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Operator: Greetings. Welcome to the SiriusXM's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jennifer DiGrazia, Senior Vice President of Investor Relations. Thank you, Jennifer. You may begin. Jennifer Digrazia: Thank you, and good morning, everyone. Welcome to SiriusXM's First Quarter 2026 Earnings Call. Today's discussion will include prepared remarks from Jennifer Witz, our Chief Executive Officer; and Zach Coughlin, our Chief Financial Officer. Following their comments, we will open the call for questions. Joining us for the Q&A portion are Scott Greenstein, our President and Chief Content Officer; Wayne Thorsen, our Chief Operating Officer; and Scott Walker, our Chief Advertising Revenue Officer. . I would like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based upon management's current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SiriusXM's SEC filings and today's earnings release. We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I'd like to remind our listeners that today's call will include discussions about both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock-based compensation. Additionally, please find a supplemental earnings presentation and trending schedule on our Investor Relations website for your convenience. With that, I'll turn the call over to Jennifer. Jennifer Witz: Good morning, everyone, and thank you for joining us today. We are off to a strong start in 2026, executing with focus and discipline against our 3 strategic priorities we outlined in December 2024, strengthening our subscription business by delivering exceptional in-car listening experiences, accelerating growth across our advertising business and leveraging our scaled SiriusXM portfolio to drive efficiency and long-term value. In the first quarter, we made meaningful progress across each of these areas, supported by solid performance in our core business and strong operational execution. On the subscriber side, we delivered significant year-over-year improvement in net additions, grew ARPU and achieved the lowest first quarter churn and highest subscriber satisfaction scores in our history. Through our recently announced landmark partnership with YouTube, we will significantly enhance our advertising capacity, and we continue to expand margins through our enhanced focus on efficiency, capturing $45 million toward our $100 million 2026 cost savings target. Before turning the call over to Zach for a more detailed review of our financials, I would like to offer a few observations. Starting with our subscription business, performance in the quarter was strong with a meaningful year-over-year improvement in self-pay net additions to negative 111,000, an improvement of 192,000. This reflects the growing adoption of companion subscriptions among our most loyal customers, ongoing progress with our continuous service initiative and momentum in our automotive dealer extended duration plans. Together, these offerings expand SiriusXM's presence across multiple vehicles and users within a household and make it easier for subscribers to seamlessly maintain service as they transition between vehicles, deepening engagement and reinforcing long-term loyalty. While we remain mindful of a more measured auto sales environment and its potential impact on trial volumes, our resilient in-car foundation and focus on controllable levers continue to support performance. Churn remained a standout, improving to 1.5% despite our February price increase, which contributed to a 1% year-over-year increase in ARPU to $14.99. The combination of pricing discipline supported by continually adding value to our packages and the ongoing impact of our customer experience initiatives underscores the durability of our subscription model. Our strong retention is also supported by high customer satisfaction levels. Our latest studies showed year-over-year improvement across all 5 core metrics: satisfaction, perceived value, likelihood to continue, likelihood to recommend and the essentialness of our service. Notably, both loyalty and perception metrics rose in tandem, an important signal of not only current satisfaction, but also growing confidence in the long-term value of our offering. We are also seeing traction across key demographics with the majority of the increase in satisfaction being driven by Gen X and Y. Gen X delivered strong gains, particularly in perceived value, intent to continue and essentialness, while millennials showed meaningful improvement in satisfaction and value, highlighting both the progress we are making and the opportunity that remains. Content is a defining strength of SiriusXM and a key driver of perceived value and engagement. We continue to expand and evolve our programming in ways that fuel fandom and deepen engagement across music, sports, comedy and culture. In the first quarter, we introduced exclusive full-time artist-led channels from Global Stars, Morgan Wallen and John Summit, alongside pop-up channels from BTS, Luke Combs and Robin as well as distinctive programming such as John Mayer Grateful Dead listening Party. We deepened our partnership with Metallica with the launch of the live call-in show, Tallica Talk, expanded Alt2K to our full subscriber base following 8 consecutive quarters of audience growth and broadened our comedy offering with a dedicated 24/7 channel featuring Sebastian Maniscalco. Our news and top category is also gaining momentum with consumption up 15% sequentially. This reflects continued investment in both independent and exclusive voices from the launch of Como Mornings to the strong performance of the Megan Kelly channel, where listening has grown 28% since its launch in November. We are also creating distinctive high-impact moments for listeners from intimate performances to major cultural events, featuring artists like Noah Kahan during Super Bowl Week, Kenny Chesney at Flora-Bama, Morgan Wallen in Nashville and a recent SmartLess taping in Hollywood. In sports, our offering is unmatched, spanning every major league and premier event from the NFL, MLB, NBA and NHL to college athletics, auto racing, golf and more, making SiriusXM a true year-round destination for fans. Our college sports offering continues to build momentum as a core part of our bundle with listening hours for March Madness and the College Football Championship up 22% and 37% year-over-year, respectively. At the same time, our hardware and software evolution continues to enhance the listener experience. As 360L expands across nearly all major OEM lineups, we're driving sustained growth in 360L-enabled subscriptions and increasing adoption of more personalized nonlinear listening. This is fueling double-digit growth in both usage and time spent with features like extra channels and artist-seated stations, deepening engagement. Turning to our advertising business. Momentum is accelerating. Advertising revenue grew 3% to nearly $407 million in the quarter, driven by a 37% increase in podcasting ad revenue. This reflects strong traction in video and social through our Creator Connect strategy as well as accelerating programmatic demand, where revenue more than doubled year-over-year through Google TV 360. Our partnership with YouTube marks a significant step forward. As the exclusive U.S. advertising representative for YouTube's audio inventory, we are expanding our reach to 255 million monthly listeners, nearly 90% of the U.S. population aged 13 and older. For the first time, we will offer advertisers scaled access to premium audio across a wide range of content from iconic franchises like SNL to leading creators like Mr. Beast as well as podcasts beyond our own network and streaming music. Beginning this fall, advertisers will benefit from expanded high-quality inventory paired with advanced targeting and measurement capabilities. By combining SiriusXM Media's leadership in audio advertising with YouTube's scale and always-on engagement, we are delivering high attention inventory through a more seamless buying experience while advancing a more open connected ecosystem for advertisers. In podcasting, we remain the #1 podcast network in the U.S. by weekly reach. As a launch partner for Apple's new video podcasting experience, we are helping shape the next evolution of the medium by unlocking dynamic video ad insertion and expanding access to a significantly larger advertising market. This uniquely positions us to power monetization across audio formats with greater flexibility and optionality for both creators and advertisers. These efforts reflect our commitment to an open podcast ecosystem that enables creators to grow across platforms. Across the portfolio, we are leveraging our scale, data and technology to unlock new growth opportunities and deliver stronger outcomes for advertisers. At the same time, we remain focused on building a high-performing, future-ready organization. We recently welcomed Yves Constant as Chief Legal Officer, bringing deep expertise across media, technology and content and further strengthening our operating discipline in support of our strategic priorities. Our progress is also being recognized externally. We were named by Forbes as one of the best brands for social impact and by Newsweek as one of America's greatest workplaces for culture, belonging and community as well as for women. Turning to our outlook. Our disciplined approach gives us confidence in delivering on our 2026 full year guidance, relatively flat revenue and stable adjusted EBITDA. While subscriber trends are expected to be modestly lower year-over-year, our focus remains on strong execution and driving continued free cash flow growth. Importantly, the fundamentals of our business remain strong. We have a durable subscription model, predictable and growing cash generation and a unique combination of assets, including premium content, unmatched in-car distribution, scaled audience reach and leading ad technology. We believe these strengths position SiriusXM well for the future, and we remain committed to disciplined execution, thoughtful investment and delivering sustainable long-term value for our shareholders. With that, I'll turn it over to Zach for more detail on the financial results. Zachary Coughlin: Thanks, Jennifer, and thank you, everyone, for joining us today. We delivered a solid start to the year with 3 key financial takeaways. First, we delivered revenue of $2.09 billion, up 1% year-over-year, supported by the strength of our subscriber base and continued momentum in advertising, where revenue increased 3%. Second, our disciplined cost management and a continued focus on efficiency drove approximately 6% growth in adjusted EBITDA to $666 million. And third, the strength and stability of our earnings and cash flow continues to create significant shareholder value with net income up 20% and free cash flow more than tripling year-over-year to $171 million. Together, these results underscore the steady progress we are making against our long-term strategic initiatives to enhance profitability and drive free cash flow generation. Looking first at the top line, consolidated revenue was nearly $2.1 billion, including $1.6 billion of subscription revenue, also up approximately 1% year-over-year. This growth reflects the early benefit of our recent February price increase as well as the full year impact from the 2025 rate adjustment, partially offset by a smaller average subscriber base. Advertising revenue increased 3% to $407 million as strength in podcasting, higher programmatic demand and technology fees more than offset softer demand in streaming music advertising. Turning to profitability. Adjusted EBITDA grew 6% year-over-year to $666 million, with margins expanding 140 basis points to 31.9% -- this improvement was primarily driven by revenue growth, complemented by disciplined expense management across our customer service, product and technology and personnel-related costs. Importantly, we captured $45 million towards our goal of delivering an incremental $100 million in gross cost savings this year, which includes $27 million in operating expense run rate savings and $18 million in CapEx savings. As a result, we generated strong bottom line performance with net income improving 20% to $245 million and earnings per diluted share growing 22% to $0.72. Free cash flow was $171 million, more than tripling year-over-year, primarily driven by higher adjusted EBITDA and lower capital expenditures. Turning to the segments. SiriusXM generated $1.6 billion in first quarter revenue, with subscriber revenue up 1% to $1.5 billion, supported by ARPU increasing 1% to $14.99. This reflects the benefit of recent pricing actions, including the February adjustment and the carryover benefit from the March 2025 change. SiriusXM advertising revenue declined 10% to $35 million, primarily due to softness in news, while equipment and other revenue at $41 million and $31 million, respectively, were relatively flat year-over-year. Gross profit increased 3% to $966 million, with margin expanding to 61%. While a softer auto environment, particularly following last year's tariff-driven pull forward in vehicle sales, created headwinds for trial starts, new acquisition programs and retention are supporting healthier subscriber trends. Self-pay net additions were negative 111,000, a 192,000 increase versus the prior year period. This was driven in part by growing adoption of companion subscriptions, which contributed 124,000 incremental self-pay net additions in the quarter. As a reminder, the companion offering is targeted to our most loyal subscribers and engagement has remained strong with continued marketing support and early indicators showing improved retention among those taking advantage of this benefit. This performance was further supported by continued progress in our continuous service initiative as well as momentum in automotive dealer extended duration plans, more than offsetting lower conversion rates. The stability of our subscriber base remains a core strength, reflected in first quarter self-pay churn of approximately 1.5%, the lowest first quarter level in our history. Notably, churn remained resilient despite recent pricing actions as we continue to evolve our packaging and pricing structure to better meet demand across different customer segments. With more than half of our subscribers having been with us for over a decade, we believe this performance underscores the strength of our enhanced value proposition and sustained customer satisfaction. Moving now to the Pandora and off-platform segment. Revenue increased 3% to $501 million. Advertising revenue grew 5% year-over-year to $372 million, driven by a 37% increase in podcasting revenue and higher programmatic demand and technology fees, partially offset by lower advertising demand for streaming music. We continue to expect modest growth in advertising for the full year 2026. Subscription revenue declined 2% to $129 million due to a smaller subscriber base. Segment gross profit for the quarter was $139 million with a margin of approximately 28%, representing a slight decline from 29% in the prior year period. As part of our ongoing efforts to simplify the business and sharpen our focus on higher return initiatives, we recorded a $6 million charge in the first quarter associated with restructuring and severance costs, which compares to $48 million in the prior year period. I'd also like to provide some context on the higher depreciation this quarter. As part of our ongoing portfolio optimization, we have begun decommissioning and planning the de-orbit of our FM6 satellite, reducing its useful life from 15 to 13 years. With XXM10 now in service, this capacity is no longer needed. We expect approximately $60 million of incremental noncash depreciation in 2026, including $3 million in the first quarter. This has no impact on free cash flow, but will reduce reported net income and EPS. Capital expenditures were $105 million in the first quarter, down from $189 million in the prior year period, primarily reflecting lower satellite spend and the timing of capitalized software and hardware investments. We continue to expect approximately $400 million to $415 million in non-satellite CapEx for the full year. Over time, total CapEx should trend lower with variability driven by the satellite replacement cycle. Near term, spending remains elevated as we complete our next generation of satellites, after which we expect a step down to more normalized levels. Now moving to the balance sheet. During the quarter, we completed a successful $1.25 billion refinancing, allowing us to retire all 2026 notes and redeem $250 million of 2027 notes, effectively extending maturities and strengthening our overall capital structure. And we remain on track to achieve our target leverage range of low to mid-3x by the end of this year. We also continue to return capital to shareholders, including $91 million in dividends and $21 million in share repurchase, driving efficiencies, optimizing the portfolio and prioritizing high-return investments. This positions us to reaffirm our 2026 outlook for relatively stable revenue and adjusted EBITDA modestly lower self-pay net additions versus 2025 and continued growth in free cash flow to approximately $1.35 billion with a path to $1.5 billion in 2027. The durability of our subscription model and the consistency of our cash generation continue to provide a strong foundation as we navigate the current environment and remain focused on long-term value creation. With that, I will turn the call back over to Jennifer to address recent headlines in the media. Jennifer Witz: Before we open the line for Q&A, I want to briefly address recent media speculation regarding SiriusXM. As a matter of policy, we do not comment on rumors, and we ask that you keep today's questions focused on our operating and financial performance. Our Board and management team are always focused on creating long-term value for our shareholders, and we'll continue to pursue that objective in a thoughtful and disciplined way. With that, I will turn the call back to Jen so that we can begin our Q&A session. Jennifer Digrazia: Thank you, Jennifer. Operator, we are ready to take our first question. Operator: [Operator Instructions] And our first question comes from the line of Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Jennifer, maybe on spectrum, it's become very much top of mind over the last few weeks. I would be curious just to get your latest thoughts around the opportunity that you see for SiriusXM to monetize some of its excess spectrum, perhaps the types of opportunities you're considering, whether that's building adjacent services, partnering with someone or an outright sale? And then how soon do you feel like these opportunities could come into focus here for the company? Jennifer Witz: Sure. Thanks, Stephen. Before we jump into Spectrum, I just want to acknowledge all that our team has accomplished since we refocused our strategy in December 2024. We are doing exactly what we said we would do. And as a result, we're seeing momentum really across the business. We continue to launch new in-car subscriber acquisition programs and maintain record low churn and high customer satisfaction. We are growing our ad revenue and leveraging our unique strength to support a significant new partnership with YouTube, which we'll talk more about today. And we're finding incremental efficiencies to lower our cost structure, resulting in an improving outlook for both revenue and EBITDA. And we're growing free cash flow to our target of $1.5 billion in 2027, reaching our leverage target later this year and giving us the opportunity to expand capital returns to shareholders. And then on top of all this, there's what you're asking about, which is how we're exploring ways to highlight the value of our spectrum. So I'm going to start on that, and then I'm going to hand it over to Wayne to give a bit more detail. But clearly, recent activity in the market has supported the point that high-quality spectrum is increasingly strategic and particularly as these new use cases have emerged like direct-to-device. So from our perspective, just as a reminder, we have a very unique position. We control 35 megahertz of contiguous spectrum in the 2 gigahertz band, which is a scarce and valuable asset. And of course, 25 megahertz of that today supports our core satellite radio broadcast operations. And we also recently acquired the 10 megahertz of WCS C&D block licenses, which are the 2 5 megahertz bands around the Starz band. These already support emergency and public safety services, but also obviously act as a guard band against potential interference from adjacent terrestrial use alongside Starz. So we have been regularly assessing monetization opportunities in our normal course of business. And as we have said in the past, we are in discussions with potential partners regarding various options because we see a path to value creation as starting with incremental partnership-driven opportunities, and that's going to allow us to capture some value while we maintain flexibility and upside over time. So maybe I'll turn it over to Wayne to give a few more details. Wayne Thorsen: Yes. And just to add to that, importantly, we do see the path to value creation being partnership focused as well as evaluating things internally, which we've said in the past, and our position there remains consistent. We've also said previously that we're engaged in discussions around potential opportunities with partners, and we continue to evaluate those as part of our broader effort to maximize the value of these spectrum assets. That said, we're not going to comment on specifics of any discussion as is our policy. What I would emphasize, though, is that we view spectrum as a strategic asset with meaningful long-term potential. And our priority here is ensuring that any potential use, whether internal or with third parties, fully protects our core services while creating the opportunity to generate incremental value over time. That includes support for, of course, our public safety initiatives, any new partnerships discussions, the in-house services that we may make use of given our dramatically increasing footprint of our wideband chipset and then, of course, making sure that we meet all of our regulatory commitments. Operator: Our next questions are from the line of Jessica Reif Ehrlich with Bank of America. Jessica Reif Cohen: I have 2 questions. The second one is a bit of a multiparter, so I'll start with the first. As media -- and I mean like video and audio continues to consolidate around scaled platforms, how do you think about the importance of incremental audience and advertiser reach, particularly across podcasting, streaming, national versus local ad sales relative to your current portfolio? And if you do conclude that there are assets or capabilities that could accelerate your strategy, how should we think about your willingness to use your balance sheet for more flexibility versus staying firmly within your current leverage framework? That's one, and I'll come back to the second. Jennifer Witz: Okay. I'll let Zach handle leverage in a minute. But first of all, I'm very pleased to have Scott Walker, our Chief Ad Revenue Officer and the Chief Architect of our partnership with YouTube on the call today. So I'm going to turn it over to him in a minute. But I think YouTube is so core to what you're asking about. So scale for us is 255 million listeners, which is access to 90% of the U.S. population, 13 and older. So we are very focused on this as our opportunity to expand scale. And a good way, I think if I just take a step back, to understand this partnership is to first focus on the consumer behaviors that you alluded to about video and audio and how these behaviors aren't necessarily fitting into these neat format boxes we've used as an industry, right? So consumers are moving more fluidly between formats. They're watching and listening as they go about their days. And for instance, they might start a video on their phone and then minimize the screen on their commute while they keep listening. So this behavior is happening at enormous scale on YouTube. And as a result, YouTube has become one of the largest audio consumption platforms in the U.S. So there are numerous examples of this, whether it's listening to music on smart speakers or listening to a podcast or an interview while your phone is in your pocket. All of these are examples of content consumed the same way people use traditional audio platforms. And this partnership that we have with YouTube brings that massive amount of untapped audio-first engagement to advertisers for the first time. And that's alongside a native ad format that actually matches the listening experience. So again, combined with our existing portfolio across music streaming, podcasting and SiriusXM, we will now reach 255 million monthly listeners, which is massive scale. And this tremendous reach positions us not only to grow overall ad spend, audio ad spend, but also to capture a greater share of that audio ad spend over time. And maybe, Scott, you can give a couple of more comments, and then we'll go to the sort of broader leverage question. Scott Walker: Sure. Thank you, Jennifer. I want to touch on one of the things that Jennifer mentioned anytime you can match up the ad format and natively integrate it based on how consumers are actually experiencing the content, it's better for the user and better for the advertiser in terms of performance, and that's exactly what we're doing here with this partnership with YouTube. In the battle for finite attention that is increasingly scarce to your question, we've just unlocked this massive untapped opportunity based on the insights that Jennifer referred to earlier, that consumers are much more fluid in how they use YouTube, switching back and forth across listening and watching. And one of the reasons why we are so confident in this opportunity is that it's a true partnership with YouTube. We are co-developing proprietary technology in terms of integration with our scaled systems with Google's ad platform, ensuring that we can scale our go-to-market and deliver a product that we know meets the criteria of the world's most discerning and largest audio buyers. Zachary Coughlin: Okay. And then Jessica -- sorry, to your question, Jessica, around the balance sheet -- sorry about that. Our capital allocation framework remains consistent with what we've outlined previously. First, we're prioritizing investing in the business, funding those initiatives that support our key strategic priorities. And I think we saw in the first quarter, those investments are increasingly translating into tangible financial results, especially in profitability and free cash flow. Second, we remain committed to a disciplined balance sheet. Our target leverage in the mid- to low 3x range, which we've communicated previously. We ended the first quarter at 3.6x and feel confident in our path to reach that target by year-end. And from there, it's really focused on returning capital to shareholders. We have a consistent dividend that we intend to maintain, and we see share repurchases as an important lever from that. So while buybacks have been more modest recently, as we've been working on deleveraging, achieving that leverage target will create additional capacity, giving us flexibility to potentially increase repurchases. So I think -- and finally, we'll remain opportunistic around incremental value creation, areas like our spectrum assets, which we've talked about a moment ago, or places we see longer-term optionality to unlock additional value as well as selective inorganic opportunities that must meet our strategic and financial criteria. So I think we see -- overall, it's a balanced and disciplined approach, both investing in the business, strengthening the balance sheet and positioning ourselves to enhance shareholder returns as we execute against those leverage goals. Jessica Reif Cohen: If I could just -- my second question is actually more specific on YouTube. If you could just dive a little deeper into like how you see this evolving. Google owned TV 360, which you mentioned earlier, does that now become your main programmatic DSP? And actually, maybe you can unpack a little bit about what you're seeing in programmatic in general, how -- what percentage is, how fast it's growing. But the other part of YouTube is that it is a global platform. And you have so many channels that lend themselves to global audience. I know this hasn't come up in probably years, but would you rethink that strategy? Jennifer Witz: So Scott Walker, why don't you start on the advertising side? And then Scott Greenstein pick up the content side. Scott Walker: Sure. On the programmatic question specifically, we feel like we're strongly positioned with our proprietary ad technology platform, as was in terms of our ability to plug into all of the major DSPs in order to make that buying as flexible and easy as possible. And as it pertains to this YouTube partnership, specifically, initially, programmatic is not part of the partnership, but we see a massive opportunity to unlock advertiser demand based on this incremental reach that we speak to despite that. In terms of where programmatic is growing, it's certainly growing as a percentage of the overall spend in digital media. And that trend continues in our business as well. Programmatic is growing at a healthy rate. Our partnership with the Amazon DSP is an example of where we see incremental budgets being unlocked. And programmatic with respect to podcast is also growing. Jennifer mentioned triple-digit growth rate year-over-year in Q1, reaccelerating. Scott Greenstein: Great. And Jessica, on the international question, the podcasts are currently distributed where they make sense overseas on that side. And then as far as the content goes, we're open for any deal or any licensing situation. It just has to make sense. The good news is with the amount of content we have under license, a lot of it is worldwide and the relationships are there. So if ever it comes a point where whether it's through technology or a licensing deal, the relationships will be there, and it will be a pretty easy transition to open up negotiations to go further on that. And we also have the unique ability to create content for any market that might be adjacent to what we're doing. Jessica Reif Cohen: Million more questions, but I won't hog the call. . Operator: Our next question is coming from the line of Barton Crockett with Rosenblatt Securities. Barton Crockett: Okay. Great. Congratulations, again, on the YouTube deal. To kind of ask a little bit more about this deal there could be such a large kind of funnel of revenue flowing through. But I was wondering if you could give any sense of the degree to which the lion's share of that would be stay on Google's kind of side of the ledger and how much of that you guys might be able to extract for your efforts? How do you kind of think about the take rate essentially on the deal? Anything you can say about that? Jennifer Witz: I think -- look, there's -- right now, we're prepared to talk about the size of this, the magnitude of the scale and how we're going to increase our reach. And we expect to launch in the fall, as we've said. And I think we're going to ramp this up over time. I don't think it will have a meaningful impact on this year's numbers. But as we go into 2027, we'll have the opportunity clearly when we provide guidance to give you a better sense as to the magnitude. But we've given you some general numbers on the scale of it. And I think we will be watching, obviously, the magnitude of the incrementality of this audience reach relative to where we are today, which is very significant, obviously, with $1.8 billion in ad revenue across our properties. So that's what we're prepared to share today, but we do believe it's a significant opportunity for us, and we can share more on general economics as we get closer to the end of the year. Barton Crockett: Okay. All right. That's fair. And then I apologize if this has already been covered, but with all of the kind of activity around space with SpaceX and with Globalstar and Amazon and the recent kind of SEC weird space NPRM giving you guys some telemetry trafficking and control capability potential with your spectrum if that moves ahead. To what degree do you think there's potential for you guys to be meaningful players in the space ecosystem, leveraging some of your spectrum rights? And how could that kind of play out? Jennifer Witz: So look, I think you mentioned the weird space testing, so I'll just touch on that. We have had discussions with the FCC related to this. And from our perspective, this is a constructive step as it continues to formalize, clarify the rule of TT&C. And it's a legitimate important use of satellite spectrum. And so it recognizes that we have the right to be protected from interference and also helps direct how other parties could use the satellite spectrum productively. And look, there's going to be a lot of different ways that I think spectrum -- the use of spectrum evolves over time. And this is a good example of where multiple tenants could use the same spectrum in a very methodical way. And we -- that's one of the examples, I think, of the things that we could look at going forward to unlock more monetization opportunities. Wayne Thorsen: Yes. Thanks, Barton. This is Wayne. And I would add that we do see optionality here, as we've mentioned previously, but we see this optionality will be realized over time. So not through a single step, but along a multiyear glide path sort of shaped by what we think of as 3 factors. First, the subscriber and hardware ecosystem that we have. We have an installed base throughout the entire satellite radio band, including on the legacy Sirius band and more importantly, millions of vehicles on the road with embedded radios and OEM commitments tied to the spectrum. Second, the technology migration. So we're already developing next-generation chipsets and 360L hybrid radios that can use both Sirius and XM bands. And so this gives us increasing flexibility over time to make use of this. So today, we have millions of vehicles that are already enabled with this new chipset. We expect this to grow to more than 65 million by 2029. And then third, regulatory obligations. Like our licenses come with requirements to provide specific services that, of course, we will need to continue to meet. Operator: Our next question comes from the line of Bryan Kraft with Deutsche Bank. Bryan Kraft: I had a couple on advertising as well. I guess, first, could you talk about the capabilities that 360L has the potential -- sorry, the capabilities 360L has the potential to bring to your advertising business? And what plans you have to activate those capabilities? And also things like addressability, measurement, those sorts of opportunities? And could you give an update on the advertising supported tier and at this point, where you see that going? And then I just had a follow-up on YouTube. Google is obviously quite a large sophisticated player in digital advertising with scale and technology. Can you just talk about why a player like YouTube would view working with Sirius as better than doing it themselves? And if you could also talk about whether you see this partnership maybe leading to additional major partnerships in the future? Does it sort of open the door to more opportunities like this? Jennifer Witz: So I'll let Scott address the second part, and I'll talk a little bit about 360L and Play. With 360L, we do believe there's an opportunity for more addressability for audio advertising in the car. And we're expanding, obviously, the volume of vehicles on the road that have 360L -- we haven't yet unlocked real targeted ad capabilities inside 360L. We are looking to do that over the course of this year even potentially. But clearly, the focus now is on executing on YouTube and making sure that we can launch that as it's a much bigger scaled opportunity. And then on Play, I'd say it's similar. We are leveraging play as an opportunity to broaden the top of the funnel as with many other of our lower-priced packages, and it's been helping there to do that. The ads inside of it are -- today, the scale isn't as significant because, again, we're using it as a way to market and get customers into higher-priced packages. But in the future, as we unlock more addressability in the car, obviously, it would benefit Play as well. And Scott, do you want to handle YouTube? Scott Walker: Sure. When YouTube first came to us, the insight that they brought was that audio is a unique channel. And relative to other media channels, YouTube is very much considered a default video platform, and that was the focus for most of the advertisers. And the awareness that there was massive listening behavior happening on the platform was just not there. So the first point is that the recognition audio is a unique channel that requires a sales team that has honed a different approach or a different craft in terms of the relationships with the buy side, the creative nuances around audio, our measurement expertise, and we have a proven track record of over 20 years of defining the digital audio category and really the ad market within that. So I think our reputation in the market with advertisers and with creators speaks for itself and Google and YouTube recognize that. And on that last piece, it was clear that we have delivered for YouTube creators on the podcast side. Some of our biggest podcast creators in our network, whether it's Mel Robbins, Konan O'Brien, Alex Cooper, they're all massive players in terms of usage and engagement on YouTube. And we have clearly demonstrated best-in-class monetization through our embedded sponsorships on YouTube, and that was yet another signal that we were the right partner for this opportunity. Bryan Kraft: And the last part of it was, do you think that this is something that could open up additional partnerships? YouTube is obviously very unique, but are there other potential players that may see this, what you're doing with YouTube and say that's probably a party that we ought to join? Scott Walker: Yes. We have certainly expanded and diversified our advertising business over the years by broadening into a larger network of both streaming partnerships with the likes of SoundCloud and our #1 podcast network, where we have the most shows in the top 20, 4 of the top 10 and #1 position in terms of weekly reach. So this was a natural evolution of that strategy of diversifying and leveraging this amazing demand engine that we've created on the audio side to help YouTube monetize this content. And success here and demonstration of our ability to be successful, I think, opens up doors beyond this certainly. Operator: The next question is from the line of Sebastiano Petti with JPMorgan. Sebastiano Petti: Just closing the loop on the spectrum stuff. So I guess, Wayne, based on your comments to "protect core services and that this will take a number of years and FCC obligations as well as OEM obligations. My interpretation is that any notion that you could "force migrate subscribers off of the lower 12.5 megahertz is probably outside the bounds of probably something you guys are contemplating? That's my first quick question, and then I have a follow-up. Wayne Thorsen: Yes. Thank you, Sebastiano. I'd say that we don't have any plans at this point right now to force migrate, of course, but we're always evaluating how we can best serve our customers, and we have millions of customers currently on this band. And so as we're thinking about the opportunities to do something more strategic or create more strategic value here, certainly, we're thinking about timing. But timing in all of these cases, the timing of a start of an opportunity is, of course, different than the timing of being able to catalyze an opportunity. So we're -- all of these plans need to be thought through in multiyear stages, even if other things happen first and with partners or others. Sebastiano Petti: Got it. And then in terms of timing, I mean, my understanding, I think, is you're unable to really kind of do anything with this lower 12.5% until it is fully cleared. And I think based upon I think, Jennifer, you may have touched upon in previous conferences recently, but we're looking at, what, 5 years for the spectrum to still be cleared. And so is that like the inside of how we should think about when monetization could potentially occur on the spectrum? Jennifer Witz: I don't want to be too specific because as we've said in the past, we've had a long runway on the spectrum with the subscribers there being very sticky. But I would suspect it's inside of 5 years. We've also talked about C&D, where there's maybe more opportunities in the nearer term, the 10 megahertz on either side. But I also think just with the NMPRM about weird space stuff, again, that there are some opportunities to do things while we have active subscriptions in that spectrum, probably limited, but there are opportunities. And of course, I think Wayne touched on this a little bit. There's just -- there's a long runway for how another potential partner would actually execute on this. And so that timing actually could be quite consistent. Operator: The next question is from the line of David Joyce with Seaport Research Partners. David Joyce: You had impressive uptake with the companion strategy earlier this year. Do you see that continuing? What strategies do you have to keep driving that for the overall subscriber platform? Jennifer Witz: Sure. So first of all, we're very pleased with our Q1 subscriber performance, especially after a strong Q4 last year. And the companion subscriptions clearly contributed to that, and we noted that they were 124,000 in the first quarter and as well as continuous service and expansion of our auto dealer extended duration plans. And with companions, the great thing about it is that we've been talking about kind of 2 themes as it relates to our subscriber performance and future growth as well as revenue, one being enhancing subscription value and the other being expanding access. And companion really does both, right? It expands access to SiriusXM to more listeners across the household and also enhances the value and improves retention of that subscription household. So we're really pleased. I think the question really is, as we -- we've been successful in the marketing, I think beyond our expectations actually. But how long does that last? And does the -- sort of do the take rate start to mature at some point over the course of the year. But we're also looking at where it may make sense to expand availability. So that's why we're being cautious and not changing the context we've provided about subscribers for this year. That as well as what Zach noted earlier in terms of auto sales and how those could materialize. There's still pressure on gas prices and impact on the consumer. Operator: The next question is from the line of Kutgun Maral with Evercore ISI. Kutgun Maral: I wanted to ask another one on advertising. You made a lot of progress building out the ad business with new capabilities and innovative partnerships. But it still feels like that opportunity doesn't get full attention from investors given the much larger satellite subscription revenue base. So as you think about the portfolio from here, is there any interest in reshaping the business to better highlight your advertising capabilities and opportunities, whether it's through additional scale via M&A or potentially a clear separation between the satellite subscription business and the Pandora and off-platform side. And I know we're, of course, not talking about specific deals, but what I'm really trying to get at more so is if there's a big focus right now to better match what I see as the strong execution you're demonstrating on advertising against unlocking value in the share price? Jennifer Witz: So we have the 2 segments, which gives you, I think, some exposure to the Pandora and off-platform segment, which is the vast majority of our advertising. And so -- and we provide a fair number of metrics there, but it's a good point. And obviously, with the increasing scale, we will find ways to provide, I think, more metrics around the advertising business going forward. I do want to touch on M&A because you mentioned it. And just note that we see significant opportunity within our existing businesses and whether that's obviously executing and expanding our reach through partnerships like YouTube, but also improving monetization across our ad-supported businesses, like we've done with Creator Connect or Apple Podcast better targeting and measurement tools and of course, enhancing the value of in-car subscriptions and unlocking the value of our spectrum assets like we've talked about. So these are the areas we're focused on day-to-day, and we believe they offer the clearest line of sight to high-return opportunities. And Zach mentioned that we'll continue to look at and be opportunistic on inorganic M&A and inorganic growth, but we're going to be very disciplined about that. Operator: The next questions come from the line of Steven Cahall with Wells Fargo. Steven Cahall: So I just wanted to make sure I understand the subscriber guidance for the year. I think you said that you'll see modestly lower self-pay net adds. I think you lost around 300,000 last year. So should we kind of think about companion as slowing as you get through the rest of the year? Could we annualize what you did in the first quarter for companion for the rest of the year? I'm just kind of trying to understand what core net adds are doing. I don't think companion comes with any revenue contribution. So just trying to understand kind of what the core base looks like, excluding companion. And then I have a quick follow-up. Jennifer Witz: So I can ask Zach to comment on the sort of context we provide around subs. But I do want to note that you're correct about companion in terms of not adding specific revenue for those subscriptions. However, it was part of our strategy to ensure that we're adding value before we increase subscription prices. And so we've now done this 2 years in a row very successfully. And we see actually higher retention among households that are taking companion subscriptions. And it's logical because there is more engagement across the household. So it does result in not only providing a benefit for us to successfully execute on rate increases, but also just driving more engagement. So I do believe it translates through to overall revenue. And as I mentioned a bit before, we're just being cautious, I think, about the year in general. But on companion specifically, that we continue to market and look for other opportunities to perhaps use it, especially perhaps in acquisition as more of a family plan. But I would expect the program to mature as we offer it to a specific set of our full-price subscriptions. Zachary Coughlin: Yes, for sure. I think you've got it right, Stephen, regarding our guidance and the numbers around the self-pay net adds. I think one thing to add to what Jennifer was saying, just numerically, if we take a look at ARPU, we're actually really pleased with that as well. So we're getting the subscriber growth, partially companion program, and we're also seeing ARPU up 1% versus last year. Obviously, the primary driver of that was pricing, reflecting the rate actions. But I think what's important is that the ARPU growth is not coming at the expense of the broader health of the business. Alongside the higher ARPU, we're seeing improved subscriber trends, record low first quarter churn stronger engagement and continued gains in customer satisfaction. So I think you have to look at all these together. And as is really a measure of the quality of the subscriber base. So we're driving higher monetization while strengthening retention and overall customer value. And I think this is our third quarter of ARPU growth, and we would expect that to carry through the rest of this year as well. So I think the composition of all of that shows the strength of sort of the actions that we're taking. Steven Cahall: And just a quick follow-up on conversion. I think there's a few things going on in conversion. So I think a tailwind for how you account for the auto dealer duration plan. So can you give us any more color on contribution from those plans, which seem really positive? And then you did call out a little bit lower conversion, I think, on self-pay. I think those historically were in the mid-30s. Any sense of where they're kind of running today? Jennifer Witz: Yes, Steven, we continue to see some of the same trends we've seen in the past on conversion rates. And we have had slight declines as younger car purchases come into the trial funnel and then, of course, used conversion rates lower than new. And the good news is that we just have so much more data. And with all the personalized marketing capabilities we're building, and are coming even later this year, we can address customers in a much more personalized way in our marketing, whether they're listening or not or based on their content preferences. So I think the single biggest opportunity for us continues to be with 360L rollouts. And we're at about, I think, 55% of sales by the end of the year with the OEMs that are ramping, we'll be at 70%. And we do continue to see 360L conversion rates better than non-360L. And as we ramp 360L on AAOS, which can be updated much more quickly, we see those conversion rates even higher. So these are the tailwinds. Our extended duration plans also help. And we're hopeful that we can start to stabilize some of these trends and we're intently focused on conversion rates as a measure of demand, but we also have many other demand-focused programs in place that wouldn't necessarily show up there, right, such as companion subscriptions or Podcast Plus and some of these other programs that we put in place. Operator: The next question is from the line of Cameron Mansson-Perrone with Morgan Stanley. Cameron Mansson-Perrone: Jennifer, you started the Q&A talking about the way the team has executed over the past couple of years. First quarter results are pretty encouraging. I'm wondering if you could provide some color given the reaffirmation of the full year guide, just how you're thinking about growth in the balance of the year. Jennifer Witz: Yes. Maybe I'll let Zach take that one. Zachary Coughlin: Yes, for sure. I think thanks, Cam, for the question. I mean it was a really good first quarter, revenue growth of the 1% and importantly, growth across subscriber revenue and advertising, both sides of that. And then combined with the strong cost discipline, EBITDA growth of 6%, net income, 20% EPS, 22%. So some really good metrics. And I think in cash flow, cash flow -- free cash flow tripled and free cash flow per share increased 217% to $0.51. So when we provided guidance last quarter, we talked about how important it was to provide the stable outlook, and we're off to a great start. So I think beyond that, we feel very good about the start of the year and the progress we've made, which does increase our confidence in the plan. But that said, it's still early in the year, and there's a lot of time ahead of us. When we look at the full year outlook, the underlying assumptions of our plan really haven't changed. But we are continuing to monitor the auto environment closely. We've seen some softness there, particularly in the OEM funnel. And while we haven't seen any change in customer behavior to date, churn and engagement remains very strong. We're also mindful of the broader macro backdrop. So given that, we just think at this point in time, it's appropriate to remain disciplined order outlook while staying focused on executing through the rest of the year. So as we continue to see strength in the business, it's something we'll revisit as the year moves forward. Operator: Our last and final question is from the line of Clay Griffin with MoffettNathanson. Clayton Griffin: I just got a quick one on the inventory scope attached to this YouTube partnership. Just if you could put some detail around what exactly it includes, for example, does this include the inventory on the ad-supported version of YouTube Music -- and then maybe just sizing the overall sort of impression scale at this point, given that, obviously, YouTube is dominated by video ads today. And then as a follow-up, just to confirm, Jennifer, it sounds like that this deal is likely to be accounted for on a net basis. Did I hear that right? Just maybe just walk through the mechanics of the accounting. Jennifer Witz: No, it will be like our other ad representation deals where it's growth, and it will be in the Pandora and off-platform segment. And Scott, do you want to address the inventory? Scott Walker: Sure. Thanks for the question. So in terms of the scope of this, -- the primary use cases are both YouTube Music, the ad-supported YouTube Music tier and the YouTube main app, where listener -- where users of YouTube are primarily listening versus watching. So this could be static image music videos or LYRIQ videos. This could be YouTube connected via Android Auto or CarPlay in the car. This could be long-form content, whether it's podcast or interview content on smart speakers in the home. All of these are examples. And the scale here is matched or commensurate with the reach. We talked about the Edison research that we recently conducted where the reach of this YouTube listening-first audience is 212 million monthly listeners. And combined with our 170 million across our podcast network, our Pandora streaming network, et cetera, we're now reaching 255 million users overall. So the scale of this is significant. I'll reiterate Jennifer's earlier comments about the ramp of this. We are launching this in the fall during the Q4 planning cycle. So we expect the growth and the ramp to happen more in '27 and beyond. Jennifer Witz: Okay. So in closing, thank you all for joining. I'd just like to say that we're very pleased with the strong start to the year. and the early progress we're making across each of the strategic priorities we laid out in December of 2024, and we continue to see that strategy translating into tangible results. whether that's the strength of our in-car subscription model, our growth in advertising or the broader efficiencies across the organization. And we are well positioned to build on this progress as we move throughout this year. and we remain thoughtful and disciplined in how we allocate capital and invest for future growth. So our focus remains on execution. And we're confident in our ability to deliver on our full year objectives and our guidance and drive sustainable long-term value for shareholders. So thank you for joining us this morning. Operator: Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.
Operator: Good day, and thank you for standing by. Welcome to the A. O. Smith Corporation First Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. You will then hear an automated message advising 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 hand the conference over to your speaker today, Helen E. Gurholt. Please go ahead, ma’am. Helen E. Gurholt: Good morning, everyone, and welcome to the A. O. Smith Corporation First Quarter Conference Call. I am Helen E. Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Stephen M. Shafer, Chief Executive Officer, and Charles T. Lauber, Chief Financial Officer. In order to provide improved transparency into our operating results, we have provided non-GAAP measures. Free cash flow is defined as cash from operations plus capital expenditures. Adjusted earnings per share excludes the impact of restructuring and impairment expenses. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website. A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we described in this morning’s press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. We will be using slides as we move through today’s call. You can access them on our website at investor.aielsmith.com. I will now turn the call over to Stephen M. Shafer to begin our prepared remarks. Please turn to the next slide. Stephen M. Shafer: Thank you, Helen, and good morning, everyone. Before I discuss our first quarter results, I want to sincerely thank all A. O. Smith Corporation employees for their exceptional dedication and resilience during the first quarter. In particular, I would like to recognize our North American water heater team for their swift response to weather-related damage at one of our facilities, as they acted to ensure the safety of their colleagues while at the same time finding a way to recover from our production loss and continue to serve our customers well. I remain grateful for your dedication and teamwork, which continue to strengthen our company and our culture. Now moving on to our first quarter 2026 financial performance. Please turn to Slide 4. North America sales increased 1% to $753 million and Rest of World sales decreased 11% to $201 million, resulting in total company first quarter sales of $946 million, a decrease of 2%. Our EPS was $0.85, a decrease of 11% due to lower volume and transaction-related expenses recognized in the quarter for the Leonard Valve acquisition. Despite these headwinds, diligent working capital management helped to drive strong free cash flow performance in the quarter. Our China sales decreased 17% in local currency in the first quarter, which was in line with our expectations as well as broader market performance. With the discontinuation of most government stimulus programs and continued low consumer confidence, the water heater and water treatment markets remain challenged, especially the premium portion of the market where we compete. We expect this softness to persist. We also believe that our ongoing strategic assessment has created some uncertainty in the market and has delayed certain investments, putting further pressure on our business. We continue to make progress with our assessment and are moving with urgency to provide greater clarity for our customers and employees, with the goal of defining a clear path forward in the coming months. Now I would like to share some additional color on our North America business. North America water heater sales decreased 2% year over year. Production and shipping constraints caused by adverse weather, most notably at our Ashland City, Tennessee facility, combined with softer-than-anticipated residential industry demand early in the year, negatively impacted the quarter. As we discussed on our January earnings call, the wholesale residential channel continues to face challenges, including a soft market in new construction and continued initiatives by retailers to expand into serving the professional. Despite these pressures, we are encouraged by the stabilization of our market share in the wholesale channel in the first quarter, while recognizing there is still work to be done with more improvement to come. Additionally, we are pleased with our share performance within the retail channel and the strength of our retail partnerships. Our strong market leadership and balanced presence across both channels provide us with clear visibility into market trends, supported by robust data, analytics, and deep customer relationships. I am encouraged by the positive momentum we have going into the second quarter. North America boiler sales grew 2% compared to 2025, as residential boiler volume growth and carryover pricing benefit more than offset lower commercial volume. North America water treatment sales increased 1% in the first quarter. Ten percent growth in our priority dealer channel was largely offset by softness in the specialty plumbing wholesale channel. A cautious consumer environment led to flat growth in our more consumer-facing channels, with a general trend towards a trade down to lower-priced products. We expanded operating margin by almost 100 basis points; despite the slower start to the year, we continue to work on improving the profitability of this platform. Leonard Valve contributed $16 million to sales in 2026, led by strong performance. We exited the quarter with a strong backlog, and Leonard remains on track to achieve another year of double-digit growth. I will now turn the call over to Charles T. Lauber, who will provide more details on our first quarter performance. Thank you, and good morning, everyone. Charles T. Lauber: Please turn to Slide 5. First, I would like to highlight two items impacting the quarter. As Stephen noted, we had weather-related headwinds in the quarter, including damage to a portion of our roof at our Ashland City manufacturing facility. Because of our team’s swift response and our insurance coverage, we project minimal impact to our full-year performance. However, we estimate that production and shipping constraints, offset by insurance coverage on direct costs, negatively impacted our first quarter by approximately $0.04 per share. In addition, we acquired Leonard Valve on January 6 and, as a result, recognized $0.03 of transaction-related expenses in corporate expense for the quarter. North America segment first quarter sales of $753 million increased 1% against a tough comp, as carryover pricing benefits and Leonard Valve sales contributions were largely offset by lower residential water heater volumes and weather-related production and shipping constraints. North America segment earnings of $175 million and segment margin of 23.3% decreased by $10 million and 140 basis points, respectively, versus the prior-year period. Lower segment earnings and segment margin were primarily the result of lower residential water heater volumes and more than offset the earnings contribution from Leonard Valve. Carryover pricing benefits more than offset cost inflation in the quarter. 2025 benefited from pull-forward demand ahead of an announced price increase and a stronger mix towards higher-efficiency products. Moving to Slide 6. Rest of World segment sales of $201 million decreased 11% year over year due to continued weak consumer demand in China driving lower sales, which was partially offset by favorable foreign currency exchange. Rest of World first quarter 2026 segment earnings of $12 million and segment margin of 6.2% decreased by $8 million and 250 basis points, respectively, versus the prior-year period. The lower segment earnings and segment margin in 2026 were primarily due to lower sales volumes, which were partially offset by continued cost management in China. Please turn to Slide 7. We generated strong free cash flow of $119 million in the first three months of 2026, a significant increase over 2025, primarily driven by diligent working capital management and the timing of customer payments that more than offset lower earnings. Our cash balance totaled $204 million at the end of March, and our net debt position was $412 million. Our leverage ratio was 24.7% as measured by total debt to total capital, higher than 2025 due to the cash we borrowed under a new term loan used to acquire Leonard Valve. We continue to have significant available capacity for future acquisitions. Turning to Slide 8. In addition to returning capital to shareholders, we continue to drive organic growth through the development of innovative product offerings and productivity through operational excellence—two of our key strategic priorities. Earlier this month, our Board approved our next quarterly dividend of $0.36 per share. We repurchased approximately 700 thousand shares of common stock in the first quarter for a total of $51 million. We expect to repurchase $200 million of our shares during the full year 2026. Consistent with our focus on portfolio management, we continue to actively assess M&A opportunities that meet our strategic and financial criteria. Please turn to Slide 9 for 2026 earnings guidance and outlook. Our revised 2026 outlook includes an adjusted EPS range of $3.70 to $4.00 per share. This excludes a relatively net cash neutral North America water treatment restructuring and impairment charge of approximately $20 million that we expect to recognize in the second quarter. Key assumptions within our outlook include: steel costs have steadily risen throughout the first quarter, leading us to increase our full-year 2026 steel cost assumption to be a year-over-year increase of approximately 15% compared to 2025. In addition, due to recent oil price volatility, our transportation and certain material cost assumptions have also increased since our previous guidance. We now project that freight, non-steel material costs, and tariffs will increase our overall total company cost of goods sold by approximately 3% in 2026. Our guidance assumes oil prices and tariff levels will remain at a similar level to where they are today; we continue to monitor the situation. We maintain our estimate that 2026 CapEx will be between $70 million and $80 million. We continue to expect strong free cash flow of between $525 million and $575 million. Interest expense is projected to be between $30 million and $40 million, an increase over previous years due to the $470 million of additional debt incurred to acquire Leonard Valve. Corporate and other expenses are expected to be between $80 million and $85 million and include $6 million of transaction expenses associated with the Leonard Valve acquisition recognized in the first quarter. Our effective tax rate is estimated to be between 24% and 24.5%. We project our outstanding diluted shares will be 138 million at the end of 2026. I will now turn the call back over to Stephen M. Shafer to expand on our key markets and our 2026 top-line growth outlook for each business. Staying on Slide 9. Stephen M. Shafer: Thank you, Chuck. Within North America, our top-line outlook includes the following assumptions. While the residential water heater industry had a slower-than-expected start to the year, we maintain our view that full-year 2026 industry shipments will be flat to down as softness in new construction persists and proactive replacement remains steady. Due to a recent statement from the Department of Energy indicating a one-year enforcement delay of the October 6 commercial regulatory change, we revised our outlook and now expect less pre-buy activity in the quarters leading up to the original transition. We now project that U.S. commercial industry volumes will be similar to last year. In response to rising steel, freight, and other input cost inflation, we have announced price increases for most of our water heater and boiler products in North America, with increases varying by product, ranging from approximately 4% to 7%. We have seen some cost increases already leading into the second quarter, particularly within transportation. We expect to begin realizing the benefit of these announced price increases beginning in the third quarter. As always, we are maintaining ongoing communication with our suppliers, customers, and stakeholders as we address current market challenges while also implementing diligent cost management strategies. We continue to project our North America boiler sales to grow between 6% to 8% in 2026 due to pricing benefits and a strengthening backlog in commercial and residential boilers. We have reduced our 2026 sales guidance for North America water treatment to growth of 5% to 6%. The decrease in our outlook reflects the impact of cautious consumer behavior in our consumer-facing channels, which is approximately half of our business, where we have experienced soft demand as well as a shift toward lower-priced products. We are pleased with the progress of our priority dealer network expansion efforts and expect sales in that channel to achieve double-digit growth in 2026. Our guidance that Leonard Valve will achieve double-digit growth and contribute approximately $70 million in sales in 2026 is unchanged. Integration efforts are on track, and we are pleased with the reception we are receiving as we explore ways to go to market together. Moving to our Rest of World outlook and assumptions, we have updated our full-year guidance for China sales, which we now expect to be down low double digits in local currency compared to last year, with sales in Q2 down approximately 15% compared to Q1, as we balance channel inventories for the current environment. This revised guidance reflects our updated view of the China market, where we expect persistent headwinds throughout the year due to continued low consumer demand, severely limited government stimulus, and ongoing competitive pressures. We continue to advance our China assessment, evaluating strategic alternatives to strengthen our long-term competitive position. The evaluation is providing valuable insights into both the advantages and challenges facing our business. Many actions we have identified to improve the performance of our China business are pending the conclusion of our assessment, which is impacting our expected recovery timeframe. We are looking to provide greater clarity within the next few months. We project our India business, inclusive of Spirit, will have top-line growth of approximately 10%, and this is unchanged. Based on these 2026 assumptions, we expect total top-line growth of approximately 2% to 4%. We expect our North America segment margin to be approximately 24%, and Rest of World segment margin to be between 6% and 7%. Please turn to Slide 10. This morning, I would like to provide additional color on our operational excellence value creation opportunities. Our focus is to provide sustainable margin improvement in mid-cycle markets and protect our profitable growth in times of less market certainty. Over many years, we have looked to drive continuous improvement throughout our operations with our AOS operating system. Today, we are building on that foundation with new tools and making more strategic moves to help prioritize around our strengths and drive improved profitability. The tool sets we are now bringing to operations include enhanced stability for process intelligence and AI capabilities to drive better customer experiences at greater levels of productivity. Initial application examples include order management, warranty claims processing, and technical service support, where we are identifying opportunities, developing process improvement, and using AI agents to drive that improvement. Still early days, but we are excited by the potential of what we see. The streamlining of our North America water treatment business is an example of focusing on our strengths to drive more profitable growth. As we announced this morning, we are taking actions to continue improving our profitability and accelerate long-term growth through footprint optimization and brand rationalization. These steps are part of our ongoing water treatment strategy evolution and allow us to further focus on the areas where we expect to be most competitive going forward. We expect to recognize a restructuring charge of approximately $20 million in the second quarter and a projected annual savings of between $6 million and $8 million beginning in 2027. These exciting new tools that help us reimagine our operating processes and our continued strategic focus on prioritizing around our strengths are two ways in which we are bringing operational excellence to life at A. O. Smith Corporation. I look forward to sharing more details as this focus area for us matures going forward. Moving to Slide 11. Our team responded well when faced with pressure in several of our key markets in the first quarter. I am pleased with the market share improvement we saw in residential water heating, the double-digit valve sales growth that Leonard Valve contributed to the quarter, and the strong free cash flow achieved through diligent working capital management. With the strategic actions that we are taking, supported by our consistent operational discipline, I believe A. O. Smith Corporation will continue to strengthen its leadership position and be well equipped to capitalize on future opportunities. With that, we conclude our prepared remarks. We will now open the call for questions. Operator: Thank you. We ask that you please limit yourself to one question and one follow-up. One moment for our first question. Our first question will come from the line of Susan Marie Maklari with Goldman Sachs. Your line is open. Please go ahead. Susan Marie Maklari: Thank you. Good morning, everyone. Thanks for taking the questions. My first question is on the channel inventories in residential. You mentioned that you did have some pull forward around the pricing that you announced. Can you talk a bit more about how much you are seeing in there and how you are thinking about the channel going into the second quarter? And how we should think of the flow-through in the next couple of quarters as a result of that? Charles T. Lauber: Good morning, Susan. The reference that I made to pull forward in the first quarter was to last year, so we really have not seen any pull forward in 2026. By the way, the channel inventories we think are kind of in line with what we would expect coming out of the first quarter. Susan Marie Maklari: Okay. So you have not seen anything from the pricing you announced this year yet? Charles T. Lauber: Not meaningful. The price increase that we have is effective mid-May, roughly, so it is pretty early days. Susan Marie Maklari: Okay. That is helpful. And then, turning to commercial, you mentioned that the regulatory change got pushed out for a year. Can you give us more color on what drove that and how you are thinking about the demand there now for the balance of this year and then even into next year as the channel positions for that? Charles T. Lauber: Sure, Susan. The DOE commercial rule that was set to take effect in October has been challenged through the court system, and it has been held up so far, but it is pending and waiting to see if the Supreme Court will review it. We do not know whether the Supreme Court will take on that challenge or not. What the DOE issued late last week, because of that uncertainty and because we are getting closer to the October 6 date, was, in essence, a letter stating they would not be enforcing the rule until October 2027. However, that might also change as things play out both in the court system as well as how DOE thinks about the rule going forward. There is still a lot of uncertainty out there, but it has us feeling like it was more prudent to think that the industry may do less buy-ahead because of that announcement. Operator: Thank you. One moment for our next question. Our next question will come from the line of Matt J. Summerville with D.A. Davidson. Your line is open. Please go ahead. Matt J. Summerville: Thanks. A couple of questions. On the water treatment side of things, I was under the impression that getting out of the retailer big-box channel was the reset for that business, and it sounds like you are initiating yet another reset in water treatment. Remind us how big that business is and help us understand a little bit more around how we should be thinking about that looking ahead. Then, as a follow-up, you expect your China business to now be down low double digits. How does that sync up to what is actually happening in the market? Are you losing share? How do you justify the length of this review process with the potential that you are continuing to bleed share in that business because of how long the process has taken to unfold? Stephen M. Shafer: Good morning, Matt. The water treatment business is just over $250 million, roughly. Last time we talked about a reset, it was the exiting of on-the-shelf retail, and that was one ingredient of the reset. This is the next step of focus. It is really about leveraging our brands—focusing on our A. O. Smith Corporation brand more than some of the brands that we acquired—and rationalizing our manufacturing footprint. Think of it this way: in 2026, we are looking to expand margins by about 200 basis points to move to about 15% operating margins in North America water treatment. In 2027, with this next restructuring, we would expect an incremental couple hundred basis points. It is the next step in moving that profitability up. Regarding the China market environment and our performance, the whole market saw challenges in the first quarter, many of which we highlighted—stimulus has run its course and consumer confidence remains low—so it was a challenging quarter in the categories we participate in. From the third-party data we track, we did not lose meaningful share; we actually maintained our share in the first quarter, but it was certainly a down market condition. That environment is probably the biggest driver to why the assessment is taking a bit longer than we had hoped. There are still a lot of positive things coming out of the assessment for us. Third-party assessments validate that our brand and pricing power are very strong, and there is a lot of interest from potential partners. The dialogue is maturing, and I am hoping that in the coming months we will be able to provide clarity on our path forward, but it is occurring against a challenging market backdrop. Operator: Thank you. One moment for our next question. Our next question comes from the line of Tomohiko Sano with JPMorgan. Your line is open. Please go ahead. Tomohiko Sano: Hi. Good morning, everyone. We understand the guidance revision was mainly driven by external factors in China and North America. In this challenging environment, have you observed any changes in your market share across key regions? And as a follow-up, on Leonard Valve, how is the integration progressing, and are you on track to realize the expected synergies? Stephen M. Shafer: Good morning. In China, in the last few years there has been some market share loss, but in Q1 we do not see any meaningful market share loss; we think we are holding our own in a challenging market. Within the U.S., on the water heater side, we have stabilized our share position in the wholesale channel, which was a big focus over the last quarter. There is still more work to be done. On the retail side, we are very pleased with our share position and the strength of our partnerships. Regarding Leonard Valve, we are very pleased with the first quarter. It is a great fit with our portfolio and serves as the foundation for our water management strategy going forward. Integration is on track with the plan. Most of our opportunity is in ways to go to market together. We have been out talking to customers, and it has been very well received. Operator: Thank you. One moment for our next question. Our next question will come from the line of Joseph Nolan with Longbow Research. Your line is open. Please go ahead. Joseph Nolan: Good morning. I wanted to focus on the margin and price/cost outlook over the remainder of the year. In the second quarter, you will be feeling the impact of higher steel and freight costs, but it sounds like you are not expecting to get price benefit until Q3. Can you walk through margin cadence over the remaining quarters of the year? And as a clarification, on the commercial water heater industry outlook coming down to flat now, is that really just a reflection of the regulatory change, or are there other moving pieces? Charles T. Lauber: Sure. We were happy with our price/cost relationship in Q1; pricing overcame the costs we incurred plus a little bit of margin, so we are walking into the second quarter in a good position for the costs behind us. However, we are seeing incremental costs in the second quarter—transportation is up, diesel fuel is up, and steel costs continue to rise. We have an announced price increase that takes effect in the third quarter. So we will see a little pressure in Q2 before pricing benefits begin, and that should be overcome in Q3 and Q4 with the pricing we expect to have in place. We feel comfortable with our positioning but are watching costs closely, especially those related to oil and transportation. On commercial water heaters, the biggest driver of the outlook change to flat is the DOE regulatory timing and the related reduction in anticipated pre-buy. Operator: Thank you. One moment as we move on to our next question. Our next question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead. Mike Halloran: Good morning, everyone. Can you help put this in context on how you expect earnings to cadence through the year? The $0.03 from Leonard goes away, price/cost dynamics in Q2 are a little less favorable with more favorable in the back half, and timing around headwinds and demand dynamics—do you get a catch-up in Q2 from the weather? How does that key into the year? And on pricing, are you expecting any pull-forward of demand ahead of the 4%–7% price increases, and how do you think channel acceptance will go given the moving pieces in the water heater space? Charles T. Lauber: There are a couple of moving parts since our last outlook. Starting with China, Q2 is expected to be down roughly 15% from Q1, with decremental margins of 35% to 40%, so we expect a difficult quarter there. We expect to come out of Q2 with better balance of channel inventories; they are relatively the same as last year, but we would like to be leaner in this environment. In North America, costs are ahead of us in Q2 before we see pricing in Q3, which is a headwind to margin in Q2. On DOE, previously we would have expected a meaningful amount of pull-forward in Q2 and Q3; we have softened that, so commercial volume cadence is now expected to be pretty similar to other years with flat volume year over year. Overall, Q2 EPS is expected to be roughly 25% of our full-year guidance midpoint. That includes a little help in Q2 from some pricing pull-forward. We expect a solid performance in North America in Q2 based on a little pull-forward. The back half should be a little stronger on boilers—Q3 is always stronger—and China typically has its strongest quarter in Q4 after a muted Q1. So, stronger Q2 on the top line, some headwinds on cost, real headwinds in China, and more normalization in the back half. Stephen M. Shafer: On pull-forward ahead of the 4%–7% price increases, there is usually a little of that, and we work closely with our customers to navigate these transitions, serving them well while being smart operationally. Ultimately, we remain committed to keeping our customers competitive, even as we manage through cost pressures and market uncertainty. Operator: Thank you. One moment for our next question. Our next question will come from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open. Please go ahead. Jeff Hammond: Hey, good morning. It seems like you are just cutting EPS $0.15, but a lot of the macro assumptions are moving the wrong way. Can you talk about offsets to that—price, restructuring savings, or catch-up from the plant issue—that would mitigate the EPS impact? And on dynamics between wholesale, retail, and this price increase: have you seen other players announce similar pricing around steel and fuel inflation, and any changes you are seeing in the wholesale channel? Charles T. Lauber: We had a little bit of catch-up on the plant issues—not a lot—but that will help a bit in the second quarter. From our last guidance, the big changes were China and the DOE policy statement. Teams continue to look at cost management in China and North America as we watch the market play out. Costs are volatile right now with oil and transportation. That is the biggest driver we are keeping an eye on. Stephen M. Shafer: We will not comment on competitor pricing, but historically we have been successful offsetting costs over time, and we feel good about our positioning. It remains a competitive environment, and we would expect the industry to experience similar cost inputs. Our commitment is to make sure we keep our customers competitive. Operator: Thank you. One moment for our next question. Our next question will come from the line of Adam Farley with Stifel, on behalf of Nathan Jones. Your line is open. Please go ahead. Adam Farley: Good morning. Following up on the commercial water heating regulatory impact, does that change how you are planning to ramp capacity for that commercial change? And more broadly, can you update us on capacity plans for this year and into next year? Also, on tariffs, was there any incremental change to the gross tariff impact with recent rule changes, and what is contemplated in the guide? Stephen M. Shafer: We were prepared for the transition from a capacity standpoint and made investments to get ready. If demand is pushed out and customers delay orders, and if the regulatory rule goes into effect later, we will be ready with those investments. Many have been made, and some that were still in front of us we are delaying until we have certainty of the demand need. On tariffs, we saw some relief in certain areas and increases in others. Overall, the tariff outlook is maybe net neutral to slightly favorable, but that is overshadowed by other costs related to oil, diesel fuel, transportation, and resilient steel prices. Net-net, it is a bit of a cost headwind, which is why we have pricing out there. Operator: Thank you. One moment for our next question. Our next question comes from the line of Andrew Alec Kaplowitz with Citi. Your line is open. Please go ahead. Analyst: Hi. Good morning. This is Natalia on behalf of Andy Kaplowitz. First, you held the outlook for boilers despite lowering expectations across most other product categories. Can you unpack what you are seeing in underlying demand—how much is volume versus pricing? And second, as you think about capital deployment, how are you viewing the current M&A pipeline, particularly in terms of opportunities within your core business versus adjacency areas? Charles T. Lauber: Our boiler growth for the year has a big price component, including carryover pricing from last year. Q1 was a little softer on commercial, which we highlighted, but we see orders coming up, and that business has typical seasonality. We remain confident in the 6% to 8% growth forecast. Commercial is catching up based on the order book, and price remains a big component of the growth. Stephen M. Shafer: There are opportunities to strengthen our core via M&A, alongside significant organic investment to maintain our leadership. Getting scale and profitability in our water treatment platform has been a big focus for us over the last seven to eight years, and there are still a few opportunities to strengthen that business through M&A. A big focus for us is on the water management platform. Leonard Valve, which we closed in January, is in that category, and we think it is probably the richest area for us from an M&A standpoint as we build out and expand in water management. Operator: Thank you. I am showing no further questions. I would like to hand the conference back over to Helen E. Gurholt for closing remarks. Helen E. Gurholt: Thank you for joining us today. We look forward to updating you on our progress in quarters to come. Please mark your calendars to join us at four conferences this quarter: Oppenheimer on May 5, KeyBanc on May 27, Stifel on June 2, and Wells Fargo on June 9. Thank you, and enjoy the rest of your day. Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect. Everyone have a great day.
Operator: Hello, and welcome to WESCO International, Inc.'s 2026 First Quarter Earnings Call. If you would like to ask a question, please press star followed by 1 on your telephone keypad. Please note that this event is being recorded. I would now hand the call over to Scott Louis Gaffner, Senior Vice President, Investor Relations, to begin. Thank you, and good morning, everyone. Scott Louis Gaffner: Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature are subject to uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today we will use certain non-GAAP financial measures. Required information about these measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com. On the call this morning, we have John J. Engel, WESCO International, Inc.'s Chairman, President, and CEO, and our Executive Vice President and Chief Financial Officer. I will now turn the call over to John. John J. Engel: Thank you, Scott. Good morning, everyone. Thank you for joining our call today. We delivered an exceptional start to 2026, building on last year's market outperformance and accelerating business momentum. In the first quarter, sales, backlog, operating margin, adjusted earnings per share, and free cash flow all increased versus the prior year and exceeded our expectations. Record first-quarter sales of $6.1 billion were up 14%, marking our third quarter in a row of double-digit sales growth. Booming data center demand remains a significant growth driver of our business. Data center sales of $1.4 billion were up approximately 70% versus prior year and represented 24% of total company sales in the quarter. Overall, our business momentum continued to accelerate in the quarter with organic sales up sequentially, outpacing normal seasonality and reinforcing the strength and durability of demand across our end markets. This performance reflects broad-based strength across our entire portfolio led by continued strong momentum in CSS and EES, along with improving trends in UBS. We again ended this quarter with a record backlog, up 22% versus prior year, reflecting the continued effectiveness of our cross-selling program and providing clear visibility of the secular growth trends in our business. Profit growth, margin improvement, and free cash flow generation were also excellent in the first quarter. Adjusted EBITDA grew 25% and adjusted EBITDA margin expanded 60 basis points driven by gross margin expansion and strong operating cost leverage on our double-digit sales growth. Adjusted diluted earnings per share was up 52% versus the prior year. Free cash flow generation at 128% of adjusted net income was also very strong, underscoring our disciplined execution and continued focus on working capital management. We are very pleased with our first-quarter results. While we remain mindful of the volatility of the broader macroeconomic environment, we see positive momentum continuing across our business. As a result, we are raising our full-year outlook for 2026. As the market leader and with positive momentum building, I am confident that WESCO International, Inc. will continue to outperform our markets through disciplined execution, our differentiated value proposition, and the strength of our global platform. Our team remains focused on driving strong growth and margin expansion and delivering superior value to our customers and shareholders. One final comment: as we announced earlier this year, Dave Schulz is retiring from WESCO International, Inc., and our new CFO has joined our team. I would like to thank Dave for his outstanding leadership, his dedicated service, and his tremendous contributions to WESCO International, Inc. and our overall success over the past ten years. We wish Dave and his family our very best. Our new CFO is off to a great start. I will now turn it over to him to take you through our excellent first-quarter results and raised full-year outlook in more detail. Unknown Speaker: Thank you, John, and good morning, everyone. I would like to thank John and the board for the opportunity, and I want to recognize Dave for his leadership and thank him for his partnership during this transition. Before turning to our results, I will take a minute to touch on my near-term priorities. I intend to focus on partnering with the leadership team to scale our business in attractive end markets, drive profitable growth, continued market outperformance, and deliver strong cash flow with disciplined capital allocation. That mindset has been shaped by working across both public and private companies, often in complex global, highly competitive technology and capital-intensive businesses. John and I are aligned on the initial focus areas where we have the potential for taking our existing great capabilities to the next level. First, driving operating leverage and margin expansion as we scale, particularly in data centers and other high-growth end markets. This will be accomplished by a combination of partnering with our business leaders to ensure that our commercial and go-to-market strategy reflects our enhanced value proposition and partnering with our functional leaders on continuing to improve our cost structure. It is all about profitable growth. Second, improving working capital efficiency and cash conversion through tighter processes, analytics, and execution discipline. This is not just about back office. It is about optimizing our end-to-end capabilities from sales funnel to cash collection. Transitioning to our results, let me start with the highlights for the quarter. We delivered strong organic sales growth year over year, with sequential performance better than typical seasonality. Profitability improved with meaningful EBITDA margin expansion. EPS was up more than 50%, and free cash flow generation was strong at 128% of net income. With that, let me turn to our first-quarter results starting on Slide 4. We delivered an excellent first quarter with reported sales of $6.1 billion, up 14% year over year, including 12% organic growth. We delivered volume growth across all three SBUs and realized an estimated price benefit of approximately three points. Gross margin was 21.2%, up approximately 20 basis points year over year, and SG&A operating leverage improved by 40 basis points. As a result, adjusted EBITDA increased 25% to $389 million and adjusted EBITDA margin expanded 60 basis points to 6.4% of sales. Turning to Slide 5, adjusted EPS increased 52% year over year to $3.37. The year-over-year improvement was driven primarily by stronger operating performance in the quarter, reflecting higher sales and improved profitability. Additionally, EPS growth benefited from a lower tax rate and from the absence of the preferred stock dividend following last year's redemption. Turning to Slide 6, CSS delivered another excellent quarter with organic sales up 22% year over year and reported sales up 24%. This growth was driven by continued strength in WESCO Data Center Solutions, which delivered a record quarter with sales up over 60%. Within the rest of the portfolio, security delivered high single-digit growth, while enterprise network infrastructure declined mid-single digits due to weakness in the service provider market. However, including data center-related sales, enterprise network infrastructure grew high teens year over year. Overall, organic growth was driven primarily by volume, up about 21%, with price contributing approximately 1%. Backlog ended the quarter at a record level and was up approximately 40% versus the prior year, reflecting continued strong data center project activity and order rates. Profitability also improved meaningfully and our focus remains on margin expansion as we scale the business, particularly in our data center markets. Adjusted EBITDA increased 41% to $223 million and adjusted EBITDA margin expanded 110 basis points to 9%. Importantly, despite some modest pressure on gross margin from large data center projects, we generally see healthy and accretive EBITDA margins for WESCO International, Inc. data center solutions. Moving to Slide 7, EES delivered solid growth in the quarter with organic sales up 7% and reported sales up 9% year over year. Growth was driven by strong execution in OEM and construction. OEM was up mid-teens, driven by strength in semiconductor and data center markets. Construction was up low double digits, supported by robust wire and cable demand and continued infrastructure project activity. Industrial was down low single digits, primarily reflecting project timing impacts. However, our industrial stock-and-flow business grew mid-single digits in the first quarter, and backlog was up double digits supporting an improving trend. Data center sales in EES were up over 100% year over year and represented about 10% of EES sales, highlighting the continued scaling of our exposure to this secular growth trend. Overall, organic growth was driven by solid underlying demand, with volume contributing approximately 3% and pricing contributing about 4%. Importantly, backlog ended the quarter at a record level, up 14% versus the prior year, supported by strong order activity and pipeline conversion. Profitability improved meaningfully in the quarter. Adjusted EBITDA increased 30% to $185 million, and adjusted EBITDA margin expanded 130 basis points to 8.2%, driven by higher gross margins and strong operating leverage. Turning to Slide 8, UBS delivered 6% organic sales growth in the first quarter supported by improving demand and an increasing backlog. Utility delivered high single-digit growth driven by strong double-digit growth in investor-owned utilities and continued positive momentum in grid services. Public power was flat year over year, which is encouraging. However, the market remains highly competitive, and gross margins are expected to remain under pressure given weak sales in transformers and wire and cable, consistent with our prior commentary. Broadband delivered mid-single-digit growth year over year, supported by strength in the U.S. Overall, organic sales growth reflected approximately 3% volume growth and about 3% pricing. Backlog increased 16% year over year. We are seeing increasing interest in our grid services-enabled power capabilities from hyperscalers and other data center customers. We have a growing funnel of sales opportunities and we are bullish that we will benefit from AI-driven data center investments and other major power-related infrastructure projects over the long term. Adjusted EBITDA was $131 million, down 5% versus the prior year, and adjusted EBITDA margin decreased 120 basis points to 9.6%, primarily driven by gross margin pressure and higher SG&A as a percentage of sales. Recall that UBS is accretive to total company adjusted EBITDA margin; given its higher margin profile, the improved growth rates will lead to even higher margins over time given the operating leverage. Turning to Slide 9, I want to take a moment to further review the continued momentum we are seeing in the broader data center market and WESCO International, Inc.'s role in that growth. Data center sales continued to scale in the first quarter, reaching approximately $1.4 billion, up about 70% year over year and representing 24% of total company sales in the quarter. Notably, the data center end market is now WESCO International, Inc.'s largest end market across all three SBUs and supports a diverse set of customers with a diverse set of capabilities. On a trailing twelve-month basis, data center sales are now approximately $4.8 billion, or 20% of total sales. This underscores both the strength of the secular demand environment and the expanding scope of what we provide customers across all business units and across the full life cycle. Turning to Slide 10, this highlights our end-to-end data center offering and the role we play across the full life cycle, with exposure across CSS, EES, and UBS. WESCO International, Inc. supports hyperscale, multitenant, colocation, and enterprise customers with a comprehensive portfolio of products, services, and solutions that span power, connectivity, and ongoing operations. Our expanding capabilities and global ecosystem position us as a trusted partner as customers build, scale, and operate increasingly complex data center environments. Turning to Slide 11, we delivered strong free cash flow of $213 million in the first quarter. Free cash flow was 128% of adjusted net income. Despite sequential sales growth, net working capital was a source of cash in the quarter, largely driven by timing of inventory purchases and accounts payable. Moving to Slide 12, during the quarter, we executed a highly successful $1.5 billion bond refinancing that was upsized relative to the initial launch, reflecting strong investor demand and record pricing. Notably, we achieved the lowest coupon WESCO International, Inc. has ever achieved on a senior notes offering and the lowest for a double-B rated five-year note issued since 2021. The net proceeds will be used to redeem our 2028 senior notes, improve liquidity, and further strengthen the balance sheet. This refinancing meaningfully improves our debt maturity profile and is expected to generate more than $20 million in annualized interest expense savings. We exited the quarter at 3.2x net debt to adjusted EBITDA. Additionally, we repurchased $25 million of shares during the quarter towards offsetting dilution. Moving to Slide 13, within CSS, we have raised our 2026 outlook to low double-digit growth, reflecting the continued strength and visibility we are seeing in data centers. Data center sales are now expected to be up 20%+ for the year. Given the size of the market, we intend to continue to focus on healthy EBITDA margin business. Our outlook for EES and UBS remains unchanged. Moving to Slide 14, we are increasing our outlook for the full year given strong first-quarter results. Before I get into the details, I want to address our position relative to the current macroeconomic uncertainty. Through the first quarter and into April, we have seen no meaningful disruption to our revenue or profitability, but we continue to monitor the situation closely and kept this backdrop in mind for our outlook. In the Middle East, I am pleased to report that all of our employees are safe. From a company perspective, we generate less than 1% of our sales in the region, with the majority of those sales related to our CSS business. The secondary impacts on transportation costs are more tangible but have so far been manageable. Our teams are focused on passing these cost increases to our customers where appropriate and limiting the time that transportation quotes are valid to minimize overall risk. On the tariff front, the overall impact to WESCO International, Inc. is not material. As a reminder, WESCO International, Inc. is the importer of record for a small percentage of our cost of goods sold, typically low single digits. We typically increase prices when needed to maintain margins. At this point, we do not expect any material recoveries from the IEEPA decision. Based on the strong start to the year, we are raising our full-year 2026 outlook. We now expect reported sales growth of 6% to 9%, with organic sales growth of 5% to 8%, which implies reported sales of approximately $24.9 to $25.6 billion. Our assumptions around foreign exchange and pricing remain unchanged. On profitability, we continue to expect adjusted EBITDA margin in the range of 6.6% to 7%, essentially increasing our EBITDA guidance in dollar terms. We are raising our adjusted diluted EPS outlook to $15 to $17 per share, reflecting earnings leverage demonstrated in the first quarter as well as slight adjustments to the expected tax rate for the year. There is no change to our outlook on interest expense, based on our current view of no rate cuts this year and factoring in timing of the debt raise and subsequent paydown. Finally, we continue to expect free cash flow of $500 to $800 million as we maintain working capital discipline supporting higher growth. As a reminder, our historical pattern is typically about 70% of our annual cash flow is generated in the second half of the year. Turning to Slide 15, while April is not entirely closed out, month-to-date sales per workday are up about 10% year over year, with growth continuing to be led by CSS. For the quarter, we expect reported sales to be up high single digits. Recall that more than 50% of our sales are related to project activity and the mix of project sales is higher in the second and third quarter due to increased construction activity. The timing of project billings at the end of the quarter will determine where we land in the high single-digit range. On margins, second-quarter EBITDA margin is expected to be about flat year over year and within our full-year guidance range. Higher incentive compensation, approximately 25 basis points, accounts for most of the year-over-year pressure, and we continue to expect double-digit growth in adjusted EPS. As you think about our outlook, keep in mind that we had strong sales growth and good EBITDA margins in the second, third, and fourth quarter of last year. On a two-year stacked basis, growth is expected to remain strong and consistent with the outlook we have provided. We have covered a lot of material this morning, so let me briefly recap the key points before we open the call to your questions. In summary, we delivered an excellent start to the year with double-digit sales growth, margin expansion, and over 50% earnings-per-share growth. AI-driven data centers and related investments from our customers remain a key driver of growth across several product categories and verticals. We generated strong cash flow and improved our leverage and debt maturity profile during the quarter. Despite macroeconomic uncertainty, we are confident in our positive business momentum and are raising our full-year outlook. As we lean in to support organic growth, there is no change to our previously communicated capital allocation priorities and guiding principles. With that, operator, we can now open the call to questions. Thank you. Operator: We will now open the call for questions. If you would like to ask a question, please press star followed by 1. Our first question today comes from David John Manthey with Baird. Please go ahead. David John Manthey: All right, thank you. Good morning, guys. Good morning, John. CSS is doing amazing, so I will focus on EES and UBS with my questions first thing here. First, on lead times, I know within the industrial business you mentioned project timing as the reason for that small decline there. With switchgear components stretching well a year and medium voltage switchgear sometimes 40 to 60 week lead times, you are clearly navigating any shortages in the market well overall. But could you just talk about the specific issues? Where are the pinch points, and is that what you mean by project timing? John J. Engel: Yes. Great question, Dave, and your lead-time comments are accurate. We are still seeing extended lead times in a couple of critical categories, but honestly we have been facing those extended lead times since the pandemic, and we have been managing the business well. I think this is more of a very specific intra-quarter project timing issue. I will give you my views of industrial. I have mentioned this before. I really believe we are at the beginning of an industrial super cycle in the U.S. in particular. It is driven by AI-driven infrastructure investments, clearly the need for increased power generation not just for AI data centers but for all these mega projects, and a fundamental secular trend that I think is becoming more apparent every day regarding reshoring. These secular trends are going to play out over many years, and they really expand WESCO International, Inc.'s opportunity set. Specifically relative to your question in Q1, I would ask you to look at our short-cycle business. Our industrial stock-and-flow, the short-cycle business, MRO supplies and such, was up in line with mid-single-digit growth with the recent recovery in industrial production. That is a good and important leading indicator. It was offset for us with some project timing issues. Relative to the project timing issues, however, our book-to-bills were exceptionally strong in EES and particularly in industrial in the first quarter, and we have double-digit backlog growth in the industrial portion of EES. That supports a future improving trend for industrial, again consistent with my overall views of the cycle. David John Manthey: Thanks for that, John, and I agree. Maybe I could ask the CFO: from the first conversation that you and I had, I get the impression that you are a deal guy at heart. Could you discuss, as you settle in here, how you find the WESCO International, Inc. M&A process, and as you think about the pipeline, your general thoughts on consolidation going forward? Unknown Speaker: Yes, Dave. I have spent a lot of time on operations. One thing I would mention: I am more of an operations guy than a deal guy. But I do like to get into the operations side of deals. I would say we have a great team here evaluating deals, and we are going to be very active, but also very disciplined. We want to make sure that there is fit in terms of our strategy and where we want to take the business, and we want to play into a lot of the megatrends that we are seeing in the marketplace. It is all about how a deal accelerates our overall growth and profitability, and not just something that we would buy to leave standalone. Like we have talked about, the margin profile is another real important driver for us. We are very focused on it. We have launched a number of initiatives on that front, and M&A will be another lever. One thing back on your earlier question, not specific to EES and UBS: I came from the infrastructure side, building a lot of infrastructure. One of the things that we see—and we will see some of the secondary effects here—is the throttling factor for building infrastructure really are two things: lead time and skilled labor. That has been true for a number of years and will continue to be true going forward. It is not the appetite for investment; it is not the allocation of capital; it is really those two things that are calibrating the spend quarter over quarter from a customer's perspective, not our perspective. David John Manthey: I appreciate your thoughts. Thank you, and thanks, John. Unknown Speaker: Thanks, Dave. Operator: The next question comes from Analyst with RBC Capital Markets. Please go ahead. Analyst: Hi. This is Kenny Stemen for Deane today. I wanted to ask you about data centers. Can you unpack data center strength given you are clearly outperforming peers here? Where are you gaining share of wallet? How is the growth rate different across the gray space, white space, and services? And related to that, what is driving the step down in data center growth rate in the back half in your guidance? Thank you. John J. Engel: Good morning. We have outlined white space and gray space growth rates. White space, ostensibly supported and provided by our CSS business with deep roots that go back decades, grew north of 60% in the quarter and is the driver of the backlog growth in CSS, a major driver. Very strong growth rates in white space. Services are embedded in that; we do not break that out separately. For the gray space, ostensibly served by EES, that was up over 100% in the quarter, and again services are baked into that. We are very confident that we are outperforming the market meaningfully. We are uniquely positioned with our portfolio because we have the datacom-related solutions—white space with CSS—we have the core electrical infrastructure and connectivity solutions supported by our EES business, and we have the power solutions supported by our UBS business, which is our grid services in particular tucked under UBS. Relative to the outlook, we took investors through that when we provided our full-year guide. We think it was appropriate originally; we have stepped it up meaningfully now given this exceptional start to Q1. Analyst: Thank you. I appreciate that. Sticking with CSS, another really good double-digit incremental margin for this segment this quarter. What needs to happen for these double-digit incremental margins to be sustainable and potentially move toward the mid-teens given you are still executing on large projects? John J. Engel: We have been very clear on how we are managing that business. We have a new CSS leader who has been at the helm for four quarters. He took a business that had positive momentum and accelerated that momentum and stepped up the performance meaningfully. You see that in the results. We are very aggressively managing our gross margins, and you can see they remain stable. We are trying to expand gross margins too, and we would love to do that over time, but we have stable gross margins in CSS and outstanding operating cost leverage. To be at 9% EBITDA for Q1—we are thrilled with that. It is a huge step up. We have been north of a nine-handle on EBITDA margins more than one quarter in a row; we had it in Q4 as well. You are seeing the power of our portfolio, our execution, and the inherent operating leverage in our business model showing up in the EBITDA expansion for CSS. We are very focused on gross margins—every single basis point matters—and we will ensure the operating cost leverage, and we have very strong top-line momentum. The backlog is at an all-time record level, growing at 40% that is well in excess of our first-quarter sales growth rate. As a side note, the backlog growth for all three businesses and segments was well in excess of our first-quarter sales rates for each of the three SBUs. Analyst: Appreciate that. Thank you. Operator: The next question comes from Sam Darkatsh with Raymond James. Please go ahead. Sam Darkatsh: Good morning, John. Good morning, CFO. How are you? John J. Engel: Good. I am good, Sam. How are you? Sam Darkatsh: I am well. Thank you for asking. Two questions. It looks like Slide 15 shows April coming in maybe better than March. The comparisons year on year are pretty similar, and you are saying April is up 10%. Can you give a little color on what you are seeing, John? Are you seeing stock-and-flow improving over the last month or two, or is that just timing of projects? John J. Engel: Good question, Sam. First, I would say mix. We are seeing a consistent mix with what we had in the first quarter. We still have two days to go—we are in the last day—but by the time we see the final numbers for yesterday and then we have today, which will close the quarter, we will have the full view. We have very strong book-to-bill rates continuing, again mix consistent with Q1. In Q1, we had very nice stock-based sales momentum. Projects kicked in very nicely. Relative to my comments on EES industrial, we had very good stock-and-flow momentum there; it was project timing that resulted in that not being a net growth in Q1. I feel good about our stock momentum, Sam. I will make that comment. Sam Darkatsh: Thank you. Second question: I think there was a recent presidential determination that authorizes federal purchasing and financing for the electrical grid. How material might this be for you, and when or where would it materialize first? John J. Engel: First, the various associations we are part of have been working across the industry and with industry partners and association members, of which we are a participant, proactively with the federal government on addressing the core issues around supporting this infrastructure buildout in the U.S. The biggest driver is power and the power chain. We would see that as supportive of what I see as fundamentally secular growth trends in utility. I have made a strong statement that utility was classically a cyclical industry and has now moved secular growth even though we are not seeing that manifest in all the numbers yet. We would see it in our UBS business and in our EES business—supportive of the secular trends. Sam Darkatsh: Thank you much. Operator: The next question comes from Guy Drummond Hardwick with Barclays. Please go ahead. Guy Drummond Hardwick: Good morning. John, I want to click on the point you brought up earlier about backlog growing faster than sales in Q1. So organic sales up 12%, backlog up 22%. At what point do sales catch up with backlog, or does backlog really underpin 2027 revenues to the extent that they are lengthening somewhat? John J. Engel: Great question, Guy. Good morning. Backlog only represents a piece of our business. Long-term multiyear alliance agreements for utility customers and multiyear national and global account agreements in industrial—there are also some in CSS—do not all get loaded in the backlog because we are loading in the actual POs. We may have a multiyear agreement but only load in the POs when we get them. That said, we have been reporting consistently the trend on backlog. The fact that that growth rate is materially higher than our sales growth rate bodes well for the balance of 2026, but it is also a look into 2027, which is the heart of your question. When you look at the projects that are in the backlog, a number of them also ship in 2027, and there are some longer-lead items that we are quoting for 2027–2028—like some transformer business in utility. Think about the trend and the relative growth rate of backlog versus sales; it speaks to the rising demand curve that our portfolio is capturing. Guy Drummond Hardwick: And just a follow-up: the 14% backlog growth in EES is the fastest in three years. How much of that was driven by data center projects? John J. Engel: We have not disclosed that number, but think about the math. Data centers for the gray space—EES’s exposure—was up 100% year over year but is only 10% of EES sales. You should think about that 14% as being a very healthy number for EES overall. Two of our three SBU leaders are new in their jobs in the last year. CSS, we promoted from within four quarters ago. EES, we hired a leader from outside who returned to the electrical industry; he has now been at the helm for three quarters and is off to an outstanding start, as is our CSS leader. Look at the momentum vector and the profit quality improvement of EES starting in Q3 last year, Q4, and now Q1. This is his third quarter since joining us. It is a big deal to have two of your three business leaders new in the saddle in the last year; we are seeing stepped-up execution in both businesses. Guy Drummond Hardwick: Thank you. Operator: The next question comes from Christopher D. Glynn with Oppenheimer. Please go ahead. Christopher D. Glynn: Thanks. Good morning. Exciting start to the year. Feeding off that last topic, you were going into the EES margin trends and execution there. The gross margin sequentially has been a really strong trend and now year over year standing out, and nice outperformance on the EBITDA margin this quarter, particularly from a normal sequential seasonal pattern that we have long seen. I think the normal seasonality of the 2Q profitability ramp from EES is sort of downplayed in the suggested enterprise margin for the second quarter. Are you seeing those seasonal margin swings level off, and is that moderating the 2Q forecast over the first quarter given that the baseline shifted upward in the first quarter? John J. Engel: First, on EES specifically, we are not guiding gross margins or op margins by SBU for Q2; we do not guide at that level. Relative to our overall outlook of flattish EBITDA margins for the enterprise in Q2, there are some interesting timing dynamics when you look at sequentials. I will hand it to our CFO to take you through. Unknown Speaker: Thanks, John. A few things to highlight. As I said in my prepared remarks, if you look at our incentive comp and performance last year versus this year, that is about 25 to 30 basis points of overall headwind in terms of the EBITDA margin at the enterprise level. Typically we see a step down in revenue Q4 to Q1, so a lot of the operating leverage that you see in the business in terms of sequential improvement in EBITDA margin was accelerated into the first quarter of this year. Sequentially, the improvement is muted. A couple of other things: we are in an inflationary environment, but we are doing a pretty good job managing that and passing along where appropriate. Also, with the growth of our data center business, we are making some very disciplined investments in facility expansion and capability expansions. That shows up on our cost side. Think about those as small step-function investments; we will see the benefit over several quarters and the operating leverage from that investment. That also mutes a little bit of the margin expansion year over year. Christopher D. Glynn: Great color. Thanks. One on WDCS: I think you mentioned that is now mix accretive in CSS. Curious to double click on that. I imagine if we look at your historical top five to 10 suppliers for the enterprise, there has probably been some swapping as WDCS has ramped so prolifically. Anything interesting there? John J. Engel: We thought it was important for investors to understand that WDCS—the exceptional growth we are getting and the way we are managing the margin profile of the business we are taking on—we are being very judicious in terms of what we bid and then applying our value proposition. We are getting very good margin pull-through; it is accretive, as outlined, to CSS. That is very encouraging given the strong secular growth trend. We have had some movement in the top five to 10 suppliers for overall WESCO International, Inc. I am not going to go through that on this call, but clearly a number of those suppliers are experiencing meaningfully greater growth given CSS growth rates. Look at our overall momentum as a company: third quarter in a row of double-digit growth for the enterprise. The rising tide we are creating with our suppliers is raising a number of their boats. Christopher D. Glynn: Appreciate the color, and talk soon. Thanks. Operator: The next question comes from Kenneth Newman with KeyBanc Capital Markets. Please go ahead. Kenneth Newman: Thanks. Good morning, guys. Welcome to the team, looking forward to working with you. Maybe first on pricing: the 3% net price—can you help quantify how much of that was from carryover benefits from last year versus incremental pricing that I know was not baked into the outlook? And any color you are seeing from supplier pushes on pricing as we exited the quarter? Unknown Speaker: Most of that is carryover benefit, because of the timing of when we get notices and the actual yield and what flows through. A couple of things to keep in mind: CSS is our largest business unit right now, in which the price impact has been small compared to the other two business units, and increasingly we are doing a lot of projects where pricing is negotiated with special pricing agreements. Just a comment as you think about our outlook. Kenneth Newman: Understood. Follow-up on data centers: really strong growth, particularly in white space. Can you contextualize what you saw in gray space versus white space? How much of the white space growth was a transition from projects you won in gray space a few years ago? And how should we think about the potential of that 100% growth in gray space this quarter transitioning to white space activity over the next 12 to 18 months? John J. Engel: Very good question. We are working the OneWESCO solution on all future bid opportunities. It may be for a portion of white space, gray space, or a piece of the power solution with UBS. We are pulling in all three SBUs and, irrespective of what the RFP is for, going in with our full value prop. That has excellent momentum. Specifically, the EES growth we got—the majority in Q1—was not linked to a prior CSS or white space win. The market today procures gray space and white space at different times in the build cycle, and power is addressed much earlier and by different decision makers. What that means for our mix in real time is we are not seeing a lot of that linkage yet, but we are putting a lot of shots on goal with our broader value proposition, and we are very confident that has huge needle-moving potential for WESCO International, Inc. going forward as we aggressively go after this secular trend. I could not be more pleased with the 100% growth in gray space in Q1 for EES. That shows we are putting an awful lot of shots on goal. It is roughly 20% of our overall sales mix, but still a very encouraging growth rate. Unknown Speaker: One minor point to add: as the new guy coming in, I have been super impressed with the coordinated effort across all three SBUs in our go-to-market on data centers. We really go to market as OneWESCO across white and gray space, but every customer buys differently, and we let the customer decide where our value proposition resonates. Kenneth Newman: Very helpful. Appreciate it. Operator: The last question today will be from Patrick Michael Baumann with JPMorgan. Please go ahead. Patrick Michael Baumann: Good morning. I had one on digital transformation. It seems like those costs are stepping up here in the first quarter in terms of what is outside the P&L. What are you spending that on—what are those costs for? What is the path and timing of the ERP rollout? Your confidence in execution on that? And what happens to those costs on day one when ERP systems turn on? How long does it take you to realize the benefits? John J. Engel: Our last fulsome update was at our Investor Day year before last. We outlined that program and laid out extensive activities remaining for design/build; we had not really begun deployment then. We have not given a fulsome update—which we will do at our next Investor Day—but I will address your question. Outstanding progress on the design/build; we continue to grind away at that and have begun deployment. We have a very small number of locations in each of the three businesses that have been deployed. That has been part of our agile design/build process with increasing capabilities being brought to bear and released into those locations. We had a notable milestone in the first quarter where we have one operation—one end-to-end P&L operation as part of CSS—fully deployed on our new digital platform. That occurred at the very end of the first quarter. Now we have an end-to-end operation with the latest instance and most capabilities deployed to date. We still have design/build activities that continue through this year and into the beginning of next year, but then our deployment phases in and accelerates, completely consistent with what we outlined at Investor Day. It is a phased deployment; unlike a knife-edge ERP transition that puts the enterprise at risk, we control the phasing to ensure we do not disrupt the business and can manage change effectively. It is our utmost priority that we do not disrupt our current business momentum. We have excellent improving momentum and want to execute against that, as evidenced by our first-quarter results. No change to program design/build/deployment schema. Huge milestone in Q1 with one end-to-end operation now deployed, and we are seeing how that is operating. The benefits will phase in over a multiyear period similar to what we outlined at Investor Day, where we said it is a two-speed EBITDA margin improvement profile going forward. We are grinding away to get operating margin expansion as we complete design/build and deployment, but once that is complete, there is a step-function increase in margin expansion because all the one-time investments are done. We very much look forward to those benefits. They are not hitting our P&L yet; that is all to come. Unknown Speaker: On your question on the disclosures, we provide a fair amount of disclosure in terms of what is excluded from EBITDA to get to adjusted EBITDA. Like most companies, the objective is to give you visibility to things that, like John mentioned, are one-time in nature. We will reevaluate that every year when we do our reporting, but you have full visibility. Patrick Michael Baumann: Thanks for that. My last question—this was asked earlier in the call, but bear with me: your data center revenue in the quarter was $1.4 billion. Annualized, you are at $5.6 billion, which would be up about 30% versus what you reported last year. In the quarter, you are up 70%. You have hyperscaler CapEx going up 70% this year. Help us understand what tails off. Is it some big projects or jobs that top out in the first quarter? The 20% growth is great, but in context of what you have been putting up, something seems like maybe it is project timing. Can you help us understand? Unknown Speaker: We addressed it earlier in the call, and you gave the answer in the last part of your question—project timing. That is the answer. It was project timing then; it is project timing now. With that said, it is an exceptional start to Q1. We are thrilled with the start. Patrick Michael Baumann: Thanks a lot. Best of luck. Operator: This concludes our question-and-answer session. We have addressed all your questions, so we are going to bring the call to a close. There is no one left in the queue, which is great. We have a lot of calls lined up for today and tomorrow. We look forward to speaking with you in the follow-ups. Thank you all for your support. It is very much appreciated. We expect to announce our second quarter earnings on Thursday, July 30. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems Q1 2026 Earnings Call. [Operator Instructions]. A question-and-answer session will follow the presentation by management. [Operator Instructions]. Today's call is being recorded, and a replay will be available through May 7, 2026. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore, may no longer be current. I will now turn the call over to Colleen Lubic, Vice President of Investor Relations. Please go ahead. Colleen Lubic: Good morning, everyone, and thank you for joining us to discuss Axalta's first quarter 2026 financial results. I'm Colleen Lubic, Vice President of Investor Relations. Joining me today are Chris Villavarayan, our Chief Executive Officer; and Carl Anderson, our Chief Financial Officer. Before we begin, please turn to Slide 2 for our forward-looking statements and non-GAAP disclosures. We posted our first quarter 2026 financial results this morning. You can find today's presentation and supporting materials on the Investor Relations section of our website at axalta.com. Our remarks today and a slide presentation may include forward-looking statements. reflecting our current views of future events and their potential impact on Axalta's performance and with respect to the proposed merger of equals between Axalta and AkzoNobel. These statements involve risks and uncertainties and and actual results and outcomes may materially differ. We are under no obligation to update these statements. Our remarks and the slide presentation also contains various non-GAAP financial measures. We included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Please refer to our filings with the SEC for more information. With that, I would like to now turn the call over to Chris. Chrishan Anthon Villavarayan: Thank you, Colleen, and good morning, everyone. Turning to our first quarter highlights. We delivered strong results and exceeded expectations across our financial metrics. In the quarter, we generated net sales of $1.25 billion, adjusted EBITDA of $259 million and adjusted diluted EPS of $0.56, which came in 12% above expectations. These results reflect disciplined execution and a focus on the levers within our control. We also set meaningful cash generation records this quarter with $68 million of cash from operations and $21 million of free cash flow, an improvement of $35 million year-over-year. This period marked the 12th consecutive quarter of year-over-year profitability improvement in our industrial business, while Mobility achieved a first quarter net sales record and adjusted EBITDA margin of 17.5% reflecting solid execution and cost discipline, and we saw stabilization in Refinish at nearly $500 million in sales, consistent with the last 5 quarters. Innovation has always been and remains an important differentiator for Axalta. During the quarter, we received 6 Business Intelligence Group Innovation Awards and 3 prestigious Edison Awards. Echo next Jet, a collaboration with Dura and ZAR enables OE manufacturers to provide next-generation personalized exterior finishes at production scale, shifting from a fixed pallet to unlimited customization without sacrificing quality, durability or efficiency. And Alesta e-Pro FG Black a powder coating engineered for thermal stability and secondary fire protection in electric vehicle battery systems. Echo NextJet and Alesta e-Pro FG Black were both acknowledged with Gold Edison Awards. St. Master AI, which was acknowledged with the Bronze Edison Award is a breakthrough intent manufacturing using advanced AI to address the challenge of color variability in paint manufacturing. Edison Awards honor technologies that are redefining industries solving complex customer challenges and shaping the future. I want to recognize the smart and talented people at Axalta for developing and bringing to market advanced solutions with real-world impact. Let's turn to Slide 4. We Against a backdrop of macro uncertainty and elevated volatility, we remain focused on managing through what we can control. While recent developments have increased uncertainty across cost and supply availability, our actions over the past several years have positioned us well to mitigate raw material inflation. We're closely monitoring developments across energy, logistics and the broader supply and demand landscape as it relates to the evolving situation in the Middle East. From a purchasing perspective, we delivered 12 consecutive quarters of year-over-year improvement in variable costs due to strong productivity projects as well as focused implementation of procurement best practices. We now have approximately 60% of our direct spend under contract rather than spot buys. Many of our strategic supplier agreements are stronger and incorporate indexation, which is helping reduce volatility and improve visibility. As it relates to pricing, -- we plan to move quickly to offset the impact of inflation. We're driving solid discipline across the portfolio. In Refinish, we expect to implement mid-single-digit pricing in 2026, reflecting the value we deliver. In mobility, more than 50% of our revenue is now tied to raw material indices, which provides a natural hedge against cost volatility. Mobility has delivered 6 consecutive quarters of positive year-over-year price mix, reinforcing our ability to offset inflation. Across the rest of the portfolio, we are prudent and proactive with the pricing actions and surcharges in place, where appropriate to help protect margins. From a transformation and cost discipline standpoint, we continue to tightly manage our operating expenses. In the first quarter, SG&A declined 7% year-over-year on a constant currency basis and we exceeded our operational productivity targets. Even amid top-line pressure, our adjusted EBITDA margins have exceeded 20% for 9 consecutive quarters, underscoring the durability of our operating model. Supporting all of this is our resilient supply chain and cost structure. Approximately 90% of our direct buy is locally sourced, where variable costs represent about 60% of COGS. Inventory levels remain at roughly 115 days on hand, which helps limit the impact of inflation, particularly as we enter the second quarter. Let's turn to Slide 5. We see solid execution across all our businesses. In Refinish, net body shop wins increased 10% year-over-year and generated net sales growth in the first quarter in 3 out of our 4 regions. We're also expanding with leading MSOs, which remain a key focus for the business. In Industrial, our most diversified portfolio, the we global macro has been the story for the last few years. However, we are starting to see signs of recovery. We delivered 5 consecutive quarters of net sales growth in Asia, driven by our Energy Solutions business, drove volume growth in Europe during the quarter with share gains in our e-code business, and we're seeing positive price/mix for 7 straight quarters. In mobility, we delivered record net sales in the first quarter of $452 million and growth in 3 out of our 4 regions. Commercial Transportation Solutions, which was a bright spot in 2025 and also delivered record first quarter sales, driven by continued success with new business wins. Overall, new business wins and excellent operational performance across the portfolio are helping us offset the headwinds in North America where the macro environment has been tempered by economic anxiety, elevated consumer costs and higher for longer interest rates. With that, I'll turn the call over to Carl to discuss our financial results. Carl Anderson: Thank you, Chris, and good morning, everyone. Turning to Slide 6. net sales were $1.254 billion, a 1% decrease year-over-year, primarily driven by lower volumes in Performance Coatings. This was partially offset by favorable foreign currency translation largely due to a stronger euro. These dynamics were expected and contemplated in our first quarter guidance. Gross margin was 33% and down slightly from last year, driven primarily by unfavorable mix from lower volumes in North America. Net income was $91 million, a decrease of $8 million from the prior year period. This was driven primarily by $22 million in transaction costs associated with the pending merger with AkzoNobel. These costs were partially offset by a $17 million discrete income tax benefit and a reduction in interest expense. SG&A was down slightly as we continue to aggressively manage our cost structure. Adjusted EBITDA in the quarter was $259 million, resulting in an adjusted EBITDA margin of 20.6%, while both metrics were lower year-on-year, we did perform above expectations as reductions in operating expenses and variable costs helped to offset lower volumes in Performance Coatings. Adjusted diluted earnings per share was $0.56, exceeding our outlook by 12%, supported by lower interest expense and stronger overall earnings in the quarter. Our momentum in cash generation remains strong. Cash provided by operating activities was $68 million, a company first quarter record. This was an increase of $42 million year-over-year. Free cash flow of $21 million was another first quarter record for Axalta and improved by $35 million versus the prior year period. This was primarily driven by improved working capital and lower interest payments. Performance Coatings first quarter net sales declined 2% year-over-year to $802 million. This decrease was driven by lower volumes, primarily in North America and unfavorable price/mix. These impacts were partially mitigated by favorable foreign currency translation and contributions from our acquisitions and our Refinish business, which we continue to execute as part of our distribution strategy outside of North America. Refinish net sales declined 3% to $498 million, reflecting lower claims activity and shifting customer order patterns as anticipated. Industrial net sales declined 2% year-over-year to $304 million, with volume pressure in North America and Latin America, partially offset by price mix and foreign exchange. Notably, Europe and China delivered volume growth in the first quarter. First quarter Performance Coatings adjusted EBITDA was $180 million, down from $197 million a year ago. Adjusted EBITDA margin decreased by 170 basis points to 22.4% due to lower volumes and unfavorable price mix, which was partially offset by a reduction in operating and variable expenses. We do expect that price/mix will inflect positively beginning in the second quarter and carry on through the rest of the year. Mobility Coatings delivered record first quarter net sales coming in at $452 million, an increase of 3% from the prior year period. Light Vehicle net sales increased $9 million, driven by favorable foreign currency and organic growth in 3 of our 4 regions, including continued momentum from new business wins in Brazil. As planned, sales in China declined in line with lower auto production in the region. Commercial Vehicle net sales were also up 3% year-over-year, supported by favorable foreign currency impacts, new business wins, positive price mix and record commercial transportation solution sales, which together helped offset the effect of lower Class A truck production. Mobility Coatings adjusted EBITDA totaled $79 million in the first quarter compared to $73 million a year ago, reflecting benefits from lower variable costs, favorable foreign currency and reduced operating expenses. Adjusted EBITDA margin increased 100 basis points year-over-year to 17.5%. In the first quarter, we delivered another period of consistent cash generation, which underscores the durability of our operating model. Interest expense declined 14% year-over-year -- and during the quarter, we repaid $54 million of gross debt and added with a net leverage ratio of 2.3x. For full year 2026, we expect interest expense of approximately $150 million representing an improvement of more than $25 million versus last year and nearly 27% lower than 2024. For the rest of the year, we are planning on deploying most of our free cash flow to pay down our term loan and expect that our net leverage ratio will be below 2x at year-end. As we turn to our outlook on Slide 10, I'll start with the macro assumptions underlying our 2026 guidance. External forecasts and key performance indicators remain relatively consistent with how we entered the year. That said, geopolitical developments, including the situation I ran and broader Middle East tensions, have increased uncertainty across global markets, impacting energy prices, inflation and consumer sentiment. While the ultimate duration and economic impact of these developments is unclear, to heightened volatility has the potential to create additional pressure on both demand and cost in the back half of the year. In Refinish, we are seeing signs of a more stable market as destocking trends are abating and claims activity is sequentially expected to improve. Auto insurance premiums have moderated meaningfully. Used vehicle prices are rising and miles driven are trending favorably. At the same time, consumer sentiment inflation concerns are more challenged. All this being said, we are planning for second half volumes to improve compared to last year. In Industrial, we were encouraged by the results we saw in the first quarter, particularly in Europe and Asia. However, we remain cautious about the pace and timing of recovery in North America this year. Overall, our business is positioned very well for an eventual market recovery in North America as we are performing at record margin levels and have significantly improved our operational efficiency. In mobility, we are now assuming global auto production of approximately 91 million builds, down from our prior outlook of 92 million units. In Commercial Vehicle, external forecasts for North America Class 8 builds have increased and we now assume approximately 274,000 units, up 10% from previous expectations. With respect to the second quarter, we expect net sales to be roughly flat with adjusted EBITDA in the range of $280 million to $290 million and adjusted diluted earnings per share of approximately $0.65, roughly in line with a year ago. For the full year, we are maintaining our previous guidance expectations for revenue, EBITDA, earnings per share and free cash flow. At this point, we are tracking closer to the lower end of EBITDA and EPS guidance given the demand signals we are seeing at this time. We also continue to expect to deliver adjusted EBITDA margins of approximately 22%, in line with last year, as our pricing and cost actions are expected to help offset the incremental inflation we anticipate. Overall, our outlook reflects disciplined execution and continued focus on margin protection, cash generation and confidence in our ability to perform yet again in any type of environment. Turning to Slide 11, I'll provide an update on the pending merger of Ecos with AkzoNobel. The transaction continues to progress very well, and we remain firmly on track with all of our key strategic work streams. Both teams are highly aligned and are working together seamlessly as we prepare for the shareholder vote regulatory approvals and day 1 readiness. A critical pillar of this combination is the substantial synergy opportunity we have identified. We remain confident in our ability to deliver $600 million in annual run rate synergies. Integration planning between both companies is well underway with dedicated clean teams established to identify and accelerate these synergies, and designed to capture value quickly and deliver a seamless transition at ECOS. On the regulatory front, filings are underway, including the U.S. and the EU -- we have filed a confidential Form F-4 with the SEC and are progressing as planned. In parallel, we are maintaining active and constructive engagement with shareholders and we expect the shareholder votes for both companies to take place by early July. Overall, we are excited and energized and remain confident in our ability to deliver meaningful substantial and sustainable value creation through the combination with AkzoNobel. With that, I will turn it over to Chris for closing remarks. Chrishan Anthon Villavarayan: Thanks, Karl. We're executing well and delivering consistent performance while maintaining strong operational focus. At the same time, we have made significant progress towards our combination with AkzoNobel that we expect will strengthen our portfolio, enhance our financial profile and create significant long-term value for shareholders. The transformational actions we have taken across procurement, fixed operating costs and network optimization have fundamentally improved the business and protected margins to prepare for the upside. We have built a solid foundation, which has strengthened with the Akzo combination, and we will be ready when the macro rebounds. Thank you for joining us today. I will now turn the call over to the operator to open the line for Q&A. Operator: [Operator Instructions] We will take our first question from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess just given the abrupt spike in the raw material cost, has that dynamic changed the destocking dynamics impacting auto refinish, especially in North America? And could you just update us on your view for the time line for volumes in that business to inflect higher? And just a broader question as it relates to whether that dynamic might start to intersect with just a broader economic slowdown given the spike in inflation and the impact on the consumer, et cetera? Chrishan Anthon Villavarayan: Sure, Ghansham. So I'll start, and maybe I'll turn it over to Carl. But as we see it right now, we're certainly seeing stabilization. And as April is closing. And as we look at Q2, I would say we're showing a bit of an increase in volumes in Q2 or, let's call it, sales in Q2, and we're certainly seeing that come through. So I would say the market is pretty stable, and we're heading towards a recovery. And if you look at Carl's last slide, if you look at all the indicators, they're all positioning the right way, miles driven up. Insurance costs are starting to abate, and we can start seeing that flat line. And also the used car pricing is trending the right way. So all of this dynamic is heading the right way. For us, the incremental benefit here is also what's happening with destocking. Destocking is starting to abate and you can start seeing that in our results in Q2 or our guide for Q2, we're essentially seeing price/mix start turn markedly positive and it's really driven by that. Carl Anderson: Yes. And Ghansham, just to add, I think the -- in addition to all that, especially as we think about the second half on price mix with some of the price actions the teams are executing, as Chris said, that will imply positively second half, and you probably will see that in the second quarter as well. And we're also seeing the benefit from some of the more recent M&A transactions come through as well for the full year. Operator: Thank you. We will move next with Mike Sison with Wells Fargo. Michael Sison: Nice start to the year. Just curious, when you think about the second half of the year, third quarter, fourth quarter, you have more heads of raw material costs and such. And if you get to the midpoint of the guidance, you're going to need a much -- well, about much target, but a stronger second half versus first half. So -- can you sort of walk us through how you get that ramp into the third and the fourth? And how you think the raw material situation gets sort of handled during that time period? Chrishan Anthon Villavarayan: Sure, Mike. I think it's a very good question. If I look at Q1, you can see that we had a good quarter. We had pockets of improvements across all 3 businesses. if you look at industrial, we had strong performance in Asia. We actually saw Europe return was good news. Again, 1 quarter doesn't certainly set a standard here going forward. So we're seeing positive momentum even as we look at April in Industrial. And now moving to Refinish. Again, we're starting to see sales inflect and our performance as well, especially with destocking coming out is positive here, too. And in Mobility, the real story here is the return of CV. As you look at and our performance also in CTS -- the commercial vehicle market, if you look Q from Q, Q1 to Q1 of this year was actually down 26%, but we're only down about 6%. And it's really our performance in the growth on the CTS side. So now if you project that forward, what's driving the benefit, it's 3 or 4 things. The first thing is we've already gone through with pricing across all 3 businesses. And then if you look at how we're normally structured, it's usually 48% in the front half and about 52% in the back half. If you look at us now, it's like 45-55. What's the difference? It's really 3 things. The first 1 is with destocking coming out, we expect that positive price mix in Refinish to inflect and continue through the back half. The next element of this is really the the CV volumes coming back. Again, with commercial vehicle coming back in the back half, that strengthens us in the back half really drives good margin performance. As you know that those margins are higher and closer to our Refinish margin. And the last element that we have here is a little bit of a pickup in REV or, let's call it, markets. So we expect industrial to be up slightly and also Refinish to continue to inflect through the back half. So those are the 3 things that are driving the positive momentum in the back again, the offset is certainly the inflation, which we have already priced for. Operator: We will move next with John Roberts with Mizuho. Edlain Rodriguez: This is Edlain Rodriguez for John. Chris, you talked about the 50% of mobility revenue that's tied to the raw materials index. Can you talk about any lag if there is any in there? And also for the remaining 50%, will prices come on time to not have any negative impact in the second half of the year? Chrishan Anthon Villavarayan: Yes, it's a great question, and it's reflective of what I would say the team has performed. If you look at the last 3 years, as you know, this isn't the first time we've been here. I mean, if you look through the tariffs, if you look through the Iran, Russia conflict, if you look through hyperinflation, this team over the last 3 years has had to deal with this many other times. And I think this is the nate muscle that we've changed at [indiscernible] and it's really about driving that pricing discipline when we see it. And so I would say in terms of mobility, on the other 50%, we have already gone out with pricing. There is a 3- to 6-month lag with indexes but you also get the positive on once this starts inflecting the right way. But overall, as you can see our margins and what we're laying out as our guide for Q2 and the rest of the year, it shows the positive performance because we absolutely believe we can capture this not only through pricing but also the cost actions from a productivity and a purchasing initiative standpoint that we have out there. You put all that together, the whole company will be running at about almost 22 points of margin, but this business will be running at 17% to 18%, probably some of the best performance we have seen in the last 5, 6 years. Operator: We will move next with David Begleiter with Deutsche Bank. Unknown Analyst: This is Emily Fusco on for Dave Begleiter. Just kind of turning back to Refinish and the trends you're seeing. Your competitors that have already reported have suggested share gains. So just kind of how would you characterize your positioning today? Or any more color you could give? Chrishan Anthon Villavarayan: Yes. I think I've obviously stayed away on commenting with what our competitors do. Maybe I'll give you about 3 or 4 perspectives here. The first 1 is specific to, I think, some of the commentary that have come out in the last -- in this quarter it's easy to show improvement from double digits down to up double digits. So maybe it's net 0. But moving from that and being more specific to us, we measure net body shop wins. And as I described it, in our Q1 performance, we saw that go up 10%, and that is a record, record quarter for Axalta. And so how are we growing? And if you look at this data also over a 3- to 4-year look, you notice we went from about 85,000 body shops to close to north of 95,000 body shops. So we continue to grow, and we can see that. Conceptually, 1 of the things that we are growing more is in the economy space and mainstream space, this was obviously driven by our CoverFlexx acquisition, which we did almost a year ago that's really enabling us to grow in this region or this area. We used to have about 9% market share. We move north of 11%. So this has been a good story for us. And as I look to the rest of the year, we believe, especially with MSOs in North America, where we can also start seeing that we're expanding. We already have 9 out of 12. But with those MSOs, we continue to win more body shops. And on top of that, as I look at the economy mainstream, I believe this is going to be a very strong year for us. Operator: We will take our next question from John McNulty with BMO Capital Markets. Caleb Boehnlein: This is Caleb on for John. Just given some of like how much like the chemical spot rates have moved this year, can you help us understand a little bit better, like why the inflation headwind is only like mid-single digits this year and not higher like many people thought maybe just kind of like what your -- what the raw material headwind will be as you're exiting Q4? Chrishan Anthon Villavarayan: Sure. I'll start, and maybe I'll hand it over to Carl. I would say there are probably about 3 or 4 things that may be were similar or differentiate us from others or peers than what we are seeing I think first 1 is geographic mix. If you look at the impact, which is more European and Asia from an Asian impact, China is about 10% for us. Asia is, let's call it, just north of 15 points percent for us. So in terms of impact, it's less for us from a geographic perspective. The second part of this is if you think about our buy of our COGS is Cox. And of that, about 40% to 50% are tied to oil. So we are slightly better in this case as well compared to some of our peers. The third element of this is something that we've been working on for quite a while for the last 3 years is really our purchasing initiatives and what we -- how we have driven our material buys, we used to be 60% on spot buys, we're now 60% on contracts. And so we have a natural hedge here based on indices and the ability to manage this at least with some visibility through the full year. So I think those are the 3, the incremental benefit we also have is the inventory levels. We're sitting on 115 days that puts us around 4 months. And if you really think about it, it's different by business and it gives us the ability to manage to push forward pricing faster or a little bit slower. But in terms of the Q2 impact, we're seeing this to be low single digits and increasing through the back half of the year. And I would say, as we get through the back half of the year, this might feel like high single digits, but we'll certainly be out there with pricing when we see that effect come through. Maybe I'll turn it over to Carl. Carl Anderson: Yes. And just maybe to add to that, if you look at just 2026, obviously, first quarter, we performed better. So we were low single digits that benefit as we think about a raw material performance. As Chris referenced, we do expect that for the full year to be mid-single digits. And it's really going to be a focus and more of a -- where we're going to be going as it relates to what oil is going to be doing a little bit longer term. So whether it's mid-single digits or potentially a little bit higher that as we're exiting the year, as we look at the business, we expect to continue to drive productivity within how we manage our purchasing spend. as well as other cost measures that we look to deploy. Operator: We will take our next question from Matt with Bank of America. Rock Hoffman Blasko: Rock Hoffman on for Matt. I think your slides have called out mid-single-digit pricing for Refinish. Is that a full year comment or a 2Q to 4Q comment? And how can I kind of square that away with the negative price mix you saw in 1Q. Also just any updates on kind of the IRIS mixing rollout would be helpful as well. Chrishan Anthon Villavarayan: Yes, sure. Thanks for the question. Yes. So if you think of the first quarter, pure price was about low single digits, up about 2% on a year-over-year basis. Most of what you saw as far as in the quarter, related to the negative impact was on mix. And as we look forward, some of the pricing actions the team is putting into place here in the second quarter as well as in the second half. So those numbers would be for what the full impact would be with the total gross pricing that we're going after specifically for our Refinish business. Really, as it relates to Iris mix, we're pretty excited about that. The teams are executing very, very well. I think we're getting -- we're nearing 1,000 in total installations. And that's -- it will continue to be a big focus for Refinish team as we look to get that out more broadly here in North America. Operator: we will take our next question from Mike Harrison with Seaport Research Partners. Michael Harrison: Chris, maybe you could give us a little more detail on what you're seeing in commercial vehicle. Just some thoughts on the timing of this big swing in Class 8 -- and then maybe some more detail on what's going on in Commercial Transportation Solutions. I assume that, that's kind of the fruit of several quarters or years worth of effort to build out that business. But maybe give us some more detail on the momentum you're seeing and any specific customer wins or markets or applications you would call out? Chrishan Anthon Villavarayan: Sure. Thanks, Mike. Great question. I'd love to. So as we look at commercial vehicle and obviously, coming from my past, it's certainly very cyclical. And as it goes down and goes below a replacement demand, you always expected in a few, let's call it, a few quarters later to always pick up, and we can certainly see that pick up. So Q1 was very weak. And as you can see from many of the OEs that have reported, if you do a Q-over-Q comp, you can see the decline. But as we get into Q2, we can already see those numbers pick up in turns, not only from a forecast perspective, but also what we see in April. One of the things that we did is, as we got into the business and certainly a credit to the mobility team in terms of we were -- we had such a strong presence and such leadership on the OE side of Class 8. And we wonder -- as the team wondered why could -- we could take that technology and certainly match it in everything that's CTS. And if you think about this space, it's really what we do in specialty, what we do in off-highway, what we do in military and also whatever we do in RVs or the recreational space. So they set a plan to really grow in this space. And just to give you a perspective, the overall market is about $3.5 billion, and we only have about 7% market share -- so we saw this as a great opportunity to grow. And that's certainly -- the fruits of all that work is what you're seeing coming through in Q1, and it will certainly continue to come through as we go through the rest of the quarters not here to probably provide what our targets are going to be for the rest of the year. But I just want to point out, you can see the performance, again, as I said earlier, coming through in Q1. The market is down 26 points we're just down 6 points so that offset really happened from all the wins that we had on the CTS side. Now going forward, the additional space opportunities here is this isn't just focused in North America. We're also looking at how we can really expand this globally -- and this is certainly, I think, something that's a bright star in our mobility business. The incremental difference we also made here was at capacity. Our CTS and our Refinish business actually come out of our Refinish lines and our refinish plants. So we needed to add capacity and really make sure that we were ready once we took this volume to that once CV returned that we can ensure that we can protect and perform for those customers. And we've certainly done that. The record capital investments that you have seen part of that was to ensure that we're structurally in the right place for this business. So I think there's far more upside here in this business as we go forward, and I look forward to tell you more about it as the rest of the year progresses. Operator: We will move next with Patrick Cunningham with Citi. Unknown Analyst: This is actually Rachel Lee on for Patrick. So I know that you're still guiding to greater than $500 million for the full year free cash flow. So given the potential for mid-single-digit inflation and working capital requirements, how are you managing inventory levels and receivables through the balance of the year? Carl Anderson: Yes. Thanks, Rachel, for the question. So I think maybe we'll start in the first quarter. We were pleased with the performance. If you think about our cash conversion cycle, we improved by about 6 days year-on-year in the first quarter. And as I think what is in front of us for the rest of the year, as Chris said, we are pricing. And so if I look at kind of what the impact is going to be in DSOs, we're going to get out in front of that a little bit. So I think even with a mid-single-digit inflation kind of running through and getting an inventory, we still feel very, very confident in our ability to deliver on free cash flow. We're going to have lower interest expense this year on a year-over-year basis, and we continue to look to improve overall cash conversion cycles for not building off what we did in the first quarter, and I'm hoping that we will be able to improve that even a little bit more on a year-over-year comparison as we move throughout the year. Chrishan Anthon Villavarayan: And I just wanted to add -- maybe just to add to a few more comments. I think I really want to add to the performance that we saw in Q1, really a credit to the finance team and Carl, but just driving some enormous performance in interest rates. And obviously, we'll get that tailwind for the rest of the year. Operator: We will move next with Chris Parkinson with Wolfe Research. Christopher Parkinson: I realize you can't necessarily jump the gun in terms of the AXA deal, but in terms of your own cost execution and just navigating what I think most of us would characterize as fairly difficult markets over the last few years. Is there any kind of update on your thoughts or the trajectory of the synergy target with the companies, Presumably, you're still going to touch with them, you've been executing on your own any quick update there would be very helpful. Chrishan Anthon Villavarayan: Yes. Christopher. Good question. Certainly, I think on both sides, we're managing costs. But I would say Greg and I have been working with a clean team environment. We've had 2 exceptional teams on both sides to work on this, especially as we get closer to the boat and also start heading towards close to really define what is the work streams with hard to help up some external consultants so that we can keep this very clean and also look at what actions and the more and more time both of us spend on this, we can really get comfortable with the actions and be able to reiterate that the $600 million is just the floor. And I would say -- as we get half the vote, we're going to spend far more time on really driving the actions so that we can get -- hit a gate running when we close. But I would say every day we spend and we were on calls weekly we get more and more comfortable with the fact that this will create enormous value. And I mean, you think about all the different multitude of buckets that we can focus on in terms of scale and purchasing, we go from $2 billion to $6.5 billion plus. There's an enormous ability here from scale what we're doing right, what they're doing right, what the overall scale can provide and then from that, you can move to supply chain synergies, what we can do jointly from the fact that between the 2 of us, we have almost 400 warehouses and locations and how we could improve all of that and drive utilization, how we're approaching the same customers. And then you go into the duplicity of everything that you have in SG&A. And finally, even beyond that, the incremental opportunities when you look at indirect and all the other cost buckets. I would say there's just a basket that is -- provides a great opportunity to work on once we become together as a combined company. Operator: We will move next with Kevin McCarthy with Vertical Research Partners. Matthew Hettwer: This is Matt Hettwer on for Kevin McCarthy. What are you seeing in the demand function for your industrial business? It sounds like like they're stronger in Asia and Europe than domestically. Could you take us through how the business is doing regionally -- and then finally, what are your thoughts on whether rising input costs for your customers in that business will lead to incremental demand weakness in the back half of the year? Chrishan Anthon Villavarayan: Sure. I'd love to. I think maybe I'll first give you a perspective again to the 2 bright spots. Asia continues to grow. We have seen, let's call it, 5 quarters of growth. And as we project forward, -- it still looks strong for us. And again, this is primarily in our Energy Solutions business, where everything that we provide, whether it's impregnating resins for battery -- sorry, for motors or all the coatings that we provide for battery enclosures, all of that is on a positive trend. And so certainly, a tailwind that we see there. In Europe, that inflected last quarter, again, business that we gained here in E-Coat and we continue to see positive signs in volume across even powder and architectural extrusions in this region. So that's a positive inflection for us. Again, the positive here is also probably coming into the spring buying cycle. Now moving to North America. This continues to be weak. Again, I think interest rates being higher for longer has been an impact here. But we feel, at some point, this will inflect. Carl Anderson: And just to add to that, for Industrial in total, we're not -- for the full year, we're seeing it really flattish on a year-over-year basis. And so if you think about even in the second half on your demand question, we're not seeing in aggregate in getting that much better through the year, and that's already reflected in our guidance numbers that we put forward. Operator: Our next question comes from Josh Spector with UBS. Lucas Beaumont: This is Lucas Beaumont on for Josh. So I mean it seems like there's kind of been a shift amongst, I guess, both you guys and the rest of the coatings peers towards like greater index linking of pricing to raw material shifts. So I guess that's probably happening more in the coatings businesses that seem to have less pricing power compared to those with more -- and I guess while we sort of might reduce shorter-term earnings volatility at the front of the cycle, I mean, it then seems like it's set up to kind of give the pricing back on the back end and might like reduce the net price cost benefit that you're capturing over the full cycle. So I mean, I probably would have said this was like a feature as it ties to a bug in the sense that you're getting more price cost over time and it's helping kind of drive your earnings growth in the medium term. So do you think the shift -- I guess, one, maybe just give us a view on how you see this shifting or not shifting overall? And then I mean would you -- how do you think that supports or, I guess, impairs medium-term earnings growth cycle? Chrishan Anthon Villavarayan: Well, maybe I'll start and then hand it over to Carl. I would have to disagree with that a bit, primarily because of my view on what the indexing provides. What the indexing provides is more visibility and control so that you can price. And as I look at our business model in 2 out of our 3 businesses, this, let's call it, the indexing is not tied to that. So when we talk about our Refinish business and when we talk about our industrial business, the best part of what we do is we see the visibility from a purchasing aspect and then we are able to go right in and price. And as you can see with what we have already defined in terms of pricing both in our industrial and Refinish business, we've already done that. We've already priced in Q1 we're already seeing the results. That's why we can already target almost 22 points of margin for Q2. Now moving into our mobility business, that's where there's indexing tied for 50% of the business to RMI indexing. And here, your comment is solid with the exception of the fact that you do get it on a lag basis. On the rest of the business, we are able to price, and we have done it consistently through what I would call it, through the last 3 risk factors that we have faced in the last 3 years, whether it's the inflation that we saw because of the tariffs, whether it was just the pure hyperinflation that we saw in North America or whether it's the Iran conflict or for that matter now, the Middle East conflict, my simple perspective here is we set a target that was 300 to 400 basis points higher than where we were just 3 years ago. In our A plan, we set a target of 21 points of margin, and we have been performing at that margin even through all these 4 crisis. at north of 21% to 22% for the last -- and certainly, that is reflective on our EBITDA performance for the last 3 years. But now I'll turn it to Carl, if I miss something. Carl Anderson: I don't think you missed anything, but just as a reminder, during this whole time period when we really started to increase the overall RMIs we had in place in our mobility business, we've more than doubled the margin during that time period. And if you look back over the last probably 4 or 5 years, the overall margin profile of Axalta's expanded 600 basis points. So when we have best margins in the business in the coatings business. So we feel very good with our strategy and how we're executing Operator: Thank you. At this time, we have reached our allotted time for questions. I will now turn the call back over to Chris Villavarayan for closing comments. Chrishan Anthon Villavarayan: Well, to everyone, thank you for calling in and certainly for your interest. I certainly want to start by congratulating the team for a good Q1, a solid Q1. We're certainly looking forward to Q2, and we believe that we have great plans to execute here, including working with Greg and the Axo team towards our merger. And with that, thank you. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and welcome to the CNX Resources Corporation First Quarter 2026 Question and Answer Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to hand the call to Tyler Lewis, Senior Vice President of Finance and Treasurer. Please go ahead. Tyler Lewis: Thank you, and good morning, everybody. Welcome to CNX Resources Corporation's first quarter Q&A conference call. Today, we will be answering questions related to our first quarter results. This morning, we posted to our Investor Relations website an updated slide presentation and detailed first-quarter earnings release data such as quarterly E&P data, financial statements, and non-GAAP reconciliations, which can be found in a document titled "1Q 2026 Earnings Results and Supplemental Information of CNX Resources Corporation." Also, we posted to our Investor Relations website our prepared remarks for the quarter, which we hope everyone had a chance to read before the call, as the call today will be used exclusively for Q&A. With me today for Q&A are Alan Shepard, our President and Chief Executive Officer; Everett Good, our Chief Financial Officer; and Navneet Behl, our Chief Operating Officer. Please note that the company's remarks made during this call and answers to questions include forward-looking statements which are subject to various risks and uncertainties. These statements are not guarantees of future performance, and our actual results may differ materially as a result of many factors. A discussion of risks and uncertainties related to those factors in CNX Resources Corporation's business is contained in its filings with the Securities and Exchange Commission and in the release issued today. Thank you for joining us this morning, and operator, please open the call for Q&A at this time. Operator: We will now open the call for questions. Our first question comes from Leo Mariani of Roth. Please go ahead. Leo Mariani: Yes, hi, good morning. I was hoping to hear a little bit more about the Utica. I see you brought three wells on here in the first quarter. Any comments on well performance or costs? I know you have been working hard to continue to improve the play over time, so just wanted to see if there was an update there. Alan Shepard: Hey, Leo. Good question. We are continuing to develop the Utica program. The most recent pad was turned to sales late in the quarter, so we are a little ways off from providing any production results from that. Everything we have seen so far, as we have mentioned on previous calls, is very consistent with our expectation of the reservoir. We are continuing to make progress on the cost side, but nothing new to update at this time. The way to think about it is that toward the end of this year, we will be in a position to provide a more fulsome update. We will have a solid data set to provide to the market toward the end of 2026 or early 2027 once these wells have had enough duration on them. Leo Mariani: Okay. And would you envision that, as you develop a more robust data set, if the play continues to progress nicely, we could see a little bit more allocation to the Utica versus the Marcellus in the next handful of years? Or do you think that the Marcellus is still probably going to be a little bit economically superior based on current rates? Alan Shepard: I think the Marcellus has the advantage of having the infrastructure already in place. We optimize for the best economics per well, and right now, with the SWPA Marcellus, you generally do not need to build new infrastructure because of the legacy investments there. You will see us blend in more Utica over time as that is the longer-term position for the company, but in the SWPA Marcellus we are in harvest mode, and you will continue to see those wells for the next few years. Leo Mariani: Okay, that is helpful for sure. I just wanted to ask on your NewTech business. Any updates there on business lines other than the environmental credit monetization that you have been consistently doing? Specifically, anything on AutoSet or on the CNG or LNG businesses you have mentioned in the past? Alan Shepard: Everything is consistent with where we thought it would be at this point in 2026. We are still waiting for final guidance on 45Z, but we do not think that is going to impact any of the projections we have made so far. Nothing new to update there, Leo. Operator: The next question comes from Jacob Roberts of TPH. Please go ahead. Jacob Roberts: Good morning. On hedging, you typically transact on a longer-term basis than a lot of your peers. Given what seems to be the prevailing theory of an improving gas base in that 2028-plus timeframe, can you give some context on what you are seeing in the 2028 market? I think you added another 13 Bcf to the book with this update. Curious what you are seeing on that longer-dated market at the moment. Everett Good: Yes, again, on our longer-term hedges, we are in a position to be more opportunistic, with patience, than we have been in the past. As we see price move up, we have also seen basis differentials tighten, and that has helped us get to a better all-in realized price in the California market. We are targeting to bring that up over time as we approach that year. Jacob Roberts: Okay, perfect. I appreciate that. And then I know you made some changes to the balance sheet. Just curious what the next steps are from here on that front. Everett Good: Yes, we did a very positive refinancing of our 2029 notes into new eight-year notes at 5.875% in the quarter. Generally, we have been very consistent in pushing out maturities to make sure that we are at least two to three years out before our next maturity. The next one up for us is a 2030 maturity that we will handle well ahead of time. It is all about keeping the maturity profile extended and making sure that we do not have periods with large maturity towers in front of us. Jacob Roberts: Thanks. I appreciate the time. Operator: Thank you. Our next question will come from Michael Stephen Scialla of Stephens. Please go ahead. Michael Stephen Scialla: Hi, good morning. I wanted to ask about in-basin demand. Some of your competitors are becoming a lot more confident on that, talking about it growing by more than 10 Bcf per day by the end of the decade. Do you share that enthusiasm, and is there anything you can share that the company may be doing to capture some of that demand? Alan Shepard: I would agree that we certainly see the same long-term optimism on the demand side. Some of the announcements that have come out are mind-boggling when you think about a nine-gigawatt power center plan; there have been multiple of those proposed. We see the announcements, and we are monitoring as RFPs come out for gas supply and are participating in those. The magnitude of gas that will be demanded in-basin in Appalachia is going to need to be sourced by multiple producers. If you think about folks like us that have the resource depth and the creditworthiness to enter into long-term arrangements with these new demand sources, we will certainly benefit. The only question in my mind is timing: is it three years, five years, or seven years? Michael Stephen Scialla: Alan, do you see that developing more on the Ohio side? It looks like it is maybe ahead of Pennsylvania, and can you participate as much over there if that is the case? Alan Shepard: For an Appalachian producer, given the interconnectedness of the pipes, we are pretty agnostic to where it develops. You can wheel gas around between the states pretty easily. As a macro observation, Ohio has shown itself to be a little easier to do business with in terms of speed. It is a little bit flatter there for some of the data centers, and they have intersection points with the long-haul pipelines like Clarington that make it very attractive. Pennsylvania is also competitive—you have the Homer City plant and the NextEra projects; they are still working on site selection but have indicated the Mon Valley area, which is certainly in our footprint. Bigger picture, we are agnostic; we are excited about the growth in demand. And as Everett mentioned, you are starting to see differentials tighten up in the out years, and we hope that trend continues. Michael Stephen Scialla: Got it. I wanted to ask on your convertible notes. Can you say when during the quarter you expect that remaining $[inaudible] to convert? I am just trying to estimate the diluted share count for the second quarter. Everett Good: That maturity is on May 1. So those shares will be issued—approximately 12 million shares net issuance—later this week. Alan Shepard: And when we say net, that includes the effect of the cap call that we structured when we entered into the converts. So the 12 million is the net out the door. Michael Stephen Scialla: Great. Thank you. Appreciate it. Operator: This concludes our question and answer session. I would like to turn the call over to Tyler Lewis for any closing remarks. Tyler Lewis: Great. Thank you again for joining us this morning. Please feel free to reach out if anyone has any additional questions. Otherwise, we will look forward to speaking with everyone again next quarter. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 FTAI Aviation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference will be recorded. I would now like to hand the conference over to your first speaker today, Alan Andreini, Investor Relations. Please go ahead. Alan Andreini: Thank you, Marvin. I would like to welcome you all to the FTAI Aviation First Quarter 2026 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer; David Moreno, our President; Nicholas McAleese, our Chief Financial Officer; and Stacy Kuperus, our Chief Operating Officer. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements. including regarding future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and to review the risk factors contained in our quarterly report filed with the SEC. Now I would like to turn the call over to Joe. Joseph Adams: Thank you, Alan. The first quarter was a solid start to the year for us, and we'd like to begin this morning by highlighting the key objectives for each of our businesses in 2026 and the progress we made during this first quarter. Across aerospace products, strategic capital and power, we are scaling platforms with strong structural demand in a disciplined manner in deploying capital to support growth where we see the most attractive long-term returns. I'll start with aerospace products. First, a top priority for us in 2026 is to focus on accelerating our market share growth. As our production capabilities, parts procurement strategies and overall MRE customer adoption reach an inflection point, now is the time for us to take full advantage of our competitive moat and focus on market share growth. As a reminder, we're only 5 years into building our aerospace products business, and as the business continues to mature and grow, we have the opportunity to leverage our enhanced execution capabilities to take more market share more quickly from traditional engine maintenance shops. Second, as the market for the CFM56 and V2500 engines continues to mature, we've seen a notable increase in demand for leased engine solutions from top-tier airlines. even those with in-house engine MRO capabilities. We offer flexibility customized pricing and scale that no one else can fulfill and these large programs are very sticky. It's a key priority for us in 2026 to win more of this business. Third is production. We've always talked about expanding production capacity well ahead of growth as well as adding maintenance facilities in parts of the world where we see strong traction with our customer base. It's notable today that when you look at the map, we have no major maintenance facilities east of Rome, Italy. I'd expect this to look different when we are in next year's first quarter call. Turning to results. Aerospace Products results support the objective I just outlined with top line revenue growth accelerating both year-over-year and quarter-over-quarter, up 104% year-over-year and 32% quarter-over-quarter, respectively. First quarter adjusted EBITDA of $223 million is an increase of 70% year-over-year and up 14% from $195 million in Q4 of 2025. EBITDA margins for the quarter of 30% are indicative of an increased mix of deals with large airline customers and a larger mix of full performance restoration shop visits. We expect this to be the trend line going forward as our capabilities have been built out, and we're able to bring volumes to the market that others simply cannot. Shifting now to strategic capital, where our top priority is completing the deployment of the 2025 SPV or special purpose vehicles. Our deployment pace for the first vehicle has been strong, and our engine maintenance focused approach to adding value to aircraft ownership has been well received by the market. As we approach the end of the second quarter, the 2025 SPV will be fully invested, and we will shift from the deployment period to the harvest period where quarterly distribution will now begin. David will share more with you about the goals for adding value to the portfolio during this phase. As an active asset manager, we're always pursuing ways to enhance the returns above what is the contractual lease stream. Our second area of focus for strategic capital is the launch of the 2026 SPV. We continue to plan to have a first close at the end of the second quarter, and we'll start acquiring aircraft in the third quarter of this year. The investment strategy 12- to 15-month deployment period and size of the vehicle will be consistent with the 2025. Last, to support the build of the Strategic Capital business we've added to the team and now have over 40 dedicated individuals focused on sourcing, underwriting and servicing the portfolio across offices in Dublin, Dubai, Cardiff and New York. The growth ambitions and differentiated strategy around engine maintenance has resonated in the market and we've been able to attract great talent to supplement our existing team and scale the platform. Finally, the FTAI Power business continues to make strong progress towards its commercial launch in the fourth quarter of this year. This week, we signed an important joint venture agreement with the Jereh Group for packaging and customer conversions that are in advanced stages, both of which David will share more details about shortly. Before I pass it over to David, I want to address the conflict in the Middle East that began at the end of February the broader geopolitical environment our industry is navigating today. We are hopeful for a peace of resolution and a return to more normal energy trading and prices but we're also realistic about some of the challenges of today's environment. Beginning with aerospace products, our exposure to the Middle East is limited. Less than 3% of our global current gen narrow-body fleet is based in the region, and we have very little customer exposure. More generally, we've not seen any meaningful change in shop visit demand to date. That said, elevated oil prices and fuel prices do negatively impact our customers' financial situation, and while this can create some volatility, it's the exact environment where our FTAI value proposition becomes even more critical to the customer. When an airline is facing a multimillion dollar engine shop visit in comparison to a faster, lower-cost engine exchange with FTAI, the decision is even easier to make when liquidity is top of mind. It's also worth remember that airlines cannot meaningfully change their fleets in response to short-term volatility. New aircraft orders are locked in for the next 4 to 5 years. and the current generation aircraft will continue to be a vital part of the global fleet for many, many years. In short, market share gains in aerospace products are much more consequential to us compared to overall market growth. Our strategic capital periods of volatility create opportunities -- investment opportunities, when liquidity is tight, sale-leaseback transactions help raise funds and avoid future shop visits. As the only lessor in the world that covers all engine maintenance for its aircraft portfolio, we are uniquely positioned to help airlines in this matter. pAnd lastly, for Power, our business is largely insulated from the geopolitical dynamic today. The MOD 1, our product runs predominantly on natural gas. And to the extent we see additional aviation retirements that will just provide additional feedstock to grow our conversion efforts. So I will now hand it over to David Moreno David. David Moreno: Thanks, Joe. I will start by providing an update on aerospace products production. We refurbished 270 CFM56 module this quarter across our 4 facilities, an increase of 96% compared to Q1 2025. This is a good start to our 2026 production goal of 1,050 modules and continues to reflect the hard work of our fast-growing team. As Joe mentioned, we have built a strong aerospace products foundation over the last 5 years, and we are ready to further accelerate our market share growth. From a commercial perspective, we are seeing customer engagements expand to larger, more programmatic partnership as airline adoption accelerates. This is driven by both the overall market tightness as well as FTAI's capabilities continuing to broaden to now include engine and module exchanges, engine leasing and aircraft leasing. We can't emphasize enough the stickiness that's created as our relationships with airlines and asset owners expand. We become a solution provider that is integrated into the operational plans for the airline's future growth. Our close relationships with airline customers is something we are very proud of, and we believe this will continue to accelerate our market share in the years to come. Next, I'll share a further update on our strategic capital. To support the full deployment of the 2025 SPV, we upsized the vehicle's warehouse debt facility at the end of March, adding $1 billion of committed capacity. This facility is now $3.5 billion in size across 10 lenders, creating a strong roster of partners for our significant debt capital needs in the business going forward. As we mentioned last quarter, capital deployment for the 2025 is largely complete. We have closed 165 aircraft as of the end of Q1. And after we sign a few LOIs that are in process, all new aircraft will go into the -- all new future aircraft will go into the 2026 SPV. With the 2025 SPV transitioning from investment mode to harvest mode, we are very focused on maximizing the value of potential cash flows for our investors. We do this through active management of maintenance events, both airframe and engines as well as through lease extensions. We continue to see strong desire from our airlines to fly current gen aircraft as long as possible. especially when they do not have to worry about engine shop visits. Our all-in-one solution of combining leasing and engine maintenance has resulted in many lease extensions, and we believe this will continue to be an important trend in the portfolio. Finally, on FTAI Power. I want to share updates on the timing of our commercial launch, our packaging integration and progress with customers. First, we remain firmly on track to commercially launch the MOD 1 in the fourth quarter and our prototype testing is actually running ahead of schedule. We have completed all the major mechanical testing milestones, including testing our redesigned Mod 1 fan stage at synchronous speed and we expect to wrap up final testing in the third quarter. The results to date have exceeded our expectations. We have been also hosting customers on-site to observe the Mod 1 prototype directly, and that has become an important part of how we sell this product. Second, as Joe mentioned, we signed a joint venture agreement with Jereh Group, one of the leading packagers for mobile gas turbines. This is a foundational step for the program as Jereh will be our primary partner responsible for taking our turbine and combining it with the mobile package that includes the key components like the generator and gearbox. Through the joint venture, we will draw on Jereh's manufacturing footprint across the United States, the UAE, Canada and China, which gives us scale, geographic reach and a clear path to global product rollout. The joint venture derisks our supply chain accelerates our speed to market and align the incentives of both parties across the long-term success of the platform. Third, we are building a customer base committed to the long-term deployment of the Mod 1. The customer momentum we discussed last quarter has accelerated meaningfully. We are indeed in active negotiations with leader across the energy and digital infrastructure landscrape, and every one of these deals is anchored by long-term service agreement or LTSA on the turbine. One exciting element is that customers are coming to us with a range of commercial structures in mind from outright purchase to lease, which speaks to the flexibility of our model and the strength of the underlying demand. The interest in lease structure in particular, fits naturally with our strategic capital initiatives and gives us the ability to offer customers a sought-out after leasing solution while preserving capital efficiency. Several of these conversations are framed around multiyear multi-block deployment plans, which gives us visibility well beyond 2027. Last, what has resonated most with customers is the maintenance model. The ability to swap a turbine in place in just 2 days rather than taking the unit offline for an extended overhaul is a capability that the industry -- the power industry has not had access to before. and it translates directly into a lower levelized cost of energy or LCOE for the customer. Based on these conversations stand today, we expect to be mostly sold out of our 2027 target production in the near term with a meaningful portion of 2028 spoken for. Before I hand it over to Nicholas, I want to take a moment to congratulate him on his promotion as CFO; as well as Mike Hasan on his promotion to CIO. Both Nicholas and Mike have been key contributors to our operational success and their new leadership roles they are positioned to have a large impact on our future success. With that, I'll now hand it over to Nicholas to talk through the first quarter numbers in more detail. Nicholas McAleese: Thanks, David. The key metric for us is adjusted EBITDA. We started 2026 with adjusted EBITDA of $325.6 million in Q1 of 2026, which represents a 17% increase compared to $277.2 million in the fourth quarter of 2025. The $325.6 million EBITDA number was comprised of $222.6 million from our Aerospace Products segment, $153 million from our aviation leasing segment and negative $50 million from Corporate and Other, including interest segment eliminations and start-up expenses associated with our power initiatives. . Aerospace Products delivered another good quarter with $222.6 million of EBITDA and an overall EBITDA margin of 30%. This is up 14% sequentially from $195 million in Q4 of 2025 and up 70% year-over-year compared to $131 million in Q1 of 2025, reflecting continued momentum from production growth and operating leverage. Turning to Aviation Leasing. The segment continued to perform well, generating approximately $153 million of EBITDA in the first quarter. This included $45 million of insurance recoveries, $12 million in gains on sale, $25 million from 2025 SPV management fees and co-investment returns and $71 million from leasing assets held on our balance sheet. For insurance recoveries, in addition to the $45 million recognized in the first quarter, we continue to expect approximately $5 million to be settled later this year, consistent with our previously communicated $50 million for 2026. When combined with the $65 million recovered during 2024 and 2025, this brings total recovery since the outbreak of the war in 2022 to approximately $115 million against the $88 million we rolled off in 2022. For gain on sales, we began the year with $127.5 million in asset sale proceeds, generating a 9% gain or $12.1 million. as we closed the first 9 of 14 aircraft expected to be sold to the 2025 SPV this year and divested several noncore assets during the quarter, including airframes and an Orbi211 engine. Overall, as we continue to launch new strategic capital vehicles on a programmatic basis, we expect the mix of leasing EBITDA to increasingly shift towards strategic capital-driven earnings as we further pivot away from balance sheet aircraft leasing and toward a more capital-light fee-driven asset management model. This shift in our business model is also driving continued improvement in our financial profile. We began the year at approximately 2.3x leverage on an annualized basis, now below our targeted range of 2.5 to 3x agreed with our rating agencies. meaningfully lower than the leverage levels of approximately 5x in 2022 and 4x in both 2023 and 2024 before we pivoted to an asset-light strategy. In April, we also upsized our revolving credit facility from $400 million to $2.025 billion and extended the maturity of the facility through 2031 on improved pricing terms, providing SPI with a long-term source of liquidity. The facility was significantly oversubscribed and are supported by a diverse syndicate of 15 lenders, including several institutions that also finance the debt facility of our 2025 SPV. As we continue to scale our asset management platform, this alignment across financing relationships enhances flexibility, lowers our cost of capital and delivers tangible financial benefits to the public company. Finally, in the first quarter, we generated $158 million of adjusted free cash flow, reflecting several strategic investments made early in the year to position the business for further growth in 2026. These included approximately $75 million in prepayments under our multiyear CFM56 parts agreement with the OEM, approximately $81 million in induction prepayments for V2500 engines, where demand for full performance restoration remains strong, a $19 million of incremental inventory for FTAI Power to build working capital in support of a targeted 100-unit production run in 2027. Excluding these growth investments, adjusted free cash flow for the quarter totaled approximately $333 million, reflecting the strong underlying cash generation capability of the business. With that, I'll hand it back over to Joe for final remarks. Joseph Adams: Thanks, Nicholas. I'd like to reiterate how encouraged we are by the start of 2026. Despite a dynamic geopolitical backdrop, demand across our customer base remains robust, execution across our 3 platforms is extremely strong and the strategic investments we're making today position FTAI well for continued growth in 2027 and beyond. While developments in the Middle East remain fluid and could present both challenges and opportunities, we continue to see strong underlying fundamentals across our business and a durable competitive advantage in all of our platforms. Consistent with our view, we reaffirm our 2026 total business segment EBITDA outlook of $1.625 billion, comprised of $1.05 billion from aerospace products and $575 million from aviation leasing supported by growing and accelerating demand across our proprietary aerospace offerings. Based on this outlook, we also remain confident in our expectation to generate approximately $915 million of adjusted free cash flow in 2026, which reflects continued execution against our annual production plan of 1,050 CFM56 modules to meet customer demand while prioritizing excess cash flow for reinvestment in high-return growth initiatives, including M&A, minority investments in the 2026 SPV and the continuing development of FTAI Power. As a result of this confidence for the third consecutive quarter in a row, we're announcing an increase to our dividend from $0.40 per quarter to $0.45 per share per quarter. The dividend will be paid on May 26 to shareholders of record as of May 13. This marks our 44th dividend as a public company and 59th consecutive dividend since we started. As we look ahead to the rest of 2026, our focus remains on building a durable, scalable and differentiated platform that delivers value over the long term. The investments we are making across aerospace products, strategic capital and power are designed to strengthen our competitive position, expand our addressable markets and support sustainable growth for many years to come. And I want to recognize the teams -- fabulous teams across our organization for their continued focus on execution and delivery in a demanding operating environment. And I also want to thank our customers and partners for the trust they place in FTAI as we help them navigate capacity constraints and rising demand and our shareholders for their ongoing support as we continue to scale our business. We are focused on executing against the opportunities in front of us and remain confident in FTAI's ability to deliver. With that, I will pass it back to Alan. Alan Andreini: Thank you, Joe. Marvin, you may now open the call to Q&A. Operator: [Operator Instructions] And our first question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Nice quarter. I have 2 questions, if that's okay. First one is on Aerospace products. Market share continues to climb higher, up from 10% to 12% while the margin rate is healthy, but has taken a step back. Can you maybe talk about some of the puts and takes? How much came from higher work scope versus the market share in new customers. Joseph Adams: Yes. I mean we really don't have a specific breakout of the components. It's really a mix of things that go into it. And as we mentioned previously, as the customers get bigger, the potential orders get bigger, the work scopes get bigger. We are consciously going for a higher market share and to drive faster growth in EBITDA in an absolute dollar amount. And we think that moves the needle much more than anything else and really the opportunity to take advantage of this scale that we have today. and really capture as much of the market as possible is something that we've been working hard to get ourselves in a position to be able to do for years, and we feel like we're there at this point. David Moreno: Yes. And this is David to add to that, right? I think as Joe mentioned, the scale is intentional. It's obviously intentional on the aerospace products, but it's also intentional across the value it creates on our -- on the entire business, right, our strategic capital and our power business. So when we look about -- think about the value creation, there's no better lever than increasing market share for us as a top priority. Sheila Kahyaoglu: Great. And then maybe, David, you mentioned much of the '27 '28 modules should be committed to in the near term. Can you give us some flavor of what your customer set looks like and the underlying assumptions in terms of volumes and packaging capability as you get into the 2028 time frame? David Moreno: Yes. So we've made meaningful progress with customers. As I mentioned, we've had customers on site as well to look at the prototype, understand that. I think that's a very important piece of the sales process. So to give you a little more color, the customers really consist of 4 types of customers. #1 hyperscalers, #2 data center operators; #3 gas distributors and #4 financial sponsors. There's a lot of activity from financial sponsors who are actually -- who are providing a lot of capital in this space. We feel very good about being where we're at and we expect to be, as I mentioned, in a short matter of time sold out of 2027 volumes. The conversations we're having are beyond '27, they're multiyear multi-block conversations. So we're talking about conversations or orders into 2028 and beyond. And I think that's a very important piece is when we built this, we wanted to create a diverse group of customers, really with the intention of having them operate this base load for a long term. And I think we seen that, and we're very happy with the progress. And as I mentioned, I think we're kind of in the final steps here, and we hope to update you guys shortly. Sheila Kahyaoglu: Got It. Share in Aerospace and Power, makes sense. Operator: Our next question comes from the line of Ken Herbert of RBC. Kenneth Herbert: Joe and David and Alan and Nicholas. Maybe, Joe or David, can you just talk a little bit more about the relationship with your JV partner, Jereh Group? And maybe how that came about, why you picked them and the value uniquely they sort of bring to this FTAI Power opportunity? . David Moreno: Yes, this is David, Ken. So I can take that. Yes, we're very excited about our partnership with Jereh Group. They're one of the largest oil and gas equipment manufacturers across the world. And what they're going to be doing with us is they're going to basically handle everything except the turbine, right? What that means is the actual trailer, all the key components on the trailer, including the generator, the gearbox and all the controls. And that will allow us to focus on the Mod 1, which is our -- obviously our specialty around the turbine. Jereh, we selected Jereh because of their scale in manufacturing. They have manufacturing facilities across the U.S. Canada, the UAE and in China, so that scale is obviously an important theme, and it's something that we're going to continue to talk about as well as they have a lot of experience with aeroderivative packaging package turbines for, let's say, folks like GE Venova, Baker Hughes, Siemens, and that they can create a lot of value and everything but determined. So I think it's a really good marriage between both companies, and we have shared incentives to continue to work and scale this business together. Kenneth Herbert: Does the work with Jereh at all impact sort of your access to the post sales economics and we think around maintenance and spare parts and other ways to sort of monetize obviously, the FTAI power? David Moreno: Yes, I would say there's no real change to how we've talked about economics, right? So the overall unit economics will remain roughly the same in line. right? But obviously, a part of this will come through a joint venture. So the way that I will look on the face of the financials may be a little different, meaning revenue may be slightly lower and then we'll have earnings piece of this earnings through earnings in a joint venture. But overall, the unit economics remain the same. Obviously, as part of the Jereh Group handling the packaging. That means for us, we'd have to invest less in working capital around the packaging piece of the equation, which is obviously a good part -- but overall, they're best in class. They can package at scale and they're vertically integrated. So they add a lot of value there. So it does not have any impact on our overall margins. Yes. And I think we talked about this on the call, but we're obviously very focused on the long-term service agreement when we talk about economics to FTAI on the turbine. What that is, is effectively customers will pay for us to service the turbine. And I would think of that as very similar type economics as our aerospace business, where effectively, customers will pay us based on usage. And depending on usage, every 3 to 6 years, turbines will have to get replaced. And we're going to be handling that through our exchange business, which we're very excited. And what that means is, effectively, we can replace these turbines in 2 days or less. And we're excited because typically, the lead times of doing maintenance on turbines is actually a bit longer than the aerospace business. So we think that's going to be a huge competitive advantage. as well as a revenue stream, which we're very excited about. . Operator: Our next question comes from the line of Kristine Liwag of Morgan Stanley. Kristine Liwag: Maybe, David, since you're talking about power, I just want to touch a bit more on some of the things you said. So I just want to clarify, when you said that you're mostly sold out for 2027, does this mean that these things are accounted for and you're just waiting for ink to dry on the orders? That's the first question. And also the second question, can you provide more color in terms of how your interactions are with these hyperscalers? What's important to them? When you talk about being able to service these engines these turbines at a shorter period. Is that a key differentiator? Are they valuing this? And ultimately, how competitive is your offering to what they're considering right now? David Moreno: Yes. Yes. So we're in advanced negotiations. I'd say we're in kind of the final steps, and we expect, let's say, to be sold out imminently. So that's the first question. As far as the second question, what differentiates our product and what's important for our customer really it's 3 things, right? Number 1 is speed to power, right? So customers want units now, right? There's really a shortage of equipment out there. And our unit is mobile, and it can be installed in less than 2 weeks. So that's a big value add, very different than, let's say, an EPC or construction that takes, let's say, could take up to 18 months. Number 2 is scale. Customers want scale. I think now between our ability on the turbines as well as Jereh's ability on the packaging we have really scale that no 1 has today. And then number 3 is really reliability of the product, which includes, obviously, the reliability of the turbine. So it's the CFM56, it's the most durable engine ever produced and then as well as the maintenance or the servicing of it, which is a huge advantage, right? Ultimately, if you can service a unit in 2 days versus 6 months, that ultimately means you need less units and it's lower operating costs for our customers. So all that's very important, and I think they're very excited about the Mod 1. And again, we we've really been thoughtful about building the customer base, not just thinking about 2027, but thinking about the longevity of this platform. Kristine Liwag: Super helpful, David. And then you guys have historically talked about the power margins would be better or equal than aerospace products. With your investment now in higher market share for aerospace products within the margin pressure that that's yielding. Can you talk about where you think power margins could be in the long run? I mean, compared to when you guys have talked about the power initiative, this ability to turn around the maintenance in 1 to 2 days, it seems like a very significant opportunity. So does that materialize in better pricing, better margins. Anything to level set us on power margins and what to expect for '27 and '28 8 would be helpful. David Moreno: I would say our margins, right, when we talked about it, are going to be in line to our historical Aerospace margins, right? So I would say there's no changes based on our growth in market share on aerospace, that has no impact on power. We're obviously going to be providing more color as we progress through the specifics of these contracts. But you're right, the long-term service agreement is a key differentiator. It's really value add for the customer. And for us, it's recurring revenue, right? It really sets up a long-term base. Typically, the type of contracts we're going to enter are going to be long term in nature. so let's say, 10 years plus. And I think that's a very important piece because it's not only the day 1 sale, but it's also the ability to provide services on that equipment, which is a huge differentiator for our customers and something they prioritize when talking to us. Operator: Our next question from the line of Giuliano Bologna of Compass Point. Giuliano Anderes-Bologna: Congratulations on the continued impressive results in the scaling of the business. The one thing I'd like to focus on is the real acceleration in the module count in producing 270 this quarter. Can you tell us more about what's driving that acceleration in the module production because it seems like a pretty impressive acceleration in your production volumes. And be curious about the durability and where things should go from there because it very well. versus your stated targets for the year. David Moreno: Yes. No, no, we're proud of the execution from the team, right? And as we said all along, right, we've been really focused on execution, and that includes adding the capacity, which we've done. Number 2 is the people, right? We've been focusing on adding the right people and we've talked about the trading academy so that continues to be humming. And then obviously, number 3 is execution. So we're very excited. I think that's playing out in the numbers. As you mentioned, we went from 138 modules in Q1 in 2025 to 270. So pretty dramatic increase year-over-year. And I would point out that Rome and Lisbon are still ramping up. So I think we see a lot of momentum from those facilities and a lot of growth coming. So we're very excited. . I think Joe also mentioned this earlier, we continue to look for additional capacity east of Rome. I think that's a key priority for the business. We want to get ahead -- well ahead of capacity as we continue to go for market share. Joseph Adams: And I think also having a part supply deal from the OEM helps us scale as well, and that's a huge provider of parts, you need parts people and facilities to build an engine. And so we've really concentrated the last year on all 3 of those. And the result is we're able to double production year-over-year. Operator: Our next question comes from the line of Josh Sullivan of JonesTrading. Joshua Sullivan: Just wanted to touch base on the conflicts in the Middle East? I know your exposures be limited. But if this is a projected broader event, given the cost saving tools that FA offers, are you seeing any early conversations with new customers who might feel they're exposed to preparing? Joseph Adams: Well, I think -- I mean, when you get into these environments, liquidity becomes #1, 2 and 3 for airlines to focus on. And so any time that happens, you start having increased on sale-leaseback opportunities, asset sales avoiding engine shop visits. So yes, it's a direct result of when you get into these environments, the priorities change for the airlines customers, and we're there to partner with it. We're always offering help. We've done this in other past crisis. If you think about COVID or back when airlines have been -- the Russian situation. So we're always flexible, and we have a lot of access to capital. and we can save -- so we really go in and try to sort of sit down and work with the clients to figure out what they want -- what they need and what we can do and how to how to help them as opposed to sort of an adversarial relationship. It's really a partnering approach, which has worked very well. Joshua Sullivan: And then I guess kind of relatedly, are you seeing any acceleration in engine assets for sale in the Middle East or Europe becoming available as a result of the conflict. And I guess it's really a question on the retirement dynamic and how that's playing out in your view. David Moreno: Yes. No, it's early. So we're not seeing that yet. As Joe mentioned, obviously, for us, we want airlines to do well, the entire aviation industry is better when airlines are doing well, but we're well prepared with the tools that we have, right? I mean, Joe covered it, but the ability for us to do a sale leaseback with engine management really has 2 benefits. day 1, you create liquidity and day 2, you avoid the expensive shop visits. So we're really 1 of 1 that can execute at that scale. So it's still early, but we're prepared to help when the time is right. Joseph Adams: I mean the only thing you see in the beginning are if people were flying A340s or 747s or sometimes some regional jets that are either high -- really high cost or low revenue those can be taken out of operation, and that's sort of what you see in the early periods. But core fleets that people need to operate their schedule and they plan over multiple years and you can't get replacement capacity. It's been such a tight market. We don't expect to see much, if anything, on that changing in the next few months, even if this goes on. Operator: Our next question comes from the line of Brandon Oglenski of Barclays. Brandon Oglenski: Joe, can you speak maybe a little bit more on the customer profile of these larger airlines that you had in the quarter? And looking forward, as you seek to get more market share here. I think this might actually be very much a validation of the model that you have here. But I don't know, maybe you want to elaborate? Joseph Adams: Yes. I mean it's a great question because I mentioned last time that if I was talking to some of the big airlines 12 or 18 months ago, they would have been somewhat, we don't need this product, and we're a little bit more dismissive. But now we talk to airlines, virtually everyone in the world is a potential customer, if not an actual customer today. And the reason is, you can go to an airline and say, you tell me what you think you're going to spend to rebuild an engine, and I'll match that price or beat that price for you. And I'll get rid of all of the expenses you have to incur to manage that event like spare engines, engineering departments and the risk that the cost becomes -- you have a negative surprise in the cost overrun, all that goes away. And it's like who wouldn't want to do that. So it is a great pit. So when airlines hear that, and they think about it and say, why shouldn't I -- particularly if I'm moving into the new technology that believe and even if I have my own maintenance capabilities, why shouldn't I begin to use this product, at least for a portion. And then ultimately, a conversation becomes or if you like it for 10% of your fleet, why not 100% of your fleet. And we have conversations now where we go into an airline and we might have acquired some aircraft on lease to an airline through SCI, and the airline says, we go in and say, "Great news. You never have to do another engine shop visit on that fleet ever again. So you don't have to fight with our lessor, and you don't have to manage the engine shop visit and end up spending a lot more money, and they like, that's fantastic. Why don't you go try to buy all of my other leased aircraft from other lessors and convert those? And so they're actually helping us to expand the relationship. And ultimately, the goal is to manage for an airline -- their entire fleet. And once you get to the level of comfort, like why wouldn't they want to do that? So I would say virtually every airline in the world, I can't think of maybe a handful that might not, but almost everybody in the world is an actual or potential customer. Brandon Oglenski: And Nicholas, I think you -- congrats on the new role, but you improved liquidity with a larger revolver, but I think also enhanced the warehousing facility on SCI. Is that correct? Nicholas McAleese: Yes. Thanks, Brandon. So I think it's probably important to clarify first, they are 2 independent facilities from each other. So the revolver is related to the public company and is the primary source of liquidity. The warehouse upside was all related to closing out the deployment of capital for SEI One as we tracked about $6 billion number. But said that, we do have lenders in both facilities. across them. And then so as we become a bigger and bigger player on the SCI, we're able to see financial benefits. And we're both very pleased with the outcome of this is that we're able to improve terms on the public company given we're becoming a much larger player on the SCI. Brandon Oglenski: And can you just put that in context of your expected capital commitments or capital cost at the corporate level looking out the next year or 2? Nicholas McAleese: Yes. So for the first SCI, we did -- we have 19% of the $2 billion that we closed earlier in the year. the capital call for that, there's approximately $95 million remaining from that as of 3/31. We do expect that to be closed by Q2, and that will fully close that. As a reminder, SCI 1 is a closed-end fund -- so once we commit that capital, we'll then switch from being in investment mode to harvest mode. And at that point, we'll start doing distributions back to all of the institutional LPs, including FTAI for its 19%. Related to SCI 2, we are actively now in the equity fundraising mode. So from that, we will expect to deploy capital in the second half of the year. but the timing of that will ultimately relate to the cadence of when we first do our equity closing. Operator: Our next question comes from the line of Brian McKenna of Citizens. Brian Mckenna: Okay. Great. So there's clearly a lot of noise across private credit today, although most of that is within corporate direct lending, but what are your dialogues like today for SCI 2. We've been hearing that institutional allocators continue to deploy capital in a big way across private credit despite all the rhetoric out there, specifically into ABF opportunities. So I'm curious what you're seeing on this front. And then from your seat, what's ultimately driving such strong demand for your product? Joseph Adams: Well, I would say, ultimately, it's returns. And these are -- we're not seeing any impact from whatever the private credit side is experienced in withdrawals or redemptions because our investors are all committed into private equity style vehicles and nonredeemable structures. So it has no impact on our ability. And really what people like is an uncorrelated asset-based return that has high contractual cash flows. And that's a sweet spot in the market. It always has been. It is -- and we hit that perfectly. So -- and what we're able to show people is a higher return with lower risk, which is another thing that every investor I've ever met is always trying to find that. So we're able to show better returns than a traditional approach given our engine maintenance exchange program. and lower risk because we have less residual value exposure. So there's really nothing -- what we offer is a great product in today's world. And all of the investors in the first SPV or we're doing this with an idea that it would be a program and they would be able to do this over multiple funds over the next few years, and they're seeing great returns. And so they're very happy with what we've been able to do and are very committed to continuing to invest. Brian Mckenna: That's helpful. And then you're clearly building a great network here of alternative asset managers and large institutional allocators for SCI, but I'm curious. A lot of these large investors also own or are invested in data centers and energy-related infrastructure. I think you guys alluded to this a little bit, but is there an opportunity to leverage some of these relationships on the SCI side to further enhance the adoption and distribution of your power product over time? David Moreno: Yes, this is David. And the answer is absolutely. So we're -- we've talked about the demand being -- a lot of demand for leasing, long-term leasing. And we're thinking about it very similar to the way that we thought if you think about our Aviation business, where we can create these long-term contracted cash flows. And then our capital partners are very much wanting to invest in these type of assets. So we feel very good about being able to scale that. And I think that's a very capital-efficient way to do so. So absolutely. Joseph Adams: It also further differentiates our product because most equipment sellers don't offer financing. And so we -- when we go to the customer, we say like we did in aviation on the power side, you can either buy it and you can lease it or you can have a power purchase agreement. You tell us what you want. And that flexibility is hugely beneficial to today's world where there's a lot of demand for capital, as you can see. And people are trying to figure out how to make it go farther. So the flexibility that we can offer on the financing is extremely well received, and it's a perfect structure for an SCI power vehicle. Operator: Our next question comes from the line of Shannon Doherty of Deutsche Bank. Shannon Doherty: First one for Nicholas and congratulations on your new role. After the additional $5 million of expected insurance proceeds this year, will you be completely finished with the insurance claims? Nicholas McAleese: Thanks, Shannon. Yes, that's correct. So we settled on $44.6 million in Q1, of which we received $20 million -- $27 million of that -- the balance of that will be received in Q2 from cash proceeds. And then remaining that $5 million is consistent with our original guidance of $50 million. After that, that will be ultimately it and closed. Shannon Doherty: Great. And for my second question, any update on the progress of getting the remaining PMA parts approval with the -- we all know that parts inflation is an issue for everyone in the industry right now. So maybe you can provide us with some more color on levers that you can pull to manage costs? Joseph Adams: Sure. So -- I mean, just to recap, there are 5 parts in total that [indiscernible] has been working on 3 are approved. Those 3 represent about 80% of the total cost savings. So the last 2 parts are in process to getting approved. But the majority of the cost savings is already with parts that are already available in the market. So -- but they are in the works in terms of getting approval for those last 2. Operator: Our next question comes from the line of Myles Walton of Wolf Research. Unknown Analyst: This is Greg Dalberg on for Myles. I just had a quick follow-up on Giuliano's question regarding module production. I wanted to focus more on Miami and Montreal specifically just because looks like Montreal is down sequentially in 1Q in Miami was well above the full year run rate. So can you just talk about the dynamics specifically in 1Q and kind of how those play out through the year? David Moreno: Yes, I can take that. So Montreal is our most mature shop which that means they're going to handle the heaviest work scopes. So the product production mix is based on -- truly on work scope. So Montreal is doing, let's say, heavier shop visits while Miami is doing a bit lighter and then Rome today and Lisbon are doing the lightest work scopes. Unknown Analyst: Got it. And then a quick 1 for Nicholas. Just given the corporate expense in 1Q was embedded with some of the power costs. Can you talk about the full year expectation? Nicholas McAleese: Yes. So we had approximately $10 million in incremental expenses related to power, that's R&D expense, and that's -- but that's also incremental head count from building out the teams of engineers, technicians and support staff. So decomposing that you can assume that we will be approximately slightly less on an annualized level related stuff for 2026. But as in the future years, we plan on growing this into 100 unit production growth, we will be increasing headcount. So in outer years, you can expect that our expenses for Power will continue to grow. But ultimately, there is some onetime expenses in Q1, Q2, Q3 as we do or indeed that will immediately hit our P&L rather than being capitalized. Joseph Adams: But probably in 2027, it will be a segment, and we will not have it in corporate. It will be a sizable business, and we'll set it up as a separate reporting segment. And so all those expenses will be attributed -- allocated to the Power business at that point. Operator: Our next question comes from the line of Andre Madrid of BTIG. Andre Madrid: This is the first quarter in a while that I can remember at least that we didn't see some kind of acquisition being announced. Obviously, still remains a capital deployment priority. I guess just could you give more color as to what the M&A pipeline looks like? Maybe obviously not too deep in the details, but color around scale and maybe geographic location and capability. Joseph Adams: Yes. I didn't realize we've built an expectation. We have an M&A every quarter. But it is hard to control that. But I would say, on M&A, the activity is in 2 different categories. This one is adding capacity to the overhaul business. And we did allude to the fact that we expect by this time next year, that we'll have another facility somewhere east of Royal, Middle East. So we are -- we do have some candidates. We're working on that. it's often hard to control the timing of M&A. So -- but we've been very disciplined and we found great assets to add. And when we get the right structure and the right asset, we can move quickly. So we -- we're working on deals in that category. And then the second area where we've been active is in piece part repair and part manufacturing. And we have several deals that we're looking at in that space as well. So we'll continue to vertically integrate in our product offering. Anytime we can undertake an activity to reduce the cost of overhauling and building an engine. We're going to be very aggressive about that. And we've added -- last year, we added Pacific Aerodynamic and prime through the Bauer partnership. So we'll keep looking and hopefully add additional capability in the repair and piece-part manufacturing business in the future. Operator: I see no further questions at this time. I would now like to turn it back to Alan Andreini for closing remarks. Alan Andreini: Thank you, Marvin, and thank you all for participating in today's conference call. We look forward to updating you after Q2. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, welcome to Frontdoor's first quarter 2026 earnings call. Today's call is being recorded and broadcast on the internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer. He will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Davis. Matt Davis: Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's First Quarter 2026 Earnings Conference Call. Joining me today are Bill Cobb, Chairman and CEO; and Jason Bailey, Senior Vice President and CFO. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at www.investors.frontdoorhome.com. As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC. Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements. All forward-looking statements are made as of today, April 30, and except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures for the most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. I will now turn the call over to Bill Cobb for opening comments. Bill? William Cobb: Thanks, Matt Davis. Coming into 2026, we laid out an ambitious plan, grow the member base, deliver structurally higher margins and maintain a disciplined capital allocation framework to create shareholder value. I am happy to report that we are off to a fast start in 2026 and executing on each of these. Turning to Slide 5. Revenue grew 6% to $451 million. Gross profit margin remained strong at 55%. Net income grew 11% to $41 million. Adjusted EBITDA increased 3% to $104 million and we bought back $60 million worth of shares. Operationally, our member count trend continues to move in the right direction with growth in our first-year channels accelerating to 3%. Combining this with our strong execution in the renewal channel, we now anticipate total member count will grow approximately 1% for the year. This would be a major milestone and would mark the first-year of organic member count growth since 2020. Complementing our core business, our HVAC upgrade program continues to be a significant driver of growth and adds meaningful value for our home warranty members. Let's now turn to Slide 6 to take a deeper look at channel performance. Starting with the direct-to-consumer channel, where ending member count grew 3% versus the prior year period, marking the sixth consecutive quarter of year-over-year member growth, proof that our strategy is working. Our approach to DTC is anchored in 3 key areas, strengthening brand leadership, growing demand and improving conversion. First, strengthening brand leadership. We continue to benefit from strong brand awareness, which we further reinforced in March with the launch of our latest Warrantina campaign. Campaign results continue to be terrific, with improvements across key brand metrics, including unaided awareness up 6% to 28%, purchase consideration up 5 points to 35% and likelihood to recommend up 8 points to 63%. Second, we are growing demand through an optimized value proposition, a more refined targeting approach and enhanced performance marketing. These efforts are allowing us to drive higher intent to purchase traffic while maintaining discipline around our marketing investments. In short, we are improving both the quality and quantity of demand entering the funnel. Additionally, we have started to see increased demand from the integration of 2-10 onto our platform with better SEO performance and an improved user experience. And third, we are improving conversion. We continue to refine our sales funnel through optimized marketing content for LLMs, AI tools to improve sales performance and promotional pricing, all to drive stronger conversion. The beauty of our promotional pricing strategy is that we are able to deliver member count growth without compromising long-term renewal performance. Most importantly, the renewal rates for our promotional cohorts are consistently exceeding those of non-discounted member cohorts. Now moving on to the first-year real estate channel. While existing home sales remain near 30-year lows, home inventory continues to rise. This improvement in inventory is creating a more favorable selling environment for home warranties. To capitalize on this, we have been deliberately investing at the local level and leveraging targeted promotions to position our brands for success. Here's a great metric. Our attach rate has improved now for 8 consecutive months and was at nearly 6% of existing home sales in March. As a result, ending member count for first-year real estate grew 3%, the first time we have organically grown this channel in years. This is a very big deal. Now turning to renewals, where our performance has been nothing short of amazing. Renewal rates remain near record highs, supported by a combination of factors, continuous improvement in the end-to-end member experience and reduced cancellations driven by engaging with members at the right time with the right message. Now moving to non-warranty and other, we continue to scale during the quarter with revenue growth of 23% year-over-year to $41 million. HVAC upgrades remain the primary driver and we continue to optimize how we run the program. By routing a greater share of HVAC claims to higher converting contractors, we have seen significant improvements in both quote rates and orders. Let me now turn to Slide 7 to discuss our strategic priorities driving value creation. Last quarter, we were clear about the priorities that matter most for our business. First, member growth. Improving first-year acquisition trends, combined with strong renewal rates, gives us confidence that we expect to deliver approximately 1% member count growth this year. Second, we continue to scale non-warranty revenue in a disciplined manner. We have proven our ability to expand share of wallet while deepening engagement with our member base. Third, deliver structurally higher margins. Last quarter, we increased our long-term margin targets, underpinned by dynamic pricing and cost discipline. This margin performance translates into strong cash generation, which brings us to our final priority, disciplined capital allocation to drive long-term value creation. Our capital allocation priorities remain unchanged. First, we invest to accelerate growth through organic initiatives and selective M&A. Second, we maintain a strong balance sheet and financial profile. And finally, we return excess cash to shareholders and we are on track to complete our current share repurchase authorization by early 2027. Execution across all of these long-term goals is clearly reflected in our financial performance. With that, let me turn it over to Jason to walk through the financials and our outlook in more detail. Jason? Jason Bailey: Thanks, Bill. Good morning, everyone. Let's start on Slide 9, where I will quickly cover some of the financial highlights for the quarter. We are off to an excellent start in 2026. Our first quarter results reflect focused execution and consistency across the business. Versus the prior year period, revenue grew 6% to $451 million. Gross margins remained strong at 55%. Adjusted EBITDA increased 3% to $104 million. And lastly, adjusted diluted EPS grew 14% to $0.73 per share, reflecting strong earnings growth and the positive impact of our share repurchase program. Now let's turn to Slide 10 for a deeper look at our revenue performance. As I just highlighted, total revenue grew 6% to $451 million. This was driven by approximately 5% from higher realized price and 1% from higher volume, primarily due to the HVAC upgrade program. From a channel perspective, compared to the prior year period, renewal revenue grew 6%, driven by higher price. First-year real estate revenue increased by 3% as higher volume was partially offset by slightly lower pricing. First-year direct-to-consumer revenue decreased 5%, driven by our promotional pricing strategy aimed at increasing member count growth. This lower pricing reflects a higher mix of discounted first-year members from the past 12 months of new member acquisition, which was partially offset by higher volume as we added more new members. Lastly, non-warranty and other revenue increased 23% due to both higher price and volume driven by our HVAC upgrade program. Now moving down the P&L to gross profit and gross margin on Slide 11. Gross profit increased 5% versus the prior year period to $248 million, while gross profit margin held strong at 55%. For the first quarter, our gross profit margin reflects higher price realization of 5% or $19 million, disciplined cost management leading to low single digit cost inflation, slightly higher incidence or service requests per member, which includes approximately $1 million from unfavorable weather in the quarter. This gross profit margin also reflects the ongoing expected revenue mix shift as non-warranty and other revenue continue to scale within the portfolio. Turning to Slide 12 to review our net income and adjusted EBITDA. For the first quarter, net income grew 11% to $41 million versus the prior year period. Adjusted EBITDA grew 3% to $104 million. As planned, SG&A increased during the quarter to capitalize on the strong momentum from 2025 in the direct-to-consumer channel. Adjusted EBITDA margin remained strong at 23%, reflecting disciplined cost management and solid operational execution despite the higher levels of marketing investments. Let's now turn to Slide 13 to discuss our free cash flow and capital deployment. Our recurring revenue and capital-light business model continued to generate excellent free cash flow of $114 million in the quarter. As a reminder, we expect to convert adjusted EBITDA to free cash flow at a rate of over 60% in 2026. In the quarter, we returned $60 million to shareholders through share repurchases. We ended the quarter with a strong liquidity position of $698 million and a low net leverage ratio. More broadly, this financial strength supports the capital allocation strategy Bill outlined earlier, providing the capacity to invest in long-term growth, maintaining balance sheet strength and returning excess cash to shareholders. When stepping back, Q1 was another proof point of what our business model is built to do. We continue to deliver strong earnings, generate significant free cash flow and return substantial capital to shareholders while accelerating growth investments. Let's now turn to our second quarter outlook on Slide 14. For the second quarter of 2026, we expect revenue to be in the range of $635 million to $650 million. This outlook reflects a low single digit increase in renewal revenue, a mid-single digit increase in first-year real estate revenue, a low single digit decrease in first-year direct-to-consumer revenue and a mid-20% increase in non-warranty and other revenue. We expect adjusted EBITDA to be in the range of $198 million to $208 million. This reflects higher gross profit from revenue conversion, low single digit inflation, continued revenue mix shift to non-warranty and our strategic decision to increase sales and marketing spend with the strong momentum we are seeing in the first-year channels. Turning to our full year 2026 outlook on Slide 15. We are reaffirming our full year 2026 outlook with key assumptions remaining essentially unchanged, as detailed in our earnings release and shown on the slide. As a reminder, and for those of you that are new to our story, I want to take a moment to discuss how seasonality impacts our financial results. With our first quarter results and second quarter guide, we anticipate that 53% to 54% of our full year 2026 adjusted EBITDA will be generated in the first half of the year. This is similar to the split in 2025. This is a normal part of our business and the reason why I encourage our investors to focus on our full year performance and guidance as the true measure of how we are delivering results. While the geopolitical environment has become more complex, our execution across the business, combined with multiple levers we can deploy to offset inflation, give us confidence in our ability to deliver on our expected revenue and adjusted EBITDA growth for the year. With that, back to you, Bill. William Cobb: Thank you, Jason. Our first quarter results reflect a continuation of the strong execution you've come to expect from Frontdoor. I'd like to highlight 3 things as we wrap up. First, our member count growth. Our member count is now growing. The team is doing great work and we're seeing that translate into measurable progress. And as a result, we now expect our total member count to increase approximately 1% for 2026, a major milestone for our business. Second, we are continuing to deliver strong margins in line with our long-term targets. The operating model we have been strengthening over the past several years is allowing us to deliver consistent results. And finally, our business model is doing what it was designed to do, generate a lot of cash and return that to shareholders through share repurchases. We love the position we're in and we remain focused on executing with discipline as the year progresses. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question is coming from Mark Hughes of Truist Securities. Mark Hughes: Can you talk about the real estate channel? It seems like you're having good success there. I wonder if you might touch on the attachment rates. You said they've been improving in recent months. Was it 8% in March? Where did they bottom out at? Where historically have they gotten up to in a stronger market? William Cobb: Yes. If you recall, many years ago, and I'm talking 6 or 7 years ago, attach rates in the industry were around 30%. That has fallen through COVID and the real estate sluggishness into the mid-teens. What has happened is we have steadily seen improvements in our attach rate, which is a measure of our warranties divided by existing home sales. So in March, we hit 6% on that measure. And I think it reflects some really good work by our real estate team, some work we're doing on shifting our focus away from large MSAs to focusing really on the local real estate agent. We have added some promotional pricing there. It's not at the level of 50% off, but it enables us to basically get the attention of real estate agents. And we've seen -- we've spent a lot of time talking about the improvements we've made to our members with the app, our experts, et cetera. So it's a combination of factors and we're steadily moving up. And like I said, I watch that measure very closely, the attach rate and our team with 8 consecutive quarters of improvement. That's a lot of what we think is driving the better performance. Mark Hughes: Yes. And will the strategy be on renewal, you'll move that up pretty expeditiously like you've been doing in the direct-to-consumer channel? William Cobb: Yes, it continues to be around 30%. It's a big initiative for our teams to try to -- we tick up into the 31% level, but we've been kind of stuck at 30%. But if we can unlock that, that would be great. It used to be in the mid-20s. So we have made a lot of progress there. And as you saw in our 10-K, our renewal rates improved by 200 basis points in 2025. So I think that the combination of efforts is why we feel so good about where the renewal book is coming. And if we can continue to grow the first-year channels, the renewal book is catching up and that's why we are now at 1% ending member count growth, what we're forecasting for '26. Mark Hughes: And then one more, if I can. You talked about the 2-10 that you're integrating onto the platform, you're seeing some momentum as a result of that. Could you expand on that point? William Cobb: Yes. We now run it as one, and this was always the plan. We thought that the synergies we could start to drive in revenue. So we run HSA, AHS and now 2-10, all of our DTC actions, all of our real estate transactions, all of our renewal transactions are all on one platform. This gives our teams an ability to do specific initiatives. So for example, now 2-10 can do 50% off on the DTC channel. Now we can do the same kind of tactics that we've used to help drive the renewal channel. So that's why it makes it a lot easier for us to execute 2-10 as being part of the platform. Jason Bailey: Yes, I'd add, Bill, to the other good examples would be our dynamic pricing tools can be applied, our contractor algorithms. It's just a great... William Cobb: Yes. So we now have one integrated contractor relations team, one integrated customer support team, et cetera. Operator: And our next question is coming from Eric Sheridan of Goldman Sachs. Eric Sheridan: I want to go a little bit deeper in how you continue to get message around scaling marketing investments around your brands, around driving customer acknowledgment of the product set and customer adoption of products broadly. And how are you thinking also about applying marketing to the balance you want to strike between the warranty business and the non-warranty business over the long term in terms of the messaging you want to put in front of consumers? William Cobb: Yes. Our primary focus is on the warranty business because the non-warranty business is primarily, at this point, a B2B2C business where we work very closely with our contractors. But there's a halo effect on the brands that come from talking about American Home Shield and what that does for our members. So the way we operate is we talk about our marketing funnel. It starts at the top with our broad advertising message. We use the warranty as our main message. But that's a portion of our marketing investment because there are all the elements of search marketing, direct mail, social media. There's a variety of tactics that we use in our overall marketing. Then what we do with non-warranty is that we're really marketing to our members directly. So with a 2.1 million member base, we find that very efficient for us. That's why we call it relatively CAC-free when we talk about non-warranty. So -- and we have such a good relationship with our contractors. They're very excited about this additional piece of business that they can put in new equipment. And frankly, it has a downstream effect of less truck rolls because the equipment is so new. So we think it's a virtuous cycle working together. Like I said, the primary focus is on American Home Shield, but we have a number of techniques that we're using, including some of the AI tools I referenced in my remarks. And it's really come together. The marketing team's done a terrific job. Operator: And our next question is coming from Jeff Schmitt of William Blair. Jeffrey Schmitt: So the new promotional strategy in real estate seems to be off to a good start. Are you seeing competitors respond to that? Are some starting to do the same thing? Or do you anticipate that happening? William Cobb: We haven't gotten much intelligence that others have done that. Now we believe that they probably are taking a look at that. But right now we're trying to -- we're very focused on the local real estate agents. So that's where our focus is. But we haven't picked up a lot of noise around others trying to do that. Jason Bailey: Yes. I think I'd add, too, our focus there in that strategy is more, as Bill said in his remarks, about engagement. And so I think in addition to the promotional pricing, we can drive engagement by highlighting the app, our experts and kind of our overall improvements to customer experience. And so I think this is just another tool in our kit that allows our field sales team to really succeed. William Cobb: I think that's right, Jason, because I think what we try to think about is we need to keep bringing the agent new news, whether that happens to be during a promotional pricing period or the other elements that we've added to our arsenal. Jeffrey Schmitt: Okay. And then, so there's 5% of realized pricing in the quarter, that was better than we had expected. Did you push through another round of pricing increases in December? And at what level? Or was that more from your dynamic pricing? Jason Bailey: It's no incremental pricing since our last update. I think it's just the effectiveness of our dynamic pricing tools. We're pretty much in line with where we were expecting or where we are expecting the year to land. William Cobb: Yes. I think, Jeff, when we talk dynamic pricing, what we're really saying is we're constantly looking at, frankly, increasing our prices. But some members get a price decrease and that's the advantage of dynamic pricing. We're really priced to the person. So it really was a continuation of what we're trying to do with our [ 1/12 ] at a time recognized revenue base. We're able to -- while there's a disadvantage that it takes 12 months for it to be fully realized, there's an advantage that we can act very quickly and enact pricing changes and that's really what we've done. But I think we're pleased with that effort. I think it also ties back to the strong renewal rates we've had, which also enables us to show a nice increase in pricing. Jason Bailey: Yes. I think there's probably a little bit of timing in there in the compare to the Q1 versus Q1 of the prior year. We're still targeting that kind of low 2% to 3% full-year realized price impact. Operator: And our next question is coming from Ian Zaffino of Oppenheimer. Isaac Sellhausen: This is Isaac Sellhausen on for Ian. So the question would just be on the customer retention for the quarter. It looks like that was just down slightly compared to last year. Not sure if that is a timing thing, but maybe you could just touch on that piece of it, maybe in relation to the renewals channel specifically and then kind of your expectations for retention as you move through the year. Jason Bailey: Yes. It's down slightly in Q1. That's just timing of 2-10 rolling into the book. I think we mentioned at acquisition, their retention rates were lower than ours. Now that they're fully in our book, I'd say that's just a minor impact in the quarter. By year-end, we expect retention to be relatively flat. The other thing I'd kind of point to is our renewal rates continue to be strong. I think Bill mentioned earlier, we were up almost 200 basis points year-over-year at the end of '25. And now with 2-10 on our platform, that's one of the upsides we see just as we put our tools and techniques on the base, we'll see that their rates come up to higher. William Cobb: Yes. So Jason is right. It's a mix issue, but AHS retention rates continue to be very strong. Isaac Sellhausen: Okay. Understood. And then just as a follow-up, as far as the gross margin outlook for the year, you guys reaffirmed that. Maybe if you could just touch on the cost side, whether it be parts or equipment or labor, maybe just how things have trended in the first quarter and then the confidence you have in that as you move through the year to reach that margin target? Jason Bailey: Yes. We're at low -- I'd say low single digit inflation in Q1. Our contractor relations team has done a great job working with our contractor network. We feel good about our outlook for the year. I would obviously say Bill and I are monitoring macro conditions daily and working with the team. So we're pretty confident that we'll be right in line with our guide. The outlook is pricing flowing through, similar incidence rates to prior year and then low single digit inflation for the full year. Pretty normal weather is our expectation. And then we've obviously considered the mix of non-warranty as it grows all in that guide. Operator: And our next question is coming from Sergio Segura of KeyBanc Capital Markets. Sergio Segura: First question I just had was on the full year outlook. So can you maintain that? I guess last year, you had a pretty steady cadence of beating and raising. So you beat this quarter in 1Q. So maybe just walk us through why you chose to keep the annual outlook unchanged despite the stronger-than-expected performance. Jason Bailey: Yes, Sergio. I'd say the Q1 is just a little bit of timing on the beat. We're very confident in how we're operating. We just -- since we just gave the guidance and obviously watching all the macro news, we felt really good about reaffirming where we are. We think the team, both top line and bottom line, are operating very, very well. So that's just kind of how we ended up on reaffirming where we are. William Cobb: Yes. It's a little bit of an anomaly because we report Q4 so late. It's like 2 months into the year and then we come right back only a month into Q2 to report Q1. So -- but giving the guidance 60 days ago and we felt like we did beat. It wasn't a large beat, but we're very proud of it. And so we felt like let's stay, let's reaffirm guidance at this point, and then we'll see -- we'll take another look at midyear. Sergio Segura: Understood. And then the second one I had, which is somewhat related, has to do with just the geopolitical tensions we're seeing and the macro uncertainty that you mentioned. Any comments you can provide on how the higher and volatile oil prices might be impacting your input costs and how much of a swing factor that could be to margins for this year? Jason Bailey: Yes. Like I said a minute ago, Bill and I monitor this really probably almost hour to hour, day to day, Sergio. But the team is operating very, very well. In Q1, we were really successful. We haven't seen a huge impact from fuel costs. It's definitely an input for our contractors. But remember, we manage cost overall on a total cost per job. And the levers as we think about there are probably 4 or 5 key tools we use to kind of manage that cost base. One, I'd start with, we're always thinking about our mix of preferred contractors and how much business we have with them and trying to optimize that mix. Two, Bill and I continue to remain laser-focused on SG&A and how we control costs there and what levers we have. Three, we are in a great position with our supply chain and being able to manage among multiple vendors and suppliers as we think about where we want to put our volume. And then the last two would be probably the more normal things you think of, but that's how we manage our trade service fees and how we manage dynamic pricing if we need to go to that level. So I think we've got a lot of tools in our toolkit to help us manage through this as we think about kind of the big macro picture right now. Operator: Our next question is coming from Cory Carpenter of JPMorgan. Cory Carpenter: I wanted, Bill, to go back to a comment you made in the prepared remarks. I think you said renewal rates for the promotional cohorts are exceeding those for the non-promotional cohorts. Can you just expand a bit on that? Obviously, that's a bit counterintuitive. And then does that make you want to lean more perhaps even into that discounting strategy? William Cobb: Yes. It is counterintuitive, Cory. And we talk about this all the time and I press the team multiple times, but these numbers, right, I think it has to do with consumer behavior beyond just home warranties. This is a tactic that a lot of consumer services companies are using where you really discount your first year and then there's almost an expectation among consumers that I got a great deal in the first year, I'm going to have to absorb an increase in pricing. As we've said, however, we believe or we've proven, we've been at this for about 3 years now. So we've been able to see that we're able to climb back up to the, if you will, normalized pricing level within 18 to 24 months. So we test this all the time, but I think what has happened is that it just proves out that people and it has to do with what kind of service they get, do they have the right contractors, a lot of factors. The moment of truth is really the most important piece there. So I know it's counterintuitive, but we've been testing this and proving it out continuously. To your point about would this indicate that we would do more, I think that's something we pulse. We stay very close to this every month in terms of how we want to pull the trigger on promotions. We are now moving into early days of dynamic discounting so that it isn't just the broad brush. We'll continue to do broad brush promotions like 50% off. But we're encouraged about what is potentially going to happen with dynamic discounting. So I think we're very active in this field. Like I said, we've been at it for about 3 years and we feel good about it. And obviously, the important point is to make sure that those renewal rates continue to stay high. Cory Carpenter: And I wanted to ask one more question on macro. I know you touched on kind of the cost side question earlier, but I wanted to ask it more on the demand side. And there's been a lot of -- the potential for higher inflation and more stress on the lower end consumer. Are you seeing any change at all in consumer behavior? And maybe if you could just remind us of what your kind of mix of consumers demographically looks like? William Cobb: Yes. So let me take that. So the mix of consumers is about 50% below $100,000, 50% above that. The piece that we have not seen, no impact on demand, is because with the budget protection that our core value proposition brings, I think it actually kind of plays to our advantage. It may hurt us a little bit in the real estate sector with the real estate market continuing to be sluggish. But I think the core value proposition, which we try to hit very hard and we try to do this on a targeted basis, we talked in the past about targeting more millennials, targeting our Hispanic markets. So I think that has worked to our advantage. So to date, we haven't seen a softness in consumer demand. You can see that from some of our numbers. So -- and I think that speaks to the value proposition of a home warranty. Operator: And our next question is coming from Michael Rindos of Benchmark. Cory Carpenter: Can you talk a little bit about your relationship with SkySlope, how that works and how much business is coming through them? William Cobb: Yes. Jason has been very close to that relationship. So I am going to let him take that. I may add something. But go ahead, Jason. Jason Bailey: Yes, Mike. SkySlope, we have an ongoing relationship with them, and the announcement you saw was an expansion of that relationship. I think we were originally in 4 or 5 states and now we are expanding to over 40 states. It is -- the easiest way to describe it is think of SkySlope as a platform that makes things easier for real estate agents. And then for us, the way that translates is we're in that workflow. So it's easier to attach a home warranty. We're pleased with the relationship. And again, it's just another tool for our field sales team to be successful and kind of build on the momentum they already have. Cory Carpenter: Okay. And just as a follow-up, is that an exclusive situation that you have there? And also, as far as the growth in the real estate channel, where are you seeing the most growth on a regional basis? And how many competitors do you see in some of those markets? Jason Bailey: Yes. I will take that in 2 parts. The SkySlope relationship is not exclusive, but we're really comfortable with our position there and how well we work together. And then on a regional basis, we're seeing success. William Cobb: I think it is pretty consistent with our overall business, what we call the Smile states. And our biggest markets are Texas and California, Georgia, et cetera. I think as far as competitors go, in the real estate part of the DTC, we have a larger share, smaller share, about 1/3 in real estate because we have many more competitors. But from a geographic perspective, it's pretty consistent with the way our overall business plays out. Operator: Well, we appear to have reached the end of our question-and-answer session and indeed the end of the conference call. This does conclude today's conference, and you may disconnect your phone lines at this time. We thank you for your participation. William Cobb: Thanks, Jenny. Operator: Thank you so much.
Operator: Hello, and welcome to the Third Quarter Fiscal Year 2026 Cardinal Health, Inc. Earnings Conference Call. My name is George, and I'll be coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd like to hand the call over to your host, Mr. Matt Sims, Vice President, Investor Relations, to begin today's conference. Please go ahead, sir. Matt Sims: Good morning, and welcome to Cardinal Health's Third Quarter Fiscal '26 Earnings Conference Call, and thank you for joining us. With me today are Cardinal Health's CEO, Jason Hollar; and our CFO, Aaron Alt. You can find this morning's earnings press release and investor presentation on the Investor Relations section of our website at ir.cardinalhealth.com. Since we will be making forward-looking statements today, let me remind you that the matters addressed in these statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during our discussion today, the comments will be on a non-GAAP basis, unless specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the supporting schedules attached to our press release. For the Q&A portion of today's call, we kindly ask that you limit questions to one per participant so that we can try and give everyone an opportunity. With that, I will now turn the call over to Jason. Jason Hollar: Thanks, Matt, and good morning, everyone. We are pleased to report another strong quarter for Cardinal Health, building on the momentum we displayed over the past few years. This quarter's performance highlights the durability and resilience of our business and the team's disciplined execution. The results reinforce our conviction in the company's growth trajectory and ability to deliver long-term value creation. Our underlying operating strength continues to be led by our largest and most significant business Pharmaceutical and Specialty Solutions, and is amplified by contributions from our higher-margin growth businesses. Within Pharma, we delivered strong growth, highlighting the strength of our core. We continue to see benefits from our strategic focus on expanding our capabilities across Specialty, both downstream of providers and upstream with manufacturers. We are progressing the expansion of our MSO platforms, in particular with the Specialty Alliances multi-specialty offerings, delivering differentiated value to a growing network of physicians and enhancing patient care and access. The integration of Solaris into the specialty Alliance remains on track, and we are taking actions to realize synergistic benefits across our portfolio. In GNPD, we continue to execute against our improvement plan. Our focus on simplification and cost optimization initiatives is producing tangible results, and we continue to see notable strength in our portfolio of Cardinal Health brand products. Our deliberate actions to simplify operations, enhance supply chain resiliency and drive commercial excellence remain strategic priorities as the business navigates the dynamic tariff environment. Our other growth businesses, at-Home Solutions, Nuclear and Precision Health Solutions and OptiFreight Logistics continued to deliver robust results. Their sustained performance is a direct outcome of our continued strategic long-term investments in these areas, which are aligned with a favorable demand environment and positive secular trends in faster-growing areas of health care. The collective strength and sustained momentum across the enterprise, including our financial position, gives us the confidence to again raise our full year outlook for fiscal '26 and highlight our expectations for continued momentum in fiscal '27. And with that, I'll turn it over to Aaron to review our financials and outlook. Aaron Alt: Thank you, Jason, and good morning. Our team delivered strong financial results in the third quarter, reflecting positive and broad-based demand, operational execution and loyalty to our disciplined capital allocation framework. Our strong operational performance was supplemented by positive discrete tax planning benefits below the operating line and continued share repurchase activity. Given our confidence in the remainder of the fiscal year, we are pleased to be raising our full year fiscal 2026 non-GAAP EPS and adjusted free cash flow guidance. Let's begin with a review of our consolidated third quarter results. Total company revenue increased 11% to $61 billion. This growth was driven by strong demand in our Pharmaceutical and Specialty Solutions segment and in Other. Gross profit grew 18% to $2.5 billion due to benefits from our acquisitions and segment performance. While we maintained our focus on cost management, we also invested in the business with SG&A, inclusive of the impact of our M&A, increasing 17% on a headline basis. When you adjust for the impact of the M&A, our SG&A growth was 7%, reflecting increased volumes and purposeful investments in teams and technology across our business. The combination of these results led to an 18% increase in enterprise operating earnings to $956 million. Moving below the line, we recorded net interest and other expense of $117 million for the quarter driven primarily by the increased financing costs associated with prior acquisitions. Our non-GAAP effective tax rate for the third quarter was 10.2% due to the benefit of discrete tax planning items in the quarter. Included in our Q3 ETR was a multiyear benefit that contributed approximately $0.35 for the quarter. Average diluted shares outstanding were 236 million shares. This reflects the positive impact of the completion of our second quarter ASR program in January as well as the launch of an additional $250 million share repurchase program in the quarter, which was completed in April. This brings our fiscal year '26 total share repurchases to $1 billion, exceeding our fiscal year baseline target by $250 million year-to-date. The net result of these factors was third quarter non-GAAP EPS of $3.17, representing 35% growth. Diving deeper into the businesses, the Pharma segment delivered a strong quarter. Segment revenue grew 11% to $56.1 billion. This was primarily driven by existing customer growth across the portfolio. We continue to see strong overall pharmaceutical demand across product categories, including specialty, generics and consumer health. Within brand, volume growth also remains quite healthy though we did observe some fluctuations in mix that impacted the overall revenue line between GLP-1s, IRA changes and generics. Of note, during Q3, GLP-1s added 6 percentage points to our revenue growth. GLP-1 revenue growth remained robust at over 30%, but moderated from the prior quarter. The growth from GLP-1s was generally offset in the quarter by a 6 percentage point impact to revenue from inflation reduction at WAC pricing adjustments. Segment profit growth outpaced revenue growth significantly, increasing 18% to $784 million. This strong result was primarily driven by contributions from brand and specialty products. As previously shared, we maintained our economics on distribution contracts notwithstanding the impact of WAC changes. We also saw positive performance of our generics program, and we're pleased to again see consistent market dynamics. I want to highlight how our teams adeptly managed through the increased operational complexity resulting from heightened winter storm activity during the third quarter, a testament to the agility of our workforce and fundamental durability of our business model. As a matter of financial transparency, I will note that on a GAAP basis, earnings were impacted by $184 million pretax goodwill impairment charge related to our Navista business. The noncash impairment charge was primarily due to changes in the risk profile of the business plans, resulting in an increase in the discount rate. These changes reflect business model updates and base operational performance. The impairment does not affect our non-GAAP results. Our strong positive outlook for our Specialty business is unchanged. We are pleased with the above-market growth we are seeing in Specialty, including over 20% revenue growth in the third quarter, and we continue to expect our Specialty revenue to exceed $50 billion in fiscal 2026. In our GMPD segment, revenue was $3.1 billion. This was generally flat to prior year reflecting lower distribution volumes, offset by Cardinal Health brand growth. We were again pleased with Cardinal Health brand performance, which grew over 5% in the U.S., including timing shifts into Q2 that we called out last quarter. GMPD segment profit saw decreased to $25 million due to the adverse net impact of tariffs. That said, our segment results reflect solid underlying operational performance, and the team remains focused on executing our improvement plan driving cost efficiencies and managing the supply chain resilience to serve our customers effectively. As you are aware, our tariff exposure is concentrated in the GMPD segment. In February of 2026, the Supreme Court ruled tariffs imposed under the International Emergency Economic Powers Act unlawful, and work is underway to establish a refund process. Uncertainty remains in the timing, and administration of refunds, and we have not recognized any financial impact in the quarter, not reflected potential impacts in our updated guidance. To date, we have paid approximately $200 million in IEPA tariffs and previously noted sharing in these impacts with our customers. As a result, if circumstances change and become more certain, we would anticipate the potential future net benefit to Cardinal to be about half of that $200 million primarily driven by the repayment of the IEPA pricing that we've taken to our customers. Turning to our other growth businesses. at-Home Solutions, Nuclear and Precision Health Solutions and OptiFreight Logistics, we saw strong results. These businesses represent a key element of our long-term growth expectations. Segment revenue grew 31% to $1.7 billion and segment profit grew 34% to $179 million. This performance was driven by robust demand across all 3 businesses and the acquisition of ADS. The integration of ADS into our at-Home Solutions business is progressing well, and this combination has created a powerful platform for patients with chronic conditions that supports and can be supported by other parts of our business. Our Nuclear and Precision Health Solutions business is executing like MPHS, again saw over 30% revenue growth from Theranostics, a key area of innovation and investments. And OptiFreight Logistics continues to deliver its unique value proposition, helping health care providers manage logistics with greater efficiency and cost effectiveness, growing revenue nearly 20% in the quarter. Now turning to the balance sheet. Our capital deployment priorities remain consistent, investing organically in the business for long-term profit growth, maintaining our investment-grade credit rating, returning capital to shareholders and opportunistically pursuing value creation through strategic M&A. We ended the quarter with a cash position of nearly $4 billion after generating $1.7 billion of adjusted free cash flow in the quarter and taking several actions that align with our disciplined framework. We continue to invest heavily into the business with CapEx of $385 million so far this year across all of our businesses. We prepaid $100 million on our outstanding term loan, further reducing our Moody's adjusted leverage ratio to 3x. This places us comfortably within our target leverage range of 2.75 to 3.25x and demonstrates our commitment to our BAA2 rating at Moody's. As I noted, we also returned capital to shareholders through an additional $250 million accelerated share repurchase. Let's talk about the rest of fiscal '26. Our strong performance through the third quarter and our confidence in the fundamentals of our business leads us to raise our non-GAAP EPS outlook for the full year to a range of $10.70 to $10.80. That is a $0.50 increase at the midpoint, made up of approximately $0.13 from operational strength at Pharma and in our other growth businesses and the remainder below the line. This new range represents annual EPS growth of 30% to 31%. In pharma, we expect our fiscal 2026 revenue to come in at the lower end of our 15% to 17% range, reflecting the continued strong overall volume growth and the mix dynamics within brands that I referenced earlier. For segment profit, we are pleased to raise and narrow our profit growth outlook to 22% to 23%, an increase from our prior range of 20% to 22%. This change reflects our performance through the third quarter and is indicative of our confidence in the segment's continued operational execution with anticipated high teens profit growth in the fourth quarter at the midpoint. As you model the remainder of the year, please keep in mind that we have not fully lapped our large pharma wins from fiscal '25 and the GIA acquisition. Consequently, Solaris will be the primary inorganic driver to account for in your year-over-year comparisons. Additionally, I will note we are onboarding distribution volumes for GI Alliance and Solaris during Q4, which are reflected in our guidance. For the GMPD segment, we are reiterating our revenue outlook of 1% to 3% growth and holding our profit guidance to $150 million. We remain pleased with the progress against the GMPD improvement plan and are encouraged by both the consistency of our Cardinal Health brand growth and tangible impact of our simplification strategy. With our other growth businesses, revenue guidance is unchanged, projecting the full year between 26% to 28% growth. However, we are increasing our profit growth guidance to a range of 36% to 38%, up from 33% to 35%. This positive revision is driven by strong performance across all 3 growth businesses to date. As you model the remainder of the year, please continue to remember that we have lapped the acquisition of ADS in April, which will result in more normalized Q4 growth. Focusing below the line, we are updating our outlook for interest and other to approximately $340 million up from our previous estimate of $325 million. This is due to some Q3 adjustments within the other income and expense line, the majority of which was offset in tax and net neutral to the enterprise. Additionally, as a result of the discrete planning benefits in Q3, we are lowering our expected non-GAAP effective tax rate for the full year to approximately 19%, down from our prior range of 21% to 23%. Reflecting the impact of our share repurchase activity, we are updating our outlook for weighted average shares outstanding to approximately 237 million shares from our previous guidance of 237 million to 238 million shares. Finally, we are raising and narrowing our full year adjusted free cash flow guidance to a range of $3.3 billion to $3.7 billion from our previous guidance of $3 billion to $3.5 billion, which reinforces the robust and resilient cash-generating capabilities of our business model. In summary, our third quarter results demonstrate the broad-based strength of our business and the progress we are making against our strategic objectives. Before I close, I'd like to share some initial thoughts on fiscal 2027. The headline is that we remain confident in our long-term targets, and we'll continue to assess the various puts and takes for next year as we progress further through our annual planning process. We look forward to sharing details of our fiscal 2027 outlook during our fourth quarter earnings call, but before then a few items of perspective. While the health care landscape and regulatory environment remain dynamic, we have consistently demonstrated an ability to navigate change, reinforcing the durability and deep resilience of our model and our enduring value proposition. In our Pharmaceutical and Specialty Solutions segment, we anticipate positive demand and demographic trends to persist, supported by strong ongoing operating performance. There are several positive items informing our views. The scale and efficiency of our pharmaceutical distribution operations and our growing position in Specialty, including Specialty distribution, our MSO strategy and biopharma solutions. We will see benefits from the annualization of the Solaris acquisition in the beginning of the fiscal year and anticipate benefits of continued synergy realization. The three businesses and other are exceptionally well positioned to benefit from secular trends and to win in high-growth innovation areas like Theranostics. We plan to continue to strategically invest and position ourselves to capitalize on those trends. In our GMPD segment, the successful execution of our multiyear improvement plan is on track and gives us confidence in our continued potential to unlock value in this business. We continue to monitor the dynamic tariff environment and broader macroeconomic factors, including fuel and commodity exposure with improved ability to navigate change as a result of our multiyear focus on simplification and efficiency. All of this is supported by the fact that we are completing our third year of long-term, sustained investment in our businesses to ensure that the foundations of future growth are built before we need them. Below the line, we'll have the comparison to the discrete tax benefits this year while continuing to pursue opportunities to drive durable improvements in our tax position. We expect another year of robust cash flow generation and will be sticking to our knitting with respect to our disciplined capital framework, which creates opportunity for accretion through our baseline share repurchases. In closing, we are confident in our ability to achieve our updated higher guidance for fiscal 2026. Our priorities are unchanged, and we are executing against them. Our team is committed to our vision and will remain focused on its achievement while investing for long-term growth and value creation. With that, I'll now turn the call back over to Jason. Jason Hollar: Thanks, Aaron. Our Pharma segment once again led our performance, providing proof points of our strategy to strengthen the core and expand in Specialty. Our continued focus on the core with investments in infrastructure, technology and our people are delivering measurable improvements across the network. As an example, we continue to invest in our existing distribution centers through automation and productivity initiatives, which both improves our cost and expands our capacity. We are achieving record high service levels, which is a testament to our employees and the investments we've made focusing on the core. We continue to see consistent dynamics in generics with our Red Oak partnership and continue to have best-in-class performance in the strength of our generics program. Specialty continues to be an increasingly important driver of our strategy and results. Upstream, our biopharma solutions business is advancing its momentum, providing critical services to our pharmaceutical partners, evidenced by 3 new pharmaceutical therapies that our SYMEXYS patient support business onboarded this quarter with another 10 scheduled to be completed over the next 2 quarters. This growing pipeline underscores the trust and value we provide to manufacturers, bringing life-changing therapies to market. . We continue to see opportunity from our multi-specialty MSO strategy within the Specialty Alliance, which is proving to be a key differentiator in the marketplace, generating value for community-based physicians and their patients. Since last quarter, we closed three tuck-in acquisitions within the Specialty Alliance, adding physicians to our network and further extending our geographic reach into our 33rd state. Our model continues to unlock value through the synergies we create across our businesses. For instance, specialty Networks and the Specialty Alliance are now partnering to support a pharmaceutical company on a multiyear study focused on understanding real-world outcomes for patients receiving care at community gastroenterology clinics across the country. Specialty Networks will perform the analysis, showcasing how we connect our vast network of partners, physicians and patients to create long-term differentiated value. Turning to GMPD, we continue to demonstrate disciplined execution and make progress on our ongoing improvement plan. The team remained focused on growing Cardinal Health brand and relentlessly simplifying operations, and we made tangible progress on both fronts during the quarter. With the execution of our 5-Point Plan, Cardinal Health brand has now grown at least mid-single digits for five consecutive quarters, outpacing the broader market. Our other growth businesses, which remain an increasingly critical component of our long-term strategy were again, a significant driver of our performance this quarter. at-Home Solutions, we continue to see a strong demand environment, fueled by the ongoing shift of care into the home. To support the growing demand, we are investing to expand the capacity of our network, the breadth of our offering and in new technology to drive efficiencies and customer experience. We are pleased with the integration progress of ADS, which now marks 1 year as part of Cardinal Health. We have successfully migrated ADS volume into our distribution centers as well as onboarded nearly 1,000 new employees and nearly 500,000 new patients. This marks a significant operational achievement that positions us for enhanced efficiency and long-term growth. We are well positioned to capture ongoing growth as evidenced by the key synergies between pharma and home health, where we are seeing strong growth of our continued care pathway program, which we announced early this year, with the team now serving 165,000 patients and growing up nearly 20% since January. This progress is supported by our ongoing investments in technology and our core distribution footprint. To that end, we have signed a lease and are progressing with our new Sacramento distribution center, which will help us serve an even more customers on the West Coast. Nuclear and Precision Health Solutions continues to demonstrate its leading position, thanks to our differentiated offerings and specialized expertise. This quarter, we announced a significant expansion of our Actinium 225 production capabilities at our Center for Theranostics advancement, which will substantially increase our capacity to support the rapidly growing demand for novel targeted cancer therapies and strengthen our ability to meet customer needs today and into the future. To date, Nuclear's Actinium-225 has supported more than 15 clinical trials worldwide reflecting broad engagement with pharmaceutical innovators, a clear indicator of our ability to execute and scale in this complex and highly differentiated field. We continue to unlock opportunities for greater connectivity between our nuclear business and our Specialty businesses, exemplified by a recent supply agreement with the Specialty Alliance, which makes them our nuclear business' largest user of allusix for prostate cancer imaging. Our OptiFreight Logistics business also continues to perform well and expand its offerings, consistently demonstrating its leading value proposition for health care providers. Launched last quarter, the pharmacy solution from OptiFreight Logistics, inclusive of tech board products, shipment Navigator and tracking Beacon provides meaningful shipping process efficiencies and improved tracking visibility via an all-in-one platform to drive confidence, security and clarity for outbound pharmacy shipments. In closing, our results this quarter again demonstrates the clear progress we're making across the business. The relentless focus and dedication of our colleagues around the world underscores the vital role we play in ensuring critical products reach the right place at the right time for our customers, evidenced by the increased complexity our teams managed through to achieve record high service levels for the quarter. Our resilient business model and our foundational role as the backbone of the health care system give us great confidence in our ability to capitalize on opportunities ahead and to deliver sustained long-term value. With that, we will take your questions. Operator: [Operator Instructions] Our first question today is coming from Lisa Gill from JPMorgan. Lisa, I'm just going to put you back in the queue you could check your phone. And we're just going to move to our next question from Michael Cherny of Leerink Partners. Michael Cherny: Can you hear me? Okay. Perfect. Just one quick housekeeping and then one broader question. First, on the housekeeping side. Is there any way to quantify the accelerated SG&A investment that you mentioned in the quarter relative to positioning for future growth? And then broadly speaking, great to hear all the progress on Specialty. As you look at the portfolio now, where do you think -- if there are any kind of holes or shortfalls that you continue to see the opportunity to build out either organically or inorganically from here? Aaron Alt: Great. Thanks for the question. Happy to address them. We did call out in the prepared remarks that while SG&A was up 17% across the enterprise overall. If you exclude the impact of the M&A, it was up 7%. And I can assure you we are being quite purposeful and disciplined in thinking through our SG&A structure to ensure that where we are investing, particularly in technology and team, as I called out, it's focused on setting us up for success going forward. With respect to the Specialty portfolio, I guess I'll start and just observe that we are really pleased with the continued strength we're seeing in our specialty business. Indeed, across the pharmaceutical demand overall. But as we think about the Specialty portfolio, that was a key contributor to the excellent results that no Pharma had. GIA, Solaris, ION, all of the businesses that we've acquired have certainly partnered well with the existing Specialty capabilities, Specialty Networks, et cetera, and are performing as we expected when we brought them into the portfolio. As far as where to next, if your question is really about the inorganic opportunities, what I would observe is, while we will continue to be focused on Specialty, we have prioritized autoimmune and urology, and we'll remain focused there. But we are going to be quite disciplined as well, the right assets at the right timing at the right price, we will continue to lean in to support our growing Specialty platforms. Jason, anything to add? Jason Hollar: Yes. I'd just add that we're very pleased, Aaron, just used the word platform. And I think that's an important distinction of the investments we've made to date. We're clearly much more focused on the bolt-ons. We believe we have the capability, the business and perhaps most importantly, the teams in place to execute this strategy. And we see that there's a lot of opportunity, not just within each of these platforms, but how these platforms work together. You even heard in this call already, some of the examples of the areas that we're working not just between the MSOs but the MSOs and the rest of the Specialty business between MSOs and what we're doing with nuclear or our at-Home Solutions business. We have a lot of interconnectivity there, and it's all a component to our broader strategy to drive overall Specialty growth, which we reinforced again today is growing at over 20%. Still expect to exceed $50 billion of revenue this year. The only other thing to add outside, Specialty clearly our highest priority. We've been very clear on that point. The other acquisition that we've done in the last year that we just anniversaried here April 1, of course, is the at-Home Solutions business. So the other businesses are the other areas of potential opportunity for us. Secular growth trends that are part of the market that's growing very quickly. We are very well positioned in each of those 3 spaces. And if the right opportunity presents itself. I would use similar words as to Aaron just said, we will be very disciplined as to how we approach those opportunities. But we think the market is growing and we're well positioned. Operator: The next question is coming from Elizabeth Anderson of Evercore ISI. Elizabeth Anderson: I wanted to dive into other. Obviously, that continues to grow very nicely, and you just reseed the guidance for the fourth quarter. Are you seeing any sort of changes in trend there that give you the confidence to do that? Or how should we think about that as we sort of think about the back half of the year and then into 2027? Aaron Alt: Thanks for the question. We saw a strong performance across all 3 of the growth businesses affectionately known as other. Revenue was up 31%. Profit was up 34%. But if you really unpack that, Jason referenced the strong secular trends, the positioning -- the competitive positioning we have, that's contributing to good results within the business and indeed lots of positive perspective on where those businesses are going to take us as we carry forward. Strong demand has also been a key part of why those businesses have succeeded the way they have. I would highlight a couple of things. The core business within at-Home is doing well, and it has been reinforced by the ADS acquisition. The integration that Jason referenced earlier, it's going very well. We had highlighted in an earlier earnings call that we had a plan with opportunities to overperform, and we continue to see the goodness coming from the at-Home business supported by the ADS acquisition. And we pivoted from the integration of the supply chain, the distribution to now being focused on the systems, the back office and ensuring that we're providing the best-in-class customer experience that we aspire to for the patients being served by our at-home business. Within nuclear, boy, that Theranostic growth just keeps coming. The investments that we're making in supporting the 70 different therapeutics that are coming our way, really have created a pipeline of success for the business, some of which we're now starting to see, particularly within urology and oncology. So we're excited about that. And then OptiFreight, continues to perform, providing the excellent services to its customers with another good quarter as well. And so we were pleased to deliver a good quarter, and this business will, of course, contribute to our raise to our guidance and achieving our long-term targets. Operator: Next question will come from Erin Wright of Morgan Stanley. Erin Wilson Wright: Great. So some of the commentary on 2027 and the moving pieces was helpful. When we dig into that core pharma and Specialty distribution segment and the AOI growth assumptions that we should be considering remains strong, but how do we think about to sustain momentum into 2027? What would make you deviate from the long-term growth algo, in that segment? And how do we kind of reconcile with underlying utilization trends that you're seeing or you're expecting into 2027? And then also those continuing Specialty drivers? Aaron Alt: A couple of thoughts there. First, we remain confident that our business is quite resilient and has demonstrated durability notwithstanding a fair amount of change in the industry. And I think it's important to keep that in mind that as we talk about fiscal '27 as well. And that's part of why we're able to express the confidence in the long-term targets that we have really across the enterprise, but particularly within the pharma business. We have a strong core to our business, right? We have seen consistent positive demand, right? We saw it again this quarter. and the business is supported by positive demographic trends that aren't going away as we get one more quarter into our business. And so we think those are all things that are going to support the trajectory of that business. We will also continue to benefit from the Specialty expansion that Jason and I have just commented upon, right? And one thing we're particularly excited about as well is how the pieces are all now starting to fit together. Specialty Alliance working with nuclear. Biopharma really working with the broader portfolio. And so there's a lot of goodness there within the pharma business that we think is supportive of the long-term target. And of course, we'll provide more perspective as we get through our planning cycle at the Q4 earnings call. Operator: Next question will be coming from Eric Percher of Nephron Research. Eric Percher: I wanted to stick with Pharma and Specialty. And I'd like to get a little bit more on Navista and ION and the impairment. And I know you called out changes to the risk profile relative to a business plan. Can you give us a feel for whether that was near term versus long-term changes? And does it alter at all the oncology MSO strategy or economics of the platform? Jason Hollar: Sure. Thanks, Eric, and I'll go ahead and start and then turn it over to Aaron to walk through the mechanics. First of all, I'll just reinforce what Aaron already said, the broader strategy, we're very pleased with the execution, not just this quarter but this year but also the last several years. Exceeding this $50 billion this year, continuing to see over 20% growth in Specialty highlights our strategy is working within the collective assets that we have put in place. And I'll remind you that, that 20% growth is pretty consistent to what we said over the last 2 quarters, so each quarter this year, which was an acceleration from the mid-teens growth that we saw in the prior several years. So we've seen our specialty growth be strong and then it's accelerated this year into very strong competitive positioning. And then within oncology, it was even stronger this quarter, continuing on those trends as well, over 30% growth in oncology. So as a reminder, Specialty has a lot of components to it. Within Specialty, MSO is just one component within -- within the MSOs, oncology is just one component. And then we have, of course, Navista within that. So Navista is a component of that, and it was a combination of an acquisition, but also organic business. And we had a couple of different strategies in place. We had the equity strategy working with physicians to create this long-term cooperation, collaboration agreement with an equity component. And then we had the nonequity where it was more a transactional more contractual. And what we've seen is that while physicians like to have choices and like to have a different alternatives, ultimately, we're seeing the market voting for the equity arrangement, and that's where the market has moved. And why we're prioritizing our strategy to that component. It does not change the broader strategy of either on the MSO strategy or the broader Specialty strategy. And I think the underlying data certainly supports that. It's all coming together in a very accretive way. But with this pivot and strategy, it did have some knock-on effects that Aaron can walk through. Aaron Alt: I won't believe the point just to observe that as one piece of Specialty and one piece of oncology, and we're keeping score, right, on ourselves. As we've always committed we would tell you what we're going to do, do it and report back. And in this case, we have increased the discount rate applied to a small part of the oncology business. And -- but we remain pleased with the contribution that the specialty M&A is adding to our portfolio overall, the 8 percentage points or so within fiscal '26, consistent with the prior guidance that we've given. Operator: The next question is coming from Allen Lutz of Bank of America. Allen Lutz: Aaron, big free cash flow raise with a quarter to go. You mentioned or called out that revenue was maybe a little bit lower than your expectations. I think you called out IRA and maybe a little bit from GLP-1. We know that IRA is maybe more a headwind on the revenue side, but you were able to raise the free cash flow guidance. Can you talk about what gave you the confidence for what you're seeing? Was it better than expected? Was there a mix shift with a movement, I guess, more towards those IRA drugs that was actually a positive contributor to free cash flow? Was it more generics, just trying to understand what mix shift, if at all, impacted the free cash flow guide that was maybe a little bit better than you expected? Aaron Alt: Allen, thanks for the question. What I would observe is that -- it's amazing how what gets measured gets done. And I can't point to just 1 factor across the enterprise as being the single source of success for our ability to generate the adjusted free cash flow we did or indeed drive the increase -- the increase of the guidance. It was driven really across all of our businesses with the management teams focused on the intersection between our customer service levels and our inventory positions, ensuring that we're collecting that, which is due to us from an ARR perspective and focusing on the appropriate levels of AP with our suppliers. And so -- there were a series of initiatives that have been underway now for several quarters that are really generating the success that we are able to call out. I do want to seize on your question to maybe answer a question I haven't gotten yet or maybe for an emphasis on a point in the broader your pharma results, which is you called out the revenue. And I think this is probably a good point for me to observe that. The revenue growth within the pharma business was 11%, which I understand some were maybe expecting a little bit more than that. It's important to understand that we're in a quarter -- we're in the first quarter of a couple of things going on. Firstly, of course, we have the IRA WACC changes, which was a -- that was a negative relative to the overall growth rate and similarly -- sorry, [indiscernible] thank you. And similarly, GLP-1s is also in a period of change. And so while GLP-1s are growing extensively, still over 30%, they're growing less than they were before. And so we saw a 6 percentage point uplift from growth within GLP-1 is offset by a similar level of downdraft from IRA WACC. And then when you some other brand dynamics like some like the LOE to generics, which is a positive for profit, right? That's really what's going on within the revenue line, even though the profit line, the demand line was very strong, the profit line is very strong. So I just want to take this opportunity to reference what was going on there. Operator: We will now move to Glen Santangelo of Barclays. Glen Santangelo: Jason, I just want to follow up on some of those comments you were just making because I think there is obviously a lot of focus these IRA impact on the pricing and the revenue line. And I guess what the concern that some may have is, as these prices come down, it seems like on the fee-for-service side, you're clearly maybe being made whole, but maybe some are concerned about the buy margin on the 2% discount and then ultimately downstream when you look at practice profits if the price of these drugs are coming down, if these practices inherently become less profitable. Can you get squeezed in any way at the distributor level from the IRA price reductions beyond just the fee-for-service agreements. And I think that's what we're all trying to sort of figure out is the different components of the profitability there and if there's any vulnerability? Jason Hollar: Yes. Thanks for the follow-on question on that. Let's break it into the two components because I think you're right to talk about this in two different pieces. Aaron's comments were very much focused on the distribution side. That's by far the biggest component of our business, and it's relevant to start there. We remain incredibly confident in our underlying business model. When you think about the fees that we receive today for the services we provide, that should not change. The services are certainly not changing, and we remain the lowest paid component of the supply chain than anyone in the supply chain. So we feel very good about continuing to receive the fees that we currently receive for that work. And as a reminder, we announced the completion of the renegotiation of these contracts at the very beginning of the quarter at an analyst conference there. So this was all done prior to the quarter. It executed exactly consistent with that announcement because those agreements were already in place. Very similar to what happened with the insulin repricing the year before that. So there's a lot of precedents and frankly, it just makes sense, and it is consistent with we have [Audio Gap] be right to renegotiate the vast majority of our contracts for situations like this. So I continue to feel very, very confident with that. Now when you talk about other components of our business, MSOs in particular, as a reminder, the drug spend for our $4 billion, $4.5 billion of revenue in MSOs is pretty diversified. We have only about 1/3 of that being drug spend. And within that, we have a very diverse payer mix. So we feel very confident that the implications to our MSOs are going to be very manageable, if any at all, because ultimately, what we're all looking for is exactly what is the administration's intent for providers as it relates to these go-forward initiatives. We don't think the intent is to harm community providers that provide excellent service to their patients, excellent care at the lowest cost already today. So it all makes sense for them not to be harmed, but we recognize actions need to be taken. But even if they don't, we believe this is very manageable for Cardinal Health. Operator: The next question will be coming from George Hill from Deutsche Bank. George Hill: I'm going to dovetail right off of what Glen just asked. I guess I would -- Jason or Aaron, how would you guys characterize your fee-for-service pricing power as it relates to distribution agreements, especially in the face of some falling drug prices? And then I would ask as a follow-up. Like how have you guys analyzed that in the face of BFS risk as that's supposed to roll out and kind of get recalculated in the back half of this year? Jason Hollar: Yes. As it relates to unified service fees, I think it's just too early to talk about the -- exactly what the implication is going to be for the whole industry. I mean, this is far from just a distributor type of process change, if at all. And again, it goes all back to we feel very comfortable with the value we're providing. So just like in the initial shift to fee-for-service in the first place, which maintain those economics, we would expect there to be a similar type of transition if there is a transition that that's required. In terms of just the pricing power, it's quite simple. We have 1% margins. And I think we've been -- I've been very clear that branded products are at the low end, about 1%, right? I mean this is a blended margin of 1%. These products are at the low end. We have the right to renegotiate these rates. We get paid a certain dollar fee today the service we provide. It's clearly the best value for all those in the supply chain or they wouldn't be using the distributors in the first place. So there's nothing that changes in terms of value we're providing tomorrow. So we fully expect, we fully demand to be paid the same amount going into the future. Operator: Our next question will be coming from Stephen Baxter calling from Wells Fargo. Stephen Baxter: I appreciate the early comments on next year at this stage. I'm trying to boil down some of the business commentary and the below-the-line commentary. I guess I'm trying to understand whether you're suggesting that the benefits from lapping deals and ramping synergies you think could potentially offset the below-the-line items that we're going to be comping against as we move into next year and therefore, leave the kind of typical EPS long-term growth rate intact? Or do you think people need to be modeling maybe something more conservative at this stage? I just want to make sure I understood that right. Aaron Alt: It's a great question. Our job is to manage the entire income statement year-over-year. And what I want you to take my comments as being is providing initial perspective that we believe there are good reasons to believe in our long-term targets overall, the 12% to 14% non-GAAP EPS growth. We've talked about some of the operating reasons, the demand, the demographics, industry positioning, et cetera, all in supportive of the overall position. And as we do in every year and every quarter, we will continue to go looking for ways to optimize our below-the-line items, whether it's finding further durable ways to ensure we have the appropriate tax rate or also looking at our share repurchase plans. And so we have a lot of planning yet to do in our cycle but we are confident in our long-term targets. Stephen Baxter: [Audio Gap] you can talk about that's happening and have the volumes improved in April if it was a macro thing? And then secondly, you talked about the potential clawback on the tariffs. How do you account for that? You mentioned it's potentially upwards of $100 million versus the maybe the $200 million impact. How does that get accounted for? Does that drop through the P&L? Is it something that you're reserving for on the balance sheet now? I just want to sort of understand from an economic perspective, from a modeling perspective, from an accounting perspective, how that all works? Jason Hollar: Sure. Yes, this is Jason. I'll go ahead and start, and I'm sure Aaron will clean up then after that. In terms of volumes, I think the underlying industry volumes for the [indiscernible] fairly resilient anti-digit type of range. On the one area -- not one that's materially driving our numbers, but it is one that does have a little bit of an impact on the top line as well. We had called out in the past a large government customer, the VA that we did lose earlier in the year. And so that is a fairly low Cardinal-branded product customer. We also had a large customer that went through a significant merger. We had a part of the business better had another part. And so we did not carry over that piece of the business. Also a relatively low Cardinal branded mix customer, which is why you're seeing over 5% Cardinal brand growth in the quarter even though the top line was a little bit weaker. So we feel pretty good about the underlying industry strength the underlying positioning we have, and we're seeing continued strength on the most valuable parts of our business, which is that Cardinal-branded product. We're at the best service levels we've ever been at. We're in a really good position, certainly some supply chain complexities, but underlying a really good, strong position to continue to support our customers and grow that part of our business. As it relates to the tariffs, I think the message is trying to be simple and clear that we have the potential for a $200 million refund based upon the tariffs that we paid up to the IEPA announcement. And that is -- none of that has been put into our P&L at this point in time. What Aaron commented that we want to be really clear with is that we have directly received price increases from our customers over the last year as a result of these tariffs. And so about half of that $200 million, we ultimately -- if we receive it, we would expect to share in that about half range with our customers, implying that someday, we may have a $100 million earnings gain as a result of that change. But it is still too uncertain for us to put through any of that into the P&L. And so we have not recognized any of that. Aaron Alt: Yes, I'm just going to emphasize that last point. We haven't recognized impact in Q3. We've also now provided an update to our guidance reflective of that. The amount of any recovery that means by which the recovery occurs, the timing of the recovery, those are all uncertain at this point. And so I'm not going to get ahead of ourselves and provide you with a specific accounting and treatment until we have more clarity on... Jason Hollar: Yes. And while we're on the topic of tariffs, it wasn't exactly the question that was asked here, but we had a couple of questions so far in the '27 puts and takes. Just one thing to kind of double back on to what Aaron had referenced earlier. As it relates to unrelated to the tariff refund, but the ongoing tariffs that are still in place and certainly may change further with the 232 study that's ongoing. We would anticipate that from a year-over-year perspective, there is some opportunity as it relates to tariffs for the GMPD business, but we also all know that fuel prices are higher at this moment in time. And that also flows through to some of the commodity prices within our products. These are fairly modest in their nature. They're nowhere near the impact that we saw several years ago with the hyperinflation that was in place. So we have a tailwind associated with tariffs that we think at this moment will be likely from an operational standpoint. We also expect that it's likely that there's going to be this ongoing commodity impacts. Both are, I'll say, a reasonable similar ballpark. We'll get a lot more specific with this when we provide our '27 guidance. But you have a put and take there. That is, to some degree, offsetting, it will be dependent upon where things stand in 3 months, and we'll provide those at that time. But overall, we think that, that's not only manageable for the GMPD business, it's even more manageable for the overall enterprise. We have some impacts for fuel, but it's certainly the GMPD business is where we are most closely focused at this point. Operator: The next question will be coming from Charles Rhyee of TD Cowen. Unknown Analyst: This is Keith in on Charles. I just wanted to go back to the IRA topic real quickly. So given that you said you expect to be at the lower end of your rev guide for pharma. Is it a fair extrapolation to say that the IRA impact so far this year has maybe been a bit larger than your expectations? Jason Hollar: No. I think what I observed is there are a series of things going on within the revenue line or the revenue guide that we had provided, and we're trying to be transparent that as we are modeling as you are modeling the revenue impact to be thinking about, on the one hand, the strong demand we're seeing certainly as a positive, but also understanding the impact of GLP-1 growth given that they are relatively empty calorie dollars for us, the impact revenue don't provide a lot of profit for us. Similarly, when a branded product converts to generic, and we are seeing some notable LOE examples this year. That is a downdraft on revenue, but a positive for us from a profit perspective as well. And so we're just trying to provide some of the puts and takes that are going on within that revenue line. Operator: The next question will be coming from Steven Valiquette of Mizuho Securities. Steven Valiquette: Hopefully, I didn't miss this, but I think in some of the segment discussions with the talk about the soft distribution volumes, et cetera. It seems like some of the investors believe that that's been tied to weather impact. That was obviously pretty prevalent in some of the public hospital patient volumes, but it seems like a not really callout whether as a volume headwind in either GMPD or pharma unless I missed it. So even though the whole weather discussion is obviously irrelevant going forward. Just want to get your thoughts on that dynamic just within the just reported quarter really for any of the segments. Jason Hollar: Yes. Thanks for the question. And I don't think you missed much. We didn't dwell on that point, Steven. It's -- it was so many focus on prior days on what's important as our team did a fantastic job of maintaining record high service level across the enterprise in an environment that was fairly complicated. We have some global supply chain challenges, of course, but in the quarter, you're right to point out weather. I would characterize it as a slight financial impact across enterprise. It kind of popped up a little bit here or there, very little within our traditional distribution types of businesses, some excess costs associated with just getting the right people in the right spot and transportation reroutes and things like that, but it was very slight and not. Certainly not large enough to call out. The 1 area that was relative to the size of business, the MSOs had a little bit more of an impact just because of the nature of -- it's much more difficult to make up for lost volume on an MSO. When you think about like pharmaceutical or medical products, the next week, the next day, you can just send a second truck and you can kind of catch up nearly real time. With lost physician visits and procedures, it's harder to reschedule those. And so that's likely we lost a little bit of volume there, too, but I would consider that also slight in the big picture for the Pharma segment, a little bit more for the specific. Operator: The next question is coming from Daniel Grosslight of Citi. Daniel Grosslight: You mentioned that the ION distribution contract began transitioning in 2Q and the DIA and Solaris distribution contract will again this month. I'm curious how the ramp of distribution volumes have tracked versus your initial expectations? And then on the Solaris contract, I don't believe that was previously included in guidance. Can you confirm that and comment on how much of the pharma profitability guidance lift was driven by the Solaris distribution onboarding? Jason Hollar: Yes, on Eagle is always on that caught that. We are indeed confirming today the Solaris distribution volume is now in the process of ramping up with our pharma business. And so we're pleased with that development as we were when we achieved the GIA distribution contract and the Ion distribution contract as well. I want to emphasize, when we talked about the acquisition originally, but we do not include the impact of the distribution contracts in our financial models. That is a separate part of our business. And so it is good news for us to have the volumes coming in. Now it is late in the year. It's our fourth quarter. And so the impact to our fiscal '26 will not be material. Otherwise, we would have called it out. But as you think about the puts and takes for next year within our Specialty business, certainly now having Solaris ramping up is a positive for our... Operator: We now move to Brian Tanquilut of Jefferies. Jack Slevin: You've got Jack Slevin on for Brian. Maybe just one, a lot of questions has already been asked. Maybe one to just sort of clean up. I haven't heard too much discussion on it. There's been some reference to some of the energy cost and shipping trends you had that created headwinds for this business in 2022. Can you maybe just speak to if any of that applies right now, given some of the volatility we're seeing in energy prices or input cost of things like polypropylene? Can you maybe speak to what's different now versus what happened in 2022? Or if there's anything we should be worried about as it relates to some of those trends across the business? Jason Hollar: Sure. Yes. And I did touch on it, but I can expand further to try to answer the question of what's different now. Well, first of all, the shock we're talking about now is different. It's very much focused on not just energy but it's on oil. And that does take time to kind of filter through to some of the products from the polyethylene, polypropylene types of products. But what we're seeing is more of an oil shock right now. It does translate to fuel, and that's the comments I made earlier. The excess inflation that we saw several years ago was way beyond just fuel. It was a lot -- the container cost, you may recall, international freight was by far the biggest piece. We had very high labor inflation that carried on with that as well. And so while we did call out fuel 4 years ago, it was #4 on the list of items. Since then, we've also structured our agreements to be more flexible for us both with the carriers as well as our customers. It's not completely protecting us, but it gets back to the -- I think the word I used earlier, that I think is a good one of using here. It's certainly much more manageable than it had been structurally, but also based upon the type of issues that we have. And as it really to the product cost, really exam gloves is the one item that I continue to see and hear a lot of industry chatter about. That is one product category that we're already seeing cost increase quite a bit. Just as a reminder, PPE is a relatively small category for us, but exam gloves in particular, is relatively small. It's less than 5% of our Cardinal-branded product. So again, manageable even when we see significant dollars like that. It's important for those customers that are buying a lot of exam gloves, which are many, but it will be a relatively small pull-through today based upon those prices, and we will certainly continue to evaluate that. Also as a reminder, if there are further impacts the fuel tends impact the distribution activity. So that's a current period type of cost, and you kind of see it a little bit quicker. The product cost will take at least a couple of quarters before they'll start to flow through the P&L. So we've not seen a lot of product costs yet other than exam gloves. And when we do, we're going to have 2 to 3 quarters to be able to understand and see if we can mitigate and then, of course, delay the impact on the cost side so that we can see what happens with industry pricing at that point in time. Aaron Alt: I guess I would just close on that point of we're better positioned than we ever have been before in this business, and we are not backing away from our longer-term guidance with respect to the GMPD business either. Operator: And our last question will be from Eric Coldwell from Baird. Eric Coldwell: And I think most of mine were covered here. But I just want to circle back on two quick ones, if I may. First, on Navista and Ion and the changes you're making. I just want to kind of tie the bow on this. The topic of the impairment and the changes you're making -- just want to make sure that, that is 100% Cardinal-specific, how you're going to market, how you're interacting with the MSOs. And this is not any kind of a broader comment to the overall oncology or MSO marketplace. Is that a fair interpretation? Jason Hollar: Absolutely. And as I highlighted in my comments -- in Aaron's comments as well, over 20% specialty growth so far this year in the quarter as well, more than 30% growth in oncology. We're very pleased with our Specialty strategy, very pleased with our oncology strategy. This is entirely a focus of prioritization on the equity model of our MSOs. And Eric, do you have one other? Eric Coldwell: Discrete item. Could you just tell us what that multiyear capture was what the actual nature of that tax item is? Jason Hollar: Yes, Eric, we aren't in the practice of disclosing our individual tax positions. We take other than to observe that it was a multiyear opportunities that we did take in the quarter, which was about [indiscernible] Operator: We do not have any further questions. Now I'd like to turn the call back over to Mr. Jason Hollar for any additional or closing remarks. Jason Hollar: Yes. pleased with another strong quarter. Of course, we're looking to finish the year strong. But more importantly, as always, we're focused on the long term, doing the right things today to make sure we're successful tomorrow. So thanks for joining us today, and have a great day. Operator: Thank you, much, sir. Ladies and gentlemen, that will conclude today's conference. Thanks for your attendance. You may now disconnect. Have a good day, and goodbye.
Operator: Good morning, ladies and gentlemen, and welcome to Baxter International's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. . I would now like to turn the call over to Mr. Kevin Moran, Vice President, Investor Relations at Baxter International. Mr. Moran, you may begin. Kevin Moran: Good morning, and welcome. Today, we'll discuss Baxter's first quarter results along with our financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and reiterated outlook. The press release and investor presentation are available on the Investors section of the Baxter website. Joining me today are Andrew Hider, President and Chief Executive Officer; and Anita Zielinski, Interim Chief Financial Officer, Chief Accounting Officer and Controller. During the call, we will be making forward-looking statements, including comments regarding our reiterated financial outlook for the full year 2026 and the anticipated drivers of the second quarter and second half 2026 performance. The anticipated impact of various regulatory and operational matters, including ones related to our infusion pump platform and ongoing supply chain challenges and commentary regarding the global macroeconomic environment, including estimated impacts of tariffs and broader inflationary pressures. Forward-looking statements involve risks and uncertainties, which could cause our actual results to differ materially from our current expectations. Please refer to today's press release, the forward-looking statement slide at the beginning of our investor presentation and our SEC filings for more detail. In addition, please note that on today's call, all of our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. Non-GAAP financial measures are used to help investors understand Baxter's ongoing business performance. GAAP to non-GAAP reconciliations can be found in the schedules attached in our press release and our investor presentation. On the call, we will reference organic growth which excludes the impact of foreign exchange, MSA revenues from Vantive nd impacts associated with business acquisitions or divestitures. As a reminder, Continuing operations excludes Baxter's Kidney Care business, which is now reported as discontinued operations. Finally, Andrew, Anita and I will take questions following the prepared remarks, and we kindly ask that you limit yourself to 1 question and 1 brief follow-up so that we can give as many people in the queue and opportunity. With that, I'd like to turn the call over to Andrew. Andrew Hider: Thank you, Kevin, and good morning, everyone, and welcome Anita, who is serving as Interim CFO until we appoint a permanent successor, she will continue her duties as Chief Accounting Officer and Controller. I have full confidence that Anita's stewardship, supported by the diligence of our finance team will help ensure continuity and a seamless transition while also supporting our turnaround, including efforts to strengthen our balance sheet. I'd also like to thank [ Joel ] for his contributions and partnership during his time with Baxter. We wish him all the best. We have launched a comprehensive search for a permanent successor, and I look forward to providing an update when appropriate. In the meantime, my focus remains on executing our turnaround, including stabilizing the business, strengthening the balance sheet and driving a culture of continuous improvement. The Baxter team is working hard and made progress on all 3 fronts in the quarter. I'll cover this in more detail in a few minutes. For the first quarter, financial results were in line with our overall expectations, and we are on track to deliver on our guidance for the full year. Although we are not satisfied with where our performance stands today, we have a road map in place to improve results and drive shareholder value. I have clear insights to the challenges facing our business. We believe we are taking the actions necessary to fulfill the company's potential. As I have come to learn through my immersive 9 months as CEO and deep engagement with customers, employees and our leaders. Baxter is a foundation of good businesses with leading positions and the potential to outgrow our markets, expand margins and increase cash flow. We are focused on delivering not only better but also more consistent and predictable performance. With that, let me provide a high-level overview of our performance within the quarter. First quarter global sales from continuing operations totaled $2.7 billion, representing an increase of 3% year-over-year on a reported basis and a decline of 1% on an organic basis. Adjusted earnings from continuing operations for the quarter were $0.36 per diluted share versus $0.55 in the prior year period. As we stated in our last call, we expected the first quarter to be challenging, including difficult prior year comps. As a reminder, in the first quarter of 2025, we saw a onetime distributor build following Hurricane Helene, which benefited the MPT segment. Also in the prior year, operating margins realized a benefit due to the timing of certain functional costs being reclassified. In the quarter, we saw the expected headwinds from both tariffs and higher manufacturing costs, including absorption pressure operating margin. While we did not see a material impact from Novum LVP returns in the quarter, we believe it's prudent to continue to factor this possibility into our full year guidance. We remain focused on supporting our current Novum customers with their implementation of currently available mitigations. We continue to work diligently to finalize hardware and software corrections to resolve the active field actions. Once available, we will implement the corrections in coordination with regulatory authorities, including any necessary submissions. Looking at the overall demand environment, we continue to believe we are in attractive end markets. Advanced Surgery, for example, had another great quarter, growing 10% and we are sustaining a strong order book in our care and Connectivity Solutions business. We continue to monitor the direct and broader macroeconomic effects of higher oil prices and conflict in the Middle East. Our Middle East exposure is less than 2% of total revenue. Importantly, our exposure to fuel today is less than half of what it was historically, given the divestiture of the kidney business. That said, this is obviously a fluid situation, which we are actively monitoring. In the event, the landscape changes, it will not be Baxter specific, and we are prepared to navigate any unforeseen dynamic with rigor and agility. To support our customers, we are continuing to advance innovation in targeted areas of the portfolio. This includes positive response from customers and strong order growth from Dynamo, a smart hospital stretcher designed to improve patient safety and care team efficiency. In the quarter, we also launched the IV Verified Line labeling system, an automated solution that supports safer medication administration and the XR spine surgical table, which is designed to support surgical teams across a range of spine procedures. We also have an active pipeline of differentiated solutions with integrated AI functionality, designed to accelerate future growth. We are already leveraging AI in our Connected Care Foundation, which unifies Baxter's unique data set provided by [ Internet of Things ] devices like beds, pumps and vitals to provide actionable data and analysis. In addition, we are using AI in frontline care to develop products that strengthen clinical insights and operational efficiency. Overall, our performance in the first quarter was in line with how we expected the year to begin with a few puts and takes across the portfolio. Importantly, our results support the broader framework we laid out for 2026. And including known mechanical headwinds and a more challenging comparison to the prior year in the first half and improving performance in the second half. It is still early in our turnaround, but we are on the right track and showing progress on our 3 strategic priorities. The first of those priorities is stabilizing the business, specifically in areas that require increased focus. As an example, last quarter, we referenced back order challenges at 1 of our manufacturing facilities. That was impacting revenue and driving unfavorable mix within Pharma. During the quarter, we made significant progress in clearing back orders in addition to increasing throughput. The second priority is strengthening the balance sheet. That includes improving free cash flow to support deleveraging. I'm encouraged with the positive free cash flow generation in the quarter, which reflects early success in our effort to improve working capital efficiency. While we still have more work to do, this is a solid step in the right direction and reinforces my comments that the actions we are taking will strengthen cash generation and our overall financial flexibility over time. Our near-term capital deployment priority is debt pay down, and we continue to target net leverage of approximately 3x by the end of 2026. Once we reach our leverage goal, we will have a stronger balance sheet with more optionality to drive shareholder value, including strategic tuck-in M&A that enhances our customer offerings and growth profile as well as the option to return capital through share repurchases. Turning to our third priority, driving continuous improvement. It has been almost 6 months since we rolled out the Baxter Growth and Performance System, or GPS, which is focused on simplifying processes, leveraging data and strengthening performance management. In the time since launch, we have delayered management teams and pushed down P&L responsibility directly to leaders of each of our operating businesses. We are setting rigorous KPI measures to drive accountability and continuing to embed the operating discipline into our culture to enable better execution, consistency and improve performance over time. We have also started to deploy AI tools to accelerate efficiency gains within internal quality workflows, such as the customer correspondence and AI-assisted corrective field action communications scheduled to be deployed later this year. Looking forward, we will thoughtfully embed AI directly into internal process improvements, frontline workflows and manufacturing at enterprise scale, with the goal of strengthening speed consistency, reliability while also maintaining rigorous governance and a focus on patient safety. Baxter GPS is becoming part of how the company runs the business. We kicked off the year with 10 President [ Kaizen ] events. And we've now launched more than 230 continuous improvement events. We're building a stronger culture of continuous improvement through leader training and establishing a lean community of practice. Today much of our focus has been concentrated on cash flow, service reliability and speed to market. While we are still in the early stages of organization-wide adoption, we are seeing strong traction. Ultimately, the purpose of GPS is to enable a consistent approach across the enterprise to identify problems and opportunities earlier, the improved visibility, sulfide processes and drive accountability. This is not a short-term initiative. It is the new core of how we will operate going forward, and improve execution to deliver on Baxter's full potential. I want to take a moment to thank our more than 37,000 Baxter colleagues around the world for their resilience and dedication to our mission. As the [ ore has been rowing ] in the same direction and speed, the power we will collectively generate will be hard to stop. We continue to believe that our long-term earnings power is meaningfully better than today's level. We are taking decisive steps in the early stages of our turnaround to get us there. We have streamlined the organization for greater accountability. We have launched Baxter GPS to drive continuous improvement and competitive advantage. We have heightened our focus on innovation to better meet our customers' needs, all to drive improved performance and long-term shareholder value creation. I will now turn the call over to Anita to provide more detail on our first quarter results, including segment level performance as well as our 2026 guidance, which we are reiterating today. Anita, over to you. Anita Zielinski: Thanks, Andrew, and good morning, everyone. I'm happy to join the call this morning to cover the details of Baxter's first quarter financial performance as well as commentary in our outlook for the remainder of 2026. First quarter 2026, global sales from continuing operations totaled $2.7 billion and increased 3% on a reported basis and declined 1% on an organic basis. On the bottom line, adjusted earnings from continuing operations were $0.36 per share, a decrease of 35%. As expected and previously discussed, results reflect an unfavorable comparison to first quarter 2025, which benefited from a timing shift in expense recognition. This benefit in the prior year related to an updated estimate, which resulted in the reclassification of certain functional costs from SG&A to cost of sales. This was approximately a $50 million headwind in the quarter. Additionally, and as expected, we saw higher costs related to tariffs, which were not present in the prior year period and higher manufacturing costs, including lower absorption. . Now I'll walk through our results by reportable segment. Commentary regarding sales growth will be on an organic basis. Sales in our Medical Products & Therapy segment or MPT, were $1.3 billion and declined 2% in the quarter. Within MPT, sales of our Infusion Therapies and Technologies or ITT division totaled $981 million and declined 5%. Performance in the quarter reflects lower infusion pump sales due to the previously discussed ship and installation hold of Novum LVP and an unfavorable comparison to the prior year due to a onetime distributor build with an IV Solutions following Hurricane Helene. Within IV Solutions, performance in the quarter was in line with our expectations. As previously shared, clinical practice changes in the market have created a new baseline in demand. In Infusion Systems, results in the quarter reflected the net impact of lower sales due to the ongoing shipment and installation hold of the Novum LVP, customer returns and transition to spectrum. Sales in Advanced Surgery totaled $304 million and grew 10%. Results in the quarter reflected continued strong demand and increased volumes for our global portfolio of [ hemostats and sealants ], strong commercial execution across regions and steady procedure volumes. MPT's adjusted operating margin totaled 14.5% for the quarter. decreasing 480 basis points. This reflects the same drivers as total Baxter, including the unfavorable year-over-year comparison related to cost timing, tariffs, and higher manufacturing costs, including absorption. In the Healthcare Systems & Technology segment or HST, sales in the quarter totaled $705 million decreasing 2% due to a decline in the Front Line Care division. Within HST, sales of our Care & Connectivity Solutions or CCS division were $435 million, flat compared to the prior year period. The Patient Support Systems, or PFS portfolio, which is the largest business within CCS, saw growth in the quarter and continues to see momentum, including a strong capital order book within the U.S. This was offset by our Care Communications portfolio, which is impacted by the timing of installations. To date, we have not observed a slowdown in U.S. hospital capital spending. However, given the broader macroeconomic uncertainty, we continue to closely monitor the situation. Front Line Care sales were $270 million and declined 4%. Performance in the quarter reflects the timing of government orders and large customer deals. It also includes planned global exits in the portfolio. HST adjusted operating margin totaled 9.4% for the quarter, decreasing 380 basis points. These results reflect an unfavorable year-over-year comparison related to previously discussed cost timing and higher costs related to tariffs. Moving on to our Pharmaceutical segment. Sales in the quarter totaled $621 million, increasing 1%. Within Pharmaceuticals, sales of our Injectables and Anesthesia division were $301 million, a decline of 13%. Consistent with last quarter, the Injectables portfolio was negatively impacted by supply constraints and continued softness in certain [indiscernible] products. As Andrew referenced, during the quarter, we made significant progress in clearing back orders at 1 of our manufacturing facilities. Additionally, supply constraints associated with the disruption at a contract manufacturer contributed to the performance in the quarter. While we are working closely with the manufacturer to help improve supply of products, we do expect limited supply into 2027. Our Anesthesia portfolio also declined low double digits, reflecting continued softer demand for inhaled anesthesia products globally. Drug compounding grew 20% and continues to reflect strong demand for our services. Pharmaceuticals adjusted operating margin totaled 7.4% for the quarter, decreasing 340 basis points. This reflects the previously discussed unfavorable year-over-year comparison related to cost timing, price erosion and an unfavorable product mix within Injectables, driven in part by supply constraints impacting select higher-margin products. Finally, other sales, which represent sales not allocated to [indiscernible] and primarily includes sales of products and services provided directly through certain manufacturing facilities were $14 million in the quarter. MSA revenue from Vantive totaled $76 million. As a reminder, these sales are included in our reported growth, but they are not reflected in our organic growth. Now moving to the rest of the P&L. First quarter adjusted gross margins from continuing operations were 36.8%, a decrease of 500 basis points driven by the previously discussed headwinds and cost of goods sold. First quarter adjusted SG&A from continuing operations totaled $614 million or 22.7% of sales, slightly lower than the prior year. Adjusted R&D spending from continuing operations in the quarter totaled $124 million or 4.6% of sales. TSA income and other reimbursements totaled $42 million in the quarter, in line with our expectations. Altogether, these factors resulted in an adjusted operating margin of 11% on a continuing operations basis, a decrease of 390 basis points, reflecting the same underlying drivers discussed earlier in relation to earnings per share. Net interest expense and other expense from continuing operations totaled $67 million in the quarter. The continuing operations adjusted tax rate for the quarter was 18.3%, driven primarily by mix of earnings across jurisdictions. In total, adjusted earnings from continuing operations were $0.36 per share for the quarter. Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. First quarter free cash flow was $76 million. This compares to negative $221 million in the first quarter of 2025. The performance in the quarter reflects improved cash flow generation, including progress across targeted areas of working capital as well as continued focus on execution. We remain focused on strengthening cash flow generation and maintaining discipline around working capital, which are foundational elements of our financial strategy. Improving the balance sheet continues to be a key priority, and we intend to deploy cash towards reducing leverage in line with our capital allocation framework. Now turning to our outlook for the full year 2026, which we are reiterating. For the full year, we continue to expect total sales growth to be flat to 1% growth on a reported basis. This reflects current foreign exchange rates, which are expected to contribute approximately 100 basis points top line growth for the year. In addition, reported sales are expected to include a headwind of approximately $25 million from MSA revenues from Vantive, representing approximately 30 basis points of impact on reported growth. Excluding the impact of foreign currency and MSA revenues, we expect approximately flat organic sales growth for 2026. As it relates to the segments, there are no changes to our organic sales assumptions. In MPT, we expect full year organic sales to be flat to slightly up. This reflects the uncertain timing for the resolution of the Novum shipment and installation hold. Although we did not see a material impact from customer returns in the first quarter, we continue to believe it's prudent to include the potential impact from various customer responses in our guidance. Our guidance also assumes that the ship and installation hold will remain in place for the full year. In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both the Care & Connectivity Solutions and Front Line Care divisions. In Pharmaceuticals, we expect full year organic sales to be approximately flat. This reflects ongoing pressures in Injectables & Anesthesia related to softer market demand, continuing supply challenges and IV push utilization trends that have been discussed in prior quarters. We expect this to be offset by continued growth in drug compounding. Turning to our outlook for other P&L line items, beginning with tariffs. We continue to estimate a full year impact, net of mitigating actions to be approximately $80 million, which represents a year-over-year headwind of approximately $40 million as we experienced a full year impact. TSA income and other reimbursements are expected to range from $130 million to $140 million. We continue to expect full year adjusted operating margin from continuing operations to range between 13% to 14%. We expect our nonoperating expenses, which include net interest expense and other income and expense to total between $280 million to $300 million, reflecting higher interest expense and a lower contribution from other income. On a continuing operations basis, we anticipate a full year tax rate to range between 18.5% and 19.5%. We expect our diluted share count to average approximately 518 million shares for the year. Based on all these factors, we continue to expect full year adjusted earnings on a continuing operations basis, of $1.85 to $2.05 per diluted share. While we are not providing quarterly guidance, I will offer some additional color on how we expect performance to progress over the remainder of the year. Overall, we are reiterating the broader framework we previously laid out for 2026, including the rollout of [ no mechanical ] headwinds and a more challenging comparison to the prior year in the first half, followed by expected improvement in the second half. We now expect second quarter earnings to be similar to the first quarter with slight improvement in volumes. This reflects the continuation of the higher manufacturing costs, including absorption headwinds within ITT, which are expected to be more pronounced in the second quarter. As previously shared, as we move into the second half of the year, we expect to have fully rolled through the absorption headwinds in addition to realizing an anticipated benefit from the previously discussed actions taken earlier in the year to rightsize our cost structure. Within HST, we expect growth in the second half supported by new product launches, including Connex 360 and Dynamo. Our order in the U.S. continues to support visibility into improved performance in the second half. In Pharmaceuticals, we continue to expect the previously discussed headwinds to persist through the first half of the year. As we move into the second half, we anticipate a more favorable comparison and improved performance. Taken together, we continue to expect a second half improvement in organic sales growth, operating margin and adjusted earnings. For clarity, I will now provide a bridge from expected first half to second half margins. First, we expect improvement in volumes in the back half, consistent with typical seasonality we've seen in prior years and the associated incremental operating leverage that comes with it. This represents approximately half of the anticipated operating margin improvement from the first half to the second half, roughly 250 basis points of the total 500 basis point implied expansion. Second, we expect to realize the benefits from the cost structure actions taken earlier this year. This represents around 25% of the improvement to operating margins, roughly 125 basis points. To be clear, these actions are largely complete, and we expect them to be realized in the second half. And third, we expect to roll through the higher cost inventory produced in the second half of 2025 in Q2. This represents the remaining 25% of the anticipated improvement to operating margins or roughly another 125 basis points of expansion. With respect to free cash flow, we continue to expect free cash flow to be back half weighted, consistent with 2025. This reflects normal seasonality, the expected cadence of earnings and the expected benefit of recent cost structure actions. In closing, I just want to reiterate that I'm excited to see the traction within the organization from Baxter GPS. And I look forward to driving improved operational discipline and support more consistent execution across the business. With that, we can now open up the call for Q&A. Operator: [Operator Instructions] I would like to remind participants that call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Robbie Marcus of JPM. Robert Marcus: Congrats on the better-than-expected quarter. Two for me. First one, just wanted to get thoughts on how first quarter translates into the reiterated guide. How much of this is conservatism, how much of this is a pull forward or different assumptions moving forward. More specifically, especially as we look to 2Q, the Street's right around flat organic sales growth. How do you feel about that? And then I got a follow-up. Kevin Moran: Robbie, this is Kevin. Let me take this one just from a near-term modeling perspective. In Q1, I'd say it came in overall in line with our expectations. The 1 piece to call out there is we've been transparent about the potential risk of responses from Novam customers. We did not see a material impact in the quarter. But as Andrew referenced in his prepared remarks, we think it's prudent to continue to contemplate that in the guidance. As we move to Q2, I'd say, in line with our original expectations, we do expect some sequential improvement Q1 to Q2 on the top line, but still pressured year-over-year like we saw in Q1. And I think about it as pretty consistent year-over-year drivers from what we saw in Q1. So for example, the headwind from Novam sales, this will be the last quarter before we lap it. Andrew again talked about the risk of potential returns for Novum. We've talked about Pressures and Injectables. And we also said that HST's growth is going to come from the back half. And so the first half, we expect to be pressured and then we expect growth in the second half. And so to kind of sum it all up, the full year reiterated our expectation of approximately flat, kind of [ Novum ] pressures in the first half and then an improvement in the second. Robert Marcus: Great. Maybe if I could shift the focus to 2027. You have a good amount of TSAs and MSAs rolling off. There is still a lot of end market uncertainty. Maybe highlight if there are some of the key new product launches we can be looking for next year? And I guess the real concern out there from investors is, can EPS be a positive growth number, yes, next year. So if you're willing to comment on that, how you get there and some of the top and bottom line drivers? I appreciate it. Andrew Hider: Yes. Robbie, just a couple of items, and I'm going to start with what we've said. I'll walk through our view, and then I do want to walk a little bit on innovation. So look, while we're not providing guidance, as you're well aware, what we have gone through is that we're going to be rolling off the [indiscernible] and we expect to cover this, although we would expect to have modest growth within 2027. And we would also look to that to say we would expect to grow earnings modestly as well. When we look at our product set, not only we confidence -- we have confidence in our position with customers, and we're continuing to really outline and gain confidence in our ability to execute for our customers, we've launched some exciting new products. And I've outlined a few of these, but just to walk through. We talked about Connex 360 being a key [indiscernible] that we've launched and we've seen favorable insight from customers as well as engagement with customers as well as our Dynamo stretcher, which is a connected stretcher. And I'll tell you, we worked very closely with customers around the design, development and launch of this product and have had very strong feedback. Now it's a competitive market. And so certainly, we have to earn our right but we've seen very favorable discussions with customers and favorable uptick from engagement. So -- and I also highlighted 2 more -- while [indiscernible] still proving the point around, we are outlining novation and its impact on the future of Baxter. And we're going to continue to drive innovation as a key element of our future. We invest here. We expect a strong engagement with our customers through this process, and we would look to innovation being a -- certainly a key element of our overall growth in the future. Operator: David Roman of Goldman Sachs is on the line with the question. David Roman: Maybe we could just dive into a couple of businesses here. Maybe I'll start with MPT. There are a lot of moving parts here considering the dynamics with Novum IV conservation. But can you unpack for us a little bit what's going on beyond some of those businesses, for example, with the IV set business? How do you protect the pump disposal business, given the Novum dynamics? And I think that's something like 4 to 5x the size of your capital business and higher margins? And what are the things that can get this business back to growth besides just the stabilization in IV utilization? Kevin Moran: Yes. So a couple of things here, David. Let me start with our overall pump portfolio. And I outlined a bit around Novum, so I won't dig into that. We have launched Novum syringe, and that is a nice addition for Baxter. Additionally, we also have spectrum and spectrum, our LVP platform. So we continue to support the overall market. We expect that to be -- and we've had obviously strong feedback from customers, and we put this product on our IQX. So that allows us to have communication with our pump portfolio. And so overall, we feel we continue to have strong interest in our spectrum LVP pump. And we feel good about our offerings, especially the value proposition we bring to customers in this space. And with that, we would expect sets to be in line with that confidence. And just as a reminder, we do expect our pump revenue to grow in the back half of the year, and we're staying very close to our customer base through this. David Roman: And then maybe as a follow-up, I appreciate the bridge from first half to second half walk on operating margins. As you sit here today, a lot of things that you're laying out are contemplated on expectations for the second half of the year. Can you maybe just go into a little bit more detail about what are the signposts that you're seeing whether it's KPIs or orders or other customer dynamics that give you that confidence to embed such a significant ramp in the back half of the year? Kevin Moran: So maybe I'll walk through the conference, and then we can certainly go into buckets if needed. But overall, I'd say, first and foremost, we obviously -- and you've known this business, we do have a seasonality aspect that we've continued to look at and we are validating. Number two, when I speak to customers when we engage around our product set, we see strong interest. And we've looked at -- and there's some elements, right? We've talked to in the past, our IV Solutions business, and it's rightsizing, we would expect that to normalize within 2026, which we've outlined. Number two, we continue to look at HST as more a back half area, and we've seen continued strong interest in our product portfolio. With Q1, we did have a little nuance within Front Line Care on timing. We would expect that to normalize out throughout the year, and we would expect HST to grow at low single digits. So overall, we're feeling confident in our view and it's a credible path for our ability to execute and then really deliver on the growth -- or excuse me, what we've said in our earnings on growth, but also in our operating margin expansion. And so Overall, I would say we continue to look at the business. We continue to outline our KPIs to ensure we've got clarity and folks around executing within the year. Operator: Larry Biegelsen with Wells Fargo is on the line with the question. Larry Biegelsen: Andrew, I wanted to ask on inflation. What's embedded in the operating margin guidance for gross margin in 2026? And how are you absorbing the increased cost pressures from oil, freight, chips, et cetera. Since the Q1 call, oil, it looks like it's up about $50 a barrel since you last reported? And I had 1 follow-up. Andrew Hider: Yes. Larry. Let me walk through a couple of items here, and I'll outline how we view this as well as how we're executing towards it. To lay this out specifically, as we view oil and its impact, a reminder that we sold our Kidney Care business, and with that sale, we've gone, call it, less than 50% now is an impact on oil prices to our P&L. And so if oil stays flat as it is today, we do see this as something we can manage and mitigate and will not have a material impact in 2026. Additionally, as we see other areas, our team, and as you would expect, we've taken a very proactive approach to managing our supply chain and our supply channel. And so we are engaging very deeply with our suppliers. We were needed. We've started to look at dual sourcing, really outlining, ensuring we minimize the impact and use this as a competitive advantage for the long term. And so what I can state is as we -- as we look at our ability to minimize inflation, we've largely outlined how we want to drive this. That said, Baxter is not immune. And we continue to be very proactive, we continue to monitor. We use something called daily visual management around managing and ensuring we have our supply base. We're not immune to macro trends, and we continue to outline where we see issue, how do we impact and how do we drive that to minimize the overall impact on the business. Larry Biegelsen: That's helpful. And Andrew, maybe a high-level question. With more time under your belt now, anything more you can share about the turnaround plan and any strategic changes that we could anticipate at Baxter. Andrew Hider: Look, just to walk through, I took this job 9 months ago. And I'll tell you, I saw a compelling opportunity to create significant value, both not only near term but over the long term. And since then, my conviction has only gained to strengthened, and I am fully committed to restoring Baxter as an industry-leading company. And now why is that gain traction? I as a CEO, something called Standard work. And part of my standard work is to visit facilities, engage with our teams on how we produce product, how we drive operations as a strategic competitive advantage as well as customers. And I'll tell you the feedback from our customers is that Baxter is a trust brand. It is a brand in which they look to Baxter for innovation, for capability and to really enabling their workflow to be at a more systematic and simpler process. And so we have the ability to drive that. Now we're early in our journey. And so we've started to gain traction. We've started to see really the efforts around GPS, and I highlighted a few of those. And I guess 1 of them I would highlight is we've done over 230 events in Q1. Now no single event dictates success, it's the momentum and the build on our structure and our foundation for the future. And so look, this quarter, we met what we said we'd mean. By no means are we saying this is the end. We are laser-focused in here, we're laser focused on the future. And we've got a lot of work to do. but we've seen nice progress towards adoption of the fundamentals for how we want to get to the future and how to drive the business forward. Operator: Vijay Kumar of Evercore ISI is on the line with the question. Vijay Kumar: [indiscernible] just looking at the performance here, excluding the comps, you guys said up low singles [indiscernible] on an underlying basis, but the guidance is calling for flattish organic. So maybe just walk us through on why wouldn't Q1 trends sustain? What are you assuming for normal step down or returns, if you will, maybe comment on HSD order performance. I know there was some timing element. Would it orders grow and what gives you confidence for HSD growth in the back half? . Kevin Moran: Vijay, this is Kevin. I can take this one from a modeling perspective and reiterate some of the comments I shared with Robbie. So I guess, overall, Q1 came in line with the expectations. Again, the 1 item to note there is we've been very clear and transparent about contemplating the potential risk from responses from Novum customers. we did not see a material impact in the quarter. However, we think it's prudent to continue to reflect that in our guidance going forward. And when we think about Q2, it's going to be a lot of the same dynamics and year-over-year headwinds that impacted Q1. Injectables, Novum, the potential for Novum returns. We've said HST's growth is going to come from the back half of the year. And so we do expect some sequential improvement in volumes in Q2. However, it's still going to be pressured year-over-year. Vijay Kumar: Sorry, just on the order growth in the quarter? Kevin Moran: I'm sorry, can you repeat your question? Vijay Kumar: HST order trends in the quarter? Kevin Moran: Each -- I'm sorry, Vijay, we're having trouble hearing you. Trends of what? Vijay Kumar: Order growth for HST. Kevin Moran: That's the timing we saw in the quarter. Got it. Andrew Hider: Yes. So -- and Vijay, I'll walk through this, but let me get a little bit more specific. Within Q1, the HST performance was largely driven by our Frontline Care business, and there was some timing aspects within that portfolio, plus we did have some planned exits within the portfolio. And these were planned. CCS came in roughly flat for the quarter. And within that, we did see growth in PSS, which is the largest piece of our business for CCS, giving a lot of items here. Net-net, we do expect this business to grow low single digits for the year. Q1 did have -- for HST, a pretty big number last year. So as you recall, last year was a big comp to come off of. We would expect it to be weighted, our growth weighted to the back half. And we've seen strong demand for our Connected Care business. as well as how we look at the timing for FLC. And so overall, again, reiterating, we expect this business to grow low single digits and to be back half weighted. Operator: Matt Miksic of Barclays is on the line with the question. Matthew Miksic: Congrats on a great start to the year. Yes, I wanted to follow up on just a couple of things. One on the sort of general macro factors that are causing some concerns, I guess, and in the past had been a challenge for Baxter. I think the expectation was that was going to be tougher, David talked a little bit about oil components and chips and supply teams. One of the companies in this space report some issues around chips that had been a problem. How are you mitigating those? And so how far out into the future? Do you feel like you are kind of set through the end of the year or for the next couple of quarters? And then I had 1 follow-up. Andrew Hider: Yes. Look, and I'll walk from specifically, chips. So it's overall [indiscernible]. So from a memory chip standpoint, at this stage, we've not experienced material storages or supply disruptions. And now that said, versus that we're taking a very proactive approach to managing risk. And many areas that we're doing through disciplined forecasting, through supplier engagement, dual sourcing efforts, and certainly something that we continue to look at. As I stated earlier, Baxter is not immune. We've outlined this risk early on and we are taking countermeasures around how to minimize this and it's something we are going to continue to stay close to and something we're going to continue to monitor. But to date, we have not experienced a material shortage. Matthew Miksic: Okay. And then just a follow-up on some of the growthier areas. As we all know and as you know, sort of the search for growth drivers and innovation and shiny object, if you will, has been one of the quest of Baxter for some time. And listening to you the last 6 months or so and on this call, talk about some of the -- getting after some of the growth engines that you have within the portfolio in Surgery or I don't know if it's in HST or in Connected Care, it seems like a slightly different take on putting R&D to work to generate growth, maybe putting more wood behind arrows you already have. If you talk a little bit about that in the near to intermediate term, that would be great. Andrew Hider: Absolutely. And I'm going to start in an area and I will answer the question, but I just -- I want to be clear, we are -- we will be known as very disciplined capital allocators. And I say that to start because, obviously, I have outlined the debt repayment. But the second piece of that is invest for growth. And part of that is how we invest in innovation. And we've outlined that in the past, but as a reminder, I view innovation as base heads, not walk off grand slams. And why do I say base heads? Because we have -- we need to have that constant drive to always be in front of our customers, listening, turning that into actionable insights and driving products that overcome the obstacles that our customers face. We have put our -- we've now positioned our business to be decentralized. So think about us as being very focused on the end markets we serve and then building it into our process and how we drive innovation. And so as we look at innovation, it is an enabler for our future. Now things take time, and I want to be very clear on that. It's early days. It's early stages. We've started to see some movement. And why do I know that with confidence. We do QBRs, which is a quarterly business review with our innovation leaders similar to our businesses. So it's the same expectation around where we spend our money and understanding that drive and making sure that we are laser focused on driving growth and driving expansion for our customers to enable their success. And so we've had a couple of early successes. We have some early wins, and I outline a few of those Connex 360 as well as Dynamo as well as by the way, we've launched a few more products in the quarter that will -- there's certainly a niche area of focus offers a continued path for our customers to see the impact from innovation. And so I would just say, over time, you'll see us on that cadence of focusing on how do we expand our value for customers and ultimately drive it from an ROIC perspective back to our shareholders. Operator: Matt Taylor of Jefferies is on the line with the question. Matthew Taylor: I had a couple of follow-ups. I just wanted to know better what you were assuming for the Novum returns, just so we can understand if there aren't returns, what the upside could be? Kevin Moran: This is Kevin. So we haven't explicitly quantified what the potential risk is for returns. But as you can imagine, this is something we continuously evaluate from an accounting perspective and from a guidance perspective. Thus far to date, since the ship and installation hold, it has been fairly immaterial to our results. Again, but we just think it's prudent to assume that this potential could happen. We have talked about our total pump portfolio being less than 2% of sales, and that includes both Novum and Spectrum. So you can at least ring fence the size of our total pump portfolio, of which some of that would be related to Novum. Matthew Taylor: Got you. And then can I ask a follow-up on the inflation issues. You said that oil would be manageable in 2026. I guess my question is if it stays elevated, is it still manageable in 2027? Or can you provide any framing of exposure there next year as [indiscernible] hedges roll off, et cetera. Andrew Hider: So I'll just kind of reiterate what I stated a little earlier and then we can through the other aspect. What I stated earlier was if oil stays at its current level, we have been able to mitigate, and we would not see a [indiscernible] challenge on 2026. As far as 2027 goes, as you're -- well, we're not giving guidance today. That said, we're very focused on every aspect of our business that's going to be part of the supply chain and potential areas that we would want to mitigate. Operator: Joanne Wuensch with Citi is on the line with the question. Joanne Wuensch: I'll just put the 2 upfront. How do I think about the recovery in Injectables & Anesthesia. It sounds like that also has a back half improvement. And could you please comment on the CFO search? Thank you so much. Andrew Hider: Yes. So let me walk through this aspect. And on to Pharma specifically and get into a couple of areas on it. First, we have taken pharma. We've outlined as we've combined this with our ITT business. lot of synergies across that business. And simply put, we do -- what we do really, really well is take high-value solutions that are patient impact and we make it easy for our customers to utilize that in their setting. And we've been able to bring that together. And so the team is excited about what that brings. We have seen a couple of challenges couple of challenges in this business. And one of them -- and I outlined last quarter and into this quarter, we had a challenge in one of our operations. And the team a GPS approach. They outlined where we had the challenge, they took short term and drilled the business and aligning around long-term countermeasure to enable this business to longer term be back on track. And so we've been able to mitigate this, and we saw that trend throughout the quarter. Additionally, we also have a challenge with the contract manufacturer. And I'll tell you, having been personally engaged in this, this is going to take time. We are working very closely with them. We have people on site to work with them to improve the supply, but this will take some time, and we are staying very close to this as it's important for our customers to get this product back on track. As far as longer term, when we think about this business. The [ fit ], the area is really aligns around our ability to bring strong capabilities to the markets and compounding has been a piece of that as well around high value, high -- or excuse me, high growth, where we focus on ensuring that we also identify margin and how we attack the margin. As far as the CFO goes, look, that is well underway. We have started the search. We are seeing tremendous interest many of the variables that brought me to Baxter around our strong position with customers, the brand and potential for the future is the same that we're seeing. And so it's well underway. We're in a fortunate position with the need of being in place and a broader team continuing to execute, [indiscernible] on executing. And so we're focused on getting a CFO that understands execution as well as knows our business. And you can expect we'll update at the appropriate time. Operator: Jayson Bedford of Raymond James is on the line with the question. Jayson Bedford: Congrats on the progress here. Just a quick 1 for me. On the Novum fix, you mentioned that you'll be prepared for any necessary submissions. So I guess the question is, do you anticipate that you'll have to refile? And if so, will you notify us if you do? Andrew Hider: So as far as Novum goes, and I'm just going to walk through -- and we don't have any updates today. I want to be very clear. But I'm very pleased with the progress and level of engagement I'm seeing from our teams as they continue to address the open Novum field actions and support needed from our customers. As we stated, our guidance assumes that the ship and hold will remain in place during the year for Novum LVP. To be clear, we continue to diligently finalize additional hardware and software corrections to resolve the open field actions. And once those are available, we'll implement them in accordance with regulatory authorities and including any necessary submissions. And so we are moving. We have a strong portfolio with our Spectrum LVP, and we continue to stay very close with our customers through this process. Jayson Bedford: Okay. And just maybe as a quick follow-up. It sounds like the returns are not material, but is it safe to assume that you're seeing kind of a stabilization of returns, if I think of 1Q versus 4Q and 3Q? Anita Zielinski: That's correct. So in Q1, we did not see a material impact from the Novum LVP returns or exchanges, but we have factored this possibility into our full year guidance. And this guidance does assume that those shipment [indiscernible] hold installation remains in place throughout the year. Operator: Andrew Hider, I turn the call back over to you. Andrew Hider: Thanks, operator, and thank you for your questions today. As we shared, while we're still early in our turnaround, our team is moving with urgency and discipline and our efforts are gaining traction. Through Baxter GPS, we're aligning our organization around us shared standards of excellence and building a culture of continuous improvement. We're now operating from a stronger foundation and focused on driving more consistent performance, accelerating growth and meaningful innovation, expanding margins, strengthening cash flow, and reinforcing our balance sheet to create durable, long-term shareholder value creation. Thank you for continued interest. We look forward to sharing updates on our progress next quarter. Stay safe, and goodbye for now. Operator: Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.
Operator: Greetings. Welcome to Slide Insurance, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your moderator today, Garrett Edson with ICR. Thank you, sir. You may proceed. Garrett Edson: Thank you, and good morning. With us today are your host, Bruce Lucas, Chairman and Chief Executive Officer of Slide; and Andy Omiridis, Chief Financial Officer. By now, everyone should have access to our earnings release, which was published yesterday after the market closed and can be found on our website at ir.slideinsurance.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management regarding the company's future performance, anticipated events or trends and other matters that are not historical facts. Forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Slide. Our statements are as of today, April 29, 2026, and we undertake no obligation to update any forward-looking statements we may make, except as required by law. In addition, this call is being webcast, and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.slideinsurance.com. With that, I'd now like to turn the call over to our Founder, Chairman and CEO, Bruce Lucas. Please go ahead. Bruce Lucas: Thank you, and welcome to our first quarter 2026 earnings call. We appreciate your continued interest in Slide and are excited to be speaking with you today. We started off 2026 by delivering another quarter of strong execution across our business and reinforcing the ability of our tech-enabled coastal specialty focus to produce what we believe to be the best top and bottom line performance in our sector. Our performance was once again based on strong renewal rates on our existing book, expansion of our voluntary sales and the continued acquisition of Citizens policies. For the quarter, we meaningfully grew our gross written premiums by 49% year-over-year to $414.8 million. In the quarter, we continued to strategically capitalize on Citizens ongoing depopulation efforts. As a reminder, our extensive data capabilities and technology-driven underwriting process enables us to identify Citizens policies that offer compelling return profiles. While we plan to remain selective in pursuing Citizens assumptions this year, we expect to continue to grow our gross written premiums in 2026 year-over-year as a result of higher policy retentions, higher voluntary sales and the launch of new states. In addition to our strong top line results, Slide grew net income by 51% year-over-year to $139.5 million, which is another new quarterly record for the company. Along with net income, first quarter return on equity was once again strong at 12.5% and 50% on an annualized basis, reflecting the continued strength of our business. Meanwhile, our disciplined underwriting model continues to deliver industry-leading results with our combined ratio improving to 55.5% compared to 58.9% in the prior year quarter. Our first quarter performance continues to deliver robust profitability and attractive equity returns that create meaningful value for our shareholders. This strong start to the year positions us well to achieve our full year objectives. We have deliberately built a dynamic coastal specialty insurance platform with the strongest balance sheet in the sector, providing us with the financial flexibility to accelerate our geographic expansion throughout 2026. While we've established a strong market position in Florida, we're now strategically extending our proven capabilities into additional catastrophe-exposed markets. For example, South Carolina continued to deliver robust voluntary sales in the first quarter, and we're confident we will be able to build on this momentum moving forward. As we continue to progress through 2026, we remain committed to thoughtful geographic diversification in multiple states. Our geographic expansion will bolster our foundation for sustainable growth and long-term shareholder value. We are in the final process of completing our 2026 reinsurance program, and I anticipate completion of the reinsurance tower in the next 1 to 2 weeks. Year-over-year, risk-adjusted rate decreases are prevalent in the Florida market and the decreases have been substantial. I will not disclose the extent of the decreases in pricing at this time, out of respect for our reinsurance partners who are still negotiating with our peers. However, I will note that we increased our first event reinsurance tower by roughly $1 billion versus 2025. And despite this increase, reinsurance capacity significantly outpaced our demand as every layer of the reinsurance tower was oversubscribed on favorable terms. I'd like to thank our reinsurance partners for their unwavering commitment to Slide through hard and soft market conditions, and your partnership is greatly appreciated. During the quarter, we completed our $120 million stock repurchase program, and our Board authorized a new $125 million repurchase program in late March. In the first quarter, we repurchased approximately 7.7 million shares at a weighted average price of $17.75 per share. Since initiating our buybacks, we have repurchased approximately 13.3 million shares at an average share price of $17.30. Through our repurchase program, we have returned $230.9 million to shareholders and reduced our IPO dilution from 13% to 3%. This reflects our business model's ability to generate strong free cash flow, our willingness to opportunistically repurchase shares when we believe there is a dislocation in our valuation and our ability to successfully return capital to our shareholders in a highly value-accretive way. It is unusual for a recent IPO issuer to return IPO proceeds less than 1 year after going public, and there are a couple of reasons for our decision to aggressively pursue share buybacks. First, since our IPO was priced in June at $17 per share, we have significantly outperformed our expectations each of the last 4 quarters while providing strong guidance for 2026. Despite our consistently strong results, our share price remained close to the IPO price, which does not reflect our fair value. Second, our strong financial performance has meaningfully increased our free cash position, which continues to build. This growth in unencumbered cash has exceeded our near-term deployment needs, and we believe we have ample capital flexibility to support our growth initiatives even after repurchasing $230 million of common stock. Given our current earnings profile and outlook, we believe repurchasing shares at attractive valuations is a prudent use of capital that can enhance earnings per share and return on equity over time. We remain highly confident in our business plan and expected financial performance and believe our share repurchase program further supports our objective of delivering best-in-class returns on equity. Accordingly, the Board of Directors has authorized an additional $100 million share repurchase program. We will continue to evaluate repurchase opportunities in a disciplined manner, and we'll act when we believe doing so is in the best interest of shareholders. We expect to strengthen Slide's earnings profile and balance sheet throughout 2026, and we remain committed to deploying our excess capital in ways that maximize shareholder value. Finally, our success is built on the efforts of our exceptional team. I want to thank all our employees for their dedication and the critical role they play in Slide's performance. I'm proud of what we are accomplishing together, and I appreciate all of you. Thank you for your continued support of Slide. And with that, I'll now turn the call over to Andy Omiridis to provide some color on our excellent first quarter. Anastasios Omiridis: Thank you, Bruce, and good morning, everyone. In the first quarter, net income rose 50.8% to $139.5 million from $92.5 million in the prior year period, resulting in diluted earnings per share of $1.02. Our earnings profile continues to strengthen with growth in both top and bottom line driven by increased scale achieved following our IPO in June 2025. Gross premiums written reached $414.8 million, up 49.1% from $278.2 million in the first quarter of 2025. This growth was driven by a 46% year-over-year increase in policies in force, which now stand at 508,928, driven by growth of voluntary new business, renewals of previously acquired Citizens policies and further Citizens acquisitions. During the quarter, we also acquired an additional $92.3 million in annualized gross premiums or 28,783 policies from Citizens, capitalizing on selective attractive takeout opportunities. Net losses and loss adjustment expenses totaled $111.1 million in the quarter as compared to $83.8 million in the prior year period. As a result, our accident year loss ratio improved to 28.4% from 34.2%, reflecting the continued strong performance of our book. Policy acquisition and other underwriting expenses rose to $44.1 million from $28.6 million in the prior year period, driven by increased renewal policies from prior year assumed Citizens policies, resulting in increased policy acquisition costs in 2026. General and administrative expenses increased to $46.2 million from $41.4 million, primarily due to higher staffing levels to support our growth. These trends produced an overall expense ratio of 25.1%, down from 27.4% in the prior period and a combined ratio of 55.5%, an improvement of 3.4 percentage points year-over-year. The gains reflect the operating leverage we continue to build as we scale the business. Turning to capital management. As Bruce mentioned, we completed our $120 million share repurchase program during the quarter, and our Board authorized a new $125 million program in late March. In total, we have repurchased 7.7 million shares at a weighted average price of $17.75 per share during the quarter. As of the date of this earnings call, we have repurchased an additional 3 million shares for $53.8 million at an average price of $17.95. Since inception, we have repurchased 13.3 million shares for $230.9 million at an average price of $17.30. As of March 31, 2026, we had cash and cash equivalents of $1.2 billion and total invested assets of $720 million, consisting of 33.5% corporate bonds, 31.3% municipal bonds, 24.1% U.S. government bonds and 11.1% asset-backed securities and other. As a relatively new public company, I'd like to take a moment to outline our capital priorities. We have demonstrated our ability to generate strong free cash flow and have deployed that capital both to support attractive growth opportunities and to repurchase shares when we believe it is accretive over the long term. We expect to continue managing capital in this disciplined manner, always prioritizing the actions that create the greatest long-term value for our shareholders. I'm pleased to reaffirm that the full year 2026 guidance we provided on our February earnings call, we continue to expect gross written premiums between $1.85 billion and $1.95 billion and net income between $455 million and $470 million. Top line growth is expected to come primarily from sustained organic expansion, including double-digit increases in policies in force and premium outside of Florida, supplemented by selective opportunities in Florida that meet our targeted returns. Finally, we expect to file our Form 10-Q after the market closes on April 30, 2026. Thank you for your time. And operator, we are now ready to open the line for questions. Operator: [Operator Instructions] The first question comes from Alex Scott with Barclays. Taylor Scott: First one I had for you is just a follow-up on the reinsurance commentary you gave. It sounded like a fair amount of limit you added. So I wanted to check to see if you could give us an update on how much higher the modeled PML loss would be that would still be covered by your reinsurance tower? Has that meaningfully changed sort of the risk profile of your company? Bruce Lucas: Yes. Everything scales in tandem. So we've had obviously tremendous growth year-over-year at plus almost 50%. As you add more policies, your probable maximum loss on your reinsurance tower gets higher. And so apples-to-apples compared to last year, it's the same. But in total, we did increase our first event reinsurance tower by $1 billion. So the tower is at approximately $3.5 billion of first event coverage. And that is in line with what we did last year, although on a smaller book and smaller tower, they are proportionately identical to one another. Taylor Scott: Got it. Okay. That makes sense. And just to follow up on the reinsurance costs. I mean, to the extent you have savings, which it sounds like you probably will, and that's one of your biggest costs. Can you help us think through how that translates to the loss ratio and the benefit that we actually see coming through in the underwriting? Bruce Lucas: Yes. We don't have an external quota share, so it really shouldn't have any impact on underlying loss ratio. But yes, you are correct, Alex, that reinsurance is our single largest expense of the organization. So a decrease in reinsurance pricing is good for the Florida market and Florida cedents. But the underlying loss ratio should be unchanged because our only quota share is internal. Operator: The next question is from Paul Newsome with Piper Sandler. Jon Paul Newsome: I wanted to ask kind of a broader question about the Citizens takeouts. There seems to be a pretty wide range of views about whether or not you can take them out -- take Citizens takeout today versus in the past, given how active folks have been. Maybe you could just talk a little bit about why you folks remain confident and if there's any sort of particular thing that you think you have an advantage over your peers in doing those takeouts. Bruce Lucas: Yes, it's a good question, Paul. I mean, obviously, the Citizens opportunity is not as robust as it has been in prior years. But every company is different. It depends on your portfolio? Where your portfolio is located? How do the Citizens policies fit within that portfolio? Are there reinsurance synergies that are created or the debit sets that happen? So every company is going to look at the Citizens portfolio a little differently and the policies are going to model differently for everyone. We are focused on profitability, like our growth has been incredible, and we're certainly not reliant on Citizens this year. We think voluntary growth in new states is the real story for '26. But if we see opportunities in Citizens to add accretive policies that really fit well within our portfolio, we're going to do that. And we underwrite with a $6 trillion TIB underwriting set. ProCast has been proven 100 times over now. It gives very accurate forward reinsurance costs. We feel like that gives us an advantage to find policies that are accretive to the current portfolio. Jon Paul Newsome: And then maybe as a second question, could we have a little additional color on the competitive environment? Perhaps the biggest question I get today is given where you and other insurers or profitability is why -- why wouldn't we see a rush of competitors come into the market? And is there any early evidence that something like that might be happening? Bruce Lucas: Yes, Paul, we're not seeing it. We get this question every quarter and every quarter our answer is the same. While there have been some new entrants to the market, I will note those entrants come in with an extremely small balance sheet. They have to scale. They have to build systems. They have to hire people. It's a loss lead. Maybe Citizens can be attractive for them, maybe not. But obviously, that opportunity is not as robust as it was, say, 2 years ago. We're not seeing new capital flow in, and we're seeing some companies that got conditional approval in Florida, not able to raise the necessary funds to even operate. So we're just not seeing that at this time. I think the market has been pretty stable, and we're very happy with how we are positioned in Florida. Operator: [Operator Instructions] The next question comes from Tommy McJoynt with KBW. Thomas Mcjoynt-Griffith: We appreciate you guys giving us the full year guide for net income. And to be clear, that guide, I think you said does not include your assumption for a major CAT event in the third quarter, which we as analysts often want to bake in. Maybe you can help us frame what would happen to your net income if a prior event like a Hurricane Helene, Milton or Ian were to repeat, what would that do to your net income? We understand it's not as simple as plugging in the full first event retention just because there's offsets from claims processing revenues as well. Bruce Lucas: Well, if it's an event like Helene, there's virtually zero impact to our earnings. If there's an event like Milton, there's going to be a larger impact because it was a CAT 4 that hit Tampa. Whereas Helene was primarily a flood event. We're still finalizing in the reinsurance tower what our first event retention is going to be. But I would say that as a guidepost, we have consistently kept our retention to no more than 25% of pretax earnings. So even if you had a full event retention, I would expect pretax earnings to go down by about 25% for the year. And so maybe we run a 40% ROE. It's -- we're in a very good spot here. And the retention is also spread out across a very large reinsurance tower. So it's not like you have a $200 million loss and all of that loss is absorbed by the company. We spread that retention throughout different layers. We call it COPAR. And we like to do that just to hedge the risk and show the reinsurers that we have real skin in the game. But -- and event is not some armageddon for us. It's just a ding to earnings for the year, but those earnings will still be incredibly robust. Thomas Mcjoynt-Griffith: And are there any details that you can share around second and third event loss retentions as well, the sideways protection in the reinsurance tower? Or will we need to wait for more details on the reinsurance program? Bruce Lucas: Yes. Good question. Expect something similar in terms of structure to what we did last year. We do like to step down retentions on event too. We do buy third event cover, and that is a rarity in the Florida market. In fact, I'm unaware of anyone that does that besides us. So as we get a higher number of catastrophe events, our retention steps down for each event. But we're still in the process of finalizing what that will look like, but not dissimilar to last year. Thomas Mcjoynt-Griffith: And then just last one. When we think about the new business -- sort of new business that you're generating, both in the voluntary and what I'll call the Citizens assumption side, which one of those is a larger contributor to new business growth in '26? Is it still Citizens takeouts? Or are the voluntary channels in Florida and in the other states contributing more than that this year? Bruce Lucas: It's voluntary. That will be the larger channel for sure. Operator: The next question comes from Randy Binner with Texas Capital. Randy Binner: Just picking up on that question. Can you comment on the kind of the pace and the composition of the top line growth for the rest of the year? Is there going to be -- is it going to be for the voluntary business or the business in new states? Is it going to be pretty linear? Is there any seasonality? There's kind of a tough comp in the fourth quarter. It'd just be helpful to kind of understand high level, how you see the rest of the top line coming in for the remaining 3 quarters in the year? Bruce Lucas: Yes. I would expect top line to steadily increase as we move through 2026 with the launch of new products, new states, et cetera. We do have to watch our growth because we're purchasing a reinsurance tower, and that tower has projections as to what our in-force portfolio will look like at September 30. And -- so we have to kind of navigate within the tower on the top line growth, but we did model in some very strong top line growth into the reinsurance purchase. So we're able to kind of go full steam at this point and continue to fill the exposure set within our reinsurance tower. But I definitely think you're going to see an acceleration, particularly in the third and fourth quarters. Randy Binner: Okay. That's helpful. And then just one detailed question. Do you -- was there any PYD or Cat in the loss ratio in the quarter? Bruce Lucas: We had some CAT in there. We had some relatively minor events in the first quarter, but there is no PYD. The earnings number that we posted is 100% a quarterly function with no PYD in it. Randy Binner: Okay. Got it. And then just one more, if I could. The cash balance seems high. I'm a little newer to the story, so maybe I'm not up to speed on this. But it seems like some of the cash balance on the balance sheet could shift into investments that could generate a higher yield. Is that the right way to think of how the investment income line might develop over time? Bruce Lucas: I believe, yes. And the reason the cash balance is so high is because the company keeps crushing its own projections in terms of profitability, and it is meaningfully accretive to our cash balance. As a result of the cash balance accelerating, particularly over the last 4 quarters, we've been able to do things like return $230 million of equity back to shareholders. And we still believe that we have more capital on the balance sheet than we need to execute on the business plan. So we are working closely with our financial advisers. We are reinvesting those cash proceeds into higher-yielding assets. But at this point in time, nothing is a higher yield than just the underwriting. I mean when you're running 55 combined ratios, you want to continue to bolster and increase your underwriting capability. But it is a [ chance, ] and it takes time to deploy capital in an effective and thoughtful way. But it's a good problem to have, and we expect that problem to get a little bit bigger as we go through the year, and we start posting earnings numbers for the rest of the 2026 quarters. Operator: The next question comes from Matt Carletti with Citizens Capital Markets. Matthew Carletti: Bruce, I was hoping you could just spend a minute talking about some of the new states you talked about kind of New York, New Jersey, California and so forth. And just help us with kind of which ones you might find most attractive. Some of those have been in the news in different ways. Obviously, California has a bit of a capacity issue going on to the wildfires. There's been kind of proposed profit caps in New York, which I know it won't be a big state for you overnight and maybe it's a bunch of noise about nothing. But just curious kind of your views as you sit there and think about kind of where to put your chits as you kind of expand outside of Florida. Bruce Lucas: Yes, it's a good question, Matt. I would say #1 for us is definitely California. We've spent a lot of time developing on California product and partnerships, distribution, that launch is imminent. I mean it could happen this week. I mean we're that close. We're just putting the finishing touches on systems at this point in time. So we expect to launch that product in the near term, but we think there's a tremendous opportunity in California. We also do believe that New York and New Jersey are still very accretive. And the primary reason for that is there is a capacity shortfall in both of those markets. There are tremendous reinsurance synergies that we pick up as we scale in the Northeast. It's the blueprint and model that I kind of created when I was at Heritage and it was very successful. So I have a high degree of confidence in that execution strategy. We'll see what New York does on profit caps. I think that's going to be a much bigger issue for, say, a company that has 100% of their premium in New York not a company at the end of the year that will have 4% or 5% of its premium in Europe, if that. So it's not really an issue at this point in time. We're still on track and on schedule to launch all of our new states, and we feel pretty bullish about that growth opportunity. Operator: The next question is a follow-up from Alex Scott with Barclays. Taylor Scott: I wanted to see if you could comment a little bit more on some of your efforts on distribution in California ahead of the launch. I mean, is that -- is building out distribution something that takes a long time and sort of you have the blueprint and some of the initial foundation laid, but it will kind of come in over time? Or has a lot of that work been done upfront? I'm just trying to understand how impactful this launch could be on growth for the rest of the year. Bruce Lucas: Yes, Alex, good question. All of our distribution is in place. So we spent the time on the front end to identify the right distribution partners in a very large and differentiated market. California is huge. It's not like there's 2 or 3 markets. There's probably 20 markets within California. So all of that work is done. Really at this point, we're just fine-tuning some system issues, technical issues, but it will get launched here in short order. And we do think there's an opportunity to grow top line this year by $50 million to $100 million just in California, if not more. So we're really chomping at the bit to get the finishing touches on and launch the program. Taylor Scott: Got it. That's helpful. Follow-up I had is on just the prioritization of capital return. You're in a unique position where you have enough cash coming in to potentially grow and return capital. And I look at my own model even and -- even with a good amount of growth, premium to surplus is coming down in my model, which probably doesn't make a whole lot of sense. With the stock trading at what is -- at 5.5x price to earnings, I mean, a significant discount even to the arguably more volatile reinsurers and property CAT, will you continue to leverage buybacks to reduce your share count the way you did this quarter until that's corrected? Bruce Lucas: Yes, that's a great question. It's something that we talk about a lot is capital management. And you're right. This is a good problem to have. Most companies do not have the problem that we have on profitability and cash. But we are always, first and foremost, looking for the highest return on equity for our shareholders. That is our #1 mission at Slide. It should be everyone's #1. And so the first thing we do is we really pick apart the business plan. We look at the opportunities in front of us, the amount of capital that will be required, what we believe the ROE will be on those opportunities. And once we have that cash position set aside for the growth initiatives, we then start looking at excess cash, what's the best use of it. There are definitely instances where you'd want to have some redundant capital on your balance sheet. I think that is prudent. It helps us kind of hedge out any volatility in the portfolio. But we have been generating such rapid increases in profitability and free cash that buying back stock at an average of $17.30 a share, which is less than 2% higher than the IPO price, that's a no-brainer. We'll take that trade all day. When we went public in June of last year, there were analyst projections that were issued to the Street as to what we were going to do in '25 and '26. I think it's very safe to say that we have absolutely surpassed all of those expectations in a meaningful way, yet the stock had been kind of stuck right around that IPO price. When we see that type of dislocation, we're a strong and aggressive buyer. And as we continue to increase our earnings, increase our top line, you should expect us to be very active in share buybacks as long as the price is not indicative of fair value. Operator: Thank you. At this time, I would like to turn it back over to Mr. Bruce Lucas for closing comments. Bruce Lucas: I would just like to thank everyone for participating in our first quarter earnings call. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Good morning. Welcome to the Trane Technologies Q1 2026 Earnings Conference Call. My name is Lisa, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. [Operator Instructions] I will now turn the call over to Zac Nagle, Vice President of Investor Relations. Please go ahead, sir. Zac Nagle: Thanks, operator. Good morning, and thank you for joining us for Trane Technologies First Quarter 2026 Earnings Conference Call. This call is being webcast on our website at tranetechnologies.com where you'll find the accompanying presentation. We are also recording and archiving this call on our website. Please note that statements made today are forward-looking and may differ materially from actual results as detailed in our SEC filings. This presentation also includes non-GAAP measures explained in our news release and presentation appendix. Joining me today are Dave Regnery, Chair and CEO and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave. Dave? David Regnery: Thanks, Zac and everyone, for joining today's call. Please turn to Slide #3. I'll start with a few thoughts on how our purpose-driven strategy continues to fuel strong performance over time. The dynamic global environment and rising demand for power is pushing customers to think differently about energy. With our leading innovation, Trane Technologies is uniquely positioned to win. Our high-efficiency systems and smart controls help customers save energy, lower operating cost and increased resiliency proving that sustainability and performance go hand-in-hand. Our strategy is built on a strong foundation, our robust business operating system, a powerful cash flow engine and an uplifting engaging culture. This formula positions us to deliver differentiated long-term value to our people, our customers, our shareholders and our communities. Please turn to Slide #4. Q1 was another strong quarter, marked by exceptional enterprise organic bookings, up 24% and a record backlog of $10.7 billion, up over 30% versus year-end 2025. We delivered organic revenue growth of 3%, led by our Americas Commercial HVAC business and double-digit global services growth. This strong performance translated to adjusted EPS growth of 7%. Our Commercial HVAC businesses delivered outstanding performance, particularly in the Americas, where our commercial HVAC bookings reached an all-time high, up approximately 40% year-over-year, with Applied Solutions bookings up over 160%. Our third consecutive quarter of applied bookings growth of greater than 100%. The strength of our Commercial HVAC business is further underscored by our combined Americas and EMEA backlog, which is up approximately $2.7 billion over year-end 2025. This includes approximately $1 billion from our acquisition of Stellar Energy, a leader in modular data center cooling solutions. We are exceptionally well positioned for continued growth in 2026 and beyond. Our exceptional bookings and record backlog provides strong visibility to continued market outgrowth and revenue growth acceleration in the second half of the year. Our robust and rapidly growing Commercial HVAC pipeline across key verticals, including long-term capacity and master purchase agreements in data centers bolsters our confidence in the long-term outlook. Our services business, which represents 1/3 of our enterprise revenue, continues to be a consistent and durable growth driver, boasting a low teens compound annual growth rate since 2020. Additionally, we anticipate residential market tailwinds in the second half of 2026 driven by improving market fundamentals and easier prior year comparisons. The Americas transport market also continued improvement in fundamentals, strengthening the outlook for a late 2026 and 2027 recovery. Operational excellence is core to everything we do, and we expect to mitigate tariff and inflationary pressures through our business operating system. Altogether, we are raising our full year revenue and EPS guidance, which Chris will cover shortly. Please turn to Slide #5. As discussed in our Americas segment, Commercial HVAC continued its standout performance with bookings up approximately 40% and revenues up high single digits. In high-growth verticals like data centers, customers expect innovative, highly engineered solutions tailored to their unique needs. This plays directly to our strengths, including leading innovation, system expertise, proven operational excellence and the capacity to grow with our customers as their needs rapidly expand. These factors and the expertise of our direct sales force enabled us to capture a significant share of these opportunities. Turning to residential. Bookings were up low single digits, while revenues declined mid-single digits, exceeding our expectations entering the quarter. In Americas transport refrigeration, bookings were up double digits and revenues were up low single digits, significantly outperforming end markets, which saw truck, trailer and APU segments down double digits in Q1. EMEA results were solid and consistent with our expectations, excluding headwinds from geopolitical events in the region. In Asia Pacific, Commercial HVAC bookings were up high 20s and revenues grew low single digits in the quarter, led by the rest of Asia, where bookings were up approximately 50% and revenues were up low single digits. Now I'd like to turn the call over to Chris. Chris? Christopher Kuehn: Thanks, Dave. Please turn to Slide #6. Dave covered many key points from this slide earlier, so I'll keep my comments brief. Organic revenue growth for the enterprise was solid, up 3%, led by services growth, up double digits. Enterprise organic leverage was in the high teens and adjusted EPS growth was 7%, demonstrating the effectiveness of our business operating system and driving operational excellence throughout the P&L. Please turn to Slide #7. Margins across the segments were largely in line with our expectations, with the Americas and Asia operating margins up 10 basis points and 90 basis points, respectively. EMEA margins were impacted by expected first year acquisition and integration-related costs and lower revenues than forecast in the Middle East. We also maintained high levels of business reinvestment across the portfolio in the quarter, driving our flywheel of innovation and growth. Now I'd like to turn the call back over to Dave. Dave? David Regnery: Thanks, Chris. Please turn to Slide #8. Our outlook for 2026 remained strong, supported by our record bookings and backlog. Our Americas Commercial HVAC business is executing at a very high level, significantly outperforming end markets. We expect continued strength in data centers and other core markets like higher education, government and health care, just to name a few. Our Q1 book-to-bill was approximately 150% and and our backlog is up nearly 70% year-over-year, strengthening our visibility into 2026 and beyond. Based on our exceptional backlog and the timing of customer deliveries, we expect approximately 10% revenue growth in Q2 against a tough prior year comp of mid-teens growth. We expect revenues to accelerate to low teens growth as we move through the second half of the year. In residential, we had a strong start to the year. We expect Q2 to be flattish, pivoting to growth in the second half aided by easier prior year comps. At this early stage in the year, our outlook remains prudent with flat revenues expected for 2026. Turning to transport. Market fundamentals continue to improve and are increasingly supportive of a recovery in late 2026 and healthy growth in 2027. Our market forecast remains largely unchanged, with a mid-single-digit decline expected for full year 2026. We expect Q2 to be down roughly mid-teens based on the timing of large customer deliveries within the year. As we've discussed previously, given our strong mix of large customers, orders and revenues can be uneven from quarter-to-quarter. We significantly outperformed the transport markets in the first quarter and expect to outperform for the year. Turning to EMEA. Our results to date and expectations for the year are largely unchanged, excluding impacts related to the Middle East. First and foremost, we have prioritized the safety of our employees in the region. We do expect continued headwinds in the second quarter of approximately $50 million in revenues, representing an estimated $0.05 EPS impact in Q2. We continue to monitor the situation closely. In Asia Pacific, China remains challenging with dynamic macro conditions. We expect the rest of Asia to be stronger than China in 2026. Overall, our outlook for the region remains flattish for 2026. Now I'd like to turn the call back over to Chris. Chris, over to you. Christopher Kuehn: Thanks, Dave. Please turn to Slide #9. Our 2026 guidance reflects the market dynamics we've discussed, and operational excellence driven by our business operating system. It also incorporates our value creation flywheel, continued investment in innovation, market outgrowth, healthy leverage and strong free cash flow. We're increasing our organic revenue growth guidance to approximately 7%, the high end of our prior range of approximately 6% to 7%. Our reported revenue guidance moves to approximately 9.5% with unchanged estimates for approximately 2 points of M&A and 50 basis points of favorable FX. We're also increasing our adjusted EPS guidance range to $14.75 to $14.95, were approximately 13% to 15% of adjusted EPS growth, up from $14.65 to $14.85 prior. For Q2 2026, we expect approximately 5% organic revenue growth and adjusted EPS in the range of $4.20 to $4.25. For additional details, please refer to Slide 16. Please turn to Slide #10. We remain committed to our balanced capital allocation strategy, focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure optionality as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below our calculated intrinsic value. Please turn to Slide #11. We are on track to deploy between $2.8 billion to $3.3 billion in 2026 through our balanced capital allocation strategy. This includes approximately $900 million for dividends reflecting a 12% increase to $4.20 per share annualized in 2026. We deployed or committed approximately $340 million year-to-date for M&A and strategic investments. Our share repurchases year-to-date through April stand at approximately $300 million, and we still have approximately $4.4 billion remaining under our current share repurchase authorization, providing significant optionality. Our M&A pipeline remains active, and we will continue to be disciplined in our approach. Overall, our strong free cash flow, liquidity, balance sheet and substantial share repurchase authorization offer excellent capital allocation optionality as we move forward. Now I'd like to turn the call back over to Dave. Dave? David Regnery: Thanks, Chris. Please turn to Slide #13. The Americas transport refrigeration market remains dynamic, but the long-term outlook is strong. ACT projects the market to bottom in the first half of 2026 and recover late in the second half. ACT also expects a sharp rebound beginning in 2027 and continued expansion through the end of the decade. We expect growth as well, but anticipate a more gradual slope to the recovery. We're managing the down cycle effectively, outperforming end markets and continuing to invest in innovation, so we're well positioned as the market strengthens. . Please turn to Slide #14. In closing, our strategy is aligned to powerful secular tailwinds that position us to outperform megatrends around sustainability, digitalization, and rising energy demand are intensifying the need for our systems and services. Through breakthrough innovation and the strength of our people, we're delivering superior performance for our customers and advancing a more sustainable future. With our proven business operating system, record backlog and strong demand, we are well positioned to deliver differentiated shareholder value in 2026 and beyond. And now we'd be happy to take your questions. Operator? Operator: [Operator Instructions] The first question today comes from Chris Snyder from Morgan Stanley. Christopher Snyder: I wanted to ask about the Americas applied orders. Just kind of keep getting better despite the bar already being very high. I think this quarter, you're up 160%. I guess my question is, are customers ordering with longer lead times than they were 6 or 12 months ago. Like when you guys look at this backlog, is the delivery schedule meaningfully different versus a year ago? Just trying to figure a part of the strength is there's some extension in that lead times. David Regnery: A little bit confusion. Let me try to clear it up. Look, we have published lead times for all of our products. And the published lead time on the unitary could be relatively quickly, in many cases, we have stock products. so it could be next day, all the way up through our applied solutions where you could have lead times, say, 30 weeks. So from a lead time perspective, we're very, very competitive. In fact, we also offer a majority of our applied products, quick shift programs, which if a customer had an emergency, we'd be able to respond to at a premium, but we'd be able to respond. So that's kind of the lead time side of it. Now if you're asking when customers are asking for the products, a little bit of a different question. And that could be really -- I think in the past, we probably talked about on average, and averages are always a little bit different. So we would talk about a 6 to 9 months. In some verticals, we are seeing that being extended. Could it be 12 months, 18 months, in some cases for sure, depending on the customer, how much visibility they want us to have to make sure that we make sure our supply chain is ready as well. So it's it's -- I guess the answer is, if you're asking from a customer standpoint, for sure, it's a little bit longer. Customers want that security that they're going to make sure that we have their order, and we're able to execute to it. From lead times that we actually published that we actually can meet demand for customers, that is as it's always been. Christopher Snyder: And I appreciate you highlighting that distinction between like the customers' lead times in your own because it does seem quite important. Maybe if I could just follow up on some of the cost/tariff changes that are in the market. I guess any impact on your back half price expectations in response to that? And then just kind of maybe more broadly, we hear a lot about difficulty or challenges of producing in the U.S. and others say it's just straight up uneconomical. You guys have proved the opposite. Can you just maybe talk about the advantages of producing in the United States? And how have you been able to compete effectively while facing the higher labor costs that come from domestic production? Christopher Kuehn: Yes, Chris, thanks for the questions. I'll kick off, and I think Dave will jump in. But look, tariffs and inflation, look, it's certainly a dynamic environment with many changes since our last earnings call in January. On a net basis, we are expecting more inflation, including from raw materials and tariffs in the year than was estimated, say, 90 days ago. We do expect inflation will put some near-term pressure on price costs. However, we expect to manage this for the full year and it's baked into our guide. I'm not going to size the dollar impact for competitive reasons. However, let me just share some context that I think would be helpful. We've had an in-region, for-region manufacturing strategy for well over a decade in Trane Technologies. At the end of 2025, we had 21 factories in the Americas. Of that, 20 of those factories are in the U.S. and 1 factory is in Mexico. Since then, we've acquired Stellar Energy, which added production in Florida, which we're expanding, and we're expanding capacity with a new site to open later this year in Texas. So one more thing to add. Over 95% of our products sold in the U.S. are manufactured and/or assembled in the U.S. So look, we've had a very strong track record to manage through inflation and tariffs, maybe some short-term pressure, but we've got that managing our guide, and we'll continue to leverage our business operating system to mitigate the impact of inflation, including tariffs over time. We'll look at mitigating the cost with suppliers. We'll look at alternative sources of supply. And then we'll look at pricing as necessary to offset that cost. So at this point, I don't want to get ahead of our businesses on price for the year. Our guide was around 1.5 points back in January. It's probably a little bit higher than that, probably closer to 2 points at the enterprise level now, but we'll continue to leverage the business operating system and mitigate the cost where we can and price where we need to. David Regnery: Yes. And Chris, just a follow-up there on how do we stay competitive. Look, I'll brag about our operating system, right? We are a great operator at Trane Technologies. And we like our plants right here in the United States. We like creating jobs right here in the United States, and we do it, and we do it in a very competitive way. And every time I go to one of our plants, I just see all the improvements they're making from the last time I had an opportunity to visit and I just get so excited about what the future is going to look like for our company. So look, we have -- as Chris said, we have over 21 plants now in the United States, for real shortly like that, and we are very, very competitive, as you could see with our results. Operator: Julian Mitchell from Barclays has the next question. Julian Mitchell: Just wanted to start off with a question on operating leverage. I think organically, it was high teens in the first quarter and you've got that mid-20s sort of baseline for the year. Maybe kind of walk us through how we should think about the operating leverage playing out through the balance of the year organically. And I suppose the inorganic headwind to that shrinks progressively? Is that the fair way to look at it? Christopher Kuehn: Yes, I mean in the first quarter, I think leverage is consistent with our expectations. We did a little bit better in the residential business. We had a bit of a headwind in the impact in the Middle East due to the conflict. And you're right, it was around high teens organic leverage in the first quarter. We do see that improving as we move the year. So you can think around the second quarter is in that mid-20s kind of range. And then in the second half, we're in the mid- to high 20s. In terms of organic leverage, we continue to see an acceleration in the top line and then conversion to the bottom line in the second half of the year, consistent with our guide in January. We have even more conviction about the second half of the year and the guide for the year. And a little bit easier comps in residential, growing top line and transport. And we expect to have a very strict business in the second half of the year with the Americas Commercial HVAC executing on the backlog and when customers want products. David Regnery: Yes. The only thing I would add, Julian, is in our resi business, and we talked about this on our fourth quarter earnings call, we're level loading. So where in the past, we would ramp up our factory and over really produce in the first 5 months of the year and then bleed that down as we work through the peak season. We've changed our playbook there. So we're level loading. So yes, we are taking a bit of an absorption impact here in the first, I'll say, half of the year, but that will obviously come back in the back half of the year. Julian Mitchell: That's helpful. And then maybe just a follow-up question on the resi HVAC side of things. Any big differences you're seeing on the one-step versus two-step sort of movement there? And what's your confidence in terms of that inventory level in the channel? And any early reads on summer selling season as it's starting out soon. David Regnery: Good question. I mean, look, we're very happy with our first quarter in resi. It came in a bit better than what we anticipated down mid-single digits. As far as inventory goes in, look, as we said on our fourth quarter call, we thought it was set properly in the independent wholesale distributor channel and here we are at the end of the first quarter, and we say it's set properly. So no change to that. We have the desired inventory levels, and we're optimistic. I mean we -- at the end of the fourth quarter, we felt we could be down 5% on our resi business. We've now modified that. We think it's going to be a flattish year. But we'll see how it plays out. We're only in Q1. But early signs are we're executing well. And we're more bullish than we have been for a while in our resi business. And the team there is doing a great job executing. So we'll see how the rest of the year plays out. Operator: The next question comes from Scott Davis, Melius Research. Scott Davis: So look, I want to back up a little bit. I think last quarter, you talked about the applied orders widening out and beyond just data center. Can you give a little bit of color on that? What particular markets -- I'm assuming that continued just given the orders up 160% has to be pretty broad-based. But can you talk a little bit about some of the non-data center verticals that were strong for you? David Regnery: Yes. I mean I think I talked a little bit in the prepared remarks. But yes, it was broad-based, which is always encouraging for us. Look, everyone should understand, data centers was very strong, okay? Very strong. However, we had -- from a revenue standpoint, we had growth in the majority of the verticals that we track in, at least in the Americas. I think we had -- it was 9 of the 14 verticals had positive growth, so you could see that this is a broad based. We have -- I want to make sure everyone is aware, we have not lost focus on the core or what we call the core, even though data centers are very strong. I'll remind everyone that 95% plus of our account managers or sales force do not call on data centers. And they have deep domain expertise in these verticals. And that really allows us to win. So broad-based growth, mega projects continue to grow. Data centers continue to grow. And obviously, our order rates continue to grow, and it's going to be a great year for Trane Technologies. Christopher Kuehn: Scott, I'll add on the backlog. The growth in the first quarter was -- I'll use a little bit around numbers here is around $3 billion. And of that $3 billion, around $1.2 billion was from acquisitions, and of that was around $1 billion for Stellar Energy. So that means we had about $1.7 billion, $1.8 billion of backlog growth from the core, from organic growth in the business. So a very strong quarter in terms of backlog growth. We typically have seen plus or minus a couple of hundred million dollars to the backlog in any quarter over the last few years. So very strong momentum in orders and backlog and the pipeline continues to remain very strong. Scott Davis: And are you guys operating full out in your factories and your applied facilities right now? Are you fully capacitized at this point? Or do you still have a little bit of flex? David Regnery: Yes. I mean there's flex in some of the factories. Obviously, we're operating at a very high level right now. But capacity is one of those things where everyone will -- how you're defining it, right? Right now, the majority of our factories were only running two shifts. So -- in fact, some were only running one shift. So we certainly have that to fall back on. With that said, I would also tell you that we have expanded our capacity certainly over the last 3 years, and we have plans to continue that expansion. In fact, we're making those investments as we speak. Stellar, Chris talked about earlier. We also have expansions going into our -- some of our applied factories as well. Christopher Kuehn: Yes. And Scott, we did raise our CapEx target for the year. We're generally 1% to 2% of revenue. We raised it to 2% to 3% of revenue, a, to capture the expanded production in Florida and in Texas for stellar and also to make sure we are staying ahead of where we see the growth, especially in our applied commercial HVAC business. So still targeting greater than or equal to 100% of free cash flow even with that higher CapEx spend for the year. Operator: [Operator Instructions] We'll take the next question from Andy Kaplowitz from Citi. Andrew Kaplowitz: So -- like obviously, data centers continue to be strong. But I'm curious like if you look globally, you look at a market like Asia Pac, I mean, it's still a tough market, as you said, but you did have, I think, 50% growth ex China in bookings there. So you see maybe a little bit more broad-based growth. I don't know if it's led by data centers in places like that or maybe in Europe as well? David Regnery: Yes. I mean, data centers are strong globally, okay? Once you get outside of the U.S., they tend to get smaller in size, but they're strong everywhere. Look, we had some -- we have -- our Asia team, we're still calling Asia flat for the year. But outside of China, we had some nice growth, nice orders. Team's got a very robust pipeline that they're tracking there. So we're going to continue to execute. I'm still optimistic that we could hopefully do a little bit better than flattish in our Asia Pacific region for the year. And then the team is certainly executing to that goal as well. In Europe, look, I mean, Europe is actually -- was relatively strong for us in Q1. I mean orders were up as we expected as was revenue. So we're not concerned at all about Europe, and that team continues to be very innovative and satisfying their customers in creative ways. So we're happy with Europe. Obviously, the Middle East, we could all understand what's happening there, and we talked about that in our prepared remarks. But the good news is all of our employees are safe in the Middle East and let's hope that conflict gets over in the near term here. Andrew Kaplowitz: Agreed. And I'm curious about your continued outperformance in Americas transport pretty strong in Q1 versus the market. I know you expect a recovery late this year, maybe a more gradual recovery than ACT. But maybe you can talk about why you continue to outperform sort of the new products in the market and of the outlook as you move forward there? David Regnery: Yes. I'll sound like a little bit of a broken record here because we love to talk about the innovation that we're putting out into the marketplace. And the transport markets have been down for years now. I think we all know that. And we've been saying for a long time that we're going to continue to invest even in down markets because that's what makes great companies in the long term. And you see some of those innovations and the efficiency of our products, the quality of our products. It's -- you could go out and do a sample of the trucking industry and you'd see the gold star is Thermo King, it's a gold star for a reason. And that team will continue to execute. We're seeing some nice signs that hopefully, this market turns around. We're pretty confident it's going to turn here in the back half of the year. It's late, but 2027 looks like it's going to be a very strong market. And if you listen to ACT they would tell you it's going to be a strong market and continue to build through the rest of the decade. So we're well positioned there. And I'll congratulate my team there for execution quite well here in the first quarter. Operator: Next up is Amit Mehrotra from UBS. Amit Mehrotra: Dave, I just would like to see if you can talk about what you think your TAM is within data centers and how Stellar may change that. When I think about Trane and data centers, I think large applied chillers, but obviously, there modular systems now with Stellar and obviously, the orders and the conversion is very good. So can you just talk about what that does for your competitive offering within data centers and really kind of what it does for your TAM? David Regnery: Yes. Sure. Well, let me start with Stellar, okay, because I think that's a great business, and we're so excited to have to be part of the Trane Technologies family. Today, Stellar specializes in building modular chiller plants for data centers, okay? But if we start kind of with the end in mind as to where we see stellar. Think of this as a business that in 2 to 3 years is a $1 billion business. Think of it with mid-teens plus EBITDA serving many verticals, not just data centers. The skilled labor scarcity is not unique to the data center vertical. It applies to all of our verticals, and we know that this is a great solution to help alleviate some of those shortages. So we're very excited to have Stellar as part of the acquisition. If you look at it today, it's $1 billion in backlog. I think about half of that shipping here in 2026. Modest accretion in 2026 as we'll be investing pretty heavily there. Chris talked a little bit about some of the expansions, but we're really deploying our operating system. So we'll continue to deploy that and make a good company, an even better company. And so I think it's going to -- we'll continue to see benefits with our Stellar acquisition well into the future, and we're excited to have it be part of the family. The other addition that we made was in LiquidStack, which really expanded our offering in CDUs. So another nice addition that's off to a great start, and we'll continue to leverage that. They also have some technology, kind of futuristic technology as well that we think could be part of the solutions and data centers in the future. As far as our position in data centers, we like our position, right? We're thought of it as the thermal management experts, okay? We're working with hyperscalers. We're working with other influencers, chip manufacturers and designing what some refer to as reference designs, others refer to as data centers of the future. But look, we get called on for a reason because of our expertise. And as far as the TAM goes, it keeps expanding, okay? And the data center vertical keeps moving with innovation, and we keep pushing some of that innovation and developing that innovation. But it's a very, very strong vertical today, and it will be a very strong vertical well into the future. Amit Mehrotra: Great. And maybe just a follow-up to that. I don't know if this question is for Chris, maybe if you can talk about data center service revenue and when you expect that to kick in? Obviously, services 1/3 of the business mix right now. And maybe you can just help us think about how much of that is already data centers and really like the mix within mix is data center service revenue ramps up as the mix within that mix of service positive. Christopher Kuehn: Sure. I mean, again, with the end in mind, I mean, the service opportunity with the recent last few years' growth in data centers is still well in front of us. We've been in the data center vertical for decades. And so there's been a service component, but it's been 1 of 14 verticals prior to the last few years with the significant investments there, Amit. So that's very much in front of us. We think about complex applied systems. They require the OEM to be connected. They require the OEM to provide service and maintenance and I know the last thing a data center wants is to ever have a fall to go down. So making sure that those systems and cooling systems are operating efficiently and rotation through the products is obviously very, very important. And maybe one more thing I'll maybe add on Stellar. Maybe just from a modeling perspective, as Dave said, we expect about $500 million of revenue this year from Stellar. We had about the base of that business that we acquired is around $350 million of revenue. That was part of our January guide of around 2 points of revenue contribution from M&A. We also had anticipated about maybe 25% of growth off of that just based on where data center growth was going in our January guide. Now in April, we've got the entire $500 million in our guide. And think of that as probably around $50 million incremental revenue we got captured in April. But it's an exciting business. The pipelines remain very strong in that business as well. And to Dave's point, we've got a lot of investments to make to take this from a $350 million business to a $1 billion-plus revenue business in 2 to 3 years. David Regnery: Yes. Just one other comment on services. I think I've told most of you about our investment that we made here in North Carolina and our training facility. It's really the largest of its kind. I had the opportunity of the data to speak to a class. And this particular class was there, there were technicians getting certified in data center commissioning, okay? That's how detailed we are in our training. And I'll tell you, I was so impressed with the talent of our technicians and the excitement that they had on their face. I went home and I told my wife, I said, well, I come back -- when I come back next time I'm going to be a service technician. It's just somewhat -- it's going to be so fun and there's going to be so much growth in that space. But look, we're going to -- as Chris said, a lot of this data center service works in front of us, and we're making sure we're ready for it. And it's going to be a really fun journey here. Operator: I think you will make a great technician, by the way. David Regnery: I was okay with me being a technician, but I had to do it now. Operator: Andrew Obin from Bank of America has the next question. Andrew Obin: Dave, I think you're probably doing better than a technician. That would be my guess. But maybe a question, there's a lot of conversation about behind-the-meter power and sort of resulting changes in HVAC infrastructure in data centers. Can you maybe talk about absorption chiller technology at Trane? What do you guys have? Do you need to add capacity? And does technology need to evolve to support behind-the-meter needs? David Regnery: Look, I think behind the meter needs are not only in data centers, I'll start with that, but I'll come back to that. But as far as in data center sure, we're starting to see that. As far as absorption chillers, yes, that's a technology that has been around for a while, okay? It's certainly getting some conversation now in data centers. But I would tell you there's a lot of other types of technologies that we're looking at as well that probably have less water usage, and you could get some of the same benefits -- a little bit careful here. Think of it as adiabatic cooling type solutions that we're working on in clever ways. So that's another one. There's certainly a lot of conversation around direct current in data centers. So that's another technology that we're doing a lot of work on. All that's going to be in front of us. And if you look at -- and there's a couple of some of the larger chip manufacturers that will actually publish some of these reference designs. It's very interesting to go out and look at some of what our team is working on there, and it's pretty explicit as to what some of those technologies could be in the future. But the behind-the-meter, yes, that's happening. And I would also tell you that we have a philosophy that, that will happen in all buildings, right? And long term, we believe that all buildings will be smarter. All buildings will be more resilient. And we believe that we're going to be part of the solution there with our agentic AI software tools to make buildings a lot smarter. And that's really going to be part of our future growth projections that we have going forward because we know that most buildings waste about 30% of the energy that they pay for. And when you can solve that problem, is solving a great problem for the planet from a carbon footprint standpoint. They're also creating great paybacks for the customer. And you probably heard me say before, it is green for green, right? It's great because it's saving our customers a lot of money, and it's also really good for the environment. So data centers is 1 part of it, but don't leave out the core because that same concept is going to take hold there. Andrew Obin: Excellent. And maybe once again, stay on the data center topic. Your client Stellar Energy. Can you just talk about -- and also, obviously, you have How has dialogue changed with customers since these acquisitions? And specifically, your ability to increase your service presence inside data center with these acquisitions. How should we think about that? David Regnery: Yes. I mean I don't think our dialogue has really changed with the end customers. We kind of always led with our deep domain expertise. We like direct relationships with the customer, okay? So that's not new to us. We have the broadest portfolio in the industry. So we're able to make sure that we're thinking at a system level, not a product level. So that hasn't changed. Look, the service organization, and I've said this before, when customers, whether they be a hyperscaler or a colo, when they come and see the capacity that we have within our service organization, you can see their eyes light up because they see the expertise that we have. They see how we train our associates and they just -- it alleviates a big -- if they had a fear that if something went wrong, we'd be there, that fear gets alleviated very quickly. Operator: Next, we'll take a question from Noah Kaye, Oppenheimer. Noah Kaye: Maybe just to go back to transport and the outlook. You just give us a little bit more insight on what drives your back half conservatism versus ACT. Anything that you may be seeing from the pipeline to drive that? Or we're just kind of leaving this as upside for the year. David Regnery: Yes. I mean, look, we have several models, okay, ACT as one of them that we use to do our forecasts. And so don't just base everything on ACT. Look, we think it's going to have an uptick in the back half of the year. It's probably the oldest fleet of vehicles that we've seen in a long, long time, maybe 30, 40 years. I mean this -- these units eventually have to get replaced. They cost too much to operate if you don't. You have the spot rate that's now exceeding the contract rate, which is always a good sign. We're bullish that this market is going to start to come back. And when it comes back, it's going to come back relatively strongly. We don't quite have the same inflection point in 2027 is ACT those. We think they're being a little aggressive there because I'm not sure that the trailer OEMs could respond to that type of an increase. But we're bullish about -- I think it's going to trough here in the second quarter, and I think it's upside in the back half of the year and really for several years to come. So this is a great business, and it's had some tough years. But look, having personal experience of running this business at one time in my career, we will continue to be very, very successful in our transport refrigeration business. Noah Kaye: Yes. Maybe just want to ask about some of the improvements that the company made to the reference design for large-scale data center deployments. It's a little bit of a piece with your comments earlier on innovation, but there's more of a benefit from heat recovery integration, larger air cooled chillers. How far in front of kind of the market is this in terms of the innovation trend? Are you already starting to see this kind of reflected in your orders rates or your pipeline? David Regnery: Yes. I think you got to take a reference design and think it's probably out there. We could argue whether it's 12 months or 24 months, but it's probably somewhere in between there. I think -- like I said, I think you could think of buildings being smarter, I think you're going to see chillers being smarter. And we're doing a lot of work around that. And think of it as taking different elements that may not be part of that system today and embedding them in the system. So having a chiller that knows when to run in a free cooling mode only, or having a chiller that knows when to run in a vapor compression cycle and for how long, understanding weather patterns and the impact that they have on these micro grids that are being created here with these chiller farms and knowing when to cycle which units, that's all part of the efficiencies. And then you start thinking about the water flow. By the way, they're all closed loop systems, but the water flow within the system and the velocity and the needs and the pressure. So there's a lot of complications here, and I'll get over my skis relatively quickly, but I know that we have some smart technical engineers that work with the hyperscalers and the -- of the world that love to have these conversations. And little changes make a big difference, and it can have a big impact on the bottom line of a data center. Operator: Nigel Coe from Wolfe Research is up next. Nigel Coe: I want to go back to this AI reference design that you've been highlighting, Dave. But before that, I just want to make sure we cover just a couple of guidance points. The resi outlook for flat for the year, you got flat for 2Q. Seems like 1 comp, the back half looks super easy or rather super conservative. I just want to make sure I understand that. And I think that ACT did raise the reefer builds for the full year, you're not raising your market outlook. So just wondering what that disconnect about. David Regnery: Yes. Well, I mean I'll start with the TK side of it. Look, we didn't -- we thought that TK we think that ACT maybe was a little bit -- maybe wasn't very accurate at the end of the fourth quarter. So them raising their number didn't really change our outlook very much at all, okay? Like I said, we use ACT. We use other sources, including our own internal models. So we're happy that it's not a negative number for ACT. I think it jumped up, I think it's 6% now, what they're projecting. We'll see out of the year unfolds here, but we're off to a good start in the first quarter. Some of that had to do with timing of some large customers, as I talked about in our prepared remarks. But at the end of the day, we're starting to see some some growth signs in Thermo King, which I haven't been able to say in a long time. So I'm proud of what that team has been able to do. Christopher Kuehn: Nigel, I'll add on residential. We took the full year guide up to about flattish versus flat to down 5% in January. Off to a strong start, but it's also just the first quarter of the year, right? We're just about to enter into the cooling season calling the second quarter around flattish, and maybe around mid-single-digit growth in the second half. But I mean, our teams are ready. We've talked about inventory in the channel is in a very good spot just like it was 90 days ago. And we'll see how the year plays out, but we'll let like to put it out in this outlook and a lot of confidence in the full year guide. David Regnery: Let me know if you need a unit, okay, Nigel, you could help us out. Nigel Coe: Yes. Well, I just replaced my unit, but you never know, maybe another year or 2. And then just on going back to data center -- so go back to data center. You mentioned DC power and you seem to indicate you wanted to those opportunities. So I'm wondering, do you want to be a DC power sort of equipment provider? Or are you talking about sort of realigning your equipment to be DC power native. Just want to clarify that. And then on the AI reference design, to what extent is that helping drive higher content for Trane. I'm talking about chillers and the whole integrated unit as opposed to just selling pieces of the puzzle. David Regnery: Yes. I think on the DC question, absolutely. It's -- we're not going to get into DC power, but we're going to make sure our system can work on DC power. So think of it like that. As far as the reference design, look, every reference design I've seen as chillers in it. I would also tell you that in data centers, as in other verticals, we love to think of it at a system level, and we have the opportunity to think at a system level based on the breadth of our portfolio. So we're not wed to any particular component within that system. We just wanted all to say, Trane Technologies at the end of the day. And when we sit down with the influencers in the data center vertical and work on reference designs, we're plugging and playing lots of different products and derivatives of those products that could be in a pipeline of our own NPD pipeline for the future. We're very happy with our position in data centers. We believe that the data center vertical will be strong for the foreseeable future, and we know that we're going to be a big part of that. Operator: This does conclude the question-and-answer session. I'd like to turn the call back to Zac Nagle for any additional or closing remarks. Zac Nagle: I'd just like to thank everyone for joining today's call and wanted to let folks know we'll be around for questions, as always. So please feel free to give us a call. Also we're looking forward to seeing many of you on the road here in the second quarter, and we'll speak to you at the end of the second quarter on our earnings call. Thanks again. Bye. Operator: Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.
Operator: Good morning. My name is Matt, and I'll be your conference operator today. At this time, I would like to welcome everyone to the OneWater Marine Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Jack Ezzell, Chief Financial Officer and Chief Operating Officer. Jack, please go ahead. Jack Ezzell: Good morning, and welcome to OneWater Marine's Fiscal Second Quarter 2026 Earnings Conference Call. I am joined on the call today by Austin Singleton, Executive Chairman; and Anthony Aisquith, Chief Executive Officer. Before we begin, I'd like to remind you that certain statements made by management in this morning's conference call regarding OneWater Marine and its operations may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements. Factors that might affect future results are discussed in the company's earnings release, which can be found in the Investor Relations section on the company's website and in its filings with the SEC. The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. Please note that all comparisons of our second quarter 2026 results are made against second quarter 2025, unless otherwise noted. And with that, I'd like to turn the call over to Austin Singleton, who will begin with a few opening remarks. Austin? Philip Singleton: Thank you, Jack. Good morning, everyone, and thank you for joining us today to discuss our second quarter 2026 results, which reflect the challenging retail environment, a continued improvement in boat margins, portfolio optimization and a notable reduction in leverage. Revenue for the quarter declined 9% and same-store sales were down 8%, primarily due to event timing and portfolio changes. This year, the Palm Beach International Boat Show took place at the end of March, which shifted a meaningful amount of new boat sales into the June quarter. This timing shift accounted for approximately half of the decline in new boat sales during the quarter. Also during the quarter, we completed the sale of Ocean Bio-Chem as part of our broader portfolio optimization strategy, focused on core assets and long-term value creation. While we updated our guidance to reflect the impact of the sale in February, the absence of those revenues will create challenging year-over-year comparisons for the remainder of the year. Importantly, we continue to operate from a position of strength. Our inventory continues to be in the best condition it has been in years with a healthy mix and age profile, supported by disciplined production from our OEM partners. We remain focused on enhancing profitability and reducing balance sheet leverage. We are driving margin expansion with a more streamlined portfolio of brands and assets. This combined with our strong inventory positioning, contributed to a 110 basis point increase in gross margin. We also made meaningful progress in reducing debt, supported by proceeds from the Ocean Bio-Chem sale and strong operating cash flow, and we remain on track to achieve our leverage target later this year. Beyond positioning for a market recovery, the strategic actions we've taken are helping us build a more efficient, resilient business model. As we move into the core boating season, we are encouraged by customer engagement and remain focused on execution, selling boats, managing costs and positioning our business for long-term success. With that, I will turn it over to Anthony. Anthony Aisquith: Thanks, Austin, and good morning, everyone. The quarter reflected a continuation of trends we've been seeing in recent quarters. Industry retail demand remains pressured with SSI data indicating double-digit declines in the categories in which we compete. At OneWater, lower new boat volumes were partially offset by disciplined pricing and favorable mix in a slightly less promotional environment as evidenced by our higher gross margin. Our pre-owned business remained a bright spot with revenues increasing 5%, supported by improved availability. Across our dealers, premium categories and brands continue to perform better, which is encouraging considering our portfolio's strong skew towards luxury brands. Importantly, finance penetration remains within our target range with over 60% of our customers choosing to finance a portion of their purchase with us. This highlights the market is not cash only even in the current interest rate environment. Parts and service continued to provide stability for the business, while reported results were affected by the prior year contribution from Ocean Bio-Chem. The underlying business remains solid, supported by steady boating activity. Excluding OBCI, service parts and other sales increased for both the dealership and distribution segments. Finally, I'd like to highlight our inventory positioning, which remains a key differentiator. Dealership inventory is down 3% year-over-year and down 19% over the last 2 years. Beyond the reduction in dollars, our inventory mix and aging profile are well balanced, and we are in a position of strength as we move into the selling season. The boat show selling season was encouraging. boating activity is healthy, and we believe we have the right inventory to meet our customer demand and get people out on the water this summer. And with that, I'd like to turn the call over to Jack. Jack Ezzell: Thanks, Anthony. Revenue for the quarter was $442 million, down 9% year-over-year with same-store sales down 8%. New boat revenue decreased 12%, driven by a shift in the timing of the Palm Beach International Boat Show and lower unit volumes, partially offset by higher average unit price. Solid used boat activity supported a 5% increase in pre-owned boat revenue, driven by higher unit sales and average price. Service, Parts and Other revenue declined 11%, primarily due to contributions from Ocean Bio-Chem in the prior year period. As Anthony mentioned, excluding this impact, the underlying parts and service businesses increased year-over-year. Finance and Insurance income decreased in absolute dollars due to the reduction in new boat sales, but increased slightly as a percentage of total boat sales due to the improving interest rate environment. As a reminder, interest rate cuts enhanced unit economics for boats financed through OneWater. Second quarter gross profit decreased to $106 million compared to $110 million in the prior year period. Importantly to note that our gross profit margin expanded to 23.9%, an improvement of 110 basis points compared to the prior year. This margin expansion was driven by favorable mix shift, brand portfolio optimization and continued execution of our strategic priorities to enhance both gross profit. Selling, general and administrative expenses declined in the quarter by $2 million to $86 million compared to the prior year period. This reduction reflects the impacts of our prior cost reductions, our variable cost structure and ongoing expense management. The increase as a percentage of revenue was primarily driven by the lower revenue in the current period. Against the backdrop of global uncertainty and softer retail demand, we took additional steps to align our cost structure with current retail activity. Within SG&A alone, actions taken at the end of March, early April are expected to deliver approximately $6 million in annual savings. The net loss for the quarter was $13 million compared to a net loss of $375,000 in the prior year. The increase in net loss was primarily driven by lower sales, a $6 million noncash trade name impairment charge and the tax impacts associated with the OBCI disposition. Adjusted EBITDA was $16 million. Now turning to the balance sheet. We ended the quarter with $68 million of cash and total liquidity of approximately $73 million. Inventory was $551 million, down from $602 million in the prior year, reflecting disciplined inventory management and the sale of Ocean Bio-Chem. Long-term debt was $354 million and net debt-to-EBITDA improved sequentially and year-over-year to 4.1x. During the quarter, we repaid $57 million of debt, supported by the proceeds from the sale of Ocean Bio-Chem and strong operating cash flows. We remain on track to reduce leverage below 4x by the end of the fiscal year. Turning to our outlook. Year-to-date results have been largely consistent with our forecast for the first half of fiscal 2026. As a result, our expectations for the year remain unchanged from our February update following the closing of the Ocean Bio-Chem sale. We continue to anchor our outlook on expectations to industry will be flat to down low single digits year-over-year. When factoring the lost revenue from the exiting brands and the divestiture of OBCI, we expect dealership same-store sales to be flat year-over-year and total revenue to be in the range of $1.78 billion to $1.88 billion. We expect adjusted EBITDA to be in the range of $60 million to $80 million, and we expect adjusted earnings per diluted share to be in the range of $0.20 to $0.70. As we move through the core selling season, our focus remains on driving margin expansion, maintaining disciplined cost control and continue to reduce leverage. We are encouraged by the early season activity and customer engagement, and we anticipate that our more focused portfolio, strong inventory position and operational discipline will support our results through the balance of the year. This concludes our prepared remarks. Operator, will you please open the line for questions. Operator: [Operator Instructions] Your first question comes from Joe Altobello with Raymond James. Martin Mitela: This is Martin on for Joe. I first wanted to touch on same-store sales. Can we get a breakdown between units and price and get an impact from the exited brands? Jack Ezzell: Yes. I'd say the majority of it is led by price. Units were down in the mid- to upper single digits, seeing that shift to that kind of more affluent, higher ticket item. And probably, I'd say probably half of that number is driven by the shift in the Palm Beach Show and then maybe 1/4 is from the exiting brands. Martin Mitela: Great. And actually touching on that, the show. I think we calculated out $19 million in sales were pushed from 2Q because of that show timing. Is that -- are we expecting that to show up in the June quarter, all of it? Philip Singleton: Yes. Jack Ezzell: Yes. Go ahead. Philip Singleton: Well, I was just fixing to say when you start talking about the Palm Beach Boat Show, first thing you got to really talk about is how was that show and that show was fantastic. I mean, when you looked at the Palm Beach Show, by moving at those dates for some reason, it really spurred activity. I think we were up high double -- high teen digits both in unit and dollars for that show compared to last year. And the majority of that will fall into the next quarter. Now some of that stuff on the real big stuff might push out. But it definitely -- that timing is what impacted this quarter, and we're going to see the majority of that pick up. We're going to see a lot of it pick up in April. But it should -- most of it should filter in through the whole quarter, but there might be a couple that lag out into the next quarter. Martin Mitela: Got it. And I threw up the number, $19 million. Does that sound right to you? Or could you sort of calculate the... Jack Ezzell: No, it's a little high with respect to the sales that shifted, closer to $16 million, $17 million. Operator: [Operator Instructions] Your next question comes from the line of Greg Badishkanian with Wolfe Research. Scott Stringer: This is Scott Stringer on for Greg. I'm wondering how trends are in April and excluding the boat show. It seems like there's like a nice tailwind from the boat show there. Just wondering how trends are exiting the quarter here. Philip Singleton: Yes. I mean it's continuing on. I mean one of the things that's kind of given us comfort to maintain guidance with all the macro noise out there and what could be and all that stuff is just the door swings, the Internet leads, the amount of deals that flowed through in April. I mean April was a good month. We still are maintaining that trend of higher gross margin. And then the volume, excluding what swapped over from the boat show is trending in a nice direction. So we're still optimistic on what we're seeing from the day-to-day ground activity and what's happening as far as boat sales, we're just still a little nervous about what we're going to wake up and see on the TV and how that impacts consumer confidence over the next 60, 90, 120 days. I mean one day you wake up and everything seems fine in the next day you hear that gas is going to go to $47 a gallon. And so once that noise kind of simmers down a little bit, we could be on a pretty decent path to having a good year if we can get that noise to settle down because it's certainly trending in the right way right now. Scott Stringer: Got it. That actually leads to my next question. I was wondering about the impact of higher fuel prices on boat sales. Are you seeing any sort of impact there? Is that impacting one type of customer versus another? Just curious your thoughts. Philip Singleton: Well, I mean, I'm sure at some point in time, it's got to impact everybody, but the higher-end customers and the customers that we deal with don't seem to be impacted by the trend lines that we're dealing with right now. So you'd be an i*** to say that it doesn't impact it. Could it be better -- more -- a lot better than it is right now? Maybe. But it's still pretty damn good. And so we like that possible tailwind behind us when this stuff settles and what that could open up for us. If it's like it is right now with all the noise, how much better could it get? We just don't know. Operator: Your next question comes from the line of Kevin Condon with Baird. Kevin Condon: I think you noted some additional cost actions to help that SG&A line. Just wondering if you could add some color to what those actions are? And should we expect to see SG&A continue to track lower year-over-year in the coming quarters? Jack Ezzell: Yes, Kevin, that was the kind of the -- as we looked at how SSI has been trending, while there's -- it, I'll say, decelerated, right, because I think January's SSI was, I think, around 18 20, then February, March both got better. But just trying to get ahead of what's happening at retail, we did make some cuts, mostly in and around personnel, administrative and just some reorganizations within the company just to be a little bit leaner. So it's about a $6 million on an annualized basis. So we look to capture about half of that in the back half of the year. Some of that's coming out of dealerships, some of that's coming out of -- a big chunk is coming out of distribution as well. Kevin Condon: Got you. And then maybe to ask a follow-up. You talked about the inventory being in a good position. Just wondering what your stance on orders are going forward. Do you think you could potentially capture an uptick in demand should some of that noise settle like you referenced? Or would you need to meaningfully shift inventory or order levels to take advantage of any upside? Philip Singleton: Well, I mean, we're at the beginning of the selling season. And so we really don't have to make those decisions probably for another 90 days. And so we get to have a little bit better look at where we are. I think when you look at it from an industry perspective, inventory is way down in the industry. And so if we start to see going into the selling season, the trend that we're on now maintain, you start to see as you come into the fall, that maintaining again, then that means that you've got to start ordering more boats because the manufacturers just -- they can't go in and flip another light switch and all of a sudden produce 20% more boats. So the lead time is pretty important. I think we're still in a little bit of a wait-and-see mode, but it certainly feels better than it should with all the noise going on. So I would say that as we move through April and May, get into the end of that June quarter, if the trend line that we're on right now, we're going to be forced to order more boats for next year because the inventory is just going to get depleted. It's already at a point now where if you had any kind of felt an uptick, I'm not sure we have enough. And so you got to kind of get prepared for that. But it's a little bit too early for us to really call that because there's just, again, too much noise out there, and we just need to kind of get through the next 6 weeks, which are really the prime 6 weeks leading into the summer. Operator: There are no further questions at this time. We've reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 Labcorp Holdings Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Dewey Steadman, Senior Vice President, Investor Relations. Please go ahead. Dewey Steadman: Thank you, Didi. Good morning, and welcome to Labcorp's First Quarter 2026 Financial Results Webcast. With me today are Adam Schechter, our Chairman and Chief Executive Officer; and Julia Wang, our Executive Vice President and Chief Financial Officer. This morning, in the Events section of the Labcorp Investor Relations website at ir.labcorp.com, we posted both our press release and a supplemental financial presentation with additional information on our business and operations. We will also post a replay of this webcast on the IR website for 1 year. On today's webcast, we will focus on our adjusted non-GAAP results for the first quarter of 2026, our capital allocation strategy and our updated financial guidance for the full year 2026. Our GAAP results and a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures are available in today's earnings release and the supplemental financial presentation. Please see the Use of Adjusted Measures section in the supplemental presentation for more information regarding our use of non-GAAP financial measures. In today's remarks, the term organic growth excludes the impact from acquisitions, divestitures and currency as well as other strategic actions taken in our early development business. Our remarks will also include forward-looking statements, including, but not limited to, statements about our updated 2026 financial guidance and the assumptions underlying that guidance, the expected impact of various factors on our business, operating and financial results, cash flows and financial condition, global economic and market conditions, our future business strategies, the expected savings, benefits and synergies from acquisitions, strategic actions and partnerships and our potential opportunities for future growth. Each of these forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Labcorp's Chairman and CEO, Adam Schechter. Adam? Adam Schechter: Thank you, Dewey. Good morning, everyone. We appreciate you joining us to review our first quarter 2026 financial results and progress on our growth strategy. Before we begin, I'd like to officially welcome Dewey Steadman to Labcorp. Dewey joined us in March as Senior Vice President of Investor Relations and is a seasoned Investor Relations and Capital Markets leader across health care and finance. I'd also like to thank Christin O'Donnell for her leadership of Investor Relations function, and I wish her well as she takes on an important senior role in finance as part of our precision oncology and health systems division, both of which are strategic to our growth. Turning to our results. We are off to a strong start in 2026 with continued momentum in both our Diagnostics and Central Laboratory businesses and significant progress across our strategic growth priorities. Our businesses remain strong due to our critical role in improving health and improving lives for people around the world. Our financial results were strong in the first quarter. At an enterprise level, revenue reached $3.5 billion, increasing 6%. Margins improved more than 30 basis points and adjusted earnings per share grew 11%. Looking at our segments, Diagnostics revenue increased 5%. Biopharma Laboratory Services revenue increased 8%, driven by strong growth in central labs of 11% or 5%, excluding foreign exchange. And our BLS trailing 12-month book-to-bill remains healthy at 1.04. In the quarter, we advanced our strategic priorities, starting with being a partner of choice for health systems and regional local laboratories. These partnerships and acquisitions enable us to expand our patient and provider networks, increase access to our broad test portfolio, including leading specialty diagnostics and to drive volume growth. We recently announced a nationwide strategic collaboration with Children's Hospital of Philadelphia to expand access to cutting-edge diagnostics for pediatric patients. By combining CHOP's renowned pediatric research and clinical expertise with Labcorp's scientific capabilities and extensive reach of physicians and patients, this partnership will help bring advanced diagnostic tests to more children who need them. We also completed our acquisition of select assets of Crouse Health's Laboratory Alliance of Central New York, a clinical anatomic pathology laboratory. And we executed an agreement with Crouse Health to manage their inpatient laboratories. We remain on track to close our acquisition of select outreach laboratory services across Indiana and Northwest Ohio from Parkview Health in the very near future. We continue to have an active pipeline of hospitals and regional local laboratory deals to support our long-term growth strategy. Next, we continue to progress on our strategic priority to lead in specialty testing across our key focus areas of oncology, women's health, neurology and autoimmune disease. These specialty areas are important growth drivers in both Diagnostics and Central Laboratories, with significant scientific overlap across the businesses. In fact, Labcorp supported the development of more than 85% of new drugs approved by the FDA last year, including in these important specialty areas. In the Diagnostic business, we expect these specialty areas to grow 2 to 3x faster than the broader diagnostics market. In neurology, we experienced double-digit growth, driven by our market-leading portfolio in Alzheimer's testing. Oncology also achieved double-digit growth, supported by the launch of several liquid biopsy tests and expanded access to MRD solutions over the past year. Additionally, when providers choose Labcorp for specialty testing, we see them consolidating a greater share of their patients testing needs with Labcorp. As part of our growth in specialty areas, we're collaborating with Illumina to broaden access to advanced genomic testing in oncology, particularly in community care settings. We expanded nationwide access to the first FDA-approved companion diagnostics that helps identify platinum-resistant ovarian cancer patients who may benefit from Merck's KEYTRUDA, which can reduce the risk of disease progression and improve overall survival. In addition to these specialty areas, we continue to increase our portfolio with tests that address pressing clinical needs. Recently, we launched the Labcorp Fentanyl Urine Visual Test, an FDA-cleared rapid screening test that delivers results in just 10 minutes and assesses possible fentanyl exposure for up to 48 hours. Moving to Consumer Health, where we continue to deliver double-digit growth. Labcorp OnDemand launched new tests in the quarter for insulin resistance and pancreatic function. We also introduced unique customizable men's and women's health tests, enabling consumers to design panels tailored to their needs. We are also expanding how consumers engage with Labcorp through MyLabcorp, our secure mobile app launching in May when it will be available to tens of millions of customers. MyLabcorp brings an individual test results and health data together with clinical guidance into a personalized experience to help consumers better understand their test results. MyLabcorp's AI assistant will also help simplify appointment scheduling and payments. Additionally, we continue to make significant progress on our strategic priority to utilize advanced technologies, including AI and robotics to enhance customer experiences and to improve operational efficiency and productivity. Our recent progress includes an expansion of our collaboration with PathAI to deploy an FDA-cleared digital pathology platform across our national anatomic pathology labs and hospital laboratory collaboration. This platform embeds AI into everyday clinical decision-making by enabling pathologists to review and manage cases digitally, improve turnaround times and increase consistency of results. A new AI-powered real-world data platform being developed in partnership with Amazon Web Services and Datavant to accelerate Alzheimer's research. By combining agentic AI with Labcorp's diagnostic and real world data, the goal is to improve patient recruitment for clinical trials and ultimately shorten drug development time lines. A strategic collaboration with Optum.ai to apply AI capabilities to streamline laboratory operations, improve efficiency and enhance the patient and provider experience, providing clear insights to patients about their health, test progress and next steps in care. For physicians, it will help in ordering clinically appropriate tests upfront, reduce administration delays and speed patient access to results. This work builds on a more than 20-year strategic relationship between Optum and Labcorp. This work showcases our culture of innovation and the commitment of our employees. Their impact was recently recognized by Fortune, which named Labcorp to the list of most innovative companies for the fourth year in a row, highlighting our track record of scientific product and process innovations. We were also recognized as one of the 2026 World's Most Ethical Companies by Ethisphere, reinforcing our commitment to operate with the highest standards of ethics and integrity. With that, I'll turn the call over to Julia to discuss our financial results in greater detail. Julia Wang: Thank you, Adam. We are off to a strong start in 2026. In the first quarter, enterprise revenue grew 5.8% and enterprise adjusted operating margin expanded more than 30 basis points to 14.4%. The majority of enterprise revenue growth was driven by organic growth in Diagnostics and central labs. The increase in adjusted operating margin was primarily driven by organic revenue growth. Adjusted earnings per share grew 10.6%, and we generated $71 million in free cash flow. Additionally, we remained active on capital deployment, investing $202 million in acquisitions as well as returning capital to shareholders through $98 million of share repurchases and $61 million of dividends. We ended the quarter with $981 million in cash, $6.3 billion of total debt and $700 million share repurchase authorization outstanding. Our cash balance and debt position included closing on a $750 million term loan, prefunding the retirement of $500 million senior notes in June of this year. Moving to the specifics for the quarter. Enterprise revenue was $3.5 billion, up 5.8% from the first quarter of 2025, with 3.1% organic growth, 1.4% growth from net acquisitions and 1.3% from foreign currency translation. Adjusted operating income was $508 million or 14.4% of revenue versus $469 million or 14% of revenue last year. The adjusted tax rate was 21.7%, lower than the 22.5% tax rate last year, driven primarily by benefits associated with equity-based compensation during the quarter. Despite this benefit, we continue to expect our full year adjusted tax rate to be around 23%. Adjusted EPS was $4.25, up 10.6% from last year. Free cash flow was $71 million compared to a use of cash of $108 million last year. The increase in free cash flow was primarily due to higher cash earnings. As a reminder, our first quarter is typically our lowest quarter for free cash flow. We continue to expect free cash flow in the range of $1.24 billion to $1.36 billion for full year 2026. Looking into the segments, Diagnostic Laboratories delivered another strong quarter with 5% revenue growth to $2.8 billion. With that, we have 2.9% organic growth, 2% acquisition-driven growth and 0.2% contribution from foreign currency translation. Total volume growth was 2.5%, with 1.1% organic growth and 1.4% acquisition-driven growth. Volume was constrained by the impact from adverse weather, excluding which organic volume growth would have been closer to 2%. Price/mix increased 2.6%, with organic price/mix contributing 1.8%, primarily due to an increase in test per assessment. Acquisitions grew 0.6% and foreign currency translation contributed 0.2%. Diagnostics adjusted operating income was $459 million or 16.6% of segment revenue compared to $428 million or 16.3% of revenue last year. Adjusted operating margin expanded 30 basis points, primarily driven by organic growth despite the impact from adverse weather. Biopharma Laboratory Services revenue grew to $781 million, up 8.2% compared to last year, which includes a 5.5% benefit from foreign currency translation. We delivered organic growth of 3.7%, partially offset by our Early Development strategic actions of 1%. In organic constant currency, Central Labs revenue grew 4.9% and Early Development revenue grew 0.7%. BLS segment adjusted operating income increased to $121 million or 15.5% of revenue compared to $107 million or 14.8% of revenue last year. Adjusted operating margin was up 60 basis points, driven by growth in Central Labs. We continue to make progress on strategic actions in Early Development, which will be largely complete by the end of the second quarter. Our BLS segment ended the quarter with a backlog of $8.6 billion, and we expect approximately $2.7 billion to convert into revenue over the next 12 months. Our segment quarterly book-to-bill was 0.94 and is expected to improve sequentially in the second quarter versus the first quarter. Our trailing 12-month book-to-bill remains healthy at 1.04. Turning to our expectations for 2026. Our full year guidance assumes foreign exchange rates as of March 31, 2026. The guidance also reflects our current capital allocation assumptions, including the use of free cash flow for acquisitions, share repurchases and dividends. We are raising the midpoint of the enterprise revenue range by approximately $30 million and the midpoint of the EPS range by $0.13. Looking at revenue, we expect enterprise revenue to grow 5% to 6.1%. This includes a tailwind from foreign currency translation of approximately 40 basis points. We expect Diagnostics segment revenue to grow 5.1% to 5.9%. This guidance assumes the majority of revenue growth comes from organic growth. We expect BLS segment revenue to grow 3.8% to 5.4%. This guidance incorporates the actions in Early Development and the tailwind from foreign currency translation of 150 basis points. For the full year, on an organic constant currency basis, we continue to expect the Central Labs revenue to grow in the mid-single digits and for Early Development revenue to be relatively flat, with the second half being stronger than the first half. We continue to expect enterprise margin expansion with margins improving in both Diagnostics and BLS in 2026 versus 2025. BLS margin is expected to expand more than Diagnostics, reflecting continued strong top line growth in Central Labs and operating efficiencies in Early Development as we streamline the business. As an enterprise, we continue to benefit from our launchpad initiatives, which remains on track. Our adjusted EPS guidance range is $17.70 to $18.35 with an implied growth rate at the midpoint of approximately 10%. As compared to prior guidance, we have narrowed the range and raised the midpoint by $0.13. Our free cash flow guidance range remains $1.24 billion to $1.36 billion, weighted towards the second half of the year, and we continue to expect capital expenditures to be approximately 4% of revenue as we are investing in the new strategic facility to support long-term growth in our Central Labs Services operations. We expect to continue delivering profitable growth and strong free cash flow and drive disciplined capital deployment across acquisitions that support our strategy and complement organic growth while also returning capital to shareholders through share repurchases and dividends. We remain confident in our ability to deliver durable growth and long-term value for our shareholders. Now I'd like to turn the call back over to Adam for closing remarks. Adam Schechter: Thank you, Julia. I'm pleased to announce that we'll be holding an Investor Day in New York City on September 10. We'll share more details as we get closer to the day. In summary, we had a very strong quarter. Our performance is the result of disciplined execution of our strategy, which positions us to deliver long-term sustainable growth, margin expansion and value for our customers and shareholders. Ultimately, our performance is a result of our employees' commitment, compassion and innovation, which continue to accelerate our mission to improve health and improve lives around the world. We'll now take questions. Operator: [Operator Instructions] And our first question comes from Lisa Gill of JPMorgan. Lisa Gill: I just want to go back here to the first quarter. Can you discuss the impact of weather in the quarter? And then thoughts around the ACA exchange and potential changes that are coming back there. I believe that you put a number around that previously. And so should I just think that -- what did we see in the first quarter? If we didn't see anything, are you still expecting that there could be some headwinds from those volumes as we move towards the rest of the calendar year? Adam Schechter: Yes. Thanks for the question, Lisa. So if you look at weather in the first quarter, we estimate it was about a $15 million impact for the quarter. In general, if you look at that, it would impact the Diagnostics business, obviously, more so than the central laboratory business. We would expect that the organic volume growth would have been approximately 2% if it wasn't for the impact of weather. Julia Wang: Yes, Lisa, in terms of your question, as it relates to the ACA impact, previously, we provided an estimate of 30 basis points to the diagnostic volume this year. Now the impact that we saw in the first quarter was really immaterial, although it is perhaps too early to be able to draw any firm conclusion. As we know, the year-to-date enrollment is slightly better than expectations. What we do continue to monitor is if the enrolled participants are indeed paying the premiums, and equally importantly, if that has been translating into the testing utilization by this insured group. Now at this point, we continue to believe that the 30 basis point volume impact is a good estimate to work with, which is reflected in our full year revenue guidance for Diagnostics for 2026. Operator: And our next question comes from Jack Meehan of Nephron Research. Jack Meehan: I wanted to ask you about one of the big policy questions we've been getting at the moment, which is the new one that's related to the CRUSH initiative. Adam, what do you think this means for Labcorp in the lab industry broadly speaking? And is it possible you can share any color around any exposure to some of the codes that have been highlighted? Adam Schechter: Yes. Thanks, Jack. So if you look at CRUSH, what CMS is attempting to do is to reduce fraud, to reduce waste and to reduce abuse. The process has been going on, frankly, for several months now. And we're supportive of any initiative that can create a level playing field within the industry and support what's right for patients. I mean nobody wants there to be abuse in the system. Health care costs are high, and we've got to find ways collectively to reduce those. And a good way to do it is to reduce any type of waste, fraud and abuse. Now we worked with our trade organization, ACLA, we submitted a comment letter in March. And the letter encourages CMS to kind of be thoughtful in their efforts so that they can avoid unintended consequences such as impeding Medicare patient access to medically necessary laboratory testing, to prevent them from potentially punishing legitimate providers. So when I think about it, it makes sense to try to reduce the fraud and abuse, but we have to find the appropriate way to do that and not get in the way of what we're really trying to do, which is to improve patients' health and lives. Operator: And our next question comes from Michael Cherny of Leerink Partners. Michael Cherny: Maybe if I can go back to the volume side on Dx. Obviously, you mentioned some of the mix dynamics on test per requisition. As you think about the trajectory and what's embedded in guidance, what are the moving pieces that you see around that number against the backdrop of how share is progressing relative to just broader volumes? Any thoughts would be great. Adam Schechter: Sure. And let me give some context, and I'll answer the question directly. So if you look at Diagnostics revenue, we had a 5% increase over last year, reached $2.8 billion. If you look at the organic growth, it was about 3%. Acquisitions were about 2%, and there's just a slight, slight impact from foreign currency. So if you go to volume growth, it was 2.5%. 1.5% was organic growth. That would have been higher, about 2% if it wasn't for the weather and about 1.4% was acquisition-driven. If you look at the price/mix, there was a good increase of 2.6% with organic price/mix being about 1.8% of that. As I think about it, you are seeing substantial growth in the specialty areas like neurology, oncology, autoimmune disease and other areas that we're focused on. In those areas, you tend to see less accessions, but more test per accession and a higher price per test, particularly in areas like oncology. So I feel good about where we are. I feel like we've got momentum as we move into the second quarter and the rest of the year. I feel good about the mix of the business that we're seeing. We're focused on the higher-margin business where we can continue to get good volume but also at a good price and good margin. And I think that's why you're seeing such good improvement in our margins as well. So net-net, I feel confident in the guidance that we've provided, and I feel good about the momentum to get there. Julia Wang: And Michael, maybe to just build on what Adam just shared, if you look at our updated guidance for the Diagnostics revenue for full year 2026, the midpoint growth is 5.5%, and we continue to expect the majority of that revenue growth to be coming from organically. Operator: And our next question comes from Patrick Donnelly of Citi. Patrick Donnelly: Can you talk a bit more about the bookings trends you're seeing in BLS? If you guys can break down what you're seeing in ED versus central lab in the quarter, that would be helpful. And then you commented that quarterly book-to-bill, you're expecting it to be up sequentially 2Q versus 1Q. Can you just talk about what's driving that confidence? Is that improved conversations with customers recently? And any color there would be helpful. Adam Schechter: Yes, absolutely. So I feel very good about the progress and the momentum that we have in our BLS business. We had an 8% growth over last year, and it was about 4% from organic revenue. If you kind of look at the 2 businesses, you see the BLS segment is going well, but the Central Labs are actually driving the growth. Central Labs grew 11% or 5% if you look at it on an organic constant currency basis. And then the Early Development business was relatively flat. We still make a lot -- we made a lot of progress on our strategic actions in Early Development, and those will be completed by the end of the second quarter. So I feel good about the momentum. It enabled us to raise the midpoint of the guidance for our BLS segment. As I look at the quarterly book-to-bill, we had a very strong quarter in fourth quarter last year. If you look at our trailing 12 months right now, it's at 1.04. The quarter was about 0.96, but we stated that -- 0.94, but we stated that we expect sequential growth in the second quarter. That's based upon the 0.94 being mostly driven by timing. Some of that fell into fourth quarter versus first quarter, some of that fell from first quarter into second quarter. We are having a good RFPs. We have a good win rate. And as I look at the rest of the year, I expect to have a book-to-bill that will remain above 1. I've always said you want to have a book-to-bill above 1. But then it's also a tale of 2 cities. If you look at Early Development, you'd expect that book-to-bill to be below 1 because a lot of the business can be gotten and then actually occur within the same year. The CLS business is typically above a 1.0. If you look at the trailing 12 months, that's what you would see if you look at the 2 separate businesses. And the CLS business is mostly longer-term, larger-scale trials. Those trials are continuing to come to RFP, and I feel very good about our ability to win those trials. So I have confidence in the book-to-bill as we move through the rest of the year. That's what made me feel confident to raise the midpoint of the BLS guidance. Operator: And our next question comes from Tycho Peterson of Jefferies. Tycho Peterson: Wondering if you could just touch a little bit more on esoteric testing. I think MRD, you've obviously expanded the indication portfolio in breast, lung, Stage III colon. So maybe just touch on the reimbursement pathway there for the different buckets. And then Alzheimer's, I know you did the Roche deal for the primary care market. How are you thinking about that versus specialists? Adam Schechter: Yes. Thanks, Tycho. So as I look at the specialty areas, I feel very good about our momentum. I feel good about our scientific leadership, and I feel good about the trends moving into the future. We focus on 4 key areas: neurology, oncology, autoimmune disease and women's health. And in each of those areas, we're continuing to lead with the types of tests that we're bringing into the marketplace. You specifically mentioned neurology. Neurology is growing, particularly in Alzheimer's disease, all of neurology is growing, but it's being driven by our success in Alzheimer's disease. We don't yet break out the individual segments, but it's getting to be at a point where at some point, we will break it out because it is growing so quickly. If you look at the tests, we are a leader in that field, in the number of tests, the types of tests and our ability to have large scale to bring those tests to a primary care setting. As you mentioned, in oncology, we continue to bring new tests to market. We continue to feel good about our science. When we think about liquid biopsies and solid tumors in oncology and tissue test, we remain a leader. And in those areas, the reimbursement aren't necessarily quite where we'd like them to be at the moment. But I think over time, as we collect more data, we run more trials, the reimbursement will get there. But what's important to note is when you win in these areas, many of these patients require a lot of tests outside of just the specialty tests. So an oncology patient that is being treated for cancer, they get tests for their white blood cells, red blood cells, their liver, their kidneys. So when we tend to win the specialty tests, we also tend to get all the other tests that a physician might want for that patient and find appropriate for that patient. So our success in the specialty areas also leads to additional success in the overall marketplace. Operator: And our next question comes from Elizabeth Anderson of Evercore ISI. Elizabeth Anderson: I was wondering if you could update us on your thoughts about the PAMA survey that starts tomorrow. What are you hearing in terms of hospital participation? And how do you sort of see that impacting potential updates to PAMA later in the year for next year? And then also, any updates you have on the RESULTS Act progress? Adam Schechter: Absolutely. And obviously, this is something we spend a lot of time thinking about. We spent a lot of time with our trade organization, and we spent a lot of time in Washington talking about the importance of the RESULTS Act. And we continue to push for the implementation of the RESULTS Act. We think that is the right appropriate best path forward. Our trade group, ACLA, has been doing a lot of advocacy. And I can tell you, there is an understanding across the Senate, across Congress that a long-term permanent fix needs to be enacted. In terms of what we're waiting for results, we're really waiting for a CBO score, which could give us a sense of the likelihood of approval. We're waiting for CMS to do the technical assistance on the bill. So there are several steps that we're still waiting for. So in the meantime, we continue to make sure that we submit the data according to the law, which we will do. And the impact of PAMA of the RESULTS Act does not go through this year and PAMA actually comes to fruition next year, the impact to Labcorp will be highly dependent upon the number of other laboratories, including hospital laboratories that report their data. The more that report, the lower the impact will be for Labcorp because we are a very high quality but lower cost with broad reach laboratory. So there's a lot of work being done to encourage laboratories in hospitals and other settings to report their data, we just don't have any insight yet. As you mentioned, the reporting is just about to begin as to how many people may or may not report the data. But of course, Labcorp will. Operator: And our next question comes from David Westenberg of Piper Sandler. David Westenberg: So I wanted to talk on the consumer testing environment with Labcorp OnDemand. And of course, you're launching the MyLabcorp app in May with the AI assistant. So just given the fact that this has been growing double digits in Consumer Health, and it is a strategic priority, could we see some investments from you over the next couple of years and some DTC efforts? And how should we think about the magnitude of that growth and the expenses there? And how should we think about ROI? Adam Schechter: No, absolutely. It's an important question, and we spend a lot of time looking at the consumer market. As you mentioned, Labcorp OnDemand continues to expand, continues to grow, and it's growing strong double digits. And we continue to bring new tests to marketplace through OnDemand. We now have over 200 biomarkers in categories like men's and women's health and cancer screening, sexual health, longevity, and those are all available as we speak today. We already do some advertising to consumers, particularly through social media and other areas for OnDemand. And I would expect that business to continue to show good strong growth, and we will continue to invest in bringing new products to market and into the appropriate advertising to consumers where it makes sense. We also continue to look at the other parts of the consumer business. We've decided at this moment, there are some parts of it that although there is strong volume at the current pricing and not knowing the floor of the pricing that we're not necessarily going to compete at this time. We'll continue to evaluate that. But we see so much growth opportunities in the specialty areas, in the areas where there's significant medical unmet need, where we can win scientifically with what we can bring to market with new tests and in those areas where they have great reimbursement but also have higher prices and margins that we continue to focus in those areas. We continue to focus on the business development pipeline that we have and the hospital deals that we're doing, and we have a very long, broad pipeline of those types of deals. So as I think about the future, I am optimistic about our growth prospects before us and the strategic priorities that we've put in place. Operator: And our next question comes from Michael Ryskin of Bank of America. Michael Ryskin: I want to ask on LaunchPad initiative and just sort of margins throughout the year. Can you just give us an update on progress there? And you saw 40 bps of margin expansion in the first quarter, continue to point to expansion throughout the year, I think, across both segments. We would just love to hear your comments on pacing through the year, ability to take cost versus just top line volume benefits. Adam Schechter: Sure. I'll start with giving you a sense of LaunchPad, and then I'll ask Julia to talk a bit about the margins. If you look at LaunchPad, we're on track. We continue to make strong progress. And a lot of what we're doing right now is thinking how do we use technology, including artificial intelligence, robotics and computation to help us reduce costs but also to improve the customer experience, things like MyLabcorp that we're launching to help patients understand their lab results better, their health better and so forth. So as I start to think about AI, I think about it in multiple ways. One, what can we do to improve customer experience? What can we do in order to try to drive revenue? The second thing is how do we drive operational efficiency from it? Or how do we change processes? And you've seen us talk about certain things that we're doing with digital pathology and microbiology and things that we're doing in cytology, all these things will help to reduce costs over time. We've talked about things that we're doing with billing using artificial intelligence in order to reduce bad debt. And I think all of those things will help us with things over time. That's a revenue generator. So as I look at the future, a lot of the costs coming out will be driven by technology, and then I'll ask Julia to give you a little more information about the margins. Julia Wang: Yes. Michael, we are really pleased with our margin progression. Over the past few quarters, we have been disciplined and consistent in driving margin expansion across the entire enterprise, including both segments. As you can see in the release this morning, in the first quarter, our Diagnostics segment margin was improved by 30 basis points versus prior year, primarily driven by organic growth despite the impact from adverse weather. As we look to the full year 2026, we continue to expect another year of margin improvement in Diagnostics, supported by strong revenue growth as well as operating efficiencies, including LaunchPad initiatives that Adam just shared. Now as you move to the BLS segment, in the first quarter, the margin was improved by 60 basis points versus a year ago. And this improvement was primarily benefiting from the strong top line growth in Central Labs, which, as you may know, is the more profitable business within the segment. Now on a full year basis, we continue to expect the BLS margin to improve more than that for Diagnostics as we continue to benefit from organic growth in Central Labs and the strategic actions that we are taking in ED. All in all, I would say that the margin expansion across the enterprise inclusive of the 2 operating segments is expected to contribute to the double-digit EPS growth guidance at the midpoint for full year 2026 that we just updated this morning. Operator: And our next question comes from Luke Sergott of Barclays. Anna Kruszenski: This is actually Anna Kruszenski on for Luke. I wanted to go back to margins actually. If you could talk about maybe what you have baked in, in terms of potential inflation on fuel costs and if you have anything baked in on additional weather headwinds for later in the year? And then lastly, on that weather point, curious if you could talk about how -- like what percentage of appointments that had to be canceled you were able to recapture like later in the quarter or in 2Q? Adam Schechter: Okay. I'll start with the last one first, and then I'll ask Julia to talk a bit more about the margins. If you look at the weather impact, the way I think about that is approximately 20% to 25% of our business goes through our service centers. And we know who has appointments, we know who has requisitions, and we get the vast majority of those patients back over time because we know who they are. But the other 70% to 75% goes through physicians' offices. There, we don't necessarily know who has appointments. We don't necessarily know the doctor's availability to take on those additional patients. So that's a bit harder to go after until those requisitions are available within the system. Julia Wang: Yes. Let me start with the fuel cost. So obviously, we've been closely monitoring the situation, and we currently actually expect a minimal impact to our business. Of course, the oil and gas prices have been dynamic. And our diagnostic logistics network does include a fleet of vehicles and [indiscernible], but we have been shifting to hybrid vehicles over time, which helps us mitigate this risk to a certain degree. And if you just look at the fuel prices in early April, the estimated AOI impact is approximately $5 million to $10 million this year. We believe this impact is manageable, and we have reflected that in our updated guidance. I think the other question you had is really related to weather assumption for the balance of the year. Now just as a practice, we generally do not bake in explicit assumption for weather for our forecast simply because it's something a little bit difficult to really project. But with that being said, as you heard us sharing earlier, if you look at our full year revenue guidance for our Diagnostics business segment, we are looking at revenue growth of anywhere between 5.1% to 5.9% with a midpoint of 5.5%. So I think when you think about certain factors that could potentially move us within that range, weather could be one of the factors. With that being said, of course, we continue to have a very robust M&A pipeline. And to the extent that we continue to make progress and depending upon the timing, that could actually be another factor that moves us a little bit towards the high end of the range. So all in all, I would say that at this point in time, we are comfortable with the range that we are providing, and we are encouraged to head into the second quarter of this year. Operator: And our next question comes from Erin Wright of Morgan Stanley. Erin Wilson Wright: So how would you describe the deal pipeline right now? Like what are you seeing in terms of the pipeline, both in terms of acquisitions as well as partnerships, outreach deals otherwise? Like given just the landscape that we're in, the uncertainties and seeing -- are you seeing an acceleration or building pipeline of these types of deals with health systems or otherwise? And how does it maybe compare to this time last year? Adam Schechter: Yes. Thanks for the question. Our pipeline remains very strong. And I wouldn't say it's accelerated versus this time last year. It was strong this time last year. I've spent quite a bit of time talking with different folks in health systems across the country. And I think you're right, they are struggling right now, and they are looking for ways to partner and for ways for us to work with them. And I don't think that is going to stop anytime soon. In fact, if PAMA is implemented in January, although there will be a short-term impact during the year to us, I think over time, it actually will increase the pipeline of deals because these local regional laboratories are under a lot of stress already. The hospital system laboratories are under stress already, and I think that would just make it more difficult. So stay tuned. I expect we'll have some more deals that we'll be talking about in the future, and I look forward to talking about those. Operator: This concludes our question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, and welcome to Industrial Logistics Properties Trust's first quarter 2026 financial results conference call. I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations. Please go ahead. Kevin Barry: Good morning, and thank you for joining Industrial Logistics Properties Trust's first quarter 2026 earnings call. With me on today's call are President and Chief Executive Officer, Yael Duffy, Chief Financial Officer and Treasurer, Tiffany R. Sy, and Vice President, Marc Krohn. In just a moment, they will provide details about our business and quarterly results, followed by the question and answer session with sell side analysts. Please note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws, including guidance with respect to certain second quarter and full year 2026 financial measures. These forward looking statements are based on Industrial Logistics Properties Trust's beliefs and expectations as of today, 04/30/2026, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission which can be accessed from our website ilptreit.com. Investors are cautioned not to place undue reliance upon any forward looking statements. In addition, we will be discussing non GAAP financial measures during this call including normalized funds from operations or normalized FFO, adjusted EBITDAre, net operating income or NOI, and cash basis NOI. A reconciliation of these non GAAP measures to net income is available in our financial results package, which can be found on our website. Lastly, we will be providing guidance on this call including estimated normalized FFO and adjusted EBITDAre. We are not providing a reconciliation of these non GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. I will now turn the call over to Yael. Yael Duffy: Thank you, Kevin, and good morning. To begin, I would like to highlight the announcement we made last week that our consolidated joint venture successfully priced $1.6 billion of fixed rate interest only debt at an attractive interest rate of 5.71%. This outcome was achieved despite geopolitical headwinds and capital markets volatility. It also speaks to the strength of our high quality portfolio, the creditworthiness of our tenants, and the depth of the banking relationships our manager, The RMR Group, has built. As Tiffany will cover shortly, this financing takes out the JV's floating rate and amortizing debt, substantially strengthening its capital structure, insulating it from interest rate swings, and driving stronger cash flow. As a result, all of Industrial Logistics Properties Trust's consolidated debt will now be fixed rate and non amortizing, at a weighted average interest rate of less than 5.5%. Turning to our results, I am pleased to report another quarter of strong earnings growth that outpaced our expectations, which was supported by continued leasing momentum across our portfolio. Same property cash basis NOI increased more than 4% year over year and normalized FFO grew more than 60%, demonstrating the meaningful progress we have made reducing financing costs and driving rent growth. We leased 862,000 square feet at a weighted average rent roll up of 26.3%, marking our sixth consecutive quarter of double digit rent growth. Renewals accounted for approximately 70% of the activity, reflecting continued strong tenant retention and portfolio stability, with consolidated occupancy of 94.6%. Today, 8.1 million square feet, or 11.5% of Industrial Logistics Properties Trust's total annualized revenue, is scheduled to expire by 2027, which provides us a substantial runway to capture embedded rent growth and drive organic cash flow. Currently, our leasing pipeline stands at 6 million square feet with more than 2 million square feet already in advanced stages of negotiation or lease documentation. We are especially pleased to share that we anticipate fully leasing the 535,000 square foot vacancy in Indianapolis in June, accomplishing a key 2026 initiative for the company. Before I turn the call over to Tiffany, I want to underscore the momentum we have built across fronts: a meaningfully strengthened capital structure, continued double digit leasing spreads, and a healthy pipeline of embedded mark to market opportunities still available to us. Looking ahead, we believe we have a clear path to continued cash flow growth and delivering value to our shareholders. I will now turn the call over to Tiffany R. Sy for the financial results. Tiffany R. Sy: Thank you, Yael, and good morning, everyone. Yesterday, we reported first quarter normalized FFO of $22 million, or $0.33 per share. These results exceeded the high end of our guidance by $0.20 per share, driven by one time revenues and fees totaling $1.1 million. Normalized FFO grew 16% on a sequential quarter basis and 63% compared to the same quarter a year ago. Same property NOI was $90.3 million, same property cash basis NOI was $87.4 million, and adjusted EBITDAre totaled $87 million, each increasing on a year over year and sequential quarter basis. Turning to our balance sheet, we ended the quarter with cash on hand of $100 million and restricted cash of $86 million. Our net debt to total assets ratio declined modestly to 68.8% and our net debt leverage ratio improved to 11.6 times from 11.8 times. Last week, we priced $1.6 billion of five year fixed rate, interest only mortgage financing for our consolidated joint venture at 5.71%. We expect to close the loan on or about May 8, and plan to use the proceeds to refinance the joint venture's existing $1.4 billion floating rate loan and $[inaudible] of fixed rate amortizing debt. The new debt is secured by the same 90 mainland properties as the existing borrower. With this refinancing, our consolidated joint venture will unlock nearly $20 million in annual cash flow by eliminating its amortizing debt and the need to purchase interest rate caps. Additionally, all of Industrial Logistics Properties Trust's consolidated debt will be fixed rate, limiting our exposure to market interest rate volatility, with a weighted average interest rate of 5.48% and no debt maturities until 2029. Turning to our outlook, we introduced full year guidance in our earnings presentation issued last night, in addition to the quarterly guidance we have been providing. For the second quarter of 2026, we expect interest expense of $61.5 million, including $59 million of cash interest expense and $2.5 million of non cash amortization of deferred financing fees, adjusted EBITDAre between $85.5 million and $86.5 million, and normalized FFO between $0.31 to $0.33 per share. For the full year 2026, we are guiding to interest expense of approximately $245 million with cash interest of $234.5 million and non cash interest of $10.5 million, adjusted EBITDAre between $344 million and $349 million, and normalized FFO of between $1.27 to $1.34 per share. This guidance reflects the impact of our consolidated joint venture's refinance. It also assumes our vacant property in Indianapolis is leased in June 2026 and does not include the lease up of our Hawaii land parcel. In closing, we are pleased with the meaningful progress that Industrial Logistics Properties Trust has made over the past year, refinancing our floating rate debt and enhancing cash flow. As we look ahead to the remainder of 2026, we are focused on building on this momentum, advancing our growth initiatives, and creating long term value for our shareholders. That concludes our prepared remarks. We will now open the call for questions. Operator: Thank you very much. We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. Our first question comes from Mitchell Germain with Citizens Bank. Please go ahead. Mitchell Germain: Thank you very much. Can you provide some sensitivity from the top to the bottom end of the guidance range, please? Meaning, what will impact the bottom, and what factors take you to the high end of the range? Tiffany R. Sy: Sure. Sometimes we have one time reimbursements or one time fees. They are usually not very large, so that accounts for the $1 million range in the guidance. Mitchell Germain: Got it. Okay. That is helpful. Obviously, interest rate is pretty much fixed at this point. So maybe provide some perspective on the Indianapolis lease. I know this has been a big priority strategically. Do you believe it becomes income paying in June? How should we think about that, and maybe provide some perspective on the economics? Are we looking at rents going higher? Yael Duffy: Sure. We anticipate the lease to be signed in June. There will be a minimal free rent period of four months, so we will start seeing the cash in the back half of the year, and it will be at a roll up in rent. Mitchell Germain: Great. And then last question from me: with regards to the recent debt, does it offer more flexibility from a covenant perspective with regard to your ability to potentially look to sell some assets? And then more broadly, do you think that asset sales might become more of a strategic priority? Tiffany R. Sy: There is a 24 month lockout period in the new debt. Yael Duffy: I will add that with the leasing of this property in Indianapolis, it will allow us flexibility on the $1.16 billion debt to be able to look to sell properties in that pool. So while we might not be able to, in the short term, have dispositions within that mountain of debt, we will have greater flexibility now that we have gotten this Indianapolis lease completed. Mitchell Germain: Thanks, and I appreciate the guidance. Kevin Barry: Thanks, Mitch. Operator: Thank you. Our next question comes from John Massocca with B. Riley. Please go ahead. John Massocca: Good morning. Maybe can you walk us through what the $1.1 million of one time items were in the quarter? And is that why guidance is calling for a step down in 2Q versus 1Q at the midpoint? Tiffany R. Sy: Yes, that is exactly why. There was $150,000 of percentage rent that gets trued up. That happened this quarter. And then we also had $450,000 of a one time remediation fee related to a move out that has already been released. John Massocca: Okay. And the percentage rent true up, is that something that could hit in any given quarter, or is that usually a 1Q item? Tiffany R. Sy: It is always a 1Q item. We just do not know what the amount will be, or even if it will be incremental to us. John Massocca: And post the debt transaction, now that your balance sheet is pretty set, how are you thinking about utilizing the cash balance today? You talked a little bit about dispositions, maybe using that cash to pay down debt potentially. Or would you even potentially look into the acquisition market? Just curious how you are thinking of managing the cash outstanding, given there is a little more certainty from a debt side of your balance sheet. Yael Duffy: We are evaluating all of our options right now. We want to make sure that we have cash on the balance sheet to address our tenants' needs. We have a couple of tenants we are in early discussions with who are looking at potential building expansions that they want us to partner with them on, so we want to make sure that we have that cash available to us. It is early stages. We will see where we shake out and then go from there. John Massocca: I know those are potentially unique situations, but how do you think about a return threshold if you get back into the market of deploying capital? Tiffany R. Sy: We are certainly in a better position today than we were even a year ago, so that is something we are always considering with the Board. John Massocca: Was I asking about property acquisitions or even other investments? If you were to get back into the market, how would you view the current cap rate environment versus where you would want to deploy capital? Are there things out there today, especially given it would probably be coming from cash on hand rather than newly raised capital? Yael Duffy: Given where our leverage is today, I do not see us looking to acquire any properties at least in the short term, unless it is a very specific or opportunistic situation. John Massocca: And lastly, the CapEx spending was down a little bit. I know 1Q can be a relatively weak period seasonally for CapEx spend, but is that a more typical run rate, or was the current quarter a bit of an anomaly? Tiffany R. Sy: The current quarter was an anomaly. Q1 can be down sometimes. That is not what we are forecasting going forward. John Massocca: That is it for me. Thank you very much. Kevin Barry: Operator, I believe that concludes our Q&A. Yael Duffy: Thank you for joining today's call, and we look forward to meeting with many of you at the NAREIT conference in June. Please reach out to Investor Relations if you are interested in scheduling a meeting with Industrial Logistics Properties Trust. Operator, that concludes our call. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that this conference call is being recorded today, April 30, 2026. I will now turn the call over to Samantha Sacks Gallagher, general counsel with VICI Properties Inc. Samantha Sacks Gallagher: Thank you, operator, and good morning. Everyone should have access to the company's first quarter 2026 earnings release and supplemental information. The release and supplemental information can be found in the Investors section of the VICI Properties Inc. website at viciproperties.com. Some of our comments today will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are usually identified by the use of words such as will, believe, expect, should, guidance, intends, outlook, projects, or other similar phrases, are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. I refer you to the company's SEC filings for a more detailed discussion of the risks that could impact future operating results and financial condition. During the call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available on our website and our first quarter 2026 earnings release, our supplemental information, and our filings with the SEC. For additional information with respect to non-GAAP measures of certain tenants and/or counterparties discussed on this call, please refer to the respective company's public filings with the SEC. Hosting the call today, we have Edward Baltazar Pitoniak, chief executive officer; John W. Payne, president and chief operating officer; David Andrew Kieske, chief financial officer; Gabriel F. Wasserman, managing director of business development; and others on the team. Edward and team will provide some opening remarks, then we will open the call to questions. With that, I will turn the call over to Edward. Edward Baltazar Pitoniak: Thanks, Samantha, and good morning, everyone. This morning, you will hear from John W. Payne on our recent investment and growth activities, and you will hear from David Andrew Kieske on our financial results and updated 2026 earnings guidance. To start, I would like to thank the members of the VICI Properties Inc. team for their continued hard work. Contributions to the business, including their efforts around the deal activity we announced this quarter, are essential to our success and ability to deliver value to our owners. Today, I would like to share with you, in abbreviated form, the thoughts I shared in my recent annual report letter. I will begin with this: The leaders of any business should always have a clear and cogent answer to the question, what business are you in? At VICI Properties Inc., the high-level answer to that question is, we are in the business of sourcing, allocating, and stewarding capital invested accretively in experiential real estate of enduring value. That could be the answer offered by any REIT or real estate investment management firm in America, save for one word: experiential. The 28 other REITs currently in the S&P 500 all have their own distinct adjectives in front of real estate, whether those modifiers be logistics, data center, office, residential, lodging, retail, self storage, etcetera. Property types may differ, but we all wrestle with the key real estate investment attribute of relevance—and on the opposite end of the investment spectrum, obsolescence. The more relevant the real estate is to its intended end users, the greater the likelihood that the income and value of that real estate will be sustained and potentially grow. The relevance of a property is ultimately determined by the people who use the real estate for its intended purpose. And for that reason, I believe that real estate investment insights are ultimately cultural insights. To evaluate the current—and moreover future—relevance and value of real estate requires the development of insights and forecasts into how people will live, work, play, heal, gather, create, and otherwise manifest the experience of living their lives now and over the lifespan of the investment. As I noted a moment ago, at VICI Properties Inc., we are strategically and organizationally committed to investing in experiential real estate, and that commitment is anchored in the insights and forecasts we have developed around the experience economy during our first eight years as a company. Spending trends support our thesis. According to Mastercard, during the period of 2019 to 2023, when the COVID pandemic led to a spike in goods purchases, global spending on experiences nonetheless rose 65%, while spending on things only increased 12% over the same period—a more than five-to-one growth ratio favoring experiences. This momentum has persisted after the post-COVID boom. TD Cowen’s January 2026 report on the experience economy showed that experience-related services, like gaming, accommodations, sports, air travel, and other leisure-related spend, have seen an average annual growth rate of 5.2% from 2023 to 2025 compared to average annual total personal consumption expenditure, or PCE, growth of 2.9% during the same period. The durability and persistence of this trend across multiple economic cycles, demographic shifts, and technological innovations supports the thesis that preference for experiences is not transient and instead signifies a deeper and enduring secular change. At VICI Properties Inc., we balance our secular focus with sharp attention to what is going on in the here and now. At any given time, we at VICI Properties Inc. believe we are responsible for managing our relationship and exposure to three key dimensions of impact: secular trend impact, cyclical trend impact, and idiosyncratic impact unique to VICI Properties Inc. Let me take each one of these dimensions of impact in reverse order. By idiosyncratic impact, I mean developments unique to VICI Properties Inc. arising out of our specific business conditions. These can be issues or situations that generally do not have secular or cyclical causes, beyond our management control. These are issues that we can and must address through our own management actions. By cyclical trend impact, I mean cyclical developments and trends in our economy and our society. These are fluctuations that are likely beyond our—or any management team’s—control, but VICI Properties Inc.’s business model and our revenue income streams as a net lease REIT are generally not highly subject to material cyclical fluctuation. We also strive to invest in businesses and sectors that have lower-than-average cyclicality to mitigate cyclical risk. By secular trend impact, as I noted above, I mean material and impactful changes in the ways in which people are living, working, playing, healing, gathering, creating, and otherwise manifesting the experience of living their lives. As with cyclical trends, secular change is beyond our management control. But what is within our control is identifying, understanding, and preparing for those changes, and consequently developing and executing responses that enable us to capitalize on positive developments and manage our risk exposure to potential negative developments in and around the experiential economy. As investors in large-scale, long-duration real estate, we work hard to be right about the secular. If you get secular trends wrong, as a real estate investor, it is hard to overcome the value-eroding impact of negative secular impact. If you get secular trends right, you have more management capacity to seize opportunity and manage cyclical and idiosyncratic developments. The VICI Properties Inc. executive team was in Las Vegas two weeks ago, and around every corner, we witnessed the secular power of experiences. Secular is long term. Getting secular right represents long-term competitive advantage. And with that, I will turn it over. John W. Payne: Thanks, Edward, and good morning to everyone. VICI Properties Inc. had an active first quarter with approximately $1.2 billion in new capital commitments. The last two quarters—Q4 2025 and Q1 2026—represent the first consecutive quarters during which VICI Properties Inc. has announced more than $1 billion in new capital commitments sequentially in the company’s history. This quarter, we announced an expansion of our long-term strategic relationship with Cain and Eldridge Industries by providing a $1.5 billion mezzanine loan as part of the construction financing for the One Beverly Hills development project. The mezzanine loan represents a $1.05 billion incremental commitment beyond our previously announced $450 million investment. Construction on the development commenced in 2024, with vertical works beginning in fall 2025, and phased delivery is scheduled to commence in 2028. VICI Properties Inc. also had international gaming real estate activity during the quarter. We announced the pending $144 million acquisition of four real estate assets located in Alberta, Canada, at an 8% cap rate in connection with Pure Casino Entertainment’s pending take-private acquisition of Game Host. This transaction is emblematic of VICI Properties Inc.’s ability to help our existing tenants execute on their growth strategies through the monetization of their real estate. Having worked alongside IGP and Pure for the last few years, we have appreciated their ability to operate and grow a very effective gaming platform. Subsequent to quarter end, we entered into a new lease agreement with Clairvest in connection with the closing of Clairvest’s acquisition of Northfield Park in Ohio from MGM. This transaction added VICI Properties Inc.’s fourteenth tenant, further diversifying our tenant roster, which has always been a core portfolio management objective since VICI Properties Inc.’s inception, and there was no change to total rent collected by VICI Properties Inc. Last week, we also announced that all gaming regulatory and shareholder approvals have been met for the previously announced $1.16 billion Golden transaction; we expect this acquisition to close today. This transaction reflects VICI Properties Inc.’s strategic entry into real estate ownership in the Las Vegas locals market, which has deeply rooted, loyal customer bases and attractive demographic tailwinds, and it highlights our ability to transform relationship-building efforts into constructive growth for our shareholders. To continue on the thread of Las Vegas, operator reports this week have demonstrated improvements in Q1. There was strong convention-related activity during the quarter with about 140 thousand ConExpo/Con-AGG attendees in March, and operators are continuing to address the value issue with MGM and Caesars offering promotional deals catering to value-oriented consumers. There are plenty of demand drivers, particularly around professional sports and entertainment, that continue to make Las Vegas a draw for a wide range of consumers for the foreseeable future. Construction on the A’s stadium has started. The NBA has voted to pursue a Las Vegas franchise. And the annual spring WWE event brought over 100 thousand attendees to the city a few weeks ago. Furthermore, our tenants continue to invest heavily in the assets we own on the Strip—from MGM Grand’s $300 million room remodel to the Omnia Day Club development out front of Caesars Palace, to the renovation of the Mirage and the building of the absolutely incredible Hard Rock guitar tower. We acknowledge the emerging changes that exist in the gaming space, from iGaming’s expanding presence to the growing, though largely unregulated, prediction markets, to the stabilization of online sports betting. But we do believe that brick-and-mortar gaming assets in the right markets, operated by the right operators, will retain sticky consumer bases and continue to perform well. At the same time, we will continue our broader long-term strategy that includes diversifying our tenant base, continuing to invest in other experiential real estate, and managing a portfolio set to benefit from the secular trends Edward mentioned in his opening remarks. Now I will turn the call over to David, who will discuss our financial results and guidance. David Andrew Kieske: Thanks, John. I want to start with a few numbers that I believe best capture what VICI Properties Inc.’s business has been designed to do. In the first quarter, on a year-over-year basis, we grew AFFO per share by 4.5% while only increasing our share count by roughly 1%. This sustainable, efficient growth is made possible by the fact that our business generates about $650 million of free cash flow annually, and we have been able to deploy that free cash flow into incremental investments without having to dilute our shareholders. Furthermore, VICI Properties Inc. has an AFFO payout ratio of approximately 75%. We are focused on maintaining our ability to continue to grow our dividend, which we have done every single year since we have been public in 2018, posting a peer-leading eight-year dividend growth CAGR of 7%, and intend to continue to protect the sanctity of the dividend as we strive to continue to grow the business both organically and externally. Each year’s growth is supported by a strong balance sheet. Our total debt is $17.1 billion, and our net debt to annualized first-quarter adjusted EBITDA is approximately 5x, at the low end of our target leverage range of 5x to 5.5x. We have a weighted average interest rate of 4.46% as adjusted to account for our hedge activity, and a weighted average 5.7 years to maturity. As of 03/31/2026, we have approximately $3.1 billion in total liquidity comprised of approximately $480 million in cash and cash equivalents, $142 million in estimated proceeds available under our outstanding forwards, and $2.4 billion of availability under our revolving credit facility. I would note that subsequent to quarter end, we settled all remaining outstanding forward equity to partially fund the Golden transaction, which, again, as John mentioned, is closing today. Turning to guidance, we are raising AFFO guidance for 2026 in both absolute dollars as well as on a per-share basis. AFFO for the year ending 12/31/2026 is expected to be between $2.665 billion and $2.695 billion, or between $2.44 and $2.47 per diluted common share. As a reminder, our guidance does not include the impact on operating results from any pending acquisitions without announced expected closing dates, possible future acquisitions or dispositions and related capital markets activity, or other nonrecurring transactions or items. With that, operator, please open the line for questions. Operator: Thank you. As a reminder, to ask a question, please press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. Please limit yourself to one question and one follow-up. One moment for questions. Our first question comes from Barry Jonathan Jonas with Truist. You may proceed. Barry Jonathan Jonas: Hey, guys. Good morning. Thank you for taking my questions. Your loan book is expanding again. Curious how you think about the right mix there versus traditional sale-leaseback. David Andrew Kieske: Yeah, Barry. It is a strategic tool that we have in our toolkit to develop long-term relationships. And, as you know, some of the loans have direct pathways to real estate ownership, and others have the ability to learn about sectors that we would like to own the real estate in over time. We feel pretty good about where the size is right now. We are at high single digits in terms of percent of total assets, and we are very mindful of the fact that these loans will get repaid over time. But we have developed very good relationships with the sponsors and the operators and the owners of these businesses such that there may be future opportunities to deploy these proceeds either into real estate or incremental credit opportunities going forward. Barry Jonathan Jonas: Thanks, David. That is really helpful. Then just for a follow-up, I would just broadly ask what the pipeline is looking like right now. If you could maybe talk about how the mix between gaming and non-gaming is looking, that would be helpful. John W. Payne: Hey, Barry. Good morning. Not much different than the past couple of quarters. We continue to spend quite a bit of time on the casino side. We obviously have announced over the past couple of quarters some deals with some new tenants that we are very excited about—not only the deals we have with them, but where we could potentially grow in the future. So we continue to look at opportunities in the casino space. We also are spending time in the same categories that we have talked to you about, whether that is unique attractions, university and professional sports or surrounding development, golf, and pilgrimage resorts, and unique opportunities. The other thing, we are spending some time with our current tenants—are there new amenities at their existing properties that we can continue to build out with them on a larger scale? So I guess all three pillars are active at this time. I could not give you a pie of where I am spending my time, but I would say all three we are spending time on. Operator: Thank you. Our next question comes from Caitlin Burrows with Goldman Sachs. You may proceed. Caitlin Burrows: Maybe just a follow-up on that last point. You mentioned that new amenities at existing properties is one of your opportunities. I know when you guys initially announced the partner property growth fund opportunity with the Venetian, like, two years ago now, there was a potential incremental $300 million of funding, which I feel like you have not talked about in a while. So is that not potentially happening, or what can we expect there? David Andrew Kieske: Hey, Caitlin. Good to hear from you today. It is still potentially happening. If anybody has walked the Venetian over the last couple of years, you can see the transformations that the team has done, led by, you know, Patrick Nichols and Rob Brimmer and all the folks that go to work very hard every day within the proverbial four walls of that asset. They have put in new assets, room remodels, updated the convention space, and it initially used $400 million of our capital, and we are in constant dialogue about their future capital plans and what they might continue to add to that asset to continue to grow the revenue base there. John W. Payne: There are probably some other opportunities with tenants as well we continue to speak about. We are just not prepared to talk about that today. Caitlin Burrows: Okay. So as it relates to the Venetian one, sounds like just wait and see over the next six months or so to see if that materializes or not. David Andrew Kieske: Yeah. I think that is right, Caitlin. And, look, our capital is flexible, and there is an outside date on it, but if they wanted to go longer, we would be willing to go longer with that. Caitlin Burrows: Yeah. Makes sense. Okay. And then in the earnings release, you mentioned that you guys entered into forward interest rate swaps, which I guess I was a little surprised by since you do not have that much floating rate debt. I was wondering if you could just go through the thinking there and under what circumstance you expect to use that? David Andrew Kieske: Yeah. No, you are right, Caitlin. We do not have any floating rate debt other than our revolver, but these are forward-starting interest rate swaps to start to leg our way into an interest rate hedge portfolio ahead of our upcoming refis, which we have maturities in September and December this year, and then turning the corner into February 2027. In the interest rate market, you can either do forward-starting swaps or treasury locks, and we have started to build up a portfolio of forward-starting swaps to lock in the base rate. Caitlin Burrows: Got it. Thanks. David Andrew Kieske: Thank you. Operator: Our next question comes from Smedes Rose with Citi. You may proceed. Analyst: It is Nick Joseph here with Smedes. Curious what feedback you are getting from tenants just on underlying demand trends, given the relatively fluid macro outlook? John W. Payne: Yes. We have watched, as you have, many of our tenants who are in the public markets announcing about the consumer and their results. And you can see that in their results. Obviously, the regional markets have performed steady is the best way I would describe it. Las Vegas is going through a transition. You can see that it turned the corner from some of the slowness that they had. They are making adjustments to their business models, which you have heard from us for over eight years. These are the best operators in the world. They know how to adjust their businesses accordingly, and they are doing it right now. They will also get the bumps over the coming years of new attractions coming to Las Vegas, which always has benefited that market. So as new assets open up, as new product opens up, trial will open up. They can price their business accordingly a little bit faster in the regional markets than they can in the Las Vegas markets, but you can see from the results that they are quite good. Analyst: Thanks. And then just hoping you could give an update on the Caesars regional leases—how those assets are performing right now. And then, obviously, there have been some press reports about Caesars—any potential impact if there is a privatization there? Edward Baltazar Pitoniak: Yeah. Maybe to take those questions in reverse order, Caesars has not confirmed anything, and thus everything that is being talked about is rumors. And, as a fundamental practice, we do not comment on rumors. As concerns Caesars’ regional trends, you obviously saw their results, which they released on Tuesday. What we are certainly seeing is the benefits of the CapEx that Caesars has very smartly invested in a number of regional assets over the last couple of years—notably places like New Orleans and now Lake Tahoe. And I think what we are clearly seeing—and I believe the market is seeing as well—are the benefits of that CapEx. And I think it is also notable to see the narrative reemphasis Caesars is putting on its database. They spoke about the importance of its database in relation to its digital strategy during their earnings call on Tuesday. And I think it is key to remember that so much of the database—and John knows way better than I do—so much of that database is generated by the regional spokes in the Caesars hub-and-spoke system. Operator: Thank you. Our next question comes from Chris Darling with Green Street. You may proceed. Chris Darling: Regarding the Cain Eldridge relationship, can you speak to your vision for that partnership over time? I find the notion of partnering with a private capital source interesting in terms of furthering your own growth plans, particularly if you may not feel comfortable issuing equity capital at various points in time. Edward Baltazar Pitoniak: Yeah. Good to talk to you, Chris. What we have learned about Cain and Eldridge over now, I guess, almost two years that we have been partnering with them is that they have a vision of the world and the experiential economy that is very, very synchronous and aligned with ours. And what we really value in Cain and Eldridge is, frankly, the energy of their animal spirits in terms of identifying and seizing opportunities globally. And they are obviously an example, Chris, of the power of insurance capital pools at this particular moment in time and at this particular phase of global capital formation. And so, very much to your point, we believe that as responsible stewards of VICI Properties Inc.’s capital, we need to constantly be monitoring the landscape of global capital formation and identifying pools of capital that may be very valuable to our business—the growth of our business, the durability of our business—wherever that capital may come from. And we are certainly not the first to do that. You have certainly seen over the decades very great REITs like Prologis pursue such a strategy. I would not say that we are necessarily going to mirror that strategy, but we are certainly going to look to grow with great partners. And Cain and Eldridge are certainly an example of that. Chris Darling: That is helpful. And then maybe just switching gears for a follow-up. With the Golden deal closing today, can you speak to how that team is thinking about growing their business? And specifically, I wonder if there is anything related to new acquisitions, reinvestment into the existing portfolio—anything like that where you can play a role in the near term. John W. Payne: Yeah. It is a great question. One of the things that we are excited about and have been excited about since we started meeting with the Golden team—and, obviously, as we announced, that transaction will close today—is we will begin that work. This transaction closes today; we will begin that work on areas where we can grow together. I do know the team there is anxious to continue to look at unique opportunities to see their portfolio be diversified. And our capital can help them in many ways—to your point—not only as we look together at acquiring new assets, but how can our capital help them at their existing assets, adding amenities that can attract new consumers and grow their EBITDA. We had initial talks on those, and we will continue, now that the deal is closed, to really refine those over the coming months and years. Operator: Our next question comes from John G. DeCree with CBRE Capital Advisors. You may proceed. John G. DeCree: Hi, guys. Thank you for taking my questions. Edward, you just kind of talked about attractive pools of capital, I guess kind of in the equity sense. Maybe Edward or David, curious if you thought about other pools of capital or sourcing debt capital—international financing sources. I noticed the financing in Canada for the Pure Gaming deal. I would say base rates are a bit lower there. One of your tenants went for the yen carry trade—they obviously have a project, MGM in Japan. But curious if there are opportunities for more creative debt capital uses to kind of tick down your overall cost of capital. David Andrew Kieske: Yeah, John. Always good to hear from you. It is a great question and one that we have talked about since our inception. You go back to the beginning of VICI Properties Inc., and we kind of had a very unnatural balance sheet for a REIT, and we worked hard to transition that balance sheet into a more standard—and obviously investment-grade—balance sheet. And we have always been trying to be forward-looking around where we can source alternative forms of both debt capital as well as potentially equity capital at some point in the future, and you are spot on with our recent acquisitions in Canada—there could be an opportunity to issue debt up there. We have, on and off, looked at things overseas and looked at the various financing markets that other triple-net lease REITs and even other REITs take advantage of, whether it be euro- or sterling-denominated. And then we watch what other net lease REITs have recently done—some of the larger REITs—in terms of accessing private capital. And so, as Edward said, being a good steward of capital and finding the most attractive pools, partners, and opportunities for us is something we work hard at every day. John G. DeCree: Thanks, David. John, in your prepared remarks, you highlighted the increase in investment activity the last couple of quarters. Is there anything you attribute that kind of success and increased activity to? Is it just the kind of stars aligned? I know these transactions and investments take quite a while to bake, but is there anything changed? Or what would you attribute the ability to get some capital to work the last couple of quarters? John W. Payne: Hey, John, good to hear from you. I do not think anything has changed. I think you described it very well at the beginning of the question, which was some of these larger deals take time. When we are doing billion-dollar acquisitions or credit deals, they take time. I am not saying that a $50 million deal does not take time, but we need to be diligent about our evaluation of the deal, and it simply works out—the timing just works out when we are ready to execute. Edward Baltazar Pitoniak: And, John, I just want to add that I had a little bit of a bet with my colleagues that despite all the activity in Q1—and thank you for recognizing all that activity—that somebody would use the term “quiet” to describe the quarter. And indeed, a couple did. But I have been very proud of myself for not blowing a gasket. John G. DeCree: Great. I appreciate it. It is always good to talk to you. David Andrew Kieske: Thanks, John. Operator: Thank you. Our next question comes from Ravi Vijay Vaidya with Mizuho. You may proceed. Ravi Vijay Vaidya: Hi there. Good morning. Hope you guys are doing well. I wanted to ask a little bit more about the Caesars regional lease here. Are there active negotiations or discussions regarding a lease? Or are we seeing if the recent CapEx improvements at a number of these assets—it seems like they are off to a good start in producing improvements in property-level NOI—are we kind of in more of a wait-and-see mode regarding how those initiatives kind of flow through and subsequently improve the coverage there? Edward Baltazar Pitoniak: Yeah. So, to the first part of your question, Ravi, we are not going to—and never will—comment on those kinds of discussions with any tenant. And then I will just reiterate what I said earlier about, yes, the positive evidence in terms of the CapEx paying off and the renewed focus on the part of Caesars to the power of the hub-and-spoke system as powered by the database, so much of which is developed at the regional level—brick-and-mortar location by brick-and-mortar location. John W. Payne: Can I add one thing to that? Because I do think at times people judge where you put in capital—that is how you, that is the only way you grow the business. This is a business that ebbs and flows. It is controlled at times by the databases Edward described and the way the business can be—the incentives can be done—and understanding the consumer segments and targeting them in different ways often can move the business up and down. So capital is absolutely an important part of the business, but it is not everything about what drives revenues. There is loyalty. There is service. There is execution. There are offers. And that is important to understand when you look at a complex business like the casino business. Ravi Vijay Vaidya: Got it. That is really helpful color. Just one more here. Can you offer any comments on what is going on with Century Casinos? It seems that they have been under a strategic review for a little while, but I think the coverage is pretty healthy on those assets. Maybe discuss the disconnect between corporate credit and strong four-wall credit on that lease? Thank you. David Andrew Kieske: Yeah, Ravi, you summed it up well. They have hired a bank and announced a strategic review. The asset-level coverage is very strong. They have very good execution at the asset level. And we do not have any inside baseball or anything that we could share about what is going on with the process. I think if you look at their leverage, it may be a little bit higher than some of the others, but they have a couple years to deal with that term loan that sits on their balance sheet. You would have to ask that question directly to them for an update on what is happening there, but we feel good about the operations and the folks on the ground that go to work every day in our assets. John W. Payne: And we like the results of the incremental capital in our property growth fund that we put in with them a few years ago at the Missouri asset. So we spend a lot of time there understanding that capital and what it has led to at this business. David Andrew Kieske: Thank you. John W. Payne: Thank you. Operator: Thank you. Our next question comes from Daniel with Capital One Securities. You may proceed. Analyst: Hello, everyone. Thank you for taking my questions. You all have a lot of leases linked to U.S. CPI in one way or another. Are there any particular months where you are really looking at the 8 a.m. report because it will have an outsized impact the following year? Edward Baltazar Pitoniak: Yeah. Hi, Dan. The Caesars lease, the measurement period is July, August, September for a lease that resets every year on November 1. Beyond that, I believe Venetian resets in March, so the measurement period would be January. So, yeah, we follow it, obviously, but it is nothing we have any control over. We just wait until the score gets posted, and then we know what is going to happen from there. David Andrew Kieske: Okay, Dan, the only thing I would add—and saw that in your note this morning—there is nothing assumed in guidance other than the base rates in our escalators. Analyst: Okay. Great. Thank you. And then, you all own a few properties in New York and Atlantic City. One of the full commercial casinos opened in New York City recently. Are there any competitive pressures that you all or your gaming operator partners are thinking through there? Any color would be helpful. John W. Payne: Well, it is a great question. Most likely, it should go to our tenants right now. Obviously, the Resorts World that opened in New York with table games happened two days ago, but I am sure the secret shoppers have started from our tenants. It is something we will continue to monitor. And our tenants will continue to monitor, and we will have conversations about that—where those customers are coming from. Is it a radius of 20 miles, 15 miles, 50 miles? They will learn over time. But, clearly, if any new market opens up—whether that has been New York starting to open up, Virginia opening up in the past, Nebraska opening up over previous years—it is something that our tenants are aware of, and they continue to track and adjust their plans accordingly in their offices. Analyst: Great. Thank you. John W. Payne: You are welcome. David Andrew Kieske: Thank you. Operator: Our next question comes from an analyst with Morgan Stanley. You may proceed. Analyst: Hey, great. Just my first one on the commentary of experiential real estate in the opening comments. Just thinking about the supplement and some of the sectors that you have not quite made it in yet, whether it is professional sports or theme parks or anything like that. Any updated commentary on how you are thinking about that opportunity and if we are getting closer? Is it sort of still wait and see? John W. Payne: Well, it is hard to tell you exactly the timing of when a deal can be announced. What I would tell you is if you asked me that question a year ago compared to what I know today, it is very different. Our knowledge base of the players in whether it is university and professional sports infrastructure, whether it is the understanding of how surrounding developments around these arenas and new stadiums or universities—how they get done, how they take place, where our capital can be effective—we sure do know a lot more today than we did a year ago. When I can tell you we can put our capital to work, or if we put our capital to work, I cannot answer that. But what I can tell you is we continue to see a large opportunity in professional and collegiate athletics, particularly in sports infrastructure. Analyst: Great. That is really helpful. And then if I could just go back to the Cain and Eldridge—just a nonbinding sort of agreement. You do not often see these nonbinding agreements and so forth. Just a little bit more color around there. Is it sort of just the messaging that there is a partnership happening? Why not do something a little bit more binding? Edward Baltazar Pitoniak: Well, it would be hard to do anything binding without a very clear sense of what the future will bring. To bind each other to what we might do together three or four years from now would seem very unnecessary and very unwise. And I think rather than focusing on whether an agreement is binding or nonbinding, for us the most important thing is alignment of views, alignment of values—probably most importantly—and establishing a relationship, as we have done through One Beverly Hills, that is founded on trust and a real desire to understand each other’s needs and how we can best serve each other’s needs. David Andrew Kieske: Great. Analyst: That is it for me. John W. Payne: Thank you. Operator: Thank you. Our next question comes from Richard Hightower with Barclays. You may proceed. Richard Hightower: Hi. Good morning, guys. Thanks for squeezing me in here. David, since you brought it up in one of your earlier answers, I will assume it is fair game. But just to go back on the idea of VICI Properties Inc. sourcing private capital in some form going forward. I am assuming that you might have been referring to the Realty Income multiple announcements recently. And so if I think about those particular announcements, in each case it sort of solves a very unique problem for both counterparties—whether it is in terms of, obviously, cost of capital to the REIT but also a particular group of assets, the cadence of deal flow, a particular risk profile that is sort of well suited for the other counterparty. And so, if I think of that as a template, what does that look like with VICI Properties Inc.? What form does that take, and how does that compare to just an institutional partner coming in and buying the stock at what is obviously a very attractive level here? David Andrew Kieske: Yeah, look, Rich, I think your intro to the question hit on a lot of the things that we think about. But taking a half step back, the biggest thing we think about is where are alternative pockets of capital. And, obviously, Prologis started it many, many years ago with their fund business. Others have emulated that. I am not saying we are going into the fund business, but we watch and learn what others do. There is a whole lot of focus on these high-grade capital solutions or these insurance pockets of capital, and it is something we are studying and learning and seeing if there might be a use for it—whether it be with existing assets or potentially future acquisitions. And it is a way to just continue to diversify. We want to diversify the portfolio of real estate, and it is important to have a diversified pool of capital sources to continue to execute on our growth ambitions over time. Richard Hightower: Okay. That does make sense. And I guess maybe to follow up, if I think about your regular-way deal flow capacity—given that we have sort of exhausted the forwards, obviously got liquidity in other forms—but just help us put pencil to paper on what maybe your current total acquisition capacity is as the balance sheet stands today. Thanks. David Andrew Kieske: Yeah. We sit at the low end of our leverage range, so we have got incremental debt capacity. As I mentioned in my comments, we have $650 million of true free cash flow—it is after dividends—on an annual basis. And, look, the stock is at a level that is not all that attractive to us right now, but we are not sitting on our hands. John and the business development team are hard at work every day sourcing opportunities. The uniqueness about our business is that things take time, and as you have seen, they are lumpy and chunky, but we are confident that we can continue to execute our external growth plans with the sources of capital that we have available today. Richard Hightower: Got it. Thank you. David Andrew Kieske: Thanks, Rich. Operator: I would now like to turn the call back over to Edward Baltazar Pitoniak for any closing remarks. Edward Baltazar Pitoniak: I will just close out by thanking everybody who is on the call today. I recognize it is a very busy day in a very busy earnings season. We appreciate your time and support, and we will look forward to talking to you again in late July. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to the CBIZ First Quarter 2026 Results Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Chris Sikora, VP of IR and Corporate Finance. Please go ahead. Chris Sikora: Good afternoon, and thank you for joining us on today's call to discuss CBIZ's first quarter 2026 results. We posted an investor presentation that tracks to our prepared remarks, and it is available on our Investor Relations website. Before we start, I'll remind all participants that you will hear forward-looking statements during this call. These statements reflect the expectations and beliefs of our management team at the time of the call, but are subject to risks that could cause actual results to differ materially from these statements. You can find additional information on these factors in the company's filings with the SEC. Participants should be mindful that subsequent events may render this information to be out of date. We will also discuss certain non-GAAP financial measures on today's call. As noted on Slide 3, a reconciliation between GAAP and non-GAAP financial measures can be found in the supplemental schedules of the presentation. Joining us for today's call are Jerry Grisko, President and Chief Executive Officer; Brad Lakhia, Chief Financial Officer; and Peter Scavuzzo, Chief Information and Technology Officer. I will now turn the call over to Jerry, who will start on Slide 5. Jerry Grisko: Thanks, Chris. Good afternoon, everyone, and thank you for joining us. We entered 2026 with a clear plan, and our overall first quarter performance was in line with our expectations. We delivered year-over-year growth in revenue, profitability and free cash flow while returning value to shareholders through highly accretive share repurchases. Our organic growth improved throughout the quarter and is up sequentially compared to the fourth quarter. We remain confident that we will exit the year growing at our mid-single-digit organic growth target rate and be in a position to return to our long-term growth algorithm. As we will discuss on the call, we also advanced our strategic growth priorities and made meaningful progress on our efficiency initiatives while continuing to invest in our AI capabilities, and we believe that we're positioned to be the clear leader in the middle market. I want to thank our CBIZ team members for their exceptional performance as we completed our first busy season as an integrated company, a significant milestone for our organization. Our teams delivered strong results for clients, coordinated effectively across the platform and maintained solid utilization during our most critical period. We are operating fully as one company with unified teams, aligned culture and vision, common systems and a strengthened go-to-market approach, and our scaled operating model is beginning to work as intended. In the fourth quarter of 2025, organic revenue growth was flat as we completed a year of significant transformation and integration. As we moved into 2026, we are beginning to realize the benefits of the foundation we put in place. Combined with a more favorable market backdrop, organic revenue growth improved as we progressed through the first quarter. Our Q1 growth in Financial Services was still impacted by headwinds related to prior client exits tied to our risk and profitability standards and residual integration-related productivity impacts that shifted some tax revenue into the back half of the year, as previously discussed and contemplated in our full year guidance. We estimate that these temporary factors reduced reported organic revenue growth by approximately 200 basis points in the first quarter. We continue to expect these impacts to abate by the second half. With our solid start to the year, we are reaffirming our revenue, adjusted EBITDA and free cash flow targets while increasing our adjusted EPS outlook, reflecting confidence in our underlying earnings power and the impact of our accretive share repurchase activity. Now moving to Slide 6. We are advancing our 4 strategic priorities to drive growth. These priorities will strengthen our ability to win new business, retain and expand client relationships and enhance pricing. First, CBIZ continues to attract, retain and elevate top talent. We are proud to have been recently named a Top Workplace in the nation by USA TODAY for the sixth consecutive year and see that reflected in our strong employee retention performance across the company. Also, we are capitalizing on the greater scale and investment opportunity of our new platform by bringing in high-caliber talent to CBIZ. Within Financial Services, our lateral hiring initiative is identifying and advancing high-impact, high-producing MDs with several new hires recently completed and a robust pipeline of senior candidates who are drawn to CBIZ. Within Benefits and Insurance, we have added a variety of net new quality producers in the quarter and expect high momentum to carry to the second quarter as we work towards our full year target of approximately 15% increase in producers. I'm also pleased to have Peter on the call today. With Peter's appointment as Chief Information and Technology Officer and President of CBIZ Technology, we're making a deliberate convergence, one leader, one platform, one road map. Peter brings close to 20 years of industry experience and is widely regarded as one of the leading voices in technology and AI in our profession. Second, we recently launched our spring national brand campaign, featuring targeted national televised ads across our key markets. This year, our focus remains on translating increased visibility into stronger engagement for our services and reinforcing our position as a trusted partner during transformational events. Our brand and marketing investments are a key complement to both our go-to-market and talent recruitment strategies. We have already seen these investments paying dividends with early traction reinforcing brand awareness and strengthening our connection with clients and talent. Our 12 industry verticals are an increasingly important driver to how we go to market and serve our clients. This structure was designed to lead with insights, anticipate client needs and deliver coordinated, tailored solutions that drive stronger retention, accelerated growth and reinforce our value-based pricing. We are making meaningful progress implementing this strategy, including the development of new industry-focused managed services that bring together capabilities across tax, advisory and benefits to address specific client needs. We are seeing positive results from the greater connectivity these industry verticals provide for our national experts. In Alternative Investments and Real Estate, collaboration between our national experts is enabling us to secure a variety of new engagements in areas where clients were unaware of our capabilities. As we continue to strengthen our industry practices, we are seeing increased new client pipeline activity across several key verticals, including Consumer and Industrial Products, Capital Markets, Alternative Investments and Construction. Finally, we are delivering a more coordinated client experience across our service offerings. With our highly recurring revenue base and strong client retention, our most immediate growth opportunity is expanding relationships with existing clients. We are already seeing good progress as we take a more systemic approach to cross-selling across services and geographies. We are systematically increasing the number of clients using multiple services, and we expect these efforts to contribute to organic growth over time. Taken together, we believe strong execution against these 4 priorities positions us to drive attractive levels of growth in 2026 and beyond. Now moving to Slide 7. I've asked Peter to join us today to provide you with a more detailed walk-through of how we're advancing our AI road map. But first, let me briefly reiterate how we're thinking about AI and why we believe our strategic approach to AI will be a catalyst for CBIZ breaking away from many of our competitors. Our business is built on long-standing client relationships and services, often delivered in regulated environments that require licensed professionals to take accountability for outcomes. These engagements serve as a critical third-party validation for lenders, investors and regulators, which creates a high bar for substitution and reinforces client stickiness. Further, our middle market clients rely on us for judgment, context, expertise, intuition and ethics and typically do not have the scale or capital to build and govern AI-driven solutions themselves. The combination of our trusted relationship with our clients and our continuing investment in improved tools, processes and systems, including AI, create a defendable moat around our position with our middle market clients. We have also largely transitioned to a value-based pricing model, which positions us to benefit from the AI-driven efficiencies. As we adopt AI, we expect it to enhance our ability to deliver insights, expand wallet share and improve margins while reinforcing and not replacing the valued role we play for our clients. With that, I will turn it over to Peter to share more detail on what we're delivering. Peter Scavuzzo: Thanks, Jerry. We spent the last several quarters building the foundation for how we deploy AI across the organization, and we're now entering the next phase of that work. Let me share what that will look like internally and externally and how we see it creating shareholder value. Just last week, we began the full rollout of our latest internal capabilities company-wide, moving from primarily AI-assisted workflows to more advanced agentic-based AI solutions. We intentionally timed this rollout following busy season to ensure our teams could remain fully focused on client delivery during our most critical period. The maturity of large language models, combined with the accessibility of advanced features within AI platforms and our own internal talent and execution has brought us to an inflection point where deployment risk is manageable and the productivity and efficiency payoff is measurable. Building on our commitment for ongoing AI-driven talent development, our latest platform release further strengthens professional growth and retention. Professionals join and stay where they're empowered to do meaningful work. By significantly reducing manual repetitive tasks, our AI initiatives are improving retention and making us a more attractive destination for the next generation of talent. We are already seeing this in our recent lateral hiring discussions. As it relates to the technology itself, our recent advances in AI-based data extraction and structuring capabilities position us to deliver faster, more insight-driven solutions for clients across a wider range of services. For example, on the work we are performing in one of our [ attest ] services, for year 1, our AI-based data extraction workflow is producing 20% efficiency with our anticipation in subsequent years that this efficiency will grow to 40%. At the same time, we are also using agentic AI to support revenue growth by enhancing how we generate and pursue revenue opportunities. We are developing AI-driven workflows to improve the speed, quality and consistency of RFP responses and enabling us to pursue opportunities we previously could not due to resource constraints. Beyond new client wins, AI-driven insights create natural conversation starters with existing clients. For example, enabling us to benchmark client performance and flag opportunities that our professionals can then act on. This is one way in which we will expand our relationship and wallet share. As these capabilities scale, we expect improved win rates, faster time to market and more differentiated offerings that support sustained growth and long-term value creation. Lastly, a critical part of our AI strategy also includes our partner ecosystem, which is the foundation for the tools we are putting in place. We are leveraging leading technology partners with deep expertise in our industries and combining those capabilities with our new AI platform, proprietary workflows and our domain knowledge. All of this is packaged together to drive productivity and efficiency and provide innovative solutions to our middle market clients, which are historically underserved from a market perspective. Our approach allows us to move faster, reduce execution risk and build a secure enterprise-grade foundation while remaining focused on what we do best, serving clients and delivering high-quality outcomes. Over time, this model gives us a scalable and flexible platform that can continuously evolve as AI capabilities advance. While still early on, we are making strong progress, and we'll continue to update you as our capabilities develop and we drive results. Jerry, back to you. Jerry Grisko: Thanks, Peter, and congratulations on your new role. We believe that companies that successfully implement AI and automation will reap the benefit of significant efficiency gains with the savings following through to the bottom line, resulting in margin expansion. We expect that industry leaders will then take a portion of these savings and redeploy them to capture new revenue opportunities and accelerate organic revenue growth. By freeing our professionals from manual, time-intensive work, we expect a favorable mix shift towards higher-value, higher-margin advisory project-based services, the deployment of a new AI-enabled offerings where compliance and professional judgment matter most and improved win rates as our scale and technology investments differentiate CBIZ from smaller competitors. We believe that AI will be a turning point for our industry with several breakout firms that have the scale and ability to invest in and train professionals to use technology to better serve our clients. At the moment, we believe that we are at the forefront of investing in and using these new technologies. Overall, we believe we are building the right foundation to leverage AI in a disciplined and scalable way, and we're excited about the role we will play in creating long-term value for our clients and our business. Slide 8 details how offshoring continues to be a meaningful opportunity for CBIZ. We are on track to achieve our target of increasing offshore hours from approximately 6% in 2025 to 10% in 2026. Our partners in the Philippines and in India are delivering high-quality work, and our U.S. teams are better engaging our global teams, which gives us confidence that we can accelerate our initial investment time line to further expand our global capabilities. Over the next several years, with the benefit of our existing offshore delivery centers, we plan to expand hours completed outside the U.S. to more than 20%. We believe achieving these levels, which are consistent with comparable companies, will drive significant growth and margin opportunities over time. To wrap up my remarks, I want to comment on the current business climate and our outlook. As I shared last quarter, our assumptions regarding the level of project-based activity largely drive the range of our 2% to 5% organic revenue growth outlook. With that in mind, I'd like to highlight a few encouraging trends we've seen since our last call. First, the market environment for advisory work has continued to be favorable with notable wins across risk advisory, credit risk, valuation and private equity driving strong pipeline momentum. Second, we are seeing increased activity in our Capital Markets group with more clients evaluating transactions as market conditions improve. Third, we are very pleased to have a favorable pipeline of new prospects across both Financial Services and B&I, and we expect our pipeline to continue to grow. It is our expectation that revenue growth should continue to improve each quarter as we move through the year. Finally, as Brad will discuss in more detail, we are pleased with the strong free cash flow we are generating, and we'll continue to redeploy that into debt repayment and opportunistically repurchasing stock at highly accretive valuations to create value for our shareholders. Now I'd like to turn the call over to Brad for our financial review. Brad Lakhia: Thank you, Jerry, and hello, everyone. My comments begin on Slide 10. Our first quarter results represented a solid start to the year and were in line with our overall expectations. Consolidated revenue increased 1.3% year-over-year to $849 million, with organic revenue growth of 1%. Adjusted EBITDA increased $3 million year-over-year to $244 million, and adjusted EBITDA margin increased slightly by 10 basis points. Adjusted diluted earnings per share was $2.50 compared to $2.33 in the first quarter of last year, a 7% increase, reflecting the strength of our business model, synergies we are capturing through enhanced size and scale and a lower share count. Turning to Slide 11. We remain very pleased with our free cash flow performance, which drives and supports our capital allocation priorities. Free cash flow improved $64 million year-over-year, primarily due to $53 million of proceeds received from the final purchase price adjustment. This improvement balanced our typical peak seasonal working capital use and enabled us to fund approximately $63 million in share repurchases through the end of April. Net leverage decreased to approximately 3.4x compared to approximately 3.9x at the end of the first quarter of 2025. The improvement was primarily driven by growth in pro forma adjusted EBITDA, along with modestly lower debt levels. Our weighted average fully diluted share count, which includes all future shares to be issued as part of the acquisition, declined by 2.6 million shares year-over-year. April year-to-date, we have repurchased approximately 2 million shares through open market transactions and under our Right of First Refusal Program. Moving to Slide 12. Please note a presentation update for this quarter. Our Financial Services segment now includes our former National Practices segment, which is now part of our Technology Services business. All figures presented today reflect this change and are on a comparable year-over-year basis. Turning to performance. Financial Services had a solid start to the year with results in line with our expectations. Revenue increased 2.1%, driven by strength across core accounting, tax and advisory and resulted in reported organic growth of 1.8%. As Jerry noted, results continue to reflect elevated but transitory client attrition related to the integration. We estimate this reduced first quarter Financial Services revenue by approximately 200 basis points versus last year. Excluding this impact, first quarter organic growth would have been approximately 4%. Looking ahead, we expect organic growth to accelerate as we lap these attrition and integration-related productivity impacts in the first half and benefit from our growth initiatives in the second half. We remain encouraged by year-to-date new wins and a strong pipeline. And in addition, favorable market demand for our advisory businesses continues with clear visibility 60 to 90 days out. On pricing, we continue to expect mid-single-digit rate increases, which are embedded in our planning assumptions. Our long-term financial services growth algorithm is unchanged, targeting mid-single-digit organic revenue growth and continued adjusted EBITDA margin expansion driven by top line growth and operating efficiencies. Turning to our Benefits and Insurance results on Slide 13. First quarter revenue was $108 million, representing a 4% decrease year-over-year. Coming into the quarter, we expected revenue to be down in the first quarter due to tough comps on project-related work and contingent commissions. Contingent commission declines are primarily driven by client attrition that occurred in 2025. The remaining portion of the decline was primarily driven by the unexpected departure of a single producer and his team in February. This was an isolated departure, and we do not anticipate any similar departures. On the contrary, we expect our net number of producers to continue to increase. As a reminder, our producers are subject to certain restrictive covenants, which we have successfully enforced in the past and intend to do so with this departure. Within the recurring portion of the B&I business, which is consistent with the overall CBIZ split of recurring versus nonrecurring revenue, demand fundamentals were strong and our pipeline remains healthy. In addition, we continue to attract and develop new validated producers, and our industry-focused growth initiatives are gaining traction. The recurring portion of our business, when normalized for the producer departure, was up approximately 4% in the quarter. B&I adjusted EBITDA in the quarter was primarily impacted by the flow-through impact from the nonrecurring revenue items as well as planned incremental marketing investments to support our growth initiatives. We're confident in our ability to grow at historical growth rates for the remainder of the year with B&I supporting our full year overall growth expectations. Turning to our 2026 outlook on Slide 14. We continue to expect revenue to be between $2.8 billion and $2.9 billion, representing 2% to 5% year-over-year growth. Our adjusted EBITDA is effectively unchanged, but is updated to a range of $465 million to $475 million to incorporate the comparative stock-based compensation adjustment. We've increased our adjusted EPS to reflect a lower share count driven by our share repurchases through April and our stock-based compensation adjustment. Adjusted EPS is now expected to be in the range of $4 to $4.10 per share, which assumes a weighted average fully diluted share count of approximately 60.5 million. Free cash flow guidance is unchanged and expected to be in the range of $270 million to $290 million, representing a 60% conversion at the midpoint of our adjusted EBITDA outlook. While our improvement in the first quarter was largely driven by a onetime benefit, we see ample runway in the near term to drive a higher conversion through lower integration-related spend, lower interest and improved DSO. On Slide 15, our capital allocation priorities are unchanged and are supported by strong free cash flow generation. Our first priority remains funding organic growth and maintenance capital. Second, we remain committed to delevering, targeting a net leverage ratio of less than 2.5x in 2027. And at our current valuation, we view share repurchases as highly accretive and a compelling use of capital and therefore, intend to remain active and opportunistic. The strength and scale of our business model, combined with our meaningful free cash flow gives us confidence in our ability to invest in growth, return capital through repurchases and achieve our leverage targets over time. With that, I'll turn the call back to Jerry. Jerry Grisko: Thanks, Brad. Our top priority in 2026 remains reigniting our growth engine and leveraging our scale. We have clear strategic growth priorities and efficiency initiatives that we are confident will drive value creation for all of our clients and our shareholders. We believe we have the building blocks in place to deliver on our long-term growth algorithm. Now looking forward, we're focused on compounding value through multiple growth engines. We see tremendous opportunity to not only retain business and expand within existing clients, but also to land new clients who seek the multiservice capabilities we now offer. The work completed in 2025 has built a strong foundation for operating margin expansion as we increasingly deploy technology and leverage global resources. And importantly, we remain committed to our high-return capital allocation priorities that are supported by strong and consistent cash flow. Finally, I want to thank our CBIZ team for your continued hard work and our shareholders for your ongoing support. We look forward to further engagement with you all in the months ahead. And with that, operator, please let's open the call for Q&A. Operator: [Operator Instructions] Our first question today comes from Jeff Silber from BMO Capital Markets. Jeffrey Silber: Peter, let me start with you. I really appreciate you being on the call. Given the tools that are out there, do you think it's possible that some of your clients might be able to do some of the work that you're doing from an AI perspective on their own, perhaps unbundling some of the services and perhaps putting some pricing pressure on some of the services you're providing? Peter Scavuzzo: Thanks for the question. I don't think the tools are able to provide the expertise and knowledge we can offer in the profession. That's a requirement in the regulated environment that we operate in. They could certainly produce some anecdotal information, but the profession requires, especially in the regulated industry, for us to provide all that expertise and know-how that we've created or built over the last several decades, which are critical for delivery. So I don't see that as being a pressing concern. Jeffrey Silber: Okay. That's great. And you gave some examples, one in terms of using AI a bit more efficiently in terms of answering RFPs. Are there other examples maybe from an expense perspective that you might be able to use some of the tools to help improve margins? Peter Scavuzzo: I think it's too early for us to speak on all of the things we're working on right now. We just took this next phase moving from an assistive to an agentic AI strategy. I would expect as the quarters unfold in the future, we'll have more examples that we can provide similar to ones that you just brought up. Operator: Our next question comes from Thomas Wendler from Stephens Inc. Tom Wendler: Happy to be up to speed on the company finally. I'm going to start off with the Benefits and Insurance. You had a departure there this quarter. Can you maybe remind us of the pace of increase to the producer count there in 2026? Jerry Grisko: Yes. Tom, this is Jerry. We are planning on having about 15% increase year-over-year. It's a little lumpy from quarter-to-quarter, but we're off to a good start, and we have a very strong pipeline. So we're confident that we'll be able to achieve that 15% target for the full year. Tom Wendler: Perfect. And can you maybe speak to the cross-servicing opportunity there as you get some of those Benefits and Insurance hires fully up to speed? Jerry Grisko: Yes. It's a great question, Tom. It's actually often why producers join us, right? So when you think about our go-to-market through industry, and let's just say you're a construction client, that construction client not only needs the tax work that we do and the attest work that we provide and the valuation work, but they also need surety bonds. And they also need -- they have a workforce and they need payroll and they have to provide them with health insurance. So what's a very attractive kind of draw to outside producers into CBIZ is that they have all of those arrows in the quiver now and they could bring it to life through those industry groups. So it might be a combination of, like I said, P&C, might be a combination of payroll benefits provider or an employee benefits plan, a 401(k) tax audit, a whole host of services. Brad Lakhia: Yes. Tom, this is Brad. Thanks, first of all, for initiating coverage. We're certainly glad to have you on board. I appreciate you and the Stephens team. I would just add to what Jerry said, if you look back about a year ago, we formally stood up the 12 industry groups. And so as we think about the last 12 months and not only the work around integration, but bringing these industry teams together, forming them, we are seeing a lot of really, really positive traction across the 2 segments, across all the service lines within the segments. And so we're really encouraged about the pipeline of opportunities that those industry groups are starting to pull together and seeing some early wins as a result of that collaboration. Tom Wendler: Perfect. And maybe I'll sneak one more in here quick. You guys are pretty active in the repurchase this quarter. Can you maybe give us some color on how we should be thinking about the pace of repurchases moving forward? Jerry Grisko: Yes, Tom, thanks. Appreciate the question. First and foremost, I'll restate the priority -- capital allocation priorities that I highlighted earlier. I won't restate them because I think you heard them loud and clear. But we feel right now, our valuation is it's candidly what we feel is quite undervalued. So as we think about current valuation levels, the level of accretiveness of share repurchases is quite compelling, as I commented on. So we're going to remain active. We still have a lot of flexibility to do that, driven by our strong cash flow supported foundationally by the recurring nature of our business model, the stickiness that comes with our client relationships and the strong retention we have. So we just feel like fundamentally, our business can support being more opportunistic there. But I'd also just say, Tom, we're going to continue to be focused on those opportunities to strengthen free cash flow, the things I mentioned, DSOs. You'll see lower integration spend as we move into 2027 next year. That will help our conversion and also help us accelerate our delevering strategy as well. Operator: Our next question comes from Andrew Nicholas from William Blair. Andrew Nicholas: I want to start off on price. I think you mentioned in your prepared remarks that you continue to expect price increases in the mid-single-digit range. Any color you can add to kind of recent pricing conversations, whether you're supported by kind of the macro backdrop, whether there's any pushback from a technology perspective? I know last year, amidst a choppy macro, there's a little bit more pushback. So just kind of curious for color on how those pricing conversations have gone over the past couple of months. Jerry Grisko: Yes, Andrew. First of all, we're just coming out of busy season. So we're not having a lot of pricing conversations now. We would have had those kind of at the -- entering into the season and as we firm up our engagement letters. But I will tell you, we're highly confident in our mid-single-digit pricing that we've put into the plan for the year. That is consistent with the pricing that we've achieved kind of historically through CBIZ. It was a little higher maybe in '23, '24, which is part of the conversation in '25. But in '26, at the mid-single-digit level, quite comfortable there and are not hearing really pushback on that pricing. I will also say around technology and AI and those things, we really value-based price. Our clients expect that we're going to get efficiencies from a number of sources like offshoring, AI, automation, et cetera. So we're really not seeing pricing pressure there either really in a big way. Brad Lakhia: Yes. And the favorable market conditions within the more nonrecurring advisory pieces of our business, Andrew, have continued, and we have line of sight to that, as I commented here over the next couple of months at least. So we see that as fundamentally pretty strong in terms of pricing within those parts of our business. Andrew Nicholas: Great. And maybe just to kind of follow up on the macro piece. It sounds like the backdrop has continued to improve, understanding that, that's one of the major kind of deltas or factors driving you between the top and bottom end of your top line guide. Just kind of curious as where we sit today, are you a little bit more constructive on those things outside of your control than you were when you gave the initial guide? And just kind of broadly, if you could expand a bit on the comment that organic growth improved as you move through the quarter. Is that predominantly a macro comment? Or are you getting some integration improvements that's helping you on a month-to-month basis as well? Brad Lakhia: Yes, Jerry and I'll probably team up on this one, Andrew. There's several things maybe to unpack there. I would say in terms of the guide, just like we said a couple of months ago when we put it out, the top end was predicated more on continued favorable market conditions, those conditions that we saw in the second half of last year. We're encouraged by the fact that we see that -- we've seen those continue in the first quarter. We have line of sight here for at least the next few months. So I would say a quarter doesn't make a year. And certainly, as we get here to the second quarter, if the conditions remain the way they are as we look to the second half of the year, that would give us encouragement to the top side. Also, just as a reminder, we're -- the back half of the year, we'll be lapping some of the integration related -- start lapping some of the integration-related productivity impacts and some client impacts as well. So as you think about the back half growth rates relative to last year and some of the comparability there, I'd ask you to keep that in mind. And then there was a third part, I think, to your question, Andrew, I'm sorry, I could not... Andrew Nicholas: Yes. I talked about kind of the month-to-month, you said organic growth month-to-month... Brad Lakhia: Yes. So I think a few things there. One is January started off a little bit more challenging for us than maybe we expected, largely just because of the fact our teams were really working together for the first time in busy season. That includes them using technology during busy season for the first time that for many of them was either new or updated across the entire service line in some cases. So we had some just bumpiness in January. We feel like we fully overcame that and then potentially some as we progress through the quarter. But then if we just strip that aside and look at some of the real growth as we looked at February of this year versus last year, March of this year versus last year, we're starting to see the improvement, the real more core organic improvement as well. So encouraged by that and gives us some encouragement -- further encouragement around just meeting our overall guidance as well. Andrew Nicholas: Perfect. And if I could just squeeze in a quick modeling question. I think last quarter, you outlined kind of a rough mix between first half and second half on both revenue and EBITDA. I think it was 55-45 on revenue and 70-30 on EBITDA. Is that still a good way to think about how the year plays out or any kind of puts and takes a quarter later? Brad Lakhia: Yes. No, I still say that applies. There might be some very, very minor tweaks. But overall, that's still what we're expecting. Operator: Our next question comes from Faiza Alwy from Deutsche Bank. Faiza Alwy: I wanted to follow up on the macro question. So I know this is obviously the busy season for you. 1Q is your highest revenue quarter. And so I'm curious, as we think about the improvement in organic growth from flat to up 2% this quarter, like how much of that is driven by sort of improving market conditions versus maybe better execution on your end in part because it is a busy season. So I just wanted to get a bit more color around that, just given the different mix of business through the course of the year. Jerry Grisko: Yes. Faiza, it's Jerry. I would say not improved macro conditions, I would say continued favorable macro conditions, right? So as you indicated, this is really kind of a heavy -- we just -- we're exiting a heavy compliance portion of our seasonality of our business. We'll have another one kind of in the third quarter. But in between there, it's a lot of more project-based discretionary advisory type work, which takes the type of climate that we're in to support that work. We're very comfortable, very pleased actually with the demand that we saw for that type of work in Q1. We're very pleased with the pipeline. We have about a 60-, 90-day visibility into that pipeline. Very pleased with that pipeline that we're seeing now. And so long as those conditions hold kind of constant through the year, we're quite bullish on our ability to hit the guidance that we had laid out earlier. Brad Lakhia: Yes. And then I'd just add, Faiza, if you weren't covering us this time last year, but the front half of last year had some, I'd say, comparability things I'd just like to highlight. One is market conditions in the front half of last year were more challenging and uncertain, although we came into the year thinking they were going to be better. So there's a year-over-year comparability and that nonrecurring advisory part of our business is very, very strong. So we're encouraged by that. And then just sequentially, because I think you may have been referring to like Q4 versus Q1 growth rates. It does -- we are seeing improved productivity from the integration itself, which is very, very encouraging. We expect that to only get better as the year progresses. Faiza Alwy: Okay. Great. That all makes sense. And actually, I wanted to follow up on that sort of productivity question. Maybe you can just give us an update on the integration progress. I believe for 2026, you had a couple of remaining items like just the common practice management system and the real estate footprint. And I guess where I'm getting at is you talked about sort of some of the lapping, some of the churn in the business in part due to the acquisition. And so I guess just asking for the level of confidence that you really are lapping that and that there aren't any incremental things to consider there? Jerry Grisko: Yes, Faiza, what gives us comfort on the churn and the client churn is that we're not seeing the same conditions that we saw last year. So obviously, that churn related to predominantly 2 things. One was some conflicted clients. Of course, those are -- that was transitory, that's out of the system. And the second one was really kind of the profile of the client, the risk profile, profitability profile. We're not seeing those same kind of conditions exist now because we've already kind of addressed that in 2025. The other thing that gives us confidence is as we look at the strength of our pipeline kind of across the board, just the new clients that we've won, the size, the profile of those clients and the pipeline of new clients on both sides of the business, both Financial Services and Benefits and Insurance, all point very favorable for us. So really encouraged there. Brad Lakhia: Yes. Let me add. Last year, as we were coming out of busy season and we were looking to obviously kind of go out win clients, address the pipeline that we had. We made some things difficult on our team as we came together, particularly around the attest side of our business, just around our client onboarding processes. So we've addressed that. We addressed that mid- start of last year. That's going very, very well. Our onboarding process for our clients has notably improved. Our teams are giving us that feedback. And as Jerry emphasized, the win rates that we're seeing and the quality of the wins is really strong, backed by a really, really, really strong pipeline. So I just want to reemphasize what he just said. Operator: [Operator Instructions] Our next question comes from Chris Moore from CJS Securities. Christopher Moore: Yes. Maybe another one on AI and efficiencies and just perhaps looking at it a little bit differently. So rather than looking at it from can your clients duplicate what you're doing on the AI side, a lot of the conversations that I've been having with investors is just the fear from a competitive standpoint that your clients will be looking for price reductions because there will be alternatives out there driven by AI. So I guess really the question is, from a competitive standpoint within the middle market, generally, you're competing with other firms that don't have the capability to invest what you're investing in AI? Is that the thesis? Or I was just trying to understand a little bit better how you're thinking about that. Jerry Grisko: Yes, Chris, exactly as you just described it. When we think about how well we're positioned today with our size, our scale, the investments that we're making in this area, the number of resources that we put against it, the tools that we now have, we could never have made those investments 18 months ago. And so when I think about competing in the market against firms that are substantially smaller than us, I believe that there's a great opportunity to take market share for no reason other than, again, they will not be able to make those investments. They will not be able to upskill their workforce in the same way and really kind of create new products and solutions to bring to the market. We wouldn't have been able to do it without the size and scale, and I'm sure they won't either. That creates a great opportunity for us in 2 ways to take market share kind of from that next level of competitor in the market. And also, we've had a little bit of kind of comments around others coming down market. It also allows us to go upmarket. So we see great opportunity from a market share perspective, both upmarket and downmarket as a result of the investment we're making in our size and scale in this area. Peter? Peter Scavuzzo: Yes. Just one added comment. I feel that AI and automation is strengthening our position and not weakening, and it's going to increase our ability to be more competitive. Christopher Moore: I appreciate that. Maybe just on the project work. So Jerry, you went into that a little bit. But specifically with respect to margins, are there certain buckets that are meaningfully kind of higher margin contribution than others? Jerry Grisko: I would say, Chris, overall, our advisory work is, in fact, higher margin than the more compliance work. Now it's -- let me remind you of the attributes of the business, 72% recurring, right, essential services. So we like that feature, right? That's a feature that's very stable, allows us to perform kind of regardless of the business climate, et cetera. But we also like the other kind of 28% that tends to be more project for all the reasons we talk about in the environments like we're facing now, like we're having now favorable environment, it allows us to bring greater value to the client relationship. It is, in fact, higher margin. At times, it can be higher growth. So very favorable there, too. And again, overall higher margins, the mix of those margins vary by service. Operator: And with that, ladies and gentlemen, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Chris Sikora for any closing comments. Chris Sikora: Thank you for joining the call today. If you have any questions, please feel free to reach out to the CBIZ Investor Relations team. Thanks, and have a great rest of your day. Operator: The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Pulmonx First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Now it's my pleasure to hand the conference to Brian Johnston with Investor Relations. Please go ahead. Brian Johnston: Good afternoon, and thank you all for participating in today's call. Joining me from Pulmonx are Glen French, President and Chief Executive Officer; and Derrick Sung, Chief Operating Officer and Chief Financial Officer. Earlier today, Pulmonx issued a press release announcing its financial results for the quarter ended March 31, 2026. A copy of the press release is available on the Pulmonx website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends, commercial strategies and future financial performance, including long-term outlook and full year 2026 guidance, the timing and results of clinical trials, physician engagement, expense management, market opportunity, guidance for revenue, gross margin, operating expenses, cash usage, commercial expansion and product demand, adoption and pipeline development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed with the SEC on March 10, 2026. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations to these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the press release, which is posted on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, April 29, 2026. Pulmonx disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Glen. Glendon French: Thank you, Brian. Good afternoon, everyone, and welcome to our first quarter 2026 earnings call. Here with me is Derrick Sung, our Chief Operating Officer and Chief Financial Officer. Pulmonx delivered total worldwide revenue of $20.6 million in the first quarter of 2026. Since our last update, we are increasingly encouraged by continued operational momentum, and we remain confident in our ability to achieve our previously communicated revenue guidance of $90 million to $92 million for the full year 2026 with a return to global growth in the back half of this year. We are making good progress in our efforts to address internal operational and executional challenges that have led to recent underperformance, and we remain highly focused on 3 key priorities: First, reaccelerating U.S. sales growth; second, advancing our market-expanding clinical initiatives; and third, aligning our cost structure to drive profitability. Let me take each of these in turn, starting with our progress on driving U.S. sales growth. A foundational element of reaccelerating U.S. revenue growth is having the right people and the right culture in place, and I'm encouraged by our progress. We have filled with top talent all our sales leadership positions and substantially all our U.S. field sales roles. We are also seeing clear improvements in our commercial team culture. Further, sales turnover has stabilized over the last 6 months, a marked improvement from earlier in 2025. We expect turnover from here to be in line with industry standards. We believe this stabilization is a direct result of our efforts to increase leadership transparency and streamline selling priorities to focus on our highest impact activities. These priorities are grounded in our previously discussed near-to-far approach, specifically, one, setting up high-quality and efficient valve programs; two, engaging with COPD-oriented clinicians aligned with hospital systems offering Zephyr Valves; three, working together with our champions to educate service line administrators to ensure appropriate resourcing of their programs; and four, concentrating our direct-to-patient efforts on geographies with established treating centers that have the capacity to accommodate interested patients. We are encouraged by early feedback from the field force and from our customers on this approach, which reflects greater focus, stronger engagement and a more consistent execution model overall. As the newer members of our team become increasingly productive, we expect U.S. sales performance to improve over the course of the year with growth reacceleration in the back half of 2026. Turning to our second priority, growing our addressable market with our AeriSeal program remains a key focus. Our CONVERT II pivotal trial is progressing well, and we are especially encouraged by our pace of enrollment since bringing on new leadership within our clinical affairs organization. Today, we are highly confident in our ability to complete enrollment of this trial in 2027, bringing us one step closer to expanding our total addressable market by approximately 20% globally. We see meaningful potential for AeriSeal to serve as both a revenue driver and a market expander for Zephyr Valves over the medium to long term and look forward to providing updates on enrollment progress in the quarters ahead. On our third priority, we have made substantial progress in aligning our spending with our strategic priorities. As previously discussed, we executed a broad cost reduction initiative in the first quarter. With these actions, our underlying expense trajectory has significantly improved, and we remain on track to deliver meaningful operating leverage and lower cash burn while maintaining investments in our key growth drivers. In closing, we have greater conviction in our strategy to refine execution to further penetrate the substantial remaining market opportunity for our products. While 2026 is a year of execution and transition, we are confident in the progress we are making. We have a better understanding of what drove prior underperformance. We have taken meaningful steps to address those issues. And we have aligned the organization around initiatives that matter most. We remain confident in the underlying strength of the business, the size of the opportunity ahead of us and our ability to deliver sustainable, profitable growth over time. With that, I will turn the call over to Derrick to provide a more detailed review of our first quarter results. Derrick Sung: Thank you, Glen, and good afternoon, everyone. Total worldwide revenue in the first quarter of 2026 was $20.6 million, a 9% decrease from $22.5 million in the same period last year and a decrease of 12% on a constant currency basis. U.S. revenue in the first quarter was $13.3 million, a 7% decrease from $14.2 million during the same period of the prior year. We added 15 new U.S. treating centers during the quarter. International revenue in the first quarter of 2026 was $7.3 million, a 12% decrease from $8.3 million during the same period last year and a decrease of 21% on a constant currency basis. The decline in revenue was fully attributable to the absence of sales to our distributor in China. As a reminder, we are currently awaiting the renewal of our Chinese registration certificate, which we expect to come in the second half of 2026. Excluding China, we continue to see solid performance across all our other international markets, which grew 22% as compared to the same period last year and 9% on a constant currency basis. Gross margin for the first quarter of 2026 was 78% compared to 73% in the prior year period. The year-over-year increase was driven primarily by the lower mix of distributor sales in our international markets. Looking forward, we continue to expect gross margin to be approximately 75% for the full year of 2026, trending higher in the first half of the year and lower towards the second half of the year based on the mix of distributor sales. Total operating expenses for the first quarter of 2026 were $29 million, a 6% decrease from the same period last year. Noncash stock-based compensation expense was $3.8 million in the first quarter of 2026. Operating expenses in the first quarter included approximately $1.4 million of onetime costs related to the restructuring initiative that we executed at the start of the year. Excluding stock-based compensation expense and the restructuring costs, operating expenses in the first quarter of 2026 decreased 8% from the same period of the prior year. We remain committed to decreasing spend in 2026 through our cost alignment efforts while maintaining investments in our key growth initiatives. To that end, we continue to expect full year 2026 operating expenses to fall between $113 million and $115 million, inclusive of approximately $19 million of noncash stock-based compensation expense. R&D expenses for the first quarter of 2026 were $4.9 million compared to $4.8 million in the first quarter of 2025. Sales, general and administrative expenses for the first quarter of 2026 were $24.1 million compared to $26.1 million in the first quarter of 2025. Net loss for the first quarter of 2026 was $13.7 million or a loss of $0.33 per share as compared to a net loss of $14.4 million or a loss of $0.36 per share for the same period of the prior year. An average weighted share count of 41.9 million shares was used to determine loss per share for the first quarter of 2026. Adjusted EBITDA loss for the first quarter of 2026 was $8.5 million, consistent with the first quarter of 2025. Excluding onetime restructuring charges, adjusted EBITDA loss was $7 million and 18% favorable to the same period of the prior year. We ended March 31, 2026, with $61.6 million in cash, cash equivalents and marketable securities, a decrease of $8.2 million from December 31, 2025. In the first quarter of 2026, we took meaningful steps to strengthen our balance sheet and extend our cash runway. First, we executed a cost restructuring initiative that reduced our ongoing operating expenses by over 10%. Second, we closed on a $60 million credit facility with a 5-year interest-only structure, extending the maturity of our existing debt out to 2031 and providing us with access to an additional $20 million in undrawn capital subject to certain revenue milestones. With these measures in place, we expect to burn roughly $23 million of cash for the full year 2026, which would be a substantial decrease from the $32 million of cash that we burned in 2025. Finally, turning to our revenue outlook for 2026. We are reiterating our full year 2026 revenue guidance of $90 million to $92 million. Our guidance contemplates sequential quarterly improvement in our year-over-year revenue trend with a return to year-over-year growth in both our U.S. and international businesses in the back half of the year. In the U.S., we expect our recently filled sales positions and our refocused commercial strategy to gradually drive improving sales productivity as the year progresses. Internationally, revenue growth through the first half of 2026 will continue to be negatively impacted by the lack of sales to our distributor in China. That said, we expect continued strength throughout the year from our remaining international markets with year-over-year sales growth in our international business resuming in the second half of the year. To conclude, we entered 2026 with a clear plan, and our first quarter reflects early progress. We remain focused on the work ahead, ramping our sales organization, advancing our clinical programs and delivering the financial leverage we've committed to. We are confident in the strength of our business and our team's ability to execute. With that, I'd like to thank you for your attention, and we will now open the call up for questions. Operator: [Operator Instructions] Our first question comes from Rick Wise with Stifel. Frederick Wise: Let me start off, if I could. I mean, obviously, getting the sales team in place, it sounds like it's largely in place critical. And it seems like you're seeing some good, encouraging, early progress here. Maybe talk to us about in more detail some of the points you made about going deeper in the accounts and some of the specific strategies you're using to see sales growth accelerate. And maybe just as part of that, help us -- maybe it's a question for Derrick, but help us understand what's dialed into the guidance in terms of productivity with these new people and today and what you're hoping for and what we might see? Glendon French: Rick, so we are -- well, first and foremost, we have been focused on narrowing the items that we're asking our U.S. sales force to do. I think one of the key things that we realized coming into this period was that last year, there were just too many balls in the air. So we've narrowed that focus, and it's in the areas that we commented on in the comments that just preceded. And we have, as you had mentioned, substantially filled all of our open positions. Our average tenure, as you might imagine, is not what it was a year ago, but we are bringing people up to speed quite quickly. We are focusing our activity on setting up high-quality and efficient valve programs, and we're doing that by engaging COPD physicians around these centers to be driving patients into those centers. We are looking to gain administrative service line level, administrative support to ensure that we have the resources to execute on that plan. And we're seeing positive impact from those efforts even in these early stages. But I think that one of the bigger issues for us is just getting our sales force up and running and trained and moving forward. And we are right where we expected to be at this point. So we feel good about the fact that we're full and that people are coming up the learning curve, and we certainly have some very bright spots with regard to the execution of the strategy that we've outlined. Frederick Wise: That's great to hear. Derrick, for you, maybe just help us just think through with the first quarter in hand, the 2026 growth cadence and thinking about the reaffirmed '26 guidance range you laid out, it implies 60 basis points for the year. This is sort of a transition. Are you -- do you feel like consensus has got it right in terms of the current sequencing? Should we be more back weighting it? I think consensus for the second quarter is like $22-ish million. And if that's the case, what gives you the confidence that the company can have the step-up needed from 2Q to 3Q, et cetera, to get to the numbers you've laid out? Derrick Sung: Sure, Rick, and thanks for the question. As it relates to guidance, we do expect to demonstrate a sequential quarterly year-over-year improvement in growth as the year goes on. And as Glen said, we feel very good about the performance in Q1. We're already demonstrating that, particularly in the U.S. Our year-over-year growth rate, while down 7% in Q1, is a meaningful improvement from our growth rate of -- our decline of 11% in Q4. And so we already feel like we've bottomed in Q4 in terms of year-over-year growth rates. And both in the U.S. and internationally, we expect to see -- and I think this is reflected to your question currently in consensus, but we expect to see that sequential improvement every quarter flipping to positive year-over-year growth in the back half of the year and even exiting the year with double-digit growth, both U.S. and international. In the U.S., what gives us confidence and the driver for that sequential improvement in year-over-year growth is, in fact, the addition of the new folks that we have brought in and the time that it takes to -- for the new reps to get up to speed and get up to productivity. So that does take some time, typically 6 to 9 months or so is what we've seen on average for new hires to get up to speed. And so as the year progresses and also as our focused strategies take hold in the U.S., we do expect to see that improvement sequentially across the year. On the international side, it's really a question of comps, frankly. So the decline that you're seeing in our international sales in Q1 is primarily all attributable to timing of sales into China. We are currently awaiting registration of our -- or renewal of our registration certificate in China. So there's a lack of absence of sales into China in the first -- this year, and we expect -- and in the first half of this year, certainly in last year, in the first half of 2025, there are a number of large orders that were placed into China. To put it into context, China is still a relatively small portion of our total sales, less than 5% of our total sales. But the timing of those sales drove tough comps in the first half of this year. So that's what's driving the optical declining growth rate and will drive that optical declining growth rate for the first half of this year. Our underlying business, as we talked about, is still strong. We grew 22% year-over-year reported in Q1. We've seen double-digit growth in our underlying direct international businesses for the past couple of years. We expect that trend to continue. And so in the back half of this year, that underlying strength of our OUS business, continued strength, will be more representative in our growth rates, and that's what we expect to drive the step-up in growth in our international business. Operator: Our next question is from the line of John Young with Canaccord. John Young: Appreciate the progress update provided today. I want to go to the U.S. accounts, 15 added in Q1. I think that was higher than any number that was added last year according to our model. I would love to know, is this due to the refocused sales team ramping quickly? And maybe how should we think about just the pace of account additions for the remainder of the U.S. for the year? And if I could ask my second question, too, related to the sales force, just what metrics are you guys focused on in monitoring the success of the revamped sales force? Glendon French: So 15 is, as you noted, a strong number relative to what we saw on a quarterly basis across last year. It's difficult to say whether that's anywhere close to the new normal. I think we're going to stand with the 10 per quarter expectation, which we laid out. But I'll let Derrick talk about that guidance if he wishes to. But that feels like the right sort of number. Some of these new accounts, I think, were lining up, perhaps, to happen late last year, maybe fell into this quarter. I think time will tell as to whether the mean is above 10, but I would keep that. With regard to metrics, at this point, we feel really good about the plan. We are focused on moving things in a fairly simplified basic way. And we're just trying to bring our people up to speed as quickly as we possibly can. We have some territories that are -- that did very, very well last year. They continue to be doing well this year, continuing to take advantage of the momentum that they established. And we see that in an array of different indicators. We've talked before about the importance of StratX and seeing that sort of coming through as the leading indicator for our performance, and we feel good about where we sit at this point. Operator: [Operator Instructions] It comes from Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: I know this has come up on, I think it was the previous call as well, but wondering if you can speak to kind of bigger picture growth aspirations. I know you're only a few quarters into this. And I think last time, the context provided was substantially better, which obviously aligns with the cadence of revenue growth throughout 2026. But now that you've had a little bit more time with the organization, are you comfortable providing any type of -- we expect to be a double-digit grower commentary or something similar in nature to that as you think about a longer-term business? Glendon French: Yes, Frank, you want to take that, Derrick? I mean, I'll go ahead. I'll start. You can add to it, Derrick, if you wish. We fully expect -- I fully -- I will speak for myself. I certainly expect us to be a double-digit grower. I think everybody on the team expects us to be a double-digit grower. I think we're trying to figure out when you look about -- you look across the period where we weren't meeting that expectation or we are moving sort of rapidly in the direction of not meeting that expectation was particularly in the United States, we're trying to get to the bottom of that. We think we were doing too many things, and we think we lost too many sales reps, and we think we can get back into a double-digit range. Where exactly in that range is still to be determined. I believe, obviously, outside the United States, we've thrown up a couple of 20% in a row roughly in terms of our growth in 2025 over 2024 and 2024 over 2023. And absent the matters that Derrick outlined, we're in that same sort of neighborhood in the first quarter as well in some of our key markets. All of our major European markets are double-digit growers in the first quarter. We don't report that, but that's the case. So we feel good about that. They're executing on a plan that looks very much like the U.S. plan, which is no coincidence. And we've got TAM expanders on the horizon that we're working very, very hard to push forward. We are excited about AeriSeal and look forward to talking more about that as we move deeper into the year. Derrick, did you want to add something to that? Derrick Sung: Yes, I would simply add that also contemplated in our guidance even for 2025, as I just mentioned, is that we will exit the year growing double digits in both our international and U.S. markets. So I don't want to get ahead of ourselves and provide any more guidance than that beyond '25, but -- or '26, I'm sorry, in 2026, I meant to say, our guidance contemplates double-digit growth as we exit the year. And I don't want to provide any more guidance beyond '26, but I just did want to add that additional commentary. Thanks, Frank. Frank Takkinen: Perfect. Maybe just for my follow-up on the Chinese registration renewal. Is there a reliance on that to hit the second half expectations for OUS growth? And then related to that, what needs to happen for that renewal? Is this more administrative in nature? Is there some risk to this renewal maybe not occurring on time with your guided time lines? Derrick Sung: Yes. Thanks, Frank, for that question. I'll take that. This is Derrick. So we do continue to expect the renewal of our registration certificate to come in the back half of this year. It is, I believe, an administrative process that we're simply working through. So it will simply take some time. But at this point, we don't have any reason to believe that we won't get that registration certificate renewed in the back half of the year. Now when we do get that -- when that renewal comes, I would say that our expectation is that the resumption of sales into China will be very gradual. There'll be -- accounts will need to be restarted, et cetera. So we're not expecting a bolus of sales to come in. It will take some time. And to that end, our current guidance doesn't contemplate a significant contribution from China even in our back half. However, as I mentioned, we will be anniversarying those tough comps from our China sales in the first half of 2025. And so I think that will -- we'll expect to flip back to positive international growth. And as Glen and I just mentioned, you'll see our international growth rates just really be much more reflective of the strong underlying growth in our direct international businesses that we're currently experiencing. Operator: [Operator Instructions] And it comes from Joseph Downing with PSC. Joseph Downing: I guess as you kind of reprioritize the existing base of treating physicians, can you just help to quantify same-store productivity, say, in your top quartile accounts versus, say, the bottom couple of quartiles? And in this, I guess, how much of the 2026 U.S. revenue plan depends on what's in the bottom 2 quartiles versus this top 25%? Glendon French: Yes. We -- I would say that we are focused on -- to the extent that we have some -- we've got a mix of things going on here, Joe. We've got uncovered territories that are now covered. So we need to reestablish those connections and get those moving. We tend to have a bias toward the accounts that are performing best and trying to move them along and take full advantage of the near-to-far strategy in relation to them, make sure that they're leveraging all the best practices that we've talked about in prior calls. And so I would say the top quartile would be more of the area of focus as opposed to the lowest quartile. We are, however, bringing in some number of new accounts that -- and where our standards for bringing our accounts online have changed quite a bit. We really raised the bar and expect those accounts to invest pretty heavily in terms of their time and efforts to get up and running and have patients that are ready to go. So there's far fewer people who are recently trained who are not doing procedures. So we actually are quite optimistic about the newer accounts that are coming online and are doing procedures right out of the blocks. So those probably -- those would be what I would consider outside the first -- or the first quartile or the top quartile or lower quartile, but rather just new accounts on top of that. But first and foremost, we're getting our team up and running -- back up and running and just trying to support the strongest of our accounts most predominantly and some of our newer accounts will also make some good contributions. Joseph Downing: And then just for my follow-up, I want to touch on LungTraX real quick. I know it's kind of being refocused or deemphasized a little bit, whichever way you prefer to frame it. But I'm just curious like what percent of U.S. accounts right now, I think it's the larger ones you said are still -- it's more effectively used in those kind of accounts. What percent of the accounts are using it? And then kind of what, like, ROI threshold would lead you to kind of selectively expand it again versus keeping it kind of at this narrow scope? Glendon French: So we pulled back our -- we were spending what in retrospect looked like a disproportionate amount of our time pursuing Detect, what we call LungTraX Detect. And so we -- I think we brought that to a level of time and attention that it deserves. We learned a great deal during the period of time where we were heavily promoting Detect in that it really fits into a specific subset of our accounts. We did some pilots across the last year or so, and we -- and it revealed that the technology works well in certain types of accounts. And so we're tending to target Detect. I wouldn't call it a deemphasis at all. We're just -- I think it's just a more focused approach to Detect in situations where we have determined that there could be sort of a great return for the hospital that invests in Detect in terms of patient flow and so forth. So as far as what percent of accounts, I don't think we report that. But everything you've heard before, which is in certain accounts, it can be great. We definitely have data that suggests that. It takes longer to get set up than we, I think, anticipated last year that it would. And those that are up and running, it took a little time to get them up and running, but there seems to be -- all indications are that when that technology is up and running and being used, it's a pretty solid contributor to our efforts in that account. Operator: Thank you. And this will conclude the Q&A session, and I will pass it back to Glen French for closing remarks. Glendon French: Thank you very much, operator. In summary, we have a clear plan, and our first quarter reflects early progress executing this plan. We remain focused on the work ahead, specifically ramping U.S. sales, advancing our clinical programs and delivering the financial leverage to which we have committed. We are right where we expected to be at this point. We are confident in our business and in our team's ability to continue to execute. I want to thank you very much to -- I'd like to express a thank you to our employees for your focused and considerable efforts and thank everyone on this call today for your time and your ongoing interest in Pulmonx. Have a good afternoon. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Hello, and welcome to Alkami's first quarter 2026 financial results conference call. My name is John, and I will be your operator for today's call. [Operator Instructions] I would now like to turn the conference call over to Steve Calk. Steve, you may begin. Steve Calk: Thank you, John. With me on today's call are Alex Shootman, Chief Executive Officer; and Cassandra Hudson, Chief Financial Officer. During today's call, we may make forward-looking statements about guidance and other matters regarding our future performance. These statements are based on management's current views and expectations and are subject to various risks and uncertainties. Our actual results may be materially different. For a summary of risk factors associated with our forward-looking statements, please refer to today's press release and the sections in our latest 10-K entitled Risk Factors and Forward-looking Statements. Statements made during the call are being made as of today. We undertake no obligation to update or revise these statements. Unless otherwise stated, financial measures discussed in this call will be on a non-GAAP basis. We believe these measures are useful to investors in understanding our financial results. A reconciliation of the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC. Now I'd like to turn the call over to Alex. Alex Shootman: Good afternoon, and thank you for joining us. We delivered a strong first quarter, achieving 29% revenue growth and over $22 million in adjusted EBITDA, both above expectations. We closed 6 new digital banking relationships, including 2 banks and 3 Digital Sales & Service Platform clients. In addition, we introduced our first integrated capabilities for the Digital Sales & Service Platform and a new product called Alkami Engage. Our first quarter performance continues to demonstrate Alkami has the potential for long-term durable growth and increased operating leverage. Alkami operates an attractive and predictable business model in a resilient, large and growing market. Our target market is over 2,000 regional banks and credit unions that rely on legacy infrastructure incapable of providing a modern digital experience. A portion of growth comes from displacing these systems. Given industry-standard 5- to 7-year contracts combined with stable win rates, we maintain good visibility into the long-term ARR growth that comes from new logo additions. Once on the Alkami platform, our investments in service and reliability, the mission-critical nature of our platform and high switching cost drive gross retention rates 8 to 10 points above typical SaaS companies. High retention rates, combined with clients adding users and adopting more of the platform, results in reliable long-term client growth. Every 5 years, our clients grow by more than 100% of their original platform investment, with our 2021 through 2023 cohorts spending above 2x their landing ARR and clients 2016 and older spending close to 4x their landing ARR. Additive to the land retain and growth algorithm for Alkami is our entry into the bank market. Four years ago, we launched an effort to use commercial banking capabilities built for large, complex credit unions to pursue market leadership serving community banks. At that time, banks represented 2% of our live online banking clients, and today banks are at 13%. Over this four-year period, we tripled revenue, expanded gross margin by over 700 basis points, and improved operating leverage by more than 2,000 basis points. Through different macroeconomic distractions and volatility in the financial services sector, Alkami has continued to deliver by adding new clients, keeping our clients, expanding our product offering and increasing margins. Client decision cycles create a unique characteristic for Alkami. Our online banking platform is in a replacement market with prospects on legacy platforms under long-term contracts. There are usually fewer than 300 potential clients in our target market that renew contracts in any given year. Within this group, a portion choose not to convert, given the effort and perceived risk. Among those who make a change, we consistently win 30 to 40 new clients per year. For example, the 6 new logos in Q1 is slightly above our historical Q1 average. New logo growth is consistent and will not spike unless customers choose to exit contracts early or see enough value to overcome conversion resistance. This consistency is a strength, but it also means the next phase of our growth will be driven by expanding the value we deliver within each financial institution. Increasing the value of the platform not only drives expansion, it also improves conversion, and this is why the MANTL acquisition was so strategic. The MANTL acquisition adds platform functionality to encourage conversions and expands our install base. Standalone MANTL new logo creation has been outstanding, with 61 clients added since the beginning of 2025. These are now Alkami clients we can target to cross-sell online banking. In addition to the new logos, at our recent customer conference we demonstrated differentiated capabilities that materially improve how financial institutions acquire and engage customers. Two weeks ago, we concluded Co:lab, our annual client conference. The conference continues to set records with over 600 customer attendees, of which 83 were prospects. Since the MANTL acquisition, we've been building deep technical connections between our online banking and origination platforms to deliver an integrated front end that enables our market to compete with mega banks and neo banks like Chase and Chime. We built this capability with seven clients as design partners, six of which have the code in production. We demonstrated live product with real results at Co:lab. In a side-by-side comparison against 2 leading mega banks and a digital-first fintech, we showed a complete customer journey from account opening through digital engagement. Using a live environment and real workflows, Alkami's Digital Sales & Service Platform, or DSSP, completed that experience in under 2 minutes compared to an industry benchmark of 5 minutes and to 3 contestants in the 3- to 4-minute range. DSSP has continued to perform for Alkami. Since the beginning of 2025, we've gone from 11 to 48 clients who have all 3 products that make up DSSP. Over half of all new logos since Q2 of last year have been DSSP. DSSP new logos see a 30% uplift in ARR versus our historic online banking offering. Our intent with DSSP is to increase the number of clients willing to convert, expanding our opportunity within the existing market constraints. We have not reflected this in our long-term model, and our outlook under current new logo assumptions continues to support attractive long-term growth for Alkami. Last quarter, we introduced a 2030 framework, and that model assumes 40% of ARR growth coming from new logo additions at numbers consistent with our historical average and 60% of ARR growth from expanding within our client base. Alkami is evolving from a vertical application in a replacement market to a vertical platform provider that drives growth for bank and credit unions, and this transaction is occurring because the market demands it. Historically, community banking technology was defined by core providers that controlled the system of record. Everything else, digital banking, onboarding, payments, was built around that core. For years, that architecture defined how financial institutions operated. That reality has changed. Digital has become the primary way customers experience their financial institutions. Our clients need technology not just to process transactions, but to sell and service financial products in a digital-first world. This is the role of the Digital Sales & Service Platform, a platform that provides a long tail of growth opportunities for Alkami and positions us to become the new primary technology partner for community financial institutions. In this market, leadership will not be defined by the number of institutions served, but by generating the most economic value from each financial institution on the platform. The investments we've made to integrate our acquisitions creates the functional capabilities of Alkami's DSSP that are winning in the market. However, the platform investments we've made create compounding value for Alkami and our clients. Alkami is a single instance, multi-tenant, industry specialized platform, and this gives us the opportunity to provide AI capabilities our clients are requesting. For details on Alkami's AI perspective, please review my prepared comments from our last earnings call. In the February 25 call, I spent over 50% of my time on AI and Alkami. Since that earnings call, I've had 39 face-to-face customer meetings, and AI was discussed in every one of them. Not one client mentioned building their own digital banking or origination platform, but every client wanted to talk about AI as an enabler for personalization, underwriting, fraud management, customer service, analytics, offer management, and more. With over 23 million account holders on our platform, we have a unique foundation to apply AI capabilities at scale. At our customer conference, we demonstrated working AI prototypes built on this platform. These included capabilities that allow clients to tailor Alkami to their needs through prompt-driven development, use natural language to query platform data and better understand their account holders and operations, and deploy co-pilots that support both banker workflows and account holder experiences. These capabilities are powered by our platform, including our data infrastructure and telemetry from Alkami Engage, a new product which captures real-time user interaction data across the customer journey. Importantly, these are not conceptual demonstrations. We're actively working with a small group of clients to test these capabilities and determine the appropriate commercial models. Given our platform foundation, bringing these capabilities to market is less a technical challenge and more a question of how to package and price them effectively for our clients. In closing, we are pleased with the integrated product capabilities we built into Alkami's Digital Sales & Service Platform. The market reaction has been positive. DSSP provides a foundation we can continue to build upon to differentiate Alkami. We are evolving Alkami from a system of record to a system of action, delivering measurable outcomes for our clients and increasing the value we create within each financial institution relationship. I'm proud of our business results this quarter and grateful to more than 1,200 Alkamists who continue to get it done and do it right. I'll now hand the call to Cassandra to discuss our financial results. Cassandra Hudson: Thank you, Alex. Our first quarter results exceeded our expectations, highlighted by strong adjusted EBITDA performance that underscores the durability of our model and the progress we're making in driving operating leverage. We continue to execute with discipline, delivering consistent growth while expanding profitability and investing strategically to support long-term value creation. Let me start with our updated outlook. For the second quarter of 2026, we expect revenue of $128 million to $129 million, representing growth of 14.2% to 15.1%. As a reminder, our second quarter revenue outlook includes the impact of a sizable termination fee recognized in the second quarter of 2025, which represents an approximate 3 percentage point headwind to year-over-year growth in the quarter. In the second quarter, we also expect adjusted EBITDA of $17.9 million to $18.7 million or 14.3% margin at the midpoint. This outlook incorporates the impact of our annual user conference, which is reflected in our normal seasonal expense pattern. For the full year, we expect revenue of $527.1 million to $530.9 million, representing growth of 18.8% to 19.7% and adjusted EBITDA of $94.9 million to $97.9 million or 18.2% margin at the midpoint, reflecting continued operating leverage as we scale the business. Our revenue outlook reflects several underlying assumptions consistent with what we shared last quarter. We expect continued cross-sell momentum across the platform, along with a steady cadence of ARR launches throughout the year. We also expect high single-digit ARPU growth, reflecting strong expansion within the base, partially offset by a modest moderation in user growth among existing clients. We expect a meaningful decline in termination fee revenue in 2026, which will reduce reported growth by a few percentage points. This headwind is partially offset by the contribution from MANTL. We expect growth to moderately accelerate in the third quarter due to a more favorable year-over-year comparison. Turning to profitability, we expect a full year non-GAAP gross margin of approximately 65%. In the back half of 2026, we expect adjusted EBITDA margin to be north of 19%, weighted toward the fourth quarter and in line with our typical seasonal pattern. Overall, we expect approximately 500 basis points of margin expansion for the year, driven by operating leverage in the model, efficiencies from our offshore operations, and continued cost discipline while also funding targeted investments in AI that we believe will drive product innovation and long-term efficiency. Lastly, we expect stock-based compensation to be approximately 14% of revenue for the year. As we discussed last quarter, our long-term model framework reflects what we believe are achievable targets based on the strength of our business today and the visibility provided by our long-term contracts. We continue to expect to achieve Rule of 45 by 2030. From a growth perspective, we expect a gradual increase in banks new logo wins supported by our Digital Sales & Service Platform alongside continued leadership in credit unions, reflecting the replacement-driven nature of our market. We also expect consistent execution in our add-on sales efforts and volume growth from existing customers together driving ARPU expansion and contributing significantly to our long-term growth. As well as total dollar churn of approximately 2% to 3% annually, with about half associated with our digital banking clients. Importantly, our long-term outlook does not assume incremental M&A. From a profitability standpoint, we expect non-GAAP gross margin approaching 70% over time as we improve execution on implementations and drive support efficiencies. Approximately 300 basis points of annual adjusted EBITDA margin expansion driven by scale and continued operational improvements, particularly across R&D and G&A, and stock-based compensation declining to approximately 10% of revenue. Turning to first quarter performance, revenue was $126.1 million, up 29% year-over-year. Subscription revenue grew 30% and represented 96% of our total revenue. As a reminder, we closed the MANTL acquisition on March 17, 2025. This timing contributed approximately 14 percentage points of year-over-year growth to Q1 2026. Growth rates will become fully comparable beginning in the second quarter. We increased ARR by 22% and exited the quarter at $494 million. Importantly, we have approximately $71 million of ARR in backlog pending implementation, representing 40 new clients and roughly 1.4 million digital users. We expect the majority of this backlog to go live over the next 12 months. As Alex highlighted, we continue to see strong momentum with our Digital Sales & Service Platform. From a financial perspective, DSSP is important because it is driving higher quality revenue across several dimensions. Clients adopting multiple components of the platform tend to have higher initial contract values, longer contract durations, and stronger retention profiles over time. This is already contributing to ARPU expansion and ARR we're seeing across the business. Additionally, as we integrate MANTL and expand our platform capabilities, we are increasing our ability to land with a broader set of products and expand within the client over time. This reinforces our land and expand model and supports the long-term durability of our revenue. We exited the quarter with 307 clients and 23 million registered users, an increase of 2.5 million users or 12% year-over-year. Over the past 12 months, we implemented 35 clients supporting 1.2 million digital users, and existing clients increased their digital adoption by 1.5 million users. Our contracts provide strong visibility into attrition, typically several quarters in advance. Over the past three years, we have churned less than 1% of our digital banking ARR annually. For 2026, we currently expect to churn four digital banking clients, which again represents less than 1% of ARR. This speaks to the mission-critical nature of our platform and the strength of our long-term client relationships. Revenue per user increased to $21.46, up 9% year-over-year, driven primarily by MANTL's contribution, strong cross-sell execution, and increased user adoption among existing clients. Remaining performance obligations were approximately $1.7 billion or 3.5x live ARR, providing strong visibility into long-term revenue. First quarter non-GAAP gross margin was 64.4%, roughly flat year-over-year, driven by the higher database technology costs we discussed last quarter. We view these costs as temporary and expect them to decline by the end of 2026. First quarter operating expenses were $59.4 million or 47.1% of revenue, representing 530 basis points of year-over-year improvement realized across all areas of operating expense. Adjusted EBITDA was $22.3 million above the high end of our expectations, with an Adjusted EBITDA margin of 17.7% and expansion of approximately 540 basis points year-over-year. We ended the quarter with $77.6 million in cash and marketable securities. In the first quarter, our operating cash flow improved 15% year-over-year. Free cash flow was consistent with prior year, and we repaid the remaining $15 million of our revolving loan. Finally, today we announced that the board of directors has approved our inaugural stock repurchase program of up to $100 million. This is an important milestone that reflects our confidence in both our long-term growth and our robust cash flow generation capabilities. We continue to believe in a disciplined and balanced approach to capital allocation that enables us to grow through additional acquisitions, delever the balance sheet through debt reduction, and opportunistically repurchase shares to deliver increased value to our shareholders. In closing, our results this quarter reflect continued execution against our strategic priorities and the strength of our platform. We are scaling with discipline, balancing growth and profitability while investing in the capabilities that we believe will further differentiate Alkami over time. The visibility in our model and continued momentum across the business position us to drive sustained long-term value. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Cristopher Kennedy from William Blair. Your line is now open. Cristopher Kennedy: Cassandra, you have the grow over in the second quarter, but you also talked about accelerating growth in third quarter and fourth quarter. Can you just provide a little bit more clarity as to the confidence in accelerating growth? Cassandra Hudson: Sure. Yes just to clarify, Cristopher, that growth acceleration will be in the third quarter in particular, and is really driven by a more favorable year-over-year comparison, just some timing dynamics that we experienced in 2025. As it relates to the headwind in the second quarter, that's really timing of termination fee revenue. You know, we do have that headwind in every quarter this year, but it is a little bit more pronounced in the second quarter in particular, which is why I called it out on the call. Cristopher Kennedy: Okay. Got it. Understood. Alex, you mentioned it, but any additional takeaways or observations from Co:lab when you were talking to your customers and kind of how they're viewing the current environment and AI? Thanks for taking the questions. Alex Shootman: First of all, Co:lab was an amazing event. You know, once again, we set record in terms of number of attendees. It was great to see 83 prospects, a good balance between credit union prospects and bank prospects. A couple comments. There was no let up in digital transformation. You know, this is a pretty big market. As I mentioned, over 2,000 credit union and bank customers that all have legacy technology. They're all smart. They all understand what they need to do. They are a little bit captive to these long-term contract dynamics that we talked about. Just continued demand in terms of demand for digital transformation. What was really exciting to see. For our market, and for those of you that don't bank with a regional bank or credit union, you may not really be able to appreciate this. For our market, what's been critical for them to compete with these large money center banks and fintechs is what we would call an integrated front end, a digital front door, whatever you might want to call it. It is the integration of digital banking and a deposit origination platform and a loan origination platform to be able to attract a customer, convert them into a customer, have them in digital banking, have them with a digital with additional products and all of that seamless, and so that the customer or prospect doesn't even know that they're in multiple different products. That has been the benchmark that these institutions have looked for, and that's what we showed from stage. I think what I was most pleased with is the audience reaction to real technology that we showed that will make a real difference for this market. Operator: Your next question comes from the line of Aaron Kimson from Citizens. Please go ahead. Aaron Kimson: Alex, you spoke again today in your prepared remarks about more banks being open to separating online banking from their core provider. Can you talk about what's driving that willingness, whether it's increased acceptance that the standalone digital providers like Alkami have the superior solution for online banking, the maturity of your solution with MANTL, or a change in the ease of integrating a standalone digital provider solution into the core, or maybe something else I'm missing? Thanks. Alex Shootman: Thanks. Once again, let's talk about the difference between the bank market and the credit union market. In a previous earnings call, I've got the specific numbers, so I'm going to give you the round numbers. I know we've got the specific numbers. In the credit union market, it's probably in the mid-40%, 45% of the customers that have an online banking application that is supplied to them from their core provider. In the bank market, it's been north of 75%. That's the part that we're beginning to see unwind. I actually talked to a prospect at Co:lab who is going to pay off four years of their remaining digital banking contract to move to a different digital banking platform from their from their core. I asked them, I said, "This is one of the first times that I've ever heard this. Why are you doing this?" They said, "In our market, we have to compete with Wells Fargo and KeyBank, and we're at the point where our digital capabilities are insufficient, and if we don't make this change, it's going to impact the business of the bank." You're starting to see that demand push create these conversions. The flip side of that is the more customers that see somebody come onto a platform like Alkami successfully go through the conversion, successfully bring their customers on board, then they're willing to make the change. It's ultimately a decision of value versus risk. That's why the integration of the data marketing platform and the onboarding platform and digital banking is so critical because when a bank sees the outcome of speed to bringing on a new customer, reduced cost to bringing on a new customer, increased speed to cross-sell, they start to have the conviction to make the change. Aaron Kimson: That's really helpful. Thank you. The second one is a little bit more direct. You've incurred $2.8 million in shareholder matters related expense over the prior 2 quarters with $2.2 million in 1Q. Can you provide any color on the nature of these expenses and if you anticipate them to be ongoing or settled for the near term after you added 2 new board members on March 31st? Thanks. Cassandra Hudson: Sure. Thanks for the question. You know, those costs are really defense related in nature. You know, we do expect to incur additional costs related to this item. You know, obviously it's difficult for us to predict how much they will be, though I don't think that we're going to be scaling at $2.8 million every quarter from here on out. You know, I think so we saw a little bit of a higher cost in Q1, and I would expect those to moderate from here on out. Operator: Your next question comes from the line of Jacob Stephan from Lake Street Capital Markets. Your line is now open. Jacob Stephan: Maybe just first kind of a note-keeping one here. Maybe give a deeper dive into the bank versus credit unions in the backlog. Cassandra Hudson: Let's see. I guess banks versus credit unions, it's pretty, I would say, evenly split, in terms of their size. You know, right now we have 13 banks in the backlog, and the rest would be credit unions. Jacob Stephan: Okay. Second one for me. I know you've kind of given some in-depth detail on user adds in the past. I'm wondering if you could kind of help us think through the adds in the last quarter and maybe over the last several quarters in terms of existing clients, how many of those were newly implemented customers, and just that kind of trend. Cassandra Hudson: I mean, in the past, you can kind of think of the trend as roughly half and half new versus existing. In Q1 in particular, just kind of flipping back to my script. We implemented 1.2 million digital users over the past 12 months and then 1.5 million related to existing clients. A little bit more weighted to existing clients over the past year here. Operator: Your next question comes from the line of Jeff Van Rhee from Craig-Hallum Capital Group. Please go ahead. Daniel Hibshman: Hey, this is Daniel on for Jeff Van Rhee. Just on MANTL and the pace of logo adds there, the 14 this quarter, maybe if you would want to compare that to previous quarters or expectations, just how MANTL is tracking relative to expectations. Cassandra Hudson: I mean, I think they continue to track very well, right? You know, with all of our products there is a bit of a cyclical nature to the sales cycle. You know, for us, Q1 tends to be a bit of a lighter quarter and Q4 tends to be our strongest quarter. You know, I think we continued to see really good performance, in Q1 for MANTL coming off of a really record 2025. Alex Shootman: I would just point back to the reason why we're pleased is you go back to beginning of 2025 and our DSSP clients, so that's clients that have acquired MANTL have gone from 11 to 48. And in the same period of time, standalone MANTL new logo clients of 61. You know, you figure that's a 5-quarter period of time. You know, I'm the ever-optimistic CEO, but I consider that to be outstanding performance to to make an acquisition like that. Just take a step back. The acquisition closed in Q1, right? We needed to integrate the two companies, and in that period of time delivered that kind of both new logo and cross-sell performance at the same time as integrating the technologies together into one experience that unites the front end of digital banking and origination. I'm frankly just super proud of the team for what they've done. Daniel Hibshman: Yes. Great. Alex, maybe if you could just talk a little bit. I liked your line about Alkami evolving from being a system of record to a system of action. If you could just expand a little bit more on what that means to you and in particular any examples you'd have of that. Alex Shootman: Yes. You know, what our customers are asking for is, historically the digital part of the financial institution was somewhat passive, right? It's relying on the account holder to know what they want to do and then come in and take action. As we all understand how systems have changed and how we interact with systems, now what our institutions are asking for is, "You have all of this data. You've got transactional data, you've got telemetry data, you've got core transactional data. I want you to start predicting things that we want the account holder to do, and then I want you to notify the account holder and ask them to do that. That's what I mean in terms of making a shift from a system of record to using the data and the analytics capabilities that we have and the predictive capabilities that we have. Now I want you to tell me to take an action or tell our account holders to take an action. Right? I notice that I know that. To give you an example: "I know that at this time of the month, every single month, your balance starts to drop, so I'm going to reach out to you and recommend an action for you to take so that you don't get into a bad financial situation." That's the kind of thing that I'm talking about when I say move from a system of record to a system of action. Operator: Your next question comes from the line of Andrew Schmidt from KeyBanc Capital Markets. Your line is now open. Andrew Schmidt: The sales force, the shift to a separate bank and credit union, sales forces. How has that evolved? Has that been effective in terms of building the pipeline, typically on the bank side? I hear you on the backlog. I'm just curious how that has progressed. Thanks so much. Alex Shootman: Yes. Thanks for the question. Our pipeline remains balanced. It's pretty evenly split between banks and credit unions. For us, the transition has been effective. It allows us more specialization in the bank market, and we remain happy that we did it. Andrew Schmidt: Got it. That's helpful. You know, obviously everyone is thinking through sort of more efficient organizational structure when we think about AI development, et cetera. I know you're probably pretty heavy users of this internally, but is there any like structural changes or process changes that need to be made as a result of just increases in model productivity, things like that to consider? Is it more kind of just product velocity output increasing on that side of things? Thank you. Alex Shootman: I mean, you could imagine that we're using every single model provider in all parts of the organization right now. We're not yet at the point where we're ready to come to our investors and say, "This is the benchmark productivity that we're going to run after." I think the biggest thing that we're seeing in terms of change is the front end of the software development life cycle. If you think about DevOps did a lot for us in the back end of the software development life cycle, in terms of how we would test code, how we would release code, how we would support code. That's where a lot of that transformation occurred. A lot of the transformation that we're seeing right now is just the speed in the front end of the software development life cycle and how quickly we go from what used to be something that was in a PRD that is no longer in a document at all and is now a fully functional prototype that we're reviewing with a client instead of having conversations through PowerPoint or through documents. That's where I see a lot of, frankly, a lot of promise for the organization. Within the support organizations we've fully wired the company from a data perspective for access for all of the support organizations to try to speed up the time at which it takes to respond to customers, and then ultimately the cost that it takes to respond to customers. I'm probably like every other software executive right now where we're watching our companies transform in months what we used to see happen in years. It's, it's actually a pretty fun and amazing to be in a software company. Andrew Schmidt: Yes. Makes sense. A lot of progress in a short period of time. It's great to hear. If I could just squeeze one more modeling question in. I think I heard the acceleration in the back half revenue perspective, because that makes sense as we move past the term fees, et cetera. Is it possible to have a 3Q, 4Q breakout of the cadence to expect and then for both revenue and EBITDA? I just want to make sure we have that right and we're not caught off guard, if that's possible. If not, that's fine, but thought I'd air that out. Thanks so much. Cassandra Hudson: No, no worries. Couple points, and I'll kind of talk about top line and EBITDA separately. On revenue, the acceleration is very specific to Q3. And it is due to a more favorable year-over-year comparison. There are some timing elements in the prior year that's driving that acceleration. You know, if you just kind of think about the nature of our model, right? It's very predictable. We have a steady amount of ARR launches happening this year. Very consistent dynamics from existing customer and ARPU growth. Just given that I think that kind of you can calculate what that implies from a revenue perspective for our model. Alex Shootman: Can I just say one thing, Andrew? Andrew Schmidt: Yes. Alex Shootman: Because you've followed us for a while. I, and I'm not trying to be coy, but I would just really encourage you to go back and look at the post Q2 commentary from last year, where we were very specific and said, we actually took down Q3 last year because we had a termination fee that accelerated into Q2. That's exactly what Cassandra's talking about, right? That's the exact -- it's no more complicated than that. Andrew Schmidt: Yes. No, it makes sense. Just to wrap it up, EBITDA? is EBITDA [ largely track ]. Cassandra Hudson: For adjusted EBITDA, we typically see adjusted EBITDA builds each quarter throughout the year. Q4 typically is the highest, both in, obviously, in terms of dollars, but more importantly the EBITDA margin. That trend we expect to continue. Alex Shootman: We got to give you props for trying to get Cassandra to go ahead and give you a Q3 guide. Andrew Schmidt: Exactly. You know I'm always pushing the envelope, Alex. I appreciate it. Operator: Your next question comes from the line of Elyse Kanner from J.P. Morgan. Please go ahead. Eleanor Smith: First maybe for Alex. As banks start to grow as a, as your total customer mix and backlog. Are there any unique challenges of serving banks or differences you observe from serving credit unions? Alex Shootman: For sure. It's really, I would call it, let's call it product technology and skills. From a skills perspective, what we've had to bring into the organization are people that understand how to do commercial data conversion. Converting a a complex business account and the data in the complex business account into Alkami is very different than converting the data from a retail account. That can be account data, payment data. All of that data set is very different, bank versus retail. From a product perspective, I think what we've mentioned over several calls is we've got a 3-phase treasury management build-out. The first phase of our treasury management build-out was to put ourselves in a position where we could effectively move a bank that was on a legacy core provider's platform into Alkami. That's the work that we've been doing over the last 12 months. I think we you know, we largely finish up that work at the end of, at the end of this quarter. There's capability build-out that we have to do. The cores themselves bank cores operate more from a batch perspective. Credit unions cores operate more from a real-time perspective. The core integration themselves and the way that we have to have Alkami, which is a data-hungry application. It's data-hungry because we want to create a great user experience. You create a great user experience by having all the information in front of the user. We've had to do some things with the way that Alkami interacts with the bank cores to make sure that the clients get good performance for their customers. Three big differences. The skills that we have to have in the organization, the application functionality that we have to create, and then the technical integration to the cores themselves. Eleanor Smith: Perfect, Alex. That makes a lot of sense. For Cassandra, are there any unit economics considerations that we should be aware of if Alkami signs a DSSP client versus a regular new logo digital banking client? Specifically, what are the implications to revenue ARR and profitability that we should consider? Cassandra Hudson: Well, I mean, one of the big benefits of DSSP is really around obviously we're selling all three products at once, and we typically see about a 30% higher ARPU on our DSSP deals as compared to a traditional new logo. That would be one. You know, that lends itself naturally to higher ARR especially over time as these banks and credit unions grow with their user base. You know, very, very profitable customers for us. I would say consistent unit economics from a implementation cost perspective. You know, we have to implement all three products and we kind of do that over the first 12-month term. Otherwise, I would say the dynamics there are relatively consistent. Alex Shootman: The part that is untested but we have optimism about, what we've delivered so far is just the first phase of functionality of the Digital Sales & Service Platform, and that's that those couple of use cases I shared. We're not going to stop building. What I get excited about is the opportunity to build new products that we have an opportunity to charge for, assuming that there's value in them, to bring to the clients. From my perspective, those would go into the Digital Sales & Service Platform at a a lower cost of sale in terms of what the customer is buying. Remember, what we just shared is 11 to 48 customers in five quarters. There's not yet a long track record where we're able to say, "This is the change in the unit economics. Operator: Your next question comes from the line of Saket Kalia from Barclays. Please go ahead. Saket Kalia: Alex, maybe for you, just to piggyback off that last question on DSSP a little bit. You know, clearly that tool, as you folks just talked about, adds a lot more value at landing. Maybe that's a little bit of a longer sales cycle. I mean, you talked about the 11 to 48. I guess as you look back, how is that sort of performing versus what you expected? As you think about that sales cycle, is that about in line with what you expected or is it longer or shorter? Curious about how it's sort of progressing so far across that still relatively small sample size. Alex Shootman: I got to tell you, completing an acquisition and then within a 1 year having that kind of cross-sell, that blew me away in terms of expectations. I'm pleasantly surprised. We don't have the data yet, but I actually think... If you think about what we're showing our client in terms of the experience that they have bringing on a customer, you get two kind of things folks are looking for. Can I attract a new customer, and can I sell more products? Having this integrated front end, when people see it, and they know how hard they've been trying to deliver it for the last 20 years across a set of 10 different technologies, my expectation is that the sales cycle's not going to be any longer. I don't want to predict anything. To me, I would hope it's shorter, but it's still governed by the market dynamics that we talked about, right. This is the market dynamics or the long-term contract. That governs the sales cycle more than anything else, really. Saket Kalia: Got it. That makes a ton of sense. Cassandra, maybe for you..... Alex Shootman: Yes, let me just... Saket Kalia: I'm curious -- sorry, please. I'm sorry. Alex Shootman: Yes. Sorry for talking over you. We don't have this in our model. Remember, the most important thing for us is not, can we win against a competitor? The most important thing for us is can we increase the number of people that decide to convert off their legacy technology? This is not included in our model at all. What I'm hoping is that DSSP creates enough value so that some of those folks that didn't want to go through the conversion effort decide to go through the conversion effort, and we unlock more opportunities within the market constraint that we have. Saket Kalia: Got it. Very clear. Thanks for that, Alex, by the way. Cassandra, maybe for my follow-up for you, I'm and it's a little bit of a broader question. I'm curious if there's anything that we should keep in mind this year from just a renewal perspective. You know, over the years, we've just been growing the customer base, and of course, those customers are going to renew. I mean, is there anything that we should keep in mind this year just around potential tailwinds to ARPU or gross margins or anything like that as you think about that renewal pool sort of steadily growing over time? Cassandra Hudson: Thanks for the question, Saket. I what I would point to is certainly there's gross margin benefit as we achieve higher levels of scale, and more and more of our customers have been on the platform for quite some time now. That does lend itself to higher gross margin. You know, upon renewal, we typically see customers increase their total contract value with us. They might buy additional product, and obviously continue to grow their user bases. Those benefit us, and we see that in increased ARPU as well as our NRR trends. I guess those would be kind of the three areas I would point to in terms of the renewal impact. You know, we don't have any real big concentrations in any one year where we have an outsized number of renewals. It's pretty evenly spread, just given how long our business has been humming here. Operator: Your next question comes from the line of Adam Hotchkiss from Goldman Sachs. Your line is now open. Adam Hotchkiss: I guess to start on the Alkami Code Studio launch. Curious, I realize it's incredibly early, but curious, as to sort of initial customer and prospect reactions to that. Any indications as to how you might charge for that going forward would be helpful. Thank you. Alex Shootman: Yes. Let me make sure that I've got some clarity. The product that we announced is Alkami Engage, and that's the product that is collecting the account holder telemetry information. The reference to Code Studio, if you look at my prepared remarks, what I shared was that we showed a prototype technology demonstration. That is not a product that we have decided to release yet, and it's for all the reasons that you framed. We had it in our innovation studio. People loved working with it. The two things that we're trying to work out really with any of these AI products are the more the commercial terms than necessarily the the technical terms. It's do we price it simply and then take the cost risk? I'm pretty sure if Cassandra and I showed up and said tokens are our profit guide, y'all wouldn't give us a pass. It's do we price simply and then take the cost risk, or do we introduce a usage metric that's not a usage metric that the client has any history with, and so it's hard for them to model? You know, I actually mentioned four different prototypes that we showed. You talked about Code Studio. That was just one of the four. That's what we're in deep discovery with our customers right now. We have a handful that are using each one of the prototypes to try to understand what the most effective commercial terms are for the, for the product. Given the platform that we have, The complication for us is not really, I don't want to minimize how hard it is to build a new product, but it's not really can we build AI capabilities? It's really how do we monetize these AI capabilities in a way that it's easy for the customer to buy and it's safe for the company from a profitability perspective. Adam Hotchkiss: Yes. No, that's incredibly helpful, Alex. I think that makes a lot of sense, especially given what's happened to token costs. Just to follow up on that, I'd be curious how that impacts your. And I realize it's maybe a bit difficult now, but how does that impact this launch and some of the beta testing you're doing impact your sort of 3 to 5-year view of the platform? Do you see Alkami becoming more customizable since the cost and accessibility of development is ultimately going to be coming down and you're going to be adding new features more quickly, using third parties, first party, et cetera, beyond what you currently have in DSSP? Is that sort of the goal in the roadmap, or am I missing the mark and there's something else to read into there? Thanks. Alex Shootman: Look, I don't mean to come across as snarky when I say this. That's not my intent. Like, all of our holy grail is to get more revenue and have it cost us less to deliver it. That's what we're really looking at all the time. We're not yet ready to change the long-term model that Cassandra's talked about. You know, Cassandra had talked about a long-term model that guides the Rule of 45. If and when we have enough evidence within our operations, either in terms of revenue lift or in terms of cost efficiency to change that model, then we'll announce that we're changing the model, and we'll give you the reasons why we're changing the model. We don't have enough evidence yet to change that longer term model. Operator: That concludes the Q&A portion of the call. Thank you for joining us today. You may now disconnect.
Operator: Good morning. My name is Cath, and I will be your conference operator today. At this time, I would like to welcome everyone to the Illinois Tool Works Inc.'s First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. And if needed, one follow-up question. Thank you. Erin Linnihan, Vice President of Investor Relations, you may begin your conference. Erin Linnihan: Thank you, Cath. Good morning, and welcome to Illinois Tool Works Inc.'s First Quarter 2026 Conference Call. I am joined by our President and CEO, Christopher A. O’Herlihy, and CFO, Michael M. Larsen. During today's call, we will discuss Illinois Tool Works Inc.'s first quarter 2026 financial results and provide an update on our outlook for full year 2026. Slide two is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2025 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide three, and it is now my pleasure to turn the call over to our President and CEO, Christopher A. O’Herlihy. Christopher? Christopher A. O’Herlihy: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, Illinois Tool Works Inc. delivered a solid start to the year with results that were in line with our expectations. In the first quarter, we continued to outperform our underlying end markets, delivering revenue growth of 5% and a 12% increase in GAAP EPS to $2.66. Through disciplined operational execution, we expanded operating margin by 60 basis points to 25.4%. We continue to capitalize on positive demand trends in our CapEx-related segments, with organic growth in Welding up 6% and Test & Measurement and Electronics up 5%. While our consumer-facing businesses contended with challenging end market dynamics, the Illinois Tool Works Inc. team executed at a high level on the profit drivers within our control. Our Enterprise Initiatives contributed 120 basis points to the bottom line, driving that 60 basis point overall margin improvement. We were equally encouraged by our continued progress on Illinois Tool Works Inc.’s organic growth agenda, specifically on customer-backed innovation, or CBI as we call it. We are positioning the company to consistently deliver 3% plus CBI contribution to revenue by 2030. As we have noted before, this is the key driver of our ability to consistently deliver 4% plus high-quality organic growth at the enterprise level. As we look ahead and based on our solid Q1 results, we are raising our full year GAAP EPS guidance by $0.10. Our new guidance midpoint of $11.30 incorporates a slightly lower tax rate and represents 8% year-over-year growth. Our full year organic growth projection of 1% to 3% remains unchanged, reflecting current demand levels adjusted for seasonality. For the full year, we expect operating margin expansion of approximately 100 basis points powered by our Enterprise Initiatives. Notably, all seven segments are projected to deliver positive organic growth and margin expansion in 2026. As we have said before, Illinois Tool Works Inc.’s unique business model, resilient portfolio, and “do what we say” execution demonstrated daily by our colleagues worldwide ensure we are well positioned to deliver robust financial performance in any environment and remain invested in our long-term strategy through any business cycle. As order activity continues to strengthen across several of our end markets, our production capacity, new product pipeline, and best-in-class customer-facing metrics position us to take market share and fully capitalize on these positive demand trends that we are now beginning to see. With that, I will now turn the call over to Michael to provide more detail on the quarter and our guidance for 2026. Michael? Michael M. Larsen: Thank you, Chris, and good morning, everyone. In Q1, the Illinois Tool Works Inc. team delivered a solid operational and financial start to the year. Starting with the top line, revenue growth was 4.6% driven by organic growth of 0.4%, a 3.9% contribution from foreign currency translation, and 0.3% from an acquisition. As Chris said, we were particularly encouraged by positive demand trends and strong order activity in our CapEx and semi-related segments. The combination of our product line simplification, or PLS, efforts and delayed sales to the Middle East reduced our organic growth rate by approximately one percentage point. For context, our annual sales to the Middle East represent approximately $100 million, which is less than 1% of Illinois Tool Works Inc.'s total annual sales. On the bottom line, operating margin improved by 60 basis points to 25.4%, with Enterprise Initiatives contributing 120 basis points. Incremental margins were approximately 40% in the quarter, and we expect both operating margin and incremental margins to move higher as the year progresses. Free cash flow grew 6% with a 69% conversion rate reflecting typical first quarter seasonality. We also repurchased $375 million of shares during the quarter. Overall, a solid start to the year with revenue growth of 5%, earnings growth of 12%, and some encouraging demand trends that bode well for the balance of the year. Please turn to slide four for a brief update on our Enterprise Initiatives. Since 2012, our strong execution on the Enterprise Initiatives has been the most impactful driver of margin improvement at Illinois Tool Works Inc. The 120 basis points contribution this quarter from our strategic sourcing and 80/20 front-to-back activities was in line with our expectations, and we remain on track for a full year impact of approximately 100 basis points independent of volume. Looking ahead, we expect these initiatives to continue to drive meaningful gains through 2030 as we track toward our 30% margin goal. Now let us move to the segment highlights. Starting with Automotive OEM, where revenue increased 4%. While organic revenue declined 1%, we outperformed global automotive builds which were down more than 3%. On a regional basis, North America was down 5%, while Europe was flat. China declined 3%, but significantly outperformed automotive builds, which were down 10%. Builds in China are projected to meaningfully improve sequentially in the second quarter, including double-digit growth in EVs where we are particularly well positioned. At the segment level, we continue to expect our typical 200 to 300 basis points of outperformance versus builds, which are now expected to be down approximately 2% for the full year. Operating margin improved by 170 basis points to 21%. Turning to slide five, Food Equipment delivered revenue growth of 2%, with organic revenue down 3%. Strength in Service, which grew 3%, partially offset a 6% decline in Equipment. North America was down 5%. A slower start than expected on the institutional side, particularly in the education end market, was partially offset by growth in restaurants, including QSR, which was up double digits, and Service, which grew more than 4%. Encouragingly, since January, we have seen gradual improvement in institutional demand trends, and at the Food Equipment segment level, we continue to expect positive organic growth and margin improvement for the full year. International business was flat and is projected to deliver positive organic growth starting in Q2. Test & Measurement and Electronics had a standout quarter, with 10% revenue growth and 5% organic growth, the highest growth rate in three years as the green shoots we talked about last quarter begin to look more like a sustainable recovery. Through this recent down cycle, our divisions stayed invested in their long-term growth strategies, including capacity and new products, and they are uniquely positioned to meet growing customer demand and fully capitalize on the growth opportunities in front of them. As a result, Electronics grew 10% this quarter, and the semi-related businesses, which represent about $500 million in annual revenues or about 15% of the segment, grew more than 15%. Looking ahead, market indicators like increasing fab utilization, encouraging customer signals, strong response to new products, as well as strong order activity all support the view that the positive demand trends that we are seeing in this segment today are sustainable in the near term. Moving on to slide six, Welding delivered another strong top line performance as revenue grew 7% with organic growth of 6%. Equipment grew 8% with a strong contribution from new products. North America was the primary growth engine, up 8%, with mid-single-digit growth in filler metals. The growth was broad based, with mid- to high-single-digit growth across our businesses including in both industrial and commercial. International was down 6% due to a difficult comparison of plus 14% in the year-ago quarter. Operating margin was best in class at 32.1%. Polymers & Fluids delivered 5% revenue growth and organic growth of 2% driven by new products and robust market share gains, primarily in automotive aftermarket, which grew 3%. Polymers was flat against a tough comparison of plus 6%, and Fluids was also flat. Operating margin expanded 150 basis points to 28%. Turning to slide seven, in Construction Products, revenue was up 3%, and encouragingly, this quarter marked the best organic growth performance in four years. Overall, organic growth declined 1%. North America was flat as our residential and renovation business delivered positive organic growth of 1%. In this segment, we remain well positioned for the inevitable housing recovery down the road. Europe was down 3%, and Australia/New Zealand was down 2%. Specialty Products revenue was down 1%, with organic revenue down 5% due to the impact of PLS activities and delayed Middle East sales. Despite the top line pressure and with the margin tailwind from recent PLS activities, the segment expanded operating margin by 40 basis points to 31.3%. With that, let us turn to slide eight for an update on our guidance. As we have said before, Illinois Tool Works Inc. is well positioned to deliver meaningful progress on both the top and bottom line in 2026. On the top line, we are maintaining our total revenue growth projection of 2% to 4% and organic growth projection of 1% to 3%. Per our usual process, this is based on current levels of demand adjusted for typical seasonality and prevailing foreign exchange rates. On the bottom line, we continue to expect operating margin to improve by approximately 100 basis points to a range of 26.5% to 27.5% as Enterprise Initiatives contribute approximately 100 basis points. We continue to expect that price/cost will be modestly accretive to margins after factoring in recent tariff changes and all known material cost increases, offset by corresponding pricing and supply chain actions. Our projection for incremental margins in the mid- to high-40s remains unchanged. Incorporating our first quarter results and the lower effective tax rate projection for the year of 23% to 24%, we are raising our GAAP EPS guidance by $0.10 to a new range of $11.10 to $11.50, representing 8% growth at the $11.30 midpoint. In terms of cadence, we are projecting a 48/52 EPS split between the first and second half of the year, which is less back-end loaded than 2025 and our previous guidance. Finally, we expect free cash flow conversion to exceed 100% of net income, and we are on track to repurchase approximately $1.5 billion of our shares in 2026. In summary, we are heading into the balance of the year with positive momentum on both the top and bottom line. All seven segments are projecting positive organic growth and further improvement in their industry-leading margins. Overall, Illinois Tool Works Inc. is well positioned to deliver on our guidance, including solid organic growth with best-in-class margins and returns. And with that, Erin, I will turn it back to you. Erin Linnihan: Thank you, Michael. We will now open the call for questions. Cath, will you please open the line and then inform callers on how to get back into the queue? Operator: Thank you. At this time, I would like to remind everyone, to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Andrew Alec Kaplowitz with Citigroup. Your line is open. Close enough. How is everyone doing? Christopher A. O’Herlihy: Good morning. Good morning. Andrew Alec Kaplowitz: Good morning. I know it is early in the year, but when you think about growth in the segments, is it fair to say that your CapEx businesses such as Test & Measurement and Welding are trending ahead of your expectations? Maybe consumer and Specialty, I guess, and Food Equipment was more institutional or a little below, and they just kind of net out. How are you thinking about growth by segment versus your original expectations? Christopher A. O’Herlihy: Yes. So, Andy, as we have indicated, we expect all seven segments to show positive organic growth this year. I think you have characterized the first quarter pretty well. What we saw is those CapEx-related segments like Test & Measurement and Welding, with Test & Measurement, obviously in semiconductors and Electronics, as Michael indicated, grew more than 15%. And I would say with continued order strength here in Q2. Welding, it has been a tough environment for a few years. We grew 6% in Q1, a mixture of strong order activity that again continues into Q2 and continued improvement in CBI. And I think encouraging on Welding, the strength was pretty broad-based. It was not just in industrial markets, which we started seeing in Q4, but it also, in Q1, bled into the commercial platforms as well. So certainly on those CapEx-related markets, strong order activity. And then on the more challenged consumer-facing markets, even though they are challenged, we continue to outgrow those markets. If we look at Automotive as a prime example where we again demonstrated a couple of hundred basis points of improvement over the market, similarly in Construction and even in areas like Polymers & Fluids, where in automotive aftermarket we showed a very healthy growth rate versus retail point of sales in automotive aftermarket. So I think it is a tale of two markets right now. We are seeing the industrial CapEx markets very strong with great order activity. But even in those consumer-facing markets, which are improving a little bit, we are outgrowing those markets. Andrew Alec Kaplowitz: It is helpful, Chris. And maybe a similar question on margin for you or Michael. You reiterated the incrementals for the year in the mid- to high-40s. Are you getting there at all differently? Because I mean, Test & Measurement and Auto look good, but Food Equipment obviously was lower. Was that just lower absorption in the quarter and it gets better from here? Are you seeing increased inflation impact you at all? How do you think about that? Michael M. Larsen: Yes. I think, Andy, overall, the incremental margin assumptions and the operating margin assumptions are unchanged from what we were when we gave guidance on our last call. We continue to expect incrementals in the mid- to high-40s, and we expect to improve operating margins by 100 basis points this year. Seasonally, Q1, as we talked about on the last call, always starts out a little lower, and then margins and incrementals improve sequentially as we go through the year. We also expect, based on current run rates, that we will see some increased operating leverage as we go through Q1 to Q2 and into the back half of the year. So overall, the margin expectations, as Chris said, are that every one of our segments will improve operating margins this year. Obviously, the ones that are benefiting from some positive demand trends in particular should be expected to maybe outperform a little bit on those incrementals. Just a word on Food: I would say certainly an anomaly in that segment in terms of the margin performance and the incrementals in the first quarter. It is really an isolated challenge in one particular end market on the institutional side, and it relates back to the month of January. We did see improving demand trends in Food Equipment, as well as in that particular end market, as we went through February, March, and April. But it is certainly something we will continue to keep a close eye on. I would just add while we are on margins that while some of the more growth-challenged businesses that Chris talked about—Polymers & Fluids, maybe Automotive, Construction—continue to execute at a very high level, you see that despite some of these top line challenges, they continue to expand margins, which is really encouraging. Andrew Alec Kaplowitz: Very helpful. Operator: Your next question comes from the line of Jamie Lyn Cook with Truist Securities. Your line is open. Jamie Lyn Cook: Hi. Good morning. I guess this is my first question, can you just help us understand, last quarter it sounds like you were pretty positive on short-cycle momentum, things improving, your confidence level today with some of the uncertainty related to the war with Iran and macro and whether you saw any change in the cadence of sales throughout the quarter or into April? And then my second question, can you just give us an update on CBI, the contribution expected for 2026, and whether you are contemplating other parts of the portfolio that were having a harder time with CBI so perhaps there are opportunities to refocus to certain product lines which are being more successful versus not? Thank you. Michael M. Larsen: Thank you, Jamie. Maybe I will take the first part and then hand it over to Chris for the CBI question. In terms of overall confidence, let us start with the context that we came in right along with our plan for the first quarter. We talked on the last call that we expected a step down from Q4 to Q1, and we actually, on the top line, did a little bit better than that. So I would say if anything, we are more confident today as we sit here. I think it is important to mention that our guidance today is based on the current levels of demand that we are seeing in these businesses. In some of these businesses, maybe Welding and Test & Measurement in particular, we are seeing order rates that are meaningfully higher than the organic growth rates that those segments put up in the fourth quarter and the first quarter. That is not included in our guidance today. Again, based on our past practice, this is based on current run rates. And while there may be a little bit more of a challenge in a place like Food Equipment, which we just talked about, we believe as we sit here today we have more than enough strength in those CapEx-related and semi-related segments to offset any challenges there. And like I said, we are more confident in our organic growth guidance of 1% to 3% today than we were on the last call. One last word on Automotive: automotive did have a slower start in China. Automotive builds in China were down 10% in Q1, and they are projected to be flat in Q2. So we are expecting a pretty meaningful ramp from Q1 to Q2 with sequential growth in the low- to mid-single digits. We expect meaningful sequential margin improvement of about 100 basis points, and we expect incremental margins to improve. If you look at the cadence that we outlined—you have the EPS split 48/52—we just did 23% in Q1, which is exactly what we said on the call last time. That would imply that for the second quarter, the EPS contribution would be about 25% to the full year. And as we sit here today, we feel very, very confident in our ability to deliver both Q2 and the full year. Christopher A. O’Herlihy: And then, Jamie, on your question on CBI and the opportunity profile, CBI can look a little different segment to segment, division to division. What I would say is that we have strong momentum right across the company on CBI, and we are really encouraged by the progress that we are making in every segment. We continue to see increasing strength in our pipeline of new products. It is one of the reasons why even in some of these slower growth markets we are outperforming those markets. We have had several successful new product launches this year across the portfolio. I would call out segments like Welding, Test & Measurement, Food Equipment, and Automotive. We delivered a 40 basis points CBI yield improvement in 2025, and based on what we see in Q1, we are tracking really well to deliver incremental improvement in 2026 on the path to 3% plus by 2030, if not before. Patent filings continue to be strong—up 18% in 2024, 9% in 2025—and we see additional increases in 2026. As we have said before, patent filings continue to be a very strong leading indicator of CBI at Illinois Tool Works Inc., given the customer-backed nature of our innovation, which means that more often than not, patent filings are there to protect important customer solutions. Increased patent activity is often pretty well correlated to future revenue growth. So we feel very positive about the engagement, enthusiasm, and followership around CBI, and we are now starting to see this come through in patent filings and yield. Thank you. Operator: Your next question comes from the line of Tami Zakaria with J.P. Morgan. Tami Zakaria: Hi. Good morning. Thank you so much. I have one question, and it is rather longer-term. As you think about your Food Equipment business, how do you view the proliferation of GLP-1 drugs and its impact on demand from restaurants and the hospitality industry? I see you had really strong growth in the quarter from restaurants—you mentioned QSRs—but just longer term, is GLP-1 on your radar as you plan for this segment over the coming few years? Christopher A. O’Herlihy: I would say, Tami, it is not something we are giving a lot of thought to. I would say GLP-1 is early days, and I would also say that if you look at Food Equipment, restaurants represent a smaller portion of our business, and particularly QSR represents a smaller portion of our business. The biggest portion is institutional. We have a sizable restaurant business, but a smaller piece is in QSR, which is probably more directly impacted. So I would say it is early to tell. It is not something that is on our radar at this point. But as you mentioned QSR, it is not a huge part of our business, although it is growing nicely. Michael M. Larsen: And I would just add, we have said before Food Equipment is one of the most fertile segments from an innovation standpoint. There is so much room for customer-backed innovation, and we would expect that to continue to only accelerate from here and offset any pressures like the ones that you are talking about. Tami Zakaria: Understood. Thank you. Michael M. Larsen: Mhmm. Operator: Your next question comes from the line of Stephen Edward Volkmann with Jefferies. Your line is open. Michael M. Larsen: Hi. Good morning, everybody. I was going to stick with Food as well because that comment kind of caught my attention. Do you think that that market is actually turning? Or is there something that you are doing that is kind of Illinois Tool Works Inc.-specific there? I will leave it there. Christopher A. O’Herlihy: I think it is hard to say the market is turning, Steve. I do think that we have some interesting innovations going on in that space. As Michael mentioned, the Food Equipment space is very effective from an innovation standpoint. We have new product launches in all product categories in 2026, really driven around critical customer pain points like energy, water, and labor savings, and all those trends are very relevant in QSR. I am pretty sure that a large part of our QSR growth is coming from innovation. Michael M. Larsen: And I would just add that we always talk about the strength of the Service business. While QSR, in particular, can be a little bit lumpy, the Service business is more of an annuity-type business. Our ability to put up 3%, 4%, 5% organic growth on a consistent basis at attractive margins kind of buffers some of that lumpiness that you might see in the businesses that you are talking about. Stephen Edward Volkmann: Got it. Okay. Thank you for that. And then, Michael, it sounded like there was a margin thing that happened in the quarter that was very specific. Should we assume 2Q is kind of back to normal? Michael M. Larsen: Yes. I think there is really nothing unusual about Q1, other than the slow start maybe in Food Equipment. If you look at how the quarter progressed, January started out a little bit slower because of Food Equipment, and then we improved from a growth standpoint in February and got even better in March. I think March organic was up 4%, and in April we are off to a really good start with organic growth. If you look at our full year guidance range of 1% to 3%, we are probably trending towards the high end of that range here in April. On margins, we expect a sequential improvement from Q1 to Q2. We just did 25.4%. We would expect more than 100 basis points of improvement sequentially from Q1 to Q2, so that would put it somewhere around 26.5%, and further improvement into Q3 on margins and as well in Q4. From a growth standpoint, from Q2 to Q3, revenues based on run rates again are about the same in Q3 and Q4. But that is all that we need to deliver some meaningful organic growth towards the higher end of the range in the second half of this year. Hopefully, that gives you a little bit of context. Stephen Edward Volkmann: Very much so. Appreciate it. Thanks. Michael M. Larsen: Sure. Operator: Your next question comes from the line of Julian C.H. Mitchell with Barclays. Your line is open. Julian C.H. Mitchell: Hi. Good morning. Good morning. Michael, sorry, there are a couple of other calls going on. But just to clarify your comment on the top line just now, were you referring to total company there in terms of the confidence of getting to the higher end of the range? Obviously, we had some questions on you were just over flat in Q1, and you have got 2% pegged at the midpoint for the year, and you tend to just guide with run rate, as you say. Is there anything happening on price later in the year that comes in because of cost inflation that gets the growth moving up? Michael M. Larsen: I think, Julian, as we have said before, the first quarter was right in line with our plan. The organic growth rate was as we described it on the last earnings call, and how the year is projected to unfold is based on our typical seasonality. In terms of price, since you asked, we had a plan assumption going into the year around price as well as price/cost. Given some of the inflationary pressures that we are seeing, just like everybody else, our divisions have reacted from a price standpoint. We now expect a little bit more price, and that will start to come through primarily in the second quarter and then carry forward into Q3 and Q4. So I think it is fair to say there might be a little bit more of a price impact there. But broadly, we are very close to our original plan as we sit here today, including the organic growth projection of 1% to 3%. Nothing has really changed relative to our guidance other than, as we said, we have seen some really positive demand trends in two segments in particular. Julian C.H. Mitchell: That is helpful. Thank you. And when we are looking at the operating margin guidance, you are off to a good start versus that 70 basis points or so acceleration that is guided for margins at the midpoint for the year as a whole. If we are thinking about some of the margins that were weakest—I think Food Equipment you have dealt with already—anything in Welding that we should think about over the balance of the year, the margins there perhaps picking up steam? And company-wide, is operating leverage fairly steady as you move through 2026? Michael M. Larsen: What I can tell you, Julian, is that as we sit here today, we would expect every segment to improve margins in Q2 relative to Q1. And then we would expect sequential improvement to those margins again in every segment in Q3 and into Q4. As you mentioned Welding specifically, those are best-in-class operating margins by a fair margin. So you would expect to see less improvement in the segments that have margins at or above 30%. You should expect to see a lot more improvement in places like Test & Measurement. There is a little bit of impact from some recent acquisition activity, but as volume and price begin to pick up as we go through the year, you are going to see some really solid operating leverage in the Test & Measurement business as well. Christopher A. O’Herlihy: Julian, I would just add that we have really good line of sight on at least 100 basis points of improvement with our Enterprise Initiatives. Andrew Alec Kaplowitz: That is helpful. Thank you. Operator: Your next question comes from the line of Bank of America. Analyst: Morning. Look, I think you have been very clear on expecting improvements in organic growth into the second quarter, calling out specifically for the Food Equipment segment. That is a positive. How about the Specialty Products segment? Michael M. Larsen: Yes. I think there was a little bit of an impact from the Middle East—kind of delayed sales in the aerospace business—which is sitting on significant orders and backlog. Those sales have been delayed. That and the combination of PLS efforts that are somewhat front-end loaded this year reduced the overall organic growth rate by three points in Specialty in the first quarter. We would expect that growth rate in Specialty to improve from here. I would say the equipment businesses in Specialty are performing very well, and then in some of the more consumer-oriented businesses there are some challenges, as you are well aware, as Chris talked about. There are places like the medical business that is growing leaps and bounds at this point in time. So it is really all those factors offsetting each other. As we said, we expect the Specialty business to deliver positive organic growth this year and meaningful margin improvement based on what we are seeing in the businesses that make up Specialty as we sit here today. Thank you. Analyst: And then with the Supreme Court's ruling against the AIPA tariffs, several manufacturing companies have filed for refunds. Where do you stand in that process for yourself? Christopher A. O’Herlihy: With respect to tariff recovery, given our “produce where we sell” philosophy, the direct impact of tariffs was largely mitigated at Illinois Tool Works Inc., and to the extent that there was an impact, we were able to recover this in price. In this regard, tariff recovery is not something that is on our radar, I would say, and we certainly do not have anything in our guidance for it. Analyst: Sure. Operator: And that concludes today's session. Thank you for participating in today's conference call. All lines may disconnect at this time.
Operator: Thank you for standing by. Welcome to the Benchmark Q1 Fiscal Year 2026 Earnings Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Paul Mansky, Benchmark Investor Relations. You may begin. Paul Mansky: Thank you, operator, and thanks, everyone, for joining us today for Benchmark's First Quarter 2026 Earnings Call. With us today are David Moezidis, our President and CEO; and Bryan Schumaker, our CFO. After the market closed, we issued an earnings release pertaining to our financial performance for the first quarter of 2026, along with a presentation, which we will reference on this call. Both are available under the Investor Relations section of our website. This call is being webcast live, a replay of which will be available approximately 1 hour after we conclude. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as in the appendix to the presentation. Please take a moment to review the forward-looking statements disclosure on Slide 2 of the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks which are not historical statements of fact are forward-looking statements, which involve risks and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, David will start with an overview, followed by Bryan's further detail of our Q1 results and guidance. We'll then turn the call back to David to share his perspective on sector trends and closing remarks. If you please turn to Slide 4, I'll turn the call over to our CEO, David Moezidis. David Moezidis: Thank you, Paul. Good afternoon, and thank you for joining us today. In the first quarter, we delivered revenue of $677 million and EPS of $0.58, both coming in towards the higher end of our expectations. Our first quarter performance reflects solid execution across the business and meaningful progress in our strategic priorities. As we look ahead, the combination of improving end-market conditions and our momentum in Semi-Cap and AC&C and the operational discipline we've been emphasizing gives us greater confidence in our outlook for the year. We now expect full-year revenue growth to be in the 9% to 10% range, up from our prior expectations of mid-single-digit growth. We also expect EPS growth to outpace revenue as we remain focused on execution and disciplined expense management. Turning to Slide 5. During the quarter, we saw evidence of improvement across a broad cross-section of our end-markets, reflecting the benefits of our well-balanced portfolio. Medical revenue continued to accelerate year-over-year and Semi-Cap returned to double-digit sequential growth. Within AC&C, the AI-related wins we've discussed on prior calls have begun to ramp, and our confidence continues to improve. Meanwhile, performance across the rest of the portfolio was in line with our expectations. These are early but clear signs that the customer-first initiatives we began implementing over the past 2 years are taking hold. That shows up in more disciplined customer engagements, clearer program prioritization and more consistent execution across the portfolio. We also delivered another quarter of solid bookings performance. This consistency reinforces our confidence in both the pacing of the year and the sustainability of our growth outlook. Operationally, we continue to drive leverage, with both operating income and earnings growing faster than revenue year-over-year. At the same time, our sustained focus on working capital efficiency drove another quarter of strong free cash flow despite stepped-up investments to support future growth. While we remain mindful of the broader environment, demand signals are stronger today than they were 90 days ago. Regardless, our priorities do not change; stay close to our customers, execute with consistency and continue to build a more resilient operating model. In short, we're encouraged by how the year has started and by the momentum we're seeing as we move forward. With that, I'll turn the call over to Bryan to walk through the financial details for the quarter. Bryan Schumaker: Thank you, David, and good afternoon, everyone. Please turn to Slide 6. Revenue in the quarter was $677 million, up 7% year-over-year and above the midpoint of our prior guidance of $655 million to $695 million. Non-GAAP EPS was $0.58, which was at the higher end of our prior guidance range of $0.53 to $0.59. As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, restructuring, impairment and other items as detailed in Appendix 1 of this presentation. For the first quarter, non-GAAP gross margin was 10.3%, improving 20 basis points year-over-year and decreasing 30 basis points sequentially, primarily due to volume. Non-GAAP operating margin of 4.8% was also up 20 basis points year-over-year, but down 70 basis points sequentially, driven by lower revenue and higher variable compensation. Our first quarter non-GAAP effective tax rate was 27.4%, slightly above our prior guidance range, driven by jurisdictional mix. Please turn to Slide 7 for the first quarter 2026 revenue performance by sector. Semi-Cap revenue, while down slightly year-over-year, increased 12% (sic) [ 2% ] sequentially, reflecting improved momentum as we progress through the quarter. As expected, industrial and A&D moderated year-over-year, down 3% and 2%, respectively. Meanwhile, medical revenue grew 24% and AC&C grew 41% year-over-year. Please turn to Slide 8 for our trended non-GAAP financials. Year-over-year, we saw a consistent improvement across revenue, profitability and earnings. This reflects continued discipline in execution and mix. Although these metrics were sequentially down this quarter due to seasonal volume and variable expenses, we expect both sequentially and year-over-year improvement for revenue, profitability and earnings throughout the balance of 2026. Please refer to Slides 9 and 10 for a discussion of our balance sheet, cash flow and working capital trends. In the first quarter, we generated $47 million in operating cash flow and $29 million in free cash flow despite investing in both inventory and capital equipment to support our future growth. As of March 31, we were $120 million net cash positive. Our cash balance was $325 million, representing a $3 million sequential increase. We had $145 million outstanding on our term loan and $60 million outstanding on our revolver, leaving $486 million in available borrowing capacity. We invested approximately $18 million in capital expenditures during the quarter. Our fourth PT building in Penang remains on track to begin operations in Q3. Based on the momentum we are seeing in the business, we expect full-year 2026 capital spending to track to the higher end of the 2.0% to 2.5% range. Demonstrating our continued commitment to return value to shareholders, we distributed $6 million in cash dividends and repurchased $6 million in stock during the quarter. At quarter end, we had approximately $117 million remaining under our share repurchase authorization. Our cash conversion cycle for the quarter was 67 days, which is a 19-day improvement year-over-year and consistent with our strong fourth quarter performance. A key contributor to that progress was disciplined inventory management. Inventory days declined 14 days year-over-year even as we grew the top line over the same period. This discipline translated into an improvement in turns to 4.8 as compared to 4.0 in the prior year period. Please turn to Slide 11 for our second quarter guidance. For the second quarter of 2026, we expect revenue to be within a range of $700 million to $740 million, representing 12% year-over-year growth at the midpoint. We expect non-GAAP gross margin to be between 10.4% and 10.6%, and non-GAAP operating margin to be between 5.1% and 5.3%. We anticipate GAAP expenses will include approximately $6.1 million of stock-based compensation and $0.8 million to $1.2 million of non-operating expenses, including amortization, restructuring and other charges. Our non-GAAP diluted earnings per share is expected to be in the range of $0.65 to $0.71. Interest and other expenses are expected to be approximately $3.5 million. We continue to advance initiatives aimed at structurally improving our tax rate over the long term. However, for the second quarter and full year, we expect our effective tax rate will be in the range of 26% to 27%. Finally, for the quarter, our weighted average share count is expected to be approximately 36.3 million. With that, I would like to turn the call back over to David for our outlook by market sector and closing remarks. David Moezidis: Thanks, Bryan. Let's turn to Slide 12 for our outlook by sector. Within Semi-Cap, since late last year, we've been sharing our view that a potential recovery in 2026 was showing more promise. This became more evident in the first quarter as revenues were stronger than expected, increasing double digits sequentially. Over the past several years, we supported existing programs, secured new wins and invested in capacity, including investments such as our Penang 4 facility in anticipation of an industry upturn. Looking ahead, we expect this to translate into both sequential and year-over-year growth throughout the year. Within industrial, revenue was in line with our expectations, and we see modest growth in 2026. Within the sector, we're seeing good performance from transportation and agriculture, while automation and HVAC saw softer conditions. Overall, we remain positive on the outlook for the sector longer term. Turning to aerospace and defense. Our commercial air business continues to perform well. After 2 years of double-digit growth, we expect A&D to moderate in 2026, driven primarily by program timing within defense. Importantly, bookings activity across defense and space remains strong, positioning the sector for a return to growth as these programs are expected to ramp later in the year and into 2027. Medical delivered another standout quarter in Q1, and we expect this performance to continue over the next several quarters, supporting our growth for the year. I'm particularly encouraged by the breadth of the growth drivers in medical, which includes our competitive wins, strong end-markets and new program ramps. Lastly, in AC&C, we delivered exceptional year-over-year results in the quarter, driven by the initial ramp of AI-related wins we've discussed over the past several quarters. These wins were enabled in part by our liquid cooling capabilities, which supported our HPC programs and are now seeing traction in clustered AI solutions. While still early in the ramp, our visibility continues to improve, leading us to expect strong growth from this sector in 2026. As a validation that our customer-first initiatives are working, I'm pleased that we were recently named HP Enterprise's 2026 Manufacturing Partner of the Year, a meaningful acknowledgment from a strategic customer. In summary -- turning to Slide 13. We are pleased with our first quarter performance and how 2026 is taking shape. The progress we're seeing did not start in Q1. It reflects the work we've put in over the past several years, which gives us the confidence to raise our full-year revenue outlook to 9% to 10%, with operating income and earnings growing faster than revenue, both sequentially and year-over-year throughout the remainder of the year. At the same time, we remain committed to investing in the business with customer satisfaction as our central focus. This includes continued capacity expansion around the world, as well as ongoing investment in our leadership and capabilities. Whether capacity, talent or manufacturing efficiency, these investments share a common objective to deepen customer engagement, accelerate innovation and support the opportunities ahead of us. With that, I'd like to thank our customers, our shareholders and the entire Benchmark team around the world for their continued trust, dedication and execution. Operator, we can now open for questions. Operator: [Operator Instructions] And your first question comes from the line of Max Michaelis with Lake Street Capital Markets. Maxwell Michaelis: Congrats on the quarter as well as the guide. First one for me, kind of want to stick to semi here. With Penang 4 opening up in Q3, can you remind me how much capacity -- excess capacity that will bring online? David Moezidis: Max, we don't discuss kind of how the capacity online is. But what we can tell you is the additional capacity that is coming online is setting us up to serve our customers inside of 2026 and positioning us for further growth in 2027. Maxwell Michaelis: Perfect. And then sticking with semi, I mean, when we think about this strength here going throughout 2026, are you seeing this broad-based strength across your entire customer base? Or is it kind of a onesie-twosie deal? David Moezidis: No, no. This is broad-based. This is definitely broad-based. And we started hearing the signals at Semicon in October, and I shared that information in one of our earlier calls. And those signals started materializing into orders. And now we're up and running, as you could see with our performance. Maxwell Michaelis: And then last one, just with AC&C. You talked about strong momentum with enterprise AI clusters as well as on-prem cloud infrastructure. Any other use cases you can touch on, or maybe potential visibility into future orders that you're in conversations with right now? David Moezidis: Well, what I can say is those are the 2 key drivers, but we're also anticipating as we exit the year and enter 2027, HPC is going to actually start picking up on its own and contributing nicely as well. Operator: And the next question comes from the line of Steven Fox with Fox Advisors. Steven Fox: I had a couple of questions as well. I guess, first of all, I was wondering if you could dial in on the operating leverage you're seeing as per the guidance for Q2. I was wondering, first of all, if there's any sort of unusual headwinds like as you ramp capacity that maybe is limiting that? And as your mix shifts, how do we think about operating leverage as you get into the second half of the year? And then I had a follow-up. Bryan Schumaker: Yes. So if you look at our operating leverage -- Steven, thanks for the question. As we've referenced, I mean, we expect kind of the bottom line to kind of grow to 1.5 to 2.0 is what we're thinking on dropping to the EPS, so as you get throughout the year. Now the current operating margin will be impacted a little bit as we've expanded kind of the overall growth by some variable compensation and a little bit of impact from just other corporate expenses due to some ramp and some other things. But overall, I mean, we feel good about the back half and being able to leverage up on the operating margin as we continue throughout the year. So, you see some of that from Q1, our guide in Q2 and then kind of throughout the remainder of the year, you'll see that coming through. Steven Fox: Great. That's helpful. And then just as a follow-up, David, I mean, you mentioned new programs that you've been working on for years, capabilities, et cetera, in the Semi?Cap space. Can you give us a better sense of like what's coming to fruition now that maybe changes the mix or supports the growth? I'm just trying to get a sense for how some of those efforts are paying off maybe in the next 6 to 12 months. David Moezidis: Yes. I would frame it into 2 areas. One is we're increasing our share of wallet with our existing customers. And two, we're actually winning new share with some new customers, so newer brands, newer logos, if you will. So it's contributing from both fronts. And from our perspective, this is an area that we made investments in over the course of the last several years, and we're starting to see the fruits of those labors. Steven Fox: And if I could just follow up on that real quick. When you talk about some of these wins, like does the product or the services you're providing in the future, is it similar mix to what you would say you've done over the last 2 to 3 years? Or there's any changes on that front? David Moezidis: Yes, Steven. I would say it's very similar for the most part. Now, you'll see products change with regards to the level of complexity, but how we serve our customers in the semiconductor capital equipment space is a combination of our precision technology solutions as it relates to machining and such, as well as electronic, mechatronics, system integration and PCBA assembly. So it's really the total breadth of services that we're able to bring to bear for our customers. Operator: And the next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Congrats on the quarter here. So, I'm just curious, in the Semi Cap, you say you expect sequential growth, but do you expect the second half to be much stronger still or... David Moezidis: Yes. Anja, this is David. We do. And we're looking at -- we don't typically go out and start providing specific sector growth rates, but we decided that for this sector specifically because there's been a lot of questions for us to share with you that we'll be somewhere around the mid-teens from an overall growth in this space. Anja Soderstrom: Okay. And then also for AC&C, how should we think about that? That was very strong for the quarter. And do you expect that to step up? Or is it going to be on the same sort of level as the first quarter? David Moezidis: Yes. I would say, as we continue our ramp, we expect it to continue to improve. Now to what extent, we'll report back at that on that next quarter. Anja Soderstrom: Okay. And then just remind me again for Penang, is that higher margin business? Or is it corporate average? Bryan Schumaker: Yes, Anja. This is Bryan. So yes, it is higher margin. So it's primarily focused on precision technology Semi-Cap. So, that's why it is bringing the higher margin. So just to take that into consideration and then you look at our overall portfolio, you have the growth that we're seeing in the Semi-Cap space and you also have the AC&C, which is the lower end that kind of offset. But yes, as far as PT goes and that expansion, it is on the Semi-Cap, the higher end. Operator: [Operator Instructions] Your next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Sorry, I just had one more. I wanted to squeeze in. Do you see any sort of difficulty in the supply chain or component availability at all? David Moezidis: Yes. Anja, we're starting to see select lead times increasing in pockets. And we're seeing the same challenges as pretty much everybody in the memory space. And really, we're doing our very best to get in front of it and make sure that we manage the supply chain properly. Operator: And we do have a follow-up question coming from the line of Steven Fox with Fox Advisors. Steven Fox: I was just curious, maybe some of this takes a little time to matriculate, but how do you think the conflict in Iran is impacting defense program run rates, maybe not this quarter but over the back half of the year? Is that something we should think about beyond just sort of the secular trends that you're writing? David Moezidis: Yes, Steven. Our view on that is even if you have immediate resolution, defense is going to perhaps remain strong for the next 12, 18 to 24 months as those investments will need to really be there for replenishment purposes. That's probably -- and that's my opinion on that. But from an order perspective and market share and bookings, we continue to see momentum there. We're winning defense programs. And as I shared in my script, we're also winning in space. So, we remain very positive in this sector, and we see it picking back up in 2027. Operator: I'm showing no further questions at this time. I would like to turn it back to Paul Mansky for closing remarks. Paul Mansky: Thank you, operator, and thank you, everyone, for participating in Benchmark's First Quarter 2026 Earnings Call. For updates to upcoming investor conferences and events, including a replay of this call, please refer to the Events section of our IR website at bench.com. With that, thank you again for your support, and we look forward to speaking with you soon. Operator: And this concludes today's conference call. You may now disconnect.