how these tariffs are calculated. So it is a very dynamic situation. We certainly appreciate your question. It makes it very difficult to truly know how to operate that. And Brandon, is there anything else you want to add? Brandon Moss: Yes. Just maybe something to point out. As it relates to the tariff landscape, those tariffs impact even our domestic supply base, right? Like us, most suppliers have a very diversified and international supply base themselves. And so those tariffs may be getting -- may be impacting our raw material inputs even on domestic supply sources. So obviously, as you guys know, it's been a challenging, again, 18 months or so with the tariff landscape. I think we're navigating it quite well. And I think what is probably most important is with the repeal of the IEEPA tariffs and now the change to Section 232, we do see that as a net neutral to positive impact for Shoals in the back half of the year. Obviously, caveating that with unless something else changes. So I think we're navigating it well, Brian, and I appreciate the question. Matthew Tractenberg: Thanks, Brian. Christine, I think that that's going to be the last question that we take today. Operator: Absolutely. We have reached the end of the Q&A session. I will now turn the call back to Matt for closing remarks. Matthew Tractenberg: Yes. Thank you, Christine. So I want to note to our audience that we have a very active IR calendar through June. Those events are listed on our Investors section of our website. So if you're attending conferences, you want to meet with us, please let us know. We're happy to. If we can help further, let just reach out to investors@shoals.com with any questions. Thanks for joining us today, everybody. Have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon and welcome to the Curaleaf Holdings, Inc. First Quarter 2026 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions on your touch-tone telephones. To withdraw your questions, you may press star and 2. Please also note today's event is being recorded. At this time, I would like to turn the floor over to Camilo Russi Lyon. Sir, please go ahead. Camilo Russi Lyon: Good afternoon, everyone, and welcome to Curaleaf Holdings, Inc. first quarter 2026 conference call. Today, I am joined by Chairman and Chief Executive Officer, Boris Jordan, President, Unknown Speaker, and Chief Financial Officer, Edward Kremer. Before we begin, I would like to remind everyone that the comments on today's call will include forward-looking statements within the meaning of Canadian and United States securities laws, which by their nature involve estimates, projections, plans, goals, forecasts, and assumptions, including the successful integration of acquisitions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements on certain material factors or assumptions that were applied in drawing the conclusion or making a forecast in such statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the company's filings and press releases on SEDAR and EDGAR. During today's conference call, in order to provide greater transparency regarding Curaleaf Holdings, Inc.'s operating performance, we will refer to certain non-GAAP financial measures and non-GAAP financial ratios that involve adjustments to GAAP results. Such non-GAAP measures and ratios do not have a standardized meaning under U.S. GAAP. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by U.S. GAAP, should not be considered measures of Curaleaf Holdings, Inc.'s liquidity, and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable U.S. GAAP financial measure under the heading Reconciliation of Non-GAAP Financial Measures in our earnings press release issued today and available on our Investor Relations website at ir.curaleaf.com. I will now turn the call over to Chairman and CEO, Boris Jordan. Boris Jordan: Thank you, Camilo. Good afternoon, everyone, and thank you for joining us to discuss our first quarter results. 2026 is off to a strong start across macro, fundamental, and regulatory landscapes, and more importantly, we are seeing a clear shift in the trajectory of our business and the industry. The macro headwinds that constrained growth over the past three years are now beginning to turn into meaningful tailwinds. In the U.S., consumer spending remained healthy in the first quarter; however, we are closely monitoring current inflationary pressures. Stronger income tax refunds versus last year have supported spending power to the benefit of robust cannabis sales, reinforcing the resilience of underlying demand even in the face of higher gas prices. At the same time, we believe the anticipated hemp ban is already benefiting the regulated market. Alcohol retailers have begun destocking hemp-derived products, and we expect that trend to accelerate as we approach the November 11 implementation deadline, driving consumers back into the regulated channel, increasing traffic, and further strengthening the position of scaled operators like Curaleaf Holdings, Inc. From a fundamental standpoint, our strategy is delivering. The investments we have made in the core pillars of our Built for Growth framework—customer centricity, brand building, and operational excellence—are translating directly into tangible P&L performance. First quarter revenue of $324 million grew 6% year-over-year, exceeding both our guidance and internal expectations. Our domestic and international segments grew 2% and 35%, respectively, underscoring the durability of our core business and the strength and scalability of our global platform. Without question, Curaleaf International is a key differentiator and an increasingly important driver of long-term value. Gross margin was 49%, and adjusted EBITDA was $63 million, or a 20% margin, including a 170 basis point drag from our international segment as we continue to invest in driving growth and market share gains abroad. We ended the quarter with $106 million in cash on the balance sheet. Net income from continuing operations was $70 million, or $0.09 per share, compared to a net loss of $50 million, or $0.09 per share last year. We also continued to strengthen our balance sheet. We reduced our acquisition-related debt by $9 million and successfully refinanced our $475 million senior secured note with an oversubscribed $500 million three-year facility backed by strong demand from both new and existing investors. This transaction is a clear signal of investor confidence in our strategy, execution, and credit profile. Additionally, we completed the buyout of the remaining 45% minority interest in our German subsidiary Four 20 Pharma, bringing our ownership of Curaleaf International to 100%. Based on a recent comparable public market transaction, the implied value of Curaleaf International is approximately $1 billion, highlighting the significant embedded value within our global platform that we believe is not yet fully reflected in our current valuation. The U.S. cannabis industry has now entered what we believe is the most important regulatory inflection point in 55 years. Two weeks ago, under the direction of President Trump, Acting Attorney General Todd Blanche rescheduled medical cannabis from Schedule I to Schedule III, while simultaneously restarting the broader rescheduling process, with an ALJ hearing set to commence on June 29 and conclude no later than July 15. This dual-track approach is deliberate, designed to move with urgency while ensuring a durable and legally sound outcome. The practical and financial implications are highly transformative to the industry. First, federal funding for medical research will be allowed. Our U.K. team has been conducting research in concert with Imperial College London on cannabis-derived solutions for neuropathic pain. We plan to share this research with the DEA and FDA while also leveraging our partnership with the University of Pennsylvania, whose cannabis research we also support under our special research license. Access to cannabis research should shed light on the medicinal properties of the plant, and further remove the stigma that cannabis carries. Second, the removal of 280E taxation on medical cannabis, expected to be retroactive to at least January 1, immediately unlocks meaningful balance sheet benefits. 60% of Curaleaf Holdings, Inc.'s business is medical and stands to get substantial 280E relief. When the adult-use process concludes, which we expect later this summer, these benefits should extend across the adult-use portion of our business as well. The remaining open question relates to the IRS look-back period for retroactive 280E relief, and we expect further clarity in due course. Equally important, the DOJ's order opens an unexpected step that reforms medical cannabis beyond Schedule III. The order provides that we can get DEA licenses for our medical cannabis businesses, which would make our business fully legal under the CSA. In fact, today, we filed applications to register with the DEA. Proceeds from CSA-compliant cannabis cannot be deemed money laundering. The practical implications of this are yet to be seen, but we and the industry are racing to explore increased access to banking, financial services, and credit card use for our medical cannabis business. Normalized banking relationships and, critically, the ability to accept major credit cards would remove friction at the point of sale, improve conversion, and lower transaction costs, continuing the normalization of the consumer experience. It would also improve cash management and expand access to credit, representing another meaningful step change in profitability and scalability for Curaleaf Holdings, Inc. Our adult-use business may also benefit from increased access to financial services when the expected adult-use rescheduling happens later this year. Furthermore, after adult-use rescheduling, the probability of uplisting to a major exchange meaningfully increases once guidance from Treasury is provided later this year. With the glass ceiling now broken, we are seeing increased momentum at the state level as non-cannabis states, including North Carolina, South Carolina, Tennessee, and Indiana, are actively exploring medical programs. Importantly, the upside here goes well beyond tax relief and banking access. The DOJ framework introduces a catalyst from which Curaleaf Holdings, Inc. is particularly well positioned to gain. The issuance of DEA licenses to state-legal cannabis operators makes them compliant providers of cannabis under the CSA and in the international treaty framework. This opens the door for us to participate in import and export transactions. The real import-export market will require permits from the DEA, and many states have already indicated that they would support both exports and interstate commerce. For Curaleaf Holdings, Inc., this represents a significant and highly strategic opportunity. We already have built one of the largest and most efficient, sophisticated cultivation and manufacturing footprints in the United States. This established network of facilities positions us to supply our international operations with domestically grown product, dramatically improving margins and strengthening control over our supply chain. Today, we produce approximately 20% of the product we sell internationally. That leaves a substantial opportunity to vertically integrate, expand margins, and unlock incremental profitability at scale, while further leveraging our existing domestic infrastructure. Interestingly, in the U.S., the mix has flipped. We produce approximately 80% of our own products, and buy 20% third-party products. Put simply, we believe we are uniquely positioned not just to benefit from the regulatory shift, but to lead the next phase of industry growth. Curaleaf International delivered a strong start to the year with revenue growing 35% year-over-year, ahead of our internal expectations. Performance was led by continued momentum in Germany and the U.K., with early signs of recovery in Poland. In Germany, after a soft January reflecting accelerated pharmacy stocking late last year, sales rebuilt through the quarter, and March was our strongest month, a positive setup heading into Q2. In the U.K., consistent growth in patients at Curaleaf Clinic more than offset competitive pricing dynamics and patient fees. Margins were pressured this quarter as we worked through transitional dynamics in our international supply chain. Prior to the recent U.S. rescheduling developments, we had been evaluating meaningful CapEx to expand our international cultivation footprint. We are now reassessing that investment in light of a more compelling alternative—leveraging our domestic cultivation assets and award-winning U.S. genetics to supply international markets. We would not only avoid significant CapEx, but also unlock meaningful gross margin expansion as we scale. Looking ahead, we remain optimistic that Spain and France will begin contributing in 2027 as those programs finalize their frameworks. And importantly, U.S. rescheduling could act as a catalyst for other countries to embrace medical cannabis. We are actively monitoring each market, and will share more as visibility increases. With that, I would like to hand the call over to our President to discuss our U.S. strategy and operations. He has been with us for nearly a year, bringing his CPG experience from Pepsi and Albertsons to Curaleaf Holdings, Inc., and has already made an impact on the business. Unknown Speaker: Thank you, Boris. Our domestic business grew 2% year-over-year, and more importantly, we are seeing clear proof points that our strategy is working. The three pillars of our Built for Growth framework—customer centricity, operational excellence, and brand building—are coming together to create a durable and scalable foundation for growth. We saw the clearest early success in Florida, where we implemented the strategy first. By improving flower quality and strain diversity, introducing new products, aligning assortment with demand, and delivering a seamless customer experience, we drove 15% transaction growth year-over-year, more than offsetting price compression. We have now taken this playbook and are deploying it across other key markets, including Utah, Ohio, and Pennsylvania, with similarly encouraging early results. Ultimately, our entire network of states will benefit from these actions. Let us discuss the pillars of our Built for Growth strategy beginning with the first, customer centricity. Our R&D efforts have always started with a deep understanding of our consumer, and that focus continues to drive meaningful insights and innovation. BRIC 2, which launched in March, is a clear example, addressing key consumer pain points like clogging, enhancing the overall experience through flavor protection technology and Meter Mode intelligence, providing a measurable draw each time. Soon, the Flavor Series and Legacy Series of BRIC 2 strains will be complemented by the Live Series consisting of live resin and rosin to round out the portfolio. Similarly, the launch of Dark Heart last month establishes a new benchmark in ultra-premium flower. With best-in-class genetics, limited drops, and disciplined distribution, the brand is driving strong full-price sell-through and reestablishing Curaleaf Holdings, Inc. as a leader in the premium segment. Second is operational excellence, which speaks to delivering consistent improvements across our business, as we have seen in our cultivation facilities and, more recently, our retail store experience. By matching retail assortments with customer demand and optimizing pricing, we are driving steady gains in key metrics such as traffic and units per transaction. These incremental improvements are compounding into meaningful financial performance. Third is brand building, which is critical to long-term staying power as the market evolves. In Select, we have simplified the product architecture to clearly communicate its value proposition, and we are seeing positive consumer reception that will add to its market-leading position. We are also investing in trade marketing and elevated visual merchandising in partner doors, with encouraging results as domestic wholesale grew 19% this quarter. At the same time, we are expanding distribution with a disciplined focus on profitable growth. For example, last month's takeover of The Travel Agency in New York showcased our brands across both physical and digital channels, delivering outstanding results by significantly increasing traffic and AOV, benefiting both Curaleaf Holdings, Inc. and The Travel Agency. As the industry scales, we believe leading brands will capture disproportionate share. Today, according to Headset and BDSA [inaudible], the Curaleaf Holdings, Inc. portfolio holds a top share position, with Select maintaining the number one position in vapes, and we see substantial opportunity to expand on that leadership. When these three strategic pillars come together, they create a powerful flywheel, driving repeatable revenue growth, margin expansion, and increasing returns over time. I will close by recognizing that these results and the opportunity ahead are a direct reflection of the execution, discipline, and commitment of our over 5 thousand-member team across the organization. As we look forward, we believe the three-year down cycle the cannabis industry has navigated is now turning upward. The combination of improving fundamentals, accelerating regulatory momentum, and our scaled global platform positions us exceptionally well for what comes next. We thank President Trump for delivering on his commitments, turning promises into tangible results. Promises made, promises kept. Alongside Acting AG Blanche, he achieved what others had started but were not able to complete. As a result, patients, consumers, Curaleaf Holdings, Inc., and the burgeoning cannabis industry are meaningfully better today. With that, I will turn the call over to our CFO, Edward Kremer. Ed? Edward Kremer: Thank you. Total revenue for the first quarter was $324 million, a 3% sequential decline compared to the fourth quarter due to normal seasonality, and increased 6% compared to the same period last year. Strength in Ohio, Curaleaf International, New York, Utah, and Massachusetts was offset by challenges in Nevada and Illinois. By geography, our domestic segment grew 2% year-over-year, with retail contracting 2%, which was more than offset by 19% year-over-year growth in domestic wholesale. International revenue grew 35% year-over-year, beating our internal plan, driven primarily by Germany and the U.K. By channel, total revenue was [inaudible] Ohio and solid growth in Curaleaf International. Our first quarter gross profit was $157 million, resulting in a 49% gross margin, a decrease of 220 basis points compared to the prior year period. The primary drivers of this contraction were price compression and discounts, partially offset by continued cultivation efficiency gains and disciplined labor expense controls. Our domestic gross margin was 50%, flat with the fourth quarter, underscoring the stabilization we are seeing in our U.S. business. While price compression remained present in most of our markets, we continue to find ways to offset that impact through cultivation efficiencies, product innovation, and selective price increases in states where demand is outstripping supply. Notably, we have recently begun to see the rate of price compression decelerate. International gross margin was 42%, a decrease of 190 basis points sequentially, driven by pricing pressure in our U.K. business and in German flower, and lower service volume sales, which carry a higher margin. SG&A expenses were $113 million in the first quarter, an increase of $7 million from the year-ago period. Core SG&A was $108 million, an increase of $5 million from the prior year. The year-over-year increase in our core SG&A primarily reflects international expansion, additional headcount, and new store openings in Florida and Ohio. Core SG&A was 33% of revenue in the first quarter, a 35 basis point decrease compared to the prior year due to leverage and stronger sales. First quarter adjusted EBITDA was $63 million, a decrease of 4% compared to last year, while adjusted EBITDA margin was 20%, inclusive of a 170 basis point drag from international, a decrease of 200 basis points versus last year. First quarter net income from continuing operations was $70 million, or $0.09 per share, compared to a net loss of $50 million, or negative $0.09 per share in the year-ago period. During the quarter, prior to the rescheduling news, we completed a routine tax review with external counsel. Based on new information that came to light, we determined that certain tax positions in previous years met the more-likely-than-not standard required under ASC 740. This conclusion allowed us to release a significant portion of our previously recorded tax reserves and accrued interest from our balance sheet. These positions will also reduce our uncertain tax position liabilities going forward. Separately, following Treasury and IRS guidance on medical cannabis rescheduling, we expect to recognize additional 280E tax benefit in future periods. Now turning to our balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $106 million. Inventory increased $16 million, or 7%, compared to the fourth quarter due to planned inventory builds in anticipation of our BRIC 2 and Dark Heart launches, coupled with inventory stocking ahead of April. Capital expenditures for 2026 continue to be expected at roughly $80 million. We generated first quarter operating cash flow and free cash flow from continuing operations of $21 million and $4 million, respectively, largely due to the aforementioned inventory investments ahead of the two product launches. We expect operating cash to build as the year progresses consistent with the cadence of our business. Our outstanding debt was $565 million. During the quarter, we reduced our acquisition-related debt by $9 million and completed refinancing of our $475 million note with a three-year $500 million note. Before moving on to guidance, I would like to announce that we are transitioning independent audit partners to BDO. BDO is the fifth-ranked global accounting firm known for its expertise, innovation, and global reach. The move reflects our commitment to strengthening transparency, enhancing financial oversight, and aligning with best-in-class partners who can support our continued growth. Notably, we are the first in the cannabis industry to make this shift, setting a new benchmark for operational excellence and forward-thinking leadership. By partnering with a firm of BDO's caliber, we are positioning ourselves to navigate an increasingly complex business landscape with greater confidence and precision as we get closer to U.S. exchange uplisting. I want to extend my sincere thanks to our accounting team for their exceptional work in making this transition possible. This achievement is a direct result of their dedication, expertise, and tireless efforts, and I would like to thank PKF for their support and partnership over the past seven years. Now on to our outlook. While we are experiencing strong increases in traffic due to the many initiatives we have in place, we are closely watching the impact higher energy prices will have on our consumers' disposable income as inflationary pressures arise. Taking these macroeconomic factors into account, and assuming current market conditions persist, we expect total revenue for the second quarter to increase 2% to 3% sequentially from the first quarter, which at the midpoint implies approximately $333 million. With that, I would like to turn the call over to the operator to open the line for questions. Operator: We will now open the call for questions. Ladies and gentlemen, at this time, we will begin the question-and-answer session. To ask a question, you may press star and then 1 on your touch-tone phones. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and 2. In the interest of time, we do ask that you please limit yourselves to one question. Again, that is star and then 1 to join the question queue. Our first question today comes from Aaron Thomas Grey from Alliance Global Partners. Please go ahead with your question. Aaron Thomas Grey: Hi. Good evening, and thank you for the question here. Nice to see that growth continue on international. I know it has decelerated a bit from 2025, so first off, I would love to hear your outlook for growth for international for 2026. And then second, in terms of your prepared remarks on potential exports from the U.S. to international, is there any color you could give on timing, and then as we think about whether or not the existing cultivation footprint would suffice, or potentially you would want to acquire, given the climate that your current cultivation is in, and also the potential need for or the need for EU-GMP or GACP? Thank you. Boris Jordan: Thank you for that question. Let me first start with the international supply chain. As everyone knows, the international supply chain has been very difficult for everybody in the sector. A lot of cultivators are not producing the type of flower that passes very strict regulations, and therefore we have been looking, mostly in Canada, for increasing our own production, our own growing of product to ship to the international markets. However, this recent rescheduling—the language in rescheduling—really has given us pause, because we could use our U.S. infrastructure. The timing of that, we do not know. It very explicitly says that we should be able to. Upon my return from Europe—I am in Europe now—I plan to spend some time in Washington meeting with the DEA as well as the DOJ to see what the timing could be. But because once we submit our application, we are deemed rescheduled from Schedule I to Schedule III, in theory we could start very quickly. We do need state cooperation as well. We need export permits from them. There will be some time. So I really expect not to be able to do this probably until the end of the year, and we will see at that point in time. On the outlook for international growth, I think we mentioned in the last call we are looking at around 25% to 30% growth internationally this year, reduced down from over 50% last year due to no new markets. We expect that to accelerate significantly going into 2027. Operator: Our next question comes from William Joseph Kirk from Roth. Please go ahead with your question. William Joseph Kirk: Thank you, everybody. During the prepared remarks, the President gave transaction numbers for the quarter. I think he said plus 15% year-over-year, I believe, was how he said it. What is that on a same-store sales basis, and how has that transaction growth year-over-year been trending the last couple of quarters? Boris Jordan: President? Unknown Speaker: From a same-store sales basis, we are not going to comment on that, but the trends are moving in the right direction in general, and we will be able to talk about that on next cycle. But overall, as we look at transactions, they are moving up, and they are eclipsing right now the price compression that we see in the marketplace. William Joseph Kirk: Okay. And then a separate kind of follow-up question. We have seen some comments today or some reported comments out of Senator Tim Scott about banking. My question would be, how much of what we need to see or want to see from here requires some sort of congressional action versus things that can be done by the administration and the agencies, who appear to be pretty well aligned? Boris Jordan: I will take that. I think that we knew that Senator Scott was going to say this. As a matter of fact, I think last year on several podcasts and things I did, I mentioned that Senator Scott said that once we got rescheduling, as Chairman of the Senate Banking Committee, he would move SAFE Banking. So we do expect him to do that. I think we will probably see that in the third quarter, most likely. I do not think it will fit the agenda for the second quarter, and maybe we could even get a vote before the midterm election. I do not know, but certainly I think we could get a vote before year-end. It is a very popular issue, as you know. It has passed the House many, many times. I suspect that it will pass the Senate now. It seems to be more bipartisan today than it was under the previous Senate. The main person blocking it was Senator McConnell. As we know, Senator McConnell is retiring in 2027. So I do expect that SAFE Banking should be able to make it through. However, there is a chance also that we could get guidance—like the crypto industry did—from FinCEN and from Treasury that would indicate that the banking industry could start to serve the sector. However, I believe that that will be good enough for certain institutions, but I believe other institutions will want to see some level of legislation because, as we all know, one presidential administration to another could change the view, and so ramping up banking operations to then have to shut them down if the next President, for instance, had a different view, or the next Attorney General or Treasury Secretary had a different view—I think that they will want to see legislation. So certainly money-center banks, I believe, will want to see SAFE Banking legislation go through before they get involved. But I do think a lot of other financial institutions, including credit card companies and mid-sized regional banks, as well as working capital facilities and things like that, can open up with simple guidance from FinCEN and Treasury. Operator: Thank you. Our next question comes from Kenric Tyghe from Canaccord Genuity. Please go ahead with your question. Kenric Tyghe: Thank you, and good evening. This is at least the second quarter I can recall where you have highlighted lower price compression and a fairer domestic environment in terms of that price compression actually decreasing. Could you speak to, one, how broad-based that lower promotional intensity is; and two, the extent to which you think that hemp relief you were calling out—with alcohol retailers destocking and increased traffic into the regulated channel—is a factor? Thank you. Boris Jordan: I think there are several factors that are driving our comments on price compression. The first one is Curaleaf Holdings, Inc. has substantially, over the last year and the six months that I have been CEO, increased the quality of our products. We have rationalized our product SKUs. We have increased the quality of our flower substantially. And so we have been able to start to increase prices ourselves because of that, and we are seeing better margins both in our wholesale business and our retail business based on our own product quality. The second thing I would say is there are certain markets in the U.S.—I will bring two as an example, Florida and Massachusetts—that are starting to see stabilization in pricing, and we are not seeing the type of decline, or maybe even any decline, in those markets at this time. There are other markets, however, that are still compressing, but we are starting to see stabilization in certain markets. So overall, I would say that I am getting a slightly better feeling that that is partially maybe because hemp products are starting to disappear. Even though we still have many hemp sellers that have until November, we definitely think that the supply chains are starting to break down. We think there is less product availability. We think certain retailers, as they sell the inventory, are not replenishing it. And so I think we are starting to see the early part of a recurrence. I do not believe that that will really hit until early 2027, when I do expect somewhere between 10% to 15% organic growth in the sector just based on the hemp shutdown. Operator: Our next question comes from Frederico Yokota Gomes from ATB Cormark Markets. Please go ahead with your question. Frederico Yokota Gomes: Hi. Thanks. Good evening. Congrats on the great quarter here, guys. Just a question, more big picture on rescheduling. We got the medical portion, and we are probably going to get the recreational portion in the second half. We know about the 280E impact, but could you talk about the potential impact that rescheduling could have on sales, margins, the overall competitive environment, and M&A? Could it accelerate consolidation? Would it maybe let some companies that are struggling survive for longer? What do you think are some of the puts and takes here in terms of a post-rescheduling world in the industry? Boris Jordan: I think that it is too early to tell whether it will or will not have an impact on pricing. Let us be honest: most companies were not paying but accruing UTPs in their balance sheets. So I do not know yet whether we can talk about pricing changes in the marketplace at this point in time. I do not expect it to have a significant effect there. I do, however, think that it will have a significant effect on consolidation and M&A. We are already seeing a tremendous amount of tuck-in acquisitions across the country. Many companies have not announced them yet, but I can tell you we know of literally probably 10 to 15 transactions that have been done in the last two quarters regionally. Maybe they are waiting for approvals or something. And I do also expect, as I have said earlier, to see larger consolidations between MSOs as well. This is very much a velocity business. A lot of these companies compete literally across the street from each other with stores. We are seeing more transactions and we are seeing transactions increasing. And with the price compression that happened during the hemp period, we are seeing less capacity availability and less product availability in markets and shortages of products in the regulated market. And so by combining grow facilities, you are going to have massive cost savings, and you are also going to have massive synergies to be able to provide the market with product and branding. And so I do think you are going to see it. It is a compelling story to see significant MSOs starting to merge on the back of rescheduling. I think you will see it because now you have certainty on the balance sheet. And so, certainly, after we get the IRS guidance on 280E and we get, hopefully, the rescheduling of adult use in the second quarter, at that point in time, I do think that you are going to start seeing consolidation in the second half. Operator: Our next question comes from Russell Stanley from Beacon. Please go ahead with your question. Russell Stanley: Good afternoon, and thanks for the question. Just around the scheduled hemp ban and efforts that are starting to interfere with the implementation date. I would love to hear your confidence level that it will go into effect as scheduled. Do you see any risk to the date at this point? Thanks. Boris Jordan: I think that, obviously, the hemp industry is doing everything they can. They raised quite a bit of money and they are lobbying very aggressively. And this is politics, and it is Washington—never say never. But at the moment, as we speak right now, I can tell you I believe there is very little appetite within the House and Senate to change the rules that they set last year at this early stage. I do think, however, going forward, maybe a few years from now, you might get some changes, particularly around beverages. But I do not think you are going to get any changes here between now and November. Operator: Our next question comes from Pablo Zuanic from Zuanic & Associates. Please go ahead with your question. Pablo Zuanic: Thank you. Two quick questions. One, in the past, Boris, you have talked about spinning off part of the international business. On the math you are giving—$1 billion—that is about 5x system sales. Your domestic business is trading around 2.5x. Is that still in the cards, especially with stocks—although you have moved up—stocks have not moved up as much as we would have expected given all this good news? So if you can comment on that. And then the second question, which is somewhat related: I know we are all, including myself, very excited about the news flow and about the fact that companies that register with the DEA will become federally legal, supposedly, but the product will remain federally illegal, right? And will that create a problem as we move forward trying to implement a lot of these changes? When I say federally legal—you know, Iowa, Kansas, Indiana—it is still illegal there for medical even. So I am just trying to reconcile one and the other: an illegal product and a legal company. Thank you. Boris Jordan: The medical product in those states where medical product is approved will be legal under federal law, and I believe many of the states will be passing medical cannabis legislation. We already know of at least five states that in the past have not even considered it that are already now looking at passing medical cannabis legislation in those states. Some of the states you mentioned are part of that group that is looking at doing that. And so I do think that you will have that. Under the CSA, medical cannabis is going to be legal. I want to stress that point. Under our plans on international, we always have that option if we want to do it. Right now, we would like to see what happens with the rescheduling of adult use in the second quarter. Our business—if you take a look at Curaleaf Holdings, Inc.—in fact, if you add in our European business, 80% of our business is medical. And so if you combine the U.S. and the European business, 80% of our revenue actually comes from medical. However, the impact of 280E will only impact our U.S. business, which is 60% medical. And so we have a lot of options available to us if we decide. But at the moment, I am assuming and hoping that as this legislation passes in the second quarter, I do think that at that point in time, and as we get banking legislation, you will have significant institutional interest in the sector. I have spoken to many large-scale investors—large long-only funds that manage trillions of dollars. Today, they cannot really look at this sector until they have, one, visibility into adult use; two, visibility into what effect that has on the balance sheet. And at that point in time, they need to start doing their research. They need to go to their compliance committee. So I believe that it will take six to twelve months post final rescheduling for large institutional players to start participating in the market. And if that is the case, I do not see a reason for us to have to split the business up. However, I will never say never, because the European business is growing very aggressively. I do believe our margins, as we start to vertically integrate that business, are going to improve also quite dramatically, obviously helping the overall margin of the business because Europe is starting to become a bigger part of our business. And so we will take a look at things at the time that we feel necessary. Right now, I feel pretty good about keeping the business together. Operator: And with that, we will be concluding today's question-and-answer session. I would like to turn the floor back over to Camilo Russi Lyon for closing remarks. Camilo Russi Lyon: Thank you, everyone, for joining us today. We look forward to speaking with you again in about 90 days. Have a great day. Operator: And with that, ladies and gentlemen, we will be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.