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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.
Operator: Hello, and welcome to the Xcel Energy Inc. 2026 First Quarter Earnings Conference Call. My name is Jordan, and I will be your coordinator for today's event. Please note this conference is being recorded. For the duration of the call, your lines will be in a listen-only mode. A question-and-answer session will follow the prepared remarks, and questions will only be taken from institutional investors and analysts. Reporters can contact media relations with inquiries, and individual investors and others can reach out to investor relations. I will now turn the call over to your host today, Mr. Roopesh Aggarwal, vice president, investor relations. Please go ahead, sir. Roopesh Aggarwal: Thank you, Jordan. Good morning, and welcome to Xcel Energy Inc.'s 2026 First Quarter Earnings Call. Joining me today are Bob Frenzel, Chairman, President, and Chief Executive Officer, and Brian Van Abel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer your questions if needed. This morning, we will review our 2026 first quarter results and highlights, provide updated 2026 assumptions, and share recent business and regulatory updates. Slides that accompany today's call are available on our website. Some comments during today's call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and SEC filings. Today, we will discuss certain metrics that are non-GAAP measures. Information on the comparable GAAP measures and reconciliations are included in our earnings release. In 2026, the ALJ for the Prairie Island outage case recommended an additional $4.241 billion disallowance of replacement power cost for power procured in 2024 associated with an extended outage at the plant starting late 2023. As a result, Xcel Energy Inc. recorded a charge of $37 million, or 4¢ per share, in the first quarter. Additionally, in 2026, Xcel Energy Inc. recognized $22 million, or 3¢ per share, due to an increase in estimated insurance proceeds for the Marshall Wildfire litigation. Given the nonrecurring nature of these items, they have been excluded from first quarter ongoing earnings. As a result, our GAAP earnings for 2026 were $0.89 per share, while our ongoing earnings, which exclude these nonrecurring charges, were $0.91 per share. All further references to earnings, drivers, and variances in our discussion today will refer to ongoing earnings. For more information on this, please see the disclosures in our earnings release. I will now turn the call over to Bob. Bob Frenzel: Thank you, Roopesh, and good morning, everybody. At Xcel Energy Inc., our mission is to make energy work better for our customers, helping them thrive. Our past quarter showcased our commitment to this mission through focused execution and delivering on our plans to strengthen and modernize the grid, expand our energy sources, and deploy innovative technologies to ensure that the energy we provide our customers remains reliable, affordable, and safe, both now and well into the future. And on these fronts, we are off to a great start this year. In the first quarter, Xcel Energy Inc. invested over $3 billion in new infrastructure to support our customers' and states' growing energy needs for increased resilience and cleaner energy, and we are on track to deliver our most extensive capital investment plan in the company's history this year. We identified additional transmission and generation needs in our states, delivering on our expectation of incremental investment above our base plan. We announced details of our contract with Google for a new data center in the Upper Midwest that we believe is a model for large load development that benefits customers and communities. We filed that contract with the Minnesota PUC. We continue to use our scale and our balance sheet to ensure that we have the right partnerships with critical suppliers, tier-one EPC firms, and developers to execute on budget, on time, and on scope on our growing portfolio of projects. We delivered strong ongoing earnings of $0.91 per share, and we remain confident in our ability to deliver on our annual investment plans and our earnings guidance for the twenty-second year in a row, one of the best track records in the industry. On our fourth quarter call, we announced progress on our data center pipeline with a signed ESA with a large data center in the Upper Midwest. During the first quarter, we provided further details about this groundbreaking agreement with Google. As demand for electricity accelerates across the country, we believe that utilities have a responsibility to lead with solutions that balance innovation, reliability, sustainability, and affordability. Xcel Energy Inc.'s customers already have some of the lowest energy bills in the country. In fact, when you adjust for inflation, the typical Xcel Energy Inc. residential energy bill is almost 25% lower today than it was ten years ago, and in nominal terms, Xcel Energy Inc. residential electric bills are approximately 30% below the national average. Under a 15-year agreement, Google will cover the entire cost of its service and infrastructure requirements to power its new data center, including 1,900 megawatts of new wind and solar generation and long-duration storage using Form Energy's innovative 100-hour iron-air battery. With credit protections in place, we estimate that this new data center will save customers $1 billion to $1.5 billion over the term of the ESA, helping keep customer bills low long into the future. In addition, and as part of our shared sustainability goals, water needs for the data center will be limited through Google's use of air-cooled technology in lieu of water-cooled. In April, we also reached a definitive nonexclusive agreement on our previously announced MOU with NextEra Energy to co-develop generation, storage, and interconnections to accelerate data center development across our operating companies. We expect this joint development agreement will deliver a balance of company-owned resources and purchase power agreements with NextEra across all forms of generation, including wind, solar, battery storage, and natural gas. We are already underway developing solutions for 2 gigawatts of new data center capacity with plans to expand in the near future. In April, we also filed our large load tariff in Colorado, with proposed terms that are similar in scope to our Google ESA and the Minnesota large load tariff filing. Data centers will commit to a long-term contract, minimum bills, termination fees, credit requirements, and incremental cost tests to ensure that our existing customers are protected from new large load customer needs. In the coming months, we plan to make similar filings in Texas, New Mexico, and Wisconsin. We believe our partnerships with hyperscalers, regulators, communities, and developers set a high bar for responsible large load development. We are partnering to ensure large load growth strengthens our overall system, benefits our local communities, and maintains our states' clean energy goals, and does not increase cost for our existing customers. These collective actions give confidence in our ability to deliver on our forecast to secure 6 gigawatts of data center load by year-end 2027 with in-service dates into the early 2030s. In October, we outlined our plan to meet the growing infrastructure needs of our customers. We detailed a $60 billion base investment plan to continue our energy transition and to make needed investments to strengthen our transmission and distribution systems. At that time, we also expected that our base plan would likely need to be augmented based on anticipated but unapproved transmission and generation needs. Through the first quarter, we now believe we have line of sight to at least $7+ billion of the $10+ billion opportunity that we highlighted last year. This incremental investment includes the 765 kV Crawfish Draw to Phantom transmission line in our SPS company that was allocated by SPP in February; two-thirds, or over 1,200 megawatts, of the generation and storage needed for the Google data center project; and 800 megawatts of generation approved by the Colorado Commission in February and April as part of the near-term procurement portfolio. From here, we continue to see additional infrastructure investment needed to serve our growing customer needs, including active generation RFPs in PSCO, NSP, and SPS; additional regional transmission investments in SPP and MISO; and the generation to support the 3 gigawatts of data center demand that we added to our target plan on the Q4 earnings call. As these opportunities materialize, they will drive additional growth and investment both within and beyond our five-year capital plan. As we continue to add to capital backlog, it is also important to execute on the projects that are in the queue. In the first quarter, Xcel Energy Inc. invested over $3 billion in new infrastructure for our customers. We brought online nearly 500 megawatts of new solar generation and utility-scale battery storage in SPS and in Colorado. In total, these projects will deliver system resiliency and reliability as well as $425 million of tax credit benefits to our customers over the life of the project. Across our entire portfolio of projects, 2026 to 2030, we expect customers will see more than $7 billion in aggregate benefits from PTCs and ITCs associated with various generation and storage projects, helping keep our customer bills among the lowest in the country. With continued growth across our industry, we also recognize that supply chains and qualified labor for generation, transmission, and distribution projects will become more constrained. That is why our recently announced alliances with GE Vernova and NextEra and strategic agreements with tier-one EPC firms across our portfolio of renewable and gas generation, transmission, and distribution projects are critical to delivering on our growing investment pipeline well into the 2030s. Finally, our field teams continue to operate at the highest levels and were recently recognized by EEI with an Emergency Recovery Award for outstanding effort to restore service quickly and safely following severe thunderstorms that came through our Upper Midwest service territory in 2025. And for the seventh year in a row, Xcel Energy Inc. was named a World's Most Ethical Company honoree by Ethisphere, which measures the company's corporate governance, culture of ethics, and environmental and societal impact. As we look forward to the rest of 2026, Xcel Energy Inc. will continue our focus to deliver customers safe, clean, reliable, and affordable energy; execute with excellence on our 2026 $14 billion capital investment plan, our most extensive in the company's history; realize the unprecedented opportunities for growth that we laid out in base and incremental investment plans; secure incremental large customer loads that can benefit all customers and meet this moment in our country's growing demand for energy; reach constructive outcomes on rate cases and resource solicitations; make operational and system hardening investments to protect our communities from the risks of extreme weather; and deliver on our earnings guidance for the twenty-second year in a row. With that, I will turn it over to Brian. Brian Van Abel: Thanks, Bob. Good morning, everyone. Starting with our financial results, Xcel Energy Inc. had ongoing earnings of $0.91 per share in 2026, compared to earnings of $0.84 per share in 2025. The most significant earnings drivers for the quarter include the following. Higher electric revenues due to rate case outcomes, nonfuel riders, and sales growth, partially offset by weather, increased earnings by 23¢ per share. Higher APDC increased earnings by 10¢ per share. Offsetting these positive drivers, higher interest charges and common equity financing decreased earnings by 18¢ per share, reflecting funding of our infrastructure investments and discipline to maintain a strong balance sheet. Higher depreciation and amortization decreased earnings by 5¢ per share, reflecting our capital investment programs. Lower natural gas revenues due to weather, partially offset by rate case outcomes, decreased earnings by 3¢ per share. Turning to weather and sales, Colorado overall experienced its warmest winter on record during the fourth quarter. As a result, impacts from weather to electric and natural gas sales reduced earnings by $0.09 per share. On a weather-adjusted basis, first quarter electric sales increased by 2.8%, driven by continued oil and gas growth in SPS and broader C&I growth across jurisdictions. For 2026, we continue to expect full-year weather-adjusted electric sales to increase 3%. Moving to recent regulatory activity, in our North Dakota electric rate case, the commission approved our previously announced settlement authorizing a $27 million revenue increase. In our South Dakota electric rate case, we reached a constructive black box settlement with staff for a net revenue increase of $26 million. A commission decision is expected in the second quarter. This Tuesday, we received the intervenor testimony in our Colorado electric rate case, which we believe provides a starting point for ongoing settlement discussions over the next month. Late yesterday, we received the ALJ report in our Minnesota electric rate case recommending a 9.8% ROE and a 52.5% equity ratio, with a final commission decision early in the third quarter. In the New Mexico electric rate case, intervenor testimony is due on May 1, and we expect the commission decision in the fourth quarter. As we look to our financing plan, Xcel Energy Inc. continues our commitment to maintain a strong balance sheet upon accretive growth with the balance of equity and debt. In the first quarter, we issued forward contracts over $1 billion of equity from our ATM program. Additionally, we issued an $800 million junior subordinated note at the holding company, which receives 50% equity credit with the rating agencies. This, combined with our unsettled forwards and collared forward contracts from 2025, addresses over half of our $7 billion of equity need in our five-year base plan. We also continue to make strong progress on the 231 of the 304 submitted claims; we have reached settlements with 79 of 107 potential claims presented for mediation by parties represented by attorneys. Finally, 26 of 73 complaints have been settled or dismissed and have reached the statute of limitations for property loss claims. We have updated the low end of our estimated liability to $460 million. We have committed $397 million in settlement agreements, including agreements with the subrogated insurance plaintiffs and the three largest claims by acreage. In total, we have $525 million of insurance coverage. Moving to guidance, we are reaffirming our 2026 ongoing EPS guidance range of $4.04 to $4.16 per share. We remain confident in our ability to deliver 6% to 8%+ long-term earnings growth and expect to deliver 9% EPS growth on average through 2030. Updates to key assumptions are included in our slides and earnings release. With that, I will wrap up with a quick summary. Xcel Energy Inc. posted strong ongoing first quarter 2026 earnings of $0.91 per share. We continue to lead a clean energy transition, ensuring safe, clean, and reliable service and keeping customer bills as low as possible. We have line of sight to $7+ billion of opportunities in our incremental $10+ billion investment plan. We have announced details of our data center agreement with Google, which we believe is a model for driving large load growth while protecting and throwing benefits to our other customers and communities. We partnered with multiple tier-one EPC firms, critical suppliers, and developers to ensure we have the resources needed to execute on a growing portfolio of investment opportunities on budget, on time, and on scope. We continue to work to reach constructive outcomes, including settlements in our active rate cases. We maintain a strong balance sheet and credit metrics and have addressed over half of our $7 billion five-year base equity need. We are reaffirming our 2026 ongoing EPS guidance of $4.04 to $4.16 per share. Finally, we remain confident in our ability to deliver 6% to 8%+ long-term earnings growth and expect to deliver 9% EPS growth on average through 2030. We will now open the call for questions. Operator: It is now the question-and-answer session. If you would like to ask a question, please press star then 1 on your telephone keypad. Your first question comes from the line of Richard Sunderland from Truist Securities. Your line is live. Analyst: Hey. Good morning, everyone. Bob Frenzel: Good morning. Analyst: Thank you. Starting with some of the regulatory progress this week, I guess Colorado with the intervenor testimony. Could you expand a little bit more on the sort of settlement potential over the next month that you referenced in the script, and any other takeaways you would highlight there? Then similarly on Minnesota with the ALJ recommendation, any other thoughts you could offer would be helpful. Thank you. Bob Frenzel: Absolutely, and good morning. I would start with Colorado Electric and take a step back from a macro view. We have the lowest bills in the country in Colorado, about 1% share of wallet. We have one of the fastest transitioning clean energy systems and generation fleets in the country, so we are achieving state policy, and we hope that is recognized by our policymakers. On the rate case, the intervenor direct testimony is relatively consistent with what we saw in the last case. In our last case in Colorado, we had a near-unanimous settlement, and we have settled three of the past four electric cases. We think we have a decent starting point. The procedural schedule shows the settlement deadline on May 28, so we will start settlement discussions and look forward to working with the parties early in May. Hopefully, we can reach a constructive settlement like we have in the last few rate cases. On the Minnesota side, we received the Minnesota ALJ report late yesterday after we had already shipped off our earnings release, so it is not referenced there. You will see details in our 10-Q that we file later today. We think it is generally a balanced overall recommendation. It is constructive to see a 9.8% ROE and a 52.5% equity ratio. We are digesting a few of the other trackers and pieces in it, but overall we think it is a constructive recommendation. Procedurally, we will see MPUC deliberations in June and then an MPUC order in July. We are working through a lot of rate cases and looking to reach constructive outcomes this year to deliver for both our customers and our shareholders. Analyst: Great, thanks for running through all of that. Turning to some of the data center activity, you had a lot of commentary around the Google agreement and the landmark effort there. On Slide 14, the 4 gigawatts contracted by year-end 2027—what are the gating factors to signing? The $6 billion to $8 billion incremental CapEx framework you called out elsewhere in the deck, is that applicable there? Any highlights on the financing side of those advances as well—any unique ways to finance that? Bob Frenzel: Let me kick it off, and then I will ask Brian to weigh in. Not surprisingly, yesterday's hyperscaler announcements continue to show high interest in data center development, and we are seeing a lot of interest across all eight of our states in terms of activity and backlog. At the top of the slide you mentioned is a 20 gigawatt backlog, and that continues to be greater than 20 gigawatts; the interest level continues to grow in our service territories. We have a gigawatt either built or through construction and another one that we are in front of the commissions with approvals on, particularly the Google transaction. As we said in our fourth quarter call, we expect to execute on enough ESAs this year to get to a 3 gigawatt target, and another 3 gigawatts next year. We are actively engaged with our customers. These are long and deliberate discussions to make sure that we can reach innovative and constructive outcomes like we did with Google. I think we have proven we can do competitive, highly renewable, low-carbon data center development in our regions. We have the most links in our company in the Upper Midwest, and that has been a focus area for us and a focus area with our JDA with NextEra. With the large load tariff filing in Colorado and the ability it allows us to bring generation, transmission, and the load together in a package to the Colorado commission—and we have those capabilities as well through both SPP and SPS processes in Texas and New Mexico—we do expect to file a large load tariff in Texas as well this year to help expedite that, but it does not preclude us from coming forward with contracts in the near term. We are active on the engagement front with all the hyperscalers and large data center developers. There is a lot of interest in the footprint that our company provides in terms of high penetrations of low-cost renewables that our existing customers have benefited from and we think these large load customers can benefit from as well. Brian Van Abel: Just a couple of things to make sure we get all parts of your question. You referenced the $6 billion to $8 billion number. That is something we have had in our slides before for what we view as the incremental investment opportunity to serve every gigawatt of data center. If you look at Google being a model, it is served with a lot of renewables and long-duration storage—very different than if you are serving it with just a CCGT. Moving forward our clean energy policies and priorities and meeting our state objectives gives us a really good investment opportunity in how we are going to serve these. On the slide about our $10+ billion investment pipeline, we talk about 10 to 12 gigawatts of RFPs in flight and the 3 additional gigawatts of data centers we expect to contract. Those 3 gigawatts of data centers will drive another 6 to 10 gigawatts of generation that we need. So it is a huge long-term opportunity to fill in the back end of this five-year plan and deliver transparency and growth visibility into the early 2030s. It is not only about filling in our investment pipeline here in the back half of this decade but really driving the investment pipeline in the early 2030s. We also have to mention the customer affordability opportunity this drives—we can bring forth the clean energy opportunity with the resources advantage we have in the middle of the country paired with the affordability benefits for our current customers. We are super excited about this opportunity. Bob Frenzel: You asked about alternative financing. We are certainly looking at all those alternative financings just like our peers are. Right now, our base plan to beat is how we have talked about it—funding incremental CapEx with incremental equity of roughly 40%. We are already ahead—one quarter into our five-year plan, and we have 50% of our equity taken down for our base five-year plan. We are staying ahead of it and will continue to deliver growth, happy to fund accretive growth with equity, and maintain that strong balance sheet because it is really important as you go through this cycle of long-term extended growth. Analyst: I appreciate the comprehensive response. Thank you. Operator: Your next question comes from the line of Nicholas Campanella from Barclays. Your line is live. Nicholas Joseph Campanella: Hey. Good morning. Thanks for taking my questions. Bob Frenzel: Morning, Nick. Nicholas Joseph Campanella: I appreciate all the regulatory follow-up. You have line of sight now to the $7 billion of incremental versus, I think, $10 billion of upside. Could you give us some clarity on the shaping of that spend and, as you roll forward the plan to 2031, how much of that is going to get encapsulated? Brian Van Abel: Hey, Nick. Good morning. On that slide—Slide 8 in our earnings deck—we highlight the different pieces of that $7+ billion. Think of the 765 kV transmission line in SPS; the goal is in-service by 2031, so a lot of that will be in our current five-year plan, using the back part of that five-year plan. The Colorado generation—800 megawatts, some gas and 600 megawatts of wind—again should be in service by around 2030, particularly the wind where the goal is to capture the production tax credits. We have not specified the in-service dates on the assets to serve Google; that is not public. If it is wind and solar, the goal is to get those in to capture the tax credits to ensure low-cost renewables, and long-duration storage has a longer potential runway in terms of tax credits. We always provide our comprehensive update in Q3, but that is a good way to think about how this rolls into the front five years with a little bit flowing into the early 2030s. Nicholas Joseph Campanella: Great. As you get to the back end of that plan, the large loads are going to be ramping, hopefully. At what point would you revisit the 40% equity financing assumption? Secondly, any thoughts on defending the Baa1 outlook with Moody's? Brian Van Abel: Longer term, it is important to maintain a strong balance sheet and good credit metrics. We understand where we are with Moody’s. Over the long term, we think about that 17% CFO-to-debt type of metric. In a large build cycle, it gets pressured a little bit, but it is important to maintain a strong balance sheet over the long term. In terms of the equity financing, that has generally been our rule of thumb. Every time we roll forward a new five-year plan, depending on cash generation, project timing, and tax benefits, we incorporate all that. So 40% is a rule of thumb, and we will continue to be consistent with what maintains our metrics. We think in this type of build cycle and capital investment, with volatility in the market, it is important to have a good balance sheet to weather through things. Nicholas Joseph Campanella: One more we were curious on is the MISO capacity print. It came down a little bit earlier this past week. Do you see that as a tailwind at all to the territories you operate in? As you think about capacity planning while you are doing data center development, how is that maybe changing thoughts there? Bob Frenzel: One of the interesting things about the MISO market and the capacity auction itself is it has been much more volatile and less predictable than some other regions given the large bilateral nature of MISO. The print itself is not something we look at in the near term because we have a bit of length in the Upper Midwest and have been able to sell into that market. Over time, it is not the signal that we use to drive new capacity additions and new load forecasting. So, relatively uninteresting in the short term for the MISO capacity auction. Our long-term forecast is in partnership with MISO—where we see asset additions, asset reductions, and load growth—which still leads to a really exciting region and an area that data centers definitely want to be energized by. Not much to the auction itself. Operator: Next question comes from the line of Julien Dumoulin-Smith from Jefferies. Your line is live. Julien Patrick Dumoulin-Smith: Hey. Good morning, team. Thank you very much. Let me nitpick on a few things you have already said. On Colorado intervenor testimony, hearing some decent confidence on settlement—you never say it is done till it is done—but how do you think about the prior guidance of 50 to 60 basis points of lag here? Is that attainable? What are the permutations? Also, given in parallel the comprehensive capital riders now available, how do you think about the future cadence of cases and trying to establish a longer duration here? Brian Van Abel: Good morning. Certainly, if we can reach a constructive settlement, the prior guidance remains intact. If you look at where staff and UCA are—about a 9.0% midpoint ROE for staff and 9.2% for UCA—it is a decent starting point for settlement negotiations. Our equity ratios are important in Colorado; overall it is really important to maintain credit quality in Colorado, so that equity ratio is a significant point. We have a good history and track record of settling on the electric side. On the riders and opportunity, there is an opportunity to have a longer-term path to not filing rate cases maybe every year as we have been. It depends on a constructive settlement here on the electric case to set that base framework. We look forward to engaging the parties over the next month to see if we can reach something constructive. Julien Patrick Dumoulin-Smith: Going back to the data center large load—what is the geographic footprint you are contemplating for incremental announcements? Different states have different tax regimes. You alluded to Texas filing something. How might that geography be proportioned relative to your others, and how might that impact the Colorado comments? Also, on the NextEra partnership, you throw 2 gigawatts out in that pipeline. Is that separate and distinct from the 3 gigawatts by 2027, and help tie the numbers out? Bob Frenzel: We started with generation length and transmission capabilities, and that has led people to be most interested in the Upper Midwest—the Minnesota, Wisconsin, and Dakotas—where we have more length in the near term. In the longer term, we are working on a large load tariff in Colorado. There is active legislation in Colorado around making Colorado a place with a framework to attract data centers. In the Southwest, Texas and New Mexico are hugely popular given the price of electricity and general attractiveness. When we talk to the large hyperscalers and developers, they like working with us because we have multiple regions of the country, and we can deliver solutions in different parts of the country that help them meet portfolio needs across a large swath of the United States. On the high-probability pipeline, we expect 4 more gigawatts to be contracted by 2027. That is inclusive of the 2 gigawatts we referenced with NextEra, and the NextEra partnership could be larger than that. We are actively engaged in two; it could be bigger to serve all four, and we are working on that. Julien Patrick Dumoulin-Smith: Inasmuch as nitpicking on cost, starting the year out well—any updates on Sherco and timeline there? Bob Frenzel: Yes, our plans are to continue to retire Sherco at the end of this year, and we have both the transmission and generation needed to serve that interconnection on a go-forward basis in the Upper Midwest as part of our long-term resource plan. Those plans are still intact, and we have not heard anything that would lead us to do anything differently at this point. Julien Patrick Dumoulin-Smith: Awesome. Best of luck. You have a lot cooking. We will talk soon. Bob Frenzel: Thanks, Julien. Operator: Your next question comes from the line of Carly Davenport from Goldman Sachs. Your line is live. Carly S. Davenport: Good morning. Maybe just a couple quick ones on Colorado. First, I think the PUC sunset bill came out of committee last week. What are your latest views on some of the provisions around securitization and potential changes like expanding the size of the PUC, and your thoughts around that? Bob Frenzel: You are accurate. Each of the agencies in the state undergoes sunset review; the PUC was up this year, usually on a seven- to ten-year cycle. The goal is to look at the effectiveness and efficiency of the agency and the necessity of the functions for the future of the state. One of the provisions in the legislation was the expansion of the use of securitization as a tool. We have been thoughtful in proposing securitization in cases where it makes a lot of sense. We have permission to securitize the remaining balance of Comanche 3 when that plant retires at 2030. We have looked at securitization for portions of our wildfire investment in the state. We proposed—and did not execute—on securitization around fuel costs, particularly around Winter Storm Uri. It is a good tool to have in the tool chest. We want to make sure it is used for the right things as we go forward. We are very engaged in the legislation as drafted; there is a little bit of time between now and the end of session. We continue to talk with all parties about how to bring efficiency and effectiveness to the state—whether it is speed of filings or decision-making on resource plans. There is a lot we think we can do in this era of energy growth to partner with the PUC as we move forward, working with all stakeholders. Carly S. Davenport: As we move more into the core of wildfire season in Colorado over the next couple of months, can you talk about expectations going in based on current weather forecasts and the mild winter you had in Colorado? Also touch on some of the risk reduction work you have done in the last couple of years to get ahead of that risk. Bob Frenzel: Thank you. I appreciate you recognizing all the great work the team has done over the last number of years. It goes in a number of buckets. We talk about situational awareness and our ability to understand weather patterns and take action on them more discreetly and accurately, with less customer impact—it has really grown over the last [inaudible]. Situational awareness is higher than it was [inaudible]. Public safety power shutoffs are, in limited cases, [inaudible]. They are modestly grown in our ability to [inaudible] and make it safe or cover the back end as best we can. Underneath situational awareness, [inaudible] hardened assets in fire-prone areas as sufficiently volatile weather might see it as we go forward. Communications to our customers, our new outage management systems, new customer notification systems, and more engagement on the community side have all improved. We are in a low snowpack in Colorado this year and drier conditions. We think with all the things we have done on the operational side, the situational awareness side, and the community engagement side, it is going to lead us to have a high-performing summer in Colorado. Carly S. Davenport: Great. Thank you for all that color. Operator: Your next question comes from the line of Jeremy Tonet from JPMorgan. Your line is live. Jeremy Bryan Tonet: Hi. Good morning. Bob Frenzel: Hey, Jeremy. Jeremy Bryan Tonet: Coming back to the Google agreement—if Google is willing to pay for newer technologies like Form, do you see this as a trend? Are you seeing these threads in your other conversations at this point as far as appetite? Bob Frenzel: Great question. We think about aligning with state policies and how we move this forward. One example is in Colorado, where an advanced geothermal bill is moving through the legislature. That could be another place where a hyperscaler could help fund an advanced geothermal project in Colorado, given the state's focus on the clean energy transition. This is a great blueprint as we think about longer-term opportunities not only in Minnesota but other parts of our service territory. New technology is generally more expensive; it takes investment to commercialize. This is a great model to align the data center and hyperscaler opportunity with our state policy objectives. I will add that these large customers are committed to the long-term sustainability of their own product. They are highly interested in our regions of the country where the wind blows and the sun shines, and we can deliver both renewable energy and innovative technologies. We have seen real receptivity at our commission levels to do that, particularly when it is protecting existing customers. We will continue to be innovative and sustainable, and we are working with a customer set that is aligned with us. Jeremy Bryan Tonet: Maybe taking a step back on your ability to win more data center load—you kind of stand out versus others. What are the key offerings—market-by-market or the type of solutions? What is key to the rate of wins you have posted? Bob Frenzel: The diversity of our company and regions, the ability to deliver various fuel sources and deliver speed to power to these customers, are really important. Speed is very important to these folks today, and sustainability is going to be very important to them as we roll through time. For example, how we handled the water situation—even in the land of 10,000 lakes in Minnesota, water is a key topic. The ability for us to partner with a large data center owner and come up with an innovative, creative air-cooled versus water-cooled solution can be a template for development going forward. We are talking with all the hyperscalers and data center developers. Depending on their customer mix and perspectives, they will find value across the portfolio of states we serve, and we are here to meet that moment. Brian Van Abel: On the execution side, if we are going to deliver a portfolio of clean energy resources, that takes a development team and scale. In our base plan, we have 10 gigawatts of generation and storage, 7 gigawatts of which are renewables. It takes a platform—our partnerships on the EPC and OEM side matter—because another gigawatt this year and three more next year take a significant pipeline of clean energy resources to execute. The hyperscalers have confidence in what we are doing and our track record delivering renewable projects, which is really important. Jeremy Bryan Tonet: Understood, very helpful. One quick last one—recognize this is premature—but seeing the ALJ just now, any thoughts on prospects for settling given this very early time of review? Brian Van Abel: On the Minnesota electric side, generally the most likely time to settle is leading into hearings, and we have had the hearings. We would be willing to discuss settlement, but the impetus is usually before hearings. We look forward to MPUC deliberations in June and seeing the order in July. Operator: Your next question comes from the line of Ross Fowler from Bank of America. Your line is live. Analyst: Morning, Bob. Morning, Brian. How are you? Brian Van Abel: Doing great, Ross. Thanks. Analyst: On the JDA with NextEra, do you see potential to expand that beyond 2 gigawatts? How are you thinking about expanding that? Bob Frenzel: The JDA itself is unbounded as far as I am concerned. We partnered with a national development platform to pair nicely with our very strong strength in generation and transmission development. We did this for speed to power, to expand the pie, and to deliver on this moment of the country's needs. It could be the partnership we go through for all of our generation needs for large loads. It is not exclusive; we can still have great relationships with other generation developers and data center developers. There is no limit on it. Analyst: We are all focused on growth, but what about the layer of execution risk behind that? You have the GE Vernova strategic alliance—on those five natural gas turbines, is that just in the queue or priced? Then generally, can you point to some things since you have a different execution risk profile than most? Bob Frenzel: We have 24 gas turbines through Siemens and General Electric that are slotted and in various stages of production and delivery over the next five years. I feel very comfortable with access to gas turbines and the ability to meet our base and upside cases. With respect to risk profile, we sit in a great spot. We are excited about where we sit with our key vendors and suppliers—GE Vernova being one, NextEra being another. We have negotiated and framework agreements with both EPC vendors and equipment vendors across transmission, distribution, and gas businesses. We have wind turbines available, solar, breakers, high-voltage transformers—a lot of equipment—and access to people through our partnerships. We feel very confident in our ability to meet our base and upside capital plans. Brian Van Abel: That is why you see the slide on base generation we are executing over the next five years. EPCs and OEMs see that we have a long pipeline—scale matters—and that is how we get partnerships with tier-ones. These are long-term partnerships; moving from site to site to drive crew efficiencies avoids mobilization and demobilization costs. There are a lot of efficiencies we can drive—ordering multiple gigawatts of CTs or wind turbines. Huge benefits of scale help de-risk execution and make us competitive in RFPs to deliver the most competitive projects for the benefit of our customers. Analyst: Definitely meant to be complimentary. Have a great day, guys. Thank you. Operator: Your next question comes from the line of Steve Fleishman from Wolfe Research. Your line is live. Steven Isaac Fleishman: Hey. Good morning. On Slide 8—the famous Slide 8—can you spend a quick minute on the non–check mark items and when we will have visibility on them? Also, how much of the CapEx would show up by 2030 on some of those? Brian Van Abel: Happy to take that. Nearest term is the SPS RFP. We received bids in January and are going through the evaluation. We will make a filing with the New Mexico Commission later in Q2. That is 1,500 to 3,000 megawatts nameplate capacity, a lot of renewables as part of meeting New Mexico renewable energy standards. I expect renewables related to that would come in prior to 2030—good opportunity to filter into the back part of our five-year plan. The NSP RFP—we recently received bids, are working through the evaluation, and will file with the Minnesota Commission later this year. That accelerates resource acquisition to secure renewables and capture tax credits—looking at 4,000+ megawatts of renewable generation and storage by 2030, which would also filter into our base five-year plan. In Colorado, we are working through the JTS and will file an RFP later this year. That will play out into next year; for renewables, the goal will be to get them in by 2030, but there is likely some baseload and thermal generation that could slip into the early 2030s depending on when we need the resources. On the 765 kV transmission lines in SPP, that is a competitive bid we will submit later this year; we likely will not get a decision until next year. On data centers, we will execute on 1 gigawatt this year, and the 3 gigawatts would be a significant opportunity next year; it depends on the resource mix. I view that as how we deliver longer-term growth visibility post-2030. We have great line of sight into 2030 and the early 2030s; we want to continue to extend that and give shareholders visibility into executing our long-term growth objectives. Steven Isaac Fleishman: Quick follow-up on the NSP and SPS renewables RFPs—do you expect most of that to be company-owned or some PPAs? Brian Van Abel: It is a balance. We have not disclosed details. Publicly we guide to 50/50. We have done better in some RFPs—in the last SPS RFP we did north of 75%. In Minnesota we have opportunities to reuse transmission interconnections. Our goal is to bring competitive projects for the benefit of our customers. We guide to 50/50 and aim to do better because we think we have really competitive projects. Operator: Your next question comes from the line of Sophie Karp from KeyBanc. Your line is live. Sophie Ksenia Karp: Hi. Good morning, and congrats on a good update here. Is there a way for you to quantify customer benefits from incremental data center load as it materializes like some of your peers are doing? Thinking through potential community relations issues—could it be helpful to show that benefit more directly? Is it possible? Bob Frenzel: It is a great question. On the Google data center—close to a gigawatt—it led to $1 billion to $1.5 billion of customer savings. That translates to about 1% to 2% residential electric customer net benefit. That is probably not a bad rule of thumb, but we have not given guidance on that. A lot of the benefit comes from sharing the fixed costs of the grid, especially transmission investment, where adding large load shares costs more broadly among more megawatt-hours. In particular, the addition of 1,900 megawatts of wind, solar, and storage is beneficial as we think about dispatch priority in the Upper Midwest—a knock-on effect beneficial for our customers. The carbon neutrality is also beneficial. We have not given firm guidance; it is probably in that zip code, and we can work on something like that in the future. Sophie Ksenia Karp: Thank you. That is all for me. Appreciate it. Operator: Our next question will come from the line of Anthony Crowdell from Mizuho Securities. Your line is live. Anthony Crowdell: Hey. Thanks for squeezing me in, guys. Two quick ones. You have been very aggressive in doing, I guess, 50% of your equity over five years just in the first quarter. Any cadence on the remaining half? Are you looking to take care of it all in 2026? Any color? Brian Van Abel: Generally, we do not give specific timing on equity issuances. We have been very proactive. The forward component in the ATM will be pushed out a couple of years, giving flexibility in when you issue and when you actually draw down the equity proceeds. That helps time with capital investment needs. We will continue to be proactive and get out ahead. We are pretty proud of having half of our equity need locked down one quarter into a five-year plan—three months into a sixty-month plan. Anthony Crowdell: Quickly on Smokehouse Creek—you give a lot of detail on the slide, appreciate it. You are still under the insurance cap—I think $525 million. You have been aggressive on working through settlements. Any color on resolving all of it, or out of the 107 potential claims, any color? Brian Van Abel: The statute of limitations on property claims hit the two-year mark in February. Those that have come in—we are early in the process, but our goal is to work expeditiously through them like we have through our settlement process. We have been very successful with over 300+ claims and lawsuits settled. We have a low-end accrual of $460 million and finalized settlements of approximately $400 million. It is really that $60 million delta that is the low-end estimate. We will continue to provide updates quarterly, and we feel really good about what we have done so far. Anthony Crowdell: Thanks so much. Congrats on a good quarter. Operator: Our final question will come from the line of Steven D’Ambrisi from RBC Capital Markets. Your line is live. Steven D’Ambrisi: Hey, Bob and Brian. Thanks for fitting me in. Hopefully, I can bring it home strong. Quickly, what do you think large loads do for earned returns or structural under-earning that you have in any of your jurisdictions as they come online? You have a 9% EPS CAGR, but rate base growth is very front-end loaded and the capital plan is back-end loaded, and we have talked about adding incremental capital to the plan mostly in the tail. How does the shape of earned returns look as you see rate base growth accelerating? Brian Van Abel: On earned returns, we have talked about closing the gap, particularly in Colorado, where we are working through things and have filed rate cases that go in effect next year in terms of full annualization. Structurally, there is 50+ basis points of structural lag; we will continue to work on that. On data centers and overall sales growth—whether it is oil and gas growth in SPS or diversified growth—we have an opportunity to drive better returns between rate cases or stay out of rate cases longer term as sales growth materializes. That is a great long-term opportunity—not only bringing affordability benefits with data center loads, but also helping stay out of rate cases over the long term. It will take a while for data centers to ramp late in this period, but it is a great long-term opportunity on both affordability and driving earned returns. Steven D’Ambrisi: Appreciate it, guys. Thanks very much. Operator: That concludes the question-and-answer session. I will now turn the call over to Brian Van Abel for closing remarks. Brian Van Abel: Thank you all for participating in our earnings call this morning. Please contact our investor relations team with any follow-up questions. Have a great day. Operator: That concludes today's meeting. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the California Water Service Group first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I will now turn the conference over to James Lynch, Senior Vice President. You may begin. Thank you, Demi. James Lynch: Welcome everyone to our first quarter 2026 results call for California Water Service Group. With me today is Martin A. Kropelnicki, our chairman and CEO, and Greg Milleman, our vice president of rates and regulatory affairs. Replay dial-in information for the call can be found in our quarterly results earnings release, which was issued earlier today. The call replay will be available until 06/29/2026. As a reminder, before we begin, the company has a slide deck to accompany today’s earnings call. The slide deck was furnished with an 8-K and is also available on the company’s website at calwatergroup.com. Before looking at our first quarter 2026 results, I would like to cover forward-looking statements. During our call, we may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company’s current expectations. As a result, we strongly advise all current shareholders and interested parties to carefully read the company’s disclosures on risks and uncertainties found in our Form 10, Forms 10-Q, press releases, and other reports filed with the Securities and Exchange Commission. And now, I will turn the call over to Martin A. Kropelnicki. Martin A. Kropelnicki: Thanks, Jim. Good morning, everyone, and thank you for joining us this morning to review our first quarter 2026. There are six primary areas that we want to talk about today. The first one being, obviously, the quarter, and I would say Q1 results were in line with our expectations given the fact we had a delayed 2024 general rate case. To remind everyone, in March we did get a proposed decision and there is a comment period that follows that proposed decision, which is 30 days. Our comments were filed, and then yesterday we received what is called a revised proposed decision that I have asked Greg to talk about a little bit more in detail later in our discussion today. I will generally say that the revised proposed decision we are very happy with, and we are on the docket day for approval at the California Public Utilities Commission. In terms of the quarter, again, the delay of the rate case meant there were items we could not book because of the delay. But given where we are, results were in line with expectations. I think the highlight of the quarter is the fact that our infrastructure investment for the first quarter was up 17%, and we continue to make good progress on our PFAS treatment and cost recovery from the polluters who polluted the grounds and the waters that we treat. On the business development side, there are two areas. We are focused on the Nexus acquisition deal, as well as we filed our change of control in Texas to advance our purchasing of a minority interest in BVRT, which is the Texas partnership that we have been involved in for the last five years. Yesterday, at our Board of Directors meeting, our board declared a 325th consecutive quarterly dividend, and that follows, of course, the 59th annual dividend increase that we had in January. Additionally, as I mentioned on our year-end earnings call, we have officially kicked off our centennial year of operations, which means we have been going out to the regions that we operate doing employee and customer celebrations, which has gotten off to a very good start. I will talk a little bit more about that later today. Before I get into some of the details in these six subject areas, I am going to turn it over to Jim to go through the financial results. Jim, I am going to hand it off to you, please. James Lynch: Alright. Thanks, Marty. As Marty mentioned, the proposed decision on our California 2024 general rate case is expected later this afternoon. Having said that, our first quarter results do not include the impact of the revenue requirement or any of the other provisions included in the revised proposed decision. Recall that the company does have an interim rates memorandum account and that does authorize us to retroactively apply the decision back to January 1 once it is finalized. So we are not losing out on any of the potential benefit from the rate case for the time that decision has been delayed. In 2026, revenue was $214.6 million compared to $204 million in 2025. Net income for the quarter was $4 million, or $0.07 per diluted share, compared to the prior year first quarter of $13.3 million, or $0.22 per diluted share. Moving to slide six, you can see the impact of activity during the quarter. The primary earnings drivers were rate increases, which added $0.11 per diluted share, and accrued and unbilled revenue, which added $0.06 per diluted share. The accrued and unbilled revenue increase was due primarily to warm and dry weather during the last month of the quarter. The revenue increases were partially offset by an overall decrease in consumption for the quarter, increased depreciation and interest expense related to new capital investments, and an increase in the effective income tax rate due to a reduction in tax credits, which, when combined with other items, reduced EPS by about $0.32 per diluted share. Turning to slide seven, we continue to make significant investments in our water infrastructure to ensure the delivery of safe and reliable water. As Marty mentioned, our capital investments for the quarter were up 17.6% to $129.5 million. Our total planned capital investments for 2026 are $627 million, and this reflects the amounts included in the revised proposed 2024 California rate case decision. It also includes our estimated expenditures in the other states. The constructive impact our capital investment program is having on regulated rate base is presented on slide eight. If approved as requested, the 2024 California GRC and Infrastructure Improvement Plan, coupled with planned PFAS investments and capital investments in our utilities in the other states, would result in a compounded annual rate base growth of over 11%. Moving to slide nine, we continue to maintain a strong liquidity profile to execute our capital plan. We continue to pursue tuck-in M&A opportunities as we progress on the acquisitions of Nevada, Oregon, and VBRT. As of 03/31/2026, we had $58.1 million in unrestricted cash and $45.6 million in restricted cash, along with approximately $470 million available on our bank lines of credit. We maintain credit facilities totaling $600 million that are expandable to $800 million, with maturities that extend into March 2028. We also have over $340 million remaining on the shelf we filed in connection with our ATM program, after completing approximately $6.1 million of program sales during the first quarter. Importantly, both Group and Cal Water maintained strong credit ratings of A+ stable from S&P Global, underscoring the strength of our balance sheet. Turning to slide 10, we just declared our 325th consecutive quarterly dividend of $0.335 per share. We also announced our 2026 annual dividend of $1.34 per share. This is our 59th consecutive annual increase and is 8.1% higher than 2025. And with that, I will now turn the call over to Greg to discuss the revised proposed decision on our rate case. Greg Milleman: As Marty mentioned earlier, we received a revised proposed decision on our 2024 California general rate case yesterday, and a final decision is expected later today or shortly thereafter. The revised proposed decision provides clear visibility into revenue growth, including approximately $91 million in 2026, followed by $43 million in 2027, and $49 million in 2028. Importantly, it continues key regulatory mechanisms like the Monterey-style RAM, and authorizes cost balancing accounts such as our pension cost balancing account, health care cost balancing account, and a new general insurance liability balancing account, which help stabilize earnings despite variability in customer usage and certain operating costs. While decoupling was not included, the decision introduces a new sales reconciliation mechanism and an updated rate design that better support fixed cost recovery. Overall, we view the revised proposed decision as constructive and supportive of continued infrastructure investment and long-term earnings stability. And now Marty will take us through the remainder of the deck. Martin A. Kropelnicki: Thanks, Greg. Just echoing what I said early on, I am very happy with the PD that is going to the Commission today for approval. When it is approved, we will issue an appropriate press release and related 8-Ks with more of the details of what is included in that final decision. I think it is fair to say from Greg’s perspective managing our rates department and Jim’s perspective as our CFO, we are very happy with the outcome and look forward to getting the rate case wrapped up and moving on with our plans for 2026. Moving on to slide 12, just a quick update on where we are with our Nexus project. As you may recall, we announced that we reached an agreement with Nexus to acquire their Nevada and Oregon operations. We have continued to progress very well working with Nexus. They are a great company to work with. We did file our change of control applications with both the State of Oregon and the State of Nevada. The State of Nevada has a six-month statutory decision timeline. Oregon does not. We are hoping the two will stay on track around the same time, and we could drive to close these transactions as early as by the end of the year. In the interim, the subject matter experts continue to work very well together, and we are mapping their processes into our systems. I have also had the pleasure of visiting all the sites in Oregon and Nevada and am very happy to say I was very pleased with all the employees that I met with. They are very professional and very sound operators, as well as an outstanding management team. In addition, since we last talked, I have had meetings with all the commissioners in the State of Oregon as well as the commissioners in the State of Nevada and their staffs. Those meetings have all gone well. When we conclude this acquisition of the Nexus assets, essentially, it will give us almost 100 thousand connections outside of the State of California in total, which is about 20% of our total connections, again diversifying out of California and expanding our footprint on the West Coast. In addition, and I think this is significant and we do not talk a whole lot about it, for those of you that have been with us for a long time, if you remember in 2008 and 2009, we started talking more about water and the wastewater business and recycled water. Back then, we really had one to two wastewater treatment plants that we operated. When we get this deal closed with Nexus as well as BVRT final buyout of the minority interest, we will have over 24 wastewater plants that we will be operating in the western half of the U.S. I think that shows our diversification out of California into wastewater and water, which I believe will play a very important role for water in the western half of the United States. Looking at slide 13, on the BVRT slide, we did file the change of control application with the Texas Commission. That is on file with them. In addition, we added another 210 connections to our existing system. We are waiting for the Texas Commission there as well, and then we will close on the minority interest that still remains in GVRT, and then that will become a wholly owned subsidiary of Texas Water Service Company. Moving on to slide 14, we have started officially celebrating our centennial anniversary. I would encourage everyone to take a look at our annual report. Our corporate communications team headed by Shannon Dean did an outstanding job going through “then, now, and next,” which is the theme of the annual report. I am also very happy that we have had over 41 thousand people visit our centennial website, which has a lot of information about the company, the rich history of the company, and how we grew from the idea that started with three World War I veterans to being a multibillion-dollar company that we are today. If you are interested in that site, I encourage you to look at it at 100years.lwatergroup.com. In celebrating our 100-year anniversary, we have scheduled a number of events throughout the State of California that include both employees as well as local officials. We held our first one in Bakersfield. That was a big success. We will have another one in Southern California in June. The overall goal of the program in celebrating this at a regional level is it allows us to increase awareness of the company’s track record among our local communities and our public officials that we are allowed to serve. In addition to getting people together to celebrate our success, we also are getting a lot of proclamations and resolutions, for example, from the Speaker of the California State Assembly, the City of Visalia, the City of Chico Chamber of Commerce, the Central Valley Asian Chamber of Commerce, and the San Joaquin Hispanic Chamber of Commerce, and there is more to come. It is fun to be out there talking about 100 years of service and reflecting on where we started to where we are today. We will now open the call for questions. Yami, let us open it up for our Q&A, please, for the guests on the call. Operator: Thank you. You will need to press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of an Analyst with Baird. Your line is open. Analyst: Hey, good morning, Jim, Greg. Good morning, guys. Thank you so much for the time, and I appreciate all the information here. Two questions for me, maybe a PFAS question and then a balance sheet question. I will start with the EPA talking recently about microplastics and potentially regulating some other substances outside the initial PFAS guidelines. Do you have any early thoughts on this, and specifically, might these be treatable within your current plans, or would this require further capital investment beyond what you have already laid out? Martin A. Kropelnicki: Good question, David. Some of you have heard me talk about UCMR, which is the Unregulated Contaminant Monitoring Rule list that the EPA publishes, and they update that list every so many years. If you really want to see what is coming down the pipe—no pun intended—on water regulation, you want to monitor that UCMR list, and microplastics have shown up and evolved on that list. It is certainly a hotter topic at the EPA right now, and it is something that is in water supply. You will likely see regulations established and an MCL to make sure there are no microplastics in the water. There is more to come from the EPA on that. Obviously, they go through a scientific process and come up with standards. Those standards get handed off to the states, and the state Departments of Health are responsible for implementing those standards at the state level. I believe we will ultimately have a standard on microplastics. I do, and I think as a society we have gotten a lot better at not putting microplastics into the ground or into the ocean. I think that part of it is improving, but I do think at some point we will have a standard that will evolve that we will have to treat for. As part of that process, the EPA will also talk about the appropriate methods and techniques to treat water that has microplastics in it. I think it is uncertain right now whether or not the current treatment that we are putting in place for PFAS will be effective for microplastics, and that will depend largely on the EPA. Analyst: Super helpful, thank you. Maybe then just turning to balance sheet. I appreciate all the comments on liquidity and available credit, but could you talk a bit about how you are thinking about equity issuance and capital needs more broadly throughout the balance of the year? James Lynch: I think—we feel very confident that we will be successful in closing both BVRT and the NexSys acquisitions in Nevada and Oregon. That will be incremental to our normal cadence of debt and equity issuances. We will take a look at the timing on when we anticipate that is going to occur and determine the most efficient way to approach the capital markets to fund those transactions when the time comes. There are some interesting instruments out there relative to forwards that will allow us to time it closer to minimize any dilution that could occur in terms of the difference between the time we raise the equity and the time we actually close the transactions, so we will be looking into that. We believe when the transactions close, it would likely occur towards the end of the year, and that is when I would look to raise the capital for those. Otherwise, we would continue to rely on our ATM and our normal lines of credit taken out by longer-term debt as we work through our capital programs and fund our other capital needs. Once again, everyone— Martin A. Kropelnicki: Jim, if you do not mind me jumping in, Dave, it is probably worth mentioning too—as you recall, we have our PFAS program, which is fairly substantial, and we have a separate application before the Commission that we are waiting to hear on because that will add further pressure on Jim on the capital side. But the flip side is we have been very successful on the litigation side. Just last week, we received another $6.5 million gross from the polluters’ trusts that have been set up. We have recovered about $66.5 million in gross receipts in our recovery process going after polluters, which nets us just about $50 million. That $50 million will be a direct offset to our PFAS program and help keep those costs lower for our customers. So we are approaching 20–25% of those estimated PFAS costs being covered through our legal efforts, and our legal team continues to do a very good job leading our industry efforts at getting recovery on that. That will help a little bit. For some perspective, we initially anticipated two segments of the program: one is treatment and one is well replacement, with our objective to get the treatment in by 2028, and the well replacements will take longer. Of the total amount we plan to spend on PFAS, about $60 million is for the wells and the remainder is for treatment. Analyst: Super helpful detail. I appreciate it very much, and best of luck tonight with the meeting on the GRC. It has been a long road and I am excited to have it behind us. Thank you. James Lynch: Thank you. Appreciate it. Thanks, Davis. Operator: If you would like to ask a question, press star 1 on your telephone keypad. There are no further questions at this time. I will turn the call back over to Martin Kropelnicki, CEO, for closing remarks. Martin A. Kropelnicki: Thank you, Demi. Thanks, everyone, for joining us today. The big thing to watch for moving forward is what happens at the Commission today. We are hoping for approval, and we are very happy with the revised proposed decision that is on the docket for today. As we move into the second quarter, what are we going to be focused on? We have to implement the results of the rate case. While that sounds like an easy task, there is a lot involved in doing that. There is a retroactive piece that goes back to January 1 that Jim and his team will have to work on, and we will give a lot of clarity around that as we wrap up the quarter and have the appropriate disclosures in our financials for our second quarter 10-Q. In addition, there are thousands of table changes that have to take place on the billing cycle with the new tariffs. The rates team, working with our customer service team, the accounting team, and the IT team, will be making those tariff changes and doing the appropriate testing to make sure our tariffs are accurately being billed. Assuming an approval today, we anticipate starting billing the new tariffs on July 1 of this year. In addition, we are staying very focused on our M&A side and really the Nexus transaction and the BBRT transaction, answering the Commission’s questions on the change of control applications, as well as doing all the integration work and being ready to quickly close, integrating those assets onto our platform once approved by the appropriate commission. It is going to be a busy second quarter, and then throw in the 100-year celebrations on top of that. We have a lot going on, but the team remains laser-focused on the tasks at hand. The last thing I want to do before we hang up is note this is Greg Milleman’s last earnings call with us. If you know Greg, he is not a person that wants a lot of hoopla or fanfare, but I could not let the morning go without recognizing his contributions to California Water Service Group. We recruited Greg from Valencia Water in 2013, where Greg served as senior vice president of administration. Believe it or not, we are Greg’s third job out of college. He started off with Arthur Andersen, then went to Valencia Water, and then he joined us. We brought Greg in as a manager of special projects. We were very impressed with him when we met Greg and did not really have a spot for him, but we thought he was a quality hire, a senior hire from within the water industry. Within a year, he was promoted to the director of operations, helping the operations team focus on deploying capital more quickly and more efficiently and making sure that plant is getting into service as quickly as possible. In 2017, he was named the interim director of rates to help lead our rate case efforts. In 2019, he was named vice president of rates for California, and then in 2022, when Paul Townsley retired, he took the helm as our vice president of rates and regulatory affairs to lead our overall rate strategy for all of our operating companies. Greg has only been with us 13 years, and from a Cal Water standpoint, that is not a lot of time—we have many employees with 30 and 40 years of service with the company—but Greg’s impact on the company has been nothing short of amazing. If you look at our rate cases over the decade that he has been with us, we have done the best with our rate cases under his leadership and his team. I would be remiss if I did not take this opportunity to tell Greg thank you and to wish him and Jen all the best in retirement, and we look forward to keeping in touch as we do with all of our retirees. So, Greg, thank you, and with that, Demi, we will wrap it up, and we will see everyone next quarter. Thank you very much. Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining, and you may now disconnect.
Operator: Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services, Inc. First Quarter 2026 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, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. I would now like to turn the call over to Michael Perito, Head of Investor Relations. Please go ahead. Thank you. Michael Perito: Good morning, everyone, and thank you for joining us for our first quarter 2026 earnings call. Today’s presenters are President and CEO, Anthony J. Labozzetta, and Senior Executive Vice President and Chief Financial Officer, Thomas M. Lyons. Before beginning their review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today’s call. Our full disclaimer is contained in last evening’s earnings release which has been posted to the Investor Relations page on our website, provident.bank. Now I would like to hand it off to Anthony J. Labozzetta, who will offer his perspective on our first quarter. Anthony? Anthony J. Labozzetta: Thank you, Michael. And welcome, everyone. I appreciate you joining us today to discuss Provident Financial Services, Inc.’s first quarter 2026 results. I am pleased to report that we delivered another strong quarter of financial performance, demonstrating the continued momentum of our business and the effectiveness of our strategic initiatives. For the first quarter, we reported net earnings of $79 million, or $0.61 per share, representing solid profitability as we continue to execute our growth strategy. Our annualized return on average assets was 1.29%, while our adjusted return on average tangible common equity was 16.6%. Pretax pre-provision net revenue of $108 million, which grew 13.5% year over year, benefited from higher net interest income and notable growth in contingency income from our insurance platform, Provident Protection Plus. This represents 1.75% of average assets on an annualized basis, compared to 1.61% for the same quarter last year. We continue to focus on our balanced approach to sustaining growth across our business lines while also managing risk appropriately and generating sustainable positive operating leverage. Turning to our balance sheet, our commercial loan team generated new loan production of $649 million in the first quarter, up 8% compared to the same quarter last year. This production contributed to our commercial loan portfolio growth of $161 million, or 3.9% annualized. Commercial and industrial loan activity was particularly strong, growing at a 10% annualized rate. Commercial loan payoffs during the quarter were down significantly to $191 million, and overall, we remain positive about our loan growth guidance for 2026. Our commercial loan pipeline reached a record $3.1 billion as of March 31. This pipeline is well diversified and comprised of $1.3 billion in CRE, $1.1 billion in C&I, $400 million in specialty lending, and $200 million in middle market loans. This is the first time in our company’s history that both the CRE and C&I pipelines have exceeded $1 billion, reflecting the investments we have made in our commercial banking group to generate sustainable, diversified loan growth. Switching to deposits, our total nonmaturity core business and consumer deposits increased $66.5 million during the quarter, or 2.2% annualized. Seasonal municipal deposit outflows and an intentional reduction in brokered deposits during the quarter impacted our total deposit balances, which were down sequentially. Our average noninterest-bearing deposits were relatively stable, and we remain focused on deposit generation strategies to build core deposits in consumer, small business, and commercial verticals. While the overall deposit environment remains very competitive, our focus on relationship banking combined with our expanding digital capabilities and treasury management solutions positions us well to continue attracting quality deposit relationships that support our loan growth objectives. Provident Financial Services, Inc.’s commitment to managing credit risk and generating top quartile risk-adjusted returns remains unchanged. During the first quarter, we experienced net charge-offs of $3.1 million, representing just 6 basis points of average loans. Nonperforming loans increased to 73 basis points of total loans from 40 basis points in the fourth quarter, with the increase primarily attributable to a bankruptcy that impacted four related commercial loans totaling $82 million. I would like to provide additional context on this relationship. These loans have no prior charge-off history and require no reserve allocations due to strong collateral values. Appraisals received in 2026 reflect loan-to-value ratios for the collateral properties of 32.9%, 51.7%, 61.3%, and 81.9%, respectively. We are expecting resolution of these credits by year end. Based on the current cash flow and occupancy rates of the properties and our secured position, we do not foresee a material loss to the bank. Outside of this relationship, we would have seen improvements in all credit metrics during the first quarter, including levels of loan delinquencies, nonaccrual loans, and criticized and classified assets. Shifting to noninterest income, we are pleased with the performance during the quarter. Our Provident Protection Plus insurance platform, in particular, delivered exceptional results in the first quarter, with customer retention rates continuing at approximately 95% and significant year-over-year growth in both new business and contingency income. The strong contingency income we received this quarter reflects the quality of the relationships with our clients and carriers, and the effectiveness of our risk management approach. We are seeing increased collaboration among our insurance platform, the bank, and Beacon Trust, which is creating meaningful cross-sell opportunities and deepening client relationships across our organization. The pipeline in our insurance business remains strong heading into the remainder of 2026, and we continue to invest in talent and capabilities that will drive sustainable growth in this differentiated revenue stream. Beacon Trust remains focused on retaining and growing its customer base, and we are optimistic that the recent hires will help accelerate growth over the balance of 2026. Additionally, we have a strong pipeline for further SBA gain-on-sale over the remainder of the year. Our strong financial performance continues to build our capital position well beyond regulatory requirements. We delivered another quarter with significant year-over-year growth in earnings per share, profitability, and tangible book value, with our tangible common equity ratio ending the first quarter at 8.6%. During the quarter, we opportunistically took advantage of market volatility and bought back $12.4 million of our shares. Having said that, our top capital priority remains unchanged: driving sustained organic growth across our franchise while achieving top quartile risk-adjusted profitability. I am incredibly proud of both the efforts and production of our employees. I would now like to turn the call over to Thomas M. Lyons for his comments on our financial performance. Tom? Thomas M. Lyons: Thank you, Anthony, and good morning, everyone. As Anthony noted, our net income increased 24% versus 2025 to $79 million, or $0.61 per share, with a return on average assets of 1.29%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 16.6%. Pretax, pre-provision earnings were $108 million, or an annualized 1.75% of average assets, a 13.5% increase from $95 million, or 1.61% of average assets, reported for 2025. Despite a lower day count, revenue topped $225 million for the second consecutive quarter, driven by net interest income of $194 million and record noninterest income of $31.5 million. Average earning assets increased by $264 million, or an annualized 4.7% versus the trailing quarter, with the average yield on assets decreasing 13 basis points to 5.53%. This reduction in asset yield was largely offset by a 12 basis point decrease in the cost of interest-bearing liabilities to 2.71%. Interest-bearing deposit costs fell 21 basis points versus the trailing quarter to 2.39%, while total deposit costs declined 16 basis points to 1.94%. While a reduction in net purchase accounting accretion attributable to lower loan payoffs resulted in a 4 basis point decrease in our reported net interest margin versus the trailing quarter, to 3.04%, our core net interest margin increased by 3 basis points to 3.04%. Given the macro developments since the start of the year, we are now modeling no further Federal Reserve rate actions for the remainder of 2026, versus three cuts in Fed funds in our initial modeling. As a result, we are slightly tightening our NIM outlook to 3.40% to 3.45%, inclusive of purchase accounting accretion. We also now expect approximately 3 basis points of core NIM expansion in the second quarter. Period-end loans held for investment increased $144 million, or an annualized 3% for the quarter, driven by growth in commercial, multifamily, and commercial mortgage loans, partially offset by reductions in mortgage warehouse, construction, and residential mortgage loans. Total commercial loans grew by an annualized 3.9% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.9 billion. The pipeline rate of 6.24% is accretive relative to our current portfolio yield of 5.85%. Period-end deposits decreased $178 million for the quarter, or an annualized 3.8%. The decrease was driven by seasonal outflows of municipal deposits expected to return in subsequent quarters and a tactical decision to reduce brokered deposits in favor of lower-cost FHLB borrowings. More specifically, the pricing of brokered deposits was notably elevated in March, and we elected to utilize more borrowings at a cost savings of approximately 20 basis points, driving a more favorable impact to our net interest margin. Asset quality remains strong despite the increase in nonperforming loans that Anthony previously detailed, with nonperforming assets representing 58 basis points of total assets. Net charge-offs were $3.1 million, or an annualized 6 basis points of average loans. We recorded a net negative provision for credit losses of $2.1 million for the quarter, as required specific reserves on individually evaluated impaired credits declined, there was modest improvement in our CECL economic forecast, and changes in our portfolio mix warranted lower pooled reserves. This brought our allowance coverage ratio down 5 basis points from the trailing quarter, to 90 basis points of loans at March 31. Noninterest income increased to $31.5 million this quarter, with solid performance from our insurance and wealth management divisions, as well as increased BOLI claims and year-over-year increases in core banking fees and gain on SBA loan sales. Noninterest expense increased to $117.1 million this quarter, reflecting increased compensation and benefits costs and occupancy expense. Expenses to average assets and the efficiency ratio, however, both improved from the prior-year quarter to 1.95% and 52%, respectively. We now project quarterly core operating expenses of approximately $117 million to $119 million for the remainder of 2026, with the run rate in the second half of the year being higher than the first half. As we noted last quarter, in addition to normal expenses, we will be upgrading our core systems in 2026 and expect additional nonrecurring charges of approximately $5 million in connection with this investment, largely to be recognized in the third and fourth quarters. Our continued sound financial performance supported earning asset growth and again drove strong capital formation. Tangible book value per share increased $0.33, or 2.1% this quarter, to $16.03 per share, and our tangible common equity ratio increased to 8.55% from 8.48% last quarter. Common stock buybacks for the quarter totaled $12.4 million and 589 thousand shares, and we have 2.2 million shares remaining on our current authorization. We reaffirm our previous full-year 2026 guidance of 4% to 6% loan and deposit growth, noninterest income averaging $28.5 million per quarter, and core ROA targeted at 1.2% to 1.3%, with a mid-teens return on average tangible common equity. That concludes our prepared remarks. We will now open the call for questions. Operator: At this time, I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Your first question will come from Feddie Justin Strickland with Hovde Group. Feddie Justin Strickland: Hey, good morning. Just wanted to start on credit and the senior housing facilities. It seems like you do not really expect material losses there, but can you speak any more to the collateral, location, and the types of senior housing facilities these were or are? Thomas M. Lyons: Yes. They consist of independent living, assisted living, and memory care—no skilled nursing—and minimal exposure to Medicaid. There is strong demand for the properties, which is one of the reasons why we expect to see minimal loss as the bankruptcy gets resolved, in fairly short order, we think. As to location, East Coast. Properties range from $15.1 million to, for our share, $31.8 million as the highest loan amount. LTVs, as we disclosed in the release, go from 51.7% to 81.9%. Probably noteworthy is the highest LTV is actually on the lowest loan amount—that is the $15.1 million credit. More specifically, the properties are in New Jersey, Connecticut, Maryland, and Florida. Regarding fees, I think it is just an acknowledgment of some of the volatility in some of those line items; a piece of that was BOLI income. We do expect to see some seasonality in the insurance business, but we are anticipating continued improvement in the wealth management revenues as well over the course of the year to offset some of that to a degree. On SBA, that will be lumpy as well depending on production and where the gain-on-sale margins are at any point in time, so there may be a little bit of conservatism in that $28.5 million average. On loan accretion, there was a significant reduction in payoffs this quarter, which we actually like to retain the asset. If we are looking for 3 basis points of core margin expansion to roughly 3.07%, we are still anticipating a margin in the 3.40% to 3.45% range for the balance of the year, the difference being purchase accounting accretion. Operator: Your next question will come from Timothy Jeffrey Switzer with KBW. Timothy Jeffrey Switzer: Hey, good morning. Thanks for taking my questions. Really quick follow-up on your comments on the NIM. Can you talk about maybe how a Fed rate cut would impact, not necessarily 2026 numbers, but perhaps 2027? Is it accretive to earnings going forward if we get one or two cuts? And then on your loan backlog reprice, I know you have a good amount of loans over the next year or so. Can you update us on how much there is and what the gap is on new yields versus old? And lastly, could you walk us through some of the benefits and new capabilities the core upgrade from FIS will bring you, and whether there are any new products it will enable? Thomas M. Lyons: It is, Tim. I think consistent with last quarter when we talked, each cut is about 2 to 3 basis points of benefit to us on the current balance sheet. On the loan backlog reprice, the loan pipeline is just under 6.25%, and we still have loans coming off in the mid-5s, so there is some pickup. We have isolated that benefit to the NIM to be about 2 to 3 basis points over the 12-month period. It is about $5 billion in the total loan portfolio subject to repricing, but only roughly 60% of that we get a benefit from because about 40% relates to Lakeland-related portfolio dynamics affecting repricing. Anthony J. Labozzetta: So, Tim, to add a bit more color, the loan pipeline is at about just under a 6.25% rate. We can get you the exact dollar amounts offline, but the general impact to margin is the 2 to 3 basis points Tom mentioned as legacy mid-5% loans reprice toward the low-6% pipeline levels. Anthony J. Labozzetta: On the core upgrade, at a high level we will have more robustness around the lending area in terms of information and data flows. Branch account opening will be much faster and more robust. It also creates the foundation for us to attach other applications through APIs that work more efficiently. The FIS core is much more functional for a more complicated commercial bank that has a lot of verticals, so we can get the full benefit on the current core—those are some of the expected benefits. Operator: Next question will come from Stephen Moss with Raymond James. Stephen Moss: Good morning. Maybe just starting off here on the loan pipeline—looking good—just curious how you are thinking about the pull-through given economic uncertainty. I realize you updated or increased the loan growth guidance, but how you are thinking about those things? Anthony J. Labozzetta: I look at our pipeline, pull-through, and commitments—they are looking good. We are still thinking the guidance is good. We might overachieve the guidance depending on what happens with prepayments and market conditions, but I do not see anything right now, given the geopolitical circumstances, that would affect the guidance we have provided. Depending on prepayments, that will determine whether we can overachieve or come close. It is also a pretty good dynamic at Provident Financial Services, Inc. because of the way growth is distributed—it is very diverse. Just by normal dynamics, without us doing anything and just achieving our pre-loan objectives, we can still see the CRE ratio coming down because of capital build and diversification into other books like C&I, specialty lending, and middle market. That is a pretty good dynamic we are accomplishing here, which is our strategic focus. Thomas M. Lyons: As I indicated in my comments, the pull-through adjusted pipeline is about $1.9 billion. If you do the math, that is about a 60% to 61% pull-through rate. In terms of mix, about 47% is commercial real estate and multifamily, C&I is about 49%, and the balance is consumer at about 4%. Stephen Moss: And then on the deposit side, what are you seeing for competition these days, and how are you feeling about funding cost trends? Anthony J. Labozzetta: Competition is probably more heightened than I have seen in the last bunch of quarters. It is getting tougher not only on the deposit side but on the lending side. We are seeing spreads coming down and creative structures on deposit programs—people waiving fees or certain conditions, and pricing pressure. We are responding. We see good dynamics in our consumer and small business sides. On municipals, we have good RFPs moving into the second quarter. Our focus is to get our regional teams and TM teams more expanded so we can get more scale. We feel good about the prospects, but competition is stronger than I have seen in a while. Stephen Moss: On the reserve, with the CECL move down, should we think of this as a one-time adjustment, or how are your thoughts on where this reserve goes? Thomas M. Lyons: A lot of that is dependent on the forecast going forward. I would not expect material continued improvement in that forecast, given macro events. A big piece was the reduction in specific reserves. We had a really strong quarter for resolutions with very minimal losses. You saw net charge-offs of $3.1 million; about $2.5 million of that was previously reserved for, so no need to replenish those reserves. There are limited specific reserves on the remaining impaired loans that have been identified, and we are very positive on resolution prospects for a number of those credits in the coming quarter. We do not see a lot of loss content in the book overall. We also had some improvement in the portfolio, with construction loans reducing a bit, which required less pooled reserves as well. Overall, 6 basis points of charge-offs—we feel strongly about the quality of our underwriting and our credit quality going forward. Stephen Moss: Following up on the credits with the senior housing—are those nonperformers cross-collateralized? Any chance you have a weighted average LTV? Anthony J. Labozzetta: They are not cross-collateralized. They are in Delaware statutory trusts. The specific LTVs are outlined in the release; they go from 32.9% up to 81.9% on the smallest dollar credit. To give more color, these loans went into NPA not because of cash flow issues but because of the bankruptcy of the holding entity that caused payments to stop. That is why we feel strong about ultimate resolution: cash flows are intact, LTVs are strong, and we just need to go through the bankruptcy process. We feel a resolution can happen this calendar year, with minimal to no loss to us. It is hard to say absolutely no loss, but we think it is going to be a positive resolution. Operator: Your next question will come from David Storms with Stonegate. David Storms: Good morning, and thank you for taking my questions. I wanted to start with noninterest income. It was mentioned in prepared remarks that there has been cooperation between insurance and the rest of the business, helping to drive insurance growth. How much more integration or cooperation could there be here, and how applicable could that be to the wealth segment? And then a follow-up on the efficiency ratio, which has hovered in the low 50s—what appetite or ability is there to keep dialing that lower, and do any of the core updates have a significant impact on that? Anthony J. Labozzetta: We are seeing huge momentum. Insurance revenue grew about 21% year over year. The cross-functional dynamic of working with the commercial bank, Beacon, and the retail side is very integrated. Referrals are tracked, but it has become natural—people are doing it because of the value it creates for customers. There is ample room for continued insurance growth, and our focus is staffing up to support demand. There is still a lot of business within the bank that we can refer across, and the same is happening on the Beacon side—we saw positive flows this quarter and good referrals from the bank and insurance back into Beacon. We need to continue building the Beacon salesforce to handle inbound referrals. It is a differentiated revenue stream we can continue to build. On the efficiency ratio, we are constantly looking for operational efficiencies. A big part of today’s ratio reflects investments we have made in technology and infrastructure over the last several quarters; we are seeing revenue benefits from those investments. We will continue branch optimization and deploy technology tools for efficiency. Expect a “do more with less” approach going forward. I would expect the efficiency ratio to continue to trend down over time, though it will be sawtooth as we invest and then recapture positive operating leverage. Thomas M. Lyons: The new core system will help on efficiency—straight-through processing, onboarding, and automated boarding/closing should reduce manual touch and improve cycle times, supporting lower unit costs as we scale. Anthony J. Labozzetta: Kerry, before we move to the next question, I wanted to respond to the last question to Steve: the weighted average LTV on the four properties is 53%. They are not cross-collateralized, but that gives a sense of the size of the issue. Operator: Your final question will come from Manuel Antonio Navas with Piper Sandler. Manuel Antonio Navas: Good morning. Can you revisit the buyback pace going forward and how it is impacted with greater loan growth in the second quarter? You mentioned being opportunistic—what pricing would get you involved? And could you update us on places on the periphery of your geography where you have added talent or offices and their growth ramps so far? Thomas M. Lyons: The pace will depend on market conditions and our expectations for growth. You saw a significant bump in the pipeline rate, but we believe we have adequate capital and capital formation to continue to take advantage of market conditions when warranted. I do not want to define a specific price. We try to keep the earn-back on buybacks in the low three-year range at a maximum level, but it really depends on our current view about asset generation and capital formation at any point in time. Anthony J. Labozzetta: We have added talent in the Westchester market; down the Main Line in Pennsylvania around the Philadelphia area; and we are adding talent into the Cherry Hill area. As part of our growth strategy, that includes lending and deposit gathering, and we are also moving some of our business partners, like insurance and wealth, into those markets to penetrate further. Our strategic plan contemplates further expansion over time. Operator: There are no further questions at this time. I would like to turn the call back over to Anthony J. Labozzetta for any closing remarks. Anthony J. Labozzetta: Thank you, everyone, for joining the call and for your questions. Before we end, I would like to take a moment to congratulate Thomas M. Lyons. This is his last official earnings call. He has been a great leader here and has done so much for Provident Financial Services, Inc. You have been a great partner, Tom, and you will be missed by me and all of your colleagues at the bank. Thank you, Tom. We look forward to speaking with you all soon, and thank you very much. Operator: Thank you for your participation. This does conclude today’s conference. You may now disconnect.
Operator: Good afternoon, everyone, and thank you for joining us today for Ategrity's First Quarter Fiscal Year 2026 Earnings Results Conference Call. Speaking today are Justin Cohen, Chief Executive Officer; Chris Schenk, President and Chief Underwriting Officer; and Neelam Patel, Chief Financial Officer. After Justin, Chris and Neelam have made their formal remarks, we will open the call for questions. [Operator Instructions] Before we begin, I would like to mention that certain matters discussed in today's conference call are forward-looking statements relating to future events, management's plans and objectives for the business and the future financial performance of the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are referred to in our press release issued today, our final prospectus and other filings filed with the SEC. We do not undertake any obligation to update the forward-looking statements made today. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is also available in our press release issued today, a copy of which may be obtained by visiting the Investor Relations website at investors.ategrity.com. I will now turn the call over to Justin. Justin Cohen: Good evening, and thank you all for joining Ategrity's first quarter earnings call. This is Justin Cohen, and I'm joined today by Chris Schenk, our President and Chief Underwriting Officer; and Neelam Patel, our CFO. Ategrity delivered another quarter of record earnings, generating outstanding margins while gaining market share. We produced a combined ratio of 87.4% and grew gross written premiums by 23.1% in an industry that was relatively flat with both metrics better than guidance. We are winning by identifying underserved segments, building solutions that give our distribution partners an advantage and improving the quality and renewability of our portfolio. While competition is increasing, we are defining distinct markets where we can compete on our own terms. This quarter, we extended that momentum by launching several new strategic initiatives, including new regional strategies in Texas, Florida and New England while maintaining strict technical rigor in risk selection and pricing. We will discuss these initiatives in more detail later in the call. As our footprint expands, we are demonstrating operating leverage. Our expense ratio improved 2.5 percentage points year-over-year as earned premium growth outpaced expenses. We continue to optimize our business mix and leverage our centralized underwriting model to improve profitability and lower unit costs. At the same time, we are investing in the business, both to support our growth initiatives and to advance automation and AI across the organization. Turning to the market. Competitive pressure continued to intensify in parts of the E&S market this quarter, but its impact on our business remain limited. By focusing on small- and medium-sized businesses and delivering differentiated solutions, we continue to operate outside the more commoditized parts of the market. We are seeing this play out consistently across the portfolio, reinforcing our confidence that we can continue to build profitable market share. With that, I'll turn it over to Neelam to review our financials, followed by Chris to discuss our underwriting performance and go-to-market strategy. Neelam Patel: Thanks, Justin. We delivered another strong quarter with adjusted net income of $25.6 million, up from $8.5 million in the same quarter last year, driven by top line growth, improving margins and continued strength in our investment income. Gross written premiums were up 23% in the quarter and growth was broad-based. Casualty premiums grew 27% and property premiums grew 13%. Net written premiums increased 32%, which reflects higher retention year-over-year, while net earned premiums were up by 34%. Fee income was $2.2 million compared to $0.6 million a year ago, reflecting standard policy fees introduced over the course of 2025. Our underwriting income for the quarter was $13.3 million, up 87% year-over-year. That translates into a combined ratio of 87.4% compared to 90.9% last year due to reductions in both our loss and expense ratio. Our loss ratio came in at 58.8%, down 1 point year-over-year, driven by strong underlying results in our property business. We had favorable development this period equal to 0.5% of net earned premium. Catastrophe losses were 4% of net earned premium, down from 6.2% last year due to very few CAT events in the first quarter compared to the prior year, where we had modest losses from California wildfires. On expenses, the overall expense ratio improved 2.5 points to 28.6% Operating expense was 10.9% of net earned premiums, down 1.4 points year-over-year. That improvement was driven by earned premiums growing faster than operating expenses, along with the benefit of higher fee income. Policy acquisition costs as a percentage of net earned premiums declined to 17.6% from 18.8%. The improvement was primarily mix driven as growth has been concentrated in lines of business carrying lower acquisition costs and higher ceding commissions. Moving on to investment results. Net investment income was $12 million, up from $7.9 million last year, reflecting a larger investment portfolio. Realized and unrealized gains were $9.5 million, supported by strong results in our utility and infrastructure portfolio. Our effective tax rate was 20.6%, bringing the net income to $25.5 million. Adjusted net income was $25.6 million or $0.51 per diluted share. Turning to the balance sheet. Cash and investments increased by $42 million from the fourth quarter to $1.15 billion, reflecting strong operating cash flow. Book value increased by $17 million, driven by retained earnings, offset by a decrease in AOCI. Our book value per share ended the quarter at $13.13, up 24% since the IPO. Overall, the quarter reflects strong growth, underwriting discipline and increased operating leverage. With that, I'll turn it over to Chris to discuss underwriting and operating performance. Chris Schenk: Thanks, Neelam. Last quarter, we described our business as having multiple differentiated pathways for growth and how that has allowed us to operate independently of market cycles. This quarter is another validation of that model. In a competitive environment, Ategrity delivered another record quarter with all of our key metrics trending favorably. Top line growth of 23.1% with more than 50% coming from strategies unique to us. Expense ratio declined even as we continued investing in production capacity, technology, marketing and partnership management. Rate change remained positive. Cost of product indicators continued to track favorably. We are succeeding because our model is built on two key principles: a long-term view of customer value and a deliberate approach to creating new markets for growth. These are uncommon in E&S. At a fundamental level, all carriers operate within the same growth equation, renewal contribution plus new business production. These are driven by the same inputs. What is your renewal base? What is your retention ratio, average premium, submission growth, quote ratio and buying ratio. The difference in carrier results is driven by which levers they can move and which levers they're willing to move. For us, what we adjust is driven by our view of risk taking and that long-term view is measured in terms of customer lifetime value. For several years, we have optimized the inputs that matter to us. And as the market shifted, these became a clear structural advantage. On renewal inputs, since 2021, we have focused on writing durable, sticky business. That showed up this quarter in a record renewal base and our highest retention since going public. We optimized our retention rate through targeted rate actions while maintaining positive rate across the portfolio. On new business, the levers we can actively manage are submission growth, quote production and average premium. Submission growth was strong. This was driven by our distribution investments as well as our strategic initiatives. Quote production reached an all-time high, supported by the submission volume as well as the quality of those submissions. Our investments in AI and our operating model allowed us to process that volume efficiently while maintaining fast turnaround. Shifting to conversion. Conversion moderated modestly, but that was expected. Conversion is often the least controllable lever for a technical underwriting organization. We were able to win at a higher rate in areas where we have a regional strategy. And finally, average premium. As the competition intensified in larger accounts, we leaned into small and middle market risk in our core verticals where precision, speed and consistency matters most. Those dynamics combined improved the overall quality and renewability of the portfolio. Our results this quarter is straightforward. We retained more of what we wanted, and we added new business with higher expected lifetime value. Our model only works if we acquire business on the right terms, which is why we continue to build targeted growth pathways that position us where competition is less aggressive. This quarter, we launched three new regional strategies in areas with attractive economics and lower competition. Let me take you through how we did this. While headlines suggest that the E&S market is losing share to admitted carriers, the reality is there's a two-way flow, and we are focused on the inflows. Ultimately, there are 50 state-level markets, each with its own distinct dynamics and even more localized submarkets beneath that. Dislocations are constant, and our advantage is identifying them early. To be clear, what we're doing goes beyond simply tracking state-level trends. We analyze municipal level economic, legal and policy trends. We look at submission flows and loss experience, and we even look at admitted market filings to pinpoint opportunity. That work drove targeted strategies in Texas, New England and Florida in the last quarter. Those strategies are focused at a city and even at a neighborhood level. For example, along the I-10 corridor in Texas, we have seen wholesale trade moving into the E&S space, while in Springfield, Massachusetts, older mixed-use properties are flowing into the market. We have built strategies around these specific profiles, and we are offering solutions. And furthermore, we equip our partners with the insights through interactive city guides and targeted marketing, enabling them to source the business more effectively. In doing so, we're establishing ourselves as the go-to-market for these risks. This will, in turn, drive future submission growth, provide offsets should there be any declines in conversion rates. and it will allow us to win on our terms. And finally, this will all feed back into our future renewal base. This is how our differentiated growth strategies translate into above-market performance. Combined with our focus on lifetime value, they create a compounding growth model while preserving underwriting discipline, and this ultimately positions us for superior results going forward. With that, I'll turn it back to Justin. Justin Cohen: Thanks, Chris. Our model is standing out in an increasingly competitive market as we have built a repeatable advantage and are executing against it with discipline. Turning to our outlook. Our top line guidance for the second quarter of 2026 remains consistent with last quarter. We expect direct written premium growth of approximately 20 percentage points above the E&S market, reflecting continued market share gains and the strength of our model. From an underwriting margin perspective, we expect a combined ratio in the 87s, representing continued year-over-year improvement. We thank you for your time listening. And operator, can you please open the line for questions? Operator: [Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan: I was hoping just going back, I guess, tying it a little bit to your growth outlook. If you could just give us a sense when you think you're going to be 20% above, I guess, the industry for the second quarter. What are you thinking about just in terms of property versus casualty top line growth? Justin Cohen: Elyse, at this stage, we're not breaking out the growth by property and casualty, although what I would say is that we do believe that there is an opportunity in the second quarter for property to accelerate a little bit compared to the first quarter. Elyse Greenspan: And then if that's the case, I guess, -- what are you guys seeing from a pricing perspective -- sorry, go ahead. Chris Schenk: Yes. So the catalyst for growth, as we mentioned, are the regional strategies and our -- those are all packaged products. So that alone should give you a signal in terms of how they will move. Elyse Greenspan: Okay. That's helpful. But then what are you seeing, I guess, when we -- we've heard of a lot of just aggressive pretty substantial price cuts on the property side within the E&S market. What are you guys seeing from a pricing perspective, both in property as well as within casualty? Chris Schenk: So we -- there's two dynamics. There is there's CAT property where there's very aggressive competition. Those tend to be larger accounts also. We are not in that space. We -- that's not core to us. So we have not observed those dynamics. as severely as our peers had. When it comes to just large non-CAT accounts, we did see some more pressure there, and we chose to walk away because the rates were not right. We had more than enough opportunities in small and medium to compensate. Elyse Greenspan: Okay. And then I think you guys said there was 0.5 point of, I believe, was favorable development for the quarter. What drove that? Just some color on lines and accident years? Justin Cohen: Elyse, if you may recall from the last earnings call, we talked about how we have been very conservative in recent years on both property and casualty. In particular, we spoke about how property, we were booking at a prudent accident year ratio -- current accident year ratio, even though we hadn't quite seen the losses come through. As we went through this quarter, that continued. So we haven't seen that development that we expected. And even into this quarter as well, that trend continues. So we think we're very prudently reserved there. And that this quarter was a release of some of those reserves in property 2025. Operator: Our next question comes from the line of Pablo Singzon with JPMorgan. Pablo Singzon: Your attritional loss ratio, I think, was up year-over-year. And then I guess if you take a step back and look at it on an annual basis, it seems like it's been going up as well. And I assume that's mainly mix. I was wondering if you could talk to what's going on beneath the surface there? Justin Cohen: Yes. We have not changed our underlying liability loss pick. So there is a component of that, that is mix. And the other component is that, again, in this year, we are booking our attritional property in a conservative way relative to last year and especially relative to the losses that emerged in the first quarter that have actually emerged in the first quarter. Pablo Singzon: Makes sense. And then second question on reinsurance retention. So that stepped up year-over-year as you sort of communicated before. How will that ratio look for the balance of the year? And is there more appetite to bring it up in subsequent years? Justin Cohen: Yes. There is -- this year should be relatively consistent with regard to reinsurance. We had stopped or nonrenewed a casualty quota share formally this year. So we had done a half step in the beginning of '25 and half step in 2026. And so what you've seen in the first quarter is relatively consistent. There is some mix amongst quarters because there's more property in some quarters than others, but this is a good benchmark. Operator: Our next question comes from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman: And I'd like to get a sense of pricing a little more granularly. I know Elyse was asking. But on the property that you are writing, and I suspect that's a lot of the smaller property accounts as well as casualty, could you talk about the rate that you're getting there? Chris Schenk: Yes. So as part of our renewal playbook, we sought to -- we managed to lifetime value. So we actually had accounts that performed really well, and we give back some rates there, as I said on the call. Overall, we had net positive rate change. In terms of what we're seeing on new business -- there is the pressure on the CAT-exposed business. There's pressure on business in certain parts of Texas, certain parts of Florida. We have a regional strategy for Texas and Florida. We are -- where we are, there is less competition. So most of the market is competing for and competing on price. In Houston and Galveston, we are in Laredo and Waco and El Paso and San Antonio. Those are -- it's a different risk profile and also smaller markets. That's really what is driving the new business growth. And we -- as a result, new business rate levels are slightly above our -- what we would expect, if not flat. Andrew Kligerman: Got it. That was helpful. And with regard to those regional strategies, and that was an interesting comment, Chris, about being in some of the smaller markets in Texas, for example. Could you elaborate a little more on what industries you're looking for with these smaller businesses in smaller markets? Chris Schenk: Yes. So the binding constraint here is that we do not go beyond our core verticals as we go into a region and build our playbook. So we look for opportunities within our core verticals which we have talked about in the past, construction, hotel, hotels, restaurants, retail, residential real estate. So we are still sticking to our core verticals. We have some emerging verticals like wholesale trade, which we do in small business, and we're now expanding into middle market. That is -- I mentioned that one on the call. A lot of that is emerging in Texas. In addition, we have mixed-use retail. So those are effectively occupancies that are a little bit more complex because you have multiple types of businesses on the first floor of a building with an apartment building with apartments above. So that type of mixed occupancy is something that you need specialized knowledge for, right? So we are a restaurant and a retail on the first floor is something we can figure out. Those are the types of classes. So we are not deviating from our core specialist classes because, in fact, it's the specialized knowledge that makes the difference. Andrew Kligerman: That sounds very thoughtful. And if I could sneak one last one in. So with the policy acquisition costs at $17.6 million and the operating expense at 10.9%, just given the rationale that you provided, these seem like sustainable numbers. So 28.6% on the expense ratio seems like a decent run rate. Am I thinking about it right? Justin Cohen: Yes, Andrew, I think that's right. The 17.6% in the acquisition cost is a strong ratio, and it's been going down because we've been mixing into brokerage, which has lower commissions. There will be a very, very modest upward trend there in terms of one as the earning of the ceding commissions on the quota share go away, but that will be very modest. And we still do believe we have meaningful opportunity on the expense ratio over time because we are -- we have the scalable model. Chris Schenk: We have talked about AI. We have talked about technology that is in development right now. We have a number of solutions that are in pilot phase. And as those get fully implemented, they will provide for further leverage. And as we have been developing those, we are doing them in a relatively cost-effective way. So -- we're not building that legacy tech debt which one might assume based on what the historic cost around these types of solutions might have been. Operator: Our next question comes from the line of Alex Scott with Barclays. Taylor Scott: First one is on distribution. Can you talk me through sort of the timing of when you launch some of these new initiatives like the Texas-based initiative in New England? And is that -- are we starting to get new business coming through from that? Are we still in the phase where we're kind of building out distribution? And how will -- if we are building out distribution still, like how does that roll in over the next 12 months? Chris Schenk: So the way we approach the regional strategy, it does start with an appointment strategy. So that starts well ahead of our official launches. So New England launched 2 weeks ago, for example. But starting in September, the distribution buildup was in progress. So we actually did get some contributions from New England as a result, even though the official launch event, if you will, was just 2 weeks ago. Similarly -- similar for Texas, similar for Florida. There is a market -- there's an engagement phase where we get feedback from the market regarding solutions that we're willing to offer, and that alone starts to generate interest in doing business with us. Then there's an appointment phase and then there's the official launch event, which is really a marker more than anything else. Taylor Scott: Got it. Okay. Could you talk about gross versus net premiums and just how we should think about your retention and how that will be expected to trend here? Chris Schenk: Yes. So as you probably saw the retention is up meaningfully year-over-year, which we expected. And that was, as I referred to earlier, the cessation of the quota share on our primary casualty business, which was purely opportunistic in nature. So we are deploying capital through that, and that's why our retention ratio has gone up into the 80s, which we think is the -- in the low 80s is the right place to think about it going forward. Operator: [Operator Instructions] Our next question comes from the line of Matthew Heimermann with Citi. Matthew Heimermann: Two quick ones or one quick one and then a follow-up. Do you have losses in the quarter, right? Chris Schenk: We do -- it will be in the Q, but the -- I think the [ paid-to-incurred ] just to back into it, we're in the mid-50s. Matthew Heimermann: Okay. And then just for -- I don't know if this is for you, Chris or Justin or both. But just thinking about like with the regional strategy going focused on the smaller account sizes, I'm curious just what the -- what competitors you're potentially displacing there? And is it legacy carriers? Is it some of the MGAs that maybe are -- is it traditional MGAs or tech-enabled MGAs where maybe the cost structure is a little less advantageous relative to what you can do? Just be curious your thoughts on kind of who you might be competing with there, given it's different than the majority of the calls that we would listen to as we go through the quarter? Chris Schenk: Yes. So on the E&S side, very few carriers truly have a playbook for the places that we are -- where we're competing. We are positioning ourselves to absorb business coming out of the admitted market. Part of this is studying what is flowing in E&S and being proactive in designing solutions. That is very different than what many of our peers do. And in fact, is a more traditional E&S playbook would be take whatever comes in, wait to see what comes in, build solutions in a bespoke way for whatever comes across the underwriter's desk. We are studying what's actually exiting the market, building a solution. And as I mentioned on the call, we have these city guides, right? So we are actually giving our partners, our wholesale partners, wholesale distributors, the city guides, they're interactive. The up on their iPhone and they can have a conversation with their retailer that says, this is what's coming out of the admitted markets. I have a home for it. It's called Ategrity. And that is what we're doing here. So it's less about displacing more so kind of guerrilla marketing, if you will. Matthew Heimermann: Okay. And it does sound like it's fair to read you a few carriers doing this as it is other intermediaries who might be aggregating or it's just rifle shot -- excuse me, it's just kind of a shotgun approach for a retailer if they have one of these particular risks previously? Justin Cohen: You're asking do the retailers have this risk, the wholesalers to the retailers. I think as Chris was saying, we're helping -- we're providing the opportunity for growth for our retail partners more than anything else. Chris Schenk: For our wholesale partners... Matthew Heimermann: For our wholesale partners. Justin Cohen: Their clients are the retailers in a framework. Matthew Heimermann: My question was as they're going -- yes, but is that like -- sorry, I should have said wholesaler, not retailer. But the point was, is that wholesaler kind of like shotgun isn't quite sure where to go in the market in the past or it's still going to traditional carriers? Or are there, in your mind, some other intermediaries kind of playing in these channels? That's -- I get what you're doing. I'm just trying to figure out what the home -- what might have been in the past for this business if you haven't stuck in front of it? Justin Cohen: So that retailer did not need to work with a wholesaler because they would have been able to go to an admitted market. So in this scenario, now that they need to find a home for that specific profile, we are being proactive in telling them where that home is. That's what our wholesalers are doing. And that's why we invested in the marketing because we want to be the first in the door to make sure that we establish ourselves in that way. Operator: Our next question comes from the line of Alex Scott with Barclays. Taylor Scott: I just want to see if you could give us a feel for how persistency has been running. Any kind of metrics you can give us and particularly as you've kind of lapped some of these bigger initiatives, how is that trending? Justin Cohen: Yes. So our retention rate was the highest since we've gone public. And we had a larger renewal pool, so which means that our theory of kind of a highly -- high lifetime value for each account acquired is starting to prove out. And in fact, so with the newer strategies, in fact, though, with Project Heartland, for example, where we're now two or three renewal in, we are now starting to see that lifetime value target come into place, which we have not disclosed, but we do have a target. Taylor Scott: Okay. But you guys aren't willing to offer up just at a high level how persistency is running for the overall book? Justin Cohen: When you say persistency, you mean the retention rate? Policy retention rate? Taylor Scott: Yes. Yes, correct. Justin Cohen: We're not disclosing it. Taylor Scott: Okay, all right. Operator: We have reached the end of the Q&A session. I will now turn the call back to Justin for closing remarks. Justin Cohen: Well, thank you all for joining us this evening. We thank you for your interest in the company, and we look forward to speaking with you in the weeks ahead. Take care. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings. Welcome to the L3Harris Technologies, Inc. First Quarter 2026 Earnings Conference Call. At this time, participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Tony Calderon, vice president investor relations and corporate development. Thank you. Tony, you may now begin. Tony Calderon: Thank you, Tiffany, and good morning, everyone. Joining me today are Chairman and CEO, Christopher E. Kubasik, and CFO, Ken Sharp. Earlier this morning, we published our first quarter earnings release detailing our financial results and updated 2026 guidance. We also filed our 10-Q and provided a supplemental earnings presentation on our website. Before we begin, please note that today's discussion will include forward-looking statements subject to risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information, please refer to our earnings release and SEC filings, which will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release. With that, I will now turn the call over to Christopher E. Kubasik. Christopher E. Kubasik: Thanks, Tony, and good morning, everyone. I would like to start by thanking Kenneth L. Bedingfield for his two-plus years as CFO, and for taking on the missile solutions segment president role this past year. Ken is now focused full time on expanding solid rocket motor production capacity in support of the Munitions Acceleration Council program. I would also like to welcome our new CFO, Ken Sharp, to today's call. He joined the team in mid-March and has hit the ground running. I continue to believe L3Harris Technologies, Inc. attracts the best talent in the industry, and I am excited about what we are building here. Also, I would like to thank our employees for a great first quarter—one of the best we have had—and especially those employees that are forward deployed supporting our warfighter. The global security environment is evolving rapidly, and the implications for our customers are increasingly clear. Across the Middle East, Europe, and the Indo-Pacific, the threat environment is driving greater urgency around readiness, resilience, and modernization. Our customers are focused on capabilities that can be quickly fielded, and they are looking for partners that can deliver. This positions us well to drive industry-leading growth. Our strategy is aligned with customer demand. The Trump administration has made it clear that rebuilding the defense industrial base is a national security imperative. The Pentagon and Congress are increasingly supportive of multiyear procurement authorities and other mechanisms to improve throughput across the ecosystem. In support of that imperative, there has been a step change in the DoD budget request driven by the need for affordable solutions that can be produced at speed and scale. With a $1.1 trillion base budget request, and $350 billion in reconciliation funding, the proposed budget sends a strong signal that our nation must invest in the industrial base. Specifically, the president's request reinforces demand signals for critical missiles and munitions, SDA tracking layer, Compass Call business jets, and tactical communication modernization—all of which align with our core strengths. At the same time, our allies are expanding their defense budgets. There is a greater urgency around modernization in Europe and other key international markets. Our international book-to-bill was 2.2 for the quarter. Over the past five years, we have embraced the unique trusted disruptor strategy that positions us between traditional primes and the new defense tech companies. We are delivering at the scales expected of a prime combined with the agility and rapid missionization of new defense tech companies. Our consistently strong financial results demonstrate the success of our strategy. Everything we have done for the past five years is positioning us for sustained growth for the next decade. We have purposefully positioned ourselves around the fastest growing priorities including space sensing and missile defense, aircraft ISR missionization, resilient communications, and missiles and munitions. Our customers are moving with urgency. They need capability delivered at speed, at scale, and with proven performance. We are aligned with those requirements, and we are executing against them now. Capacity is the new capability, and that is what L3Harris Technologies, Inc. has. So let us get into the details. Our backlog has almost doubled to over $40 billion, and that does not yet include the $25 billion of orders for the Munitions Acceleration Council programs which are currently in negotiations. This record-breaking backlog also positions us to be more durable and predictable as we have increased to two times revenue coverage. In Q1 2026, revenue grew over $600 million, or 15% organically. Revenue has now grown organically in nine of the last 10 quarters. Our operating income increased by $125 million. We continue to expand and deliver industry-leading margins underpinned by strong program performance even as we continue to accelerate investments in our business. Segment operating margins have now increased for the tenth consecutive quarter. Our focus on transformation and being agile meant reducing unnecessary cost and streamlining our operations. Revenue per employee has increased by almost 25% over the past couple of years, driven by productivity improvements and aided by investments in technology, including AI. Earlier this year, we entered into an agreement to sell 60% of our space propulsion and power systems business, announced and closed the novel partnership receiving a $1 billion investment from the Department of War, and filed a confidential Form S-1 with the SEC last night to take our missile solutions segment public. We accomplished all of this while delivering an impressive first quarter. Key orders this quarter highlight our strategy in action. We achieved a 1.4 book-to-bill with awards in missionized aircraft, solid rocket motors, and software-defined communication products. Within Space and Mission Systems, we built on our fourth quarter marquee win, the South Korea airborne early warning and control aircraft program. We won another international multi-aircraft missionized business jet program just a few months later. This award with a NATO ally is valued at more than $2.2 billion with an initial $726 million order booked in the quarter. We also secured the Strategic Tanker and Transport Capability award in Canada with two contracts totaling approximately $700 million to support the Royal Canadian Air Force. Within resilient communications, international demand for software-defined tactical communication products remains very strong. This quarter, we booked $460 million of international orders with three NATO member countries who prioritize resilient, low probability of detect communications in contested environments. In missile warning and missile defense, we have invested in building differentiated positions. To date, we have secured 56 SDA tracking satellites, driving growth in our Space and Mission Systems business. We submitted our HVTSS follow-on proposal and look forward to a midyear award. Within our ISR business, we have produced over 100 missionized business jets over the past decade. In the quarter, we delivered the first two Peregrine business jets to the Royal Australian Air Force to advance their airborne ISR and electronic warfare capabilities. Our business continues to grow with 20 missionized business jets in production. Turning to resilient communications, we have an installed base of 1 million software-defined radios worldwide. We are well positioned to increase that by 20% over the next couple of years supporting customer needs for secure, upgradable systems that operate seamlessly in contested environments. Our missile solution strategy, including the $1 billion Department of War investment which we received in April, and our planned IPO represents a thoughtful and creative evolution in how we are positioning the business. We designed this model intentionally to move faster, unlock incremental shareholder value, and align more closely with customer priorities in a rapidly evolving environment. We continue to move quickly to accelerate the expansion of solid rocket motor capacity. Our customers are taking note of our investments, all of which are reflected in our 2028 financial framework. In February, we proudly hosted the Secretary of War in Camden, Arkansas, to highlight the progress on our solid rocket motor capacity expansion and to meet our patriotic workforce. Our missile solutions business is making excellent progress. Our team is in place. The S-1 is filed. Negotiations on multiyear procurement frameworks are progressing. And we expect to synergize contracts later this year. Our new missile company will be named Axyv, spelled A-X-Y-V. The Axyv name is inspired by the engineering of missile guidance and positioning: the A for axes of X and Y and the V for the velocity of the missile trajectory. Axyv conveys how we think about the business, with clarity of strategy, certainty of direction, and focus on agile execution. The company is built for momentum, with a portfolio designed to deliver at scale. As you can see, we delivered a strong first quarter, reinforcing our line of sight to our 2026 commitments and the 2028 financial framework. I will now turn the call over to Ken for the financial results. Ken Sharp: Thank you, Chris. I would like to start by saying it is an honor to join the L3Harris Technologies, Inc. team at such a pivotal time. I am excited to contribute to a mission that plays such a critical role in supporting the men and women who serve our country as well as those of our allies. I also want to sincerely thank the entire L3Harris Technologies, Inc. team for such a warm welcome. Our strategy as trusted disruptor continues to drive strong financial results. We have the capability to invest and deliver at scale while having a commercial mindset to anticipate customer needs, innovate, and rapidly bring solutions to the warfighter. This approach has allowed us to outperform our legacy peers over the last couple of years as we have fundamentally changed our processes, cost structure, and strategic focus. You can see this in a multiyear financial proof point Chris highlighted earlier. Revenue grew, as reported, over $600 million to $5.7 billion, yielding 15% organic growth. We experienced particular strength in our Space and Mission Systems and Missile Solutions segments. We also continue to experience strong international demand with growth accelerating over 20% as our allies modernize their technologies and invest more heavily in their national defense. Segment operating income increased $125 million to $902 million. The increase was due to revenue volume, improved program performance, and higher monetization of legacy assets, partially offset by higher growth in businesses with lower average margin and increased investment in research and development. Segment operating margin was 15.7%, up 10 basis points from the prior year. GAAP earnings per share of $2.72 was up 33% year-over-year. The increase reflects higher operating income, lower interest expense, and a lower effective tax rate, partially offset by lower pension income. Free cash flow was an outflow of $187 million, driven by working capital timing. The Q1 free cash flow is typical of our trends. As a reminder, we now report on a GAAP basis for both segment operating income and earnings per share. This change reflects our continued commitment to enhancing transparency and further improving the quality of our earnings. I would also note that the prior-year quarter had fewer working days. Lastly, our investment in innovation and capacity, which are hallmarks of our trusted disruptor strategy, increased 44% in the quarter. Turning to our segment results. Space and Mission Systems delivered revenue of $3 billion, up 24% year-over-year, driven by strength in a number of our sectors. Space and Mission Systems revenue benefited from a milestone associated with procurement of material on a new classified program. Segment margin increased 60 basis points due to improved program performance, partially offset by increased material purchases and increased investment in research and development. Communication and Spectrum Dominance delivered revenue of $1.9 billion, up 3%, driven by increased volume of resilient communications products, night vision devices, and the ramp-up on the Next Generation Jammer electronic warfare program. Segment operating margin increased 60 basis points due to higher sales of resilient communication products and night vision devices, and a favorable legal settlement. This was partially offset by higher investments in customer demonstrations, prototypes, and research and development. Turning to Missile Solutions. Revenue was $1 billion, up 18%, and segment margin was 12.5%, up 110 basis points. Revenue increased on higher production volumes across key missile, munitions, and space propulsion programs. Missile segment margins increased due to mix and volume and a gain on the sale of legacy assets, partially offset by net unfavorable EAC adjustments. I will now turn the call back to Chris. Christopher E. Kubasik: Alright. Thanks, Ken. Let me highlight a few examples that demonstrate our agile approach to innovation and growth. Within our missile warning and missile defense business, the DoD jointly recognized the government and our Space Systems team with the 2025 David Packard Excellence in Acquisition Award. This award acknowledged the success of this joint team on the HPTSS program. The system successfully demonstrated tracking against a hypersonic target. It is proven and ready to defend the nation. Turning to the threat from unmanned aircraft systems, we anticipated a need for low-cost counter-UAS systems. As a result, we invested ahead of need to develop this capability and converted an existing factory to integrate our VAMPIRE counter-drone systems. We are positioned to capitalize on the rapidly expanding pipeline for these critical counter-drone systems. Our VAMPIRE system is combat-proven with hundreds of successful drone engagements, providing a modular, highly effective, low cost-per-kill solution. And we supported the successful Artemis II mission, contributing over 100 critical subsystems and components including propulsion, compute, communications, and critical systems for the first crewed lunar mission in more than fifty years. This mission demonstrates the breadth and depth of our engineering talent and our ability to support some of the most complex missions in the world and beyond. Taken together, these examples highlight a consistent theme. We are aligned to the most important missions, delivering capabilities needed today, and building the capacity required to sustain that growth over time. Back to you, Ken. Ken Sharp: Perfect, Chris. Turning to our 2026 guidance on Slide 10. We are reaffirming the full-year revenue guidance of $23 billion to $23.5 billion, representing 7% organic growth at the midpoint. We are maintaining our segment operating margin guidance of low 16%. We are increasing both the bottom end and top end of our GAAP EPS range by $0.10 to $11.40 to $11.60. We are reaffirming our free cash flow guidance of $3 billion. Our cash generation will be weighted to the back half of the year. At the segment level, we are reaffirming our revenue and segment margin guidance. Our 2026 guidance and 2028 framework continue to include Missile Solutions as it exists today. Consistent with our past practices, we do not contemplate impacts from the planned Missile Solutions IPO, the Department of War investment, or the planned sale of a majority stake in our space propulsion business. When these transactions occur, we will update our guidance accordingly. Moving to our supplemental guidance, our non-service income increased $20 million to $290 million and total pension income to $310 million. With that, Tiffany, please open the line for Q&A. Operator: We will now be conducting a question-and-answer session. At this time, please limit to one question per person. If you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 1 if you would like to remove your question from the queue. If you have an additional question, please press star 1 again to get back in the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question today comes from the line of John Godin with Citigroup. Please proceed with your question. John Godin: Ken, I wanted to ask about SMS and CSD, and I am reminded of a very cool chart you had at the Investor Day that showed growth versus valuation, and it implied that SMS multiyear growth was going to be considerably higher than CSD. When I look at the consensus estimates that are out there, it is pretty tightly packed. So I would love to use the opportunity to chat about SMS and what that growth profile might look like over the next couple of years and understand if there is upside to that growth over time, how you guys see it. Thank you. Christopher E. Kubasik: Alright. Thank you, John. This is Chris here. I appreciate you referring back to that chart. I think that was an important chart, and something people want to go back and reference. SMS had a great first quarter, as you saw, and the pipeline is very strong. In our ISR business, about a decade ago we started investing to position ourselves for missionized business jets. A perfect example was the South Korea award in Q4. We talked about the NATO country, and it all started with the Compass Call. We currently have 10 under contract today, and if you look at the budget request, you will see another 12 bringing the fleet to a potential for 22—and I believe many, many more. So I think what is unique about this market, and just ISR alone, is how well we perform and how quickly we move as a team. Specifically, we can basically take a commercial aircraft and in 18 months missionize it, which is unheard of for a military aircraft. Everyone is wanting early warning systems. I think this is one of the best platforms out there, and I think the future of ISR is very bright as a result of that one market. Space—we have talked a lot about space. This is another decision strategically we made about five years ago to invest in space, to be a prime satellite manufacturer. We have won every SDA competition. We submitted the proposal for the follow-on to HPTSS. We would expect to win that here, hopefully, in a few months, and the space business is growing quite well. In maritime, which is also part of SMS, there has been a huge increase in the budget for Navy and Navy ships, so we have the acoustics, the optical, platform and communication systems. So absolutely, we stand by the guidance we gave for the year, which I think is better than most out there, and we will continue to monitor and see if any adjustments are appropriate as the year progresses. Operator: Our next question comes from the line of Ronald Epstein with Bank of America. Please proceed with your question. Ronald Epstein: Yeah. Hey. Thanks, guys. Good morning. Chris, could we go a little deeper on what is going on in the space business? I mean, there was so much growth there, and I do not know what you can say around Golden Dome and what is going on there. But I am certain if you can give any more color on that, everybody would appreciate it. Christopher E. Kubasik: Yeah, Ron. Good morning. I think I will put it in two big buckets. We have missile warning and missile tracking as one line of business, and we have the classified work. I will give you some insight, which will probably be unsatisfying, but nonetheless, those two lines are growing very, very well. On Golden Dome, there have been a lot of opportunities there. It has taken a while for the monies to be identified and freed up so that the Space Force can go ahead and start the acquisition process. I mentioned the RFP came out for the HPTSS follow-on. We, and I am sure others, have submitted our proposals, and that is currently under evaluation. There are some other capabilities that are classified that fall under the broad Golden Dome umbrella. But let me just say with our capabilities, we are responding to RFPs, and our ability to build these satellites relatively quickly, affordably, and get them launched and performing I think is a differentiator. Actually, later this year, our customer will be launching the Tranche 1 eight satellites, and I think that will be pretty exciting. On the classified, I can tell you that we have been awarded a sole-source contract for $600 million with the potential for billions of dollars of follow-on. That is a result of our past performance, a creative, innovative solution that is working and is pretty much a game changer. So I have to acknowledge the customers are doing what they said, and they are going to reward and recognize those companies that are in fact performing. And in this environment, where speed and capacity matter, we have the factories. We have talked about the 200 thousand-square-foot investment we made a few years ago. We are performing, and I believe that positions us well for growth. I would like to point out on the HPTSS, which is probably why we won that award, it demonstrated capability—the only one to my knowledge that did. So that is why I am optimistic that we should win the next award. Operator: Our next question comes from the line of Myles Walton with Wolfe Research. Please proceed with your question. Myles Walton: Thanks, and good morning. Chris, on the topic of awards, you mentioned $25 billion of orders pending with the Munitions Acceleration Council. Do you expect those negotiations to wrap up in the next quarter or two quarters? Is this going to flow through quickly in one fell swoop, or is it more the visibility of the pipeline, and it will come out over time? Christopher E. Kubasik: Yeah. Thanks, Myles, and good morning. Step one is the framework agreement, which I have to admit in my decades of being in this industry is a new concept. I would think of that as a term sheet, if you will. We are in negotiations, again, as a supplier providing the solid rocket motors to the two major primes—Lockheed and Raytheon, specifically. They have announced their framework deals. They tend to be seven years for most of these MAC programs, like PAC-3 and THAAD, and maybe some are five-year programs or frameworks. They have theirs in place. We are close to finalizing those frameworks as a subcontractor framework with a prime. That should occur here in the near future. There we are basically agreeing on the pricing, the schedule, and some of the key terms. Those documents will allow us and give us confidence to continue to invest, even though we have been investing, to accelerate our investments. The $1 billion from the DoW is additional cash that accelerates that investment. Then the next step will be for the primes to go ahead and turn their framework agreements into contracts, and then I think shortly after that, we would turn ours into contracts. We are targeting the end of the calendar year. We have plenty of business and backlog that we are upon. This would be the next tranche. I do not see any line breaks or anything. In fact, we will be ramping up. I have to give the Department of War credit for their innovative approach to acquisition here. What is going on now has never been done in the history of our country, and they are going fast. We, and the rest of the defense industrial base, are keeping up with them to the best of our ability. I think it is a once-in-a-lifetime opportunity, and we are seeing a major shift—all for the positive—going forward. The budgets are up. We have the new technology. It is performing. Demand is up. And at the end of the day, you need the capacity to build all this stuff. We have the capacity, and we are even increasing it more. So I feel pretty good about where we are, Myles, and appreciate the question. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question. Sheila Kahyaoglu: Good morning, Chris and Ken. Chris, maybe digging into Ron's question a bit more—you had such stellar growth in Space and Mission Systems. Can we talk about the ISR portfolio, how that did, how it is growing, how South Korea is coming in, and can you maybe talk about the international pipeline there? Christopher E. Kubasik: Yeah. Thank you, Sheila. ISR has been a complete turnaround over the last couple of years, and it is both domestic and international. Let me start with the domestic side. There are a fair amount of classified programs that we are working on. Again, we are platform agnostic. We are taking anything from, as you know, crop dusters all the way up to major large commercial aircraft and missionizing, modernizing, as we have always done. There probably is not a platform we have not worked on. I mentioned 100 different aircraft in the past decade. I highlighted Compass Call as an example. If we can get this budget passed and get an additional 12, that is a big deal for us. That is how I see the domestic side. On the international, we were just reviewing the other day. We have about a $40 billion pipeline just on ISR international, to answer your question. When you look at South Korea—and I know that was in the fourth quarter—but I think everyone on this call knows how long and how hard it takes to close these international deals. To have a marquee win like that and, literally months later, to get a call from a NATO customer based on that award and all the great work we are doing is unheard of in my career. So we have the momentum. There are other international opportunities. Everybody wants early warning systems. And airborne aircraft by modifying a commercial plane seems to be the best, quickest way to get that capability. That speaks for a bright future, and that is why you see the growth for not only 2026, but all the way through the 2028 framework that we laid out two months ago. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Please proceed with your question. Seth Seifman: Thanks very much, and good morning, everyone. I wanted to ask about the communications business and what you learned and your takeaways from the budget request, both in terms of the traditional programs in the Army and the Marines, but also this new C2 infrastructure and C2 transport lines in the Army budget with some significant resources. How do you think about those and your ability to participate there? Christopher E. Kubasik: Okay. Thank you, Seth. I was hoping I would get that question. Good morning. We will start domestically with the Army HMS program. This has been a long legacy for L3Harris Technologies, Inc. Happy to report that in 2027, the budget is $515 million. I think there were concerns, including myself, that early on the president's budget request or discussions were that that would be cut significantly. So $515 million is a big deal. Even more impressive is that similar amounts are outlined for the next five years. So Army HMS is well funded and hopefully eliminates a lot of the concerns out there about the future of that portfolio. When you switch to the Marines, 2026 was a little bit of an off year. Their budget was down to $200 million. As of today, they have requested $750 million. So $200 million to $750 million for the Marines. They love our software-defined radios. They see the need for resiliency in dangerous and contested environments. We add in our stealth waveforms, and the affordability of these compared to maybe other options out there gives me a lot of confidence that at least the domestic side is looking good. You may recall we won a sole-source IDIQ a couple of years ago for the Marines. I point that out because clearly the vehicle is in place—contractual vehicle is in place—if they want to move quickly. This continues to demonstrate the power of the commercial business model that we have talked about for at least a decade, and we will continue to talk about it. We have had it for close to twenty years. It is working, and I think this kind of budget and demand signal is attributed to the commercial business model, which is why I have been advocating for more and more commercial opportunities for the defense industrial base to compete on in that level playing field. The other piece that gets a lot of attention, rightfully so, is NG C2. That is a large budget—$2.8 billion, to be specific. We are absolutely supportive of the NG C2 strategy and initiative. There is a transport layer, as they call it, which is basically where our software-defined radios, I think, will play nicely. We have already been awarded two contracts under NG C2 for the transport—admittedly not huge contracts—but still two pretty early on. The rest of the money is also associated with the infrastructure. So the Army and other companies—we are working with the Army and other NG C2 companies—to ensure that our products and radios can seamlessly integrate into an open-systems architecture that is currently being developed. I feel pretty confident and optimistic about our radio business, whether you look at the domestic side or internationally. I will switch internationally. As I highlighted in my prepared comments, there were three NATO allies—I will not mention them by name here—who are in fact buying our products. Belgium and Netherlands are other opportunities we are working on. Those are targeted for Q4 of this year. All these programs, as we have talked about, are ten-year modernizations. They have road maps. We can see the quantities. We can see how our new products and investments are paying off. In general, all these countries are about 20% complete, so there is a long runway ahead of us. As I mentioned, 2.2 book-to-bill international. There have been concerns whether anyone, including us, can grow internationally for all sorts of political and other reasons. But as we have said, at the end of the day, they want the best technology, and we are winning business in those countries with indigenous capabilities and head-to-head competition. Ken Sharp: Alright. Just a quick add, Chris. One, they are spectacular radios and great to have them in the hands of the warfighter. We do expect the business to accelerate as the year progresses and get to our guidance estimate. Operator: Our next question comes from the line of Douglas Harned with Bernstein. Please proceed with your question. Douglas Harned: Yes. Good morning. Thank you. I wanted to continue on this theme on communications. In the past, part of what has enabled you to get the margins you have gotten in radios has been your own investment, your own IP. You said this quarter that you had higher R&D spend in both SMS and CSD. Can you talk about how you are looking at your own R&D investment going forward and what percentage of revenues you see that moving forward at, and then how you see that being used across your portfolio? Christopher E. Kubasik: Yeah. Good morning, and thanks for that question, Doug. We are proud of the fact that we were able to increase our margins while investing. It is a huge growth market. Nobody denies that there is a huge demand, and this is kind of a once-in-a-generation opportunity to build backlog and to differentiate ourselves. We are absolutely investing in the radio business. Specifically, we will be rolling out a new radio shortly. We call it the Falcon V—following on from the Falcon IV—but it has some great new technologies that I think will be well received, and the main focus there is on the high data rate, which again is a need and a desire by the customer. We have made those investments to allow for that to occur. As with everything, these are all ten-year modernization cycles. I mentioned that international is about 20% complete. When I look at the domestic market, they are maybe halfway through their modernization. These go on ten-year cycles. We have been investing. We are increasing. As we roll out these new capabilities, I think it is going to increase our market share. There has been no cutting back relative to that. We stick in that 2.5% to 3% of revenue for our R&D, but the reality is we will do whatever it takes based on the demand and the opportunities. As we have talked before, we have well over $1 billion of CRAD contracts. In some cases, the customer gives us R&D contracts. I would put that on top of it. We kind of kick around $2 billion or so a year we are spending in R&D, and if you throw in the Shield Capital investments, it is another way of accelerating it. I really do not look at it from a specific account. We are spending all-in maybe 10% of revenue, in my opinion, on innovation, growth, and R&D. Hopefully, that helps, Doug. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed with your question. Noah Poponak: Good morning, everyone. On the surface, the high rate of organic revenue growth and new order bookings growth in the quarter makes the reiteration of revenue guidance look a little conservative. I know you have the non-linear working weeks. If you could talk through how much was there pull-forward, is there conservatism, is it just the math of the working weeks? And then, Chris, you referenced your backlog coverage now being meaningfully higher. Does that make you feel more like there is upside risk to the near term, or more like the existing growth has longer duration? Christopher E. Kubasik: Thanks for that, Noah. It definitely gives me confidence in the longer duration of revenue growth. As I mentioned, once we get these MAC programs in, you can see $60 billion to $70 billion of backlog in the next twelve months for L3Harris Technologies, Inc., which, if you go back not that long ago, is pretty darn impressive. As I reiterated, everything we have been doing over these last three to five years had a purpose to align with the strategy that we have laid out called the trusted disruptor—which I know not everybody understands what it means—but whether you understand what it means or not, you cannot argue with the financial results, not just this quarter, but for the last three years. We are growing. We are adding backlog. If we can end the year or next twelve months with $60 billion to $70 billion of backlog, that gives me a lot of confidence in the future of growth and the visibility. Of course, we always have the potential to try to accelerate and pull some of that stuff forward. I think I will ask our new CFO, since I defer to my CFOs on guidance adjustments and take their recommendations. Sounds like they wanted us to increase revenue. Why did you not do that then? Ken Sharp: Alright. Thanks, Chris. Look, it is absolutely a great quarter. Great start to the year. Fifteen percent organic revenue growth, margin expansion, 33% EPS growth. So I can understand why you are asking the question. I will add we did increase EPS, so I will take credit for the $0.10 increase there, but just give you a couple thoughts. I am forty-five days into the job. We are in the first quarter. We have a lot of road in front of us. I feel incredibly confident with the business. I think you will see us in July—it is a great question to ask then. Hopefully, we will have made some moves there, but I do think there is a level of conservatism in there. The extra productive days—it is really hard to exactly put your finger on the dollar amount—but I think it is a couple percentage points at the end of the day, maybe $200 million-ish in revenue. That really was not the driver in the quarter. It is just a great business doing really solid performance. Christopher E. Kubasik: I will just add in, Noah. We stick with our guidance for the full year—around 7%—and it is one of those damned if you do, damned if you do not. If we ended the quarter flat, you would be asking how the heck you are going to get to seven. We come out at 15%. Gives you a lot more confidence in getting to seven. I like to start—having not had the experience much—start the year with a great first quarter, have an awesome second quarter, and then see where we are and give you an update. A lot of things still in the works, so we need to work some more, continue to perform, and we are feeling pretty pleased with how we came out so far this year. Operator: Our next question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question. Robert Stallard: Thanks so much. Good morning. Chris, you highlighted how classified work contributed to the strong growth in SMS. Could you give us an update on how big classified is as a percentage of the overall company, and whether you think it is going to grow faster or slower than the overall company? Thank you. Christopher E. Kubasik: Thanks for that, Robert. I know it is never satisfying when you give the classified answer, and actually more and more programs are becoming classified that were not historically. We are hanging out right around 25% to 30%. The actual number is 28%, an increase from the prior year. We see international growing. We see classified growing. Really, everything is growing. Again, that is a result of getting this portfolio in shape over the last five years. I know there was a lot of concern about some of the acquisitions. We only made two, and they are both blowing away the business case. We said at the time that we made these we thought they aligned with the future of warfare. It appears that they are. The stuff we divested, and will continue to look to monetize, are either not core to L3Harris Technologies, Inc. and belong with a better owner. I really like the portfolio, and I think that is why you are seeing these kinds of results, and we will continue to see how we make our 2028 framework. Operator: Our next question comes from the line of Peter Arment with Baird. Please proceed with your question. Peter Arment: Yes. Thanks. Good morning, Chris, Ken, and Tony. Chris, I do not think anyone would question the demand signals on supporting these multiyear agreements, but maybe you could give us a little color on how L3 is protected on the amount side if there are changes. I know you have probably thought a lot about it, but just curious to hear your thoughts. Thanks. Christopher E. Kubasik: Thanks, Peter. That is absolutely a key focus of these negotiations. The DoW understands we are leaning forward, as is the entire defense industrial base. We may have started sooner than the rest, but everybody understands that it is more like a commercial world—you make the investments to get the long-term returns. These five- and seven-year deals are a big deal. There is bipartisan support for this, especially on missiles and munitions. It is hard to predict the future. Hopefully, a lot of this will be funded through the reconciliation—that is ten-year money. You could argue that could be covered in that. There will be protections for changes in quantities and, I guess, in the unlikely event that a program is no longer funded or needed. Given the demand signal, it is hard to imagine that would occur—at least in where we are focused, which is missiles and ammunition. That will be the next step. The framework agreement—obviously at a high level there is an agreement relative to that. Now we just need to reduce it to writing. Great question, but clearly that is on the top of everybody's list for the entire industry, and I think we are all going to be aligned and get the protections we need. Operator: Our next question comes from the line of Scott Mikus with Melius Research. Please proceed with your question. Scott Mikus: Morning, Chris and Ken. Going back to Peter's question, at Missile Solutions you have an aggressive volume ramp over the next decade. How much of your material spend at Missile Solutions is with sole-source suppliers, and when you firm up your multiyear agreements with the Department of War, are you also going to lock in those key suppliers so you are protected on inflationary pressures? Christopher E. Kubasik: Thanks, Scott. The answer is yes to the second part. In fact, we have had long-term agreements with the majority of our top suppliers. We are working with them, as you would imagine, to allow them to ramp up as well. Many of those suppliers are making investments on their own, and the Department of War is also helping them either with equity investments or loans. That is going to be, as you imply, key to all of us ramping—the supply chain. That was one of the first discussions going back almost a year with the DoW. They understand the need for the supply chain. In fact, we are part of the supply chain as a first-tier supplier with the SRMs to the missile primes. Sole-source—maybe at the time of the acquisition there were a lot of sole-source providers. I do not think we really have anything significant at this time. We have clearly focused on getting multiple suppliers, especially with cases, nozzles, and igniters. There are several components that we ourselves are investing in to have an additional second or third source of supply. We are not afraid to make any changes we need to find a way to grow this business. You would imagine people are knocking on our door trying to work for us. The companies that are willing to invest and play along with what we are trying to accomplish are going to get more and more work. That is going to be the key. I would think by the end of the year, if not already, we do not have any single sources of supply. Operator: Our next question comes from the line of Pete Skibitski with Alembic Global. Please proceed with your question. Pete Skibitski: Chris, I was wondering if I could double click one last time on space, particularly on the space pipeline. You talked about the aircraft ISR pipeline that is very robust. Are you seeing the space pipeline—excluding even HPTSS—really growing meaningfully? It seems like the administration is putting a lot of emphasis on space surveillance, that mission area, maybe expanding that. That might be classified. Also this AMTI, kind of moving AMTI from aircraft to space. Are you seeing a real expansion of the pipeline there and might we see increased order flow even beyond HPTSS over the next twelve months or so? Christopher E. Kubasik: Thanks, Pete. I can assure you the pipeline here I am looking at is in the tens of billions of dollars. A lot of what I talk about is LEO, the low Earth orbit. There are opportunities that we are currently working on and bidding that are both MEO and GEO orbits that, as you would imagine, are all classified. There really is not a big international, if I am honest, with space. There are a few things that we are doing there, but it is all going to be Air Force, Space Force, as you suggested. There are a lot of competitions coming up, and our past performance seems to be positioning us well. There is absolutely a commitment. I would say the last three to five years has been a lot of one-off demos. I hate to go back to HPTSS, but that was one satellite—and it worked. Now they are ramping that up with the follow-on. That type of approach is occurring throughout that portfolio. Big focus on missile warning, missile defense, hypersonics, classified—some of the areas you mentioned. I can assure you we have the capability. Again, we do not prime everything. There are a few things where we are working as a subcontractor based on our payload capabilities. There are a few places we are a merchant supplier, which is nice because you get on whatever team wins. It looks good. The team just has to continue to perform. We will get these things launched, and the future is bright. I wish I could tell you more, but this is a classified area, and I think the financial results speak for themselves. We will now take the last question. Operator: Our final question today comes from the line of Gautam Khanna with TD Cowen. Please proceed with your question. Gautam Khanna: I was wondering if you could give us some color on the asset sale in the quarter and the legal settlement, and what is embedded for asset sales throughout the year. How far along are we in that process of portfolio shaping? Thank you. Ken Sharp: Sure. Maybe some quick color. We routinely look at our shop floor space, where the products are in their life cycle. Clearly, we want to continue to keep the floor space focused on things that are higher growth, innovative, delivering capability for the customer. From time to time, we get products that are probably 20- to 30-year maturity. They do not grow really fast. They are great products. They just probably belong in somebody else's portfolio. We tend to look to move those out, free up the shop floor space, and really keep our workforce focused on innovative products. In the quarter, call it 30 to 40 basis points of margin, give or take, in the missiles business that popped through. We also had negative adjustments on EACs in there as well. They kind of offset one another. For the full year, we will certainly update as we go. I do not think we have any specifics around product line sales built into our guidance at this point. Christopher E. Kubasik: As we close today's call, I want to again thank our employees for their continued focus and dedication in a dynamic and demanding environment. We have several factories working three shifts, so your efforts are much appreciated. Their work directly supports the men and women who are bravely serving our nation. Supporting the warfighter is at the core of everything we do, and we remain mindful of their safety and well-being during these times. Thank you all for joining us today, and we look forward to talking to you in the weeks and months ahead.
Operator: Greetings, and welcome to Valero Energy Corporation First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Donovan, VP, Investor Relations. Thank you. You may begin. Brian Donovan: Good morning, everyone, and welcome to Valero Energy Corporation's First Quarter 2026 Earnings Conference Call. I am joined today by Lane Riggs, Chairman, CEO and President; Gary Simmons, Executive Vice President and COO; Rich Walsh, Executive Vice President and General Counsel; Homer Bhullar, Senior Vice President and CFO; as well as several other members of Valero's senior management team. If you have not yet received a copy of our earnings release, it is available on our website at investorvalero.com. Included with the release are supplemental tables providing detailed financial information for each of our business segments, along with reconciliations and disclosures for any adjusted financial metrics referenced during today's call. If you have questions after reviewing these materials, please feel free to reach out to our Investor Relations team. Before we begin, I would like to draw your attention to the forward-looking statement disclaimer included in the press release. In summary, it says that statements made in the press release and during this conference call that express the company's or management's expectations or forecasts of future events are forward-looking statements and are intended to be covered by the Safe Harbor provisions under federal securities laws. Actual results may differ from those expressed or implied due to various factors, which are outlined in our earnings release and filings with the SEC. I will now turn the call over to Lane for opening remarks. Lane Riggs: Thank you, Brian, and good morning, everyone. I am pleased to report that it was an excellent first quarter, demonstrating our team's ability to optimize our refining system and deliver strong financial returns. In a period marked by considerable disruption in the commodity markets, our operations and commercial teams executed well. Early in the quarter, the availability of incremental Venezuela supply resulted in wider crude differentials. Our advantaged Gulf Coast refining network was well positioned to benefit from the discounted heavy sour feedstocks. Market conditions shifted sharply in March as the global supply of crude and refined products tightened. Our operations team responded decisively, adjusting the product slate to reflect market signals and delivering a record monthly jet yield. At the same time, our commercial and financial teams proactively managed commodity risk to mitigate unique adverse impacts of a highly dynamic pricing environment. Financially, we maintained a strong balance sheet while continuing to honor our commitment to shareholder returns. On the strategic front, we continue to make progress on the unit optimization project at our St. Charles refinery. This $230 million initiative will enhance our ability to produce high-value products, including alkylate. We expect the project to begin operations in 2026. Looking ahead, constrained global refining capacity and low product inventories in key markets should continue to support refining fundamentals. Our concentration on high-complexity refineries provides significant feedstock flexibility and direct access to global markets, which are especially beneficial in the current environment. Additionally, our disciplined financial strategy and capital allocation framework position us to perform well across market cycles. In closing, our strong performance in a volatile first quarter underscores Valero's operational, commercial and financial strength. We remain focused on things we can control: operational excellence, system-wide optimization, and disciplined financial decision making. Consistent execution across these priorities positions us to benefit from the current margin environment and will continue to differentiate Valero. With that, I will turn the call over to Homer. Homer Bhullar: Thank you, Lane. For the first quarter 2026, net income attributable to Valero stockholders was $1.3 billion or $4.22 per share, compared to a net loss of $595 million or $1.9 per share for the first quarter 2025. Excluding the adjustments shown in the earnings release tables, adjusted net income attributable to Valero stockholders for the first quarter 2025 was $282 million or $0.89 per share. The Refining segment reported $1.8 billion of operating income for the first quarter 2026, compared to an operating loss of $530 million for the first quarter 2025. Adjusted operating income for the first quarter 2025 was $605 million. Refining throughput volumes in the first quarter 2026 averaged 2.9 million barrels per day. Refining cash operating expenses were $5.13 per barrel in the first quarter 2026. The Renewable Diesel segment reported operating income of $139 million for the first quarter 2026, compared to an operating loss of $141 million for the first quarter 2025. Renewable Diesel segment sales volumes averaged 3 million gallons per day in the first quarter 2026. The Ethanol segment reported $90 million of operating income for the first quarter 2026, compared to $20 million for the first quarter 2025. Ethanol production volumes averaged 4.6 million gallons per day in the first quarter 2026. G&A expenses were $285 million for the first quarter 2026. Depreciation and amortization expense was $840 million for the first quarter 2026, which includes approximately $100 million of incremental depreciation expense related to ceasing refining operations at our Benicia refinery. Net interest expense was $140 million, and income tax expense was $401 million for the first quarter 2026. The effective tax rate was 23%. Net cash provided by operating activities was $1.4 billion in the first quarter 2026. Included in this amount was a $303 million unfavorable impact from working capital and $102 million of adjusted net cash provided by operating activities associated with the other joint venture member’s share of DGD. Excluding these items, adjusted net cash provided by operating activities was $1.6 billion in the first quarter 2026. Regarding investing activities, we made $448 million of capital investments in the first quarter 2026, of which $404 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance, and the balance was for growing the business. Excluding capital investments attributable to the other joint venture member’s share of DGD and other variable interest entities, capital investments attributable to Valero were $430 million in the first quarter 2026. Moving to financing activities, we remain committed to our disciplined capital allocation framework. Shareholder cash returns totaled $938 million in the first quarter 2026, resulting in a payout ratio of 59% for the quarter. And on January 22, our Board approved a 6% increase to the quarterly cash dividend, reflecting a strong financial position and our commitment to a growing dividend. Turning to the balance sheet, in March we opportunistically issued $850 million of ten-year notes at a 5.15% coupon to de-risk upcoming debt maturities later this year. The notes priced at a refining sector record-low ten-year spread of 102 basis points over treasuries. At quarter end, we had $9.2 billion of total debt, $2.3 billion of total finance lease obligations, and $5.7 billion of cash and cash equivalents. Our debt to capitalization ratio, net of cash and cash equivalents, was 18% as of 03/31/2026. Our cash balance was higher at quarter end, reflecting the opportunistic timing of the March debt issuance and our decision to move towards the high end of our long-term $4 billion to $5 billion cash target to preserve optionality in a volatile market environment. Overall, we ended the quarter well-capitalized while still honoring our commitment to shareholder returns. Turning to guidance, as we operate the Port Arthur refinery at reduced rates, we continue to assess the full extent of the damages and develop a plan for repairs. We expect the incident to result in additional capital expenditures in 2026, which should be covered by insurance, subject to our applicable insurance deductibles. We will update our 2026 capital investment guidance when we are able to provide a definitive cost estimate and expected repair timeline. Outside of Port Arthur, our previous guidance regarding capital investments for sustaining the business and growth projects remains unchanged. Our growth projects are focused primarily on shorter-cycle optimization investments that enhance crude and product optionality across our refining system, as well as efficiency and rate expansion projects within our ethanol plants. Collectively, these projects should strengthen the earnings capacity of our existing asset base. For modeling our second quarter, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.69 million to 1.74 million barrels per day, reflecting reduced rates at Port Arthur; Mid-Continent at 450,000 to 470,000 barrels per day; West Coast at 120,000 to 130,000 barrels per day, reflecting the idling of Benicia; and North Atlantic at 480,000 to 500,000 barrels per day. We expect refining cash operating expenses in the second quarter to be approximately $4.85 per barrel. For the Renewable Diesel segment, we expect sales volumes of approximately 320 million gallons in the second quarter. Operating expenses should be $0.46 per gallon, including $0.22 per gallon for non-cash costs such as depreciation and amortization. Our Ethanol segment is expected to produce 4.7 million gallons per day in the second quarter. Operating expenses should average $0.39 per gallon, which includes $0.04 per gallon for non-cash costs such as depreciation and amortization. For the second quarter, net interest expense should be about $145 million. Total depreciation and amortization expense in the second quarter should be approximately $730 million, which includes approximately $33 million of incremental depreciation expense related to our plan to idle the processing units and cease refining operations at our Benicia refinery completed this month. We expect incremental depreciation related to the Benicia refinery to be included in D&A through April. The second quarter earnings impact of this incremental depreciation is expected to be approximately $0.09 per share based on current shares outstanding. For 2026, we expect G&A expenses to be approximately $960 million. That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions. Operator: We will now open the call for questions. The floor is now open for questions. Today’s first question is coming from Manav Gupta of UBS. Please go ahead. Manav Gupta: Good morning, guys. Very strong quarter considering everything else that we are seeing out there. I just quickly wanted to pivot to the global refining macro, and I am trying to understand, as these prices are rising, what you are seeing for demand out there. Are you seeing any early signs of demand destruction in your system? You kind of alluded to it, so I just want to confirm this. As you look into the next at least six or nine months, you have some refiners like Valero who can run as they wish, and then there are some refiners who may have a good kit somewhere globally but they cannot run because they do not have enough crude. I am just trying to understand within your refining system, are you able to source any crude that you are looking for and run all out if you want to? Gary Simmons: Yes, Manav, this is Gary. Despite the fact that, as you alluded to, prices for transportation fuels are moving higher, domestic demand appears to be very resilient. If you look at our wholesale volumes year over year, we do show a reduction in sales volumes in our system. However, this is not really a reflection of demand, but a result of idling the Benicia refinery and exiting a position in the Boston market. When we look at sales, we would say U.S. demand for gasoline is flat to slightly up. Diesel demand is up a little. That seems to be consistent with what you are seeing in the DOE data as well, with the DOEs reflecting increases in demand for gasoline, diesel, and jet. The big change in demand year over year is the pull into the export market since the conflict in Iran started. The recent DOE data show exports from the U.S. are up 470,000 barrels a day year over year. The pull into the export market is causing inventory to draw in the U.S. Relative to the five-year average, total light product inventories in the U.S. have drawn 30 million barrels since January. Distillate inventories are at five-year lows. Domestic demand remains strong for diesel with good agricultural demand as we start planting season, and the freight indices are beginning to improve a little. Export demand for distillate, especially jet, has been very strong with interest for U.S. Gulf Coast barrels from all over the world. As we approach driving season, gasoline inventory is now at the bottom of the five-year average range. The trans-Atlantic arb to ship to PADD 1 from Europe is closed. Both domestic and export demand remain strong. The Jones Act waiver is allowing us to supply PADD 1 and PADD 5 more efficiently from the U.S. Gulf Coast. I think as we approach driving season, VGO availability will start to become an issue. It does not appear there is sufficient VGO to fill both FCC and hydrocracking capacity. Current economics would favor hydrocracking, which could reduce gasoline production moving forward. You have read a lot about global demand destruction since the straits have been closed. It really appears to us that this is not demand destruction; this is insufficient supply to meet demand. Our expectations coming into the year were that new capacity additions along with more bio-renewable fuels on the market would be sufficient to meet incremental demand. We thought supply-demand balances would be similar to last year and then you would start to see a tightening at the end of this year. But the conflict in Iran has really created a market with demand significantly outpacing supply. We had very little excess refining capacity globally, so it is going to be difficult to restock inventories even once the conflict is resolved. Randy: Manav, this is Randy. I think the short answer to your crude sourcing question is yes. Most of our system is located in the Mid-Continent and Gulf Coast, so crude availability is really not much of an issue. As we have seen in the stats this week, the U.S. has become a major exporter of crude, amplified by the SPR release. Any exports out of the U.S. have to overcome high freight and pretty steep backwardation. We are always optimizing our crude slate in the Gulf Coast, and this time is no different, just the volatility on price and freight have been more extreme than normal. With the high freight costs, we have made some changes in our system by cutting back waterborne crudes and running more pipeline barrels. In addition, with more SPR volume on the market, we have purchased more of that grade, optimizing against other crudes. Since January, with the Venezuela sanctions removed, heavy discounts were already very advantaged for our system, and since the Iranian event started, those trends have only continued. Canadian heavy crude today is trading at about a $16 discount versus WTI in the Gulf. The location of our system in the Gulf Coast makes it a very advantaged backdrop. Operator: Thank you. Our next question is coming from Neil Mehta of Goldman Sachs. Please go ahead. Neil Mehta: Thanks so much, team, and again really solid results. Not to focus too much on quarter-to-quarter stuff, but when you think about the second quarter indicators, they are already showing $30 on the Gulf Coast versus Q1 levels, which were $18. It harkens back to 2022 when at that point your share count was closer to 400 million. Today, it is closer to 300 million. Maybe that is a question for Homer. As we start thinking about modeling out Q2, any pluses and minuses that we should be thinking about and anchoring to? Anything about March profitability that can give us a sense of what Q2 could shape up like? And then one specific product to dig into is jet, Gary. There is a lot of talk about the potential for shortages in parts of the world. How are you thinking about that product in general, how you can maximize your production of it, where you are trying to get it to, and are these concerns about jet availability globally founded or unfounded? Homer Bhullar: Yes, Neil, I think if you look to the second quarter, definitely some headwinds and tailwinds. Steep backwardation in the crude market is a headwind. In addition to the backwardation, when you see the physical markets disconnect from the futures, it becomes very complex to see what that will do to capture rates. In terms of tailwinds, heavy sour discounts and our system’s ability to maximize heavy sour crude are tailwinds. The premium regrade for jet fuel is a tailwind, as well as premiums for secondary products. So there are a lot of pluses and minuses as we move into the second quarter. Gary Simmons: On jet, I would say the concerns are founded. Jet is incredibly short. We have been trying to maximize jet in our system. Typically, if you look at jet as a percentage of total distillate, that averages 26% in our system. In March, we got that up to over 30%—jet as a percent of total distillates. In addition, we have a couple of refineries that do not make jet today that we are moving into jet production mode to try to increase jet yields even further as we go forward. Operator: Thank you. Our next question is coming from Theresa Chen of Barclays. Please go ahead. Theresa Chen: This quarter has highlighted the earnings volatility that refiners faced, and the range of outcomes has been wide in part due to different commercial and financial strategies. Despite operating in the same macro environment, your results appear to have been less volatile. From your perspective, what has enabled that? Does it reflect differences in crude sourcing, product placement, or hedging strategies, or something else structural in the business? Relatedly, this environment is also stress testing the balance sheets and leverage thresholds across the sector. You chose to maintain a relatively elevated cash position, to Homer’s earlier point in the prepared remarks. How are you thinking about that capital strategy today, particularly as a buffer against the volatility? And shifting gears, how should we think about the trajectory of DGD profitability going forward, considering current macro conditions, feedstock considerations, and regulatory changes that we have seen recently? Homer Bhullar: Hey, Theresa, I will start on the risk side and hedging specifically. Under normal market conditions, our approach can be more formulaic and process-driven where we basically manage our exposure above or below LIFO with derivatives positions. But when we started seeing higher volatility in both crude and product markets, our team met frequently—daily—to review our positions, and we were more proactive in managing our exposure. For example, we maintained our inventory positions much closer to LIFO. That reduced our overall exposure to derivatives-associated price swings, and in addition, it helps ensure you do not have a significant draw on cash for margin calls. You can see that we had minimal impact on that through working capital. On cash, we did move our overall base cash position towards the high end of the $4 billion to $5 billion minimum cash balance we have talked about. This is why we moved to a higher cash balance after the pandemic—to ensure that our liquidity never comes into question. While we did not have a huge cash flow draw, hopefully this quarter highlights the value of a higher cash balance. Our cash balance coupled with our bank facilities left us with almost $11 billion of total liquidity at quarter end, so we are really well positioned for whatever the rest of the year brings. Lastly, we were also proactive, as I mentioned in the opening remarks, and we opportunistically pre-financed our upcoming maturities for the balance of the year at a record-low spread. We just try to be proactive on every financial aspect of our business—risk, balance sheet, and shareholder returns. Eric Fisher: On DGD, Homer did a great job explaining the risk management structure. It is a little bit different, and so the mark-to-market that we have on our forward feedstock positions will be a little bit of a headwind if we see the underlying commodities continue to rise like we did for the last month or so. That said, the RVO is a pretty strong tailwind. We see higher margins—certainly higher in Q2 than in Q1—and overall, a better 2026 versus 2025. Operator: Thank you. Our next question is coming from Joe Lache of Morgan Stanley. Please go ahead. Joe Lache: Great, thanks. Good morning, and thanks for taking my questions. As we look beyond the Middle East disruptions, can you talk about how you see the supply-demand balance shaping up over the next couple of years? It seems like the balance was already pretty tight before the disruption, and now there is refinery damage and the need to replace inventories to contend with. Does this change how you think about mid-cycle margins going forward? And on Port Arthur, I recognize you are still going through the assessments, but to the extent you can, could you talk through the refinery damage assessment process and potential restart timeline, and what are the signposts that we should be watching for from the outside here? Lane Riggs: I do not know that this changes our approach to mid-cycle margins. We take a fairly conservative approach because of our disciplined approach around capital investment. We like to take a conservative mid-cycle because we use it to justify the capital. But certainly, it will create a market that is very tight. Even before the conflict started, our view was that starting at the end of this year, global demand would outpace new refining capacity additions, and we would have several years of tightness. The situation has brought that forward. In our view, if you look at the lost total light product production that has happened since the straits have closed, it takes a minimum of at least three days to rebuild stock for every day that the straits have been closed. At this stage, it is at least six months to a year to start restocking inventories back to where they were. There is just not a lot of excess refining capacity out there, and as we move forward and global demand continues to grow, it makes that situation even tighter. Gary Simmons: On Port Arthur, on March 23 we had a fire in the diesel hydrotreater at Port Arthur, and the entire refinery was shut down as a precaution. All employees were accounted for. No refinery injuries were reported as a result of the incident. The investigation into the cause is ongoing, so I cannot share too much around that. Our operations team did an excellent job getting the smaller crude unit train back up in early April, along with the coker, hydrocrackers, the reformer, and a distillate hydrotreater. We are currently starting up the larger crude unit as we speak, along with the FCC and alkylation unit. We would expect by May 1 that throughput looks fairly normalized at the Port Arthur refinery. The diesel hydrotreater that experienced the fire, along with an adjacent kerosene hydrotreater, do remain down, which could negatively impact capture rates some in the second quarter. We expect to get the kerosene hydrotreater back by the third quarter. The diesel hydrotreater did sustain extensive damage; we do not have a timeline for the rebuild yet. As Homer mentioned, the impact is reflected in our throughput guidance for the quarter. Operator: Thank you. Our next question is coming from Doug Leggate of Wolfe Research. Please go ahead. Doug Leggate: Thanks for having me on. I am trying to understand what is going on with the physical crude impact on capture rates. We saw Maya, we saw Pemex cut their K factor in half. We are seeing Dated Brent at big premiums, and now apparently a flotilla of tankers coming to the U.S. Gulf Coast perhaps putting a bid under WTI. When you look at your slate, how is the physical side of the crude market impacting the capture rate? And for Homer, you have one of the best balance sheets in the sector, which means you have a lot of options for your surplus cash. If you look at the implied free cash flow forever—excluding the current windfall—is north of $7 billion at a 10% discount rate. How do you think about your valuation in the context of what you do with that cash, specifically as it relates to share buybacks? Randy: I will start on the crude side. For the most part, Gary mentioned before, part of the headwind on capture is the steep backwardation in the market. It hit some highs last month at $11 to $14; it is in the $6 range now, and it has moved higher over the last couple of days. Some of the grades are already included in the capture calculation, so that is already reflecting some of the movement. Outside of that, there are things that we are doing that are not captured in it—Venezuelan purchases, for example. Since the January sanctions removal, we have meaningfully ramped up Venezuela runs in our system, all done at better economics than our alternatives on heavy sour. As we touched on before, heavy grades in the Gulf Coast continue to look very attractive for our system. Homer Bhullar: Doug, thanks for your comment on the balance sheet. There is no doubt current margins are good, but as you can tell by our results, we put ourselves in a really good position to take advantage of that and not hang our strategy on just the current margin environment. We continue to optimize and grow the business with discipline around minimum return thresholds, and we are using a longer mid-cycle price set, as Lane highlighted earlier. We also continue to work hard to manage our costs, and all of this puts us in a great position for shareholder returns. With respect to buybacks, share repurchases are an efficient and flexible means of returning excess cash to shareholders in the broader context of capital allocation. Our balance sheet and cash position are in the best position they have been for a very long time. Our underlying commitments around the balance sheet, minimum cash, and shareholder returns will not change, but we may move within the bounds we have laid out depending on the environment. We clearly did that with respect to cash during the first quarter. Our net debt to cap is still below our long-term range of 20% to 30%, and we have plenty of coverage for other uses of cash. I think you will continue to see us return excess free cash flow to shareholders through share repurchases. This approach has reduced our overall share count by 42% since 2014, and our return on buybacks is close to 20% over that time period. Buybacks do create perpetual value by reducing the share count, so you should expect us to continue to operate in that mode. Operator: Thank you. Our next question is coming from Philip Jungwirth of BMO Capital Markets. Please go ahead. Philip Jungwirth: You mentioned earlier making some adjustments in the Gulf Coast on the feedstock sourcing side, and I was wondering if you could talk about any changes you have made specific to the North Atlantic region. You have Dated Brent in the indicator, but I assume you can do a bit better here, especially at Quebec City. Maybe also touch on the export side and how you are optimizing given market volatility and global demand for products? And we regularly get questions around some form of restriction on product exports. Based on your conversations, where would you put the level of government support here? What would be any unintended consequences? What other levers are there to pull to ease some of the upward pressure on gasoline prices, whether RVP or other things that could be done? Randy: Sure, Phil. For Quebec, it is mostly a 100% North American crude slate—taking barrels from Western Canada and from the Gulf Coast—that tends to avoid some of the spikes we saw in Dated Brent earlier in the month. For Pembroke, we did see volatility in the prompt-dated market that seems to have lined out as some of the initial panic buying subsided. It even got to the point where some people were reportedly cutting runs as Dated Brent spiked higher. Fortunately, we avoided some of the peak numbers on crude purchases. Looking ahead, our margin environment for Pembroke still looks favorable as we move forward. Rich Walsh: On export restrictions, there have been lots of conversations with the administration, and they are keenly aware and watching prices. They have already taken actions—the Jones Act waiver early on really helped. The reality is any kind of export ban actually makes the situation worse, and they are keenly aware of that. The U.S. is long crude and long refining production, and we are tethered to the world market. It is important to make sure that we get optimized and provide supply to global markets—this is a huge competitive advantage for the U.S. The administration fully understands that. They are looking at all the options and tools out there, but we are not positioned like some other countries that do not have the resources we have. Those kinds of strategies really do not make sense for us. I do not think there is meaningful potential for an export ban to happen. Operator: Thank you. The next question is coming from Jason Gabelman of TD Cowen. Please go ahead. Jason Gabelman: Thanks for taking my questions. The recent conflicts have resulted in pretty massive dislocations in the market. Do they change the way you think about investment opportunities and how you run the business in the medium term? For example, you talked about a potential VGO shortage in the country—could that be an area for investment to help close your own shortage, or are there other opportunities like that? And on futures curves and specifically futures cracks, the market broadly uses that to help price refining stocks, but there is not much liquidity on the back end of those curves. If it could take six to twelve months if Hormuz was open today to rebuild inventories, how do you think about where cracks are on futures in the second half of the year? Do you think we see a similar dynamic as during the Russia-Ukraine war where the back end trends higher through the year and ends up higher than what was represented early in the year? Lane Riggs: It is a good point. The Ukraine and Iran conflicts have really demonstrated the resilience of North America, largely due to a robust oil and gas industry. We sit in the Gulf Coast; we have the most flexibility on crude feedstocks, and we can export anywhere in the world. In terms of how we think about projects, we like to bucket them. We like projects that increase our commercial leverage. On your VGO question, that is an area we want to get through our gating system to position ourselves to be less dependent on VGO imports. We are not going to lose our discipline, but we see an issue highlighted by these conflicts. We also like reliability projects—the key is to be able to move your assets around and run reliably through all this. Finally, yield projects—better yields, essentially FCC projects, to upgrade what we are making. On ethanol, while it is not directly tied to the conflicts, you are seeing the world looking to blend more ethanol in the fuel mix. We have a positive view of the ethanol business and are investing in incremental growth and yield improvements, with the backdrop of improving carbon intensity. In renewable diesel, we have the SAP project hanging out there; we want to see policy. Everything in that space is very dependent on how policy works out across administrations. Gary Simmons: On the futures curves, our view is the back end of the curve is undervalued. It is somewhat hindering trade flows that need to happen. High freight rates along with steep backwardation are making markets that are short and need product today look to the future thinking they will be able to buy that product at lower values. In reality, it is the curve just rolling up, and we expect that to continue. Operator: Thank you. Our next question is coming from Matthew Blair of Tudor, Pickering, Holt. Please go ahead. Matthew Blair: Hey, thanks and good morning. You mentioned some of your commercial opportunities in areas like the North Atlantic. Do you also have opportunities on the West Coast and, in particular, are you using Jones Act waivers to ship both crude and products to the West Coast? And the ethanol results seemed pretty good—better than our expectations. Was that just a function of improving values on the co-products, or were you able to record any 45Z contributions in the ethanol segment? What is the overall outlook for 45Z and the potential contribution this year in ethanol? Randy: Matthew, we have utilized several Jones Act waivers, primarily for products—both renewables and conventional products—moving from the Gulf Coast to the West Coast and to Florida. Eric Fisher: On ethanol, Lane alluded to what we are seeing in global demand. As one of the largest exporters of ethanol, we are seeing a pull on ethanol. As hydrocarbon prices have increased, so has the value of octane, and ethanol—being an octane component—has become the cheapest form of octane in the world. That is why you are seeing a lot of interest, and countries can use ethanol as a supplement just like in the U.S. You see a lot of countries going from E0 to E10. Brazil is going from E30 to E32. India is going to E20 and talking about going higher. Everyone sees ethanol as a cheaper form of liquid fuel, so you are seeing demand. As far as the PTC (45Z), what we booked in the first quarter was $0.10 a gallon on 10 of our plants, using the original definition of qualified sales. What we will ultimately see once the guidance is published—hopefully by the end of this year, but it may not be until next year—is the next $0.10 to $0.20 across all our plants, across all our sales. Operator: Thank you. Our next question is coming from Paul Sankey of Sankey Research. Please go ahead. Paul Sankey: Good morning. You had mentioned the shortage of VGO, and I wondered if you could talk a little bit about where you might anticipate other actual physical shortages emerging in the oil chain. Secondly, Lane, you have talked in the past—Joe certainly has said this—that when you look at your inventories over time, you do not play inventories; you are working operationally to optimize your performance. Firstly, I assume that you are still doing that. Secondly, how do you see a situation where inventories deplete? I assume that the industry will not go to zero inventories. As we get these draws, when is the point at which prices go a ton higher, in your best guess? Lane Riggs: On other shortages, obviously VGO is an issue. If you think about how trade flows worked before all this started, net VGO flowed from Europe and the Middle East into the U.S. to satisfy the complexity—the FCCs and the hydrocrackers—here. Besides jet, which everybody knows about, in the U.S. we do not see other structural issues in terms of intermediates at this point. On inventories, yes, we continue to operate around our working inventory, which equals our LIFO inventories. Homer alluded to the volatility in the commodity market; we worked hard to avoid derivative volatility and to keep crude oil inventories from creeping above working levels that would create a short paper position. Gary Simmons: It is very difficult to tell at what inventory level prices inflect sharply higher. As I alluded to before, with steep backwardation, a lot of markets that are short product today are living hand-to-mouth, thinking they will be able to buy replacement barrels in the future at cheaper values. At some point, they will realize they need the volume, and you will see a reaction in price. At what inventory level that occurs, I do not have any specific insight. Operator: At this time, I would like to turn the floor back over to Mr. Donovan for closing comments. Brian Donovan: We appreciate everyone joining us today for the call. As always, feel free to contact our Investor Relations team if you have any additional questions. Have a great day. Operator: Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
Operator: Greetings, and welcome to the NWPX Infrastructure, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Scott J. Montross, President and CEO. Please go ahead, sir. Scott J. Montross: Good morning, and welcome to the NWPX Infrastructure, Inc. First Quarter 2026 Earnings Conference Call. My name is Scott J. Montross, and I am President and CEO of NWPX Infrastructure, Inc. I am joined today by Aaron Wilkins, our Chief Financial Officer. By now, all of you should have access to our earnings press release, which was issued yesterday, April 29, at approximately 4:00 p.m. Eastern Time. This call is being webcast and it is available for replay. As we begin, I would like to remind everyone that statements made on this call regarding our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent Form 10-K for the year ended 12/31/2025 and our other SEC filings for discussion of such risk factors that could cause actual results to differ materially from our expectations. We undertake no obligation to update any forward-looking statements. Thank you all for joining us today. I will begin with a review of our first quarter performance and our outlook for 2026, and then Aaron will walk you through our financials in more detail. We delivered a strong start to 2026. Net sales were up 19% year-over-year to $138.3 million, reflecting meaningful growth across both our Water Transmission Systems (WTS) and Precast businesses. Our strategy delivered record first quarter consolidated gross profit of $26.7 million, up 38% from last year, with our gross margin expanding 260 basis points year-over-year to 19.3%. That strength carried through to the bottom line, highlighting the operating leverage in our model and continued execution across the organization. We generated record first quarter profitability with earnings of $1.08 per share, and produced strong free cash flow of $25.7 million, or $2.62 per share, reinforcing the strength and consistency of our earnings profile and the resilience of our cash flows. Turning to our WTS segment, revenue reached a first quarter record of $93.5 million, up 19% year-over-year with strong margin improvement. Our performance reflected higher production volume, with tons produced up 18%, supported by strong project execution. This growth came despite adverse weather that caused unscheduled downtime across three WTS facilities early in the quarter. Selling prices were up 1% year-over-year driven by changes in product mix, and we also benefited from favorable project timing across several large water transmission jobs. In addition, we saw one of our strongest booking quarters to date with robust bidding activity and the emergence of a significant previously unplanned project that is under NDA, which will contribute positively to our 2026 result, all of which contributed to a substantial increase in our backlog, reinforcing the strength of demand across our markets. WTS backlog, including confirmed orders, ended the quarter at a record $430 million, up from $346 million at year-end and well above the $289 million level we reported this time last year. Looking ahead, we expect the 2026 bidding environment to be moderately stronger than 2025. WTS gross profit increased 42% year-over-year to $17.3 million, resulting in a gross margin of 18.5%, up 300 basis points from last year. This improvement reflects higher volume supported by strong customer demand, and the related efficiency gains and higher overhead absorption that come with that level of production, favorable product mix, and the overall solid operational execution across the segment. Now turning to our Precast segment. Precast revenue increased 19% year-over-year to a new record first quarter level of $44.8 million. Our performance was driven by a 14% increase in selling prices from a favorable change in product mix, and increased sales volume reflecting continued growth in the nonresidential portion of our business. At Park, production increased 30% year-over-year with strong growth in revenue per yard shipped. Despite borrowing costs that remain elevated as the Fed held interest rates steady in 2026, we are continuing to see signs of improvement in the nonresidential demand trajectory as we progress through 2026, specifically related to data center projects that have been instrumental in buoying the commercial construction demand. At Geneva, production and shipments had solid year-over-year gains of 78% respectively, despite seeing a moderate slowdown in the residential construction market, which has more than been offset by growth in Geneva’s nonresidential business. Leading indicators remain solid early in 2026 with the Dodge Momentum Index up 26% in March versus March 2025. The commercial sector was up 29% and institutional was up 20%, indicating positive signals for nonresidential construction activity this year and into 2027. Our Precast order book ended the quarter at $55 million, down modestly from $57 million at year-end and below the $64 million level at March 31. The Precast order book has remained stable for the last several quarters and continues to keep pace with higher levels of production and customer shipments. Stronger volumes and pricing drove a 30% year-over-year increase in Precast gross profit to $9.3 million, resulting in a gross margin of 20.9%, up from 19.1% last year. These results show that absorption rates are improving with higher throughput. We expect margins to continue recovering as nonresidential demand builds. Now turning to our strategic growth initiatives. As previously discussed, we are making solid progress expanding Precast capabilities across our network. We are also looking at where it makes sense to bring Precast into additional WTS facilities through our product spread strategy, which remains an integral part of our long-term growth plan. As part of that endeavor, we are seeing better capacity utilization at our Precast plants, strong momentum at our Geneva operations in Utah, and steady progress as we introduce Park and other Precast-related products into more WTS locations. At the same time, we continue to evaluate M&A opportunities in the Precast-related space that can accelerate our strategy, expand our manufacturing capabilities and efficiencies, and broaden our geographic reach and product portfolio. Consistent with this approach, we are looking at both single-plant acquisitions and larger opportunities that can support long-term growth and help us advance our Precast expansion. As previously announced, we completed the acquisition of Bouton Precast, a single-site producer in the high-growth Pueblo, Colorado market during 2026. The integration is off to a strong start and we are encouraged by the long-term growth potential we see in the Colorado market. I will now turn to our outlook for 2026. In our Water Transmission Systems segment, we expect higher revenue and margins compared to both 2025 and the prior quarter, driven by more favorable volume and product mix and the emergence of a significant previously unplanned project. We entered 2026 with a robust WTS backlog and elevated bidding levels, and both strengthened further in the first quarter, providing even greater visibility into near-term demand. Based on what we are seeing today, we expect full-year bidding levels to be stronger than what we saw in 2025 and we expect backlog to stay elevated throughout 2026. We remain encouraged by the level of activity across current and upcoming water transmission projects, which continue to come with improved economics and margins. For a more complete view of these projects, please refer to our investor presentation on our website. Turning to Precast, we maintained a stable and healthy order book in 2026 and we expect a stronger year for the Precast business overall. Demand remains healthy in the nonresidential market, supporting continued momentum across our Park and Geneva platforms. For the second quarter, we expect Precast revenue to be higher than the second quarter of last year and the prior quarter with stable margins driven by solid demand, higher production levels with improved absorption, and a strengthening order book. On a consolidated basis, we expect the second quarter to be stronger than we have seen in recent years. We believe 2026 is shaping up to be a historic year for NWPX Infrastructure, Inc. Continued momentum in our Precast business combined with strong bidding activity in our WTS business is indicating the potential for another record year. In addition, the significant previously unplanned WTS project noted earlier is additive to what we already expect for a record year. In closing, I am very pleased with our results, which set new first quarter records across nearly every metric. Our teams delivered exceptional execution throughout the quarter, and I want to thank everyone at NWPX Infrastructure, Inc. for their commitment to our strategy and to maintaining a strong safety culture. With the WTS backlog that is stronger than ever, a healthy bidding environment, and solid momentum in our Precast order book, we feel well positioned to carry this performance forward and continue building on the progress we have made across both segments. As we look ahead, our near-term priorities remain: one, maintaining a safe and rewarding workplace; two, focusing on margin over volume; three, intensifying our pursuit of strategic acquisitions; four, implementing cost efficiencies across the organization; and five, returning value to our shareholders when M&A opportunities are limited. I will now turn the call over to Aaron, who will walk through our results in greater detail. Aaron Wilkins: Thank you, Scott, and good morning to everyone joining the call today. Before I begin, I would like to mention that unless otherwise stated, all financial measures in my remarks refer to 2026, and all comparisons will be year-over-year comparisons versus 2025. I will begin with our profitability. We delivered record first quarter consolidated net income of $10.5 million, or $1.08 per diluted share, up from $4 million, or $0.39 per diluted share, reflecting the improving operating leverage on higher revenues and the continued strength in execution across the business. On the top line, consolidated net sales grew 19.1% to $138.3 million from $116.1 million last year. Our Water Transmission Systems segment also posted a record first quarter, with sales rising 19.1% to $93.5 million versus $78.4 million. This growth was driven by an 18% increase in tons produced due largely to project timing and a 1% improvement in selling price per ton due to product mix. Precast delivered a record first quarter as well, with sales up 18.9% to $44.8 million compared to $37.7 million. The results benefited from a 14% increase in selling prices due to product mix and a 4% increase in volume shipped. As a reminder, the products we manufacture are unique, and the average sales prices for both of our operating segments, as well as the Precast shipment volumes and WTS production volumes, cannot always be relied upon as comparable metrics due to variations in the mix between periods. We also achieved record first quarter consolidated gross profit supported by higher volume and favorable pricing and mix. Gross profit was $26.7 million, up 37.7%, representing 19.3% of sales, a 260 basis point improvement from $19.4 million or 16.7% of sales. In Water Transmission Systems, gross profit increased 42.3% to $17.3 million, or 18.5% of segment sales, a 300 basis point improvement from $12.2 million or 15.5% of sales. The increase reflects higher production volume and the associated operational efficiency gains, as well as favorable changes in product mix. Precast gross profit also reached a record first quarter, rising 30% to $9.3 million or 20.9% of segment sales, compared to $7.2 million or 19.1% of sales. The 180 basis point improvement in gross margin was largely driven by higher selling prices tied to product mix. Selling, general and administrative expenses were $14 million, up 1.5%, and represented 10.1% of net sales, a 180 basis point improvement from 11.9% of net sales a year ago, even with modest increases in incentive compensation expense. For the full year 2026, we now expect consolidated SG&A to range between $53 million and $55 million. Depreciation and amortization expense was $4.8 million compared to $4.4 million, and we continue to expect a full-year expense of approximately $20 million to $22 million. Interest expense declined to $0.3 million from $0.6 million, reflecting lower average daily borrowings. Income tax expense was $2 million, resulting in an effective income tax rate of 16% compared to $1 million or a rate of 19.8% last year. The effective rates for both quarters were primarily impacted by tax windfalls recognized upon the vesting of equity awards. Our tax rate can vary based on the level of total permanent differences relative to pre-tax income. For the full year, we currently expect an effective tax rate of approximately 24% to 26%. I will now turn to our financial condition. At 03/31/2026, cash and cash equivalents improved to $14.3 million from $2.3 million at year-end. Our debt balance totaled $10.7 million, and there were no outstanding borrowings on our credit facility at March 31. This resulted in a net cash position of $3.5 million as we continue to drive cash to the balance sheet to support our growth and shareholder return priorities. Our improved profitability, coupled with favorable changes in working capital, drove strong net cash provided by operating activities of $29.2 million, reflecting a more than 500% increase from $4.8 million last year. Capital expenditures were $3.5 million compared to $3.7 million last year. For the full year 2026, we continue to expect CapEx in the $20 million to $24 million range, including approximately $6 million for investment projects to support our Precast product spread strategy and broader Precast growth initiatives. As a result, we generated $25.7 million of free cash in the quarter compared to $1.2 million last year. For 2026, we are raising our full-year free cash flow outlook to $50 million to $56 million, up from a prior range of $40 million to $46 million. In terms of capital deployment for the quarter, we spent $8.9 million to complete the purchase of Bouton Precast, repurchased approximately 33 thousand shares of our common stock at an average price of $67.17 for a total of $2.2 million, and repaid $1 million in debt. These activities highlight our ability to continue to grow NWPX Infrastructure, Inc. while concurrently returning value to our shareholders. To close, we delivered a strong start to the year, with first quarter records for revenue under the current configuration, gross profit, and earnings. We also generated very strong free cash flow, further strengthened our balance sheet, and remained disciplined in our capital deployment. Our record Water Transmission Systems backlog and our solid Precast order book, coupled with the commercial team’s focus on pricing and our track record of superb operational execution, position us to achieve new heights in financial performance as we move through the remainder of 2026. Thank you to our employees for their continued concentration on workplace safety and to our shareholders for their continued support. I will now turn it over to the operator to begin the question-and-answer session. Operator: We will now open the call for questions. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question today comes from Julio Alberto Romero with Sidoti & Company. Julio Alberto Romero: Thanks. Good morning, Scott and Aaron. Scott, I appreciate the significant previously unplanned project is under NDA, so to the extent that you can, could you maybe help us understand, at a high level, how additive the project is to your 2026 outlook? Does it go beyond 2026, potentially to 2027? And then secondly, should we think of this as kind of a one-off, or does it have the potential to lead to additional phases or repeat business with that customer? Scott J. Montross: Yes, and like you said, we are under NDA. It is a government-related project. It is being produced at multiple of our plants. What I would tell you is it looks like this piece of the project, because there are, from what we understand, multiple other pieces of this project as we go forward into the future, is right in the area of about $50 million. The real question is it is a relatively short-fuse job that is scheduled to be produced in the late second quarter, third quarter, going into about the mid-fourth quarter of this year, and that segment is expected to be done. I think one of the challenging things right now is there is a little bit more of a question on how quickly you can get all the steel to do it, so there is a potential that some of it could leak into next year. But the understanding we have of these projects is there are multiple phases that are planned right now that go out into the future that could be additive to other years as we go into the future, and I think that is probably as clean of a look as I can give you, Julio, on the thing. Julio Alberto Romero: Absolutely. I really appreciate the color you gave with that answer. On your cash flow in the quarter, it was very strong, and it looks like your net contract asset position improved pretty meaningfully, driven by contract liabilities. Can you give us any more color on what drove that increase, and is it tied to that project, or any other larger WTS projects? Aaron Wilkins: Yes, hi, Julio. The cash flows for the business obviously can be a little bit challenging to forecast because they can at times be a little lumpy, which is normal. Really what happened, and what continues to be a focus for our Water Transmission Systems commercial teams, is to drive what I call special billings—trying to get the steel billed in advance of the project, get MOH payments and progress payments throughout the job. That is something that over the span of the last three years we are seeing growing success at. It is still negotiated individually with specific customers, but we are able to do that more often than we used to be able to do it. What happened was we had a $20 million collection on one of those special billings come in in the month of February or March. You will notice that our accounts receivable remains elevated, which means that we are still doing a great job of billing customers. That is because we have, also on a completely separate job, billed another customer for a little over $20 million, and that has since been received. The business model really has been driven to get the cash flows as a focus, and that is why, in part at least, I raised our guidance range for free cash for 2026. I think we are going to be more successful. I think there are more opportunities for the WTS team to do these special billings in the year compared to 2025, which was also a very successful year, by the way. And I think that the new job that Scott just talked to you about, those two elements were worthwhile for raising the range so quickly into the year. I will tell you, though, Julio, the thing that could still come, depending on the success—there is always timing, right? You could always be paid on January 1 for something that really was attributed this year, which is why I may be a little bit gun-shy. But it is very possible that cash flows could go up another clip of $10 million or more in the ranges to be broadcast in the future. So it is not unheard of to think of $60 million or more of free cash this year for the company. Julio Alberto Romero: Understood. Very helpful there. And one more for me: you have record backlog of $430 million in WTS, including confirmed orders. Can you help us think about where your capacity utilization stands for that segment, and would you be able to take on additional work from here? Scott J. Montross: Yes. We can take on a lot more work than we have right now with the capacity we have spread across the country in our plants. We would need to move stuff between plants, but we have plenty more room to take on additional work as we go forward. Capacity utilization—if we are much over probably 70% or 72% in the Water Transmission Systems business—that is probably about a high point for us at this point. You can obviously add additional shifts too if we need to, which we do at certain plants at certain times when it is busy enough. So yes, we have a lot more room to produce a lot more, Julio, and are ready to do so. Julio Alberto Romero: Excellent. Thanks for all the color, and best of luck. Scott J. Montross: Thank you. Thanks, Julio. Operator: As a reminder, if you would like to ask a question, please press star 1 at this time. We will pause for just a moment. At this time, there are no further questions. I would like to turn the call back over to Scott J. Montross for closing remarks. Scott J. Montross: I would just like to wrap up by saying thank you to everybody for joining the call, like always. We delivered a very strong start to 2026. I think we are at a point now where we can say that NWPX Infrastructure, Inc. is hitting on all cylinders with the things that we are seeing. The bidding, outside of the project that is under NDA, in the first quarter in Water Transmission was probably the strongest we have seen, and really probably the strongest booking quarter that we have ever had on the Water Transmission side of the business. So we have significant momentum going forward on the Water Transmission side. On the Precast side, again, we are seeing a lot of work around data centers. Data centers are one of the things that are really buoying the commercial construction side of the business now, and the two states that we are in on the Precast side—primarily in Texas and in Utah—are very strong data center centers. I think there are something like 140 projects going on in Texas that we are taking part in, and other projects going on in Utah, which is becoming more of almost a giga site for data centers where there are really large ones being built. Even with a little bit of the slowdown that has been discussed in the press on the residential side of the business, we are still seeing very strong Precast business, and where we have seen slowdown on the residential side—for example, at our Geneva business—that is being picked right up on the nonresidential side, and the Precast business continues to grow. The biggest thing is we continue to advance our strategy going forward with both organic growth and M&A; we are going to continue to do that. We expect a strong second quarter. When we looked at the projections for 2026, even before we had this special project come forward, we were projecting another record year and stronger than 2025, and this big project is just additive to that. We are hitting on all cylinders. We appreciate your support as shareholders and our analyst support. Thank you, and we will see you in late July. Operator: Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time.
Operator: Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2026 CVR Partners, LP 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 that time, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one. As a reminder, today's call is being recorded. I will now hand today's call over to Richard J. Roberts, vice president of FP&A and investor relations. Please go ahead, sir. Richard J. Roberts: Good morning, everyone. We appreciate your participation in today's call. With me today are Mark A. Pytosh, our chief executive officer; Dane J. Neumann, our chief financial officer; Mike Wright, our chief operating officer; and other members of management. Prior to discussing our 2026 first quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events, or otherwise, except to the extent required by law. This call also includes various non-GAAP financial measures. Disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2026 first quarter earnings release that we filed with the SEC for the period. Let me also remind you that we are a variable distribution MLP. We will review our previously established reserves and current cash usage, evaluate future anticipated cash needs, and may reserve amounts for other future cash needs as determined by our general partner’s board. As a result, our distributions, if any, will vary from quarter to quarter due to several factors, including, but not limited to, operating performance, fluctuations in prices received for finished products, capital expenditures, and cash reserves deemed necessary or appropriate by the board of directors of our general partner. With that said, we will turn the call over to Mark A. Pytosh, our chief executive officer. Mark A. Pytosh: Thank you, Richard. Good morning, everyone, and thank you for joining us for today's call. To summarize financial highlights for 2026, net sales were $180 million, net income was $50 million, EBITDA was $78 million, and the board of directors declared a first quarter distribution of $4 per common unit, which will be paid on May 18, 2026 to unitholders of record at the close of market on May 11, 2026. In 2026, our ammonia plant utilization was 103%, with both plants running well and experiencing minimal downtime during the quarter. We also saw an increase in ammonia sales volume relative to the prior-year period, along with increased sales prices for UAN and ammonia. The tightness in the nitrogen fertilizer market that began in 2025 has only been amplified by the conflicts in the Middle East over the past two months, leading to higher prices for the spring. I will discuss further in my closing remarks. I will now turn the call over to Dane to discuss our financial results. Dane J. Neumann: Thank you, Mark. Turning to our results for 2026, we reported net sales of $180 million and operating income of $58 million. Net income for the quarter was $50 million, or $4.72 per common unit, and EBITDA was $78 million. Relative to 2025, the increase in EBITDA was primarily due to a combination of higher UAN and ammonia sales pricing and higher ammonia sales volumes. Ammonia production for the first quarter was 220 thousand gross tons, of which 70 thousand net tons were available for sale. UAN production was 335 thousand tons. During the quarter, we sold approximately 310 thousand tons of UAN at an average price of $343 per ton and approximately 73 thousand tons of ammonia at an average price of $687 per ton. Relative to 2025, total sales volumes were down slightly, primarily due to lower UAN production and sales volume as a result of some minor planned and unplanned outages at East Dubuque during the quarter. First quarter prices for UAN increased approximately 34%, and ammonia prices increased approximately 24% relative to the prior-year period. Direct operating expenses for the first quarter of 2026 were $63 million. Excluding inventory impacts, direct operating expenses increased by approximately $9 million relative to 2025, primarily due to higher natural gas and electricity costs and repair and maintenance expenses. Capital spending for the first quarter was $14 million, of which $8 million was maintenance capital. We estimate total capital spending for 2026 to be approximately $60 million to $75 million, of which $35 million to $45 million is expected to be maintenance capital. We anticipate a significant portion of the profit and growth capital spending plan for 2026 will be funded through cash reserves taken over the past few years. We ended the quarter with total liquidity of $178 million, which consisted of $128 million in cash and availability under the ABL facility of $50 million. Within our cash balance of $128 million, we had approximately $17 million related to customer prepayments for the future delivery of product. In assessing our cash available for distribution, we generated EBITDA of approximately $78 million and had net cash needs of $36 million for interest costs, maintenance capex, and other reserves. As a result, there was $42 million of cash available for distribution, and the board of directors of our general partner declared a distribution of $4 per common unit. Looking ahead to 2026, we estimate our ammonia utilization rate to be between 95% and 100%, direct operating expenses, excluding inventory and turnaround impacts, to be between $57 million and $62 million, and total capital spending to be between $28 million and $32 million. With that, I will turn the call back over to Mark. Mark A. Pytosh: Thanks, Dane. In summary, we had another strong quarter of operations with ammonia utilization over 100%, and the recent conflicts in the Middle East have caused prices to increase further for the spring. The spring planting season is underway, and it has gone well so far this year. The USDA is currently estimating approximately 95 million acres of corn will be planted in 2026. While this is a decline from the record levels of 2025, 95 million acres is well above the average level of corn plantings over the last five years. Yield estimates are approximately 183 bushels per acre, resulting in an inventory carryout level below 2025. Soybean planted acreage is expected to be approximately 85 million acres with a yield estimate of 53 bushels per acre, resulting in an inventory carryout roughly in line with 2025. December corn prices are approximately $4.75 per bushel, and soybeans are approximately $11.90 per bushel. The Trump administration and congressional leaders continue to discuss potential subsidy programs for farmers to help offset lower grain prices and higher input costs. As a reminder, the U.S. is a net importer of nitrogen fertilizers, resulting in domestic fertilizer prices being heavily influenced by changes in global fertilizer prices. Europe, Brazil, and India all compete with the U.S. for global fertilizer production. Geopolitical conflicts have impacted the global fertilizer industry for the past few years, beginning with Russia's invasion of Ukraine in 2022. The recent conflicts in the Middle East have caused further disruptions to global supply, with roughly 30% of nitrogen fertilizer production typically transiting through the Strait of Hormuz. In addition, multiple nitrogen fertilizer production facilities across the Middle East have been damaged or have curtailed production over the past few months due to limited natural gas supplies. Unfortunately, these events occurred at a critical time for farmers needing to secure crop inputs ahead of the spring planting season, as fertilizer inventory levels were already tight across the industry following the large planting seasons in the U.S. and Brazil in 2025. While it remains unclear how long these issues in the Middle East and Russia will persist, we will continue to focus on safely and reliably running our plants at high utilization levels to meet the needs of our customers during this challenging time in our industry. Natural gas prices in Europe have also increased amid the recent Middle East conflicts, currently trading around $14 per MMBtu, while U.S. prices have once again fallen below $3 per MMBtu. Damage sustained at LNG production facilities could take several years to repair, which would likely keep upward pressure on international gas prices relative to U.S. prices. The cost to produce ammonia in Europe has remained durably at the high end of the global cost curve, and production remains below historical levels, which has created sales opportunities for U.S. Gulf Coast producers to export ammonia to Europe for upgrade. We continue to believe Europe faces structural natural gas supply issues that will likely remain in effect through the next few years. The conflicts over the past few years in Ukraine and now Iran are a reminder of the value of U.S. production with adequate and secure feedstock availability. At our Coffeyville facility, we continue to work on a detailed design and construction plan intended to allow the plant to utilize natural gas as an alternative feedstock to third-party pet coke, in addition to increasing ammonia production capacity by up to 8%. We now believe we can achieve the feedstock diversification and capacity expansion of this project without investing the capital to source hydrogen from the adjacent Coffeyville refinery, which should significantly reduce the total capital spend associated with that scope of the project. We also continue to execute certain debottlenecking projects at both plants that are expected to improve reliability and production rates. These include the brownfield capacity expansion at East Dubuque that we intend to complete during the upcoming turnaround, in addition to water quality upgrade projects at both plants and the expansion of our DEF production and load-out capacity. The goal of these projects is to support our target of operating the plants at utilization rates above 95% of nameplate capacity, excluding the impact of turnarounds. If the two brownfield expansion projects are completed, we estimate our consolidated ammonia production capacity would increase by approximately 7%. The funds needed for these projects are coming from the reserves taken over the last few years, and the board elected to continue reserving capital in the first quarter. While the board looks at reserves every quarter, I would expect them to continue to elect to reserve some capital, and we anticipate holding higher levels of cash related to these projects in the near term as we ramp up execution and spending. We believe unitholders will see the benefits of these investments in the coming years as these projects are completed and brought online, improving reliability and performance. In the quarter, we executed on all the critical elements of our business plan, which include safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors, and communities; prudently managing costs; being judicious with capital; maximizing our marketing and logistics capabilities; and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for their excellent execution, safely achieving a 103% ammonia utilization, and the solid delivery on our marketing and logistics plans, resulting in a distribution of $4 per common unit for the quarter. With that, we are ready to answer any questions. Operator: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star followed by the number one. Again, as a reminder, to ask a question, press star followed by the number one on your telephone keypad. At this time, there are no questions. I will now hand the call back over to the presenters for any closing remarks. Mark A. Pytosh: Thank you, everybody. We appreciate you joining the call today, and we look forward to discussing our second quarter results in late July. Thank you very much, and have a good day. Operator: This concludes today's call. Thank you for joining. You may now disconnect your line.