加载中...
共找到 38,319 条相关资讯
Operator: Good morning, and welcome to the Minerals Technologies First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Lydia Kopelova, Head of Investor Relations. Please go ahead. Lydia Kopylova: Thank you, Gary. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Eric Aldag. Following Doug and Eric's prepared remarks, we'll open it up to questions. As a reminder, some of the statements made during this call may constitute forward-looking statements within the meaning of the federal securities laws. Please note the cautionary language about forward-looking statements contained in our earnings release and on the slides. Our SEC filings disclose certain risks and uncertainties, which may cause our actual results to differ materially from these forward-looking statements. We also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and in the appendix of this presentation, which are posted on our website. Now I'll open it up to Doug. Doug? Douglas Dietrich: Thanks, Lydia. Good morning, everyone, and thank you for joining. Today, as usual, I'll provide a quick review of our first quarter financials. Then I'll give an update on our outlook for the remainder of 2026, including an overview of the impact that current events are having on our business, and the progress we've been making on our growth projects. Eric will then take you through the detailed financials and provide our outlook. After that, we'll open up the call to questions. Before I get into the details, let me start with the headline. We delivered a strong first quarter with broad-based double-digit growth, and we're seeing early proof that our strategic growth investments are paying off. First quarter sales came in at $547 million, up 11% from prior year. Sales growth was broad-based and from both of our segments. We saw an 11% year-over-year increase in our Consumer and Specialty segment, driven by Household and Personal Care, which grew 16% and and Specialty Additives, which grew 6%. Our Engineered Solutions segment sales increased 12% over last year, with high temperature technologies up 8% and and environmental and infrastructure of 24%. A portion of this growth is tied to the specific investments we made last year in support of our strategic growth initiatives to expand into higher-margin consumer markets and into higher growth geographies. If you recall, we projected that these initiatives would drive $100 million in annualized revenue beginning this year and this quarter, we delivered the first portion of that growth. From a market perspective, we saw small improvements in demand at the start of the year, which then trended stronger in March. The stronger trend has continued here in the second quarter. Operating income was $68 million, excluding special items, up 7% from last year. Earnings per share were $1.38, up 21% and and both operating and free cash flows improved significantly compared to last year. Like most companies, we felt the impact this quarter from the rapidly changing environment caused by the recent geopolitical events, and I'll talk about that more on the next slide. Let's start on the left side of this slide with some points about the impact current events of -- in the Middle East. Overall, we've avoided any material impact on sales or operations to date. Where we have seen an impact is with higher energy and freight costs, which we are addressing through pricing actions and temporary surcharges. In terms of our operating and sales footprint, we only have a small presence in the region, primarily consisting of refractory sales to Middle East steel producers and a long-standing joint venture in our Energy Services business. We did encounter some challenges with shipments that were in the Persian Gulf when the conflict started, but we managed to redirect those shipments to ensure delivery to our customers. Our team responded quickly to the changing environment, much as we did last year with tariffs, and I want to thank our employees for their agility and creativity in identifying solutions for our customers. Our biggest current challenges are higher energy prices at our facilities, increased fuel cost for our heavy equipment and higher transportation and freight costs. Once these impacts became apparent, we implemented price actions some of which could be implemented quickly and others which will take effect over the next 90 days due to contractual terms. We are, of course, closely monitoring the evolving conditions and are prepared to implement further actions as needed. We've had minimal supply disruptions as a result of the conflict, and I'd like to point out that from a broader supply chain and logistics standpoint, we benefit from the geographically diverse structure of our business and the localization of our operations. We typically produce our products within the same region or country where we sell them. I believe that this operating structure is one of MTI's key differentiators as it limits the impact that global supply chain disruptions have on us. This structure will further demonstrate the value as the trend for locally produced minerals and mineral-based products increases. Now let me turn to the right side of the slide to update you on our growth projects. The progress we're making and the associated timing of the expected sales as well as the market updates. There are a number of positive elements here, all contributing to what we see as strong sales momentum this year. I'll start with our Consumer and Specialty segment, in our household and personal care product line, we've been upgrading and expanding several of our facilities. The Cat litter facility expansions that we completed late last year in North America are fully online. We've been ramping up the new business we've secured for them from customers in the U.S. and Canada. In fact, this was a record sales quarter for Cat Litter, which grew 19% over last year. Our new cat litter facility in China also continues to ramp up and should be fully functional by the second half of the year with new business orders already secured. Last year, we announced a capacity expansion for our natural oil purification facility. We expect to have this fully online late in the second quarter, enabling us to meet the rapidly growing demand we are seeing for renewable fuels specifically sustainable aviation fuel. Our high-performing products are uniquely capable of meeting the challenging specification for these applications. In this quarter, sales of these products grew 14% over last year and we expect the pace -- this pace to accelerate once the expansion is fully operational. Elsewhere in our Specialties business, our Animal Health business is trending nicely with sales up 9% over last year. and we're anticipating strong volume growth in Fabric Care starting in the second half with the introduction of a new technology. In our Specialty Additives product line, we previously announced the ramp-up of several new satellites in our paper and packaging business as well as capacity expansions at others, all of which remain on track for the second half of this year. One area where we've not seen much improvement is in the North America residential construction market, which remains relatively slow. Turning to our Engineered Solutions segment in the high-temperature Technologies product line, the min scan installations we previously announced all remain on track. We are seeing higher refractory product demand from stronger steel markets in North America as well as from the share gains we've captured as a result of our MINSCAN installations. Europe steel production, on the other hand, remains soft. Our Metalcasting business remained stable with no major inflections. We're seeing some strength in municipal foundry applications. the North America heavy truck market is showing signs of potential recovery that we continue to see slow demand from the agricultural equipment market. Foundry markets in Asia remained stable, and demand for our engineered foundry blends continues to expand with sales growing 9% in the first quarter of last year. In environmental and infrastructure, we're seeing the potential beginnings of demand improvement, mainly through environmental lining project activity, which has increased of late. We're also on track for 10 or possibly more new water utility implementations for our FLUORO-SORB remediation product in the second half and demand for our infrastructure drilling products remains robust in both North America and Europe. Let me summarize all this for you. First, I'm pleased with how our growth investments are performing, and we're on track to deliver $100 million of incremental sales. We're off to a strong start to the year, and we still have several new growth projects ramping up over the next 2 quarters. In addition, we're seeing improving trends in many of our end markets. At the same time, we're mindful of continued macro uncertainty, particularly around energy costs. But even with that backdrop, the momentum we've established from these well-timed investments and the positions we've established in durable and growing end markets puts us on track for a solid growth year. Our current projection is for mid-single-digit sales growth in 2026, and this could inflect higher if the market strength we are currently seeing continues. Now let me turn the call over to Eric, who can take you through our financials and provide more details. Eric? Erik Aldag: Thanks, Doug, and good morning, everyone. I'll start by providing an overview of our first quarter results. followed by a review of the performance of our segments, and I'll wrap up with our outlook for the second quarter. Following my remarks, I'll turn the call over for questions. Now let's review our first quarter results. We had a strong start to the year. Q1 sales were $547 million, up 5% sequentially and up 11% from prior year with solid growth across all product lines. In the sequential sales bridge on the upper left, you can see that sales in the Consumer and Specialty segment grew $22 million from the prior quarter or 8%, driven by strong growth in both Household and Personal Care and Specialty Additives. Sales in the Engineered Solutions segment were up $5 million from the prior quarter, driven by high temperature technologies. Operating income was $68 million in the first quarter, up $1 million from the fourth quarter, driven by higher volumes and improved productivity in the Consumer and Specialty segment. Turning to the year-over-year bridges. You can see that sales were well above prior year in all 4 of our product lines. Excluding favorable foreign exchange, our sales grew 8%, driven by higher volumes in several of our businesses. We also benefited from a few extra days in the quarter relative to last year. We estimate that underlying growth, excluding FX and the few extra days was 5% to 6%. In Consumer & Specialties, sales in Household and Personal Care were up $19 million or 16%, and Specialty Additives sales increased $9 million or 6% from prior year. In Engineered Solutions, sales in high-temperature Technologies grew $14 million or 8% versus prior year, and Environmental and Infrastructure sales grew $13 million or 24%. Operating income improved 7% from prior year, with increases from the segments totaling $8 million. Operating income and margin would have been stronger if not for the rapid shift in freight and energy costs we experienced during the quarter as well as higher corporate expense due to the change in stock price during the quarter and the resulting mark-to-market impact on stock-based compensation. Recall that our guidance for the first quarter assumed $2 million to $3 million of higher energy and mining costs. We actually incurred about $5 million of higher costs in the quarter. While we do hedge a large portion of the energy we consume at our plants, the increases we experienced in the quarter were mostly in the form of higher freight expenses due to the increase in fuel costs. We expect to fully offset these higher input costs through pricing and other actions as we move through the year. However, we are anticipating a timing lag of up to 90 days in some cases based on contractual pricing arrangements. All in all, it was a good start to the year with solid growth above our initial expectations. We are managing through some new cost challenges, and we are working diligently and quickly to overcome them, just as we've done in previous inflationary periods. Despite these higher costs, our earnings per share, excluding special items, grew 21% from last year, setting us up for a strong year in 2026. Now let's turn to a review of our segments, beginning with Consumer & Specialties. First quarter sales in the Consumer and Specialty segment were $297 million, up 11% from prior year. In Household and Personal Care, sales of $142 million or 16% -- were up 16% year-over-year. Cat Litter sales continued to build on the momentum we saw in the second half of last year. The new business we secured ramped up ahead of schedule in the first quarter, which helped drive Cat litter sales up 19%. Sales of bleaching earth for edible oil and renewable fuel purification remains on a solid growth track, up 14% from prior year, and commissioning is underway with our capacity expansion for this product line to serve our expanding order book. Our capacity investments are also progressing well for animal health and fabric care, which grew 9% and 13%, respectively, in the first quarter. And we expect sales from these investments to ramp up beginning in the second half. Sales in Specialty Additives grew 6% from prior year to $154 million. Our volume to paper and packaging customers in Asia was up 21%. And including the ramp-up of our newest satellite there. This growth was partly offset by slower sales into residential construction. We did see an improvement in residential construction volumes from the fourth quarter as expected. However, this end market remains soft compared to prior years. Operating income for the segment increased by 8% from last year to $33 million. Operating margin improved by 40 basis points sequentially despite the rapid increases in freight and energy costs we saw in the first quarter, and we expect operating margins to continue to build throughout the year as we work with our customers to pass through these incremental costs and as we gain leverage from our growth initiatives. Looking ahead to the second quarter, we expect segment sales to be similar sequentially and up 4% to 5% from prior year. Sales in Household and Personal Care are expected to remain strong up mid- to high single digits from prior year, driven by continued growth in cat litter and bleaching earth for renewable fuel purification. We expect sales in Specialty Additives to be similar, both sequentially and year-over-year. We expect a seasonal uptick in residential construction, albeit below last year's level to offset seasonal maintenance outages for paper and packaging customers and a paper machine conversion from paper to brown packaging in North America. Now let's turn to the Engineered Solutions segment. First quarter sales in the Engineered Solutions segment were $250 million, up 12% from prior year. In our high-temperature Technologies product line, sales of $183 million were 8% higher on continued strength in the steel market in the U.S. And despite ongoing softness in the agricultural equipment and heavy truck markets, sales to GLOBALFOUNDRY customers were flat to prior year, supported by continued growth in Asia, where sales were up 9%. Sales in our environmental and infrastructure product line were $67 million, up 24% from prior year. We continue to see strong pull for our infrastructure drilling solutions. -- with sales up 46% over prior year. Also contributing to the growth for this product line were stronger starts for large-scale project activity and offshore water treatment relative to last year. Overall, the segment delivered another solid operating performance. Operating income increased by 14% versus prior year to $39 million, representing 15.7% of sales. Sequentially, margin for the segment was impacted by fewer equipment sales and seasonally higher mining costs as we expected, in addition to the higher freight costs. Looking ahead to the second quarter, we're expecting sales for the segment to increase by high single digits, both sequentially and year-over-year. In high-temperature Technologies, we're expecting a sales increase following the Lunar New Year holiday outages in Asia in the first quarter and demand from steel customers in North America is expected to remain strong. Sales in environmental and infrastructure are expected to increase by around 20% sequentially as we enter the seasonally stronger period for large-scale project activity. And this would equate to around a 10% growth over last year for this product line. Now let me turn to a summary of our balance sheet and cash flow highlights. Our first quarter cash flow improved significantly versus the prior year. First quarter cash from operations was $32 million, up $37 million from prior year. The first quarter is typically our lowest cash flow quarter. And as usual, we expect free cash flow to build as we move through the year. Capital expenditures in the first quarter were $23 million an increase of $5 million from prior year as we continue to make investments to support our growth initiatives and our operations. We continue to expect full year capital expenditure in the $90 million to $100 million range with the potential for slightly higher spending depending on the pace of certain investments. Free cash flow also improved significantly over last year, and we continue to expect to finish the year with free cash flow in the 6% to 7% of sales range. The balance sheet remains strong with our net leverage ratio at 1.7x EBITDA. Now I'll summarize our outlook for the second quarter. Overall, we expect second quarter sales to be approximately $560 million, up around 6% from prior year, driven by growth in both segments. In Consumer & Specialties, our guidance reflects growth from our new cat litter business that began in the first quarter as well as the ramp-up of our expansion for edible oil and renewable fuel purification. Overall, for the segment, we expect 4% to 5% sales growth over last year despite residential construction markets remaining soft. In Engineered Solutions, we expect continued growth in North America refractories, Asia foundry and improved environmental and infrastructure project activity. Overall for the segment, we expect year-over-year growth of around 7% to 8%. Altogether, we expect operating income for the quarter of approximately $80 million and earnings per share of between $1.60 and $1.65. I want to highlight that our outlook for the second quarter includes $12 million of higher inflationary costs on a year-over-year basis. This is up from the $5 million we experienced in the first quarter. Given the rapid pace of these cost increases and the contractual pricing lag for certain customers, we are expecting around a $3 million temporary impact on our operating income in the second quarter, and this is included in our guidance. However, even with the new cost challenges we've been navigating in the first half, we're still expecting 2026 to be a strong year for us. As Doug mentioned, we're well on track for mid-single-digit growth in sales this year. We could certainly exceed this mid-single-digit growth level if our end markets remain relatively constructive, but we feel this is a balanced and appropriately cautious outlook for the year given the current macro uncertainty. And based on our current outlook for energy costs, pricing and end market dynamics, we're currently tracking to about a 14% operating margin for the full year. This means we're expecting margins to improve by more than 100 basis points from the first half to the second half, approaching our 15% run rate target in the second half, driven by our pricing actions and volume leverage from our growth initiatives. Of course, should energy costs moderate this year, our margin could move higher. Before we turn to questions, I'd like to highlight that we're hosting an Investor Day on September 22 at our R&D facility in Bensalem, Pennsylvania. The event will include a webcast program updating investors on our 5-year targets as well as an in-person R&D walk-through, showcasing some of the technical and innovation capabilities that are driving our growth today and into the future. We'll be sending invitations in the coming weeks, and we look forward to seeing many of you there. With that, I'll turn the call over for questions. Operator: [Operator Instructions]. Our first question is from Daniel Moore with CJS Securities. Dan Moore: Eric. I appreciate all the color. Congrats on obviously nice quarter. Impressive momentum from a top line perspective. I think if we backed out FX and some of the extra days, 6% plus, so well ahead of the mid-single digits or at least tracking well. How much of that growth was price versus volume? And I just kind of -- I know you have a lot of different end markets, but how would you describe your growth relative to overall end market growth, just trying to tease out the impact of some of those strategic investments and initiatives that you've been making? Erik Aldag: Yes. Thanks, Dan. Thanks for the question. So pricing was relatively minimal in the first quarter. We expect that to be a little higher as we move forward as we've obviously had to implement some price increases to cover the higher costs. But around 1% pricing in the first quarter versus last year. And yes, as far as the growth, I think when we gave the guidance at the beginning of the quarter, we expected a bit of a ramp-up as we move through the quarter. But we had pretty broad-based improvement in the pace of sales into March. I talked about the new Cat litter business that we have coming in a little early. I think we're certainly outpacing the market growth as it pertains to the Cat litter market with the new business that we've secured here in North America. These are new items that we're launching with retail partners, new stores that we're in. So certainly outpacing market growth there. And the other sort of highlight was in the environmental and infrastructure product line -- it's just -- it's been great to see that product line show a few consecutive quarters of growth after a pretty long period of stagnant or a subdued market for the product line. So as we mentioned in the prepared remarks, things like infrastructure drilling, the environmental lining systems, just getting stronger pull, and we're starting to see early signs of a pretty positive market for that product line. Dan Moore: Really helpful. And actually, just kind of stole the answer to my second question because certainly, Enviraland infrastructure is clearly turned owner appears to be turning it. I guess, just talk about your visibility, project-based work. So what are you seeing in terms of RFQs and opportunities looking beyond the next quarter or 2 in that business? Douglas Dietrich: Yes, Dan, let me hand that one over to Brett Argirakis to give us some color on the mining market. Brett Argirakis: Dan, thanks for the question. Yes, as Eric said, really, in the last 4 quarters, it showed a little bit of improvement. And this quarter, it was pleasant outcome. So overall, the growth drivers in the first quarter were primarily a result of increased activity in the mining sector in both North America and Europe. The sector actually has shown global improvement versus last year and really is pointing to continued improvement in the second quarter and into the third. We're seeing -- also seeing North American municipal landfill projects improving. And it's providing us additional opportunities -- we are getting more RFQs, as you pointed out. And so we are feeling pretty good about the rest of this quarter into the third. So our pipeline really has increased and we've been specified into several projects for this year in both our North America and European production schedules are pretty healthy, really into the third quarter. So we feel pretty good about the next couple of quarters. Dan Moore: Very good. I guess, last for me, and I can jump back in queue with follow-ups. But you're demonstrating certainly not just this year, but in the last couple of years, more speed and agility in terms of pricing reacting to the spike in energy and other input costs. Obviously, it's a little bit of a lag. So we saw some margin compression. I'm just wondering how much of the year-over-year margin contraction was kind of lags in energy input costs versus mix or any other factors? Erik Aldag: Yes. So Dan, in the first quarter in terms of the price cost lag, it was probably about a $2 million impact for us on margins, mostly freight and that picked up really in March, obviously, the other thing kind of weighing on our margins in the first quarter that I alluded to, was the higher corporate cost, but that was $2 million to $3 million higher depending on the comparison period that you're using and that was really just based on the change in the stock price during the quarter. It's a mark-to-market impact on stock-based compensation. So if not for those kind of 2 items, the freight cost increases and the corporate costs, operating income would have been well over $70 million. We probably would have been above last year's margin. So yes, we have some -- we've got to pass through the higher cost in pricing. We've got the surcharges in place. We've got pricing actions implemented. We do just have some contractual limitations that results in a lag of up to 90 days in some cases before we can pass that through. So about a $2 million impact from the inflationary point in the first quarter. probably about a $3 million impact in the second quarter just because of the full load of higher freight costs. And then that should taper down in the third, certainly, probably closer to $1 million in the third and then catching up in the third quarter. Douglas Dietrich: Yes. Dan, the only thing I'll add is that, yes, we've gotten more agile with this. But at the same time, look, we -- we price our products on value, not cost, right? But there are times where like this and some unprecedented times. And if you remember in 2022, we were able to pass through over $200 million of inflationary costs. So we do have that pricing power. We do work with our customers. We understand there's temporary fluctuations. So when we see something like this, we need to move and we use different methods. We use general regular pricing increases, but also surcharges to make sure that we're only pricing for when these impacts happen. So we move very quickly to put those in place. And as I mentioned in my remarks, we will we will make sure that we monitor the situation if we need to take further action, we'll do that, too. Dan Moore: That's helpful. And then I think you said, Eric, 14% kind of trending to 14% operating margin for the year. If we did level set or sort of circle those charges already probably closer to 15%. So if I have any follow-ups, I will circle back. Operator: The next question is from Mike Harrison with Seaport Research Partners. Michael Harrison: Congrats on a nice start to the year. I wanted to just clarify, you mentioned the 1% price mix. Can you break out what the FX contribution was that was part of that 11% growth and did I hear correctly -- did I hear you correctly that you had a number of extra days that contributed to the strong revenue number? Erik Aldag: Yes, that's right, Mike. So the FX impact was about 3% on a year-over-year basis. That's going to come down as we move through the year. It's just based on where the dollar euro basically was this year versus last year and that sort of levels out as we move through the year. So on a full year basis, probably looking at where currency rates stand today, probably looking at more of a 1% to 2% FX impact. But for the first quarter, it was about 3% impact. And yes, so we did have a couple of extra days in the quarter just based on how our fiscal quarter fell. The extra days went into the Easter holiday. So we estimate that the extra days contributed to about 2% to 3% of the growth on a year-over-year basis. Michael Harrison: All right. Very helpful. And then I just wanted to kind of revisit the -- just the margin performance. I understand that there was some headwind related to the freight costs you mentioned as well as the corporate higher corporate expense. But I'm just a little bit surprised that with 11% revenue growth number that we didn't see more leverage to the bottom line. So maybe just talk a little bit more about price mix or any other costs or efficiency issues that may have impacted your margins? Douglas Dietrich: Yes. We started off the year. I'm going to hand this back over to Eric, but just to kind of chime in on your commentary of disappointed to see it follow the bottom line. Look, we were set up for a great quarter. I think things were starting to trend north, we had new products coming in, margin contributions were right on target where we wanted. Look, higher stock price, the mark-to-market is something we're -- it's going to happen. But we are set up for a good quarter. So yes, we do think that this will ultimately fall to the bottom line. But then when the energy prices hit, we had to take that on. You know we have some lag in pricing. So that was unexpected in the quarter. But we do think that as this moves through and as our pricing actions fall in, that margin is going to come back. So this is a temporary thing, Mike. But it really had to do with energy and freight. So Eric, do you want to -- I think we bridge to just... Erik Aldag: Maybe a couple of things. From a mix perspective, Mike, we talked about residential construction being soft. So Q1 is a seasonally soft period for residential construction and the market is relatively soft. And I think we've mentioned before that those are relatively high contribution margin products. So that does generally have an unfavorable mix impact. And I would also say that for the cost impacts that we are experiencing, probably 2/3 of that cost impact is impacting the Consumer & Specialties segment. And that's where we have some contractual limitations as well in terms of the timing of passing things through. And so we do expect those margins, in particular in that segment to improve as we move through the year. Michael Harrison: All right. Then I just wanted to talk a little bit about this $3 million price cost lag that you expect in Q2. Any thoughts on what could drive that to be better or worse in terms of things you can control and your ability to get higher pricing or find some improved procurement or things like that. Obviously, if the war ended today, that would probably be favorable. But then my other -- the other piece of this question is, do we expect that $3 million price cost lag to be neutral by the time we get to Q3 and then at a certain point, is your expectation that, that would turn favorable to earnings or margin contribution? Douglas Dietrich: Go ahead, Eric. Erik Aldag: Yes. So it's going to depend a lot on energy costs generally. And our energy spend isn't directly linked to oil prices but there's a correlation there into freight, some of the energy-linked raw material packaging that we buy, the energy spend that we have on the plant. I would say, yes, we're planning to be caught up on that in the third quarter. We may have about $1 million of lingering impact in the third quarter. But as we move through this as long as energy costs stabilize, we plan to more than offset and maintain our margins at least. I think Doug mentioned the prior inflationary time period. I would say that between 2022 and 2024, we took on over $200 million in costs. And over that same time frame, we also improved our margins. And so I think we've shown historically that we can pass things through. I think we've gotten faster over time as an organization. We're seeing $3 million in the second quarter that's going to come down to something closer to $1 million in the third, assuming energy costs stay relatively close to where they are today. Douglas Dietrich: Yes. I mean things that can improve it, Mike. Obviously, energy costs dropped rapidly and stay there for a while. I don't think we're projecting that right now. I think we're looking at this probably being through the year at higher energy costs. It's going to take a while given what's going on, I think, to have that happen. It could change. That could be one upside for us. But again, we're going to take care of our customers. We're going to make sure that we price appropriately for the value we deliver and pass through some of these costs with them. So yes, there are some things that can improve upon that. But we're giving you our best projection in a volatile environment right now. Michael Harrison: Right. And then last question I had is just on the metal casting and foundry business. I guess, first of all, it sounds like you continue to pick up additional market share with the custom green sand blended product in Asia. So that's great to hear. But I was just curious, you mentioned in North America heavy truck, I think that's a headwind now, but I think the assumption or what the forecasts are saying is that because of some regulatory changes, heavy truck could pick up as we get into the second half. And I'm just curious if your expectation is that North America foundry should see some improvement in the second half, either just based on heavy truck or because we're kind of getting into some easier comps here? Douglas Dietrich: Yes. Heavy truck has been kind of a headwind for a while. So is the heavy ag off-highway ag business for a couple of years. So -- and that has been, at least in heavy truck due to some pending regulation that I think we're getting some clarity on. I think the comments I put in were relatively stable markets in North America, but we are seeing potentially some -- the order book for heavy trucks starting to build. And I think, as you said, that could be towards the second half of the year. So early signs that folks are going to move forward with buying these trucks, and that will certainly flow into kind of our heavy truck business. ag, we have not seen that yet. That's the 1 area that still seems to be flat. So yes, we could see some improvement, and I think we might be starting to see the beginnings of that early this year, Mike. Operator: The next question is from Pete Osterland with Truist Securities. Peter Osterland: So just wanted to start on your recent growth investments. So you noted the $100 million aggregate sales target is still on track. Are there any of these investments specifically where you're seeing more or less traction than you originally expected? And on a related note, just in terms of the cost impact, given what appears to be a more inflationary environment, I guess any incremental costs or delays that you're expecting with fully ramping your growth investments relative to what you originally expected? Douglas Dietrich: No, we're not seeing that right now. I think let me characterize this. First, we are seeing a little bit of stronger pull or at least earlier pool in the pet litter business, the Cat Litter business. We brought those facilities online late last year, 2 in North America, 1 in China, which is still ramping up, but we started up last year and have begun to fill them up with this business that we projected to be about $25 million plus this year, and that actually started a little bit sooner than we had expected. So that's one positive area. We do have more investments, these investments that are coming online associated with this growth. I mentioned the bleaching earth associated with the oil purification and sustainable aviation fuel, that's going to be coming online in the -- late in the second quarter. And that's supporting very strong demand we're seeing for that product. I mentioned year-over-year first quarter, that product grew 14%. We see that accelerating potentially going through the year. We've already booked -- almost booked out that facility through the rest of the year, just given the strong demand. So that could accelerate. We have 2 paper and packaging satellites coming on late in the year. We've got MINSCAN, we've got FLUORO-SORB installations. So there's a lot building this year that you haven't yet seen. I'm also going to highlight that the markets I just mentioned to you are kind of what we're going to call, not immune, but a bit more durable to what's going on with energy. As I mentioned, the cat litter is pulling and the sustainable aviation fuel is not necessarily driven by cost driven by regulation. And so as the regulations have changed, for the amount of sustainable aviation fuel, that's what's driving this demand, and we see that being very durable this year. Same with the MINSCAN installations, those are contracted. Those will be installed, and we'll start to see the pull in the revenue from those as they get installed. And the paper PCC satellites are contracted. And as they ramp up, we'll start to see the pull there. So I don't see -- outside of that, there could be some market demand fluctuation. We're seeing the strength. Energy costs could change those markets a little bit this year. But the investments we've made, we see are being put into durable and growing markets that we think just alone, that's going to drive at least the mid-single digits growth. And as I mentioned, if these markets hold in like they are, could be better this year. I hope that helps. Peter Osterland: Yes, very helpful. And you kind of touched on what my follow-up was going to be. So I guess just thinking about the disruptions in global energy prices and logistics related to the Middle East situation. where within your core portfolio, do you see the greatest potential for derivative impacts on demand here? I guess, where regionally or by end market is demand potentially most vulnerable for you -- are there any markets that could benefit? I guess what are the potential demand impacts that you're focused on right now if the situation has prolonged? Douglas Dietrich: Yes. Look, I don't want to ignore the fact that higher energy prices may not have settled in fully to the global economy, and we'll have to see where they go and how long they are elevated. I think our concerns are most outside the United States in terms of Asia and Europe. We've been seeing some improvement in some of our European products -- and that could be an area. I think in Asia, parts of Asia, I think most of our business, more of our businesses in China, I think that's a little bit more immune, but we could see some slower demand associated with higher energy costs that could dampen with the strength that we're currently seeing. But that's what I'm saying, even if those kind of balance each other, I think the durability of the products and the growth investments we currently made are going to at least post on track for a floor of about mid-single digits, 5% growth this year. Operator: The next question is from David Silver with Freedom Capital. David Silver: So I have a scatter of questions here. First 1 is just on pet litter, and I apologize, I probably just wished on it when you discussed it earlier. But the 19% growth, would it be possible for you just to break that out by factor? In other words, I'm certain there's a currency benefit there, maybe but price. But I'm just wondering how much was organic volume growth and how much of that might have been related to the ramp-up in China? Erik Aldag: Yes. Thanks, Dave. I mean I'm going to tell you, it was mostly volume. And we did have the favorable currency across the company of about 3% to 4%. But in terms of the vast majority of that 19% increase, it was mostly volume. David Silver: Okay. And then I did want to touch on the FLUORO-SORB comments you made in the opening remarks. And in particular, I wanted to hone in on the word implementation. So 10 implementations scheduled for the second half. Just a couple of questions. When you say implementations, I mean how much -- how many of those are I guess, full commercial developments as opposed to maybe an important, I don't know, beta tests or sampling kind of thing? And then, you did mention last quarter that at least 1 of these newer projects was targeted for Europe. And I'm just wondering, in the 10% for the second half, how many might be outside the United States. Douglas Dietrich: Yes. Let me start, and I'll pass it off to Brett. David, we probably have 250 -- now it's some sort of 350 Brett, 350 trials going on around the world. And so these 10 are full installations, right? I think we had 7 last year. We have 10 scheduled for this year. And as I mentioned, that could be higher. But Brett, I want to give some color on kind of what the trial activity is like, where it's going on? Brett Argirakis: Sure. David, that's right. FLUORO-SORB is now operating in 10. These are full-scale municipal drinking water plants that are treating the PFOS impact water. And we continue to receive pilot requests in not only the U.S. but EU, U.K., Japan and now Hong Kong. So we are doing trialing activity now in all of those countries. There's another 10 municipal systems that FLUORO-SORB has been specified for in -- for upcoming installations. Most of those are under construction now and expected later this year and into 2027. We're seeing a strong progression from early pilots in small ground water treatment plants to additional full-scale implementation. So those smaller scales are now we anticipate them moving into large scale like the 10 we're doing now. But over the last 6 to 8 months, our request to pilot FLUORO-SORB in the large surface water facilities has doubled. That's signaling an expansion to us in more higher value segments. So this would be those -- like the large project we did in the Eastern U.S. that takes on a lot of FLUORO-SORB we're getting more of those requests. So that's also positive. The other thing we're seeing is the in-situ remediation activity increasing. And we've secured several Department of War and aviation-related field pilots to demonstrate our PFAS absorption using our FLUORO-SORB. So some examples would be like on and off base drinking water treatment, in situ stabilization for contaminated groundwater plooms storm water treatment, which is getting even more attention. There's a lot of activity there. And that's really due to the risk of PFOS migration into sensitive receptors. So all in all, David, we're seeing continued interest. It's a -- it feels like a slow progression, but we're moving very fast and it is global right now. David Silver: Okay. And I'm just going to follow up. But a couple of things. Just to clarify, so 10 implementations or I'll use installations in the second half of '26. And then, Brett, I believe you said there's another 10 that are -- the work is progressing maybe for first half of 27 or full year -- is that -- did I quote you correctly or? Brett Argirakis: Let me clarify. So yes, so there's 10 full-scale active. There -- we anticipate 10 more that will go for the second half of the year, correct? And that some of those may trickle into early '27, but we continue to look for more. There could be more, as Doug pointed out in his comments. Douglas Dietrich: Is that clear, David, so we have 7 installed -- 10 installed thereabouts. We have 10 more coming this year. We expect that there will be more installations coming. We haven't announced those yet, but we expect that more installations will be coming in as this builds between '27 and '28, which is regulation will start to go in in '29. So yes, we're seeing that momentum. We're seeing the trial activity. We're seeing the pool for trial activity. We're seeing extended trials, which means they're really working with the product. We've seen only positive results from those trials. And we're starting to see more and more conversions. So we expect this will continue as we get closer and accelerate as we get closer to the regulation deadlines. David Silver: And I hope you don't mind, I'm just going to follow up with one more. So out of the 10 installations, Brett, would you characterize them as using FLUORO-SORB alone, FLUORO-SORB in conjunction with granular activated carbon or -- just what is the standard? What seems to be the approach that your customers are most interested in and when they want to incorporate FLUORO-SORB into, let's say, a drinking water project? Douglas Dietrich: I would characterize them as some of both. I think we are seeing stand-alone floors or installations. We're seeing it used very effectively in conjunction with others. Could be on the front end or the back end of the other media, but we're seeing some of both, I would say. So -- which I think is a good thing. I think that allows the broad-based use of utility that's currently using a certain media to be able to add FLUORO-SORB. So that opens -- it says that all uses are being valuable. And it really depends on the utility, their type of system. And the PFOS that they have in the drinking water. So it's some of both. That's how we're characterized for you. David Silver: Okay. I'd like to swing over to PCC satellite activity. And in particular, you did discuss the 3 ramp-ups that are underway and adding to results. But I was wondering if DJ or whoever might be able to just characterize the next wave of projects that you might be bidding on? In other words, maybe the quantity relative to -- is it higher or in line with kind of typical like bidding activity or bidding opportunities? And then more to the point, are we kind of at a phase in that business where there's kind of a shift maybe more than 50% of the opportunities relate to packaging as opposed to uncoated free sheet. Just what is the status of kind of the new project or the potential project funnel for PCC satellites. D. J. Monagle: David, I'll field that one. Thanks for the question. So let's -- just on clarifying those investments that are part of that $100 million deliverable that we were speaking about to which we spoke earlier. There were 4 of those are paper and packaging investments. And I think the mixture of those informs how this portfolio is currently looking -- so if I look at those 4, 2 of them were packaging, 2 of them are printing and writing and the mix of technologies. One was standard PCC on GCC and a couple of new yield. And so as I've spoken in the past about the pipeline, I think I've been saying it's just under 2 dozen active pursuits and even though we've closed on these 4 deals, I look at the pipeline today, and it's it's another 2 dozen opportunities that we're working on. So the pipeline remains flush full. The interest remains high. But now what we're seeing is a shift in -- you had said 50% packaging. I would say the number has been in the past 10-plus percent, and now it's been migrating more towards 25%, 30% is packaging, and that's kind of holding steady -- but what we're seeing in the mix of technologies, I would say 50% or so are in standard PCC and then the other 50% is New Yield and GCC. And so that's the mix that's been happening for us. The other shift that we saw is that the -- all these new investments have been Asia, India and China, we are seeing a fair amount of pull from around the world on this. So a little bit of Europe, a little bit of America and different parts of Southeast Asia. In addition to the traditional pull from India and China. So that's how I would describe the portfolio. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Doug Dietrich for any closing remarks. Douglas Dietrich: Well, I appreciate everyone joining today. Thank you for the questions. We look forward to chatting with you in 3 months. So thanks for attending. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the CubeSmart First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the call over to Josh Schutzer, Senior Vice President of Finance. Josh, please go ahead. Joshua Schutzer: Thank you, Paige. Good morning, everyone. Welcome to CubeSmart's First Quarter 2026 Earnings Call. Participants on today's call include Chris Marr, President and Chief Executive Officer; and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session. In addition to our earnings release, which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the company's website at www.cubesmart.com. The company's remarks will include certain forward-looking statements regarding earnings and strategies that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the company furnishes to or filed with the Securities and Exchange Commission, specifically the Form 8-K we filed this morning together with our earnings release filed with the Form 8-K and the Risk Factors section of the company's annual report on Form 10-K. In addition, the company's remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found in the first quarter financial supplement posted on the company's website at www.cubesmart.com. I will now turn the call over to Chris. Christopher Marr: Thank you, Josh. Good morning. The first quarter showed a continuation of trends from late last year with results that were in line with our expectations. We are encouraged to finally see the inflection in same-store revenue growth this quarter as the stabilization and operating trends we experienced in late 2025 is flowing through the financial metrics. We expect continued gradual improvement throughout 2026, albeit without a projected catalyst coming from the macro environment. Positive move-in rates and same-store revenues were supported by steady demand trends and lessening headwinds from new supply. We are encouraged that the wave of new stores from the last couple of years continues to lease up while the forward pipeline remains lighter. This environment continues to showcase the strength of our quality focused strategy with primary markets outperforming and showcasing their lower beta characteristics. Steady demand when combined with fewer vacates resulted in a 240% increase in net rentals for the quarter, helping to narrow the year-over-year occupancy gap to now 20 basis points by the end of April and putting us in a good position entering the spring summer busy season. Our more stable urban markets in the Northeast and Midwest continue to outperform, while our more transient supply-impacted markets across the Sunbelt and the West Coast are beginning to see green shoots in the form of second derivative improvement. We are also encouraged by pricing trends. Last year, we began seasonally pushing rates a little earlier, which for us, created a tougher March comp, but move-in rates have improved throughout the month, they ended the quarter up 2% and that plus 2% spread held through the month of April. Across all markets, our existing customer metrics remain strong, with no change to attrition rates or credit. Our pricing and operating strategies when combined with our best-in-class portfolio, are attracting a high-quality customer who is remaining in the portfolio longer. Looking at performance across markets, 21 of our top 25 MSAs saw a sequential improvement in the same-store revenue growth during the quarter. The Acela corridor continues its outperformance led by New York, Austin and Washington, D.C. MSAs. Midwest markets led by Chicago, maintained their steady pace of improvement. Major Sunbelt markets showed encouraging signs with Miami swinging to positive same-store revenue growth, and Phoenix and Atlanta making meaningful progress in their recovery from the influx of new supply. We are proud of the work our operations team has done to have us well positioned to capitalize on the opportunities presented as we transition into our busiest time of the year. We remain committed to our strategy of building the highest quality portfolio in the storage sector. Through cycles, our target markets and their strong demographics produce the best long-term risk-adjusted returns. The strength of our portfolio demographics and density of populations around our stores ensure stability of demand and insulates our portfolio from some of the cyclicality based by more transient and supply impacted markets. We are confident that our focus on building the highest quality portfolio in the self-storage sector by acquiring high-quality assets in top markets will create meaningful value for our shareholders over the long term. Thank you, and I'll now turn the call over to our Chief Financial Officer, Tim Martin, for his comments. Timothy Martin: Thanks, Chris. Good morning, everyone. Thanks for taking a few minutes out of your day to spend it with us. First quarter results were encouraging coming in at the high end of our expectations, giving us a nice positive start to the year. Same-store revenue growth was 0.6% over last year. And as Chris mentioned, nice to see top line growth flip to positive for the first time since mid-2024. Move-in rates remain positive year-over-year, while the occupancy gap further narrowed to down 30 basis points from down 70 basis points at year-end. The early months of 2026 were a continuation of trends from last year with generally stable overall levels of demand. Demand does vary across markets and submarkets and with a continued bifurcation in performance between the outperforming core urban markets in the Northeast and Midwest, and the more volatile performance across the more supply-impacted markets throughout the Sunbelt and Southwest. However, we have seen second derivative improvement across most markets. Same-store operating expenses grew 5.8% over last year, in line with our expectations. After 4 straight years leading the industry in expense control, our expectation is for more inflationary type growth this year with some particularly tough comps early in the year, leading to outsized growth in the quarter. We knew snow removal costs were going to be elevated over the prior year, and those elevated costs accounted for about 120 basis points of our overall quarterly same-store expense growth. We entered the year with attractive return opportunities across our primary marketing channels and a plan to front-load some of our spending to take advantage. When combined with a tough comparison, as we had historically low spending in the first quarter of 2025, the year-over-year growth was robust. We expect that for the full year, marketing as a percentage of revenues will align with historical trends. Personnel expense growth reflects our continued focus on delivering the experience our customers tell us they desire. 2/3 of our customers tell us they want some level of in-person service. As we continue to fine-tune staffing based on our data-driven prediction models as well as our first-person customer feedback, we expect personnel expense to grow at current levels throughout the first half of the year, tapering a bit in the back half as year-over-year comparisons ease. Revenue growth of 0.6% combined with 5.8% expense growth yielded negative 1.5% same-store NOI growth for the quarter. We reported FFO per share as adjusted of $0.63 for the quarter, which was at the high end of our guidance entering the quarter. On the external growth front, we continue to execute on our disciplined capital allocation strategy, looking for creative avenues to attractive risk-adjusted returns in this environment. Where the disconnect between public and private market valuations persisted. We, again, repurchased shares in the quarter as the relative value of our portfolio made it our most attractive investment option. We own the highest quality portfolio of self-storage assets and at the low valuation levels during the quarter, the best risk-adjusted return we had was investing in our existing high-quality portfolio rather than the relatively higher private market valuations for what were ultimately inferior assets. Year-to-date, this has been our most attractive avenue for capital deployment. We also closed on the first store in our recently announced new joint venture with CBRE IM with a $250 million mandate to invest in high-growth markets, allowing us to continue to grow the portfolio with enhanced returns. In the current environment and our current cost of capital, joint ventures such as the CBRE venture are a good investment option for us to pursue. On the third-party management front, we added 33 stores to the platform in the first quarter and ended the quarter with 854 third-party stores under management. Our balance sheet remains well positioned with conservative leverage and access to a wide range of capital sources to fund potential growth. We have a bond maturity late in the year that we will address with existing capacity or through accessing the debt markets opportunistically in the coming quarters. Details of our 2026 earnings guidance and related assumptions were included in our release last night. As I opened with, performance in the first quarter was encouraging and in line with our expectations resulting in no change in our guidance range and underlying assumptions with a small exception of a slightly lower share count resulting from our share repurchase activity. Thanks again for joining us on the call this morning. At this time, Paige, why don't we open up the call for some questions. Operator: [Operator Instructions] Our first question comes from Samir Khanal with Bank of America. Samir Khanal: Chris, looking at your advertising expense growth was up year-over-year. I guess when do we see the impact of that come through? Average occupancy was up slightly sequentially, and just help us understand kind of how to think about occupancy with the spend you're doing? Should we expect a bit of a ramp-up in 2Q? And maybe you can unpack that for us. Christopher Marr: Sure, thanks for the question. So as Tim touched on, there was a lot of variables that went into the marketing growth in Q1. And obviously, starting with relatively by historical standards, low spend in the first quarter of 2025. So a very difficult comp. We knew we had -- we were experiencing late last year and going into the beginning of this year, a good ROI on the spend across all of our channels, continue to see some good opportunities through not only paid search, but also as the LLM continue to evolve some interesting opportunities there as well as in social and in those channels. The spend in terms of the translation, it's always going to be that balance between occupancy and rate. So certainly, as we think about the ROI on that spend, it's a combination of those two. Are we getting more customers into the top of the funnel? That answer is, yes. Are we able to convert those customers at better rates? That answer is, yes, and then ultimately, as you've seen in the trends in asking rates. And as I mentioned, that continued to be in positive territory, up about 2% in April. That occupancy gap, as I said, continue to contract was 20 basis points at the end of April. So we're starting to see it fairly quickly in both rate and occupancy and would expect that trend to continue. Again, that being said, this is a weekly decision as we think about how to allocate capital to our marketing line item. And so it will continue to ebb and flow. But as we sit here today, as Tim mentioned, for the full year, our expectation is as a percent of revenue, marketing will be in line with what we would have seen from historical trends. Samir Khanal: And I guess just my second question is on New York certainly holding up well. Maybe talk about kind of the demand trends you're seeing in New York and certainly anything on supply would be great as well. Christopher Marr: Yes. I think New York continues to be a star performer for us. It's why we love the market incredibly resilient through cycles. What we're seeing is almost a complete absence of new supply in the outer boroughs, certainly, that competes well overall. And then for stores that compete within existing Cube. So that sharp decline in supply that we've seen now over the last couple of years is being very helpful as we think about the performance of our same stores. It was a very challenging rental housing market in terms of cost in New York. So you are seeing folks looking for solutions to that issue. And certainly, we are one of those solutions that folks are finding. So continue to be productive. Manhattan, where we have one owned and a few managed, they're getting some supply, and you are seeing some of those stores, particularly those that may have overweighted the unit mix to the really small, blocker-sized units are a little bit softer there, but the outer boroughs continue to perform really, really well. Operator: Our next question comes from the line of Michael Goldsmith with UBS. Michael Goldsmith: Chris, in your prepared remarks, you noted a 240% increase in net rentals in the quarter. Maybe you can break that number down a bit, both the steady demand and fewer vacates and what that could mean for trends going forward? Christopher Marr: Yes. I think the trend in the quarter is pretty consistent with what we had what we had seen historically over the last bit, we disclosed it on Page 16 of the supplemental package. So rentals in the first quarter were down 1.8%. Here in April, we actually had rentals that were up about 1% year-over-year. So good top funnel demand in April at good prices. So very encouraging trend to start off the second quarter. Vacates were down 3.9% in the quarter. Again, that's just what I think we're seeing a little bit across the industry. The existing customer base is particularly sticky, staying longer than certainly pre-COVID historical trends. Michael Goldsmith: And my follow-up question relates to the guidance or reaffirmation. Regarding that, is that just a function of it's early the year and you -- the decreasing season is really going to determine the trajectory of the annual results? Or is there just a level of -- is there a level of conservative? Just trying to get a understanding of the thought process behind reiterating the guidance. Timothy Martin: Thanks, Michael. So we just provided the annual guidance not all that long ago. And the first quarter played out, as we mentioned, very consistently with our expectations on both revenue and expenses and overall from an FFO standpoint, just ending up at the high end of our guidance for the quarter. So nothing has really changed. Nothing happened in the first quarter that would cause us to reevaluate the impact for the full year. And as we sit here, getting ready for our primary leasing season, we're in the same place as we were 60 days ago, ready to go and looking to capitalize on all the opportunities that will present themselves, but nothing has happened in the last 60 days that has had an impact or change on our overall view for the year. Michael Goldsmith: Good luck in the second quarter. Timothy Martin: Appreciate it. Thanks. Operator: Our next question comes from the line of Ravi Vaidya with Mizuho. Ravi Vaidya: I wanted to ask about your thoughts about broader regulation and maybe price moratorium that may be in New York and maybe a couple of other markets. Have you had discussions regarding any sort of pricing restrictions or policy shift or moratorium that you could be anticipating from the current administration here in New York? Christopher Marr: We have not engaged directly in those conversations. As we've seen across a variety of different real estate product types as well as other industries, certain municipalities have been focused in on varying factors affecting the consumers. And we believe that we offer a valuable solution to our customers who are experiencing a need to put their valuable possessions in a self-storage facility for a period of time that they define. And we think we provide a good value for that service. So from our perspective, we continue to be keenly focused on that customer service element and providing good value and a solution for their need as varying things governmentally, ebb and flow, we'll will continue to be involved as a corporate. Ravi Vaidya: That's really helpful. I wanted to ask also about the fee income realized in the quarter was elevated. This quarter is also elevated last quarter. What's driving that? Timothy Martin: Yes. So on the other property income line item. We have -- there are a variety of things that are in that line item. They include merchandise sales, locks, boxes, fees, as you mentioned, truck rental income. We're always looking at ways to enhance and grow our cash flows in those areas. And we've had some success in that line item. If you think about the level of growth in that line item in the first quarter, we would expect the first quarter to be a little bit higher than where we would land for the full year as it relates to growth on that line item. But we continue -- we always continue to look for ways to provide many services to our customers, and some of them show up in the line item. Operator: Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just hoping you could talk a little bit about the '26 earnings guidance, it implies a bit of an acceleration, but flat on same-store revenues. Just hoping you could talk through the dichotomy and the acceleration versus flat between earnings and same-store revenue? Timothy Martin: I'm trying to understand your question. Certainly, our guidance implies that there is, within the range, there is an opportunity for top line to grow throughout the year, and that's going to be the result of all the trends that Chris touched on a narrowing gap in occupancy. Some better rates to new customers. And so looking at top line growth that could accelerate a little bit. We talked about the expense somewhat of anomaly of some really difficult comps. The snow being part of it. Marketing expense year-over-year. And so the first quarter had an expense growth that's higher than the range. So if you're looking at accelerating NOI growth then throughout the year would be the expectation that's embedded in the guidance. Was there another portion of your question that I missed? Juan Sanabria: That's helpful, Tim. And then just switching gears on the third-party management. You guys have had some success on the growth side, growing the relationships with the net number has seeing a little bit of shrinkage. So just curious on how we should think about the net number going forward and the different pushes and pulls within that business? Christopher Marr: It's a little bit analogous to our customers and their length of stay. We are -- we continue to add stores to the third-party management platform, again, 33 more this quarter. We have a great pipeline that looks pretty similar to what it would look like this time of year over the past few years. And so our team in the business development side is focused on finding owners or expanding our relationship with existing owners, and what we can control is having an attractive offering and providing great services to our third-party owners and adding stores to the platform. What we can't control is when they decide to transact and sell their assets. There are times where we are the acquirer of those assets. We've bought over $2 billion worth of assets from stores that we had previously managed. But in an environment where we are today, we oftentimes are not the buyer. And so the majority of the stores that leave our platform are because of a transaction and they sell to somebody who self manages or they choose to -- they have an existing other relationship that they use to manage their stores for. So very difficult to predict. But ultimately, when stores leave our platform, in large part, it means that we've -- job well done because we've managed a store for somebody helped to create that value, to put them in a position to be able to seek liquidity and they tend to do pretty well as we create a lot of value for them. Operator: Our next question comes from the line of Todd Thomas with KeyBanc. Todd Thomas: First, I just wanted to follow up on April, I think, Chris, you said April rentals were up 1% year-over-year. How did that look on a net rentable square foot basis? And can you discuss occupancy through April and sort of quantify the move-in rents that you discussed a little bit. You said that rentals were at good prices. Can you just elaborate on that a little bit? Christopher Marr: Yes. Thanks, Todd. So through the month, we continue to see nice demand in April. And the rentals or the move-ins were up just a little bit shy of 1% throughout the month. You combine that with the continued trend in lower vacates and occupancy from March to April, so not to confuse these two 20 basis points occupancy from March through April grew sequentially, about 20 basis points, and that occupancy gap then at the end of April to April of last year was also -- had also shrunk to about negative 20 bps. The rent through April, as I mentioned early on, at the end of March, that last few days of the month, we saw average rent rate on rentals right around 2% for those last couple of days of the week or the last week of March. Those trends continued throughout April and the average rent rate on rentals in April was plus 2%. Todd Thomas: Okay. That's great. That's helpful. And then I just wanted to see if you could speak a little bit more around the improvement that you're seeing in some of the Sunbelt markets, some of the more challenged or supply-challenged markets, I guess, that you've discussed. Do you see that trend improving and continuing as you move through the year? Or does it remain sort of choppy in the near term in your view? Christopher Marr: I think as it relates to Miami, does feel as if the wave of supply has been reasonably absorbed, you're still seeing, albeit the velocity is less than what certainly we saw coming out of '21, '22, '23, the velocity of inbound folks into the Greater Miami is reduced a bit, but still pretty healthy. So feeling pretty good about that MSA, Phoenix and Atlanta. If you think about where they're heading this has really been one of the first quarters where we saw some good positive momentum in those two markets in terms of starting to chew into the negative same-store revenue results that we've seen over the last year or so, but cautious on those two, would like to see another quarter or so of that momentum continuing before you would feel much more column about those two. Todd Thomas: Okay. So it doesn't sound like you would continue to expect the Acela corridor or to be outperforming at year-end? Or do you see potential for there to be sort of a handoff during the year or late in the year as we start to think about '27? Christopher Marr: Yes. Maybe a little premature, given as we're starting to get here into the busier season. Certainly, would not be surprised if the Acela corridor from an overall growth for the year is at the top of the pack. Operator: Our next question comes from the line of Eric Wolfe with Citi. Nicholas Joseph: It's Nick Joseph here with Eric. So we continue to see consolidation within the storage sector. So just curious if you think there are benefits to being kind of larger or at a certain point, does it kind of diminish and once you're large enough, there's not incremental benefits to getting even bigger. Christopher Marr: Yes. I think -- from our perspective and how we think about portfolio construct, there is value to having scale in market. So I think having a portfolio that has brand awareness and scalable opportunities on both the pricing and the expense side within markets and submarkets, I think, has proven to be has proven to be a good strategy. I think when you think about scale on a national level, I think those benefits diminish relative to what you can get with within scale and market. Nicholas Joseph: And then just on the buybacks, as you think about funding continued buybacks, where are you willing to take leverage assuming your stock stays at these levels? Timothy Martin: So what we talked about when we execute on the share repurchases last quarter for the first time is that we generate roughly $100 million in free cash flow, and kind of the first level of analysis for us when thinking about the share repurchases is has the valuation been disconnected enough for long enough. And when we got to the fourth quarter, the -- both of those boxes were checked, and so we started to execute on the share repurchases. And so a little bit more than $30 million of those purchases in the fourth quarter, another a little bit more than $30 million in the first quarter. And so you kind of think about that tracking towards utilizing that free cash flow that we generate to repurchase the shares, plus or minus. And so to this point, we've been repurchasing shares effectively with no impact on leverage. If you were then thinking about how you would execute on share repurchases above and beyond that $100 million-ish for us on an annual basis. Then you're getting into your question, which is how much leverage would you be willing to use. And I think for us, then that goes up another level. Not only would the disconnect between public and private market valuations have to be big enough for long enough, you're then -- also then taking a view on -- for how long do you think going into the future because our equity capital is precious to us. We need to raise equity capital to support our growth over time. And so we don't take executing on our share repurchases lightly from that perspective. So we talked last quarter about how could we then continue to navigate through an environment where there's this disconnect. And that's where we started looking at and continue to look at opportunities where perhaps we take some assets that we could contribute to a co-ownership vehicle and take some of the proceeds from that to support additional share repurchases above and beyond kind of the $100 million level. And that would be a way to -- for us to continue to navigate and create shareholder value consistent with our long-term strategic objectives of having the highest quality portfolio so we could improve the quality of our portfolio through contributing to some of those assets and take advantage of the arbitrage then between public and private market valuations. It's not super appealing for us to just lever up the balance sheet to repurchase shares for the reasons that I mentioned earlier. Operator: Our next question comes from the line of Michael Griffin with Evercore ISI. Michael Griffin: Great. It seems like existing customer trends continue to be strong. But Chris, I'm curious if you can either quantify or give us some color on the rate increases that are going out now versus maybe this time last year? Are you getting more aggressive trying to push on those ECRIs? And have you seen any customer pushback when it comes to getting those rate increases? Or are they still generally pretty willing to swallow them. Christopher Marr: The magnitude and the pace of increases to the existing customers is generally unchanged from what we would have seen first quarter of '25 and here into April on a year-over-year basis. So really no fundamental change. And then from an overall customer behavior, and this starts with broad the credit and how we think about units falling into arrears, receivables, units going to auction, et cetera have not seen any measurable change in consumer behavior. We certainly watch all of those metrics quite carefully, particularly given some of the macro impacts we're seeing on the consumer. Michael Griffin: Appreciate the color there. And then on the transaction market, I realized that just given where deals are trading right now, maybe relative to your cost of capital on balance sheet acquisitions and not make sense right now. But can you give us a sense of deal volume, how investors are receptive to self-storage product down the market? And is there any way for you to compete on wholly-owned acquisitions? Or are JV deals probably the more opportune avenue to go down at this juncture? Timothy Martin: Yes. Thanks, Michael. So the transaction market hasn't really changed all that much. There are still a pretty healthy number of assets that are out there and brokers are representing a lot of potential sellers. I would say the environment has been very similar now for several quarters in that many of the assets that are on the market will trade if they get to the seller's targeted price, many of them don't. So I would say the hit rate on transactions closing remains lighter than certainly at historical levels. Our cost of capital, just back to the share repurchase conversation, when you just think about choices for us and different items on our capital allocation venue, year-to-date, year share repurchases have been more attractive given the quality of our portfolio versus the quality of an opportunity that we see out there. Our team, our investments team continues to be very active and very busy underwriting a ton of opportunities. It's just the clearing price on where things are trading or where a seller desires them to trade versus a valuation that makes sense for us to acquire that in an accretive way, both short, medium and long term just doesn't work right now. On the joint venture side, what I was alluding to is we can make our dollars go a lot further in this market by being a piece of a joint venture. And then from our standpoint, we can get some enhanced returns given the fee structures and management fees and the like in our invested dollar in a joint venture investment. So I would say that the result of what you've seen for us for the past many quarters is that there are assets that are trading. There is a strong desire from many, many pockets of capital to be in the storage space just not valuations they're attractive to sellers at the moment. Operator: Our next question comes from the line of Viktor Fediv with Scotiabank. Viktor Fediv: So you mentioned that you'll be addressing the September 2026 note maturity, potentially like existing past or opportunistic issuance. So given where credit spreads are today, either a time line or tenure you're targeting? Timothy Martin: Yes. So we have a nice gap in our maturity schedule, 7 years out and then anything 10 years or longer is wide open on our maturity schedule. So likely pads for us or to evaluate from a tenure perspective, likely either a 7- or a 10-year bond. We do have amounts drawn on our line as we started the year. I think we saw a possibility that maybe we would go twice this year, and we still could and perhaps do a chunk of 7s and a chunk of 10s. Obviously, the world was -- has been pretty volatile here in the beginning part of the year. And so we look at -- for us, pricing, if we were to go today on 7 year would be right around 5%, just a little bit higher and then on we would be in the low to pushing mid-5% range for a 10-year bond. So we'll continue to be to onto the markets and be opportunistic, and we're in a great position that if we don't feel. And if we don't see an attractive window to access that market, we have capacity to address that maturity, and we'll be patient and opportunistic. Viktor Fediv: Understood. And then a second question, but just a quick follow-up on your churn because obviously, first quarter was impacted by weather conditions. So you saw a decline in both move-ins and more substantial on vacates. And you mentioned that so far, second quarter is a positive territory for move-ins, but still down year-over-year on vacates. Just trying to understand whether we can expect some acceleration in vacates as kind of flowing through Q1 being slower or you don't see that in the most recent data? Christopher Marr: So as it relates to the weather, I think the reality in the storage business is that it impacts both the move-in and the move-out. If your intention on a miserably snowy Saturday was to vacate, likely defer, but eventually, you're done with the product. So it's something when the weather clears and it's comparable to access you depart. Similarly, for the most case, on the move-in side. It's more of a deferral now there if it was -- if it was a move-in from someone who's in transition from point a to point b, then the firm, but they still need to transact. If it was if it was a solution to another problem where you had some variability to your need, then perhaps that customer doesn't come back within the near term and wait for another day. But it has a little bit of an impact in the near term, but over the course of time, I think it tends to work itself out. So I think the trends we've seen are very consistent with what has been occurring over the last year or so, which is the impact of supply has certainly been felt on the move-in side. Customers have more options within a market. I think, as we said in the earlier remarks, that impact continues to decline, and we expect it to continue to decline. So that's been a bit now more of a helpful tailwind than a headwind. On the vacate side, I think we're seeing a customer base, particularly in the more urban stores for whom we are a more semi permanent solution to their particular need as opposed to the more typical precode where it was a transaction in which a customer was simply moving from point a to point b and a add a more defined time line for their length of stay. Operator: Our next question comes from the line of Brendan Lynch with Barclays. Brendan Lynch: Chris, you mentioned large language models in the context of advertising spending. Can you just give us an update on how Cube is using large language models and how it's changing dynamics for acquiring clients? Christopher Marr: So very early stages in terms of certainly our product and how folks are searching for it. So we're still seeing only about 1% or 2% of the customer conversions to a rental coming through channels search channels, not paid search, but increasing gradually. And again, I think it's interesting because it's creating an opportunity for sort of a longer tail search that brings in a disparate characteristics in terms of what the customer is searching for. So as an example, looking not only for geographic convenience. So self-storage near me continues to be the most searched term but also bringing in the more qualitative of mature convenience, but high-quality service, good value. It's creating an opportunity to begin to have a bit more of a spatial surge. So help me understand how to store all the possessions in my one-bedroom apartment, et cetera. And so what feeds into that, though, is not all that different than what we would have seen as we somewhat evolved from Yellow Pages to paid search, it's the geographies of the geography, but being able to have reviews or other content that enhances and validates that your store has those characteristics that, that customer is searching for good value, great customer service, et cetera. So very early stages continues to evolve. And then the monetization of that is not quite there yet either in terms of how our some of these LLM ultimately going to monetize the value of having that customer come through that panel. So early and interesting, and we're doing a lot of work with our great team here internally on the marketing side and with a lot of our external partners to continue to make sure that we are well positioned as this evolves. Brendan Lynch: Maybe a follow-up on that. Are you finding that customers who are using the large language models can be more efficient in the amount of space that they take. I'd imagine if you didn't have the capability to assess really what amount of space you needed for, say, a one-bedroom apartment. If you ask a large language model and said you need a 10x10, you might have otherwise taken the 10x20. So just kind of walk through those considerations about how the customer might be benefiting as well? Christopher Marr: Yes. So again, very, very early in this whole journey. So not at a point to draw any conclusions. But one of the headaches, frankly, in our industry is that our customers, in general, are not always the most spatially aware. It's sometimes difficult to understand how all the contents of your 1 bedroom apartment may fit into a 10x10 storage Cube. So to the extent that the LLM and the various inputs help that customer makes the right decision on the front end. I think that's very helpful from a frictional cost perspective to us because having to have them begin the journey and then discover that they either went too large or too small, and they need to relocate to another Cube as an operationally frictional cost to us. Operator: Our next question comes from the line of Eric Luebchow with Wells Fargo. Eric Luebchow: Tim, I know you talked a little bit about potential co-ownership or JV structure to contribute some assets. I guess as you think about that potential structure, would you focus more on your core urban assets in the Midwest or Northeast, that have been more stable in the last couple of years or potentially look at more Sunbelt markets where trends have been a little choppier. Timothy Martin: Yes, I appreciate the question. Overall, what we would hope to do is to, again, be consistent with our long-term objective to have the highest quality portfolio. So most likely what we would do is look for assets that we contribute that are in perhaps outside of top 40 MSAs or assets within top 40 MSAs that are more on the outer ring of that particular MSA versus kind of the core inside. Then you go through that analysis and say, do you want to target assets that are in markets that have been underperforming or under pressure from supply and the like. And would you be potentially leaving some meat on the bone for some of those assets as those markets inevitably recover and start to outperform. All those things are considered. All of those things are consideration. So it's complicated and -- but we continue to work through that because at the moment within the current environment, we think it potentially could be a pretty attractive path for us. Eric Luebchow: Great. And I guess just rough numbers, are you still seeing acquisition cap rate kind of in the lower 5% range for Class A? Or have those kind of moved at all year-to-date? Timothy Martin: I think that's a safe characterization. I mean we see some things to trade even tighter than that. But I would say very low 5s is -- tends to be where things are trading. Sometimes you get into the mid-5s. A lot of sellers based on what they're looking for would imply something very, very tight even inside some of those numbers. Operator: Our next question comes from the line of Mike Mueller with JPMorgan. Michael Mueller: Just quick one, are you seeing any pockets of opportunity where you're starting to see development make more sense at some point? And where we could see activity pick up in the next few years for you? Christopher Marr: No. The short answer, I think there are always going to be a unique opportunity in a market where you don't have supply in the trade ring, whether that be ground up or a conversion of the existing asset. So it's not 0. But I think the inputs in terms of costs and then the ultimate underwriting of rental rate for the new customers to fill up the new store, continue to make development quite challenging on a broad scale. Michael Mueller: Got it. Okay. And then maybe just something on ECRI. I know you talked about the consumer being good and accepting ECRI. But if you look at the move outs that tend to happen, do you have a sense as to what portion leaves in conjunction with ECRI versus they just don't need storage anymore and maybe how that compares to the split compares to, I don't know, what you've seen in normal times over the past. Christopher Marr: Yes. To the best that we can get at that again, we are -- we're observing that customer that gets a rate increase and then their behavior in the recent months following that and comparing that to our expectations based on historical data over a long period of time, and we haven't seen any change in that trend. The stated reason the overwhelming amount of time for why a customer chooses to leave the portfolio is because they no longer have the need for the storage Cube that brought them to us in the first place. Operator: Our next question comes from the line of Spencer Glimcher with Green Street. Spenser Allaway: I appreciate all the color you provided on the third-party management business. Just Curious if you think that over time, you're more sophisticated AI usage or machine learning will bring a greater portion of smaller operators to your platform? Timothy Martin: And I think the -- I think you put that in a laundry list or a bucket of a lot of things that we and a handful of sophisticated operators bring to the table. And so I think that's one of those areas where Chris touched on a little while ago, we're early stages. But as the search for the product evolves from an AI perspective, opportunities to improve operational efficiencies, pricing systems, the larger players are going to most likely be the winners and be on the front end of a lot of that evolution. And I would think that if I were an owner of a store and looked at how challenging of an operating business that we're in, that those large players like us have those tools, have those advantages. So I would just put that in a bucket with a whole bunch of other things that have us stand out as to why our platform is going to help create the most value for their self-storage asset. Spenser Allaway: Yes, that's fair. Do you think it will be incumbent upon you and the team to go out and make that point like very clear to smaller operators as part of just kind of looking outreach and trying to have others see the growing value of your platform? Or do you think that, that will just naturally bring smaller operators see you without kind of additional work on your end? Timothy Martin: I think it will be a combination of those things. Certainly, our business development team, and we're at trade shows and lot of our third-party opportunities come from referrals. And so we need to do a good job and continue to do a good job for our existing owners because their referral is one of our most important contributors to adding stores to the platform. But at trade shows and our "dog and pony" shows certainly we need to do a good job to explain all the things that we do and how we do them in ways that we believe are superior to the way that others do them. And so that, again, that's another piece of that story, and that's another piece of our sophisticated platform that we need to both perform on and do a good job of explaining to potential customers of ours. Operator: There are no further questions at this time. I will now turn the call back to Josh for closing remarks. Christopher Marr: Hey there, this is Chris. Josh, ceded his closing remarks to me. But thank you all for listening. We're very enthusiastic by how the Spring has started here for our business and our company. We're quite excited by all of the things we're working on internally, which I think will continue to create value over time and continue to create a great customer service experience for the users of our products. So looking forward to the quarter and seeing how the busy season unfolds here and we'll be excited to report back to you in a few months. Thanks, everyone, and have a great weekend. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Summit Hotel Properties, Inc. First Quarter 2026 Conference Call. At this time, all participants are in a listen-only mode. To ask a question during the session, please press 11 on your telephone. You will then hear an automated message indicating your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to Kevin Milota. Please go ahead. Kevin Milota: Thank you, Operator, and good morning. I am joined today by Summit Hotel Properties, Inc.’s President and Chief Executive Officer, Jonathan P. Stanner, and Executive Vice President and Chief Financial Officer, [inaudible]. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws. These statements are subject to risks and uncertainties, both known and unknown, as described in our SEC filings. Forward-looking statements that we make today are effective only as of today, 05/01/2026, and we undertake no duty to update them later. You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call, on our website at www.shpreit.com. Please welcome Summit Hotel Properties, Inc.’s President and Chief Executive Officer, Jonathan P. Stanner. Jonathan P. Stanner: Thank you, Kevin, and good morning, everyone. Thank you for joining us today for our first quarter 2026 earnings conference call. We are pleased with our first quarter financial results, which were driven by a meaningful sequential improvement in operating fundamentals throughout the quarter. RevPAR in our pro forma portfolio inflected positive in the first quarter, increasing 20 basis points year over year, which exceeded expectations communicated during our fourth quarter 2025 earnings call by over 200 basis points. Importantly, operating strength was broad based across the portfolio, particularly in March, with growth in multiple high-rated demand segments driving increases in average rates and RevPARs in many of our markets. Operating fundamentals improved each month as the quarter progressed. While RevPAR declined in January and February, those declines were more than offset by 4.1% RevPAR growth in March, which was driven by a robust 5.6% increase in average rate. We were especially encouraged with March results, which represented a relatively clean calendar comparison for our portfolio. Despite the lingering government shutdown and highly publicized TSA wait times, we believe March trends are more indicative of the underlying demand strength in our business and have been pleased to see these trends continue in April. While demand strength and pricing power were broad based across our portfolio, our best performing demand segments were our highest rated segments, which allowed us to yield out a portion of lower rated business, in a reversal of the prevailing pricing trends we experienced for most of last year. In particular, the ongoing recovery in business transient travel is driving better midweek performance, as RevPAR growth increased 3% for the quarter and 10% in March in our negotiated segment. This helped drive double-digit RevPAR growth in a dozen of our markets in March, including urban-centric markets such as Baltimore, Charlotte, Cleveland, Miami, Pittsburgh, San Francisco, and Washington, D.C. As a reminder, we expected our first quarter to be the most challenging of the year given multiple headwinds faced in our portfolio, notably a difficult Super Bowl comparison in New Orleans where we own six hotels, and continued weakness in government demand, with Doge-related travel cuts not lapping year-over-year comparisons until the March time frame. In addition, disruption related to winter storm Fern and civil unrest in Minneapolis further reduced first quarter reported RevPAR growth. In total, these events created an approximately 140 basis point headwind to our first quarter RevPAR growth, most significantly in January and February. Our outlook for the remainder of the year has improved, driven by strengthening demand trends that have persisted into the second quarter. We are also approaching what is expected to be a robust summer of special events–driven demand. We expect April RevPAR to increase approximately 3.5%, and our second quarter revenue pace is currently trending approximately 4% ahead of the same time last year. Pace trends in June are particularly strong, supported by a favorable event calendar highlighted by our significant exposure to major demand catalysts, including the 2026 FIFA World Cup, where we have exposure to six U.S. host markets representing approximately one third of our total room count and 44 scheduled matches. In addition, we expect strong incremental demand from the U.S. 250th anniversary celebrations in Boston, Washington, D.C., and Baltimore, as well as several other major summer travel and event-driven demand drivers. As we have discussed on previous calls, government and government-related demand has been a significant headwind for our portfolio since the creation of Doge in the quarter of last year, and the lapping of these comparisons is expected to improve our year-over-year growth rates going forward. While first quarter government-related demand declined 12% year over year, this represented a meaningful improvement from the 20%+ declines we experienced through most of 2025. Encouragingly, March government revenue increased approximately 3%. Our outlook for this demand segment has improved, demonstrated by second quarter government pace currently trending up mid single digits. Government demand represents approximately 5% to 7% of our total guest room and revenue mix, and we believe this could serve as a potential modest tailwind to our year-over-year growth rate in the last three quarters of the year. Given our strong first quarter results and our improved outlook for the remainder of the year, we have increased the guidance ranges for our key operating and financial metrics, which were outlined in our earnings release yesterday. [CFO name] will provide more details on our updated guidance ranges later in the call, but we believe the revised ranges strike the appropriate balance of reflecting a more positive outlook while acknowledging that our most meaningful quarters are still ahead and macro and geopolitical uncertainty persists. While near-term performance trends are driving our improved outlook, longer-term lodging fundamentals suggest an improved demand environment has the potential to create an extended period of attractive top-line growth. More specifically, supply growth remains meaningfully below historical averages, and still elevated construction and financing costs create an impediment to a meaningful near-term reacceleration in construction starts. In addition, consumer prioritization of travel and experiences remains paramount, which has driven resilient leisure demand. And finally, improved industry demand has increasingly been driven by the ongoing recovery and acceleration of business travel, which uniquely benefits our urban-centric portfolio. We believe these dynamics create a favorable operating environment as we move through the balance of 2026 and beyond. From a capital allocation standpoint, in the first quarter, we successfully closed on the previously announced sale of the 122-room Hilton Garden Inn in Longview, Texas, a noncore asset owned in our joint venture with GIC. The hotel was sold for $12.3 million, representing a 6.8% capitalization rate based on trailing twelve-month net operating income after consideration of foregone near-term capital expenditures. In April, we entered into an agreement to sell our wholly owned Courtyard and Residence Inn Dallas Arlington South hotels for a combined sale price of $19 million. The two hotels total 199 guestrooms, and the transaction reflects a 5% capitalization rate based on trailing twelve-month NOI after factoring in near-term capital expenditures that we would otherwise have been required to fund. We expect the Arlington transaction to close in the third quarter, which will allow us to capture the demand generated from the FIFA matches in the market. These dispositions are consistent with our ongoing strategy to selectively recycle capital out of lower growth assets, reduce future capital requirements, and enhance the overall quality and growth profile of our portfolio. Proceeds from asset sales support our broader capital allocation priorities, including enhancing liquidity, reducing leverage, repurchasing shares, and maintaining the physical condition of our portfolio. During the first quarter, we remained active under our share repurchase program, repurchasing 1.4 million common shares for an aggregate purchase price of $6 million, or a weighted average price of approximately $4.17 per share. As of 03/31/2026, we had approximately $29 million of remaining capacity under the program. Since launching the program in 2025, we have repurchased approximately 5 million shares, representing roughly 4% of total shares outstanding, at an average price of $4.26 per share. We believe these repurchases represent an attractive use of capital and reflect our continued confidence in the intrinsic value of the portfolio and the long-term earnings power of the business. In summary, we are encouraged by the start to the year and remain optimistic about the improved outlook for our industry broadly and our company specifically. While the operating environment remains dynamic, the breadth of demand improvement we are seeing across the portfolio combined with favorable industry supply conditions reinforces our confidence in Summit Hotel Properties, Inc.’s ability to outperform as fundamentals strengthen. Our priorities are unchanged. We remain intensely focused on optimizing profitability at the property level, prudently allocating capital, and continuing to strengthen the balance sheet. We believe this disciplined approach, supported by our high-quality portfolio and efficient operating model, positions Summit Hotel Properties, Inc. to create meaningful long-term value for shareholders. With that, I will turn the call over to [CFO name] to discuss our financial results for the quarter in more detail. Unknown Speaker: Thanks, and good morning, everyone. First quarter pro forma RevPAR increased 0.2% year over year. Driven exclusively by growth in average daily rate. Strength in rate was a primary theme of the first quarter, as nearly all segments generated positive growth year over year. In particular, the retail and negotiated segments, our clearest indicators of higher-rated leisure and business transient demand, delivered first quarter RevPAR growth of 78% respectively, driven by strong rate performance. Furthermore, the retail and negotiated segments experienced sequential improvement across each month of the quarter, culminating with March RevPAR growth of 1,160%, respectively. Finally, as Jonathan mentioned, government-related demand within our qualified segment inflected positively during the first quarter, with March RevPAR increasing approximately 3%. Due to the relative strength of the company’s first quarter operating results, RevPAR index increased to 116% of fair share. Driven by these positive RevPAR trends and strong cost controls, first quarter operating results materialized above expectations outlined during our February earnings call. For the first quarter, adjusted EBITDA was $44.2 million and adjusted FFO was $25.5 million, or $0.21 per share. Several core markets delivered strong first quarter results, including continued strength in San Francisco and South Florida. In San Francisco, where the company owns three hotels, the market benefited from a strong citywide calendar and several high-impact demand events, including the JPMorgan Healthcare Conference in January, Super Bowl in February, and RSA in March. Our hotels performed exceptionally well during these peak periods, capitalizing on compression nights to drive strong top-line performance, resulting in RevPAR increasing 27% in the quarter. Looking ahead, we expect this momentum to continue in the second quarter, particularly June, supported by a strong convention and special events calendar, including several major technology conferences, Pride, and the start of the World Cup and related fan activities. In South Florida, our Miami and Fort Lauderdale hotels delivered a strong first quarter performance, with RevPAR growth exceeding 14% driven by a 9% increase in average daily rate. In Miami, operating results were supported by peak season demand and several high-impact January events, including the NHL Winter Classic and the College Football National Championship, and a more condensed spring break calendar due to the shift of the Easter holiday to the first weekend in April. Our South Florida portfolio continues to benefit from the highly successful repositioning of the Oceanside Fort Lauderdale Beach. The hotel generated first quarter revenue and EBITDA growth of 5,690%, respectively, as the renovated rooms product and expanded food and beverage amenities appeal to both tourists and locals alike. Group demand also continues to accelerate at the Oceanside, given the property’s location adjacent to the Fort Lauderdale Aquatic and Diving Center, which is also home to the International Swimming Hall of Fame. Looking forward, we expect continued strong demand in the second quarter for South Florida. Our AC and Element Hotels, located across from Brickell City Center, are ideally situated for visitors attending the World Cup fan festival at Bayfront Park in Downtown Miami during June and July. In Fort Lauderdale, the Oceanside is pacing 12% ahead of second quarter 2025 as the property continues to ramp post-renovation. Non-rooms revenue increased 10% year over year in the first quarter across the company’s portfolio, reflecting continued progress in our efforts to capture a greater share of the customer’s discretionary spend. Food and beverage revenue was again a meaningful contributor, supported by the reconcepted restaurant and bar offerings at the Oceanside Fort Lauderdale Beach, enhanced breakfast programming at select hotels, and continued focus on driving higher beverage and outlet sales. In particular, food and beverage revenues at the Oceanside Fort Lauderdale Beach experienced a fourfold increase year over year and drove the majority of the company’s overall increase in food and beverage sales. We also realized healthy growth in other ancillary categories, including marketplace sales, parking income, and resort amenity fees. These revenue streams remain an important component of our broader operating strategy, and we believe there is additional opportunity to build on this momentum throughout 2026. Pro forma operating expenses increased 3.6% year over year in the first quarter, reflecting continued discipline across the portfolio despite ongoing cost pressures. Increases in the quarter were primarily driven by merit-based wage adjustments as well as payroll taxes and employee benefits, which is a result of our strategic shift to internal staffing. Stability in the labor pool is best evidenced by the continued reduction in contract labor, for which nominal costs declined 6% versus first quarter 2025. Contract labor now represents 9% of our total labor pool, which is approaching pre-pandemic levels. Furthermore, employee turnover is also in line with pre-pandemic levels, declining 1,300 basis points from the prior year period. For the full year 2026, we expect nominal expense growth of approximately 3%. From a capital expenditure perspective, in the first quarter, we invested $12 billion across our portfolio on a consolidated basis and $9 million on a pro rata basis. Ongoing and recently completed renovations include the Dallas Downtown Hampton Inn and Suites, Grapevine TownePlace Suites, the Scottsdale Courtyard, Tucson Homewood Suites, and our Mesa Hyatt Place. For the full year 2026, the company expects pro rata capital expenditures to range from $55 million to $65 million, the majority of which will be incurred in the second half of the year. Turning to the balance sheet, during the first quarter, we fully repaid our $288 million 1.5% convertible senior notes that matured in mid-February utilizing our $275 million delayed draw term loan and corporate revolver. Pro forma for this refinancing, we have no debt maturities until 2028. When accounting for our swap portfolio, approximately 50% of our pro rata share of debt is fixed. Including the company’s Series E, Series F, and Series Z preferred equity within our capital structure, we are over 60% fixed on a pro rata basis. With ample liquidity and an average length of maturity of nearly three and a half years, we believe the company is well positioned to navigate any potential near-term volatility while also pursuing value creation opportunities. On 04/23/2026, our board of directors declared a quarterly common dividend of $0.08 per share, representing a dividend yield of approximately 6.4% based on the annualized dividend of $0.32 per share. The current dividend continues to represent a modest payout ratio relative to our trailing twelve-month AFFO. The company continues to prioritize striking an appropriate balance between returning capital to shareholders, investing in our portfolio, reducing corporate leverage, and maintaining liquidity for future growth opportunities. Included in our earnings release last evening, we updated full-year guidance for key 2026 operating metrics, as well as certain nonoperational assumptions. Our outlook is based on the 94 lodging assets owned as of 03/31/2026, including the Courtyard and Residence Inn, Dallas Arlington South, which are currently under contract for sale and expected to close in the third quarter. Our current range includes $0.5 million of hotel EBITDA for the remainder of the year that would be foregone upon closing of the sale. For the full year, we have increased our RevPAR growth outlook to 0.5% to 3%, which translates to adjusted EBITDA of $170 million to $181 million, and adjusted FFO of $0.75 to $0.85 per share. Based on our RevPAR growth outlook of 0.5% to 3%, and nominal expense growth of approximately 3%, we expect full-year 2026 hotel EBITDA margins to range from flat to down 75 basis points, which includes approximately 25 basis points of headwinds from higher property taxes. We expect pro rata interest expense, excluding the amortization of deferred financing costs, to be $58 million to $62 million, and preferred distributions, including the Series A, Series F, and Series Z securities, to be $18.5 million. Our outlook does not assume any additional acquisitions, dispositions, share repurchases, or capital markets activity for the balance of the year. Finally, the GIC joint venture results in net fee income payable to Summit Hotel Properties, Inc. covering approximately 15% of annual pro rata cash corporate G&A expense, excluding any promote distributions Summit Hotel Properties, Inc. may earn during the year. We will now open the call for questions. Operator: Thank you. And as a reminder, to ask a question, please press 11. The first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Your line is now open. Austin Wurschmidt: John, you had mentioned May is pacing up, I think, 4%. Based on what you have seen in March and April, how much degradation have you seen in pace this far out as you get closer to realization? And then can you compare that to what you saw last year where, if I recall, you lost a little bit of pace as you got closer through the month versus what you actually realized? Thanks. Jonathan P. Stanner: Good morning, Austin. First, to clarify what we said in the prepared remarks, our second quarter pace is trending up about 4%. We expect April to finish up around 3.5%. Looking at the monthly cadence for the second quarter, May is at a lower pace than we are experiencing in both April and June, and June pace is way up given our expectations for the World Cup. Over the last 30 to 60 days, we have seen an acceleration in in-the-month-for-the-month, and that is a reversal from the trends we saw last year. I would expect our June pace, which is trending up high teens year over year at this point, to normalize as we get into the month. We are not yet in the traditional booking window for June, but we do have a fair amount on the books specifically related to the World Cup, so we would expect that to normalize. The broader takeaway is that what we have seen in the month for the month, and even within the last couple of weeks of the month, has been a meaningful acceleration from our expectations. You saw that in March—most of our Q1 outperformance was related to March—and we have seen those trends continue through April. Austin Wurschmidt: That is helpful. As you think about that pacing and what could be realized in the second quarter—certainly tracking above the high end of the full-year guidance range—how should we think about cadence and any implied deceleration in the back half? And given the firming up in midweek higher-rated business, how does that compare to what you underwrote looking into the back half? Thanks. Jonathan P. Stanner: We clearly outperformed our expectations for the first quarter; we finished modestly positive but closer to flat. Our expectation was always that the second and third quarters would be the highest growth rates of the year, and that outlook has not changed. We remain constructive on the second and third quarters. Some of that is driven by strength in World Cup markets, but our outlook is definitely more constructive today for the balance of the year than it was when we reported sixty days ago. Operator: Thank you. The next question will come from Michael Bellisario with Baird. Your line is open. Michael Bellisario: Hi, everyone. Good morning. Two parts here. In terms of the pickup in demand you have seen: first, how would you separate BT versus leisure trends? And second, any quantifiable share gains you might have seen from rebookings from Mexico during the peak spring break travel period? Thanks. Jonathan P. Stanner: The biggest takeaway from the quarter is that strength was fairly broad based, and what you saw was rate-driven RevPAR growth in the quarter and more specifically in March. That reflects our ability to either yield out lower-rated business or drive incremental occupancy in higher-rated channels—predominantly our premium-rated retail channels and our negotiated channel. We saw our best growth rates midweek in the negotiated segment. First quarter RevPAR in the negotiated segment was up 8% and was up double that in March. Our urban markets were up 6% in March, so there is no question we saw strong midweek BT-driven demand throughout the quarter, particularly in March. Leisure was also good. In South Florida and Scottsdale, we outperformed our expectations going into the quarter. There was likely some benefit from the disruption in Mexico in March, predominantly in our South Florida and Scottsdale markets, and it helped us in March. But many of the trends we saw in March have continued into April, and we do not expect that to create any difficult comparison or distortion in demand patterns going forward. Michael Bellisario: One follow-up. 1Q was more rate than occupancy, with some impacts affecting demand. How should we think about 2Q and beyond in terms of the mix between rate growth and occupancy growth? Jonathan P. Stanner: We expect the vast majority of our RevPAR growth going forward to be rate driven. The first quarter trends have continued through April, and our expectation is that the majority, if not all, of our RevPAR growth in April will be rate driven. When we gave initial guidance, we expected roughly a 60/40 rate versus occupancy split. That has thankfully shifted to be predominantly rate-driven growth for the remainder of the year, which should have better flow-through to the bottom line. Operator: The next question will come from Chris Woronka with Deutsche Bank. Your line is open. Chris Woronka: Good morning. Thanks for taking the questions. On direct bookings, where do those stand for your portfolio? And do you think new and expanded branded credit cards are helping drive direct bookings on the leisure side? Then I have a follow-up. Thanks. Jonathan P. Stanner: We have continued to grow our share of direct bookings—approximately plus or minus 70% for the full portfolio. That reflects our high-quality hotels in good locations affiliated with strong brand distribution channels. We saw a step-up, particularly in brand.com channels, in the first quarter, continuing trends we have seen coming out of the pandemic, with last year being a mild exception when there was greater reliance on some OTA channels. Those brand distribution platforms and loyalty programs are powerful, and we are driving the majority of our business through those channels. Chris Woronka: Along those same lines, I know you do not have many resorts with Hyatt, but Hyatt recently went through another points adjustment. Is that having any impact on you? I think it was meant to be more owner friendly. And on the Hyatt breakfast program that has gone through iterations—any update on whether you are getting bottom-line help from those changes? Jonathan P. Stanner: We do not have a ton of Hyatt properties that are high redemption generally—Orlando being an exception where we get a fair amount of redemption, and Orlando has been a very strong market, particularly near the new Universal development. Generally, brand redemption programs have been trending in a more owner-friendly way over the last several quarters, and we hope that continues. Specifically related to breakfast, we were part of some of the pilot on the charge-to-breakfast at Hyatt Place. Overall, it was a positive experience for us. It is property-by-property and market specific, but generally it has been modestly positive to the bottom line. Operator: Thank you. The next question will come from Logan Shane Epstein with Wolfe Research. Your line is open. Logan Shane Epstein: Maybe diving into the government segment, you noted sequential improvement into March with it inflecting positive. What drove that—any specific markets, or was it broad based? And a follow-up: can you quantify the potential impact given it was down 20% for a number of quarters in 2025, and what is embedded for the rest of the year? Jonathan P. Stanner: We have talked for a while about how our comps would ease as we got into March and April and lapped the Doge comparison from the first quarter of last year, and that played out. Government revenue was down about 12% year over year in Q1, after trending down 20% to 25% for most of last year, with the exception of October when we saw incremental reductions in demand related to the government shutdown. In March, government-related revenue was up 3%. For the second quarter, government pace is trending up mid single digits year over year. It is a relatively small demand segment, so these are smaller numbers, but this is modestly more positive than we expected coming into the year. In terms of markets, we saw some lift in places like Tucson and had a really strong quarter in Washington, D.C., some of which was government-related or adjacent business. It is fairly broad based, and our expectations are modestly more constructive than when we started the year. Logan Shane Epstein: A follow-up on a different note. Given we now have about three quarters of operations at the Oneira expansion, how is that performing relative to initial underwriting? Jonathan P. Stanner: We have done really well there and had a nice beat to our internal budgets and expectations in the first quarter. It is a wonderful asset that benefits from growth in Austin and tremendous growth in Fredericksburg. There have been several high-end products announced in that area—a Waldorf Astoria and an Aman—so submarket growth has been terrific, which has helped performance. We have a unique, compelling offering, and the original thesis and expansion thesis have both played out. First quarter results were meaningfully above expectations. Operator: I am showing no further questions at this time. I will now turn the call back over to Jonathan for closing remarks. Jonathan P. Stanner: Thank you all for joining us today. We look forward to seeing many of you on the conference circuit over the next several weeks. Thank you again, and we hope you have a nice weekend. Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, and thank you for holding. Welcome to Aon plc's First Quarter 2026 Conference Call. [Operator Instructions] I would also like to remind all parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. For information concerning these risk factors, please refer to our earnings release for this quarter and to our most recent quarterly or annual SEC filings, all of which are available on our website. Now it is my pleasure to turn the call over to Greg Case, President and CEO of Aon plc. Please go ahead. Gregory Case: Thank you, and good morning, and I appreciate you attending our first quarter earnings call. I'm joined today by Edmund Reese, our CFO. The presentation, which Edmund will reference during his remarks is available on our website. We started 2026, the final year of our 3x3 Plan, with strong momentum. Our first quarter results reflect continued strong performance, consistent execution and progress against the strategic priorities we defined more than 2 years ago. We're operating with discipline, investing deliberately and delivering differentiated value for clients, reinforcing confidence in our ability to produce sustained organic growth, margin expansion and long-term value creation. Today, I will focus on three areas. First, I will describe the external landscape and the forces shaping client demand. Second, I will highlight how our execution of the 3x3 Plan is translating into performance, including how advanced analytics and AI are increasing value and opportunity. Finally, I will highlight our results and share some perspectives on our outlook and how we see the year unfolding as we continue to build momentum. Let's start with the external landscape. Now more than ever, our clients are operating in an environment defined by volatility, complexity and rising stakes. Geopolitical uncertainty, economic pressures and cyber risk are converging with rapid technological change. These dynamics are increasing interconnection across risk, capital and workforce planning. With the ongoing conflict in the Middle East, we're working closely with clients, both in region and globally to help them build resilience and continue to operate and grow in a highly uncertain market. In this environment, the value of making better decisions has never been more evident or urgent. Capital is more selective. Boards and regulators are demanding stronger governance, transparency and resilience, and management teams are focused on protecting against downside risk while enabling growth, improving capital efficiency and supporting workforce sustainability. As a result, clients demand outcome-based advice in addition to transactional solutions, and they're looking for partners who can help them understand the risk and people challenges, design bespoke programs and execute consistently across geographies. This environment increasingly rewards firms that can integrate data, analytics and deep expertise to help clients make decisions with clarity and confidence. These trends align directly with Aon's strategic investments, client mix and innovative capabilities. On the topic of strategic execution and the 3x3 Plan. Execution against our strategy remains strong and disciplined. The 3x3 Plan continues to sharpen focus, align investment and drive accountability across the firm. It accelerates progress behind Aon United, integrating capabilities across Risk Capital and Human Capital and scaling them through Aon Business Services, or ABS. Through ABS, technology and advanced analytics are embedded enablers of our strategy, combining proprietary data, advanced analytics and expertise to design, place and govern bespoke risk and capital solutions. This combination creates a strong competitive advantage that technology alone cannot replicate. We established ABS nearly a decade ago and deliberately stepped up our investment beginning in 2024 to embed AI and advanced analytics across the firm. These investments are delivering results, materially improving productivity and execution for clients. By year-end, we expect to have invested approximately $1.3 billion in talent and technology, enhancing productivity and strengthening our ability to better diagnose risk, design integrated solutions, access capital efficiently and execute consistently for our clients. There are several proof points and performance milestones worth highlighting. First, on client segmentation and revenue quality. We compete on client outcomes, resilience, capital efficiency and workforce effectiveness, not transactions. The vast majority of our business serves global, large and middle-market clients with complex risk, capital and workforce needs. In these segments, value is created through expertise, proprietary insight and seamless execution. Meanwhile, less than 2% of our revenue is derived from SME and Personal Lines segments. This client mix translates into strong revenue quality, with the majority of our revenues recurring and embedded in ongoing client needs. Our Health and Wealth businesses together account for approximately 34% of firm revenue. Within those businesses, roughly 80% is highly recurring and anchored in regulatory and mission-critical activities, including annual valuations, pension administration and asset-linked revenue in wealth and annual benefits, broking and advisory and health. Project-based consulting, where our advice is differentiated by proprietary data and technology is less than 10% of firm-wide revenues. Our continued investment to enhance these capabilities, including in our Radford McLagan Compensation Database, instrumental in supporting workforce transformation, reinforces how deep expertise and proprietary data translate into higher value outcomes for clients. Second, on expanding the addressable market. We previously highlighted insured risk as a percent of GDP declining over the last 3 decades. Embedding AI into advanced analytics and modeling are making insurance more relevant by accessing new capital. This narrows the gap between economic loss and insured loss and increases the importance of firms that can design, place and govern complex programs. A clear example of this dynamic is digital infrastructure, where AI computing is driving unprecedented global investment in data centers. These assets introduce complex construction, operational, catastrophe and cyber risk that exceed traditional insurance solutions. Our data center life cycle insurance program, which we recently increased capacity by another $1 billion to $3.5 billion, allows our firm to lead as a market maker, bringing together the sort of coverage, large-scale capacity and capital solutions across the full life cycle of these assets. This is a growing source of demand directly linked to AI adoption, where our integration, data and expertise create a meaningful advantage, positioning Aon as a strategic partner of the clients, leading to opportunities to win new business and deepen relationships. Here, again, our investment and progress in AI-embedded analytics is allowing us to expand beyond the $4.6 trillion of traditional reinsurance capital to access the $250 trillion capital pool that includes private equity, sovereign wealth and pension funds. Third, on innovation embedded within our core brokerage model, Aon Broker Copilot illustrates how, through large language models and predictive capabilities, we can more efficiently embed advanced analytics directly into revenue-generating workflows and transform the manual placement process. The platform draws on decades of proprietary quoting, pricing and trading data to provide real-time insights to brokers as they negotiate complex placements. Further, we're extending these capabilities across the value chain. Aon Claims Copilot improves claims advocacy by consolidating data across geographies and lines of business, enabling better preparation, monitoring and negotiation. As a result of our advocacy over the last decade, we've been able to overturn and partially recover nearly $10 billion of financial value for claims that were initially denied. Claims Copilot strengthens our advocacy efforts and leads to even better outcomes for clients. This represents outcome-driven application of data analytics and expertise, not automation for its own sake. In addition to supporting revenue growth, our investments are improving how the firm operates. For example, we're seeing substantial productivity gains across invoicing, certificates of insurance and policy administration. And these gains are increasingly measurable. For example, a 50% reduction in cycle time from 22 to 11 days for invoicing and 70% reduction in invoicing work, a 95% reduction in handle time and certificates of insurance from hours to less than 5 minutes and a 95% reduction in time in policy checks from 48 hours to 30 minutes. As a result of these improvements, colleague capacity is being redeployed toward higher-value advisory and client-facing activities, fully reflecting our belief that winners in the application of AI will lead with a world-class people strategy to grow today and into the future. Critically, AI-driven productivity creates operating leverage. By lowering unit costs and reinvesting those gains into differentiation and growth, we're expanding margins while increasing the value we deliver to clients. Consistent with our long-term philosophy, productivity gains are intentionally reinvested to strengthen differentiation, accelerate innovation and deepen client relationships while still supporting margin expansion. This flywheel of higher value growth, operating leverage and disciplined reinvestment underpins our confidence in durable value creation for shareholders. Turning briefly to results. Our first quarter performance reflects strong execution across the firm. We delivered 5% organic revenue growth, continued to expand adjusted operating margin, realized strong growth in adjusted earnings per share and generated significant free cash flow. In particular, Q1 highlights the fourth consecutive quarter at or above 6% organic growth in Commercial Risk, reinforcing the impact of deliberate investments we've made and the value delivered through our innovative solutions. Additionally, our balance sheet remains strong and flexible. As Edmund will discuss in more detail, we continue to execute a balanced capital allocation strategy in the first quarter with programmatic M&A and substantial capital return to shareholders through stepped-up share repurchases and our dividend. Finally, we recently announced a double-digit dividend increase for the sixth consecutive year. Looking ahead, we are reaffirming our guidance for 2026 and remain confident in our long-term outlook. The external environment continues to reinforce demand for our solutions. Our strategic priorities are clear and our execution remains constant. We believe the net effect of technology adoption is an expansion of our addressable market. Insurance and risk management becomes more relevant as analytics improve decision-making, alternative and private capital expand available capacity and clients seek integrated outcome-based solutions. Because Aon is uniquely positioned to source capital, integrate capabilities and govern in complex risk and human capital issues for clients across the globe, we expect to grow faster than the market and increase share over time. In closing, Aon is well positioned strategically, operationally and financially. We're delivering differentiated value for clients in an increasingly complex world and translating that value into strong performance and long-term shareholder returns. To our 60,000 colleagues around the world, thank you. Thank you for your continued commitment to our clients, each other and our Aon United strategy. Now I'm pleased to turn the call over to Edmund for his comments and perspective. Edmund? Edmund Reese: Thank you, Greg, and good morning, everyone. Before getting into the details of our first quarter results, I want to clearly anchor today's discussion on the fundamentals that define our performance and momentum as we advance through the final year of the 3x3 Plan. Over the past several quarters, we've been very intentional. First, establishing strategic clarity through our communication, then demonstrating disciplined execution, reflecting in consistently strong financial performance. As we move through 2026, our message remains consistent. The fundamentals of our business are strong, resilient and evident in our results. First, we have high confidence in the structural advantages of our business, exceptionally deep client and industry relationships, proprietary data and analytics and integrated service and global capabilities, all of which are difficult to replicate and, importantly, position us to deliver increasing value over time, particularly as AI accelerates the shift from transaction-based models towards insight-led decision-making. These advantages support sustained economics tied to value delivered, high retention and recurring revenue streams, existing and new, and they underpin our ability to sustain mid-single-digit or greater organic growth and generate returns through the cycle. Second, our confidence is substantiated by our consistent execution. Quarter after quarter, we continue to deliver sustainable organic revenue growth, expand margins through operating leverage and convert earnings into strong free cash flow. The choices we've made, investing in revenue-generating talent, scaling Aon Business Services, expanding Aon client leadership and building a leading middle-market platform, are collectively working together to generate higher-quality growth that is capital-light, margin accretive and resilient across market conditions. Third, our strong execution positions us with significant financial capacity and flexibility. During the quarter, we recognized the unique market conditions and opportunistically deployed $500 million to repurchase shares at prices we believe represent a compelling discount to intrinsic value. With consistent free cash flow generation, a disciplined balance sheet and leverage within our target range, we also remain well positioned to supplement organic growth with high return inorganic investments, ensuring that capital allocation continues to enhance long-term shareholder value. And finally, when you step back and collectively connect these attributes, durable competitive advantages, consistent execution, differentiated performance and disciplined capital allocation with significant financial flexibility, the implication is clear. These are the characteristics that, over time, result in value creation. Our focus remains on the inputs we control: strategy, including growth investment in AI-embedded tools, execution and disciplined capital allocation. As we deliver, we look forward to the outputs, including market recognition of the quality and durability of our financial model. With that context, let's turn to our first quarter results. On Slide 5, you see the first quarter results. Organic revenue growth was 5% for the quarter and total revenue increased 6% year-over-year to $5 billion. Adjusted operating margin expanded by 70 basis points and reached 39.1%. Adjusted EPS was up 14% to $6.48. And finally, we generated $363 million in free cash flow, up 332%. Let's get into the details of these results, starting with organic revenue growth on Slide 6. Organic revenue growth was 5% in the quarter, in line with our mid-single-digit or better guidance. This performance reflects the impact of our strategic investments in hiring across priority growth areas, combined with the increasing contribution from our analytical and advisory capabilities. In Commercial Risk, organic revenue growth of 7% marked the fourth consecutive quarter of growth at 6% or higher. Results reflected meaningful contributions from both North America, where growth was double digit, and EMEA as well as strong performance in our core P&C business. M&A closed deal activity accelerated during the quarter, and M&A services provided an incremental lift to organic revenue growth. In addition, our MGA businesses across both large and middle-market clients contributed positively, supported by continued client demand for specialized underwriting solutions. Finally, construction grew at a double-digit rate and remains a contributor to growth as our data center revenue pipeline is on pace to be 3x higher than last year, reinforcing our confidence in sustained mid-single-digit or greater growth in 2026. In Reinsurance, 4% organic revenue growth was driven by growth in treaty placements and double-digit growth in facultative placements. Treaty growth reflected 10% to 15% rate pressure that was more than offset by continued strong new business activity, including the addition of new logos. Insurance-linked securities were a smaller contributor in the quarter but continued to grow at a double-digit rate with outstanding volumes reaching $61 billion. Looking ahead to the second quarter, our data points to further rate pressure at April 1 renewals with rates down 15% to 20% in both the U.S. and Japan, partially offset by roughly 10% higher demand. Importantly, we continue to expect full year organic revenue growth in line with our mid-single-digit or greater growth objective, supported by a strong second half, driven by continued growth in international facultative placements and growing demand in our Strategy and Technology Group Solutions. Health Solutions grew 4% in the quarter. Our core Health and Benefits business, representing approximately 75% of the Health revenue delivered strong mid-single-digit growth across both EMEA and APAC, partially offset by slower discretionary spend in Talent Solutions, reflecting ongoing pressure that extended through the first quarter of 2026. Looking ahead, the demand for our analytics and advisory capabilities is increasing as employers navigate rising health care costs, manage transitioning workforces and focus on delivering better outcomes for their employees. With that demand building and the core business performing well, we continue to expect full year organic growth in Health to be within our mid-single-digit or greater objective. And finally, Wealth generated 1% growth driven by regulatory and valuation-related work in EMEA and market performance impact on NFP asset-based revenue, partially offset by softer advisory demand in the U.S. We expect mid-single-digit growth in Wealth for Q2 as the pension risk transfer market in the U.K. remains strong with Aon as the market leader. Turning to the key components of our Q1 organic revenue growth on Slide 7. Aon has a consistent track record of generating new business that contributes 9 to 11 points to organic revenue growth, and that continued in Q1. In the quarter, new business contributed 9 points to organic revenue growth, supported by both new client acquisitions and expanding mandates with existing clients. Our investment in revenue-generating talent in high-growth areas like construction and energy continue to deliver measurable impact. Our 2024 and 2025 cohorts contributed 75 basis points to Q1 organic revenue growth, and we expect momentum to build as these cohorts season. We've noted in the past that our data analytics and capabilities make us a destination of choice. And despite ongoing competitive pressures for talent, we continue to expect to expand our revenue-generating population by 4% to 8% in 2026. Q1 '26 retention remains strong in the mid-90s, improving 20 basis points over last year, led by Commercial Risk and Reinsurance as deeper Enterprise Client Group engagement and ABS-driven insights enhance client value and relationship depth. Net new business contributed 5 points to organic revenue growth in the quarter. Net market impact, which captures the impact of rate and exposure, contributed 1 point to organic revenue growth and was delivered in line with estimates despite a softer pricing environment in P&C and Reinsurance. Rate-driven pressure in Reinsurance following 1/1 renewals was offset with higher limit and expanded coverage in Commercial Risk, further reinforcing that growth is primarily driven by business investment and client demand and remains largely uncorrelated with pricing cycles. And one final point on revenue. First quarter fiduciary investment income was $55 million, down 18% from the prior year, as higher average balances were more than offset by the lower interest rates. On Slide 8. Q1 adjusted operating income was up 8% to $2 billion, and adjusted operating margins expanded 70 basis points to 39.1%. Through ABS, we are structurally lowering our cost base by reducing technology costs, standardizing and automating processes, including the integration of NFP and embedding AI into our development and operational workflows. These actions are not only driving margin expansion but also creating durable capacity for investments that support sustainable top line growth. Restructuring savings were $25 million in the quarter, contributing 50 basis points to adjusted operating margin. We remain on track to deliver $100 million of savings in 2026, advancing toward our goal of $450 million in total savings by 2027, with 2026 marking the final year of our restructuring investment. Moving to interest, other income and taxes on Slide 9. Interest income was $12 million in the first quarter and up $7 million over last year, driven by interest earned on proceeds from the sale of NFP Wealth. Interest expense came in at $179 million, $26 million lower than last year, primarily due to lower average debt balances. We expect Q2 '26 interest expense to be approximately $180 million. Other expense was $15 million lower than last year, driven by lower noncash pension expense and the remeasurement of balance sheet items. We estimate Q2 '26 other expense to range between $15 million and $20 million. Finally, the Q1 effective tax rate was 20.3%, 60 basis points lower than Q1 '25, reflecting the geographic mix of income growth and the favorable impact of discrete items. Our full year tax outlook remains unchanged at 19.5% to 20.5%. Turning now to free cash flow and capital allocation on Slide 10. We generated $363 million of free cash flow in the first quarter, reflecting strong operating income growth. This is a strong start to the year, and we continue to expect double-digit free cash flow growth in 2026. Turning to capital on the right-hand side of the slide. Our strong free cash flow growth enabled us to continue to execute our disciplined capital allocation model, balancing investment for growth with capital return to shareholders. As Greg mentioned, in April, we increased our quarterly dividend by 10% to $0.82 per share, marking the sixth consecutive year of double-digit dividend increases and reflecting the cash-generating strength and durability of our business and financial model. We also remained active in M&A and allocated $349 million toward high-growth tuck-in acquisitions in middle market that align with our strategic priorities and return thresholds. The largest use of capital in the quarter was shareholder return. In total, we returned $662 million to shareholders, including $500 million in share repurchases, a significant step-up from the average $250 million per quarter over the prior 8 quarters. As I noted earlier, we were proactive and leaned in the market conditions, repurchasing shares at prices well below the firm's intrinsic value. And that conviction is grounded in the fundamentals of the business, driving strong performance today and also informed by the investments we are making to drive future growth in talent, AI-embedded analytics and scalable platforms, which we believe increase the long-term earnings power and terminal value of the firm. Taken together, these actions reflect the consistent application of our balanced capital allocation model, maintaining our leverage objective, consistently growing the dividend and executing our disciplined approach to high-return M&A and returning excess capital to shareholders, ensuring capital allocation continues to enhance long-term shareholder value. I'll conclude my prepared remarks on Slide 11 with a few thoughts on our financial objectives and 2026 guidance. The first quarter 2026 performance reflects a start to the year that is right in line with our expectations and reinforces the strategic choices we have made to drive sustainable growth. Accordingly, we are reaffirming our 2026 full year guidance for mid-single-digit or greater organic revenue growth, supported by continued new business wins, the compounding contributions from our revenue-generating hires and accretive growth in middle market. We delivered 70 basis points of margin expansion in Q1, and we are seeing the benefits of efficiency gains from our scalable ABS platform and continued progress on our restructuring objectives. As a result, we are reaffirming our expectations for 70 to 80 basis points of margin expansion for the full year. The combination of organic growth and margin expansion supports our outlook for strong earnings growth in 2026, and with high conversion of those earnings into cash, positions us to deliver double-digit free cash flow growth for the year. Our strong capital position affords us the financial flexibility to actively deploy capital across multiple avenues, supplementing organic growth with strategic M&A while also executing opportunistic share repurchases. We have substantial financial capacity to pursue our high-quality M&A pipeline, and we remain firmly on track to deliver at least $1 billion in share repurchases for the year. As we move to Q&A, I want to emphasize that the performance you are seeing is the result of deliberate decisions. Our organic investments as part of the 3x3 Plan, $1.3 billion in talent and the AI-embedded capabilities that enable that talent to bring faster, deeper insight to clients as well as our inorganic actions are all intentionally aligned to deliver consistent earnings and free cash flow growth. We are already realizing productivity improvements today, and we are reinvesting those gains back into capabilities that both expand what we can deliver for clients and how efficiently we deliver it. In a world where technology increasingly enables and amplifies differentiated insight, advice and outcomes, this reinvestment cycle is critical. When executed well, it expands the addressable market by making risk transfer more relevant and increasing insured risk as a percentage of GDP, while also unlocking incremental AI-enabled opportunities to gain share with existing and prospective clients. Our investment leadership here strengthens our long-term growth profile, reinforces our conviction in the firm's growing terminal value and supports long-term value creation for shareholders. So with that, let's open up the line for questions. Kerry, back to you. Operator: [Operator Instructions] And our first question will come from Elyse Greenspan with Wells Fargo. Elyse Greenspan: My first question, I was hoping if you could just provide a little bit more color on just the contributions from data centers to organic growth in the quarter. I know Edmund said, I think it was 3x the level this year than last year. But hoping just to size it a little bit to get a sense of the contribution to organic in Q1 and expectations for the next few quarters of the year. Edmund Reese: Elyse, thanks for joining. Great question. I will hit data center in particular, but the important point in this question is our Commercial Risk business and how broad-based the growth was. Data center, just real pointedly, was a part of the double-digit construction in our business. But again, the growth in Commercial Risk was broad-based. So I just have to highlight that in a lower rate environment, Commercial Risk has been 6% or better for the last 4 quarters. And we're not surprised with the strength in Commercial Risk because the results reflect what I just said in the script there, our intentional strategic decisions. So it was broad-based with strength in the U.S. double digit, with EMEA achieving strong growth in the core P&C business. New business itself in Commercial Risk was over 12 points of contribution. That's very much supported by the priority growth hires in construction, where data center shows up as a component of that. Retention was 50 basis points higher in Commercial Risk for the quarter. That's our analyzers helping with RFPs. We have a whole suite of them now rolled out in the U.S. and EMEA. And again, the net market contribution in Commercial Risk was still positive despite pricing pressure in property. And I'll also emphasize just again, to your point, the priority growth areas. Double-digit growth in construction, that's wins and pipeline in data centers. So we had wins that were higher this year and a pipeline that is giving us confidence in the outlook for the year, but it wasn't the key driver of growth. I also mentioned M&A in that. Again, the growth was strong there as well, but we still would have been at these fourth consecutive quarters of 6% growth with or without that, just again, emphasizing how broad-based the growth was. And I'll just point out one other item, Elyse, that the synergies that we are getting from NFP, particularly as we utilize our facilities like Aon Client Treaty in London, is just another contributor to the growth here. So we're going to continue to focus and invest in these drivers of growth, our talent and our technology. We believe those investments, including in construction and data center hires, hires who are focused on that, those are the things that will sustain new business growth and continue the strong retention that we have. Gregory Case: And I think really, Elyse, what Edmund, I think summarized there very, very well is the broad-based piece. And we remain incredibly excited about the data centers. But it's really very much we're at the beginning of the beginning with tremendous promise ahead, and we're very well positioned. Elyse Greenspan: And then my follow-up question is on capital. I recognize you guys leaned into a buybacks in the Q1, but you left the target for the year at $1 billion plus. You obviously could have raised it. Is it just -- are you waiting to see how the M&A pipeline develops? Is it a function of what happens to your stock price? Obviously, there's been more volatility, right, within the brokers subsequent to the end of the Q1. So just trying to understand the desire to lean into buyback and also continue to pursue your M&A strategy. Edmund Reese: Yes. Another important topic, Elyse, so thank you for raising it again. And even on this one, I have to step back as well because I have to begin with just reiterating how pleased we are with the free cash flow generation in the quarter and the continued execution of the capital allocation model, right? I mentioned in the script that we're right in line with our leverage objective, actually a little bit better in this quarter. I think we came out at 2.7. Our objective is at least 2.9 there. We announced a double-digit increase in the dividend. We're investing in middle market. And as you just mentioned, we're taking advantage of the market opportunity as well and returning capital to shareholders. So the question just really has me come back and anchor in our capital allocation model, which we're executing with discipline here. As we go through '26, I mean, you hit on a few things there. We are going to continue to look at the pipeline for M&A. I mentioned earlier that we have strong criteria and thresholds that have to be met strategically, financially. You know that we look at M&A that can be above 10% revenue after owning it for a year, that have IRRs that are at least 20% and allow us to continue to have our market-leading ROIC in it. That's what we evaluate, and there continue to be opportunities in middle market and select international markets like Japan and EMEA and even LatAm that we are looking at. So we have the flexibility with our strong balance sheet to pursue those M&A. If they don't meet the criteria, then we won't have a lazy balance sheet. I continue to use that terminology, and we'll return the excess capital to shareholders. So for now, I think it is prudent for us to stick with our at least $1 billion in the year. Obviously, $500 million in the first quarter is a great start that gives us confidence in that number, and we'll see how the year plays out. Operator: And our next question will come from Andrew Andersen with Jefferies. Andrew Andersen: On expanding mandates versus truly new logos, can you maybe just talk about what the mix was this quarter and how that has been trending versus last year? I would think expanding mandates is better for margins near term, but perhaps that's not the case, and would be particularly interested in CRS. Edmund Reese: Yes. This is a key, key topic, new business growth. I mentioned in the script there, 9 to 11 points, as we've shown in the Investor Day and continue to produce, is what the objective is. So another quarter of 9 points. And it's a great question. If you look back over '25 or even '24, I mentioned during Investor Day that it's been split about half and half between new logos and expanding with existing clients. And you see some movement quarter-over-quarter in the different solution lines, but it's about equal. And then Commercial Risk, in particular, on your question, 12 points of contribution in the quarter from Commercial Risk. That's a strong item. That was both, again, an equal mix between the new logos and expanding with our existing clients there in the quarter. So it's typically going to be balanced across each, and we're looking to pursue each as we deploy Enterprise Client Group, right? We have a whole focus on this, and Greg can speak up on the Enterprise Client Group, really expanding with our existing clients, increasing the relationship with the senior executives, the HR leads, the CFOs of the organization. That allows us to deepen the relationships and retain those clients. So we're seeing that in both. New logos, I called out in the script also, was a strong driver for Reinsurance as it helped us offset some of the rate pressure there as well. So I think a strong quarter from that standpoint. Andrew Andersen: And there's been some broader industry discussion around broker commissions and fee levels. How are you thinking about this dynamic in the context of the value that you're delivering? And where do you see these trending? Gregory Case: Let me say, Andrew, just step back and think about kind of what's going on in the market overall, we see real opportunity. When you think about sort of how this plays into AI and all that we might talk about further on this call potentially as questions come up, but real opportunity. By the way, this is opportunity based on client need. It is interesting how the question gets positioned sometimes, and it takes a view of a zero-sum game between insurance markets and advisers. But really, we should be asking the question on whether the risk industry overall is going to be led greater value for clients. And if we can meet this ever-increasing, ever-higher bar, it suggests a positive movement, and that's exactly where we are. In a world where risks are increasing, volatility is getting greater, the need for better solutions is very high, we are incredibly well positioned to deliver not just insights, but access to capital, which includes the traditional markets and alternative markets. So from our standpoint, we see a meaningful opportunity ahead with AI as a catalyst, driving and enhancing our strategy. Again, AI is not a strategy. Our strategy has been unbelievably strong and well proven. AI is a catalyst for it. And we do what Edmund described in his comments. We expand addressable markets. We've got greater access to those markets. We've got the ability to add even greater value as those markets expand, and that suggests stronger performance. But really, Andrew, to be clear, the ultimate arbiter of truth here is clients. They decide. And we're really well positioned to add greater value. And in doing that, it creates greater opportunity for operational improvement. Operator: And moving next to Rob Cox with Goldman Sachs. Robert Cox: First question just on the Middle East. Can you just talk about how the Middle East conflict showed up in Aon's results this quarter? And maybe if you have any ideas you could talk about the potential to see claims inflation from the conflict later on this year? Gregory Case: Maybe to start overall, Rob, just a general view on the Middle East. Generally, and how it's impacting kind of our clients around the world and certainly, obviously, in region. And I want Edmund to talk specifically about the results in the Middle East and sort of how that's played into the overall performance in the quarter. Listen, our first and foremost focus is on our colleagues and our clients sort of in region and supporting them and reinforcing all that they're going through. As we think about broad-based, obviously, the Middle East is not a tremendously substantial part of our business, but it's important for clients around the world. It will have overall implications. And from our standpoint, we'll see how things evolve. But right now, uncertainty is what we work toward on behalf of clients. It's how we serve and support them. And so whatever form that takes, however long this lasts, we'll be there, and it will have implications on overall operating performance. But so far, it's very much in development mode. But specifically in the quarter, Edmund, do you want to comment on that? Edmund Reese: Yes. Greg, I actually just want to start with what you just said, like our focus is on the colleagues and clients. But if I do move to the performance there. The headline growth for us, Rob, in the region was actually double-digit growth. You got to keep in mind that our Middle East business, as Greg just said, not a substantial part of our overall business, but over 50% of it is Health. Those renewals happened actually before the conflict and that escalation -- before the conflict escalated. So it's pretty locked in. Commercial Risk in the Middle East was one of the largest growers in our portfolio. You can imagine, with increasing risk in the region, that actually creates more demand for us to be able to help clients, as Greg said in his opening remarks, move through that. And the Reinsurance business in that region, 70% of it is done on 1/1 renewals. So again, we had strong growth there as well. Greg's point is the right one. It's a small part of our portfolio. We're very diversified. And as you heard me say, our strength is broad-based. Now if we continue to see an escalation or a prolonged conflict, that could have some impact that seeps into the broader impact on economy. But again, if that happens, our clients actually need more of our services. So we'll continue to monitor development closely, but we remain focused now on our clients and colleagues. Robert Cox: That's super helpful. And I just wanted to follow up on the risk analyzers. Edmund, I think you attributed some of the retention gains in Commercial Risk to the risk analyzers. I'd imagine it's also contributing to new business. How are you actually measuring the benefits from the risk analyzers? And can you just give us some color on adoption usage compared to the past in the various businesses? Edmund Reese: Yes. We've -- our team, led by our COO and our business partners have really been rolling out our risk analyzers. And Greg said it earlier, and I'm sure he will emphasize that. Where we started here was with Commercial Risk. And we've started to roll some of this out into Health, and we're starting to see some of that benefit in core health and benefits. But the Commercial Risk area is where we're seeing the business. And what I talked about, as I said, we've rolled it out. We're on later versions in the U.S., sort of mid-game in EMEA and rolling out in the other regions as well. But it is very clear and measurable to look at the impact of when we use the analyzers and when we don't use the analyzers. And we look at win rates, we look at renewals, and we look at new business from it. Again, it is the first place. The priority hires and the analyzers, if I had to boil it down the 12 points of contribution in Commercial Risk to two things, talent and technology, our hires in the priority growth areas and the analyzers coming through across property, across D&O, across cyber. And now Greg in his script mentioned us rolling out Broker Copilot as well, which is helping us bring insights on pricing, trading data to our clients very quickly as well. So if I had to attribute that new business to two things, it would be those two items. And we're able to measure it very well. But Greg, any comments from you on that? Gregory Case: No, I think you've covered it well. I do want to -- just for context, Rob, back up, and it isn't just the analyzers, right? This is a very measured approach we've taken over a number of years to answer a very straightforward question. How do we address increasing client need. And so the analyzers are a direct response to that, driven by client need. We can do the analyzers because we've got the raw data, the quantity, the quality, how we've ingested it and curated it. We've got the analytic capability, and then we have an organizational structure. When you think about Risk Capital, Human Capital, it doesn't exist anywhere else. And that allows us to take very high-quality talent, the best in the world, as Edmund described, and really make sure we're aligned to deliver this. And so it's not just the analyzers. It's also the service component, what we do on certificates and ad hoc certificates, a whole range of things, invoices. So it is revenue driven and service driven. And then, obviously, it creates -- we have efficiency then that Edmund described before, which means we can reinvest back into that capability. And the reason that's important is it highlights the versions. Don't miss that point. We're on like Version 10 or more of the property analyzer. And across the suite of analyzers, we continue to evolve them. We're about to attend the RIMS Conference. We're going to come away with 15 ideas that are go into a next iteration, and we've got the machine that can just keep innovating to do that. But the real punchline here is we're making a difference, and they're making a difference because they matter to clients on revenue, how they help build their businesses and make decisions and how they run their businesses around service. Operator: And our next question will come from Mike Zaremski with BMO Capital Markets. Michael Zaremski: First question, focusing on the really nice commercial risk organic. Just want to make sure we shouldn't get over our skis given we know that 2Q is one of the biggest property quarters in the industry. So when you think about the net market impact, Edmund for 2Q, in the last 2Q it decelerated fairly materially from 1Q. Should we be kind of keeping that in mind as we think about the rest of the year or just the near-term 2Q is maybe a governor on how excited we should be? Edmund Reese: Well, there's two parts to your question that are important to highlight. One is, you're right. We are running this firm on an annual basis, and not on a quarterly basis. And so we think about the guidance as full year annual guidance because there could be movement within the quarters. Setting that aside, on net market impact, the second part of your question, which I think is important, the guidance, as you know, is 0 to 2 points of contribution from that as the quarters have moved through the end of '25 and into this quarter, despite the pressure that we see, whether we're talking about Commercial Risk in P&C or even in Reinsurance. We've been at roughly 1 point or slightly higher, and that continued in this quarter. That's what we expect throughout the rest of the year, including Q2. It's just important to highlight here that it's not -- that could have an impact, 0 to 2 is still how you should be thinking about it. But more importantly is the growth in GDP, the business investment that we're having right now because that's the pricing piece that we're talking about in the net market impact. And the diversity of the products, the diversity of the geographies, I just talked about the broad-based growth in Commercial Risk. Those are the things that allow us to grow at mid-single digit or better in any pricing environment, and that's where we focus on. So even in this quarter, it's not new, right? Property was down 15% in this quarter. Casualty, like mid-single-digit growth. D&O, a little bit of an uptick in price there. Cyber at low single-digit rates. We have these micro markets on pricing, but we take actions to help our clients take advantage of these markets, help them increase their limit, increase their coverages. And those are the things that allow us to still have the mid-single-digit growth. Greg? Gregory Case: And Mike, I don't miss -- I hear your point on over our skis. We've taken in a very measured, methodical approach year-over-year-over-year period. But you would observe the 4 quarters that Edmund described in Commercial Risk, observe the fact that we, in our 3x3 Plan, have really laid out a series of capabilities defined by clients, driven by serious, serious industrial strength content and content behind them. And we focused initially on Commercial Risk and across the U.S. And what Edmund just described is a very broad-based 7% organic against whatever pricing environment. We didn't qualify it on that. It doesn't matter. It's helping clients succeed, winning more clients, doing more with them, keeping them longer, all those things with it. And the team was phenomenal. They delivered 7%. I think you described double-digit North America. And so this is a pretty unique progress. We don't get excited about it. We just stay focused on client need, and we've got to deliver for the year. But you ask yourself, did we increase probability of the mid-single digit or greater, you should feel good about that progress with that context. Michael Zaremski: Yes. Definitely, even seeing the net margin impact not move much over the last many quarters has been a great result. Just lastly, real quick. In your prepared remarks, you talked about driving productivity improvements. Clearly, a lot of GenAI technology adoption that's being accelerated across your firm. Do you envision a future where Aon's productivity per employee could accelerate to much higher levels than historical levels? Or too soon to know? I guess I asked because one of your broker peers did offer kind of a very long-term North Star about productivity improvements that could be fairly material. Gregory Case: Yes. Listen, this is probably worth a little bit of time since it's come up so much. And I'd really like to offer a couple of thoughts, and then, Edmund, I want you to jump in here, too. This is so fundamental to our firm. Look, on this whole topic of kind of the impact of AI, is it productivity? Is it -- what is it going to be? And how is it going to play out? First, we want to be clear on our position here. We're incredibly excited about the possibilities of AI to reinforce, and we mean reinforce our strategy. It's not our strategy, reinforce our strategy, accelerate it and strengthen it. And we mean over the next 5 years, and we mean equally important over the long term. And we also want to be clear, the capability, we've been doing this for multiple years now. It's already being seen. You saw it in the quarter. And it's going to be seen more over time. And we're going to deliver for clients now and increase long-term value for Aon. And again, our view has developed over time. I mean, we restructured our firm over many years to address this Risk Capital, Human Capital, ABS, how we deliver from an integrated client standpoint. And we also were clear on, look, this comes from our -- how do we do this? How can we pull it off? People can talk about it. We can pull it off because of the data, the raw quantity, the quality, how we've ingested it, how we changed that over time, how we curate it. The analytics, Mike, that come with it and how we model and what we do with it. The analytics are interesting. But when they become a suite of analyzers with the sort of service capabilities that have been introduced and refined 10 or 15x, that's when it becomes powerful. That can only happen with Risk Capital and Human Capital, which is why we're pretty excited about this. And I will come back to look, it's all driven by a few principles. One is literally what do clients need? How is it changing over time? And these responses that we've driven are all around revenue enhancement and driving that piece first and foremost, service enhancement second, and then productivity, which is why we've said, listen, you're not going to get success here in AI without an absolutely world-class people strategy out in front driving this. And that's what we're seeing. And the analyzers from client demand have actually changed the way clients think about what their businesses -- how they evolve, their risks in their business. What we've done on the service side as well. But if that's the client piece, the other piece to your question is really around value and what are the economics of that, the operating results of that. And frankly, greater value, as I described before, is greater margin potential. But then it also has to be continuous. So that's got to be durable. So I would just say, look, from our standpoint, we have our North Star. We're driving toward it. It's really delivering. And we see greater, greater opportunity to have an impact. To go back to Elyse's first question, one of them are in areas that are on the net new, which is data centers. Just beginning. But we're positioned unbelievably well because of all the work we've done. So we're pretty excited about the potential here and see it developing over time and see real opportunity. We don't see this as a defend the house. We see this as a true build the house opportunity. But Edmund, I'd love you to talk a little bit about the value part of this and the durability part of this. Edmund Reese: Yes, absolutely. And your question, Mike, is on the value part and the impact on the economics. Greg just talked about the demand of it. There's the economics, which I think have an impact today. And the third part is the durability of it, the ongoing benefit, how we will perform better. And that's the compelling part of it. We are operating and you're seeing it in our results, today. It's not just margin, though. It's in the new business growth. And I think our compensation there is tied to the outcomes, as Greg talked about earlier, as we help clients with capital, so we help them with workforce, as we help them improve their resilience. It shows up in retention. We had NPS up 10 points, something that I don't think I mentioned earlier here. And the analyzers I have mentioned are improving the RFP rates. And then it's showing up in your question, the margin improvement. Greg gave some stats earlier on claims, certificates of insurance, invoicing, policy management, all those things are lowering our unit costs, and we had talked earlier about 5% to 15% productivity improvements. Those things are happening right now, and we're doing it in a way that still allows us to bring value to our clients. So that's number one. The economics of it are showing up top line and bottom line and in our results today. The important point is that the performance builds over the coming years, right? Like you see multiyear tailwinds from this. Our work in data center is a great example of that. Our work on workforce solutions is a great example of that as well. So our insights and our capabilities are going to help us expand this market. Our content and the investments are going to help us gain share in this expanding market. And as we continue to lead in the investment and get these productivity improvements, we will reinvest, which creates this virtuous circle loop, which at the end of the day, just means that more durable business, a more scalable business and a more valuable business, more valuable business over the long term as we bring this value to clients. Operator: And we'll go next to Bob Huang with Morgan Stanley. Jian Huang: So my question is really also related to the Middle East, but not really Middle East. As we think about the Middle East conflict, the elevated energy price should have a fairly notable impact on GDP in Asia. I understand the Middle East contribution to you is probably small, but the Asia contribution probably is not. As we think about Asia growth slowdown due to energy prices, can you maybe help us understand the impact on organic growth guidance throughout the year, think about the inflation impact and things of that nature? Gregory Case: I'll start overall, Bob. We want to come back and, again, governing thought, reaffirm exactly where we are on mid-single digit or greater from a growth standpoint. We're looking now across the world, see all that you're looking at as best we can. And our view has been single digit or greater. So start with that overall governing thought. And then I just want to highlight a point that Edmund alluded to earlier around ambiguity and uncertainty. Pieces that create challenges in one area create opportunities in other areas. We've seen it countlessly. I mean, I think about even now in the Middle East, which, again, as Edmund described, is not a big part of our business, has done unbelievably well, helping clients understand the situation and really protect themselves as they also think about growth. APAC, Asia, tremendously important for us, still, on a relative basis, not a massive part of the overall firm, but fairly important. And we get your point on the energy side, but frankly, it's going to create other opportunities. Clients trying to decide how to navigate that environment. And that's what we do. We're going to help them do that, which is why you kind of come back to the form might change. The form might change. What we do might change. It may evolve. But our ability to help clients succeed in an uncertain environment has never been greater and is continuing to strengthen, and it's why we come back to that affirmation. But what else could you add to that, Edmund? Edmund Reese: Greg, I don't have much to add to that except like that shows up in the results, right? Our international markets are really leading the growth in many of our individual solution lines. And as that mix changes, we feel good that, that continues to be the opportunity where we can help the clients, which shows up in our results. So not much to add to that. Jian Huang: Okay. Really appreciate it. My last question is about the AI expense, right? So on your press release, you talked about, there's an $8 million increase in IT expense. As we think about AI expense, it's variable expenses, it's token-driven, prompt-driven on the input cost side. Going forward, like as you build out more AI capabilities, how should we think about that overall expense? Is that all essentially factored into the margin guidance? Is it -- as you have a higher and increased utilization of AI, can you just help us with that a little bit? Edmund Reese: It's a great question. And the short answer is yes. It is factored into the margin guidance. Again, me and our COO, our Chief Operating Officer and I talk about this all the time. We are model agnostic. We're building our own models, Broker and Claims Copilots are great examples of that, but we're also working with all the big names you know in the space. And in fact, that comes back to our organizational readiness. Me, Greg and the leadership team just spent some time actually tiering our organization from who needs the basic tools that have less need for tokenization and who needs the tools that are experts. Zone 1, 2 and 3 is sort of how we frame it. So we're super focused on who's going to be using it. Again, our focus is top line growth and productivity. So we want to equip the organization on both of those areas to build the things that help us with top line growth and get the productivity while being conscious of the cost. When I come to the cost, clearly, we have it baked into the $1.3 billion investment that we did as part of the 3x3 Plan. And you've astutely and rightfully called out the tech development part of our income statement, where I would say probably half of what you saw, nearly $600 million in 2025, is connected to AI as well. Obviously, there's a tech infrastructure part of that, but a significant component is the tech dev completely focused on AI. But again, it's our commitment to those investments that highlight our leadership in the space. We factor that in, those costs and the reinvestment of productivity improvements from that in our overall guidance here. Gregory Case: And maybe one observation I'll just add to that, Bob. As you think about the mechanics of literally how we thought about the investment, the cost, as Edmund described it, maybe Simon, our COO and how they discussed it, and it is really an intricate discussion. These are all critically important. So understand sort of how we look at that. But the real breakthrough here is not just cost efficiency, right? The real breakthrough is delivering client value. Literally, it's the revenue part of this and the service part of this. So it's more revenue, better retention of that revenue, all these things factor in. And this is where we want to absolutely -- this is where we've got to get yield to get return, not just efficiency. So again, back to some of the earlier questions on the call around sort of the zero-sum game that everything boils down and gets smaller and smaller. For us, it's bigger and bigger with opportunities. That is a revenue conversation. That's a productivity conversation that's beyond efficiency. And this is where we have seen some breakthroughs. This is really what's led to a lot of our work to accelerate not just taking cost out. We've done that before and continue to do that. But we're truly helping clients do things they couldn't have done before. Operator: And we'll go next to Cave Montazeri with Deutsche Bank. Cave Montazeri: So you started investing in ABS over 10 years ago. And I think until recently from the outside, really felt like it was primarily a margin expansion story. But now, and you've mentioned that several times on the call today, it really looks like we're seeing the tangible impact on organic as well, and we can really see the flywheel effect that you guys are talking about. Now others have noticed and everyone now wants to be a bit more like you guys, can build their own version of ABS. How important is it for you to have that first-mover advantage? Because as more of your peers implement their own version of ABS, will those efficiencies and better analytical tools become commoditized? Or is there like a real moat to being early and that others will always be playing catch-up because you keep on investing and getting better at ABS? Gregory Case: Listen, I really appreciate the question, and it is the question of the day in terms of sort of when you think about some of the evolution, I would really start and emphasize, again, this starts with client need, how it's evolving over time and how we respond to it. We're responding to client need. That's the strategy. Again, AI is not a strategy. Serving clients in a more effective way as their risk increase, that's the strategy. And if you think about what's required to do that, this is where we come back to -- we have been -- it's taken a long time. It's hard to pull this together. And it isn't just the analytics and the data. By the way, that's critical. You don't have the raw quantity and then turn it into quality in a way you can ingest it, curate it, you don't have anything. So that's taken a long time. By the way, ABS was doing cost and that for us, so important. We had great Reinsurance data. We had great Commercial Risk data, great Health data. But they weren't connected. Now we've got them connected in a way that we've not ever seen before. The analytics of that result in these capabilities. But also to be clear, this isn't about analytics. At one level, it's about organization. It's about alignment, Risk Capital and Human Capital. We broke our firm down organizationally and rebuilt it to connect the dots around Risk Capital. This is Reinsurance and Commercial Risk. So imagine Reinsurance contend and insight ingested into a Commercial Risk decision process. This is a massive, massive change in terms of sort of insight for clients. So for us, the organizational change, absolutely important. The analytics and ABS, absolutely important. And then the way we go to market. Edmund described it before around Enterprise Client and a connected global firm, that sounds trivial, but it's powerful. Clients should not be negotiating or trying to understand Aon. We should understand them and bring the integrated firm. If we bring the integrated firm, Aon client leadership with capabilities that never existed before, Aon Business Services, driven by a set of analytics not seen before. That's what for us is the wow. And if we can do that, that's a revenue-driven engine. And we're just going to keep investing in that engine and driving that engine. And the outcome, and don't miss this part that Edmund described. This is about not just in the next 5 years' performance. This is as you think about our terminal value, if you want to look at it that way, this is a bigger market. Data centers are a bigger market. Solving cyber is a bigger market. And then the way to serve that market requires real expertise, new expertise, which means if you've got it, you're going to win more share. And if you win more share, you're going to create more value. And value means you have the opportunity to deliver for clients and for shareholders on margin. You can do both. So that's our mission. That's our view. And we feel fortunate we made progress. But to be clear, we got to hammer down. We see the opportunity here for the clients, and we're going to keep driving it. Cave Montazeri: And then my follow-up question was on the personal lines exposure that you said was less than, I think, 2% of premium. Could you kind of remind us like how that came about? Is that something that kind of you want to keep, that's core to Aon or that your clients ask for? Gregory Case: Just a quick overview. Just first of all, personal lines, this is complex at some level. The piece we serve, this is higher net worth individuals, sometimes tied into businesses, really trying to think about what they're up to. We're working hard to support that. So I don't want to dismiss that as not complex, but it's a very small part of what we do. It's less than 2%. Sometimes it comes with the businesses overall. So put it in context, I understand it's not priority, but it's also important. Yes, Edmund, go ahead. Edmund Reese: Yes. And the way that we've sort of -- the majority of our personal lines business has come as part of the acquisitions that we've been doing over the past decade, right? We've done over 150 acquisitions. And you actually see us continue to have active portfolio management where we look to focus on our core, the higher-growth core businesses. You've actually seen us have cash from dispositions. It was over $730 million in 2024. That comes from the disposition of the personal lines business as we continue to go through our portfolio hygiene here. So that's why it's at that percentage, and I would say, continuing to shrink as we move forward here because we're super focused on our core Risk Capital and Human Capital business. Operator: And thank you. I would now like to turn the call back over to Greg Case for closing remarks. Gregory Case: I just wanted to say thank you to everyone for joining the call. We appreciate it, and look forward to the next quarter. 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 day, and thank you for standing by. Welcome to Moderna's First Quarter 2026 Conference Call. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lavina Talukdar, Head of IR. Please go ahead. Lavina Talukdar: Thank you, Kevin. Good morning, everyone, and thank you for joining us today. to discuss Moderna's First Quarter 2026 Financial Results and Business Update. You can access the press release issued this morning as well as the slides that we'll be reviewing by going to the Investors section of our website. On today's call are Stephane Bancel, our Chief Executive Officer; Stephen Hoge, our President; and Jamie Mock, our Chief Financial Officer. Please note that this conference call will include forward-looking statements made pursuant to the safe harbor provisions Securities Litigation Reform Act of 1995. Please see Slide 2 of the accompanying presentation and our SEC filings for important risk factors that could cause our performance and results to differ materially from those expressed or implied in these forward-looking statements. With that, I will turn the call over to Stephane. Stéphane Bancel: Thank you, Lavina. Good morning or good afternoon, everyone. Thank you for joining us today. I will start with a review of our first quarter, jimmy will then cover our financial results and outlook, followed by Stephen on commercial and clinical progress. I will close by discussing our value drivers before we take your questions. The Moderna team delivered a great quarter all around. In the first quarter, we grew year-over-year revenues significantly to $0.4 billion, driven primarily by execution of our long-term strategic partnership in -- with the U.K. government. With a strong Q1, we are reiterating up to 10% growth in 2026. We reported a net loss of $0.5 billion, excluding the previously announced Arbutus litigation settlement or $1.3 billion on a GAAP basis. We ended the quarter with $7.5 billion in cash and investments, maintaining a strong balance sheet as a result of continued financial discipline. Our cost reduction efforts continued in the first quarter, building on actions taken in 2025 and resulting in a 26% year-over-year reduction in adjusted cash cost in the first quarter, excluding the litigation settlement. This performance keeps us on track with our full year objective of approximately $4.2 billion in adjusted cash costs. We also advanced our commercial portfolio and our pipeline. In our respiratory portfolio, we achieved an important milestone with the approval of [indiscernible] in the European Union. [indiscernible] was known before as amounted 1083 of flu plus COVID combo vaccine. This is the first flu plus COVID combo vaccine approved in the world, and this marks Moderna a fourth approved product. I am very proud of the team for bringing this innovation to patients. This is exactly what Moderna stands for. We also secured approval for [indiscernible] in the European Union. These 2 new approved products in Europe will be important growth drivers in the EU in 2027, and when we anticipate COVID market reopening for Moderna. In the U.S., our seasonal flu vaccine mRNA-1010, was assigned a pot of August 5. In oncology, for Intismeran, we initiated a new Phase III clinical trial in non-small cell lung cancer for patients with Stage 1 disease. It's our first Phase III clinical trial evaluating Intismeran in a monotherapy arm in patients with early-stage disease. I am very excited about this new clinical development because Stage 1 lung cancer is mainly treated with surgery alone today. Additionally, we look ahead to our upcoming ASCO oral presentation, where we'll report a 5-year update of our Intismeran in adjuvant melanoma. We were also pleased to recently present at AACR the new clinical data for mRNA-4359, which is currently in Phase II for patients in Stage IV disease, metastatic disease in melanoma and lung cancer. Lastly, with support from [indiscernible], our Pandemic flu program, mRNA-1018 has now initiated its Phase III study. I'm very pleased with the company's strong performance in Q1 and very thankful for our team that executive across the board. With that, I'll turn it over to Jamie. James Mock: Thanks, Stephane, and hello, everyone. Today, I'll cover our first quarter financial results and then review our 2026 financial framework. Let me start with our commercial performance on Slide 7. For the first quarter, total revenue was $400 million, coming in above our guidance and represents a $300 million increase versus the prior year. Our geographic mix was approximately 80% from international markets and 20% from the United States. This strong international revenue performance was primarily driven from deliveries under our long-term strategic partnerships. For the second quarter, we are expecting revenue of between $50 million and $100 million, evenly split between U.S. and international markets, which would bring our first half revenue to approximately $440 million to $490 million. Our strong revenue performance year-to-date puts us on a solid path to achieve our full year revenue growth target of up to 10%, which we are reiterating today. Now I'll round out our full first quarter financial performance on Slide 8. As I just mentioned, revenue was $400 million in the quarter. Cost of sales for the quarter was $955 million. This includes $878 million related to our previously disclosed litigation settlement. Excluding this item, cost of sales was $77 million, a 14% year-over-year decline on a non-GAAP basis, driven by reduced unutilized capacity costs, losses on purchase commitments and inventory write-downs, partially offset by higher sales volume. Regarding the litigation settlement in March, we announced that we entered into a settlement agreement with [indiscernible], resolving all litigation with them worldwide. Under the deal terms, we will make a lump sum payment of $950 million in the third quarter of 2026, of which $878 million was recognized in cost of sales during the first quarter of 2026, and the remaining $72 million is being amortized over the next 3 years. Under the agreement, Moderna will appeal to the Federal Circuit to argue its government contractor immunity defense, which limits its liability under federal statute 1498. If Moderna ultimately prevails on that issue, no further payments will be due. If, however, the Federal Circuit of firms liability under Section 1498, Moderna has agreed to make an additional payment of up to $1.3 billion. We have concluded that a loss related to this pending Section 1498 proceeding is not probable. And accordingly, no charge has been recorded. R&D expenses for the quarter were $649 million, a 24% decrease compared to last year, driven by lower clinical development and manufacturing costs as we wind down large Phase III respiratory programs, and our CMV Phase III study, partially offset by higher post-marketing commitments from our COVID products. SG&A expenses for the quarter were $173 million, an 18% decrease compared to last year, driven by lower spend across all functions, reflecting continued cost discipline while supporting the business. Our income tax provision was immaterial in both periods as we continue to maintain a global valuation allowance, which limits our ability to recognize tax benefits from losses. Net loss for the quarter was $1.3 billion or $3.40 per share compared to a net loss of $1 billion or $2.52 per share last year, primarily driven by the litigation settlement. Excluding this item, the net loss would have been $0.5 billion or $1.18 per share, down over 50% versus the prior year. We ended the first quarter with cash and investments of $7.5 billion compared to $8.1 billion at the end of 2025. The decrease was primarily driven by operating losses as we continue to invest in R&D and advance our pipeline. The litigation settlement did not impact cash in the first quarter as the $950 million payment is due in the third quarter of 2026. Now let's turn to our financial framework for 2026. As mentioned earlier, we expect total revenue to grow up to 10% in 2026, with a geographic mix of roughly 50% from the U.S. market, and 50% from international markets. Our 2026 revenue guidance factors in potential future declines in COVID vaccination rates, offset by increased penetration of mNEXSPIKE and revenue from our long-term strategic partnerships. As a reminder, this guidance assumes no revenue from our flu vaccine or [indiscernible]. Our cost of sales projection has increased from $0.9 billion to $1.8 billion, and now includes the $0.9 billion litigation settlement charge. Without the litigation charge, our cost of sales projection would have been unchanged versus our previous guidance and reflects our expectation of gross margin improvement from manufacturing efficiency gains and volume leverage. R&D expenses are still anticipated to be approximately $3 billion as we continue to invest in our pipeline while maintaining financial discipline. We now expect the timing of our R&D spend to be slightly weighted more to the second half of the year. SG&A expenses are still expected to be approximately $1 billion, flat versus the prior year. Similar to 2025, our commercial spend will be more heavily weighted to the second half of the year due to the seasonality of our commercial business. In aggregate, excluding the $0.9 billion litigation charge, we are expecting total GAAP operating expenses of $4.9 billion and cash costs of $4.2 billion, which excludes stock-based compensation, depreciation and amortization. Additionally, we do not see any material impacts from the ongoing conflict in the Middle East to our 2026 financial outlook, but we'll continue to monitor geopolitical developments. We expect taxes to be negligible in 2026. Capital expenditures are still projected to be between $0.2 billion and $0.3 billion, and we expect to end 2026 with between $4.5 billion to $5 billion of cash and investments. Our cash guidance does not assume any additional drawdown from our remaining $0.9 billion undrawn credit facility. Overall, we are encouraged by the strong start to the year and remain focused on executing in Q2 and beyond. With that, I will now turn the call over to Stephen, who will walk through the commercial outlook in more detail. Stephen Hoge: Thank you, Jamie, and good morning or good afternoon, everyone. Today, I'll review our commercial outlook as well as progress across our pipeline. Slide 11 outlines our multiyear revenue growth strategy, anchored in both geographic expansion and continued advancement of our product pipeline. In 2026, as Jamie mentioned, we expect a 10% revenue growth driven by our long-term strategic partnerships in the United Kingdom, Canada and Australia, and supported by the continued growth of mNEXSPIKE. Looking across the 3-year horizon, we are building a diversified portfolio, adding a flu vaccine, a combination vaccine and a norovirus vaccine as well as late-stage assets in oncology and rare diseases, and all while expanding our global footprint into new markets. We made good progress against this strategy in the quarter. We delivered our first shipment under a strategic partnership in the United Kingdom. We secured key regulatory approvals in the European Union, including mNEXSPIKE for individuals 12 and older, and [indiscernible] for adults 50 and above. positioning us well in the large $1.8 billion annual European respiratory vaccines market. We expect both products to contribute to revenue growth starting in 2027 and in the U.S., our flu program continues to advance with a PDUFA date for set for August 5, 2026. Stepping back, our execution in the quarter gives us confidence in our ability to deliver in the near term and to grow over the long term. Slide 12 highlights our approved products within the infectious disease portfolio. With the recent EU approval of mComvriax, we now have 4 approved products, a remarkable milestone for our commercial portfolio. Starting with our COVID vaccines. We plan to submit annual strain updates across all approved geographies shortly. More than 30 countries for Spike Fax and in the United States, Canada and Australia and now the European Union for mNEXSPIKE. mNEXSPIKE also remains under review in Taiwan, Japan and Switzerland, with additional filings planned for the second half of 2026 to further expand global access to this important vaccine. Turning to RSV. mRESVIA is approved in the United States, European Union and Canada. Most recently, the European Commission also extended that approval to expanded indications to include adult age 18 and older, broadening the eligible population. For our flu plus COVID combination vaccine, mCOMBRIAX, we recently received approval in the European Union for adults 50 and older. The product is also under review in Canada and Australia, and we are awaiting further guidance from the FDA on the next steps for resuming filing in the United States. Finally, at ESCMID, we presented new data supporting heterologous vaccination with mRESVIA as well as results from a Japanese cohort from our Phase III mCOMBRIAX studies. Links to both presentations are included on this slide. Our late-stage infectious disease pipeline also continues to progress. Following with -- starting with flu, mRNA-1010 is under review in the United States, Europe, Canada and Australia, and the U.S. FDA PDUFA date is set for August 5. We recently presented revaccination data for mRNA-1010 at SMED, with a link to the presentation included on this slide. And for our norovirus vaccine, our ongoing Phase III study is now fully enrolled in its second Northern Hemisphere season. Based on case accrual to date, we continue to expect data from this study in 2026. Turning to oncology, starting with Intismeran, our individualized cancer therapy developed in partnership with Merck. This trial program continues to expand with 9 ongoing Phase II and Phase III studies. As Stephane previously mentioned, we have initiated another Phase III study in non-small cell lung cancer, our third Phase III in lung cancer. This one is in high-risk Stage 1 disease, expanding us to the earliest stage of the disease. The trial includes an evaluation of Intismeran as a monotherapy. This is our second monotherapy study following our non-muscle invasive bladder cancer study announced previously and highlighting Intismeran's safety and tolerability profile as we move into earlier stage disease. Across the portfolio, we now have multiple late-stage studies fully enrolled, including Phase III adjuvant melanoma as well as Phase II studies in renal cell carcinoma and muscle invasive bladder cancer, all of which are accruing events towards their interim readouts. We continue to make progress towards completing enrollment in our other Phase III and Phase II trials, including in non-small cell lung cancer, bladder cancer and metastatic melanoma. This broad late-stage portfolio is supported by the strong clinical data including robust 5-year results from our Phase II adjuvant melanoma study, which will be presented at ASCO. Beyond late-stage programs, our Phase I studies in pancreatic and gastric cancers are also fully enrolled, and we look forward to providing updates on those trials later this year. Now outside of Intismeran, we continue to advance additional oncology programs. For mRNA-4359, our cancer antigen therapy, Phase II cohorts are enrolling across first-line metastatic melanoma and first-line metastatic non-small cell lung cancer. We recently presented new data in first-line metastatic melanoma setting at AACR with a link to the presentation included on this slide. And finally, our early stage pipeline includes -- continues to progress, including our T cell engager, mRNA-2808 in a Phase I/II study, a cancer antigen therapy mRNA-4106 and cell therapy enhancer mRNA-4203 in Phase I studies in patients actively dosing. Now in rare diseases, our propionic acidemia or PA program is fully enrolled in its potentially registrational study. We continue to expect pivotal data from this study later in 2026. For our methylmalonic acidemia or MMA program, we have decided to defer the start of a registrational trial for that program until after we receive the pivotal readout from the PA or propionic acidemia program later this year. With that review, I will hand over the rest of the call over to Stephane. Stéphane Bancel: Thank you, Stephen and Jamie. Looking ahead to 2026, we see multiple value drivers across our company in commercial, in new product approvals and in [indiscernible] pipeline. On the commercial side, we continue to expect up to 10% revenue growth and remain focused on delivering our adjusted cash cost target of approximately $4.2 billion. We'll continue to invest in AI with a number of cross enterprise projects to reinvent work with AI. We will, of course, continue to drive increased personnel productivity across the company. We also expect potential approvals across the respiratory portfolio in additional geographies. We could, later this year, see our fifth product approved with mRNA-1010 for flu. From a pipeline perspective, oncology remains a key focus with upcoming data for Intismeran and mRNA-4359. We're also waiting for a Phase III data for norovirus, subject to case approvals, and of our PA programs, which should read out this year. The team remains focused on disciplined execution across these priorities. Over the coming months, we also look forward to engaging with the investment in medical communities at several upcoming events. This includes our investor event on June 1 at ASCO. But also, we would like to invite you in person to Cambridge or via webcast for our Science Day on June 25, where we'll provide a deeper look into our early stage pipeline, also how we're using AI and robotics to accelerate our ability to discover new technology to expand the use of mRNA to new drug modalities. On November 12, we also hosted our Annual Analyst Day, where we plan to focus on commercial priorities, product launches and expanding late-stage pipeline. In closing, I want to thank our teams around the world for the progress we've delivered this quarter. We have been executing consistently over the past 1.5 years, and I'm very excited of what is to come in 2016 and beyond. We are advancing our science, expanding our portfolio and continuing to translate mRNA into innovative medicines for patients. Each milestone achieved as important momentum and reconfirms our commitment to deliver [indiscernible] impact to people for mRNA medicine. With this, operator, we'll be happy to take questions. Operator: [Operator Instructions] Our first question comes from Salveen Richter with Goldman Sachs. Salveen Richter: So you newly disclosed initiation of a Phase III study for Intismeran as monotherapy and in combination with KEYTRUDA subcu for the treatment of high-risk Stage 1 small cell lung. Can you just -- and you spoke to it a little bit, but could you discuss your strategy to pursue this line and where it fits into the treatment landscape and why pursue a monotherapy here in addition to the combination? Stephen Hoge: Yes. Thank you for the question, Salveen. We and our partner, Merck, have been really excited by the clinical data that we've seen with Intismeran to date, including the Phase II. And it's important to highlight that the 2 pieces of that, one is obviously the efficacy signal we see, but the second is the remarkable safety profile associated with that efficacy, really no significant increase in serious or Grade 3 events when you get combination IO-IO like benefit. So the real question for us has been could we get that benefit risk profile in a monotherapy context? Could Intismeran provide IO-like protection against a relapse or recurrence of disease with a profile that really looks like a vaccine? And the best opportunity for us to do that, we and Merck have decided is it's across a couple of studies. Now the first I previously discussed was in bladder cancer, but we ultimately decided that in lung cancer, given the incredibly high burden of disease, the right approach there was to go into a Phase III potentially pivotal study. In that context, as Stephane mentioned, as you referenced, standard of care, more often than not a surgery and then watchful waiting. And so essentially, there is no other intervention. And we're looking at, therefore, INT as monotherapy as opposed to just surgery and watchful waiting for high-risk Stage 1 disease. Now we're also going to look at whether or not there's an incremental benefit of combining INT with KEYTRUDA in that setting because obviously, the best way to address cancer is to have it never occur after Stage 1. Unfortunately, what happened in the treatment landscape is many of those Stage I patients will recur, sometimes even recur as Stage IV or metastatic disease, and that is when we're fighting very late to try and control a quite progressed cancer. And so our goal, simply put, is to intervene early, prevent the relapse or recurrence from ever happening and in so doing, try and achieve cures in the earliest stages of disease. Benefit risk there needs to have a very good safety profile, and we really do think that the monotherapy safety profile of INT will be really strongly supportive if we can see in that Phase III study a strong efficacy signal. So we and Merck have been talking about this one for a while. Our strategy has been to focus on the adjuvant settings, but we have -- and we have started, as you know, some metastatic studies, but we have always wanted to move earlier, signaled that from the beginning because of that benefit/risk profile of INT and we are really excited to see the potential now in Stage 1 disease in a Phase III lung cancer trial. Operator: Our next question comes from Jessica Fye with JPMorgan. Jessica Fye: With a significant amount of international sales this quarter, I remember the -- I think the U.K. order from last year got pushed into early '26. I'm just trying to think about those contracts and the right way to think about what more could come from the U.K. for the remainder of '26? Like is it possible this is a double order year? And maybe you could just elaborate on how that works? Stephen Hoge: Yes, sure, I'll take that. And so the delivery that happened in the first quarter is for their spring campaign. And so for -- in the United Kingdom, there's a recommendation for both spring and fall booster for the targeted population does over the age of 75 or with significant risk factors. And so a second campaign is planned for the fall, and so the third and fourth quarter of this year, and that would be an additional delivery later this year. Operator: Our next question comes from Terence Flynn with Morgan Stanley. Terence Flynn: Great. Just wondering if you can be any more specific about the timing of the interim Phase III of the INT and adjuvant melanoma. I know you said 2026, but can you refine that at all at this point? And then maybe talk to the range of potential outcomes there? Are there only 2 outcomes, either the trial hits at the interim and continues as planned? Or is futility also a potential outcome on this interim? Stephen Hoge: Yes. Thank you for both questions. So I will disappoint in the sense that we won't refine that guidance. We have said we are confident based on the event accrual that we will see interim analysis conducted in 2026. I shouldn't say more, except that, that confidence should indicate where we think we are. On the question of the outcomes, there is not a built-in futility assessment. The interim analysis is either to declare early success or to continue to accrue events in the trial towards a subsequent interim analysis or final analysis both of which could happen in the years ahead. The study is very well powered and has been balanced in terms of its accrual. And so we have continued to accrue events in a way that we would expect, and therefore, we're optimistic about that interim analysis. But obviously, if we have not yet hit the critical hazard ratio to declare early success, we will have the benefit of continuing to look at more events afterwards, but futility is not a part of the current plan. Operator: Our next question comes from Luca Issi with RBC. Luca Issi: Great. Maybe, Jamie, on IP, can you just walk us through why the legal team deemed the additional $1.3 billion charge on 1498 is not probable. I guess the question is what gives you confidence that you will ultimately prevail there? And then maybe just kind of bigger picture, remind us that time line of when the final ruling could come? And then maybe quickly, Stephen, what's the latest thinking on flu in the U.S. ahead of PDUFA? We obviously now have a new acting director [indiscernible]. So I wonder if you have had any interactions with her, and whether you think that having her need is incrementally positive or incrementally negative for you? So any color there, much appreciated. James Mock: Yes. Thanks for the question, Luca, I think I may disappoint as well because we're not really going to comment too much on the merits of the trial. So all I can say is our legal team and ourselves, we are confident, and therefore, we believe it improbable that we would lose and therefore, have not recorded anything. From a time line perspective, it's always difficult to exactly read, but we think that it could be perhaps late 2027 maybe into 2028 is where we think that this might be resolved. But again, that's a moving target. Stephen Hoge: And for the question on the FDA and the -- particularly the flu 1010 program, we continue to progress well in that review in the normal back and forth with the review team and the folks in the office of vaccines towards our PDUFA date, obviously, at this point through a mid-cycle. And we would describe that as a pretty normal course, the kinds of exchanges we're having. And so we're encouraged by that and look forward to that August 5 PDUFA date. Obviously, we'll work hard to answer any questions, any remaining questions that the FDA has as they complete that review. As to the senior leadership, whether it's [indiscernible] or otherwise, we don't usually interact with them in these reviews at all. Really, this is the review staff, the folks in the office of vaccines, and that is the only place that we've been going back and forth. And we don't expect any impact, certainly didn't before, today or after as a result of the new Acting Director. We do look forward to working with the leadership of [indiscernible] broadly across our portfolio. So the 1010 flu vaccine review continues somewhat independently, but we have a large portfolio of other products from in Intismeran, INT to norovirus to our first rare disease program, the propionic acidemia program, all of which we hope have pivotal readouts this year, and we look forward to bringing those forward. So it's an exciting time for us, hopefully, for the field, and we are very grateful for the partnership across FDA and CBER as we try to bring these medicines forward to patients. Operator: Our next question comes from Tyler Van Buren with TD Securities. Tyler Van Buren: Congrats on the quarter. For the Phase III Intismeran adjuvant melanoma top line data, can you remind us what it is powered for? And perhaps more importantly, can you give us your latest thoughts on what constitutes success from a clinical standpoint? And what you need to show in RFS on an absolute basis or as we think about relative benefit there? Stephen Hoge: Thank you, Tom, for the question. So we haven't disclosed the powering assumptions for the IA. Suffice it to say, we -- the Phase II data had a really strong hazard ratio, very narrowly missed and a substantially smaller powering 150, 160 participants as opposed to 1,100. And so we're -- we think we are well powered -- very well powered if we see a similar hazard ratio. That would obviously be a huge success. But to your second part of your question on sort of the range of things that we would be pleased with, obviously, anything looks like the Phase II would be spectacular. But candidly, we think the opportunity for benefit could be anywhere between that 1.5% that we saw in a number like 0.8, where there's a significant benefit still in terms of survival and treatment of melanoma -- adjuvant melanoma, Stage II melanoma. Now across that range is a wide range of outcomes that we want to understand the raw data in what's happening. If you see really strong RFS and really strong eventually overall survival, as we've seen so far in the Phase II study, that's encouraging. If you saw maybe the overall survival or just a [indiscernible] data was better even if the RFS was not, that would probably equally be encouraging. And so there's a range of outcomes for how we would declare success that will depend upon the different clinical benefits that we see in the study. But for now, we feel like we are well powered going into that interim analysis. If not, we look forward to the subsequent analysis. And we think there are a range of outcomes here ranging from the Phase II results to a whole bunch of events that are much more modest, that could still be really meaningful patients and move forward successfully commercially as a treatment for Stage 3 mono. Operator: Our next question comes from Ellie Merle from Barclays. Eliana Merle: Curious what your expectations are for timing for data from RCC and muscle invasive bladder cancer. And can you elaborate on what good data would look like in these indications? And then what the next steps would be in those indications if the data are positive? Stephen Hoge: Yes. Thank you for the question. As we've previously said, both of those randomized Phase II studies are fully enrolled, about 300 participants in each. And so we're really excited to to fill in the picture on the strength of performance for INT across a range of different tumors. I would point particularly to the RCC as 1 that we're we're interested to see whether or not we can provide a really meaningful clinical benefit because we still think there is an opportunity, headroom for improvement there that's quite significant. Now those are event-driven trials, and we did want to protect the registrational possibility for those trials. So we're blinded, and we're accruing events towards that first interim analysis in both. For obvious reasons, we -- if possible, we would want those studies to be registrational. And so we want to make sure we accrue a good number of events and that we treat those analyses the right way. And because that it's hard to guide right now. We don't exactly know when potentially this year or even early next year that those results could come in because they are event-driven analysis. But when we have accrued sufficient cases to conduct that blind analysis, we will definitely be doing so. And all of us are eager to see the results because it will help not only guide whether or not those products or those indications are reasonable to move forward more quickly, again, potentially to a registrational study or towards a Phase III pivotal study, which we would look to start quickly. But also, they feel in that picture of how broadly INT is going to play. And in some ways, if you think of RCC as an example of a place where it's relatively far from melanoma in terms of mutational burden, and therefore, an opportunity for us to demonstrate a potential benefit that would then widen the aperture of where we think INT might have a role. So we're keen to see that data, but we are blinded at this point. We're following those events, and we are eager to provide updates once we have more. But for now, we can't guide on when that timing would be. Operator: Our next question comes from Michael Yee with UBS. Michael Yee: We have 2 questions on INT. The first was on the melanoma study. Would we expect that, that's a similarly designed protocol as it relates to the interim? I recall that the Phase II strongly hit at the interim. And so just trying to understand if a similar type of standard interim was built in here such that if it doesn't stop at the interim, it would imply some sort of different hazard ratio for the first term versus the second room? Similarly, on the renal study, we understand that this is a much slower progressing tumor if you look at the KEYTRUDA adjuvant studies, just trying to understand how it would be possible that a potential interim would come this year, or that's a much differently designed study in terms of an interim? Stephen Hoge: Yes. Thank you, Michael, for both questions. So first, we obviously haven't given any statistical guidance on the Phase III interim analysis. But suffice it to say, I just did a moment ago. We wouldn't be conducting the interim unless we thought there was a chance of success. And in that sense, we are not defining that as the hazard ratio that existed in the Phase II. There were some differences in the population, but certainly, that would be a situation we would want to have a relatively early look at. And so it's somewhere between there and obviously, not significant that we're looking for. We are -- we have -- we are really excited, but we also just need to wait and let the data mature and see those results. And so we're optimistic about that first interim. But it's fair to say that if it isn't successful, there's still opportunity in the second and the final. And we definitely have reserved alpha for both of those for what we think would still be commercially important products. So that's Point 1. Now on the renal, the renal is -- RCC is, as you said, the events can happen more slowly. There is a benefit, obviously, from KEYTRUDA, but there's a substantial headroom still. Even if you look to the combination products, KEYTRUDA plus Bezu, Merck has just had a great success there, with a hazard ratio of 0.72, there's still headroom even above that for improvement in terms of disease free survival. And so we're keen to look at that result. There are about 300 participants enrolled in that study. And I'll remind you as a reference, that's about twice as large as the Phase IIb adjuvant melanoma study that we've all been speaking so much about. We're not intending to power that as a registrational study, but it has registrational potential. And what that means is we could have a lower statistical threshold for declaring that there's a strong result there, a strong signal, I think, again, like what we saw in the Phase IIb with melanoma. The key there though, would be we would not want to unblind that study if at a lower threshold, call it 0.1 -- alpha 0.1, we wouldn't want to unblind the study if it was trending towards statistical significance and registration potential. And so that's the key unknown in that RCC study in terms of timing is we will hit a trigger for conducting human analysis based on events. The DSMB will look at that result and then advise us whether it's appropriate to declare early success or whether to remain blinded or alternative outcomes that are more like futility, but that would cause us to want to look at that data and quickly determine whether or not we want to run a Phase II. And so it's a high degree of uncertainty of what that looks like, but it's all about trying to make sure that if we have a drug here, a strong signal in RCC with registrational potential, we did not disrupt that. Or if it's strong, it needs a Phase III more powered analysis that we get that going quickly. And I think that's the decision that lies ahead of us in partnership with the DSMB. Operator: Our next question comes from Courtney Breen with Bernstein. Courtney Breen: Just a couple more on INT. What I wanted to understand as we're getting closer and closer to the kind of it's becoming a meaningful lot of model [indiscernible], but there's obviously still a big [indiscernible], but also on revenue recognition between you and your partner. Number one, can you help us kind of understand the parameter here, and I think through what this might look like to moda kind of realized contribution in the P&L recognizing that it is [indiscernible]? And then second, in the Stage 1 monotherapy and combination study, can you just again help us understand a little bit about that Stage 1 prevalence of diagnosis relative to later stages? Cancer lung cancer is obviously relatively, compared to other cancers, age quite late. So it would be helpful to understand how you think about this market and potential building if we can see kind of some opportunities for those patients? And speaking of that opportunity, any comments on kind of what the bar looks like particularly compared to a watching and waiting scenario? James Mock: Yes. Thanks, Courtney. I think we're breaking up a little bit, but I think the first question was around rev rec as it pertains to INT. So let me take that one. And I'll put a caveat out there that we don't even have the product approved. We're working with our auditors. It's not a traditional joint venture. So -- but this is -- I'll give you to the best of our knowledge, how we think it will work. So it will end up being that we deliver the product to Merck because they're obviously the market authorization holder, and they were sell it on to the customer. So that will be the first part of our transaction. And so you can imagine some amount of our COGS plus some markup. Thereafter, whatever the profit split is, then we will take that share -- Our share of that of 50%. So it ends up being naturally somewhat greater than 50% of the profit share because it's predicated upon first shipping the product and having some markup on that and then taking the margin on top of that. So that will change over time because we -- as we've laid out before, we're working on our cost of goods sold and with that will continue to come down over time as we continue to drive automation. So it will start a little higher as our cost of goods sold. Well, obviously, like any product starts higher and then get more productive over time. But that's the general framework, and I hope that helps. But again, we hope to be in that position next year to be able to start recognizing that revenue. . Stephen Hoge: [indiscernible] cancer Stage 1. So lung cancer really represents a pretty unique opportunity because screening through X-rays has actually been an important intervention for identifying early-stage disease, Stage 1 disease. Now the majority of diagnoses still show up later at Stage 3, Stage 4, in particular, but you're seeing an increase almost 1/3, north of 30% of diagnoses are now earlier stage, Stage 1, Stage 2. And that has grown over the last decade and hopefully continues to grow through better screening, including a relatively easy intervention, a chest x-ray that your primary care doctor can provide. So we do hope and expect that there's a big push on earlier -- catching lung cancer earlier. And that is a natural place, therefore, to try and intercept and intervene if you have a great benefit risk profile, again, to be proven, but we know we have the safety profile. And if we can do that, then we'll be able to dramatically impact the number of Stage 4 or Stage 3 and 4 diagnoses that start to show up. You've already seen evidence of that, right? I mean if you look in the United States, over the last decade or 2, there has been an increase in the number of diagnoses that have -- the percentage of diagnoses that are happening in earlier stage and a commensurate decrease that are happening in the later stages. And so we do think it's a unique tumor opportunity for us to go demonstrate Stage 1 intervention because of that screening regime around chest x-rays and the overall trajectory in the field. Operator: Our next question comes from Jeff Meacham with Citigroup. Geoffrey Meacham: I have 2 quick ones. The first 1 on Intismeran, as you grow the experience and data here, I know most of the trials are in combo with KEYTRUDA are there other I-O combo mechanisms that could also bear fruit, or is that better addressed with the rest of your oncology pipeline? And the second 1 on norovirus. As we get closer to data, do you have any updated view of what success looks like here, just given the standard of care? My sense is a significant benefit is all you need, but want to get you guys' perspective? Stephen Hoge: Yes. Thanks for both questions. So first, on the alternative IO-IO combinations, we are looking in the adjuvant setting and earlier in many of these Phase III studies. We do have a metastatic melanoma study, as you know. But we -- in that context, generally IO-IO combinations and the toxicity associate has not been seen as advantageous. And so for now, most of our focus is on the combination with the PD-1 and KEYTRUDA because of our partner, Merck. We would be interested in subsequent studies in exploring alternative I/O combinations. But as you kind of alluded to, that's already something we're starting to do in the rest of our pipeline. And in particular, I'd point to 4359, where we are looking in metastatic melanoma and alternative regimens, CTLA-4 plus PD-1 combinations, EPI, Nivo as an example, have been important intervention showing benefits in those populations. And that's a place where, if we want to add a third I-O agent for hopefully some benefit, we are doing some early Phase I/II exploratory work right now. So you might see, just as a function of the huge amount of work we're already doing in INT, you might see us first explore those other combinations for our cancer vaccines platform in the other off-the-shelf context first. But that doesn't rule out that in the future, we might explore the use of INT on top of other regimens. Certainly, both ourselves and our partner, Merck are interested in that. Now on the norovirus side, I think you hit the nail on the head. We we think given that there is not currently an approved vaccine for norovirus, and given that particularly for those at highest risk, those over the age of 75, those that have other medical comorbidities, there really is a high societal and medical costs associated with the profound dehydration that can happen with even just what might feel like a 2-day norovirus infection, not just hospitalization, but the significant exacerbations of underlying medical diseases as well and some death. And so that population, anything that can be done to reduce that burden would be ultimately value creating for the health care system, put aside the benefits for the individual patient. And so we're -- we think statistical significance is the bar. Obviously, we want to see a vaccine efficacy that's also meaningful and so north of 50%. But on -- but given that there currently is no standard of care or treatment, we would take anything above there as a success. Operator: Our next question comes from Cory Kasimov with Evercore ISI. Cory Kasimov: I also have 1 on Intismeran. So wondering how critical is it to demonstrate an overall survival benefit in Interpath-001. Given the challenges of showing OS and adjuvant melanoma, do you believe physicians would interpret the data set any differently absent a clear OS signal? Stephen Hoge: Yes. So I'd make a couple of observations. So first, RFS is a pretty good predictor. I mean this is a relapse-free survival. So again, it's not progression-free survival, it is survival, and tends to correlate. And if you look at our Phase II study, we have released previously the RFS, DMFS and even OS trend data. We look forward to the ASCO presentation to provide the 5-year update and the view on RFS, DMFS and OS. And I would point to that presentation and the data, and we hope that, that will provide confidence for physicians, for health care systems, for patients on that relationship in this case and in the case of Intismeran in combination with KEYTRUDA in the adjuvant melanoma setting, and that, that would provide sufficient confidence to move forward if the Phase III is positive. Now the Phase III data, we will follow OS. And we're through 5 years in the Phase II. So it will take us some time to get to that same level of data in the Phase III, but it will be a part of the trials going forward and can provide a significant degree of confidence going forward, but again, RFS really is survival in this case. Operator: Our next question comes from Simon Bick with Rothschild & Co Redburn. Simon Baker: Just looking at the Q2 revenues, a couple of quick questions. Firstly, should we -- or could you give us any color on the split? Or should we assume that the entirety is SPIKE vax? And also, Jamie, I wonder if you could give us any comments on phasing. It was a very strong number against our expectations, but I just wanted to know if there was any pull-through of expected revenues from Q2, particularly with some of those governmental orders outside the U.S.? James Mock: Yes. Thanks, Simon. So let me address the first question. as it pertains to product split. This was largely, the majority is COVID still. So we have not been -- as we've always said, we don't anticipate RSV being a significant growth driver in the year 2026. We believe that will take a little bit of time for us. So this is still primarily COVID-related. As for the timing, we laid out the second quarter. So -- and then I think maybe your question is more on the second half. But for the second quarter, we laid out $50 million to $100 million in the second quarter. So that should bring our first half to almost $0.5 billion of revenue. And that, if you look at that as probably $400 million outside the United States and $100 million in the United States. So let me talk to the timing of the year and give big picture and kind of compare it to last year. Last year, we had $700 million of sales outside the United States, and it was $100 million in the first half and $600 million in the second half. So with $400 million is in the first half of this year, if we repeat last year, that's $1 billion. And we've been talking about saying that our mix between the U.S. and international is going to be about a 50-50 split. So if we just repeat last year, that should get us $1 billion. And then in the U.S. last year was $1.2 billion. I said in my prepared remarks that we're expecting some amount of decline and we've modeled for that. So hopefully, that gives you a little bit of the phasing and timing here. And the last point I'll say is back to the question that was asked earlier, is in the second half of last year, we didn't have any U.K. revenue. So to Stephane's point that if there is a fall season, in last year, $600 million outside of the United States. We did not have in the U.K. There are other puts and takes that's why we've guided up to 10%. I'm not giving explicit guidance here, but I'm trying to give you the picture and contextualize what the year might look like from a U.S. versus OUS split. Operator: Next question comes from Andrew Tsai with Jefferies. Lin Tsai: It's a bigger picture question. I'm just curious what your guys' latest thoughts are on BD and even considering technology or assets beyond mRNA. Does it make sense to add more assets to your pipeline? Or do you think you're right sized for now? Stéphane Bancel: Thanks for the question. So if you think about the company, as you know, we've always focused on building the most impactful mRNA platform to enable modalities, families of medicines to enable them a lot of medicines happening using the same technology components. We've done it with infectious vaccines. We don't it with Intismeran. I look at a number of studies now. We are doing it in rare disease. And as we share more at our Science Day on June 25, we have been investing heavily to keep increasing in new modalities. You see it with a T cell engager that Stephen talked about [indiscernible]. You see it with 1439. And there's many more assets, we're going to walk you through what the science has enabled. So we're very focused on expanding to new modalities to enable new families of medicine. As you've seen in the past, we acquired a company in Japan a couple of years ago because it was expanding the mRNA operating growth of Moderna. We are continuing to look at science across the board, whether it's from academic labs or from companies, public or private. If we find the right opportunity to increase what we can do, we will, of course, execute on those priorities. But we don't have a pipeline problem like most companies in the industry. We have an abundance of products. As you know, we have been very disciplined on cost right now to get back to breakeven. But we have a lot of exciting science that is waiting to go into the clinic soon, and we'll share more of that on June 25. Operator: Our last question comes from Alex Alexandria Hammond with Wolf Research. Alexandria Hammond: So with the recent approval of the COVID flu vaccine in the EU, can you just walk us through your commercialization strategy? And I guess what is the successful launch of like a year from now and 5 years from now? Stephen Hoge: Yes. Thank you for the question. So first, I want to start by saying, as is our pattern, our path, we do not expect revenues in the year of approval for these vaccines. And so 1083 [indiscernible] or flu in the United States, none of those are in our guidance that Jamie was speaking about. Now your question is more kind of looking forward in '27 and '28, what does success look like? The first step, the one we're engaging in right now across the major markets in Europe is securing market access and so that is pricing and reimbursement. That is a national process, and one that is underway, even publicly underway, for instance, in France, where they have initiated that, frankly, quite quickly after approval, which we think is an encouraging sign. It's important to note that across Europe, there's about a $2 billion respiratory vaccine market. We previously sort of summarized that. Flu is a big part of that, and COVID is the second large part of that and it's much more portion reserve for RSV. So we see it as a very large opportunity for our combination COVID vaccine. Lots of benefits to payers, to health care systems, to patients. Patients appreciate the -- it's only 1 shot and there's a strong preference on that. But payers and health care systems really appreciate the lower burden of work. It's a single product. It's only 1 injection. You don't have to procure both. And the amount of time you get back from a health care provider, be that a physician, a nurse, a pharmacist that they can get back to do other things that are value creating for the health care system is actually a huge part of the value proposition of the product. And so what we've been doing with those governments, and we will do throughout the back half of this year, is help build that economic value story. We've got real-world effectiveness coming -- data coming out from our products, and we hope to be able to show their benefit for the individual, but we also want to help the health care systems understand and value the savings that they will get from a respiratory combination vaccine. And so that's the big push really over the next 12 months. We do hope for a successful launch in '27 in the first markets where we can get pricing and access. And in some cases, in Europe, that takes a couple of years as a process, and it would really be 2028 when you'd start to see that more significant uplift. Our hope is that we end up with a very large share of that $1.8 billion to $2 billion respiratory vaccines market because we really do think we have a unique product that can save the health care system money and deliver better value for patients and providers. And so we're -- we'll have more guidance as we move forward. But rest assured that we are spending the next year securing that market access pricing and reimbursement and helping people understand the value of that combination. Patients get it quickly, health care systems are also getting it quickly, and we've got the work ahead of connecting those dots so that we can have a successful launch in '27 and really drive growth of the business in '28. Operator: Thank you, ladies and gentlemen, this concludes the question-and-answer portion of today's program. I'd like to turn the call back to Stephane for any further remarks. Stéphane Bancel: Well, thank you very much for joining us today. As you can see, we're excited about 2026, returning to sales growth and critical Phase III readouts norovirus, Intismeran and propylene acidemia. We look forward to talking to many of you over the next few days and a few weeks. We're excited to host you more from them Monday, June 1 at ASCO. And on June 25, Han Cambridge for a Science Day. Have a nice day, and have a great weekend. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Good morning, and welcome to Lazard's First Quarter 2026 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Treasury. Please go ahead. Alexandra Deignan: Thank you, Chelsea. Good morning, everyone, and welcome to Lazard's earnings call for the first quarter of 2026. I'm Alexandra Deignan, Head of Investor Relations and Treasury. In addition to today's audio comments, we've posted our earnings release on our website. A replay of this call will also be available on our website later today. Before we begin, let me remind you that we may make forward-looking statements about our business and performance. There are important factors that could cause our actual results, level of activity, performance, achievements, or other events to differ materially from those expressed or implied by the forward-looking statements, including but not limited to, those factors discussed in the company's SEC filings, which you can access on our website. Lazard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update them. Please also note that unless we state otherwise, all financial measures we discuss today are non-GAAP adjusted financial measures. We believe these non-GAAP financial measures are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measure is provided in our earnings release and investor presentation. Hosting our call today are Peter Orszag, Lazard's Chief Executive Officer and Chairman; and Tracy Farr, Lazard's Chief Financial Officer. After our prepared remarks, Chris Hogbin, Chief Executive Officer of Asset Management, will join us as we open the call for questions. I'll now turn the call over to Peter. Peter Orszag: Thank you, Ale, and good morning to everyone. Before turning to our first quarter results and outlook for the year, I want to start with our announcement of the acquisition of Campbell Lutyens, and the future establishment of [ Lazard Cal ], a new private capital advisory unit within Lazard that will serve as our third global business closely coordinated with our world-class M&A and other advisory practices. This transaction underscores how Lazard is building on its core advisory franchise while both diversifying our business model and accelerating our growth. Campbell Lutyens is a premier global private markets adviser focused on fund placement, secondary advisory and GP Capital Advisory services. Along with our existing PCA group, the transaction combines two highly complementary advisory platforms that will create the leading primary and secondary advisory business globally, with approximately $500 million in anticipated combined '27 revenue. The acquisition marks an important milestone on the path towards Lazard 2030, and an exciting avenue for additional growth. Lazard 2030 is a multiyear plan to build a more productive resilient growth-oriented firm. Our focus is on enhancing our long-standing strength in M&A, while also building leading platforms in restructuring and liability management, capital solutions and private capital advisory. Our recent investments have expanded the solutions we provide for clients and diversified our revenue mix. Revenue related to private capital connectivity has increased from approximately 25% of total advisory revenue in 2019 to 40% today. Upon closing the Campbell Lutyens acquisition, we will achieve our 2030 target of approximately 50%, even while delivering total revenue growth. The acquisition of Campbell Lutyens and establishment of [ Lazard CL ] strengthens our ability to deliver for clients at a time when fundraising is increasingly competitive and liquidity solutions are more complex. Operating across all major alternative asset classes and in all major global markets, [ Lazard CL ] will provide an unparalleled platform for independent differentiated advice that meets the evolving needs of institutional investors financial sponsors and their portfolio companies. By pairing the combined proprietary data sets of these two businesses with our AI capabilities, we will deliver deeper insights for clients while advancing our goal of becoming a leading AI-enabled independent financial firm. We view this acquisition as strategically disciplined, financially accretive and culturally aligned. We share a commercial mindset, collegial approach and unwavering commitment to our clients. With Lazard's heritage in Europe, including the U.K., where we have had a significant presence for well over a century, we also have a shared respect for Campbell Lutyens [indiscernible] and for the importance of preserving local identity within a global firm. This step highlights our further investment in the U.K. and in growth across our global franchise. Taken together, this transaction reflects how we are positioning Lazard to lead across both public and private markets with exceptional advisory and asset management capabilities, while remaining anchored in the strategic [indiscernible] that defines our firm. We anticipate the transaction closing before the end of the calendar year, and we look forward to welcoming Campbell Lutyens' team to Lazard. Now turning to the quarter. Firm-wide adjusted net revenue was $673 million, up 5% compared to 1 year ago. In Financial Advisory, our outlook is optimistic despite geopolitical uncertainty with conditions depending in part on the path forward in the Middle East. Client engagement remains very active, and the pace of client interactions continues to accelerate. Total conflict clearances are up significantly, reinforcing our confidence in our deal outlook. As one example, [ conflict ] clearances for deals above $5 billion are up 50% year-over-year. The broader underlying dynamics supporting activity also reinforce our constructive outlook. Companies continue to look to achieve scale and focus amid rapid technological change and a regulatory environment that is constructive. Dispersion and corporate performance continues to drive elevated restructuring and liability management alongside M&A. We anticipate ongoing strength in fundraising and the potential for increased private equity activity. These dynamics align with our existing Financial Advisory and future [ Lazard CL ] businesses, providing multiple and complementary levers for revenue growth. Financial Advisory activity can admittedly be uneven from quarter-to-quarter. And during the first quarter, we had several transactions moved to later in the year. As a result, revenue from this business was not as strong as we anticipate the rest of the year will be. Robust growth in restructuring and liability management, and private Capital Advisory along with solid M&A performance in Europe, supported overall results and underscore the benefit of our diversified model. Looking beyond 2026 to the next phase of Lazard 2030. Retaining, promoting and recruiting top talent remains a core component of our long-term growth strategy. We more than exceeded our goal of expanding our Financial Advisory [indiscernible] by 10 to 15 net additions from the first quarter of each year, with 28 net additions for 2025. Our recruiting pipeline is strong, and we remain opportunistic about adding new MDs in 2026, while we also focus on integrating Campbell Lutyens following [indiscernible] close. In Asset Management, we delivered net inflows of $9 billion this quarter, the highest level of quarterly net flow in almost 20 years. The momentum we see in our results underscores that our strategy is successfully pivoting the business where active Asset Management [indiscernible] advantage. While our focus on the areas of the market where information is imperfect -- with our focus, sorry, on areas of the market where information is imperfect and where our systems and research carry a distinct edge, including in quantitative strategies and emerging markets, we continue to see client demand and growth. Even with significant inflows for the quarter are one but not yet funded pipeline remains strong. While the environment remains uncertain, our business is well positioned for the year ahead as market volatility creates more opportunities for active managers and global diversification is firmly back on the agenda for investors. We continue to believe 2026 will be a year in which investors increasingly reallocate towards emerging and international markets which is where Lazard's presence and capabilities are particularly strong. With a more diversified platform, best-in-class research and investment processes, enhanced global distribution strategy and new leadership, our Asset Management business is well equipped after opportunities aligned with client demand. Overall, client demand continues to grow for independent differentiated device and investment solutions grounded in [indiscernible], the broad insight and judgment needed to navigate complex macroeconomic and geopolitical dynamics. And that is what Lazard excels at delivering. As we reflected in our annual shareholder letter published last month, Lazard today is a structurally and culturally different organization, more [indiscernible], more globally connected across public and private markets and better positioned to deliver long-term growth beyond traditional cycles. Now let me turn the call over to Tracy to discuss our financial results. Tracy Farr: Thank you, Peter. Financial Advisory adjusted net revenue was $356 million for the first quarter of 2026, 4% lower than the prior year. Building on our momentum in Private Capital Advisory, recent assignments included [indiscernible] Capital Partners, [indiscernible] Capital on continuation funds and advise [ NOVA ] infrastructure on the raise of Infrastructure Fund II. Further reflecting the diversification of our franchise, liability management and restructuring assignments include debtor roles with [indiscernible] and [ Xerox ] Holdings and creditor rules involving [ Ampology ] and [ DISH ]. Demonstrating global reach with complex assignments. We completed transactions. We [indiscernible] $23 billion acquisition of [indiscernible] and planned subsequent separation into two independent companies. And recently announced transactions include Zurich Insurance Group on its [ GBP 8.2 billion ] recommended cash offer [indiscernible] Turning to Asset Management. Adjusted net revenue was $309 million for the first quarter of 2026, up 17% from the prior year quarter. Revenues reflected management fees of $296 million for the first quarter, 25% higher than the first quarter of 2025, and up 3% on a sequential basis. Incentive fees totaled [ $11 million ]. As of March 31, we reported AUM $259 billion, up slightly compared to year-end and demonstrating improvements in flows. During the quarter, we had net inflows of $9 billion, market appreciation of $354 million, foreign exchange depreciation of $3 billion and divestitures of $1.5 billion. Average AUM for the first quarter was $266 billion, up 2% compared to the prior quarter, and up 15% compared to 1 year ago. To mandate highlight ongoing demand for our quantitative global and fundamental equity capabilities. In the first quarter, we secured several new mandates spanning our Advantage platform, systematic equities, fundamental strategies, fixed income and private markets. Related to a few key transactions during the first quarter, the sale of our [ State and Edgewater ] funds was an attractive resolution for our investment in the firm. This resulted in a $78 million noncash gain in our GAAP results, which is excluded from our adjusted reported results. In addition to our organic growth investments, yesterday's announced acquisition of Campbell Lutyens an important step in the execution of our Lazard 2030 strategy, materially accelerating revenues, scale and the diversity of our platform. Upfront consideration is all stock with optionality on deferred payments to be either stock or cash. The acquisition is expected to be EPS accretive in 2027 with no synergies assumed. Equity ownership is broad-based at Campbell Lutyens. So this transaction creates significant value through retention and performance alignment with long-dated deferrals. It also has the near-term effects of strengthening the balance sheet, additional cash [indiscernible] the business. Now turning to firmwide expenses. Our adjusted compensation expense was $471 million for the first quarter of 2026, resulting in a compensation ratio of 69.9%. Our adjusted non-comp expense was $149 million for the first quarter of 2026, which equates to a non-compensation ratio of 22.1%. Improving operational efficiency and delivering profitable growth is a top priority. We continue to take a disciplined approach to expenses while investing in the long term. We are committed to achieving efficiency over time as we balance both sides of these [indiscernible]. Shifting to taxes. Our adjusted effective tax rate for the first quarter reflects discrete tax benefits related to stock-based compensation awards [ that vested ] during the quarter. We currently expect our effective tax rate for the full year 2026 to be in the high [ 20s percent ] range. Turning to capital allocation. In the first quarter of 2026, we returned $174 million to shareholders, including a quarterly dividend of $47 million. In addition, yesterday, we declared a quarterly dividend of $0.50 per share. Guided by our Lazard 2030 strategy, we are building a stronger and more resilient firm. The addition of Campbell Lutyens and the future establishment of [ Lazard CL ] as our third global business will accelerate our strategy and strengthen the scale, relevance and strategic importance of our connectivity to private markets. With ongoing focus on disciplined execution, across financial advisory and Asset Management, we are positioning Lazard to deliver sustained growth and long-term value across cycles. Now we will open the call to questions. Operator: [Operator Instructions] We'll take our first question from Devin Ryan with Citizens Bank. Devin Ryan: First question, obviously, appreciate the comp ratio dynamic in the first quarter, just the -- this kind of [indiscernible]. But -- can you just talk about kind of the full year? Do you think you can drive some improvement there just based on what you're seeing right now in the revenue backdrop, appreciating things can change? And then bigger picture, probably for Tracy, just as you've been in the seat here for a bit, are you identifying any opportunities that could maybe drive more leverage as we look out beyond 2026? Peter Orszag: I think, Tracy, can take both of those. Tracy Farr: I appreciate the question. So first of all, I'd go to Peter's opening comments around our positive outlook for the year, as you can fully expect comp ratio as a factor of 2 different metrics. And so as we gain more and more confidence around the revenue projection, there's leverage there. I want to be careful. I mean, your comment is exactly right. It's effectively a math equation. And the accrual that you'll see of the [ 69.9% ], I think we would still guide you closer to a comp ratio for the full year, similar to what we had last year, around 65.5%. You understand from a GAAP basis, we're required to accrue on a fixed compensation basis, and that has a larger impact in the first quarter. So some of the math, which I understand is complicated, shows that there'll be a higher accrual in the first quarter versus the second. I do think that there are opportunities to be more disciplined. Obviously, me being in this role, one of the things that I stress that I would focus on was operational efficiency and cost management. I think there's additional ability to be disciplined in the comp ratio itself directly. I think you have seen relatively strong amount of discipline on non-comp already in the first quarter. To your question about just other areas, yes, I think there are opportunities, particularly in our support functions, around streamlining operations between both geographies and businesses that we have a renewed focus on finding efficiencies there. We launched a long-dated program to address some of those costs and cost reductions. I think we'll have more details that we can give on that in the second half of the year. I further believe that there's still opportunities as we see advancement in technology and AI and other parts of our business. But again, I think you'll see a continued focus on my part around operational efficiency. Devin Ryan: Great. And then Peter, I won't leave you out here. First off, congratulations on the Campbell Lutyens acquisition, seemingly get you in the top couple of firms and Private Capital Advisory, obviously, [indiscernible] already had a strong business, but this scales that quite a bit. So the question really is Campbell Lutyens didn't have all the other advisory capabilities that Lazard does, and your existing private capital business was pretty integrated with from my sense. So can you just talk about the network effects that you think you can get off of Campbell Lutyens? And then also what that could mean for like productivity uplift of those partners, or just more broadly across the firm as you integrate all those LP and GP relationships with broader Lazard? Peter Orszag: Sure. Thanks so much for the question. First, I'd note, we believe, and I think the data show that we're a pro forma [indiscernible] leader, not one of the leaders in primary and secondary fundraising business as a whole -- on a pro forma basis, for [ Lazard CL ] post close. Second, there is a network effect, a flywheel effect in both directions from M&A, restructuring and liability management to the fundraising business and vice versa. This is one of the major motivations that Campbell Lutyens had for joining Lazard, which was the recognition that they needed more of those capabilities in order to compete in the fundraising business. And they -- again, this was a big part of the discussion, which is the ways in which there was a business flow in both directions. So we're very excited about the opportunities for enhanced productivity from -- not just the kind of base business, but from -- in a sense, referrals in both directions. And this was a core part of the strategic logic of the transaction. In addition to that, I don't want to discount the data piece of this. As you know, really [indiscernible] information and data on both GPs and LPs is difficult for most people to obtain. [indiscernible] this combined business will have a data-rich environment that will be coupled with our AI systems that will help facilitate that flywheel effect that I was mentioning earlier, in addition to helping on the core primary and secondary fundraising business itself. So there's a lot of opportunities for uplift here that we're excited about. Operator: Our next question will come from Alex Bond with KBW. Alexander Bond: Another question on the deal, and congrats there again. Can you help us think about the business mix at Campbell Lutyens just in terms of, maybe, secondary advisory, related revenues versus the primaries business relative to your existing in-house units currently and also in a similar sense in a geographical split of their business compared to yours? And essentially, just trying to determine where do you think their business will fill in the most white space relative to your existing offerings? Peter Orszag: Yes. I appreciate that. And what was attractive for us about this transaction is the [ LEGO ] piece nature of it in terms of very little overlap and a lot of where they're strong, we were weaker and vice versa. So I would highlight, in particular, their strength that -- the way I would put it is we're now balancing in the secondaries market, for example, GP transactions that are a source of excellence with LP transactions that are on the Campbell Lutyens side, more of the focus across asset classes. We're adding complementarity between real estate, private credit and then infrastructure and other for example. And so that's fitting very nicely. And then on the fundraising piece, strength in North America with their -- with strength in Europe and in Asia. And so you're just seeing, as we went [indiscernible] layers down, the entire ecosystem coming together in a comprehensive way, I think it is exceptional having seen lots and lots of potential transactions, the degree to which the pieces fit together to form a coherent whole. We also have some additional information on the mix of activities and what [ Lazard CL ] would look like in the supplemental deck that we posted yesterday on our website. Alexander Bond: Great. And then maybe for my follow-up and going back to the comp and I guess just want to drill down on maybe the impact of last year's above trend hiring there. You obviously added the 28 net MDs last year, well above the [ 10% to 15% ] target that you have out there. But maybe if you could just help us quantify maybe how much the hiring last year impacted the comp in 1Q relative to the full year '25 rate? And then also maybe how we should think about [indiscernible] hiring last year, maybe trickling through and [ impacting higher trends into '26 ], if at all? Peter Orszag: Sure. Let me take that question and then Tracy can take -- or I'll take that part of the question and then Tracy can take the, kind of, I don't want to call it the mechanical part. I'm not [indiscernible] that to you, Tracy, the calculation part. Obviously, last year, we added a lot of talent and well above our [ 10 to 15 ] net add per year target. We have added some bankers this year. Healthcare Services is a good example. We're interviewing others. And by the way, I would note, [indiscernible] an aside, one of the people I interviewed earlier this week before this transaction was announced was highlighting the importance of the secondaries business to his M&A franchise. So just coming back to the flywheel effect. We think that with [ Lazard CL we'll ] have even expanded ability to recruit and attract top talent. But bottom line, I think that we will be [ within our ] range this year in terms of net adds rather than above it. So 2025 was an unusual year because we had a lot of talent that we thought was productive and valuable. I'd also note, just on the timetables here, that also means that if you look back over time at the separations we've done to help modernize our culture. And then when the net adds have been, a lot of the future productivity, I've talked about this before, is still yet come as the bankers that we've been hiring up on to our platform. And if you look at the year-by-year net adds and subtractions, and then add a lag of 1 to 3 years depending on what kind of ramp you want to do. The vast majority of the productivity gain from the hiring we've done is yet to come. Tracy Farr: Yes. And I think the only thing I'd add to that are the mechanics. I mean you talked about the hiring and the expectation around hiring this year. Naturally, we've talked about the ramping and we've talked about that percentage of MDs that are still in that ramping period. Keep in mind that, that still remains at a relatively high level of around 40%. And so again, as that number were to come down, which would be effectuated by, for example, Peter's comment of us being in the middle of that range. You'll see a little bit of of leverage as that matures. I guess, mechanically, maybe what I'd point you to is when you think about total fixed comp, which obviously has a component to that of guarantees as you're bringing in MDs from external places, total fixed comp, if you were to compare it quarter -- first quarter this year versus last year was up kind of low double digits. And so when you think about the total adjusted net revenue being up effectively 5%, there's naturally going to be a higher accrual rate of first quarter. Again, I think that, that math and that mechanic probably paints a tougher picture in the first quarter than what I believe the full year will look like. We think that through both a more positive outlook on the revenue front through a much more disciplined approach on comp this year than maybe what has existed in the past, given my involvement in that process. I think that the guidance that I gave you around comp coming down closer to where it was last year is important. Operator: Our next question will come from James Yaro with Goldman Sachs. James Yaro: Congrats on the deal. I did want to touch, Peter, on the sponsor's backdrop right now. It remains the weaker part of M&A once again so far this year. You did sound a constructive tone on this part of the market. Maybe you could just expand a little bit on the timing and speed of sponsor M&A, recovery and the ingredients associated with that as you look ahead? Peter Orszag: Sure. Look, I struck a constructive tone on the market as a whole. I don't think I struck a constructive tone on the private equity piece of that. And in fact, for example, the [ conflict clearance ] is above $5 billion. The rapid growth there, those are almost all just given the deal size public transactions. Those are much less likely in the private capital sphere as an example. But I agree with you. There's a little bit of waiting for [indiscernible] kind of phenomenon where -- with regard to private equity activity, we've all been waiting for that moment. I'd say if you listen to the heads of the large alternative asset managers who are going to drive a lot of this activity, they are still saying that 2026 will be the year in which they're going to be selling and buying a lot of firms. So we will see how that plays out. But the other point I wanted to make is that our connectivity in private capital, the reason that our revenue share on the advisory side has gone from 25% to 40%, extends well beyond private equity M&A and involves restructuring and liability management engagements with these firms. It involves the Private Capital Advisory business, which is growing rapidly. It involves our [ Lazard cap solutions ] business. So I think the piece that you're focused on appropriately is a subset of the overall private capital activity. And I agree with you that we're -- we've been waiting for a substantial uptick in private equity activity. We'll have to see how the year turns out. We are seeing a significant number of processes that we're [ involved ] in. So that's promising in private equity M&A. And then the second thing I'd say is, again, look to the [indiscernible] comments of the leaders of these firms in terms of what they say they're going to be doing in this calendar year. But we all have to wait to see it actually manifest itself. James Yaro: Okay. I apologize from mischaracterizing your comments. Maybe just a little bit on Asset Management here. I was hoping you might be able to expand a little bit on the flow outlook from here. Do you expect to be able to continue at the recent level of inflows? And perhaps if you could also just unpack a little bit the fee rate dynamics in the quarter in Asset Management and how we should think about the fee rate going forward as well? Peter Orszag: Chris Hogbin is going to take that for us. Christopher Hogbin: Sure. Thank you for those questions. So look, on the flows, we obviously enjoyed a strong first quarter with $9 billion of net inflows. I think that reflects a deliberate sort of focusing [ on ] our distribution efforts, strong investment performance growth in a number of services, and client demand in areas where we have very strong offerings. As Peter mentioned in his remarks, we've seen clients looking to diversify into international emerging markets and global strategies. And as a reminder, 2/3 of the AUM we manage is nondollar-denominated. So we benefit from that. In terms of the flow dynamic going forward, we still have a very strong one, but not funded pipeline. We see a lot of commercial activity. But I would not straight line the number from Q1 through the year. In fact, in the next couple of months, we might see a little bit more of a moderation in the net flow level. As a reminder, net flows is the difference between two big numbers, gross flows, inflows and then outflows. So we think that while we continue to see very strong gross flows, there are some areas of our business where we may see some level of redemption. But we still remain very confident that we will deliver the -- on our commitment of having net inflows for the full year. So we're very confident at that level. Secondly, to your question on fees. Fees in the -- average management fee in the quarter was 44.6 basis points. That's actually up sequentially from [ 43.9 ] in the fourth quarter and up meaningfully from the [ 41.2 ] from a year ago. Obviously, [indiscernible] a fee rate a lot depends on the evolution and the mix of the business going forward. But we feel comfortable as we see the business today, that the fee rate should stay around this level through the remainder of the year. Operator: Our next question will come from Brennan Hawken with BMO. Brennan Hawken: Congrats on the Campbell Lutyens deal. Could you help us understand the price paid for Campbell Lutyens? And thanks for the clarity on the equity financing, Tracy. When was the deal price struck? Could you [indiscernible] understand that, too? As far as the pricing [indiscernible] Tracy Farr: Yes, I can take both of those. So you'll have hopefully seen that the reference share price was $46.50. As you can imagine, we had, throughout the process, a long set of negotiations between the heads of terms and the ultimate pricing. It was based on kind of a medium-range [indiscernible] during the period. On the questions on the equity financing, and maybe it's just helpful to walk through this for everyone. The [ 575 ] total noncontingent consideration, the $460 million of that is paid upfront. So that's -- the $460 million is based on that [ $46.50 ] reference share price. A significant portion of that, about half of it, we can get into the details be effectively released upon issuance. So not locked up about another half of it is locked up over a period of 3 years. There's also $115 million of a deferred payment, which would which would not be priced at the [ $46.50 ] It would be priced at issuance, which is 2 years from close, also subject to then a further 1-year lockup on that. As was noted in the materials that Peter referenced, there was another $85 million of performance-based earnout. On both the deferred and the earn out, we have the ability to pay settle in either a cash like security or stock that gives us some opportunity to manage dilution depending on where the share price is, that was important to us. But we thought that the all-stock nature of the transaction was attractive for a number of reasons. First and foremost, the alignment of incentives between the people that are joining our firm and our existing employees. The nature of the deferral has strong retention dynamics between just the long-dated nature of the deferral and the grant dates, but also forfeitures associated with it. So we thought that, that was powerful from a retention perspective. And then lastly, as was mentioned, we think it's a powerful tool in just further enhancing the balance sheet and providing future strategic flexibility. This would be a deleveraging transaction naturally. But as we continue to think about other organic or inorganic investments that we want to make, increasing our strategic flexibility was important. Brennan Hawken: Thanks for highlighting all that. Another angle that I was interested in pursuing Tracy was the, sort of, getting an understanding of the price paid on the actual earnings that you are acquiring. Could you maybe help us understand the earnings that is embedded either in your 2027 revenue base where you have the combined entity? And importantly, what kind of profit margins [ CL ] had, or anything that we can kind of get a little clarity on the underlying metrics? Tracy Farr: Yes, it's a great question. When you think about it from an acquisition multiple perspective, and we talked about it being accretive in 2027, the way that I would think about it is it was effectively acquired at a multiple similar to our total consolidated weighted average multiple, which is why it's effectively breakeven in the first year and likely accretive in the second year. So that gives you a bit of a sense on just the earnings multiple related to it. The revenue of the business is slightly larger than our own PCA business, but with really holding operating margins in the mid-20s percent range. So this was both a high-growing and high-performing asset. So it was a chance to invest in both revenue growth but also profitability. You didn't ask it, but I also think that this is an opportunity, going back to the comp ratio perspective, not only to help from a scale perspective, which always helps accomplish [indiscernible]. But I also think the -- when you look at respective comp margins in respective businesses, this is another area where our consolidated comp ratio could benefit over the medium term. Operator: Our next question will come from Ryan Kenny with Morgan Stanley. Ryan Kenny: Just want to clarify, as you focus on integrating Campbell Lutyens, does it rule out additional M&A near term in areas like asset management? Peter Orszag: I'll take that. The short answer is that I think we've been disciplined in the acquisition targets that we have been looking at. Campbell Lutyens, I think, is right down the fairway in terms of type of business that we find attractive. It's not -- I think I've talked before about avoiding advisory firms that are [indiscernible] kind of thing that where you're putting a premium on something with very little to no terminal value. We will continue to pursue [indiscernible] in which we're going to avoid doing that. And then on the asset side, we were disciplined. Obviously, we were being pitched a lot of private credit opportunities early in my tenure. We decided not to pursue those in part because we did anticipate that the valuations looked high and we anticipated there might be a wobble in the market at some point, which is exactly what has occurred. That having been said, there may well be teams within Asset Management that we find interesting, not necessarily major acquisitions. And then the only other thing I'd say is we are taking a very active look at our wealth management opportunities, and we believe that there may be pathways for growth in that arena. So I'll leave it at that, which is on the advisory side, I think we've been pretty clear about the criteria that we would apply to acquisitions. And on the asset side of the business, I don't think you should anticipate anything in the traditional asset management space, but we may be -- we're looking through the growth opportunities in our Wealth Management business. And in addition, we are actively always looking at adding talent and teams in our core Asset Management business, where we believe that it's differentiated. And obviously -- one other thing as we look at any opportunity, I just want to emphasize, it's got to fit strategically. It's got to fit from a valuation perspective and a shareholder value perspective, and it's got to fit culturally. We're really pleased with Campbell Lutyens from that perspective, but those are the only transactions that we're going to be doing where you hit all 3. And we will continue to be quite disciplined in terms of what we look at. Ryan Kenny: All right. And then separately, Peter, what are your thoughts on the new proposed merger rules in Europe? Is it meaningful to your Advisory business there? Peter Orszag: It could be. I think it's -- I think -- look, the backdrop in Europe is that there are lots of great European companies, but the macro backdrop has been stymied and to some degree, the corporate backdrop has been impeded by -- you don't have as many frontier firms in Europe as you do in the United States. And so I think going back to the [indiscernible] report, this was one of the recommendations that was in that report. And so in addition to potential that there's opportunity created by moving in this direction. I'm also glad that Europe is moving on some of the [indiscernible] recommendations because I think that's important to not just M&A in Europe, but also European economic growth. Operator: Our next question will come from Mike Brown with UBS. Michael Brown: So Peter, you noted that several large transactions slipped out of Q1, but the conflict clearance is above $5 billion or up, 50% year-over-year. Can you maybe just talk about that pipeline to revenue conversion timing here? Is this potentially coming through in 2Q? Or is it really going to imply kind of a heavy second half skew? And is there risk here that some of these deals ultimately don't reach the finish line? Just maybe some color there about kind of what drove that slippage this quarter? Peter Orszag: Sure. I mean, I think the short answer is this is not a quarterly business. It's a lumpy business, and you have to, kind of, look at underlying trend because the quarters can bounce around. That is what we're very excited about. We are, if anything, ahead of schedule relative to our 2030 plan on all of the indicators that we're tracking to achieve that plan. But quarter-to-quarter, things can move around. It's -- I don't know that there's one explanation for the various different slippages. A lot of them are idiosyncratic to specific deals, or regulatory approvals, or what have you, things do move around. With regard to the outlook from here and the comp clearances. What I would say is I would just underscore that again, which is that there is no guarantee that a [ conflict clearance ] turns into an announcement, and that turns into revenue. But it is encouraging and an indication of the increasing traction that we're getting as a firm. I see this in a in a more qualitative way in terms of the board rooms that we're now in, the CEO relationships we now have that did not exist a couple of years ago. The frustrating part of this business is that takes a long time to mature and it takes a long time to convert into revenue. But it's happening and the conflict clearances, I think, are an indication of that. So I don't want to provide [indiscernible] precision on exact conversion timing. But I do want to give some encouragement about the underlying -- under the surface momentum that the business is creating in terms of our relationships, and those relationships turning into mandates and then ultimately mandates turning into revenue. Michael Brown: Okay. Great. Appreciate the color there. And then I just wanted to ask about Campbell here. A lot of good color. I like the way you frame kind of the [ LEGO ] building blocks here. So it doesn't seem like there's much overlap. But if you were to think about some of the synergies, clearly, there's some network effects. You talked a little bit about that. Maybe expand on that a little bit? Is this an opportunity to continue to, kind of, find ways to get paid more from sponsors if ultimately, there's less deal activity coming through? And then maybe on the expense side, is there any opportunities that could come through there, Tracy, maybe touch on any like shared services, or other expense opportunities here? Peter Orszag: Sure. What I would say is I do think that there is a benefit to being the market leader. Actually, even the responses we've gotten over the past 24 hours from some of our major clients underscores how excited they are that we will be able to offer the full suite of services that they may need in primary and secondary with a global fundraising practice that fills in the holes and therefore, if anything even more effective on their behalf. And so I'd say the past 24 hours has been encouraging on the additional revenue that will come to the combined business precisely from the combination. And then I've already highlighted the data point. I'd say in private markets, this is particularly important. The more insight you can have across a wider array of private market participants, the more effective you're going to be for any given client. And then third, I'd say the scale itself opens -- and we'll have more to say about this in the future, but the scale itself opens up a whole array of new opportunities which I'll leave [indiscernible] vague for right now, but that we're excited about in terms of what we can offer to counter-parties and to others associated with Lazard. So more to come on that. And then on the cost side, the accretion in 2027 that Tracy mentioned, you can fill in additional detail, Tracy, does not assume cost synergies. But -- and so we're -- we're excited about this transaction even in the absence of that. Obviously, as we move through integration process undoubtedly in these sorts of things as we examine different ways in which we can be more efficient together than we were separately. I have confidence that there will -- those synergies will be possible. It's just that we didn't assume any. Tracy Farr: Thanks, Peter, and it's a great question. I think maybe one point I would add on the revenue front. In the negotiations that we have with Campbell Lutyens, keep in mind, they -- this was a bilateral negotiation. One of the things that they found very attractive about Lazard itself was our preeminent M&A practice. In their own revenue pipeline, we talk [indiscernible] diligence the fair bit there's a lot of opportunities where they collaborate, and with other advisory partners where that now could be a revenue synergy within our existing business. So I would say that, that is more revenue synergy [indiscernible] On the cost side, you're exactly right. I appreciate you using the shared service concept. As you know, I've shared my views around legacy Lazard, not having kind of a shared service mentality in corporate. I continue to believe that there are significant synergies there. Naturally, they have a lot of support functions that will come across that can complement that analysis. So that's an area. Peter already mentioned the geographical [ LEGO ] compatibility with our business in addition to the client and the service offering, there's a geographical one that is beneficial. So from a real estate perspective, I think there are also some synergies, which we did not include. The last one I would say is, I'd be remiss if I didn't complement the talent at Campbell Lutyens, both in their corporate and within the business. But I had a significant amount of time to spend with their finance, legal and other support functions. And I think simply, as we evaluate other cost efficiencies throughout Lazard, the talent that we're able to bring over from Campbell Lutyens will be an important component to that strategy. Operator: Our next question will come from Daniel Cocchiara with Bank of America. Daniel Cocchiara: [indiscernible] came into the year just -- with a lot of emerging market excitement, but the war and energy price spike has kind of thrown that into question. I was wondering if you could just talk about how these developments have impacted your near-term outlook just for the Asset Management business? Peter Orszag: Chris will take that. Christopher Hogbin: Yes. I mean it's interesting. If you look through the first quarter, the flows picture was actually very consistent from January to February to March and the gross -- so we didn't -- as the Iran conflict kicked off. We didn't really see any impact in the flows in our business. As a reminder, institutional investors tend to be a little [indiscernible] longer term. And if anything, see any of those market movement is an opportunity to achieve their longer-term asset allocation. So it really hasn't changed much in the outlook for our business at this point. Operator: Our next question will come from Brendan O'Brien with Wolfe Research. Brendan O'Brien: To start, there's been a lot of noise on the private credit space at the moment where there's growing concerns on the outlook for credit performance, just given the greater exposure to software companies. Just want to get a sense as to whether you're seeing any signs of building stress in both sponsored portfolio companies broadly, as well as within their software holdings specifically. And just as we think through the timing of this opportunity, is this more of a 2026 kind of fee event, or more of a long-term one in your view? And just how does the private credit loans, or the fact that there will be more private credit concentrated potentially impact the opportunity from a liability management versus Chapter 11 perspective? Peter Orszag: I'll take a little bit of that, and then Tracy, you can come in also. Look, I'd say the following. I'd say in our -- in the parts of our business that deal with sponsors who are in the software space, you're seeing an effect. It's not universal. It's a bit idiosyncratic firm by firm, but that is a very, very small share of our overall advisory practice. And in general, I'd say the private credit challenges are concentrated in the software sector. And they are also, I'd say, more salient or more severe, if you will, in -- among alternative asset managers or private credit players that have also turned to retail investors. And the reason for that is I think retail investors are more used to having the ability to just withdraw money whenever they want to, and there is a tension between that thought and the relatively illiquid nature of many of these investments. Institutional investors who account for the vast majority of funding of the private credit market overall, I think, understand that point, but it's something that many retail investors are not quite as used to [indiscernible] this juncture is exactly why these private credit funds have gating constraints on the size of withdrawals that are possible at any point in time. It's still somewhat awkward when someone wants money back and they don't get it back immediately. Anything else you wanted to add, Tracy? Tracy Farr: I would just go back to a couple of points. I mean, we noted earlier, the restructuring practice having a broader mandate between creditor and debtor. I think there's a lot of opportunity there. I actually came out of the capital solutions business within Lazard, where I spent the majority of my career. Keep in mind that practice is really a very bespoke credit in private capital advisory business, where, frankly, as some of these challenges emerge, that business actually performs better [ as it's ] dealing with kind of bespoke credit or private capital solutions that exist. And then I go back to part of the rational around PCA and Campbell Lutyens, I think [indiscernible] as much as any kind of the complexities in private credit manifest themselves and challenges in whether it's M&A, Peter mentioned IPOs earlier but just other financing solutions that enable transactions, the ability to pivot towards continuation of vehicles and secondaries, Again, we see that as a natural hedge within the business and frankly, [ just a ] high-growing area. Brendan O'Brien: That's helpful color. And then for my follow-up, I just wanted to touch on the cross-border environment at the moment. With the conflict in the Middle East, once again highlighting the fragility of global supply chains. I just want to get a census to the extent of which some of your larger multinational clients are rethinking their respective footprints and whether you see this as spurring more cross-border M&A activity once we're past the conflict? Peter Orszag: I would say that large multinational firms are definitively rethinking their supply chain footprint. That's pretty much across all sectors. I would [indiscernible] say that I think even when this conflict is resolved, and we could talk more length about the various options there. But even when this conflict is resolved, the risks associated with being cognizant that there are various choke points across the global economy are, I think, much better appreciated today than was the case a decade ago. And leadership teams and Boards are responding to that recognition by trying to create more resilience. The trade-off is it's not so easy to decide in some sense how much insurance you're going to take out against those checkpoints because it's expensive to do it. And so I think that's exactly what -- and I don't mean literal insurance. I mean geographic dispersion that [indiscernible] the chokepoint. So I think that's what you're seeing. I don't know that the end of the hostilities in the Middle East is going to be the kind of break point for those questions because I think there's broad scale appreciation that we're just in a new environment. And even if peace breaks out in the Middle East, the risk that various choke points across the world will again be used for leverage in geopolitical conflict is well appreciated by boards and C-suites. And so they're evaluating how to respond to that. I would just highlight again, I think while this sort of uncertainty is unfortunate for the global economy, it is also something where clients increasingly look to a place like Lazard to help them guide, to help get insight into what they should and could be doing. I've emphasized before the contextual alpha era that we're in. I think we are living in an era of contextual alpha. And Lazard's geopolitical team integrated with our banking teams and then also integrated with our investment professionals on the asset side, meet that moment. Operator: We have a final question from Alex Bond with KBW. Alex please make sure that you're unmuted. All right. This does conclude Lazard's First Quarter 2026 Earnings Conference Call. You may now disconnect.
Operator: Good day, everyone, and welcome to the First Quarter 2026 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, at www.eastman.com. I will now turn the call over to Mr. Greg Riddle, Eastman Investor Relations. Please go ahead, sir. Greg Riddle: Thank you, Becky, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; and Jake LaRoe, Senior Manager, Corporate Analysis and Investor Relations. Yesterday after market closed, we posted our first quarter 2026 financial results news release and SEC 8-K filing. Our slides and the related prepared remarks in the Investors section of our website, eastman.com. Before we begin, I'll cover 2 items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially Certain factors related to future expectations are or will be detailed in our first quarter 2026 financial results news release. During this call, in the preceding slides and prepared remarks and in our filings with the Securities and Exchange Commission, including the Form 10-Q to be filed for first quarter 2026 and the Form 10-K filed for full year 2025. Second, earnings referenced in this presentation exclude certain noncore and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures including a description of the excluded and adjusted items, are available in the first quarter 2026 financial results news release. As we posted the slides and the accompanying prepared remarks on our website last night, we will now go straight into questions. Becky, please let's start with our first question. Operator: We will now take our first question from Vincent Andrews from Morgan Stanley. Vincent Andrews: Mark, I'm wondering in methanolysis, given what's going on, the run-up in crude oil prices and virgin plastic prices running beyond that, if in methanolysis, this is providing an opportunity for more customer trial or adaptation, whether it's in the U.S., potentially some export opportunities because I seem to remember over the last year or so, we've been talking about customers not wanting to spend or try things that are different, but it would seem to me now your product probably offers some significant relative value beyond just its recycled nature. So if you could comment on that, that would be really interesting. Mark Costa: So we certainly are very excited about the strength of revenue growth or associated with the renewed platform around methanolysis, both on the specialty side as well as the rPET side we need to keep in mind that the end markets here, even though there's a lot of stress in the marketplace right now with Middle East conflict. The end market demand situation hasn't really changed dramatically. Consumer discretionary on durables is still relatively challenged or cosmetics, et cetera. So we're not seeing an uptick in any market demand in this context. And the customers are still fortunately very focused on the value of renewed content and interested in buying it. So on the specialty side, I don't think anything has really changed. We are getting a bunch of wins. We're seeing a great build in specialty customers. You saw some of that volume growth happen in Q1. It will continue into Q2. and into the back end of the year. And it's happening with Tritan sales and cosmetic packaging, where we're seeing the most adoption. On the rPET side, I think there is more of a question around just relative value of our rPET relative to the where virgin PET prices are going with the increase in oil. And certainly, that improves the price position of our material relative to those materials that are going up in a considerable way. And so we see strong demand there. But obviously, the demand was strong before oil went up, and we're running our capacity to serve that. And so that 4% to 5% revenue growth that we've talked about in January, we still think that's probably accurate. There may be some upside. The real upside, I think, sits relative to the underlying market sits more in the Middle East related issue than it is just on the new value proposition across the portfolio, but in particular, specialty plastics since we're talking about Advanced Materials right now, has some upside there. As our competitors in Asia, principally are facing a much higher oil costs, much higher natural gas cost they're having to raise prices like we are aggressively in this context. But they're also facing security supply issues. There are shortages out there that's driving all this price increase. So there's -- people are going to start running into the inability to actually make product polymers, whether it's great competition or indirect polymer competition. So we're just seeing signs of it, but we expect to see more potential volume upside driven by that operational constraint that's going to be occurring in Asia in particular. So there's a combination of renewed growth for sure. What's impressive in this entire environment is even with the challenges that our customers are facing economically, we're still building, they're still paying premiums for these products, which is a really impressive test of the value proposition. Operator: Our next question comes from Patrick Cunningham from Citigroup. Patrick Cunningham: Sort of a related question just on the volume upside as being a reliable supplier here. Have you seen tangible market share gains, particularly in CI at this point? I know you kind of touched on this, but how would you sort of handicap the potential for share upside in other parts of the specialty business as a result of the conflict? Mark Costa: Yes. So it's a great question, and we're certainly paying a lot of attention to this issue, as I just mentioned. So on the Chemical Intermediates side, certainly, we can sell everything that we can make. And the good news about this year because we had such large cracker turnarounds last year is we have a lot more volume to sell this year than last year. So we have more volume to sell. Remember, we sell a good amount of that in North America, where we have good margins always. And then we had the export market that we would send material into from Chemical Intermediates to run the assets well. But those margins have been significantly compressed last year. So those margins now with the shortage out of the Middle East have gone up significantly. And so we're going to see the benefit of that. So we see the benefit of bought more volume than we expected in North America with the tightness in the overall markets from the imports that would have come from Asia that are not coming as much -- as well as the spreads expanding and a lot more volume to sell. So we're definitely seeing share benefits as well as being explored to higher-value markets like Europe than Asia where markets are being shorted by material that's not coming from Asia as readily. So lots of different benefits going on there. When it comes to the specialty side, I already hit the point, I think. But we definitely see the potential for volume and market share upside in AFP and Advanced Materials. But it has -- we haven't seen any significant amount of improvement yet. So we think that's still to come. A lot of people are very focused on the price of oil or the price of global natural gas which is certainly raising the cost structure of our competitors around the world much higher than us. But the quantity shortage, I think, is an impact to the world that we haven't actually seen yet. The people are living off of a certain amount of inventory, whether it's customers or competitors in serving the market, but that's going to start running out and they're going to start seeing more shortages impacting the markets in addition to just the sort of direct oil or natural gas dynamic. Patrick Cunningham: Understood. Very helpful. And then just on fibers, you specifically called out reduced customer shipments, some forward-looking volume risks. Can you elaborate what you're seeing there and why the implied second half earnings run rate should still show some improvement year-on-year? Mark Costa: Sure. So just to sort of go back just a moment to sort of what we're dealing with in fibers. When the earnings came off last year relative to '24, it was really multiple components. The tow volume is part of the story, but it's important to remember that about $30 million of the decline was textiles, $20 million was sort of stream utilization due to weak demand across the company and about $15 million in energy. So when you move to this year, what we told you in January was we thought that the tow volume would be moderately up relative to last year, which was a combination of locking in our contract business with everyone. So we had a modest price decline to lock in our contracts. But our Middle East customers were expected to grow a bit because they were the ones that were missing their contract commitments last year due to the issues we explained about the not realizing market share growth in their markets. And so we were expecting some modest growth into from that. Obviously, with the Middle East war happening, the -- those customers have been impacted. We actually have towed there to serve their demand. in some warehouses. So it's not an issue of us getting material to them. It's an issue of their ability to operate in this environment. and be able to export their cigarettes to other markets because a good portion of their production isn't just for the Middle East, it's for exports to other markets. And so how they get that material out is a bit of a constraint. So Q1 was fine. We see a little bit of risk in Q2 where they're not going to buy quite as much in that quarter as we expected. And the real question is how do they come back in the back half of the year to meet their contract commitments. When it comes to your back half question -- and the other thing that's going a little bit slower and why we lowered earnings about $20 million in our guide here is the yarn business is not growing as fast in this market context. So we don't see that volume pick up -- and as a result, we don't -- we're not getting as much of an asset utilization tailwind as we expected. So when you think about that, we still feel really good about how the business is doing. And then when you look at it from a second half point of view, have several drivers that will make the second half much better than the first half. First is these contract commitments. So even with our large customers who have signed annual contracts that holds to relatively constant to last year. The contracts allow flexibility in how and when they buy it. And a number of them have chosen to buy less in the first half and buy more in the second half. So you have a pretty significant ramp-up in volume with our core customers around the world, just meeting their contract minimums, which is sort of what we have in this outlook. So that's happening. The second is you've got some continued build in the Naia yarn and film side of things. You will have a little bit of energy tailwind as the energy gets cheaper from a flow-through basis from the winter storm in Q1 to lower natural gas prices going forward. So a number of these factors come together to enable this. And of course, our cost reductions are sort of back-end loaded as well across the company, and some of that flows in here. Operator: Our next question comes from David Begleiter from Deutsche Bank. David Begleiter: Mark, on CI, if you were to hold spreads steady at today's rates, and layer in that $50 million of maintenance tailwind for Q3, what will that mean for Q3 EBIT? Could we see EBIT $100 million in CI in Q3? Or is that too ambitious? Mark Costa: Well, I think, Dave, we sort of guided you that in Q2 would be around $50 million in EBIT with a pretty tight market situation that's going on, obviously, right now. As we look at and what the trends could be, I would think it's going to be more similar than to be substantially up. I mean, without a doubt, the margins are tight right now and there will be a tailwind from Q2 to Q3 on the shutdown side. But it then comes to your assumptions around when the Strait is going to get open. If the Strait gets open in the next months, obviously, some pressure is going to come off in the marketplace, and you'll have spreads moderate a bit. So that makes it a little more complicated to sort of say it's going to be up. I think it being similar is a reasonable expectation. But it really comes down to how this whole straight situation plays out and how long the market tightness goes. When you think about it, the price of oil, price of global natural gas are obviously incredibly high right now. and that gives us a very significant advantage in how we make a lot of products, not just olefins, but everything because a lot of our customers are also -- or competitors are based on natural gas, not just for energy, but for feedstock. But if you think about just the cracker side of things on olefins, which is the vast majority of the improvement for us, you've got maps that are offline, and you've got methanol off-line, that's 15%, 20% of that, not just the oil, but these derived products, a lot of time for these refineries to restart. Then you got to get the derivatives restart, then you got to fix the logistics question. And then you've got damage in places that have to be repaired. All of this says the moderation isn't going to go all the way back to pre-conflict in our minds on oil or for the derivatives. But certainly, when the Strait opens, some of that pressure come off and factor into sort of how the margins trend in the back half of the year. But we feel great about how the business has improved. We're happy to have the cash flow that comes from this business. And we certainly think that it lets us to reset better. David Begleiter: Very good. And just on the potential volume upside and specialties from these disruptions in Asia, how do you go about making these permanent rather than just temporary? Mark Costa: That's a great question. So I mean I think it's going to -- it's unfortunately at the patent's answer, David, on where we pick up the volume. In some places where it's a like competitor the shares may normalize back a bit. But customers are learning painful lessons about exposure and reliable suppliers. And I think one thing to keep in mind is this is an excellent proof point about the advantages of being a North American chemical company and in particular, being a very vertically integrated chemical company with 80% of our assets in the U.S. gives us a huge cost advantage but it also gives us a huge security supply advantage to our customers, and there's value to that. And certainly, one we intend to take full advantage of in supplying our existing customers but also picking up new ones that we will intend to hold on to. When we pick up customers, by the way, from other materials, then the chances are we can hold on to them because the value proposition of our product is better once they once they start using it. Typically, they're using some cheaper polymer like polycarbonate or SAN that doesn't perform as well, but it's cheap. When they switch over to our polymer they're going to see it perform far better with their consumers and then that should provide some stickiness in how we hold on to that share once they've realized it. So we're going to be doing everything we can. And of course, we're going to be trying to lock business in on contracts for a longer-term commitment where we can as well in this environment to sort of give us resilience on the volume and the price side. Operator: Our next question comes from Josh Spector from UBS. Joshua Spector: Just curious around your visibility around any pull forward or not. I mean I think in your prepared remarks, you said it's not pulled forward, but how are you validating that? I guess, all the conversation around potential supply risks from some of your competitors probably makes your customers a bit more nervous and probably build a little bit of inventory. So curious there. And then related with that, just how does this impact your production plans? I think you kept your asset utilization tailwind kind of the same. I would think if you're anticipating their demand, maybe there could be some upside there. So curious if you could talk about that as well. Mark Costa: So when you think about the demand pull forward, we're operating with the underlying assumption that end-market demand this year is going to be similar to last year, which is the same assumption we gave you at the beginning of the year. And it's the same thing we're using for how we think about planning and assessing what's going on. And in that context, what we're seeing in volume growth in the second quarter sequentially is strengthened growth in the AM business, really in specialty plastics which is associated with all the methanolysis wins, which is associated with clear wins of new applications and market share we're getting in our core and Tritan business, our cosmetic business that doesn't have anything to do with pull forward. We don't see a big spike in demand like last year where people are just trying to buy stuff ahead of tariff risk. I think part of what's going on is customers see the risk and want to get ahead of price increases or want to have security supply, but they're also being cautious about what they do when it comes to building too much demand with market uncertainty that we all can recognize in the back half of the year in this context. And the other factor in this too is inventories are really low at the end of last year. So you also have to keep that in mind. That's part of the strength of recovery you saw from Q4 to Q1 as people just starting to rebuild some inventories or, if you will, end of destocking that was going on in Q4. But we don't see a lot of inventory out there in the supply chains at this stage. It's always difficult to see it. To be clear, we certainly, along with the entire industry, have not been experts in understanding the supply chain inventory. But we don't see a lot of build of that, certainly not in March. And as we go through this quarter, our order books are really strong. So we had a good March, a strong March and we see that continuing in April and May. But June is a wildcard in this market context. We don't see any problems, but we just don't have that much visibility all the way out to June. But overall, there's just a sign of given market pull-through in the specialties. As I said, in CI, we can sell what we want to make and probably can do that through the end of the year. Operator: Our next question comes from Frank Mitsch from Fermium Research. Frank Mitsch: I was struck by the $500 million of price increases that you have started to implement. I'm wondering if you could talk about how you see that phasing in. What has been the initial reactions from your customer base? And how does that match up in terms of your expected inflation in raw materials? William McLain: Frank, what I would say is, as Mark has already highlighted, in Chemical Intermediates, we were reacting in the moment and driving price increases and volume growth as we think about what's required to supply. In the specialties, obviously, our pricing philosophy has been around the value of our products. And as we pace that with our partners over time. What we expect sequentially is in our specialties, mid-single-digit price increases from Q1 to Q2, when you think about our chemical intermediates, those are phasing in. I would say they're in the high teens or approaching 20% as we see that sequential momentum. So we were -- our teams across the world reacted in the moment in Q1 when March occurred, and we have good progress out of the date. Mark Costa: Yes. So just to answer the question around the sort of market competitive dynamics around this. Clearly, everyone is raising prices, whether it's polymers or chemicals across the entire industry. So you have that momentum to leverage being cautious on price increases will accomplish nothing when you're trying to worry if you think about consumer demand, except you missing out on margin, I think everyone understands that. That's point one. Number two is the competitors we have, especially in the specialties, especially in Advanced Materials are Asian based. They've got significant increase in oil, and they have significant increase in natural gas prices. So their cost structure, their energy cost structure has gone up more than us. And so they're feeling a lot of pressure to manage their prices, and we're seeing the price increases from our competitors similar to us. across the markets. So in this context, we feel pretty good that we can get the price up, hold our volumes. And we've got great commercial teams. We've shown the value of innovation by holding on to price incredibly well in '24 and '25 in very weak market conditions. And now we're in a hyper inflated market condition, and we're showing we can increase our price in our specialties and keep track with our raw material and distribution costs, which is just further proof that we have a specialty business that has differentiated value propositions. And -- but we're always close to our customers. We'll always be keeping an eye on competitive activity and make adjustments if we have to, but we're not seeing the need to do that at this stage. Frank Mitsch: That's very helpful. And if I could come back and get a clarification, when talking about fiber is getting better in the second half of the year, part of that is you have contract commitments from Middle East customers that you're anticipating they're going to meet their contract minimums, et cetera, et cetera. But wouldn't this qualify as force majeure? I mean wouldn't they be able to say, "Hey, look, I mean, this -- to me, it seems like the very definition of force majeure. How should we think about that? Mark Costa: First, to frame it, the Middle East customers are about 10% of our revenue in this segment. So the other 90% is predominantly tow as well as some yarn customers. And in that 90%, the real dynamic here is just they all have contracts -- they all have volume commitments. Our forecast is based on them buying at the bottom end of the volume range in those contract commitments. And so that's global, it has nothing to do with the Middle East. And they bought less in the first half of the year and going to buy more in the back half of the year. And that is the principal driver of the increase in earnings in the second half relative to the first half. And when you get down to the Mid East part, these customers have made a lot of investments in new capacity, and we're winning in the marketplace, but not quite as fast as they wanted. And that's where sort of their volume draw last year sort of came up short. They had taken a bunch of actions and start gaining market share this year and are very focused on doing it. They just have a logistics issue of getting it out. And so we've adjusted our expectations for the risk of that challenge by sort of lowering the earnings expectations segment to this $210 million to $240 million range, which is about a $20 million drop. And part of it is just a bit less volume from them, a bit less yarn growth a bit less asset utilization benefit and you put those 3 together, and that's how you get to that $20 million versus where we were originally. And that's really sort of the dynamic. So it's about customers meet their contracts. Those customers historically have always met their contracts under any situation, and they don't have a force majeure excuse on that 90%. Operator: Our next question comes from Matthew DeYoe from Bank of America. Matthew DeYoe: I can't remember now if it was the slides or the release, but you talked a little bit about the EPA tariff refunds. Wondering if that was a tailwind to 1Q or if it's more 2Q, if it was, how much are you expecting to get back there? William McLain: Matt, on the IEEPA tariffs, obviously, with the Supreme Court ruling and the Court of International Trade, we recognized about $20 million within Q1. That wasn't a tailwind that the EPA recognition of the refund was basically in line with the winter storm impact. So you can think about those 2 as being neutralized in Q1. Also, that is the recognition. There's no further IEEPA refunds to recognize and we would expect to get the cash related to that sometime in the second half of the year. Matthew DeYoe: Just to clarify, that's been like included in the 1Q results then. William McLain: Yes, both the winter storm and IEEPA in the Q1. Mark Costa: So if you think about it, they neutralize each other out. So when we gave you our guide in January, we said this is our outlook excluding the winter storm impact that we are in the middle of. But by the time we got to the end of the quarter, IEEPA tariffs neutralized the winter storm it turned out to be about the same. So it was just a clean quarter relative to how we guided in January. Matthew DeYoe: All right. That's helpful. I'm jumping back in. So context is helpful for me. And then on methanolysis, Right. I just wanted to kind of square some of the commentary because you talk a bit about new wins. And at the other side, you're saying demand hasn't really changed much. So can you just kind of refresh where we are on kind of the upscaling here? Mark Costa: Sure. So when it comes to the revenue of circular, there are 2 components to it, right? There's the core business we have where we're adding recycled content to our Tritan products, our cosmetic products. in our specialty businesses and growing those businesses. Obviously, those end market businesses have been very challenged economically from '22 through '25 as a discretionary spend where consumers have pulled back. So the rate of growth we've seen on the specialty side has not been as good as we would have expected in the last couple of years in '24 and '25 in particular, as we were ramping up this plant. The good news is we've been winning some more applications through the back half of last year that are showing up as additional revenue that you saw some of the benefit in Q1, you'll see it build in Q2 and even more so in the back half. on that specialty side with those wins. So to be clear, we're not saying that end market is improving. We're just picking up more market share in durables or in cosmetic packaging with our value proposition. So that's happening. Then on top of that, we swung a line that can make Tritan back to making PET that we've explained to you guys a year ago so that we could make PET and serve that our pet market because Pepsi and some others wanted to start buying sooner than their original contract obligations because they saw the value proposition we have with our renewed products. So our superior clarity, our superior quality our superior performance and how the product actually performs was recognized and they wanted to start building and use that material this year. So when you put those 2 together of selling more rPET with Pepsi and with some other packaging companies, brands, you get that 4% to 5% revenue growth that we talked about in January. And when I was answering Vincent's call, I was just confirming, we still see that 4% to 5% growth. But the Middle East conflict hasn't yet significantly increased that to be more than 4% to 5% growth. We're going to pick up volume for other reasons, as I described, due to sort of impact on competitors. But in this case, we're going to sell what we can make and we're ramping up our PET capability to sell even more, but it takes a bit of time to do that on the capacity side to continue supporting that growth, not just this year, but also additional growth next year on the rPET side. Operator: Our next question comes from Jeff Zekauskas from JPMorgan. Jeffrey Zekauskas: You talked about earnings $50 million, perhaps in the second quarter and in the third quarter in Chemical Intermediates, but propane prices have really been pretty volatile. Sometimes they're $0.75 a gallon and sometimes they're $0.90 a gallon. How are you handling your propane values? And can you reach these numbers that you're talking about if propane is at $0.90 a gallon. William McLain: So Jeff, obviously, we're buying propane at the market prices. that you're referencing. We do believe here in Q3 -- I'm sorry, in Q2 that we believe that we've appropriately taken that into consideration as we look at the supply-demand balances and how we've priced into the market with our price increases. So yes, there's some range or, as we say, approaching $50 million for the quarter, but we think we've taken that into the appropriate context for $0.75 to $0.90 range. Jeffrey Zekauskas: Okay. And you talked about for the year, perhaps approaching the cash flow that you generated last year. What are the parts of working capital that are sort of holding your operating cash flow back? Are they payables or receivables or something else? William McLain: Yes, Jeff, what I would say is, as always, the Eastman team does a great job of generating and managing our cash flows, and that was demonstrated again here as we think about the level of consumption of cash actually being lower than the prior year. So for Q1 out of the gate, I believe, but we've got things well managed and under control. As we think about sequentially, we know that we built some inventory in Q1 for our large turnarounds, and we expect to deplete that. That's going to be offset with some of the inflation that we've described and I've been talking about through the call. At the end of the day, the pressure will come as you think about there's pressure on the inventory and on the receivables account, but we also think that, that will be mitigated by higher accounts payable at year-end. And we're just trying to look and see what's the second half scenario when we get to midyear as we then think about managing all of the various levers. So under control, the range is narrowed because of the level and magnitude of inflation overall. And as you think about net working capital, you've got 2/3 in your assets and 1/3 in payables. So net tension on that front. That's all we're highlighting at this point. Operator: Our next question comes from Kevin McCarthy from VRP. Kevin McCarthy: Mark, can you speak to the expected quarterly earnings cadence in Advanced Materials? It seems like we have a fair number of moving parts there. I'm curious about how you're dealing with paraxylene inflation here and whether you think you can recover or possibly over recover those sorts of input costs, whether there are any lag effects we should be keeping in mind and I think you called out some auto production variances there. So maybe you can kind of just kind of walk us through some of those moving parts and think about whether you would expect earnings to do better in the back half versus the second quarter and that sort of thing. Mark Costa: Sure, Kevin. So when you think about Advanced Materials, there's a cadence, as you said. So first of all, it was a great recovery out of Q4 into Q1. Obviously, we had some mass utilization headwinds with some choices we made there. So as you go into Q2, you've got the benefit of seasonal increase in volumes, these application wins we've talked about, starting with rPET and renew specialty product selling, but other products growing, that's going to give us a lift into Q2. The automotive market, relative on a year-over-year basis for the year, we're expecting to be sort of down sort of low single digits. So that's on a year-over-year basis, it's a bit of a headwind. On a sequential basis, it's a tailwind because the performance film business always has a big ramp-up in volume from Q1 to Q2 that we'll also see helping us on that front. So you have all those factors coming together on the volume side. And then you've got the actions we're taking on price, as you mentioned. So teams have moved incredibly quickly to start implementing prices on either April 1 or May 1 to cover the expected increase in raw material costs, paraxylene, VAM, the key raw materials that go into this segment. And we believe we're very much on track to sort of keep pace with those as we go through the quarter. And then you've got utilization benefits coming in underneath of this that also start to help out. So a number of reasons why we'll certainly have a better sequential quarter in Q2. And then as you look forward into the back half of the year, what you'd expect to see here is continued volume growth because a lot of the build in the circular side is back-half loaded. You're going to see continued improvement and just wins in general. So the back half we won't have a normal seasonal decline in volume because of all those wins that will offset what is still a normal seasonal decline. So you get volumes that could be flat to a bit better in the back half, which would be not normal, but it makes sense with all the innovation we have in this market context. So you've got that happening. You've got the prices having fully caught up. So you've got a first half to second have sequential tailwind in price cost as that plays out as well as energy coming off a bit. And then you have the cost savings and a lot of the utilization benefit is going to be in the back half, too. So a number of reasons where AM will be stronger than normal in the back half of the year, which is also true of the fibers business being stronger than normal. And just to finish out the strength since we're on the topic, AFP would be normal, right? So it will be normal seasonality in the back half of the year. And then as we just talked about Chemical Intermediates, margins are going to be better in the back half of the year relative to the first half of the year, especially on a Q1 basis, relative to the back half. So when you put all that together, that definitely drives earnings to be very attractive in AM to be as we expected as well holding similar in AFP, CI a lot better this year. Fiber is a bit off. So the overall number means that our earnings per share should be above $6 a share. Kevin McCarthy: Very helpful. And then secondly, with regards to your Chemical Intermediates segment. How much harder can you run your assets in the second quarter and moving forward relative to the first quarter. Is there a meaningful uplift from utilization? Or is it really all about the more favorable spreads there? William McLain: So I would just highlight, obviously, we were impacted by some of the winter storm on operations as well. So as we think about going from Q1 to Q2, we'll have -- definitely have that as a tailwind. And also as we look at our olefins and the Oxo's from that perspective, I would highlight that we did build some inventory in Q1 for our planned asset till turnaround. So our asset till, I'll call it, upside here in Q2 is limited. But for us, we see most of that margin growth coming in our olefins at this stage. Operator: Our next question comes from John Roberts from Mizuho. John Ezekiel Roberts: Within the automotive weakness, are you seeing better performance in your coatings ingredients than you're seeing in the films area? Mark Costa: So no, we're not really seeing a difference. You have to remember, a lot of our demand is driven by the refinish market as opposed to the OEM market on the coating side. Obviously, that market has been a bit challenged just like the performance films, the aftermarket in general is more discretionary in consumers' behavior that's been through in '24, '25, and we expect that to continue here the overall auto market, as I said earlier, is expected to be a little bit soft. And I'd say our demand will be in line with the market on the coating side. And certainly, I think that's not as -- not true in the AM side. So we'll continue to do a little bit better than the market with our innovation like HUD and even EVs still take 3x as much material per car versus ICE where there is growth in EVs. And I think some growth in EVs will certainly come back with -- especially in places like Europe and China with a high price of gasoline you're going to see some people moving back to EVs for economic reasons, maybe even in the U.S. But I would focus more in Europe and China for that. So I think that there's -- those kind of advantages will help us do a little bit better on the interlayer side, performance film side will be like coatings more in line with where the market goes. John Ezekiel Roberts: And then was the winter storm impact in the tariff refund benefit largely booked in the same segments? William McLain: On, what I would highlight is, obviously, those aren't going to be uniform and -- but I would say there's not a material difference that I would highlight for you. Operator: Our next question comes from Mike Sison from Wells Fargo. Michael Sison: For Chemical Intermediates, can you give us -- can you give us a thought what pricing needs to be year-over-year in 2Q to get to the $50 million? And just curious on the delta there in terms of the improvement year-over-year. William McLain: Yes, Mike, what I highlighted earlier is you can think about the sequential price increases approaching 20% for Chemical Intermediates overall. Mark Costa: And while we're adding in the specialties, it's about mid-single-digit price increases going on the specialty side that gets you to that $500 million. Michael Sison: Got it. And then it seems like Advanced Materials margins are going to continue to -- will improve sequentially in 2Q. This is a segment that I recall it used to be at 20%. Is that still the potential for that segment longer term? Mark Costa: Absolutely. The business is a great business. The main issue that's affecting the margins in Advanced Materials is volume relative to fixed costs. It's not a price variable cost issue. The price of variable cost has been good, held up and been incredibly stable, frankly, from 2022 to now. And even now with incredible inflation that we're facing in the business and across the company, we're implementing prices to keep up with it. So this really -- when you think about AM is more of a utilization-based issue, right? So you've got the underlying cost structure, then we added $100 million of the cost structure for the methanolysis plant and you've been stuck in a really weak economic environment that hasn't improved since 2022 where volumes in housing, consumer durables are still well below 2019 levels. and even auto is now dropping probably below 2019 levels with the trend this year, we sort of got back to 19% last year. So a lot of opportunity and a lot of pent-up demand of cars 15 years old appliances getting to their end of life that's in our future. So we feel very good about demand coming back when we get past 1 crisis after another and driving utilization benefits, and we're creating our own growth and filling out the methanolysis plant in a weak environment, proving innovation is a critical success factor for our company and how to win in this industry. And we're holding our price cost stable through all that. So that starts translating into materially improving margins as well as a utilization better than last year without the inventory management of last year. and cost reduction activities that have been pretty significant in '25 and '26. So no, we feel that we can get the margins back. We just need a stable economy. Operator: Our next question comes from Arun Viswanathan from RBC Capital Markets. Arun Viswanathan: I guess a few questions. So first off, just on the spreads environment in CI, you noted some strength, and I guess, obviously, that should continue into Q2. I guess, are you seeing any supply issues for your competitors or anything out there that could lead to maybe some permanent rationalization of capacity and I guess, what are you seeing on the supply-demand side for some of the markets in CI? Mark Costa: It's a great question. I mean under this sort of economic stress, there was a lot of assets in Europe in the Chemical and Immediates world that we're on the edge of being rationalized, shut down for economic reasons. And obviously, the economic situation has gotten worse for them. And I think that's also true of some assets in Japan and South Korea, where there's a lot of discussion around rationalizations. So I think it's reasonable to expect that some people are going to look at the current situation, say, if I was going to planning on shutting that asset down 2 years maybe I just do it now in this context. I don't have a lot of evidence of that because we're 60 days into a crisis. So everyone is just managing their way through this dynamic, and we don't even know how long the straight will stay close. So a lot that will factor into that. But I do think global natural gas prices, for example, will likely stay higher for some period of time because even when Strait opens, Qatar has got to repair all the damage that was done to their fields and their processing capability. You've got oil fields that could get permanently shut in Iran right now if this goes on much longer, a lot of debate around that. You've got just -- it's hard to imagine oil production globally and natural gas production globally suddenly coming back to pre-conflict levels. Not to mention, turning oil and natural gas into methanol and naphtha and ammonia and everything else, it's just -- it would be very surprising for just a snap back to those low levels. So I think all of that then just creates more economic pressure on the people on the far right side of the cost curve. Those locations I just mentioned, they're going to have to start considering some rationalization. For sure, we're the low-cost winner in this kind of context. China has got its own dynamics, where we will probably be fine. So I wouldn't expect a lot of rationalization there except for some maybe they're old assets that are not competitive anymore as well, I guess. So yes, we expect to see it, but I can't quote you a bunch of plants that have announced in the last 60 days. Arun Viswanathan: Okay. I appreciate that. And then just as a quick follow-up. Obviously, historically, your spreads have expanded after inflationary cycles like this. Maybe you can just contextualize the magnitude that we should expect on maybe AM and AFP spread expansion in Q3 and the durability of that. I guess just wondering if you think that these feedstock levels will allow for some more durable pricing power as you move through the year? William McLain: I think we've talked previously around high oil environments being positive for Eastman. And as Mark has just highlighted cost curves over time. In our specialty businesses, obviously, we price off of the value and the relative value and Mark has highlighted the tension and, I'll call it, price increases and lower-value products within the polyester business and how ultimately that can lead to share and other opportunities as we continue to grow. As we think about the momentum, obviously, we're making the price increases so that we're pricing through the quarter to ensure that our margins are stable. And we'll look to continue to do that into Q3. Mark Costa: One thing you have to watch out, we run our business on a dollar per kg basis, on a percent basis. So when you get these kind of significant increases like '21, you also have a denominator math problem. So the prices go up a lot that goes into the denominator, not just the numerator when you're calculating margins. So you've got to watch out for that. But we'll be very clear about trends around how dollar per KG is going in our margins. Operator: Our next question comes from Laurence Alexander from Jefferies. Laurence Alexander: A short term and a long term. In the near term, how are you thinking about the rough magnitude of working capital as an impact on your free cash flow conversion this year? And secondly, you mentioned kind of the sort of hitting the quantity limits or the outright shortages. Do you have a sense from your customers where kind of they are expecting or kind of where everybody is waiting to see this actually crack in terms of which end markets feel the outright shortages first? And then which ones if shortages do develop, take the longest to fix. William McLain: So on the working capital front, as we think about the full year impacts, obviously, we built some here in Q1. A lot of that was around planned turnaround. But just as a proxy, I would use the $500 million increase in revenue. And you can take 1/3 of that as I think about how things could balance out and that could be the full year headwind. And obviously, that could go up or down depending on the timing of the freight opening, et cetera. But I think $150 million, $200 million roughly. Laurence Alexander: Sure. When you think about where shortages are likely to develop first, when you speak with your customers and they say kind of where are the most -- where they're warning you or if they do warn you about potential plant shutdowns, where they're flagging kind of -- that may happen first or which end markets or -- I mean, obviously, Southeast Asia seems most likely. And then kind of which ones are saying, well, if we shut down, it's going to take us a long time to come back up and fix things because it snarls up the downstream chain too much. Mark Costa: Yes. So those are great questions. I mean there's a question about our competitors, and then there's a question about our customers and then the whole supply chain. We're not seeing any disruption yet at the customer level. where they can't get something to finish making the product. It's like the semiconductors back in the auto situation back in the 2021 time frame. We are keeping an eye on that, but we haven't had any customers come to us with that problem yet. So it will be sporadic, and it will be customer specific. It won't be something you can really foresee is my guess and how that plays out. But we're keeping a very close eye on it. I think that the dynamics around this is obviously pretty volatile, which is why we're not giving full year guidances. You've got a lot of potential upside as we've been talking about. There's obviously end market risk with inflation that has to be all sort of weighed together. But what I'd say overall is we feel really good about our team and how well they perform. When you think about all the dynamics thrown at them all the way back to COVID to this inflationary environment to total collapse and sort of discretionary demand in '22 that stayed with us until now. And then mid East crisis. And it's a lot to manage. So I'm incredibly proud of how our team manages through all this and find a way to extend our value propositions. I think the innovation strategy is one that is being proven out to have been a very good choice we made over a decade ago to have ways to defend our value to grow in markets where they're flat or challenged and send our value in weak times or supply shot times like now, and it's creating a lot of strengths in this company. And the circular platform certainly is turning out to be a very good choice that's delivering a lot of growth in this market context. And then, of course, translating all that into cash flow and having a strong balance sheet. So we feel good about how we're navigating with this. We think we have a very meaningful improvement in earnings this year relative to last year. And we're going to focus on what we can control in this chaos to keep delivering for our shareholders every day. Greg Riddle: As that was the last question, I'll say thanks again for joining us. We appreciate you spending time with Eastman. I hope everybody has a great day. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Quaker Houghton First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to John Dalhoff, Director of Investor Relations. Mr. Dalhoff, you may begin. John Dalhoff: Thank you. Good morning, and welcome to Quaker Houghton's First Quarter 2026 Earnings Conference Call. Joining us on the call today are Joe Berquist, our President and Chief Executive Officer; Tom Coler, our Executive Vice President and Chief Financial Officer; and Robert Traub, our General Counsel. Our comments relate to the financial information released after the close of the U.S. markets yesterday, April 30, 2026. Our press release and accompanying slides can be found on our Investor Relations website. Both the prepared commentary and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Quaker Houghton's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures, and the company has provided reconciliations to the most directly comparable GAAP financial measures in the appendix of the presentation materials, which are available on our website. For additional information, please refer to our filings with the SEC. Now it's my pleasure to hand the call over to Joe. Joseph Berquist: Thank you, John, and good morning, everyone. We delivered a strong first quarter with organic volumes up 3% year-over-year, resulting in our third consecutive quarter of adjusted EBITDA growth. Our performance was driven by new business wins in all regions, highlighted by double-digit organic volume growth in Asia Pacific, where we continue to gain traction across the region. Adjusted EBITDA increased 5% compared to the prior year, building on net share gains that enabled us to outperform our end markets, which we estimate were down approximately 1% in the quarter. Gross margins improved from the fourth quarter, increasing 150 basis points sequentially and 40 basis points year-over-year. The sequential improvement in margins was bolstered by higher utilization of fixed assets and improved operational performance. Market conditions remain soft overall, with pockets of incremental industrial gains tempered by weak automotive production. The hostilities in the straight of our moves are creating inflationary pressure on raw materials and input costs. But so far, it has not had a significant direct or indirect impact on demand. Strong commercial execution from our team and contributions from our recent acquisitions helped offset the underlying sluggish markets, enabling us to deliver organic volume, revenue and EBITDA growth in the quarter despite headwinds and volatility. Turning to the first quarter results. Net sales increased 8% year-over-year, fueled by net share gains of 4% at the top of our target range, along with the contribution from recent acquisitions. This marks the 10th consecutive quarter of net share gains, while our end markets have been consistently sluggish. Organic sales volumes in Asia Pacific grew for the 11th consecutive quarter. While our business in China continues to grow above end market rates, we are also achieving outsized growth in emerging markets such as India, Thailand and Vietnam. Operating margins have expanded in the region as we are benefiting from recent organic investments in localized manufacturing. In EMEA, organic volumes grew 2% in the first quarter as new business wins outpaced persistently tough end markets. Volumes in the Americas declined slightly year-over-year, driven by a lingering customer outage, tariff uncertainty and weather-related disruptions. Despite these challenges, March had the highest volume in the Americas in the last 16 months, signaling improved momentum as we exited the quarter. EBITDA margins declined 50 basis points year-over-year, primarily because of higher SG&A expenditures related to acquisitions, foreign currency and incentive compensation. I would like to provide more color on the ongoing conflict in the Middle East and how we are managing its impact on our business. Immediately after the conflict began, we established an executive level task force to monitor developments, assess potential impacts and coordinate our response. Our top priority was to ensure the safety of our more than 4,700 employees, particularly those living and working in the region. We also took swift action to confirm supply continuity to customers in the affected region. Since then, the task force has remained actively engaged, tracking conditions closely and addressing emerging pressures. From a business perspective, we have proportionately low direct sales exposure to Middle East countries near the conflict area. Our sales to North Africa and the Middle East in 2025 were less than 2% of total company net sales. While first quarter results were largely insulated, we expect higher raw material and shipping costs in the second quarter. To address this, we implemented pricing actions across all regions with some taking effect in April. There will be a typical lag between rising costs and price realization, which we expect will create temporary gross margin pressures in the second quarter. Based on the actions we have taken and additional increases planned for this quarter, we expect to recover margins within 1 to 2 quarters. Meanwhile, we are committed to ensuring products reach our customers without disruption. We have not yet seen a meaningful impact on customer demand, but a prolonged conflict could begin to influence broader economic activity, including forward demand and further cost inflation. With this backdrop, we are focused on what we can control. Today, we are announcing the launch of a new transformation program that will reduce cost and complexity across the organization, optimize our manufacturing network, strengthen sales and technical capabilities and simplify global processes. We will pace investments over the coming months to unlock productivity in a disciplined manner. The first phase is underway through a comprehensive business process review focused on finding cost opportunities and improving master data management. The program will fundamentally change the way we work, and we are looking to modernize the employee and customer experience. In the first quarter, we took steps to streamline our executive leadership structure to sharpen customer focus and accelerate decision-making. This program is central to achieving adjusted EBITDA margins at or above our target of 18%. We expect to exit this year with approximately $10 million in new run rate savings. Over the next 3 years, we see a clear path to delivering at least $20 million to $30 million of sustainable structural cost improvement with much of that target already identified. We have a clear line of sight to a robust set of initiatives, giving us confidence in our long-term transformation path. This new program complements actions that are already underway. The closure of our manufacturing facility in Dortmund, Germany remains on track, and we are beginning to realize the associated financial benefits. We continue to expect approximately $2 million in cost savings from the closure in 2026 and $5 million in annual run rate savings beginning in 2027. We also recently announced the planned closure of our manufacturing facility in Songjiang, China, which will coincide with the start-up of our new facility in Zhongjuang later this summer. Production from Songjiang will transition to the new site as it comes online, enabling more efficient operations and enhanced capabilities. This modern facility will strengthen our ability to serve customers across Asia Pacific and manufacture recent portfolio additions more competitively at the local level. Turning to the outlook. Our view on macro trends is consistent with prior expectations. End markets declined modestly in the first quarter as expected. And while we still continue to predict flat end market conditions for the full year with normal seasonal improvement and a slightly better demand environment in the second half, we expect sequential volume and revenue growth in Q2, driven by seasonal improvement and wrap effect of new and recent business wins. Visibility through the first part of the quarter indicates steady demand. At the same time, we anticipate temporary gross margin pressure related to higher input costs stemming from the Middle East conflict, which is expected to push gross margins below our target range in the second quarter. The situation remains dynamic due to the prevailing market uncertainty. We expect these gross margin headwinds to be temporary, lasting no more than 1 to 2 quarters. Our current estimate is that second quarter gross margins will be 200 to 300 basis points below quarter 1 on a sequential basis. Through pricing actions we are taking, we expect to fully recover gross margins within our target range of 36% to 37% as we exit the year. With the rapid raw material cost escalation in recent weeks above what we experienced at the end of the first quarter and the ongoing uncertainty of the situation, we are in the process of implementing further price increases, which we expect will be in place before the end of the second quarter. We are recovering the cost impact from inflation in a responsible way and collaborating with our customers to successfully navigate the complexity of the current situation. As mentioned previously, the company is also taking action to improve our cost structure. Our long-term earnings profile continues to be resilient. Our local-for-local operating model and deep customer relationships differentiate us and enable new business wins. As a result, even amid heightened uncertainty, we continue to expect revenue and adjusted EBITDA growth in 2026, assuming no significant further deterioration in our end markets because of the Middle East conflict. In closing, I am incredibly proud of our team and their consistent execution in a challenging environment. We are making substantial progress across key priorities, including pursuit of new business, cost structure optimization, while also diligently executing our strategy to create long-term value for our customers and shareholders. With that, I will turn the call over to Tom to walk through the financials in more detail. Tom Coler: Thank you, Joe, and good morning, everyone. First quarter net sales were $480 million, an 8% increase from the prior year. Organic volumes increased 3%, driven by global net share gains of 4% across all regions, with Asia Pacific being the largest contributor. Acquisitions contributed an additional 4% to net sales, primarily related to Dipsol, which will become part of our organic base beginning in Q2. We also had a 4% benefit to net sales from favorable foreign currency translation, primarily due to the euro strengthening against the U.S. dollar. Partially offsetting these items was unfavorable selling price and product mix, which was 3% lower than the prior year associated with lower index pricing, regional and geographic mix. As expected, gross margins improved on both a year-over-year basis as well as sequentially to 36.8%, near the high end of our target range. This was driven by product margin improvement and more favorable manufacturing absorption. On a non-GAAP basis, SG&A increased approximately $16 million or 14% in the first quarter compared to the prior year. This increase was primarily due to acquisitions and the impact of foreign currency. Excluding these items, organic SG&A was approximately 6% higher in the first quarter, mainly due to higher incentive compensation and accelerated depreciation related to our corporate headquarters and lab consolidation in the Philadelphia area. We delivered $73 million of adjusted EBITDA in the first quarter, while adjusted EBITDA margin of 15.1% declined year-over-year due to higher SG&A costs. Switching now to our segment results. Our Asia Pacific segment continues to be a growth engine with organic net sales increasing in 10 of our 11 last quarters and new business wins far exceeding the high end of our total company target range. Asia Pacific sales in the first quarter increased 25% year-over-year as the impact of our acquisition of Dipsol complemented organic volume growth of 10% and a favorable foreign currency impact of 3%. These drivers were partially offset by unfavorable price and mix, which declined 2% in the quarter. Segment earnings in Asia Pacific increased approximately $8 million or 32% in the first quarter compared to the prior year. This was driven by higher top line growth as well as improved product margins and more favorable manufacturing absorption. First quarter net sales in EMEA increased 10% year-over-year, partially due to favorable foreign currency impacts. Higher net sales from organic volume growth and the impact of acquisitions were offset by lower selling price and product mix. Segment earnings in EMEA increased approximately $2 million or 9% in the first quarter compared to the prior year. First quarter net sales in the Americas were in line with the prior year as favorable impacts from our acquisitions and foreign currency were offset by lower organic sales volumes and selling price and product mix. Lower volumes were attributable to a continued customer outage, regional tariff uncertainty and weather impacts early in the quarter, while lower selling prices were primarily the result of our index contracts as raw material costs declined in the quarter compared to the prior year. Segment earnings in the Americas decreased approximately $5 million or 8% in the first quarter compared to the prior year. This was driven by higher SG&A related to selling expense and incentive compensation as well as unfavorable product mix that negatively impacted margins. Turning to nonoperating costs. Our interest expense was $10 million in the first quarter, which was consistent with the prior year and the past few quarters. Our cost of debt remained approximately 5% in the quarter. Our effective tax rate, excluding noncore and nonrecurring items, was approximately 28% in the first quarter, which is slightly lower than the prior year and in line with our expectations for the full year effective tax rate in the range of 28% to 29%. And in the first quarter, our GAAP diluted earnings per share were $1.13 and our non-GAAP diluted earnings per share were $1.63, a 3% increase over the prior year due to improved operating performance. Cash generated from operations was $4 million in the first quarter, increasing from a use of cash of $3 million in the prior year. The first quarter is typically our lowest from a cash generation perspective due to incentive compensation payments, working capital investments and the seasonality of our business. The improvement over the prior year was primarily the result of better operating performance and lower cash restructuring costs, which totaled $4 million in the first quarter. Capital expenditures in the first quarter were approximately $11 million, primarily related to the construction of our new facility in China. We anticipate capital expenditures to increase in the remaining quarters as we complete construction in China and finalize the build-out of our new corporate headquarters in Pennsylvania. We still expect full year 2026 capital expenditures to be approximately 2.5% to 3.5% of sales. During the first quarter, we paid approximately $9 million in dividends. We remain focused on our capital allocation priorities and balancing investments for growth with returning cash to shareholders, and we'll continue to weigh opportunistic share repurchases in a prudent manner that optimizes shareholder value. In April, we announced that we entered into an amended credit agreement in which we extended our nearest debt maturity by almost 4 years from June 2027 to April 2031, while also increasing our revolving credit facility availability by approximately $300 million and improving our overall credit terms. The amended agreement also provides us with the right to increase the revolving credit facility by approximately $331 million for additional liquidity. The improvement in our credit terms and increased availability under this new agreement reflects the strength of our balance sheet and are clear indicators of the underlying health of our business and the durability of our cash flows. The new agreement provides increased financial flexibility that will allow us to execute our strategy, achieve our capital allocation priorities and continue investing in growth. We delivered strong first quarter results, continuing to gain share and driving organic volume growth despite ongoing macroeconomic and geopolitical challenges. With a strengthened balance sheet and increased financial flexibility, we are well positioned to continue executing our strategy and creating value for shareholders. With that, I will turn it back over to Joe. Joseph Berquist: Thank you, Tom. We are executing a clear set of priorities to strengthen the business, simplifying how we operate, enhancing our capabilities and putting the right cost structure in place to support sustainable growth. With that, we would be happy to answer your questions. Operator: Our first question comes from the line of Mike Harrison with Seaport Research Partners. Michael Harrison: I wanted to start with just kind of the raw material picture. I think you did a good job kind of articulating the expectation of 200 or 300 basis points of margin pressure next quarter. But maybe just give us some details on what you guys are seeing in terms of raw material costs. I assume that the biggest pressure you're seeing is in crude-based materials, but maybe comment also on what you're seeing. I know we're just getting past an oleo chemical spike, and I think some of those materials also continue to be kind of volatile. And also, if you can cover whether you're having any issues with raw material availability in any parts of the world. Unknown Executive: Yes. Thanks, Mike. Good question. So talking about the general situation. If you think about our raw materials, there's really 3 buckets, right? It's base oils, it's additives and then it's oleochemicals. And right now, as is typical in an inflationary environment like this, everything sort of keys off of what's happening with crude oil, right? And so all 3 of those buckets are higher. In the sort of when hostilities broke out, as I mentioned just a few minutes ago, we put a task force together that day, right, that Saturday, we started looking at what impacts this is going to have on supply, first of all. and then also cost. And I think from a supply standpoint, to your last part of your question, we've been very fortunate to not have any issues. I think the flexibility of our supply chain, the fact that we have this local-for-local approach and really as one of the leaders in the space, I think our relationships and our ability to get product around the world is very good. Overall trend in those 3 buckets or raw materials in general, what we had thought sort of the increase was going to be toward the end of Q1, I would say in the recent weeks, that has gone up more. So we put an increase out at the end of Q1. Some of that became effective in April, more will become effective here in May. And we've already started on another round of price increases just because the cycle is pretty inflationary right now. Will that go further? I personally have my own thoughts on that. I don't believe so. But it all depends. If it does, I think as we did in the past, we have pretty good ability to go out and get pricing, but there is this lag. And so our view of is, as I said, we think it's going to be somewhere between 200 basis points, maybe a little bit more than that. We have index agreements as well. And those index agreements tend to adjust on a quarterly basis. So that's why there's that lag. It's just not something that we can go out and press a button and do immediately. Michael Harrison: All right. Very helpful. And then I wanted to ask about the new transformation program that you guys announced in the press release and in your prepared remarks. Kind of what was the genesis of this program? And maybe just give a little bit more detail on what kind of actions you're taking that are beyond what you got -- the actions that you've announced with previous cost programs that are, I believe, still in mid-flight. Unknown Executive: Yes. We've sunset or I mean I guess there's a few lingering things with prior cost programs. But this is a new program. And the genesis of the program really is, I believe our EBITDA margins need to be above 18% and pushing 20% eventually. And we're in the sort of mid-teens space right now. And I've been in the role now for about 18 months. And I think visibility overall to how the company is operating, some things that kind of jump out to me are spans and layers. We had maybe added some layers of management that weren't there before. One of my philosophies was to bring the decision-making closer to the customer. I really would like to have our culture be one of working managers or hands-on working managers. So -- so just some general like bringing clarity to the org structure and looking at areas where there's redundancy, maybe there's a little bit of load. We've addressed that and are addressing that. I mean this is also about Mike, there's tremendous complexity still lingering from when Quaker and Houghton came together in 2019. That was a huge transformational deal. And while we've integrated very well, we've had great customer retention, and we're able to aspire our customers, I think -- there's also the reality that our master data is a little messy that creates a lot of inefficiency, that creates a lot of manual work. We looked at our business processes and just certain things like how we process intercompany charges amongst ourselves and how many times our customer service people have to touch an order before it gets to the customer; it's really inefficient. And so the key thrust of this is around business process optimization and making sure that we have a Quaker Houghton way of doing things, tied very closely to that is our master data. And we have a very good line of sight to where that's going. And actually think that there's efficiency that's at the end of that process that will -- we can start to leverage things like AI and shared services type program. to make the business more competitive. This is not a reaction to what's happening in the Middle East. This is something that I feel we need to do. It's the right thing to do for the business. We've got to be more efficient. We got to have a more modern employee and customer experience. And it's time to kind of bring the company forward and so we can really start to take advantage of a more modern set of tools. Michael Harrison: That makes sense. And then I guess last question for now is just -- as always, I'm trying to get a little bit of a sharper view on how you guys are thinking about EBITDA for the next quarter? You mentioned the gross margin pressure. Typically, you guys would see some seasonal improvement in EBITDA, but it sounds like maybe that could be completely offset by gross margin pressure. So is it fair to say we're probably looking at an EBITDA number in the second quarter that's pretty similar to what you guys just reported in Q1? Unknown Executive: Mike, I think that's fair. I do think the volume aspect of this surprisingly, in the market that we're in, you would think as volatile as it is, our volume is very strong. So I feel -- I do feel confident that second quarter volumes will sequentially improve, that even where I sit today, I would expect year-over-year improvement. There's visibility to our order book. There's visibility to business that we've won and sort of the wrap effect of that, what's in the pipeline. I mean we have a couple of parts of our business where we're actually adding labor to boost up some of our off shifts to keep up with demand. So the demand aspect of it is very good. And we're putting price in. That price will not all be in, in the second quarter, and there's another phase coming. But I do think from a volume perspective, we expect it to be better and seeing some of that normal seasonality that you see but there will be the slide of gross margin. And I think the math would say we're going to be within range, right, of where we landed in Q1. Operator: Our next question comes from the line of Jonathan Tanwanteng with CJS Securities. Jonathan Tanwanteng: I was wondering if you could talk about the expanded credit agreement you did recently and your thoughts maybe on capital allocation from here. Did you update that? I know that it was becoming current, but the expanded size, did you do that to accommodate your expected operational organic growth? Or did you see more of an opportunity maybe to do share repurchases or M&A here? Maybe just give us a little more color on the opportunities that you see going forward and how you're addressing that? . Tom Coler: Yes. John, this is Tom. I'll share some thoughts on that. I would say, first and foremost, the update to the credit agreement was really about an opportunity to extend maturities, right? So we were going current here in June of this year with maturity of our existing facility in June of 2027. So this gave us an opportunity to extend that out to April of 2031 and add some additional years with respect to the facility. It does add additional capacity for us to really continue to be flexible and use all the available tools from a capital allocation standpoint. We continue to be focused on investing in growth, both from an inorganic standpoint as well as organic growth, things like our new plant in China. And then I think, as I said in my prepared remarks, we continue to weigh how we deploy capital for growth as well as return capital to shareholders through opportunistic share buybacks and continue to pay dividends and those sorts of things. And so I think it's a combination of extending our maturities, some additional capacity, which gives us more flexibility from a capital allocation standpoint. We also improved terms as part of this refinancing of the facility and we have a great and supportive bank group that enabled us to accomplish those things in terms of the maturity and the additional capacity in the improved terms. Jonathan Tanwanteng: Got it. And maybe just to be a little more focused here, do you see opportunity just given the market volatility, whether it's in your own shares or in potentially acquiring tuck-ins or larger players? . Unknown Executive: Yes. I'd say, John, yes to both, right? I think we have done -- it's been a couple of quarters since we've done anything meaningful on share repurchase. But we're not going try to do that. Balance sheet is in a good position. So if the opportunity presents itself, we expect we will do that. I would also say that the M&A pipeline as always, remains active. There are a number of sort of bolt-on tuck-in type of opportunities out there that we think will give us more things in the portfolio that we could sell to our existing customers and those types of deals have been very accretive for the company in the past. And part of our strategy -- it will be part of our strategy going forward. So I would say yes to both questions. And we're really happy we got the financing on it. When we got it done and that the terms and additional flexibility that came with it. Operator: Our next question comes from the line of Laurence Alexander with Jefferies. Daniel Rizzo: It's Dan Rizzo on for Lawrence. A couple of things. As you aim for your 18% to 20% EBITDA margins, once I guess, some of this volatility may be kind of subsides and your restructuring is in place, how should we think about incremental margins kind of in the mid-cycle? I mean it's obviously increasing. I was wondering how we should kind of -- how we could quantify it. Tom Coler: Yes. Dan, it's Tom. Thanks for the question. I think as we're thinking about driving towards that 18% plus EBITDA margin. I think our assumptions relative to our targeted gross margin range remain consistent in that 36% to 37%. I think what you heard us talk about in our prepared remarks and some of Joe's comments is really around this opportunity from a transformational and restructuring program to focus on cost and complexity reduction with respect to our G&A functions, our manufacturing and sledging network. And so as we look out over the next couple of years, where we see some leverage is really as we think about SG&A as a percent of sales, those G&A functions and driving some of that cost and complexity out of the business. And that's really the pathway towards that 18% as well as volume growth and continuing to work around net share gains and some of the things that we've been able to successfully execute. Daniel Rizzo: I'm sorry, did you mention that I not hear what the cash cost of the plan is, the new plan? Tom Coler: No, we didn't mention anything specific about the cash cost of the plan. I think the -- what I said was we will pace this out over time. So for instance, we're not planning to put a big new ERP system in, right? So it's not going to be a huge outlay. I think what's typical here is 1 to 1.5x to achieve the types of synergies that we're looking at. So we're not planning any sort of extraordinary type of investment to get there, Dan. Hopefully, that answers that question. Daniel Rizzo: No, that does. That's helpful. And then my final question. So you guys have done a good job, obviously always of increasing market share. But you have a lot of new products from Houghton and Dipsol. I was wondering how much of your share growth is increased sales to existing customers versus going into like kind of different customers? And how that kind of breaks out? Tom Coler: It's a really great question, Dan. -- it's much easier to go in and what we say is grab a share of the wallet versus opening up a new door with someone that you don't have a relationship with. So proportionately, most of the gains that we're getting are coming from share gain within existing customers, growing that share of wallet, right? It's the customer who may be buying a lubricant from us that we could sell them, grease, specialty grease, fire resistant hydraulic, finishing -- metal finishing type of chemical. So it's really the majority -- high majority is coming from that growing with existing customers, new parts of the portfolio. Daniel Rizzo: That's very helpful. Operator: Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: Yes, sorry about that. I hope you guys are well. Congrats on the quarter. I guess, I understand the couple of hundred basis points of gross margin compression, maybe that you're expecting for Q2 because of the lag in pricing for us. I would have 2 questions. So first off, do you expect to fully recover that in the second half, which -- and does that imply that you have to actually price above inflation? And then secondly, I know you guys were successful in recouping inflation in the last inflationary cycle in '22, '23, and you were able to price seemingly above inflationary levels. . But is the demand picture now maybe slightly choppier or less robust and would make that a little bit more difficult or take longer to recoup those margins? Or how should we think about that? Tom Coler: Yes. No, good question, Arun. Thanks for those. I would say, the goal overall is we have these target gross margin ranges. I've talked about the 18% EBITDA, and we're pretty committed to that, right? So that would imply in this type of environment that you've got to stay ahead of inflation a little bit. That being said, we volume to make sure we retain and we don't have a lot of churn and we can continue to stack the wins and the growth that we're seeing going forward is also part of it. About 1/4 of our pricing is on index. So it takes away a lot of the emotional aspects of this. Our customers, I think, understand the situation that we're in right now. And we've also said, look, if things recess. In the cost side, we will act accordingly. And we're not trying to gorse them in any way, we're trying to be very responsible about it, as I said previously. The demand environment right now, surprisingly, is very strong. And will that change? It's possible it will in any type of inflationary environment like that, it could happen but through, say, the first 4 months of the year and visibility to where we are with our demand currently, we're not seeing that. We think will be okay. And then the margin question specifically, we do think by the end of the year that we would get back into the 36% to 37% range. And that's our goal. Arun Viswanathan: Okay. Great. And then I guess a follow-up, maybe I can just ask about the volumes. You said that the volume environment is -- the demand environment is quite strong. Maybe you can just kind of describe that a little bit more in detail because is it steel utilization rates are really holding up and aluminum maybe as well, automotive? Maybe you can just touch on some of the end markets. And also regionally, it seems like, obviously, Asia Pacific has remained relatively strong, and you're benefiting from some wins. But North America and Europe, are you also seeing some improvement? Or how should we think about that? Tom Coler: Yes. No. Look, I think the main takeaway here is we're really punching above our weight. And let's focus on Asia because -- the results are very, very strong, double-digit volume growth. I mean, that's against a backdrop of industrial production actually declined in China in the first quarter and we've seen light vehicle builds really in all regions down between 2% and 4%. So we are outperforming the markets that we're in. We've seen some improvement on the metal side, steel and aluminum production, that can, at times, be a precursor that automotive is going to swing back, right? -- end of Q1, I think, as I mentioned, North America seemed to pick up and little bit in North America will drive our Americas segment? And then typically, as you head out of Q1 in areas like Asia, you put the Lunar holiday behind you and you get into normal seasonality patterns. And I think they had a tough first part of the year, China especially, but areas outside of China; India, Vietnam, Thailand, actually, they had pretty good performance. And so that offsets a little bit what's happening in China. So all in all, like as we head into the second quarter, as I said, I think this sort of normal seasonality returns. That's what it feels like right now. And then us taking share, consistently taking share above market, we would expect that would continue into the year. Operator: Our next question comes from the line of David Silver with Freedom Capital Markets. David Silver: Yes. Good morning. Thank you. a couple of questions. I have a couple of questions. First one, tactical, second one, maybe a little bit longer term. But on the tactical one, and I apologize in advance that this sounds very naive. But I'm leaning on your long experience on the commercial side, Joe. And I'm sure that your company has a very detailed playbook for operating in conditions such as the one we're facing now with volatile feedstock cost pressures. And I'm just kind of scratching my head and I'm saying, why not a surcharge, I guess? In other words, something that can be pegged to something clearly visible to both sides. It might halt some of that 200 to 300 basis point erosion on the way up and the customer gets the assurance that when the relevant cost pressure abates that the pricing that persisted before this will quickly return. But I'm sure your company has a long playbook. Maybe if you could just share some of your thinking about how quicker typically goes about recouping cost pressures in fast-moving markets, such as the one here. Tom Coler: Yes. No, good question. So we do use surcharges. That is something that we do -- and really, you're able to put some of that in immediately, especially when it comes to things like freight. Other parts of the business, I mean, we have to go in and really show the data to the customer. just as our suppliers come to us, we push back and say, well, why is this going up? And I'm going to shop it around and that happens when we talk to our customers as well. So I think the nature of how we in our relationship. We're not a commodity, right? We are really kind of embedded in these plants. We're sitting in the morning meeting. We are part of the really -- become part of their operations in some cases. So we have to bring the data. We have to give them justification. And a lot of times, we have to give them options about what we're going to do about it, right? Can we do something to offset it in other ways through service or bundling a product. So it's a laborious process, but it's also very, very necessary. I think if you're going to have long-term trusting relationships with your customers, that's really the only way we can kind of approach it. We would love to be able to be more efficient and quicker with these things, but it's extremely volatile. And then you run into these situations where every Friday, something changes, right, and have to kind of adjust to that as well. But I think over the long term, David, our goal is to get back to this target range gross margin. That's something that we've always done and have also been pretty open about the fact that it does take us a quarter or two lag to catch up. David Silver: Okay. Great. I have a longer-term question or a question about a longer-term topic. But one of the trends that's going to become increasingly apparent, I guess, over the next couple of years, we'll be reassuring and onshoring of heavy industry here. So with your global footprint, I'm guessing that Quaker has about as good a view on automakers and primary metals activities that might be showing up in the U.S. from some offshore companies. And I was just wondering, does Quaker have a playbook currently to maybe capture a little more than your share of this new investment coming to, let's say, the United States. Is there a process? Do you have to qualify 12 or 18 months in advance? Just -- what is the playbook that Quaker is developing to maybe take full advantage of the coming wave of large investments in automotive and other kind of heavy industry assets here? Tom Coler: Yes, great question. We do have a playbook. And I think that playbook is pretty consistent regardless of what region new capacity is coming online. Look, we are seen as the industry leader. We participate in industry technical groups and forums. And when -- and we maintain relationship with the mill builders in the equipment suppliers. And so when a new installation comes on and you rightly point out that there's a lot of investment in North America right now. We generally know about it in the early phases. We try to be involved on the front end in the design of those systems and more often than not when new capacity comes online, we're the incumbent supplier. So that is something that is part of our playbook. How do we make sure that, that's a valuable approach for our customers. We have our own CNC machines. We have a pilot rolling mill in the company, and we can really do some things on the front end to test and ensure that we're going to have success when they start these mills up and that's something that's really important. I think the other aspect of this is there's been a shift, right? I mean if you look at metal production in China, I think more steel is made there than the rest of the world combined. And when you look at the trends just in the past few years, automotive production in China is starting to really take off. And you're seeing the Chinese brands be more prominent in Africa and Southeast Asia and even in Europe and not so much here yet, but -- but we've always said we're kind of agnostic of where it gets me. And I think just my point is, as that part of the business grows, I think we're very pleased with our ability to kind of grow in a differential way right now in that part of the world. That's something that's been very intentional. David Silver: Okay. Great. I appreciate all the color. Operator: Our next question comes from the line of Jon Tanwanteng with CJS Securities. Jonathan Tanwanteng: I apologize if you already addressed this, but I was wondering if you could talk about the potential for demand destruction or disruption at your customers and what you planned for in your scenario analysis as you consider what would happen if you run or the mid compute was extended. Have you talked to your customers about them? And what contingencies might be and what your earnings profile and the revenue profile might look like if that would happen? . Tom Coler: Yes, John. I mean, look, we talk to our customers every day about that. We're watching that as closely as we can. I think it's a tough thing to predict. I would say right now, there's an equal chance that this thing is prolonged or not prolonged. There's -- I would also say there's an equal chance that there is going to have some impact on demand that could be very, very disruptive or it's going to have no impact, right? And so when we talk about our sort of our model and how we're looking at the year, I'm basing it upon what the most -- the information I have today, which is, as we head into -- we're now well into the second quarter, visibility on what we have, I'm not seeing that sort of catastrophic demand disruption on the horizon. We're not hearing that from our customers, so we're not expecting it at this point. Is it possible it happens? Absolutely. The longer this thing goes on, and the higher inflation goes, it's not necessarily good for anyone's business, right, if that continues. But I think we can't necessarily bake that scenario in although, as I said earlier, there's probably an equally likely chance that happens or it doesn't happen right now. So based upon that, our outlook is kind of like with all the information we have today, the best thing we know and looking at all the empirical evidence we have, we're not seeing that yet. So we didn't bake that into our guide. Operator: And we have -- there are no further questions at this time. I would like to turn the floor back over to Joe Berquist for closing comments. Joseph Berquist: Thank you. Yes, we, again, really appreciate the interest in Quaker Houghton. I want to thank all of our employees for what they continue to do in these really volatile times and especially our employees that were impacted in this -- the region close to the conflict and the amazing work that they've done to keep our customers supplied. So -- appreciate the questions. If there's any follow-up, don't hesitate to reach out to John Dalhoff, and we'll be happy to answer any additional questions you have. Thanks. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Welcome to HF Sinclair's Corporation's First Quarter 2026 Conference Call and Webcast. Hosting the call today is Franklin Myers, who is serving as Chief Executive Officer of HF Sinclair. He is joined by Vivek Garg, acting Chief Financial Officer; Steve Ledbetter, EVP of Commercial. Valerie Pompa, EVP of Operations; and Matt Joyce, SVP of Lubricants and Specialties. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Vice President, Investor Relations. Craig, you may begin. Craig Biery: Thank you, Matt. Good morning, everyone, and welcome to HF Sinclair Corporation's First Quarter 2026 Earnings Call. This morning, we issued a press release announcing results for the quarter ending March 31, 2026. If you would like a copy of the earnings press release, you may find it on our website at hfsinclair.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today's press release. In summary, the statements made regarding management expectations, judgments or predictions are forward-looking statements. These statements are intended to be covered under the safe harbor provisions of federal securities laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non-GAAP measures. Please see the earnings press release for reconciliations to GAAP financial measures. For any forward-looking non-GAAP measures, the company is unable to provide a reconciliation without unreasonable effort due to the unpredictability and uncertainty of certain items. Also please note any time-sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript. And with that, I'll turn the call over to Franklin. Franklin Myers: Okay. Thank you, Craig. Let me add my welcome to all those on this call to the HF Sinclair's first quarter earnings in 2026. First, let me express my gratitude to over 55,000 employees of the company for making the first quarter a good one. As most of you know, first quarter for HF Sinclair can sometimes be challenging due to weather, due to softness in the economic conditions in our markets. And typically, we have turnaround activities with some of our assets. This quarter, our operations ran safely in compliance and reliably, which you'll hear more about in a minute. This reflects the continuing improvement in our operation and is a testament to the focus on excellence by our employees. So thank you, employees of HF Sinclair. During the first quarter, our CEO and CFO, both took leaves of absence as previously described in our annual report on Form 10-K. The Board has the task of addressing the future leadership of the company, and we'll do so with diligence and care. In the meantime, I will continue to serve as CEO and President until decisions in that regard are made. In reference to the ongoing Board process, we will not address those events in that process today. The current executive leadership team and the other employees of the companies are committed to continuing the successful performance of the company, and it is performing at a very high level. Please keep in mind that much of the strategy of the company began in 2021 and '22 with the acquisition of our Puget Sound in the merger with Sinclair. My presence as CFO is to help maintain the focus and commitment to the strategy as set by the Board. I'll remind you that I've been Chairman through that entire time since 1990, and this is an ongoing process that we're pursuing with diligence. Our employees continue to work daily with the desire to operate at a high level to improve our company for the benefit of all constituencies. But before moving on to the reports of the others, we have to acknowledge the military conflict in the Middle East. Our thoughts and prayers go out to members of our Armed Forces involved as those in as an individual is called up in harm's way. We continue to hope for a peaceful resolution. The conflict though has created substantial and material disruption to the crude oil and the necessary -- for crude oil and other necessary prior the advancement of markets around the world. This disruption creates volatility in the markets we serve. The company remains focused on addressing any challenges we have to serve our customers. And in that regard, we remain very nimble as we see events occur because we see volatility in the markets that we've got to address on a constant basis, and it's one that's not without challenge within our industry or our company. But I believe our team is up to the challenge. And I think that we will see and continue to see as others have stress in the world as a result of this, and we've got to just address it to make sure we do our part to try to resolve that stress. With that, I'll turn it over to Steve to take us through some of the commercial issues. Steven Ledbetter: Thank you, Greg, and thank you all for joining our call. During the first quarter, we delivered strong results across each of our business segments, supported by safe and reliable operations and good commercial optimization. With our continued operational focus, we recorded an excellent safety quarter with no Tier 1 process safety events despite the heavy turnaround mode and harder weather season. We are pleased with these results and remain committed to progressing our operational initiatives. Now let me cover our business highlights. In Refining, we completed 2 turnarounds at our Puget Sound and Woods Cross refineries. Despite the heavy turnaround in harsh winter weather we faced, we were pleased with our reliability performance, running crude charge at the upper end of our guided runs coming in at 613,000 barrels per day. We do not have any planned turnaround scheduled until the El Dorado turnaround commences towards the back end of the third quarter. We are encouraged by the refining margin strength in our regions and believe that we are well positioned to capture the current market conditions as we head into summer driving season. Our focus remains on our strategic initiatives and improving throughput, capture and operating expenses. In our marketing segment, we're making great progress with the integration of our previously announced Green Trail Fuels JV. We believe this joint venture will allow us to accelerate growth of the Sinclair brand and expand our footprint. While growing the earnings of this business with exposure to other high-value adjacent revenue streams, we added 25 branded sites in the quarter with more than 100 sites with contracts signed and expected to come online over the next 6 to 12 months. We still expect to grow our number of branded sites by approximately 10% annually. In our Renewables segment, we were very pleased with our team's ability to optimize our business, both commercially and operationally in order to capture the favorable market conditions in the period and deliver strong financial performance. Strong delivery of our feedstock strategy, molecule high-grading and operational excellence have set our business up well to capture favorable market conditions. And we remain optimistic that the LCFS, D4 RINs and producers tax credits will continue to support the renewable diesel margins. In our lubricant segment, we have experienced unprecedented cost inflation across our product portfolio both in magnitude and the rate at which it occurred. In response, the team moved quickly to implement multiple pricing actions aimed at recovering these higher costs in an efficient and disciplined manner. We've seen early progress from these initiatives and fully expect to continue pursuing additional price recovery actions throughout the second quarter as elevated cost pressures persist. Despite the volatility in the broader global supply environment, our supply chain currently remains secure, and we have been able to source the necessary feedstocks to supply our customers at historical rates. During the quarter, we returned $167 million in cash to shareholders, consisting of $91 million in regular dividends and $76 million in share repurchases. Since the Sinclair acquisition in March 2022, we have returned over $4.9 billion in cash to shareholders and have reduced our share count by over 66 million shares. Today, we also announced that our Board of Directors declared a regular quarterly dividend of $0.50 per share, payable on June 2, 2026, to holders of record on May 11, 2026. On the strategic front, we continue to advance the evaluation and planning of our multiphase project to leverage our advantaged logistics and production positions in the Rockies to meet the growing needs of Western markets. At the end of our Q4 Puget Sound turnaround, we successfully brought on another project enabling flexibility to swing approximately 7,000 barrels per day between diesel and jet, depending on the market environment. and this is paying off given the current market conditions. We continue to advance the El Dorado vacuum furnace project to provide improved reliability and yield while allowing up to an incremental 10,000 barrels per day of heavy crude into the mix. This project is expected to come online as part of the fall turnaround. In closing, our strategic priorities have not changed. We will continue to work towards improved safety, reliability and cost efficiencies in refining and renewables and unlocking our integrated value chain while growing our marketing, midstream and lubricant segments. We expect the current favorable market environment to continue into the summer driving season, and we believe our diversified portfolio of assets is well positioned to generate strong cash flows. With that, let me turn the call over to Vivek. Vivek Garg: Thank you, Steve. Good morning, everyone. I'm Vivek Garg, acting Chief Financial Officer, and I'm pleased to be on the call with you today. Let's begin by reviewing HF Sinclair's financial highlights. Today, we reported first quarter net income attributable to Sinclair shareholders of $648 million or $3.56 per diluted share. These results reflect special items that collectively increased net income by $521 million. Excluding these items, adjusted net income for the first quarter was $127 million, or $0.69 per diluted share compared to adjusted net loss of $50 million or a negative $0.27 per diluted share for the same period in 2025. Adjusted EBITDA for the first quarter was $426 million compared to $201 million in the first quarter of 2025. In our refining segment, excluding the lower of cost or market inventory valuation adjustment benefit of $604 million, first quarter adjusted EBITDA was $55 million compared to negative $8 million in the first quarter of 2025. This increase was principally driven by higher adjusted refinery gross margins in the West region and increased refined product sales volume, which were partially offset by lower adjusted refinery gross margins in the Mid-Con. Small refinery RINs waiver granted by the EPA in the fourth quarter of 2025, increased adjusted refinery gross margin by $21 million in the first quarter of 2026. Crude oil charge averaged 63,000 barrels per day for the first quarter compared to 606,000 barrels per day for the first quarter of 2025. In our Renewables segment, excluding the lower of cost or market inventory valuation adjustment benefit of $68 million, we reported adjusted EBITDA of $133 million for the first quarter compared to negative $17 million for the first quarter of 2025. This increase was principally driven by increased sales volume and higher adjusted renewable gross margins in the first quarter of 2026 as a result of the narrowing of Boho spread, higher RINs prices and the recognition of significantly more producers tax credit benefits compared to the first quarter of 2025. First quarter results included prior year production producers tax credit benefits of $49 million that were recognized following the February 2026 proposed ruling by the United States Department of Treasury and IRS. Total sales volumes were 52 million gallons for the first quarter of 2026 as compared to 44 million gallons for the first quarter of 2025. Our Marketing segment reported EBITDA of $28 million for the first quarter compared to $27 million for the first quarter of 2025. Total branded fuel sales volume were 325 million gallons for the first quarter of 2026 compared to 294 million gallons for the first quarter of 2025. Our Lubricants and Specialty segment reported adjusted EBITDA of $103 million for the first quarter compared to adjusted EBITDA of $85 million for the first quarter of 2025. The increase was primarily driven by a large FIFO benefit in the first quarter of 2026 as compared to the first quarter of 2025, partially offset by the dislocation between rising feedstock costs and product sales price increases. During the first quarter of 2026, we recognized a FIFO benefit of $53 million compared to $8 million in the first quarter of 2025. Our Midstream segment reported adjusted EBITDA of $111 million in the first quarter compared to $119 million in the same period of last year. This decrease was primarily driven by marginally higher operating costs resulting from a fuel contamination incident at one of our product terminals in Colorado in the first quarter of 2026. Net cash provided by operations totaled $457 million in the first quarter, which included $119 million of turnaround spend. HF Sinclair's capital expenditures totaled $102 million for the first quarter. As of March 31, 2026, HF Sinclair's total liquidity stood at approximately $3.15 billion, which includes a cash balance of approximately $1.15 billion and our undrawn $2 billion unsecured credit facility. As of March 31, we had $2.8 billion debt outstanding with a debt-to-cap ratio of 22% and net debt to capital ratio of 13%. Now let's go through some guidance items. With respect to capital spending for full year of '26 , there has been no change. For the second quarter of 2026, we expect to run between 600,000 to 630,000 barrels per day of crude oil in our refining segment. which reflects planned maintenance activities at Parco and Navajo and unplanned maintenance at El Dorado in the period. We are now ready to take questions from the audience. Matt, if you could switch over, please. Matt Joyce: The floor is now open for questions. [Operator Instructions] Your first question is from Matthew Blair with TPH. Matthew Blair: Thank you, and good morning, everyone. Your renewables results were quite strong, even excluding the PTC benefit that rolled through. Could you talk about some of the drivers in Q1 that helped push up profitability? And then for the second quarter, what do you think is a good target for utilization? And would you expect even stronger margins, just given that some of the indicators have really moved up in the second quarter? . Steven Ledbetter: Matt, this is Steve. I'll take that one. We were quite pleased with the performance of our RD business. as we've been on this journey to make this business come into profitability, we've said we needed in poor market conditions to get us to breakeven or slightly positive. We achieved that coming out of 2025. And now the market has turned in our favor. I will tell you, though, that it's not all market driven as we've taken a very hard line and look at our feedstock strategy, and that's getting much closer direct to sources near our facilities and making sure that we're prompt and hedging without anything out into the future. So from a feedstock strategy, that's working very well. I would tell you the market placement strategy we've had is working where we're finding other markets to take products to and not be completely dependent on the California market. So we're finding ways to leverage our integrated value chain, both in the Pacific Northwest as well as putting product up into Canada. And then the last one is really OpEx discipline. And that is ensuring that we've taken structural cost out. We have more of that to do, and we're seeing the results there and optimizing our catalyst to ensure that it performs on the longer runs, and we're getting the yields out of it. All of that combined with the overall market favorability, as you know, changed in 2026 to where we are structurally more balanced with domestic feedstock and domestic demand. I would say other helps to that is that just the distillate macro, in general, has found increased value in both the regular ULSD and car market. So we're pleased with what we're doing. There's more to do there. And I think your second question was around our utilization in Q2. We're not going to guide specifics, but we do believe that we will optimize particular co-located kits to the best value, and we see that being north of 70% utilization, net of all of the planned events that we have. So we're pretty excited about what our renewables business looks like now as well as for the rest of the year. Matthew Blair: Sounds good. And then could you also address the lubricants market going forward? Are you seeing global supply reductions as a result of the Iran war and it looks like some of the pricing indicators have started to move up. And maybe you could just talk a little bit about your ability to capture potentially higher margins in lubricants going forward. Matt Joyce: Yes. It's Matt Joyce. I'll take that one. We are seeing a really great market move right now as we have experienced this rapid and cost increase throughout the back end of the first quarter. We do see that being a protracted movement into the second and third quarter. And based on our locations where we produce and how we source our raw materials, we have been able to secure all of the needed raw material supply for the balance of the year. We're able to be supplying our customers at the rates that they're requesting of us and we have seen some growing demand that we anticipate will be with us through the second and third quarters at least of the year as this crisis, it prolongs itself and until the straits open up. But we feel that we're in a really good position to take advantage of those. We've also implemented multiple pricing actions to offset those higher raw material costs and work to capture that on the bottom line. So we'll look to see that come into place later this year as well. . Operator: Your next question comes from the line of Manav Gupta with UBS. Manav, go ahead. Manav Gupta: My question is specifically for Steve. Look, Steve, you have been working very hard for sometime at DINO, bringing about change and we see that in the midstream results, we see that in the lubes results I'm just trying to understand with this management shakeup, has anything changed from your end? Is the strategy the same you're following? And how are you going about building those 2 businesses as you were before the management shakeup took place? Steven Ledbetter: Thanks,. We're not going to comment necessarily on management change, but I think your point is a good one, and that is to reinforce the fact that the executive team that was here to build the strategy is still here and is executing diligently upon that. That includes making sure that we're improving and focusing on our reliability and our safety performance as well as leveraging the integrated value chain and growing those various segments. So you specifically asked about Midstream, we feel, is a key lynchpin to unlock that integrated value chain. We're bidding more value and molecules on our kit to supply our refineries as well as take products to our regions. We've talked about our multiphase project to really unlock our Go West strategy, and we think that's just the tip of the spear here. I'll maybe ask Matt to talk a little bit about what we're doing from a lube's perspective specifically. Matt Joyce: Yes. Manav, as you know, we've continued to high grade the molecules that we have on hand. We're moving into more specialized finished lubricants and specialties applications. We continue to execute on our plan of tucking in those opportunities for acquisition like you've seen with industrial oils unlimited over the past several months. And we're going to look for those opportunities going forward and continue to refine the business and be that value-added supplier to our customers that deliver something that's distinct and sticky as far as the value proposition is concerned. Franklin Myers: And Manav, let me add one thing. This is Franklin. Part of the reason I'm here is to give the executive team the confidence to continue with the plan and making sure that they have the tools and the resources to continue with the actions that Steve and Matt mentioned. There is no let up on the focus of what we're trying to do here. Manav Gupta: Perfect. My quick follow-up is a little bit on the refining macro. You saw some of the global majors report today morning and with not such good earnings on international assets and then guiding down volumes on international assets. And that's a function of crude availability. Now when we come to somebody like a DINO, I'm assuming you're not fighting those issues that crude availability is not an issue for you. So you can run hard into the second and the third quarter. And if you could talk a little bit also about your strategic asset Puget Sound because a lot of shortages are happening in California, how can you use that asset to supply to the market in California? Because, look, your pipeline or the competitor pipelines will take time. But in the near term, you can get to California through Puget Sound. So if you could talk about some of those dynamics? Steven Ledbetter: Okay. Thanks, Manav. From a global perspective, and a crude supply element. We don't face those challenges. As you know, the U.S. refinery complex is probably the most advantaged globally with the most secure crude supply outlets, and we're connected to multiple hubs and run various different grades of crude from Canada to the North Slope to many different types of domestic light sweet crudes at Cushing, and we gather and buy our own crude in the Southwest and use that both at our teaser refinery and moved some of that up into the Mid-Con to run at our El Dorado refinery. So from a crude supply perspective, some of the challenges that our competitors are facing, we do not face just from a supply. Now does it impact the overall price of the crude as it looks to compete to different markets, it certainly does. We've been successful in ensuring that we have a proper approach to buying that crude and that the cracks are supportive to whatever inflationary pressures are associated with the global dynamic. So we don't feel concerned about that relatively speaking to some of the other global issues and are in a good spot to go take advantage of our position. As far as Puget goes, as you mentioned, the West Coast has -- and PADD 5 particularly has been considerably tight. It's getting tighter. We talked about our project to go get there. And as you mentioned, it's a few years out. But you've seen imports reduce as Asian producers have had to curtail runs, and so that just continues to tighten the market. Our approach to get to California, we put in a flexibility project last year that allows us to produce and swell the gasoline pool to either make carb or sell high-valued unfinished components, which, to this point, has been more profitable. So we're moving Alkylate out of Puget into the gasoline pool in California. It's just one element. Further, as I mentioned in my prepared remarks, we put a project into swing diesel to Jet depending on the market environment, and that's paying off greatly, not only to the West Coast, but also into markets in Latin America. So we see the West Coast as a real good opportunity. It's tightened up and we look forward to taking further advantage of that as we develop some of these projects. Franklin Myers: And Manav, part of your question was you said run the assets hard. I want to make sure that you understand that we're going to run reliably and not push our assets -- that's more important to us to make sure we're up as opposed to trying to unduly stress our assets to increase volumes. Manav Gupta: No. My thing was are you running them close to -- some of your peers globally are being first to run assets at 40% and 50% because of crude availability. That was my question. Franklin Myers: Yes. That is not the case. Operator: Your next question comes from the line of Neil Mehta with Goldman Sachs. Neil Mehta: I just want to build on Manav's question around crude and specifically around 2 grades -- has had seen enormous volatility here. And so just how are you guys thinking about the setup for that spread in particular. And then WCS, the outlook as we think about the second quarter, but also the balance of the year. And then Franklin, I had a management question for you as a follow-up. Steven Ledbetter: All right. So this is Steve. I'll take the first one. Franklin, to take the hard one. Okay. So TI, what we've seen is, yes, the spread is widening given the geopolitical elements. Q1, we saw quite a bit higher than $5, and we think that, that will probably continue to be the case, but the curve on TI basically remains very steeply backward dated as things change through this geopolitical event, that curve moves, and so it flattens out. But we are in a position to take -- not have an issue as far as the spread goes from a Brent TI I think the backwardation is something that is -- that we're watching very closely. As you know, we pay a role in separation, and that will impact our late in crude, but we're managing that carefully to go get into the right markets to ensure we can get the margin coverage for that increased cost. You asked about WCS. I think WCS has been a bit better. Some of the pipes coming out of Canada have shown some apportionment -- and I think ultimately, egress will become a problem. I think some of that is also competing with the Venezuelan crude that is now on the market, and that will keep some there, but we see that from Q1 to Q2, we're looking at a $14-ish spread. And remember, we have connected with pipe space right out of Hardisty all the way into our assets in the Mid-Con, and we take advantage of that. But it will depend on what happens longer term as you've seen probably as recently as last night, the presidential permit signed. So there are multiple projects being contemplated to bring additional crude out of Canada either for domestic use or export. And so as that happens, that could force some pressure on the differentials longer term. But there's a lot of time that we want now and then many things can happen on what project goes or what doesn't. But we're evaluating all of them. And I think we're in a really good position to go take a bit of our heavy oil value chain at multiple sites. Neil Mehta: That's really clear. Franklin Myers: You have a question for me. Neil Mehta: Yes, sir. So my follow-up is just on just how you're thinking about the process by which I defined the permanent CEO and CFO. I know there's sensitivity around this and I don't want to litigate the past, but just how is the Board approaching this? What are the characteristics you're looking for over a long-term leader? Are you looking internally, you're looking at external? And just anything you can provide the market would be great. . Franklin Myers: I appreciate your question. We're not going to get into that. We do have a process ongoing. When we're in a position to share that, we will. Let me just make a comment quickly on our Board. We have a very experienced, very high functioning board that I have been in communication with them regularly about this very question and so when we've got something, we'll tell you in the meantime, let me assure you, and some of you don't know my background, I spent 21 years in the C-suite at 2 different S&P 500 companies at all different levels. I'm not a paper CEO with this group. They know I'm here every day, making sure it's going forward. So I don't know that, that reassures you, but the strategy we put in, we're executing on, and there's no let up. And the process will go forward and we will find an excellent leader for this company in due course and we're not going to bottle on it. We are looking at it very seriously. Operator: Your next question comes from the line of Joe Laetsch with Morgan Stanley. Joseph Laetsch: So I wanted to go back to the macro and just given where product prices are today, can you talk about the demand trends that you're seeing within your system? Are you seeing any signs of demand destruction on gasoline or diesel. And then maybe stepping back more broadly, how are you viewing the balances today from both the supply and demand perspective in the Mid-Con and the Rockies. Steven Ledbetter: All right. I'll take that one, Joe, Steve. As far as demand goes, what we saw in the U.S. just for the quarter, U.S. demand was down and gas around 2%, but distillate was up around 4% in our regions that we operate in that more favorable gas was slightly up and diesel was also up. I'll tell you that in the prices, one thing that we're watching, I think you're intimating is price elasticity. And so if you look at through our service centers, we're down year-over-year same-store sales around 2%, but that's against the backdrop that you'll see in some of the consultants' reports in OPUS down about 4.5%. So our portfolio high grading is working, and we're outperforming that. We have started to see some cuts in terms of travel, particularly as jet continues to price up. As you know, the global dimension is heavy distillate supply shortage. So -- they were low, both diesel and jet and they're getting lower. And most of the disruption in the Middle East, they're very much heavy distillate producers. So on the backdrop, that paints a favorable margin picture, but it also creates some concern on what permanent demand structure demand disruption may actually happen. So we're watching that very closely. It's still a bit too early to tell, but we are seeing some slight consider softness as we head in the driving season as people are going to go make those decisions, and we'll just see how that plays out. But I do believe a prompt resolution is going to be more beneficial for the global energy complex than a lingering one. As far as it goes with regards to the Mid-Con, as you know, in Q1 we had Winter Storm firm, which somewhat put a pin in the demand bubble and created a massive supply glut. And so prices were quite low, which led to us rationalizing crude runs and economic sparing in the Mid-Con as it got towards the latter half or latter part of March and what we're seeing in Q2, that inventory picture is really tightening up. And I think U.S. exports of clean product hit a record. So there's products moving into the Gulf to go back supply where they can't get the supply and their current inventory stocks are very low. So Rockies is a little bit of a different story. It's relatively balanced to tight. I will tell you that we have a light planned maintenance schedule across the complex in the U.S. between Q2 and Q3. So any meter disruption will further create a whipsaw in terms of total product supply and demand imbalances. So it's a pretty tight situation but we look forward to the strength of the Mid-Con and the Rockies and our regions for the balance of the year. Joseph Laetsch: Steve, that's helpful. And then following up on your comments on marketing. That segment continues to string together some pretty nice quarters. Could you just talk about some of the outperformance during 1Q and how you see the segment shaping up for the rest of the year here? Steven Ledbetter: Yes. Our marketing businesses, as we've talked about, one of the untapped values of the Sinclair acquisition has been really leveraging that brand and the strength. And we had another good quarter in $2 million plus of the EBITDA. We brought on another new set of sites. But this is -- the value associated with that brand is by getting the full share of what the brand should command. We're growing volume. We saw our volume grow year-over-year 10% plus, which is good. We're seeing that. We've seen about high grading the portfolio. We're beating the same-store sales versus what the market has. So we're taking the portfolio approach of getting to the right areas and maybe pulling some of the assets maybe don't fit with our overall brand promise moving forward. And there's growth in our licensed businesses. DINO has a significant pull on it. and we've yet to go fully develop that. Our Green Trails JV is just the first step of where we think that's truly going to accelerate our growth in the brand. But the adjacencies of the higher-valued revenue streams we're excited about. So it's really just blocking and tackling and being very purposeful about where we're strategically placing our bets, and we see more upside as we move forward. And our business is becoming a material business to the company. Franklin Myers: And everybody loves the green dinosaur. It's a great van. You need to join. Operator: Your next question comes from the line of Phillip Jungwirth with BMO. Phillip Jungwirth: I did want to ask about the Bridger Pipeline expansion, which you referenced earlier with the approval news yesterday. So this goes right down to Guernsey, assuming this gets built, how a fall would you expect this to change feedstock sourcing for your refineries or impact crude diffs. And separately, just anything to note on market impact from the double edge conversion from crude to NGL follows a similar route? Steven Ledbetter: Yes, I'll talk a little bit about the Bridger pipeline. Of course, bringing more crude in the Guernsey will allow some more flexibility into the hub. Whether it goes or not or the level, and we don't know. And so we're not going to speculate on that necessarily, but one thing that we've been focused on in terms of our crude slate flexibility is widening the crude basket, which allows us to go take advantage of dislocated crudes when they present themselves. And as you know, we're connected to the hub that connects both all to our -- some of our Rockies as well down to the Mid-Con. And so to the extent that we see market opportunity, we'll evaluate whether we participate or not, we think we're in a good position because of the flexibility that we put into place to widen our crude basket as well as our connectivity. And your other question was on -- sorry, could you repeat that one? Phillip Jungwirth: Double edge conversion from crude to NGLs. Steven Ledbetter: Yes. I don't know that it has a relevant impact on our specific crude supply set it to something to the overall market differentials. We'll just have to see when we contemplate some of these other projects coming online, I don't think it's a material impact to us either way. . Phillip Jungwirth: Okay. Great. And then you did repurchase some shares in the quarter. Just how are you thinking about capital returns going forward until you have more permanent leadership in place? And should we just stick with the historical framework? And just how tactical do you plan to be, just given the strength in the equities here in the second quarter? Vivek Garg: Yes, that's a good question. Thank you. I'll take that. This is Vivek. So in terms of our share repurchases, we'll continue to execute on our capital allocation strategy. We'll opportunistically repurchase shares under our 2024 share repurchase program. We don't typically guide on the pace or the amount of buybacks. But as we've always shared with the with everyone that we'll continue to execute on our capital allocation strategy, which is driven by free cash flow, capital returns and balanced capital allocation. Operator: Your next question comes from the line of Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: Two things, guys, if you don't mind. First of all, SREs, there's -- the new RVO is, I think, here to be confirmed here in the next several weeks. Just want to get your perspective as to given where RINs are currently, what that might mean for you guys, if there's some way to quantify that and expectations of duration, at least through the Trump administration, if that's possible. And then my follow-up is really on product swings. I think in your backyard gasoline has started to get -- the whole slate appears to be getting better. Jet fuel has obviously been extraordinary. What kind of flex do you have to move towards where the advantage products might be today? And what does that look like for you guys in terms of incremental yield. Steven Ledbetter: Doug, this is Steve. I'll take that one. So from an SRE perspective, as you mentioned, the RVO being finalized. What is our viewpoint. I mean you've seen the RIN run to unprecedented records this year. We believe that the RVO is becoming an extreme burden. It's now projected to be $50 billion a year or an equivalent of $0.30 per gallon. Don't know that the latest RVO is helpful to energy cost for either the industry or the consumer. And so what that valuation really looks like for us, we're not going to guide, we believe in the and the SRE was contemplated as part of the original RFS for a reason. And that's to help the smaller refineries who are disproportionately advantaged here. And we believe in that program. We're not going to speculate. We have petitions out currently for 5 of our refineries that we think qualify under the contemplated plan. We're not going to talk about value necessarily, but we do believe that it could be a material relief to the burden that we're facing. How long this thing goes and the duration, there's considerable fight going on associated with the validity, legitimacy, the frame and the shape of the program moving forward, but we're actively involved and our interest will be measured and our interest will be part of the discussion on the solution moving forward. So that's generally our thinking on the RVO, but again, the SRE piece is something we believe in and we will continue to advance and go after that under the current framework of the program. As far as product swings go, yes, I think you're right. we mentioned the PSR project to be able to move and swing between distillate and jet and both of those products are quite good. So the difference between jet and market versus distillate on the West Coast, those are -- some -- each at has been very, very strong. We have the ability to swing anywhere from 10% between gas and distillate across the entire fleet. And we're in a max distillate mode now. Having said that, we also believe that our value chain will allow us to run heavier oil and take care of our retail asphalt business, which enhances our overall margin production. And then we're going and trying to ensure that we're at the top end of those yield curves and running as much premium as we can. So we have the ability to go flex right now at a max distillate mode, but we're watching it and watching it very carefully. Operator: Your next question comes from the line of Jason Gabelman with TD Cowen. Jason Gabelman: Franklin, you mentioned running your refineries responsibly, which is prudent given the margin environment. In the past, DINO has talked about unlocking in addition capacity within the system that would be worth an additional refinery in terms of size. Is that still an aspiration for the company? Or is the 600,000 barrel a day to 630,000 range kind of the upper end of where you expect to run? . Franklin Myers: We have had recent and active conversations of reinvestment into some of our assets to try to increase the throughput over time, not immediately. And so it is something where -- let's think about the sustainability of DINO. We have to look at these assets and understand what our markets demand today, but what they will demand in the future. And as we look at that, and we have free cash flow, some goes back to the shareholders, but some will need to be reinvested not just for maintenance but for improving the complex of our assets. And so yes, the Board will take that up. In fact, it's an item we're going to take up here as we look at the long-term planning. Now I don't want to be held to a volume on where we get to that's going to depend on the -- a lot of planning and -- but if there is opportunity, we believe, to increase. Steven Ledbetter: Yes, maybe just a follow on to that. From an overall value, we launched a few business improvement programs. We've said our key imperatives are to improve reliability and our HSS performance. We're seeing that quarter-over-quarter. So we're starting to see the green shoots as well as unlocking the value of the integrated value and we're starting to see that. So some of the projects that we've invested in, we talked about the PSR project, we talked about the back tower project at El Dorado. Both of those are going to improve our yield as well as capture in terms of generating more value for the same throughput that we're putting through our kits. So crude flexibility. All of those things that we've talked about in the past in terms of optimization, we believe there's value to be had there, and we're seeing some benefits start to show up as a result. Jason Gabelman: Great. My follow-up is just on M&A or A&D, I should say. The Renewable segment certainly had a strong quarter. The margin environment is more constructive. You've seen peers sell down stakes of their renewable diesel businesses. Is that something that you could see doing in the future? And then, I guess, more broadly, just M&A comments on the refining landscape would be welcomed as well. . Franklin Myers: Sure. Let me handle that one. Number one, as a management team, and as a Board, we're charged with looking at the allocation of capital to the assets that we have and trying to determine which ones pay back the best and lean into those and the ones that are more mature take cash flow and lean into opportunities. And then see opportunistically, you've seen in our past, and thank you for this, it gives you a good segue into what I was going to say to wrap up. Going back in time, when we did the acquisitions of PSR and St. Clair. We subsequently did the acquisition -- the reacquisition of our midstream business. They're collectively working together as Steve has talked about the entire value chain. When doing that, if you think about what the company has done and read our report card, we've distributed $4.9 billion, and our market cap today is $12 billion. So think about the ratio of that in 4 years. And in addition to that, our share price has gone from 30 to 60 something. So you look at a rate of return on a company compared to most any other investments you have, not in our complex, but broadly in the mid-cap space or the energy space. We compare favorably with what we've given back. And what's happened is we've leaned into marketing, which Steve has indicated as we've been growing and it adds to the value proposition of what we've had. We've weighted out on the renewable space for the weak players to die during weak markets. And that's what you do in a capitalistic market. You let the weak ones die and you let the strong ones survive. We're not going to be knee-jerk just because we had 1 good quarter and say let's go run and do something. We've waited through the hard times. Let's go harvest these good times. In midstream, we felt like we needed opportunity to manage midstream more tighter. We've talked about some initiatives. There are some others going on. We're going to look at that. We've done acquisitions in both marketing and in lubes, we're going to lean into where we see opportunity and value with our free cash flow. And we see bright days ahead for the Sinclair franchise. When I say love the green dinosaur, it's an affinity brand that people can come to really enjoy and it's 1 that our employees are proud to wear on their shirts and uniforms every day. And so thank you for this question, given me a chance to talk about the successes of our company and how we're going to move forward in the future with this. Greg, do we have anything else? Vivek Garg: Not. I think that concludes our call for today. Franklin Myers: Thank you all for being part of our call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings, and welcome to Cinemark Holdings First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chanda Brashears, Senior Vice President, Investor Relations. Thank you. You may begin. Chanda Brashears: Good morning, everyone, and thank you for joining us today to discuss our First Quarter 2026 Results. Our earnings release, executive commentary and 10-Q were issued earlier this morning and are available on our website at ir.cinemark.com. Today's call is being webcast with a replay and transcript available on our website after the call. Before we begin, I'd like to remind everyone that during this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. Forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to materially differ from those expressed or implied. The factors that could cause results to differ materially are detailed in our most recent annual form report on 10-K as well as with the SEC and available on our website. Also today's call will include non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the website's most recently filed earnings release 10-Q and on the company's website at ir.cinemark.com. Joining me this morning are Sean Gamble, President and CEO; and Melissa Thomas, CFO. Consistent with last quarter, Sean will provide some brief introductory remarks, and then we'll turn it over to Q&A. Sean? Sean Gamble: Thank you, Chanda, and good morning, everyone. The first quarter of 2026 marked our strongest first quarter since the onset of the pandemic across all revenue categories and adjusted EBITDA with meaningful year-over-year top line growth and margin expansion. Worldwide revenue increased 19% versus 2025 to $643 million. Adjusted EBITDA grew 143% to $88 million, and our adjusted EBITDA margin expanded 710 basis points. Our results are indicative of our team's ability to effectively capitalize on a strengthening box office environment, while continuing to derive benefits from our sustained efforts to deliver unmatched entertainment for our guests, build audiences, grow new sources of revenue, strengthen our operating capabilities and optimize our circuit. As described in greater detail in our executive commentary that we published this morning, we believe our standout first quarter performance is the byproduct of strong operational execution and our advantaged market position, which continues to be reinforced by our ongoing investments and strategic initiatives. From an execution standpoint, we achieved significant year-over-year box office growth and sustain the sizable market share gains we've achieved over the past several years through impactful programming actions and far-reaching marketing strategies that boosted attendance. As a more compelling slate of films was released into our theaters, we were able to leverage our extensive consumer marketing network and sophisticated scheduling tools to help amplify film awareness and optimize screen utilization to drive ticket sales. Furthermore, actions we pursued to increase engagement and stimulate food and beverage consumption drove record high concession sales and diligent labor and overall cost management, combined with improved operating leverage contributed to our significant margin expansion in the quarter. Complementing our execution the initiatives we are pursuing to drive incremental growth and productivity continue to position Cinemark for long-term success. These initiatives include a wide range of actions focused on sustaining our high-quality theaters expanding premium amenities and leveraging new technologies to further advance our operating capabilities. Examples include sustained investments we're making in enhanced screen formats, laser projectors and motion seats as well as the overall upkeep of our theaters to ensure our guests enjoy a premium experience at Cinemark regardless of which auditorium they choose. Additionally, we continue to actively expand data-rich tools and automation throughout our operating practices to strengthen our decision-making, enhance our customer journey and improve process efficiencies. As we look ahead, we maintain our confidence in Cinemark's long-term growth prospects on account of our solid financial position, distinct competitive advantages and the multitude of opportunities we have to drive incremental value. Furthermore, we are highly encouraged by continued positive momentum in our industry's core fundamentals namely sustained consumer enthusiasm for larger-than-life cinematic experiences, strength of upcoming film content and robust studio support of theatrical exhibition. These fundamentals were recently reinforced by moviegoing results in the first quarter and at CinemaCon last month as filmmakers and studio executives reaffirm their steadfast commitment to theatrical experiences, and showcased a diverse and plentiful volume of compelling films that will be released over the coming years. Moreover, there's been constructive progress over the past several weeks in expanding the theatrical window which is an important factor in the long-term health of the film ecosystem. So we remain bullish on our future, and we are thrilled with the strong kickoff to 2026 as well as the promising lineup of films on the horizon, particularly in light of last week's successful opening of Michael, and this weekend's highly anticipated release of The Devil Wears Prada 2. Operator, we'd now like to open up the line for questions. Operator: [Operator Instructions] Our first question today is coming from Robert Fishman of MoffettNathanson. Robert Fishman: A couple for you guys. Sean, we've been debating windows for many years now. So I just would appreciate your updated thoughts after talking to all the studios at CinemaCon about the value that they see in 45-day windows. And do you expect a return of consistent minimum windows to help improve the overall moviegoing habits and how we should think about the impact to film rental costs, would be the first one to start with, please. Sean Gamble: Sure. Thanks for the question, Robert. As we've kind of talked about before in the past, following all the evolution that's taken place with the theatrical window and both the length and variability over a pretty short period of time following the pandemic, there has been a lot of ongoing discussion between studios and exhibitors as we've been evaluating the impact of that on consumer behavior. So your question on the value they see in 45 days, I think there's recognition that the shortened window has been creating headwinds in full attendance recovery, particularly for smaller titles and more casual moviegoers. So I think this is a big step in terms of course correcting what may have over-indexed in terms of reducing beyond 45 days and now shifting back to that. So we see all these announcements as a really positive step forward. I think, again, there's recognition not only by studios, but by the wider creative community as well that this is a necessary step to help sustain long-term industry health. I think the impact of that change still remains to be seen. It's like we have to watch what that does over time. It's not a precise science trying to measure how much of that opening weekend attendance has been affected by the window, but we all believe that this will have a meaningful improvement in moving the needle in a further positive direction. So it's something we will be watching to improve. As far as film rental rates go, I mean, there's a lot of factors that go into film rental discussions. The short answer is we don't expect it to impact film rental. Again, I view the recent shifts in windows as an important reset in the right direction based on the sizable reductions that may have gone a bit too far over the past few years. While this progress definitely represents significant improvements even at 45 days, the window is still down approximately 40% from the pre-pandemic norm. So we don't have -- and those -- most of those film scales were kind of predicated on an environment that preexisted before the pandemic. So we don't expect a material impact as a result. Robert Fishman: Okay. Maybe, Melissa, your Movie Club now drives about 30% of your box office. So just wondering how do we see the demographic breakdown of Movie Club and the frequency of returning to the movies for your members and how that might differ from just regular moviegoers? I know you referenced that The Global Cinema Federation study, the success of the younger moviegoing habits, but what can Cinemark or the industry do to bring back older moviegoers? Sean Gamble: I'll take that one, Robert. I mean, as far as the profile of our Movie Club members, I would say it largely is consistent with just general demographics of moviegoers on the whole. I think it is a program that is one of the examples that helps not only for younger audiences, but older audiences alike. And your question on what can we do to bring other audiences back. We continue to see that as we get new members into the program, their moviegoing frequency increases, and that spans all age ranges, which is part of the reason why it's such a valuable program and guests find tremendous value in it. So not only do they come more, they upgrade more, they buy more food and beverage and are some of our most satisfied guests. So that's one of the things. Beyond that, and this goes beyond the Movie Club question, I think it extends into the profile of films that are getting released. I think this year, it's probably one of the most diverse slates we've seen for a while. So as more of that content come that appeals to other types of age ranges and that's more sustained, that should help. And then our marketing efforts, too. I mean, we continue to increase the sophistication of our marketing efforts to really target market, different consumer categories and really speak to what is motivating to them. So certain things that may appeal to younger audiences, we will craft messages one way and other we'll craft them differently for older audiences. So there's a range of things like that. But we're thrilled with the movie -- back to Movie Club, we're thrilled with our Movie Club success. And again, it really spans all age brackets. Operator: Our next question is coming from David Karnovsky of JPMorgan. David Karnovsky: Maybe following up on the first question. Sean, I wanted to see if kind of post CinemaCon, you see any traction in terms of getting the studios to space out their releases and getting more back to a pre-pandemic pattern, just kind of noting some of the still kind of large gaps in programming like in the winter or late summer. Sean Gamble: Sure. Yes, it's another great observation, David. And it's probably the next piece of the puzzle to continue to make progress on. I think, we've seen volume continue to recover. So that's made leaps and bounds from where we were a few years ago. We've obviously just had the recent news on Windows, which we think is great progress there in terms of supporting a healthy theatrical exhibition ecosystem. The other piece is just the cadence of movies because this does tend to be a momentum business where people go, they have a good time, they see what's coming up, they come back. And when there are those gaps that can disrupt that momentum and then we got to reboot the engine again and again. So this year, I'd say we have a little bit of that kind of clumping going on in the summer months and at year-end. I think probably coming out of CinemaCon, at least beyond just talking about it, when we looked at what is currently lined up for first quarter of next year, I think what -- at least for now, assuming that the release dates hold, the first quarter looks far more robust than we've seen in prior years, the first quarter of 2027, I mean. So we've seen some of that kind of clumping and we had wished that some of the stuff that's been programmed in the summer would have spread earlier in the year. We saw more of that this past CinemaCon. So hopefully, that will continue to stretch out over the full of the year, and that will be something else that will be beneficial to the industry. David Karnovsky: Okay. And then in the prepared commentary, you spoke to marketing and the resonance of some of the direct-to-consumer brand programs. I'm curious if the traction here changes your long-term view at all of market share gains, per caps or even other revenue, right, assuming customers might be kind of more inclined to buy tickets through Cinemark rather than a third party. And then just for Melissa, like given the marketing runs through film rent, I don't know if it's possible to quantify at all some of the added expense you've incurred here. Melissa Thomas: Yes. Thanks for the question, David. So on the marketing front, we have leaned in there. We've stepped up our investment post-pandemic. And we have seen some nice successes there, and our marketing efforts do span across both the admission side as well as the food and beverage side. We do think that we have been seeing benefits there. And our market share, we do believe is reflective of those benefits. And you saw us even in Q1, maintain elevated market share in the quarter, and that was flat year-over-year despite a challenging comp. There are a number of factors that we're doing across our business, so beyond just marketing that are really driving growth across market share average ticket prices and our per cap. So it's a combination of all of the efforts across marketing, loyalty, our showtime optimization as well as our investments in our circuit that we've been doing on an ongoing basis. So I wouldn't call out one area specifically, but we have made significant progress on the marketing side, and I do think you're seeing that in the results. And from an investment standpoint going forward, not only have we had a step-up since 2019, but as you look at full year 2026, I would expect our marketing as a percent of revenue to increase year-over-year just based on the returns that we've been seeing to date. Now we continuously calibrate that spend as we're monitoring our returns and adjusting our mix based on what we're seeing in the data, but feel really good about the progress we've been making there. Operator: Our next question is coming from Eric Handler of ROTH MKM. Eric Handler: Thanks for the question. Sean, Cinemark has always prided itself on having a wide range of offerings across premium and baseline pricing. I'm curious, with this week's Wall Street Journal report, having a competitor charging $55 for IMAX film streamings for Dune 3 in this opening weekend. How do you feel about price sensitivity from consumers? And do you have a $55 ticket presale for Dune 3? Sean Gamble: Well, the short answer is we don't have that for Dune 3. As far as pricing more broadly, the way we look at it is kind of on the unique profile of each theater and expectations of our guests with the kind of overarching objectives of maximizing attendance and box office and food and beverage incidents and total revenue, while at the same time, ensuring that our guests perceive strong value in their experience to encourage repeat visitation. Through all our pricing team and analytics, we found that, that approach has served us well. And when you look at our attendance recovery compared to the industry and our growth in concession per cap year-over-year, we think that's really working. To the extent we were to pursue something in that direction, we would do so very cautiously just to gauge the impact it has on guest value perception as well as visitation frequency as well as our overall Cinemark brand proposition. Eric Handler: That's helpful. And secondly, looking at your concessions line, you've seen really good increases in per cap spending. Merchandise, I'm seeing more and more of in my local Cinemark. So I'm curious how much of the lift is driven by merchandise versus sort of the core food and beverage product? Melissa Thomas: Thanks for the question, Eric. So on the per cap side, for domestic per caps, break down our 7.5% growth year-over-year. That's largely driven by strategic pricing. That's the majority of it, followed by higher incidents and then a shift in product mix. Now the product mix this quarter, the favorability there was actually predominantly driven by a shift into larger sizes within our core offerings, so specifically fountain beverages and popcorn. That was actually offset in part by a lower mix of merchandise. And that was really just driven by the film content in the quarter. If you look at the relative mix year-over-year and what lended itself to movie-themed merchandise, we did have a lower mix of merch in the quarter. So there are other factors that are driving per cap. Now as you think about the balance of the year, however, we do expect, based on the film slate that there are meaningful merchandise opportunities ahead of us, and we would expect that to be an increasing part of the mix and a key driver of per cap growth for the balance of the year. Sean Gamble: And I would just add, last year, merch was up about 40% year-over-year. So we -- to Melissa's point, we continue to see growth over time. We expect to continue to see further opportunity as it's something that fans continue to embrace and it continues to enhance just the overall experience and event of coming to our Cinemark theaters. Operator: Our next question is coming from Mike Hickey of StoneX. Michael Hickey: Great quarter, guys. Congratulations. Just two from us. Sean, I guess, CinemaCon was pretty exciting this year. Hot topic was Paramount, Warner Bros. deal. Obviously, there's an industry view that I think most exhibitors are subscribing to. But just curious with David, his presence at the show seemed to be pretty meaningful. And I know he was really messaging to all of you that he's going to deliver on film volume and committed to that 45-day window. Does that you think have sort of any impact on your view of the deal or the industry's view of the deal? And I guess on the concession side, what do you think is really achievable on a deal that everyone kind of thinks is going to get through? And I have a follow-up. Sean Gamble: I'm sorry, could you clarify that last piece of the question, Mike? I missed that. Michael Hickey: Yes. I think there's obviously pushback from the industry, and I think there's the view that it's intended to drive some level of concessions in terms of commitments, whether it's film volume or window or marketing. And so, I was just wondering what's actually achievable there in your view? Sean Gamble: Got you. So let me start, and then I'll -- you can tell me if I kind of capture that fully. Paramount is a great partner to exhibition. They've been for many years. It was a nice step that David came out to CinemaCon to kind of speak directly to the wider exhibition community. I think the positive thing is they're saying all the right things regarding their future intentions for film volume and windows in a combined company, which is a great start. I'd say -- that said, us similar, I think, to the wider community, we just like to see those statements backed by firm commitments just to ensure there is, in effect, the follow-through and that leads to the preservation of a healthy and sustainable theatrical and film ecosystem going forward. So I mean, I think that's the big piece. And I may have missed your concessions question. I don't know if I captured it in that, but that's kind of what I think we and the industry at large is really seeking out of this. Michael Hickey: Okay. I think that works, Sean. The other is on Netflix. I think that also -- Ted showed up, which was great. Made a statement, I think, post the deal that obviously didn't go his Netflix's direction. Just curious, your conversations with him or the broader Netflix team, whether it's at CinemaCon or before or after. Obviously, they gave themselves sort of an off-ramp from their prior philosophy on how they view theatrical when they were sort of romancing the Paramount, Warner Bros. deal. Now that that's gone, there's still, I guess, the formation of that ramp. Do you see that Netflix is becoming or wants to be a more constructive partner with exhibitors? Obviously, Stranger Things and other one-offs have been successful. But I guess the key here is the theatrical window. Do you feel like there's some momentum to move in the right direction? Sean Gamble: Thanks, Mike. I would say it was great to see Netflix and Ted personally take the time and initiative to come to CinemaCon. And I think, I would categorize the discussions as being productive and opening the door to the possibility of greater collaboration at some point down the road. There -- as you mentioned, they're very pleased with the recent successes they've had in theaters with their Stranger Things Finale and K-pop Demon Hunter Sing Along, and they've certainly expressed a desire to explore more of those types of events as well as possibilities for film releases. So I think that's a step in the right direction. While I don't necessarily anticipate any type of material shift on their part in the near term following that meeting. We do continue to believe there's mutual opportunity in partnering together and remain optimistic that they will pursue a more meaningful venture into theatrical distribution over time. Operator: The next question is coming from Drew Crum of B. Riley Securities. Andrew Crum: Sean, you highlighted the success of your PLF screens in the last few quarters. As you look ahead and continue to invest, is there an optimal mix of PLF screens versus standard screens you see for your circuit? And what is the time frame to achieving that? Sean Gamble: Sure, Drew. Good question. I think one of the governors on large screen format and enhanced format screens is just the size of the auditorium and size of the screen. So you got more flexibility clearly if you're building a brand-new venue. But with existing theaters, you got to bear that in mind to make sure that it delivers the appropriate level of enhanced experience. On the whole, we still have about 6% of our screens that are kind of in the PLF category. So there's more runway in that with -- and we've even announced more XDs and more screen Xs, and we're adding a couple more -- a few more IMAXs. So we've got a range of those things going in. So we continue to see opportunity there. But the overall extent to that, I think it is capped again by how many screens we have that can fit the bill of premium amenities. And then also just the fact that, look, there's definitely a growing appetite for enhanced formats and theaters by certain categories of moviegoers. But what we've seen, too, is there's also those other moviegoers who don't prefer to pay the upcharge for that. So striking that right balance is important. And by and large, if you look at the amount of box office that is generated by PLFs, it's about 15%. So if you think about it, 85% of the overall box office in the industry is coming from all those other cinematic screens. So it's still relatively small in the whole scheme of things and just got to kind of bear in mind that, that right balance from what we're offering in terms of a range of options to consumers as well as how things get marketed in the marketplace. Andrew Crum: Got it. Okay. And then, Melissa, you highlighted in the deck call it, marginal 3.5% increase for salaries and wages expense against a much higher attendance figure. As you look at the middle of the P&L and aspire to achieve discipline around spending, what areas do you see where you can achieve or drive further efficiencies? Melissa Thomas: Thanks for the question. Yes, the key areas that we're focused on from a cost management, I mean, obviously, across the full expense line items, we're trying to drive efficiencies. But salaries and wages and the concession COGS are really 2 key areas that we're looking to drive efficiencies out, and we've seen some nice success. And you see that both in our salaries and wages rate for the quarter as well as our COGS rate for the quarter. So we were on the labor side, pleased with our disciplined management of labor costs. We aligned staffing levels and operating hours in response to consumer demand. We effectively managed wage rate inflation, and we delivered on our labor productivity initiatives. As you look forward, labor hours and wage rates, I mean, those are going to be the key factors on our salaries and wages. We'll continue to flex our labor hours up or down based on projected attendance and operating hours, though not necessarily at the same rate, and we'll try to drive efficiencies within those hours. The one thing I would call out, though, Drew, for modeling purposes for Q2 specifically, we did have a significant overperformance from Minecraft in Q2 of last year, which resulted in fewer labor hours than would typically be expected for that level of attendance. So there will be a tougher comp for salaries and wages in Q2 on a year-over-year basis. And wage rate inflation, we do expect will remain a factor. But again, we'll continue to look to try to offset some of that with our labor productivity initiatives. On the international side, I would just highlight there, we, again, continue to look to drive productivity initiatives. But what you saw in the quarter in Q1 was wage rate inflation really coming into play, particularly just in the Latin American market, we have seen, which is not unusual, but we have seen government mandated wage increases that have exceeded inflation. So that has put some pressure on that line item that we continue to manage and we'll look to manage going forward. Just a little bit of detail on the COGS side. As you look at some of the things that we're pursuing there, we have been really active on the strategic sourcing front. So we had mentioned in our executive commentary that we made changes to our distribution model, allowed us to not only expand our product selection, but also lower our overall product cost, and you're seeing that play through. We've also been consolidating our vendor base to leverage our scale and continue to competitive source our products. So lots of efforts going on there to try to combat the inflation that we've been seeing. Operator: The next question is coming from Omar Mejias of Wells Fargo. Omar Mejias Santiago: Sean, maybe first on M&A, there's been recent media reports of potential consolidation activity in the space. Without getting into specifics, how are you thinking about your appetite for accretive opportunities right now? And when you evaluate deals, are you more interested in circuit level pickups or something larger, more transformative? Sean Gamble: Sure. Well, look, I'd say one of the areas of focus that we think about as we position ourselves for success going forward is optimizing our footprint, and that includes growing and recalibrating and strengthening our circuit as appropriate. And M&A is certainly part of that equation. So it's very much on the table. I would say with regard to growth via M&A, we do look at all prospective opportunities. And we do tend to highlight -- tend to target high-quality assets that have -- we think have solid assured returns over time. So we do tend to prefer deepening penetration into the markets where we already have some presence because that leverages our established infrastructure and relationships and knowledge of the market. But we also consider other factors such as scale and strategic importance and competitive positioning and margin profile. So there's a range of things that we do look at. Ultimately, our goal is to create value for shareholders. As far as kind of tuck-ins versus more transformative M&A, I think it boils down to the deal. So I wouldn't necessarily limit one, I would just pigeonhole us into any one area. There's probably more, I think, more inclination to potentially move on some kind of tuck-ins that can move a little bit faster, but it really just boils down to the economics and the prospects for a given deal. Omar Mejias Santiago: That's very helpful. And Sean or Melissa, on Latin America, attendance and results were a bit below expectations. Just wanted to get some color on how much of that was just the slate not resonating versus anything you're seeing on the consumer side? And with the Q2 slate ahead and the rest of the year, how does the slate look for that Latin American audience? Melissa Thomas: Yes. Thanks for the question, Omar. So as it pertains to international in Q1, we did see what you're seeing in our results there is essentially the film content just simply didn't resonate as well in the region in the first quarter. That happens from time-to-time, and it impacted our margin. That said, our team delivered results that were in line with Latin America benchmarks. As you look forward, we do feel really good about the slate for the remainder of this year for Latin America and do believe that it will resonate well with audiences in the region. Titles like Toy Story 5, Spider-Man, Avengers, Minions, and Michael are all anticipated to deliver strong box office results in LatAm. We also have another title from the Insidious, SAGA this year, which typically performs particularly well in the region. There are certain films such as Odyssey or Supergirl, Cat in the Hat, Dune 3 that might not index as favorably as they are projected to do in the U.S. market. But we also do have local content in the international side. Not a ton of visibility there yet into major contributors, but there's always opportunity for a breakout film. But on balance, I would attribute Q1 to really just a film slate that didn't resonate as well with the market. Balance of year, we feel optimistic about the film slate. Operator: Our next question is coming from Chad Beynon of Macquarie. Chad Beynon: And great to see you all at CinemaCon. Melissa, you've kind of touched on this a little bit throughout the call so far just in terms of some of the cost items, but approaching it from a different angle with respect to the Middle East conflict, gas prices, we saw some big fluctuations even this week. How are you thinking about the impact from this if that continues, either domestically or internationally? And are you starting to see some of your vendors kind of pass through these costs of maybe delivering some of the goods or anything else that goes into the margin? Melissa Thomas: Thanks, Chad. On the cost side, we do benefit from contractual structures that provide some protection for rising gas prices, though there are elements of fuel charges in select agreements. But to the extent higher fuel costs have an impact, it would mostly likely show up in our cost of goods sold line item. At this point, though, we wouldn't expect it to be material, and we're not seeing those costs come through by and large. So I would say not expecting it to be material or have a big impact. Chad Beynon: Okay. Great. And then one of the big takeaways from CinemaCon was around the renewed interest from the Gen Z age group. Outside of just the content that's coming out in the near term, can you just talk about some of the things Cinemark is doing to better attract and retain some of these customers that maybe haven't been as frequent in years past? Sean Gamble: Sure. I think probably one of the biggest things that we've done recently is at the end of the last year, we launched our first-ever Cinemark brand campaign called its Showtime. And that was very much structured with an eye toward younger moviegoers to have more showcasing kind of the freshness and the fun of moviegoing and in particular, at Cinemark. So it definitely was through that lens, and we're using that strategically as part of our overall marketing efforts going forward to try to speak to that audience. Along those lines, too, clearly, one of the things that we've done in our different social media efforts is we're using a lot of influencers through our -- in our process, which resonates with that audience in particular. So that's a big piece of it. And then just the way we kind of put our different kind of media spots out there, there's different things that we're doing with an eye to that. And I mentioned briefly in kind of the executive commentary, we mentioned in our executive commentary how also with our emails, we're kind of sending out unique calibrated emails that are personalized based on attributes of our guests, so -- and people who are in our network of direct communications. So all those kinds of things are just examples of how we're calibrating different ways of speaking to those audiences. And then when they're in our theaters, making sure we're offering them the types of things that appeal to them, whether that's food and beverage or that is a category of audience that these premium amenities are resonating with. So as we continue to roll those out, our motion seats, our large screen formats, our screen Xs, like things like that, all speak to that audience and are working really well. So all those things come together to kind of really help with as well as the film content in attracting that audiences more and more. Operator: Our next question is coming from Patrick Sholl of Barrington Research. Patrick Sholl: So following up on an earlier question, do you have like any sense on like the extent of the audience that like with the shortened windows was staying home? Or is that like kind of just hard to pierce out? Sean Gamble: It's difficult to fully pierce that out. So one thing we've seen is the week-to-week patterns of films release have held relatively consistent to pre-pandemic characteristics. So on that -- in that regard, that's been a positive. But that overall opening that then plays through that pattern is where the challenge has been. And it's -- as we said, we've seen the effect of that across all categories of moviegoers, particularly pronounced in more casual moviegoers who come only once or twice a year as well as on smaller films. So those are some areas of the audience that have perhaps been a bit more pronounced, but it's kind of cut across the board. And the hard part is like we know there's a big gap that's been unexplained in terms of attendance recovery. And when you kind of start to go through all the different pieces of what it could be, everything points to windows, which is why we're so encouraged by these recent changes, but kind of singling out a specific area of audience is difficult to do. Patrick Sholl: Okay. And then just on the concession side, could you maybe talk about the -- I guess the breadth of the wide release slate that you offer merchandise for and like how you would expect that to, sort of, trend as film volume increases? And maybe just the overall contribution from that side of the concession spending area. Sean Gamble: Sure. Let me -- I'll start on that, and you can let us know if we kind of captured what you're asking. As Melissa referenced, merchandise, which has certainly been growing in appeal and has not only represented a revenue opportunity, but helped to eventize going to the cinema, even kind of the talent and the films have gotten into the promotional vehicle of that. It is largely tethered to film content. We do sell a range of other things like we'll sell Cinemark blankets and we sell Cinemark thing, we sell kind of nostalgia type T-shirts and things like that. But the big drivers of what's causing the growth are the new releases. So it kind of boils down to what -- it's the situation that Melissa was having for first quarter where last year, the films that released lended themselves a bit more to merchandise compared to the first quarter of this year. As we look over the course of the balance of this year, it's quite robust in terms of the opportunities that we see for merchandise. So it's something we're leaning into more and more. And we do expect that to continue going forward. I mean, when we -- with the materials we saw at CinemaCon and just the general trends of what studios are investing their production into, majority of that lends itself well to merchandise. Clearly, there's the main -- the big tentpole blockbuster films, but then you'll get different types of categories, too, that things can resonate, which sometimes can kind of surprisingly be really robust. Operator: Our next question is coming from Stephen Laszczyk of Goldman Sachs. Stephen Laszczyk: Sean, I wanted to get your latest sense and see if you could talk a little bit more about what you're seeing out there on the competitive front in the markets you're operating in. And then specifically within those marketplaces, I'd be curious how what you're seeing is maybe influencing some of the decisions you're making around things like marketing, the pricing at a market-to-market level than some of the strategic investments you're making on the CapEx side? Sean Gamble: Sure. I mean, look, I'd say the competitive environment continues to get stronger, which isn't necessarily a bad thing. I think this is the type of industry where in certain circumstances, all boats rise and fall together. So to the extent our peers in the industry are delivering consumers a really positive moviegoing experience, that tends to bode well for the impression of the industry as a whole. So as others are leaning into premium amenities as well and ideally enriching the overall experiences they're providing for guests, that's a good thing. So we're certainly seeing more of that. We're seeing others step up their marketing efforts to attract people to their venues as well as to just help build awareness for upcoming films. All that works well. I would say we're obviously -- we feel we're in an advantaged position because of all the work we've done for the past several years. We've got a big head start on that. It's part of what resonates in our market share results, in our attendance results and our overall performance results. We obviously haven't stopped. We continue to further advance what we're doing. There's just a long road of initiatives that we're pursuing to take our programming, our marketing, our pricing, our scheduling, everything to the next level. So for us, it's just a matter of okay, how do we keep that lead and ideally continue to gain it even as competition continues to strengthen. Stephen Laszczyk: Great. And then maybe just a follow-up for Melissa. Just wanted to see if you could unpack with any more detail the drivers around utilities and other and SG&A expense increases in the first quarter. And then just as we think ahead to the balance of the year, how we should be thinking about modeling those line items across the rest of the quarters? Melissa Thomas: Sure. From a utilities and other standpoint, that was up primarily driven by the increase in attendance as many of those costs are variable or semi-variable in nature. So credit card fees, janitorial repairs and maintenance, electricity costs. So you will see that uptick happen, and it is primarily attendance related in the quarter. And as you think forward for utilities and other, there's a couple of things that I would call out outside of the variable and semi-variable nature of our expenses. I mean, we do expect those to scale with the anticipated growth in attendance that we're expecting for the balance of the year. But from a rate perspective, I would just call out that we do continue to expect electricity costs to be higher, just reflective of market rates, and that's more a macro level dynamic that we're seeing. And then on the repairs and maintenance side, just as a reminder there that we do expect our repairs and maintenance to remain elevated as we continue to address deferred maintenance needs across the circuit. So we don't expect that to have a meaningful year-over-year impact because we started those efforts last year. However, there could be some timing kind of quarterly within the year there. And then other factors, we do have fixed costs like property insurance and real estate taxes that those would be subject to the broader insurance market and changes in property values. But we continue to focus on disciplined management within that line item and in particular, usage as it comes to electricity costs and the pressure we're seeing there. From a general and administrative expenses, on the G&A side, for the quarter, what you're seeing there primarily excluding stock-based compensation, G&A was up about 2% globally, and that's driven by wage and benefit inflation and some targeted investments in headcount and capabilities, including our ongoing shift in cloud-based software to support our strategic initiatives. Those impacts were partially offset by lower professional fees. As you think about the go forward, we do expect to continue to have an impact from merit increases and some investments that we're making in talent and capabilities. We do expect variability in the areas of professional fees and incentive comp may somewhat offset those increases. So we'll, again, continue to be disciplined on the expense side within G&A line item as well. But there's puts and takes. However, we're not expecting meaningful increases there. Operator: Our next question is coming from Eric Wold of Texas Capital. Eric Wold: Maybe just want to take that last question on kind of individual expenses maybe to kind of a higher kind of broader level. I guess knowing that recovery in attendance in box office and the associated kind of concession spending are kind of the biggest drivers to pushing your margins higher and back towards kind of pre-pandemic levels ex obviously, DCIP and the other kind of things that were back then. I just want to get a high-level sense of where you see margin leverage this year on that kind of revenue growth as we get back towards a $10 billion box office environment given all the labor, utilities, inflationary headwinds that may be pushing back on that versus maybe what you may see in a more optimal recovery environment? Melissa Thomas: Yes. So where we -- thanks for the question, Eric. So where we expect to gain the most leverage is going to be against our fixed expenses, and that's going to be in the U.S. side, our facilities lease expense primarily being fixed in the U.S. as well as our G&A expenses. So those are kind of primary areas that we expect to get leverage. Beyond that, we've talked about some of the different expense impacts across the P&L. But I would kind of step back and take a look at overall margin profile and what we have been able to deliver because we've been seeing inflationary pressures across these various expense categories for some time, but we've still been able to deliver really strong margins because of the offsets we've been able to provide, but also the top line growth that we've been able to deliver from a food and beverage per cap, average ticket standpoint -- average ticket price standpoint, as well as maintaining our market share gains relative to pre-pandemic. So we'll continue to focus on growing the top line, and that will give us leverage as well as trying to mitigate expense pressures that we see. But overarchingly, we do expect the box office and attendance levels to improve year-over-year, which does support margin expansion. And then we'll continue to focus from an execution standpoint on gaining the most leverage that we can out of that growth. Operator: At this time, I'd like to turn the floor back over to Mr. Gamble for closing comments. Sean Gamble: Okay. Thank you, Donna, and thank you all for joining us this morning. We appreciate you taking the time to participate today. And we look forward to reconnecting in a few months to share and discuss our second quarter 2026 results. I hope you all have a wonderful weekend. Thanks. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.
Operator: Good day, everyone, and welcome to the Estée Lauder Company's Fiscal 2026 Third Quarter Conference Call. Today's webcast is being recorded. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini. Laraine Mancini: Hello. On today's webcast are Stephane de la Faverie, President and Chief Executive Officer; and Akhil Shrivastava, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the noncomparable impacts of acquisitions, divestitures, brand closures and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. Retail sales performance discussed is based on information available as of April 29, 2026. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. Throughout our presentation, our profit recovery and growth plan will be referred to as our PRGP. And now I'll turn the webcast over to Stephane. Stephane de la Faverie: Thank you, Rainey, and hello to everyone. Today, we raised our fiscal '26 outlook and offered our preliminary view on fiscal '27. We do so with confidence in the trajectory of our business as our third quarter results extend our strong year-to-date performance and as we begin realizing the benefits of one operating ecosystem. For the third quarter, organic sales rose 2%. Operating margin expanded significantly, bolstered in part by gross margin expansion and EPS grew 40%, further demonstrating the momentum of Beauty Reimagined. For the 9 months of fiscal '26, we have delivered progress in many areas of our business. 3 of 4 regions grew organically, led by high single-digit growth in Mainland China and double-digit growth in our priority emerging markets. The Americas stabilized, and we remain focused on seizing its full potential. Looking at categories, fiscal year-to-date, fragrance rose double digit organically, significantly outperforming the industry and skin care grew low single digits, while hair care stabilized and makeup rate of decline slowed. Fiscal '26 is promising to be the pivotal year we intended, one in which we restore organic sales growth and expand our operating margin for the first time in 4 years. We now expect to deliver organic sales growth of 3%, the high end of our prior range. Operating margin on track to be 10.7% to 11%, significantly ahead of the 10% we previously expected at the midpoint and notably better than the 8% of fiscal '25. Driving these results and expectation are retail sales growth and share gain in several key markets. In Mainland China, with our high single-digit retail sales growth, we estimate we outperformed prestige beauty for the third consecutive quarter of fiscal '26, driven by brands, including La Mer, TOM FORD, Le Labo and The Ordinary. For Travel Retail, in Hainan, we significantly outperformed prestige beauty, which itself improved sequentially to gain share as our activation for Lunar New Year drove remarkable performance. Retail sales rose strong double digit, accelerating from high single digit in the second quarter with 10 brands growing double digit, led by La Mer, Estée Lauder, and M·A·C. In Japan, where prestige beauty declined low single digit, our share expanded overall, driven by outperformance in makeup. In Korea, we returned to retail sales growth, up high single digits and gained share in makeup. In both markets, M·A·C performed exceptionally well. In the U.S., our retail sales grew mid-single digits. We gained volume share in total prestige beauty driven by every category. On a value basis, The Ordinary gained share in skin care, while Clinique, M·A·C, Bobbi Brown Cosmetics, and Estée Lauder expanded share in makeup. The company gained value share in the U.S. prestige hair care, driven by Aveda and The Ordinary, and we are seeing evidence of Aveda's turnaround given share expansion, traction on data. These retail sales and share trend around the world are a tribute to our team's delivery of Beauty Reimagined. During the third quarter, we continued to execute with excellence across all 5 action plan priorities. We accelerated best-in-class consumer coverage, expanding our portfolio presence in consumer preferred, high-growth channels, market, media and price tiers. For Amazon Premium Beauty stores, we deepened brand reach across the 10 markets where we have launched, for instance, with Clinique launching in France and Estée Lauder in the U.K. Similarly, we increased our brand reach on TikTok Shop in markets from the U.S. to Germany and Malaysia and enhanced our online presence in China, launching The Ordinary and Douyin and Estée Lauder and M·A·C on vip.com. This work, coupled with strong performance on Douyin, Tmall and Coupang, one of the leading Korean online platforms, drove double-digit online organic sales growth in the third quarter. Impressively, fiscal year-to-date online organic sales growth grew 10%, leading us to believe we outperformed prestige beauty in the channel. In March, we strengthened our ties in specialty-multi with M·A·C's much anticipated entry into the U.S. Sephora. For the month, M·A·C was the #1 lead brand in makeup across the Sephora stores where it launched. For our second action plan priority, create transformative innovation, we delivered on all 3 areas of breakthrough, on-trend and commercial. Our newness in fragrance resonated especially well, contributed to the category's double-digit organic sales growth driven by every region. Le Labo delivered another quarter of remarkable growth with high single-digit like-for-like door growth and strong double-digit organic sales growth, driven in part by Violette 30, a recent addition to the classic collection. TOM FORD's innovation in the category went from strength to strength as the brand followed Oud Voyager's successful launch earlier in fiscal '26 with the highly sought-after Figue Érotique. BALMAIN's Beauty Destin, the brand's new entry into prestige price tier with a refillable bold scent drove an exceptional consumer response and stronger-than-expected retail sales. Lastly, in fragrance, KILIAN PARIS's latest launch, Her Majesty, contributed to the brand's strong double-digit organic sales growth, the fastest in the company, demonstrated our ability to accelerate growth in promising emerging brands. In skin care, breakthrough launches from La Mer in eye and Estée Lauder Supreme franchise were among several drivers fueling strength for those brands in Mainland China. While we are pleased with the performance of these launches, globally, we did not have the breadth of newness in skin care relative to last year's third quarter. Fiscal year-to-date, innovation has been a vital contributor to skin care organic sales growth, and we have a rich innovation pipeline for fiscal '27. In makeup, Estée Lauder Double Wear next-generation Matte foundation drove the brand's double-digit growth in the category, while M·A·C's Lip and cheek Mousse captured the multi-use makeup trend. Turning to our third action plan priority. We boosted consumer-facing investment for the fifth consecutive quarter, focused on high ROI opportunities. La Mer experiential celebration for the launch of the rejuvenating eye cream were one of the several drivers making La Mer once again the greatest contributor to the company's organic sales growth. And Estée Lauder's launch of the all-new Double Wear foundation deliver exciting activation around the world to drive engagement and new consumer acquisition. We invested in groundbreaking campaigns, including Jo Malone's commercial innovation featuring the Jagger sisters, driving organic sales growth. The ordinary showcased its brand equity with its dictionary theme pop-up across 5 countries as the brand extended its double-digit organic sales growth. Our fourth action plan priority is to fuel sustainable growth through bold efficiencies. We achieved a significant milestone in the PRGP's program restructuring by quarter end, having approved initiatives to achieve the high end of the target gross saving range. In April, we expanded the size of the restructuring program, reflecting additional initiatives expected across the pillar of the program. This includes the expansion of the positions impacted, which largely reflects the anticipated exit of select unproductive doors in department stores and freestanding store channel as we increasingly tapped into the high-growth potential of online. This was a decision we did not take lightly as it will impact beauty advisor globally as we evolve our business to better align with consumer shopping preferences. We remain committed to completing business case approvals for the restructuring program by the end of fiscal 2026. With a line of sight to additional growth benefit driven primarily by optimization of our selling model, we are increasing the target range of gross savings. For the entirety of PRGP, we have taken decisive actions to reshape our cost structure and operation to drive speed and agility, which is now evident in our organization. We remain on track to achieve the vast majority of PRGP's full run rate benefit in fiscal '27. Since launching Beauty Reimagined, we are well on our way in executing the biggest organizational leadership and cultural transformation in our company's history, while successfully managing internal and external disruption and restoring organic sales growth and improving profitability. Finally, for our fifth action plan priority, we have now fully established One ELC, our operating model, aligning brands, regions and functions as one team with one culture and One Operating Ecosystem. We swiftly deployed one team to begin fiscal '26, simplifying the organization with fewer layers and silos and clear ownership. More recently, in February, we unveiled one culture guided by our beauty commitments, reinforcing how our team works every day grounded in accountability and bold entrepreneurship thinking. On our last earnings call, I spoke of the work underway for our one operating ecosystem to build a more connected and scalable enterprise transform by AI. At that time, we had established enterprise business services selecting Accenture and elected to modernize our direct-to-consumer omnichannel experience with Shopify. In April, we appointed WPP for a unified enterprise-led approach to media buying to enable greater scale, precision and impact. By partnering with these and other best-in-class organization, we are transforming from a fragmented data landscape to a more unified one, enabling real-time insights, a single consumer view and more effective activation across brands and markets. We made significant progress with Accenture over the last few months, beginning to consolidate vendors across brand, region and functions to drive simplification, ensure governance and eliminate long-tail spend. We have completed go-live across consumer care, CRM and tech infrastructure and are pleased with the early proof points that we have achieved in record time. All told, we plan to have Enterprise Business Services fully deployed by the end of calendar '26. Before I close, I'm thrilled to welcome to The Estée Lauder Company's portfolio, the #1 prestige skin care brand in India, Forest Essentials. In March, we agreed to build upon a long-term partnership as a minority owner by acquiring the remaining shares. With the transaction expected to close in the second half of the calendar year, Forest Essentials is an exquisite Indian beauty brand grounded in the science of modern, luxurious Ayurveda, and we are excited to expand the brand in India and share it with the world. Additionally, in April, we made a minority investment in 111Skin, a luxury skin care brand, which is ideally positioned for pre- and post-procedure growing demand. This exemplifies our minority investment strategy to build brands for the future like we did with DECIEM and Forest Essentials. In closing, with strong year-to-date results and the momentum of Beauty Reimagined, we are confident we will deliver our now higher fiscal '26 outlook. Looking ahead to fiscal '27, our view is for prestige beauty's growth to accelerate as we expect retail sales growth from the China ecosystem, including travel retail to improve to mid-single digit and the global demand for prestige beauty to remain robust. In our preliminary plan, we intend to deliver another strong year in fiscal '27 as we expect accelerating organic sales growth of 3% to 5%, gaining prestige beauty share at the mid- to high end of the range and operating margin of 12.5% to 13%. We have the right brands, the right team and a clear momentum onward and upward. Before I turn to Akhil, I extend my deepest gratitude to our colleagues around the world who have achieved so much for the Estée Lauder companies. I also want to recognize our colleagues, retailers and suppliers across the Middle East as they navigate a challenging time in the region. We are committed to continuing to support the safety and well-being of all our employees in the affected area. I will now turn the call over to Akhil. Akhil Shrivastava: Thank you, Stephane. Hello, everyone, and thank you for joining us today. Overall, we delivered strong performance in the quarter with sales growth, continued margin expansion and strong cash generation. Across One ELC, we are executing against our strategic priorities with great efficiency, continuing to advance Beauty Reimagined with focus, discipline and speed. I'll begin with a recap of our third quarter performance and then turn to outlook covering a raised fiscal '26 outlook and a preliminary view on fiscal '27. For more details on our third quarter results, please refer to the press release we issued this morning. Starting with organic net sales. We grew 2% year-on-year, driven by double-digit growth in fragrance. Performance in the category was broad-based across most brands and all geographic regions, led by double-digit growth from our luxury brands and in both The Americas and Mainland single-digit net sales growth in Mainland China and double-digit growth collectively in our priority emerging markets. Across our 4 regions, we delivered mid-single to double-digit growth online, reflecting continued momentum from expansion. In North America, sales declined low single digits, reflecting continued pressure in brick-and-mortar, including retailer bankruptcies, shop-in-shop closures and softness for some of our brands. The disruption to our business from the conflict in the Middle East negatively impacted our third quarter sales growth in EUKEM by approximately 1 percentage point. The impact to our consolidated results was not material. I'll discuss our assumption for the remainder of the fiscal year related to these disruptions when I address our outlook. Turning now to margins. Gross margin for the quarter was 76.4%, an expansion of 140 basis points compared to last year. This was largely driven by strong net benefits from a focused PRGP execution and programs covering all aspects of operational efficiencies, including our zero-waste initiatives, which drove another reduction in excess and obsolescence this quarter. These net benefits helped to offset headwinds from incremental tariffs and inflation. This also reflects a favorable impact of 95 basis points related to an in-period charge we took last year for under-absorbed overhead costs. Our improved sales leverage also contributed to expansion in the quarter. Looking at operating margin, we expanded by 360 basis points, delivering a margin for the quarter of 15% compared to 11.4% last year. Changes in our business mix, along with the shift in spending to the fourth quarter led to better-than-expected results. Our disciplined investment allocation and PRGP net benefits drove a 4% reduction in nonconsumer-facing expenses and improved operating leverage even with the normalization of employee incentive costs. This funded a 9% increase in consumer-facing investments or 5% excluding the impact from FX. We continue to invest for growth, enhancing brand desirability and reinforcing the execution of Beauty Reimagined. Our effective tax rate for the quarter was 31.8%, up from 30.8% last year. Diluted EPS was $0.91 for the quarter compared to $0.65 last year, an increase of 40%, driven by our sales growth and cost leverage. This also includes a dilutive impact of $0.02 related to business disruptions in the Middle East. Looking at our overall PRGP. We continue to execute with discipline, delivering results ahead of our expectations. With the establishment of One ELC operating model, we are continuing to make measurable progress against our strategic priorities, driving sales growth, improving our cost structure and fueling sustainable long-term value creation. In terms of restructuring costs, through March 31, we recorded $1.1 billion of total cumulative charges, primarily related to employee-related costs. Further to Stephane's comment on evolving our focus towards high-growth channels and reflecting approved initiatives through April 29, we now expect total restructuring and other charges of $1.5 billion to $1.7 billion before taxes. We still expect approvals for specific initiatives under the restructuring program in total to be completed by the end of fiscal 2026. Shifting now to another key priority, cash flows. For the 9 months, we generated $1.2 billion in net cash flows from operating activities. This is a meaningful improvement compared to the $671 million generated last year and primarily reflects higher earnings, excluding noncash items. Also contributing to the improvement was a favorable change in operating assets and liabilities despite the significant increase in restructuring payments. We invested $306 million in CapEx as we continue to prioritize consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the 9 months, CapEx was down 23% versus last year, reflecting the phasing of projects. These results reinforce our ongoing focus on improving free cash flow. Turning to our outlook. The current geopolitical and macroeconomic environment remains uncertain and continues to drive global volatility. Starting with fiscal '26, our solid year-to-date results supported by continued net benefits from our PRGP and disciplined cost management give us confidence in raising our fiscal '26 outlook. In terms of the conflict in the Middle East, our outlook assumes a greater year-on-year impact from disruption to our business in the fourth quarter relative to the third as shipments for key shopping moments had already gone out before the conflict began. This helped to minimize the impact to our third quarter sales and profitability. For the fourth quarter, we expect an unfavorable impact of approximately 2 percentage points to sales growth and $0.06 to EPS. Now looking at our fiscal '26 outlook. We expect organic net sales growth of approximately 3% at the high end of our prior guidance range. For the full year, the impact of business disruptions in the Middle East is expected to be less than 1%. We assume gross margin of approximately 75% and operating margin of 10.7% to 11%. The strong margin expansion is in spite of a more normalized level of employee incentive costs, which is expected to have a greater year-on-year impact in Q4 than in the first 3 quarters of the year. Diluted EPS is now expected to range between $2.35 and $2.45. This represents a year-on-year growth of 56% to 62% and includes a dilutive impact of approximately $0.07 related to business disruptions in the Middle East. We also assume a weighted average share count of approximately 365 million shares. Please refer to our press release issued this morning for other assumptions included in our fiscal '26 full year outlook, including those regarding evolving trade policies and enacted tariffs. For fiscal '27, our preliminary view is based on strong progress across Beauty Reimagined and our PRGP as well as our assumption of low to mid-single-digit growth in global prestige beauty. While we are in the process of finalizing our fiscal '27 plan, we currently assume net sales growth of 3% to 5% for the full year and operating margin of 12.5% to 13.0%. As Stephane said, we are confident in the trajectory of our business while recognizing ongoing external uncertainty and volatility. We plan to share a more complete view on fiscal '27 in August when we report our fiscal '26 full year results. At that time, we will refine our view as needed based on our assessment of prevailing geopolitical and macroeconomic conditions as well as changes in foreign currency exchange rates. In closing, we remain focused on executing our long-term strategy to become the best consumer-centric prestige beauty company with clear priorities of sales growth, margin improvement and strong cash generation. Across One ELC, we are advancing a multifaceted transformation with discipline and speed, and we are deeply grateful for the dedication, resilience and passion of our employees around the world who make this progress possible. Together, we are positioning the company to deliver sustainable long-term value creation. That concludes our prepared remarks. I'll now turn it over to Rainey. Laraine Mancini: Before we start Q&A, please note that management will only be addressing questions related to our fiscal '26 third quarter results, outlook for fiscal '26 and preliminary view on '27 as set forth in the press release we issued this morning or discussed on today's call. The company will not be commenting on the status of discussions with Puig or the possibility of a transaction. The company does not intend to provide any further information ahead of an official announcement detailing an agreed-upon transaction or a termination of discussions. [Operator Instructions] And now let me turn it over to the operator for the Q&A session. Operator: [Operator Instructions] Our first question today comes from Dara Mohsenian with Morgan Stanley. Dara Mohsenian: I was hoping to maybe get a bit more perspective on long-term margin potential. You're obviously making greater-than-expected progress on margins in fiscal '26. You've announced the greater job cuts and cost savings. So I just wanted to get some updated perspective from you on how you're thinking about the path to margin expansion as you look out past the guided to fiscal '27 level, with all the progress you're making? Do you think you can get back to the peak high teens margins you had in your business at one point? And perhaps just give us a general sense as you look out past fiscal '27 on the incrementality of cost savings and reinvestment needs as you look out longer term. I know you won't quantify that, but just a general sense of the continued opportunity there and the need to sort of reinvest behind the business. Stephane de la Faverie: No. Thank you, Dara, for the question. I was expecting this question. But the -- so when you think about it, so -- and I've said it now consistently over the last few quarters, we're executing the biggest transformation in our company history at every level, leadership, cultural, operational, you name it. And I think we've demonstrated over the last 3 quarters and actually since the launch of Beauty Reimagined, now the fifth quarter, that we are executed with speed and agility. We are back to growth now for the first time in 4 years. We are expanding margin. Now if you think about the margin that we've expanded or we are planning to expand this year at the higher end of the guide for the year, plus what we are -- the preliminary view that we are giving for fiscal '27, we would have expanded margin by 500 basis points from the starting point of Beauty Reimagined. We were at 8% margin. We could finish around 11% this year, and we have a preliminary view of 12.5% to 13% for next year. So obviously, this is an enormous amount of work that is coming from our ability to just improve gross margin. You saw gross margin has expanded by 140 basis points into this quarter. The reduction of the nonconsumer facing that is consistent, again, minus 4%, which is showing the discipline that we are putting in the management of our SG&A. And today, we've announced the PRGP continuous and new ideas that we are putting out there to continue to further optimize our SG&A in favor of improving the consumer-facing and investing behind our brand. And I was very clear about like now in February '25, when we launched Beauty Reimagined that we needed to invest behind our brand, and we are seeing the retail momentum and the sequential improvement in many of our brands, geographic channels around the world. So when you think about it, coupled with the new operating model that we are putting in place, and this operating model is built in partnership with best-in-class partners around the world. You name like Accenture, Shopify, WPP that we've announced last month, which is going to allow us to create a unified media activation model. You start thinking that all of what we are doing is to build a P&L that is built for leverage. And it's very important for us that we unlock additional growth. And the momentum that we are seeing this year is what is giving us the confidence to get and to give you the preliminary view for fiscal '27 at 3% to 5%, which I want to be very clear, at 3% to 5%, like Akhil would say, at the mid to the high point of this view, we will be gaining market share. And that is going to create a lot of leverage in our P&L. And you do that, you couple with the emerging market growth, the online growth, all of that is going to create more leverage for the operating margin over time. And I want to make it clear. Margin recovery is a milestone. It's not a sprint. But -- and I really -- I'm really beyond proud of what we are doing as a team today to show the momentum. And I want again to stress that if we deliver the top end of our view for next year, it will be 500 basis points improvement to 13% operating margin. And with the leverage that we are building in the P&L, I believe we can continue to improve over time. Operator: The next question comes from Filippo Falorni with Citi. Filippo Falorni: So thank you for the addition of the preliminary fiscal '27 guidance. That was very helpful. I was hoping you can expand a bit more from a geographic and category standpoint, where you see the acceleration in the global prestige category and from an Estée Lauder specific standpoint, where you see the biggest opportunity in terms of improvement in market share. Just curious what regions are driving the acceleration you're expecting and where you see the biggest opportunity? Stephane de la Faverie: Thank you, Filippo, for the question. I'll start and certainly Akhil will add a few things. The thing that I would say to start with is the category of beauty is still extremely resilient and very attractive as we speak. We're seeing many indications of the life cycle of the consumer is expanding. Consumer entering younger into the category. They are staying longer also with us. This is the reason why we've launched this big venture into longevity led by the Estée Lauder brand, but many of our other brands. We are seeing so new category also then pre and post procedure. This is the reason why we've done a minority investment in 111Skin, but we have many of that in many of our brands. We have emerging market that continues to grow, thanks to what I've been saying for now quite some time, 500 million new consumers that are going to enter the middle class between now and 2030. The accessibility of beauty through online channels, specialty-multi that is growing in, frankly, every geography around the world. So when you think about -- you take this macro change and the continuous robustness of the category, coupled with what we've demonstrated with 3 of the 4 regions that are posting growth over the last 9 months. Fragrances in double digit in the last quarter, online in double digit, priority market in double digit. China is in the fifth quarter of consecutive market share gain. And we are doing it in a way that I'm extremely proud because it's very well balanced between the channel, but also the brand. We have 6 brands in double-digit growth in the quarter in China besides like, obviously, the La Mer that continues to be very strong, but we have TOM FORD, we have Le Labo. We have many brands. We have Hainan also that is in recovery. I've said it in my prepared remarks. We are growing significantly ahead of Hainan. The Hainan is actually sequentially improving, but we are improving much, much faster than the average. And I would say, last but not least, the stabilization of North America and the U.S. for me was super important. I've communicated at the beginning of Beauty Reimagined. It is about rebalancing the growth between the region, between the category. And the fact that in the U.S., our investments are paying strong dividends in the sense that every of the 4 category are growing share in volume. It was about reactivating recruitment, and we are doing it. And we are doing it also by gaining not only volume share, but by value share with The Ordinary and on 5 makeup brands in the U.S. So all of this indication shows that, Filippo, we are not only diversifying the growth by geography, but we're also diversifying the growth by category. Now in the quarter, we have had very strong positive momentum in Fragrances. But when you look over the 9 consecutive months, skin care is accelerating and makeup and hair care are sequentially becoming like stronger. And obviously, the launch of M·A·C in Sephora in the U.S. or TikTok Shop around the world are the proof point that the strategy from a consumer coverage, from an innovation acceleration and investments are working. So I would say in a sense that when you put the macro condition behind beauty alongside the acceleration that we're seeing in our geographies and in our categories and the diversification of the growth, we feel very confident putting our outlook or just the preliminary view that we've given for next year and which will position us into a market share gain, again, as I said in the prior question, if we deliver the mid- to the high point of the preliminary view. Akhil Shrivastava: Filippo, I'll just -- Stephane touched very well upon our growth trajectory. I wanted to touch a little bit upon the margin progression and also build upon Dara's question. So at 13% margin -- 12.5%, 13% margin, our gross margin is north of 75%. Our SG&A or total OpEx is 62%. So there's still significant runway, as Stephane said, on margins. And why we feel confident is because if you look at even this year, we started with a guide of about 9.4% to 9.9%, and it's really the comprehensive nature of our work, which starts by looking at discounts to operational excellence to a One ELC model, which Stephane talked about, which really covers many meaningful parts. Shopify is one of them. It's a total online transformation. And the leadership of Brian and team, we are doing a total tech transformation. There's a full-on project on procurement. We announced WPP in the media. So we are going to drive significant ROI on our consumer-facing. With EBS on Accenture, that's a whole program to drive a better One ELC streamlined model across various parts of the world. So what you are seeing is a very comprehensive program to drive cost and with increased -- slightly increased announcement of restructuring, this gives us significant runway beyond the 11% and -- 12.5% and 13% margin guide we gave. So between those 2 combinations of growth flywheel that Stephane talked about and a new cost efficiency with restructuring, but everyday efficiency muscle we are building in the organization up and down the chain gives us the confidence to drive not only growth but margin, cash and total value creation. Operator: The next question comes from Rupesh Parikh with Oppenheimer. Rupesh Parikh: So just going back to Americas and maybe specifically North America. So growth there has been flattish. So just curious, as you look to FY '27, do you expect to turn the corner from a growth perspective? And just in terms of some of the inventory destocking headwinds, would you expect those to go away next year? Stephane de la Faverie: Thank you. The simple answer is yes. We expect basically to go from where we were declining for a decade to the stabilization we're saying to the acceleration. And that's a massive work that the team is doing. So like am I happy where we are in North America? I think the team is doing a fantastic job. We are not there yet, and we still have like some work to do, but the team is really working very hard to rebalance the channels and to have consistent performance behind the brands. But look at it objectively in the quarter, having the 4 category in volume share gain and having The Ordinary that continues to do a fantastic job in skin care and gaining market share, both in volume and in value, having 5 brands in makeup gaining share in value in the quarter is showing that the Beauty Reimagined is working in this market. Now obviously, we're coming from a position of strength. Like I said, we have many brands in top rankings, but we had to pivot, and we are pivoting very fast where we are distributing our brands in the market. Now we have 12 brands in Amazon in the U.S. performing extremely well. We have the launch of M·A·C Sephora that is only 4 weeks old in the quarter, okay? So we just launched at the beginning of March, and M·A·C is already gaining 10 points of market share in the entire quarter. But I would just like to also want to highlight that it's been just like skyrocketing in terms of market share gain in lip, which is one of the key categories. So we're seeing many proof points of the acceleration in the market. We are reactivating in recruitment. We are putting more innovation in the market. We are moving to, like I said, Amazon, TikTok Shop, more brand into Sephora, continuous acceleration with Ulta. We have like fantastic support from all our retail partners. And we have online growth in the high single digits in the U.S., which is also very encouraging that is just giving us all of this confidence that we can return to growth next year. And then I would say just one thing, Rupesh, like we've done all of that with exiting some of our brands and some channels and also having to navigate disruption like bankruptcies in some retailers that is costing us up to 2 points of growth in the quarter. So now if you exclude all this disruption, we would be even closer or certainly very close to like market share gain. And we are narrowing the market share loss. In the quarter, we've only lost 6 basis points in value versus prior year, but gaining significant volume. And that was for me the key indicator to put the foot on the gas pedal and to just accelerate in North America. And I think that was your question, Rupesh, I hope I've answered what you wanted. You asked, sorry, on the inventory. The inventory in North America in a very good position, and we are managing, like I said, in every geography, in every channel, we're shipping to the demand, and I'm very confident that we are in the right place pretty much everywhere. Is there 1 or 2 SKUs that are above what we wanted? This is normal. We are managing through it, but nothing unusual to manage for us at this point. Operator: The next question comes from Lauren Lieberman with Barclays. Lauren Lieberman: So I wanted to talk a bit about channel strategy in the U.S. So you guys have been outspoken and made a lot of progress, obviously, on Amazon and you've had the launch with M·A·C in Sephora. But we read this week that Bobbi Brown may be exiting U.S. department stores. And department stores have long been, let's call it, I don't know what's analogous to use, but a challenge as the channel itself has been deeply pressured. So just perspective on exposure to department stores, willingness to kind of continue to make kind of bold moves in that sense to exit channels outright to reposition because it's a big swing if the reporting on Bobbi is correct. Stephane de la Faverie: Yes. No. Thanks, Lauren. You're right. We are continuing to resize our -- the channel in North America. And we are -- frankly, it's not only North America, I would say it's in our Anglo market that it is in the U.S., that is in the U.K. and in Australia to a certain extent also. And we are moving to high-growth channel. This is why we've been really fast and diligence in putting our brand on Amazon. This is why we moved M·A·C into Sephora, and I really want to thank the Sephora team and our team for the fantastic support for a really, really great launch, the continuous support from our partners at Ulta, where we're doing great things. But we have to continue to rightsize the department stores, and I've been very clear. And part of the PRGP expansion, if you look at it, we are reducing -- so 70% of the expansion from an employee workforce, our beauty advisers from channels that are dilutive, especially in department stores and freestanding store. And we are rationalizing. And in some places, we have a brand that we are exiting from some channels to really focus on the high-growth channel. To answer your question on Bobbi Brown, Bobbi Brown is a fantastic brand. We love the brand. There's plenty of proof points where the brand is growing in Asia, and we have plenty of proof points where the brand is growing in the high-growth channel, such as Amazon or specialty-multi. And this is where we are putting our effort and I have been very clear all along that Beauty Reimagined was about rebalancing the geography, rebalancing the category, but also rebalancing the channel to make sure that we are aware that consumers are shopping. So these are some of the tough decisions that we have to make, but we are making them with speed, agility, and this is going to create more momentum for us in the Anglo markets. Akhil Shrivastava: If I could just add one thing, Lauren, which you are very well familiar. I mean, one of the untold story of Estée Lauder Companies is how well diversified our channels are around the world. If we look at globally, our online business is almost 1/3 of our business. Our direct-to-consumer is more than 30% -- even in the U.S., online is getting closer to 40% and direct-to-consumer is more than 30%. So worldwide, we have capabilities on around 8 to 10 big channels in the world. And we are bringing these capabilities cross capabilities around the world. For example, one of the things Stephane has done is how to work with pure-play. We now have a global team that drives pure-play progress around the world. So on platforms like Amazon, TikTok, we are taking the progress of one country to another at a rapid pace like we have never done before. So it's an extraordinary ability to pivot. Market is transforming, but as part of Beauty Reimagined #1, we are trying to lead that change through consumer coverage and whole organization is working across the board on that. Operator: The next question comes from Chris Carey with Wells Fargo. Christopher Carey: I wanted to ask about the EUKEM segment. You flagged double-digit growth in emerging markets. I believe you had constructive commentary on France in this call, if I heard that correctly. So clearly, there's some momentum in key areas. It does suggest the U.K. is perhaps a bit more muted. Can you give us a sense of how you see the U.K., how the strategies to improve the market are evolving? And perhaps in general, as you think about this region more broadly, how you would see the key growth drivers as you march toward this organic sales target that you would have over the next 12 months or so? Stephane de la Faverie: Yes. No, thanks, Chris. The EUKEM is a tale of so many different stories because obviously, you have the U.K., you have Europe and you have the emerging market. Thanks for noting the emerging market for us, we're very happy with the momentum that we are getting in the market with double-digit growth in this quarter, and we have had some very strong positive momentum for now quite some time in this quarter. India has been absolutely phenomenal for us. We have like a market like Vietnam, Indonesia, Turkey, that are doing well. And surprisingly, also, we have had good net sales growth in the Middle East because we were getting ready for Eid and Ramadan. So we had shipped just before to get ready, and we had fantastic campaigns, great activation, new product into the market. And obviously, all of that has been somehow disrupted by, obviously, the conflict in the region. The interesting thing also within the Middle East, UAE is the region within the Middle East that is the most affected with this trial. Obviously, we have actually maintained strong position in Saudi, where for the quarter, we are flat in sales with only a 2% decline in March. So it tells me that we have a strong position, and we will navigate through this disruption. Obviously, we are hoping, and like I said, for the safety of our employees and our team, suppliers and et cetera, that this is going to become to realization very quickly. With that, I think we will continue to build on the momentum. When it comes to Europe itself, Europe is more muted, Chris. We have had, obviously, some success in France and in Spain, where we are gaining market share in Frances. We are really deploying all our niche and France brand at speed, and we are seeing a lot of like good demand in this market. But generally speaking, the consumer sentiment in Continental Europe has been the most affected around the world outside, obviously, of the Middle East region, and we are navigating through this disruption by being very strategic on where we are investing. For instance, we've put a lot of investment on Double Wear behind Estée Lauder, and it's been fantastic. We have some great activation on The Ordinary and The Ordinary is gaining market share in the region. So we are more targeted and more specific on how we are deploying our capital in the region. Now when it comes to the U.K., and I know my team was not happy when I told a few quarters ago that I was not happy with the performance, and we've worked very hard together to just turn around. And I'm very happy to report that a sequential improvement and the U.K. is back in positive territory. Now we are not there yet. Operator: The next question comes from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: All right. I just had a quick follow-up on EBIT margins next fiscal year. I guess I'm wondering how critical it is for organic sales growth acceleration to ultimately drive op margin improvement versus your PRGP savings. And then I did have a question on the impact from duty-free changes at Beijing and Shanghai Airports. You had mentioned this last year. So just hoping for an update on where things stand and if the resolution of these issues should ultimately support a sequential improvement in growth in F Q4? [Technical Difficulty] Operator: Pardon me, ladies and gentlemen. It appears we lost the connection to our speaker line. Please standby while we reconnect. Thank you for your patience. Pardon me, everyone. I have our speakers joined back. We can continue. Bonnie Herzog: Okay. I don't know if... Laraine Mancini: Can you tell us where we left off? Does Stephane need to repeat that answer? Bonnie Herzog: Yes, it's Bonnie. I can repeat my question. I assume you guys didn't hear it. I just -- I did have a quick follow-up on EBIT margins fiscal year. I guess I'm wondering how critical it is for organic sales growth acceleration to drive the margin improvement in the year versus your PRGP savings. And then I do have a question on the impact from duty-free changes at the Beijing and Shanghai airports that you did highlight last quarter. Could you just maybe provide an update on where things stand and if the resolution of these issues should support a sequential improvement in growth in F Q4? Akhil Shrivastava: Bonnie, so I'll start with EBIT margin and then Stephane will take on another question. So it's a very pertinent question given that 3% to 5% sales growth is an acceleration. So we feel confident that the work we have done on -- as I was saying earlier, on the restructuring work the big structural cost savings; and number two, the everyday efficiency we are building in the organization. With that, we feel confident in our margin at different sales ranges, of course. When we give this guidance, we give in a risk-adjusted way that how we can get to that margin at the top end of the range, bottom end of the range, and even if the sales fully doesn't materialize. So sales is a critical part of the driver of margin, but we have multiple tools in the toolkit to continue to drive margin expansion. Of course, on a long-term basis, growth is critical to drive this, but we are still in the middle of a massive cost transformation. So we feel good about the cost work, which, of course, has an opportunity to do even better when that kind of margin -- that kind of sales growth comes through. So in summary, what I'm saying is we have a very strong cost program, which, of course, depends on growth, but is in itself a huge margin expander in itself. Stephane de la Faverie: Yes. And Bonnie, just one quick thing on travel retail. I'm sorry for the quick tech issues that we have had here. I'm glad that we are back. So on travel retail, things are moving in the right direction. And our travel retail business posted a low single-digit growth in the quarter, which is a net sequential improvement compared to what we've been. And remember, we said that there was an issue with -- a potential issue with the retailer transition, especially in Beijing and Shanghai Airport and obviously, online. But the impact has been less than initially expected. I have to say, I want to recognize again my team in travel retail and also our partners, retailer partners in Hainan because they've worked tirelessly to make sure that we were not going to miss Chinese New Year or the key activities. So frankly, things are getting better. And as a result, we are also rebalancing where the growth is coming from. Hainan has been absolutely fantastic for us. We grew over 30% in the quarter in retail, which is significantly above the department. And I think I mentioned it earlier that we have 6 brands in double digit with Lauder, La Mer, Jo Malone, Clinique, M·A·C and Bobbi Brown growing. So we are accelerating. We are accelerating the recapture. And at the same time, as we are rebalancing within the China -- travel retail China ecosystem, we're also accelerating travel retail around the world. And I made it very clear that the investment that we are putting in travel retail West, if we are lucky to travel around the world, we are going to see better presentation, more consumer experience in all key airports that it is from Heathrow to Charles de Gaulle to Singapore, to Bangkok, you name it, our team is working tirelessly to deploy new brands, especially all our luxury fragrances brands like Kilian, Le Labo, TOM FORD and Jo Malone. So we have a lot of work to continue to do, and we are confident that travel retail is back to stabilization, and we are hoping past, hopefully, the disruption in the Middle East that we are going to be able to continue to grow in multiple geographies. Operator: That concludes today's question-and-answer session. If you were unable to join for the entire webcast, a playback will be available at 1:00 p.m. Eastern Time today through May 15. Please visit the Investors section of the company's website to view a replay of the webcast. That concludes today's Estée Lauder conference call. I would like to thank you all for participation and wish you all a good day.
Operator: Good morning, and welcome to the Piper Sandler Company's First Quarter 2026 Earnings Conference Call. Today's call is being recorded and will include remarks by Piper Sandler management, followed by a question-and-answer session. I'll begin by turning the call over to Kate Winslow. Please go ahead. Kathy Winslow: Thank you, operator. Good morning, and thank you for joining the Piper Sandler Company's First Quarter 2026 Earnings Conference Call. Hosting the call today are Chairman and CEO, Chad Abraham; our President, Deb Schoneman, and CFO, Kate Clune. Earlier this morning, we issued a press release announcing Piper Sandler's First Quarter 2026 financial results, which is available on our website at pipersandler.com/earnings. Today's discussion of the results is complementary to the press release. A replay of this call will also be available at that same website later today. Before we begin, let me remind you that remarks made on today's call may contain forward-looking statements that are not historical or current facts, including statements about beliefs and expectations, and involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's reports on file with the SEC which are available on our website at pipersandler.com and on the SEC website at sec.gov. Today's discussion also includes statements regarding certain non-GAAP financial measures that management believes are meaningful when evaluating the company's performance. The non-GAAP measures should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release issued today. I will now turn the call over to Chad. Chad Abraham: Thank you, Kate. Good morning, everyone. Thank you for joining us. We posted a strong start to the year, generating first quarter adjusted net revenues of $470 million, our tenth consecutive quarter of year-over-year growth, a 20% operating margin and adjusted EPS of $1. Corporate Investment Banking achieved a first quarter record with revenues of $324 million, up 30% year-over-year due to robust corporate financing activity as well as solid contributions across advisory services. . Our Healthcare franchise produced an exceptionally strong quarter, setting a new high watermark in terms of revenues. Results were driven by our medtech and biopharma teams as well as meaningful contributions from Healthcare IT and Services, 2 areas where we have invested in strengthening our capabilities. Within U.S. medtech M&A, we rank as the top adviser based on number of announced deals. Our Financial Services group also registered a strong quarter as they closed several significant bank M&A transactions. We ranked as the #1 adviser in U.S. bank M&A based on deal value announced during the quarter. Our Insurance and Asset Management subsectors also contributed to the strong performance. Advisory revenues were a first quarter record of $251 million, up 16% year-over-year due to the strong performance from Healthcare and Financial Services, and contributions from our Services and Industrials and Energy teams. For the quarter, we ranked as the #2 adviser in U.S. M&A based on announced deals under $2 billion and ranked #3 based on announced deals under $5 billion. In addition, our non-M&A advisory teams remain active and are a growing component of our performance. Our Debt Capital Markets Advisory business recorded a strong start to the year and was a meaningful contributor to this growth. Our deep product expertise, trusted relationships with market participants and close collaboration with our industry teams continue to deliver consistent, high-quality execution for our clients. We are also seeing positive momentum within our Private Capital Advisory Group, where we are leveraging our sponsor relationships and sector expertise to grow market share. As market conditions evolve, we continue to benefit from our broad industry coverage and comprehensive product capabilities. Looking ahead, our industry and product teams are busy advising clients and pipelines remain strong. However, the timing of these transactions may be influenced by market conditions. We expect second quarter advisory revenues to be similar to the first quarter. Turning to Corporate Financing. The equity underwriting market was resilient during the quarter despite the volatility with the fee pool up 73% year-over-year, driven mainly by the Healthcare sector. Corporate Financing revenues for the quarter for $73 million, up 122% from the first quarter of last year. We completed 36 equity, debt and preferred financings raising $14 billion for corporate clients. Activity was led by our Healthcare team, which served as bookrunner on all 23 equity deals they priced during the quarter. Our absolute and relative outperformance was driven by strong equity issuance for biopharma companies. In this sector, we ranked as the #2 investment bank based on the number of book-run deals. Over the last decade, we've built a scaled biopharma platform with deep expertise and products across banking, research, capital markets and sales, positioning us to capture share and drive strong results. As we look ahead, we expect second quarter corporate financing revenues to decline from a strong first quarter. Shifting to talent. We finished the quarter with 192 investment banking managing directors, the highest number in firm history. Development of our internal talent, along with identifying talented partners to join our platform, continues to be a priority as we strengthen our product and sector teams. During the quarter, we promoted 6 of our bankers to Managing Director, and we hired 3 MDs that strengthen our advisory capabilities in Healthcare, IT, European Life Sciences and Upstream Energy. Let me close with a few final points. While the near-term macroeconomic environment remains uncertain, our core strategy is unchanged. We remain focused on advising clients with deep expertise and providing a comprehensive suite of capital market solutions. We are committed to expanding our platform for continued growth while delivering strong margins to our shareholders. With that, I will turn the call over to Deb to discuss our Public Finance and Brokerage businesses. Debbra Schoneman: Thanks, Chad. I'll begin with an update on our public finance business. We generated $24 million of Municipal Financing revenues for the quarter, down 9% year-over-year. Revenues were balanced between our governmental and specialty businesses. During the first quarter, we underwrote 98 municipal negotiated transactions, raising $3 billion of par value for our clients. As we look ahead, our pipelines are strong with clients looking to access the market. We anticipate that second quarter revenues will improve modestly from the first quarter, aligning with the typical seasonality of this business. Turning to our Equity Brokerage business, higher volatility drove increased trading volumes in response to geopolitical events, resulting in record first quarter revenues of $60 million, an 11% increase from the prior year. Performance was broad-based across our trading desks, including our derivatives desk as clients increase their hedging activity. Our platform offers clients many execution and payment channels to take advantage of our differentiated research and trading capabilities. Looking ahead, our results will continue to be correlated with market volatility and trading volumes. We expect our second quarter revenues to decline from the record first quarter levels. While volatility helped our Equity Brokerage business, it negatively impacted our fixed income business. As the quarter progressed, the day-to-day volatility during March significantly reduced our regular-way client activity. We were able to mitigate this reduction by completing balance sheet restructuring trades in conjunction with the closing of bank M&A transactions. We produced fixed income revenues of $50 million in the first quarter, up 6% from the prior year period. The diversification of our product capabilities and client relationships, coupled with our capital-light model, provided a level of resiliency to our results. The near-term fixed income outlook remains challenging. We've experienced a slow start to the second quarter as ongoing geopolitical developments are keeping many clients on the sidelines. Now I will turn the call over to Kate to review our financial results and provide an update on capital use. Kate Clune: Thanks, Deb. My comments will address our adjusted non-GAAP financial results which should be considered in addition to and not a substitute for the corresponding GAAP financial measures. As a reminder, we affected a 4-for-1 forward stock split of our common stock on March 23, and our common stock began trading on a split-adjusted basis at the start of trading on March 24. All share and per share amounts discussed on the call have been retrospectively adjusted to reflect the impact of the stock split. For the first quarter of 2026, we generated net revenues of $470 million, operating income of $94 million and an operating margin of 20%. Net income totaled $72 million and diluted EPS was $1. Net revenues for the first quarter of 2026 declined from the seasonally strong fourth quarter of 2025, but increased 22% over the first quarter of last year. The year-over-year growth was driven by a 30% increase in Corporate Investment Banking revenues. Advisory Services delivered the strongest first quarter on record and Corporate Financing activity was robust. In addition, our Equity Brokerage business achieved strong results. Margin expansion remains a strategic priority as we continue to scale our platform. Current quarter operating income grew 37% over the first quarter of 2025, outpacing our year-over-year revenue growth of 22%. Turning to expenses. We reported a compensation ratio of 61.6% for the quarter, an improvement of 90 basis points from the first quarter of last year, driven by increased net revenues. This improvement in our ratio reflects our continued commitment to exercising operating discipline, while balancing employee retention and investment opportunities. For the first quarter of 2026, non-compensation expenses were $86 million, up 15% over last year, in part due to an $8.5 million litigation-related expense taken during the quarter. This expense relates to the pending settlement of the California lawsuit originally filed in 2014, specific to variable rate demand notes within our Municipal Finance business. Excluding the $8.5 million litigation expense, non-compensation costs for the quarter increased 4% year-over-year driven by higher underwriting expenses associated with increased corporate financing activity and were 16.6% of net revenues. This ratio reflects an improvement of 300 basis points from the first quarter of last year as we continue to drive leverage from higher revenues. Moving to income tax expense. For the first quarter of 2026, our income tax expense was reduced by $7 million of tax benefits related to the vesting of restricted stock awards, which resulted in an income tax rate of 23.4%. Excluding these benefits, our effective tax rate was 30.8%. Now finishing with capital. Our consistent operating discipline and capital-light approach continued to result in strong cash generation to deploy in order to drive shareholder returns. During the first quarter, we returned an aggregate of $171 million to shareholders, which included dividends totaling $101 million or $1.45 per share paid to shareholders through our quarterly and special cash dividends. It also includes repurchases of approximately 884,000 shares of our common stock were $70 million, which offset a significant portion of the share count dilution from this year's annual grants. Lastly, I'm pleased to announce that effective today, the Board approved a quarterly cash dividend of $0.20 per share, a 14% increase from our previous quarterly cash dividend. The dividend will be paid on June 12 to shareholders of record as of the close of business on May 29. We are pleased with our start to 2026 and remain focused on driving long-term growth and further elevating the durability of the platform while generating best-in-class returns. With that, we can open the call up for questions. Operator: [Operator Instructions] We will now take our first question from James Yaro with Goldman Sachs. James Yaro: Chad, I'd love to just get an update from you on whether the upward sloping trend of activity in bank M&A has slowed at all in your opinion or continues? And then maybe to the degree you could also comment on the recent rate vol in the forward curve in particular and whether that should have an impact on the Bank Hedging business and Fixed Income? Chad Abraham: Okay. Well, why don't I take the first question, James, and I'll let Deb take the second one. But on bank M&A, we had a good Q1 with a significant amount of closings. I would say on the announced bank M&A, I do think it's a little slower than we anticipated. We announced a couple more transactions this week. So I would say we're seeing decent volume on some of the smaller transactions, just haven't seen the pace we were seeing on a little bit of the larger transactions. Just as a reminder, that happened a little bit last year, and it picked up as well. So we'll have to see. Debbra Schoneman: Yes. And then on your question relative to hedging activity with banks, our derivative desk has been incredibly busy relative to conversations. We've seen some increased actual activity of transactions being completed. But I think one of the things that you see is when there's volatility while you might naturally think, boy, there should be a lot of hedging, it also makes it challenging to determine how they want to position given that volatility. So definitely, a lot of activity going on there, but nothing that's necessarily outside of the norm. James Yaro: That's super helpful. Maybe just on the equity capital market side. You talked about strength in Healthcare. That's obviously been 1 of the 2 sectors alongside Industrials that has performed very well so far this year. I'd love to just get your sense on based on your backlogs, how sustainable you think the equity capital markets activity could be? And specifically, as it relates to the Healthcare business, which is driving a lot of that, I believe? Chad Abraham: Yes. So it was a good quarter for the market, but it was a particularly good quarter for us just with market share. That happens sometimes with -- if we have a handful of larger fees. Obviously, we specifically said in the commentary we thought capital markets would be down. It's just hard for us to maintain sort of that super outsized market share performance in Q2, but that market remains open and especially how biotech trades. Sometimes that market trades just differently than the overall market. So we feel pretty good about that backdrop, but do not think that, that first quarter market share is sustainable. . Operator: We'll next go to Steven Chubak with Wolfe Research. Steven Chubak: Absolutely. Yes. So I wanted to start with unpacking some of the comments around the Advisory outlook. You mentioned Advisory fees should be down sequentially, not surprising given the choppy macro. I was hoping to get some perspective on which sectors you're seeing the biggest slowdown in deal activity. And based on your current visibility into the backlog, just how long do you expect this moderation or let's call it somewhat of an air pocket to persist? Chad Abraham: Yes. So obviously, in our commentary, we said Advisory would be similar. So I would say I think it sort of depends on the sector. We obviously talked about banks and with announcement volume down in Q2 -- or Q1, obviously, that has some impact on the go forward. We had a spectacular Q1 in parts of Healthcare and Medtech that are sort of hard to repeat. So some of that is just relative to our own performance. But I would say, in the overall market, especially on the sponsor side, while I think sponsors pitch activity has been good. I think the question is how quickly do they launch and do they transact? And so while I don't think there's any real panic, there's also not tremendous urgency. So I think it's -- I think the market is fine. I don't think it's accelerating. And those 3 combinations of things probably drove our commentary. Steven Chubak: Understood. I mean with regard to sponsors, it certainly feels like Waiting for Godot. Maybe just to switch gears and focus on the Software side, just given Technology has been a meaningful contributor to your M&A business historically, we're all hearing of emerging concerns on AI disruption, the SaaSpocalypse, was probably good to speak to your outlook for Software M&A and the willingness of these corporates to consider inorganic growth or even consolidation amidst some of the growing AI fears? Chad Abraham: Yes. So obviously, for us, Technology is one of the areas we've been investing heavily in, but on a historic basis, it's out of our 7 history teams, one of the smallest. So I think on a relative basis, we will be impacted less. But no question, we will be impacted. We actually had a decent Q1 in Technology up from last year. And what I would say with the Software transactions, I think I think the market's slowly figuring out where is the real disruption going to be, where does sort of the data and vertical expertise really sort of find its way through in the new tech market, but there is no question, especially on the larger deal side, things are going to be slower, folks are going to be cautious, valuations are down and valuations are down versus prior financing levels, which makes it hard to transact. I do think that -- we've seen that in other tech cycles. We will see that work its way through the system. And then like you said, just with AI and technology shifts for the survivors, that will probably accelerate other activity. But that's going to take a while to take -- to work out. So I think our expectations are fairly cautious for our Tech and Software business this year. Operator: We'll next go to Devin Ryan with Citizens Bank. Devin Ryan: Want to stay on Advisory and maybe talk a little bit about some of the non-M&A businesses. Obviously, it sounds like private capital is continuing to gain steam. We're still hearing restructuring is relatively active. Can you talk about kind of contribution that you're seeing from non-M&A? And then just more broadly, how that impacts kind of the outlook as you look out over the next year or even 2? Chad Abraham: Yes. Sure. We had a good Q1 in non-M&A. Obviously, we've got the major pieces of that DCM advisory, restructuring and then private capital advisory. For us, sort of the real bright spot in Q1 is even after a good end of the year, our Debt Capital Markets Advisory business had a very good Q1. I would say, restructuring and private capital were fine, but the outsized performance was driven by Debt Capital Markets. I do think relative to private capital advisory now that we're kind of 1.5 years into our acquisition, I'm pretty encouraged by what we're seeing on some of the continuation and other transactions as we've now closed a few, and we have -- and frankly, we have a few more, and it's really across all of our industry teams, which I think -- which is good for us to see. And over time, I think that's going to be more and more of a contributor for us. Devin Ryan: Got it. Maybe one for Deb here. On fixed income revenues, you mentioned kind of resiliency with balance sheet restructuring trades with the bank closings, but 2Q started slowly with clients on the sidelines. Can you just help us understand kind of the moving parts of that? Is that bank M&A, was that interest rates? Is that just market volatility? Just trying to think about what needs to change to kind of bring people off the sidelines? Debbra Schoneman: Yes. I think the biggest thing that needs to change is just volatility needs to come down. Some vol is great for trading businesses, but it's been too extreme, and I think part of that's rate, part of that just is looking at what's happening in the geopolitical environment. So I would say that's the biggest thing that we just need to see some sustained reduction in just volatility in the marketplace relative to the bank restructurings, and that's going to follow the closings of M&A transactions. So that's just something to watch there. And as Chad talked about a little bit of a slowdown in some of the announcements. This is an industry-wide phenomenon, actually. That does ultimately impact our opportunities in, say, the next quarter to be able to have more of those. So I think -- let me know if there's anything else I can add color on there, but I think those are the biggest components. Devin Ryan: Yes. That's great. Maybe if I could just squeeze one in to get Kate involved. Just on the comp ratio and kind of the outlook, obviously, I appreciate the year is still somewhat uncertain, but you started the year with nice revenue growth, some comp leverage, I think, down 90 basis points from the beginning of 2025. So how are you thinking about the ability to drive -- you've been incredibly consistent on the comp ratio, which is great. But like the ability to continue to drive leverage from here off of a better jumping off point for 2026 relative to 2025? Debbra Schoneman: Thanks, Devin. So we're now sort of consistently at the low end of the range that we had previously guided to, which was 61.5% to 62.5%. So pleased with that progress. And also pleased with the leverage we were able to drive in the first quarter, given the improvement in the top line revenue number. That being said, we do have a highly variable comp model, which has allowed us to be as consistent as we have been through the cycle. So while we'll certainly look to drive leverage where opportunities present of certain parts of our comp expense base, that leverage could be a little bit more modest than perhaps you'd see elsewhere. And we're also always looking for additive investment opportunities. So it's a bit of a balance. But we intend to continue to operate within the low end of the range or just below as we have for the first quarter here for the rest of the year. Operator: [Operator Instructions] We'll next go to Mike Grondahl with Northland Securities. Mike Grondahl: Chad, if we think about your Advisory pipeline, there's probably traditionally some activity as you go from winter to spring some inflows, a little bit of outflows. Can you comment at all how winter to spring activity happened this year? Did it kind of stop recently with the war? I'm just trying to get a sense of how different the activity was this year versus more normal years? Chad Abraham: Yes. Thanks, Grondy. What I would say is Q1 is always a challenge for us because it's just seasonally down. And then especially, we had such a just -- Q4 is always good, but last Q4 was really, really strong. So you never know exactly how that's going to impact Q1 pace. So I think the fact that on a relative Q1 basis it was a record, and it was so good. I think we were especially excited just given that was off of a really strong I do think the combination of those 2 quarters, you're always looking at what you're adding and what you're taking. And I think that, that probably drove some of our commentary about why we thought advisory would be similar in Q2. But other than that, nothing sort of extraordinary there. Mike Grondahl: Okay. And then -- what do you think the markets need to see to kind of get back on an upward slope. Is it the Iran war? Is it lower oil prices? Is there -- if you had to call out 2 or 3 things, what do you think it is? Chad Abraham: Yes. I mean, it's hard to just talk about the whole market. I mean, honestly, our -- each of our sort of segments is driven by certain things. I mean in our Energy business now, things are rock and they've got a lot of interesting things going on. We talked a little bit about it. I think in bank land, one of the things that's pretty important is just what's the starting point of stock prices. They're down a little bit and that's not a perfect time to transact. And then just, yes, relative to the sponsor business, I think it's just going to be some stability. It's not like we're not transacting, but sort of a -- and there's really 3 decision points for sponsors. And April is always our heaviest pitch month, and that's true today. So we know what's coming, but then there's a decision point of do you launch before the decision point of do you transact. And so I think it's just certainty of close. And so do we get some resolution on a global macro and do people feel like they're going to hit their valuation points. And we'll learn a lot in the next couple of months here. But the good part is, I think people are at least confident enough in sponsor land to do the pitch, start the process, but there'll be another big decision point this summer about do we launch. Operator: And at this time, we have no further questions. I would like to turn the call back over to Chad Abraham for closing remarks. Chad Abraham: Thank you, Margo, and thanks to everyone that joined us this morning. We look forward to updating you on our second quarter results this summer. Have a great day. Operator: And this does conclude today's call. We thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Arcosa, Inc. First Quarter 2026 Earnings Conference Call. My name is Chloe, and I will be your conference call coordinator today. As a reminder, today's call is being recorded. Now I would like to turn the call over to your host, Erin Drabek, Vice President of Investor Relations for Arcosa. Ms. Drabek, you may begin. Erin Drabek: Good morning, everyone, and thank you for joining Arcosa's First Quarter 2026 Earnings Call. With me today are Antonio Carrillo, President and CEO; and Gail Peck, CFO. A question-and-answer session will follow their prepared remarks. A copy of the press release issued yesterday and a slide presentation for this morning's call are posted on our Investor Relations website, ir.arcosa.com. A replay of today's call will be available for the next 2 weeks. Instructions for accessing the replay number are included in the press release. A replay of the webcast will be available for 1 year on our website under the News and Events tab. Today's comments and presentation slides contain financial measures that have not been prepared in accordance with GAAP. Reconciliations of non-GAAP financial measures to the closest GAAP measure are included in the appendix of the slide presentation. In addition, today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's SEC filings for more information on these risks and uncertainties, including the press release we filed yesterday and our Form 10-Q expected to be filed later today. I would now like to turn the call over to Antonio. Antonio Carrillo: Thank you, Erin. Good morning, everyone, and thank you for joining us for a discussion of our first quarter results and 2026 outlook. I am very pleased with our performance. We kicked off the year with strong results, made meaningful progress on our strategic transformation, and increased our full year guidance for continuing operations. In the first quarter, we delivered adjusted EBITDA growth of 10% from continuing operations, double our revenue growth, and expanded margin by 100 basis points. The strong performance was driven by robust double-digit top line growth and strong margin uplift in utility structures. Despite typical seasonality and winter weather impacts, Construction Products contributed solid results, and we were pleased to see performance improved as the quarter progressed. Importantly, we recently reached a key milestone in our transformation. On April 1, we announced the completion of the $450 million barge divestiture, a pivotal step in simplifying our portfolio. Now with 2 segments, we're fully focused on Construction Products and Engineered Structures, both well positioned to benefit from infrastructure investment and power market tailwinds in the U.S. We intend to use the net proceeds from the barge sale to reinvest in our growth platforms and manage our debt. In March, we completed a $60 million acquisition of a natural aggregates operation located in Florida with accretive margins that enhance our platform in this attractive market. We continue to have an active bolt-on M&A pipeline complemented by a healthy set of high-return organic growth projects. Our balance sheet is in great shape. And at the end of the first quarter, pro forma for the barge divestiture, net debt-to-adjusted EBITDA decreased to 1.9x, slightly below our target range, providing for both flexibility and capacity to support continued growth. Turning to the outlook. Our full year 2026 guidance now reflects continuing operations only. At the midpoint of our guidance range, we expect adjusted EBITDA of $565 million, up $22.5 million from our previous guidance range, representing 11% growth year-over-year. In Construction Products, our demand outlook remains broadly consistent with the start of the year with new uncertainty created by the conflict in the Middle East, which commenced the day after our February earnings call. While geopolitical volatility is elevated and oil prices have risen sharply, we have not seen that translate into weaker demand in our construction footprint. Within Engineered Structures, our first quarter performance in utility structures exceeded expectations. Momentum has been building in the demand environment for some time, and this strength is aligned with the excellent commercial and operational execution by our team, driving record margin performance in the quarter. As a result, we have raised our expectations for the balance of the year. Reflecting on our journey as a stand-alone public company, we have never been better positioned. Our objective at the time of the spin-off was to grow in attractive markets while simplifying the portfolio and reducing cyclicality. We have succeeded in doing this while strengthening our margin profile and enhancing the company's overall resilience. Across our simplified portfolio, we are aligned to capitalize on durable multiyear U.S. infrastructure-related tailwinds. We're confident that these advantages, combined with disciplined capital deployment and consistent execution, position us to deliver continued shareholder value creation. I will now turn the call over to Gail to provide additional details on our first quarter segment results. Gail Peck: Thank you, Antonio. Good morning, everyone. My comments today will focus on continuing operations. First quarter results for the barge business are included in discontinued operations, and we have eliminated segment reporting for Transportation Products. Starting with Construction Products. First quarter results finished largely in line with our expectations, overcoming a slow start to the quarter due to severe winter weather across our footprint in January. Segment revenues increased 5% and adjusted segment EBITDA decreased slightly. Adjusted EBITDA growth in aggregates and trench shoring was offset by pronounced seasonality in asphalt and lower cost absorption in Specialty Materials. For aggregates, freight-adjusted revenues increased roughly 6%, driven by 2% pricing growth and 4% volume. Adjusted cash gross profit margin increased 220 basis points and adjusted cash gross profit per ton increased 7%. Performance this quarter was led by our Texas region, which benefited from favorable weather in February and March that more than offset the harsh winter conditions throughout the quarter in our East region. Turning to Specialty Materials and Asphalt. Revenues decreased 4%, primarily due to lower asphalt volumes. Revenues for Specialty Materials increased slightly, driven by higher lightweight aggregates volume. Costs were higher year-over-year due to planned maintenance downtime at one of our lightweight plants and a larger seasonal impact from asphalt. The result was lower adjusted EBITDA for the quarter. We expect to see earnings growth and margin improvement for both product lines for the remainder of the year. Finally, our trench shoring business completed another strong quarter of growth with both revenues and adjusted EBITDA up about 26%. Record order levels converted into higher volumes, and customer sentiment remains very positive. Moving to Engineered Structures. Segment revenues increased 4%, led by mid-teen growth in our utility and related structures businesses, more than compensating for lower wind tower revenues, which were expected. Utility structures revenue accelerated north of 15%, supported by both volume and pricing. Significant margin expansion drove a 21% increase in adjusted segment EBITDA. Segment margin increased to a record 21.1%, up 300 basis points year-over-year due to strong utility structures performance. During the quarter, the team successfully executed strategic capacity expansion projects to drive volume and accelerate the delivery of more favorable product mix. We ended the quarter with record backlog for utility and related structures of $558 million, up 28% from the start of the year. Order activity continued to be strong and included a couple of orders for long-term projects that extend into 2028. Customer reservations, which are not included in reported backlog, are also robust. For wind towers, we received orders of $43 million during the quarter for delivery in 2026 and 2027. We ended the quarter with backlog of $600 million and expect to recognize 36% in 2026 and 59% in 2027. I'll now provide some comments on our cash flow performance and balance sheet position. During the quarter, we generated $58 million of operating cash flow from continuing operations, which compared favorably to last year's $21 million use of cash. The increase was driven by higher earnings and a $53 million reduction in the use of cash for working capital. CapEx for continuing operations for the first quarter was $44 million compared to $33 million in the prior year period, which reflects increased investment in our core growth platforms. Free cash flow from continuing operations was $21 million, up from negative $49 million in the prior period. Additional cash activity in the quarter included the investment of $60 million for the bolt-on natural aggregates acquisition and $18 million of share repurchase to offset dilution. Our balance sheet and liquidity position were enhanced by the barge sale. Pro forma for the April 1 closing, net debt-to-adjusted EBITDA is 1.9x compared to 2.3x at quarter end. This reflects $370 million of estimated after-tax net proceeds, of which $83 million was used to prepay a portion of the outstanding term loan balance in April. Pro forma liquidity is estimated at $1.1 billion, including full availability under our $700 million revolver. I'll wrap up with guidance updates on a few items to reflect continuing operations now that the barge divestiture has closed. We now expect full year CapEx of $215 million to $240 million, a slight reduction from the prior range. We anticipate a full year effective tax rate of 16% to 18%, down 1.5 points due to a lower expected state tax rate for continuing operations. The first quarter tax rate of 5.3% was favorably impacted by onetime discrete items. So our guidance implies a quarterly effective rate slightly above the top end of the range for the balance of the year. And finally, we anticipate the full year corporate cost impact to adjusted EBITDA to be approximately $60 million at the midpoint of our guidance range, roughly flat with 2025 as we offset barge stranded costs. I will now turn the call back to Antonio for more discussion on our 2026 outlook. Antonio Carrillo: Thank you, Gail. We have started the year on solid footing, completing the barge divestiture, delivering strong financial and operational results and raising guidance. As a result, Arcosa is well positioned to deliver another year of record financial results for our 2 remaining segments. Our outlook for the year has improved, driven by the strength in utility structures as well as solid execution in the first quarter. At the midpoint of our guidance range, we anticipate revenues of $2.65 billion, up 6% year-over-year and adjusted EBITDA of $565 million, up 11% year-over-year. We expect margin to expand to a record 21.3%. In Construction Products, we anticipate another record year of revenues and adjusted segment EBITDA. In our guidance range, we continue to expect mid-single-digit adjusted EBITDA growth for the segment. For the aggregates business, we are incorporating low single-digit volume growth and mid-single-digit pricing improvement consistent with our February guidance. On the cost side, we're managing increases in oil-related inputs. We're actively deploying fuel surcharges and loading fees in the aggregates operations to combat higher diesel costs and the asphalt pricing is indexed to changes in liquid AC. We're maintaining strong pricing discipline to support solid unit profitability gains consistent with actions we took to address high inflation. Our 2026 outlook is underpinned by infrastructure and heavy nonresidential demand. In Texas, our largest market, we delivered above-average volume and pricing gains in the quarter, driven by healthy demand and favorable weather conditions in much of February and March. While highway lettings have been trending off peak levels recently in Texas, the outlook for state spending growth over the next several years is very positive. In New Jersey, our second largest regional market, the demand outlook is also favorable, as both the Department of Transportation and the Transit Authority have approved budget increases for 2026. We're ramping up for the spring construction season after a very cold start to the year. We believe there is pent-up demand as customers are ready to start their projects and make repairs caused by the harsh winter weather. There is also progress in advancing a multiyear surface transportation reauthorization with initial language expected to be released by the House Transportation and Infrastructure Committee later this month. Within heavy nonresidential, volumes continue to benefit from data center development, reshoring activities in certain areas, and overall demand for new power generation. Additionally, we see continued momentum related to LNG opportunities in the Gulf Coast. Residential remains challenged by affordability, and the recent rise in oil prices has weakened consumer confidence. With a soft start to the spring selling season, we see residential volume recovery pushing out to 2027, and anticipate flat to slightly down residential volume in aggregates this year. We service attractive markets and expect our footprint to benefit when the housing market recovers. In summary, our construction outlook continues to be supported by infrastructure and heavy nonresidential activity in 2026. With the winter season behind us, we're optimistic about a solid construction activity in the quarters ahead, led by healthy demand fundamentals in our largest markets. Moving next to Engineered Structures. We had an excellent start to the year, exceeding expectations for the segment, with outperformance driven by utility structures, our largest business in the segment. Regarding the market outlook, conditions remain very healthy. As we have discussed before, the expansion of data centers and the rise in electricity consumption across the U.S. continues to drive a significant and sustained increase in power demand. Our utility customers have made large multiyear capital commitments to power investments along with ongoing efforts to modernize the grid. As a result, our backlog continues to increase and we are optimizing pricing. We're successfully addressing the recently implemented steel tariffs. Previously, we were exempt from Section 232, as we source our steel from the U.S. for the manufacture of utility structures in Mexico to be sold in the U.S. Effective April 6, these imported structures are subject to a new 10% steel tariff on the full value of the finished products. We have contractual protection in place to effectively pass through the impact. We're optimistic that the joint review of the USMCA later this year will create certainty in the commercial relationships between U.S. and Mexico and avoid tariffs on products made in Mexico that comply with USMCA and are made of U.S. steel. We're advancing several high-return investments in utility structures to align capacity with strong demand, while at the same time, focusing on efficiencies and throughput enhancements within our footprint. We're ahead of schedule with the conversion of the Illinois wind tower plant, which had been idle for several years to a utility pole plant. With critical equipment being installed and commercial success filling our backlog, we now expect to produce large utility poles from this facility by the end of the second quarter. Our new galvanizing facility in Mexico completed its first dip in April, and we should be commercially operational in the second quarter as well. Our expectations are that the expected cost savings from the galvanizing facility will help offset start-up costs in Illinois. Additionally, planning continues for the transition of a second wind tower facility in Oklahoma to produce utility poles. In that plant, current wind tower backlog extends through 2027. We can run both product lines in parallel, and we expect to be moving our people to produce utility poles as wind tower orders are fulfilled. Within wind towers, which represent roughly 10% of full year total company revenues, the team performed well while transitioning to lower volumes. We now have 3 customers in our backlog with the orders received in the quarter, and we're planning for a volume recovery back to 2025 levels next year based on the backlog already in place. With power demand rising and wind energy remaining competitive source of generation, we're optimistic that there will be demand for wind towers after the tax credits expire. With 2 of our 4 wind tower plants under active conversion to produce utility structures, Arcosa will be well positioned to deliver strong returns on the capital invested in the wind business while retaining a great optionality to further expand capacity for utility poles if demand continues to strengthen. Our first quarter beat and guidance raise highlights the significant strength in utility structures that serve as a backbone of the grid modernization. Electricity demand is expanding at a pace not seen in a generation. We now anticipate segment adjusted EBITDA growth of approximately 10% at the midpoint of our guidance range with utility structures more than compensating for a transition year in wind towers. As it relates to our capital allocation priorities, we have an active pipeline of additional bolt-on opportunities, both in natural and recycled aggregates, and expect to deploy capital towards the highest value opportunities. While not reflected in our midpoint of our guidance, we are confident that we can execute on several bolt-ons this year. In closing, we're entering the second quarter with strong momentum and improved balance sheet and additional confidence underpinned by increasing our guidance. The divestiture of our barge business is a significant milestone in our company's evolution and will sharpen our focus on our key growth businesses. We remain proactive in our value creation strategy and are always seeking for ways to deliver more value for our stakeholders. I'm extremely proud of our team's excellent start to the year. We're now ready for your questions. Operator: [Operator Instructions] And we'll take our first question from Julio Romero with Sidoti & Company. Julio Romero: So on utility structures and maybe the Engineered Structures segment overall, the segment margins are very strong here in the first quarter, at a record level, I believe. Can you just help us understand what's driving the margin strength, particularly how much of that is driven by utility structures? And just help us think about how sustainable that margin performance is for the balance of '26? Antonio Carrillo: So let me give you some color. I think we mentioned in our scripts, but the 2 businesses, let's say, it's a K-shape segment. Utility structures are going up pretty significantly. And as we've mentioned before, we expect the wind to come down given that we see 2026 as a transition year. So utility structures has been overcompensating for the reduction in wind. As Gail mentioned, our revenues went up over 15% in the quarter. And margins were extremely strong. Our team performed incredibly well. As volumes come up and we've been able to tweak our capacity across our footprint, the margin has continued to go up. So it was mainly driven by utility structures. On the wind side, I also mentioned we expect this to be a transition year. In the second half of the year, we're going to start ramping up, because we already have the backlog in 2027 to go back to 2026 (sic) [ 2025 ] levels. So ideally, as the year goes by, we should continue to see utility structures continue to perform and accelerate, and wind should, at the end of the year, start accelerating to be able to fulfill our strong 2027 backlog. Gail Peck: And Julio, I think you asked for some guidance as we look forward in the sustainability of the margin. As you pointed out, the segment did report record margins in the quarter. So fantastic performance. Really, all the businesses were in line with our expectations and the outperformance was utility driven. So as we look through the balance of the year, we have raised our margin expectations for the year versus where we were here in February. You can see that in the guide with the EBITDA. The incremental margin on that EBITDA raise is pretty strong. So we do have some -- we are ramping up our Clinton, as we mentioned, that will be operational at the end of the second quarter. But we do still have some start-up costs that we'll incur in Q2, along with some continuing start-up costs on the galvanizer. Those will probably hit their peak level in Q2 before they start abating in the back half of the year. So a long-winded way of saying our margin expectation for this segment has increased, and we would see an annual margin in the 20% range sustainable for the year. Julio Romero: Excellent. Really helpful there. And then second question is, you mentioned that customer reservations for utility structures, which aren't included in the backlog, are also robust. Can you maybe expand on that commentary and how those have been trending relative to historical? And then kind of related to that, you also mentioned in the script about advancing several high-return investments related to capacity and utility structures. Does that go beyond the current conversions of Illinois and Tulsa? Yes, that's my 2-part question there. Antonio Carrillo: Let me start with the first one. As we've always said, we have long-term contracts with our customers. And as our customers' utilities determine exactly what they need, the designs on the poles, et cetera, that's when we include them in our backlog. So as our backlog grows, normally, the reservations also grow. Normally, the reservation piece is about the same size as our backlog. This time, it's probably a little smaller, because we have some additional orders that were outside of our normal contracts. But they normally grow in parallel, both the backlog and the reservations. And we continue to see very strong demand and very strong customer sentiment on what's coming. So very excited about what we're seeing on utility structures. On the 2 main projects that we have, which are the conversion of the 2 plants and the galvanizing -- 3 projects, 2 conversions and the galvanizing, those are the main projects in utility structures. We do have a lot of smaller projects that Gail mentioned in her script that we are trying to maximize our throughput in our plants; for 2 things, one is to maximize the margin profile of the products we are producing in a very tight market; and second, to try to increase our throughput. So lots of small projects in addition to the large projects. Operator: We'll move next to Trey Grooms with Stephens. Ethan Roberts: This is Ethan on for Trey. Great job on the quarter. I wanted to touch on maybe your cost outlook. Any more detail on how to think about the energy exposure across your Construction Products business, how you're navigating that? And any expectations on timing impacts on the margin as we progress through the year, and perhaps in the Engineered Structures business as well, any other inflationary inputs that you're looking at would be great. Antonio Carrillo: Sure. I'll give you conceptually and let Gail give you some numbers. So we use between 10 million and 11 million gallons of diesel in the footprint. And what we've been doing since this conflict started is passing through fuel surcharges and loading fees. So I think we have taken all the actions that we need to take to mitigate all these impacts. And I think we're in good shape. That's on the construction side. On the utility structures and wind, the impact is negligible. We don't have a lot of exposure to diesel. Our main exposure is natural gas. And as you've seen, natural gas, it went up a little bit, but it hasn't had a huge impact. So we don't expect a significant amount of impact there. And I'll let Gail give you some more color. Gail Peck: Yes. And Antonio mentioned the consumption that we have in aggregates, which is obviously clearly our most intensive diesel user. And so we've seen -- as you've heard from others, we didn't see much impact in Q1 as prices started to spike in March. But we're seeing diesel prices up about $1.50 a gallon in our footprint. So if these prices remained at this elevated level, we'd estimate about a 4% to 5% headwind to cash unit profitability for 2026, and that's unabated. So as Antonio just discussed, we have actively implemented surcharges and steps to mitigate that impact. So happy to provide any more color. Antonio Carrillo: A couple of additional comments. I mentioned in my script, but we only have one large operation for asphalt in the Northeast, and our prices are indexed to liquid AC costs. So that's something that we're covered. So overall, I think we are in good shape. One more thing that differentiates Arcosa from many of the peers. We don't have ready-mix. We don't distribute our products. We don't deliver them. For the most part, the diesel is consumed inside our facilities. We don't have a large footprint in trucks delivering asphalt or aggregates or ready-mix or cement or anything like that. So we are, I think, a lot more insulated. Ethan Roberts: Got it. That's all very helpful color. So I appreciate that. And maybe shifting gears a little bit back to utility structures. At a higher level, how long of a tail do you think that this level of utility power demand has? I mean you mentioned in the prepared remarks that some of these contracts extend into 2028. So how long of a tail do you think this has? And of course, what are you seeing here that gives you confidence in raising the guide here in the earlier part of the year? Antonio Carrillo: Yes. Let me start with your second question. We're raising the guide for 2 reasons. Performance has been very good. But we have the backlog already in place to support our guidance. So we have a lot of confidence in what our team is doing, and we have the orders to support our guidance. So that's on the guidance piece. On what gives us confidence? So when you look at -- let's go back 7 years, 6 years, there's always this forecast of investment by utilities in the grid. And the forecast has been strong. And that's why we, 8 years ago, almost when we spun off, we decided this was going to be one of our growth businesses, because we saw significant investment in utility infrastructure that was coming and it was coming fast. But what has happened is that every year since then, things have gotten, let's say, more optimistic about the amount of investment going into the grid. And then AI came and that simply, let's say, supercharged the demand for transmission towers and the investment companies have to do to support growth in power demand. So things have gotten -- they were already looking good and they have gotten better. We recently did market studies to support our expansions. We are not doing them blindly. We talk to our customers. We ask about their demand. We ask about their forecast for the next several years. And our forecast suggests that this has a very long tailwind of sustained demand for many years to come. So I think we're in a really strong position. Operator: We'll move next to Min Cho with Texas Capital Securities. Min Cho: First, on the utility structures, Gail, can you break out kind of price versus volume in the quarter? And maybe talk to any change in mix in terms of larger structures or anything like that, that we should be aware of? Gail Peck: Sure. As we said, we had north of 15% revenue growth in the quarter within the utility structures product line. And really a combination of very favorable volume and price, I would say, with a tilt towards volume, but both are -- just based on the demand environment right now, we're getting a tailwind from both sides of the equation. Product mix, we've done a good job, I would say, from the margin lift with the increase in efficiencies and throughput. We've really worked through, I guess I could say it was lower-priced product, but the market is pretty attractive right now to be able to pull forward some of the improved price in our backlog. So you saw that in the margin lift as well. Maybe I'd turn it to Antonio just to give you some color on the product type and what's driving demand right now, but we're certainly seeing a movement towards larger tower structures as the increased need for transmission expands. Antonio Carrillo: Yes. So I'll give you color. I think what we've seen over the last several years is a trend toward larger poles. And I would say that's our sweet spot. As a company, we pride ourselves in our engineering capacity and capabilities. And I think that's what our customers value. When you go to smaller poles, they're simpler, they're easier to make, and margins in general are lower. We've seen a large move towards larger poles, and that's our sweet spot. And that's why I think Arcosa is in a very strong position, because we are transitioning from a -- we're in a transition year for wind towers. And those towers, as you know, wind towers are very large. So the plants are very nicely suited to transform them into larger utility pole plants, which is what the market needs. And that's what we're doing right now, transforming plants that we had already in place to utility poles. As we move forward, we are very confident in our ability to ramp up Illinois. That's what we do for a living, and then transform Tulsa into another transmission tower plant. And by 2028, we'll only have 2 wind tower plants left, which gives us great optionality. If the utility pole market continues to accelerate, we'll have a lot of optionality to add capacity if the market continues to grow in that way. Min Cho: Excellent. And I know there's been a push or there's been a lot of discussion about the 765 kV transmission lines, which typically require like larger lattice towers. And I believe Meyer has experience with those towers. But do you have the capability and capacity to be able to produce these types of towers for these extra high-voltage lines? Antonio Carrillo: Yes. For the most part, those lines, as you said, have been lattice. As you know, most of the lattice towers are imported. There's a couple of people developing capacity here in the U.S., but for the most part, they are imported. We have the engineering capability to do it and are working on it, but we have not sold those towers in the past. But we are actively working with customers on designing and developing them. And the plants we have converted, the wind tower plants, have capabilities to build those poles if we get to that point. So I think that's one of the things that Meyer, which is our brand for utility poles, is extremely well suited for those changes that are coming, and we're actively pushing for it. Min Cho: Excellent. Let's see. I know that you -- obviously, congratulations on the barge sale, strengthened your leverage here. How are you prioritizing your incremental cash? I know that you mentioned M&A and obviously, you're doing the conversions. But if you can just kind of talk about your prioritization there. And I also saw the share repurchases this quarter. So that would be helpful. Antonio Carrillo: The share repurchases are normally just opportunistic. We normally try to compensate for the compensation dilution. It's not our main capital deployment. We have no plans to increase our dividend at the moment. We've kept it flat for a long time now. And the reason is we always say that we have more ideas than money, which is a sign of a healthy company. We have a robust pipeline of bolt-on opportunities, both on the aggregates and recycled aggregates, and that's always been our priority on the inorganic side. And on the utility structures, it's mainly an organic story. We have a lot of opportunities to continue to deploy capital there. So those are our 2 priorities. How do we continue to increase our footprint on natural aggregates and recycled aggregates, in great locations, with accretive margins, like the acquisition we announced in the first quarter in Florida. And then on the second side is continue to accelerate our transmission tower expansion, so that we can keep up with the market. So I think we have opportunities to deploy the capital. You will see us pay. Gail mentioned, we paid, I think, $83 million in April for our debt. So we will continue to manage our leverage profile as we see fit. Operator: And it does appear that there are no further questions at this time. Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Greetings. Welcome to Fulgent Genetics First Quarter 2026 Conference Call and Webcast. [Operator Instructions] please note, this conference is being recorded. I will now turn the conference over to Lauren Sloane, Investor Relations. Thank you. You may begin. Lauren Sloane: Good morning, and welcome to Fulgent's First Quarter 2026 Financial Results Conference Call. On the call are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, Chief Commercial Officer. The company's press release discussing the financial results is available on the Investor Relations section of the company's website, ir.fulgentgenetics.com. A replay of this call will be available shortly after the call concludes on the Investor Relations section of the company's website. Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views, expectations and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different than what is described in or implied by these forward-looking statements. Please review the more detailed discussion related to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in the forward-looking statements contained in the company's filings and with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2025, and subsequently filed reports, which are available on the company's Investor Relations website. Management's prepared remarks, including discussion of non-GAAP profit, loss, operating expense, margin, earnings and earnings per share and adjusted EBITDA contain financial measures not prepared in accordance with accounting principles generally accepted in the United States or GAAP. Management has presented these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but these measures should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the first quarter 2026 for more information, including the description of how the company calculates non-GAAP income and loss, non-GAAP earnings and loss per share, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating profit and loss and margin and adjusted EBITDA and a reconciliation of these financial measures to income and loss, earnings and loss per share and operating margin, the most directly comparable GAAP financial measures. The company does not provide reconciliations of forward-looking non-GAAP measures to the most directly comparable GAAP measures because the information necessary to calculate such reconciliations, including equity-based compensation, tax effects, acquisition-related items and potential impairment, any of which may be material, is unavailable on a forward-looking basis without unreasonable effort and the probable significance of those items cannot be predicted. With that, I'd now like to turn the call over to Ming. Please go ahead. Ming Hsieh: Thank you, Lauren. I will start with some comments on our 2 business lines. Then Brandon will review our product and go-to-market updates for our laboratory service business. And Paul will conclude with the financials and outlook before we take your questions. I am pleased with our first quarter results in our laboratory service business and the momentum in our therapeutic development business. In Q1, we also successfully completed the acquisition of Bako Diagnostics and StrataDx, which contributed our strong first quarter results as we had anticipated. In the laboratory service business, we are seeing that the investments in AI and digital pathology solutions are continuing to work at an accelerated pace, offering new and expanded opportunities for growth and improved operating leverage in the future. And as of today, with our in-house developed platform, EasioPath, we are approximately 100% visual across all our cases. We also accelerated progress on our therapeutic development pipeline in the fourth quarter and expect to continue progress this year. Starting with our first clinical candidate, FID-007, advanced through Phase II with 46 patients enrolled. Last week, we announced that our abstract on the Phase III trial of FID-007 was selected by ASCO as a rapid oral presentation with head and neck cancer track session. The Phase II trial enrollment of FID-007 closed on time, on December 29, 2025. We are encouraged by the early efficacy and safety data. FID-007 combined with Cetuximab demonstrated meaningful anticancer activities and a favorable tolerability profile that at both levels for the second-line treatment of recurrent metastatic head and neck sarcoma cell carcinoma. We anticipate having end of Phase II meeting with FDA for the second half of this year and hope to enter into a Phase III registration trial for the treatment of recurrent or metastatic head and neck sarcoma cell carcinoma patients in the first half of 2027. We are encouraged by our clinical trial progress achieved so far and believe entering into the Phase III registration trial will further increase the probability of success of the commercialization FID-007 for the treatment of recurrent or metastatic head and neck sarcoma cell carcinoma patients who currently have very few effective treatment options. Our second clinical candidate, FID-022 is progressing through Phase I dose escalation with the third dose level successfully completed and the fourth dose escalation is ongoing. We expect to finish the study and determine the maximum tolerance dose level later this year. FID-022, it is nanoencapsulated SN-38 for the treatment of solid tumors, including potentially colon, pancreatic, ovarian, and bile duct cancers. Overall, I'm pleased with the progress we have made in the first quarter. Our pharma R&D efforts are progressing faster, better and more cost effectively than planned. We look forward to present our detailed findings from our Phase II study on FID-007 at this year's ASCO meeting. We believe that we executed our strategic initiatives and are in a strong financial position to execute our strategies. We are pleased to reiterate our topline revenue guidance for 2026. We are adjusting our non-GAAP EPS and cash balance guidance to reflect cash returned to shareholders, pursued our stock repurchase program and the resulting reduction in the number of our previously forecasted outstanding shares. I would like to thank our employees, partners and stockholders for your hard work, loyalty and a strong quarter. We look forward to further progress in 2026. I will now turn the call over to Brandon Perthuis, our Chief Commercial Officer, to talk more about our laboratory service business. Brandon? Brandon Perthuis: Thanks, Ming. We ended the first quarter at $71.1 million, which was a decrease of 3.2% year-over-year and 14.6% quarter-over-quarter, driven by the reduction in sales to our large customer who has begun transitioning testing in-house, which we discussed last quarter. Breaking it down into our 3 business areas, Precision Diagnostics revenue for the first quarter was $40.2 million, a decrease of 8.8% year-over-year and down 16.5% sequentially. Anatomic Pathology revenue for the first quarter was $25.1 million, a decrease of 0.9% year-over-year and down 7.2% sequentially. For Biopharma Services, revenue was $5.8 million, an increase of 43.2% year-over-year, but down 28.0% sequentially. We were excited to announce during the first quarter that we completed the acquisition of Bako Diagnostics and StrataDx. This acquisition adds to our market presence in Anatomic Pathology and more than doubles the size of our pathology sales team. The focus now shifts to integration, which is off to a very good start. One of the top priorities is to cross-train the Bako and Strata sales team to sell Fulgent pathology services and vice versa. We believe a well-trained, cross-functional sales team will pay dividends as we look to expand our market size in Anatomic Pathology. We've made a few announcements around our new whole genome test. In this quarter, we continue to advance the product. We have now integrated Illumina's TruPath Genome targeting the variant classes that have historically required separate testing workflows such as complex structural variants, repeat expansions in difficult to map regions and variant phasing without parental samples. Unlike traditional long-read platforms, TruPath Genome achieved this through proximity mapped read technology, delivering long-range genomic insights on the same high-throughput infrastructure already powering our genome test without the workflow or scalability trade-offs. Designed to deliver comprehensive results in a single report covering SMVs, CNVs, genome-wide deletion and duplication, mitochondrial variants and repeat expansions across 20,000 genes, our genome test is built on the principle that a rare disease patient shouldn't have to navigate a gauntlet of sequential tests to get an answer. On our last call, we detailed our AI strategy, which involved rolling out several new modules this year. In the first quarter, we went live with a new dermatopathology AI tool. Digital dermatopathology slides often arrive in inconsistent orientation. This slows the diagnostic process and may introduce interpretation errors. The objective was to implement an auto rotation solution to automatically align slides to a standard orientation. Doing so will reduce time spent adjusting images, ensure consistent presentation of structures like epidermis and dermis, improve diagnostic accuracy, enhance workflow efficiency, reduce turnaround time and potentially lower cost. Proper orientation is crucial because pathologists rely on consistent visual cues. When slides are automatically aligned, key structures appear in a predictable orientation. This reduces the cognitive load on the pathologist, allowing them to interpret images faster with fewer errors. It also helps standardize the diagnostic process, making it easier to compare cases and train new staff. Overall, this leads to improved accuracy in diagnosis and a smoother workflow as pathologists spend less time manipulating slides and more time on actual diagnosis. We are excited to announce that during the quarter, we received MolDX approval and pricing for our PGx test. This is a perfect timing with the recent update and positioning from the American Society of Clinical Oncology for pharmacogenomic testing, particularly for the gene DPYD. While ASCO historically stopped short of endorsing universal testing, newer clinical notices and meeting data signal a clear shift toward proactive integration of DPYD testing into routine oncology care. In 2026, ASCO issued clinical notice urging clinicians to prioritize DPYD genotyping as part of the initial diagnostic workup for patients being considered for certain chemotherapy drugs such as 5-FU. This represents a notable evolution from earlier physicians where ASCO and other U.S. bodies did not recommend routine pretreatment testing due to concerns about evidence sufficiency and potential impact on efficacy. The clinical driver behind these recommendations is well established. Patients with deleterious DPYD variants are at a significant increased risk of severe or fatal toxicity from fluoropyrimidines. Studies show that genotype-guided dosing can substantially reduce Grade 3 and above toxicities without compromising efficacy. In parallel, health economic analysis presented at ASCO highlights that pretreatment DPYD testing reduces downstream costs by avoiding hospitalization, intensive supportive care and treatment interruptions. As ASCO, NCCN and FDA guidance converge, ordering behavior is potentially expected to shift from discretionary to routine. Given that fluoropyrimidines are used in a large portion of solid tumors, this translates into a substantial addressable market. We believe this represents a near-term opportunity to scale pharmacogenomics and a longer-term positioning play in precision oncology, where proactive safety-driven testing is becoming integral to therapeutic decision-making rather than an optional add-on diagnostic test. We remain focused on executing our strategy with discipline, investing in opportunities that will drive sustainable growth and delivering long-term value for our shareholders. While the environment continues to evolve, we are confident in the strength of our team, the resilience of our business and our ability to navigate ahead. We appreciate your time today and look forward to updating you on our progress next quarter. I'll now turn the call over to our Chief Financial Officer, Paul Kim. Paul? Paul Kim: Thank you, Brandon. Revenue in the first quarter of 2026 totaled $71.1 million, including $2.6 million from Bako Diagnostics and StrataDx compared to $83.3 million in the fourth quarter of 2025. The decrease in our Q1 revenue was primarily the result of lower volume from our largest customer, as indicated on our last call and timing impact as we work through claims processing backlog. Gross margin. GAAP gross margin was 30.2% and non-GAAP gross margin for the first quarter was 32.3%. The decline in gross margin reflects fixed costs over lower revenue base attributed to the decline in revenue for the reasons I've mentioned. We expect gross margins to normalize as the backlog clears in the coming quarters and as revenue increases. Now turning to operating expenses. Total GAAP operating expenses were $56.1 million in the first quarter, which decreased when compared to $68.8 million in the prior quarter. The decrease in operating expenses was due to a one-time professional liability expense in the prior quarter. Non-GAAP operating expenses remained relatively flat in Q1, totaling $42.6 million compared to $43.1 million in the previous quarter. Non-GAAP operating margin decreased sequentially to a minus 27.7% due to decreased revenue. Our GAAP loss in the current quarter was $24.8 million, an increase from the prior quarter's GAAP loss of $23.4 million and a GAAP loss of $0.08 per share based on 30.9 million weighted average diluted shares outstanding. Adjusted EBITDA for the first quarter was a loss of approximately $15.2 million compared to a loss of $4.5 million in the prior quarter. On a non-GAAP basis and excluding equity-based compensation expense, intangible asset amortization and acquisition-related costs and severance, loss for the quarter was approximately $11 million or $0.36 per share based on 30.9 million weighted average diluted shares outstanding. In the first quarter, we repurchased 2.6 million shares under our stock repurchase program. We continue to repurchase shares into the current quarter, purchasing an additional 0.5 million shares as of today. Since the inception of the stock repurchase program in March 2022, a total of approximately $6.6 million in shares of common stock has been repurchased under the program with approximately $91 million currently remaining available for future repurchases of our common stock. Turning to the balance sheet. We ended the first quarter with approximately $604.7 million in cash, cash equivalents, restricted cash and marketable securities. The $100.8 million decrease in cash from the previous quarter was primarily driven by $56.6 million paid for the Bako Diagnostics StrataDx acquisition and $40.1 million spent on our stock repurchase program. As of quarter end, we have not yet received $106 million federal income tax refund, which has been delayed due to the government shutdown in the prior year and now due to constrained resources at the IRS. Before providing our guidance for 2026, I would like to provide an update on certain drivers shaping our expectations for the year and the anticipated impact from our recent acquisition of Bako Diagnostics and StrataDx. As anticipated and mentioned on our previous call in February, we saw a decrease in revenue from our largest customer, which is moving its testing capabilities in-house. Revenue from this customer this quarter decreased $6 million from the prior quarter. We expect revenue from this customer in the second quarter to continue to be impacted by a significant decrease in volume and expect revenue to potentially stabilize in the second half of the year. We continue to believe this decrease in revenue from our largest customer will be partially or fully offset by the estimated contribution of approximately $53 million from Bako and StrataDx contributing to overall revenue growth in the second half of the year. Bako's revenue will primarily be categorized as Anatomic Pathology. We continue to forecast that for the full year 2026, no single customer will account for more than 10% of our total revenue, reflecting an improvement in our customer concentration profile. We reiterate our guidance of total revenue of $350 million for 2026, representing an 8.5% year-over-year growth. We continue to estimate Precision Diagnostics revenues to be approximately $168 million, Anatomic Pathology to be approximately $162 million and Biopharma Services to be approximately $20 million. We expect non-GAAP gross margins for the full year to be approximately 39% as the product mix shifts with the change in our customer composition. We anticipate the gross margins to improve in the second quarter due to the higher forecasted revenue and then to further improve to approximately 42% by the end of the year. We expect non-GAAP operating margin to be a minus 20% for the year. We continue to prioritize investment across 2 key areas: R&D, where we're advancing both our laboratory testing capabilities and clinical study pipeline and sales and marketing where we have grown the team. Our sales and marketing spend this year reflects a full year of our expansion that began last year, combined with the recent Bako and StrataDx acquisition, which more than doubled our sales team. Together, we believe this sets us up with a substantially larger and more capable commercial organization to drive growth going forward. The anticipated spend for the therapeutic development business is approximately $26 million in 2026 as we continue advancing clinical trials for FID-022 and FID-007. We remain committed to the strategic investment in our business, including operational improvements and targeted upgrades to our laboratory infrastructure. These investments are designed to strengthen our competitive position and enhance throughput capacity over time. We believe our foundational technology platform is highly scalable, capable of driving meaningful operating leverage and margin expansion as volumes grow. We believe our business is still on track with our original 2026 revenue guidance. The updates to our EPS and cash guidance are solely attributable to decreased shares resulting from the stock repurchase program and the cash used for these repurchases. Our forecasted average fully diluted share count for 2026 has decreased from 32 million shares to approximately 29 million shares due to the shares purchased so far this year under our stock repurchase program. The decreased share count has an effect of $0.14 to EPS. Therefore, using the updated average share count of 29 million, we expect our full year 2026 non-GAAP EPS guidance to decrease by $0.14 to a loss of $1.59 per share, excluding stock-based compensation, impairment loss, acquisition-related costs, further share repurchases and amortization of intangible assets as well as any onetime charges. Finally, our cash position continues to be strong. Assuming for fiscal year 2026, capital purchases of $12 million spend on our therapeutic development business of $26 million, $14.5 million for the previously disclosed professional liability expense and excluding any future stock repurchases or other expenditures outside of the ordinary course, which could include other M&A, we anticipate ending the year with approximately $636 million of cash, cash equivalents, restricted cash and investments in marketable securities. The $49 million decrease from the original cash guidance of $685 million is directly attributed to the $49 million of stock repurchases made year-to-date. This number further assumes receipt of approximately $106 million in tax refunds, which has been delayed as a result of a Q4 2025 government shutdown and constrained resources at the IRS. Overall, we're proud of the growth we have achieved over the past couple of years, and we're excited by the additional momentum that the acquisition of Bako Diagnostics and StrataDx brings as we look ahead. Together with our strong technology platform, we believe we're well positioned for longer-term growth as our strategic investments, innovations and expanded offerings deliver value. Thank you for joining our call today. Operator, you may now open it up for questions. Operator: [Operator Instructions] Our first question is from Lu Li with UBS. Lu Li: I think the first one, probably sticking to the Precision Diagnostics. If you're excluding the largest customer impact, what is the underlying business growth for the remainder of the portfolio? I was like doing the quick math, it still -- it seems like still like a teens growth. Just wanted to make sure if that's correct. Paul Kim: Yes. So the impact from the largest customer was significant. The amount was substantial for 2025. We are anticipating and have experienced lower volumes from that customer in Q1, and we anticipate those levels to be further down, although not at the accelerated pace as we experienced in Q1. If you strip that away and take a look at the underlying Precision Diagnostics business, your math, we're checking it right now, I think, is consistent, meaning that we do have growth in the precision diagnostics area for this year. Lu Li: Got it. And then maybe switching to the gross margin in Q1. It seems like a little bit lower than, I think, your initial target of 37%. Any reasons why it's a little bit lower? Is it coming out from acquisition or anything else? And then -- yes, I think that will be the question. And then how comfortable you are to kind of like get back to kind of like 40% in the second half? Paul Kim: Sure. Thanks for that question. The lower gross margins are coming from the lower-than-anticipated revenues. Revenues for the first quarter could have been higher, in the millions of dollars than what we posted. And that's largely happening, as we mentioned in prior, the lower volumes from our largest customer, coupled with timing impact from claims delayed in releasing from processing backlog. We anticipate that to normalize here in the coming quarters, which should provide an uplift to the revenue in addition to normalizing our gross margins. The lower revenues also had some weather and seasonality impact, which Brandon will color in. Brandon Perthuis: Yes, certainly, Paul. Appreciate that. Q1 historically has been a little bit softer for us. And it is partially related to seasonality. Like this quarter, we did have our laboratories shut down multiple times due to weather. And in addition, January often sees deductibles being reset. So there's some impact there. But I think Paul covered probably the larger impact areas. Paul Kim: The other final thing -- the other final comment that I will make on the gross margins because that was the original part of your question is, if you take a look at the guidance for 2026, we are reiterating and keeping the $350 million guidance as well as the other financial metric, including gross margins for the entirety of the year. The difference in the update that we provided on the loss is solely due to the stock buyback, the aggressive stock buyback that we have conducted since the beginning of this year. In the first quarter, we repurchased 2.6 million shares. And to date, so far, we've purchased an additional 0.5 million shares. In total, that's 3.1 million shares or approximately 10% of our total outstanding shares or 13%, 14% of our float that's out there. So we believe that the amount and the magnitude of the buyback indicates the conviction that we have not only within our capital base, but our overall strategy and value for the company. Brandon Perthuis: Yes. And Lu, you asked, was there any impact from the acquisition? I just want to cover that. No, there was no impact from the acquisition. Lu Li: Okay. That's very helpful. And then finally, there has been a lot of attention on the CMS CRUSH initiative. I'm wondering if you guys have any in-house view in terms of like the potential impacts to your business? Brandon Perthuis: Not at this time, Lu. We don't have any comment on that. Operator: Our next question is from David Westenberg with Piper Sandler. David Westenberg: So first, Paul, a couple of things. What was -- the contribution from StrataDx and Bako would be really small, right, because it closed on the 17th. But I was just wondering what that was for the quarter. And then you also mentioned kind of some of the collections impacting Q1. So what should Q2 look like? So, like, I know you -- I think you're saying some of that will go into Q2. I don't want to get too aggressive with the number there, but I also want to include that. So how should we think about Q2 given that impact? Paul Kim: Sure. So 2 things. One, the contribution from Bako in the first quarter, you are correct. It was small. It was $2.6 million. And your question about what should Q2 look like? Q2 should be a higher quarter. It will be a higher quarter than the first quarter because of the overall positioning of our base business, but we also get the full quarter of Bako and StrataDx. So, when we take a look at the forecast for Q2, Q3 and Q4, the targets are in excess of $90 million per quarter in terms of revenues. David Westenberg: Got it. Yes, just totally mispronounced that. Anyway, secondly, Brandon, I want to kind of touch onto the key product segments, Precision Diagnostics. In terms of the growth in that area, are there any key products, [indiscernible] launches? Or is it Beacon that helps you grow there? Is it some of the stuff you're going to be doing in rare disease? I mean, what are you excited about there in terms of regrowing to fill the loop of the overall large customer? Brandon Perthuis: Yes. Thanks for the question. I think we benefit tremendously from our diverse portfolio of tests. At this point, we have 22,000 genetic tests that span just about every area of health care. So it's difficult to pick a few different areas out of that where we're particularly excited. But I think it's safe to say within sort of rare disease, the momentum we have with exomes and genomes is pretty substantial. We do believe we have a differentiated product. With our whole exome now including long reads, short reads, as well as full RNA-seq transcriptomic analysis, we are going to make more diagnoses than some of our peers and what we've been able to do previously. Analyzing all 3 of those in parallel is really the best approach to maximize diagnostic yield. So we're really excited with the product development around our whole genome and whole exome products, and we do see a lot of momentum in that space. In addition, we've launched a rapid and ultra-rapid genome. Some of those turnaround times are as quick as 48 hours, which is critical for some of these NICU patients. So certainly see momentum there. Beacon has continued to do very well for us. We now have the largest panel in the industry, up to 1,000 genes, which is fully customizable for our clients. But in addition, our oncology business is doing well. The heme business is doing well. And this momentum -- very recent momentum in pharmacogenetic testing related to this DPYD gene is very tangible. It's very real. We're seeing a lot of requests for this. We do a great job with that test in terms of our turnaround time and our quality. So again, I think we have a lot of different areas for growth and really do benefit from having tremendous capabilities across Precision Diagnostics. David Westenberg: Got it. And then just, I want to talk about -- sorry, the pharma backlog, now this was strong in the quarter, and it is the growth area. So should we expect like visibility for the full year, just given the fact that this is really probably running off backlog? And is the book-to-bill growing in that category, Paul? Paul Kim: Well, we continue to see lumpiness in our biopharma business. We've mentioned this essentially on every call that the nature of this business are large transactions with long sales cycles for better or worse. But the business does have momentum overall, but we're going to continue to see sort of these peaks and valleys until we hit this larger steady state for that business segment. But in the back half of the year, we do have continued growth in Biopharma Services. But again, there will be some up and downs in that area. David Westenberg: Got it. And then lastly, Ming, I wanted to talk about the FID-007. You're in Phase II. You do have the presentation at ASCO. So it does seem to be doing well. Can you talk about what we're needing to look at, at the ASCO presentation or other words to see if you'd advance it to Q3? And at what stage in the pipeline do you consider commercialization? I mean, partnerships, licensing, that other kind of thing in order to monetize that asset. Ming Hsieh: Yes. Thank you, David, for the questions. We are excited to be selected by the ASCO for the presentation. Out of 8,000 applications, we belong to a very small group of companies or the clinical trials to be presented in the area. You may remember, we also published our data last year at ESMO for the clinical results. During that time, our results is significantly better than the peers in the industry. So we are excited about the opportunity, and we're looking very much forward for the ASCO presentation. So that's from the clinical trial side. We are -- have the options for the collaborations with potential partners, but it also -- we want to present the opportunity when we do the collaboration at a strength, not at a weakness. So we do have the cash position to go through the clinical trials by ourselves, but we're also looking for that meaningful partners, not only contributing in terms of the resources for the trials, but also long-term relationships. Operator: There are no further questions. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good morning, everyone. Welcome to Shenandoah Telecommunications First Quarter 2026 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Lucas Binder, VP of Corporate Finance for Shentel. Lucas Binder: Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for the first quarter of 2026. Our results were announced in a press release distributed this morning. In addition, we filed our Form 10-Q with the SEC. The presentation we will be reviewing is included on the Investor page on our investor.shentel.com website. Please note that an audio replay of this call will be made available later today. The details are set forth in the press release announcing this call. With us on the call today are Ed McKay, President and Chief Executive Officer; and Jim Volk, Senior Vice President and Chief Financial Officer. After the prepared remarks, we will conduct a question-and-answer session. I refer you to Slide 2 of the presentation, which contains our safe harbor disclaimer and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements. Additionally, we provided a detailed discussion of various risk factors in our SEC filings, which you are encouraged to review. You are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements. With that, I will now turn the call over to Ed. Go ahead, Ed. Edward McKay: Thanks, Lucas. Good morning, everyone, and thank you for joining us today. Starting on Slide 4, I'll share some of our first quarter highlights. During the quarter, we released 22,000 passings to sales, bringing our total Glo Fiber expansion markets passings to 449,000. We added approximately 6,000 Glo Fiber net customers in the first quarter, a 9% improvement over the prior year period, and we now serve a total of 94,000 customers. Our Commercial Fiber business also delivered a strong quarter with 196,000 in sales bookings and revenue growth of 4.7% year-over-year. Collectively, these results demonstrate the excellent momentum we continue to see in our fiber businesses. We were also pleased with our first quarter financial results. Consolidated revenues and adjusted EBITDA grew 4.8% and 15% year-over-year, respectively, and we remain on track to deliver positive free cash flow in 2027. Turning to Slide 5. We highlight our integrated broadband network that spans more than 19,000 fiber route miles across 8 states with over 700,000 total broadband passings. As shown on the map, all planned Glo Fiber markets have now been launched, and our primary focus is adding passings in our existing Virginia, Pennsylvania, Maryland and Ohio markets. We remain on track to complete our Glo Fiber expansion in 2026, reaching 510,000 passings. On Slide 6, our sales and marketing team continues to drive strong growth across our Glo Fiber expansion markets. And during the first quarter, we added approximately 6,000 new customers and nearly 7,000 total video, voice and data revenue-generating units. Our 5-year price guarantee rate card introduced in the second half of 2025 is gaining traction, supported by the expansion of our door-to-door sales channel. Over the past 12 months, we have added more than 23,000 new data customers, more than 26,000 total RGUs as well. Total Glo Fiber revenue-generating units surpassed 110,000 in the first quarter, up 31% compared to the prior year. Moving to Slide 7. First quarter construction was strong with over 22,000 passings added, bringing the total to more than 449,000. Coupled with the continued increase in homes passed, penetration rose to 20.9%, a 30 basis point increase over the fourth quarter and 150 basis point increase year-over-year. Penetration trends across our Glo Fiber cohorts are shown on Slide 8 and reflect blended penetration rates for both residential and small and medium business passings. We are expecting data penetration rates of approximately 37%, 5 to 7 years after launching the market, and our most mature cohorts launched in 2019 and 2020 have now exceeded this with an average penetration rate of 37.5%. In addition to providing the fastest speeds in our markets, we continue to focus on providing outstanding local customer service. As shown on Slide 9, our average monthly churn was 0.92% in the first quarter, which continues to be among the best in the industry. Broadband data average revenue per user for the first quarter was stable sequentially and year-over-year at more than $77. We continue to have success selling up the rate card with nearly 82% of our new residential customers in the first quarter, selecting speeds of 1 gig or higher, including 18% choosing 2-gig service and 5% choosing 5-gig service. Our commercial fiber business is highlighted on Slide 10. In the first quarter, incremental monthly sales bookings exceeded 196,000, driven by strong demand from wireless carriers, wholesale customers and school systems. Our service delivery team installed 167,000 in new monthly revenue during the quarter and the acquired Verizon backlog that drove elevated installation activity in 2025 is now substantially complete. Average monthly compression and disconnect churn remained very low at 0.4% in the first quarter, reflecting exceptional support from both our network operations center and sales team. Turning to Slide 11. We show our operating results for our incumbent broadband markets. At the end of the first quarter, we served more than 111,000 broadband data customers. Data, voice and video RGUs totaled more than 156,000 at year-end, down 4% year-over-year, primarily due to video customers moving to online streaming services. Total broadband passings in our incumbent markets stayed steady compared to the fourth quarter, and we expect to complete 1,800 additional government-subsidized incumbent grant passings in 2026, primarily in West Virginia. As shown on Slide 12, the recently constructed subsidized passings represent a strong growth segment for our incumbent markets with data penetration exceeding 40% within 6 quarters of a neighborhood launch. Average penetration in our 2023 cohorts is over 52% with the oldest cohort reaching 71%. We've already achieved an aggregate penetration of 37% across 23,000 subsidized passings. Moving to Slide 13. Monthly broadband data churn was stable sequentially and up modestly year-over-year at 1.46% for the first quarter. The slight uptick in churn was due to promotional activity from satellite competition in some of our most rural markets without a fixed Wireline competitor. In these markets, we implemented a speed increase late in the first quarter, providing customers with higher speeds at the same price to better differentiate our service from satellite offerings. Across approximately 1/3 of our passings where we face another fixed broadband competitor, our rate card strategy of offering greater value with higher speeds at the same price continues to be effective at mitigating churn. As expected, broadband data ARPU declined 1.6% from a year ago to $82, driven by the addition of new customers with more aggressive pricing in our competitive markets. I'll now turn the call over to Jim to walk you through our first quarter financial results. James Volk: Thank you, Ed, and good morning, everyone. I'll start on Slide 15 with financial results for the first quarter. Revenues grew 4.8% to $92.2 million, driven by another quarter of strong Glo Fiber expansion market revenue growth of $6.4 million or 34.6% due to a 33.7% increase in data subscribers and stable data ARPU. Commercial Fiber revenue grew $900,000 or 4.7% year-over-year, driven primarily by growth among existing customers in the enterprise and carrier verticals. Incumbent broadband markets revenue declined $2.2 million, primarily due to lower video revenue from a 14.6% decline in video RGUs as customers switched to streaming video services and to a lesser extent, lower data revenues due to a 1.6% decline in data ARPU from a more aggressive rate card in competitive markets. RLEC revenues declined $800,000, primarily due to lower DSL revenue from a 28% decline in DSL RGUs and lower government grant support revenues. Approximately half of the decline in DSL RGUs was due to customer upgrades to our broadband service. Adjusted EBITDA grew $4.1 million or 15% to $31.7 million, driven by $4.3 million in revenue growth and slightly higher operating expenses. Adjusted EBITDA margins increased 300 basis points to 34.4% in the first quarter of 2026 as compared to the first quarter 2025 due to a combination of high incremental margins in Glo Fiber, fewer lower-margin video customers and a favorable true-up related to a government grant. Turning to Slide 16. We reiterate our annual guidance for 2026. We expect revenues of $370 million to $377 million, adjusted EBITDA of $131 million to $136 million and CapEx net of grant reimbursements to be $220 million to $250 million. Moving to Slide 17. We invested $75.8 million in capital expenditures in the first quarter 2026 and collected $11.5 million in government grants for net CapEx of $64.3 million. CapEx declined 16% compared to the first quarter of 2025 due to completing 91% of the incumbent broadband markets government subsidized builds to unserved areas in 2025. We have also completed construction of 88% of our target Glo Fiber passings as of March 31 and expect to complete the Glo Fiber expansion by the end of '26. I'd now like to update you on our liquidity and debt maturities on Slide 18. As of March 31, we had $707 million in outstanding debt and $636 million of net debt. We have no debt maturities until 2029. Total available liquidity was approximately $195 million as of March 31, consisting of $44 million of cash and cash equivalents, $27 million in restricted cash, $18 million available under the VFN, $68 million available under the RCF and $38 million remaining reimbursements available under government grants. In addition, the company has over $117 million of VFN commitments that are not available to draw as of March 31. We expect the available VFN capacity to reach the commitment levels with continued growth in the secured fiber network revenues from the ABS entities. In summary, as noted on Slide 19, we have 3 catalysts converging that we expect will lead us to generating and growing positive free cash flow in 2027 and beyond. low double-digit adjusted EBITDA growth rates driven by our fiber businesses, declining capital intensity as we exit the construction phase of our business plan and declining cost of capital after refinancing our debt in 2025. Thank you. And operator, we are now ready for questions. Operator: [Operator Instructions] Our first question comes from Hamed Khorsand with BWS Financial. Hamed Khorsand: First question is just, are you seeing any changes or challenges in adding subscribers given the competitive nature that you're talking about in your markets? Edward McKay: In our Glo Fiber markets, we're not. Our net adds were up 9% over the first quarter of 2025. So we're very pleased with our progress there. We did mention in our incumbent markets, we did see a little bit of churn to Starlink with some of the promotional offers they launched in the first quarter. But other than that, we're on plan as expected. Hamed Khorsand: Okay. And then as far as the change of goes ending your construction phase and going into more of a subscriber growth phase here, are you going to be increasing marketing expense? Or is this -- should we expect just CapEx to decline and it's just going to be incremental here to cash flow? Edward McKay: Yes. I would expect marketing expense to be similar and the primary impact will be the decline in CapEx. Operator: Our next question comes from Christian Schwab with Craig-Hallum. Christian Schwab: Yes. Congratulations on the solid results. On your ASP on the Glo Fiber business and the recent areas and trends of moving from just not just 1 gig speed or higher at 82%, but having people want 2% and 5%. Do you think those trends are sustainable over a multiyear period? And do you have any target expectations for customers' needs for higher speeds at 2 gigabytes, excuse me, and above as your penetration rates go to your target levels on the fiber that's been laid in the last few years, meaning your blended ASP at $77, I think in most markets, your 1 gig product is priced around $65. So do you see ASP trends in that business increasing over time? Or is it too early to tell? Edward McKay: I'd say medium term, we are offering 5-year price guarantees on the higher speed tiers. But longer term, I think there's opportunity there. And we were very pleased with the speed mix in the past quarter. The demand is out there for those higher speeds, and we do think that's sustainable going forward. Christian Schwab: Okay. Fantastic. And then on the commercial fiber business, could you just remind us what your growth objectives are there and how you see that market over a multiyear time frame doing for you? And the potential for you to add additional subscribers? Edward McKay: Well, I'll start, and then I'll pass it over to Jim. One opportunity we do see is with the data centers moving out to our more rural areas, we think that's an additional opportunity for incremental revenue. We're really not playing in the hyperscalers space today. There have been several data center announcements in our markets. We think we certainly have the opportunity to win our share of those services, and that would be additive to our current revenue. And I'll let Jim talk a little about the growth projections. James Volk: Yes, Christian, we're generally expecting mid-single-digit revenue growth rates from the commercial business over like a 3- or 4-year period. It's important to note, this is a little bit of a lumpy business. Some of the larger deals like what Ed mentioned that we're working on, on the hyperscalers and some of the carrier business tends to be a little lumpy. But we do have -- each quarter, we're adding more enterprise customers along the way as well. But yes, we think there's a nice growth opportunity here in the mid-single-digit growth rates. Christian Schwab: Great. And then a follow-up on the data center for clarity. Can you just remind us of the miles of fiber that you have and the connectivity potential that you have in data center so people can understand maybe potentially a little bit better why data center customers would be coming to you? Edward McKay: So 19,000-plus route miles of fiber in total. Our fiber network stretches from Chicago all the way to the Washington, D.C., Ashburn, Virginia area. We get major markets in between like Columbus, Ohio, like Pittsburgh. And we have many unique fiber routes. So as these data centers move out further from the metropolitan areas, seeking areas with land and power, we believe we have the opportunity to take advantages of those unique fiber routes that we have and gain some of that business. Christian Schwab: Can you give us an idea what the revenue potential would be not this year, but over a multiyear time frame, given that trend as data centers move out a little bit away from metro into rural areas that might want to take advantage of your 19,000 fiber miles. Can you give us an idea of the revenue potential, not an estimate, but maybe an aspiration or goal that you guys may have for that market? James Volk: Yes, Christian, I think it would be a little premature to get into revenue expectations. But I can tell you, there is about 20 data centers being either built or being built close to our fiber in the 8 states that we operate in. So not clear to me whether all of them are actually going to get built. But if they do get built, we think we're in a prime position to win some business. Operator: [Operator Instructions] Our next question comes from Vikash Arlaka with New Street Research. Vikash Harlalka: There's a lot of concern among broadband investor base around pricing power and broadband ARPU growth for the industry. Do you think that broadband businesses have pricing power today? Or are we entering a period of deflation for the business? And then I have a follow-up. Edward McKay: So I'll say in our Glo Fiber business, we're expecting fairly flat ARPU in the near term. I think over time, we do gain that pricing power. And then our incumbent business, we mentioned earlier, as we've seen some competition in our markets, we have seen a slight decline in ARPU there. So it's -- I think it's a bit of a mix depending on which business you're looking at. James Volk: Add to that. In our incumbent business, about 2/3 of the passings, we are the only fixed wireline provider. So we do think we have some pricing power there as well. Vikash Harlalka: Got it. That's helpful. And then I just wanted to go back to your comment about increased competition from Starlink during the quarter. It sounds like the competition was mainly because Starlink had some promotions. And so did you lose customers on the growth add side or churn or both? And do you see this competition as continuing from here? And if so, what's your plan on addressing this increased competition? Edward McKay: So we only saw the impact in the most rural areas of our incumbent broadband market. We saw really no impact in Glo Fiber and no impact in the majority of our incumbent passings. So what they started offering in the first quarter was $15 off for 4 months as a promotion. But I think the biggest factor was they offered free equipment. It was previously $350 , so we'll see how long this lasts. They could be offering these promotions in preparation for a potential IPO later this year. But we have the ability to increase speeds. So we've done that. Late in the first quarter, we increased speeds significantly in our rural incumbent areas. Most of those customers that left were on legacy rate cards. So we've given those customers more value for the same price, and we think that will help mitigate. Operator: Our next question comes from Christian Schwab with Craig-Hallum. Christian Schwab: Yes. Just a quick follow-up on that. Just on the Starlink promotion in your most rural market, these are very slow speeds. Can you just quantify a little bit more clarity around your commentary to compete with Starlink, how you increased -- give us an idea of what speed you were operating at to what speed you can move customers to compete with Starlink because this really isn't the competition for fiber at 1, 2 and 5 gig speeds. Edward McKay: Yes. So in all of these markets, we have the ability to offer gigabit speeds. And I think it was a -- customers were looking for a potentially lower-priced alternative. But when you compare our pricing to Starlink's pricing, after that promotional discount expires, we're actually favorable from a pricing standpoint and a speed standpoint. So we'll see how long these customers stay on Starlink. We certainly think we have the opportunity to win some of those back as well. Operator: Thank you. I would now like to turn the call back over to Ed McKay for any closing remarks. Edward McKay: Thank you for joining us today. We look forward to updating you on our progress in the future quarters. And operator, that concludes our call. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Vincent, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Mines Limited Q1 2026 Conference Call. [Operator Instructions] Mr. Ammar Al-Joundi, you may begin your conference. Ammar Al-Joundi: Thank you, Vincent. Good morning, and thank you for joining our Agnico Eagle First Quarter 2026 Conference Call. I'd like to remind everyone that we'll be making a number of forward-looking statements, so please keep that in mind and refer to the disclaimers at the beginning of this presentation. Next slide, please. We're pleased to announce a solid start to the year with production slightly above budget and with costs in line with our guidance. This solid operating performance, coupled with exceptional gold prices has allowed Agnico Eagle to announce yet another quarter of record net income driven by record operating margins. We are reiterating 2026 production guidance with production expected to be weighted approximately 48%, 52% between the first and second halves of the year. We're also pleased to reiterate our cost guidance for 2026. This is no small task given the uncertainties and pressures in the market over the past several weeks. As you will hear on this call, this has been a strong quarter across all of our businesses. Solid operations, strong progress on moving our growth pipeline forward, continued exceptional exploration results and as mentioned, another quarter of record financial results. My team will go through all of this in more detail in a moment, but let me outline and summarize what I believe are the 3 key messages that are important to take away from this call. One, as mentioned, we're off to a good start to the year with solid operating performance, delivering record operational and financial results. Record mill throughput at Macassa, record development rates at Meliadine, record pit tonnage at Detour. We're delivering these solid operating results while doing an excellent job controlling costs, leveraging off our relentless focus on cost control while benefiting from certain structural cost advantages that derive from our business model, including, for example, in both Ontario and Quebec, where we produce the majority of our gold, all of our electricity is either hydro or nuclear and really not exposed to changes in fuel and diesel prices. With regards to Nunavut, where we do generate our own power through diesel, we've got a lot of that diesel hedged both by necessity because we have to bring the diesel up in advance through a short barge season, and we have it stored up there, but also by some very smart and proactive hedging by our treasury department with regards to diesel exposure. We've also got the benefit of lower employee turnover and the reliable supply chain that comes from being the best customer for decades in the safe regions in which we operate. Two, we continue to strengthen our financial position and to increase returns to shareholders. This quarter, we paid a $1.3 billion 2025 tax catch-up. We distributed $375 million to shareholders. We invested almost $400 million into our high-quality growth projects, all while increasing our cash position by almost $250 million. At these gold prices, we will increase our share repurchases, and we are increasing our normal course issuer bid to $2 billion. And three, and perhaps the most important takeaway, we continue to aggressively reinvest in our business into the best pipeline in the industry, into projects that deliver exceptional returns at relatively lower risk, and we are making steady progress in many cases, ahead of schedule. Dom and Natasha will spend some time talking about the projects they're moving forward to increase production at Agnico Eagle by up to 20% to 30% over the next decade, including Detour to 1 million ounces, Malartic to 1 million ounces, Hope Bay, Upper Beaver and San Nicolas. In addition, with the expected consolidation of our Finnish platform, we now see a path to further growth that comes from building a 500,000 ounce a year multi-decade platform in what we believe to be the most prospective land package in Northern Europe. Guy will spend some time going over some of the continued great exploration results he and his team have generated focusing on Detour and Malartic, but he'll also spend a bit more time talking about this Finnish land consolidation and what he and his team see as a long-term potential well beyond the Ikkari project. Our strategy remains focused, focused on safe, responsible mining, focused on operational excellence, delivering reliable, low-cost production. We have the best land packages in the most prospective and safest gold jurisdictions in the world. We have a path to industry-leading production growth over the next decade. Our execution of delivering this growth remains on track. And at these gold prices, we think we can deliver this growth and reduce share count at the same time. Now before I turn the call over to Jamie, I need to spend a moment on safety. Tragically, we've had 2 fatalities over the past 5 months. This is not acceptable. I recognize and I accept that the responsibility for the safety of our people rests ultimately with myself and with my team. We've mobilized our teams to reinforce across our company and at all levels and to all employees, our commitment to not only deliver on our guidance, but to do so safely and responsibly. There is nothing more important than the safety of our people and our communities, and we commit to do better. With that, I'll turn the call over to our CFO, Jamie Porter, to review our first quarter operating and financial results. James Porter: Thank you, Ammar. As highlighted earlier, we delivered another strong financial quarter, driven by solid operational performance and continued leverage to higher gold prices. We had several record financial results during the quarter, including adjusted net income of approximately $1.7 billion or $3.41 per share and adjusted EBITDA of just over $3 billion. We generated about $730 million of free cash flow in the first quarter. This is particularly impressive given that we paid roughly 50% of our expected 2026 cash taxes totaling $1.8 billion in the quarter, of which $1.3 billion had been previously disclosed as related to our 2025 tax liability. First quarter gold production of approximately 825,000 ounces was actually slightly better than planned with the lower production year-over-year reflecting mine sequencing at LaRonde, Macassa and Fosterville. With the first quarter representing about 24% of the midpoint of our annual guidance and production weighted to the second half of the year, we're well positioned to meet our full year production targets. Total cash costs were $1,093 per ounce and all-in sustaining costs were $1,483 per ounce, reflecting higher royalty costs associated with a significantly higher realized gold price, lower production volumes as expected and a stronger Canadian dollar compared to the first quarter of 2025. Importantly, costs continue to trend within our full year guidance ranges of $1,020 to $1,120 per ounce for total cash costs and $1,400 to $1,550 per ounce for all-in sustaining costs. While we continue to monitor cost volatility, including diesel prices and foreign exchange movements, we believe our regional operating model, local procurement strategies and disciplined hedging program provide meaningful mitigation against potential cost pressures. With respect to diesel prices, our 2026 cost guidance assumes an average diesel price of $0.78 per liter. Direct diesel consumption covering mobile equipment and on-site power generation in Nunavut is estimated at approximately 108 liters per ounce of gold produced, representing roughly 7% of our total operating cost base. We believe that our exposure to diesel price volatility is below industry average, reflecting the fact that the majority of our gold production comes from underground mines, which are generally less diesel intensive than open pit mines. Further, the majority of our gold production is from mines located in Ontario and Quebec, which benefit from access to non-oil-based grid power. Overall, our sensitivity to diesel prices is estimated such that a 10% change in diesel prices results in roughly a $6 per ounce impact on annual total cash costs after taking into account our hedge position. We do not currently anticipate any disruption to our procurement strategy for fuel or other key consumables, and we remain comfortable with our full year cost guidance. We turn to Slide 5. We are in the strongest financial position in the company's history. We continue to deliver meaningful returns to our shareholders alongside further balance sheet strengthening and disciplined reinvestment in the business. During the quarter, we returned approximately $375 million to shareholders through dividends and share repurchases, representing roughly half of free cash flow. As previously announced, we intend to renew the normal course issuer bid in May on substantially the same terms with an increased limit of up to $2 billion. And at current gold prices, we are still targeting returning approximately 40% of annual free cash flow through dividends and buybacks. We will also look for opportunities to offset dilution from the proposed Rupert Resources acquisition, including potentially returning proceeds from portfolio investment sales through additional share repurchases. In parallel, the balance sheet keeps getting stronger. At the end of the first quarter, our net cash position increased to approximately $2.9 billion, giving us one of the strongest balance sheets in the sector. This strength was recognized recently by Fitch, which upgraded Agnico Eagle's long-term issuer rating to A- with a stable outlook. At the same time, we continue to reinvest in the business, advancing our 5 key pipeline projects that are expected to underpin long-term production growth of 20% to 30% over the next decade. We are exceptionally well positioned in the current gold price environment with a continued focus on disciplined capital allocation and long-term shareholder value creation. With that, I'll turn the call over to Dom. Dominique Girard: Thank you, Jamie. Good morning, everyone. In my section, I'm going to talk the update on operation and project for Quebec, Nunavut and Finland. For the first quarter, a good start led by Malartic and Meadowbank on the production, and we are in good position for the full year cost and production. An important milestone in the first quarter at Malartic, where we took the first stope at East Gouldie via the ramp approximately 1 kilometer underground. Why it's important? Based on the 2023 study, we're going to mine there up to 2042. But based on what we know now, we're going to be mining there up to 2060, most probably. Most probably, I will not be the COO at that time, but we have a good bench that's going to take it from there. So it's very positive. And on the shaft sinking, I'm going to talk a bit about that next slide, shaft sinking and also production hoist, it's also going well. The plan is to bring that ore to the surfaces via the shaft mid-2027. Everything is aligned. On the continuous improvement, an important milestone achieved at LaRonde. They were working on that since a couple of years to do autonomous hauling. So it's a good example of leveraging the synergy into the region using the LZ5 expertise. So what is that autonomous hauling? We are taking the ore from the 3.2 kilometers underground up to 2.9 kilometers without drivers. So this is a real example of a positive impact using technology. Instead of operating, let's say, using 4 trucks and 8 operators, for day shift or night shift, those guys in the current situation, they are able to operate effectively 10 to 12 hour per shift just by the time to go underground. Using the technology, we're able to use 2 trucks operating by 1 person, 1 night shift, 1 day shift, so a total of 2, and we're able to operate on a 20-hour basic. So it's a clear example of using technology to improve productivity and very good job done at LaRonde on that. Also in Finland, what we did, we took 3 and 4 people -- key people from each site from mainly Canadian operation. I mean the GMs, the key guys in the continuous improvement, the VP. We bring them to Finland to see what they did there. It was the first time for most of the people, not just to see the reindeers, but also the Finland site. And it was about how they did it in Finland, the mindset on continuous improvement, their leadership and the tools they were using. And it was also a very good opportunity to build a relationship and sharing best practices through our key people into the company. Guy is going to talk about that, but very happy also about the Ikkari, what's going on is very positive for the Finland team. Next slide. On the growth project, at Malartic, the ramp and shaft, as mentioned going well. The pilot hole for the first -- for the second shaft is done down to 1.8 kilometers underground. No issue related to that. And the study continue on the Shaft 2 and Marban and the Wasamac study. It's progressing well, and we're looking to give you an update in September later this year. At Hope Bay, look to the picture. So we are in good position. That was our goal. We are in a good position to potentially announce the construction in May with the Board. So the camp is ready. The fab shops are ready to welcome the construction team. The mill is empty, ready to go. And we are in good position for the engineering. That was one of an important goal. So we're going to be over 50% that guarantee and give us confidence into the cost into the schedule. We're going to give you more detail at the visit at site for the lucky ones that are coming because we're going to have [ Muscat ] on barbecue, charcoal barbecue. So this is -- the team is working on that. That's going to be a good thing. Before giving the mic to Natasha, the visit at Hope Bay, you're going to see the picture over the first 10 years. But we're going to most probably be there for many 10 years. And that's what Guy is going to show you into the car shaft, what is our vision on to the region. And also, the last 2 years, we focused on infilling the patch, the new deposit and to be ready for that study. But Guy is also gearing up to restart treasure hunting into the Hope Bay site eventually more next year and the years after. So on that, I will pass the mic to my great colleague, Natasha. Natasha Nella Vaz: Thanks, Dom, and good morning, everyone. I'll cover the operational highlights for Ontario, Australia and Mexico. So the regions delivered good performance to start the year. At Detour, they hit a quarterly record in tonnes mined, but they also had a record mill throughput for the first quarter with the lowest turnover -- quarterly turnover that we have seen since the mine began open pit operations. Over at Macassa, the mill here also delivered record quarterly throughput as a result of the ongoing optimization initiatives as we ramp up that mill towards over 2,000 tonnes per day by the end of the year. Now despite this progress, total mill tonnage was below plan this quarter, and this was mainly a function of challenges we faced with our old paste plant while commissioning the new one, which we expect to be fully operational in Q2. At Fosterville, they also performed very well this quarter. There was a significant step change in productivity, and that's really due to ongoing mine optimization efforts. Improvements this quarter were seen in both development and stope cycling. And it was the same with Pinos Altos. The team there continues to work very hard on initiatives to safely extract the most value from their assets. Now in terms of initiatives this past quarter, Dom spoke about our knowledge sharing trip to Finland to help other sites understand their continuous improvement journey and really inspire them to do the same. And of course, it was really great to network, to gain alignment to collaborate with other sites. And another good example of collaboration between sites and really maximizing the value of our assets and of our infrastructure was between Macassa and LaRonde. I just want to take a quick second to recognize both teams here. They worked very closely together over the last few months. And with a coordinated effort, they were successful in receiving the approval to allow ore from the AK deposit to be transported and processed at the LZ5 facility. At Macassa, we also successfully completed the installation of the LTE network underground. The connectivity is expected to support a range of optimization initiatives, including the implementation of a dispatch system and enabling the site to obtain short interval control. And this can enable us to make decisions quicker, to become more agile, to become more productive and as a result, further optimize our costs. So these are just a few examples of our ongoing productivity focus and our operational improvement initiatives. Moving to the next slide. I'll give you an update on the projects in Ontario and Mexico. The Detour underground project, that plays a very big role in the plan for the complex to be a 1 million-ounce producer annually. We're still in the early days of this project, but we're making very good progress, and we're advancing on schedule. We continue to advance the exploration ramp and have achieved just over 820 meters of development, reaching a depth of about 147 meters. We also began excavating the overburden for the conveyor portal, which is near the mill and progressed work on the camp extension. And to complement the planned bulk sample, we initiated a high-intensity drill program in an area being considered for mining as early as 2028, and Guy will speak to this program shortly. Over at Upper Beaver, there have been a lot of progress made this quarter with both the ramp and the shaft advancing ahead of schedule. The ramp has advanced over 500 meters in the quarter and has reached a depth of 108 meters. The shaft sinking, which commenced in the fourth quarter of last year, has already reached a depth of 382 meters. And similar to Detour, to complement the planned bulk sample at 760 level, the high-intensity drill program continued during the quarter. Now with respect to San Nicolas, we're waiting on the regulatory decision for key permits. But in the meantime, we're continuing to advance the engineering of the critical infrastructures, which will help further derisk and build confidence in our execution strategy. We're also continuing with the drilling activities focused on condemnation drilling and geological evaluation near the planned mine area. Finally, I'd like to close by just recognizing the teams at our operations and our projects for their very disciplined execution in the first quarter and for their continued focus on advancing our optimization initiatives and our key projects as we move through the year. And so with that, I'll turn the call over to my friend, Guy. Guy Gosselin: Thank you, Natasha, and good morning, everyone. Pleasure again to be able to report on progress we're making in exploration as obviously, this is one of the key components to be able to deliver that 20% to 30% growth that we are promoting. We had an excellent quarter in terms of diamond drilling, completing 25% or nearly 360 kilometers of drilling of our overall budget of 1.4 million meters for the year, having 127 rigs in operation on mine site and key value driver project. We continue to advance in our journey in exploration to make drilling safer and more productive while maintaining a unit cost in the same order than the last couple of years, aiming to offset inflation with gain in productivity. Going to specific projects on Slide 10. In Malartic, 35 drill rigs are in operation, completing 75,000 meters in Q1, 16 underground, 13 on surface in proximity to the Odyssey infrastructure and 6 at our regional target, including Marban deposits across the 3. At Odyssey, as mentioned by Dominique, the shaft and the ramp development are progressing ahead of schedule and the first stope is currently being mined at East Gouldie, which is quite exciting, considering the discovery hole in East Gouldie was made just a couple of years ago in 2018 and that we are already there with the ramp in the shaft because of the great collaboration between the various teams to turn it from a discovery into a mine in such a short period of time. This is impressive. We continue to get strong exploration results at East Gouldie with 6.7 gram over 36 meter on Level 105 in the center of the ore body and also in the internal zone between Odyssey North and Odyssey South with a new structure that returned 9 gram over 53-meter core land. Although we do not have a full understanding yet of the true thickness of that structure, it continued to show the additional upside we see both in the internal zone at Odyssey North and South and in East Gouldie that keeps growing laterally. And on the adjacent Marban project, lateral exploration drilling continued to the west and to the north of the proposed open pit, while we are, at the same time, advancing with the condemnation drilling program to confirm the potential location of surface infrastructure. Now on Slide 11, at Detour Lake, 9 rigs completed close to 40,000 meters of drilling in the first quarter, in line with our budget. Drilling was continued to focus on the Western extension of the ore body to the west of the open pit, where we are contemplating to initiate mining underground early on, utilizing the exploration ramp. Some strong results such as 8.9 grams over 14 meters at 190-meter depth and 10.7 grams over 10 meters at 500-meter depth shows a strong potential for high-grade underground mineralization over a large area that extends over more than a kilometer now adjacent into the west of the open pit, where the exploration ramp is currently being developed. Briefly, at Hope Bay, as mentioned by Dominique, we've had a great quarter in terms of drilling on ice, thanks to the team's great winter drilling program. We started early. We've completed north of 33,000 meters of drilling as of the end of March, and a full update will be provided on the May 19 press release along with the project announcement we've been talking. And finally, on Slide 13, in Finland, I would like to provide some color on the recent announcement we made with an offer to acquire all of the outstanding share of Rupert and Aurion Resources, along with the 70% interest of B2Gold and the Fingold JV. It was a great job by our corporate development team and legal team. With these 3 combined transactions adding to our current landholdings, we will be consolidating close to 2,500 square kilometers, consistent with our corporate strategy of focusing on regional hub, leveraging our 20 years of experience in exploration, permitting, mine construction and operation with a strong social license to operate in the most fertile greenstone belt in Europe. By combining the Finnish workforce of Agnico along with the workforce of Rupert and Aurion and removing property boundaries, we will aggressively explore in the near term, the immediate and lateral extension of the Ikkari deposits as well as the multiple occurrences that were identified on the Fingold JV and the large land position owned by Rupert and Aurion. Personally, it reminds me a lot about Kittila mine acquisition in 2005. At the time of the acquisition, there was approximately 2 million ounces down to less than a kilometer. And 20 years later at Kittila, it grows down to and still open at depth below 2 kilometers with a global endowment of 10 million ounces, considering past production reserves and resources known so far. I see a similar potential on the structure at the Ikkari deposit and as these mineral system are similar to our Canadian greenstone belt that have demonstrated extended vertical geological fertility. By this transaction, we are aiming to deliver in Finland a platform for multiple mines over multiple decades, similar to the 3 regions in Canada that are Quebec, Ontario and Nunavut, where we will be leveraging our regional expertise. And on that, I will return the microphone to Ammar for some closing remarks. Ammar Al-Joundi: Thank you, Guy, and thank you, Jamie and Dominique and Natasha and everyone else on our team. Really exceptional work, really tremendous results, well done. As you can see, we continue to work hard for all of our stakeholders, and we'll continue to build off the same foundational pillars that have defined our strategy and that have served us very well over the past almost 70 years. We will focus on the best mining jurisdictions based on geologic potential and political stability. We'll be disciplined with our owners' money, making investment decisions based on technical and regional knowledge, creating value through the drill bit and through smart acquisitions where and when it makes sense. We are uniquely well positioned with a quality project pipeline, leveraging existing assets in the best regions in the world where we believe we have a competitive advantage. And we will continue to be focused on creating value on a per share basis and on being leaders in our industry in returning capital to shareholders as evidenced by over 43 years of consecutive dividend payments and increased share buybacks. We have a clear and executable strategy to create tremendous additional value per share for our owners well into the foreseeable future with manageable risk, leveraging off existing infrastructure and regional competitive advantages. We have the assets, we have the projects, we have the resources and we have the people. We are making it happen right now. We will stay focused, and we will not be distracted. Thank you again for joining us on this call. And for many of you, thank you for decades of trust and support. We will always work hard to maintain that trust, and we will never take it for granted. Operator, may I ask that we now open up the call for questions. Operator: [Operator Instructions] First question comes from the line of Lawson Winder from Bank of America Securities. Lawson Winder: We'd like to start off with the Finnish acquisition, and we haven't had a chance to ask you guys about this in this type of forum since the announcement. And Guy, thank you very much for the picture you've painted and for the color on getting to 500,000 ounces. But can you help us understand what are the sort of value creation steps over the next 12 to 24 months to get to a better understanding of what that ultimately looks like. So resource update, study, when do you expect permitting to start? And just any other considerations on that sort of time line thinking? I appreciate it. Ammar Al-Joundi: I can start, but maybe Dom and Guy can jump in on more details. The first thing, Lawson, and by the way, nice to hear your voice, the first thing Lawson really was to consolidate all of this property. There's a lot of potential. They're good properties, but they were individually constrained and so that's why it was very important for us. And as mentioned, our entire team, but in particular, the corporate development team and the legal team did a really good job in allowing us to consolidate all of this at the same time. It's really first and foremost, and then I'll pass it over to my colleagues about consolidating what we think is the best land position in Europe. Dominique Girard: Thanks, Ammar. Lawson, Dominique speaking. Maybe I think what on my side, I need to do is to freeze the scope of that one, let's say, without the boundaries, where we should put the mill, the tailings and revamp the schedule, the study based on the new acquisition. And the exploration guys are all excited to add, but we're going to need to kind of try to kick that project for a first start but also to get some flexibility, maybe, for example, at the mill to make sure -- it's always a challenge to get enough detail into the study to push that into the permitting. And that's what we're going to focus by staffing the study team and eventually the construction team. Guy Gosselin: So maybe in complement, Lawson, Guy speaking now. As we discussed in the press release, our plan by removing the property boundary is to have sort of an updated view with the current information by the end of 2027, where we're going to have sort of a better picture of what the optionality that removing the property boundary offer on both the optimum pit design and location of infrastructure. And while we're going to right away, as a matter of fact, start drilling once the acquisition is completed because we know as well that property boundary was also constraining the drilling close to the property boundary. So -- but that's our intent. By the end of 2027, we should have an idea of the kind of a revised concept based on the current information, while we're going to continue to drill and maybe look at other iterations. So maybe like you can refer to what we did in Malartic. We're going to be providing most likely a first version of what it could be and then keep drilling and adjust based on what we're going to discover. Lawson Winder: Okay. That's helpful. And then just a follow-up from me with respect to the Detour Lake underground drill results. There were some really, really substantial intercepts, of course. With the drilling you've done to date, has your understanding of what the Detour Lake underground can be, has it evolved and changed in any way in the past, let's say, 12 months? I mean is it starting to look like it could be a much bigger system? And are you possibly reconsidering what the ultimate development plan might look like Detour underground? Guy Gosselin: Well, I would like -- to me, the area west of the pit is very similar to what was historically mined on the ground at Detour that we are now mining with the pit closer to surface. So obviously, we are showcasing a couple of great results. On average, we think that, that area will be anywhere between maybe 2.5 and 3.5 grams, something like that. And obviously, when you put those some spectacular results along with some others that are in a 2, 3-gram over 20, 30 meter. So it's in line with our expectation. It's aligned with what we're actually just firming up the model of that zone. As you know, we are mindful of the history at Detour. In order to selectively mine a high-grade ore, you need a ton of drilling, you need the right drill spacing. When we are getting there with the ramp, we're going to be soon being able to drill it more aggressively from underground as well from the exploration ramp. So it is shaping up as we thought. It's always an area that I personally liked a lot west of the pit. Natasha Nella Vaz: Lawson, just to add to that, it's Natasha, by the way. Just because of the -- we do have a study team looking at this and looking at different iterations as we proceed with the exploration program. But with the combination of the exploration success and the high gold price environment, there is definitely optionality here at Detour. So it's fairly early stages, I would say, but the team is looking at different trade-offs for potentially a higher milling capacity, a larger underground, potentially another pushback at the pit. But again, very early days. Operator: Your next question comes from the line of Fahad Tariq from Jefferies. Fahad Tariq: In the quarter, there was an announcement about a Nunavut collaboration agreement with B2Gold. Can you maybe just talk about the thinking behind that and what you hope to learn from their operations at Goose? Ammar Al-Joundi: Well, we -- it's Ammar here. I'll start and then maybe Dominique or Jean can comment. In general, we always like to try to work with our colleagues and our peers. We have a lot of experience in the areas we operate. We think we have some competitive advantages, but we're not so naive to think that we know everything. So any time we get an opportunity to work with our peers to see what they're doing, we take advantage of that. I think our owners would want us to do that. And also from B2's perspective, they're good people. We know them well, and they think that we do a good job where we operate, and they want to see if they can learn a little from our operations as well. So it's just the kind of stuff that we want to do in the industry. I think that's probably enough on that. Fahad Tariq: Okay. And then maybe just one for Jamie. I noticed the buyback pace slowed down quarter-over-quarter in the first quarter. Is that just a function of the pretty significant cash tax payment. And can you just remind us of the minimum cash you'd like to keep on the balance sheet going forward? James Porter: Yes. No, that's exactly right. I mean we said we put out our guidance in February that we'd be targeting returning about 40% of our free cash flow through a combination of the dividend and the share buyback. Our free cash flow was lower in Q1 as a result of the cash tax payments. So I think our -- the percentage worked out to closer to 50%. It was $150 million of shares repurchased in the quarter, which was half of what we did in Q4. That will ramp up certainly in Q2 and through the rest of the year as our free cash flow is expected to be higher. In terms of minimum cash balance, I mean, I think we're comfortable where we're at now with $3.1 billion of cash, $2.9 billion of net cash, between $3 billion and $5 billion I think that's a good position to be in, in terms of just giving us financial flexibility to be able to execute on our strategy. But yes, definitely higher share buyback activity expected through the remainder of the year. Operator: Your next question comes from the line of Josh Wolfson from RBC Capital Markets. Joshua Wolfson: I appreciate the additional disclosure on the energy sensitivity side of things. I had a question in terms of the Hope Bay project update later this month. Looking at the current market for prices, there's obviously been a high degree of inflation. How are you thinking about incorporating some of those input prices for that project update and thinking about maybe the near-term impact versus what otherwise would a long-term, much more reasonable price be? Ammar Al-Joundi: Josh, it's Ammar here. I'll start and then Dom will jump in. In my experience, the most important thing in building projects is to get the engineering done and to have the execution plan well laid out. We have seen some inflationary pressure, but actually, it hasn't been that bad. And the team, as Dom said, I mean you looked at the picture, the camp is going to be there. The backup power is there, the mill building, half the mill building is there. Water treatment is there. So we're coming to this with an advantage of infrastructure in place, which allows us to execute. I mean it's all about execution, but also exceedingly important is the amount of engineering the team has done, which allows them to get a much better control overall on execution and, therefore, on cost. Dom? Dominique Girard: Yes, Josh, we -- in May, we're going to give more detail on the economic. That that's going to be obviously positive economics. And our assumption are based on the long-term view, we're going to give you some sensitivity to understand how that could impact, and we don't know the future. But as Ammar mentioned, we're -- I'm very comfortable where we are right now. We've been mining in Nunavut over 17 years, and we've built already 3 projects with Meliadine, Meadowbank and in Amaruq. So that's -- it's a good time for Nunavut to add another -- it's going to be over 400,000 ounces per year, and that's going to bring us to potentially 1 million ounces per year into the Nunavut platform. Joshua Wolfson: Great. And then another, I guess, 2-part question for Malartic. I mean first question there is what drove the grade improvements this quarter? And I guess we saw something similar last year. Should we expect to see it going forward. And then second part is just on the September update that you referenced. Given that we had expected, I guess, the shaft project completion not really until year-end and then a larger update in the second half of next year, how should we be thinking about what information is disclosed ahead of that completion in September? Dominique Girard: Yes. Just for the grade, it's a question of sequencing mainly into the Barnett pit. That's the -- that's the only thing that changed that. And I will let Jean-Marie to answer on the second part. Jean-Marie Clouet: Josh, yes, in September, the plan would be to provide an update. So the last update really for Malartic was in June 2023. What we want to reflect in September is the update in the reserve resources that we've seen over the last few years and also start giving a better idea in terms of how the second shaft, Marban and Wasamac start to fit together, start giving ranges around what we think it will cost and operating. But you're right, the studies will be later in the year, but we should be able to provide a very good picture of what Malartic will look like to get to the 1 million ounce per year. Operator: Your next question comes from the line of Daniel Major from UBS. Daniel Major: Ammar and team, first question on the Finland acquisition and then around the kind of balance sheet and capital returns. First question is, was there a reason for using Agnico shares rather than cash specifically? And then I guess the second part, you alluded to exceeding the 40% cash flow payout potentially in order to reduce the share count following the acquisition. Can you give us a sense of kind of quantum you could be at $3 billion to $5 billion of net cash quite quickly through the year. Should we expect that as a limit to the cash balance you'd want to hold and how that would flow through to the buyback? Ammar Al-Joundi: Well, thank you for the question, Ammar here. I'll answer the first one, and maybe, Jamie, you can answer the second question. With regard -- it's a very good question on why we use shares instead of cash. And the answer is we wanted to use cash and they wanted 100% shares. I think their view and rightfully so is Agnico shares are good shares to have, and they wanted 100% shares. We used full cash on the other deals. And I think Jamie, as part of his answer to the second, can also incorporate how we hope to offset a little bit of the share issuance through the rest of the year. James Porter: Yes, absolutely. So I think in our disclosure, Daniel, we referred to potentially increasing repurchase activity based on the sale of some of our portfolio investments. So if there's opportunities for us to do a little bit more based on our views on valuation, we will do so. With respect to kind of minimum cash balance, where we are now, I'd say, is we're very comfortable. And as the cash balance increases, we'll look at even more activity under the share buyback. But I'd say the minimum target is 40%. We may be able to exceed that based on either our free cash flow performance or the proceeds of the sale of some of our investments. Daniel Major: Okay. And then my next question is on San Nicolas, actually saw Teck in Anglo American yesterday and discussed the project a little bit. But I mean it feels like it's somewhat subscale at 50% for either yourselves or the other partner. Have you had any discussions around the ownership of the project? And would you be keen to consolidate if the opportunity arose? Ammar Al-Joundi: Yes. I think we would look at it. We still think it's a good project. I don't want to forecast what our colleagues and our partners are thinking. But obviously, if they said, "Hey, would you want to look at it," we'd look at it. Daniel Major: Okay. Great. And then just one quick one, if I could. On Finland. I noticed Boliden deferred a pushback at Kevitsa because of the change in the taxation for the mining sector in Finland. Can you just give us any color about how you're seeing that landscape with respect to Kittila and the new acquisitions? Dominique Girard: Yes. Yes, there's tax change in Finland. And this is included into our evaluations as well as our life of mine at Kittila. Yes. James Porter: I was just going to add, the industry is lobbying the government to look at potentially changing the structure of those taxes to make certain additional things that are deductible to offset the impact. But all that was factored into our modeling. Operator: Your next question comes from the line of Bennett Moore from JPMorgan. Bennett Moore: Congrats on the record quarter. I guess following the land consolidation in Finland and as you continue to think about the company's next leg of growth beyond the early 2030s, where does Australia fit in this picture? Do you see similar opportunities around Fosterville? Ammar Al-Joundi: Well, thank you for the question. Actually, I was just out in Fosterville about a month ago. And I mean it's such fantastic people but we spent a lot of time on some recent I would say, very good exploration results in and around Fosterville. I think as some of you know, we've consolidated some land. That part of Australia was the original gold rush. And nobody is really focused on it for decades. And it's still very early, but I was quite pleasantly surprised with some of the results they were getting and the enthusiasm they had. Now we get questions all the time about the rest of Australia. We think Australia is a great place to mine, not just for gold. But I mean, you know us, we are very careful about what we do. We're very disciplined. And right now, we are -- we continue to be focused in Australia at Fosterville and the team we have there and the opportunities around that. Bennett Moore: Then I think it's been about 6 months since you launched the Avenir business. So just wondering how this is progressing, what sort of new opportunities the team may be evaluating. And then maybe if you could also comment on what sort of critical mineral opportunities there may be around the Lapland Greenstone belt as well. Ammar Al-Joundi: Well, I mean, it's a good -- I'll ask Guy to talk about sort of base metal and critical metals in the Lapland belt because there are some. Just with regards to Avenir, it's a really enthusiastic team. They are looking at a lot of things. What I would say is that they are naturally narrowing down what they're looking at and becoming more focused. It's an exciting business to be and in. It is a separate entity. We are supportive of it. And just to repeat, we're not obliged to do anything, but it does give us an opportunity to see things that are well considered. And maybe, Guy, you can talk about non-precious opportunities in Finland. Guy Gosselin: Yes. So yes, so in addition, obviously, of what triggers our primary interest, which is the structure around the circle line and the main break. We also know that it's the same -- to the north of that, that's the same rock package that hoists basically the given the Kevitsa in the Sakatti deposit that are nearby that are nickel, copper, PG and even at the old Pahtavaara mine, there was some evidences of massive sulphide that are potentially kind of a sign. So we have all of the ingredients. But for us, we see that as potentially an add-on and our primary focus remains to fully explore for gold. And if there's something else because there's the fertility of the rock is there, we'll see. Operator: Your next question comes from the line of Anita Soni from CIBC World Markets. Anita Soni: I just wanted to ask a little bit about the cadence of the production ramp over the course of the year. So I think you said that in Q2, it will be similar to Q1 production. And in Q1, there were, I guess, a couple of challenges with Kittila coming off of the shutdown and then the weather just impacting the restart there. So what are the things that are kind of offsetting in Q2 if Kittila is going to ramp back up. And I would assume it's the Caribou migration that I should be modeling. And then going into the back half of the year, what are the things that are ramping up. It's the AK project, right, at Macassa? Ammar Al-Joundi: Anita, it's Ammar here. It's -- honestly, it's more just mine sequencing and where we are on the plan. There's -- you've got a good point on specific items that were in the first quarter. There are always -- and we try to spread it out through the year when we have maintenance, when we have shutdowns, we try to, as you mentioned, exactly right, there's always the uncertainty of the Caribou season. But I think our team is really quite exceptionally good at taking all of that into account and projecting through the year. We don't typically give 48%, 52%. We decided we wanted to do it because we just wanted people to know that actually everything is going quite well. And as mentioned, the first quarter was actually a little bit above budget. So there's nothing in particular. It's mostly just mine sequencing and various other elements that come into it. Anita Soni: And then just from a longer-term capital allocation question, a lot of those questions have been asked and answered. But I just wanted to get an idea of as you think about the cash balance increasing, where do your priorities lie in terms of capital, just rank them again in terms of capital return to shareholders. And I mean, the balance sheet is pretty strong at this point, and you're accumulating a lot of cash. So where does reinvestment into the business now fall into the -- has it moved up over the capital return to shareholders? James Porter: Yes. Thanks, Anita. I'd say, I mean, reinvestment in the business is always a very high priority, right? The 5 key value driver projects that were that we're advancing our 30% to 60% IRR projects in the current gold price environment. So we want to invest as much as quickly as we can in those. And we're doing that. I mean our capital spending has increased from $2.3 billion last year to probably $3 billion this year all in, and we'll look to continue to find opportunities to accelerate that to bring that production forward. Beyond that, I'd say right now, in this gold price environment, we're fortunate in that we can do it all. We can afford to reinvest aggressively in the business. We can afford to deliver very strong returns to shareholders. I mean, 40% is kind of the floor for this year of our free cash flow being returned, I think, is quite attractive, and we can continue to strengthen the balance sheet. Having that $3 billion to $5 billion net cash position just gives us the -- again, the financial strength and flexibility to be able to execute on our business strategy even in a much lower gold price environment. So I don't think our priorities have really changed. We'll continue to look for opportunities to accelerate reinvestment in the business while strengthening our financial position and delivering strong returns to shareholders. Ammar Al-Joundi: It's a -- we understand the questions. The exact position of cash on the balance sheet is as much an art as it is a science. It's a $100 billion company, whether it's $3 billion or $4 billion or $2 billion, really, that's up to the discretion primarily of the CFO and treasury -- but I just want to make the point having been a CFO myself, it's not like there is an exact perfect number. What you want to do is look at all the circumstances at the time, make sure you have -- the most important thing a CFO has on his table is liquidity for the company. And so I think Jamie and the team are doing a great job balancing everything. Operator: Next question comes from the line of John Tumazos from John Tumazos Very Independent Research. John Tumazos: Thank you very much for your service to the company. I'm trying to make a back of the envelope concept of the Ikkari mine or Central Lapland new mine coming in 2034. Is a fair guess 15,000 tonnes a day times 2.25 grams times 95% recovery to get to the 500,000 ounces and that, that might cost $1.2 billion when we get to 2034, all those years out. Ammar Al-Joundi: Yes. It's -- John, first of all, I'd like to thank you for your service to the industry. That's a very nice introduction. It's -- we're still early in looking at that. It's -- maybe we can go through some of the details offline. I don't know, John, did you want to -- I mean, we got to be careful because these are very, very early, and we're working on it, but go ahead, John. John Roberts: I can step in. First of all, John, I'm very surprised with your question because I was expecting that you were asking how we were able to put all of this together at once. So a bit disappointed with the question. But on this, listen, 10,000, 15,000, we will have to define it and a function of the throughput, we will arrive with the minimum of, let's say, 200,000 plus, we'll be careful before we will provide any number. but I'm more focused on looking what it will be one day. And as Guy described, it's a high potential. And I think this is where I would like that we bring most of the attention, what it can be eventually. So we are excited with the consolidation and stay tuned because I think moving forward toward the end of 2027, we'll have more to say. Guy? Guy Gosselin: So John, what we are referring to in our press release is a platform of 500,000 ounces when combining Kittila and Ikkari together. That's currently and still we need to work if we can make it bigger than that, and we cannot work on the -- but just to make it clear, the 500,000 is just solely for Ikkari. It's our vision of the platform for the time being. John Tumazos: Let me ask another one, if I may. And thank you for the clarification. I was assuming we were only talking about the new property. I was guessing the CapEx and then the consideration for the 3 purchases -- and on the 4.22 million ounces of current resources slightly larger than the 3.5 million ounces of reserves. And $1.2 billion development capital, it works out to $1,268 an ounce acquisition and CapEx to develop. Should we be assuming that the resources are going to double or triple and that that's not the new normal for how much we're going to pay for developing mines. Ammar Al-Joundi: John, it's Ammar here. And I think this is probably the way that we look at it. The acquisition cost worked out by our internal assessment. And remember, we know this project quite well. We've been there for 6-plus years looking at it. We acquired it effectively by our own internal models at quite a good discount to NAV, just based on what we felt on our own, what we thought were fairly conservative. So we've acquired an asset in a region we know well that we have been looking at for 6-plus years at a considerable discount to NAV, and we got the rest of the land package for free. So we're excited about it. We think it makes a lot of sense. I can't get into all of the numbers, except to say in our usual fashion, we did an awful lot of homework before we decided to proceed. Operator: Your next question comes from the line of Tanya Jakusconek from Scotiabank. Tanya Jakusconek: My first question is for Dominique. Dominique, I hope that snow will be gone from Hope Bay when we're up there. That picture showed quite a lot of barbecue. I just wanted to ask because we capital increases lately at some of the projects out there, should we still be thinking that $2 billion for Hope Bay would be a reasonable capital for 10-year mine plan that you've been talking about? Dominique Girard: Tanya, yes, we see a bit of inflation, but it's going to be below 2.5 for sure. And the thing we need to finalize, we have a very good now, let's say, level of engineering, but there is a decision that we're taking, for example, to fast track Patch 7 and to do more ounces earlier, for example, to start the mill right up at 6,000 tonnes per day, it's going to be a ramp-up, but the mill is going to be designed right upfront at 6,000 tonnes per day compared what we did with Meliadine. And also, for example, we're looking to add one more wing to keep the drilling ongoing and to let Guy doing treasure hunting onto the property. So there's a decision that we're taking internally that at the end of the day, affecting the initial CapEx, but it won't be a big surprise. It's going to be slightly over $2 billion. Ammar Al-Joundi: And the changes are not so much inflation. They're more instead of ramping up the mill in 2 stages just because of the economics, you just do it all at once. And as Guy said, do you invest in some peripheral infrastructures so that we can continue to accelerate exploration. Tanya Jakusconek: Okay. That's helpful. Over $2 billion slightly because of plant rather than inflation. Ammar Al-Joundi: Yes, yes, sure. Tanya Jakusconek: Okay. Now that I have you on, just 2 quick questions for you. You mentioned the strategy in Australia, which was to focus around Fosterville and drilling that platform to see what you have there. In Mexico, besides San Nicolas, is that -- do you have anything else that you're looking at to expand that platform? Ammar Al-Joundi: At San Nicolas? Tanya Jakusconek: Mexico itself. Ammar Al-Joundi: Well, it's -- so we are looking at opportunities to expand San Nicolas. But beyond that, Tanya, there's really nothing substantial that we're seeing as an opportunity in Mexico. Tanya Jakusconek: Okay. And then my final question, Ammar, for you. It's always tragic to hear about fatalities for everybody in the mining industry. And so my question to you is from your tragic incidents that you had at your mine sites. What have you learned? And what changes to procedures and processes have you put in place from these learnings? Ammar Al-Joundi: Well, thank you for asking because it is very important, Tanya. Look, I think that we've learned what we already know, which is never ever slow down in emphasizing the importance of safety. And sometimes it's really disappointing. It's the routine things, the things that people do every day that they get too comfortable with. That's human nature, and it is our job to really just push it. What we did was we mandated a stand down, where we took every employee in at all of our sites, every single one and reemphasized it. We have a very sophisticated and comprehensive safety program like most of our peers. And frankly, it's really devastating to have had those fatalities. Tanya Jakusconek: So it seems that it was just routine so nothing that you would have changed, I guess, is what you're saying from procedures and processes. Ammar Al-Joundi: Well, I mean, I think that, yes, I don't want to get into detail. There's a lot of work still ongoing. These weren't things that -- well, actually, Carol, why don't you jump in, sorry. Carol-Ann Plummer-Theriault: Tanya, as you can understand that it's -- any loss of life is a tragic loss of life. In both of these instances, the in-depth investigations are still ongoing. The authorities are involved and the regulatory authorities and so on are involved in these investigations as well. So we can't share the results of these investigations yet. But certainly, there are learnings around this. We're sharing to the degree possible, not just internally, but to industry peers where there has been something that we can start sharing immediately to make sure that these types of accidents couldn't happen elsewhere. And really for us, we're really, as Ammar said, reemphasizing just the importance of safe production and making sure that we're following our procedures and always looking for the risks in the workplace and how we can mitigate those risks. So to that end, we've been looking at major hazards, which are the hazards of things that could actually be a life-changing accident and putting in place critical controls. So we're continuing down that road. And I think that's a really important step for us as we continue on that journey towards zero accidents. Operator: There are no further questions. I'll turn the call back over to Ammar. Ammar Al-Joundi: Thank you, everyone, for joining us. And everyone, have a nice weekend. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to ACCO Brands First Quarter 2026 Earnings Call. I will now hand the conference over to Christopher McGinnis, Director of Investor Relations. Please go ahead. Christopher McGinnis: Thank you. Good morning, and welcome to the ACCO Brands conference call to review our first quarter 2026 results. Speaking on the call today is Tom Tedford, President and Chief Executive Officer of ACCO Brands; and Deb O'Connor, Executive Vice President and Chief Financial Officer. Slides that accompany this call have been posted to the Investor Relations section of accobrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude amortization and restructuring costs, noncash goodwill and intangible asset impairment charges, bargain purchase gain and other nonrecurring items and unusual tax items and include adjustments to reflect the estimated annual tax rate on quarterly earnings. Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these measures to the most directly comparable GAAP measures are in the earnings release and slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking non-GAAP financial measures. Forward-looking statements made during the call are based on the beliefs and assumptions of management based on information available to us at the time the statements are made. Our forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially. Please refer to our earnings release and SEC filings for an explanation of certain risk factors and assumptions. Our forward-looking statements are made as of today, and we assume no obligation to update them going forward. Now I will turn the call over to Tom Tedford. Thomas Tedford: Thank you, Chris. Good morning, everyone, and thank you for joining us today for ACCO Brands first quarter earnings call. Last night, we reported first quarter results with sales and adjusted EPS above our outlook. We also reiterated full-year guidance. We are pleased with the strong start to the year, and the results indicate we are executing well on our key operational and strategic initiatives. First quarter consolidated sales grew 8%, higher than our expectations, driven by favorable comparable sales and better first quarter performance from the EPOS acquisition. Additionally, as expected, foreign exchange had a significant positive impact on revenue in the quarter. In the Americas segment, sales growth was driven by favorable currency translation, computer accessories and the EPOS acquisition. Sales for computer accessories within the segment were strong, reflecting new products and a meaningful end-user pipeline. In North America, early purchases of back-to-school products were better than anticipated. While it is still early, we are confident in the upcoming back-to-school season due to increased listings and the absence of order cancellations due to tariffs in the prior year. For the season, we are expecting back-to-school sales to be flat to up low single digits. Sales of office products were down across the segment, but the rate of decline improved. In Latin America, sales improved due to a combination of a change in go-to-market strategies and new products. Turning to the International segment. Sales growth of 15% was driven by favorable currency translation and the EPOS acquisition, which I'll discuss in more detail shortly. The rate of decline improved in the quarter, reflecting the positive impact of price, broad-based improvement in core category demand and favorable mix. Our overall strategy remains focused on expanding our product range in faster-growing categories with an emphasis on technology peripherals. Our target for 2026 is for peripherals to grow to represent 25% of the company's projected revenue. In support of our strategy, our acquisition of EPOS was completed in the first quarter. We are excited about the potential of this addition to ACCO Brands. The integration is on track with expected 2026 sales of approximately $80 million over 11 months of the year and a modest contribution to profit. As a result of the acquisition, Jeppe Dalberg-Larsen, President of EPOS, will now lead Technology peripherals for ACCO Brands. Jeppe has over 20 years of experience leading technology peripheral businesses and is a strong operator who will drive our growth initiatives. This change in leadership is another step to better position ACCO Brands to execute on our strategy of expanding our global market shares and enhancing our product portfolio and technology peripherals through organic and inorganic initiatives in these large and growing categories. Pivoting to gaming accessories. The global gaming market faced headwinds in the first quarter from broad industry challenges and softer consumer spending. Our PowerA brand is well positioned to capitalize on 2 significant catalysts that we believe will improve performance throughout the year. The continued adoption of Nintendo Switch 2 consoles by the consumer and the expected fourth quarter release of Grand Theft Auto 6. Additionally, our product pipeline is robust as we are expanding our gaming portfolio to include simulation as well as a revamped audio offering. Our leading product portfolio, the important work we do with OEMs and our strong channel partnerships give us confidence in the back half of the year. In Computer accessories, the Americas delivered solid sales growth. In the International segment, sales were down versus the prior year as we comped a large government order in the U.K. in 2025. Normalized, computer accessory sales in the segment were up modestly year-over-year. We have an expansive range of new products and an improving pipeline throughout 2026 that will support our growth objectives. Transitioning to our cost optimization work, we continue to execute on our cost reduction and footprint optimization program. We remain on track to achieve the $100 million cost reduction target by the end of the year. Some of our projected savings, however, may be offset by rising costs due to the ongoing conflict in the Middle East. We anticipate fuel costs and certain raw materials to increase globally with the impact weighted towards the back half of the year. The company is carefully monitoring the situation and has taken appropriate steps to mitigate these potential impacts. We have considered these developments in our guidance, however, recognize this is a dynamic situation that is evolving daily. While consumers and some customers may be more conservative in the near term due to economic uncertainties, our tight cost controls and growth initiatives give us confidence in the year. In summary, I am pleased with our first quarter results. I am proud of our strong execution against our value-enhancing initiatives and the progress we are making on our strategy to transform ACCO Brands into a more focused, efficient and growth-oriented company. I will come back to answer your questions. Now let me turn the call over to Deb. Deborah O?Connor: Thank you, Tom, and good morning, everyone. As Tom mentioned, first quarter sales and adjusted EPS were above outlook. Comparable sales improved with a better mix of product sales as well as back-to-school order timing earlier than anticipated. Reported sales in the first quarter increased 8% with comparable sales down less than 3%. Growth in the quarter was driven by FX and the EPOS acquisition. Comparable sales reflect growth in Latin America and computer accessories in the Americas as well as lower declines in several core categories. Gross profit for the first quarter was $107 million, an increase of 7%, with the margin rate of 31.1%, down 30 basis points. The margin rate decline was attributable to lower priced product mix. Adjusted SG&A expense of $95 million is up modestly to the prior year, with the increase largely due to unfavorable FX and the EPOS acquisition, significantly offset by cost savings. Adjusted operating income for the first quarter was $12 million, up $5 million versus the prior year, reflecting cost savings somewhat mitigated by organic volume declines. Before turning to segment results, let me provide some detail on the bargain purchase gain related to our acquisition of EPOS. This $38 million gain represents the purchase price of EPOS compared to the preliminary fair market value of the business, which is primarily from working capital. As Tom mentioned, the integration of EPOS is on track, and our outlook includes $80 million of 2026 sales with a slightly higher gross profit rate than our consolidated average and neutral to adjusted EPS. We remain on track to deliver the outlined $15 million in cost synergies in 12 to 18 months. We recorded $7 million in restructuring charges, primarily related to this acquisition, most of which will be paid out in the next year. Let's turn to our segment results for the first quarter. In the Americas segment, sales were up 3% with comparable sales down 2%. We had good growth in computer accessories and in Latin America, which was offset by our core office products. The early purchase of back-to-school products was comparable to last year, and we expect the full season to be up modestly. The Americas adjusted operating income was $13 million in the first quarter, up approximately $3 million with the margin rate improving 140 basis points to 7.2%. The margin rate improvement was driven by cost savings. In the International segment for the first quarter, sales were up 15%, with comparable sales down approximately 3%. The improvement in the rate of the decline in comparable sales was driven by new products, and we also saw increased purchases of office products due to the lower year-end buying we highlighted in the fourth quarter. International adjusted operating income was $11 million, with the margin rate at 6.7%, consistent to the prior year. Free cash flow in the quarter was $1.4 million, comparable to last year and in line with our plan. Inventory was up $67 million since the start of the year. $27 million of that increase was related to EPOS, while the remaining increase was attributable to seasonal inventory build and higher tariff costs. During the quarter, we returned $7 million to shareholders in the form of dividends. At quarter end, we had approximately $252 million available for borrowing under our revolver and finished the quarter with a consolidated leverage ratio of 4.1x. Now let's move to the outlook. For 2026, we are reiterating our expectation for full year reported sales to be flat to up 3% and adjusted EPS to be within the range of $0.84 to $0.89. This outlook reflects a prudent sales expectation in the back half of the year given the global environment. We also anticipate cost increases in the near term, which we have considered in our guidance. Free cash flow is expected to be within the range of $75 million to $85 million, with approximately $25 million in restructuring payments and $15 million in CapEx. Lastly, we anticipate a consolidated leverage ratio within a range of 3.7x to 3.9x. For the second quarter, we expect reported sales to be up within a range of 1% to 4% with a lesser benefit from FX. We expect adjusted earnings per share to be within the range of $0.24 to $0.28. While the current environment remains dynamic, we are confident in the future of our company. We have no debt maturities until 2029 and a long history of productivity savings and cost management. Our strategy pivot is an exciting opportunity for ACCO Brands to accelerate growth and potential value creation for our shareowners. Now let's move on to Q&A, where Tom and I will be happy to answer your questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Greg Burns from Sidoti. Gregory Burns: So with the guidance for the year, given the strong first quarter, why wasn't there more flow-through to the rest of the year? I know you talked about maybe some macro uncertainty, but why aren't we seeing maybe a little bit more of a flow-through for the balance of the year? And then how much FX and acquisition-related growth is baked into that flat to up 3% revenue for the year? Deborah O?Connor: Greg, it's Deb. First of all, the first quarter for us is a pretty small quarter. As you know, we typically had the bulk of our profits come in 2Q through the rest of the year. So it's always a difficult quarter to gauge your full year on. We're pleased with how we ended the first quarter, obviously. But in this environment and with all the global uncertainty with the Mid East and everything else, we just prudently left our -- and reaffirmed our guidance for the full year. And that's where we sit. And if you look to the full year, we have about 5% still coming from the EPOS acquisition. So very consistently throughout all the quarters next year. Foreign exchange is about 1%. So this first quarter had 6%. Future quarters have anywhere from 1% to kind of flattish. So we end the year with about a 1% impact. Gregory Burns: Okay. Great. And then in terms of EPOS could you talk about the opportunities to expand that brand globally, the timing of maybe some of the initiatives you have around that? And also, can you just help us better understand EPOS' position or position within the prior ownership? Like why wasn't the brand more successful in kind of growing into new markets? Thomas Tedford: Yes. Greg, this is Tom. Let me address the first part of your question initially, and then we can get into the second piece to the extent that we can. We are early in the integration process with EPOS. We're very pleased with what we've learned so far, and we certainly have growth synergies that we have targeted as a part of the acquisition thesis. We believe it's very complementary to our Kensington business. We recognize that it's a different product category. However, it likely goes through the same routes to market globally. And we think there's opportunities as we look ahead to pair the product along with our robust Kensington portfolio to offer a one-stop solution for enterprise attachments when laptops and desktops are deployed. So we think there's some significant opportunities as we look ahead to drive growth. Clearly, we're focused at the moment on integration and delivering the synergies while maintaining the growth initiatives that we have in both businesses. I don't want to comment on the historical performance of EPOS. It was under different ownership. I don't know if it was a highly strategic element of the Demant business, and I don't want to speculate as to why they struggled. I just want to reiterate to you that we feel very confident in the business and the products and frankly, the leadership of the team. And that's why we've announced a change in leadership and a change in focus with our organizational structure, and we have Jeppe leading it. So we're optimistic about the future. We're excited about the brand, and we look forward to positive business results from EPOS this year and beyond. Operator: Your next question comes from the line of Joe Gomes from NOBLE Capital. Joseph Gomes: Congrats on the quarter. So this is a follow up on EPOS. I don't know is there anything that you could point out that drove the segment outperforming expectations? Or did you just kind of go in with low expectations? I don't know if there's anything you can point out there, provide a little more color on that EPOS outperforming. Thomas Tedford: Yes. That's a good question, Joe. Candidly, we weren't really sure the uncertainty of an acquired business and the potential disruptions in integration. We just found it prudent to be careful with our guidance assumptions for the business. We're learning about it more and more. As I said earlier, we're very optimistic about its contributions to our business this year and beyond. But candidly, it was just our lack of really visibility into their forecast given what we knew, we thought it was a prudent thing to do to be careful with the numbers that we included in our models. Joseph Gomes: Okay. And then maybe I don't know if you could provide any more color on the early back-to-school. It sounds like it's performing a little bit better than maybe people had initially anticipated. I don't know if you can talk about inventories and what your customers are saying to you, kind of feedback you're getting from them on the whole back-to-school program. Thomas Tedford: Okay. Yes, it's early, Joe, obviously. We're in the process of shipping early orders, which predominantly are direct import orders from Asia. As we spoke in our prepared remarks, we believe the season is going to be up modestly. We feel good about our brands based on their performance last year in which ACCO Brands' portfolio of brands took market share in the U.S. and in Canada. So we're optimistic about the season. We have good line of sight to the initial orders. They're at or better than our current forecast. So early indications are strong, and we hope that the sell-through isn't impacted by some of the uncertainties and potential inflation based on the conflict in the Middle East. But given what we know today, we feel very good about back-to-school this year. Operator: Your next question comes from the line of Kevin Steinke from Barrington Research. Kevin Steinke: You mentioned that you saw growth in Latin America. And I know that region was a bit more challenged last year. You talked about consumers trading down, product choices, et cetera. But you mentioned that, I think in your prepared remarks that you shifted your go-to-market strategy. So maybe can you comment on that a little bit more? And did that contribute to the growth you saw in the first quarter? Thomas Tedford: Yes, Kevin, good question. Latin America was a good performing part of our business in the first quarter this year. And you're right, we managed it well. We implemented changes to meet the consumer where they are. We recognize that it's a constrained environment in both Mexico and Brazil. We've adjusted our product assortment. We've adjusted our go-to-market strategies, our incentive plans for our sales reps, and we've adjusted pricing where it was appropriate. So the combination of the strategies that we deployed in the market at the back half of last year have better positioned our product assortment for growth. And we'll continue to refine it as things continue to change, but we feel really good about where we are today in Latin America. Kevin Steinke: Okay. Great. And just following up on gaming accessories. You talked about the expectation of a stronger second half of 2026 and the reasons why it makes sense. You did mention some industry challenges currently. Is that just related to softer consumer spending? Or is there anything else that you would mention in terms of just the challenges you mentioned for the industry? Thomas Tedford: Yes. We believe it's largely related to a softer consumer. In the first quarter, if you think about the sequencing of our annual sales, a lot of it is reliant upon holiday and holiday was relatively weak for gaming in Q4, which left some inventory opportunities for retailers, which presented some challenges for us in Q1. But what I do feel good about is our brand. Our brand has taken share each month in the first 3 months of the quarter. We think we're well positioned as we discussed in our prepared remarks for the balance of the year. And candidly, we're excited about our new product assortment. So we think a lot of good things are in store for PowerA in 2026. Kevin Steinke: Okay. Understood. And as you mentioned, you're kind of factoring the potential for a softening in customer demand. Given the macroeconomic uncertainties, which makes sense to be prudent. But have you actually seen any noticeable signs of softening demand yet? Or is that just at this point, just trying to be cautious given the environment? Operator: Yes. We haven't to date. We think if there is a challenge with demand, it won't be felt until later in the year. And as Deb mentioned in her prepared remarks, we have seen some early indications of some cost increases, predominantly driven by fuel. And we are taking the necessary steps internally to protect profitability and to position ourselves to deliver the year based on what we see today. But from a demand perspective, we have not seen pressures on demand yet. Kevin Steinke: Okay. So have you -- do you have planned price increases in the pipeline currently or just kind of monitoring the situation on the cost front? Thomas Tedford: Yes, a good question. It's actually both. We do have some planned price increases that we are going to market in different geographies across the globe, and we'll continue to monitor the cost environment, and we'll take actions if necessary. Operator: Your next question comes from the line of William Reuter from Bank of America. William Reuter: My first one, clearly, you guys had some tariff cash payments last year. Can you share with us the magnitude of those? And in the event that you do get a refund, I guess, have you applied for refunds? And if you do get that, how would you allocate that cash? Deborah O?Connor: Yes. So -- we have talked in the past about our claim and how we have put it forth and that we feel very comfortable with the amount. And we're talking somewhere in kind of the $25 million range. We don't expect anything in 2026, and we'll watch it as it goes. William Reuter: Okay. And then on that, not expecting anything in '26, is that based upon the status of your claim, whether it was liquidated or not liquidated and the timing of what that may be? Because I think that there are a lot of signs that indicate some refunds may be paid this year. So is it just conservatism on your part or based upon the unique attributes of your claim, you just know it won't be this year? Deborah O?Connor: Yes. It's interesting. I would say maybe a little bit of both. But to be paid this year, there's a lot that has to happen at the government and different places like that. So who knows, to your point. And then we do have some claims that are a little more complicated that we anticipate coming in later. William Reuter: Got it. That's helpful. And then as you see things now, I know that you manufacture a portion of your products and you also have third parties that manufacture others. Is there any sort of a sense for what the headwind based upon current oil prices may be this year in the back half? Thomas Tedford: We've built our best thinking into our current guidance. That may be why you don't see us taking guidance up for the full year based on the over delivery in Q1. We've done our best to project what we think the impacts are going to be. But as you know, this has been a dynamic situation. We're optimistic that it ends relatively soon, but we've taken into account a prolonged disruption based on the conflict in the Middle East in our guidance. William Reuter: Got it. And then just lastly for me. Is there anything -- any commentary about this computer peripherals growing to 25%? I'm not even sure what products you're including in that. But any comments about the competitive dynamics of those categories? It would seem to me you may be going up against some big companies, but I'm certainly not a tech analyst. So anything you could share? That's it. Thomas Tedford: Yes, happy to. So technology peripherals, let's start there. It consists of our brands, Kensington, PowerA, LucidSound and EPOS. So it's not just computer accessories, it's computer and gaming products that we sell globally. We think those are large TAMs, growing TAMs and TAMs in which we have relatively small shares in. And so we think the dynamics for future growth are very positive. And we're working hard to position our brands to take market share in each market that we compete in globally. Operator: At this time, there are no further questions. I will now turn the call over to Tom Tedford for closing remarks. Thomas Tedford: Thank you, everyone, for joining us. We are pleased with our first quarter results and expect the combination of the EPOS acquisition, momentum from growth initiatives and positive foreign exchange to drive revenue improvement in 2026. Our commitment to operational excellence through continued cost management and productivity programs position us to deliver improved profits and cash flow. With our optimized operational structure and momentum with leading brands, we have a strong platform to generate consistent free cash flow while strategically repositioning ACCO Brands towards faster-growing technology peripheral categories. I want to thank our dedicated team and recognize their efforts and congratulate them on a strong first quarter. We appreciate your interest in ACCO Brands. I look forward to talking with you when we report our second quarter results in July. Operator: This concludes today's call. Thank you all for attending. You may now disconnect.
Operator: Greetings, and welcome to the Proto Labs First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Johnsrud, Investor Relations. Thank you. You may begin. Ryan Johnsrud: Thank you. Good morning, everyone, and welcome to Proto Labs' First Quarter 2026 Earnings Conference Call. I'm joined today by Suresh Krishna, President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer. This morning, Porto Labs issued a press release announcing its financial results for the first quarter ended March 31, 2026. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release. Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. The results and guidance we will discuss today include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results. Now I will turn the call over to Suresh Krishna. Suresh? Suresh Krishna: Thanks, Ryan. Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. We are off to a strong start in 2026. First quarter revenue grew 10% year-over-year as we delivered another record revenue quarter. I am very pleased with the balanced execution reflected in our financial results. We achieved double-digit revenue growth significant gross margin expansion and improved operating leverage. Importantly, this reflects not only continued momentum but measurable improvements in customer engagement, growth and operating performance. These financial results are a credit to the hard work and dedication of our employees as they continue to execute with discipline across the business. I'd like to thank all Proto Labs team members for their outstanding quarter. So far, in 2026, we continue to see strong traction with larger strategic customers contributing to our higher revenue per customer and reinforcing this as a key long-term growth driver. During the quarter, revenue per customer grew 20% year-over-year, providing evidence of the momentum we have with enterprise customers. In U.S. we grew 12%, marking the fourth quarter in a row of double-digit revenue growth in the region. I want to acknowledge the leadership of Sean Farrell, and the regional sales and customer success teams for driving that performance. Double-digit growth and significant margin expansion in the first quarter led to strong cash flows and earnings, reflecting in the strength of our business model. In the first quarter, we achieved Proto Lab's highest non-GAAP earnings per share in over 5 years. Our strong results were fueled by exceptional demand for our CNC machining service, which grew over 20% year-over-year in the U.S. driven by continued strength in aerospace and defense including space, exploration, satellites and drones as well as strong growth in robotics. As we saw in the last quarter, well-funded and innovation-driven markets where speed, precision and digital manufacturing are critical, continue to rely on Proto Labs as we deepen relationships and strengthen our position as a strategic partner. In April, we joined the Space Foundation, a global space community supporting collaboration and education. This move strengthens our presence in this fast-growing ecosystem as aerospace innovation accelerates rapidly in the new space age. With organizations like NASA, Lockheed Martin and Northrop Grumman as long-standing customers, we continue to support leading-edge programs where speed, precision and reliability are critical. This is especially apparent following ARTEMIS 2 and its successful Lunar mission. Overall, our first quarter performance reflects continued progress on executing our strategy, which remains centered around serving customers across the product life cycle while building on the core strengths that differentiate us. As a reminder, our long-term strategy is anchored in four pillars: Elevating the customer experience, accelerating innovation, expanding production and driving operational efficiency. While these pillars will guide our business in the next few years, we are encouraged by the early traction we are seeing across each area. As we focus our investments and prioritize work around these pillars we drove higher revenue per customer, strong growth in CNC machining and operating margin expansion. We continue to see expanding engagement with larger strategic customers in aerospace and defense and medical, reinforcing our conviction that production will become a meaningful long-term growth driver. We achieved AS9100 certification in our European operations during the first quarter, which expands our ability to support aerospace and defense customers globally. We are now better positioned to deliver high-quality aerospace grade parts while helping customers regionalize their supply chains and reduce disruption. This milestone strengthens our global capability and credibility in aerospace and defense and expands our ability to capture production programs globally. Moving to our 2026 operational changes. As we've said in our last earnings call, 2026 will be a year of transformation and acceleration focused on improving the customer experience and building systems that will scale Proto Labs over the long term. On our fourth quarter call, we discussed several organizational and operational changes that position Proto Labs for faster growth and improved profitability. The first change we discussed is ensuring we have the right leadership, structure and operating mechanisms in place. Our product and technology teams are now combined under our CT AIO, Marc Kermisch, ensuring product and technology are aligned and is essential as we accelerate our organic innovation road map to improve our offer and the customer experience. The second operational change in 2026 is enhanced focus on continuous improvement and quality. In April, Jonathan Blaisdell, joined Proto Labs as Head of our Proto Labs Business Excellence Systems. Jonathan has over 30 years of continuous leadership at Danaher and most recently at Polaris, where he helped embed a lean management system, driving operational and financial improvements. At Proto Labs, he will focus on strengthening our management system, operating rhythms and problem-solving capabilities, so our regions and service lines can execute more effectively at scale and drive productivity. We are already seeing tangible quality improvements in our injection molding operations during the quarter, we made investments to drastically improve quality with our largest, most strategic injection molding customers. This will improve customer friction and help us expand our production offer. Importantly, the work we are doing is already driving operational benefits and will continue to unlock speed and leverage throughout 2026. Next, we have established our global capability center or GCC, in India, which will serve as a critical enabler of our long-term strategy. We are in the process of building out our team and presence in the region. We look forward to providing additional updates on our progress in the future. Lastly, the fourth change we called out is a strategic reset in Europe. We have taken deliberate actions to reset the business in Europe, including targeted reductions in the first quarter to align cost structure with current revenue levels and improvements in go-to-market operations. We started some of Europe go-to-market work in late 2025, including alignment to core industries and simplify and increased customer engagement. I'm proud to say that these efforts are beginning to yield early results. with the region delivering 11% sequential growth in the first quarter, a sign that our teams are executing with discipline and focus. These early improvements are an important step towards stabilizing performance and positioning Europe to contribute to both growth and margin expansion going forward. I want to thank our European colleagues for their continued dedication as we reset this important part of our business. In closing, as we continue to progress through 2026, our priorities remain clear: elevate customer experience, accelerate innovation, expand our production capabilities and continue operating with discipline. Execution across these areas is already translating into improved growth and engagement, and we believe it positions Proto Labs to deliver accelerating revenue growth and expanding profitability over time. I am encouraged by our strong start to 2026 and confident in our ability to execute our strategy and deliver durable long-term value to customers and shareholders. With that, I'll turn the call over to Dan to walk through our financial performance and outlook in more detail. Dan Schumacher: Thanks, Suresh, and good morning. I'll start with a brief overview of our first quarter results. followed by our outlook for the second quarter of 2026. First quarter revenue was a company record $139.3 million, up 10.4% year-over-year. In constant currencies, revenue grew 8.7%. U.S. revenue grew 11.8% year-over-year, while Europe declined 3.4% in constant currencies. . First quarter CNC machining revenue grew 17.6% year-over-year in constant currencies. As Suresh stated, we continue to see very strong demand for our machining services across several key end markets, most notably, space exploration, satellites, drones and robotics. U.S. CNC machining revenue grew 23% year-over-year. During the quarter, we executed targeted pricing actions in line with machining market dynamics. Injection molding grew 3.5% in constant currencies as we drove strong performance in large orders with strategic customers. 3D printing revenue was flat year-over-year in constant currencies as growth in the U.S. was offset by weak demand in Europe. We are still seeing strong demand for metal 3D parts in the U.S. And year-over-year, DMLS revenue growth was nearly 30%. Sheet metal grew 2.3% year-over-year in constant currencies, driven by solid growth in aerospace and defense and industrial tech. Shifting to margins. Non-GAAP gross margin was 46.2% in the first quarter, an expansion of 140 basis points, both sequentially and year-over-year. Higher factory gross margins drove the increase via both volume improvements and pricing increase. Also, mix was a tailwind in the quarter as higher margin factory revenue grew faster than network revenue. First quarter non-GAAP operating expenses were $48.9 million, up $1.8 million compared to the prior year due to higher contractor, license and demand generation spend. On a percent of revenue basis, adjusted operating expenses were 35.1% of revenue, down 220 basis points year-over-year. This decrease was driven by a combination of 3 factors: First, we made targeted cost reductions in the first quarter, mostly in Europe as part of our strategic reset. There were also some reductions in the U.S. as we look to fund our strategic projects. Second, employee costs were lower than anticipated as we ramp hiring for our strategic pillar projects. We expect to increase SG&A spend throughout 2026 as we invest to execute our long-term strategy. And third, as part of our drive operational efficiency pillar, we are in the early innings of finding savings and efficiencies that will allow us to invest in growth areas. Adjusted EBITDA was $22.8 million or 16.3% of revenue up from $17.4 million or 13.8% of revenue in the first quarter of 2025. First quarter non-GAAP earnings per share were $0.54, up $0.21 year-over-year driven by volume, factory gross margin expansion and leverage on our operating expenses. $0.54 is the high adjusted EPS figure we've reported since the third quarter of 2020. We generated $17.5 million in cash from operations during the first quarter. Proto Labs continues to lead the digital manufacturing industry and cash generation, reflecting the strength of our business model. On March 31, 2026, we had $158 million of cash and investments on our balance sheet and 0 debt. Our outlook for the full year and second quarter of 2026 is outlined on Slide 14. We still expect full year 2026 revenue growth of 6% to 8%. For the second quarter, we expect revenue between $140 million and $148 million. At the midpoint, this implies 7% revenue growth year-over-year. We expect foreign currency to have a $500,000 favorable impact on revenue compared to the second quarter of 2025. Our earnings guidance incorporates the following assumptions for the second quarter of 2026. Non-GAAP add-backs will include stock-based compensation expense of approximately $4 million, amortization expense of $900,000 and restructuring and transformation costs of $600,000. We also expect a non-GAAP effective tax rate between 25% and 26%. In summary, we expect second quarter 2026 non-GAAP earnings per share between $0.50 and $0.58. That concludes our prepared remarks. Sashi open -- please open the floor for questions. Operator: [Operator Instructions] The first question is from Greg Palm from Craig-Hallum. Greg Palm: Congrats on the solid results. Can you maybe give us a little bit more color on cadence of the quarter. I think you had mentioned that January had started off slow if I recall correctly. So what did you see February, March? What are you seeing so far in April? And just from like an upside standpoint, I think you called out A&D space, but any other end markets that maybe surprised you a little bit to the upside. Dan Schumacher: Yes. One thing for the quarter, although Europe was down 3% year-over-year, they were up 11% sequentially. So we're seeing some good traction within Europe. Suresh talked about the Europe reset, and we're seeing some benefits and some stronger performance in Europe as we're moving quarter-over-quarter. In terms of what we're seeing, seasonality like in April, that's reflected in the guide. So we have a really decent start to April, and that's reflected in the number that you see, which implies sequential growth quarter-over-quarter, Q1 into Q2. It continues to be the same. We're seeing strong growth from our large customers. We're seeing strong growth from aerospace and defense end markets. I would also say computer and electronics and industrial commercial machinery performed well as well. And we're seeing that strength continue into the second quarter. Greg Palm: We shift gears to the network. So that was down sequentially barely up on a year-over-year basis on a constant currency basis. What -- any reason for the decel? What are you specifically seeing in that business? Suresh Krishna: Greg, we are -- overall, we are very happy with our double-digit growth, and this is the second quarter we've delivered that. We will see fluctuations between our fulfilled methods between factory and network. We did see some weakness in network demand in 3D printing. And we are making some changes in our go-to-market areas so that we can work to accelerate network revenue growth in the future, much as we work to drive growth in our factory business. Greg Palm: And I might have missed it, but did you give a network gross margin. Dan Schumacher: We did not. Suresh Krishna: We did not. We can get it for you. Dan Schumacher: Greg. Network gross margin was 31%. Operator: The next question is from Brian Drab from William Blair. Brian Drab: One thing that stood out to me this quarter was the injection holding business and the growth sequentially. I know you called out that the primary growth came from CNC machining year-over-year, but this injection molding result is the best result you've had, I think, in 8 quarters, are you seeing some traction from the new initiatives that you talked about last quarter? What is the main thing driving that growth? And do you think that this kind of $51 million revenue level could be the base like baseline revenue level for the year and we're going up from there or something unusual in the first quarter? Dan Schumacher: Yes. Brian, we're seeing traction really with some of our larger customers in terms of getting larger orders through injection molding. It's all the things we've talked about in terms of what we're working on from an injection molding perspective. Injection molding is a service that over time, there's less prototype that we're doing, and there's more production that we're doing. And we're just getting better and better at that with our customers. And you can see that in the sequential growth that you talked about. It's about meeting customer specifications as it relates to injection molding, especially on the larger orders. And they're really using us because we do have -- we can both schedule out over time, orders that they need or if they need them quickly, we can turn them faster than anybody else. So we're getting good traction on some of these initiatives that we've talked about on injection molding, and you can see that in the results. Brian Drab: And then you outperformed in terms of revenue growth in the first quarter. You maintained the full year guidance, can you just talk about your thinking and what you're seeing maybe in the macro or in your business that prevented you right at the moment from raising the guidance for the full year for growth? Dan Schumacher: We had a great Q1, Brian. And we're always trying to be appropriately conservative when we provide the outlook to the market. The business is performing well. But I looked at that and balance that with macro uncertainty over the long term and the visibility that we have kind of moving into the future. If you take a look at that 6% to 8%. It would be normal seasonality as you go through the year. where we gave you the midpoint of the guide for the second quarter, which is up sequentially Q1 to Q2. Normal seasonality is you're up -- you're either flat to slightly up Q3 and then you're going to be down due to the holidays in Q4. That's really what's built into the full year guide. We're 1 quarter in. We held it to where it is, but there is a certain amount of conservatism in there just based on the macro environment. Operator: The next question is from Troy Jensen from Cantor Fitzgerald. Troy Jensen: Congrats on really nice results here. Quick question for us, rasher. I guess I'd be curious to know your thoughts on how much of Proto Labs has production exposure. I've always thought of injection molding is primarily all production because you produce some out of parts, but I don't know if you've tried to figure out what percentage you have exposed to prototyping versus production and how that's changed over the past year or so. Suresh Krishna: Again, I think we said it in our strategic plan. We are early in our journey to build the capabilities needed for production. I don't know if you've given out in terms of percent what it is, but we are building it and more customers in our interactions with our bigger strategic accounts, they want us to get into production, and that's what we're building out as part of our strategic pillars is to be able to do more production for them. Absolutely, we see more interest in injection molding and in 3D printing as well. And we continue to gain some of these orders that gives us longer runs. We are still further away from getting to give you guys an ARR kind of number because they're still early in this production journey. Troy Jensen: How about just capacity levels right now in the factory? Any needs for investments given the accelerated growth here? . Dan Schumacher: Yes, Troy. We don't -- capacity, yes, from the perspective of mills. And DMLS, we're adding DMLS metal 3D printers. We have enough space. But as you know, in our digital manufacturing model we can scale very quickly. What we're running into capacity issues is just on the number of machines and certain services. Specifically, CNC machining, obviously, you can see because of the growth, and I also mentioned in the U.S., we have around 30% growth in metal 3D print. So we're adding DMLS printers as well. . Troy Jensen: And then just 1 more for you, Dan. Can you just touch on gross margin thoughts going forward and can we keep them above 46% here? Dan Schumacher: Yes. So the guide has gross margin flat to slightly down quarter-over-quarter. With that being said, I expect full year gross margins to be slightly up. on the year just based on what we saw in the first quarter and what we're seeing -- what I'm projecting for the second quarter. Gross margin is highly dependent on what our mix is and what we're seeing from a pricing perspective, we're going to continue to monitor market dynamics around pricing, and we'll adjust pricing as necessary. But I'm really pleased with the execution we've had as it relates to that, and you can see that in our margins. . Operator: The next question is from James Ricchiuti from Needham & Company. James Ricchiuti: First congrats on the quarter. Dan, maybe first question for you. You gave some context in terms of how to think about gross margins as we go through the year. It appears that you're also thinking more about adding some additional sales and marketing expense as you go through the year to pursue some of the growth initiatives that you're targeting. How do we think about maybe OpEx as we look out beyond the June quarter? . Dan Schumacher: Yes. I would expect OpEx to increase quarter-to-quarter. I described it on the call, we made some actions both in Europe -- and in the U.S., the Europe actions were part of the Europe reset, and the U.S. actions were to fund that strategic investments. And I expect us to invest as we go through the year. A lot of that investment is going to go into R&D. You're going to see some capital investment as well as it relates to software development as we go through the year. And these are to fund those strategic pillars, which should provide us both innovation for top line growth over the long term as well as efficiencies as we reduce the friction both with our customers and with our employees internally. So yes, there's going to be further investment as we go through the year, but that's to build traction and a strong return on the long term by funding the strategic buyers. James Ricchiuti: I also wanted to ask a follow-up. Just on what you're seeing in Europe. I know it was nice sequential growth that you're you registered in Q1. Where are you seeing the most traction? Is this from the changes you're implementing? Is it -- are these perhaps coming from any one vertical or are they coming from new customers, different business lines. I wonder what -- if you can just elaborate on the early progress you're seeing there? . Suresh Krishna: Yes. Thank you. We -- as we said, we took deliberate actions to reset the business in Europe. We made targeted reductions in the first quarter. In terms of our go-to-market changes, we started to align our sales and marketing resources around core industries, aerospace and defense and medical. And we are increasing focus on targeted customer engagement. And that is working for us. It's, again, very early what we are doing in Europe. And we are seeing the benefits of that come through in the first quarter. But again, as I said, we are very early in this effort so far. James Ricchiuti: And lastly, if I could just slip 1 in, some very nice growth in revenue per customer for contact. Again, similar type question, are you getting more traction? You called out a couple of verticals, but I'm just wondering where are you seeing the most progress in terms of driving revenue per customer? . Suresh Krishna: Yes. We are definitely -- we are very pleased with the engagement we are getting from our largest customers, most strategic customers. We spend a lot of time talking to them. And we are seeing most response in aerospace and defense and drone companies our specialty, which is speed, reliability and quality resonates a lot with these industries right now. They are high innovation. They like our speed with innovation and our ability to take them all the way through the life cycle of the part all the way into production. And that's what is resonating and giving us more share of wallet. Dan Schumacher: What I would tell you as well is as we do customer surveys, one of the things they do like about us is as we have more human interaction with them, with our experience in manufacturing and our experience in actually making the part, helping them through the process so that they're -- we're delivering what they need, and that makes that customer stickier and order from us more often. As we do more of that, that leads to really that expansion and how many orders, how many parts those customers end up buying for us in a given period. . Suresh Krishna: Yes. And these industries, as you know, are early in the innovation cycle. These are long investments, early in the innovation cycle, and we will benefit a lot as these industries continue to scale, and we get in early in the innovation cycle. Operator: This concludes the question-and-answer session as well as today's teleconference. You may all disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. Welcome to today's Colgate-Palmolive First Quarter 2026 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I'd like to turn this call over to Executive Vice President, Investor Relations, Claire Ross. Claire Ross: Thank you, Drew. Good morning, and welcome to our first quarter 2026 earnings release conference call. This is Clay Ross, Executive Vice President, Investor Relations. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Forward-looking statements inherently involve risks and uncertainties and are made on the basis of our views and assumptions at this time. Please refer to the earnings press release and our most recent filings with the SEC, including our 2025 annual report on Form 10-K and subsequent SEC filings, all available on our website for a discussion of the factors that could cause actual results to differ materially from these statements. These remarks also include a discussion of non-GAAP financial measures, which exclude certain items from reported results, including those identified in Tables 3 and 6 of the first quarter earnings press release. A full reconciliation to the corresponding GAAP financial measures and related definitions are included in the earnings press release. Joining me on the call this morning are Noel Wallace, Chairman, President and Executive -- Chief Executive Officer; Stan Sutula, Chief Financial Officer; and John Faucher, EVP, M&A and Special Projects. Noel will provide you with his thoughts on our results and our 2026 outlook. We will then open it up for Q&A. Noel Wallace: Thanks, Claire, and good morning, everyone. We're pleased with how we started the year as we delivered strong top and bottom line growth. Organic sales growth accelerated from the fourth quarter, driven by improved volume performance, particularly in Asia Pacific. Excluding the impact of private label pet food exit, we grew both volume and pricing in all 4 categories and 4 of 5 divisions. Our sales growth was led by emerging markets, the regions where our strong global brands generally have higher market shares and the greatest scale advantages. We believe emerging markets are accretive in terms of growth prospects and are investing in them accordingly. And we use the strong net and organic sales growth to deliver gross profit, operating profit, earnings per share and free cash flow growth while still increasing investment in our brands and capabilities. This encouraging start to the year gives us confidence in our outlook for the balance of the year, though significant increases in raw material and packaging costs, we have built into our guidance to reduce our expectations for gross margin for the year. When I spoke to you on our Q4 2025 call, I talked about the strength of our 2030 strategic plan. It's the choices that we made in building this plan, along with the flexibility that we've built into our P&L that allow us to deliver short-term results in a volatile environment while simultaneously building for the long term. And best-in-class companies need to do both short-term results and long-term strategy. Our global brands are driving broad-based growth by geography, by category and with volume and pricing. Our investments in advertising through our omnichannel demand generation model keep our brands top of mind with consumers in the moments that matter, and we continue to drive higher ROI even as we increase spending. We have built our capabilities in areas like innovation, data, analytics, digital, AI, and we'll continue to invest behind them and scale them across the organization. This leaves us well positioned to delight consumers with perceivable superior products to accelerate category growth and drive market share improvement. We believe our efforts in RGM, Promo AI and funding the growth give us the ability to drive profit and EPS growth even in a period of significant cost inflation. And our strategic growth and productivity program is another great example of how we're working to deliver in the short term while building up for our 2030 strategy. This morning, we announced an update along with annualized savings target of $200 million to $300 million, with the majority of the savings focused in 2027 and 2028. This is not an extension of the program as we still expect the program to be completed by the end of 2028. The savings will enable us to fund investments in capabilities to deliver on the 2030 strategy as well as to drive consistent compounded dollar-based EPS growth. More importantly, the changes we are making to our organizational structure by reducing complexity will help us build a more agile company that can thrive in an omnichannel environment. There is still uncertainty in how the rest of 2026 will play out, where oil will be, what will happen with interest rates, how the consumers will respond. But I can tell you is that we believe we've built a model that can deliver in this environment while setting us up for long-term success. And with that, I'll take your questions. Operator: [Operator Instructions] The first question comes from Dara Mohsenian with Morgan Stanley. Dara Mohsenian: So Noel, I just wanted to focus on volume mix. You clearly had strong results in emerging markets in Q1. Last year, you talked about reallocating marketing spend to some higher growth areas and opportunities. So I wanted to get a sense of how tangible the payoffs are from those efforts. Is that showing up in the Q1 results? And really, the question is how sustainable the volume strength in emerging markets might be going forward with those efforts, but also if you're seeing any negative impact post-Iran? And maybe while we're on the subject, on the other side, just North America continued to lag in Q1 and volume/mix. You did talk about improvement in Q2 in the published remarks. But just wanted to get more detail on the plans there, the level of improvement that might be realistic in North America. Noel Wallace: Yes. Thanks, Dara. Let me take the volume piece first. Clearly, globally, we're seeing volumes still be rather sluggish in our categories. So in that environment, you can imagine we're particularly pleased with the acceleration of volume growth in the quarter, certainly from the fourth quarter. And we saw that across almost all divisions and all categories, which is particularly pleasing to us. The broad-basedness of that growth, so to speak, is clearly showing up in the fact that emerging markets have accelerated. Asia Pacific was a big driver of that. We continue to see the interventions that we're taking with the Hawley & Hazel business, pay dividends for us moving forward. I wouldn't say we're completely out of the woods yet. The category continues to be pretty sluggish in China, but our business is executing better against the intervention strategies that we put in. The Colgate business continues to perform well. Latin America from a volume standpoint continues to hold its own, driving nice volume shares through the quarter. Africa, Middle East and Europe continued to do better than we expected, quite frankly, given some of the pricing that we've taken in those regions. And I think that's the other point. The strength of our brands is allowing us to drive that volume share. And that -- coming back to the initial part of your question, that the fact that we've continued to sustain high levels of advertising investment, particularly in emerging markets has allowed us to accelerate the growth. That, combined with good RGM, we had a good balance, obviously, of pricing in the quarter as well. So overall, we're very pleased with the volume results. Going on to North America. Listen, I was pretty clear on the fourth quarter call that North America was going to take some time. The interventions are in place. I know John and Shane are working very diligently on a strategy reset for North America. That's going to include some real brand interventions, accelerated innovation, more RGM, better execution, getting our promotion strategy right with some of the key retailers. So there's a whole myriad of different initiatives being taking place. And we started to see some of those come through in the back half of the first quarter. Volume was a little dampened by the fact that some of the shelf resets were later than we expected. The new product that we shipped in the first quarter came later as well. We started to see that accelerate as we exited the quarter. So plans in place to address North America overall, quite pleased with the sequential volume growth across all of our business, particularly in emerging markets. Operator: The next question comes from Filippo Falorni with Citi. Filippo Falorni: I was hoping you can give a little more color on the cost inflation that is currently embedded in guidance. I know you changed your gross margin guidance to down year-over-year versus up prior previously. So how much incremental cost inflation are you assuming? What are your assumptions on kind of like the crude oil underlying? And maybe if you can talk a little bit about a high level of the potential offsets as you get into the back half of the year and as we start thinking about next year as well? Noel Wallace: Yes. Let me just address it from a macro standpoint, I'll let Stan provide some more detail. Clearly, the assumptions that we have embedded into our guidance for the year include the $300 million of additional raw materials. We're assuming oil roughly at around $110. I think importantly, strategically, as we've always gotten ahead of the cost environment, we need to ensure that our operating units are planning for these types of inflationary environments that are coming. Clearly, we'll wait and see. There's a lot of ups and downs moving around the world, so to speak, on oil pricing. But for us, strategically, it's important that the operating units start to build this into their strategies on how they want to execute some of the strong innovation plans that we have for the balance of the year, how we execute funding the growth for the rest of the year. So again, we feel it's very prudent to get those numbers out there, and we built that into our guidance. Clearly, some of the inflationary environment has forced us to take the gross margin down for the year. But overall, we still feel we're well in line with our guidance on earnings per share. Stan? Stanley Sutula: Yes. Let me pick that up. Our assumptions for the year embedded in our gross profit margin guidance includes roughly $110 on average for the remainder of the year and the associated impact that has on raw and packaging materials. Since the fourth quarter call, we've seen an additional raw materials and logistics impact for the year of roughly $300 million. And you should think of that as roughly 2/3 raw materials and 1/3 logistics. The biggest incremental impact, Filippo, is coming from oil byproducts: resins, petrochemicals, fats and oils. And we now expect that spending in those areas to be up more than 20% year-on-year for the full year. So you can see the impact that, that has. Our logistics costs are up nearly 10% impacting both ocean and land freight. So that's what led us to take a look and put that into our guidance. And offsetting that is the work around RGM productivity across the entire P&L, which allows us to maintain our guidance. Unknown Executive: Filippo, just one other point I'd make on that is, yes, remember, the logistics goes into the SG&A not in the gross margin. So there will be an incremental impact in SG&A from that. Operator: The next question comes from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: I guess I had a quick question on your guidance. You maintained your top and bottom line guidance, but you highlighted gross margins will be more pressured. So maybe first, could you just maybe touch a little bit further on some of the key puts and takes on the gross margin headwinds. But ultimately, I'm curious if you see scope for incremental pricing. And then second, you talked about the flexibility you have to potentially pull forward some cost savings or productivity initiatives. So any more color on that would be helpful. I'm thinking about in the context of your ability to deliver on the bottom line. But I guess, ultimately, wondering if we should realistically think about your EPS coming in closer to the midpoint of your range or possibly below. Again, I'm just trying to understand how much flexibility you have there. Noel Wallace: Bonnie, thank you. So our guidance reflects what we believe is the increased volatility that we see today in the current environment. And clearly, we had a strong start to the year. So we've maintained our organic sales growth guidance in the 1% to 4%, and we're waiting to see what -- quite frankly, what impact that has on the consumer moving forward. I would say, currently, we're not seeing a significant impact, but time will tell. From an earnings standpoint, we're watching oil and other commodities, as you can imagine, to see where these prices settle out, but we feel very comfortable with our current range of low to mid-single digits. I would suggest you reflect the lower gross margin in your algorithm. It includes our increased oil and commodity assumptions for the balance of the year. As Stan just mentioned, with oil at a price of $110 for the balance of the year works out to an incremental $300 million across the board, including logistics in that number. So as you think of the rest of the income statement, understand that we remain deeply committed to offsetting as much of that as we possibly can. Clearly, the RGM efforts that we're executing across the world, we will possibly be taking pricing that will come through improved premium innovation as we execute some of the new product launches we have throughout the year. We'll look at price pack architectures as well. We'll look at mix opportunities as we move through the balance of the year. And as Stan rightfully called out, I mean, obviously, our SGPP program will allow us to offset some of that as well. But for right now, the clear indication that we have is margins will likely be down. And so we want to be prudent in getting that number out there ahead of time. Stan, anything to add to that? Stanley Sutula: No, just we have a regular productivity program outside of SGPP and our teams do an exceptionally good job executing that. So we'll be looking to drive that productivity. That is not just in the cost line. That also impacts SG&A. So as we look to drive that productivity, that will be one of the other flexibility points that we execute on. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: Noel, I was actually hoping to pivot back to APAC. You called it out in your prepared remarks as a source of strength. And in the prepared remarks, I think you noted India very briefly, just as kind of the main driver. So hoping to unpack that a little bit more, just India growth in the quarter? And then any help around just whether GST is really aiding that business and what you've seen so far? Noel Wallace: Yes. Thanks, Peter. I can't give a lot of detail on India. They haven't announced officially their numbers, but we did say, obviously, the growth in Asia Pacific were strong, and you can clearly connect that back to the 2 largest markets, which are China and India. So as I look at Asia Pacific in general, I'm really pleased with the acceleration that we saw in the first quarter. As I mentioned on the first question, we're not out of the woods yet on Hawley & Hazel, but they're making some very significant improvements in their execution and the strategic interventions we've taken over the last year are starting to take hold. One, we've accelerated innovation in that market. We're seeing that through the dual tube technology. That's in some of the prepared charts that we shared with everyone earlier. Clearly, that's having a great impact. We're getting our omnichannel execution, much more effectively implemented across the different platforms that exist, including Douyin. And so we feel good about where Hawley & Hazel is going. We've got some good brand work going on in the balance of the year, investment levels continue to be strong. And you couple that with the strength of the Colgate business in that market, which is executing very, very well. The Colgate business delivered mid-single-digit growth in a flat to declining market. So again, very encouraged by what we saw across China. That being said, if you go across the rest of the region, Philippines performed well. Thailand performed well. Malaysia performed well. Australia, a little softer than anticipated. But overall, Asia doing quite well. And clearly, some of the volume drivers that we -- volume acceleration we saw in the quarter was coming out of that region. Operator: The next question comes from Peter Grom with UBS. Peter Grom: So I was hoping to get some perspective on Latin America. Another strong volume quarter. Can you maybe just give us some more context on category growth and market share performance in the region? And Noel, you sounded pretty confident on emerging market growth from here in your response to Dara's question. So curious, just as you look ahead, do you expect this momentum to continue? And maybe specifically, do you expect to see continued balance from a volume and price perspective? Noel Wallace: Peter. Listen, Latin America continues to execute very, very well. We've got really -- I was down in Mexico and Brazil and Argentina in the last month and really pleased to see how some of the strategic capabilities that we're building and driving from the center, Latin America is definitely at the forefront of executing some of those. Clearly, their omni demand generation work is excellent, some of the work they're using AI for is excellent. RGM continues to be best-in-class and their in-store execution and driving numeric and weighted distribution across some of our adjacency categories looks terrific as well. So overall, they're executing terrifically and you saw the obviously mid-single-digit growth coming out of them and particularly the growth being Mexico and Brazil driven. So excellent results from that perspective. The innovation, I'll talk to for just a moment in Latin America, and we're seeing that across emerging markets. I talked a lot about that last year, how we're truly trying to step up innovation across all price points. And I think that bodes well as we set up an environment that will be more challenged from a consumer standpoint. We clearly expect emerging markets to continue to drive the growth for the balance of the year, and that will be driven by some of the changes that we've made on accelerating innovation at the lower price points and mid-price points while continuing to see the biggest strategic growth opportunity to be in the premium side. So you'll see that unveiled. The purple launch that we had in Asia that we've carried through Latin America now is doing very, very well. Our Home Care launch and some of the adjacencies that we've gotten into and the relaunch of our core business on Suavitel is performing quite well. So the good news is we have ample opportunities across the innovation to continue to drive growth. And I think some of the capabilities that we're executing from the center and Lat Am taking on gives us great confidence that they'll continue to perform well in the quarter. Operator: The next question comes from Andrea Teixeira with JPMorgan. Andrea Teixeira: I was just hoping to know if you can elaborate a little bit more on the -- how competitive the U.S. Oral Care businesses now? And I understand there were some setups on the innovation side. And historically, you have had a higher volume share, which sets you well for this type of like more RGM-driven market. So I was hoping to see how you left the quarter, you exited the quarter. And as you said those, if you see sequential improvement in market shares and how you're seeing that setup going to the balance of the year? Noel Wallace: Yes. Thank you, Andrea. Yes, very much the case. We expect sequential improvement in North America moving forward. The innovation came late in the quarter. We're getting that executed and some of the early signs are encouraging. But clearly, a lot more work to do in North America. And I have been through some of the strategic interventions that we're taking. I'm quite pleased with some of the decisions they're taking. The environment, to your point, is quite competitive. We see quite a bit of our competition spending a little bit more money on couponing. Nothing tremendously unusual, but one of our competitors certainly trying to drive more volume in that regard. So we will step up our investments in North America. Clearly, as we look at the balance of the year, that's a strategic growth opportunity for us, particularly in toothpaste, the toothbrush business continues to perform very well. And we're starting to see nice growth with some of the other categories as well. We've taken a much more aggressive stance on innovation, both in Home Care and Personal Care and particularly the early signs on Home Care are encouraging. So sequentially, the business should improve as we move through the balance of the year and shares should come right behind that. Operator: The next question comes from Chris Carey with Wells Fargo Securities. Christopher Carey: Just given the inflation is picking up over the course of the year. I just wanted to see if this adjust or alters your plan for pricing perhaps specifically in emerging markets where our pricing can move a bit quicker and whether that's factored in your outlook? And just as a follow-up on North America, the margins were a bit light this quarter. Any context on that and how you see those tracking from here? Noel Wallace: Yes. First on -- we'll watch the consumer very, very carefully. Clearly, there's been some compounded inflation over the last couple of years. We've seen that obviously lead to a little bit more of the sluggishness that we're seeing in the categories, but the categories have not worsened. And in fact, we think emerging markets are picking up a little bit. But we're going to watch that very, very closely. That being said, I mean, the key focus for most companies today is the inflationary environment and your ability to get pricing in the category continues to be critically important to maintain the margin dollars and the spending in the categories. And so I think you'll see pricing still come through as we move through the balance of the year. But that needs to be coupled with strong innovation. If we have the right value proposition, across our different price points. Consumers are willing to pay more. We've seen that coming out of COVID when we saw the inflationary environment then. So the key for us is getting the innovation executed and maximizing the opportunities we see both at the top end of the market in premium as well as making sure that we have a choiceful offerings at the bottom end of the market. So the answer to your question on pricing, we will take pricing where we see the opportunities. More of that will be innovation-led as we move through the balance of the year. But part of the reason why we wanted to get the raw materials into our guidance is to make sure the operations are planning accordingly. And we want to be very thoughtful about them thinking about where the cost environment is going so they can maintain the investment in the P&L moving forward. Stanley Sutula: I'll pick up the gross profit margin piece in North America. So their margins obviously are significantly pressured by tariffs on a year-on-year basis. If you recall, there was minimal tariffs in the prior year, but North America incurs the vast majority of them, and obviously, higher raw material costs. So we are lapping the highest gross profit margin quarter last year with no incremental tariffs and that year-on-year impact, we expect will be less going forward. Within North America as well, the actions that we're taking -- the raw materials is the biggest impact that we have. We will continue to drive the productivity to look to improve that margin and then the tariffs will normalize as we go through the year. Noel Wallace: Yes. The other thing I would add is the cost environment obviously is an industry issue and impacting everyone. So my sense is you will see some pricing move through the categories over time as people try to offset the inflationary environment moving through their P&L. For us, being proactive is very important to ensure that we protect the margin lines in the P&L to ensure we maintain the investment. Operator: The next question comes from Robert Moskow with TD Cowen. Robert Moskow: Noel, I was wondering what made you decide today or just recently to expand the scope of the SGPP program to $350 million to $500 million (sic) [ $550 million ]. What held you back last year from making that your original recommendation to the Board. Does it have anything to do with the higher cost environment that we're in now? Noel Wallace: No. I mean, the latter part of your question, no. I mean, clearly, we've been very proactive on putting that program together. And these programs are complex. I mean they involve a lot of different inputs and a lot of different assumptions, which the team here painstakingly goes through to ensure the assumptions are correct. I think what's so pleasing about the program, the fact that we got ahead of it is that we've seen the execution from our teams on the ground be a lot better than we expected. And a lot more ideas have come to the table as they thought it through in terms of the opportunities they have to simplify the operational structure of our business and drive more accountability across the enterprise. And so we're pleased with the fact that the programs have come in better than we anticipated, and there's been a lot of very interesting ideas that came through. You don't necessarily always know those. You know the big ones from the start. But the more important ones are how the operations are thinking about structuring themselves in a more efficient manner and those seem to be coming through. Let me turn it over to Stan, who has been driving this from the top and doing a wonderful job in making sure the teams are really proactive in thinking about the opportunities that we can go after. Stanley Sutula: Thanks, Noel. So first of all, the strong execution from the teams, when they -- when we first went in this program is a little bit different than some of our previous ones that it was addressed a little bit more methodically on addressing structure through spans and layers and items like that. The strong execution has gotten us to the high end of the initial targets. And then as Noel mentioned, we've identified additional opportunities since that launch of the program as teams look to simplify the operations, enhance the efficiency of how we operate day-to-day. Importantly, we're not extending the program. So this is going to still end by December 31, 2028. But as a result of these actions, we now expect that we'll be able to generate $200 million to $300 million of savings over the term of the program. And the majority of those savings we expect will flow through in '27 and '28. I think also an important note, as we said when we launched this program, we'll utilize these savings in 2 primary areas: to fund incremental investments, accelerating growth as part of our 2030 strategy, and that, of course, bottom line contribution. And we'll balance those based on the opportunities that we see and the overall market conditions. Operator: The next question comes from Olivia Tong with Raymond James. Olivia Tong Cheang: You flagged that even with the cost inflation headwinds, your plan to stay disciplined on brand spend. Clearly, a lot of your peers feel the same. But I'm wondering how your strategy and management of brand spend potentially pivots given the cost environment, looking for additional efficiencies, for example? And what's your view also on how this could impact the promotional environment? Noel Wallace: Yes. Listen, I think most of us in the industry understand that innovation is a clear driver of sustainable long-term growth. And the exciting aspect for us is the flexibility that we have in the P&L to ensure that we're supporting our innovation in a meaningful way. And that will continue to be the strategy that we adopt. That's been successful for us over the last couple of years, and we'll continue to execute that. And the combination of our strong funding-the-growth, our RGM and the productivity initiatives that Stan just took you through, give us confidence that we can continue to invest at healthy levels behind our brands, and that will help drive category growth in the long term. So clearly, we see an opportunity to elevate top line investment. I talked a lot about omni demand generation, and we're putting a significant amount of time within the company to truly understand the pressure points in omni demand generation and making sure that we have the appropriate understanding insights to drive persuasion and excitement behind our brands. And that might include different platform advertising, that might include increased focus on social commerce or agentic commerce. So we clearly, are understanding where the profit pools are, the revenue pools are, so to speak, and using our money wisely, and we're spending significantly more time understanding ROI as more of our money moves into digital advertising. So overall, we feel the increased advertising is something that will benefit us, benefit our brands. We're not necessarily suggesting that's going into promotion at all. Quite frankly, on the contrary, we expect our advertising, our thematic brand building work to be much more effective as we move forward as we accelerate advertising, particularly in some of the key geographies where we need more aggressive intervention relative to the success we're having. We also have brands where the advertising is driving real momentum across the world. Hill's is a great example of that, and we'll continue to accelerate growth in that part of the business where we're seeing great returns on that investment. Operator: The next question comes from Robert Ottenstein with Evercore ISI. Robert Ottenstein: Great. So I was wondering if you can talk a little bit more about Hill's, which has largely gone unnoticed so far in this call, except for your last mention. Can you -- first off, how is the category doing? Is there any signs of improvement? And then second, following on that competitive activity, how your innovations are going, how household penetration is. And then taking out the private label side, would you expect the core business to accelerate as the year goes? Noel Wallace: Yes. Robert, thanks. And thanks for bringing up a wonderful business that continues to perform exceptionally well. They had an impressive quarter in arguably what's a tough market. We delivered solid organic, I would say, both volume and price ex private label at 4.8%. The U.S. grew at 5%. So excellent growth on a top line basis way outperforming the market, which is roughly flat right now. As you saw in the prepared remarks, private label is a 260 basis point negative. That will continue to taper off. It will probably be on the total company, 20 to 30 basis points of negative impact in the second quarter, and then we should be out of that by the back half of the year. Our volume continues to be impressive on that business, excluding the impact of private label, volume was up 1%, which is terrific. We're seeing Science Diet and Prescription Diet continuously grow, particularly the Prescription Diet business had an exceptional quarter. We had double-digit growth in some of the areas that we wanted to go after, particularly on some of the strong indications that we're focused on. Importantly, as I mentioned on the fourth quarter call, we're seeing broad-based growth across that business across all of the key growing segments. The only part of the category that's suffering more than others is a dry dog. And we've seen that category continue to slip, and our growth was not where we'd like it to be. But across the growing segments, whether it's wet, whether it's cat, whether it's Small Paws, we continue to see nice, nice growth. We're gaining share across almost every single channel across the innovation that we put into the market, which is terrific. We're gaining shelf space based on the strong growth that we're bringing to our retailers. So overall, we feel very good about the business. We feel very good about the innovation cycle coming through the balance of the year. And the supply chain, as we've talked about a couple of times, continues to perform exceptionally well, giving us a lot more flexibility and leverage as we move through -- as we look through the P&L. So overall, the business is in good shape. We'd like to see the category turn a little bit more. I think that's going to take some time. But we feel we've got real growth opportunities in some of those segments I mentioned that we continue to be under-indexed in. Operator: The last question will come from Michael Lavery with Piper Sandler. Michael Lavery: I actually wanted to come back to Hill's, and I know you gave a lot of color just then, but I was wondering if you could unpack that consumer a little bit and just maybe what, if any, risk from higher gas prices on how they think about maybe trading up or getting a pet in the first place or just some of the kind of ways you see where that consumer sits in some of the various markets and if there's ways to think about how sustainable the momentum is from their point of view. Noel Wallace: Yes. Thanks. Recall and remember that we compete at the super premium end of the market on Hill's. And clearly, we'll continue to focus on real value-added innovation particularly on Prescription Diet side, which is an area where when you have a sick pet, you're very -- have to spend more money to address those issues in the Prescription Diet formulations that we have are absolutely outstanding and addressing a lot of the health concerns that pet owners have. And given the vet endorsement that comes behind that brand that allows us to continue to justify the premium price, obviously delivered by the strong efficacy that's delivered through that product. We're not immune, obviously, to the compounding inflation that will likely come in the market over the next 6 to 9 months based on where energy prices are today. But as I mentioned upfront, no different on the Hill's business, we have to continue to drive real value-added innovation into the category. Innovation that means something to the consumer. And the Hill's business clearly is -- at the center of that is the science. The science that we bring to the market is clearly differentiated in a very meaningful way. Hence, we have such strong endorsement from vet professionals to recommend the product. And that's the case across all of our advocacy-driven brands, whether it's oral care, whether it's skin health or others, will continue to drive real science-based innovation to make sure that we're bringing real value. And you balance that with a strong innovation across some of our big core businesses around the world, we find that we'll figure out ways to at least address some of the inflationary concerns to the consumer, but we're not immune to it. We're going to have to watch that very carefully. Okay. Well, thank you. I appreciate everyone, and thanks for listening in on the call today and your interest in the company. I hope you share our confidence that we have, the short-term plans in place, and more importantly, investing in the long-term capabilities of the company to continue to drive superior returns in what is obviously a very volatile operating environment. I want to make sure I thank the 34,000 Colgate people around the world who do just extraordinary work in a very difficult environment to deliver strong results and their tireless effort needs to be recognized and thanks. So we look forward to our next discussion. Thanks, everyone. Operator: The conference has now concluded. Thank you for attending today's call. You may now disconnect.
Operator: Good day, and welcome to AIG's First Quarter 2026 Financial Results Conference Call. This conference is being recorded. Now at this time, I'd like to turn the conference over to Quentin McMillan. Please go ahead. Quentin McMillan: Thanks very much, Michelle, and good morning. Today's remarks may include forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based on management's current expectations. AIG's filings with the SEC provide details on important factors that could cause actual results or events to differ materially. Except as required by applicable securities laws, AIG is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change. Today's remarks may also refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on our website at aig.com. With that, I'd now like to turn the call over to our Chairman and CEO, Peter Zaffino. Peter Zaffino: Good morning, everyone. Thank you for joining us today to review our first quarter financial results. Following my remarks, Eric Andersen will provide his initial perspectives on AIG and share some commentary on the quarter. And then Keith Walsh will provide more detail on our financial performance. Jon Hancock will join us for the Q&A portion of the call. We had a very strong start to 2026 and delivered an exceptional first quarter, the strongest first quarter that we've seen since I've been at AIG. During my remarks, I will share key first quarter highlights and discuss our outstanding progress towards our Investor Day objectives, provide a perspective on the Property market, since it's receiving a lot of attention this quarter, and outline the progress we're making on our AI and digital strategies. Before we get started, I'd like to take a moment to address the ongoing conflict in the Middle East and what it means for our people, our clients and the broader environment in which we operate. We have a significant number of colleagues in the region, and their safety remains our top priority. From the outset, our teams quickly shifted to enable remote operations, and we remain in close contact to make sure our colleagues have the support and resources they need. The impact on our industry will continue to evolve, and we remain focused on managing risk in a complex global market. Demand for expertise in property and energy, trade credit, and political risk insurance is increasing as clients navigate heightened uncertainty related to shifting trade policies. The direct impact on AIG is not material based on what we've seen to date, but we're not complacent. We're monitoring accumulation risk, adjusting underwriting guidelines where warranted, stress testing our investment portfolio and staying very close to our reinsurance partners. Just as important, we are continuing to stay close to our clients and brokers, helping them understand coverage, navigate claims issues and manage through this volatile environment. Now let me turn to our results. We had an excellent start to the year and have been very focused on advancing our strategic investments and delivering on the ambitious 3-year guidance that we provided at Investor Day in 2025. In order to achieve these objectives, we intend to continue delivering balanced net premiums written growth with excellent accident year combined ratios to support earnings expansion across our core businesses, while also focusing on our nominal expense base. Net premiums earned growth is expected to benefit AIG in the back half of 2026 and as we enter 2027. In the first quarter, General Insurance net premiums written increased 18% year-over-year on a constant dollar basis, driven by our Global Commercial Insurance business, which increased 21% year-over-year and our Global Personal Insurance business, which increased 11% year-over-year. All 3 business segments performed exceptionally well, supported by our recent strategic transactions, our differentiated reinsurance strategy and profitable organic growth that's in line with market peers. I want to provide a little bit more context on reinsurance. As I discussed during our fourth quarter call, AIG achieved enhanced terms and conditions and favorable pricing during the January 1 renewal cycle. We negotiated substantial year-over-year savings, which included the Everest portfolio, providing a meaningful tailwind to our net premiums written in the first quarter. It's worth noting that AIG's property catastrophe placements have lower modeled attachment points and higher exhaust limits for each geography on a risk-adjusted basis. For AIG, our strategy of maintaining a consistent low net retention for natural catastrophes through the cycle means that we will benefit from more attractive reinsurance pricing as evident in the positive impact to our net premiums written. We've discussed our Global Personal Insurance business in prior quarters, and I want to recognize the significant improvement in the financial performance, which has been deliberate. We grew net premiums written 11% in the first quarter, benefiting from the restructuring of our related reinsurance treaties and organic growth along with meaningful improvement in the expense ratio, which decreased 410 basis points. The accident year combined ratio as adjusted improved 570 basis points to 89.9%. The calendar year combined ratio was 89.4%, a strong improvement from 107.9% in the prior year. We continue to make outstanding progress in our Global Personal Insurance business. Shifting back to overall General Insurance financial results. The expense ratio was 29.3%, an improvement of 120 basis points year-over-year. The accident year combined ratio as adjusted was 86.6%, an improvement of 120 basis points year-over-year. The calendar year combined ratio was 87.3%, an improvement of 850 basis points year-over-year. Adjusted after-tax income per diluted share was $2.11, an increase of 80% year-over-year. Core operating ROE was 12.2%. Overall, we achieved very impressive financial results across the entire company, another exceptional quarter of execution from all of our AIG colleagues from around the world. Turning to capital management. During the quarter, we returned $760 million of capital to shareholders, including $519 million of share repurchases and $241 million of dividends. As we announced yesterday, the AIG Board of Directors approved an 11% increase in our quarterly dividend to $0.50 per share starting in the second quarter of 2026. This marks the fourth consecutive year of double-digit percentage increases and reflects the Board's confidence in our strategy and AIG's long-term outlook. Our total debt to total adjusted capital ratio was 17.7% at quarter end. As we discussed on our last earnings call, we've continued to reduce our ownership of Corebridge Financial. At the end of the first quarter, our equity interest in Corebridge was approximately 5.6%. We anticipate fully exiting our position by selling down our remaining stake in 2026, subject to market conditions. We expect the primary use of these proceeds will be for additional share repurchases. As we look ahead, AIG has tremendous financial strength and strategic optionality to execute against our objectives, profitability ambitions and our capital management priorities. Turning to the Property market. On our second quarter call last year, we spent time discussing the market's competitive dynamics and providing detail on our portfolio. I wanted to provide a further update based on current market conditions and the pricing pressure we have seen across the market on the U.S. large account segment. As a reminder, we have multiple points of entry into the global property market where we deploy capital for the best risk-adjusted returns. First, our balanced and profitable International Property business represents approximately 40% of AIG's $6.5 billion gross premiums written Property portfolio. I'm using gross premiums written because it's more accurate reflection of our performance without the impact of reinsurance. As a point of reference, the International Property portfolio's calendar year combined ratio was on average in the low 70s across 2024 and 2025. The International Property market rate environment is very different from the U.S. International pricing was down 4% in the quarter. And this was only the second quarter of rate reductions that we have had in the last 5 years. In the U.S., we have a strong performing Retail Property portfolio, which is majority shared and layered, and had calendar year combined ratios in the 70s in 2024 and 2025. In Excess & Surplus Lines, the Lexington middle market portfolio has performed exceptionally well. This has been one of the fastest-growing segments in Property and continues to deliver one of the best combined ratios in our Global Property portfolio. We've been deliberate in our growth and believe our AI implementation, which I will discuss later in more detail, will further enable this. The Lexington large account shared and layered business in Excess & Surplus Lines, which is less than 10% of our Global Property portfolio, has been under significant pricing pressure over the last year, and that's a different story. Given continued pressure on rate on a policy year basis and our general observations, we have been contracting our Lexington large account portfolio, and you should expect that to continue throughout the year if the current market environment persists. We have been and will continue to be more selective on new business within the portfolio, which decreased 19% year-over-year. Across the portfolio, we are willing to non-renew accounts that no longer meet our expected risk-adjusted returns. As part of this disciplined approach to underwriting, we're able to quickly redeploy capacity to areas of the market that provide more attractive opportunities for profitable growth. Now I want to discuss the progress that we continue to make on AI and digital. After years of extensive work exploring how to embed AI into our underwriting workflow, we outlined our blueprint at our Investor Day in 2025. That work reinforced our conviction that AI has the potential to materially improve performance and drive better solutions for our clients and for AIG. Our approach to using AI has been focused on 3 important components. First, you have to have an understanding of the technology and capabilities of large language models. Second, you have to have pattern recognition in order to know how to apply AI to your business. And third, you have to have a culture and a track record of execution in order to effectively deploy AI within an organization. While we expect the technology would develop meaningfully over time, we could not have predicted the rapid pace of advancement over the last 9 months or the breadth of AI's potential application. We started our AI journey at the core of our business in underwriting, where we felt the impact will be most profound. At the time, large language models could handle discrete tasks like answering a question or reviewing documents with limited autonomous time. In 2025, we launched Underwriting by AIG Assist to help our underwriters review our submissions with more and higher-quality information in a fraction of the time. After a successful launch, we began to deploy AIG Assist across 8 lines of business. We're very encouraged by the impact on underwriting metrics and improved data quality. In Lexington middle market property, which is an area we have targeted for growth, AIG Assist has helped deliver a 30% improvement on quoting more submissions, reduced time to quote for the underwriters by 55% and increased binding of submissions by approximately 40%. Now with advancements in reasoning models, AI agents can review, challenge and eventually recommend underwriting observations so that our underwriters can make more informed decisions and provide more robust insights to supplement their experience and underwriting judgment. We're advancing our business model and AI implementation programs to leverage this potential. To illustrate the magnitude of recent advancements in AI, when we began our work with Claude 2.0, AI agents could operate autonomously for less than an hour. Today, they can run autonomously for as long as 30 hours. This quarter, in close partnership with Palantir and Anthropic, we've begun the next phase of agentic AI at AIG that builds on early successes of AIG Assist. Using Palantir's Foundry platform, we expanded our ontology, a digital map of our business that included our underwriting processes, workflows and data relationships. This ontology, coupled with orchestration, will enable us to deploy multiple AI agent teams to integrate with our core systems, which will improve decision-making and reduce costs over time. As the logical next step in our AI deployment, we're creating a multi-agentic solution with a strong orchestration layer that coordinates specialized and trained AI agents to seamlessly supplement our underwriters' analysis and should further augment our underwriters' ability to assess risks and rate and provide coverage with real-time alignment. In this phase, we expect each AI agent to be purpose-built for a specific underwriting function. For example, one agent may handle submission ingestion and data extraction, another may perform risk evaluation against our underwriting guidelines and another could benchmark pricing against our portfolio targets, all with a collaboration agent to synthesize input from other agent large language models. These agents will communicate and handoff work to each other to augment our underwriters just like a well-functioning underwriting team, but operating at machine speed and with inherent consistency. To illustrate an example of how quickly agents can learn a business, I want to outline a beta test that was recently conducted by Anthropic. As part of a closed evaluation, Anthropic hired a professional claims adjuster to review 100 claims, ranked each as fraudulent or legitimate, and document the reasoning. Claude was then used to assess the same 100 claims. Claude's determination aligned with the adjusters 88% of the time, a very strong baseline for an out-of-the-box model with no claim-specific tuning. Fast forward to today, the latest version of Claude can elevate the performance of an entire claims team, surfacing patterns across submissions that are easy to miss when reviewing files one at a time, making our most experienced adjusters even more effective. Large language models can now hold a full file of claims information in context, every endorsement, every loss run, every guideline and reason across it with an audit trail. Examples of what Claude routinely flags include time line inconsistencies, geolocation mismatches, linguistic fingerprints, prior claim patterns, document tampering signals and coverage gaps. The intuitive nature of the large language models and its ability to learn all of the information the claims expert had access to demonstrates the potential of large language models to work alongside our underwriting and claims professionals to drive improved data, decision-making, more timely responses and more accurate outcomes. Importantly, we will be able to see what every agent is doing and can intervene in real time, if needed. Human oversight is and will continue to be essential to our underwriting processes. Overall, we're very pleased with the progress we're making, and we are beta testing the use of multi-agentic solution to enhance our team's productivity, efficiency and learning and development. AIG entered 2026 with significant momentum, and our performance in the first quarter was outstanding. We achieved impressive results in a complex operating environment, and have a very good foundation to accelerate our strategic progress. Finally, as I discussed last quarter, Eric Andersen joined AIG in February and will officially become our next CEO on June 1. Building on his decades of experience in the industry, Eric has hit the ground running, developing a detailed understanding of AIG, our business and our functions, and engaging with key stakeholders, including the AIG Board, colleagues, rating agencies, regulators and our clients, brokers and partners. We look forward to Eric's impact on leadership in 2026 and for years to come. Now let me turn the call over to Eric. Eric Andersen: Thank you, Peter. Good morning, everyone. I'm excited to join you today, and I'm honored to be part of AIG's leadership team at this pivotal juncture in the company's journey. I will begin by sharing my perspectives on AIG over the last 90 days since joining the firm. As you know, I served for decades as one of AIG's largest trading partners, and AIG has played an important part in my 3-decade-long career in insurance. In that time, I came to know the company extremely well, and gained deep appreciation for the valuable role it plays in the Global Property and Casualty Insurance market. Like many in the industry, I was impressed by the successful execution of the organization's transformation under Peter's leadership over the last several years. The company's balance sheet strength, improved underwriting, balanced portfolio, and ambitious strategic direction and powerful momentum were clearly evident. The time I have spent over the last several months meeting with colleagues, clients, distribution partners and other stakeholders have been invaluable and validated my earlier observations. AIG has demonstrated its ability to drive sustained profitability while balancing disciplined capital management with financial flexibility and building for the long term. This flexibility has enabled the execution of our recent transactions, which are already proving to be accretive to AIG's 2026 earnings. Our culture of underwriting excellence is firmly embedded across the company and is a defining attribute in which our team has great pride. Deep expertise, coupled with our commitment to prudent risk-taking, solidify AIG as a market leader, well-positioned to advise and serve clients in today's complex environment while utilizing reinsurance strategically to control volatility. As Peter has shared in depth, we are implementing a leading AI strategy designed to rapidly evolve alongside other advances in technology to deliver growth, data insights and quality decision-making. We expect our strategy to enable our businesses to be more effective over time. We have outstanding leaders. Our colleagues are highly engaged and the company is well aligned to deliver on our ambitious strategy and objectives. Before joining AIG, I thoroughly reviewed the strategy and how the company's plans for the future were outlined in our 2025 Investor Day. I believed in the strategy then and today, I want to reaffirm my commitment to the strategy and delivering on our Investor Day financial guidance, which includes: delivering operating EPS compound annual growth of over 20% over the 3 years ending 2027; driving core operating ROE of 10% to 13% through 2027; improving General Insurance's expense ratio to less than 30% by 2027; supporting the increase in our dividend by 10% in 2026; and achieving improvement in Global Personal Insurance combined ratio to 94% by 2027. I am encouraged by the strength of our results and I'm even more encouraged by the opportunities ahead. Our ability to grow is supported by our unique global platform, diversity of our products and distribution channels, risk expertise, complex claims capabilities, leadership across admitted and non-admitted markets, Gen AI capabilities and our spirit of innovation. I'm also committed to maintaining our underwriting discipline and culture. One of my personal priorities will be to work very closely with our clients and distribution partners to provide tailored solutions that address the rapidly changing risk landscape. As one of the largest U.S.-domiciled global insurers, we are proud to leverage our deep expertise in marine and war insurance and have joined other U.S. insurers in supporting the U.S. International Development Finance Corporation's Maritime Reinsurance plan to help restore confidence to the markets and support the flow of commerce in one of the world's busiest trade routes. This initiative builds on AIG's history of playing a central role in both public and private industry-led initiatives to deliver critical insurance solutions to respond to complex situations. Turning to our first quarter financial results. Let me provide an overview of our performance in General Insurance. First quarter net premiums written growth was superb and representative of our intent to position our business favorably regardless of challenges in the market environment and to capitalize on our recent strategic actions. North America Commercial net premiums written increased 36% year-over-year, with the growth largely driven by reinsurance changes and the Everest renewals in our Retail business. We continue to achieve double-digit growth in our Retail Casualty portfolio as the market conditions are largely disciplined in liability lines. Retail and Lexington property benefited from our successful January 1 reinsurance renewals. However, as Peter discussed, the U.S. Property market environment remains very competitive, and our teams are continuing to take a highly disciplined approach to the layers in which we participate and how we deploy line sizes as we continue to navigate the current rate environment. In Financial Lines, our team successfully continued to recalibrate in competitive D&O market segments where we are focusing on the value proposition of our differentiated offering and industry leadership. Western World, Glatfelter and Programs each had solid growth, which has been deliberate and Programs benefited from our new special purpose vehicle with Amwins. International Commercial net premiums written increased 12% year-over-year with the majority of growth coming from the Convex whole account quota share, Everest renewals and reinsurance changes, as the team prioritized organic growth discipline in a generally challenging rate environment. Global Commercial retention remained very strong at 88%. North America Commercial retention was 88%. And International Commercial retention was 89%. Global Commercial new business was $1.6 billion, including Everest renewals, an increase of 42% year-over-year. Our team has continued to make very good progress with the conversion of the Everest portfolio. Retention is performing within our expected range, reflecting strong support from our clients and broker partners who are intentionally choosing to work with AIG in a competitive market. The collaboration between our team and Everest has been extremely productive, delivering mutually-beneficial outcomes for both organizations. As Peter mentioned, Global Personal Insurance had a very strong quarter with underlying growth initiatives beginning to gain traction. The team has done significant work to improve profitability and growth over the past year, and we believe we should see continued progress in these areas. Before I close, I want to recognize the efforts of our team across the globe. They are doing an exceptional job navigating a dynamic market, prioritizing business with the highest risk-adjusted returns and collaborating with our clients and broker partners to identify optimal risk solutions. I'm looking forward to getting out on the road to meet more of our colleagues, clients, partners and investors around the world in the coming weeks and months. Our first quarter results were outstanding and reflect robust progress on our strategy, substantial growth and sustained underwriting excellence. This has been an incredible way to start the year from which we will continue to build on our tremendous position of strength. In closing, I am very excited to work with my fellow AIG colleagues to lead this remarkable company into the future. I want to thank Peter for the extraordinary accomplishments under his leadership to position us for success, and I look forward to continuing to work together as we capitalize on our strong foundation, disciplined capital management and sustained momentum. I'll now turn the call over to Keith. Keith Walsh: Thank you, Eric, and good morning. As Peter and Eric mentioned, we had a great first quarter, and I'm going to provide some additional detail. Adjusted pretax income was $1.5 billion, an increase of 65% from the prior year quarter. Underwriting income more than tripled to $774 million year-over-year, driven by lower catastrophe losses, improved accident year underwriting results and higher favorable prior year reserve development. Accident year underwriting income adjusted for catastrophes, rose 17%. This reflects transaction and organic growth while improving our underwriting margins, an excellent result in the current environment. On a constant dollar basis, General Insurance gross premiums written of $10 billion increased 7% year-over-year. Net premiums written of $5.6 billion increased 18%, reflecting strong growth across all 3 segments. For full year 2026, we continue to expect low to mid-teens net premium written growth in General Insurance. Net premiums earned were $6.1 billion, up 5% year-over-year. Moving to our underwriting ratios. General Insurance accident year combined ratio as adjusted was 86.6%, an improvement of 120 basis points from the prior year quarter. This improvement was driven by a lower expense ratio of 29.3%, reflecting increased operating leverage and expense discipline. Over the past several years, we have made significant progress in reducing our cost structure and improving the expense ratio while investing for the future. As individual quarters may reflect seasonal variability when thinking about the expense ratio run rate, it's better to look at the trailing 12-month trends and to model any improvement on a year-over-year basis rather than sequentially. The accident year loss ratio as adjusted of 57.3% was flat year-over-year. Total catastrophe losses for the quarter were approximately $180 million, with the largest losses attributable to winter storms. Prior year development, net of reinsurance and prior year premium, was $132 million favorable and included $127 million of favorable loss reserve development, $26 million of ADC amortization and roughly $21 million of reinstatement premiums. The favorable development was driven primarily by continued favorable loss experience, most notably in U.S. Property and Financial Lines. Overall, the General Insurance calendar year combined ratio was 87.3%, an 850 basis point improvement year-over-year. Moving to segment results. North America Commercial accident year combined ratio, as adjusted, was 85.5%, an increase of 120 basis points over the prior year quarter. This was primarily driven by a 90 basis point increase in the accident year loss ratio as adjusted due to changes in business mix as we reduced certain Property Lines and earned in more Casualty business. North America Commercial calendar year combined ratio was 85.5%, an outstanding result and an improvement of 840 basis points from the prior year. International Commercial accident year combined ratio as adjusted was 85.1%, an improvement of 30 basis points, driven by a 50 basis point improvement in the expense ratio. The International Commercial calendar year combined ratio of 87.3% improved 90 basis points year-over-year and was the 12th consecutive quarter of sub-90% combined ratio, underscoring the strength and consistency of the portfolio. Peter described the performance in Global Personal, and I'm going to add some highlights. We continue to improve underlying profitability and delivered strong performance across both net premiums written and underwriting income growth. Accident year combined ratio as adjusted was 89.9%, a 570 basis point improvement compared to the prior year quarter. The calendar year combined ratio improved over 18 percentage points year-over-year to 89.4%. We are encouraged by the progress we're making as actions we have taken to reposition the portfolio continue to earn in. Moving to pricing. We continue to take a disciplined approach to underwriting and pricing, prioritizing lines and accounts where we see attractive risk-adjusted returns. Starting with North America Commercial. Excluding the Property business, our North America Commercial renewal pricing increase was 7%, largely in line with loss cost trend. In North America Casualty, the overall pricing environment remains favorable with pricing in retail Excess Casualty up 14% and Lexington Casualty up 8%. In U.S. Financial Lines, pricing was flat, reflecting continued moderation of price reductions aligned with our team's strategy to drive rate in targeted D&O segments. In North America Property, overall pricing decreased 11%. The market remains competitive, as Peter described in his remarks. In International Commercial, overall pricing was down 1% and was slightly positive, excluding Financial Lines in the first quarter. Casualty pricing improved in the quarter, up 5%, benefiting from positive rate change on auto. Property pricing was down 4%, with modest variation by region while Japan continues to deliver both positive rate and pricing. Global Specialty pricing was down 1% and Financial Lines pricing was down 4%, a continuation of trends from the fourth quarter for both of these lines. Moving to Other Operations. First quarter adjusted pretax loss was $125 million versus the prior year quarter loss of $66 million. The difference was driven by lower net investment income and other of $54 million compared to $110 million in the prior year quarter, owing to lower parent liquidity levels in addition to lower Corebridge dividends. Given current short-term interest rate levels, we expect the second quarter Other Operations net investment income and other line to be in the range of $30 million to $40 million, subject to market conditions. Moving to General Insurance net investment income. First quarter General Insurance net investment income was $864 million, up 17% year-over-year. The increase was driven by our core fixed income portfolio, which grew net investment income by nearly 20% over the prior year quarter. This reflects the benefit of our proactive strategy to reposition the public fixed income portfolio. During the first quarter, we continued to reinvest at higher yields with the average new money yield on our core fixed income portfolio roughly 80 basis points higher than sales and maturities. The annualized yield was 4.61%, a 51 basis point improvement over the prior year quarter. The strong growth in our core fixed income portfolio was partially offset by lower alternative investment income, which was $6 million compared to $43 million in the prior year quarter. Private equity returns yielded 1.6% in the quarter, below our long-term expectation. It's worth noting that the private equity results are generally reported on a 1 quarter lag. Given the market volatility experienced in public markets throughout the first quarter, we expect second quarter alternative returns to remain below our expectations. Next, I want to spend a few minutes on our private credit portfolio, as we've slowed our deployment in this asset class given market conditions. We define private credit very broadly, as in everything that is not a public security. It includes commercial mortgage loans, investment-grade private placements, asset-backed finance and direct lending. Our direct lending exposure is about $1.2 billion, less than 1.5% of the General Insurance investment portfolio. It is a diversified portfolio of middle market loans with an average loan size of about $6 million. We hold all direct lending on our balance sheet, not through business development companies, and the software exposure is approximately $130 million or just 16 basis points of the General Insurance portfolio. We will continue to deploy funds in a wide variety of assets with key managers, including our new partners, CVC and Onex. Book value per share at March 31, 2026, was $75.82, up 6% from the prior year quarter, reflecting strong growth in net income as well as the favorable impact of lower interest rates, partially offset by capital return to shareholders through dividends and share repurchases. Adjusted tangible book value per share was $70.85, up 4% from the prior year quarter. In summary, we delivered a strong first quarter with excellent underwriting results. With that, I will turn the call back over to Peter. Peter Zaffino: Thank you, Keith. Michelle, we're ready for questions. Operator: [Operator Instructions] Our first question comes from Meyer Shields with KBW. Meyer Shields: Peter, I just want to start by saying, I've seen you take two companies from death's door to top tier, so congratulations on a phenomenal career. The big picture question that we're just trying to figure out now is that as leading carriers and brokers, both successfully adopt AI, how does that impact what the carriers pay to the brokers? And since you've been on both sides of that desk, I was hoping you could talk about how you expect that to play out. Peter Zaffino: Yes. Look, thanks for the question. And how we interact with the brokers, I think, is going to be more of how we all get so much more efficient in exchanging data and information on submissions. I mean, look between me and Eric, you've got two people here that have a lot of broker experience. And they do a lot more than gather data and do placement. They're giving massive advisory to industry groups across the globe. I think scale will matter over time. And as we look at the way in which data is being ingested through the mechanisms of a variety of large language models, I think we will be able to augment information that we get in submissions to be able to make better underwriting decisions. And what I was trying to give in that claims example in my prepared remarks is that not only are large language models sort of out of the box, not tuned, very capable and can give insight, but as they start to get trained a bit through experts, everybody benefits. And so the large language model gets more proficient, but also so does the underwriter, so does the claims executive in terms of what they learned in that calibration. So I think in the future, as enterprise becomes a much bigger part of large insurance companies and large insurance brokers, the ability to collaborate will get even stronger. Meyer Shields: Okay. That's very helpful. And then this is probably a smaller scope question. But I was hoping for any insight in terms of the impact of pricing on the Everest business. I know there's a mix of Property and Casualty. But I'm wondering how AIG's current pricing is impacting the gross premium volumes that you're bringing over from Everest? Peter Zaffino: Yes. Let me make a couple of comments, and then I'll ask Jon to maybe give a little bit of detail as he's been so intimately involved. Look, we looked at the portfolio in its entirety. We've been working very closely with Everest in the conversion. We've actually brought a lot of employees from Everest to AIG, and they've been doing a tremendous job. So they know the book. It's not as though you're handing off a portfolio from Everest to AIG without any insight. We have people here, terrific executives. Adam Clifford is running a lot of our International Commercial, doing just a fantastic job. And this has been a book that has been coveted by a lot. I mean we talk to brokers, there's a lot of inquiries about the portfolio. I don't want to go back to AI. But when we worked with Palantir on the ontology, we were able to get a look at the portfolio within a week about every upcoming month as to what the submission activity is going to be and what we like for pricing and what we thought we needed to restructure. And so we got ahead of that with the underwriters. And as Eric said in his prepared remarks, the conversion has just been outstanding, which just means that our broker partners want the conversion to go from Everest to AIG and the clients want that. And so I think that is really what I would want to take away and that the expectations in terms of loss ratio and combined ratio will be in line with what AIG's business has performed. But Jon, maybe you want to give a couple of examples. Jon Hancock: Yes. Thanks, Peter. I won't repeat things that you've said, but we're really pleased with this transaction. Everybody knows it's a renewal rights deal on business that we really like and complements our own portfolio. And I agree with Peter here. The biggest compliment I can give this book is that everyone else is chasing for it. And if you don't believe Peter, if you don't believe me, go ask the brokers because everybody is chasing for this business, so we take that as good. And when we talked about it last quarter, every indication we gave there still holds true. Now that the retention and the conversion is really strong, the ratios actually are just as we expected. We're 5 months into converting business, but obviously, we're a lot longer into that to understanding the portfolio through our underwriters, through our actuaries, through our partnership with Palantir and the way we did that. And we knew there were places in the portfolio where we'd want to reprice, restructure, play on different parts of the programs. And we're doing that. But there's also some other benefits here. We're collaborating really well with Everest. That's helped get that real support from our broker partners, that real will from our clients, they want to come to AIG. But it's also meant that we've been able to combine layers, everything's within risk appetite, take lead positions from follow positions. And as Peter said, we picked up -- we've been targeted. We picked up some real good talent on the way. That's great for our ongoing business, but it's great for helping us manage the Everest portfolio as well. Operator: Our next question comes from Brian Meredith with UBS. Brian Meredith: First, Peter, I just want to congratulate you also on this incredible transformation that you've led here in your tenure at AIG. It's really been impressive and wonderful to follow as an analyst. Yes. I guess the first question I have, I want to dive a little more into Lexington and the E&S markets here. Not only are the Property market is incredibly competitive, which you've been talking about here. But we've also heard from some companies, you're starting to see some cracks in Casualty, maybe some moderation in pricing rates, heard about terms and conditions softening up as well as maybe business moving back to the middle market from the E&S market. I'd love to get your perspective on that. Do you agree with it? And then what is the potential implications for AIG's growth in margins as we look forward here over the next, call it, 12 to 18 months on that? Peter Zaffino: Okay. Thank you. Let me try to unpack how you like -- approach like Lexington, and I think it's important to differentiate between sort of the large accounts, shared and layered, and then some of the middle-market business. I don't want to repeat what I said in my prepared remarks, but we see in the shared and layered in E&S and Property, rate decreases far and away cutting into margin and we're going to need to shrink the portfolio in the current environment. Just the one thing I would say is that we have a tendency as an industry to lock everything at the moment. We're coming into wind season. We're coming into an environment where there has been a lot of delegated authority, a lot of MGA writings and when there's CAT, sometimes it clears out, and there's opportunities. So we want to be positioned to take advantage of that. I would say the middle market, I outlined it in the Property sort of section, it has performed exceptionally well. There is a little bit more of a competitive rate environment, certainly in the middle market. But we see significant submissions, we see opportunities. They're selective. But I think as we start to get AI more embedded into Lexington, it's not because we see massive growth opportunities because the market is there. We see opportunities because we're not able to service the incredible submission flow, which has still been very strong. So I think there's going to be pockets of opportunities in the mid-market on E&S. And don't forget, like in the way in which wholesale brokers position themselves, I always put it into 3 buckets. One was pure E&S. The other was they became placement mechanisms for the 40,000 independent agents that exist within the United States that wanted more market and then they had the delegated authority MGA. So we're really kind of focusing on the middle bucket in terms of where we look at middle market, Property and Casualty. I do think the Casualty has become a little bit more under pressure from rates. I still think that we have very good returns, and we'll just watch that very carefully as we go into the back half of the year, but it's not in the same bucket as the way the property has been performing. Brian Meredith: Got you. Got you. And in terms and conditions, anything you can say there? Peter Zaffino: I think that's, like, on the ground, Brian. Like it depends on the industry group. It depends on the size and the class. I think, look, there -- in these markets, there tends to be a little bit more in terms of conditions. But what we're seeing is nothing that is concerning or a trend across the portfolio. Brian Meredith: Great. And then a follow-up, maybe more for Eric. Eric, so you're coming to a company now with significantly improved operationally, profitability, et cetera, et cetera, but also has a tremendous amount of excess capital. I'm just curious on kind of your thoughts on deploying that excess capital, thoughts on M&A and maybe how to increase the operating leverage here at AIG? Eric Andersen: That's a great question and thanks. It's great to be here. And just -- I know you said it, but I'll say it, too. The work that Peter and the team has done has just been outstanding in terms of organizing the firm. Listen, I think the opportunity is in front of us today with the plan that we've laid out right now in terms of how do we drive our organic growth, how do we continue to execute on the transactions that have been done, how do we evolve our offerings to meet our clients' needs in this risky environment. There's an awful lot to do over the next 12 to 24 months, just building on the strategy that we've laid out and really look forward to working with the team to make that happen. Peter Zaffino: That's great. And I would say, Brian, having been here for almost 9 years. We worked really hard to build that capital position, gave us the option value to do Everest, gave us the option value to assume risk for Convex. Eric and the team will be looking at opportunities. As the market gets more complicated, I think that comes with opportunity. And so like we have really worked hard on ROE. We know we have capital that we can grow into and we wanted just to provide AIG with as much option value as possible. Operator: Our next question comes from Bob Huang with Morgan Stanley. Jian Huang: Also I just want to echo what Meyer and Brian said. Peter, as a former librarian, if you write a book, we'll definitely read it. So just to put it out there. Peter Zaffino: Thank you, Bob. But I'm not writing a book. Jian Huang: Okay. No, totally understandable. So my questions are all on AI. I know there's a lot of emphasis on AI. So my question is a bit theoretical. So apologies in advance. When you talk about multi-agent collaboration and build out in underwriting functions, departmental level capabilities and then also the orchestration layer governing on top of it, it doesn't sound like a simple efficiency gain, but much more of a broader organizational and structural integration around AI. So is it fair to say 5 years down the road, 10 years down the road, there should be global-wide capability around that integration and coordination. And then there is a future state where your underwriting and your understanding of risk would be much more uniform globally. Does that sound right? I mean, is there like a future where the functions and then the coordinations will be globally across departments in underwriting? And then that's essentially where the differentiation between you and other more regional underwriters should be? Is that the right way to think about it as we think about AI integration going forward? Peter Zaffino: Well, 5 to 10 years, we couldn't predict a year out. I mean when we did Investor Day, that's why I wanted to highlight some of the significant changes in AI deployment and AI capability. I do think there's great opportunities to learn from different parts of the world and to be able to apply the ingestion, the large language model learning, multi-agent orchestration in terms of helping decision-making. Look, I think the most complicated part of the world is going to be Europe just because of GDPR and the use of data. It's very hard. And we've talked to a lot of our stakeholders there. It's very hard to beta test or roll something out in Europe without it being tested somewhere else just because of the complexity of how you're allowed to use data. So I think that -- look, there's a lot of differences across the world. A lot of Asia is very digitally enabled and very tech-oriented and believe that rollout and implementation, you have like different businesses that you need to customize. We're doing that in our Japan business. But I absolutely think in a 5-year period that the global capabilities in terms of the AI orchestration across an organization, just not in underwriting but across from front to back office will be profound. And I don't -- look, we're a large company, so I'm going to be biased, but I think you need to have size, scale and ability to beta test and try to work through this in order to get the most out of it. Jian Huang: Okay. Really appreciate that. Second question is around the AI expense costs. You talked about implementing Claude 2.0. Claude 2.0 has a lot of more token ingestions and inputs and things of that nature. As we think about just AI being much more of a variable cost rather than a fixed cost, when we think about your expense as we think about expense going forward, right? Can you maybe help us think about how that factors into your ROE considerations and things of that nature? Peter Zaffino: I think as we get into like '27, '28, not to punt to the poor, Eric, but like I think you'll start to get a lot more clarity in terms of what the expense components are of how we deploy it and what the benefits are on the revenue side. We've just begun. There's a lot of opportunities on the expense side. And why I haven't really spoke a lot about it is one is our first case was to go to the heart of the company, which is underwriting and then to go to claims. That's what we do. We're underwriters, and then in moments that our clients need us, we have to be able to deliver the best claims organization in the world, which under Julie Chalmers' leadership we're doing. So as we continue to move forward with the implementation of that, you're going to start to see benefits and efficiencies. What we're starting to work through now is more enterprise and how you actually can take the orchestration of agents. And we've moved more from Gen AI to agentic and now, we are going to look at how do you use autonomous with a lot of guardrails and supervision to work through reengineering our workflow. And with that, there's going to be a multi-agent orchestration. I can't give you a time frame. It could be '27, it could be '28. But I think there's going to be a lot of efficiencies that will create the bandwidth to reinvest in the business. And so how we're thinking about it at AIG is more capabilities, more insight, more benefit for brokers and clients, create our own bandwidth for investment by reengineering process and having the ability in certain markets to be able to grow exponentially when there's opportunities. Operator: Our next question comes from Michael Zaremski with BMO. Michael Zaremski: Great. Just a question on the loss ratio, which has been excellent. But I just wanted to -- it's one of the main questions we get from clients. You've done a great job explaining why the reinsurance helps ameliorate some of the downward pricing impacts. Your reserves look even healthier year-over-year. But ultimately, you're still living in a soft market. So I just wanted to make sure we heard that there's some core loss ratio impact as you mix into Casualty. But beyond that, should we just be -- just a little bit of kind of pressure from the soft market? Or I just want to make sure we don't get too maybe complacent or comfortable with just how excellent the loss ratio has been. Peter Zaffino: Yes. Thanks for the question. I think we saw in the first quarter evidence of the shift in mix of business with the accident year loss ratio increasing slightly by 50 basis points. Now the reinsurance did benefit that, meaning there's more net premium written and then there's a little bit earned in the first quarters, which will help us as we get into the second, third and fourth. But yes, as we look to grow organically more in casualty because we think that the pricing environment and the risk-adjusted returns are above loss cost and want to continue to do that, and we are doing that organically. And then the conversion of Everest on a Casualty basis as well as Financial Lines will change the mix a bit. And then the Property, it's hard to predict. I mean, I would expect that, that will, in the E&S, start to decrease how much we'll see where the market is, but we ought to expect E&S in the sort of shared and layered to decrease. But I tried to break out the overall Property portfolio, which has performed exceptionally well, and we got a 40% International business that is very predictable rate environment is not the same. And the other thing I would note, Mike, is that when the market was really in our favor a couple of years ago, and we were getting significant cumulative rate increases, we didn't always recognize that just in the loss ratio. We continue to build margin. We continue to put more into the overall loss ratio to make sure what we're seeing was going to be accurate. And as it emerged, it was better than we expected. So I think when you look at the loss ratios, why I broke down the reinsurance is that the reinsurance benefits because if you just say, look at our cost of goods sold, we buy a lot of property per risk, a lot of CAT, we're taking no more risk. I mean, so that's the other thing I just want to make sure I'm emphasizing is that when you look at the reinsurance and the savings, that's on same-store sales. Same attachment points, modeling goes up, it helps on the risk-adjusted basis. AALs, like there was no compromise there. We have a property per risk cover that's very comprehensive that we got benefits from. Every excess of loss treaty that we placed at 1/1 was at or better in terms of terms and conditions and pricing. And so that will benefit us. And then, yes, could there be some deterioration in the Property attritional loss ratios, which were exceptional? There could be. And so that will have a mix where the loss ratio could go up based on that mix over time. But we're highly confident that we can offset that with expense discipline, earned premium growth and the expense ratio will go down. Keith, he's already getting nervous, I can see him, that I'm going to give too much guidance. But I think when you look at what we put out in terms of the trailing 12 months, we're really getting after expenses. On a nominal basis, company has been incredibly disciplined and always performs exceptionally well. And then you have earned premium coming in. So I would expect the expense ratio to benefit the loss ratio, will reflect the mix, and we're going to watch the margins and make sure that our accident year loss ratios reflect our observations on the business performance. Michael Zaremski: That's thoughtful and helpful. And just lastly, as my follow-up for Eric. Congrats, we're looking forward to working with you. I mean, I don't expect you to kind of be able to specifically preview any changes you might make when you're officially in your seat. But just curious, you've been there for a bit now. Would you say there are some major changes or major projects you feel strongly about starting once you're in your seat based on what you've seen at AIG so far? Eric Andersen: No, that's a great question and I appreciate it. Listen, I would say other than -- let me maybe go back and tell you what I've been doing over the last 90 days and give you a little bit of context. So other than the onboarding process, in terms of digging deep into the firm itself, I've had a chance to meet with a lot of colleagues, a lot of clients, all of our distribution partners, and really excited about the vision and the strategy and where we are as a firm. And as always, it's always about execution, right? Can we continue to work with our clients and partners and develop those deep relationships? Can we continue to build a great business that obviously, you've all been recognizing today over the next journey? And listen, I think the strategy that we laid out on Investor Day, how we actually want to deploy capital, how we want to position the company to help our clients. I love where we are. I was excited about it coming in. And 90 days in, I feel even more strongly about where we are today. So I would expect, as you look at the rest of the year, I would say we are going to drive hard on the existing strategy and look to perform. Peter Zaffino: Thanks, Eric. And I want to thank everybody for joining us today. There's a few thank yous that I want to say before we leave. One is, I want to thank the sell side very much because it's been 9 years of complexity and your ability to dive in, try to be constructive, help learn so you can educate a variety of stakeholders has been hugely beneficial, and I'm very grateful for all that you did to allow us and enable us to make the progress that we did. I want to thank our employees. They did an incredible job. I've only worked in big companies for the 35 years that I've worked after college. And so I have a perspective. And in great companies, a lot of times, the positions matter. You need very talented people to be in those positions, but it's the positions and the people. At AIG, it's the opposite. It's the people that made a massive difference and the positions ended up becoming a big part of how we structure the company, but the will to win here is like nothing I've ever seen. And they've done an incredible job. They accomplished an incredible amount and just keep it going because like the best days are ahead for this company, and there's no doubt about it. And I just want to wish Eric the best of luck. As I said, the company is in great hands. Eric's been a student of the business and a practitioner for 3-plus decades, and this company is going to go from strength to strength. So I just want to thank everybody, and have a great day. Operator: Thank you for your participation. You may now disconnect. Everyone, have a good day.