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Operator: Hello, and welcome to today's Tyler Technologies, Inc. First Quarter 2026 Conference Call. Your host for today's call is H. Lynn Moore, President and CEO of Tyler Technologies, Inc. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. In order to address everyone's question and state it in the allotted time, please limit yourself to one question, and you may rejoin the queue for a question. As a reminder, this conference is being recorded today, 04/30/2026. I would like to turn the call over to Hala Elsherbini, Tyler's Senior Director of Investor Relations. Please go ahead. Hala Elsherbini: Thank you, John, and welcome to our call. With me today are H. Lynn Moore, our President and CEO, and Brian K. Miller, our CFO. In an effort to streamline our earnings communication and provide timely context around our quarterly earnings results, we published our prepared remarks yesterday shortly after posting our full quarterly results release to the news section of our Investor Relations website. This go-forward practice allows for more timely understanding of our earnings results released before our earnings call this morning. Additionally, beginning next quarter, we plan to hold our earnings call earlier in the day before the market opens. After I give the safe harbor statement, Lynn will provide a summary of our key quarter highlights and then we will move to our Q&A session. During this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses, and profits. Such statements are considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We refer you to our Form 10-K and other SEC filings for more information on those risks. We have also posted on the financial section of our Investor Relations website a schedule with supplemental information. During the past year, we have discussed our intent to simplify the supplemental information we present to focus on our key performance indicators—annualized recurring revenue (ARR) and free cash flow—along with other metrics we consider meaningful, including quarterly recurring revenues and bookings. We believe this will enable investors and others to focus on relevant metrics that best reflect the performance and trajectory of our business. Also, on the Events and Presentations tab, we posted an earnings summary slide deck to supplement our prepared remarks. Lynn? H. Lynn Moore: Thanks, Hala. Our first quarter results provided a strong start to 2026, with better-than-expected recurring revenue growth and free cash flow generation. Total revenues and recurring revenues both reached new record highs. Brian K. Miller: And free cash flow more than doubled last year's first quarter. Public sector demand remains robust, with an active pipeline and growing momentum across our cloud solutions, AI-enabled applications, and our unified transaction strategy. Operating margins continued to improve, benefiting from our cloud model transition. During the quarter, we repaid our convertible debt at maturity and executed meaningful opportunistic share repurchases under our new authorization. And earlier this month, we completed the acquisition of For The Record (FTR), representing the third largest acquisition in Tyler Technologies, Inc.'s history. We are well positioned for 2026 with durable demand drivers, accelerating cloud momentum, and a trust-based approach to leading the public sector's AI evolution, supporting our confidence in delivering on our strategic initiatives and 2030 targets. We will now open the call for questions. Operator: Ladies and gentlemen, we will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset and then press the star key and then the number one. To withdraw your request, press the star key and then the number two. As a reminder, please limit yourself to one question, and you may rejoin the queue for a follow-up. We will pause momentarily to assemble our roster. Our first question comes from the line of Terry Tillman with Truist. Please go ahead. Terry Tillman: Yes. Hey, Lynn, Brian, and Hala, thanks for taking my question. We had the benefit of going to your conference—that was helpful. A lot about enablement for customers moving to cloud and building confidence that they are ready to move to cloud. Maybe this is for you, Lynn: in terms of confidence level 90 days since your last update on SaaS flips—the volume and velocity as we look through the year. I know you had ACV growth on the flip side of 10% year over year in Q1, but any more color you can share about the confidence level—has it increased, is it where it was—for SaaS flips for the rest of the year? And related to that, is AI and agentic becoming an incremental stimulus or not necessarily? Thank you. H. Lynn Moore: Thanks, Terry. I would say my confidence level in our cloud transition—both in terms of customers flipping to the cloud and what we are doing from an operational perspective—is really high. We showcased this at Connect, as you mentioned. We had a client advisory board where we talked about the future direction of Tyler Technologies, Inc.'s client cloud movement, and clients now are just really receptive to it. I think hesitation in the past is really in the past. Now it is a matter of execution going forward. One anecdote I would share is public safety. We used to talk about how that was a little bit slower to move to the cloud. We are seeing now the public safety market is pretty much 100% going to the cloud. All those points lead me to feel just as confident as ever. Our 2030 plan has not changed. As it relates to AI, I think it is a tailwind. I would not say it is a big tailwind at this point. We have a lot of AI initiatives going. We have AI in a lot of our products. It is embedded in our workflows. We spent a lot of time showcasing it at Connect. There was a lot of buzz around what we are doing and the trust we have with our clients. They trust us to move forward with AI. I like where we are positioned. We are making the right investments. Our clients are partnering with us on it, and I like where it is going. Operator: Our next question comes from the line of Matthew David VanVliet with Cantor. Please go ahead. Matthew David VanVliet: Hey, good morning. Thanks for taking the question. You mentioned in the prepared remarks you put up that RFP activity continues to improve and you are seeing a lot of momentum there. Curious what you are seeing coming out of that in terms of deal execution—win percentage—and then also, are customers looking to land a little bit bigger now that they are moving into the cloud and bolting things on is maybe a little bit more palatable up front? How are deal sizes and win rates looking? H. Lynn Moore: I think the market dynamic is pretty steady. RFPs continue to be steady. Our win rates are steady. The market right now is good. As it relates to deal size, every time we flip to the cloud, it is an opportunity for us to upsell, and that continues. We are also seeing some increasing deal sizes by adding on things like AI. Overall, the market is good and steady. Operator: Next question comes from the line of Ken Wong with Oppenheimer. Please go ahead. Ken Wong: Fantastic. Thanks for taking my question. Brian, a question on the guidance. Nice to see the strong quarter and the raise. Any way to help us dissect some of the drivers of that increased raise—whether For The Record, the increased demand, timing of SaaS deals? Any color you can give would be fantastic. Brian K. Miller: This early in the year, there are not any major changes to the guidance. The biggest factor is the addition of FTR, which is now included in our guidance for the year. That accounted for a meaningful amount of the revenue raise along with the outperformance in the first quarter, particularly around transactions. FTR adds somewhere in the neighborhood of $30 million of revenues to the full year and a modest amount to EPS. So it is a combination of the outperformance in the first quarter as well as the addition of FTR. Ken Wong: Fantastic. Thank you very much. Operator: Our next question comes from the line of Joshua Christopher Reilly with Needham and Company. Please go ahead. Joshua Christopher Reilly: Great. Thanks for taking my question. After seeing some of the Tyler Foundry use cases at Tyler Connect and the packed room for the customer overview of the agent capabilities, clearly the demand is there for the AI products. How quickly can you ramp to market the roughly 40 to 50 use cases that you plan to release for the initial agentic use cases at the conference? And how is the sales and implementation process going to work for those initial use cases on the agentic side? Thank you. H. Lynn Moore: Yes, Josh, you are right. The buzz at Connect was strong. I think our message generally around AI really resonated with our clients, and I cannot overemphasize how much our clients put their trust in us to deliver the AI solutions for them in the future. Buzz does not always translate to deals immediately. We are getting deals. As you mentioned, the use cases—we have some of those already in the hands of clients and in the market. But I would generally say it is going to be a slower ramp. Our sector generally moves a little slower than the private sector. There is a lot of receptiveness and excitement. I think it is still TBD to see how much it is going to impact near-term financials. Operator: Our next question comes from the line of Saket Kalia with Barclays. Please go ahead. Saket Kalia: Appreciate the new format as well, so thank you. Brian, maybe for you, I would love to dig into some of the moving parts within the higher SaaS revenue guide. I think the $30 million from FTR is adding to that a little bit. Could you talk us through how the SaaS revenue guide is changing both organically and inorganically so that we are all on the same page? Brian K. Miller: Around 70% of FTR's revenues are software revenues—a combination of SaaS and maintenance—and the rest is hardware. So they are the biggest piece of that increase. The other thing driving increased SaaS is a little bit around the timing of when some of the bookings come online, so it is really some fine-tuning. There is no fundamental change from the outlook we entered the year with. Obviously, strong bookings in the first quarter give us more confidence around that. There is a modest contribution from the acquisitions last year, but those were built into our guidance for the year from the start. So really it is modest tweaking around timing combined with the FTR acquisition. And I would just add on the FTR acquisition, they are in the midst of their own SaaS transition. As we look out over the next few years, we expect SaaS to accelerate in their business as hardware and maintenance continue to decline. Operator: Our next question comes from the line of Alex Zukin with Wolfe Research. Please go ahead. Alex Zukin: A couple of really nice wins and a really strong bookings quarter for you, and it feels like even some of those wins are not fully reflected in the bookings number. What is driving the strength competitively here? Were there any onetime items, or are we pulling forward bookings from later in the year? Help us gauge how that ebb and flow should come in this year. Brian K. Miller: I do not think there is anything pulled forward or unusual. It actually was a quarter in which there were not really any large deals—just a handful of SaaS deals with ARR of more than $0.5 million a year, so no kind of multimillion-dollar SaaS deals. As you know, bookings can be lumpy with respect to big deals. We have talked about the pipeline still containing a normal amount of large deals, but this quarter there really were not those. One of the biggest software deals is a transaction-based deal—a statewide digital motor vehicle titling solution—and so it does not appear in SaaS bookings. It is one of those deals where we are providing software as well as payment processing and other services under a transaction-funded arrangement. So it does not hit SaaS bookings, does not hit bookings at all this year, and revenues really will not start for that until next year, but that is a deal that we estimate will generate in excess of $20 million a year in transaction revenues when it is at full ramp. Otherwise, we expected to see a good rebound in bookings. There were certainly some unusual events that impacted last year's first quarter, so the comp was a little bit easier. But notwithstanding that, it was a very strong bookings quarter without any major onetime events—just a good solid volume quarter. Operator: Our next question comes from the line of Jonathan Frank Ho with William Blair. Please go ahead. Jonathan Frank Ho: Hi. Good morning, and thank you for the new format. One thing I wanted to understand a little bit better is how to think about the cadence of your on-premises flips this quarter and how that may progress over the course of the year, especially as you start to implement some of these cloud-first changes. Brian K. Miller: We do not focus too much on the short-term cadence of flips. We have talked about our expectation over the next several years of getting to, by 2030, a point where 80% or more of our on-premise customers have moved to the cloud. We have said we are still on track for that. We expect the peak of that flip activity to be in the 2027 through 2029 time frame. At a high level, we expect the volume of flips—focused on dollars rather than number of flips—to be higher this year than last year. The quarterly cadence is a bit hard to pin down, and as long as we are making appropriate progress towards those longer-term goals, we do not worry about the quarter-to-quarter as much. So expect that volume to be up this year. It is in line with our expectations, and we have a high degree of confidence, as Lynn mentioned earlier, from conversations with clients that it is a matter of when and not if, and we are on the right track to achieve our goals. Operator: Our next question comes from the line of Robert Cooney Oliver with Baird. Please go ahead. Robert Cooney Oliver: Great. Thank you. Good morning. Lynn, my question is for you. Coming out of Tyler Connect, I would be curious to get your view on the product-per-customer motion for you. I guess another way to ask the cross-sell question that Matt had earlier. I think your prepared remarks mentioned that you saw some really good progress internally. I know you have driven a lot of those initiatives. I think you said that the average customer has around three products, and that could go to seven to eight. Help us put some color around what you saw at Connect and how that appears to be trending now as customers move to the cloud. H. Lynn Moore: Yes, Rob. I would actually say we are looking for an average of three to go to 10 to 12, not seven to eight, but I am not going to quibble. I think the momentum is there. We are also seeing a lot more cross-sell momentum coming out of our State and Federal group—getting more of our local products into state hands. We are seeing it with things like our document automation product and our priority-based budgeting product. The initiatives that we have been talking about for the last year and a half—around improved client success, improved efficiencies and optimization in the cloud, making the cloud experience better for our clients—are only going to help grease the wheels and help us make that cross-sell motion go faster. It is not only the competitiveness of our products and putting AI in our products, but the whole basket of our strategic initiatives that will help drive those cross-sells and upsells as we head towards our 2030 goals. Operator: Our next question comes from the line of Allan M. Verkhovski with BTIG. Please go ahead. Allan M. Verkhovski: Hey, thanks for taking the question. Can you share how you are thinking about potentially including AI capabilities for your on-premise customers? And just really quick on the strong free cash flow in the quarter—what drove that? Any onetime items we should be aware of, and the level of prudence in the updated guide considering the strength you saw in the quarter? H. Lynn Moore: Yes, Allan, as it relates to AI, as we look out over time, there have been a few questions around flips and getting clients in the cloud. Over the years, we have talked about carrots and sticks. I would not be surprised if, looking out in the future, AI becomes more and more available only in the cloud. We are not quite there yet, but that is something that we are looking at very hard. Brian K. Miller: On the free cash flow side, it was mostly around working capital improvement. We had strong AR collections, and some of that is around timing. There is not really any onetime item in there, but the timing of working capital changes—particularly around collections—helped. CapEx was a little bit lower. And improved operating margin also flowed through to cash. Mostly timing events. Our expectation for the full year around free cash flow margin has not changed at all. Nothing particularly unusual to point out—just good execution. Operator: Our next question comes from the line of Clarke Jeffries with Piper Sandler. Please go ahead. Clarke Jeffries: Hello. Thank you for taking the question. Just a clarifying one for me. You raised the midpoint of maintenance revenue by about two points. I want to confirm that was entirely driven by For The Record. And you have made reference to the timeline being a few years for the SaaS transition. Is that at all impacted by the contract length, or just the comfortable pace that you want to go through that model transition? Thank you. Brian K. Miller: Most of the maintenance increase is For The Record. Our expectation around flips and that impact on maintenance changes has not changed, so that would be the primary driver. On the longer-term pace of flips, there is not really a contract-length factor impacting that. It is really around a lot of complex issues that vary from client to client about when they are ready to move internally—things like their replacement cycles for hardware in their own data centers, their concerns about cybersecurity, their overall IT road maps, and how they can pace moving multiple products to the cloud. All of those things drive that long-term cadence around flips. It is a pace we are comfortable with. We would love it to be faster, but we can certainly accommodate it while also serving our new customers and new implementations as well. Hala Elsherbini: Thank you. Operator: Our next question comes from the line of Charles S. Strauzer with CJS Securities. Please go ahead. Charles S. Strauzer: Hi, good morning. Can we talk a little bit more on FTR and give your thoughts on the addressable market for that product line and client overlap with current valid plans? Thanks. H. Lynn Moore: Sure, Charlie. FTR has already made a big splash in their space—45% of U.S. courtrooms are using it. We look at the combination as something that enables us to create something powerful we call judicial intelligence—something that does not exist today—to bring together what are right now disparate manual systems between the judge, the clerk, and the court reporter. Right now, using Tyler Technologies, Inc.'s client base, we think our current SAM is about a $200 million market. When you expand beyond that with their core offerings, that goes up to about $500 million. We are also excited that it opens the door for other revenue opportunities. I do not want to get too carried away because we need to execute on our own SAM and then the TAM, but there are a lot of things we think we can do in terms of monetizing the audio and transcript data that could increase the overall TAM north of $1 billion—maybe $1.5 billion. I am talking about things like attorney remote access and third-party data sharing, online transcript certifications, attorney insights, even going international. There are a lot of other layers we see playing out in the future. This fits well with our overall M&A strategy—expanding in new markets, filling gaps in our offerings that are adjacent to our core fundamentals, and targeting areas that can grow faster than we can. I am really excited about this acquisition. It will take time, like all our acquisitions do, but the runway is there, and leveraging our strong position in courts coupled with their offering makes it pretty exciting. Operator: Our next question comes from the line of Adam Hotchkiss with Goldman Sachs. Please go ahead. Adam Hotchkiss: Great. Thanks so much for taking the question. I wanted to ask Rob's question on cross-sell a little bit differently. You mentioned the success and execution on the dedicated state sales team side of things. Could you help us understand what is happening on the ground with the state and federal initiatives and how that differs from the strategy and resource allocation you have had historically? H. Lynn Moore: Yes, Adam. We talked about this around this time last year. We created a whole new state sales team that is dedicated to that space—different from what was there before. Part of that is new strategic account plans, new strategic account managers, and actually targeting states where historically NIC did not have state enterprise contracts, so expanding our footprint there. We are also transforming the way historic NIC's business model worked. Historically, a lot of their state contracts were funded through DIRs, and we are moving to more of a funded-solution contract. We have already seen traction with Oklahoma and Kansas. We continue to look at sales all the time and how we can tweak and make it better, and those are some of the things we are doing in the state space. Operator: Our next question comes from the line of Mark William Schappel with Loop Capital Markets. Please go ahead. Mark William Schappel: Hi. Thank you for taking my question. Lynn, in your prepared remarks, you discussed the goal of getting every client on a single code stream for each product. How far along are you in that journey? I suspect it is still early. Which business segments—such as courts or ERP—are furthest along? H. Lynn Moore: You are right, Mark. This is what we call phase two of our cloud transition—cloud moving. You will get a lot more detail on that at the Investor Day in June. It is about getting all of our core portfolio products to a single release stream—continuous improvement, continuous delivery—with coordinated releases across our product portfolio. We have been working behind the scenes toward that, and we will give you more details at Investor Day. Part of that process is getting everybody to a single version—the cloud version—and each of our divisions is at different stages, but they are all making solid progress. It is exciting. It is where we will start seeing real leverage in the gross margins of our cloud delivery. Operator: Our next question comes from the line of Alexei Mihaylovich Gogolev with JPMorgan. Please go ahead. Alexei Mihaylovich Gogolev: Thank you very much. Hello, everyone. Brian, I wanted to ask about the R&D step-up. I remember you are migrating some of the costs from COGS to R&D. Where is the investment concentrated? Is it the agentic AI versus core ERP, courts, or implementation tooling? And what are the clearest milestones to watch for this year? Brian K. Miller: The R&D investment is pretty balanced across the things you mentioned. As you noted, there is an ongoing movement of development resources from the cost of sales line to the R&D line as we continue to evolve along that cloud transition—that is just a geography change. We have also reduced the amount of R&D that is being capitalized as some of those capitalizable projects have wound down, so more of the same resources are being expensed now that were formerly being capitalized—also not a change in work, just accounting geography. When we look at the true increase in development spend, it is balanced across innovation investments across our entire portfolio—things that improve our competitiveness, drive higher win rates, and add more value to our existing customers—as well as growing investments in AI. We are continuing to move resources that are already on board to the AI side as we execute on version consolidation and free up more internal resources, so it is not a huge hiring push on the AI side, but we are dedicating more of our development resources to those efforts. Operator: Our next question comes from the line of Analyst with Evercore ISI. Please go ahead. Analyst: Hi, this is Bill on for Kirk, and thanks for taking my question. On the $20 million state digital motor vehicle titling and electronic lien win, can you provide more detail on what differentiated you on that deal? And how should we think about the implementation timeline and revenue ramp as we look out to 2027? Brian K. Miller: That is an area where we have had a fair amount of success in the last couple of years. We have a partner in that space that we work with, and we have deployed that solution in a handful of states already. As those states move from paper titles to digital titles, they create a lot of efficiency in how they manage motor vehicle titling. Those have typically been funded by transaction revenues, so it has been a nice growth area for us. We continue to see a number of opportunities in our statewide client base, and I would say the solution we are deploying is a leader in that space. The implementation will take place over this year. We expect revenues to start in the first half of next year. They will be transaction-based revenues, and we expect those, as they ramp up, to reach north of $20 million a year of transaction revenues. Operator: Our next question comes from the line of Analyst with Stifel. Please go ahead. Analyst: As you partner with your clients on their AI journey, could you provide some of the main points of feedback they are giving you on the current feature set, the roadmap, and the pricing model? H. Lynn Moore: Yes, Parker, I think the most important feedback we have gotten is really the point we have emphasized a lot over the last year—trust. Our clients really trust us to be their partner more than anybody else. They are really concerned about their data and the protection of that data, which is something that we do. We talked a lot about the AI Foundry, and that includes all the security we have around it—around their data, around their processes—being embedded in their workflows and helping them do their business and make their jobs more efficient, freeing up their time from manual tasks so that they can accomplish other things. That message gives me the most confidence going forward. Our clients have high switching costs, and that plays to our advantage as well. We have client focus groups. We had a client advisory board where we spent time talking about AI. Our ERP solutions have their own client AI working focus groups. The feedback, and working with our partners to make sure we are doing the things that are most meaningful to them, really resonates with our clients. As it relates to the pricing model, it is going to be priced differently. Some of these are going to be priced as SaaS. Some AI features will be included as part of our competitiveness, and some will be priced as separate modules. We are still early, but we are getting wins and deals that validate our models. For example, this past quarter we won a couple of document automation deals. One in Miami-Dade—we mentioned that in our prepared remarks—where their existing maintenance and support agreement was a little over $0.25 million, and we sold a document automation SaaS deal for upwards of $0.8 million. That product is getting a lot of traction in the market. All the feedback we are getting is positive, and I like where we are sitting and our trajectory. Brian K. Miller: And to add one thought to that example with Miami-Dade, it is a value-based approach, because with that uplift from the AI-driven document automation they will generate significant labor savings. There is a very strong ROI to that purchase from Tyler Technologies, Inc. Operator: Our next question comes from the line of Analyst with Wells Fargo. Please go ahead. Analyst: This is Austin Williams on for Michael Turrin. I wanted to follow up on the AI efficiencies internally that you are seeing. Any color on how you are leveraging AI and any cost savings that you are able to drive there? And as a follow-up, any thoughts on the pace of the buyback going forward? Thank you. H. Lynn Moore: On internal AI efficiencies, we are seeing them, but it is still anecdotal at this point. Brian answered a question before about R&D, and the way we think about internal resources is we focus on capacity. In R&D, AI is increasing the capacity of our developers, which allows them to do more, which is great. We are seeing some anecdotal efficiencies in the service delivery area. For example, one of our clients in our appraisal and tax business doing a data conversion—in the past, this conversion would have taken many months and was reduced to a couple of weeks. It is still early to say we can apply that across all of Tyler Technologies, Inc.'s solutions, but what we are seeing is positive and something we continue to focus on. Brian K. Miller: On the share repurchase, we have repurchased 2.5% of our stock this year. The average price has been around $315. We still have another approximately $650 million under our authorization. When I look at our share repurchases and capital allocation, I think about our Tyler 2030 path and goals and the increasing confidence we have in our free cash flow generation that will exceed $1 billion in 2030 and we believe will continue to extend far out in the future. When I look at that, and have confidence in our 88% recurring moving to 90%+, it makes me think that today is a good value. We will continue to buy our shares when we think it is a good value. Operator: Our next question comes from the line of Terry Tillman with Truist. Please go ahead. Terry Tillman: The heart of my thunder was stolen with my follow-up on the AI-driven deals. I was going to focus on document automation, and I think both Lynn and Brian shared some perspective on that. But there were a lot of deals mentioned here. Did something happen or inflect in terms of go-to-market and the sales playbook? And with these document automation deals, does this go beyond the sphere of influence you had—whether courts or back-office ERP—and become a broader document automation use case that could go well beyond what you typically were doing? Thank you. H. Lynn Moore: Yes, Terry. I do not know that there was anything more specific—it is more the timing of these deals. We had two big document automation deals. I mentioned one was about a $0.8 million deal. Another one was Harris County that was pushing $1 million. Brian mentioned the ROI selling point, which is something we focus on, and it resonates with our clients. As it relates to the acquisition of CSI and document automation, absolutely, we think it is applicable across more parts of our portfolio. Our initial focus has been in the court space—that is their bread and butter and where we have a strong presence—but I expect it to roll out across other Tyler Technologies, Inc. portfolio products. Operator: Our next question comes from the line of Matthew David VanVliet with Cantor. Please go ahead. Matthew David VanVliet: Yes, thanks for taking the second question here. I wanted to drill in a bit more on the raise of the revenue guide for 2026. I presume it now includes For The Record. What was the contribution there, and were there any other puts and takes in terms of raising the guidance? Brian K. Miller: For The Record is the biggest contributor to the revenue gain and added in the neighborhood of $30 million in total revenues. In addition, we continue to see a little bit higher volume around our transaction-based business—some of that was reflected this quarter in the actual results. To the extent our expectations have changed at least modestly around that, we have factored that into the guide for the year. But the vast majority of the raise is the result of the FTR acquisition. Operator: Thank you, Matt. At this point, that concludes our Q&A session. I will now turn the call back over to H. Lynn Moore for closing remarks. H. Lynn Moore: Thanks, John, and thanks, everybody, for joining our call today. If you have any further questions, please feel free to contact Brian K. Miller or myself. We look forward to welcoming many of you to our June Investor Day, in person or on the webcast. Thanks again, and have a great day. Operator: Ladies and gentlemen, this concludes today's conference call, and we would like to thank you for your participation. You may now disconnect your lines.
Operator: Good day, and welcome to the Builders FirstSource First Quarter 2026 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by management and the question-and-answer session. [Operator Instructions] I'd now like to turn over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead. Heather Kos: Good morning, and welcome to our first quarter 2026 earnings call. With me on the call are Peter Jackson, our CEO; and Pete Jackman, our CFO. The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find a reconciliation of these non-GAAP measures to the corresponding GAAP measures were applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentations. Our remarks in the press release, presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from our forward-looking statements and projections. With that, I'll turn the call over to Peter. Peter Jackson: Thank you, Heather, and good morning, everyone. Our first quarter results reflect the adaptability of our operating model as we delivered strong strategic share growth in weak housing market. Across the organization, we remain focused on the factors within our control, including serving our customers, expanding our differentiated portfolio of value-added solutions and leveraging technology to accelerate growth and drive operational excellence. This disciplined approach continues to strengthen our leading position as a trusted world service partner to homebuilders. By continuing to invest in innovation and the capabilities that matter most to our customers, we are reinforcing our role as the leading building materials provider and extending our competitive advantages. Our strategy enables us to outperform as the market normalizes and to deliver sustainable long-term value for our shareholders. Let's turn now to Slide 4. Our first quarter results highlighted our agility despite the challenging housing market and seasonally lower time of the year for the industry. We landed at the upper end of the expected Q1 range for sales and EBITDA even if the macro was worse than we expected. We continue to lean on our exceptional team, leading value-added solutions and robust operating model to drive performance. Let me take a moment to share some perspective on the market. The housing market remains weak as affordability challenges and muted consumer confidence continue to weigh on demand. In recent months, geopolitical tensions have added to market volatility by contributing to higher interest rates and additional inflationary pressure. The surprise of the Middle East conflict and the uncertainty around implications for both affordability and consumer confidence have undermined the spring selling season. While we are managing what's in our control, these conditions have created sales and cost headwinds that we don't expect to fully offset this year. Sales improved in the first quarter, in line with expectations and daily sales continued to build in April. However, sentiment is clearly weaker. As people discuss, our revised full year guidance reflects these dynamics. Despite ongoing macro challenges, we remain committed to advancing our strategy, including a sustained focus on share growth, continuous improvement and capital allocation. We cannot control the market, but advancing our initiatives will enable us to realize share gains, improve the way we operate and position us to accelerate growth with any level of recovery. We expect to capture single-family share growth by delivering outstanding customer service, bundling our broad product portfolio to drive affordability and leveraging cutting-edge technology. Multi family, quoting activity remains active, but the uptick in interest rates has deferred certain projects. Given the current project pipeline, we don't anticipate a meaningful improvement in our multifamily results until next year. In response to the current market weakness, we are prudently managing spending and maximizing operational flexibility as outlined on Slide 5. We remain operationally disciplined and have taken actions to reduce costs in line with demand while preserving our ability to partner with our customers and invest in innovation and technology. So far in 2026, we have consolidated 21 facilities following the consolidation of 55 total facilities over the prior 2 years, all while maintaining an on-time and in-full rate greater than 90%. Supported by our industry-leading scale, experienced leadership team and proven ability to operate proactively through the cycle, we are confident in our ability to make the necessary adjustments and continue to deliver exceptional customer service. On Slide 6, we highlight some of the key initiatives under our strategic pillars. Our capital deployment is strengthening our competitive position and driving long-term value creation. Since the inception of the buyback program in August of 2021, we have repurchased nearly 50% of our total shares outstanding. Operational excellence is crucial to how we run the business. As we develop talent, improve agility and increasingly embed technology into our operations. We generated $6 million in productivity savings in Q1, primarily through targeted supply chain and logistics initiatives. Moving to Slide 7. Our prudent capital allocation strategy focuses on maximizing shareholder returns. In Q1, we deployed $360 million towards return-enhancing opportunities aligned with our priorities. Our consistent strong free cash flow through the cycle gives us the flexibility to invest in organic growth, pursue strategic M&A and return capital to shareholders. Drilling down into M&A on Slide 8. We remain focused on pursuing acquisitions that expand our value-added product offerings and advance our leadership position in desirable geographies. We have developed substantial and proven muscle memory to grow through M&A and have a track record of successful integration and synergy capture. As a reminder, we acquired premium building components in January, marking our company's first trust and wall panel operations in York. Since the P&C merger in 2021, we have made 41 acquisitions representing over $2.3 billion in annual sales, the equivalent of a top 6 LBM player. Demonstrating our ability to execute and integrate seamlessly. With the industry still fragmented, we see significant opportunities ahead and are confident that inorganic investments will remain an important driver of long-term growth. Turning to Slide 9. We continue to differentiate by digitally enabling our team members, strengthening customer relationships and advancing value-added product development to support long-term growth. Our investments in automation, AI and digital integrations are focused on simplifying and accelerating the building process for our customers. In Q1, our digital platform processed nearly $800 million of quotes as we continue to automate key steps of the process. Later this year, we will roll out the next generation of digital solutions. Deploying emerging technologies to support builders across key stages of the homebuilding journey. The platform will include 4 integrated hubs: community, plan, selections and construction. All accessible through mybldr.com with embedded AI capabilities, providing actionable insights through a single unified platform. Builders will have access to connected tools and real-time data to coordinate the build, reduce waste and sell homes faster. Digital is central to how we operate today, particularly with our sales organization, where these tools create opportunities to capture share, expand product adoption and deepen customer relationships. Recognizing 1 of our outstanding team members each quarter is 1 of my favorite parts of our earnings call. Today, I'm proud to highlight members of our Middletown New York Millwork team. Sam Lane, Dan Livingston, Anthony Legmen and Eddie Walsh, who are recognized by the New York State Police for their compassion and willingness to help a community member in need during dangerously cold winter weather. Earlier this year, first responders contacted Sam and his team after identifying a local resident whose front door was severely damaged and no longer provided adequate protection from the coal. The officers were seeking to purchase a replacement or to help ensure the individual safety. When our team learned that the situation and the residents need, they stepped in immediate, producing a brand-new prehung door at no cost and assisting with the installation, I'm truly grateful to our Middletown millwork team for living our BFS purpose every day to build a better future for those we serve. I'll now turn the call over to Pete to discuss our financial results in greater detail. Pete Beckmann: Thank you, Peter, and good morning, everyone. Our first quarter performance reflects disciplined execution in a weak housing market. We remain focused on managing our operations and working capital while advancing key growth initiatives to drive long-term success. Turning to our first quarter results on Slides 10 through 12. Net sales decreased 10% to $3.3 billion, driven by lower organic sales and commodity deflation, partially offset by growth from acquisitions. The core organic sales decrease was driven by an 11% decline in single-family reflecting lower starts activity and reduced value per start and a 1% decline in both multifamily and repair and remodel, consistent with our expectations given muted activity levels and consumer uncertainty. As we've noted on recent calls, several factors reconciled single-family starts to our organic sales. First, there is an approximate 3-month lag between the start and our first sale. Second, average home value has declined as homes have become smaller and less complex, creating a sales headwind, we believe a comparable start has declined in value by 10% on average since 2019. Third, housing affordability constraints continue to pressure margins across the supply chain. Against this backdrop, we believe we grew share in the first quarter, reflecting our market-leading offerings and continued role as a trusted partner. For the first quarter, gross profit was $0.9 billion, a decrease of 17% compared to the prior year period. Gross margin was 28.3%, down 220 basis points, primarily driven by a declining start environment. Adjusted SG&A of $740 million decreased $31 million, primarily due to lower variable compensation amid lower sales and lower headcount, partially offset by acquired operations. As we touched on in February, we linked further into our downturn playbook with $100 million of cost actions, which includes $75 million in year-over-year cost reductions and $25 million in cost avoidance. These actions include deeper cuts to overtime and temporary labor, adjustments to incentive compensation plans, reduced merit and overhead spend, additional facility consolidations and tighter controls on discretionary spending. To date, all actions are complete or meaningfully underway. We realized $13 million in the first quarter and are on track to achieve our cost reductions this year. This positions us to leverage our costs as the market improves. Adjusted EBITDA was $214 million, down 42%, primarily driven by lower gross profit. Adjusted EBITDA margin was 6.5%, down 360 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Adjusted EPS was $0.27 and a decrease of 82% compared to the prior year. Now let's turn to the cash flow, balance sheet and liquidity on Slide 13. Our first quarter operating cash flow was $87 million, down $45 million primarily due to lower net income. For the quarter, we delivered $43 million of free cash flow, underscoring the strength and consistency of our cash generation profile. Our trailing 12 months free cash flow yield was approximately 10%. Operating cash flow return on invested capital was 13%. Our net debt to adjusted EBITDA ratio was approximately 3.2x, while higher than our long-term target, we are confident in the strength of our balance sheet with strong liquidity of $1.5 billion. We remain comfortable with our net debt levels and we'll continue to execute our capital allocation priorities with discipline to maximize long-term value creation. Moving to the first quarter capital deployment. Capital expenditures $45 million. We deployed $12 million on acquisitions, and we repurchased 3.3 million shares for $303 million. Earlier today, we announced that our Board of Directors authorized $500 million in share repurchase inclusive of the $200 million remaining under our April 2025 authorization. On Slides 14 and 15, we outlined our latest 2026 outlook and assumptions, which reflect continued weakness in housing starts, ongoing affordability pressure and a more cautious consumer. Compared to 2025, single-family and multifamily starts are expected to be down 2.5% and repair and remodel down 1%. As a result, we are adding net sales in the range of $14.6 billion to $15.6 billion, adjusted EBITDA of $1.1 billion to $1.5 billion and adjusted EBITDA margin of 7.5% to 9.6%. We expect our 2026 full year gross margin to be in the range of 27.5% to 29%. Reflecting the below-normal starts environment, we expect free cash flow of approximately $400 million to $500 million. The year-over-year change is driven primarily by a $180 million swing in working capital and lower EBITDA. In 2025, we benefited from a working capital release driven by the lower sales environment exit the year. In 2026, we anticipate the second half to be stronger, which requires investment in working capital. Our guidance assumes average commodity prices in the range of $390 to $410 per thousand board foot in line with the long-term average of $400. Despite continued end market softness, commodity prices have pushed higher since mid-December, driven by rising input costs. For Q2, we expect net sales to be between $3.75 billion and $4.05 billion and adjusted EBITDA to be between $300 million and $350 million. The shape of the full year implies a heavier second half contribution as we lap the starts decline due to the rapid deceleration of starts to reduce new home inventory levels. In closing, we are closely monitoring the current environment and remaining agile to mitigate downside risk in the near term while also investing strategically for the future. Supported by a fortress balance sheet and strong free cash flow through the cycle, we continue to manage capital with rigor, drive for organic growth and productivity savings and pursue M&A. We remain well situated to compound value through our strategic initiatives. With that, I'll turn the call back over to Peter for some final thoughts. Peter Jackson: Thanks, Pete. We are the nation's largest supplier of building materials to homebuilders in new residential construction, combining unmatched scale with deep global execution across every major housing market we serve. We are #1 in manufactured components, windows, doors and millwork, providing significant value to builders. Our footprint, digital platform and install capabilities create an unparalleled structural advantage. With our experienced cycle-tested team, we expect to deliver solid results in the near term and significant upside when the market recovers. Thank you again for joining us today. Operator, let's please open the call now for questions. Operator: [Operator Instructions] And we'll go first to John Lovallo with UBS. John Lovallo: Despite the headwinds that you've articulated in housing so far this year, I mean we would argue that the spring selling season has probably been a little bit better than feared and better year-over-year with most builders posting year-over-year order growth. I mean I do recognize there's a 3-month lag from -- for you guys from when you start getting activity. But is this kind of better-than-expected spring part of the driver of the second half step-up that you're expecting? Along with just the easier comps? Peter Jackson: John, yes, so thanks for the question. We absolutely did see a nice build at the beginning of the year. There were a number of different conversations we were having about the positive momentum, both on the public and the private side. It's important to remember that we generally see the headlines for the public builders, but they're a significant, but not universal coverage of the industry. That momentum at the beginning of the year, I think, has been good. It's just not -- I don't think able to withstand negative headwinds around uncertainty. That's what we called out here. I still think we'll see a good year. I just think it will be a little bit weaker than what we anticipated and that has led to pressures throughout the business, whether it be on the inflation side or just the competitive dynamics side. John Lovallo: Makes sense. And then maybe just digging a little bit deeper. The outlook implies a pretty nice improvement in margin in the second half at the midpoint, I think a 26% adjusted EBITDA margin would be 9.6%, which is, I think, 200 basis points higher than the first half. I mean what are you kind of expecting to be the big drivers of this improvement? Pete Beckmann: Yes. Thanks for the question. So it's really driven by the leverage that we gain out of the summer selling seasons, with the strength in our sales flowing through some of it's related to the sequential performance and management of our cost structure. We outlined our productivity was $6 million in the first quarter. We're still targeting our $50 million to $70 million for the full year, as well as the cost actions that we've outlined. So the $100 million of cost actions are well underway. We've completed most actions. Now it's just realizing those benefits as we move forward, which should help accelerate some of that leverage we would see in the back half of the year. Operator: Our next question comes from Charles Perron-Piche with Goldman Sachs. Charles Perron-Piché: First, I just want to draw a more into the gross margin guidance embedded for the balance of 2016. I think you mentioned last quarter, Q1 would be the low point for the year. But obviously, it sits on the midpoint of the revised range. So how does it inform your expectations for the balance of the year? And what drives your expectations for the high end versus the low end of that range? Pete Beckmann: So what we had signaled last earnings call is Q1 would be the low watermark as we were anticipating a stronger build in the selling season as Peter had mentioned, with the uncertainty as well as the increase in input costs, specifically around fuel, a lot of that inbound is still unknown that we're anticipating from our supply partners. It's not nominal amount of impact that it will have on the cost. We've left the margin range fairly wide. We look to navigate what that looks like as we move forward. At the same time, we do expect to pass through where a distributor passed through those cost increases, but some of it is timing related. And as we work through that, it's probably going to have a muted impact on our margins. So we had signaled a build in margins as we go through the year and we leverage our fixed costs and cost of goods sold. That's still the case. We still anticipate that, but maybe not to the same degree, given the sales volume expectations. Charles Perron-Piché: Got it. Okay. That's helpful color. And considering the challenging housing backdrop and the profitability outlook you've highlighted, I would imagine some of your competitors are struggling significantly at these levels. I guess how are you seeing some of them behave in this market environment? And are you seeing some smaller players exiting capacity? Peter Jackson: Yes, it's a great question, Charles. The answer is, yes, there's a ton of pressure. And there are smaller players that are certainly struggling. There are players that have closed down a lot of facilities. We've obviously talked about it publicly, but they're doing it privately. We've seen that in the market. We've seen a lot of turnover. People are making significant headcount reductions, talent coming on to the market in some instances, we've seen aggressive behavior, certainly, a mix, as you might expect, right? The bell curve of performers in this market is what we see in terms of reactions. Some people are trying to pursue product categories perhaps that they haven't before. So new entrants and new competition in certain buckets. We've seen irrational behavior where people will throw numbers out and then not be able to fulfill and have to back off. And so churn in the market. And just in general, a lot of very aggressive behavior. So people alluded to it. I think sometimes it's hard to -- it's hard to relate to what people are seeing in the market, but we're -- volume levels or starts that would be comparable to 2019, but the content of the house is even smaller by another 10%. So we're certainly seeing a market that's at substantially lower levels of volume running through it even after having an additional 5 years of capacity adds and things going on. So the market is absolutely adapting. Capacity is coming out -- some of the weaker players are really struggling. We're hearing rumors of not being able to pay bills and delays and layoffs, but we'll see how it pans out. We're still strong in this. We're still able to, I think, take advantage. We alluded to that a little bit, we're sort of leaning in a little bit this quarter, harder than we have and taking advantage of some of those opportunities. it's not easy right now, but I'm absolutely proud of this team for what we've been able to do. We're still strong in this market, even though it's not. Charles Perron-Piché: Got it. Peter, and good luck with the quarter. Operator: Our next question comes from Rafe Jadrosich with Bank of America. Rafe Jadrosich: I just wanted to start on the share repurchase in the quarter. You are above the sort of target, the long-term target leverage range, but you bought back $300 million. Can you just talk about that decision and strategy going forward? Pete Beckmann: Sure. Yes, when we talk about our capital deployment strategy, it's very consistent with what we've seen. I would say, the way I would frame that is, first, making sure that our balance sheet and our debt is rock solid. We have plenty of liquidity. Second, that we're investing in the core of the business, continuing to make sure we have what we need from a capital investment perspective. Third, looking at the M&A environment, the inorganic opportunities and what high return targets are out there for us to consider and then finally, what does it make sense to lean in and buy back shares. And I think we saw the dip this quarter in reaction to the dynamics of what was going on in the Middle East and saw it as an opportunity to pick up shares of BFS at a tremendous discount. We have a lot of confidence in our balance sheet and where we stand on the leverage perspective, certainly with the decline in EBITDA levels, it's resulted in some of the multiples. The leverage multiple as you mentioned, is being a bit higher but it's not an area of concern for the business. We're going to remain disciplined. We're going to remain thoughtful about how we do it. And at no point are we going to impair our strength on the balance sheet or our liquidity position. Rafe Jadrosich: That's helpful. And then just on the inflation side, how are you -- could you just help us understand how you handle sort of higher diesel costs and some of the inflation. Does that get passed along to your customers through surcharges? And maybe just talk about the exposure in terms of the transport on the fuel side. Pete Beckmann: Yes, absolutely. And we certainly saw, as did everyone else in the space and across the world, increases in fuel costs, diesel specifically, we take those costs as inputs, and we will surcharge our customers passing along. And sometimes it's embedded in the way that we price our product and how to service our customers. So it's all embedded and we do pass that through. We evaluate it very closely. And like I mentioned on a prior question, it's not an insignificant amount on the inbound and it's not insignificant on the outbound. We do take that very serious and passing it through. Operator: Our next question comes from Ryan Merkel with William Blair. Ryan Merkel: I want to go back to gross margins. What was the biggest surprise in the quarter because you did beat the street on sales? And then on the guidance, how did you think about that? Did you just extrapolate what you saw in the first quarter or did you add a little bit of incremental weakness to the guide? Peter Jackson: Ryan, yes, thanks for the question. So I think the challenge that we face in this current environment is the variety of products that we're selling and the dynamics that are happening in each 1 of those categories. What I would say in Q1 is if you look at the trends, the core of the business is pretty well leveled out. They're certainly hand-to-hand combat in certain areas, in certain parts of the country, so you get sort of the normal variability. If you think about lumber commodity and the value add where I think we were surprised is in the specialty products and the other categories. That was where it was certainly more challenging, more volatile than we expected. Not happy about it, recognizing it for what it is and trying to account for that on a go-forward basis. But that's the core of the story. Pete Beckmann: So Ryan, if I could add to that. What's also working really well is our funding program. Where we picked up a little bit of mix is on the lumber and sheet goods. So as we've been successful with our manufactured or value-added sales, we picked up a little bit more on the lumber and sheet which is a lower margin category, which had a little mix impact. So that's all evidence of some of the share that we've been able to capture on the lumber side, leveraging that value-added capability. Ryan Merkel: Got it. Okay. And then just back on the guide, I know it's an uncertain environment. So did you just extrapolate sort of the trends in 1Q? Or did you add a little bit of cushion in the guidance. Curious how you thought about it. Pete Beckmann: I would say we don't just extrapolate we're looking at our buildup from the bottoms up as we think about our sales projections for the year, what's in the pipeline what we're hearing from our customers, the economists, we take all things into consideration as we develop our guide. And we have a normal seasonal curve. So it's a little more muted than what we had communicated last quarter -- or last quarter. But it's still a seasonal curve and we're seeing certain parts of the country saw out and start to gain momentum as we get into the summer selling season. We're playing closer to the pin, Ryan. Operator: Our next question comes from Mike Dahl with RBC Capital Markets. Michael Dahl: I want to follow up on the kind of strategic share comment. So I think in the past, you've talked about others have been more competitive on the lumber and dirty side, not necessarily wanting to share that way. It doesn't sound like this is specifically the goal of, let's win back share in lumber, it's more kind of a function of some other strategy. But can you just elaborate a little bit more on kind of the shift that you've made there? And then if there's any way to quantify when we think about the mix in the act gross margin, what that really cemented the quarter and in the guide?. Peter Jackson: Thanks, Mike. Listen, man, there was a lot of feedback there. So I think I got it, but if I don't, please just correct me in the answer. So your question was about what's the bundling -- a little bit more on the bundling, what do we think that's doing in terms of the margins and the business. So our bundling is really sort of the culmination of all the work we've done to offer the variety of products. It's the ability to come in and say, to a builder, we can make your life simpler and more efficient and put together an affordability package for you if you're interested in buying lumber plus trust plus millwork, plus Windows or whatever we're offering in that particular market. The opportunity there is to have some sort of back end or some sort of combined pricing that allows us to fill capacity, keep our operations humming. But by combining it offer a superior value while at the same time offering or capturing more gross margin dollars for ourselves. So pretty straightforward in that regard. The mix impact right now, I think Pete alluded to it in the past, I think we've walked away from more of the lumber than maybe we have to right now. We can kind of pick that up, has a little bit of a negative impact on margins by virtue of mix. I would tell you that's not the biggest impact or a negative mix in this quarter -- sorry, or negative margins this quarter. I think the primary issue is what I was outlining before about the other products, the specialty products. It's just gotten tighter I would say, surprised us how quickly it got tight in the quarter. But the core of the business, the lumber and lumber sheet and the value-add, I think, is performing largely in line with what we expect. Michael Dahl: Yes, that's helpful. Sorry, Chris. Hopefully, the follow-up comes in clearer. The -- just then to kind of dovetail understanding those comments in terms of that's not really the main driver. Some of the public builders have commented about cost increases are not taking cost increases or want to push them off. We have heard some concerns about kind of players like yourselves being caught in the middle in an inflationary environment. Obviously, historically, there's been sufficient ability to pass through costs, given your position in the market. But maybe specifically on the commodity pricing right now, there have been periods of time where you might be a quarter or 2 of margin compression as commodities rose. I think you moved away from a lot of the longer duration contracts. So that's been a little less of an issue in recent years. But can you talk through whether there's any timing differentials on -- I know you mentioned fuel, but also on the commodity side that might be pressuring margins in the near term? Peter Jackson: Yes. No, that's a good question. So I'll start with the commodity side. You're right. We have largely moved away from those long-term contracts. And we're accurately we, I think, done a better job of matching our commitments to our customers with our purchasing profile and the way we're bringing it in. So certainly, it's a little bit of that, but if it was big enough to mention I'd be calling it out. So it's fairly modest in terms of the number. The broader question I think you asked is probably the more urgent one and it has to do with, well, builders are saying they're not going to take price increases and vendors are saying, well, we're going to get price increases. So that's going to leave us holding the bag. I'd say that's not true. I think we're pretty good at this. And the balance here is we provide a value to this market on behalf of both of those parties. And there's a level of profitability that we're going to need to see in order to continue to participate. So to the extent we have good long-term partnerships and the market wants product there's going to be a pass-through of whatever it needs to be. Now do we play a mediating role in that Absolutely, right? We're in the discussions between vendors and builders and builders and vendors, depending on the dynamic. It's very clear to us that we have an affordability problem, right? We are trying to help the builders achieve that goal in any way we can. But at no point does that involve us becoming a charitable institution and losing money in order do it. So there's a balance, right? And I think they understand I've had conversations with a number of them. And I think they're going to do what they need to do and they're going to press and we're going to do what we need to do, and we're going to hold the line where it's appropriate. But in the middle, there's a lot of value and a lot of work to be done, and I think we're particularly good at navigating that. Operator: Our next question comes from Matthew Bouley with Barclays. Matthew Bouley: Just sticking on the gross margin topic. So this guidance change of hundred basis points or so. I heard you mention several drivers. You had the competitive environment, change in your starts assumption from flat to down low single digits. It sounds like price cost due to fuel, talked about lumber mix, and then the specialty products and other margin. My question is really is any 1 of those, the biggest issue? Or maybe you can kind of rank order the drivers of that change? Obviously, what I'm trying to do is get conviction on what it would take to sort of halt that decline in gross margin. Peter Jackson: Thanks for the call, Matt, for the question, Matt. Yes, I think the answer is, if I'm scaling the level of impact, the biggest one is the specialty. I think the second piece is, it's a lot of different stuff in the inflationary component is an important one. It's kind of the impact of fuel and what we're trying to do to manage it. That's more of an outbound cost thing that we're managing. It's certainly, I would say the others are more comparable in size for the starts impact the competitive dynamic mix impact and the fuel on the gross margin side. Matthew Bouley: Got it. No, that's -- got it. Perfect. That's helpful. And then the second one, the cost savings, the $100 million in 2026. It's the same number from last quarter. Obviously, your overall earnings rejection has come down. So my question is, is there any more room to press on that? And how are you thinking about the balance of hanging on to cost, hanging on to labor, et cetera, versus what it would take to kind of press on more, I guess, austerity type measures? Peter Jackson: So I think that the short answer to that is we're always looking at changing the size of the business and cutting costs in a market like this. The primary focus remains on the variable side to ensure that we're matching the people doing the work with the work that we have. And that is the biggest dollar amount by far that you're going to feel in our results. We're working through and as Pete mentioned, largely through most of the cost outs. I think at least initially, we need to digest the impact of that and make sure that we're able to deliver on the things that we're committed to delivering before we take another pass. That said, we will continue to look at it. And as the year progresses, we'll see what we need to do. We're not announcing anything today, nothing new to that. Operator: Our next question comes from Keith Hughes with Truist. Keith Hughes: Thank you with the margin hit on specialty. It seems like it's now everything you do. Has it changed the relative margins amongst the products, the pressures of the downturn are they still kind of rank order the same top to bottom. Peter Jackson: They're still rank order pretty much the same. I think what you see, Keith, in its the academic in me is kind of fascinated by you actually saw the wave of cost reductions and competitiveness flow through our P&L similar to the way you would see it hit the job side. It started with the lumber. It's a commodity move quickly. It reset quickly all the margins reset quickly, then it worked through some of the value-added products as you get into the structure and we're seeing it, we're all the way through to some of the dogs and cats on the back side of the build that we deliver. So the relative performance, still very similar, but the timing at which we saw the resets was kind of in that order and why we're seeing the specialty now is just a bit more than we thought. Operator: And our next question comes from David Manthey with Baird. David Manthey: Guys, I'm wondering if you're expecting to see any relief in the size and complexity of homes as rates are more or less stable here. I mean at some point, I think maybe it just mix up naturally as buyers would skew more affluent because of the affordability, but maybe not. Could you just discuss the second derivative rate of change and any expectations you have that as sort of a leading indicator ahead of unit volumes going up? Peter Jackson: Yes, Dave, thanks for that question. It's a fascinating one. We debated it internally going back and forth. I think that the dynamic we've seen up until now is very much a bifurcation of the market, right? You've got strength at the large-scale, the more affluent buyer, the cast fire, if you will. But on the counter, you have a lot more homes shrinking and using in complexity at the bottom end. So the starter homes are more starter. They're simpler. There's less in them. There are also -- not only is it square footage, but it's single pipe stand-alone to the townhouse offering as well, right? So those dynamics we think have played out pretty aggressively. It is our opinion that stability to improvement in the market will likely lead to a reacceleration of some of those factors, meaning people would prefer to live in it would be welcome. I think you'll see more stability through the middle and upper tiers of the market, and we will see a little bit of that. David Manthey: Okay. And if you could just update us on the ERP, how far are you? And what does the time line look like from here? Peter Jackson: Yes, sure. So for those of you who don't recall, we're in the midst of an SAP implementation. We are doing it in a very incremental way. So it's not a risk to the overall business. We did a preliminary pilot last year and have been doing some work to dial it in so that we can scale it. We're going to test those changes later on this year with another rollout. And then the expectation is it will start to accelerate in 2027 for the next kind of few years, I guess, based on the current schedule. We'll see how it goes as we start to trigger it. But we think we're ready to have a really nice rollout later this year to prove it out to prove out a new training regime and some of the other stuff we built. But that's kind of the thinking around it. It's going well. It's slow process. I'm very impatient, but I think the team is doing a good job. Operator: Our next question comes from Trey Grooms with Stephens. Trey Grooms: Everyone. So a little bigger picture here, I guess. I think installed products are something around kind of high teens or so of your sales with the install including the products you're selling, clearly. It seems like that's a value-add area that builders are willing to pay for. How are you thinking about installed generally, is this an area you can lean into in the current environment? And maybe where do you see your install offering going here over time. Peter Jackson: Thanks, Trey. Yes, I think install is still a compelling offering. It's got the combined benefit of taking work off of the builder, making the job site more efficient and capturing the off-site benefits of all the other things we're able to do. Right? So whether that be installed trust, installed windows, we do some install framing, we leverage ready frame, there's a bunch that we do. I believe that even in a market like this, where there's depressed volumes, we're doing quite well with it. It's growing or it's performing better than market. put it that way, right? It might be down, but it's down less than the overall starts, where I think it's really going to shine though is as this market starts to turn. I'm a firm belief that the lack of skilled labor will continue to be a challenge for this country in this industry for a long time. And I think the efficiencies captured in the installed model that we offer will be a differentiator and a competitive advantage as the market begins to accelerate again. Trey Grooms: Got it. That makes sense. And then on the -- with cash flow and on the balance sheet, Pete, you guys are -- you mentioned you're expecting second half to be stronger, which will require investment in working capital. Any additional color you can give us there on what that use could be or what you're baking in there for working capital as a use of cash with your updated free cash flow guide for the year? Pete Beckmann: Yes. So the working capital increase is going to be generally around or your receivables. So as we have higher sales per day as we exit the year, we'll have higher receivables that will carry over that finish line. I think we highlighted last quarter that the year-over-year changes in the change in working capital, specifically year-to-year was going to be about $300 million. Because of the lower guidance, we pulled that back, we're looking at about $180 million in the change in working capital year-on-year which is that change is helping to offset the lower EBITDA that we had outlined. And then there's some other docking cats with the CapEx guidance that we had changed that kind of make up the delta. But that's really the bigger pieces of it. Now if you also think about inventory with higher inflationary costs on a relative basis point to point, inventory cost is going to be a little bit higher as well. So we try to factor in all the real working -- operating working capital pieces as well as the things around it. I hope that helps give the frame. Operator: Our next question comes from Kurt Yinger with D.A. Davidson. Kurt Yinger: Great. Thanks, and good morning, everyone. Just looking at kind of the base business, it looks like kind of the current guide is down on sales, 4% to 5%, a little bit more than the drop in end market assumptions I think last quarter, you had kind of assumed a certain level of share gains this year. Have you dialed that back at all? Or how does maybe inflation play into that as well? Pete Beckmann: Yes. Thanks for the question. So when you're looking at the base business and the trend, you have to also factor into the margin change, the price because that's going to weigh on the top line as well. No, we have not pulled back on our share gains or organic growth. We're still driving that forward in addition to what we had talked about earlier on the bundling and going after strategic share gains where it makes sense and where it's profitable. So that's all baked into the base business trend that you're looking at. But that weight from price is certainly a factor on the sales line. Kurt Yinger: And that would be, I guess, a component of competitiveness on gross margin, not necessarily an assumption of kind of vendor-led price decreases. Is that the right way to think about it? Pete Beckmann: That's correct. But we've talked about all the factors that weigh into that margin performance. So, the competitive nature is certainly 1 of Peter has mentioned the specialty and what we've seen on the specialty side, a little bit of the mix that we talked about. So yes, the competitive environment is still active and with a lower start environment, it's going to continue to persist. Kurt Yinger: Okay. Great. And then just on manufactured products kind of price cost, lumber has been on a nice low run here through Q1 kind of stabilizing at higher levels in Q2. Did you feel like on the trust side, you're able to fully pass that through or maybe how do you balance that price cost dynamic with the desire to fill up capacity and make sure you're covering more of those fixed costs going forward? Pete Beckmann: Yes. The fixed cost dynamic is certainly a volume aspect that we talked about with seasonality and fill in the plants and making sure that we're utilizing as much as we can. That factors into some of our facility rationalization Peter mentioned in his remarks that we had closed 21 locations so far this year. Some of those are manufacturing operations where we're trying to make sure we're consolidating and maximizing that utilization. As far as the trust, we are passing the cost through, there's a little bit of lag on a trust design because you design and that cost basis is built in typically when you're co-inhibiting. So it's a little more extended than just the short term on the lumber and sheet goods However, that resets with each trust that you're bidding and quoting. So it's got a little bit of a lag, but it's something that we're proud of on how our margins have performed and how well the team does with the product that we deliver to our customers. it's going to continue to be a higher-margin category for us as we look in the future. Operator: Our next question comes from Sam Reid with Wells Fargo. Richard Reid: I actually wanted to circle back to a comment that was made in the prepared remarks on April. I believe if I heard correctly, you saw a little bit of a sales improvement in April. I was just curious, is that a function of the macro and maybe just contextualize that April sales improvement in the context of normal seasonality. Peter Jackson: Yes, I think you hit it there. It's normal seasonality. We do see sustained growth from January through at least May and then it sort of ebbs and flows throughout the rest of the year, depending on the month and the sort of the focus that the builders have in terms of what they're trying to accomplish and the reactivity to the selling season and how well it's gone. But given the kind of normal seasonality around the country, this is what it's supposed to do. And it's doing it. I think for all of us, we just like it to be a little bit better and a little bit broader. Richard Reid: That makes perfect sense there. And then switching gears, maybe going down a little bit on that install piece. We've been hearing from a lot of the builders that they're getting concessions on labor, that's 1 of the key components that some of the big guys have indicated is driving thick and brick savings. I'm just curious for your installed business, do you see any of those benefits there potentially flowing through the P&L? Just talk through that implication. Peter Jackson: Well, I'd say good news and bad news on that. Yes, we're seeing it and no, it doesn't flow to the P&L. It flows through to the job site, right? I mean that labor has a relatively modest margin, well, I guess, everything has a relatively modest margin these days. But it's dominantly a baseline competitive component, much like commodity lumber in the space. We're adding value by virtue of our efficiency. So there's some benefit there, but a lot of that is passing through. Operator: Our next question comes from Phil Ng with Jefferies. Philip Ng: Well, Peter, I guess to kind of kick things off, your sales in 1Q and even 2Q somewhat backward-looking in terms of starts and starts have actually been grinding higher a little bit. Curious what are you hearing from your customers on spring selling fees because you're calling for a better back half. The public guys have been pretty -- I mean it's out there, but just any color on that with the private customers you deal with day to day. Peter Jackson: Yes. Thanks, Phil. So yes, I mean, like to recap at the beginning of this year, I think you saw a differentiated performance. You saw some builders who have been more successful in that effort, see really nice start, right? We have a couple of builders who are doing candidly some of their best business ever because they are able to start with a clean sheet, build exactly what the current consumer is looking for and putting it into the ground at pace. Others are still worried about the burn off. And so there's a mix. Now that characterization that I just gave you is really a public builder storyline and largely what you saw. So I think in general, not too bad, pretty decent year. On balance, I would probably say that it's neutral to negative, but it's neutral to where they were, and there's some optimism in that number. When I go to the other side of this equation though is the private guys, which is still 40%, 45% of the starts. The impact of uncertainty, the impact of the war and the volatility in the stock market. I think you've had some people just say, you know what, let's just wait a little bit. And I don't think that was the tone earlier I think before the war, there was a bit of a sense of, hey, this isn't too bad. Mortgage rates look pretty good. When it crossed [ 599, ] there was some optimism -- but I think that has pulled back and slowed down. Again, I don't think that -- it's not the lights have turned off. I don't want to call an end to anything. But it's a bit more tepid than we were hoping for, given what we had seen earlier on in the year. So trying to reset around that, putting our best foot forward as to what we think is going to play out. But Hopefully, that's helpful. Philip Ng: Yes, that's very helpful, Peter. Really appreciate the color. And let me preface this question. I have a necessary seen, it's not clear to me yet the merit of going vertical, horizontal, I mean, for some of these larger distributors that have made big investments recently. But one of them in particular, made a splash with during the LBM market now as well as the insulation side of things. I'm just curious, does that give you a rethink in terms of your approach, which has been more targeted around your core or you're considering actually going more horizontal, how does that like perhaps change the competitive landscape and how you go to market just given what you're seeing in the broader industry at large? Peter Jackson: Yes. Thanks, Phil. I hadn't heard anything about what you're talking about. Yes, just didn't. So I think our comments on this have, I think, been pretty consistent. Hopefully, we'll be familiar. We really like the business that we've been able to put together. We've done some of these other things over the years. I think it's public record. We spun off our [ chips in ] business. We do very little in insulation. We do very little in roofing isn't to say we don't do it. There are certain markets where it makes sense to include it in our offering, but it's not an area of focus for us. And we think that's because there's very little overlap in terms of the benefit that these products can provide by virtue of the way that they're provided and by virtue of the customer that is purchasing what they're selling. So not true in every instance, but we think this is the right place for us. We feel very good about our ability to compete in our core market and to win. We think our strategic advantages in our core market are the things that are -- that have benefited us in the past and will continue to. I am not intimidated by any player in our market right now by virtue of what they can do. Some are far better than others at telling the story. And I can absolutely offer my admiration for a good storyteller. I love that since up. So I'll get better at it, but let's just agree that we are the biggest, we are the best and -- of anybody. Operator: Our next question comes from Reuben Garner with the Benchmark Company. Reuben Garner: I appreciate you squeezing me in. If this is a repeat, I apologize. I had some feedback earlier on the call, but you mentioned specialty margins a couple of times. I was wondering if you could give a little more color on what you're seeing there. Is it specific products within specialty? Is it just broad-based kind of price cost pressure? What's driving the margin headwind there? Peter Jackson: Well, specialty for us by virtue of what we cover is a list about as long as you are. It's everything we sell outside of those primary categories. So it's things like siding, roofing, it's the gypsum, it's cement. It's anything that we're doing is a long list. So it's that culmination of a bunch of small hits that is the outline that we're providing around the specialty that other category, if you look at our investor presentation materials. That's where it's being hit. Reuben Garner: Okay. So just to be clear, it's not necessarily the digital or install piece with -- that I believe is within that segment as well. It's more the kind of the long list of products that you sell? Peter Jackson: It's not the it will be too small to move the needle. I mean, install is in there, but it's not a -- that's not a meaningful change from what we're able to drill down into it and it's that long list and a bunch of slices. Sorry, it's just hard going forward there. The rest of the day, trying to part it all out for you. I don't think that makes sense. Operator: Our next question comes from Min Cho with Texas Capital Securities. Min Cho: Just a couple of quick questions here. Peter, you mentioned that value per start was down in the quarter, but have you started to see any stabilization there? Or do you expect it to kind of decline for the intermediate term? Peter Jackson: Well, the callout was 10% versus 2019. So it's a longer-term decontenting. I would say it's fairly leveled out we are -- we might see a point of movement in any given quarter. But it's not moved as dramatically as it did about 1.5 years, 2 years ago. Min Cho: That definitely makes sense. And also, your value-added sales remains a similar percentage of overall revenue, and I'm assuming that those margins are probably holding up better. But as long as pick back up, can you expect the value-added part of that -- of your business to grow faster or slower? And I know you had mentioned installation will probably grow faster, but just in terms of your just overall value-add products. Peter Jackson: No question. Value-add has historically been our high-growth area. We've got better capacity, better service levels and particularly in a market that's labor-constrained, which it will be as this market turns, we will absolutely see better growth in value. Operator: Our next question comes from Adam Baumgarten with Vertical Research. Adam Baumgarten: Just on -- I think you mentioned maybe not being able to recoup all the cost inflation, I assume that maybe relates to fuel in 2026. Can you give us a sense of the magnitude of the headwind you're expecting for 26 at this point? Peter Jackson: Well, I mean, it blows down to that fundamental question of affordability and how much can you pass through and how much to eat. So the answer is in broad. It's market-specific depending on local profitability. I would tell you that we're taking it a bunch of different ways. Like Pete was saying, some of it's embedded into the cost that we're providing on the material side, particularly on the inbound cost. On the outbound, we're taking it in a couple of different ways, whether it's pass-through surcharge or part of the negotiation. I think the negative number that we're managing, it's probably around $100 million, right? So it's a meaningful number. The impact on the bottom line, I would say right now is a lot less than that based on what we're doing, but it's not zero. Operator: And our final question today comes from Ketan Mamtora with BMO Capital Markets. Ketan Mamtora: Just a couple of questions. On the competitive dynamics, you talked about sort of specialty, but it struck me that you didn't talk about sort of on the trust side and the EWP side. Is it fair to say then that you're starting to see stabilization there? Peter Jackson: Yes. Yes. I mean it continues to be competitive at a given quarter could be up or down within a small range. But yes, I think the -- our belief is that we have better clarity on the lumber and stability is starting to appear the manufactured product category, the broader value add cap. Ketan Mamtora: That's helpful. Peter Jackson: I'm going to be careful, right? This is a broad statement, but I think that's generally directionally correct. Ketan Mamtora: I see. Okay. And then just on leverage. I understand it's sort of a function of just how the EBITDA is moving through this year. But on the multiple side, is there a number where you feel that you don't want to go in terms of whether there's a 4 handle on it or whether it is sort of towards the high end of 3, is there a way to sort of think about that in general? Peter Jackson: I mean the short answer is our comfort zone is 1% to 2%. So anything north of 1% to 2% is challenging. The threshold for us is always back to where do we believe the market is, where is our balance sheet, how do we manage that in a very thoughtful and strategic way in comparison to the opportunities that were presented. So I don't want to put a hard range around it, but we keep a very close eye on it. The Board keeps a very close eye on it. And ultimately, our commitment is to have a full improved balance sheet with sufficient liquidity to do what we need to do. Operator: Thank you. This brings us to the end of today's question-and-answer session as well as Builders FirstSource First Quarter 2026 Earnings Call. We appreciate your time and participation. You may now disconnect.
Operator: Hello, and welcome to the Entegris' First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeffrey Schnell, VP of Investor Relations. Jeffrey Schnell: Good morning, everyone. Earlier today, we announced the financial results for the first quarter of 2026. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on the IR page of our website at entegris.com. Joining me on the call today is Dave Reeder, our CEO. With that, I'll hand the call over to Dave. David Reeder: Thanks, Jeff, and good morning. The first quarter was a solid start to the year as we continue to execute with focus and discipline against the constructive and improving semiconductor industry environment. We are delivering on our commitments. Revenue increased 5%, slightly above the midpoint of our range, while most other metrics, including adjusted gross margin, EBITDA margin and non-GAAP EPS all exceeded our guidance range. I'm encouraged by these results, and we remain focused on the significant opportunities ahead to fully capitalize on the organization's long-term growth and earnings potential. As I mentioned, total revenue increased 5% in the first quarter as compared to the prior year, driven by a 7% increase in our APS segment and a 3% improvement in MS. Our unit-driven revenue, which is correlated to MSI, increased approximately 7% year-over-year, driven by growth in liquid filtration, advanced deposition and selective etch, all of which are critical product lines for our customers' new technology nodes. We're pleased to see the continued growth in liquid filtration, which posted its third consecutive record quarter. CapEx-driven revenue decreased modestly year-over-year in the first quarter, mostly driven by accelerating order patterns in the prior year quarter in response to tariff actions. Given our current bookings patterns, we expect 2026 CapEx revenue to increase throughout the remainder of the year and contribute more meaningfully to our overall growth profile, driven by strong WFE growth and improving fab construction trends, which support not only the latter half of 2026, but also growth expectations in 2027 and beyond. Our overall results reflect the improving demand landscape across our end markets and regions. This includes double-digit Q1 growth in Taiwan and broader Asia, supported by strong plan of record positions as well as improving demand within advanced logic and memory, driven in part by AI-enabled applications. Turning to profitability. Gross margins improved in the first quarter of 2026. The key drivers to the strength in margins on both a year-over-year and sequential basis were productivity and efficiency actions across our manufacturing network and supply chain, favorability from the useful life accounting change in the first quarter and product mix. Jeff will provide more details on this later, but we are pleased with the structural improvement in margins and expect to build on this progress in the future. Additionally, we are continuing our efforts to optimize our manufacturing network. We closed another subscale facility during the quarter in Chandler, Arizona, further advancing our operational initiatives. These actions represent an important proof point in our ongoing efforts to drive scale, optimize our footprint, improve efficiency and better position the business for growth and improved operating leverage as volumes increase. Free cash flow was also a highlight for the quarter. We delivered $144 million of free cash flow, approximately 18% of sales, despite headwinds from normal working capital seasonality. Our strong free cash flow enabled us to accelerate our deleveraging as we repaid approximately $50 million of our term loan in the quarter. We believe this trend will continue, and now expect to reduce net leverage to approximately 3x by the end of 2026. Turning our commentary to the semiconductor market. We now expect mid- to high single-digit industry MSI growth for the remainder of 2026, which correlates to approximately 75% of our business. This contemplates an improved DRAM outlook, a similar unit outlook compared to last quarter in advanced logic and NAND, and a continued mixed outlook within mainstream logic. And the outlook for fab spending is also improving, which correlates to the remaining 25% of our business, both fab construction and WFE. Let me now address the end markets. Advanced logic, which represents approximately 40% of our total revenue, remains well positioned for strong growth in 2026, primarily driven by accelerating demand for leading edge compute. Utilization rates at the most advanced nodes are already operating near effective capacity, and the industry is responding with aggressive capacity investments to support the demand for next-generation nodes. Additionally, as 2 nanometer technology enters a more meaningful production ramp this year, we expect strong growth in 2 nanometer wafer output. Process complexity meaningfully increases with sub-5 nanometer nodes, driving higher Entegris content per wafer and aligning with our strong positions of record. The memory market, which represents approximately 30% of our revenue, is also structurally strong, underpinned by AI workloads and technology road maps that are reshaping DRAM and NAND architectures. In DRAM, demand continues to accelerate, driven by increased AI consumption. Additionally, and as announced, we expect DRAM capital investments to continue at pace, supporting accelerated DRAM MSI growth beyond 2026. NAND demand and MSI are also expected to increase in 2026, though it remains more nuanced than DRAM. This view is supported by both leading-edge technology transitions and AI-driven storage requirements. The key short-term growth driver in NAND for Entegris will be layer scaling and the resulting incremental Entegris content, with wafer start activity expected to improve in the latter half of 2026 and into 2027. Vertical scaling materially increases process complexity, elevating the importance of yield, precision manufacturing and advanced process steps and materials. These technology shifts are expected to result in double-digit increases in content per wafer for Entegris. And lastly, mainstream logic. The recovery and outlook in this end market, which represents approximately 1/3 of our business, remains mixed. We continue to expect tempered MSI growth in mainstream logic through 2026, improving thereafter as new capacity additions, specifically in memory, begin to ease near-term supply concerns, especially with respect to price-sensitive consumer products. As it relates to CapEx, we are incrementally more positive on the portion of our business related to industry CapEx. The return to growth in fab spending is materializing. This is driven by selective but substantial global capacity additions and pull forwards, primarily in leading-edge logic and memory. Additionally, forecast for WFE spending remains strong as these projects advance. Entegris is well positioned to deliver value for our customers and to capture the multiyear growth opportunities we expect will emerge as we progress through 2026 and into 2027. To summarize, there are several industry and operational tailwinds fueling Entegris' growth. The industry outlook remains constructive. Semiconductor fundamentals are favorable and support growth in 2026 and beyond. This is driven by advanced logic and DRAM with a more stable near-term outlook for NAND and mainstream logic. Stronger order patterns and increasing backlog provide increased visibility and confidence across our unit and CapEx-driven businesses. Next, technology transitions will continue to drive upside for Entegris. Materials intensity and process complexity continue to increase. Beyond node transitions, we differentiate by innovating alongside our customers to advance their technology road maps, which is where Entegris creates the most value. And we are driving a stronger operational focus. We are executing with discipline to improve our operational performance, accelerate growth and strengthen our financial profile. Finally, I want to recognize our employees for their focus, discipline and execution. Their dedication enables all of us to deliver upon our commitments. Before turning the call over to Jeff, I'd like to highlight that following a rigorous search process, Sukhi Nagesh has been appointed as our new Chief Financial Officer, effective May 18. Welcome to the team, Sukhi. His engineering background, significant semiconductor industry experience, deep financial expertise and strong operational discipline make him the ideal CFO for Entegris. Having previously worked with Sukhi, I am confident that his leadership will be instrumental as we continue to execute our strategy to unlock Entegris' full potential. With that, let me turn the call over to Jeff to discuss the financials. Jeffrey Schnell: Thanks, Dave. Good morning. Q1 sales were $812 million, an increase of 5% year-over-year and above the midpoint of our guidance range. Gross margin on a GAAP and non-GAAP basis was 46.9%, above the high end of our guidance range. These results included approximately 50 basis points of onetime items, which we do not expect to recur at similar levels in subsequent quarters. The sequential improvement in Q1 was driven by productivity and execution across our network, including more consistent performance and ongoing cost controls, favorable product mix and favorability from the useful life accounting change in the first quarter, which was in line with prior guidance. Operating expenses on a GAAP basis were $239 million in Q1 and were $189 million on a non-GAAP basis. Adjusted EBITDA in Q1 was $226 million or 27.8% of revenue, also above our guidance range. The GAAP tax rate in Q1 was 1% and the non-GAAP tax rate was 8%, which includes an unforecasted release of a tax reserve. GAAP diluted EPS was $0.60 per share in the first quarter and non-GAAP EPS was $0.86 per share, which exceeded our guidance range. Switching to our segments. Material Solutions delivered Q1 sales of $351 million, up approximately 3% year-over-year. Year-over-year growth was led by double-digit increases in advanced deposition materials and selective etch chemistries, along with continued strength in CMP consumables, underscoring the durability of demand for key technologies. Adjusted operating margin was 22%, in line with the prior year period, and increased by approximately 100 basis points sequentially, reflecting improved performance across the manufacturing network. Advanced Purity Solutions delivered Q1 sales of $464 million, representing approximately 7% year-over-year growth. Results were driven by continued strong demand across the portfolio, including the third consecutive record quarter in liquid filtration, a 3-year revenue high in FOUPs and growth in gas filtration. Adjusted operating margin was 29.1% for the quarter, expanding both year-over-year and sequentially, reflecting strong operational execution and productivity, favorable product mix and the majority of the favorability from the useful life change. Switching to cash flow. Free cash flow in the first quarter was strong at $144 million, representing a free cash flow margin of 18%, a continuation of the positive trend from the second half of 2025. The increase in free cash flow compared to the prior year was driven by 3 factors: the improvement in earnings, an increase in cash from operations, primarily due to working capital discipline, and lower CapEx in the period. CapEx is expected to increase as the year progresses, but will remain meaningfully below 2025 levels. We continue to expect strong free cash flow generation in 2026. Turning to our capital structure. During the first quarter, we reduced our term loan by $50 million, building on the $300 million reduction in 2025. We currently have $400 million remaining on our term loan, which is the only variable rate debt in our capital structure. At quarter end, our net debt was $3.3 billion and net leverage was 3.6x. As Dave articulated, we expect to improve our net leverage ratio to approximately 3x by the end of 2026, underscoring our commitment to deleveraging. Moving on to the second quarter outlook. We expect 2Q sales to range from $815 million to $845 million, a year-over-year increase of approximately 5% at the midpoint. Gross margin is expected to be between 46.25% and 47.25%, both on a GAAP and non-GAAP basis, a modest improvement at the midpoint from the underlying gross margin level achieved in Q1, but more than 200 basis points of improvement year-over-year. We expect GAAP operating expenses of approximately $241 million and non-GAAP operating expenses of approximately $194 million, which reflects higher variable comp relative to 2025 and other intentional investments to support the expected growth across our portfolio. EBITDA margin of 27.5% at the midpoint, driven by incremental improvements in gross margins. Net interest expense of approximately $46 million, which accounts for debt paydown to date. We expect our non-GAAP tax rate to return to a more normalized level of approximately 15% in 2Q. We expect GAAP EPS between $0.53 and $0.61 per share and non-GAAP EPS between $0.76 and $0.84 per share. And we expect depreciation to remain largely stable for the balance of 2026 at approximately $35 million per quarter. Looking ahead to our third quarter revenue expectations. Historical industry seasonality supports a sequential improvement in the third quarter. With our current visibility, which we'll refine on our second quarter call, we expect revenue to grow by approximately 5% from the midpoint of the second quarter's guidance range. Finally, I'd like to update a few modeling items for the full year of 2026. We expect net interest expense to be slightly below $190 million, the non-GAAP tax rate to be approximately 15%, diluted share count of approximately 154 million for 2Q and for the full year, CapEx of $250 million, and depreciation of approximately $140 million. Lastly, we have set a date for our Investor Day in New York City in early November 2026, and will share the save-the-date information soon. With that, operator, let's open the line for questions. Operator: [Operator Instructions] Our first question will come from Melissa Weathers with Deutsche Bank. Melissa Weathers: Looking forward to working with Sukhi in the coming months. So I guess for my first question -- thank you for all the color that you gave in the prepared remarks on the market environment that you're seeing. I guess, could you flesh out a little bit more what you're seeing -- it's pretty obvious, AI is very strong. But I think on the consumer electronics side, the demand is -- the jury is still out on where fab utilizations are shaping out for those [indiscernible] products. So is there any more color you can provide on those non-AI markets, would be really helpful. David Reeder: Sure. Melissa, good to speak to you again. Look, we view the mainstream market as mixed, with memory availability and pricing impacting price-sensitive computer products. And then we view that as being offset, however, by power management, data center-related strength and then other ancillary AI-related strength. So on the one hand, you've got potentially some pressure on the consumer products due to the availability and pricing of memory. But yet on the other hand, you have some strengths still associated in mainstream with kind of the broader build-out of AI. So we kind of view that as a put and take. We view capacity utilization right now in mainstream as being somewhere between 75% and 80%. There have been some foundries that have reported that have broken that 80% barrier for the first time in several years since 2022 peak. So we view that as positive. We do think that, that market is improving, but we're looking at it right now with the current view of being mixed. Did you have a follow-up, Melissa? Melissa Weathers: Yes, I did. On the CapEx side, I think the numbers we're hearing from WFE companies, and you can see all the fab announcements coming on. It seems like we're going to have a pretty historic fab build-out cycle coming. So any more color on how we should think about the CapEx portion of your business, whether it's groups or the subfab system than you guys do. I think presenting that ahead of these things have buildouts, would be really helpful. David Reeder: Sure. Let me give you a quick refresher on our CapEx portion of our business. So as a reminder, about 25% of our revenue is CapEx related. And of that 25%, about 1/3 is WFE and about 2/3 is fab construction. So when you think about Entegris, we typically benefit from kind of 3 cycles of demand when the market enters an up cycle and starts building out new fabs. So fab construction-related product lines increased first. Then you typically see revenue approximately 12 months, maybe 9 to 12 months after groundbreaking, that tends to be centered more towards gas purification and fluid management products in our portfolio. Then WFE related product lines and initial filtration during tool qualification start to ramp up. That typically happens somewhere between, call it, 12 and 18 months after groundbreaking. You'll start to see product lines like gas filtration, AMC, LMC bulk filtration start to increase for us. And then finally, you'll start to see the unit-driven product lines, you'll see that demand start to increase, and that's kind of 24 months. So after the fab construction piece, after the tool placement and qualification piece, then you start to get kind of the unit-driven business coming in on the tail end, somewhere around 2 years after groundbreaking. So those are kind of the 3 waves. 75% of our business is unit driven, 25% of our business, CapEx driven. And then from an end market perspective, we would characterize memory probably being in wave 1 of this cycle. And I'm really referring more to DRAM right now. The NAND, the NAND has not announced a lot of incremental fabs or incremental capacity builds at this stage. They've been a bit more focused on driving incremental layers. We're a bit density. So memory though, I would say, is kind of in the wave 1 of this phase really with DRAM at the forefront. And then advanced logic is going through rolling portions of this phase. So probably in the wave 2 and wave 3 portion, but obviously, with some new fabs that have been announced. Operator: Our next question will come from Elizabeth Sun with Citi. Yiling Sun: I guess my first question is on the gross margin side. You -- your Q1 gross margin had a nice improvement quarter-over-quarter and also above your guidance and in Q2, improved a little bit, I guess, more on volume. But I guess, going forward, looking into the second half and maybe in '27, how should we think about gross margin path? Are you going to continue to rationalize some factories and improve [indiscernible] efficiency? David Reeder: Thank you for the question, Elizabeth. I can't tell you how pleased it actually makes me to field some questions about gross margin, particularly because we believe that we're in a period of sustained structural gross margin expansion. And so as we think about gross margin and what we're trying to drive, as I've mentioned previously, we're simplifying and refining our manufacturing network. We're relentlessly driving higher productivity, higher fixed cost absorption, better yields. There is a tremendous amount of work ahead of us, and it will be lumpy, but we are focused on delivering our full gross margin potential, which we think is significantly higher than where we are today. So getting directly to your question on Q1 gross margin. First off, our 46.9% that we posted on a non-GAAP and GAAP basis, we did benefit from about 50 bps of onetime items in the first quarter. So if you normalize for that, that would put first quarter at about 46.4%. That's about 240 bps improvement sequentially. Bridging you from fourth quarter, about 100 bps of that 240 bps improvement was related to the useful life change that we made at the beginning of this year, very much in line with what we guided at the beginning of the quarter and as highlighted in our 10-Q. Productivity and other specific efficiency initiatives, including improved plant performance, comprised the remaining 140 bps. So that kind of bridges you from 44% where we exited fourth quarter of '25 to where we delivered first quarter of '26. And then kind of bridging you for second quarter as well. Again, I'll go back to the fourth quarter simply because that's kind of a fully loaded quarter with respect to KSP as well as Rockrimmon, 2 of our newer facilities. At midpoint for Q2, we guided gross margin at 46.75%. That's about a 275 bps improvement from fourth quarter, which again was 44%. We're expecting about 150 bps to be related to the useful life change, and about 125 bps, driven by improvement in our manufacturing network as well as ongoing productivity and efficiency actions, including the closure of the 2 facilities over the last 2 quarters. Also included in this guidance, I did want to highlight -- included in this guidance is incremental production staffing and related project costs to enable incremental capacity in the future quarters of 2026 as well as into 2027. So embedded in our second quarter guide are some incremental costs that you have to incur ahead to be able to unlock and enable kind of more capacity in the third quarter, fourth quarter and then the first half of 2027 as well. So we're quite pleased with our gross margin trajectory. And did you have another question, Elizabeth? Yiling Sun: Yes. I guess the next one is on the -- congrats on the CFO appointment. I happen to know this, Sukhi has a lot of experience in M&A and corporate development. So I was just wondering, does this signal you guys are ready to do more M&As once your net leverage is below like 3x, as your -- talk about your target? David Reeder: It's probably -- one, we are incredibly happy to announce Sukhi. I'm looking forward to getting him on board. I wish he could have started today, actually, but he will be joining us in mid-May, and I can't wait to work with Sukhi again. Just to kind of recap a little bit about Sukhi, I think many of you probably know him, but to kind of recap Sukhi's background, he started in semiconductors in the mid-90s on the wafer fab equipment side. So we actually started in semis at a similar period in time. He actually started as an engineer, much like myself in semiconductors, he started as an engineer. He actually has a masters in engineering. Unfortunately, it's not in chemical engineering like me, but he does have a strong mechanical engineering degree as a background, and he got to kind of cut his teeth on the WFE side of the business earlier in his career. You followed that up with an MBA, some sell-side analyst experience, a lot of corporate experience, investor relations, corporate development, corporate strategy. He was an interim CFO. And then finally, I got a chance to work with Sukhi at GlobalFoundries. He was there when I joined the company, and he did a phenomenal job of really leading that IPO. So for all those reasons, after a very extensive process, we had a chance to sit down with Sukhi and convince him to join the team of athletes that we're assembling here at Entegris, and couldn't be happier to have him on board. Specific to your question on corporate strategy or corporate development. Right now, we're focused on delivering our leverage reduction, our deleveraging plan. And initially, this year, we told you that we thought we would be under 3.5x of net leverage. We're already at 3.6x of net leverage, and we updated you that we thought we would be closer to 3x of net leverage by the end of the year. Very happy with the profitability that we're driving. Very happy with the free cash flow that we're driving. And so as we progress through the year, while we pay off our term loan, which is something that we're planning this year in 2026 now, we feel like with that as well as with increased profitability, we'll be well positioned in 2027 to at least start to consider other alternatives, whether it's shareholder return or other opportunities in the market. Operator: Our next question will come from Timothy Arcuri with UBS. Timothy Arcuri: Dave, can you talk about just some of the puts and takes on gross margin and how to think about incremental margins from here? I know Taiwan has been sort of a 100 basis point headwind. Is that still the case? And when does that go away? And then can you talk about Colorado? I think that was only going to go away next year. So can you sort of walk through how do you sort of roll off? David Reeder: Sure. So without bridging you again, given the details we've provided, I think the best way to think about gross margin is that as we continue to grow volume from here, we should continue to get gross margin improvement from here. And so that will be both in fixed cost absorption as well as incremental efficiencies that we can drive through our manufacturing network. Now given the strength in order book that we started seeing in the middle of first quarter, we are still looking to optimize our manufacturing network, but we're balancing that rate and pace with respect to make sure that we can still deliver the demand in what looks like a very constructive semiconductor backdrop. So we're taking a bit probably a more measured approach to that as we kind of continue through this year to make sure that we can satisfy our customers with the lead times that they expect and deserve. Specific to KSP, KSP is dilutive to our P&L today, as you know, and as you articulated. We think that by the end of this year, with the ramp that's ongoing, which it's quite a good trajectory, with respect to where we were a couple of quarters ago to where we are now. But it is still a work in process. We will have that facility by the time we get to the end of the year, probably breaking even on a P&L basis, plus/minus. And then we'll start to potentially move it into a less dilutive state, will probably still be dilutive in '27, but less dilutive, significantly less dilutive once we're kind of exiting fourth quarter '26 run rate into '27. Colorado this year is all qualification. And so this year is really -- last year was facilitizing, qualifying the equipment and opening the facility, staffing the facility. This year is further staffing the facility and qualifying products with customers. We're expecting very little revenue out of Colorado Rockrimmon this year, with the hope of ramping Colorado in early 2027. So for that reason, both facilities will be dilutive to us in '26, KSP becoming less so towards the end of the quarter and then improving -- or towards the end of the year, I should say, and then improving in '27; Colorado dilutive -- fully dilutive in '26 and then starting to ramp revenue in '27. Did you have a follow-up, Tim? Timothy Arcuri: I did, Dave. Yes. So can you talk about China and just what's going on in China? Are you seeing any more competition there? We're hearing about some folks trying to do CNP there and becoming a little more -- becoming a little more of a competition for you. So can you talk about that? David Reeder: Sure. I'll actually touch on a couple of regions. Since I know the 10-Q is not out yet. It will be filed later today, where you're going to see the full regional breakdown. I'll just give you a little swing around Asia. Strong growth from Taiwan, up 18% on a year-over-year basis in first quarter. Broader Asia, in general, so including all of Asia, up double digits, slightly more than 10% on a year-over-year basis in first quarter and then migrating specifically into China. China modestly down in the first quarter. So obviously, it does remain a key long-term market for us. But when you look at the first quarter performance, that modest decline was largely driven by some of the CapEx-related businesses that were down double digits, largely reflecting some dislocated order patterns that were in the first half of last year related to tariffs, as Jeff mentioned in his script. And so if you were to exclude those, we feel like it would have been a bit more of a normal quarter in China, but the first half, we do expect to be kind of impacted by some of those order patterns that were pull-ins for the first half of last year related to tariffs. We feel like we have a strong competitive position in our franchise product lines in China: filtration, food, slurries. Yield and performance matter in China, the same way it does in the rest of the world. At this stage, we view China largely as derisked, and we think we're going to have a solid second half, and we think we're going to have a solid 2026 in China. Operator: Our next question will come from Bhavesh Lodaya with BMO. Bhavesh Lodaya: Hi, Dave, and welcome Sukhi. Looking forward to our discussions. Following up on your CapEx -- WFE CapEx side of the business day, as we see higher volumes start moving through your system, I would presume it comes with pretty strong incremental margins, perhaps better than your company average. Maybe if you could provide some color on where margins stand in that business today versus historical peaks? And how should we think about that side as volumes coming in? David Reeder: Sure. Look, let me start with utilization. We articulated in last quarter that we had about $1 billion of incremental upside that we could deliver from our manufacturing network. Now obviously, you have to staff for it. You have to position inventory for it. But that's kind of the physical capacity that we have. And so whether it's unit-driven volume or CapEx-driven volume, incremental volume is tremendously helpful from a fixed cost absorption perspective when you're sitting at the type of utilization rates that we're setting out today. So without getting kind of too far into the details of unit-driven CapEx, our unit-driven margin versus CapEx-driven margin, incremental volume does help us in a pretty meaningful way with respect to fixed cost absorption as it drives our plant utilization higher. And we do expect our plant utilization to grow higher as we progress through the year in the absence -- even in the absence of any other specific initiatives that we have. So from that perspective, we're very much pleased with what kind of the CapEx order book looks like today. We have been booked kind of through the latter half of 2026, if not into '27 on some of these CapEx items. And we do expect gross margin to grow modestly as we deliver that fixed cost absorption with incremental volume. Did you have a follow-up, Bhavesh? Bhavesh Lodaya: Yes, and a different one. So there's been a meaningful amount of inflation in terms of polymers and chemical feedstocks. Are you seeing any challenges in procurement or pricing for your raw materials? And then do your contracts with your customers building just a simple pass-through of these costs? Or is there a lag as you price it through to your customers? David Reeder: What we have seen, some modest inflation. Actually, let me start with the contracts. We do have, for some key suppliers, we do have some contractual terms with respect to price increases as well as our long-term agreements with them to take a certain amount of volumes. So there are key suppliers to us that have relatively fixed contracts, both from a pricing perspective as well as a volume perspective that we have to abide by and as do they. For the vast majority of our supply chain, however, we have agreements, but then we will do certain annual negotiations. We feel like those annual negotiations were pretty productive for us. We feel like we're in a good spot, cost-wise from an inflationary perspective, with perhaps one exception, and I'll just -- I'll touch briefly on it. The Iran Middle East conflict. As you know, it's a fluid situation, one that I'm sure everyone in the industry, including yourselves, are monitoring. It's probably a bit too early to quantify the full cost impact there, but we have seen some early cost pressure on raw materials related to some of the availability coming out of the Middle East. And specifically, that's in the areas of some of the noble gases as well as some of the resins. It looks like right now, at least our position on this right now is that we think it could be temporary. And so we just absorbed those costs. To the extent that this cost pressure kind of persists, either in logistics cost or raw feedstock cost for us, then we would evaluate increasing pricing in the future. But at this point in time, we view the inflationary pressure as -- largely as expected. Some unexpected that I just mentioned related to the conflict in the Middle East, absorbed in our P&L for now and we'll reserve the ride in the future if it becomes too big of a burden to go back and kind of renegotiate some of the pricing with our customers. So from kind of -- as we sit today, I would say, steady as she goes to continue to be reviewed as we progress through 2026. Thanks, Bhavesh. Operator: Our next question will come from Jim Schneider with Goldman Sachs. James Schneider: I was wondering if, David, if you could maybe kind of comment on what you think has changed the most in terms of the wafer start outlook for the year? It sounds like that is mainly DRAM, either increasing utilization rates or pull-ins in terms of capacity. But I was wondering if you could give any color on that? And then maybe if you could explicitly address the analog sector, where it seems like we have the stand to improve the most from a utilization perspective this year. David Reeder: Sure. Thanks, Jim. So what's changed the most from when we spoke to you in February until today, I think in -- at the beginning of February, the forecast for the industry was that fab construction would be up low single digits. And I think when you look at fab construction today, the forecast for the industry is high single digits. So that's a pretty meaningful change. It doesn't mean that we'll get necessarily that revenue in period in '26. As I mentioned earlier in the call, from groundbreaking to kind of first revenue for us is around 12 months. But that's a big change. Fab construction going from kind of low single digits, essentially flat to high single digits, I think that kind of speaks to the state of the industry, the current utilization, particularly for advanced logic and memory, and I think that bodes well for kind of the setup for 2027. So I think that was a meaningful change, not a big change for us, again, in period for '26, but I think the foreshadowing for '27 and the setup is quite good. MSI, we were originally forecasting that MSI would be low to mid-single digits. We did update the forecast for MSI to be kind of mid- to high single digits. So I would say modest change there on units. And I would say that was a little bit of a blend between advanced logic, DRAM as well as some incremental NAND, and then I would say we're still kind of expecting flat from our expectation in February with respect to -- with respect to mainstream. So I think those are kind of like the big puts and takes between our February call and our market commentary in February and where we sit today in April. To get to the second question that you had, which was really around mainstream. And mainstream, I think if you stood back and looked at it objectively, I think you'd say that the first quarter has probably been a little bit better than we originally expected. So I think from that perspective, there were, again, some of our customers that have recently released, not all of them have, but some of them that have released have kind of talked about improving inventory in the channel. They've talked about utilizations. If they're a manufacturer that have broken kind of the 80% level, which for many of them have not been breached since the peak in '22. And then all of them, I think, have kind of highlighted memory availability. So strength in kind of AI-related and data center-related products, but memory availability potentially being a concern. So I think we view that market, as I mentioned earlier, is kind of mixed. We've kind of included a mixed view. Again, this is 30% of our revenue. We've included a mixed view in our guidance for '26 as well as kind of an initial flash that we gave you for third quarter of '26 as well. Operator: Our next question will come from Charles Shi with Needham. Yu Shi: I'll start with the first question around your exposure in advanced packaging. We know this is one of the growth areas for Materials and probably want the variable between you and your closest peer in terms of some of the near-term performance. We know you probably were going to talk a little bit more about that at the Investor Day, but Investor Day probably still 6 months out. So we still would love to hear some thoughts, early thoughts, any new actions undertaking right now at Entegris? We know you talked about the thermal material, you're talking about some of the carrier stuff. Is there anything more than that right now in your thinking that Entegris can get a little bit more exposure in advanced packaging? For one, we do think that CMP seems to be a very important area, especially with the adoption of a more hybrid funding type of advanced packaging and you do have good amount of a CMP slurry path business, but I want to get some thoughts there first. David Reeder: Thanks for your question, Charles. And look, we agree with you, we think the advanced packaging market is an attractive market. Unfortunately, our exposure to advanced packaging right now is limited due to just the prior investments that we didn't make necessarily in advanced packaging. That stated, we do have some products that have performed well in this space and that we did. We were able to launch some more minor, I would say, minor spends of products to be able to address this market. So specifically advanced flow control for thick resist, delivery solutions for copper plating and photoresist CMP, as you mentioned, for high-bandwidth memory and TSVs in particular, and then, of course, the carrier offering. So we do have a portfolio of products that we have been able to penetrate the advanced packaging market with. Our current revenue exceeds $100 million a year run rate. So we're excited about some of the traction that we're getting in this market for the areas where we've been able to kind of make investment and bring products to market. We are excited about some of the products that we have in the pipeline. That's really for the future. However, it's not for today, it's not necessarily for 2026 revenue. The 2026 revenue product, so the areas that I highlighted earlier. But we will have more details for you at Investor Day in November, recognizing the nature of the question that November is still about 6 months away. So -- but that's what I can give you today. And we're excited about the $100 million plus that we're driving from the business. Did you have a follow-up, Charles? Yu Shi: Yes. Dave, since your 10-K came out intra-quarter over the last couple of months, we looked at some of the customer-specific financials. So we did notice that the largest foundry, which is the #1 customer for you, the revenue from that particular customer last year, I would call probably flat to modestly up, and there was a little bit maybe trailing what I consider as their own growth. Was wondering if you can give us some stuff? What happened last year? Why the growth wasn't keeping up very well with the leading foundry? And any -- about this year, are you able to catch up to their growth? And obviously, we heard you talking about 2 nanometer production ramp that is actually happening later this year, but I want to get some thoughts around that. David Reeder: Sure. Speaking first to last year, to 2025, there is a pretty significant build-out in '24 that from a CapEx perspective, was meaningful, and that puts some pressure on year-over-year comps. We actually felt pretty good about the unit volume for 2025. But obviously, we had some year-over-year dynamics in '25 versus '24 from a CapEx perspective. Early results here in 2026, which we'll get in our 10-Q later today. And while I won't talk about specific customers, we can certainly talk about regions. Taiwan was up 18% on a year-over-year basis in the first quarter. A lot of strength across the portfolio there, strength that we're anticipating will continue. So good results from Taiwan, again, up 18% year-over-year in Q1. And really some good results across -- broadly across Asia. Asia as a whole, was up a little north of 10% on a year-over-year basis. Obviously, that includes Taiwan that was up 18%. It also includes China that was down modestly. So the other regions in Asia performed well as well. And as you know, we have key customers in Korea, we have key customers in Singapore, we have key customers in Japan. So good to see that kind of broad region performed well as well as good to see Taiwan perform well. Operator: Our next question comes from John Roberts with Mizuho. Unknown Analyst: Welcome, Sukhi. Back to China, are you through with your requalification of sourcing into China? And I think you're actually going to rationalize some products just not requalify, and maybe, is that any headwind to the China sales? David Reeder: Yes. China, we're -- I think in Q1, I think about 85% of our revenue for China, it was in that ZIP code, was from in region for China. That's about where we exited in terms of regional qualification in 2025. We'll probably pick up another 5% of the product portfolio that we sell there in '26. So we'll probably take that 85% number up to 90% by the end of this year. I don't anticipate that we'll ever get to 100%. I think there'll be some products that just given the volume of sales, it won't justify the expense of relocating their production route. But I do think that we'll go from kind of 85% where we are today to probably more than 90%, but we do expect to get to 90% throughout the course of '26 and then above 90%, we'll work on in '27, just with this kind of upper limit of it, it will probably never get to 100%. So there will always be some amount of products that will be impacted either geopolitically or by tariffs. Did you have a follow-up, John? Unknown Analyst: Yes, in Materials Solutions, so are the constraints in the memory market driving any product shifts within the Materials Solutions segment? David Reeder: Not really product shifts. I think -- if you look at memory total, sorry, let me -- maybe it's best to break it down and be more specific. NAND, there are some shifts in the market with NAND. NAND is very much focused on driving bit density, and bit density is driven by layer count. And as layer count moves from low 200s to 300 or 300-plus layers, it does introduce new materials, for example, moly, which the company has spoken about. So we do like that trend. Incremental bit density, while it does consume capacity, so you don't get more wafers, you don't get more MSI, but it does consume process steps and capacity. And we feel like that's where the focus on NAND is right now is on driving bit density at least in the first half with potentially incremental wafer starts in the second half. Incremental bit density drives incremental materials for Entegris, particularly in areas like moly and selective etch. And so that's a trend that we would like to see continue. And we'd also like to see them continue to fully utilize those fabs to 100% capacity. So both drive bit density and drive more MSI, but I think first half is more of a bit density story. For DRAM, DRAM is operating really near capacity at this stage. So even with being fully utilized or near full utilization and even with potentially some technology changes in DRAM, there's not a significant change in the materials there. I think the most significant change was just simply the HBM wants a lot of DRAM kind of migrated into HBM. That is incremental processing. We do have some slurries and some other products in that incremental advanced packaging process steps or in those advanced packaging process steps. And so that's a trend we'd like to see continue as well. Operator: Our next question comes from Chris Parkinson with Wolfe Research. Harris Fein: This is Harris Fein on for Chris. Just given the geopolitical environment, there are some fears about energy availability. You mentioned Noble Gas has some key inputs like helium for fabs located in Asia. Just as you run the business and you have conversations with your customers, how would you characterize the degree of concern around that? David Reeder: We haven't -- there haven't been kind of semiconductor specific concerns around energy. I think in general, there's concerns around just energy consumption and availability, especially as you think about data centers tapping big parts of the grid. But we haven't really seen anything specific to semiconductors or semiconductor fabs. Obviously, it's a key consideration when you think about building a fab, but most of those fabs secure that energy in advance for -- usually for some pretty long periods of time. Did you have a follow-up, Chris? Harris Fein: Yes. The other one. On the third quarter -- on the third quarter directional framework, I think you mentioned historical seasonality supporting a sequential improvement. I just want to clarify, does that third quarter guide contemplate any cyclical recovery on the mainstream logic side? Or is this just contemplating normal seasonality and any cyclical recovery would be upside to what you're communicating? David Reeder: Yes. Our third quarter guide today, we just tried to give you a little bit more visibility based on what we're seeing kind of in our order book. So third quarter includes a little bit of seasonality. It also includes some of the visibility that we've received in our order book, particularly with respect to CapEx. And so we wanted to give you a flash of what we thought that looks like. Now that 5% sequential guide from second quarter to third quarter from our second quarter midpoint, that would be about 8% year-over-year growth if you were to do that math and then look at third quarter kind of guide '26 versus third quarter '25 actuals. So we feel like that's a pretty good guide at this stage given where we are in 2026. So we're pretty happy about that, and it's really just including some seasonality, some of the current order book that we currently have visibility to, and it really doesn't include anything -- any meaningful recovery with respect to mainstream. Thanks, Harris. Operator: Our next question will come from Edward Yang with Oppenheimer. Edward Yang: Dave, I appreciate the time and good to see the improvement. First question is on R&D, and that's been ticking down every quarter for the last several quarters now. I'm just wondering what's driving that? And related to your R&D engine, how does the pipeline look for POR wins that you could leverage above and beyond cyclical recovery? David Reeder: Sure. Thanks, Edward. There's certainly no intention to kind of tick down R&D. Obviously, if revenue is growing kind of faster than we originally expect, then you tend to get this phenomenon where you kind of set a budget for about 10% of revenue to be invested back into R&D., and so you get kind of these, let's call them, period gaps. But we do feel good about roughly this 10% level of revenue being reinvested back into R&D. We feel like that's a pretty good benchmark. Again, plus minus, and it's very different by business and where different businesses are in their growth cycle and maturity cycle as well as R&D intensity cycle. But from that perspective, we feel like our model of roughly 10% of revenue invested in R&D is, for a bunch of reasons, is the right one. Pipeline for PORs. We actually feel pretty good about both our current plans of record, our current market share as well as the PORs that are currently in our pipeline that we are competing for. So as manufacturing becomes more complex, as you move to higher layer counts and memory, as you move to more advanced packaging for DRAM that requires incremental slurries, incremental pads, incremental filtration. And then, of course, as you move advanced logic from kind of 2 nanometer to sub-2 nanometer, the landscape and the precision required and the contamination and material purity required, those requirements all get orders of magnitude harder. And we feel like that plays very well, both to our development cycle as well as to our current product line. So I feel very good about our innovation engine. It's something that we're looking forward to showcase a little bit at our Investor Day in November. So some more to come. Thanks, Edward. Operator: And this does conclude the Q&A portion of today's call. So I'd like to turn it back over to Jeffrey Schnell for any additional or closing remarks. Jeffrey Schnell: Yes. Thanks, everybody, for joining our call today, and we look forward to discussing more with you in the coming quarters. Operator: Thank you, ladies and gentlemen. This concludes today's Entegris' First Quarter 2026 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Wayfair First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference call over to Ryan Barney, Investor Relations. Ryan, please go ahead. Ryan Barney: Good morning, and thank you for joining us. Today, we will review our first quarter 2026 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; and Kate Gulliver, Chief Financial Officer and Chief Administrative Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that our call today will consist of forward-looking statements, including, but not limited to, those regarding our future prospects, business strategies, industry trends and our financial performance, including guidance for the second quarter of 2026. All forward-looking statements made on today's call are based on information available to us as of today's date. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2025, our Q for this quarter and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance, including contribution profit, contribution margin, adjusted EBITDA, adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be able for replay on our IR website. I would now like to turn the call over to Niraj. Niraj Shah: Thanks, Ryan, and good morning, everyone. We're pleased to discuss our first quarter results with you. Wayfair has been off to a solid start to the year despite a volatile macroeconomic backdrop. Our net revenue grew by 7% in the first quarter, driven by order growth of 3% and AOV expansion of 4%. The home furnishings category has had a choppy start to the year with weather disruptions in the front part of the quarter, leading right into a broader pullback in consumer spending, driven by elevated energy and fuel prices. Sometimes we get asked why weather would impact an online business. And the answer is pretty simple. Weather disrupts our customers' lives and when you have no power or your children are home from school, you're simply not shopping for home goods. By our estimates, the home furnishings category was down in the low single-digit range for the first quarter, suggesting that we outperformed the market by a high single-digit spread. However, our share spread success has held strong. We're thrilled with the customer engagement we saw during Way Day this past weekend, and we had a terrific opening to our Atlanta store earlier in the month. Our strong revenue performance in Q1 translated to noteworthy profitability. Our 5.2% adjusted EBITDA margin in the first quarter is the best Q1 result we've delivered in 5 years, and it approaches what we reported in the first quarter of 2021. Years of work to optimize our capital structure puts us in a place to take advantage of the market dislocation to repurchase more of our convertible bonds in Q1. This functions essentially as a stock repurchase. This effort reduced potential dilution by more than 4 million shares. Our plan remains consistent, increasingly outperformed the category to drive top line growth, follow that growth through in a manner that maximizes EBITDA dollars and grows them faster than revenue and deploy our excess cash to manage both our upcoming maturities and dilution. We're sticking closely to this plan even as the macro environment remains turbulent. We have heard many questions from investors regarding the impact of higher energy and fuel costs. Our platform puts us in a strategically valuable position here. While we face higher cost for fulfillment, those are reflected in the end retail price via the take rate. Suppliers ultimately decide the level of cost burden, they're willing to bear as they determine the wholesale price they want to charge for each item. Ultimately, we see that suppliers are focused on remaining competitive, especially in such a demand-constrained period. And so prices remain generally stable. This is a critical feature of our model. At every price threshold, we can ensure that we're offering the best value for shoppers due to the vast selection on our platform and the intense competition among suppliers to win each order. We're continuing to closely watch the broader economic implications and how consumers are managing their wallets as they face higher prices at the gas pump. We understand concerns that a high-ticket long consideration discretionary category, like home furnishings, would be impacted in a more meaningful economic pullback. However, it's helpful to contextualize the category's current state. It has seen steady contraction starting in 2022. The category tracked down in the double digits for most of 2022, 2023 and 2024 and saw some modest improvement to low to mid-single-digit contraction in 2025. By our estimates, in Q1 of 2026, the category is now down between 25% to 30% versus the peak in 2021 and clearly below the 3% long-term CAGR from the 2019 pre-pandemic baseline. This data holds whether you use Census Bureau, credit card panel or any other available data source. This is a cyclical category, which is clearly in a down cycle in a category that has historically always returned to trend over time. While we believe we're due for a mean reversion, the timing remains hard to predict. We take confidence in knowing that whichever direction the macro turns, Wayfair will be a key share winner because our scale gives us the ability to build a customer experience that cannot be matched. And to be clear, our plan to accelerate growth is not dependent on the mean reversion. We're very excited by how our share gain is widening and will continue to widen in this tough environment. The years of investment we've made to continually improve our core recipe, develop a global logistics network and replatform our technology architecture benefit every customer we serve. This work extends beyond our Wayfair.com business to benefit our professional offering, our retail stores, our luxury business, Perigold as well as what I'd like to focus on today, our international markets. We made great progress since we last updated you, so I'd like to spend a bit of time highlighting the exciting work we're doing internationally. If you zoom out and look at the total addressable market across the U.S., Canada, the U.K. and Ireland, we're talking about a category that approaches nearly $0.5 trillion, over $100 billion of which comes outside the U.S. While our U.S. business naturally commands a lot of attention given its scale, Canada and the U.K. represent large, highly attractive markets with similar demographics and a similar online penetration rate. We've taken a deliberate long-term oriented approach of building a global infrastructure that can be leveraged to support our efforts internationally and we think we're set to reap the benefits. In both countries, despite macro headwinds, we're seeing clear structural share gains. Particularly in a tough market, there's an opportunity for the strongest platforms to pull ahead. We're seeing this in both the U.K. and Canada, driven by a combination of: one, focused execution against the basics of our customer offering; two, the leverage gained through our global technology infrastructure; and three, our ability to deliver relevant local nuance in our marketing flywheel to maximize impact and loyalty. Let me start with the core recipe, offering the best possible selection, sharp pricing and fast reliable delivery. This is the fundamental consumer value proposition that wins in the home category anywhere. In Canada, which is our most mature international market, we achieved our highest non-COVID market share last year with growth nicely outperforming the market. Historically, Canadian consumers faced a subpar retail experience compared to the U.S., defined by smaller assortments, higher pricing and the friction of cross-border shipping. Since launching our Canadian business 10 years ago, we've been focused on dismantling those barriers and delivering a best-in-market offering. We offer nearly all of the 40 million products we show to U.S. customers to our customers in Canada. This means we have one of, if not the most extensive catalog in the country because we integrate across our entire North American supply chain. Our supply chain enables forward positioning locally in Canadian CastleGate warehouses while also fulfilling cross-border orders seamlessly utilizing our U.S. CastleGate sites. Our global footprint and advances in supply chain optimization has allowed us to shave nearly 2 days off of our delivery speeds over the past year. This operational agility also enables us to pivot quickly to meet the needs of the local shopper. In response to rising interest in domestic goods, we made it easier than ever for customers to find Canadian-made products and products that ship from Canada through curated events, site navigation filters and targeted marketing. These local-first initiatives are resonating deeply driving a 15% increase in customer engagement among this product segment. In the U.K., the story is very much the same. Despite intense consumer headwinds and pressure in the broader market, we've seen consistent share gains. We've grown our U.K. catalog to over 6 million products. Having the right item at the right price is only part of the recipe, getting it to the customer quickly and safely is where we truly differentiate. Similar to our U.S. business, we see our post order service as a key differentiator in this complex category. 60% of our large parcel orders are now delivered within 2 days. We've added room of twist delivery as well as both assembly on delivery and assembled post delivery to ensure a seamless experience from the moment of purchase all the way to enjoying it at home. We make it easy for a customer to buy a heavy bulky item and have it assembled in their living room, which builds the type of loyalty that gets a shopper to come back time and time again. And similar to the advantage in Canada, we offer substantially all of the 6 million items to customers in Irelan and other underserved markets. This brings me to the second pillar of our international momentum, our scale advantage and technology. We have a technology organization of more than 2,000 talented engineers, data scientists and product managers. Our technology development is done centrally, which means we don't need to build from zero for each market, a durable competitive advantage that allows us to raise the bar on the customer experience every day. Now where is this more evident than in our rapid deployment of generative and agentic AI? We're not just experimenting with AI, we're actively using it to widen our competitive moat. In Canada, localization is critical, particularly for our French-speaking customers in Quebec. Historically, translating and merchandising a catalog of millions of items with the necessary nuance and interior design context was a monumental highly manual task. Today, we're leveraging advanced AI capabilities to execute in-depth merchandising and product detail page translations for our French catalog at incredible speed and accuracy. We're also using AI to speed up the time it takes to launch new products on our site. In the U.K., we're deploying agentic AI to autonomously enrich our catalog data. We built this capability for our U.S. business and are now rolling it out across our platforms. We are operating agents that automatically enrich and correct product attribute details across tens of thousands of products. This means that when a customer searches for a very specific aesthetic or finish, the results they see are highly accurate, visually inspiring and complete. This kind of technological leverage allows us to use resources more efficiently, while simultaneously delivering a richer and more intuitive shopping experience. And finally, let me touch on the third pillar driving our success abroad, our marketing power and our intense focus on customer loyalty. As we have scaled our brand awareness to household name status in both Canada and the U.K., we're evolving our marketing mix to mirror our U.S. strategy, moving beyond traditional channels to aggressively lean into platforms like TikTok, Connected TV and streaming audio. Central to this approach is speaking to the consumer in a voice they recognize through local influencer and celebrity collaborations. In Canada, we scaled our Creator program from 0 to more than 1,000 creators in the past year, generating tens of millions of views. That manifests in visuals of homes that feel familiar with a style and aesthetic that is highly relevant to local market trends. We can speak to and resonate directly with the consumer looking for inspiration for her home in the suburbs of London or the heart of Toronto. Acquiring a customer is only the first step. Our goal is to earn their repeat loyalty. In the home category, a customer may only make a purchase a few times a year. Our aim is to ensure that every time they think about their home, they think of Wayfair. And that's why we're so excited about the international rollout of Wayfair Rewards. We spoke at length about the program last quarter and continue to see terrific response from our customers. We launched this program in Canada last month, and we just launched in the U.K. a couple of weeks ago. We're seeing Reward shoppers come back more frequently and at a lower acquisition cost, all of which contribute to a meaningful expansion in customer lifetime value. When you step back and look at the whole picture across Canada and the U.K., you see a business that is widening its gap to the market through a combination of our value proposition with local customers and our structural advantages versus local competitors. We're leveraging the considerable investments we've made in our proprietary global logistics, our expansive technology stack and our data-driven marketing engine and are bringing their full weight to bear on these international markets. We have a clear playbook. We have the right team in place, and we're incredibly excited about the compounding growth and profitability that lies ahead. And I'm excited to say that we're now entering a new phase where we have ramping programs that allow us to focus on profitable growth, focus on accelerating our rate of taking market share despite the tough macro, an opportunity to even further increase it when we get to a good macro, but always in a manner that optimizes for the growth of EBITDA dollars. Ultimately, delivering terrific value to our customers and helping our suppliers to grow their business enables us to continually expand our market share in a manner that maximizes our profit. This is the outcome we have been and are expressly focused on delivering. This year, you will hear us talk about the levers to do this. They include things that we've discussed, like stores, verified and rewards, but we'll also increasingly include new topics like improvements on the consumer technology front. AI tools for suppliers, enhancements in our consumer financing options and new convenient delivery offerings. These all drive up customer satisfaction and loyalty to our platforms and resulted in market share gains and more growth in EBITDA. Thank you, and now let me turn it over to Kate for a review of our financials. Kate Gulliver: Thanks, Niraj, and good morning, everyone. Let's dive into our results for the first quarter before talking through guidance for Q2. Revenue for the first quarter grew by 7.4% year-over-year, with the U.S. up by 7.5% and our International segment up by 6%. We delivered another impressive quarter of outperformance against a challenging macro backdrop by approving day in and day out that our core recipe of fast delivery, broad availability and sharp pricing combined with the growth of newer initiatives like Wayfair Loyalty and Verified stands on its own against our peers. Let me continue to walk down the P&L. As I do, please note that the remaining financials include depreciation and amortization, but exclude equity-based compensation, related taxes and other adjustments. I will use the same basis when discussing our outlook as well. Gross margin for the first quarter was 30.1% of net revenue. I tapped at length in February about how the componentry of gross margin will evolve over 2026. As we scale up programs like rewards and other investments in the customer experience, we increasingly see that maximizing profit takes our reported margins slightly lower, but leads to higher profit dollars. You can see that very clearly in the top line results. We're making gross margin investments, which drive our share spread wider. And net result year was another quarter of very healthy order growth at 3% versus the first quarter last year. Within that, we saw new order growth of nearly 7% in the quarter, our best result since 2021 and saw our active customer growth finally flipped to positive year-over-year after multiple quarters of positive sequential growth. Customer service and merchant fees were 3.8% of net revenue, while advertising was 11.2%. The net of these delivered a contribution margin of 15% in the first quarter, up by 70 basis points against the year ago period. Selling, operations, technology, general and administrative expenses came in at $356 million for Q1, the lowest it has been since the second quarter of 2019. We're hearing many questions around efficiency, especially in light of all the ways AI is augmenting productivity across our corporate staff. I find it's helpful to remind investors where we are and how much we've already accomplished. From our peak in 2022, we've taken SOTG&A down by nearly 40% on an annualized basis, which translates to more than $800 million in run rate reduction and even more when you factor in stock-based compensation and capitalized labor. This efficiency has been coded into our DNA for years. And as we drive more productivity in our workforce, we expect to further lever our fixed costs as revenue grows by billions of dollars. In total, we generated $151 million of adjusted EBITDA in the quarter for a 5.2% margin on net revenue, up by 130 basis points year-over-year. We ended the quarter with $1.1 billion of cash and equivalents and $1.5 billion of total liquidity when including our undrawn revolver. Cash for operations was an outflow of $52 million and capital expenditures totaled $54 million for the quarter. Free cash flow was a negative $106 million in Q1 and an improvement by $33 million from Q1 of 2025, which is simply a function of our typical negative working capital cycle after a successful Q4. On the capital structure front, we made further progress in both leverage reduction and dilution management. Our gross leverage ending Q1 was 3.8x ,down a full 3 turns from where we stood just a year ago. We issued a partial redemption for $250 million of principal on our 2027 convertible notes and repurchased roughly $56 million of principal on our 2028 convertible bonds as well. The over $300 million of principal reduction is the equivalent of more than 4 million potential shares of dilution which we essentially repurchased. We wanted to continue to take further advantage of the equity dislocation, so we bought back another $43 million of principal of the 2028 in April through a 10b5-1 repurchase plan. Our convertible exposure is quickly dwindling away. Today, we have just over $700 million of principal remaining on the 2027 and 2028 convertible bonds, nearly half of what the original size of those issuances were as well as the $39 million stub on our 2026 bonds. You've seen us be strategic about the ways we've managed these obligations. This is one more area where we are firmly in control of our own destiny and taking the right steps to maximize free cash flow per share. Now let's turn our attention to guidance for the second quarter. Beginning with the top line, we would guide you to mid-single digits year-over-year growth for Q2. We often hear a lot of questions from investors on how we formulate our guidance. So let me give a brief explanation. When we think about top line performance for the full quarter, we look at how the category has performed so far and how our share spread has trended. From there, we build in any specific changes to the promotional calendar or other items that would impact the comparable to get to a final figure. So in this case, we're looking at a category that has been volatile in April so far, trending down in the mid-single-digit range. Our share spread has been holding nicely in the high single-digit range. Promotional intensity over the remainder of the quarter is expected to look very similar to the year-ago period. So the combination of those factors get us to lease where we expect mid-single digits year-over-year growth from a weakening macro even as our share spread widens. Turning to gross margins. We would guide you to a range of 29.5% to 30.5% of net revenue. As I mentioned a moment ago, with the ramp of Wayfair Rewards and broader consumer price elasticity, we see new opportunities to make investments out of gross margin, which should lead to benefits on adjusted EBITDA dollars and margin as we scale order volume faster. Consistent with prior quarters, our expectation for customer service and merchant fees is just below 4%. We expect advertising in a 10.5% to 11.5% range, reaching a contribution margin of roughly 15% once more. SOTG&A is expected to continue to hold in the $360 million to $370 million range. Working your way down the P&L, this guidance suggests a second quarter adjusted EBITDA margin in the 6% to 7% of net revenue range. Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $70 million to $90 million. Depreciation and amortization should be approximately $63 million to $69 million. Net interest expense of approximately $38 million, weighted average shares outstanding of approximately $132 million and CapEx in a $55 million to $65 million range. As we wrap up, I want to zero in on the 2 core themes we hope you've taken away from the call this morning. Our success on share capture and our ability to drive durable and expanding profitability. You'll see us widen both these over the course of 2026 as we focus on raising the bar on the customer experience and earning a greater share of our shopper spending. We're not going to wait for the macro environment to normalize, we can drive growth on the basis of our outperformance, and you'll see us deliver on that over the rest of 2026 and beyond. Our model is now honed to drive substantial incremental flow-through from that growth, giving us the platform to meaningfully expand owner's earnings and free cash flow per share in the quarters and years ahead. Thank you. And with that, Niraj, Steve and I will take your questions. Operator: [Operator Instructions] Your first question comes from the line of Christopher Horvers with JPMorgan. Christopher Horvers: So the first question is, I want to try to diagnose what's going on in the environment. Obviously, it got volatile in the back half of March, April continues to look that way. But at the same time, you had stimulus that helped the customer and help drive, I think, overall retail spending. Do you think that actually helped in your category and your results in the first quarter? And then as you think about the second quarter, last year, you extended Way Day, I think an extra day, but you didn't do it this year. So that seems to provide signal some confidence in your outlook. So just trying to unpack what's going on, do you think stimulus helped such that maybe you're misreading what the trend business might be. Niraj Shah: Thanks, Chris, for your question. So yes, so here's my view. Let me start with the macro environment and then I'll do some micro comments on our business. I think the overall macro environment, it's -- I would think of home as being a category that's still out of favor. I would think of it as kind of bumping along the bottom. I think in terms of how it's comping, you think of maybe that category comping like low single digits or something right now. You probably saw the Wall Street Journal article... Kate Gulliver: Negative. Niraj Shah: Negative low single digits. You priced out the Wall Street Journal article the other day we said, hey, prices, there's been some inflation. Anything has had some inflation is basically seen consumer spending drop and they cite furniture as an example of that. So I don't think the category is going off a cliff, but I don't think the category is actually great. What I do think is happening though -- and on your question about stimulus like tax rebates, there, I think those clearly have been healthy, but I also think like good spending is not fantastic. And so -- sorry, let me take a sip of water. And so I don't know, with the gas prices, oil prices, the headlines, I'm not sure that tax refunds have driven a lot of spending in the category, which I think is part of the Wall Street Journal sort of article that I referenced. So what do I think has happened? I think we're doing particularly well, right? So I think we -- our share spread to the market, I think it's basically a double-digit share spread. And why? I think it has a lot to do with the programs we're driving, things like stores, verified rewards, we have a new delivery program, launching what we're doing with the app, what we're doing with our B2B sales force. And I think most of those are compounding programs, and almost all of them are relatively early in the impact they can have. On the Way Day extension, I think that's just an other example of us optimizing our promotional calendar in a category that's out of favor promotional events are a great way to get the category to be top of mind. And what we found is that you could have a longer event or you could have more events in the quarter. And we basically have optimized how the we try different things and we've basically optimize it from what gets us the maximum benefit. So I wouldn't overly read into the Way Day event being 3 days versus 5 days. So I think we basically set ourselves up through our own actions to actually accelerate the rate of taking share for us to grow EBITDA faster than we grow revenue. And I think we're set up pretty well to aggressively take share in what is continuing to be a down market for the category. Christopher Horvers: Makes sense. And as a follow-up question, I looked at your most recent investor presentation, at least one before today. The bridge to the 10%-plus adjusted EBITDA was taken out of the presentation, I know you're very focused on driving EBITDA dollars and contribution margin. But just was wondering, is there a signal there that we're supposed to read into it in terms of how you now think about the long-term profitability of the company? Niraj Shah: No, we're absolutely on track to get to 10%-plus EBITDA over time. So I'm not sure exactly what you're referring to. But the way we're going to grow the business, EBITDA is going to grow faster than revenue. And the way that's going to happen, a lot of that is through very profitably growing the size of the business because we have a lot of fixed costs in the business. That's how EBITDA percentage grows. And the share spread is a great indicator of how we're going to do that, and that's going to continue to expand. But let me turn it over to Kate. Kate Gulliver: Yes. Chris, I think you're referring to the IR presentation that we updated a year in February. And we just took out the bridge slide that was a few years old at this point, but we still left the 10% goal on the profitability. And in fact, Niraj and I have both said, I think several times, we actually believe it can go north of 10% adjusted EBITDA margin. We're quite confident in the path there. And if anything, you've seen us continue to build on that last year, this year in the guide for this coming quarter, right? So that's nicely picking up. And as Niraj spoke to, it's a result of the combination of share capture, and that really nice solid flow through. Operator: Our next question comes from the line of Peter Keith with Piper Sandler. Peter Keith: Maybe sticking on the longer-term topic. Niraj, in your shareholder but last quarter, you talked about a 20% plus organic growth rate that you guys are targeting berg stock is not reflecting that type of growth looking forward. So perhaps you could provide some high-level background and some of the bridge dynamics in order to get to that growth level. Niraj Shah: Yes. Thanks, Peter. And the team here in the room is pointing out that I sound like I just got back from a 9-day business trip, which includes spending a weekend in High Point, North Carolina, which turns out to be true. But they just handed me some throat lozenges, which are hopefully helping now. So to answer your question about the 20% plus organic growth rate, yes, the reason I pointed that out in the shareholder letter is that I understand folks want to model a quarter, talk about the current quarter, model the next quarter after that, et cetera. I prefer to think about how this business is going to durably grow over the meaningful long term, midterm, et cetera. And a 20% growth basically is where we think that this business can get to in the not-too future, through our own actions. And so what are some of those actions? And I've kind of recapped a bunch of those programs before, but let me just talk through maybe a little more than I have in the recent past. So we talked a lot in the last year about Rewards, about Wayfair Verified and about what we're doing with brick-and-mortar stores. And if you think about those 3, they are meant to be meaningful moats relative to other competitors, and they are meant to be compounding advantages. And what do I mean by that? Well, on average, a customer is spending $600 a year with us right now. And that's out of a $3,000 or $4,000 spend, and that's in a year where they're not moving. And can we get more share of wallet? Then can we get more new customers? Can we grow that base of customers who in 600 starts saying $700 or $800 a year with what we think we can with the loyalty program is meant to bend that curve. Something like stores where the majority of customers are new to file, that's a great way to get new customers. And by the way, our Atlanta store just opened a few weeks ago, the grand opening was a couple of weeks ago. It's opened stronger than Chicago opened. It's a great proof point. It's hard to draw a line with 1 point. We now have 2. You can draw a line. We'll assume we'll have 3 this summer with Columbus, Ohio, up 4 in November with Denver. We have more than 3 opening next year. We're pretty excited about what we're seeing there. These are profitable ways to grow the customer base and profitable ways to grow the dollars per customer per year. Well, those are 3 we're going to be talked a lot about. But then if you think about the consumer tech investments we're making now we're post replatforming, what we're doing with the native apps. If you in about the brand marketing, and hopefully, you've seen some of our new adds. I think our new ads are some of the best ads we've run in the last decade. I think our ads have gotten a little stale. And now I think they're a lot fresher and they're meant to really help people understand what we offer and frankly, draw in a lot of new customers. That's part of why you also see them running in places like NBA games and NFL games and the NCAA Final 4. This is all inside an ad budget that's actually, on a percentage basis come down pretty nicely and on a dollar basis, frankly, gotten a lot leaner. I think that's meaningful. In our B2B business, we've made a lot of change to how we run the sales force there. We think that's got a big runway ahead of it. We have emerging categories like home improvement, where we sell things like cabinetry and large appliances, things we're not known for, which we're seeing some nice growth in and we're seeing in the super early days on that. So how do we get to 20% growth over time? It's not one of these things. It's the aggregate of these things. And I think we're in the early days of proving that we can do that. We started last year at 0% year-over-year. We ended last year at 7% year-over-year. That was a year where the category probably comped down mid-single digits or something like that. And so we did that against a headwind that basically remained. This year, the headwind is probably a little less, but there's still a headwind. I don't know what we're headwind is right now, but let's call it low single-digit negative. But we're going to see that our rate of growth is going to accelerate as we go through time. Peter Keith: Okay. That's helpful. It does sound like the throat lozenge is working, but we'll pivot the next question to Kate... Niraj Shah: This is a cherry one. I would have picked lemon if I had a lot of choices, to be honest. Peter Keith: So Kate, just to parse out the guidance for mid-single-digit revenue growth in Q2, it does sound like the industry has stepped down and gotten a little bit worse in April, as you said, negative mid-single. But the Q2 guide is similar to the Q1 guide. So kind of walk us through the logic on getting to that mid-single-digit number when you -- the industry is weakening, do you think your share gains are accelerating? And I do believe that compared to get a little bit tougher as the quarter progresses. Kate Gulliver: Yes. I mean I actually think you just hit on it in the way you frame the question, and it aligns with Niraj's answer that you just gave, which is we do believe the share gains are accelerating. And so we're quite confident in that guide even with ongoing compression in the category. And I think it speaks to all of these pieces that we're working on really building and combining together. So rewards, verified physical retail, improvements in the site experience, implements and marketing. And that gives us that conviction around that widening share spread. Operator: Our next question comes from the line of Oli Wintermantel from Evercore. Oliver Wintermantel: So Niraj, maybe you can help us walk through that EBITDA bridge over time a little bit because at your last Analyst Day, we heard that gross margin should be a help to get to that 10% EBITDA margin. And now it looks like gross margins for a period of time is going the other way. So maybe you could talk a little about that. And then on the gross margin itself, maybe frame it how you think transportation cost, gas prices are a headwind there? And how you think contribution margins are going to develop over the year? Niraj Shah: Yes. Thanks for the question. So let me say a few thoughts, and I'm going to turn it over to Kate. So a few thoughts I want to share. So we gave that bridge in the summer of 2023. And so we're kind of, call it, roughly 3 years later and a few meaningful things have changed since then. Just to rattle off a couple, like one is we launched our loyalty program. Our loyalty program is a great program to grow revenue faster and grow EBITDA faster. It does lower the gross margin percentage, for example, but it does lower the ad cost percentage. We started launching brick-and-mortar stores. Brick-and-mortar stores actually where the costs get accounted for brick-and-mores stores go in different lines. So a lot of the store staff goes into Saka, for example. So I would say, at some point, we need to update the bridge for you all with the updates we have now. But the long-term numbers we can get to haven't changed. The order of operations, I would say, of what we get to when could have changed. And so I think it's important not to worry about the intermediate lines, but actually to focus on the top line and the bottom line because those are really what matter. All the changes we've made are meant to basically facilitate the top line getting better and the bottom line getting better, which I think would be the 2 numbers everyone would care about the most. But basically, in the long term, nothing has changed. And on gross margin, what do I mean by that? Like how can we get gross margin up with rewards perhaps being a drag on it, and we want to get more members in rewards. So maybe that will be more of a drag. Well, the answer is that as you scale the business, there's a lot of benefit to gross margin percentage as individual items get a lot more volume, the economics on individual items get better. And then the fixed cost of logistics is another item that gets a lot of leverage because a lot of logistics is variable, but there's actually -- we operate 20 million square feet of logistics space across, I think, roughly 70 buildings -- and there's a fixed cost nature to how that works. So there's a lot of puts and takes, but the trajectory of where we're going hasn't changed at all. But let me turn it over to Kate. Kate Gulliver: Yes. I'll add a little bit more color there, and then I'm happy to answer your second question about energy prices. So I think on the sort of componentry to get from where we are today to the 10% as Niraj mentioned, things in the business evolve and that can move around a bit, but the conviction around getting to the north of 10% obviously is still there. On the gross margin piece, in particular, on that slide, we talked about 3 things that were going to drive gross margin. The supplier adds, so the retail media piece, leverage in the business and from CastleGate and then the merch margin mix. And all of those things still exist. So I think it's really important to understand that none of those pieces are actually operating differently than we expected. We're seeing really nice gains in CastleGate. I think if you've been at High Point, you would hear that from folks. We're seeing really nice gains in the Retail Media business. But as we constantly evaluate where are the right places to invest in the customer and the customer experience, where do we see things on sort of the optimal curve there, that may make sense for us to invest in that customer experience like in the form of rewards and actually then see the result of expanding gross profit dollars. So we actually -- you saw that guide down, we're talking about over $1 billion of gross profit dollars in the second quarter. That's where you see that expansion. So things may move around, but the levers are all still there, and I think that's really important to understand. We also, in that bridge showed a little bit of leverage that we might get on SOTG&A. But throughout this year, we -- or last year, we continue to show significant improvement in SOTG&A. In fact, we're back to 2019 levels on SOTG&A with $3 billion more in revenue on the top line. So you're seeing efficiency pickups every stage of the game here. And then the other piece that I just want to point out is on that bridge, we sort of show the path to 10%, but we said we believe that we can get to well north of 10%. And so 10% is obviously a stop on the way, but we think we can continue to exceed that. On your question around energy prices weighing on GM, I think you mean in the form of transportation. Obviously, the way that our model works is we have the wholesale cost. We add from our suppliers. We add on top of that the cost to deliver, incidents and damage and then our take rate. And so effectively, we can maintain that gross margin even with fluctuations in the energy prices. Operator: Our next question comes from the line of David Bellinger with Mizuho Securities. David Bellinger: I just want to follow up on an earlier one, where you're talking about the higher energy prices, some of the macro issues. Can you talk about the cadence of sales growth through Q1? Are you seeing any of this actually show up in your business day-to-day to date? And is there also any evidence that the category may be shifting even further online during these times of higher gas prices and maybe just store visits are starting to dwindle a bit more. Is there any evidence of that digital shift starting to take shape even further? Niraj Shah: David, thanks for your question. The energy prices, I would say, I don't think energy prices have had a direct -- I don't think it's affected like sales moving online or anything like that. I would say that, obviously, in a world where customers have noticed prices going up, it doesn't help optically that they see the gas prices having jumped up 20% year-over-year. or all the headlines are basically about how inflation stubborn or there's new spikes to it. And so I think why is the category still comping negative low single digits after being down for 3 years in a row and why is it down fourth year in a row. I think that's mainly that people are not moving categories out of favor. But none of these headlines help matters. But I think the category is just bumping along. I don't think these are having particular effects. But I don't know, Kate, do you have any... Kate Gulliver: Yes. I mean I think we've long talked about the impact of consumer sentiment on the category. And so certainly, that creates incremental challenge for us. But -- we go back to what can we can control right now, and we think we can continue to control the pace of our share gain. And so we're focused on expanding those share gains even while the category may be compressed. David Bellinger: Got it. And then I just like to follow up on the consumer-facing genic AI. I know this is a very early stage. You're doing a lot with Google Gemini and their UCP. Any additional data points you can share around the traffic that's being driven to your digital properties? Or just any data points around how referrals are looking and what this could mean over the next 6 to 12 months and adding to this share capture? Niraj Shah: So let me give you the answer. There's kind of 2 sides to it. So 1 is the same way as the media landscape evolved. We were an early partner with Meta, an early partner with Google, an early partner with Pinterest helped develop [ ad news ] with all of them, still do that and all the alphas and betas with those guys. And so we want to be everywhere. We want to be there early, and we want to help shape the direction. That's the way we think about agentic commerce. So early partner with Perplexity, early partner with OpenAI, early partner with Google and what they're doing with Gemini, so on and so forth. Whether that be on shopping, the shopping protocols like UCP, whether that be with new advertising formats, the different ones of them are trying. And a number of them have publicly cited is, we're effectively partnering with them all, and we're early in partnering with them all. At the same time, as I say that, the traffic levels we're talking about today are de minimis. They're very small. A lot of people talk about the growth rate of that traffic with a high percentage, but that is a little bit misleading because you have to put a high percentage on a very low number. So where could that be over time, it could be meaningfully higher. But I tend to think that, frankly, a lot of what's going to happen in agentic commerce will really impact 3 categories of goods. One is going to be replenishment-type items where agents can just execute replenishment for you, whether that's paper towels or dish soap or whatever. You know what you want, it knows what you want cheapest way to get it by whatever you want it. Second will be like commodity items. You want a few more iPhone cables, they give me some high-quality one inexpensively and can get it for. And the third will be technical items. You want a 55-inch TV. "Hey, what's the best premium 55-inch TV out there right now? What's the best budget 55-inch TV out there?" And it can figure out the right 1 for you. And they all look the same. You probably don't care what logo is on it. You care about getting the best value, best quality, one, et cetera. Categories like fashion, beauty, home, I think there's a lot that a consumer learns through the process of shopping. There's a lot of motion there and consumers actually don't want to own the same items as each other. So to be honest, I think the role that these platforms will play will be different than I think the way a lot of it's talked about today, which hits those 3 use cases, but we're going to be there early. We're going to help shape the direction and that's the same role we kind of played with tech platforms historically. Kate Gulliver: I think we shared a bit on previous calls and some of our other remarks and even on the call today about how we're using AI to actually improve the customer experience. So there's -- what you were asking about, which is sort of off-site shopping, but there's also how do we -- we are 1P from the perspective of the data that we have into the consumer and how do we leverage that to actually make a much better experience? So we talked about AI stylists at Shopko. We talked about on the call today how we use AI to improve the merchandising of products. On the 2 calls ago, we had Fiona Tan, our CTO on the call talking about how we're using some of the personalization trends on site. And so what we are really excited about is we have this rich data set. We have engineers that have been using various forms of machine learning for years, how do they use AI to really accelerate how the consumer discovers and engages with the site. Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: My first question is 2 parts on the financial model. So first, the gross margin, I guess, pull back that is that entirely due to the loyalty program investments? Are there any other puts and takes to it? And then should we be less focused on an incremental margin more focused on an EBITDA dollar growth for the near term? And then I'll have a follow-up on agentic. Niraj Shah: I'll just say one thing and turn it over to Kate. But what I would say, I actually think if you net out the loyalty program, gross margin actually would be neutral to up, not down. But let me turn it over to Kate. Kate Gulliver: Yes. I mean I think the way we've talked about the gross margin investment is there are a few pieces to that. Certainly, the loyalty program weighs on gross margin, although it gives you improvements elsewhere, right? And we've talked nicely about the incrementality that we get in the customers from the loyalty program. We've also mentioned there are other ways that we think about investing in the customer experience, whether that be in the form of price on certain segments of the catalog or category in the form of delivery speed. So I would think about sort of multiple things that we look at on that gross margin line and we say, "Hey, these investments sense because they're going to drive greater gross profit dollars over time." And so therefore, it is the right thing to make those investments. You also asked about EBITDA incrementals and dollar growth rate. I think you've heard us say a few times that EBITDA dollars and margin, right? So EBITDA margin will continue to grow quite nicely and that EBITDA dollars should accelerate at a pace that's faster than top line growth. still seeing really nice EBITDA dollar growth. The one thing I want to point out is as you may be looking at in the '25 incremental relative to '24, you did have some sort of astounding incremental that year where we were comping over some unusual periods. And so as we spoke about at that time, those were a little bit unusual given the comps. But I think what you're seeing now is really steady profitability improvement. Simeon Gutman: Got it. Okay. And there is a follow-up on this agenetic idea. Is there a scenario in which some of the vendors, whether it's even importers, wholesalers have a way to get to the customer without using platform. I'm sure that's always exists, but do you think agentic is an enabler. And then it could decrease the value of a marketplace or your platform. And I'm wondering if that is tied into some of the loyalty you're working on now, and then the share capture that you're focused on or if those are just 2 separate thoughts. Niraj Shah: The main reason to drive the loyalty is basically 2 things. One, obviously, you want to grow the dollars per customer per year. And the second is you want to do that and basically not be paying the advertising costs of having to reach that customer repeatedly and you'd rather give the value to the customer, which effectively, if you think about the benefits of rewards, that's what effectively rewards does, it gives value directly to the customer and incent them to just come direct to us, right? So that's the trade there. In terms of suppliers wanting to go direct to customers, there's basically a few big problems with that notion. And they're obviously welcome to do that. But the problem they find is that it's expensive to reach the customers. They have a relatively narrow catalog in context of how customers want to shop the category overall was they're making a purchase decision. But the biggest issues have to do with customer service and logistics to actually deliver these items economically in a manner that avoids damage and basically successful, it's quite difficult to do that. And so suppliers -- this is why suppliers effectively in this industry don't go direct. In fashion, for example, you see them go direct. And the reason is that an article of clothing, you can actually ship very easily and you can take a return very easily because you just think about putting an article clothing in a polybag, he logistics, the service on it and the return product is actually fairly trivial on a relative basis. And so that's a big hurdle for these folks. So I don't think anything around agenetic would change how the supply chain would operate. Operator: Our next question comes from the line of Colin Sebastian with Baird. Colin Sebastian: Yes, really good to see the ongoing share gains here, and that's not with a shortage of competition, obviously. And I guess within that context, I know there's been some chatter about some of the more value-oriented marketplace is trying to move upmarket. So I wonder if you're seeing that? And I guess related to that, given what Niraj, you've sort of articulated on agentic commerce if being more focused in the middle and higher end of the consumer market, how is agenetic benefiting you in terms of those integrations with agents that may be more price-oriented than a traditional means that people in your focus -- focused on what the market might be shopping, if that makes sense. Niraj Shah: Yes. Let me take a shot, but I'm not 100% sure I understood your question, but let me answer what I think your point. So I think you're saying at the commodity end of the market, at the opening price point and where you could shop on a Walmart, on an Amazon, on Wayfair and you can get that inexpensive commodity item, that $29 bar sell from anybody. How does agenetic change that because it's a price-driven commodity purchase. And I would say that, that's a great example of the closest our category gets when I mentioned agentic, I said there's replenishment, there's commodity. There's technical as a 3 class of goods, I think, are most likely to be impacted by agentic. I think what you're saying is like there's a portion of the category that's commodity. And that's true. What I would point out is that commodity end is not where we really do much volume. And that commodity end is, in fact, where -- you can go to Target, you go to Walmart, you go to Amazon, you go to us, you got a to, you go to TikTok, you go wherever, but it kind of -- there's really no margin in that volume. And that volume is not where the differentiation occurs. And that's why we, as a category specialists do particularly well is that we actually become very strong as you come up off of that as you shop all the way through the middle and then if you think of our specialty retail brands up through the upper middle. And then as you think about Perigold and luxury, all the way up through the top. And so I think that's part of the point that I would make about agentic doesn't impact us in the same way that I think it impacts some others because the tranche of our market that would be impacted is not really -- that is not the tranche that we are particularly strong in. But is that what you were asking about? Colin Sebastian: Yes. Just in terms of the benefits that you see from integrating with agentic commerce if the agents sort of facilitate more of that price orientation. And then also if you're seeing some of the more value into marketplaces move upmarket. Niraj Shah: Yes. So -- okay. So 2 thoughts on that. I think it's hard for folks to move upmarket or downmarket. If that's not what they're known for, not what they specialize and if that's not where their supplier base is, and that's not the type of goods that they know how to merchandise and sell. So I don't know that agentic enables that movement in the same way you're thinking. Kate Gulliver: Yes. Maybe you're going to that agentic could enable more price discovery. We've long operated in a world of price discovery. And I think that's where parts of our catalogs that are more differentiated, the way that our delivery and service experience, we've spoken on this call quite a bit about actually the complexity of the category differentiate our ability to service the customer in that way. Niraj Shah: And I guess one last comment on that as well. because I've rattled off a bunch of reasons why our share spread and our growth rate can keep climbing. And when I answered Peter's question about how we get to 20% plus, it's one of the things I rattled off. But I talked about what Verified. We just zoom in on Wafer Verified for a moment. Wafer Verified is where we actually do an editorial review kind of like the old -- for those who are old enough to remember, consumer report style kind of review of an item that gets it like what the item really is to set expectations so that customers can make good choices are very happy. We do that on a selection of goods. Those goods are increasingly exclusive to Wayfair. And so that's the other thing to think about as we scale exclusive items give us differentiation because to your point about price competition, when you have an item that's exclusive and you have the merchandising and the information to support why it's a great item. So I might be able to find something that looks like it but you have no certainties around quality or knowledge of what the item will be. And I think everyone on this call is probably have an experience where you order something and what you get is not what you thought you were getting. And I think that's a concern for customers. It's yet another way that we can build a milk around what we provide. Operator: Our last question comes from the line of Brian Nagel with Oppenheimer. Brian Nagel: So I've got two. The first question, and again, at the risk of being a little repetitive here. Just with -- I guess it's more for Kate. With regard to what we're seeing in gross margin, the question I want to ask is, if I'm hearing you correctly, the impact here is largely a function of the loyalty program. But then obviously, as you discussed essentially, there positive offsets elsewhere. So I want to ask, I mean, how big is royalty now? And presumably, as loyalty continues to grow, is that going to -- does that suggest there's going to be an increasingly large impact upon the gross margin rate? Or are there some type of offsets there? And then I have a follow-up question. Kate Gulliver: Yes. So yes, certainly a component of the gross margin is the loyalty program. We said on the last call that we ended 2025 at a little over 1 million members, and we obviously intend to continue to grow the program in '26. That's contemplated, of course, in the guide that we gave for the second quarter and the way that we've talked about gross margin throughout the year. I would focus you back to sort of how do we think about EBITDA dollars and EBITDA margin growth and the accelerating EBITDA dollars throughout '26. And what we said there is that even as we make investments in some places, there will be offsets throughout the P&L, such that EBITDA dollar growth accelerates faster than revenue growth. And you've seen that this quarter. You will continue to see that. And I think that, that's an important piece to keep in mind. So that's income in the form of certainly ACR, but also in the form of how we think about leverage on the SOTG&A line and the efficiency there. Brian Nagel: Okay. That's helpful. And then my follow-up question, a different topic, but you continue to make very nice progress with regard to your balance sheet. So I guess as you is you're sort of saying improving the balance sheet. I mean how do you think about this from a -- how to manage dilution, your leverage ratios and then any type of capital return to shareholders? Kate Gulliver: Yes. Thanks for the question. Obviously, in Q1, we continue to make nice progress on there. We essentially bought back roughly $300 million of face value of the '27 to '28 million. That's roughly the equivalent of managing 4 million shares of dilution, right? So you're seeing us make progress on this potential dilution that we had overhang of the '27 and '28 as we continue to buy that back. And I think that speaks to how we're trying to manage ultimately to this free cash flow per share continuing to grow. And part of that piece is obviously on growing the numerator, but part of that is on how do we continue to take that denominator and make that as efficient as possible. And you're seeing that in the way that we're managing the '27 to '28. You've also seen us manage that in the way that we've managed net withholding on the sort of employee share pieces. And so nice progress there. As we look going forward, what we said is we want to remain opportunistic about how we continue to grow -- or how we continue to manage these -- how we continue to manage these pieces on the '27 and '28, how we continue to do that in a way that sort of manages further dilution. And then eventually, you get to a place where you're sort of talking about outright repurchasing of shares. And I think that's been a goal of ours and a place that we're excited to keep making progress to get to that point. Operator: We have now reached the end of the Q&A session. I will now turn the call back to the Wayfair team for closing remarks. Niraj Shah: I'll just leave you with -- first, thank you all for your interest in Wayfair. I'll just leave you with 2 thoughts. You can decide which one is more important. One is we're definitely very focused on how we can profitably grow the business, and that's really about accelerating the rate at which we grow the revenue which will include spreading the share growth over the market in an increasing way. You'll see that manifest in the growth in EBITDA dollars and margins. And the second thought I'll leave you with is that it turns out throats just work really well. So thank you all for your interest in Wayfair. Talk to you in next call. Kate Gulliver: Thanks very much. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the Sonic Automotive, Inc. First Quarter 2026 Earnings Conference Call. This conference call is being recorded today, Thursday, 04/30/2026. Presentation materials, which accompany management’s discussion on the conference call, can be accessed at the company’s website at ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company’s products or market, or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties are detailed in the company’s filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company’s Current Report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive, Inc. Mr. Smith, you may begin your conference. David Smith: Thank you very much and good morning, everyone. Welcome to the Sonic Automotive, Inc. first quarter 2026 earnings call. I am David Smith, the company’s Chairman and CEO. Joining me on today’s call is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our EchoPark Chief Operating Officer, Mr. Thomas Keen; and our Vice President of Investor Relations, Mr. Danny Wieland. I would like to open the call by thanking our amazing teammates for continuing to deliver a world-class guest experience for our customers. It is because of our outstanding teammates that Sonic Automotive, Inc. was just recognized as one of America’s most trustworthy companies by Newsweek. We believe our strong relationships with our teammates, guests, and manufacturer lending partners are key to our future success. And as always, I would like to thank them all for their continued support and loyalty to the Sonic Automotive, Inc. team. Heath Byrd: Earlier this morning, Sonic Automotive, Inc. reported first quarter financial results, including record first quarter total revenues of $3.7 billion, up 1% from the previous year, and record first quarter total gross profit of $598.8 million, up 6% year over year. First quarter reported GAAP EPS was $1.79 per share. Excluding the effect of certain items as detailed in our press release this morning, adjusted EPS for the first quarter was $1.62 per share, a 9% increase year over year. Moving now to our first quarter franchised dealership segment results, we generated reported revenues of $3.1 billion, flat year over year, and same-store revenues of $2.9 billion, down 4% year over year. This same-store decrease was largely driven by a 10% decrease in new vehicle retail volume, offset partially by a 3% increase in used vehicle retail volume year over year. It should be noted that first quarter new and used vehicle volume faced tough year-over-year comparisons due to the pull-forward of consumer demand for vehicles in the prior year ahead of the U.S. auto import tariffs announced in March 2025. Reported franchise total gross profit for the first quarter was up 5% and was flat year over year on a same-store basis. Our fixed operations gross profit and F&I gross profit set quarterly records, up 10% and 7% year over year, respectively, on a reported basis. These two high-margin business lines continue to increase their share of our total gross profit pool, once again contributing over 75% of total gross profit for the first quarter, mitigating the potential headwinds to new vehicle volume and margin to our overall profitability while also leveraging our SG&A expenses more efficiently than incremental vehicle-related gross profit. Same-store new vehicle GPU was $3,002 per unit, down 4% year over year. On a reported basis, new vehicle GPU was $3,144 per unit, up 2% year over year. On the used vehicle side of the franchise business, same-store used GPU decreased 4% year over year to $1,533 per unit, but increased 11% sequentially due to typical seasonality in the used car business. Our F&I performance continues to be a strength, with first quarter record reported franchise F&I GPU of $2,670 per unit, up 9% year over year and up 2% sequentially. Turning now to EchoPark, adjusted segment income was an all-time record $12.6 million, up 25% year over year, and adjusted EBITDA was an all-time record $18.6 million, up 18% year over year. For the first quarter, we reported EchoPark revenues of $581 million, up 4% year over year, and all-time record gross profit of $68 million, up 6% year over year. EchoPark segment retail unit sales volume for the quarter increased 3% year over year, and EchoPark segment total GPU was a first quarter record $3,502 per unit, up 3% year over year and up 2% sequentially from the fourth quarter. With momentum on our side, we believe we are well positioned to resume a disciplined cadence of EchoPark store openings beginning in late 2026 while also initiating targeted investment in brand marketing as a key component of our long-term growth strategy. We expect to begin funding these brand marketing efforts this year, potentially increasing advertising expenses by $10 million to $20 million, with the majority of that investment occurring in the second half. Turning now to our Powersports segment, we generated first quarter record revenues of $41 million, up 19% year over year, and first quarter record gross profit of $10 million, up 19% year over year. First quarter combined new and used retail volume was up 25% year over year. And we are beginning to see the benefits of our investment in modernizing the Powersports business and the future growth opportunities it may provide. We also welcome our new team members from Space Coast Harley-Davidson, Treasure Coast Harley-Davidson, Falcon’s Fury Harley-Davidson, Raging Bull Harley-Davidson, and San Diego Harley-Davidson. The acquisition of these five dealerships provides us coverage in key riding states of California, Florida, Georgia, and North Carolina. This acquisition further reaffirms our commitment to strategic growth within the powersports segment and diversifies our geographic footprint and seasonality. Finally, turning to our balance sheet, we ended the quarter with $770 million available liquidity, including $381 million in combined cash and floor plan deposits on hand. Our focus on maintaining a strong balance sheet and liquidity position allows us to strategically deploy capital in a variety of ways to deliver value to our shareholders. During the first quarter, we repurchased approximately 2.1 million shares of our common stock for approximately $136 million, representing a 6% decrease in outstanding share count from 12/31/2025. In addition, I am pleased to report today that our Board of Directors approved an additional $500 million share repurchase authorization and an 8% increase to the quarterly cash dividend to $0.41 per share, payable on 07/15/2026 to all stockholders of record on 06/15/2026. We continue to work closely with our manufacturer partners to understand the potential impact of tariffs on vehicle production, pricing, and volume forecasts, vehicle affordability, and consumer demand going forward. The full-year 2026 outlook and guidance on Page 13 of our investor presentation considers these uncertainties and represents our current expectations for 2026 financial results. As always, our team remains focused on executing our strategy and adapting to ongoing changes in the automotive retail environment while making strategic decisions to maximize long-term returns. This concludes our opening remarks and we look forward to answering any questions you may have. Thank you. Operator: We will now open the call for questions. Our first question is from Jeff Licht with Stephens Inc. Jeff Licht: Good morning. Thanks for taking my questions. Was curious if you could just talk a little bit about EchoPark. It appears that you are having some success there. Now you are talking about the optimism about opening some new stores. I am curious, is there anything about this particular environment where obviously supply is pretty tight, it seems like used demand might be a little higher than new demand. Anything about this environment that plays into EchoPark’s business model? And then what is it that gives you confidence to open new stores? Jeff Dyke: On a same-store basis, new car prices were over $60,000 in the first quarter. That is an all-time high for the first quarter. Our total store was over $61,000. So with the increase in new car pricing, it is making affordability a big, big issue and that is going to put wind in the sail for pre-owned. So it gives us a lot of confidence. We also are buying a lot more cars, as a percentage of our overall business, off the street, both on the franchise side and EchoPark. I believe we approached the 40% range in the first quarter, and that makes a big difference. So margins are better, we are selling more cars, we have access to inventory. We are growing, we are executing at a high level, and it gives us a lot of confidence as we move into Q2 to see the same kind of growth or even better for EchoPark on a year-over-year basis. And we are seeing it on the franchise side too, maybe as a percentage growth not quite to the extent, but in Q2 the business is really strong. And it is being driven by just amazingly high new car pricing in the marketplace. Heath Byrd: And let me add one point. I think it is really important to understand the value of us getting the non-auction sourcing, and the team has done a great job. Keep in mind, when we started we were 90% auction and 10% other sources, and now, as Jeff mentioned, we are 40%. Those vehicles make about $1,200 more in GPU than the auction vehicles, so that has been a big driver. The team has found ways to source vehicles in multiple ways rather than the auction. That is a big, big part of it. Jeff Licht: And could you talk a little bit about, I know you have somewhat integrated or tried to use your franchise dealership as a strategic asset for EchoPark. And it is notable that you did a positive same-store sales in franchise for used as well. Can you maybe just talk about the kind of the symbiotic relationship between those two and how you are using that, you know, the source for the entire enterprise? Jeff Dyke: Yes. We have never done that before. We started here in the first quarter, really the later end of the quarter, and so it is not that many cars yet, a few hundred overall, but it is going to grow. And we are buying nearly new cars out of the franchise side of the business, which obviously is helping the franchise, so it helps the franchise side of the business. Bringing those cars into EchoPark, the margins are decent, back-end margins are great, and we are selling the heck out of them, in particular on the East Coast. They have been really, really strong. The Atlanta market has been really strong in this arena, and we will continue to do that with more brands. We have been really focused on Toyota and Honda, but we will do that with more brands as we get better at this. It is very new for us, and again, just a few hundred units would be included in those numbers that you are looking at for the quarter. Jeff Licht: Thanks very much. I will get back in the queue and best of luck. Jeff Dyke: Thank you, sir. Thank you. Operator: Our next question is from John Babcock with Barclays. John Babcock: All right, thanks. First question, I was wondering if you are able to quantify the impact of weather. And apologies if I missed, but whether it is an impact on overall dollars or if there is some way to estimate the impact on volumes? Any color there would be useful. David Smith: Yes. Thank you. This is David Smith, and honestly, I am not being a smart ass, but we really do not allow weather reports in our business, in our meetings, and we just push through. And so we really do not focus on that at all. John Babcock: Okay. Totally understand. Next question, I was wondering, are you guys seeing OEMs pull forward at-lease maturities? And if so, is that benefiting EchoPark at this point? Jeff Dyke: 100%, they are doing that, in particular around BEV. And we are seeing that on the East Coast and the West Coast, and we are selling those vehicles. It is helping both the franchise side and somewhat at EchoPark. We are keeping most of those on the franchise side of the business. But definitely, the pull-aheads are helping in BMW, Mercedes. BMW has done a particularly really good job with it, and we expect that to continue as we move forward, in particular around BEV because there are so many more BEV lease returns coming back here over the next six months between now and the end of the year as those leases mature. John Babcock: Those are primarily happening with the luxury brands? Jeff Dyke: Yes. John Babcock: Okay. Interesting. And then just last question. I was wondering if you might be able to provide some color on where you plan to open the EchoPark stores, whether it is in the same region as your existing stores or if you are planning to expand into other areas? Jeff Dyke: Our early expansion is primarily in Florida and Texas. John Babcock: Okay. Thank you. Operator: Our next question is from Chris Pierce with Needham & Company. Chris Pierce: Hey, good morning. Just one on EchoPark. I know you are guiding to sub- to high-single-digit unit gains. I just was curious, I mean, you guys have performed better on front-end GPU, talked that you performed better last year on vendor leverage, seeing healthy OpEx leverage. But I guess I just want to understand what would be the real driver of unit growth? And again, I am not trying to poo-poo high-single-digit unit growth in a flat market. I am also not trying to compare you to someone putting up 40% unit growth, but I am just kind of curious what would be a real driver of mid-double-digit unit gains. That sounds like what you are doing. Jeff Dyke: Yes, 40% is certainly an impressive number. Now look, at the end of the day, we are executing our playbook and our process. We sold well over 30 units per sales associate in the month of March, for example, and we are executing, we think, at a high level. Those gains will continue through this year. That is what is giving us the confidence to open more stores as we move to the end of the year and then on into 2027. We are very comfortable with where we are, proud of our team for the growth that they have, and we look forward to that growth continuing. Heath Byrd: And I will add, one of the things that would drive the unit growth is awareness. That is precisely why we are investing in the brand starting this year. David Smith: Yes. And Jeff noted before, he mentioned Atlanta. We have had all-time record sales in Atlanta, and we think that a big part of that is because the market is much more aware of the EchoPark brand. Danny Wieland: And one final point on that, this is Danny, on the earlier point on non-auction sourcing improvements, we were up about 15% in terms of our sales in the first quarter year over year that were non-auction sourced. As Heath added, it is about a $1,200 better GPU on those vehicles, but it also gives us upside to grow that volume without being dependent on, or at risk of, pricing on the wholesale auction front. Our wholesale auction volume was actually down year over year in the first quarter, and some of that was strategic given the 7% wholesale auction price increases we saw in Q1. We took advantage of it in the late fourth quarter, but when pricing gets too high, we really push on this non-auction source path, and that will only benefit from further investment in brand awareness and sourcing from customers as we go forward. Chris Pierce: Can you, Heath, could you please drill down on Atlanta a little bit? Like, how should we think of Atlanta in terms of cohort age of store versus Denver, marketing spend in Atlanta versus other regions, and give us some sort of support beams as to what you are doing there that is driving the growth you talked about? David Smith: Yeah. This is David. One of the things we did, you may have seen, is that we got the naming rights for Atlanta Motor Speedway. It is now EchoPark Speedway. We have seen in the numbers that has been a major impact on customer awareness of the brand. And we found since 2014, when we opened our first stores in Denver, that people know about the EchoPark brand and they search for us and once they experience it, and their friends experience it, it is why we have the number one guest experience in the industry as rated by reputation.com. That really pays off. So we have been really focused on that. And as we said, we are going to start growing now, but we wanted to make sure we can maintain that world-class guest experience and the kind of volume that, like Jeff mentioned, in March our teammates were able to deliver. We had some teammates who sold 50 or 60 cars in just the month of March and maintained that high-level guest experience. That is something that, thinking of the future, is going to benefit the brand. Jeff Dyke: The awareness in the Atlanta market has more than doubled since the sponsorship, and that really gave us the leg to say, okay, we need to really make some investments here from a marketing perspective, from a brand awareness. We just were not ready till this year. And we really spent a lot of time getting our house in order, buying more cars off the street, executing at a high level. You have seen we put quarters back to back to back to back together if you are following EchoPark closely in the growth, and that growth is going to accelerate. And in particular, as we start opening stores, it will have the hockey stick acceleration. We are very excited about that opportunity, but we are going to be very prudent and focused. We have done this before, and this time we are going to make sure that we get this absolutely right. And so we are real excited about getting some stores open towards the end of the year. Heath Byrd: And I just want to highlight one more thing on this. The fact that we have sales associates that are selling 30-plus vehicles per month per associate on average, that efficiency and the process that we have, that is one of the reasons that you see for this quarter EchoPark’s SG&A as a percent of gross was lower than 70%. Our semi-fixed expense structure there, coupled with the process that allows that kind of efficiency, is just going to get better. And you will see, as we have said from the beginning, that EchoPark has the ability to leverage that SG&A because of the way it is set up. It is very unique to have associates averaging that number of vehicles per month. Danny Wieland: And Chris, one more point on the Atlanta market specifically. As operational points supporting the brand awareness and the gains we have made there, our unit volume in the first quarter in Atlanta was up about 25% year over year, and our total GPU was up $225 per car. So we are seeing more traffic, we are monetizing those incremental vehicles at a better rate. Some of that non-auction sourcing mix we talked about obviously benefits us there. We really think that is an incremental proof point in the early stages on brand awareness, and reaching consumers and letting them know who EchoPark is and what our guest experience is will only help continue to benefit those growing markets, but also our more mature markets in Houston, Dallas, and Denver as we go forward. David Smith: And one last thing: you will see as we move forward and we open new EchoPark stores that our cost basis in those stores is going to be less than we have spent historically, which is going to make it far easier to become profitable a lot faster in those locations. Chris Pierce: Great. Thanks for all the details. Appreciate it, and good luck. Jeff Dyke: Yes, sir. Thank you. Operator: Our next question is from Rajat Gupta with JPMorgan. Rajat Gupta: Great. Thanks for taking the question. Pretty good execution, congrats on that. Had a question on parts and service. Acknowledge that you do not like to talk about weather. So, irrespective, the growth is pretty strong despite some of the tough warranty comps. I am curious how we should think about growth there. I know you are sticking to your framework, but maybe if you could unpack that for us a little bit—what is really helping that business? Any change in processes, hiring cadence? How should we think about growth there for the rest of the year? Jeff Dyke: This is Jeff. Look, we told you this two years ago. We were on a mission to hire technicians—with plus 400 technicians since we started that mission. We continue to hire techs. We are executing at a really high level in our playbooks. We have a value service program that we are very focused on to drive more customers into our drive, which then allows us to upsell off of those value services we brought into the service drive. The used business is growing, so that helps internals. Just overall, we are executing at a very high level. And mid-single digits is a good number, maybe up a little bit above that. It is across the board, it is not one market or another, it is not one brand or another. We have some warranty challenges in comparison to last year. I think we had with our Honda brand we are off about $1 million in gross there. But we will drive more customer pay. We are obviously not in control of warranty, but we will drive more customer gross into those brands, into that brand. It is a bright future for fixed operations at Sonic Automotive, Inc. It is going to get better as we go on this year. It is going to get better and stronger in 2027, 2028, towards the end of the decade. There is a lot of business out there for us to get. Remember, customers buy new cars, but half of them do not go to a dealership—not just Sonic, anybody—because the industry is priced high and processes were crazy and this reputation. I think we have cleaned all that up. Our service CSI scores are fantastic, and that is all playing into the results that we are seeing, and they are just going to get stronger as we move forward. And one additional opportunity there is it is very ripe for AI. Heath Byrd: Our AI team is just going in now and is starting to look at the processes in fixed. Obviously, it is a very high-margin part of our business, but we think we can be more efficient with the technology. So I think there is opportunity in that area as well. Rajat Gupta: Got it. That is helpful. Jeff Dyke: We just broke $90 million in gross in a single month in the first quarter. That was an all-time record for us for a single month, and that is going to continue to get bigger. We have short-term goals of being over $100 million a month in fixed operations gross, and we are hopeful to see a month this year do that and then, ongoing, we will be above that. So there is just huge growth there and great opportunity for us. As we started to look at the business differently—more of a high-volume, high-traffic-count business than we have in the past—there is just too much opportunity and too many guests out there in our AOIs to take advantage of that. So that is what we are focused on. Danny Wieland: And just a couple of other points there. As you might have seen in the release, we grew customer pay at a 5% rate on a same-store basis, and warranty was at a 7% rate. So that was even an uptick in growth rate versus the fourth quarter—warranty was only 2% up year over year in the fourth quarter. We are continuing to see benefits there as long as that warranty tailwind persists, but we are really focused on customer pay. We got 40 basis points of margin expansion out of it. On an all-in basis, customer pay is growing at 9%, warranty is up 15% including the acquisition. So we have got some year-over-year upside in terms of the comparisons as we get into the back half and lap those JLR acquisitions from last year. Rajat Gupta: Right. That is very clear and helpful. I wanted to just ask a broader question around pricing dynamics. Maybe a twofold question. One is, you have this one big nationwide competitor of yours that is undergoing a pretty well-telegraphed price cut. I am curious if you are feeling it. Are you seeing it? Have you reacted to it? Any thoughts on that would be helpful. And then second question, you know, Carvana yesterday talked about some risk in the second quarter from just narrowing wholesale-retail spreads. I know that you have much lower day supply and you are improving consumer sourcing too. But curious if that is something to keep in mind as far as your business goes. Jeff Dyke: As far as the pricing goes, we have not felt that. It is isolated to VINs and marketplaces, and that has not tripped any wires over here at all. So we are not feeling that. I am going to let Danny attack the color on the spread. Danny Wieland: It is pretty normal seasonality. Obviously, prices went up in the first quarter. Jeff Dyke: We were buying cars early in the first quarter when wholesale prices were down. As we go into the second quarter, we are seeing that shrink—the gap between the two. It is not going as rapid as last year. Danny Wieland: But it is closing. Jeff Dyke: So that is real. But we still expect nice growth with EchoPark in the second quarter, and we are going to continue to expand—better growth than we had in the first quarter. Margins are hanging in there better both on the franchise side and EchoPark side in April, better than they normally do from a pre-owned perspective, which is very good. We will see how supplies hold up as we move in. They always tighten and we are always trying to shrink our day supply at this time of the year after the big first quarter and tax season. We will see how things go, but the pre-owned business should be nice and solid as we move throughout the rest of the year. Danny Wieland: And again, to our actual performance in the first quarter, our average selling price at EchoPark was down about 2% sequentially from the fourth quarter, but wholesale pricing was up 7% as we went through the first quarter. Yet our GPU expanded—our vehicle-related GPU only expanded about $200 sequentially. So we were seeing narrowing retail pricing on a mix basis anyway, increases in wholesale pricing, but still saw expansion in GPU again because of the way we buy, because of that non-auction sourcing mix. That should only give us more insulation against those movements, as well as, as Jeff said, recognizing the normal seasonality of used car pricing movements in January, February, March, and then on the downswing in April, May, June, post tax refund season. Rajat Gupta: Got it. That is helpful. Maybe just last one on balance sheet. Very surprised by the big buyback here in the first quarter. Curious, how should we think about leverage here? You obviously increased your authorization. Maybe another way to ask is, is the ramp-up in buyback just to signal that you are not really worried about the macro or the cycle here and you just feel like with the growth in parts and services, the trend in EchoPark, there are just more good things to come from an EBITDA perspective, and you feel comfortable buying back this equity right now? I was just really surprised given some of the choppiness we hear about in the macro. Thanks. David Smith: Yes, I mean, we obviously would not have bought back the shares if we did not feel confident in our business. And, as always, we want our investors to know that we are going to be looking at all our different options of where we place our capital and look for the best return. I think the key to what you were asking is what are we going to do going forward. We are going to look at various opportunities like the Powersports acquisition that we just made. That was a great opportunity and offered great ROI, and we are going to continue with that—whether it is share repurchases or debt reduction or acquisitions. It just depends on what we see in the market. Heath? Heath Byrd: Yes. I will just say, we feel like we have a very strong balance sheet at a little over two turns for our leverage ratio. And with a lot of liquidity, that gives us the ability to invest in multiple areas. As you have just seen, we were able to purchase five JLR stores last year, five powersports dealerships this year, at the same time buy back 2 million shares, increase the dividend by 8%, invest in our business as it relates to AI, buy real estate, and enhance the facilities. And finally, we are still in great shape to expand EchoPark. I think the balance sheet is allowing us to do that. We are completely comfortable where we are in the leverage ratio, we have it all cooked in and understand the impact, and are very comfortable that we have a lot of dry powder to invest in all of these areas. Jeff Dyke: And I think if you look at the last six or seven quarters that we have strung together, showing the execution and the discipline in this company like we have never shown before, that gives us a real high level of confidence. It does not matter if there is COVID or tariffs or weather or whatever else is going to come—Godzilla is going to come out and blow up our cars—we are overcoming all of that. I think that is a big testament to our team. The tenure that we have on this team is amazing. We had our board meeting yesterday, and we were going through our tenure in this company. It is just incredible. We look forward to the great remainder of the year and a very bright future for Sonic. Rajat Gupta: Awesome. Great. Thanks for all the color and good luck. Jeff Dyke: You bet. Thank you. Operator: Our next question is from Bret Jordan with Patrick Buckley: Hey, good morning, guys. This is Patrick Buckley on for Bret. Thanks for taking our questions. As you think about the longer-term outlook on franchise new GPUs, how are you thinking about the new floor there? Some peers have recently suggested a landing spot towards the upper end of their previous targets. Have your thoughts changed at all? Jeff Dyke: We did not change guidance there. We are seeing a little bit of shrinkage on front-end in April for new, but it is going the other way for pre-owned. I think we are fine in the range that we gave you for the year. Mix moves around a little bit—if you are selling more domestic than normal or more Honda than normal, we get a little drop in our front-end margin. But our F&I numbers are so good in our franchise stores. Our F&I numbers in the first quarter were up $230 a vehicle, which is just fantastic, and we expect that to continue to grow as we move throughout the year. So the total all-in margin, I think we are going to be just fine, and it may move around a little bit due to mix. You know, Mercedes sells more or less, or BMW more or less, then Honda comes in or Ford comes in—the margins are a little different. But our F&I numbers are so strong that it balances it all out. I think we will be fine with our guidance that we gave you for 2026. Patrick Buckley: Got it. And then on BMW, we have heard some talk of delayed new product timing there. Has there been any notable disruptions or impact due to that delayed product change this year? Jeff Dyke: No. They have been doing a fantastic job. They communicate well and have done an amazing job managing through this, as all of our manufacturer partners have. There have been no issues. We need to watch affordability and entry-level models in some of the luxury brands—that is an important topic to study and watch. But you start getting past four quarters in a row now we are past the $60,000 mark. I do not see that changing in the second quarter. Third quarter, they are going to pass on the tariff expenses to the consumer. Prices are going up—it helps the used car business. We will see how much elasticity is in the new car pricing. Something is going to have to happen if volume really slows off as days’ supply starts growing, and then you will have a margin compression issue. I just do not see that happening this quarter or next—maybe a little bit due to change in mix for us. But overall, I think it will be nice and steady as she goes. Patrick Buckley: Got it. That is all for us. Thanks, guys. Jeff Dyke: Thank you. Operator: Our next question is from Alex Perry with Bank of America. Alex Perry: Hi, thanks for taking my questions here and congrats on the execution. I just wanted to ask if you have seen any impact from the war—any change in new or used vehicle sales trends as we moved into April? And could you maybe help us on the cadence of the monthly comps in the quarter on the new side? David Smith: Thanks, Alex. It has been really pleasantly surprising—the resilience of the consumer—and they have just continued to show demand. You have seen in our numbers they are continuing to do business with us. Despite the uncertainty, it has really been fantastic to see. Hopefully soon this major conflict will be over, and I think we will go into the summer months with some great results. Jeff Dyke: Yes. If anything, BEV units from a pre-owned perspective—we are selling a lot more of those. The pull-aheads are helping, and that is a big win in our sales right now. Otherwise, we would have some overhang with that. In particular, the larger stores are doing a great job with that—BMW, Mercedes, they are doing a really good job. Other than that, the business has been good. Cadence-wise, January was amazing—it was just an unreal January. If you want to talk about weather, maybe that slowed us down a little bit after January, but it was just a fantastic January and a really good February. We started comping against the tariff pull-aheads in March, and you did that all of March really and the first two weeks or so of April—10 days of April—and then the comps will get a lot easier as we move into May and June. So we will see some flip around in our year-over-year numbers; we will start heading into the positive direction. If you compare March and the first two weeks of April against 2024 and 2023, we look fantastic on a year-over-year basis. That is kind of behind us now. You are going to get a little bump when we get to the September timeframe and we bounce against the BEV pull-ahead from that time frame, but it ought to be smooth sailing other than that for the rest of the year. Alex Perry: That is really helpful context. And then, you mentioned in the deck consolidation opportunity in powersports. Is that a place where you will continue to add doors? What are you seeing there that gets you excited? Do you expect it to be on the Harley side and the motorcycle space or more traditional powersports? Would love to hear how you are thinking about that segment. Thanks. David Smith: Yes. Thanks for the question. We have been really, really pleased—a big shout out to our powersports team. They have done an outstanding job. As I mentioned, modernizing the powersports industry—at least the ones that we have—we see some great opportunities, and the prices that acquisition opportunities are coming at us are very interesting. We like our diversified portfolio, so we are not going to be concentrated solely on Harley-Davidson, but this recent acquisition was really outstanding, and they are fantastic locations where, as I mentioned, you have a lot of sunny days in those markets to offset some of the snowy weather in our big South Dakota Sturgis stores. We do see opportunities. You look at the gross that is generated in motorcycle sales, new and used—it is really crazy. We are making the same amount of profit on selling an item maybe a third of the price of a vehicle. So there are some great opportunities there. Jeff? Jeff Dyke: Yes. To give you a little more detail on what David was talking about: our new GPU for the first quarter franchise was $3,144, and our GPU for powersports was $2,891—damn near the same number. Our used GPU—we have really grown the heck out of our used business in powersports; that is something the industry lacks—was $1,938 a copy versus $1,539 a copy. We are making more gross selling used in powersports than we are selling used on the franchise side. So it is a very exciting opportunity for us to grow that part of the business. We are opportunistically buying, just being very careful and cautious, as we told you from day one—growing the business and putting in our playbooks, our technology, taking care of our guests, taking care of our teammates—and we just get better and stronger. All-time record quarter; we see that backing up to the next all-time record quarter and the next one. It is a fun business with great margin percentage. Our team loves going in and buying them, and those we are acquiring love it. We are having a great time, and as David said, we have a fantastic leadership team running that business totally separate from EchoPark and our franchise business. We will see what happens in the coming quarters. There is a lot of opportunity in this segment. Alex Perry: That is really helpful. Could I ask one follow-up on that? The used grosses and the differential versus vehicle side is pretty interesting. Why do you think the grosses are so high in the powersports side on a relatively lower ASP? Is it just the fractionation of the market? David Smith: It is. That is part of it. But think about it: customers do not know what to do with that product. When they buy a new power sport—buy something Polaris or whatever—they have always taken their old one and put a sign on it in the front yard and said “for sale.” They do not know that we want to buy that from them. And they are expensive. You buy a brand new Ford—Polaris now—$55,000. We can trade for them and sell them for in the upper teens or lower $20,000s, make great margin like you see, and provide the consumer with something they have never gotten in this industry. Jeff Dyke: So there is a huge opportunity. The industry just did not sell pre-owned. We are growing pre-owned at 40%–50% clips a quarter, and that is going to continue into the future. They just did not focus on it, and that is something that is core to our success at Sonic Automotive, Inc., and we are bringing that to this industry. It is making a big difference. Danny Wieland: And that is one of the things that validated our entry into this. Over the last three quarters, we have grown 35%, 40%, and this quarter 56% used vehicle volume year over year, even in an off quarter like the first quarter seasonally. New volume was up 16%. Both new and used gross per unit grew 7% or 8%. So we are growing not just the base, but the efficiency of those products just as we get into prime selling season here starting in April and May. They also had very little discipline around inventory management, and as you guys know, that is something that we are known for in our day supply and how we manage inventory. We do not get surprises there. If we do, they are fixed within two weeks. There was absolutely none of that in the powersports business. We have cleaned all that up from a parts, used, and new perspective, and we are turning inventory like we should. That is going to expand margin when you do that. Alex Perry: That is incredibly helpful. It sounds like an exciting opportunity. Best of luck going forward. Jeff Dyke: Thank you very much. Operator: Thank you. There are no further questions at this time. I would like to hand the floor back over to David Smith for any closing comments. David Smith: Great. Thank you very much. Thank you, everyone. We will talk to you next quarter. Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Good morning. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation First Quarter 2026 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference call over to the Vice President of Investor Relations at Methanex Corporation, Robert Winslow. Please go ahead, Mr. Winslow. Robert Winslow: Thank you. Good morning, everyone. Welcome to Methanex Corporation’s First Quarter 2026 Results Conference Call. Our 2026 first quarter news release, Management’s Discussion and Analysis, and financial statements can be accessed through our website at methanex.com. I would like to remind listeners that our comments today may contain forward-looking information, which by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from actual results. We may also refer to non-GAAP financial measures and ratios that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Any references made on today’s call reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, our 50% interest in the NatGasoline facility, and our 60% interest in Waterfront Shipping. To review the cautionary language regarding forward-looking statements, and to find definitions and reconciliations of the non-GAAP measures, please refer to our most recent news release, MD&A, annual report, and investor presentation, all of which are posted on our website under the Investor Relations tab. I will now turn the call over to Methanex Corporation’s President and CEO, Rich Sumner, for his comments, followed by a question-and-answer period. Rich Sumner: Thank you, Robert, and good morning, everyone. We appreciate you joining us today to discuss our first quarter 2026 results. Our first quarter average realized price of $351 per tonne and produced methanol sales of approximately 2.2 million tonnes generated adjusted EBITDA of $220 million and adjusted net income of $23 million. Adjusted EBITDA increased versus 2025 primarily due to a higher average realized price, partially offset by slightly lower sales of Methanex-produced methanol. During the first quarter, cash flows from operations allowed us to repay $60 million of the Term Loan A facility, ending the period in a strong cash position with nearly $380 million on the balance sheet. Turning to our operations in the first quarter, our total equity methanol production of 2.4 million tonnes was slightly higher compared to the fourth quarter. Starting with our United States operations, we produced 934 thousand tonnes at our Geismar plants, and produced [inaudible] tonnes at the Beaumont plant in the first quarter. Our equity share of production at the NatGasoline joint venture was 203 thousand tonnes. Our U.S. assets operated at higher rates outside of a short period early in the quarter when production was reduced in response to a significant short-term spike in natural gas prices in late January. In Chile, we produced 398 thousand tonnes in the first quarter, utilizing gas supply from Chile and Argentina. A third-party pipeline failure that occurred late in the fourth quarter was rectified early in the first quarter, and our plants operated at full rates for the remainder of the period. We are expecting to idle one Chile plant during the middle part of the second quarter in line with gas availability during the Southern Hemisphere winter season. In Egypt, our first quarter production was similar to that of the fourth quarter, with the plant operating at full rates. The plant continues to operate well today, and we are closely monitoring the regional situation for any potential impact on its gas supply. In New Zealand, we produced 158 thousand tonnes in the first quarter, down moderately from the prior quarter. Despite the stable gas and production levels over the past few months, the structural gas outlook in New Zealand continues to be challenging. Our equity production for 2026 remains 9 million tonnes of methanol; actual production may vary by quarter based on the timing of turnarounds, gas availability, unplanned outages, and unanticipated events. Now turning to methanol industry fundamentals. The conflict in the Middle East, which began in late February, escalated into the second quarter. These events have significantly disrupted global markets for energy and petrochemical supply, including methanol, and we continue to monitor both short-term and longer-term impacts on global markets and our business. The Middle East supplies approximately 20 million tonnes of methanol per annum to global markets, and this has been significantly reduced since March. Thus far, overall methanol demand has remained relatively resilient with no significant signs of shutdowns or demand destruction. In Asia and China, which rely significantly more on Middle East imports that need to bypass the Strait of Hormuz, we have seen no trade flows from Middle East non-Iranian supply, and very modest supply from Iran into coastal markets in China since late February, and believe that downstream operations have been primarily sustained through the drawdown of inventories. We believe this situation will be unsustainable in the short term, and we are working closely with customers to understand their demand outlook. We are also trying to better understand the extent of damage to methanol plants and related supporting infrastructure in the conflict region, if any, and the length of time it might take to restore back to full operations, which is still unclear today. Given these unprecedented events, we have seen a rapid and significant escalation in methanol prices across all major regions through March and April, and we are well positioned in today’s market with our advantaged asset base that continues to operate safely and reliably. As a result, we are expecting to see significantly stronger earnings and cash flows in the second quarter compared with the first quarter. Based on April and May contract price postings, we estimate our average realized price for April and May is between approximately $500 and $525 per tonne. Assuming this pricing holds through June, and factoring in produced sales volumes similar to those of the first quarter, we would expect a significant increase in adjusted EBITDA in the second quarter consistent with the first quarter and adjusted for these higher methanol prices. It should also be noted that due to the timing of inventory flows, there will be delayed recognition into the third quarter of cost increases we are seeing now from higher natural gas prices linked to higher methanol, as well as higher ocean freight costs from higher bunker fuels. We believe the current market dynamics could be prolonged for some time, and we are monitoring the medium and longer-term impact and risk to the global economy. Our priorities for 2026 are unchanged: to safely and reliably operate our assets and supply chain, deliver on the OCI integration plan, and continue to progress our deleveraging goals. Based on our short-term financial outlook, we expect to repay the term loan of approximately $290 million in the quarter. After the term loan is repaid, we will remain focused on directing the majority of our free cash flow towards the repayment of the bond due in 2027 while evaluating share buybacks with a smaller portion of cash if they represent an attractive investment for shareholders. We will now open the call for questions. Operator: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We request you limit yourself to one question and one follow-up. For additional questions, you can go back in the queue. Your first question comes from the line of Ben Isaacson with Scotiabank. Your line is open. Ben Isaacson: Thank you very much, and good morning. Rich, a supply-demand question for you. I know on the supply side it is very fluid in terms of intel, but based on your best understanding right now, what do you think has structurally changed when it comes to methanol in the Middle East? And assuming Hormuz opens, how likely is it that Iran will be able to go back to that run rate of about 9 million tonnes a year, give or take? And then on the demand side, we know macro is challenging. We are seeing weak housing and construction on methanol affordability. I believe there are a few small cracks in some of the smaller applications. Can you discuss what you are seeing in the cadence of demand or how you are feeling about demand destruction? Thank you. Rich Sumner: Thanks, Ben. On the supply side, it is difficult to get a read on exactly what the longer-term impact could be. There are a number of things we are trying to get a better read on, starting with the infrastructure around methanol, including upstream natural gas feedstock and related infrastructure. If there is damage, what will happen to gas allocations and where will methanol fit in the pecking order? Has there been any structural damage to methanol plants or related logistics infrastructure? All of those things we need to better understand as things start to stabilize, and we are not anywhere close to that today. On the demand side, we have not seen significant signs of demand destruction. Affordability will be important. Particularly in coastal markets in China, the longer the blockade is in place and the less Iranian product flows into those markets, we think that will put pressure on MTO operating rates. We have seen methanol prices around the world outside of China in the $550 to $650 per tonne range, and it is really a supply issue. Demand remains the pull today, but what this means longer term in terms of inflationary implications and which downstream segments are hurt the most remains to be seen. We are working closely with our customers to understand their demand outlook and affordability levels, both in the short term and long term. It is difficult to provide a lot of guidance right now, but these are all things we are monitoring. Operator: Your next question comes from the line of Hassan Ahmed with Olympic Global. Your line is open. Hassan Ahmed: Good morning, Rich. Talking to various chemical executives, it seems that even if peace were declared tomorrow and the Strait of Hormuz were to open up again, it may take as long as nine months from that point for supply chains to normalize, given the pecking order of energy and chemicals and the need to reopen oil and gas fields. We also do not know the full extent of damage, particularly in Iran and other Middle Eastern countries. As I compare that to consensus earnings estimates for you, they have you peaking in EBITDA in Q2 of this year and then a steep falloff thereafter, suggesting a V-shaped recovery of volumes from the Middle East. How do you think about that? Rich Sumner: Thanks, Hassan. As I mentioned in the opening comments, we think this could be prolonged for some time. We do not think it gets fixed in short order. Gas infrastructure is really important, and methanol probably fits lower in the pecking order when you think about energy products for power, transportation fuels, and fertilizers for food. The pace of restoring both downstream and upstream infrastructure matters, and inventories throughout the supply chain have been significantly lowered globally, not just in Asia Pacific. That is why pricing has run up globally. Supply chains have to be restored, infrastructure has to come back, and it is a 25- to 30-day transit time out of the Gulf. Many things have to happen, and it is unlikely to be a light switch. The big unknown is how quickly demand-side shutdowns occur and whether supply gets ahead of demand restarting, creating whipsaws on the other side. We do think the disruption will be prolonged. Hassan Ahmed: As a follow-up, in this new pricing regime, can you discuss China’s role, particularly coal-based methanol on the cost curve, and how downstream products like acetic acid seeing downward pricing pressure in China might affect methanol pricing globally? Rich Sumner: In China, pricing is demand-driven more than cost-driven, anchored by roughly 11 million tonnes of coastal MTO capacity that is a ready and willing market. Methanol in China has been around $400 to $450 per tonne, consistent with affordability back to C2/C3 pricing, much of which is linked to naphtha. Outside China, we are seeing $550 to $650 per tonne. Some downstream petrochemicals like acetic acid have been overbuilt and are weaker given macro conditions. We are watching whether lower operating rates there release more methanol back into the market, but we have not seen a significant impact yet. We view methanol as increasingly demand-driven. We are forecasting a supply gap over the next five years of 9 to 10 million tonnes, relying on Iranian production and potentially new projects. We believe we are in a structurally tight market, which supports a demand-driven cost curve. Operator: Your next question comes from the line of Joel Jackson with BMO Capital Markets. Your line is open. Joel Jackson: Hi, good morning. A couple of questions on marginal assets, one by one. First, Trinidad. You have a gas deal up for renegotiation later this year. Some nitrogen peers in Trinidad have signed very short-term gas deals, and a third has not been able to do so. Would you consider signing a short-term gas deal to keep the plant running, assuming this very strong environment? Can you describe the Trinidad environment? Rich Sumner: Thanks, Joel. Our gas contract is up in September, and we are in discussions with the NGC. We are considering a full range of outcomes, including a short-term deal as well as the potential to idle the plants. In the short term, Trinidad is an extremely tight gas market, with LNG, ammonia, and methanol all operating below nameplate capacity. A lot will come down to commercial discussions. We are also looking longer term at optionality, but we think any new gas from Venezuela is quite a ways out and carries risk as to whether it can ever flow to methanol economically. If a short-term arrangement makes sense, we would look at it, but we also have to consider other outcomes. Joel Jackson: Turning to New Zealand, you are running one plant at low rates and gas has been a problem. It looks like the Maui gas field might be closing into this year, making the situation worse. What is the end game in New Zealand? Rich Sumner: I will remind that New Zealand and Trinidad together represent over 10% of production but less than 5% of our run-rate earnings. Both assets have performed well over our history. In New Zealand, gas issues are not new. OMV announced it would cease production on the Maui field by the end of the year. If that happens, we would no longer be capable of running our plant. We are working with gas suppliers and looking at all options to monetize our gas position, including producing methanol or selling gas, while operating safely and reliably. The outlook is tough and structurally challenging there. Operator: Your next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is open. Jeff Zekauskas: Thanks very much. In the event that your earnings fly up this year, what will happen to your cash taxes? What would be the cash tax rate in a much more profitable environment? Also, what would happen to working capital—would receivables, inventories, and payables go up at the same rate as sales, or faster or slower? Rich Sumner: I will turn that over to Dean Richardson, our CFO. Dean Richardson: Thanks, Jeff. Our tax rate guidance of 25% holds even in a higher-price environment. From a cash tax perspective, we have been guiding that the majority of our taxes are cash; however, in a higher-price environment, the majority of our earnings would be in the U.S., and the percentage of cash taxes would actually go down because of significant assets and loss carryforwards in the U.S. given the acquisition and build-out. So the percentage of our 25% that is cash tax would move toward the midrange, roughly a 50/50 split between cash and deferred. On working capital, higher methanol prices significantly impact receivables. We saw some of that in Q1, and we would expect that in Q2 as well. Inventories are largely based on our plant cost structure, with limited purchases, so we would not expect inventory balances to move materially; there would be some offset in payables. Net-net, we would expect a higher working capital balance due to higher prices. Jeff Zekauskas: For my follow-up, given what you have seen in April and normal seasonal considerations, as a base case, would you expect to sell more produced methanol in the second quarter than in the first, all else equal? Rich Sumner: It will be highly dependent on our overall sales, which we are monitoring carefully for any demand deterioration. We are also being careful about purchases. If we have flexibility not to sell in this environment, we may exercise that if it means covering with produced tonnes given the risk of change. To the extent we hold sales levels the same, you would probably see more produced tonnes coming through; if sales are reduced, you may see about the same. The majority of inventory we are bringing through now is produced product, a big change since we added 4 million tonnes of North American supply with Geismar 3 and the OCI acquisition. Operator: Your next question comes from the line of Josh Spector with UBS. Your line is open. Josh Spector: Hi, good morning. On realized pricing, you seem to be implying a discount rate in the high 40s versus realized in the low 40s this quarter. Can you confirm that? I thought when pricing goes up, the discount rate comes down and vice versa, so this seems backwards. Can you help me understand? Rich Sumner: Sure. In the second quarter, we expect to sell a lower proportion in China, which is mainly where we have purchases and where we can reduce purchases. That results in a higher discount because pricing outside of China has higher discounts, yet a higher realized price. We actually have stronger average realized pricing when our discounts are higher in this configuration. It is counterintuitive, which is why I tend to focus on average realized price rather than discounts. Josh Spector: You also commented about lags in cost-sharing agreements into Q3. Is that correct that you would over-earn a bit in Q2 because you are paying less on the equivalent gas basis, and then it catches up? How long are those lags? Rich Sumner: It is really about inventory flows. We have about 45 days of inventory, so you will see some of those costs coming through, but not all, and Q2 will not be fully reflective of today’s market structurally. There is roughly 30 to 40 days of that 45-day lag that will come in during the third quarter and be more structural in today’s higher pricing environment. That includes both shipping and gas. Operator: Your next question comes from the line of Nelson Ng with RBC Capital Markets. Your line is open. Nelson Ng: Great, thanks. First, a follow-up on Trinidad. You mentioned you are considering a number of options. For the Titan facility, is it due for another turnaround after September 2026? Does a new contract need to be long enough so that you can fund a major turnaround? Rich Sumner: There is no turnaround coming then. The economics of the existing contracts mean the lion’s share of the rents go back to Trinidad, and any increase in pricing makes it very difficult for us to support running there. A lot of this comes down to negotiations with the NGC, which are progressing, but indications look challenging. Nelson Ng: You also mentioned New Zealand and Trinidad make up less than 5% of your run-rate earnings. Got it. And on the OCI assets, you initially provided an estimate of about $30 million of synergies. Can you give an update and what is left to implement over the next several quarters? Rich Sumner: Those synergies come from insurance, logistics and terminal optimizations, IT costs, and site optimizations. Progress is going well. We are through some synergies; in other areas, like IT, we are carrying double costs this year. We have a plan to be through that by year-end. We do have a higher fixed cost carry in 2026 to then achieve the synergies beginning in January 2027. Operator: Your next question comes from the line of Hamir Patel with CIBC Capital Markets. Your line is open. Hamir Patel: Hi, good morning. Are you able to quantify the non-gas cost increases you are seeing and how much on a per-tonne basis that might be once fully apparent in Q3? Rich Sumner: The key areas are fixed costs and ocean freight. On fixed costs, as noted, we are progressing integration to bring our fixed cost structure down through the year. On ocean freight, we had a longer supply chain through Q4, with some lag into Q1. We have seen a weaker backhaul market over the past year. In today’s environment, things have changed quite a bit. Our focus is on avoiding spot vessel requirements. There are about 2,000 ships locked in the Gulf right now, and supply chains have lengthened because product must move longer distances outside the Gulf to meet demand. Spot vessel rates have increased significantly, and the backhaul market has disappeared. Our goal is to keep our ships tied to produced product and avoid spot exposure. Having our own fleet is a competitive advantage. Our cost per tonne might be higher than in more normal times, but far lower than competitors facing today’s spot market rates. Our attention around shipping has shifted accordingly. Hamir Patel: And for 2026 methanol production, what percent of that would be spot? Rich Sumner: Very little of our sales portfolio is spot. We have some flexibility to place product in the market, but our primary commitment is to term contract customers and ensuring reliable supply. If some customers are unable to produce, we may have more product available for the market, but our focus is on contract customers. Operator: Your next question comes from the line of Matthew Blair with TPH. Your line is open. Matthew Blair: Thanks, and good morning. Rich, where do MTO operating rates stand in China today, and how does that compare to a Q1 average? Rich Sumner: In Q4, MTO operating rates were about 85% to 90%. Iranian supply stayed on the market in Q4 until around December. We then saw a gradual lowering through Q1, with Q1 averaging around 70% to 75%. Through March and April, some limited Iranian volumes—around 200 thousand tonnes per month—were able to move. MTO has been holding around 70% operating rates, but we are now seeing a dramatic shift in coastal inventories in China. Assuming the blockade stays in place and there is no product available behind what came in over the last few months, inventories will draw, and it will be difficult for MTO to maintain those rates. Matthew Blair: Circling back to the guide for Q2, the $500 to $525 realized price for April and May—your realized price tends to be above a 100% capture on the spot average, but in Q2 it looks closer to 92%. Is the guidance conservative, or are you factoring in potential price decreases in June? Rich Sumner: In an upward market, there is some catch-up due to timing. For example, we set our European quarterly price back in March, when spot was around the low $500s, and it is now above $600. There are similar monthly lags depending on when you trend spot. It takes time to adjust to the then-prevailing market, so the difference you see largely reflects steady, significant increases and timing effects. Operator: Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open. Laurence Alexander: Two quick questions. First, on ammonia—can you clarify ASPs or margins and your baseline outlook for Q2, how much is contracted versus spot? Secondly, given how stark the disruptions could be if the war continues, what are you hearing from customers about what it would take for the industry to undertake capacity additions elsewhere? Rich Sumner: On ammonia, we produce and sell around 80 thousand tonnes a quarter. Our estimate at acquisition was about $50 million of EBITDA per year, based on a Tampa price of around $450 per tonne. It is now about $775 per tonne and climbed through April and May, so we are achieving significantly higher earnings—an uplift of $20 million plus per quarter at these prices. We are mostly contracted there. On capacity additions, we are not seeing the market actively discussing new builds yet. When things resolve, people will want a read on where long-term conditions rest: pricing that supports reinvestment, long-term energy prices, demand, supply, and the ability to raise capital. Many factors would need to align before you would see big capital commitments. We are in wait-and-see mode and will monitor closely. Operator: Your last question comes from the line of Steve Hansen with Raymond James. Your line is open. Steve Hansen: Thanks. On Iran and restarts in recent weeks, we have been reading about restarts but without a clear path to get product to market. Is there any indication they are trying to recreate supply chains around the Gulf or Strait, like trucking to tidewater, that would allow meaningful volume to get out? Or are the restarts just testing facilities? Rich Sumner: We are not hearing about alternate supply chains to avoid the Strait. We think the U.S. blockade is a very significant derailer to moving product out. We have not seen evidence of meaningful product movement, and everything has to ultimately move to China as well. None of that has come to our attention. Steve Hansen: One follow-up: Are you altering operational cadence versus plans from three or four months ago to run harder in this tight environment—maintenance timing, short-term gas contracts, or other levers? Rich Sumner: Across our portfolio, in North America we aim to run at 100%, and in Egypt and Chile as well—safely, reliably, and at the highest sustainable rates. New Zealand is different: the gas contracts are attractive, but we are running suboptimally well below capacity in a mature, declining basin. If we were able to run as a more flexible asset, maybe we would, but the basin is structurally challenged. Trinidad is more of a cost issue and depends on NGC negotiations; if something short-term makes sense, we will look at it, but it has to make sense in both the short and medium term. We are evaluating all outcomes in those discussions. Operator: There are no further questions at this time. I will now turn the call over to Rich Sumner. Rich Sumner: Thank you for your questions and interest in Methanex Corporation. Operator: This concludes today’s conference call. You may now disconnect.
Operator: Good day, everyone, and welcome to the Everest Group Limited First Quarter 2026 Earnings 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 Mr. Matt Rohrmann, Senior Vice President, Head of Investor Relations. Please go ahead. Matthew Rohrmann: Thank you, Jamie. Good morning, everyone, and welcome to the Everest Group Limited First Quarter 2026 Earnings Conference Call. The Everest executives leading today's call are Jim Williamson, President and CEO; and Mark Kociancic, Executive Vice President and CFO. We are also joined by other members of the Everest management team. Before we begin, I will preface the comments by noting that today's call will include forward-looking statements. Actual results may differ materially, and we undertake no obligation to publicly update forward-looking statements. Management comments regarding estimates, projections and future results are subject to the risks, uncertainties and assumptions as noted in Everest's SEC filings. Management will also be referring to certain non-GAAP financial measures. Available explanations, reconciliations to GAAP can be found in the earnings release, investor presentation and financial supplement on our Investor Relations website. With that, I'll turn the call over to Jim. James Williamson: Thanks, Matt, and good morning, everyone. This is the first quarter reporting under the new segment structure we previously announced, and the early read is consistent with what we committed to, a more focused, more profitable, more capital-efficient Everest. Both core businesses contributed meaningful underwriting income, investment income remained a durable earnings engine, and we accelerated capital return to shareholders. There is more work to do, but the quarter offers clear evidence of the strength in our lead market reinsurance treaty franchise and that the strategic reset within our new Global Wholesale & Specialty segment is beginning to take hold in the numbers. Group operating income for the quarter was $648 million, producing a net operating return on equity of 16.7%, and an annualized total shareholder return of 16.1%. This performance was delivered despite a more challenging market environment. The combined ratio was 91.2% with $130 million of pretax catastrophe losses net of recoveries and reinstatement premium, including a $58 million provision for the conflict in Iran. Excluding the Legacy segment, the combined ratio for the quarter was 89.3%. Net investment income was $567 million supported by fixed income portfolio growth and strong limited partnership returns. Gross written premium was $3.6 billion, down year-over-year 18%, largely due to the completed exit of our commercial retail insurance business and continued runoff of legacy U.S. casualty exposures. Excluding the impact of divestitures and deliberate runoff, underlying premium declined 6.4%. Consistent with the strategy we laid out in October, we will continue to prioritize profitability and shareholder return over top line volume, and Q1 is a clear example of that philosophy at work. Treaty Reinsurance delivered an excellent quarter, generating $315 million of underwriting income on an 87.2% combined ratio. Gross written premium was $2.7 billion, down 8.9% year-over-year, driven primarily by continued casualty discipline, and selective reductions where pricing or structure did not meet our return thresholds. Since January 2024, we have reduced casualty premium by more than $1.2 billion. Over that same window, the portfolio has rotated meaningfully towards short tail and specialty lines, where we continue to see opportunities for attractive risk-adjusted returns. The April 1 renewal reflected the market conditions we anticipated on the last call. Property Catastrophe pricing continued to soften with rate down 13% on our book globally. However, terms and conditions held, attachment points held and structural discipline remained intact. Our lead market position and preferred counterparty status allowed us to shape signings towards the most attractive deals. Bound premium at 4.1 decreased 14.6% versus expiring but expected returns on the written portfolio remain above our thresholds. Looking to the midyear renewals, we see continued competitive conditions. Florida will be an interesting dynamic with strong demand by cedents and meaningful tort reform benefits that we are clearly seeing in our data. We will continue to deploy capacity where the math works and pull back where it does not. Mt. Logan continues to build momentum with assets under management now exceeding $2.6 billion. Our pipeline of investor interest is strong across multiple strategies, and Logan is playing an increasingly important role in our overall capital model, supporting underwriting capacity and enhancing our return on capital. Turning to the Global Wholesale & Specialty segment. As a reminder, this business includes our London market operation, U.S. wholesale, Global fac and a number of specialty groups with deep expertise in their respective markets. This is the first quarter printed results for the go-forward platform, a 96.8% combined ratio on $793 million of gross written premium, producing $23 million of underwriting income. Premium was up modestly year-over-year, driven by growth in specialty lines and Accident & Health, partially offset by continued reductions in U.S. casualty, especially in our facultative business. A word on how to read the results. Underlying attritional loss performance in the quarter was strong, improving 3.8 points to 58.9%. This was achieved by repositioning the portfolio into higher-margin lines and by underwriting improvements in each of our portfolios. Rate achievement in key U.S. lines, including GL, umbrella access and auto liability remains strong. The operating expense ratio at 12.6% continues to reflect a drag tied to mix, and modestly lower underwriting leverage, which we expect to improve as we scale the business over time. The team is executing a clear plan, sharpening underwriting driving operating leverage and concentrating on the Specialty & Wholesale segments where Everest has genuine competitive advantage. Meanwhile, the transition of our retail business to AIG is progressing as planned, and we continue to expect meaningful capital release from this transaction to become visible in the back half of 2026. Moving to reserves. We completed our customary Q1 reserve assessments across the group. The overall reserve position remains robust, especially in reinsurance, with favorable development in the quarter of $33 million, driven primarily by short-tail lines. Consistent with our expectations following the comprehensive actions we took in 2025, there were no material movements in U.S. Casualty. Our approach to current year loss picks remains prudent across both businesses and in every line, particularly in U.S. Casualty, where we continue to build risk margin. Now a word on capital. In the quarter, we repurchased $331 million of shares at an average price of $330. We also repurchased an additional $100 million in April. Effective this quarter, we are raising the quarterly floor on share repurchases from $200 million to $300 million, absent major external dislocation. This reflects our continued conviction that Everest share price today does not accurately reflect either the current value or the true earnings power of the company. And as we have demonstrated in the past 2 quarters, we have a willingness and ability to exceed the floor repurchase amount. Stepping back, this quarter shows what the new Everest can produce, focused businesses centered on markets where we have a right to win, disciplined underwriting, deploying capital only where return expectations are clearly above our threshold, a strong balance sheet underpinned by prudent loss picks and reserve practices and a growing third-party capital base and a clear capital return trajectory. While this quarter is a meaningful step in our journey, we are not declaring victory. Market conditions are more competitive than a year ago. The legal environment in the U.S. remains hostile, and we will have to continue earning our results, deal by deal, renewal by renewal, quarter-by-quarter. But Everest is better positioned today than it has been in years, and the team has confidence in where we are taking this company. Before I turn it over to Mark, let me take a moment to thank him for his service as our CFO over the last 5 years. He has been an important partner to me as we've moved Everest to a stronger position. On behalf of the entire Everest Board and management team, I want to wish him the best of luck in his retirement. Over to you, Mark. Mark Kociancic: Thank you, Jim, and good morning, everyone. Everest delivered a strong first quarter, building upon the momentum of -- from the strategic actions taken in the prior year as both underwriting income of $316 million and net investment income of $567 million drove operating earnings per share of $16.08. This resulted in net income of $653 million and an annualized total shareholder return of 16.1%. Now turning to our group results. Everest reported first quarter gross written premiums of $3.6 billion, representing an 18.5% decrease in constant dollars while excluding reinstatement premiums from the prior year quarter. When excluding our Legacy segment, which now includes our commercial retail insurance business, gross written premiums decreased 6.4%. Combined ratio improved to 91.2% for the quarter, net favorable prior year development of $33 million from well-seasoned property reserves in our Reinsurance Treaty segment contributed a 90 basis point benefit to the combined ratio. Catastrophe losses contributed 3.6 points to the group combined ratio, largely driven by a $58 million provision for the Iran war and several other weather-related events globally. The group attritional loss ratio improved 2.8 points to 59.4% in the quarter. Aviation losses contributed approximately 2 points to the prior year first quarter attritional loss ratio. When excluding this, the improvement was driven by improved expected loss experience and a lower proportion of Retail Casualty premium. The commission ratio increased to 23.1% in the quarter, with the increase driven by mix the underwriting-related expense ratio improved 10 basis points to 6%. In the other income and expense line, we recognized a net expense of $81 million associated with the sale of the commercial retail insurance renewal rights to AIG in the quarter as well as expenses associated with the sale of other primary operations, principally Canada. As I previously noted, we expect there will be approximately $150 million of restructuring charges throughout 2026 associated with our exit from the commercial retail insurance business and we still expect some elevated real estate related costs in the fourth quarter, which we expect to mitigate through subleasing opportunities and these costs will be reflected in our other income and expense line within operating income and will not impact the combined ratio. Moving to Reinsurance Treaty. Gross written premiums decreased 8.5% in constant dollars versus the prior year quarter when adjusting for reinstatement premiums during the quarter. Property growth of 1% in the quarter when excluding reinstatement premiums, was largely driven by a 9.4% increase in Property CAT XOL. And this was more than targeted decrease of 23.9% in Casualty Pro-Rata and 13.3% in Casualty XOL. The combined ratio improved to 87.2% in the first quarter 2026. The quarter benefited from a relatively lighter amount of catastrophe losses, which contributed 3.7 points to the combined ratio versus 19.7 points in the prior year first quarter. Favorable prior year reserve development contributed 1.4 points to the improvement. The attritional loss ratio decreased 270 basis points to 56.7%, largely due to aviation losses in the prior year first quarter. And consistent with prior quarters, mix benefits were balanced by our proactive approach to embedding prudence into our U.S. casualty loss picks. And moving to Global Wholesale & Specialty gross premiums written increased 1.6% in constant dollars to $793 million, growth in accident and health, professional liability and other specialty was more than offset by decreases in property lines and reduced writings in casualty lines. Combined ratio was 96.8% in the quarter, and included 4.2 points of catastrophe losses versus 3.1 points in the prior year first quarter. CAT losses in the quarter were largely driven by losses associated with the Iran war as well as U.S. winter storm activity. And while it's early, we believe mix benefits from our actions to shift the portfolio towards short-tail lines and to strengthen the quality of the portfolio are driving improved loss experience. These actions contributed a 3.8% improvement in our attritional loss ratio to 58.9%, while we continue to set prudent loss picks. The underwriting-related expense ratio was 12.6%, with the increase driven by reduced casualty earned premium and the commission ratio increased 1.6 points to 21.2%, with the increase largely driven by mix. Now moving to our Legacy segment. The segment generated a modest drag to group results, largely due to higher ceded premiums as well as a modest increase in property loss activity. We continue to expect the segment to run at a combined ratio above 110% combined ratio for fiscal year 2026 driven primarily by higher expenses as we transition the commercial retail insurance book to AIG. Now moving to reserves. While we are seeing early evidence that our remediation actions are leading to improved underwriting results in our U.S. liability insurance portfolio, we will continue to maintain elevated loss picks as we did in 2025. While rates in U.S. casualty lines continue to increase, there remains uncertainty in loss cost trends and we expect these lines to continue to represent a smaller percentage of our overall mix. Moving on to investments. Net investment income increased to $567 million for the quarter, largely driven by strong alternative asset returns, which generated $156 million of net income in the quarter versus $55 million in the prior year quarter. Overall, our book yield remained stable at 4.5%, which is consistent with our current new money yield, and we continue to have a short asset duration of approximately 3.5 years and the fixed income portfolio benefits from an average credit rating of AA-. Our operating income tax rate was 11.7% in the first quarter 2026 which was below our working assumption of 17% to 18% for the full year, and this was driven by a onetime benefit from the takedown of an accrual of U.K. Pillar Two tax due to the U.K. updating its tax laws in the first quarter to conform with the most recent OECD guidance on global minimum tax. Operating cash flow for the quarter of $649 million decreased from $928 million in the prior year first quarter. And shareholders' equity ended the quarter at $15.3 billion, were $15.7 billion when excluding $369 million of net unrealized depreciation on available for sale fixed income securities. Book value per share, excluding unrealized depreciation on available for sale, fixed income securities ended the quarter at $393.02, an improvement of 4% from year-end 2025 when adjusted for dividends of $2 per share. In the first quarter, we repurchased approximately 1 million shares amounting to approximately $331 million at an average share price of $330.01 per share. When factoring in the lower growth environment for the industry, in combination with the strategic actions announced last year and the sale of our Canadian retail insurance operations, we would expect an elevated payout ratio for 2026 assuming a relatively normal level of catastrophe activity and other risk factors. As Jim mentioned, we now expect $300 million to be a quarterly floor for common share repurchases in 2026. Lastly, I wanted to take a moment to acknowledge that this will be my last earnings call for Everest, and the company has gone through a period of meaningful transformation over the years and I'm particularly proud of being able to be a part of the accomplishments to set Everest on its trajectory. I'm confident that Everest is in a strong position to deliver attractive results. And on a personal note, it has been a privilege to work with my Everest colleagues and the many fine people within the P&C industry over the years. And with that, I'll turn the call back over to Matt. Matthew Rohrmann: Thank you, Mark. Jamie, we're now ready to open the line for questions. We do ask you limit your questions to 1 question plus 1 follow-up, then you'll rejoin the queue if you have additional questions. Jamie, over to you. Operator: [Operator Instructions] Our first question today comes from Andrew Andersen from Jefferies. Andrew Andersen: Into Florida renewals, how much incremental demand are you seeing at an industry level? And how are you considering Everest deployment there, just given some [indiscernible] reform benefits, but also considering the current pricing market? James Williamson: Sure, Andrew. Thanks for the question. I mean, look, I'm not going to quantify the demand forecast, but I do think there's some pretty strong tailwinds in terms of clients looking to procure more limit. We have, as you probably know, a preferred position in the Florida market. I think we are a lead reinsurer for all of the best local underwriters. Obviously, the renewal is very much still in flight. It's early days. But so far, we're actually reasonably optimistic about where things will land. And I think you should expect us to be pretty consistent in terms of capacity deployment, assuming that rates move in a reasonable direction. I do think we are seeing, as I indicated in my prepared remarks, very strong statistical evidence that the tort reforms have worked, which obviously is a great positive given where our book is. Andrew Andersen: And on Casualty Reinsurance, still seeing some premium declines there, but are you seeing any improvement in terms that could warrant reengagement down the line? Or is that line still not at the return hurdles you would like to see? James Williamson: Well, to step back, I think the way I would frame this is our view of Casualty Pro-Rata, particularly given what's happening in the U.S. tort environment, is that we want to continue to partner with our best cedents who have a firm bead on how to underwrite in a fairly adverse environment, whose claims expertise, data analytics are world-class. And we're going to continue to do that. Now what that has meant for us is that we've had to reduce total premium levels, over $1.2 billion in the last 2 years. And I think that's just an indication of the level of discipline we're bringing to the equation. I think what we would need to see for that trend line to significantly reverse would be, first of all, ceding commissions on Casualty Pro-Rata remain quite elevated. I think that needs to change. And I also think you need to see some sort of normalization in the U.S. legal environment. So obviously, we're prepared to pivot when conditions warrant. But right now, I feel really good about how we're positioned. Operator: Our next question comes from Elyse Greenspan from Wells Fargo. Elyse Greenspan: My question -- my first question is on the Global Wholesale & Specialty segment. The attritional was 92.6% in the quarter. I know you guys highlighted, right, just an elevated expense level to start in the segment. But I'm just thinking away from just the expense comment. Would you highlight anything one-off in the quarter, just when we think about the margin profile of that segment from here? James Williamson: Sure, Elyse. Thanks for the question. A couple of things. First, while I do think there's a drag in the expense ratio, we're starting from a pretty decent spot. And I think we have some clear strategies in place that will help us to manage that, but that's going to happen over time. So that will be something that we're working on for a while. And there were really no one-offs in the quarter. What I would tell you is what's critical to laddering up this attritional loss ratio that drives that combined is the things that I talked about in my prepared remarks. The team has done an excellent job positioning the portfolio in terms of its mix. And that's something that we're going to continue to focus on. And then the quality of the underwriting really across lines of business has been very strong. And so again, over time, I think those things can inure to our benefit. At the same time, it's a very complex primary insurance market, as you know. We have a lot of rate movement in multiple directions across lines of business. And so we'll just navigate it very carefully and make sure that we're printing very prudent loss picks in each of the quarters that we print going forward. Elyse Greenspan: And then my second question, we've seen industry losses come up for the Baltimore Bridge event. I just wanted to get a sense of your thoughts there and just how you're thinking about Everest's risk exposure? James Williamson: Sure. Yes. So when the loss first occurred, I think a lot of people were sort of settling into about $1 billion industry loss range if memory serves. We had, as you may recall, put up a pretty prudent initial reserve of $70 million. Like you, we're gathering information regarding the settlements that are occurring around that loss. Those seem to indicate that we'll be looking at a larger overall industry loss level. But we're still very much assessing that. And what I would suggest, based on just sort of early indications, if they prove to be correct, we could be looking at a few tens of millions of dollars of incremental loss reserve needed which would flow through in a future quarter, whether that's Q2, Q3, we'll see through our prior year development line. Operator: Our next question comes from Meyer Shields from Keefe, Bruyette, & Woods. Meyer Shields: I just had a question on Global Wholesale & Specialty. I was hoping you could update us on the amount of casualty talent that you have relative to what you would want? I understand that the market is challenging for all the reasons that you laid out. But I just want to get a sense as to your assessment of whether the current underwriting team is all intact or whether we should anticipate incremental hires? James Williamson: Yes. Thanks for the question, Meyer. I feel -- one of the things I feel just exceptionally good about across really all of Global Wholesale & Specialty and certainly Reinsurance in the rest of the company is the quality of the talent that we have. if you sort of rewind the clock, remember, we started the remediation process in North America Casualty a couple of years ago. We made significant changes, and I would say, upgrades to that team. We've had a chance to continue to do that in the meantime. And so when I look at the team on the field today, whether it's in our evolution business, our U.S. programs business, or other parts of the group where we're writing U.S. Casualty, I think we have best-in-class talent. Now we are investing in Wholesale & Specialty across a number of dimensions. Technology would be an area where particularly with the retail divestiture, we now have more resources to devote to the Global Wholesale Specialty business. So we're investing in tech. And we are also selectively hiring. But I really view that as an augmentation as opposed to needing to rebuild teams. We're in a really good spot talent wise. Meyer Shields: Okay. Great. That's very helpful. And then second question, obviously, for some specialty lines exposed to the Iran conflict, there have been meaningful rate increases. I was hoping you could talk to how Everest is responding to that? James Williamson: Yes, absolutely. I mean we're in active -- we're an active underwriter in the region. We have a very robust reinsurance operation centered on the Middle East. And we also obviously underwrite a number of specialty coverages out of our London market operation in both businesses. And so as these events occur, there will be rate movement and our teams are very nimble, and they will be leaning in where they see appropriate risk-adjusted returns to both securing those rate increases and potentially deploying more capacity. Now as you can imagine, at this moment, given the level of uncertainty around where the conflict is going to go, we're being very judicious on what we're writing but I would expect it to inure to the benefit of the portfolios in terms of rate movement. Operator: Our next question comes from Josh Shanker from Bank of America. Joshua Shanker: First of all, just congratulations to Mark on his retirement. Wish him the best in all your endeavors. Quickly, you have a new floor setting of a minimum $300 million repurchase per quarter. Historically, we've seen reinsurance companies slow the roll a little bit around the early summer period in anticipation of the outcome of the hurricane season. Do you expect a programmatic purchase or will you just be continuing to buy at the same pace regardless of where we are in the calendar? Mark Kociancic: Josh, it's Mark. Yes, thanks for the kind remarks. Regarding the share buyback, I expect more of a programmatic approach throughout the year and with possible augmentation later in the year, just depending on how cat season plays out and as well as the development of the release of capital stemming from the legacy operation reserve runoff. So I think you'll see potentially more buybacks later in the year as well. Joshua Shanker: And notably, there was $33 million of favorable development in the quarter on the going-forward businesses. If I go back and look at Everest results for most of the past, there's always been almost no volatility in the reserves. [indiscernible] result in any quarter. This is always a little confusing. There's always new information, obviously, that you get about your reserves. But the truth is, I understand it. We just don't know what the future claims trend are going to be. With the portfolio throwing off [ PYD ] in this quarter, does that signal a change in how you're thinking about conveying your -- what new information comes into the actuaries? And also given, Mark, your retirement and Elias not having joined yet, why is this happening now? Mark Kociancic: Well, it started last year. I think in the second quarter, we had some favorable PYD also offset a bit through Russia Ukraine adjustments. But in general, we made a point a year ago that the reserves in property, which is where this is coming from a really well seasoned and significant enough where we felt comfortable to start releasing it. So we feel very good about the level of embedded margin in the reinsurance property reserves, especially given the seasoning we're going to play it, I think, close to the vest in terms of casualty, given the loss trend uncertainty, be prudent there. But there's a really nice embedded margin, I would say, on the property side that I think is available going forward. Joshua Shanker: And if you'll indulge me just one quick one other one. The Legacy segment, will it be small enough in 2027 that won't need to be disclosed anymore? Or is that getting ahead of myself? Mark Kociancic: Probably getting ahead of yourself. Look, the reserves will still be meaningful. The P&L, I would expect to be smaller simply because the net earned premium will have essentially become de minimis. But we set up this segment a couple of years ago under the nomenclature of calling it the other segment because we did have a few pieces in there. [indiscernible] this environmental plus Specialty program through [ Ryan ] Specialty. So I expect some level of much smaller levels of premium as this year progresses and still something in '27, I doubt it will go away, but it will definitely be much smaller. Operator: Our next question comes from Michael Zaremski from BMO Capital Markets. Michael Zaremski: Good to see a cleaner print. Just curious on the move kind of increased PMLs and kind of move into short-tail lines, is it fair for us to kind of bump up our cat loads a bit as we think about '26? Mark Kociancic: Mike, it's Mark. I think the cat load percentage back when we did the Investor Day in '23, we were saying approximately 7%-ish. We're in that same ZIP code today, you've obviously got a higher load for the Reinsurance segment and a lower one for the Global Wholesale & Specialty. It's a lot more diversified the portfolio in terms of the zonal PMLs and the risk that we're taking. And I think that it's something that will mechanically potentially increase a bit as the legacy premium diminishes and really depending on the growth environment for the company going forward as you've seen premium reductions year-over-year in some of the lines. So mechanically, it could have a slight increase given the fact that we still find property -- property cat very attractive and we are diminishing some of our casualty exposure. James Williamson: Yes. And Mike, this is Jim. The only thing I would add, I think Mark's explanation is spot on. There is that mechanical reality just driven, frankly, more by what we're doing with casualty to anything happening in property. When I look at the actual net PMLs though, and I know you don't have the 4/1s, but what I'm seeing is our net PMLs across, I think, just about every peak zone maybe with 1 or 2 exceptions are coming down now, just given the portfolio management we're doing in the market. So -- and that -- I think all other things being equal, that would continue to occur certainly during the course of 2026. Michael Zaremski: Got it. That's helpful. Just switching gears to capital management. Mark, you mentioned expect maybe higher capital management at the back of the year. But I think you just mentioned the AIG transaction, but I believe you also sold the Canadian property for a very nice multiple. So I think is it fair for us to kind of put a small placeholder for some capital return from that transaction as well in the back half of the year if that closes this year? Mark Kociancic: Yes, I think it will be a component. Clearly, the transaction still has to settle. That's probably 6 months away, and we'll see how that gets handled at the end of the year, but it will be accretive to that discussion for sure. Operator: Our next question comes from David Motemaden from Evercore ISI. David Motemaden: And Mark, I also want to extend my congratulations on your retirement. I guess maybe just quickly, Jim, on -- just hoping to get a little bit more texture on your expectations for the 6/1 and midyear renewals. Just -- I know you spoke about property cat pricing continue to soften down 13%, globally at 4/1. Maybe you could split that out between U.S. and internationally and how you're thinking about both pricing and terms in midyear? James Williamson: Yes. So thanks for the question, David. Just let's cover 4/1 and then we can pivot into 6/1. On 4/1, look, I think pricing similar North America to international. Obviously, you had some really big international renewals. And in particular, you had a lot of drag from a pricing perspective from the Japanese renewal where I think pricing levels were very robust. It's been a loss-free market for a while. And so you saw a little bit of a sharper takedown in that market. And then the other one I would call out as sort of anomalous is in India, which is becoming a much more meaningful reinsurance market. where everybody decided to get into India. We've had a very nice book of business in that country with terrific sedans for a number of years, unlike, I think, frankly, most carriers in that market, we make a fair bit of money providing that coverage and pricing was down sharply at 4/1 and we substantially cut our book of business in response to that. So that's certainly affecting the rate view. And the one thing I would sort of add before I get into 6/1 is each of these renewals are so different. 1/1, 4/1, very different renewal structure for the reasons I just cited, and then 6/1, obviously very much centered on Florida. In terms of what to expect for Florida, a couple of things to note. First of all, I do want to certainly give our reinsurance team an enormous amount of credit for how they executed in 2025 because that sets up the story. I think we had a very clear beat on the fact that 2025 pricing was well above our threshold of expected return. And we leaned into that and grew meaningfully. And I think that was exactly the right thing to do at the time, and you see that playing through in our Q1 cat growth rates ex reinstatement premiums being pretty solid. I think for this 6/1, what we're seeing is rates are definitely going to be coming off. I think there's a fair degree of rationality among underwriters regarding the exposure because it is. It's a peak zone for a reason. It's [indiscernible] peak zone. And so I think that will put a bit of a floor under things. I think terms and conditions will look good. The vast majority of our deals in Florida are on a nonconcurrent basis, and we're advantaged that way. So I think that will advantage us. And it's early days, though. I mean we've worked on, whether it's 25% or 1/3 roughly of our renewals are sort of getting some indications on them. So very early. But I would expect rates to come off maybe in the mid-teens zone, time will tell. And I think we'll have an opportunity to do quite well. It may include taking a few chips off the table. But overall, feeling really good. David Motemaden: Got it. That's very helpful. And then maybe just for my follow-up. Mark, the underwriting expense ratio 6% here this quarter, I mean, that's pretty much where you guys had said you were expecting to be exiting the year. So is -- should we be thinking about maybe a little bit lower on like continuing at this level? How should we be thinking about next year as well? Are we talking about this getting into like the low 5s, just as you guys work on some of the expense efficiencies to help offset some of the top line pressure? Mark Kociancic: I think the 6% to 7% range we talked about is still in order, a lot of different moving parts. So let me put some of those on the table. We're still benefiting materially in the first half of the year from net earned premium stemming on the commercial retail runoff that we have. So that's helping to absorb some of that expense load. I think you've also -- you're seeing in the industry and for us, reduced premium writings this first part of the year. And if that continues, that will also put a damper somewhat on the net earned premium development, which will mechanically increase the ratio. However, we're obviously aware of all this. We run fairly lean or efficiently, I'd say, on the corporate side. I think there's attention, good attention on the corporate expense load of the company to manage it in a disciplined fashion as we exit the retail and navigate whatever the premium environment is going forward. But I still think on a relative basis, we'll keep our expense advantage that we have. It's just that number could move, but not that much. I don't think it's going to be something that's problematic I just wouldn't be prepared to say you're going to be under 6% for any meaningful period of time in the next year. Operator: Our next question comes from Alex Scott from Barclays. Taylor Scott: First one I have is on the reinsurance reserves, sounded like [indiscernible] was net favorable this quarter. I just wanted to check to see if you could give us any color on was there any unfavorable if you look specifically at Casualty? And I mean, from the commentary in the presentation, it sounded like short-tail is doing well. So I'm just trying to understand if there's some level of offset to the positive commentary being made about short-tails or the property comments you made on the call that we need to consider? Mark Kociancic: No, it's doing well, Alex. No problem in Q1. We feel good about the loss picks. We took even more prudent approach, I'd say, with the 2026 loss picks for Casualty Pro-Rata, so feeling good about that. We did the review last year. The roll forwards continue every quarter. We've got our reserve studies coming in the summer, the cedent data that we're getting is pretty much in line with our expectations, and we're seeing good strength from other lines of business outside of Casualty Pro-Rata. So for now, it's steady as she goes. Taylor Scott: Got it. Very helpful. And then just on the investment portfolio, can you talk at all about any exposure you have to private credit, whether it's in your alt portfolio or your fixed maturities? Mark Kociancic: Yes, sure. So we do have private credit exposure. It's roughly 7% of our assets under management, roughly $45 billion of AUM in the company. It's something we've had for a meaningful chunk of time, a lot of diversified type holdings that we have. Direct lending, I'd say, slightly more than half, a lot of first lien secured loans attached to it as well. Software pretty much on the smaller side, I'd say it's probably 15% of that overall 7% that I'm mentioning. But it's performing well. We're not seeing anything meaningful in terms of impairments or watch list exposure. We're not adding to it, but we're quite comfortable with where we are right now. Operator: And our next question comes from Tracy Benguigui from Wolfe Research. Tracy Benguigui: You said you were in your early days with respect to the Florida renewal season. And I heard yesterday from one of your competitors that they placed the half so far. So I just want to talk about the cadence of this renewal season. If tort reform is making the market more attractive, do you think renewal discussions will wrap up earlier, this go around that you typically see? And what does that mean for pricing trajectory? Like is it better to get in sooner? James Williamson: Sure, Tracy. I mean I think every renewal season is the renewal season when we say we're going to get things done earlier and more -- in a more orderly fashion. It hasn't happened yet, but hope springs eternal. Look, I think we are -- as I said, we're a lead market in the Florida market. We have preferred client relationships. The renewal is well underway. And again, I think conditions overall will be fairly strong, given the dynamic of, yes, there is tort reform, which makes it more attractive, but there's also increased demand. And you always have to remember, it's a peak zone for a reason. And I think underwriters across the industry are well attuned to the risks involved in underwriting Florida property. And then as I would just remind everybody, just to repeat something I said earlier, north of 80% of our deals in the Florida market are with nonconcurrent terms, which I think puts us in a terrific position. Tracy Benguigui: Good. And as properties becoming more meaningful in your book, are you deemphasized -- as you're deemphasizing casualty, taking a step back, for prudence, have you made any material changes in your cat modeling process like adding additional loads? Or is it more status quo? James Williamson: Sure. I would say that our cat modeling capability is second to none in the industry, and it's a core competitive advantage of ours. So we're always enhancing our cat models. We have a fully dedicated team of PhDs, math experts, seismologists, volcanologist, you name it, on staff who are always incorporating the best scientific research, whether it's trends around climate change, views of the legal environment, et cetera. So we always want to be on the cutting edge of where we are on modeling. And -- and again, I think that's a core advantage of ours. Operator: Our next question comes from Yaron Kinar from Mizuho. Yaron Kinar: First, congratulations, Mark, on the retirement. Couple of questions. One, and I apologize for asking you, Jim, to pull out the crystal ball here. But I think you said that property cat rates remain above adequate at this point. So assuming that we have like a normal hurricane season this year, at what point would you think that the industry inflects back to flat or even property rate -- property cat rates increasing? James Williamson: Sure. It's a good question, and my crystal ball is out of order at the moment on that to mention, Yaron. I mean, look, here's what I would say. The first thing, and I know others have said this over the last few days, but -- while rates are coming down, there is also this underlying sort of floor of discipline that's occurring as well, which really gets reflected in terms and conditions, attachment points are very strong which tells me that underwriters are alive to the risks that we're taking and they're allowing rates to fall because pricing is above the levels they think they need to achieve in order to earn a reasonable return for the risk. I think there's probably still -- there's still some room, but our view and the communication we're having with our clients is, we've been a consistent supplier of cat capacity. We're a lead market. We want to get paid reasonable levels. And our view is that pricing shouldn't continue to fall. So we'll just have to see how it plays out. I think one thing that I take away from some of what I've heard in the market over the last few days from others is that you do see the lead markets taking chips off the table. And I think that's a very good sign that the market will find a reasonable rest in place from which we then can have sort of a normal market cycle. And I've said pretty consistently since the January 2023 renewal that it's my view that, that renewal was a reset around which you would see a market oscillation. And I think that's playing out and it will be up to the lead underwriters to sustain their discipline if -- when we're talking about the January 1, '27 renewal and beyond to ensure that, that is in fact what comes to pass. Yaron Kinar: That's very helpful. And then my second question is, can you size the earned premium base associated with the loan loss provision? The reason I asked this is I just want to make sure that as we think about underlying loss ratios that we have the right base here to the model into the future? James Williamson: I mean I can give you some indications. But one thing to keep in mind is a lot of the covers that are going to get affected are global in nature, especially a lot of the covers coming out of the London market. So how much of that premium is attributable to that particular region is really an impossible game. What I would tell you is if you look at our Middle East reinsurance business, meaning we have a team that's an exceptional team that's been writing in that region for a long time. And they write 4 clients based in the Middle East. That business alone is in the neighborhood of $300 million a year in gross premium. So the reinsurance loss that we've pegged for Iran is $40 million. So it gives you an idea. It's a meaningful kind of a cat number against the $300 million, but not outsized. For the rest of it, again, it would be sort of impossible to attribute an actual market size, too. But I think a [ $57 million ] provision, which we feel is quite prudent, given where the conflict is at the moment relative to a global diversified insurance and reinsurance business is a pretty modest number. Operator: And our next question is Ryan Tunis from Cantor. Ryan Tunis: First off, congrats to Mark. Jim, I wanted to go back to the attritional loss ratio in Global Specialty, the 58.9% -- make sure I'm thinking about this right. On the pro forma, that's like more than 4 points lower than what you did in 2025, which seems like quite a bit. Is that just lowering a loss pick just based on just a brand-new view of profitability? Just help me wrap my mind around that just a little bit better. James Williamson: Sure, Ryan. Happy to unpack that. I think there's a number of things happening. The first thing to keep in mind is that we have shifted the mix pretty meaningfully over that time. And some of it you see when you look at it by line, if you look at, for example, in the quarter, the growth of our Specialty businesses has a pretty meaningful impact on that number. I think then even beneath that, there's dramatic changes to the underlying portfolio. So for example, if you go back a couple of years to our U.S. wholesale business, we might have been writing a fair proportion of open -- what I would call open market E&S Casualty business. Just submissions are coming in, you're writing excess umbrella, often lead umbrellas, loss ratios on those are very elevated. I mean we've moved almost entirely away from that kind of business. What are we writing today? Well, we have experts that we've built that great team. I got a question earlier about the team we built. They're writing, for example, new risks around data centers. We have deep expertise in the area. We have a specialized product. It's still casualty. But if you look at liability profile, we might be writing an umbrella limit, a $5 million limit that might have used to be a $10 million. It's not lead anymore. We're farther up in the tower. Pricing is dramatically better. I mean those things do start to inure to your benefit in the loss pick. And I can tell you, we've been incredibly conservative in how we've reflected any of that in the number. But it's been so dramatic that I do think it justifies some movement, and that's how you get to the number where we are now. Now I do want to reiterate and maybe expand a little bit on something I said earlier in terms of where does this go from here? I feel good about the picks. Mix is really going to make a meaningful difference. And when you're in an environment where you have pricing moving in all directions. So property pricing is coming down in the core market, but casualty pricing is accelerating in a number of areas. We've got a bunch of specialty businesses. I think the relative growth of those businesses could move that average loss pick up or down and still result in really terrific overall results. So just be aware that there's some of that going on. Ryan Tunis: Got it. And then I guess just for modeling purposes, just thinking about how the invested asset base moves this year is just a little bit weird with the AIG runoff. I mean is there any rough rule of thumb on how we -- how you guys are thinking about growth there relative to the decline in premiums that's coming from those net retail business? Mark Kociancic: Ryan, it's Mark. I would expect it to be more marginal AUM growth. So part of it, to your point, is the reduction in the retail business. You've got, at least in the first quarter, diminishing gross written premium also being somewhat of a headwind. And you're seeing us emphasize buybacks, which is clearly a good thing, but a drain on AUM. So the other side of it, we'll see how the reserve paydowns progress, particularly in the Legacy segment, that will be something that also impacts it. So I would probably go with more of a flat to marginally -- marginal growth in that area. But it's dependent on all these factors on a quarterly basis. Operator: And with that, ladies and gentlemen, we'll be concluding today's question-and-answer session as well as today's conference call. We do thank you for joining. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Hubbell Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. You will then hear a message advising your hand is raised. To withdraw the question, simply press star 11 again. Please be advised that today's conference is being recorded. Now it is my pleasure to hand the conference over to the Senior Director of Investor Relations, Daniel Innamorato. Please proceed. Daniel Innamorato: Thanks, operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for 2026. The press release and slides are posted to the Investors section of our website at hubbell.com. I am joined today by our Chairman, President and CEO, Gerben W. Bakker, and our CFO, Joe Capazzoli. Please note our comments this morning may include statements related to the expected future results of our company. These are forward-looking statements defined by the Private Securities Litigation Reform Act of 1995. Please note the discussion of forward-looking statements in our press release and consider it incorporated by reference to this call. Additionally, comments may also include non-GAAP financial measures. These measures are reconciled to the comparable GAAP measures, which are included in the press release and slides. Now let me turn the call over to Gerben. Gerben W. Bakker: Great. Thanks, Dan, and good morning, everyone, and thank you for joining us to discuss Hubbell Incorporated’s first quarter 2026 results. Hubbell Incorporated delivered strong financial performance to begin the year, with double-digit growth in sales, adjusted operating profit, and adjusted earnings per share. Organic growth of 8% in the first quarter was driven by double-digit organic growth in our Electrical Solutions segment as well as our Grid Infrastructure businesses within the Utility Solutions segment. Our core utility T&D markets remain strong, with highly visible load growth driving continued strong demand in transmission and substation markets, and aging infrastructure and resiliency investments driving strong demand in distribution markets. Electrical Solutions growth continues to be driven by strength in data center and light industrial markets, enabled by our leading brands and continued success in our strategy to compete collectively in high-growth verticals. We are raising our full-year 2026 outlook for total sales growth, organic sales growth, and adjusted earnings per share this morning, as we are confident Hubbell Incorporated’s strong position in attractive end markets and continued execution of our long-term strategy will enable us to execute through a dynamic operating environment. Before I turn the call over to Joe to walk you through our financial performance in more detail, I would like to highlight an emerging growth opportunity for Hubbell Incorporated in high-voltage transmission, a long-term megatrend that sits squarely in our core, and we are demonstrating early success in a multiyear investment cycle. As background, 765 kV transmission represents one of the most efficient methods to move large amounts of power over long distances in order to accommodate accelerating electricity demand from electrification and load growth. Operating transmission lines at higher voltages enables utilities to deliver more power per line with lower losses and fewer space requirements. For Hubbell Incorporated, high-voltage transmission represents a significant multiyear opportunity which is largely incremental to existing strength in traditional 345 kV transmission markets. Our leading position and strong customer relationships position us well to capture this opportunity, and we are demonstrating early success with several key project wins supporting this initial phase of high-voltage transmission buildout. Additionally, our portfolio depth and breadth position us as a preferred partner whom customers can trust to provide a full package of critical components. This solutions offering enables high service levels and reliability while driving installation efficiency and ease of doing business for our customers. We are actively investing to support future growth in this market, including development and testing of new product offerings in collaboration with major customers, as well as in capacity expansion investments. Overall, we believe 765 kV transmission represents an addressable market opportunity of approximately $1.5 billion over the next ten years, and we believe we are well positioned to serve this attractive long-term investment cycle. With that, let me turn the call over to Joe to provide more details on our Joe Capazzoli: results. Thank you, Gerben, and good morning, everybody. I am starting my comments on slide five. Hubbell Incorporated’s first quarter financial performance was strong, with double-digit growth across sales, adjusted operating profit, and adjusted earnings per diluted share. Net sales of $1.517 billion in the first quarter of 2026 increased by 11% compared to the prior year, driven by 8% organic growth and acquisitions contributing 3%. Consistent with our fourth quarter 2025 performance, both the Electrical Solutions segment and Grid Infrastructure products within our Utility Solutions segment delivered double-digit organic growth in the first quarter, partially offset by anticipated softness in grid automation. Acquisitions contributed three points to growth in the first quarter, with DMC Power off to a strong start and integrating nicely within our T&D business. From an operational standpoint, Hubbell Incorporated generated $301 million of adjusted operating profit in the first quarter, representing 18% growth versus the prior year, with adjusted operating margins expanding 110 basis points year over year. This improvement in adjusted operating profit and adjusted operating margin was primarily driven by strong volume growth in high-margin businesses. While cost inflation accelerated against 2025 exit rates, as anticipated, our pricing and productivity actions continued to keep pace, more than offsetting those higher levels of inflation on a dollar-for-dollar basis in the first quarter. We also accelerated our investment levels in the first quarter, as previously communicated, most notably to expand capacity in high-growth areas and generate future productivity. And as anticipated, we invested $7 million in our restructuring and related program to further streamline our operational footprint, primarily within our Electrical Solutions segment, which, as a reminder, R&R is included in our adjusted results. Adjusted earnings per diluted share were $3.93 in the first quarter, representing a 16% increase versus the prior year, driven primarily by adjusted operating profit growth. Below the line, higher interest expense associated with borrowings from the DMC acquisition and a slightly higher year-over-year tax rate were partially offset by lower share count as a result of prior repurchase activity. Additionally, we repurchased $168 million worth of shares in the first quarter at a dollar-cost average below $500 per share. We expect the net impact of these repurchases to be neutral to 2026 earnings, as a lower share count will be offset by higher interest, but the repurchases of shares at attractive valuations are expected to provide us with earnings accretion in 2027. Our balance sheet remains strong and is poised to invest on behalf of our shareholders. Our primary focus remains on internal reinvestments and acquiring differentiated businesses to bolt on to attractive areas of our portfolio. The pipeline of opportunities remains healthy and active, and we continue to remain disciplined in our approach. Share repurchases represent an additional lever that we can and will utilize to return cash to shareholders over time. Turning to page six to review our performance by segment, Utility Solutions delivered another strong quarter, with double-digit growth in sales and adjusted operating profit. First quarter performance overall reflected a continuation of the momentum we realized exiting 2025, with overall drivers very similar across end markets. Utility Solutions generated net sales in the first quarter of $949 million, which represented growth of 11% versus the prior year and includes organic growth of 7% and acquisitions contributing 3%. Organic growth of 7% in the first quarter was driven by 12% organic growth in our larger, higher-margin Grid Infrastructure business, where demand strength was broad-based across T&D end markets. Utilities are investing at heavy rates, and demand for Hubbell Incorporated solutions to serve the expanding critical infrastructure needs of our customers is driving continued momentum in orders and providing visibility to further strength over the balance of 2026. As we will highlight in a few minutes, we now anticipate our Utility Solutions segment to deliver high single-digit organic growth on a full-year basis. Outside of our core T&D markets, telecom and gas distribution grew attractively in the first quarter, while meters and AMI markets remained weak as anticipated. While grid automation organic sales declined 7% year over year in the first quarter, sales increased slightly on a sequential basis. We remain confident that meter and AMI markets have stabilized, and we anticipate easing comparisons and continued strength in protection and controls products will enable grid automation organic sales to return to slight year-over-year growth in the second quarter. Operationally, HUS delivered $[inaudible] of adjusted operating profit in the first quarter, representing 21% growth in adjusted operating profit versus the prior year, with adjusted operating margins expanding 190 basis points year over year. Operating profit growth was primarily driven by strong volumes in high-margin grid infrastructure products, favorable price/cost productivity, and acquisitions, which were partially offset by grid automation volume decline. Moving to page seven, Electrical Solutions results were also strong in the quarter, with double-digit growth in net sales and adjusted operating profit. For the first quarter, Electrical Solutions generated sales of $568 million, which represented growth of 12% versus the prior year. Organic growth of 11% was again driven by strength in data center and light industrial markets, as well as solid nonresidential growth, partially offset by softer heavy industrial markets. The Electrical Solutions segment achieved approximately 40% growth in data center markets in the first quarter, driven by strength in both balance-of-system component demand as well as sales of our modular power distribution skids. Data center order activity remained robust in the first quarter, as buildout activity continues to accelerate across hyperscaler and colocation customers, providing enhanced visibility for us to increase our full-year outlook in data center markets to more than 25%. Broader light industrial markets remain healthy, as solid U.S. manufacturing activity generated demand for electrical components, and our strategy to compete collectively in vertical markets continues to drive outgrowth. Operationally, HES delivered $93 million of adjusted operating profit in the first quarter, representing 10% growth in adjusted operating profit versus the prior year, reflecting strong volume growth. Adjusted operating margins of 16.4% were down 30 basis points versus the prior year, as benefits from volume growth and the associated operating leverage were offset by higher investments in restructuring and growth initiatives. As you will see in our press release financials, within the Electrical Solutions segment, we invested $6 million in restructuring initiatives in 2026 versus only $2 million in the prior year, which impacted year-over-year margins by approximately 80 basis points, as we execute on footprint optimization projects which we are confident will continue to drive long-term productivity and margin expansion. Price realization remains strong, which, combined with productivity, more than offset cost inflation on a dollar-for-dollar basis in the first quarter. Turning to page eight to discuss our full-year outlook, we are raising our full-year sales growth outlook to 8% to 11% and organic sales growth outlook to 6% to 9%. This represents an increase of one point to the lower end and two points to the higher end of our prior full-year outlook, and is driven by both incremental price realization to offset increased inflation relative to our initial outlook as well as enhanced visibility to continued demand strength in our T&D and data center end markets. Operationally, we anticipate double-digit growth in adjusted operating profit at the midpoint of our guidance range for 2026, driven primarily by strong sales growth in high-margin areas of our portfolio. We remain confident in managing price/cost productivity to neutral or better on a dollar-for-dollar basis over the full year. So the math on higher inflation, as well as planned investments to support accelerated growth initiatives, results in a slightly more modest outlook for full-year margin expansion versus our initial outlook. Below the line, we anticipate that a lower share count of 53.1 million shares on a full-year basis will be fully offset by higher net interest, while our assumptions for other expense and tax rate remain unchanged. Overall, we continue to anticipate at least 90% free cash flow conversion on adjusted net income in 2026, and we are raising our full-year adjusted earnings per diluted share outlook to $19.30 to $19.85 per share. Now let me turn the call back over to Gerben to give you some more color on our confidence to deliver on this increased full-year outlook as we continue to navigate a dynamic macroeconomic and geopolitical environment. Gerben W. Bakker: Thanks, Joe. Turning to page nine then and concluding our prepared remarks, while the current operating environment poses macroeconomic and geopolitical uncertainty, as well as dynamic inflationary and supply chain conditions, we are confident in our ability to deliver on an increased organic growth outlook while continuing to manage price and productivity in 2026 and beyond. From an end-market standpoint, our largest, most profitable businesses are exposed to end markets such as utility T&D and data center CapEx where secular growth is being driven by long-term investment cycles. Our recent order patterns and key project wins, along with customer conversations around long-term investment planning, are providing us enhanced visibility to continued strength in these end markets. From a price/cost standpoint, while inflation has increased relative to our initial full-year outlook, we have implemented additional price and productivity actions which we are confident will offset, and we anticipate that recent updates to various tariff frameworks are largely neutral to our existing tariff cost structure. Overall, we have demonstrated our ability to manage through an inflationary environment successfully over the last several years, and we are confident in our ability to continue to do so in 2026 and beyond. While we are closely monitoring macroeconomic and geopolitical conditions, our short-cycle demand is holding up solidly, and price and productivity actions are being realized. Hubbell Incorporated’s portfolio is well-positioned with more than 90% sales exposure to the U.S., and over two-thirds of our portfolio exposed to secular growth markets in data center and utility, which we anticipate will continue to perform well through a broad range of economic environments. In short, we are confident that Hubbell Incorporated’s leading position in attractive end markets, as well as continued execution on our long-term strategy, will enable us to deliver attractive financial performance over both the near term and long term. With that, we will now open the call for questions. Daniel Innamorato: Operator? Operator: Thank you, sir. As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To remove yourself, press 11 again. We ask that you please limit yourself to one question and one follow-up. One moment for our first question. It comes from Jeffrey Todd Sprague with Vertical Research. Please proceed. Jeffrey Todd Sprague: Hey. Thank you. Good morning, everyone. Was wondering if you could provide a little more color on the high-voltage transmission outlook—just the level of project rollout there, you see that pacing in? You gave a little bit of color there, obviously. And is that $1.5 billion TAM all incremental relative to your prior view on the market? Maybe we could start there. And it sounds like you do not see this squeezing out spending elsewhere. There has obviously been a little bit of concern that all the generation spending may eat into T&D spending. You are calling the core distribution side of the business also growing at a stable rate? Gerben W. Bakker: Yes. Maybe I will start, overall, Jeff, with transmission. And then substation, I would probably categorize in the same area, as that is continuing to do really well for us. We communicated high single-digits growth there and certainly, I would say we are off to a very good start against that background. Particularly, the comments around 765—it is the ability for utilities to bring more bulk power into areas where it is needed. It is a very efficient way to do that. We have some lines in the U.S. that were built, I think, over 20 years ago that are 765. There just was not a need for it. And I think that is becoming very clear right now that the ability to drive more bulk power is actually a very efficient way to do so. We are very well positioned. We have products today that can serve it already. We have won a couple of orders already in this. We are continuing to develop products, and these are just taking it to the next higher voltages. We are able to do that with our capability, certainly with our labs. So I would say very well positioned. And we look at this truthfully as incremental, Jeff. We see this as upside to what is already needed. Any time you have a 765, you need off ramps for that, where you take the power down—think highways and offshoots of that, off ramps with substations—and then step the voltages down. So we think it is an upside for us, and we think it can drive a point of growth above what we are currently projecting with transmission already. You need both, Jeff. That is why we do not see it. Certainly, we are not seeing that in the projects that are ahead of us, the orders that we are winning. I mean, it is a logical question certainly to ask—how far can budgets flex up—but you see too that utilities are continually increasing their CapEx budgets. And I think that is a reflection of acknowledging and realizing that you really need to spend in all these areas to get the outcome you need. Jeffrey Todd Sprague: Okay. Great. Thank you. I will leave it there. Daniel Innamorato: Thank you. Operator: Our next question comes from Julian C.H. Mitchell with Barclays. Please proceed. Julian C.H. Mitchell: Hi. Maybe just a question, please, around how we should think about operating margins through the balance of the year and the operating leverage cadence, if that has changed at all versus prior thinking, please? Joe Capazzoli: Good morning, Julian. As far as the operating margin goes for the year, we are really looking at the full year with a 20 basis point margin expansion, and that is going to lean a little heavier towards Utility with more expansion and about flattish on Electrical. As the year progresses, I think we see the Utility side of margin expansion being pretty consistent. And certainly, on Electrical, we see a little bit of headwind just on the year-over-year comp from last year’s second quarter in Electrical, and the back half probably flattish. So that is kind of how we are thinking about margin for this year. Keep in mind, there is a lot of inflation that has come on, and as we cover that inflation with price and productivity, that is certainly margin dilutive. So in our 20 basis points of margin expansion at the midpoint of the guide, there is about a point of dilution just from that price/cost math. Julian C.H. Mitchell: That is helpful. And then maybe just my follow-up on the thoughts on the first half and second quarter. Maybe I missed it, but did you clarify the share of earnings in the first half? Is it still mid-high 40s? And so we are looking at kind of a $5.20-ish EPS for Q2. Any pointers on second quarter or halves phasing, please? Thank you. Joe Capazzoli: Yes. So for the second quarter, we would think about a normal seasonal setup for this year. And let us think about that on the sequential. Typically, with our strong orders coming through first quarter, we would anticipate a second quarter step-up like we would normally see: high single-digits organic growth. And add to that, we are looking at price/cost productivity at about neutral on the dollars. And so that is really the constructive way to think about Q2. Operator: Thank you. Our next question is from Thomas Allen Moll with Stephens. Please proceed. Thomas Allen Moll: Good morning, and thanks for taking my questions. Sounds like versus last quarter, we are expecting more pricing for the year, perhaps also better volumes than originally expected. So I was hoping you could unpack that 6% to 9% organic for us. How much of that is price versus volume? And how do those compare to what you provided last quarter? Thank you. Joe Capazzoli: Coming into the year, we were anticipating about two points of price, and the majority of that was coming from wraparound from actions that we had implemented last year. As we saw some of that inflation, mostly on the metal side—copper, aluminum, steel—in the first quarter, we went out with price actions in the second quarter, and that added about a point to our full-year price outlook. So our full-year 6% to 9% organic has about three points price, with the rest being volume. If you think, Tommy, about the way that price rolled on last year, the year-over-years are going to start to wrap here into Q3. So we would anticipate that our contribution from price fades as the year progresses, and our contribution from volume growth increases as we step through the year sequentially. Thomas Allen Moll: Thank you. That is very helpful. I wanted to follow up on DMC. What update can you provide for us there? And in particular, are there any elements that you are seeing unfold better versus worse than the original plan? Thank you. Gerben W. Bakker: I would say, Tommy, DMC—as we stated in our last calls—is off to a really good start. This is squarely in the area where the highest investment is going on in utility, which is transmission, and particularly this is a substation application. So I would say so far, it is meeting and even exceeding a little bit our expectations. It is also an area where we are really focused on adding capacity. I think our ability to get more out of that factory this year and next year is perhaps more a function of our ability to get capacity in place because orders are really supporting. So we are very, very pleased with it, as we are with Systems Control—another acquisition we did last year also in this space and with very similar dynamics of good demand and need to add capacity. We are very pleased with them. Operator: Thank you. Our next question comes from Nigel Coe with Wolfe. Please proceed. Nigel Coe: Just want to go back to the margins. How are the Section 232 tariffs sort of changing the landscape, and maybe talk about both businesses? And I believe that you were utilizing U.S. steel down in Mexico, so any more color there would be helpful, and any thoughts on how to think about margins by segment as well? Joe Capazzoli: Sure. Starting with the tariff, I would probably start by answering it more broadly with the events of tariff changes in the first quarter, of which, yes, February was a piece of what changed. We also saw the repeal of IEEP, we saw 01/22 come online, and we saw some of those changes in February. The sum of all of that is about neutral to us for the year. So that impact was not significant. We were paying in February, going back to Liberation Day, so February—with product lines that would have had U.S.-melted steel—the changes there were entirely offset by some other impacts on some other product lines. So overall, not significant. On your question about margins, quarter to quarter, we have 20 basis points of expansion embedded in the guide at the midpoint for the full year. The margin expansion is going to lean more heavily towards Utility, and Utility is looking at margin expansion pretty ratably across each of the four quarters. Electrical is a little bit of headwind on the margin in the first half of the year, and that normalizes in the second half of the year to get to about flattish on the full-year margin for Electrical. Nigel Coe: Maybe on the back of Jeff’s question on transmission—obviously very healthy growth, very vibrant end market. Some of the big players in that space are growing strong double digits in transmission. Do you see scope for your business to get up to those kinds of levels, and is the scope of your content increasing with time? Gerben W. Bakker: On the scope, we continue to develop products, we continue to do acquisitions, and both DMC and Systems Control are two examples where scope is increasing if you add additional product lines. Also, as you look at where the voltages go—when we talk about 765—our content on that per mile would also go up slightly from the lower voltages. So I think in net, both on what we are adding to the portfolio and where the investment is going, it does increase our content a little bit. Certainly, what we are seeing is double-digit growth. Our scope is broad, and we serve the majority of what goes on a transmission line. If you think about a transmission line, 85% to 90% of material that goes up on that, we serve. I would say we are going to get our fair share of that growth. Specifically, how many generator assets short term—it is a little harder for me to comment on that dynamic. But I would certainly say we will participate and get our fair share of the buildout. Operator: Thank you. Our next question comes from Joseph John O'Dea with Wells Fargo. Please proceed. Joseph John O'Dea: Hi. Good morning. Just wanted to touch on grid infrastructure growth expectations throughout the year. Is it reasonable to see something like low double-digit organic through the first few quarters of the year, and then I think the comp gets a little bit tougher as you get into the end of the year, so maybe that is more mid- to high single-digit? And along with that, any color on electrical distribution—understandably, the transmission and substation are driving strength, but just what you are seeing on the distribution side. Joe Capazzoli: Good morning, Joe. I will take the first part of that question on the Utility organic. And you are thinking about it the right way in terms of mid- to high single-digit organic growth as the year progresses, and we are anticipating it is going to be pretty consistent—Q1, Q2, Q3, Q4. Gerben W. Bakker: Maybe on the distribution side of it, we have been talking about this for quite some time now. What is driving the need to invest there is a lot driven by upgrading and resiliency of the grid. We dealt last year—and the last couple of years really—with destock, where we talked about that underlying demand was still solid, but we were dealing with something very specific. I think that is proving out now, with the destocking behind us, that we are actually seeing the underlying demand, and the drivers of it are continued hardening. I think it is slightly lower than transmission and substation for the reasons that we talked about—getting that power that is so needed in data centers and other areas. But we are very optimistic. And there too, if we think about the start to the year, it is not just off to a good start in transmission and substation, but distribution as well. Joseph John O'Dea: And then just on the timing of pricing and the impact on demand—were the price announcements in the quarter in place middle of the quarter, or in place at the beginning of the second quarter? And really just around any influence on demand pull-forward. It sounds like no incremental pricing required to tariffs. Over reporting season there is some debate on what kind of pull-forward dynamics there were broadly across industrials, but the degree to which you saw any of that in the quarter—it does not sound like much carryover impact anticipated throughout the year. Joe Capazzoli: Price increases went in for us at the beginning of the second quarter, and that typically takes 30 to 60 days to work its way through the backlog and to get to a point of fully realizing the run rate of that new price. So that all sets in during the course of the second quarter. We did not see any significant impact or unusual behavior with pull-forward on demand. That order momentum that we have seen continue going back to the fourth quarter, throughout the first quarter, and into the second quarter—nothing unusual in terms of how that sets up around our price increases that we have implemented. Price increases so far have been sticking. Conversations with customers have been very constructive. And the basis for our price increase has been around metals, and that metals inflation has been very visible and very well accepted in the channel. Operator: Thank you. Our next question is from Christopher M. Snyder with Morgan Stanley. Please proceed. Christopher M. Snyder: Thank you. I wanted to ask about data center. Obviously came through really good—40% in Q1. And you raised the full-year data center guide to now over 25%, previously up 15%. Is this new 25%+ basically all of your available capacity, or if demand strength is sustained, is there an opportunity to ship more this year? Thank you. Joe Capazzoli: Good morning, Chris. We spend a lot of time on that topic with all the activity and the significant demand in data center. You would recall that roughly half of our data center exposure is in our long-cycle power distribution modular skid business, for which we have good visibility to demand. Orders are booked out through the year and there is little incremental capacity, and that feels pretty well situated, and that was well situated in our original guide. So no real change on how we are thinking about the long-cycle piece. On the short-cycle, book-and-bill side, we continue to see strong order demand coming through. We continue to add capacity in that space—every quarter we are adding more capacity—and we continue to add inventory to every extent possible so that we have stock on the shelf for that short-cycle book-and-bill side of products needed for data center. So we think we have a little more capacity, and we continue to invest in that productive capacity coming online. We will continue to do that as the year unfolds to increase our capacity and serve that growing demand. Christopher M. Snyder: Thank you. I appreciate that. Then I wanted to follow up on price/cost. It seems like a year ago, you led on price/cost and then over time into Q1 the cost inflation caught up, netting you closer to neutral. Should we expect the same thing into this next round of price increases—like you will lead a little bit off the bat and then it catches up a bit two or three quarters out? Joe Capazzoli: You are definitely right in your first comment in terms of how last year played out. We were ahead on price versus cost, dating back to Liberation Day tariffs, and that benefit of being ahead kind of situated in the second quarter of last year, and we continued to run positive on PCP in each of the quarters of Q2, Q3, Q4 last year. We were positive PCP on a dollar basis to start this year, and we are anticipating managing that equation on a dollar neutral or better basis. That does have an impact on margins, as you know that math well. Do we think we can continue to hold the line on margin neutral on price/cost? No. I think that was a little beneficial to us last year, but we are very focused on managing to neutral or better and driving that double-digit operating profit growth for this year. Operator: Thank you. Our next question is from the line of Chad Dillard with Bernstein. Chad Dillard: Question for you is on Aclara. Can you talk about the sales in the quarter and how that has trended sequentially? And then just more broadly, how that business is positioned for AMI 2.0, and how should we think about when that cycle kicks off? Gerben W. Bakker: As you know, Aclara is part of the grid automation business, and that business continues to inflect up. We are down year over year, but the decline started to shrink, and while we still are a little bit down year over year in the first quarter, as we communicated, we expect that to start turning to growth. If you peel that apart and specifically to your question of Aclara versus the rest, clearly Aclara had been declining higher while the other part of the business was growing. What you have seen is that Aclara decline is starting to get smaller and smaller. We still, in the first quarter, saw a decline in that business, and as you look ahead, that is an area that has been more challenged. As utilities manage budgets—it goes back a little bit to Jeff’s very first question of how are utilities managing budgets—our view, and certainly indications from conversations, is that they are de-selecting this a little bit over other areas of investment, and we have seen fewer projects come through. But the challenge for utilities is that this equipment is going to fail at some point. The lifespan of this is not in the range of what our typical components are. What we are seeing is more project discussions right now. We are quoting more projects. We won a pretty nice piece of business that is multiyear. From where we sit today with this business decline, we should expect, going forward, to start seeing this business realizing modest growth. We feel it has stabilized—we have seen the bottom—we are now starting to come up. We are not expecting great growth rates, but the dynamics are such that this business should grow from here. Chad Dillard: Great. That is helpful. And then moving over to grid infrastructure, I know in the past you have talked about your order rates within distribution. I was hoping you could give an update on how those trended for the quarter, and can you break down how much of the demand you are seeing is restocking the channel versus pure sell-through into the end market? Gerben W. Bakker: Our view is that the demand is what is going up on infrastructure and not going to stock. We are off to a good start on revenue, and that is driven by order rates on both the Electrical and Utility side, but particularly T&D was also up nicely in the quarter. We generally do not talk about book-and-bill a lot; it is about order rates because we are a more short-cycle business. Our orders were up over one. That is not atypical in the first quarter, where people are starting to get their orders in to get ready for construction season, and that is typically a little bit over one. We were up stronger than that—close to 1.2 to start off the quarter. That is both a mix of short cycle, or book-and-bill, that was solid, as well as projects. We talked earlier about some of these projects. We feel really good about the start to the year, and it is what has driven us to raise our organic guidance. I realize there is a piece of that that is price, but there is a piece that is volume as well. We feel really good about how we started the year, and we see a continuation of this—nothing unusual in it. Operator: Thank you. Our next question comes from the line of Scott Graham with Seaport Research Partners. Please proceed. Scott Graham: Hi. Good morning. Thank you for taking my question. You have a global manufacturing footprint. With inflation higher and some of the geopolitical uncertainties, how is your supply chain behaving? Are you getting what you need? Are you getting any pushback in any corners? I think I heard Joe say no, not yet, on pricing, but we are starting to hear “enough is enough”—some corners are pushing back on pricing in different markets. How is your supply chain behaving overall? And then as a follow-up, how is your acquisition pipeline? It looks like your balance sheet is very lean right now, and I was wondering what the outlook was for 2026. Anything you can say? Joe Capazzoli: Good morning, Scott. On the supply chain, we are not seeing any significant impacts or constraints. What would be more noteworthy is that over the course of the last couple of months, with some of the disruption in the Middle East, we did have a little bit of aluminum that we were purchasing out of that region—that would be a noteworthy area. We do have other qualified sources of supply around the globe. We were able to move that to other suppliers, and we were not, at the end of the day, impacted by that, but it was something we had to address. We are not seeing constraints in other areas yet—chips or metals or component parts of any substance. So I would say the supply chain, as we see it right now, is holding up well and supporting what we need to do to service our customer demand. Gerben W. Bakker: Let me take the second one on M&A. You are right to point out that our balance sheet certainly supports doing acquisitions at larger scale than perhaps we were able to afford in the past. Before we look at the pipeline, we are focused clearly around the core areas of our business—anything in T&D, around data center, and lines around our light industrial markets. Those are all areas that we find very attractive, and there is still, based on our pipeline of deals that we are looking at, plenty of opportunity to deploy our capital there. Of course, timing is not always very predictable. But you have also seen—and Joe highlighted—what we did in share buyback during the first quarter. In periods where perhaps there is a little bit of a void in acquisition, we think utilizing our balance sheet to do buybacks is another attractive area to deploy capital. Of course, our highest preference goes to CapEx, and we certainly have increased that, and based on some of my comments of areas where we are investing, you should expect to continue to see that elevated. The second one being M&A—and I would say there is a good pipeline there, both of what we would call bolt-ons, even those are getting larger, as well as larger deals. And then we have buyback as an option. So we see within those areas that we could fully deploy our balance sheet. Operator: Thank you. And our last question comes from the line of Analyst with UBS. Please proceed. Analyst: Thank you. I wanted to come back to the high-voltage opportunity through 2035. Apologies if I missed this, but is the $1.5 billion opportunity relative to Hubbell Incorporated’s $400 million to $500 million transmission business today? I just want to get a sense of how to think about the growth opportunity. Gerben W. Bakker: If you think about that math a little bit, it represents about 7,000 miles of high-voltage transmission—how we get to the $1.5 billion with our content—and that is over ten years, and who knows if that is longer or shorter, but if you use that as a basis, and then we are not the only participant in that. We certainly have a very good position in that market with our customers. If you add all those things up, we believe it can drive a point of growth above the high single digits that we provided for transmission/substations in the absence of it. Analyst: That is helpful. And the RTO/ISO recommendation for 7,000 miles—I think there are a few hundred thousand miles of high-voltage transmission in the U.S. overall—so could that be more market opportunity if there is increasing content of 765 kV in the U.S., on top of that $1.5 billion, or is it too early to say? Joe Capazzoli: I think the $1.5 billion was related to high-voltage transmission overall, so obviously there is a baseline market of transmission that is also growing strongly, as we said. So not sure what the question was driving that, but— Analyst: No. That is clear. Thank you. Operator: Thank you. Ladies and gentlemen, this concludes our Q&A session. We will turn the call back to Daniel Innamorato for closing remarks. Daniel Innamorato: Great. Thanks, operator. Thank you, everyone, for joining us. We will be around all day for follow-ups. Thank you. Operator: Thank you. And this will conclude our conference. Thank you for participating, and you may now disconnect.
Operator: Greetings. Welcome to the SiriusXM's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jennifer DiGrazia, Senior Vice President of Investor Relations. Thank you, Jennifer. You may begin. Jennifer Digrazia: Thank you, and good morning, everyone. Welcome to SiriusXM's First Quarter 2026 Earnings Call. Today's discussion will include prepared remarks from Jennifer Witz, our Chief Executive Officer; and Zach Coughlin, our Chief Financial Officer. Following their comments, we will open the call for questions. Joining us for the Q&A portion are Scott Greenstein, our President and Chief Content Officer; Wayne Thorsen, our Chief Operating Officer; and Scott Walker, our Chief Advertising Revenue Officer. . I would like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based upon management's current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SiriusXM's SEC filings and today's earnings release. We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I'd like to remind our listeners that today's call will include discussions about both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock-based compensation. Additionally, please find a supplemental earnings presentation and trending schedule on our Investor Relations website for your convenience. With that, I'll turn the call over to Jennifer. Jennifer Witz: Good morning, everyone, and thank you for joining us today. We are off to a strong start in 2026, executing with focus and discipline against our 3 strategic priorities we outlined in December 2024, strengthening our subscription business by delivering exceptional in-car listening experiences, accelerating growth across our advertising business and leveraging our scaled SiriusXM portfolio to drive efficiency and long-term value. In the first quarter, we made meaningful progress across each of these areas, supported by solid performance in our core business and strong operational execution. On the subscriber side, we delivered significant year-over-year improvement in net additions, grew ARPU and achieved the lowest first quarter churn and highest subscriber satisfaction scores in our history. Through our recently announced landmark partnership with YouTube, we will significantly enhance our advertising capacity, and we continue to expand margins through our enhanced focus on efficiency, capturing $45 million toward our $100 million 2026 cost savings target. Before turning the call over to Zach for a more detailed review of our financials, I would like to offer a few observations. Starting with our subscription business, performance in the quarter was strong with a meaningful year-over-year improvement in self-pay net additions to negative 111,000, an improvement of 192,000. This reflects the growing adoption of companion subscriptions among our most loyal customers, ongoing progress with our continuous service initiative and momentum in our automotive dealer extended duration plans. Together, these offerings expand SiriusXM's presence across multiple vehicles and users within a household and make it easier for subscribers to seamlessly maintain service as they transition between vehicles, deepening engagement and reinforcing long-term loyalty. While we remain mindful of a more measured auto sales environment and its potential impact on trial volumes, our resilient in-car foundation and focus on controllable levers continue to support performance. Churn remained a standout, improving to 1.5% despite our February price increase, which contributed to a 1% year-over-year increase in ARPU to $14.99. The combination of pricing discipline supported by continually adding value to our packages and the ongoing impact of our customer experience initiatives underscores the durability of our subscription model. Our strong retention is also supported by high customer satisfaction levels. Our latest studies showed year-over-year improvement across all 5 core metrics: satisfaction, perceived value, likelihood to continue, likelihood to recommend and the essentialness of our service. Notably, both loyalty and perception metrics rose in tandem, an important signal of not only current satisfaction, but also growing confidence in the long-term value of our offering. We are also seeing traction across key demographics with the majority of the increase in satisfaction being driven by Gen X and Y. Gen X delivered strong gains, particularly in perceived value, intent to continue and essentialness, while millennials showed meaningful improvement in satisfaction and value, highlighting both the progress we are making and the opportunity that remains. Content is a defining strength of SiriusXM and a key driver of perceived value and engagement. We continue to expand and evolve our programming in ways that fuel fandom and deepen engagement across music, sports, comedy and culture. In the first quarter, we introduced exclusive full-time artist-led channels from Global Stars, Morgan Wallen and John Summit, alongside pop-up channels from BTS, Luke Combs and Robin as well as distinctive programming such as John Mayer Grateful Dead listening Party. We deepened our partnership with Metallica with the launch of the live call-in show, Tallica Talk, expanded Alt2K to our full subscriber base following 8 consecutive quarters of audience growth and broadened our comedy offering with a dedicated 24/7 channel featuring Sebastian Maniscalco. Our news and top category is also gaining momentum with consumption up 15% sequentially. This reflects continued investment in both independent and exclusive voices from the launch of Como Mornings to the strong performance of the Megan Kelly channel, where listening has grown 28% since its launch in November. We are also creating distinctive high-impact moments for listeners from intimate performances to major cultural events, featuring artists like Noah Kahan during Super Bowl Week, Kenny Chesney at Flora-Bama, Morgan Wallen in Nashville and a recent SmartLess taping in Hollywood. In sports, our offering is unmatched, spanning every major league and premier event from the NFL, MLB, NBA and NHL to college athletics, auto racing, golf and more, making SiriusXM a true year-round destination for fans. Our college sports offering continues to build momentum as a core part of our bundle with listening hours for March Madness and the College Football Championship up 22% and 37% year-over-year, respectively. At the same time, our hardware and software evolution continues to enhance the listener experience. As 360L expands across nearly all major OEM lineups, we're driving sustained growth in 360L-enabled subscriptions and increasing adoption of more personalized nonlinear listening. This is fueling double-digit growth in both usage and time spent with features like extra channels and artist-seated stations, deepening engagement. Turning to our advertising business. Momentum is accelerating. Advertising revenue grew 3% to nearly $407 million in the quarter, driven by a 37% increase in podcasting ad revenue. This reflects strong traction in video and social through our Creator Connect strategy as well as accelerating programmatic demand, where revenue more than doubled year-over-year through Google TV 360. Our partnership with YouTube marks a significant step forward. As the exclusive U.S. advertising representative for YouTube's audio inventory, we are expanding our reach to 255 million monthly listeners, nearly 90% of the U.S. population aged 13 and older. For the first time, we will offer advertisers scaled access to premium audio across a wide range of content from iconic franchises like SNL to leading creators like Mr. Beast as well as podcasts beyond our own network and streaming music. Beginning this fall, advertisers will benefit from expanded high-quality inventory paired with advanced targeting and measurement capabilities. By combining SiriusXM Media's leadership in audio advertising with YouTube's scale and always-on engagement, we are delivering high attention inventory through a more seamless buying experience while advancing a more open connected ecosystem for advertisers. In podcasting, we remain the #1 podcast network in the U.S. by weekly reach. As a launch partner for Apple's new video podcasting experience, we are helping shape the next evolution of the medium by unlocking dynamic video ad insertion and expanding access to a significantly larger advertising market. This uniquely positions us to power monetization across audio formats with greater flexibility and optionality for both creators and advertisers. These efforts reflect our commitment to an open podcast ecosystem that enables creators to grow across platforms. Across the portfolio, we are leveraging our scale, data and technology to unlock new growth opportunities and deliver stronger outcomes for advertisers. At the same time, we remain focused on building a high-performing, future-ready organization. We recently welcomed Yves Constant as Chief Legal Officer, bringing deep expertise across media, technology and content and further strengthening our operating discipline in support of our strategic priorities. Our progress is also being recognized externally. We were named by Forbes as one of the best brands for social impact and by Newsweek as one of America's greatest workplaces for culture, belonging and community as well as for women. Turning to our outlook. Our disciplined approach gives us confidence in delivering on our 2026 full year guidance, relatively flat revenue and stable adjusted EBITDA. While subscriber trends are expected to be modestly lower year-over-year, our focus remains on strong execution and driving continued free cash flow growth. Importantly, the fundamentals of our business remain strong. We have a durable subscription model, predictable and growing cash generation and a unique combination of assets, including premium content, unmatched in-car distribution, scaled audience reach and leading ad technology. We believe these strengths position SiriusXM well for the future, and we remain committed to disciplined execution, thoughtful investment and delivering sustainable long-term value for our shareholders. With that, I'll turn it over to Zach for more detail on the financial results. Zachary Coughlin: Thanks, Jennifer, and thank you, everyone, for joining us today. We delivered a solid start to the year with 3 key financial takeaways. First, we delivered revenue of $2.09 billion, up 1% year-over-year, supported by the strength of our subscriber base and continued momentum in advertising, where revenue increased 3%. Second, our disciplined cost management and a continued focus on efficiency drove approximately 6% growth in adjusted EBITDA to $666 million. And third, the strength and stability of our earnings and cash flow continues to create significant shareholder value with net income up 20% and free cash flow more than tripling year-over-year to $171 million. Together, these results underscore the steady progress we are making against our long-term strategic initiatives to enhance profitability and drive free cash flow generation. Looking first at the top line, consolidated revenue was nearly $2.1 billion, including $1.6 billion of subscription revenue, also up approximately 1% year-over-year. This growth reflects the early benefit of our recent February price increase as well as the full year impact from the 2025 rate adjustment, partially offset by a smaller average subscriber base. Advertising revenue increased 3% to $407 million as strength in podcasting, higher programmatic demand and technology fees more than offset softer demand in streaming music advertising. Turning to profitability. Adjusted EBITDA grew 6% year-over-year to $666 million, with margins expanding 140 basis points to 31.9% -- this improvement was primarily driven by revenue growth, complemented by disciplined expense management across our customer service, product and technology and personnel-related costs. Importantly, we captured $45 million towards our goal of delivering an incremental $100 million in gross cost savings this year, which includes $27 million in operating expense run rate savings and $18 million in CapEx savings. As a result, we generated strong bottom line performance with net income improving 20% to $245 million and earnings per diluted share growing 22% to $0.72. Free cash flow was $171 million, more than tripling year-over-year, primarily driven by higher adjusted EBITDA and lower capital expenditures. Turning to the segments. SiriusXM generated $1.6 billion in first quarter revenue, with subscriber revenue up 1% to $1.5 billion, supported by ARPU increasing 1% to $14.99. This reflects the benefit of recent pricing actions, including the February adjustment and the carryover benefit from the March 2025 change. SiriusXM advertising revenue declined 10% to $35 million, primarily due to softness in news, while equipment and other revenue at $41 million and $31 million, respectively, were relatively flat year-over-year. Gross profit increased 3% to $966 million, with margin expanding to 61%. While a softer auto environment, particularly following last year's tariff-driven pull forward in vehicle sales, created headwinds for trial starts, new acquisition programs and retention are supporting healthier subscriber trends. Self-pay net additions were negative 111,000, a 192,000 increase versus the prior year period. This was driven in part by growing adoption of companion subscriptions, which contributed 124,000 incremental self-pay net additions in the quarter. As a reminder, the companion offering is targeted to our most loyal subscribers and engagement has remained strong with continued marketing support and early indicators showing improved retention among those taking advantage of this benefit. This performance was further supported by continued progress in our continuous service initiative as well as momentum in automotive dealer extended duration plans, more than offsetting lower conversion rates. The stability of our subscriber base remains a core strength, reflected in first quarter self-pay churn of approximately 1.5%, the lowest first quarter level in our history. Notably, churn remained resilient despite recent pricing actions as we continue to evolve our packaging and pricing structure to better meet demand across different customer segments. With more than half of our subscribers having been with us for over a decade, we believe this performance underscores the strength of our enhanced value proposition and sustained customer satisfaction. Moving now to the Pandora and off-platform segment. Revenue increased 3% to $501 million. Advertising revenue grew 5% year-over-year to $372 million, driven by a 37% increase in podcasting revenue and higher programmatic demand and technology fees, partially offset by lower advertising demand for streaming music. We continue to expect modest growth in advertising for the full year 2026. Subscription revenue declined 2% to $129 million due to a smaller subscriber base. Segment gross profit for the quarter was $139 million with a margin of approximately 28%, representing a slight decline from 29% in the prior year period. As part of our ongoing efforts to simplify the business and sharpen our focus on higher return initiatives, we recorded a $6 million charge in the first quarter associated with restructuring and severance costs, which compares to $48 million in the prior year period. I'd also like to provide some context on the higher depreciation this quarter. As part of our ongoing portfolio optimization, we have begun decommissioning and planning the de-orbit of our FM6 satellite, reducing its useful life from 15 to 13 years. With XXM10 now in service, this capacity is no longer needed. We expect approximately $60 million of incremental noncash depreciation in 2026, including $3 million in the first quarter. This has no impact on free cash flow, but will reduce reported net income and EPS. Capital expenditures were $105 million in the first quarter, down from $189 million in the prior year period, primarily reflecting lower satellite spend and the timing of capitalized software and hardware investments. We continue to expect approximately $400 million to $415 million in non-satellite CapEx for the full year. Over time, total CapEx should trend lower with variability driven by the satellite replacement cycle. Near term, spending remains elevated as we complete our next generation of satellites, after which we expect a step down to more normalized levels. Now moving to the balance sheet. During the quarter, we completed a successful $1.25 billion refinancing, allowing us to retire all 2026 notes and redeem $250 million of 2027 notes, effectively extending maturities and strengthening our overall capital structure. And we remain on track to achieve our target leverage range of low to mid-3x by the end of this year. We also continue to return capital to shareholders, including $91 million in dividends and $21 million in share repurchase, driving efficiencies, optimizing the portfolio and prioritizing high-return investments. This positions us to reaffirm our 2026 outlook for relatively stable revenue and adjusted EBITDA modestly lower self-pay net additions versus 2025 and continued growth in free cash flow to approximately $1.35 billion with a path to $1.5 billion in 2027. The durability of our subscription model and the consistency of our cash generation continue to provide a strong foundation as we navigate the current environment and remain focused on long-term value creation. With that, I will turn the call back over to Jennifer to address recent headlines in the media. Jennifer Witz: Before we open the line for Q&A, I want to briefly address recent media speculation regarding SiriusXM. As a matter of policy, we do not comment on rumors, and we ask that you keep today's questions focused on our operating and financial performance. Our Board and management team are always focused on creating long-term value for our shareholders, and we'll continue to pursue that objective in a thoughtful and disciplined way. With that, I will turn the call back to Jen so that we can begin our Q&A session. Jennifer Digrazia: Thank you, Jennifer. Operator, we are ready to take our first question. Operator: [Operator Instructions] And our first question comes from the line of Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Jennifer, maybe on spectrum, it's become very much top of mind over the last few weeks. I would be curious just to get your latest thoughts around the opportunity that you see for SiriusXM to monetize some of its excess spectrum, perhaps the types of opportunities you're considering, whether that's building adjacent services, partnering with someone or an outright sale? And then how soon do you feel like these opportunities could come into focus here for the company? Jennifer Witz: Sure. Thanks, Stephen. Before we jump into Spectrum, I just want to acknowledge all that our team has accomplished since we refocused our strategy in December 2024. We are doing exactly what we said we would do. And as a result, we're seeing momentum really across the business. We continue to launch new in-car subscriber acquisition programs and maintain record low churn and high customer satisfaction. We are growing our ad revenue and leveraging our unique strength to support a significant new partnership with YouTube, which we'll talk more about today. And we're finding incremental efficiencies to lower our cost structure, resulting in an improving outlook for both revenue and EBITDA. And we're growing free cash flow to our target of $1.5 billion in 2027, reaching our leverage target later this year and giving us the opportunity to expand capital returns to shareholders. And then on top of all this, there's what you're asking about, which is how we're exploring ways to highlight the value of our spectrum. So I'm going to start on that, and then I'm going to hand it over to Wayne to give a bit more detail. But clearly, recent activity in the market has supported the point that high-quality spectrum is increasingly strategic and particularly as these new use cases have emerged like direct-to-device. So from our perspective, just as a reminder, we have a very unique position. We control 35 megahertz of contiguous spectrum in the 2 gigahertz band, which is a scarce and valuable asset. And of course, 25 megahertz of that today supports our core satellite radio broadcast operations. And we also recently acquired the 10 megahertz of WCS C&D block licenses, which are the 2 5 megahertz bands around the Starz band. These already support emergency and public safety services, but also obviously act as a guard band against potential interference from adjacent terrestrial use alongside Starz. So we have been regularly assessing monetization opportunities in our normal course of business. And as we have said in the past, we are in discussions with potential partners regarding various options because we see a path to value creation as starting with incremental partnership-driven opportunities, and that's going to allow us to capture some value while we maintain flexibility and upside over time. So maybe I'll turn it over to Wayne to give a few more details. Wayne Thorsen: Yes. And just to add to that, importantly, we do see the path to value creation being partnership focused as well as evaluating things internally, which we've said in the past, and our position there remains consistent. We've also said previously that we're engaged in discussions around potential opportunities with partners, and we continue to evaluate those as part of our broader effort to maximize the value of these spectrum assets. That said, we're not going to comment on specifics of any discussion as is our policy. What I would emphasize, though, is that we view spectrum as a strategic asset with meaningful long-term potential. And our priority here is ensuring that any potential use, whether internal or with third parties, fully protects our core services while creating the opportunity to generate incremental value over time. That includes support for, of course, our public safety initiatives, any new partnerships discussions, the in-house services that we may make use of given our dramatically increasing footprint of our wideband chipset and then, of course, making sure that we meet all of our regulatory commitments. Operator: Our next questions are from the line of Jessica Reif Ehrlich with Bank of America. Jessica Reif Cohen: I have 2 questions. The second one is a bit of a multiparter, so I'll start with the first. As media -- and I mean like video and audio continues to consolidate around scaled platforms, how do you think about the importance of incremental audience and advertiser reach, particularly across podcasting, streaming, national versus local ad sales relative to your current portfolio? And if you do conclude that there are assets or capabilities that could accelerate your strategy, how should we think about your willingness to use your balance sheet for more flexibility versus staying firmly within your current leverage framework? That's one, and I'll come back to the second. Jennifer Witz: Okay. I'll let Zach handle leverage in a minute. But first of all, I'm very pleased to have Scott Walker, our Chief Ad Revenue Officer and the Chief Architect of our partnership with YouTube on the call today. So I'm going to turn it over to him in a minute. But I think YouTube is so core to what you're asking about. So scale for us is 255 million listeners, which is access to 90% of the U.S. population, 13 and older. So we are very focused on this as our opportunity to expand scale. And a good way, I think if I just take a step back, to understand this partnership is to first focus on the consumer behaviors that you alluded to about video and audio and how these behaviors aren't necessarily fitting into these neat format boxes we've used as an industry, right? So consumers are moving more fluidly between formats. They're watching and listening as they go about their days. And for instance, they might start a video on their phone and then minimize the screen on their commute while they keep listening. So this behavior is happening at enormous scale on YouTube. And as a result, YouTube has become one of the largest audio consumption platforms in the U.S. So there are numerous examples of this, whether it's listening to music on smart speakers or listening to a podcast or an interview while your phone is in your pocket. All of these are examples of content consumed the same way people use traditional audio platforms. And this partnership that we have with YouTube brings that massive amount of untapped audio-first engagement to advertisers for the first time. And that's alongside a native ad format that actually matches the listening experience. So again, combined with our existing portfolio across music streaming, podcasting and SiriusXM, we will now reach 255 million monthly listeners, which is massive scale. And this tremendous reach positions us not only to grow overall ad spend, audio ad spend, but also to capture a greater share of that audio ad spend over time. And maybe, Scott, you can give a couple of more comments, and then we'll go to the sort of broader leverage question. Scott Walker: Sure. Thank you, Jennifer. I want to touch on one of the things that Jennifer mentioned anytime you can match up the ad format and natively integrate it based on how consumers are actually experiencing the content, it's better for the user and better for the advertiser in terms of performance, and that's exactly what we're doing here with this partnership with YouTube. In the battle for finite attention that is increasingly scarce to your question, we've just unlocked this massive untapped opportunity based on the insights that Jennifer referred to earlier, that consumers are much more fluid in how they use YouTube, switching back and forth across listening and watching. And one of the reasons why we are so confident in this opportunity is that it's a true partnership with YouTube. We are co-developing proprietary technology in terms of integration with our scaled systems with Google's ad platform, ensuring that we can scale our go-to-market and deliver a product that we know meets the criteria of the world's most discerning and largest audio buyers. Zachary Coughlin: Okay. And then Jessica -- sorry, to your question, Jessica, around the balance sheet -- sorry about that. Our capital allocation framework remains consistent with what we've outlined previously. First, we're prioritizing investing in the business, funding those initiatives that support our key strategic priorities. And I think we saw in the first quarter, those investments are increasingly translating into tangible financial results, especially in profitability and free cash flow. Second, we remain committed to a disciplined balance sheet. Our target leverage in the mid- to low 3x range, which we've communicated previously. We ended the first quarter at 3.6x and feel confident in our path to reach that target by year-end. And from there, it's really focused on returning capital to shareholders. We have a consistent dividend that we intend to maintain, and we see share repurchases as an important lever from that. So while buybacks have been more modest recently, as we've been working on deleveraging, achieving that leverage target will create additional capacity, giving us flexibility to potentially increase repurchases. So I think -- and finally, we'll remain opportunistic around incremental value creation, areas like our spectrum assets, which we've talked about a moment ago, or places we see longer-term optionality to unlock additional value as well as selective inorganic opportunities that must meet our strategic and financial criteria. So I think we see -- overall, it's a balanced and disciplined approach, both investing in the business, strengthening the balance sheet and positioning ourselves to enhance shareholder returns as we execute against those leverage goals. Jessica Reif Cohen: If I could just -- my second question is actually more specific on YouTube. If you could just dive a little deeper into like how you see this evolving. Google owned TV 360, which you mentioned earlier, does that now become your main programmatic DSP? And actually, maybe you can unpack a little bit about what you're seeing in programmatic in general, how -- what percentage is, how fast it's growing. But the other part of YouTube is that it is a global platform. And you have so many channels that lend themselves to global audience. I know this hasn't come up in probably years, but would you rethink that strategy? Jennifer Witz: So Scott Walker, why don't you start on the advertising side? And then Scott Greenstein pick up the content side. Scott Walker: Sure. On the programmatic question specifically, we feel like we're strongly positioned with our proprietary ad technology platform, as was in terms of our ability to plug into all of the major DSPs in order to make that buying as flexible and easy as possible. And as it pertains to this YouTube partnership, specifically, initially, programmatic is not part of the partnership, but we see a massive opportunity to unlock advertiser demand based on this incremental reach that we speak to despite that. In terms of where programmatic is growing, it's certainly growing as a percentage of the overall spend in digital media. And that trend continues in our business as well. Programmatic is growing at a healthy rate. Our partnership with the Amazon DSP is an example of where we see incremental budgets being unlocked. And programmatic with respect to podcast is also growing. Jennifer mentioned triple-digit growth rate year-over-year in Q1, reaccelerating. Scott Greenstein: Great. And Jessica, on the international question, the podcasts are currently distributed where they make sense overseas on that side. And then as far as the content goes, we're open for any deal or any licensing situation. It just has to make sense. The good news is with the amount of content we have under license, a lot of it is worldwide and the relationships are there. So if ever it comes a point where whether it's through technology or a licensing deal, the relationships will be there, and it will be a pretty easy transition to open up negotiations to go further on that. And we also have the unique ability to create content for any market that might be adjacent to what we're doing. Jessica Reif Cohen: Million more questions, but I won't hog the call. . Operator: Our next question is coming from the line of Barton Crockett with Rosenblatt Securities. Barton Crockett: Okay. Great. Congratulations, again, on the YouTube deal. To kind of ask a little bit more about this deal there could be such a large kind of funnel of revenue flowing through. But I was wondering if you could give any sense of the degree to which the lion's share of that would be stay on Google's kind of side of the ledger and how much of that you guys might be able to extract for your efforts? How do you kind of think about the take rate essentially on the deal? Anything you can say about that? Jennifer Witz: I think -- look, there's -- right now, we're prepared to talk about the size of this, the magnitude of the scale and how we're going to increase our reach. And we expect to launch in the fall, as we've said. And I think we're going to ramp this up over time. I don't think it will have a meaningful impact on this year's numbers. But as we go into 2027, we'll have the opportunity clearly when we provide guidance to give you a better sense as to the magnitude. But we've given you some general numbers on the scale of it. And I think we will be watching, obviously, the magnitude of the incrementality of this audience reach relative to where we are today, which is very significant, obviously, with $1.8 billion in ad revenue across our properties. So that's what we're prepared to share today, but we do believe it's a significant opportunity for us, and we can share more on general economics as we get closer to the end of the year. Barton Crockett: Okay. All right. That's fair. And then I apologize if this has already been covered, but with all of the kind of activity around space with SpaceX and with Globalstar and Amazon and the recent kind of SEC weird space NPRM giving you guys some telemetry trafficking and control capability potential with your spectrum if that moves ahead. To what degree do you think there's potential for you guys to be meaningful players in the space ecosystem, leveraging some of your spectrum rights? And how could that kind of play out? Jennifer Witz: So look, I think you mentioned the weird space testing, so I'll just touch on that. We have had discussions with the FCC related to this. And from our perspective, this is a constructive step as it continues to formalize, clarify the rule of TT&C. And it's a legitimate important use of satellite spectrum. And so it recognizes that we have the right to be protected from interference and also helps direct how other parties could use the satellite spectrum productively. And look, there's going to be a lot of different ways that I think spectrum -- the use of spectrum evolves over time. And this is a good example of where multiple tenants could use the same spectrum in a very methodical way. And we -- that's one of the examples, I think, of the things that we could look at going forward to unlock more monetization opportunities. Wayne Thorsen: Yes. Thanks, Barton. This is Wayne. And I would add that we do see optionality here, as we've mentioned previously, but we see this optionality will be realized over time. So not through a single step, but along a multiyear glide path sort of shaped by what we think of as 3 factors. First, the subscriber and hardware ecosystem that we have. We have an installed base throughout the entire satellite radio band, including on the legacy Sirius band and more importantly, millions of vehicles on the road with embedded radios and OEM commitments tied to the spectrum. Second, the technology migration. So we're already developing next-generation chipsets and 360L hybrid radios that can use both Sirius and XM bands. And so this gives us increasing flexibility over time to make use of this. So today, we have millions of vehicles that are already enabled with this new chipset. We expect this to grow to more than 65 million by 2029. And then third, regulatory obligations. Like our licenses come with requirements to provide specific services that, of course, we will need to continue to meet. Operator: Our next question comes from the line of Bryan Kraft with Deutsche Bank. Bryan Kraft: I had a couple on advertising as well. I guess, first, could you talk about the capabilities that 360L has the potential -- sorry, the capabilities 360L has the potential to bring to your advertising business? And what plans you have to activate those capabilities? And also things like addressability, measurement, those sorts of opportunities? And could you give an update on the advertising supported tier and at this point, where you see that going? And then I just had a follow-up on YouTube. Google is obviously quite a large sophisticated player in digital advertising with scale and technology. Can you just talk about why a player like YouTube would view working with Sirius as better than doing it themselves? And if you could also talk about whether you see this partnership maybe leading to additional major partnerships in the future? Does it sort of open the door to more opportunities like this? Jennifer Witz: So I'll let Scott address the second part, and I'll talk a little bit about 360L and Play. With 360L, we do believe there's an opportunity for more addressability for audio advertising in the car. And we're expanding, obviously, the volume of vehicles on the road that have 360L -- we haven't yet unlocked real targeted ad capabilities inside 360L. We are looking to do that over the course of this year even potentially. But clearly, the focus now is on executing on YouTube and making sure that we can launch that as it's a much bigger scaled opportunity. And then on Play, I'd say it's similar. We are leveraging play as an opportunity to broaden the top of the funnel as with many other of our lower-priced packages, and it's been helping there to do that. The ads inside of it are -- today, the scale isn't as significant because, again, we're using it as a way to market and get customers into higher-priced packages. But in the future, as we unlock more addressability in the car, obviously, it would benefit Play as well. And Scott, do you want to handle YouTube? Scott Walker: Sure. When YouTube first came to us, the insight that they brought was that audio is a unique channel. And relative to other media channels, YouTube is very much considered a default video platform, and that was the focus for most of the advertisers. And the awareness that there was massive listening behavior happening on the platform was just not there. So the first point is that the recognition audio is a unique channel that requires a sales team that has honed a different approach or a different craft in terms of the relationships with the buy side, the creative nuances around audio, our measurement expertise, and we have a proven track record of over 20 years of defining the digital audio category and really the ad market within that. So I think our reputation in the market with advertisers and with creators speaks for itself and Google and YouTube recognize that. And on that last piece, it was clear that we have delivered for YouTube creators on the podcast side. Some of our biggest podcast creators in our network, whether it's Mel Robbins, Konan O'Brien, Alex Cooper, they're all massive players in terms of usage and engagement on YouTube. And we have clearly demonstrated best-in-class monetization through our embedded sponsorships on YouTube, and that was yet another signal that we were the right partner for this opportunity. Bryan Kraft: And the last part of it was, do you think that this is something that could open up additional partnerships? YouTube is obviously very unique, but are there other potential players that may see this, what you're doing with YouTube and say that's probably a party that we ought to join? Scott Walker: Yes. We have certainly expanded and diversified our advertising business over the years by broadening into a larger network of both streaming partnerships with the likes of SoundCloud and our #1 podcast network, where we have the most shows in the top 20, 4 of the top 10 and #1 position in terms of weekly reach. So this was a natural evolution of that strategy of diversifying and leveraging this amazing demand engine that we've created on the audio side to help YouTube monetize this content. And success here and demonstration of our ability to be successful, I think, opens up doors beyond this certainly. Operator: The next question is from the line of Sebastiano Petti with JPMorgan. Sebastiano Petti: Just closing the loop on the spectrum stuff. So I guess, Wayne, based on your comments to "protect core services and that this will take a number of years and FCC obligations as well as OEM obligations. My interpretation is that any notion that you could "force migrate subscribers off of the lower 12.5 megahertz is probably outside the bounds of probably something you guys are contemplating? That's my first quick question, and then I have a follow-up. Wayne Thorsen: Yes. Thank you, Sebastiano. I'd say that we don't have any plans at this point right now to force migrate, of course, but we're always evaluating how we can best serve our customers, and we have millions of customers currently on this band. And so as we're thinking about the opportunities to do something more strategic or create more strategic value here, certainly, we're thinking about timing. But timing in all of these cases, the timing of a start of an opportunity is, of course, different than the timing of being able to catalyze an opportunity. So we're -- all of these plans need to be thought through in multiyear stages, even if other things happen first and with partners or others. Sebastiano Petti: Got it. And then in terms of timing, I mean, my understanding, I think, is you're unable to really kind of do anything with this lower 12.5% until it is fully cleared. And I think based upon I think, Jennifer, you may have touched upon in previous conferences recently, but we're looking at, what, 5 years for the spectrum to still be cleared. And so is that like the inside of how we should think about when monetization could potentially occur on the spectrum? Jennifer Witz: I don't want to be too specific because as we've said in the past, we've had a long runway on the spectrum with the subscribers there being very sticky. But I would suspect it's inside of 5 years. We've also talked about C&D, where there's maybe more opportunities in the nearer term, the 10 megahertz on either side. But I also think just with the NMPRM about weird space stuff, again, that there are some opportunities to do things while we have active subscriptions in that spectrum, probably limited, but there are opportunities. And of course, I think Wayne touched on this a little bit. There's just -- there's a long runway for how another potential partner would actually execute on this. And so that timing actually could be quite consistent. Operator: The next question is from the line of David Joyce with Seaport Research Partners. David Joyce: You had impressive uptake with the companion strategy earlier this year. Do you see that continuing? What strategies do you have to keep driving that for the overall subscriber platform? Jennifer Witz: Sure. So first of all, we're very pleased with our Q1 subscriber performance, especially after a strong Q4 last year. And the companion subscriptions clearly contributed to that, and we noted that they were 124,000 in the first quarter and as well as continuous service and expansion of our auto dealer extended duration plans. And with companions, the great thing about it is that we've been talking about kind of 2 themes as it relates to our subscriber performance and future growth as well as revenue, one being enhancing subscription value and the other being expanding access. And companion really does both, right? It expands access to SiriusXM to more listeners across the household and also enhances the value and improves retention of that subscription household. So we're really pleased. I think the question really is, as we -- we've been successful in the marketing, I think beyond our expectations actually. But how long does that last? And does the -- sort of do the take rate start to mature at some point over the course of the year. But we're also looking at where it may make sense to expand availability. So that's why we're being cautious and not changing the context we've provided about subscribers for this year. That as well as what Zach noted earlier in terms of auto sales and how those could materialize. There's still pressure on gas prices and impact on the consumer. Operator: The next question is from the line of Kutgun Maral with Evercore ISI. Kutgun Maral: I wanted to ask another one on advertising. You made a lot of progress building out the ad business with new capabilities and innovative partnerships. But it still feels like that opportunity doesn't get full attention from investors given the much larger satellite subscription revenue base. So as you think about the portfolio from here, is there any interest in reshaping the business to better highlight your advertising capabilities and opportunities, whether it's through additional scale via M&A or potentially a clear separation between the satellite subscription business and the Pandora and off-platform side. And I know we're, of course, not talking about specific deals, but what I'm really trying to get at more so is if there's a big focus right now to better match what I see as the strong execution you're demonstrating on advertising against unlocking value in the share price? Jennifer Witz: So we have the 2 segments, which gives you, I think, some exposure to the Pandora and off-platform segment, which is the vast majority of our advertising. And so -- and we provide a fair number of metrics there, but it's a good point. And obviously, with the increasing scale, we will find ways to provide, I think, more metrics around the advertising business going forward. I do want to touch on M&A because you mentioned it. And just note that we see significant opportunity within our existing businesses and whether that's obviously executing and expanding our reach through partnerships like YouTube, but also improving monetization across our ad-supported businesses, like we've done with Creator Connect or Apple Podcast better targeting and measurement tools and of course, enhancing the value of in-car subscriptions and unlocking the value of our spectrum assets like we've talked about. So these are the areas we're focused on day-to-day, and we believe they offer the clearest line of sight to high-return opportunities. And Zach mentioned that we'll continue to look at and be opportunistic on inorganic M&A and inorganic growth, but we're going to be very disciplined about that. Operator: The next questions come from the line of Steven Cahall with Wells Fargo. Steven Cahall: So I just wanted to make sure I understand the subscriber guidance for the year. I think you said that you'll see modestly lower self-pay net adds. I think you lost around 300,000 last year. So should we kind of think about companion as slowing as you get through the rest of the year? Could we annualize what you did in the first quarter for companion for the rest of the year? I'm just kind of trying to understand what core net adds are doing. I don't think companion comes with any revenue contribution. So just trying to understand kind of what the core base looks like, excluding companion. And then I have a quick follow-up. Jennifer Witz: So I can ask Zach to comment on the sort of context we provide around subs. But I do want to note that you're correct about companion in terms of not adding specific revenue for those subscriptions. However, it was part of our strategy to ensure that we're adding value before we increase subscription prices. And so we've now done this 2 years in a row very successfully. And we see actually higher retention among households that are taking companion subscriptions. And it's logical because there is more engagement across the household. So it does result in not only providing a benefit for us to successfully execute on rate increases, but also just driving more engagement. So I do believe it translates through to overall revenue. And as I mentioned a bit before, we're just being cautious, I think, about the year in general. But on companion specifically, that we continue to market and look for other opportunities to perhaps use it, especially perhaps in acquisition as more of a family plan. But I would expect the program to mature as we offer it to a specific set of our full-price subscriptions. Zachary Coughlin: Yes, for sure. I think you've got it right, Stephen, regarding our guidance and the numbers around the self-pay net adds. I think one thing to add to what Jennifer was saying, just numerically, if we take a look at ARPU, we're actually really pleased with that as well. So we're getting the subscriber growth, partially companion program, and we're also seeing ARPU up 1% versus last year. Obviously, the primary driver of that was pricing, reflecting the rate actions. But I think what's important is that the ARPU growth is not coming at the expense of the broader health of the business. Alongside the higher ARPU, we're seeing improved subscriber trends, record low first quarter churn stronger engagement and continued gains in customer satisfaction. So I think you have to look at all these together. And as is really a measure of the quality of the subscriber base. So we're driving higher monetization while strengthening retention and overall customer value. And I think this is our third quarter of ARPU growth, and we would expect that to carry through the rest of this year as well. So I think the composition of all of that shows the strength of sort of the actions that we're taking. Steven Cahall: And just a quick follow-up on conversion. I think there's a few things going on in conversion. So I think a tailwind for how you account for the auto dealer duration plan. So can you give us any more color on contribution from those plans, which seem really positive? And then you did call out a little bit lower conversion, I think, on self-pay. I think those historically were in the mid-30s. Any sense of where they're kind of running today? Jennifer Witz: Yes, Steven, we continue to see some of the same trends we've seen in the past on conversion rates. And we have had slight declines as younger car purchases come into the trial funnel and then, of course, used conversion rates lower than new. And the good news is that we just have so much more data. And with all the personalized marketing capabilities we're building, and are coming even later this year, we can address customers in a much more personalized way in our marketing, whether they're listening or not or based on their content preferences. So I think the single biggest opportunity for us continues to be with 360L rollouts. And we're at about, I think, 55% of sales by the end of the year with the OEMs that are ramping, we'll be at 70%. And we do continue to see 360L conversion rates better than non-360L. And as we ramp 360L on AAOS, which can be updated much more quickly, we see those conversion rates even higher. So these are the tailwinds. Our extended duration plans also help. And we're hopeful that we can start to stabilize some of these trends and we're intently focused on conversion rates as a measure of demand, but we also have many other demand-focused programs in place that wouldn't necessarily show up there, right, such as companion subscriptions or Podcast Plus and some of these other programs that we put in place. Operator: The next question is from the line of Cameron Mansson-Perrone with Morgan Stanley. Cameron Mansson-Perrone: Jennifer, you started the Q&A talking about the way the team has executed over the past couple of years. First quarter results are pretty encouraging. I'm wondering if you could provide some color given the reaffirmation of the full year guide, just how you're thinking about growth in the balance of the year. Jennifer Witz: Yes. Maybe I'll let Zach take that one. Zachary Coughlin: Yes, for sure. I think thanks, Cam, for the question. I mean it was a really good first quarter, revenue growth of the 1% and importantly, growth across subscriber revenue and advertising, both sides of that. And then combined with the strong cost discipline, EBITDA growth of 6%, net income, 20% EPS, 22%. So some really good metrics. And I think in cash flow, cash flow -- free cash flow tripled and free cash flow per share increased 217% to $0.51. So when we provided guidance last quarter, we talked about how important it was to provide the stable outlook, and we're off to a great start. So I think beyond that, we feel very good about the start of the year and the progress we've made, which does increase our confidence in the plan. But that said, it's still early in the year, and there's a lot of time ahead of us. When we look at the full year outlook, the underlying assumptions of our plan really haven't changed. But we are continuing to monitor the auto environment closely. We've seen some softness there, particularly in the OEM funnel. And while we haven't seen any change in customer behavior to date, churn and engagement remains very strong. We're also mindful of the broader macro backdrop. So given that, we just think at this point in time, it's appropriate to remain disciplined order outlook while staying focused on executing through the rest of the year. So as we continue to see strength in the business, it's something we'll revisit as the year moves forward. Operator: Our last and final question is from the line of Clay Griffin with MoffettNathanson. Clayton Griffin: I just got a quick one on the inventory scope attached to this YouTube partnership. Just if you could put some detail around what exactly it includes, for example, does this include the inventory on the ad-supported version of YouTube Music -- and then maybe just sizing the overall sort of impression scale at this point, given that, obviously, YouTube is dominated by video ads today. And then as a follow-up, just to confirm, Jennifer, it sounds like that this deal is likely to be accounted for on a net basis. Did I hear that right? Just maybe just walk through the mechanics of the accounting. Jennifer Witz: No, it will be like our other ad representation deals where it's growth, and it will be in the Pandora and off-platform segment. And Scott, do you want to address the inventory? Scott Walker: Sure. Thanks for the question. So in terms of the scope of this, -- the primary use cases are both YouTube Music, the ad-supported YouTube Music tier and the YouTube main app, where listener -- where users of YouTube are primarily listening versus watching. So this could be static image music videos or LYRIQ videos. This could be YouTube connected via Android Auto or CarPlay in the car. This could be long-form content, whether it's podcast or interview content on smart speakers in the home. All of these are examples. And the scale here is matched or commensurate with the reach. We talked about the Edison research that we recently conducted where the reach of this YouTube listening-first audience is 212 million monthly listeners. And combined with our 170 million across our podcast network, our Pandora streaming network, et cetera, we're now reaching 255 million users overall. So the scale of this is significant. I'll reiterate Jennifer's earlier comments about the ramp of this. We are launching this in the fall during the Q4 planning cycle. So we expect the growth and the ramp to happen more in '27 and beyond. Jennifer Witz: Okay. So in closing, thank you all for joining. I'd just like to say that we're very pleased with the strong start to the year. and the early progress we're making across each of the strategic priorities we laid out in December of 2024, and we continue to see that strategy translating into tangible results. whether that's the strength of our in-car subscription model, our growth in advertising or the broader efficiencies across the organization. And we are well positioned to build on this progress as we move throughout this year. and we remain thoughtful and disciplined in how we allocate capital and invest for future growth. So our focus remains on execution. And we're confident in our ability to deliver on our full year objectives and our guidance and drive sustainable long-term value for shareholders. So thank you for joining us this morning. Operator: Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.
Operator: Good day, and thank you for standing by. Welcome to the A. O. Smith Corporation First Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Helen E. Gurholt. Please go ahead, ma’am. Helen E. Gurholt: Good morning, everyone, and welcome to the A. O. Smith Corporation First Quarter Conference Call. I am Helen E. Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Stephen M. Shafer, Chief Executive Officer, and Charles T. Lauber, Chief Financial Officer. In order to provide improved transparency into our operating results, we have provided non-GAAP measures. Free cash flow is defined as cash from operations plus capital expenditures. Adjusted earnings per share excludes the impact of restructuring and impairment expenses. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website. A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we described in this morning’s press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. We will be using slides as we move through today’s call. You can access them on our website at investor.aielsmith.com. I will now turn the call over to Stephen M. Shafer to begin our prepared remarks. Please turn to the next slide. Stephen M. Shafer: Thank you, Helen, and good morning, everyone. Before I discuss our first quarter results, I want to sincerely thank all A. O. Smith Corporation employees for their exceptional dedication and resilience during the first quarter. In particular, I would like to recognize our North American water heater team for their swift response to weather-related damage at one of our facilities, as they acted to ensure the safety of their colleagues while at the same time finding a way to recover from our production loss and continue to serve our customers well. I remain grateful for your dedication and teamwork, which continue to strengthen our company and our culture. Now moving on to our first quarter 2026 financial performance. Please turn to Slide 4. North America sales increased 1% to $753 million and Rest of World sales decreased 11% to $201 million, resulting in total company first quarter sales of $946 million, a decrease of 2%. Our EPS was $0.85, a decrease of 11% due to lower volume and transaction-related expenses recognized in the quarter for the Leonard Valve acquisition. Despite these headwinds, diligent working capital management helped to drive strong free cash flow performance in the quarter. Our China sales decreased 17% in local currency in the first quarter, which was in line with our expectations as well as broader market performance. With the discontinuation of most government stimulus programs and continued low consumer confidence, the water heater and water treatment markets remain challenged, especially the premium portion of the market where we compete. We expect this softness to persist. We also believe that our ongoing strategic assessment has created some uncertainty in the market and has delayed certain investments, putting further pressure on our business. We continue to make progress with our assessment and are moving with urgency to provide greater clarity for our customers and employees, with the goal of defining a clear path forward in the coming months. Now I would like to share some additional color on our North America business. North America water heater sales decreased 2% year over year. Production and shipping constraints caused by adverse weather, most notably at our Ashland City, Tennessee facility, combined with softer-than-anticipated residential industry demand early in the year, negatively impacted the quarter. As we discussed on our January earnings call, the wholesale residential channel continues to face challenges, including a soft market in new construction and continued initiatives by retailers to expand into serving the professional. Despite these pressures, we are encouraged by the stabilization of our market share in the wholesale channel in the first quarter, while recognizing there is still work to be done with more improvement to come. Additionally, we are pleased with our share performance within the retail channel and the strength of our retail partnerships. Our strong market leadership and balanced presence across both channels provide us with clear visibility into market trends, supported by robust data, analytics, and deep customer relationships. I am encouraged by the positive momentum we have going into the second quarter. North America boiler sales grew 2% compared to 2025, as residential boiler volume growth and carryover pricing benefit more than offset lower commercial volume. North America water treatment sales increased 1% in the first quarter. Ten percent growth in our priority dealer channel was largely offset by softness in the specialty plumbing wholesale channel. A cautious consumer environment led to flat growth in our more consumer-facing channels, with a general trend towards a trade down to lower-priced products. We expanded operating margin by almost 100 basis points; despite the slower start to the year, we continue to work on improving the profitability of this platform. Leonard Valve contributed $16 million to sales in 2026, led by strong performance. We exited the quarter with a strong backlog, and Leonard remains on track to achieve another year of double-digit growth. I will now turn the call over to Charles T. Lauber, who will provide more details on our first quarter performance. Thank you, and good morning, everyone. Charles T. Lauber: Please turn to Slide 5. First, I would like to highlight two items impacting the quarter. As Stephen noted, we had weather-related headwinds in the quarter, including damage to a portion of our roof at our Ashland City manufacturing facility. Because of our team’s swift response and our insurance coverage, we project minimal impact to our full-year performance. However, we estimate that production and shipping constraints, offset by insurance coverage on direct costs, negatively impacted our first quarter by approximately $0.04 per share. In addition, we acquired Leonard Valve on January 6 and, as a result, recognized $0.03 of transaction-related expenses in corporate expense for the quarter. North America segment first quarter sales of $753 million increased 1% against a tough comp, as carryover pricing benefits and Leonard Valve sales contributions were largely offset by lower residential water heater volumes and weather-related production and shipping constraints. North America segment earnings of $175 million and segment margin of 23.3% decreased by $10 million and 140 basis points, respectively, versus the prior-year period. Lower segment earnings and segment margin were primarily the result of lower residential water heater volumes and more than offset the earnings contribution from Leonard Valve. Carryover pricing benefits more than offset cost inflation in the quarter. 2025 benefited from pull-forward demand ahead of an announced price increase and a stronger mix towards higher-efficiency products. Moving to Slide 6. Rest of World segment sales of $201 million decreased 11% year over year due to continued weak consumer demand in China driving lower sales, which was partially offset by favorable foreign currency exchange. Rest of World first quarter 2026 segment earnings of $12 million and segment margin of 6.2% decreased by $8 million and 250 basis points, respectively, versus the prior-year period. The lower segment earnings and segment margin in 2026 were primarily due to lower sales volumes, which were partially offset by continued cost management in China. Please turn to Slide 7. We generated strong free cash flow of $119 million in the first three months of 2026, a significant increase over 2025, primarily driven by diligent working capital management and the timing of customer payments that more than offset lower earnings. Our cash balance totaled $204 million at the end of March, and our net debt position was $412 million. Our leverage ratio was 24.7% as measured by total debt to total capital, higher than 2025 due to the cash we borrowed under a new term loan used to acquire Leonard Valve. We continue to have significant available capacity for future acquisitions. Turning to Slide 8. In addition to returning capital to shareholders, we continue to drive organic growth through the development of innovative product offerings and productivity through operational excellence—two of our key strategic priorities. Earlier this month, our Board approved our next quarterly dividend of $0.36 per share. We repurchased approximately 700 thousand shares of common stock in the first quarter for a total of $51 million. We expect to repurchase $200 million of our shares during the full year 2026. Consistent with our focus on portfolio management, we continue to actively assess M&A opportunities that meet our strategic and financial criteria. Please turn to Slide 9 for 2026 earnings guidance and outlook. Our revised 2026 outlook includes an adjusted EPS range of $3.70 to $4.00 per share. This excludes a relatively net cash neutral North America water treatment restructuring and impairment charge of approximately $20 million that we expect to recognize in the second quarter. Key assumptions within our outlook include: steel costs have steadily risen throughout the first quarter, leading us to increase our full-year 2026 steel cost assumption to be a year-over-year increase of approximately 15% compared to 2025. In addition, due to recent oil price volatility, our transportation and certain material cost assumptions have also increased since our previous guidance. We now project that freight, non-steel material costs, and tariffs will increase our overall total company cost of goods sold by approximately 3% in 2026. Our guidance assumes oil prices and tariff levels will remain at a similar level to where they are today; we continue to monitor the situation. We maintain our estimate that 2026 CapEx will be between $70 million and $80 million. We continue to expect strong free cash flow of between $525 million and $575 million. Interest expense is projected to be between $30 million and $40 million, an increase over previous years due to the $470 million of additional debt incurred to acquire Leonard Valve. Corporate and other expenses are expected to be between $80 million and $85 million and include $6 million of transaction expenses associated with the Leonard Valve acquisition recognized in the first quarter. Our effective tax rate is estimated to be between 24% and 24.5%. We project our outstanding diluted shares will be 138 million at the end of 2026. I will now turn the call back over to Stephen M. Shafer to expand on our key markets and our 2026 top-line growth outlook for each business. Staying on Slide 9. Stephen M. Shafer: Thank you, Chuck. Within North America, our top-line outlook includes the following assumptions. While the residential water heater industry had a slower-than-expected start to the year, we maintain our view that full-year 2026 industry shipments will be flat to down as softness in new construction persists and proactive replacement remains steady. Due to a recent statement from the Department of Energy indicating a one-year enforcement delay of the October 6 commercial regulatory change, we revised our outlook and now expect less pre-buy activity in the quarters leading up to the original transition. We now project that U.S. commercial industry volumes will be similar to last year. In response to rising steel, freight, and other input cost inflation, we have announced price increases for most of our water heater and boiler products in North America, with increases varying by product, ranging from approximately 4% to 7%. We have seen some cost increases already leading into the second quarter, particularly within transportation. We expect to begin realizing the benefit of these announced price increases beginning in the third quarter. As always, we are maintaining ongoing communication with our suppliers, customers, and stakeholders as we address current market challenges while also implementing diligent cost management strategies. We continue to project our North America boiler sales to grow between 6% to 8% in 2026 due to pricing benefits and a strengthening backlog in commercial and residential boilers. We have reduced our 2026 sales guidance for North America water treatment to growth of 5% to 6%. The decrease in our outlook reflects the impact of cautious consumer behavior in our consumer-facing channels, which is approximately half of our business, where we have experienced soft demand as well as a shift toward lower-priced products. We are pleased with the progress of our priority dealer network expansion efforts and expect sales in that channel to achieve double-digit growth in 2026. Our guidance that Leonard Valve will achieve double-digit growth and contribute approximately $70 million in sales in 2026 is unchanged. Integration efforts are on track, and we are pleased with the reception we are receiving as we explore ways to go to market together. Moving to our Rest of World outlook and assumptions, we have updated our full-year guidance for China sales, which we now expect to be down low double digits in local currency compared to last year, with sales in Q2 down approximately 15% compared to Q1, as we balance channel inventories for the current environment. This revised guidance reflects our updated view of the China market, where we expect persistent headwinds throughout the year due to continued low consumer demand, severely limited government stimulus, and ongoing competitive pressures. We continue to advance our China assessment, evaluating strategic alternatives to strengthen our long-term competitive position. The evaluation is providing valuable insights into both the advantages and challenges facing our business. Many actions we have identified to improve the performance of our China business are pending the conclusion of our assessment, which is impacting our expected recovery timeframe. We are looking to provide greater clarity within the next few months. We project our India business, inclusive of Spirit, will have top-line growth of approximately 10%, and this is unchanged. Based on these 2026 assumptions, we expect total top-line growth of approximately 2% to 4%. We expect our North America segment margin to be approximately 24%, and Rest of World segment margin to be between 6% and 7%. Please turn to Slide 10. This morning, I would like to provide additional color on our operational excellence value creation opportunities. Our focus is to provide sustainable margin improvement in mid-cycle markets and protect our profitable growth in times of less market certainty. Over many years, we have looked to drive continuous improvement throughout our operations with our AOS operating system. Today, we are building on that foundation with new tools and making more strategic moves to help prioritize around our strengths and drive improved profitability. The tool sets we are now bringing to operations include enhanced stability for process intelligence and AI capabilities to drive better customer experiences at greater levels of productivity. Initial application examples include order management, warranty claims processing, and technical service support, where we are identifying opportunities, developing process improvement, and using AI agents to drive that improvement. Still early days, but we are excited by the potential of what we see. The streamlining of our North America water treatment business is an example of focusing on our strengths to drive more profitable growth. As we announced this morning, we are taking actions to continue improving our profitability and accelerate long-term growth through footprint optimization and brand rationalization. These steps are part of our ongoing water treatment strategy evolution and allow us to further focus on the areas where we expect to be most competitive going forward. We expect to recognize a restructuring charge of approximately $20 million in the second quarter and a projected annual savings of between $6 million and $8 million beginning in 2027. These exciting new tools that help us reimagine our operating processes and our continued strategic focus on prioritizing around our strengths are two ways in which we are bringing operational excellence to life at A. O. Smith Corporation. I look forward to sharing more details as this focus area for us matures going forward. Moving to Slide 11. Our team responded well when faced with pressure in several of our key markets in the first quarter. I am pleased with the market share improvement we saw in residential water heating, the double-digit valve sales growth that Leonard Valve contributed to the quarter, and the strong free cash flow achieved through diligent working capital management. With the strategic actions that we are taking, supported by our consistent operational discipline, I believe A. O. Smith Corporation will continue to strengthen its leadership position and be well equipped to capitalize on future opportunities. With that, we conclude our prepared remarks. We will now open the call for questions. Operator: Thank you. We ask that you please limit yourself to one question and one follow-up. One moment for our first question. Our first question will come from the line of Susan Marie Maklari with Goldman Sachs. Your line is open. Please go ahead. Susan Marie Maklari: Thank you. Good morning, everyone. Thanks for taking the questions. My first question is on the channel inventories in residential. You mentioned that you did have some pull forward around the pricing that you announced. Can you talk a bit more about how much you are seeing in there and how you are thinking about the channel going into the second quarter? And how we should think of the flow-through in the next couple of quarters as a result of that? Charles T. Lauber: Good morning, Susan. The reference that I made to pull forward in the first quarter was to last year, so we really have not seen any pull forward in 2026. By the way, the channel inventories we think are kind of in line with what we would expect coming out of the first quarter. Susan Marie Maklari: Okay. So you have not seen anything from the pricing you announced this year yet? Charles T. Lauber: Not meaningful. The price increase that we have is effective mid-May, roughly, so it is pretty early days. Susan Marie Maklari: Okay. That is helpful. And then, turning to commercial, you mentioned that the regulatory change got pushed out for a year. Can you give us more color on what drove that and how you are thinking about the demand there now for the balance of this year and then even into next year as the channel positions for that? Charles T. Lauber: Sure, Susan. The DOE commercial rule that was set to take effect in October has been challenged through the court system, and it has been held up so far, but it is pending and waiting to see if the Supreme Court will review it. We do not know whether the Supreme Court will take on that challenge or not. What the DOE issued late last week, because of that uncertainty and because we are getting closer to the October 6 date, was, in essence, a letter stating they would not be enforcing the rule until October 2027. However, that might also change as things play out both in the court system as well as how DOE thinks about the rule going forward. There is still a lot of uncertainty out there, but it has us feeling like it was more prudent to think that the industry may do less buy-ahead because of that announcement. Operator: Thank you. One moment for our next question. Our next question will come from the line of Matt J. Summerville with D.A. Davidson. Your line is open. Please go ahead. Matt J. Summerville: Thanks. A couple of questions. On the water treatment side of things, I was under the impression that getting out of the retailer big-box channel was the reset for that business, and it sounds like you are initiating yet another reset in water treatment. Remind us how big that business is and help us understand a little bit more around how we should be thinking about that looking ahead. Then, as a follow-up, you expect your China business to now be down low double digits. How does that sync up to what is actually happening in the market? Are you losing share? How do you justify the length of this review process with the potential that you are continuing to bleed share in that business because of how long the process has taken to unfold? Stephen M. Shafer: Good morning, Matt. The water treatment business is just over $250 million, roughly. Last time we talked about a reset, it was the exiting of on-the-shelf retail, and that was one ingredient of the reset. This is the next step of focus. It is really about leveraging our brands—focusing on our A. O. Smith Corporation brand more than some of the brands that we acquired—and rationalizing our manufacturing footprint. Think of it this way: in 2026, we are looking to expand margins by about 200 basis points to move to about 15% operating margins in North America water treatment. In 2027, with this next restructuring, we would expect an incremental couple hundred basis points. It is the next step in moving that profitability up. Regarding the China market environment and our performance, the whole market saw challenges in the first quarter, many of which we highlighted—stimulus has run its course and consumer confidence remains low—so it was a challenging quarter in the categories we participate in. From the third-party data we track, we did not lose meaningful share; we actually maintained our share in the first quarter, but it was certainly a down market condition. That environment is probably the biggest driver to why the assessment is taking a bit longer than we had hoped. There are still a lot of positive things coming out of the assessment for us. Third-party assessments validate that our brand and pricing power are very strong, and there is a lot of interest from potential partners. The dialogue is maturing, and I am hoping that in the coming months we will be able to provide clarity on our path forward, but it is occurring against a challenging market backdrop. Operator: Thank you. One moment for our next question. Our next question comes from the line of Tomohiko Sano with JPMorgan. Your line is open. Please go ahead. Tomohiko Sano: Hi. Good morning, everyone. We understand the guidance revision was mainly driven by external factors in China and North America. In this challenging environment, have you observed any changes in your market share across key regions? And as a follow-up, on Leonard Valve, how is the integration progressing, and are you on track to realize the expected synergies? Stephen M. Shafer: Good morning. In China, in the last few years there has been some market share loss, but in Q1 we do not see any meaningful market share loss; we think we are holding our own in a challenging market. Within the U.S., on the water heater side, we have stabilized our share position in the wholesale channel, which was a big focus over the last quarter. There is still more work to be done. On the retail side, we are very pleased with our share position and the strength of our partnerships. Regarding Leonard Valve, we are very pleased with the first quarter. It is a great fit with our portfolio and serves as the foundation for our water management strategy going forward. Integration is on track with the plan. Most of our opportunity is in ways to go to market together. We have been out talking to customers, and it has been very well received. Operator: Thank you. One moment for our next question. Our next question will come from the line of Joseph Nolan with Longbow Research. Your line is open. Please go ahead. Joseph Nolan: Good morning. I wanted to focus on the margin and price/cost outlook over the remainder of the year. In the second quarter, you will be feeling the impact of higher steel and freight costs, but it sounds like you are not expecting to get price benefit until Q3. Can you walk through margin cadence over the remaining quarters of the year? And as a clarification, on the commercial water heater industry outlook coming down to flat now, is that really just a reflection of the regulatory change, or are there other moving pieces? Charles T. Lauber: Sure. We were happy with our price/cost relationship in Q1; pricing overcame the costs we incurred plus a little bit of margin, so we are walking into the second quarter in a good position for the costs behind us. However, we are seeing incremental costs in the second quarter—transportation is up, diesel fuel is up, and steel costs continue to rise. We have an announced price increase that takes effect in the third quarter. So we will see a little pressure in Q2 before pricing benefits begin, and that should be overcome in Q3 and Q4 with the pricing we expect to have in place. We feel comfortable with our positioning but are watching costs closely, especially those related to oil and transportation. On commercial water heaters, the biggest driver of the outlook change to flat is the DOE regulatory timing and the related reduction in anticipated pre-buy. Operator: Thank you. One moment as we move on to our next question. Our next question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead. Mike Halloran: Good morning, everyone. Can you help put this in context on how you expect earnings to cadence through the year? The $0.03 from Leonard goes away, price/cost dynamics in Q2 are a little less favorable with more favorable in the back half, and timing around headwinds and demand dynamics—do you get a catch-up in Q2 from the weather? How does that key into the year? And on pricing, are you expecting any pull-forward of demand ahead of the 4%–7% price increases, and how do you think channel acceptance will go given the moving pieces in the water heater space? Charles T. Lauber: There are a couple of moving parts since our last outlook. Starting with China, Q2 is expected to be down roughly 15% from Q1, with decremental margins of 35% to 40%, so we expect a difficult quarter there. We expect to come out of Q2 with better balance of channel inventories; they are relatively the same as last year, but we would like to be leaner in this environment. In North America, costs are ahead of us in Q2 before we see pricing in Q3, which is a headwind to margin in Q2. On DOE, previously we would have expected a meaningful amount of pull-forward in Q2 and Q3; we have softened that, so commercial volume cadence is now expected to be pretty similar to other years with flat volume year over year. Overall, Q2 EPS is expected to be roughly 25% of our full-year guidance midpoint. That includes a little help in Q2 from some pricing pull-forward. We expect a solid performance in North America in Q2 based on a little pull-forward. The back half should be a little stronger on boilers—Q3 is always stronger—and China typically has its strongest quarter in Q4 after a muted Q1. So, stronger Q2 on the top line, some headwinds on cost, real headwinds in China, and more normalization in the back half. Stephen M. Shafer: On pull-forward ahead of the 4%–7% price increases, there is usually a little of that, and we work closely with our customers to navigate these transitions, serving them well while being smart operationally. Ultimately, we remain committed to keeping our customers competitive, even as we manage through cost pressures and market uncertainty. Operator: Thank you. One moment for our next question. Our next question will come from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open. Please go ahead. Jeff Hammond: Hey, good morning. It seems like you are just cutting EPS $0.15, but a lot of the macro assumptions are moving the wrong way. Can you talk about offsets to that—price, restructuring savings, or catch-up from the plant issue—that would mitigate the EPS impact? And on dynamics between wholesale, retail, and this price increase: have you seen other players announce similar pricing around steel and fuel inflation, and any changes you are seeing in the wholesale channel? Charles T. Lauber: We had a little bit of catch-up on the plant issues—not a lot—but that will help a bit in the second quarter. From our last guidance, the big changes were China and the DOE policy statement. Teams continue to look at cost management in China and North America as we watch the market play out. Costs are volatile right now with oil and transportation. That is the biggest driver we are keeping an eye on. Stephen M. Shafer: We will not comment on competitor pricing, but historically we have been successful offsetting costs over time, and we feel good about our positioning. It remains a competitive environment, and we would expect the industry to experience similar cost inputs. Our commitment is to make sure we keep our customers competitive. Operator: Thank you. One moment for our next question. Our next question will come from the line of Adam Farley with Stifel, on behalf of Nathan Jones. Your line is open. Please go ahead. Adam Farley: Good morning. Following up on the commercial water heating regulatory impact, does that change how you are planning to ramp capacity for that commercial change? And more broadly, can you update us on capacity plans for this year and into next year? Also, on tariffs, was there any incremental change to the gross tariff impact with recent rule changes, and what is contemplated in the guide? Stephen M. Shafer: We were prepared for the transition from a capacity standpoint and made investments to get ready. If demand is pushed out and customers delay orders, and if the regulatory rule goes into effect later, we will be ready with those investments. Many have been made, and some that were still in front of us we are delaying until we have certainty of the demand need. On tariffs, we saw some relief in certain areas and increases in others. Overall, the tariff outlook is maybe net neutral to slightly favorable, but that is overshadowed by other costs related to oil, diesel fuel, transportation, and resilient steel prices. Net-net, it is a bit of a cost headwind, which is why we have pricing out there. Operator: Thank you. One moment for our next question. Our next question comes from the line of Andrew Alec Kaplowitz with Citi. Your line is open. Please go ahead. Analyst: Hi. Good morning. This is Natalia on behalf of Andy Kaplowitz. First, you held the outlook for boilers despite lowering expectations across most other product categories. Can you unpack what you are seeing in underlying demand—how much is volume versus pricing? And second, as you think about capital deployment, how are you viewing the current M&A pipeline, particularly in terms of opportunities within your core business versus adjacency areas? Charles T. Lauber: Our boiler growth for the year has a big price component, including carryover pricing from last year. Q1 was a little softer on commercial, which we highlighted, but we see orders coming up, and that business has typical seasonality. We remain confident in the 6% to 8% growth forecast. Commercial is catching up based on the order book, and price remains a big component of the growth. Stephen M. Shafer: There are opportunities to strengthen our core via M&A, alongside significant organic investment to maintain our leadership. Getting scale and profitability in our water treatment platform has been a big focus for us over the last seven to eight years, and there are still a few opportunities to strengthen that business through M&A. A big focus for us is on the water management platform. Leonard Valve, which we closed in January, is in that category, and we think it is probably the richest area for us from an M&A standpoint as we build out and expand in water management. Operator: Thank you. I am showing no further questions. I would like to hand the conference back over to Helen E. Gurholt for closing remarks. Helen E. Gurholt: Thank you for joining us today. We look forward to updating you on our progress in quarters to come. Please mark your calendars to join us at four conferences this quarter: Oppenheimer on May 5, KeyBanc on May 27, Stifel on June 2, and Wells Fargo on June 9. Thank you, and enjoy the rest of your day. Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect. Everyone have a great day.
Operator: Hello, and welcome to WESCO International, Inc.'s 2026 First Quarter Earnings Call. If you would like to ask a question, please press star followed by 1 on your telephone keypad. Please note that this event is being recorded. I would now hand the call over to Scott Louis Gaffner, Senior Vice President, Investor Relations, to begin. Thank you, and good morning, everyone. Scott Louis Gaffner: Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature are subject to uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today we will use certain non-GAAP financial measures. Required information about these measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com. On the call this morning, we have John J. Engel, WESCO International, Inc.'s Chairman, President, and CEO, and our Executive Vice President and Chief Financial Officer. I will now turn the call over to John. John J. Engel: Thank you, Scott. Good morning, everyone. Thank you for joining our call today. We delivered an exceptional start to 2026, building on last year's market outperformance and accelerating business momentum. In the first quarter, sales, backlog, operating margin, adjusted earnings per share, and free cash flow all increased versus the prior year and exceeded our expectations. Record first-quarter sales of $6.1 billion were up 14%, marking our third quarter in a row of double-digit sales growth. Booming data center demand remains a significant growth driver of our business. Data center sales of $1.4 billion were up approximately 70% versus prior year and represented 24% of total company sales in the quarter. Overall, our business momentum continued to accelerate in the quarter with organic sales up sequentially, outpacing normal seasonality and reinforcing the strength and durability of demand across our end markets. This performance reflects broad-based strength across our entire portfolio led by continued strong momentum in CSS and EES, along with improving trends in UBS. We again ended this quarter with a record backlog, up 22% versus prior year, reflecting the continued effectiveness of our cross-selling program and providing clear visibility of the secular growth trends in our business. Profit growth, margin improvement, and free cash flow generation were also excellent in the first quarter. Adjusted EBITDA grew 25% and adjusted EBITDA margin expanded 60 basis points driven by gross margin expansion and strong operating cost leverage on our double-digit sales growth. Adjusted diluted earnings per share was up 52% versus the prior year. Free cash flow generation at 128% of adjusted net income was also very strong, underscoring our disciplined execution and continued focus on working capital management. We are very pleased with our first-quarter results. While we remain mindful of the volatility of the broader macroeconomic environment, we see positive momentum continuing across our business. As a result, we are raising our full-year outlook for 2026. As the market leader and with positive momentum building, I am confident that WESCO International, Inc. will continue to outperform our markets through disciplined execution, our differentiated value proposition, and the strength of our global platform. Our team remains focused on driving strong growth and margin expansion and delivering superior value to our customers and shareholders. One final comment: as we announced earlier this year, Dave Schulz is retiring from WESCO International, Inc., and our new CFO has joined our team. I would like to thank Dave for his outstanding leadership, his dedicated service, and his tremendous contributions to WESCO International, Inc. and our overall success over the past ten years. We wish Dave and his family our very best. Our new CFO is off to a great start. I will now turn it over to him to take you through our excellent first-quarter results and raised full-year outlook in more detail. Unknown Speaker: Thank you, John, and good morning, everyone. I would like to thank John and the board for the opportunity, and I want to recognize Dave for his leadership and thank him for his partnership during this transition. Before turning to our results, I will take a minute to touch on my near-term priorities. I intend to focus on partnering with the leadership team to scale our business in attractive end markets, drive profitable growth, continued market outperformance, and deliver strong cash flow with disciplined capital allocation. That mindset has been shaped by working across both public and private companies, often in complex global, highly competitive technology and capital-intensive businesses. John and I are aligned on the initial focus areas where we have the potential for taking our existing great capabilities to the next level. First, driving operating leverage and margin expansion as we scale, particularly in data centers and other high-growth end markets. This will be accomplished by a combination of partnering with our business leaders to ensure that our commercial and go-to-market strategy reflects our enhanced value proposition and partnering with our functional leaders on continuing to improve our cost structure. It is all about profitable growth. Second, improving working capital efficiency and cash conversion through tighter processes, analytics, and execution discipline. This is not just about back office. It is about optimizing our end-to-end capabilities from sales funnel to cash collection. Transitioning to our results, let me start with the highlights for the quarter. We delivered strong organic sales growth year over year, with sequential performance better than typical seasonality. Profitability improved with meaningful EBITDA margin expansion. EPS was up more than 50%, and free cash flow generation was strong at 128% of net income. With that, let me turn to our first-quarter results starting on Slide 4. We delivered an excellent first quarter with reported sales of $6.1 billion, up 14% year over year, including 12% organic growth. We delivered volume growth across all three SBUs and realized an estimated price benefit of approximately three points. Gross margin was 21.2%, up approximately 20 basis points year over year, and SG&A operating leverage improved by 40 basis points. As a result, adjusted EBITDA increased 25% to $389 million and adjusted EBITDA margin expanded 60 basis points to 6.4% of sales. Turning to Slide 5, adjusted EPS increased 52% year over year to $3.37. The year-over-year improvement was driven primarily by stronger operating performance in the quarter, reflecting higher sales and improved profitability. Additionally, EPS growth benefited from a lower tax rate and from the absence of the preferred stock dividend following last year's redemption. Turning to Slide 6, CSS delivered another excellent quarter with organic sales up 22% year over year and reported sales up 24%. This growth was driven by continued strength in WESCO Data Center Solutions, which delivered a record quarter with sales up over 60%. Within the rest of the portfolio, security delivered high single-digit growth, while enterprise network infrastructure declined mid-single digits due to weakness in the service provider market. However, including data center-related sales, enterprise network infrastructure grew high teens year over year. Overall, organic growth was driven primarily by volume, up about 21%, with price contributing approximately 1%. Backlog ended the quarter at a record level and was up approximately 40% versus the prior year, reflecting continued strong data center project activity and order rates. Profitability also improved meaningfully and our focus remains on margin expansion as we scale the business, particularly in our data center markets. Adjusted EBITDA increased 41% to $223 million and adjusted EBITDA margin expanded 110 basis points to 9%. Importantly, despite some modest pressure on gross margin from large data center projects, we generally see healthy and accretive EBITDA margins for WESCO International, Inc. data center solutions. Moving to Slide 7, EES delivered solid growth in the quarter with organic sales up 7% and reported sales up 9% year over year. Growth was driven by strong execution in OEM and construction. OEM was up mid-teens, driven by strength in semiconductor and data center markets. Construction was up low double digits, supported by robust wire and cable demand and continued infrastructure project activity. Industrial was down low single digits, primarily reflecting project timing impacts. However, our industrial stock-and-flow business grew mid-single digits in the first quarter, and backlog was up double digits supporting an improving trend. Data center sales in EES were up over 100% year over year and represented about 10% of EES sales, highlighting the continued scaling of our exposure to this secular growth trend. Overall, organic growth was driven by solid underlying demand, with volume contributing approximately 3% and pricing contributing about 4%. Importantly, backlog ended the quarter at a record level, up 14% versus the prior year, supported by strong order activity and pipeline conversion. Profitability improved meaningfully in the quarter. Adjusted EBITDA increased 30% to $185 million, and adjusted EBITDA margin expanded 130 basis points to 8.2%, driven by higher gross margins and strong operating leverage. Turning to Slide 8, UBS delivered 6% organic sales growth in the first quarter supported by improving demand and an increasing backlog. Utility delivered high single-digit growth driven by strong double-digit growth in investor-owned utilities and continued positive momentum in grid services. Public power was flat year over year, which is encouraging. However, the market remains highly competitive, and gross margins are expected to remain under pressure given weak sales in transformers and wire and cable, consistent with our prior commentary. Broadband delivered mid-single-digit growth year over year, supported by strength in the U.S. Overall, organic sales growth reflected approximately 3% volume growth and about 3% pricing. Backlog increased 16% year over year. We are seeing increasing interest in our grid services-enabled power capabilities from hyperscalers and other data center customers. We have a growing funnel of sales opportunities and we are bullish that we will benefit from AI-driven data center investments and other major power-related infrastructure projects over the long term. Adjusted EBITDA was $131 million, down 5% versus the prior year, and adjusted EBITDA margin decreased 120 basis points to 9.6%, primarily driven by gross margin pressure and higher SG&A as a percentage of sales. Recall that UBS is accretive to total company adjusted EBITDA margin; given its higher margin profile, the improved growth rates will lead to even higher margins over time given the operating leverage. Turning to Slide 9, I want to take a moment to further review the continued momentum we are seeing in the broader data center market and WESCO International, Inc.'s role in that growth. Data center sales continued to scale in the first quarter, reaching approximately $1.4 billion, up about 70% year over year and representing 24% of total company sales in the quarter. Notably, the data center end market is now WESCO International, Inc.'s largest end market across all three SBUs and supports a diverse set of customers with a diverse set of capabilities. On a trailing twelve-month basis, data center sales are now approximately $4.8 billion, or 20% of total sales. This underscores both the strength of the secular demand environment and the expanding scope of what we provide customers across all business units and across the full life cycle. Turning to Slide 10, this highlights our end-to-end data center offering and the role we play across the full life cycle, with exposure across CSS, EES, and UBS. WESCO International, Inc. supports hyperscale, multitenant, colocation, and enterprise customers with a comprehensive portfolio of products, services, and solutions that span power, connectivity, and ongoing operations. Our expanding capabilities and global ecosystem position us as a trusted partner as customers build, scale, and operate increasingly complex data center environments. Turning to Slide 11, we delivered strong free cash flow of $213 million in the first quarter. Free cash flow was 128% of adjusted net income. Despite sequential sales growth, net working capital was a source of cash in the quarter, largely driven by timing of inventory purchases and accounts payable. Moving to Slide 12, during the quarter, we executed a highly successful $1.5 billion bond refinancing that was upsized relative to the initial launch, reflecting strong investor demand and record pricing. Notably, we achieved the lowest coupon WESCO International, Inc. has ever achieved on a senior notes offering and the lowest for a double-B rated five-year note issued since 2021. The net proceeds will be used to redeem our 2028 senior notes, improve liquidity, and further strengthen the balance sheet. This refinancing meaningfully improves our debt maturity profile and is expected to generate more than $20 million in annualized interest expense savings. We exited the quarter at 3.2x net debt to adjusted EBITDA. Additionally, we repurchased $25 million of shares during the quarter towards offsetting dilution. Moving to Slide 13, within CSS, we have raised our 2026 outlook to low double-digit growth, reflecting the continued strength and visibility we are seeing in data centers. Data center sales are now expected to be up 20%+ for the year. Given the size of the market, we intend to continue to focus on healthy EBITDA margin business. Our outlook for EES and UBS remains unchanged. Moving to Slide 14, we are increasing our outlook for the full year given strong first-quarter results. Before I get into the details, I want to address our position relative to the current macroeconomic uncertainty. Through the first quarter and into April, we have seen no meaningful disruption to our revenue or profitability, but we continue to monitor the situation closely and kept this backdrop in mind for our outlook. In the Middle East, I am pleased to report that all of our employees are safe. From a company perspective, we generate less than 1% of our sales in the region, with the majority of those sales related to our CSS business. The secondary impacts on transportation costs are more tangible but have so far been manageable. Our teams are focused on passing these cost increases to our customers where appropriate and limiting the time that transportation quotes are valid to minimize overall risk. On the tariff front, the overall impact to WESCO International, Inc. is not material. As a reminder, WESCO International, Inc. is the importer of record for a small percentage of our cost of goods sold, typically low single digits. We typically increase prices when needed to maintain margins. At this point, we do not expect any material recoveries from the IEEPA decision. Based on the strong start to the year, we are raising our full-year 2026 outlook. We now expect reported sales growth of 6% to 9%, with organic sales growth of 5% to 8%, which implies reported sales of approximately $24.9 to $25.6 billion. Our assumptions around foreign exchange and pricing remain unchanged. On profitability, we continue to expect adjusted EBITDA margin in the range of 6.6% to 7%, essentially increasing our EBITDA guidance in dollar terms. We are raising our adjusted diluted EPS outlook to $15 to $17 per share, reflecting earnings leverage demonstrated in the first quarter as well as slight adjustments to the expected tax rate for the year. There is no change to our outlook on interest expense, based on our current view of no rate cuts this year and factoring in timing of the debt raise and subsequent paydown. Finally, we continue to expect free cash flow of $500 to $800 million as we maintain working capital discipline supporting higher growth. As a reminder, our historical pattern is typically about 70% of our annual cash flow is generated in the second half of the year. Turning to Slide 15, while April is not entirely closed out, month-to-date sales per workday are up about 10% year over year, with growth continuing to be led by CSS. For the quarter, we expect reported sales to be up high single digits. Recall that more than 50% of our sales are related to project activity and the mix of project sales is higher in the second and third quarter due to increased construction activity. The timing of project billings at the end of the quarter will determine where we land in the high single-digit range. On margins, second-quarter EBITDA margin is expected to be about flat year over year and within our full-year guidance range. Higher incentive compensation, approximately 25 basis points, accounts for most of the year-over-year pressure, and we continue to expect double-digit growth in adjusted EPS. As you think about our outlook, keep in mind that we had strong sales growth and good EBITDA margins in the second, third, and fourth quarter of last year. On a two-year stacked basis, growth is expected to remain strong and consistent with the outlook we have provided. We have covered a lot of material this morning, so let me briefly recap the key points before we open the call to your questions. In summary, we delivered an excellent start to the year with double-digit sales growth, margin expansion, and over 50% earnings-per-share growth. AI-driven data centers and related investments from our customers remain a key driver of growth across several product categories and verticals. We generated strong cash flow and improved our leverage and debt maturity profile during the quarter. Despite macroeconomic uncertainty, we are confident in our positive business momentum and are raising our full-year outlook. As we lean in to support organic growth, there is no change to our previously communicated capital allocation priorities and guiding principles. With that, operator, we can now open the call to questions. Thank you. Operator: We will now open the call for questions. If you would like to ask a question, please press star followed by 1. Our first question today comes from David John Manthey with Baird. Please go ahead. David John Manthey: All right, thank you. Good morning, guys. Good morning, John. CSS is doing amazing, so I will focus on EES and UBS with my questions first thing here. First, on lead times, I know within the industrial business you mentioned project timing as the reason for that small decline there. With switchgear components stretching well a year and medium voltage switchgear sometimes 40 to 60 week lead times, you are clearly navigating any shortages in the market well overall. But could you just talk about the specific issues? Where are the pinch points, and is that what you mean by project timing? John J. Engel: Yes. Great question, Dave, and your lead-time comments are accurate. We are still seeing extended lead times in a couple of critical categories, but honestly we have been facing those extended lead times since the pandemic, and we have been managing the business well. I think this is more of a very specific intra-quarter project timing issue. I will give you my views of industrial. I have mentioned this before. I really believe we are at the beginning of an industrial super cycle in the U.S. in particular. It is driven by AI-driven infrastructure investments, clearly the need for increased power generation not just for AI data centers but for all these mega projects, and a fundamental secular trend that I think is becoming more apparent every day regarding reshoring. These secular trends are going to play out over many years, and they really expand WESCO International, Inc.'s opportunity set. Specifically relative to your question in Q1, I would ask you to look at our short-cycle business. Our industrial stock-and-flow, the short-cycle business, MRO supplies and such, was up in line with mid-single-digit growth with the recent recovery in industrial production. That is a good and important leading indicator. It was offset for us with some project timing issues. Relative to the project timing issues, however, our book-to-bills were exceptionally strong in EES and particularly in industrial in the first quarter, and we have double-digit backlog growth in the industrial portion of EES. That supports a future improving trend for industrial, again consistent with my overall views of the cycle. David John Manthey: Thanks for that, John, and I agree. Maybe I could ask the CFO: from the first conversation that you and I had, I get the impression that you are a deal guy at heart. Could you discuss, as you settle in here, how you find the WESCO International, Inc. M&A process, and as you think about the pipeline, your general thoughts on consolidation going forward? Unknown Speaker: Yes, Dave. I have spent a lot of time on operations. One thing I would mention: I am more of an operations guy than a deal guy. But I do like to get into the operations side of deals. I would say we have a great team here evaluating deals, and we are going to be very active, but also very disciplined. We want to make sure that there is fit in terms of our strategy and where we want to take the business, and we want to play into a lot of the megatrends that we are seeing in the marketplace. It is all about how a deal accelerates our overall growth and profitability, and not just something that we would buy to leave standalone. Like we have talked about, the margin profile is another real important driver for us. We are very focused on it. We have launched a number of initiatives on that front, and M&A will be another lever. One thing back on your earlier question, not specific to EES and UBS: I came from the infrastructure side, building a lot of infrastructure. One of the things that we see—and we will see some of the secondary effects here—is the throttling factor for building infrastructure really are two things: lead time and skilled labor. That has been true for a number of years and will continue to be true going forward. It is not the appetite for investment; it is not the allocation of capital; it is really those two things that are calibrating the spend quarter over quarter from a customer's perspective, not our perspective. David John Manthey: I appreciate your thoughts. Thank you, and thanks, John. Unknown Speaker: Thanks, Dave. Operator: The next question comes from Analyst with RBC Capital Markets. Please go ahead. Analyst: Hi. This is Kenny Stemen for Deane today. I wanted to ask you about data centers. Can you unpack data center strength given you are clearly outperforming peers here? Where are you gaining share of wallet? How is the growth rate different across the gray space, white space, and services? And related to that, what is driving the step down in data center growth rate in the back half in your guidance? Thank you. John J. Engel: Good morning. We have outlined white space and gray space growth rates. White space, ostensibly supported and provided by our CSS business with deep roots that go back decades, grew north of 60% in the quarter and is the driver of the backlog growth in CSS, a major driver. Very strong growth rates in white space. Services are embedded in that; we do not break that out separately. For the gray space, ostensibly served by EES, that was up over 100% in the quarter, and again services are baked into that. We are very confident that we are outperforming the market meaningfully. We are uniquely positioned with our portfolio because we have the datacom-related solutions—white space with CSS—we have the core electrical infrastructure and connectivity solutions supported by our EES business, and we have the power solutions supported by our UBS business, which is our grid services in particular tucked under UBS. Relative to the outlook, we took investors through that when we provided our full-year guide. We think it was appropriate originally; we have stepped it up meaningfully now given this exceptional start to Q1. Analyst: Thank you. I appreciate that. Sticking with CSS, another really good double-digit incremental margin for this segment this quarter. What needs to happen for these double-digit incremental margins to be sustainable and potentially move toward the mid-teens given you are still executing on large projects? John J. Engel: We have been very clear on how we are managing that business. We have a new CSS leader who has been at the helm for four quarters. He took a business that had positive momentum and accelerated that momentum and stepped up the performance meaningfully. You see that in the results. We are very aggressively managing our gross margins, and you can see they remain stable. We are trying to expand gross margins too, and we would love to do that over time, but we have stable gross margins in CSS and outstanding operating cost leverage. To be at 9% EBITDA for Q1—we are thrilled with that. It is a huge step up. We have been north of a nine-handle on EBITDA margins more than one quarter in a row; we had it in Q4 as well. You are seeing the power of our portfolio, our execution, and the inherent operating leverage in our business model showing up in the EBITDA expansion for CSS. We are very focused on gross margins—every single basis point matters—and we will ensure the operating cost leverage, and we have very strong top-line momentum. The backlog is at an all-time record level, growing at 40% that is well in excess of our first-quarter sales growth rate. As a side note, the backlog growth for all three businesses and segments was well in excess of our first-quarter sales rates for each of the three SBUs. Analyst: Appreciate that. Thank you. Operator: The next question comes from Sam Darkatsh with Raymond James. Please go ahead. Sam Darkatsh: Good morning, John. Good morning, CFO. How are you? John J. Engel: Good. I am good, Sam. How are you? Sam Darkatsh: I am well. Thank you for asking. Two questions. It looks like Slide 15 shows April coming in maybe better than March. The comparisons year on year are pretty similar, and you are saying April is up 10%. Can you give a little color on what you are seeing, John? Are you seeing stock-and-flow improving over the last month or two, or is that just timing of projects? John J. Engel: Good question, Sam. First, I would say mix. We are seeing a consistent mix with what we had in the first quarter. We still have two days to go—we are in the last day—but by the time we see the final numbers for yesterday and then we have today, which will close the quarter, we will have the full view. We have very strong book-to-bill rates continuing, again mix consistent with Q1. In Q1, we had very nice stock-based sales momentum. Projects kicked in very nicely. Relative to my comments on EES industrial, we had very good stock-and-flow momentum there; it was project timing that resulted in that not being a net growth in Q1. I feel good about our stock momentum, Sam. I will make that comment. Sam Darkatsh: Thank you. Second question: I think there was a recent presidential determination that authorizes federal purchasing and financing for the electrical grid. How material might this be for you, and when or where would it materialize first? John J. Engel: First, the various associations we are part of have been working across the industry and with industry partners and association members, of which we are a participant, proactively with the federal government on addressing the core issues around supporting this infrastructure buildout in the U.S. The biggest driver is power and the power chain. We would see that as supportive of what I see as fundamentally secular growth trends in utility. I have made a strong statement that utility was classically a cyclical industry and has now moved secular growth even though we are not seeing that manifest in all the numbers yet. We would see it in our UBS business and in our EES business—supportive of the secular trends. Sam Darkatsh: Thank you much. Operator: The next question comes from Guy Drummond Hardwick with Barclays. Please go ahead. Guy Drummond Hardwick: Good morning. John, I want to click on the point you brought up earlier about backlog growing faster than sales in Q1. So organic sales up 12%, backlog up 22%. At what point do sales catch up with backlog, or does backlog really underpin 2027 revenues to the extent that they are lengthening somewhat? John J. Engel: Great question, Guy. Good morning. Backlog only represents a piece of our business. Long-term multiyear alliance agreements for utility customers and multiyear national and global account agreements in industrial—there are also some in CSS—do not all get loaded in the backlog because we are loading in the actual POs. We may have a multiyear agreement but only load in the POs when we get them. That said, we have been reporting consistently the trend on backlog. The fact that that growth rate is materially higher than our sales growth rate bodes well for the balance of 2026, but it is also a look into 2027, which is the heart of your question. When you look at the projects that are in the backlog, a number of them also ship in 2027, and there are some longer-lead items that we are quoting for 2027–2028—like some transformer business in utility. Think about the trend and the relative growth rate of backlog versus sales; it speaks to the rising demand curve that our portfolio is capturing. Guy Drummond Hardwick: And just a follow-up: the 14% backlog growth in EES is the fastest in three years. How much of that was driven by data center projects? John J. Engel: We have not disclosed that number, but think about the math. Data centers for the gray space—EES’s exposure—was up 100% year over year but is only 10% of EES sales. You should think about that 14% as being a very healthy number for EES overall. Two of our three SBU leaders are new in their jobs in the last year. CSS, we promoted from within four quarters ago. EES, we hired a leader from outside who returned to the electrical industry; he has now been at the helm for three quarters and is off to an outstanding start, as is our CSS leader. Look at the momentum vector and the profit quality improvement of EES starting in Q3 last year, Q4, and now Q1. This is his third quarter since joining us. It is a big deal to have two of your three business leaders new in the saddle in the last year; we are seeing stepped-up execution in both businesses. Guy Drummond Hardwick: Thank you. Operator: The next question comes from Christopher D. Glynn with Oppenheimer. Please go ahead. Christopher D. Glynn: Thanks. Good morning. Exciting start to the year. Feeding off that last topic, you were going into the EES margin trends and execution there. The gross margin sequentially has been a really strong trend and now year over year standing out, and nice outperformance on the EBITDA margin this quarter, particularly from a normal sequential seasonal pattern that we have long seen. I think the normal seasonality of the 2Q profitability ramp from EES is sort of downplayed in the suggested enterprise margin for the second quarter. Are you seeing those seasonal margin swings level off, and is that moderating the 2Q forecast over the first quarter given that the baseline shifted upward in the first quarter? John J. Engel: First, on EES specifically, we are not guiding gross margins or op margins by SBU for Q2; we do not guide at that level. Relative to our overall outlook of flattish EBITDA margins for the enterprise in Q2, there are some interesting timing dynamics when you look at sequentials. I will hand it to our CFO to take you through. Unknown Speaker: Thanks, John. A few things to highlight. As I said in my prepared remarks, if you look at our incentive comp and performance last year versus this year, that is about 25 to 30 basis points of overall headwind in terms of the EBITDA margin at the enterprise level. Typically we see a step down in revenue Q4 to Q1, so a lot of the operating leverage that you see in the business in terms of sequential improvement in EBITDA margin was accelerated into the first quarter of this year. Sequentially, the improvement is muted. A couple of other things: we are in an inflationary environment, but we are doing a pretty good job managing that and passing along where appropriate. Also, with the growth of our data center business, we are making some very disciplined investments in facility expansion and capability expansions. That shows up on our cost side. Think about those as small step-function investments; we will see the benefit over several quarters and the operating leverage from that investment. That also mutes a little bit of the margin expansion year over year. Christopher D. Glynn: Great color. Thanks. One on WDCS: I think you mentioned that is now mix accretive in CSS. Curious to double click on that. I imagine if we look at your historical top five to 10 suppliers for the enterprise, there has probably been some swapping as WDCS has ramped so prolifically. Anything interesting there? John J. Engel: We thought it was important for investors to understand that WDCS—the exceptional growth we are getting and the way we are managing the margin profile of the business we are taking on—we are being very judicious in terms of what we bid and then applying our value proposition. We are getting very good margin pull-through; it is accretive, as outlined, to CSS. That is very encouraging given the strong secular growth trend. We have had some movement in the top five to 10 suppliers for overall WESCO International, Inc. I am not going to go through that on this call, but clearly a number of those suppliers are experiencing meaningfully greater growth given CSS growth rates. Look at our overall momentum as a company: third quarter in a row of double-digit growth for the enterprise. The rising tide we are creating with our suppliers is raising a number of their boats. Christopher D. Glynn: Appreciate the color, and talk soon. Thanks. Operator: The next question comes from Kenneth Newman with KeyBanc Capital Markets. Please go ahead. Kenneth Newman: Thanks. Good morning, guys. Welcome to the team, looking forward to working with you. Maybe first on pricing: the 3% net price—can you help quantify how much of that was from carryover benefits from last year versus incremental pricing that I know was not baked into the outlook? And any color you are seeing from supplier pushes on pricing as we exited the quarter? Unknown Speaker: Most of that is carryover benefit, because of the timing of when we get notices and the actual yield and what flows through. A couple of things to keep in mind: CSS is our largest business unit right now, in which the price impact has been small compared to the other two business units, and increasingly we are doing a lot of projects where pricing is negotiated with special pricing agreements. Just a comment as you think about our outlook. Kenneth Newman: Understood. Follow-up on data centers: really strong growth, particularly in white space. Can you contextualize what you saw in gray space versus white space? How much of the white space growth was a transition from projects you won in gray space a few years ago? And how should we think about the potential of that 100% growth in gray space this quarter transitioning to white space activity over the next 12 to 18 months? John J. Engel: Very good question. We are working the OneWESCO solution on all future bid opportunities. It may be for a portion of white space, gray space, or a piece of the power solution with UBS. We are pulling in all three SBUs and, irrespective of what the RFP is for, going in with our full value prop. That has excellent momentum. Specifically, the EES growth we got—the majority in Q1—was not linked to a prior CSS or white space win. The market today procures gray space and white space at different times in the build cycle, and power is addressed much earlier and by different decision makers. What that means for our mix in real time is we are not seeing a lot of that linkage yet, but we are putting a lot of shots on goal with our broader value proposition, and we are very confident that has huge needle-moving potential for WESCO International, Inc. going forward as we aggressively go after this secular trend. I could not be more pleased with the 100% growth in gray space in Q1 for EES. That shows we are putting an awful lot of shots on goal. It is roughly 20% of our overall sales mix, but still a very encouraging growth rate. Unknown Speaker: One minor point to add: as the new guy coming in, I have been super impressed with the coordinated effort across all three SBUs in our go-to-market on data centers. We really go to market as OneWESCO across white and gray space, but every customer buys differently, and we let the customer decide where our value proposition resonates. Kenneth Newman: Very helpful. Appreciate it. Operator: The last question today will be from Patrick Michael Baumann with JPMorgan. Please go ahead. Patrick Michael Baumann: Good morning. I had one on digital transformation. It seems like those costs are stepping up here in the first quarter in terms of what is outside the P&L. What are you spending that on—what are those costs for? What is the path and timing of the ERP rollout? Your confidence in execution on that? And what happens to those costs on day one when ERP systems turn on? How long does it take you to realize the benefits? John J. Engel: Our last fulsome update was at our Investor Day year before last. We outlined that program and laid out extensive activities remaining for design/build; we had not really begun deployment then. We have not given a fulsome update—which we will do at our next Investor Day—but I will address your question. Outstanding progress on the design/build; we continue to grind away at that and have begun deployment. We have a very small number of locations in each of the three businesses that have been deployed. That has been part of our agile design/build process with increasing capabilities being brought to bear and released into those locations. We had a notable milestone in the first quarter where we have one operation—one end-to-end P&L operation as part of CSS—fully deployed on our new digital platform. That occurred at the very end of the first quarter. Now we have an end-to-end operation with the latest instance and most capabilities deployed to date. We still have design/build activities that continue through this year and into the beginning of next year, but then our deployment phases in and accelerates, completely consistent with what we outlined at Investor Day. It is a phased deployment; unlike a knife-edge ERP transition that puts the enterprise at risk, we control the phasing to ensure we do not disrupt the business and can manage change effectively. It is our utmost priority that we do not disrupt our current business momentum. We have excellent improving momentum and want to execute against that, as evidenced by our first-quarter results. No change to program design/build/deployment schema. Huge milestone in Q1 with one end-to-end operation now deployed, and we are seeing how that is operating. The benefits will phase in over a multiyear period similar to what we outlined at Investor Day, where we said it is a two-speed EBITDA margin improvement profile going forward. We are grinding away to get operating margin expansion as we complete design/build and deployment, but once that is complete, there is a step-function increase in margin expansion because all the one-time investments are done. We very much look forward to those benefits. They are not hitting our P&L yet; that is all to come. Unknown Speaker: On your question on the disclosures, we provide a fair amount of disclosure in terms of what is excluded from EBITDA to get to adjusted EBITDA. Like most companies, the objective is to give you visibility to things that, like John mentioned, are one-time in nature. We will reevaluate that every year when we do our reporting, but you have full visibility. Patrick Michael Baumann: Thanks for that. My last question—this was asked earlier in the call, but bear with me: your data center revenue in the quarter was $1.4 billion. Annualized, you are at $5.6 billion, which would be up about 30% versus what you reported last year. In the quarter, you are up 70%. You have hyperscaler CapEx going up 70% this year. Help us understand what tails off. Is it some big projects or jobs that top out in the first quarter? The 20% growth is great, but in context of what you have been putting up, something seems like maybe it is project timing. Can you help us understand? Unknown Speaker: We addressed it earlier in the call, and you gave the answer in the last part of your question—project timing. That is the answer. It was project timing then; it is project timing now. With that said, it is an exceptional start to Q1. We are thrilled with the start. Patrick Michael Baumann: Thanks a lot. Best of luck. Operator: This concludes our question-and-answer session. We have addressed all your questions, so we are going to bring the call to a close. There is no one left in the queue, which is great. We have a lot of calls lined up for today and tomorrow. We look forward to speaking with you in the follow-ups. Thank you all for your support. It is very much appreciated. We expect to announce our second quarter earnings on Thursday, July 30. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Axalta Coating Systems Q1 2026 Earnings Call. [Operator Instructions]. A question-and-answer session will follow the presentation by management. [Operator Instructions]. Today's call is being recorded, and a replay will be available through May 7, 2026. Those listening after today's call should please note that the information provided in the recording will not be updated and therefore, may no longer be current. I will now turn the call over to Colleen Lubic, Vice President of Investor Relations. Please go ahead. Colleen Lubic: Good morning, everyone, and thank you for joining us to discuss Axalta's first quarter 2026 financial results. I'm Colleen Lubic, Vice President of Investor Relations. Joining me today are Chris Villavarayan, our Chief Executive Officer; and Carl Anderson, our Chief Financial Officer. Before we begin, please turn to Slide 2 for our forward-looking statements and non-GAAP disclosures. We posted our first quarter 2026 financial results this morning. You can find today's presentation and supporting materials on the Investor Relations section of our website at axalta.com. Our remarks today and a slide presentation may include forward-looking statements. reflecting our current views of future events and their potential impact on Axalta's performance and with respect to the proposed merger of equals between Axalta and AkzoNobel. These statements involve risks and uncertainties and and actual results and outcomes may materially differ. We are under no obligation to update these statements. Our remarks and the slide presentation also contains various non-GAAP financial measures. We included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Please refer to our filings with the SEC for more information. With that, I would like to now turn the call over to Chris. Chrishan Anthon Villavarayan: Thank you, Colleen, and good morning, everyone. Turning to our first quarter highlights. We delivered strong results and exceeded expectations across our financial metrics. In the quarter, we generated net sales of $1.25 billion, adjusted EBITDA of $259 million and adjusted diluted EPS of $0.56, which came in 12% above expectations. These results reflect disciplined execution and a focus on the levers within our control. We also set meaningful cash generation records this quarter with $68 million of cash from operations and $21 million of free cash flow, an improvement of $35 million year-over-year. This period marked the 12th consecutive quarter of year-over-year profitability improvement in our industrial business, while Mobility achieved a first quarter net sales record and adjusted EBITDA margin of 17.5% reflecting solid execution and cost discipline, and we saw stabilization in Refinish at nearly $500 million in sales, consistent with the last 5 quarters. Innovation has always been and remains an important differentiator for Axalta. During the quarter, we received 6 Business Intelligence Group Innovation Awards and 3 prestigious Edison Awards. Echo next Jet, a collaboration with Dura and ZAR enables OE manufacturers to provide next-generation personalized exterior finishes at production scale, shifting from a fixed pallet to unlimited customization without sacrificing quality, durability or efficiency. And Alesta e-Pro FG Black a powder coating engineered for thermal stability and secondary fire protection in electric vehicle battery systems. Echo NextJet and Alesta e-Pro FG Black were both acknowledged with Gold Edison Awards. St. Master AI, which was acknowledged with the Bronze Edison Award is a breakthrough intent manufacturing using advanced AI to address the challenge of color variability in paint manufacturing. Edison Awards honor technologies that are redefining industries solving complex customer challenges and shaping the future. I want to recognize the smart and talented people at Axalta for developing and bringing to market advanced solutions with real-world impact. Let's turn to Slide 4. We Against a backdrop of macro uncertainty and elevated volatility, we remain focused on managing through what we can control. While recent developments have increased uncertainty across cost and supply availability, our actions over the past several years have positioned us well to mitigate raw material inflation. We're closely monitoring developments across energy, logistics and the broader supply and demand landscape as it relates to the evolving situation in the Middle East. From a purchasing perspective, we delivered 12 consecutive quarters of year-over-year improvement in variable costs due to strong productivity projects as well as focused implementation of procurement best practices. We now have approximately 60% of our direct spend under contract rather than spot buys. Many of our strategic supplier agreements are stronger and incorporate indexation, which is helping reduce volatility and improve visibility. As it relates to pricing, -- we plan to move quickly to offset the impact of inflation. We're driving solid discipline across the portfolio. In Refinish, we expect to implement mid-single-digit pricing in 2026, reflecting the value we deliver. In mobility, more than 50% of our revenue is now tied to raw material indices, which provides a natural hedge against cost volatility. Mobility has delivered 6 consecutive quarters of positive year-over-year price mix, reinforcing our ability to offset inflation. Across the rest of the portfolio, we are prudent and proactive with the pricing actions and surcharges in place, where appropriate to help protect margins. From a transformation and cost discipline standpoint, we continue to tightly manage our operating expenses. In the first quarter, SG&A declined 7% year-over-year on a constant currency basis and we exceeded our operational productivity targets. Even amid top-line pressure, our adjusted EBITDA margins have exceeded 20% for 9 consecutive quarters, underscoring the durability of our operating model. Supporting all of this is our resilient supply chain and cost structure. Approximately 90% of our direct buy is locally sourced, where variable costs represent about 60% of COGS. Inventory levels remain at roughly 115 days on hand, which helps limit the impact of inflation, particularly as we enter the second quarter. Let's turn to Slide 5. We see solid execution across all our businesses. In Refinish, net body shop wins increased 10% year-over-year and generated net sales growth in the first quarter in 3 out of our 4 regions. We're also expanding with leading MSOs, which remain a key focus for the business. In Industrial, our most diversified portfolio, the we global macro has been the story for the last few years. However, we are starting to see signs of recovery. We delivered 5 consecutive quarters of net sales growth in Asia, driven by our Energy Solutions business, drove volume growth in Europe during the quarter with share gains in our e-code business, and we're seeing positive price/mix for 7 straight quarters. In mobility, we delivered record net sales in the first quarter of $452 million and growth in 3 out of our 4 regions. Commercial Transportation Solutions, which was a bright spot in 2025 and also delivered record first quarter sales, driven by continued success with new business wins. Overall, new business wins and excellent operational performance across the portfolio are helping us offset the headwinds in North America where the macro environment has been tempered by economic anxiety, elevated consumer costs and higher for longer interest rates. With that, I'll turn the call over to Carl to discuss our financial results. Carl Anderson: Thank you, Chris, and good morning, everyone. Turning to Slide 6. net sales were $1.254 billion, a 1% decrease year-over-year, primarily driven by lower volumes in Performance Coatings. This was partially offset by favorable foreign currency translation largely due to a stronger euro. These dynamics were expected and contemplated in our first quarter guidance. Gross margin was 33% and down slightly from last year, driven primarily by unfavorable mix from lower volumes in North America. Net income was $91 million, a decrease of $8 million from the prior year period. This was driven primarily by $22 million in transaction costs associated with the pending merger with AkzoNobel. These costs were partially offset by a $17 million discrete income tax benefit and a reduction in interest expense. SG&A was down slightly as we continue to aggressively manage our cost structure. Adjusted EBITDA in the quarter was $259 million, resulting in an adjusted EBITDA margin of 20.6%, while both metrics were lower year-on-year, we did perform above expectations as reductions in operating expenses and variable costs helped to offset lower volumes in Performance Coatings. Adjusted diluted earnings per share was $0.56, exceeding our outlook by 12%, supported by lower interest expense and stronger overall earnings in the quarter. Our momentum in cash generation remains strong. Cash provided by operating activities was $68 million, a company first quarter record. This was an increase of $42 million year-over-year. Free cash flow of $21 million was another first quarter record for Axalta and improved by $35 million versus the prior year period. This was primarily driven by improved working capital and lower interest payments. Performance Coatings first quarter net sales declined 2% year-over-year to $802 million. This decrease was driven by lower volumes, primarily in North America and unfavorable price/mix. These impacts were partially mitigated by favorable foreign currency translation and contributions from our acquisitions and our Refinish business, which we continue to execute as part of our distribution strategy outside of North America. Refinish net sales declined 3% to $498 million, reflecting lower claims activity and shifting customer order patterns as anticipated. Industrial net sales declined 2% year-over-year to $304 million, with volume pressure in North America and Latin America, partially offset by price mix and foreign exchange. Notably, Europe and China delivered volume growth in the first quarter. First quarter Performance Coatings adjusted EBITDA was $180 million, down from $197 million a year ago. Adjusted EBITDA margin decreased by 170 basis points to 22.4% due to lower volumes and unfavorable price mix, which was partially offset by a reduction in operating and variable expenses. We do expect that price/mix will inflect positively beginning in the second quarter and carry on through the rest of the year. Mobility Coatings delivered record first quarter net sales coming in at $452 million, an increase of 3% from the prior year period. Light Vehicle net sales increased $9 million, driven by favorable foreign currency and organic growth in 3 of our 4 regions, including continued momentum from new business wins in Brazil. As planned, sales in China declined in line with lower auto production in the region. Commercial Vehicle net sales were also up 3% year-over-year, supported by favorable foreign currency impacts, new business wins, positive price mix and record commercial transportation solution sales, which together helped offset the effect of lower Class A truck production. Mobility Coatings adjusted EBITDA totaled $79 million in the first quarter compared to $73 million a year ago, reflecting benefits from lower variable costs, favorable foreign currency and reduced operating expenses. Adjusted EBITDA margin increased 100 basis points year-over-year to 17.5%. In the first quarter, we delivered another period of consistent cash generation, which underscores the durability of our operating model. Interest expense declined 14% year-over-year -- and during the quarter, we repaid $54 million of gross debt and added with a net leverage ratio of 2.3x. For full year 2026, we expect interest expense of approximately $150 million representing an improvement of more than $25 million versus last year and nearly 27% lower than 2024. For the rest of the year, we are planning on deploying most of our free cash flow to pay down our term loan and expect that our net leverage ratio will be below 2x at year-end. As we turn to our outlook on Slide 10, I'll start with the macro assumptions underlying our 2026 guidance. External forecasts and key performance indicators remain relatively consistent with how we entered the year. That said, geopolitical developments, including the situation I ran and broader Middle East tensions, have increased uncertainty across global markets, impacting energy prices, inflation and consumer sentiment. While the ultimate duration and economic impact of these developments is unclear, to heightened volatility has the potential to create additional pressure on both demand and cost in the back half of the year. In Refinish, we are seeing signs of a more stable market as destocking trends are abating and claims activity is sequentially expected to improve. Auto insurance premiums have moderated meaningfully. Used vehicle prices are rising and miles driven are trending favorably. At the same time, consumer sentiment inflation concerns are more challenged. All this being said, we are planning for second half volumes to improve compared to last year. In Industrial, we were encouraged by the results we saw in the first quarter, particularly in Europe and Asia. However, we remain cautious about the pace and timing of recovery in North America this year. Overall, our business is positioned very well for an eventual market recovery in North America as we are performing at record margin levels and have significantly improved our operational efficiency. In mobility, we are now assuming global auto production of approximately 91 million builds, down from our prior outlook of 92 million units. In Commercial Vehicle, external forecasts for North America Class 8 builds have increased and we now assume approximately 274,000 units, up 10% from previous expectations. With respect to the second quarter, we expect net sales to be roughly flat with adjusted EBITDA in the range of $280 million to $290 million and adjusted diluted earnings per share of approximately $0.65, roughly in line with a year ago. For the full year, we are maintaining our previous guidance expectations for revenue, EBITDA, earnings per share and free cash flow. At this point, we are tracking closer to the lower end of EBITDA and EPS guidance given the demand signals we are seeing at this time. We also continue to expect to deliver adjusted EBITDA margins of approximately 22%, in line with last year, as our pricing and cost actions are expected to help offset the incremental inflation we anticipate. Overall, our outlook reflects disciplined execution and continued focus on margin protection, cash generation and confidence in our ability to perform yet again in any type of environment. Turning to Slide 11, I'll provide an update on the pending merger of Ecos with AkzoNobel. The transaction continues to progress very well, and we remain firmly on track with all of our key strategic work streams. Both teams are highly aligned and are working together seamlessly as we prepare for the shareholder vote regulatory approvals and day 1 readiness. A critical pillar of this combination is the substantial synergy opportunity we have identified. We remain confident in our ability to deliver $600 million in annual run rate synergies. Integration planning between both companies is well underway with dedicated clean teams established to identify and accelerate these synergies, and designed to capture value quickly and deliver a seamless transition at ECOS. On the regulatory front, filings are underway, including the U.S. and the EU -- we have filed a confidential Form F-4 with the SEC and are progressing as planned. In parallel, we are maintaining active and constructive engagement with shareholders and we expect the shareholder votes for both companies to take place by early July. Overall, we are excited and energized and remain confident in our ability to deliver meaningful substantial and sustainable value creation through the combination with AkzoNobel. With that, I will turn it over to Chris for closing remarks. Chrishan Anthon Villavarayan: Thanks, Karl. We're executing well and delivering consistent performance while maintaining strong operational focus. At the same time, we have made significant progress towards our combination with AkzoNobel that we expect will strengthen our portfolio, enhance our financial profile and create significant long-term value for shareholders. The transformational actions we have taken across procurement, fixed operating costs and network optimization have fundamentally improved the business and protected margins to prepare for the upside. We have built a solid foundation, which has strengthened with the Akzo combination, and we will be ready when the macro rebounds. Thank you for joining us today. I will now turn the call over to the operator to open the line for Q&A. Operator: [Operator Instructions] We will take our first question from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess just given the abrupt spike in the raw material cost, has that dynamic changed the destocking dynamics impacting auto refinish, especially in North America? And could you just update us on your view for the time line for volumes in that business to inflect higher? And just a broader question as it relates to whether that dynamic might start to intersect with just a broader economic slowdown given the spike in inflation and the impact on the consumer, et cetera? Chrishan Anthon Villavarayan: Sure, Ghansham. So I'll start, and maybe I'll turn it over to Carl. But as we see it right now, we're certainly seeing stabilization. And as April is closing. And as we look at Q2, I would say we're showing a bit of an increase in volumes in Q2 or, let's call it, sales in Q2, and we're certainly seeing that come through. So I would say the market is pretty stable, and we're heading towards a recovery. And if you look at Carl's last slide, if you look at all the indicators, they're all positioning the right way, miles driven up. Insurance costs are starting to abate, and we can start seeing that flat line. And also the used car pricing is trending the right way. So all of this dynamic is heading the right way. For us, the incremental benefit here is also what's happening with destocking. Destocking is starting to abate and you can start seeing that in our results in Q2 or our guide for Q2, we're essentially seeing price/mix start turn markedly positive and it's really driven by that. Carl Anderson: Yes. And Ghansham, just to add, I think the -- in addition to all that, especially as we think about the second half on price mix with some of the price actions the teams are executing, as Chris said, that will imply positively second half, and you probably will see that in the second quarter as well. And we're also seeing the benefit from some of the more recent M&A transactions come through as well for the full year. Operator: Thank you. We will move next with Mike Sison with Wells Fargo. Michael Sison: Nice start to the year. Just curious, when you think about the second half of the year, third quarter, fourth quarter, you have more heads of raw material costs and such. And if you get to the midpoint of the guidance, you're going to need a much -- well, about much target, but a stronger second half versus first half. So -- can you sort of walk us through how you get that ramp into the third and the fourth? And how you think the raw material situation gets sort of handled during that time period? Chrishan Anthon Villavarayan: Sure, Mike. I think it's a very good question. If I look at Q1, you can see that we had a good quarter. We had pockets of improvements across all 3 businesses. if you look at industrial, we had strong performance in Asia. We actually saw Europe return was good news. Again, 1 quarter doesn't certainly set a standard here going forward. So we're seeing positive momentum even as we look at April in Industrial. And now moving to Refinish. Again, we're starting to see sales inflect and our performance as well, especially with destocking coming out is positive here, too. And in Mobility, the real story here is the return of CV. As you look at and our performance also in CTS -- the commercial vehicle market, if you look Q from Q, Q1 to Q1 of this year was actually down 26%, but we're only down about 6%. And it's really our performance in the growth on the CTS side. So now if you project that forward, what's driving the benefit, it's 3 or 4 things. The first thing is we've already gone through with pricing across all 3 businesses. And then if you look at how we're normally structured, it's usually 48% in the front half and about 52% in the back half. If you look at us now, it's like 45-55. What's the difference? It's really 3 things. The first 1 is with destocking coming out, we expect that positive price mix in Refinish to inflect and continue through the back half. The next element of this is really the the CV volumes coming back. Again, with commercial vehicle coming back in the back half, that strengthens us in the back half really drives good margin performance. As you know that those margins are higher and closer to our Refinish margin. And the last element that we have here is a little bit of a pickup in REV or, let's call it, markets. So we expect industrial to be up slightly and also Refinish to continue to inflect through the back half. So those are the 3 things that are driving the positive momentum in the back again, the offset is certainly the inflation, which we have already priced for. Operator: We will move next with John Roberts with Mizuho. Edlain Rodriguez: This is Edlain Rodriguez for John. Chris, you talked about the 50% of mobility revenue that's tied to the raw materials index. Can you talk about any lag if there is any in there? And also for the remaining 50%, will prices come on time to not have any negative impact in the second half of the year? Chrishan Anthon Villavarayan: Yes, it's a great question, and it's reflective of what I would say the team has performed. If you look at the last 3 years, as you know, this isn't the first time we've been here. I mean, if you look through the tariffs, if you look through the Iran, Russia conflict, if you look through hyperinflation, this team over the last 3 years has had to deal with this many other times. And I think this is the nate muscle that we've changed at [indiscernible] and it's really about driving that pricing discipline when we see it. And so I would say in terms of mobility, on the other 50%, we have already gone out with pricing. There is a 3- to 6-month lag with indexes but you also get the positive on once this starts inflecting the right way. But overall, as you can see our margins and what we're laying out as our guide for Q2 and the rest of the year, it shows the positive performance because we absolutely believe we can capture this not only through pricing but also the cost actions from a productivity and a purchasing initiative standpoint that we have out there. You put all that together, the whole company will be running at about almost 22 points of margin, but this business will be running at 17% to 18%, probably some of the best performance we have seen in the last 5, 6 years. Operator: We will move next with David Begleiter with Deutsche Bank. Unknown Analyst: This is Emily Fusco on for Dave Begleiter. Just kind of turning back to Refinish and the trends you're seeing. Your competitors that have already reported have suggested share gains. So just kind of how would you characterize your positioning today? Or any more color you could give? Chrishan Anthon Villavarayan: Yes. I think I've obviously stayed away on commenting with what our competitors do. Maybe I'll give you about 3 or 4 perspectives here. The first 1 is specific to, I think, some of the commentary that have come out in the last -- in this quarter it's easy to show improvement from double digits down to up double digits. So maybe it's net 0. But moving from that and being more specific to us, we measure net body shop wins. And as I described it, in our Q1 performance, we saw that go up 10%, and that is a record, record quarter for Axalta. And so how are we growing? And if you look at this data also over a 3- to 4-year look, you notice we went from about 85,000 body shops to close to north of 95,000 body shops. So we continue to grow, and we can see that. Conceptually, 1 of the things that we are growing more is in the economy space and mainstream space, this was obviously driven by our CoverFlexx acquisition, which we did almost a year ago that's really enabling us to grow in this region or this area. We used to have about 9% market share. We move north of 11%. So this has been a good story for us. And as I look to the rest of the year, we believe, especially with MSOs in North America, where we can also start seeing that we're expanding. We already have 9 out of 12. But with those MSOs, we continue to win more body shops. And on top of that, as I look at the economy mainstream, I believe this is going to be a very strong year for us. Operator: We will take our next question from John McNulty with BMO Capital Markets. Caleb Boehnlein: This is Caleb on for John. Just given some of like how much like the chemical spot rates have moved this year, can you help us understand a little bit better, like why the inflation headwind is only like mid-single digits this year and not higher like many people thought maybe just kind of like what your -- what the raw material headwind will be as you're exiting Q4? Chrishan Anthon Villavarayan: Sure. I'll start, and maybe I'll hand it over to Carl. I would say there are probably about 3 or 4 things that may be were similar or differentiate us from others or peers than what we are seeing I think first 1 is geographic mix. If you look at the impact, which is more European and Asia from an Asian impact, China is about 10% for us. Asia is, let's call it, just north of 15 points percent for us. So in terms of impact, it's less for us from a geographic perspective. The second part of this is if you think about our buy of our COGS is Cox. And of that, about 40% to 50% are tied to oil. So we are slightly better in this case as well compared to some of our peers. The third element of this is something that we've been working on for quite a while for the last 3 years is really our purchasing initiatives and what we -- how we have driven our material buys, we used to be 60% on spot buys, we're now 60% on contracts. And so we have a natural hedge here based on indices and the ability to manage this at least with some visibility through the full year. So I think those are the 3, the incremental benefit we also have is the inventory levels. We're sitting on 115 days that puts us around 4 months. And if you really think about it, it's different by business and it gives us the ability to manage to push forward pricing faster or a little bit slower. But in terms of the Q2 impact, we're seeing this to be low single digits and increasing through the back half of the year. And I would say, as we get through the back half of the year, this might feel like high single digits, but we'll certainly be out there with pricing when we see that effect come through. Maybe I'll turn it over to Carl. Carl Anderson: Yes. And just maybe to add to that, if you look at just 2026, obviously, first quarter, we performed better. So we were low single digits that benefit as we think about a raw material performance. As Chris referenced, we do expect that for the full year to be mid-single digits. And it's really going to be a focus and more of a -- where we're going to be going as it relates to what oil is going to be doing a little bit longer term. So whether it's mid-single digits or potentially a little bit higher that as we're exiting the year, as we look at the business, we expect to continue to drive productivity within how we manage our purchasing spend. as well as other cost measures that we look to deploy. Operator: We will take our next question from Matt with Bank of America. Rock Hoffman Blasko: Rock Hoffman on for Matt. I think your slides have called out mid-single-digit pricing for Refinish. Is that a full year comment or a 2Q to 4Q comment? And how can I kind of square that away with the negative price mix you saw in 1Q. Also just any updates on kind of the IRIS mixing rollout would be helpful as well. Chrishan Anthon Villavarayan: Yes, sure. Thanks for the question. Yes. So if you think of the first quarter, pure price was about low single digits, up about 2% on a year-over-year basis. Most of what you saw as far as in the quarter, related to the negative impact was on mix. And as we look forward, some of the pricing actions the team is putting into place here in the second quarter as well as in the second half. So those numbers would be for what the full impact would be with the total gross pricing that we're going after specifically for our Refinish business. Really, as it relates to Iris mix, we're pretty excited about that. The teams are executing very, very well. I think we're getting -- we're nearing 1,000 in total installations. And that's -- it will continue to be a big focus for Refinish team as we look to get that out more broadly here in North America. Operator: we will take our next question from Mike Harrison with Seaport Research Partners. Michael Harrison: Chris, maybe you could give us a little more detail on what you're seeing in commercial vehicle. Just some thoughts on the timing of this big swing in Class 8 -- and then maybe some more detail on what's going on in Commercial Transportation Solutions. I assume that, that's kind of the fruit of several quarters or years worth of effort to build out that business. But maybe give us some more detail on the momentum you're seeing and any specific customer wins or markets or applications you would call out? Chrishan Anthon Villavarayan: Sure. Thanks, Mike. Great question. I'd love to. So as we look at commercial vehicle and obviously, coming from my past, it's certainly very cyclical. And as it goes down and goes below a replacement demand, you always expected in a few, let's call it, a few quarters later to always pick up, and we can certainly see that pick up. So Q1 was very weak. And as you can see from many of the OEs that have reported, if you do a Q-over-Q comp, you can see the decline. But as we get into Q2, we can already see those numbers pick up in turns, not only from a forecast perspective, but also what we see in April. One of the things that we did is, as we got into the business and certainly a credit to the mobility team in terms of we were -- we had such a strong presence and such leadership on the OE side of Class 8. And we wonder -- as the team wondered why could -- we could take that technology and certainly match it in everything that's CTS. And if you think about this space, it's really what we do in specialty, what we do in off-highway, what we do in military and also whatever we do in RVs or the recreational space. So they set a plan to really grow in this space. And just to give you a perspective, the overall market is about $3.5 billion, and we only have about 7% market share -- so we saw this as a great opportunity to grow. And that's certainly -- the fruits of all that work is what you're seeing coming through in Q1, and it will certainly continue to come through as we go through the rest of the quarters not here to probably provide what our targets are going to be for the rest of the year. But I just want to point out, you can see the performance, again, as I said earlier, coming through in Q1. The market is down 26 points we're just down 6 points so that offset really happened from all the wins that we had on the CTS side. Now going forward, the additional space opportunities here is this isn't just focused in North America. We're also looking at how we can really expand this globally -- and this is certainly, I think, something that's a bright star in our mobility business. The incremental difference we also made here was at capacity. Our CTS and our Refinish business actually come out of our Refinish lines and our refinish plants. So we needed to add capacity and really make sure that we were ready once we took this volume to that once CV returned that we can ensure that we can protect and perform for those customers. And we've certainly done that. The record capital investments that you have seen part of that was to ensure that we're structurally in the right place for this business. So I think there's far more upside here in this business as we go forward, and I look forward to tell you more about it as the rest of the year progresses. Operator: We will move next with Patrick Cunningham with Citi. Unknown Analyst: This is actually Rachel Lee on for Patrick. So I know that you're still guiding to greater than $500 million for the full year free cash flow. So given the potential for mid-single-digit inflation and working capital requirements, how are you managing inventory levels and receivables through the balance of the year? Carl Anderson: Yes. Thanks, Rachel, for the question. So I think maybe we'll start in the first quarter. We were pleased with the performance. If you think about our cash conversion cycle, we improved by about 6 days year-on-year in the first quarter. And as I think what is in front of us for the rest of the year, as Chris said, we are pricing. And so if I look at kind of what the impact is going to be in DSOs, we're going to get out in front of that a little bit. So I think even with a mid-single-digit inflation kind of running through and getting an inventory, we still feel very, very confident in our ability to deliver on free cash flow. We're going to have lower interest expense this year on a year-over-year basis, and we continue to look to improve overall cash conversion cycles for not building off what we did in the first quarter, and I'm hoping that we will be able to improve that even a little bit more on a year-over-year comparison as we move throughout the year. Chrishan Anthon Villavarayan: And I just wanted to add -- maybe just to add to a few more comments. I think I really want to add to the performance that we saw in Q1, really a credit to the finance team and Carl, but just driving some enormous performance in interest rates. And obviously, we'll get that tailwind for the rest of the year. Operator: We will move next with Chris Parkinson with Wolfe Research. Christopher Parkinson: I realize you can't necessarily jump the gun in terms of the AXA deal, but in terms of your own cost execution and just navigating what I think most of us would characterize as fairly difficult markets over the last few years. Is there any kind of update on your thoughts or the trajectory of the synergy target with the companies, Presumably, you're still going to touch with them, you've been executing on your own any quick update there would be very helpful. Chrishan Anthon Villavarayan: Yes. Christopher. Good question. Certainly, I think on both sides, we're managing costs. But I would say Greg and I have been working with a clean team environment. We've had 2 exceptional teams on both sides to work on this, especially as we get closer to the boat and also start heading towards close to really define what is the work streams with hard to help up some external consultants so that we can keep this very clean and also look at what actions and the more and more time both of us spend on this, we can really get comfortable with the actions and be able to reiterate that the $600 million is just the floor. And I would say -- as we get half the vote, we're going to spend far more time on really driving the actions so that we can get -- hit a gate running when we close. But I would say every day we spend and we were on calls weekly we get more and more comfortable with the fact that this will create enormous value. And I mean, you think about all the different multitude of buckets that we can focus on in terms of scale and purchasing, we go from $2 billion to $6.5 billion plus. There's an enormous ability here from scale what we're doing right, what they're doing right, what the overall scale can provide and then from that, you can move to supply chain synergies, what we can do jointly from the fact that between the 2 of us, we have almost 400 warehouses and locations and how we could improve all of that and drive utilization, how we're approaching the same customers. And then you go into the duplicity of everything that you have in SG&A. And finally, even beyond that, the incremental opportunities when you look at indirect and all the other cost buckets. I would say there's just a basket that is -- provides a great opportunity to work on once we become together as a combined company. Operator: We will move next with Kevin McCarthy with Vertical Research Partners. Matthew Hettwer: This is Matt Hettwer on for Kevin McCarthy. What are you seeing in the demand function for your industrial business? It sounds like like they're stronger in Asia and Europe than domestically. Could you take us through how the business is doing regionally -- and then finally, what are your thoughts on whether rising input costs for your customers in that business will lead to incremental demand weakness in the back half of the year? Chrishan Anthon Villavarayan: Sure. I'd love to. I think maybe I'll first give you a perspective again to the 2 bright spots. Asia continues to grow. We have seen, let's call it, 5 quarters of growth. And as we project forward, -- it still looks strong for us. And again, this is primarily in our Energy Solutions business, where everything that we provide, whether it's impregnating resins for battery -- sorry, for motors or all the coatings that we provide for battery enclosures, all of that is on a positive trend. And so certainly, a tailwind that we see there. In Europe, that inflected last quarter, again, business that we gained here in E-Coat and we continue to see positive signs in volume across even powder and architectural extrusions in this region. So that's a positive inflection for us. Again, the positive here is also probably coming into the spring buying cycle. Now moving to North America. This continues to be weak. Again, I think interest rates being higher for longer has been an impact here. But we feel, at some point, this will inflect. Carl Anderson: And just to add to that, for Industrial in total, we're not -- for the full year, we're seeing it really flattish on a year-over-year basis. And so if you think about even in the second half on your demand question, we're not seeing in aggregate in getting that much better through the year, and that's already reflected in our guidance numbers that we put forward. Operator: Our next question comes from Josh Spector with UBS. Lucas Beaumont: This is Lucas Beaumont on for Josh. So I mean it seems like there's kind of been a shift amongst, I guess, both you guys and the rest of the coatings peers towards like greater index linking of pricing to raw material shifts. So I guess that's probably happening more in the coatings businesses that seem to have less pricing power compared to those with more -- and I guess while we sort of might reduce shorter-term earnings volatility at the front of the cycle, I mean, it then seems like it's set up to kind of give the pricing back on the back end and might like reduce the net price cost benefit that you're capturing over the full cycle. So I mean, I probably would have said this was like a feature as it ties to a bug in the sense that you're getting more price cost over time and it's helping kind of drive your earnings growth in the medium term. So do you think the shift -- I guess, one, maybe just give us a view on how you see this shifting or not shifting overall? And then I mean would you -- how do you think that supports or, I guess, impairs medium-term earnings growth cycle? Chrishan Anthon Villavarayan: Well, maybe I'll start and then hand it over to Carl. I would have to disagree with that a bit, primarily because of my view on what the indexing provides. What the indexing provides is more visibility and control so that you can price. And as I look at our business model in 2 out of our 3 businesses, this, let's call it, the indexing is not tied to that. So when we talk about our Refinish business and when we talk about our industrial business, the best part of what we do is we see the visibility from a purchasing aspect and then we are able to go right in and price. And as you can see with what we have already defined in terms of pricing both in our industrial and Refinish business, we've already done that. We've already priced in Q1 we're already seeing the results. That's why we can already target almost 22 points of margin for Q2. Now moving into our mobility business, that's where there's indexing tied for 50% of the business to RMI indexing. And here, your comment is solid with the exception of the fact that you do get it on a lag basis. On the rest of the business, we are able to price, and we have done it consistently through what I would call it, through the last 3 risk factors that we have faced in the last 3 years, whether it's the inflation that we saw because of the tariffs, whether it was just the pure hyperinflation that we saw in North America or whether it's the Iran conflict or for that matter now, the Middle East conflict, my simple perspective here is we set a target that was 300 to 400 basis points higher than where we were just 3 years ago. In our A plan, we set a target of 21 points of margin, and we have been performing at that margin even through all these 4 crisis. at north of 21% to 22% for the last -- and certainly, that is reflective on our EBITDA performance for the last 3 years. But now I'll turn it to Carl, if I miss something. Carl Anderson: I don't think you missed anything, but just as a reminder, during this whole time period when we really started to increase the overall RMIs we had in place in our mobility business, we've more than doubled the margin during that time period. And if you look back over the last probably 4 or 5 years, the overall margin profile of Axalta's expanded 600 basis points. So when we have best margins in the business in the coatings business. So we feel very good with our strategy and how we're executing Operator: Thank you. At this time, we have reached our allotted time for questions. I will now turn the call back over to Chris Villavarayan for closing comments. Chrishan Anthon Villavarayan: Well, to everyone, thank you for calling in and certainly for your interest. I certainly want to start by congratulating the team for a good Q1, a solid Q1. We're certainly looking forward to Q2, and we believe that we have great plans to execute here, including working with Greg and the Axo team towards our merger. And with that, thank you. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and welcome to the CNX Resources Corporation First Quarter 2026 Question and Answer Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to hand the call to Tyler Lewis, Senior Vice President of Finance and Treasurer. Please go ahead. Tyler Lewis: Thank you, and good morning, everybody. Welcome to CNX Resources Corporation's first quarter Q&A conference call. Today, we will be answering questions related to our first quarter results. This morning, we posted to our Investor Relations website an updated slide presentation and detailed first-quarter earnings release data such as quarterly E&P data, financial statements, and non-GAAP reconciliations, which can be found in a document titled "1Q 2026 Earnings Results and Supplemental Information of CNX Resources Corporation." Also, we posted to our Investor Relations website our prepared remarks for the quarter, which we hope everyone had a chance to read before the call, as the call today will be used exclusively for Q&A. With me today for Q&A are Alan Shepard, our President and Chief Executive Officer; Everett Good, our Chief Financial Officer; and Navneet Behl, our Chief Operating Officer. Please note that the company's remarks made during this call and answers to questions include forward-looking statements which are subject to various risks and uncertainties. These statements are not guarantees of future performance, and our actual results may differ materially as a result of many factors. A discussion of risks and uncertainties related to those factors in CNX Resources Corporation's business is contained in its filings with the Securities and Exchange Commission and in the release issued today. Thank you for joining us this morning, and operator, please open the call for Q&A at this time. Operator: We will now open the call for questions. Our first question comes from Leo Mariani of Roth. Please go ahead. Leo Mariani: Yes, hi, good morning. I was hoping to hear a little bit more about the Utica. I see you brought three wells on here in the first quarter. Any comments on well performance or costs? I know you have been working hard to continue to improve the play over time, so just wanted to see if there was an update there. Alan Shepard: Hey, Leo. Good question. We are continuing to develop the Utica program. The most recent pad was turned to sales late in the quarter, so we are a little ways off from providing any production results from that. Everything we have seen so far, as we have mentioned on previous calls, is very consistent with our expectation of the reservoir. We are continuing to make progress on the cost side, but nothing new to update at this time. The way to think about it is that toward the end of this year, we will be in a position to provide a more fulsome update. We will have a solid data set to provide to the market toward the end of 2026 or early 2027 once these wells have had enough duration on them. Leo Mariani: Okay. And would you envision that, as you develop a more robust data set, if the play continues to progress nicely, we could see a little bit more allocation to the Utica versus the Marcellus in the next handful of years? Or do you think that the Marcellus is still probably going to be a little bit economically superior based on current rates? Alan Shepard: I think the Marcellus has the advantage of having the infrastructure already in place. We optimize for the best economics per well, and right now, with the SWPA Marcellus, you generally do not need to build new infrastructure because of the legacy investments there. You will see us blend in more Utica over time as that is the longer-term position for the company, but in the SWPA Marcellus we are in harvest mode, and you will continue to see those wells for the next few years. Leo Mariani: Okay, that is helpful for sure. I just wanted to ask on your NewTech business. Any updates there on business lines other than the environmental credit monetization that you have been consistently doing? Specifically, anything on AutoSet or on the CNG or LNG businesses you have mentioned in the past? Alan Shepard: Everything is consistent with where we thought it would be at this point in 2026. We are still waiting for final guidance on 45Z, but we do not think that is going to impact any of the projections we have made so far. Nothing new to update there, Leo. Operator: The next question comes from Jacob Roberts of TPH. Please go ahead. Jacob Roberts: Good morning. On hedging, you typically transact on a longer-term basis than a lot of your peers. Given what seems to be the prevailing theory of an improving gas base in that 2028-plus timeframe, can you give some context on what you are seeing in the 2028 market? I think you added another 13 Bcf to the book with this update. Curious what you are seeing on that longer-dated market at the moment. Everett Good: Yes, again, on our longer-term hedges, we are in a position to be more opportunistic, with patience, than we have been in the past. As we see price move up, we have also seen basis differentials tighten, and that has helped us get to a better all-in realized price in the California market. We are targeting to bring that up over time as we approach that year. Jacob Roberts: Okay, perfect. I appreciate that. And then I know you made some changes to the balance sheet. Just curious what the next steps are from here on that front. Everett Good: Yes, we did a very positive refinancing of our 2029 notes into new eight-year notes at 5.875% in the quarter. Generally, we have been very consistent in pushing out maturities to make sure that we are at least two to three years out before our next maturity. The next one up for us is a 2030 maturity that we will handle well ahead of time. It is all about keeping the maturity profile extended and making sure that we do not have periods with large maturity towers in front of us. Jacob Roberts: Thanks. I appreciate the time. Operator: Thank you. Our next question will come from Michael Stephen Scialla of Stephens. Please go ahead. Michael Stephen Scialla: Hi, good morning. I wanted to ask about in-basin demand. Some of your competitors are becoming a lot more confident on that, talking about it growing by more than 10 Bcf per day by the end of the decade. Do you share that enthusiasm, and is there anything you can share that the company may be doing to capture some of that demand? Alan Shepard: I would agree that we certainly see the same long-term optimism on the demand side. Some of the announcements that have come out are mind-boggling when you think about a nine-gigawatt power center plan; there have been multiple of those proposed. We see the announcements, and we are monitoring as RFPs come out for gas supply and are participating in those. The magnitude of gas that will be demanded in-basin in Appalachia is going to need to be sourced by multiple producers. If you think about folks like us that have the resource depth and the creditworthiness to enter into long-term arrangements with these new demand sources, we will certainly benefit. The only question in my mind is timing: is it three years, five years, or seven years? Michael Stephen Scialla: Alan, do you see that developing more on the Ohio side? It looks like it is maybe ahead of Pennsylvania, and can you participate as much over there if that is the case? Alan Shepard: For an Appalachian producer, given the interconnectedness of the pipes, we are pretty agnostic to where it develops. You can wheel gas around between the states pretty easily. As a macro observation, Ohio has shown itself to be a little easier to do business with in terms of speed. It is a little bit flatter there for some of the data centers, and they have intersection points with the long-haul pipelines like Clarington that make it very attractive. Pennsylvania is also competitive—you have the Homer City plant and the NextEra projects; they are still working on site selection but have indicated the Mon Valley area, which is certainly in our footprint. Bigger picture, we are agnostic; we are excited about the growth in demand. And as Everett mentioned, you are starting to see differentials tighten up in the out years, and we hope that trend continues. Michael Stephen Scialla: Got it. I wanted to ask on your convertible notes. Can you say when during the quarter you expect that remaining $[inaudible] to convert? I am just trying to estimate the diluted share count for the second quarter. Everett Good: That maturity is on May 1. So those shares will be issued—approximately 12 million shares net issuance—later this week. Alan Shepard: And when we say net, that includes the effect of the cap call that we structured when we entered into the converts. So the 12 million is the net out the door. Michael Stephen Scialla: Great. Thank you. Appreciate it. Operator: This concludes our question and answer session. I would like to turn the call over to Tyler Lewis for any closing remarks. Tyler Lewis: Great. Thank you again for joining us this morning. Please feel free to reach out if anyone has any additional questions. Otherwise, we will look forward to speaking with everyone again next quarter. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 FTAI Aviation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference will be recorded. I would now like to hand the conference over to your first speaker today, Alan Andreini, Investor Relations. Please go ahead. Alan Andreini: Thank you, Marvin. I would like to welcome you all to the FTAI Aviation First Quarter 2026 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer; David Moreno, our President; Nicholas McAleese, our Chief Financial Officer; and Stacy Kuperus, our Chief Operating Officer. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements. including regarding future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and to review the risk factors contained in our quarterly report filed with the SEC. Now I would like to turn the call over to Joe. Joseph Adams: Thank you, Alan. The first quarter was a solid start to the year for us, and we'd like to begin this morning by highlighting the key objectives for each of our businesses in 2026 and the progress we made during this first quarter. Across aerospace products, strategic capital and power, we are scaling platforms with strong structural demand in a disciplined manner in deploying capital to support growth where we see the most attractive long-term returns. I'll start with aerospace products. First, a top priority for us in 2026 is to focus on accelerating our market share growth. As our production capabilities, parts procurement strategies and overall MRE customer adoption reach an inflection point, now is the time for us to take full advantage of our competitive moat and focus on market share growth. As a reminder, we're only 5 years into building our aerospace products business, and as the business continues to mature and grow, we have the opportunity to leverage our enhanced execution capabilities to take more market share more quickly from traditional engine maintenance shops. Second, as the market for the CFM56 and V2500 engines continues to mature, we've seen a notable increase in demand for leased engine solutions from top-tier airlines. even those with in-house engine MRO capabilities. We offer flexibility customized pricing and scale that no one else can fulfill and these large programs are very sticky. It's a key priority for us in 2026 to win more of this business. Third is production. We've always talked about expanding production capacity well ahead of growth as well as adding maintenance facilities in parts of the world where we see strong traction with our customer base. It's notable today that when you look at the map, we have no major maintenance facilities east of Rome, Italy. I'd expect this to look different when we are in next year's first quarter call. Turning to results. Aerospace Products results support the objective I just outlined with top line revenue growth accelerating both year-over-year and quarter-over-quarter, up 104% year-over-year and 32% quarter-over-quarter, respectively. First quarter adjusted EBITDA of $223 million is an increase of 70% year-over-year and up 14% from $195 million in Q4 of 2025. EBITDA margins for the quarter of 30% are indicative of an increased mix of deals with large airline customers and a larger mix of full performance restoration shop visits. We expect this to be the trend line going forward as our capabilities have been built out, and we're able to bring volumes to the market that others simply cannot. Shifting now to strategic capital, where our top priority is completing the deployment of the 2025 SPV or special purpose vehicles. Our deployment pace for the first vehicle has been strong, and our engine maintenance focused approach to adding value to aircraft ownership has been well received by the market. As we approach the end of the second quarter, the 2025 SPV will be fully invested, and we will shift from the deployment period to the harvest period where quarterly distribution will now begin. David will share more with you about the goals for adding value to the portfolio during this phase. As an active asset manager, we're always pursuing ways to enhance the returns above what is the contractual lease stream. Our second area of focus for strategic capital is the launch of the 2026 SPV. We continue to plan to have a first close at the end of the second quarter, and we'll start acquiring aircraft in the third quarter of this year. The investment strategy 12- to 15-month deployment period and size of the vehicle will be consistent with the 2025. Last, to support the build of the Strategic Capital business we've added to the team and now have over 40 dedicated individuals focused on sourcing, underwriting and servicing the portfolio across offices in Dublin, Dubai, Cardiff and New York. The growth ambitions and differentiated strategy around engine maintenance has resonated in the market and we've been able to attract great talent to supplement our existing team and scale the platform. Finally, the FTAI Power business continues to make strong progress towards its commercial launch in the fourth quarter of this year. This week, we signed an important joint venture agreement with the Jereh Group for packaging and customer conversions that are in advanced stages, both of which David will share more details about shortly. Before I pass it over to David, I want to address the conflict in the Middle East that began at the end of February the broader geopolitical environment our industry is navigating today. We are hopeful for a peace of resolution and a return to more normal energy trading and prices but we're also realistic about some of the challenges of today's environment. Beginning with aerospace products, our exposure to the Middle East is limited. Less than 3% of our global current gen narrow-body fleet is based in the region, and we have very little customer exposure. More generally, we've not seen any meaningful change in shop visit demand to date. That said, elevated oil prices and fuel prices do negatively impact our customers' financial situation, and while this can create some volatility, it's the exact environment where our FTAI value proposition becomes even more critical to the customer. When an airline is facing a multimillion dollar engine shop visit in comparison to a faster, lower-cost engine exchange with FTAI, the decision is even easier to make when liquidity is top of mind. It's also worth remember that airlines cannot meaningfully change their fleets in response to short-term volatility. New aircraft orders are locked in for the next 4 to 5 years. and the current generation aircraft will continue to be a vital part of the global fleet for many, many years. In short, market share gains in aerospace products are much more consequential to us compared to overall market growth. Our strategic capital periods of volatility create opportunities -- investment opportunities, when liquidity is tight, sale-leaseback transactions help raise funds and avoid future shop visits. As the only lessor in the world that covers all engine maintenance for its aircraft portfolio, we are uniquely positioned to help airlines in this matter. pAnd lastly, for Power, our business is largely insulated from the geopolitical dynamic today. The MOD 1, our product runs predominantly on natural gas. And to the extent we see additional aviation retirements that will just provide additional feedstock to grow our conversion efforts. So I will now hand it over to David Moreno David. David Moreno: Thanks, Joe. I will start by providing an update on aerospace products production. We refurbished 270 CFM56 module this quarter across our 4 facilities, an increase of 96% compared to Q1 2025. This is a good start to our 2026 production goal of 1,050 modules and continues to reflect the hard work of our fast-growing team. As Joe mentioned, we have built a strong aerospace products foundation over the last 5 years, and we are ready to further accelerate our market share growth. From a commercial perspective, we are seeing customer engagements expand to larger, more programmatic partnership as airline adoption accelerates. This is driven by both the overall market tightness as well as FTAI's capabilities continuing to broaden to now include engine and module exchanges, engine leasing and aircraft leasing. We can't emphasize enough the stickiness that's created as our relationships with airlines and asset owners expand. We become a solution provider that is integrated into the operational plans for the airline's future growth. Our close relationships with airline customers is something we are very proud of, and we believe this will continue to accelerate our market share in the years to come. Next, I'll share a further update on our strategic capital. To support the full deployment of the 2025 SPV, we upsized the vehicle's warehouse debt facility at the end of March, adding $1 billion of committed capacity. This facility is now $3.5 billion in size across 10 lenders, creating a strong roster of partners for our significant debt capital needs in the business going forward. As we mentioned last quarter, capital deployment for the 2025 is largely complete. We have closed 165 aircraft as of the end of Q1. And after we sign a few LOIs that are in process, all new aircraft will go into the -- all new future aircraft will go into the 2026 SPV. With the 2025 SPV transitioning from investment mode to harvest mode, we are very focused on maximizing the value of potential cash flows for our investors. We do this through active management of maintenance events, both airframe and engines as well as through lease extensions. We continue to see strong desire from our airlines to fly current gen aircraft as long as possible. especially when they do not have to worry about engine shop visits. Our all-in-one solution of combining leasing and engine maintenance has resulted in many lease extensions, and we believe this will continue to be an important trend in the portfolio. Finally, on FTAI Power. I want to share updates on the timing of our commercial launch, our packaging integration and progress with customers. First, we remain firmly on track to commercially launch the MOD 1 in the fourth quarter and our prototype testing is actually running ahead of schedule. We have completed all the major mechanical testing milestones, including testing our redesigned Mod 1 fan stage at synchronous speed and we expect to wrap up final testing in the third quarter. The results to date have exceeded our expectations. We have been also hosting customers on-site to observe the Mod 1 prototype directly, and that has become an important part of how we sell this product. Second, as Joe mentioned, we signed a joint venture agreement with Jereh Group, one of the leading packagers for mobile gas turbines. This is a foundational step for the program as Jereh will be our primary partner responsible for taking our turbine and combining it with the mobile package that includes the key components like the generator and gearbox. Through the joint venture, we will draw on Jereh's manufacturing footprint across the United States, the UAE, Canada and China, which gives us scale, geographic reach and a clear path to global product rollout. The joint venture derisks our supply chain accelerates our speed to market and align the incentives of both parties across the long-term success of the platform. Third, we are building a customer base committed to the long-term deployment of the Mod 1. The customer momentum we discussed last quarter has accelerated meaningfully. We are indeed in active negotiations with leader across the energy and digital infrastructure landscrape, and every one of these deals is anchored by long-term service agreement or LTSA on the turbine. One exciting element is that customers are coming to us with a range of commercial structures in mind from outright purchase to lease, which speaks to the flexibility of our model and the strength of the underlying demand. The interest in lease structure in particular, fits naturally with our strategic capital initiatives and gives us the ability to offer customers a sought-out after leasing solution while preserving capital efficiency. Several of these conversations are framed around multiyear multi-block deployment plans, which gives us visibility well beyond 2027. Last, what has resonated most with customers is the maintenance model. The ability to swap a turbine in place in just 2 days rather than taking the unit offline for an extended overhaul is a capability that the industry -- the power industry has not had access to before. and it translates directly into a lower levelized cost of energy or LCOE for the customer. Based on these conversations stand today, we expect to be mostly sold out of our 2027 target production in the near term with a meaningful portion of 2028 spoken for. Before I hand it over to Nicholas, I want to take a moment to congratulate him on his promotion as CFO; as well as Mike Hasan on his promotion to CIO. Both Nicholas and Mike have been key contributors to our operational success and their new leadership roles they are positioned to have a large impact on our future success. With that, I'll now hand it over to Nicholas to talk through the first quarter numbers in more detail. Nicholas McAleese: Thanks, David. The key metric for us is adjusted EBITDA. We started 2026 with adjusted EBITDA of $325.6 million in Q1 of 2026, which represents a 17% increase compared to $277.2 million in the fourth quarter of 2025. The $325.6 million EBITDA number was comprised of $222.6 million from our Aerospace Products segment, $153 million from our aviation leasing segment and negative $50 million from Corporate and Other, including interest segment eliminations and start-up expenses associated with our power initiatives. . Aerospace Products delivered another good quarter with $222.6 million of EBITDA and an overall EBITDA margin of 30%. This is up 14% sequentially from $195 million in Q4 of 2025 and up 70% year-over-year compared to $131 million in Q1 of 2025, reflecting continued momentum from production growth and operating leverage. Turning to Aviation Leasing. The segment continued to perform well, generating approximately $153 million of EBITDA in the first quarter. This included $45 million of insurance recoveries, $12 million in gains on sale, $25 million from 2025 SPV management fees and co-investment returns and $71 million from leasing assets held on our balance sheet. For insurance recoveries, in addition to the $45 million recognized in the first quarter, we continue to expect approximately $5 million to be settled later this year, consistent with our previously communicated $50 million for 2026. When combined with the $65 million recovered during 2024 and 2025, this brings total recovery since the outbreak of the war in 2022 to approximately $115 million against the $88 million we rolled off in 2022. For gain on sales, we began the year with $127.5 million in asset sale proceeds, generating a 9% gain or $12.1 million. as we closed the first 9 of 14 aircraft expected to be sold to the 2025 SPV this year and divested several noncore assets during the quarter, including airframes and an Orbi211 engine. Overall, as we continue to launch new strategic capital vehicles on a programmatic basis, we expect the mix of leasing EBITDA to increasingly shift towards strategic capital-driven earnings as we further pivot away from balance sheet aircraft leasing and toward a more capital-light fee-driven asset management model. This shift in our business model is also driving continued improvement in our financial profile. We began the year at approximately 2.3x leverage on an annualized basis, now below our targeted range of 2.5 to 3x agreed with our rating agencies. meaningfully lower than the leverage levels of approximately 5x in 2022 and 4x in both 2023 and 2024 before we pivoted to an asset-light strategy. In April, we also upsized our revolving credit facility from $400 million to $2.025 billion and extended the maturity of the facility through 2031 on improved pricing terms, providing SPI with a long-term source of liquidity. The facility was significantly oversubscribed and are supported by a diverse syndicate of 15 lenders, including several institutions that also finance the debt facility of our 2025 SPV. As we continue to scale our asset management platform, this alignment across financing relationships enhances flexibility, lowers our cost of capital and delivers tangible financial benefits to the public company. Finally, in the first quarter, we generated $158 million of adjusted free cash flow, reflecting several strategic investments made early in the year to position the business for further growth in 2026. These included approximately $75 million in prepayments under our multiyear CFM56 parts agreement with the OEM, approximately $81 million in induction prepayments for V2500 engines, where demand for full performance restoration remains strong, a $19 million of incremental inventory for FTAI Power to build working capital in support of a targeted 100-unit production run in 2027. Excluding these growth investments, adjusted free cash flow for the quarter totaled approximately $333 million, reflecting the strong underlying cash generation capability of the business. With that, I'll hand it back over to Joe for final remarks. Joseph Adams: Thanks, Nicholas. I'd like to reiterate how encouraged we are by the start of 2026. Despite a dynamic geopolitical backdrop, demand across our customer base remains robust, execution across our 3 platforms is extremely strong and the strategic investments we're making today position FTAI well for continued growth in 2027 and beyond. While developments in the Middle East remain fluid and could present both challenges and opportunities, we continue to see strong underlying fundamentals across our business and a durable competitive advantage in all of our platforms. Consistent with our view, we reaffirm our 2026 total business segment EBITDA outlook of $1.625 billion, comprised of $1.05 billion from aerospace products and $575 million from aviation leasing supported by growing and accelerating demand across our proprietary aerospace offerings. Based on this outlook, we also remain confident in our expectation to generate approximately $915 million of adjusted free cash flow in 2026, which reflects continued execution against our annual production plan of 1,050 CFM56 modules to meet customer demand while prioritizing excess cash flow for reinvestment in high-return growth initiatives, including M&A, minority investments in the 2026 SPV and the continuing development of FTAI Power. As a result of this confidence for the third consecutive quarter in a row, we're announcing an increase to our dividend from $0.40 per quarter to $0.45 per share per quarter. The dividend will be paid on May 26 to shareholders of record as of May 13. This marks our 44th dividend as a public company and 59th consecutive dividend since we started. As we look ahead to the rest of 2026, our focus remains on building a durable, scalable and differentiated platform that delivers value over the long term. The investments we are making across aerospace products, strategic capital and power are designed to strengthen our competitive position, expand our addressable markets and support sustainable growth for many years to come. And I want to recognize the teams -- fabulous teams across our organization for their continued focus on execution and delivery in a demanding operating environment. And I also want to thank our customers and partners for the trust they place in FTAI as we help them navigate capacity constraints and rising demand and our shareholders for their ongoing support as we continue to scale our business. We are focused on executing against the opportunities in front of us and remain confident in FTAI's ability to deliver. With that, I will pass it back to Alan. Alan Andreini: Thank you, Joe. Marvin, you may now open the call to Q&A. Operator: [Operator Instructions] And our first question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Nice quarter. I have 2 questions, if that's okay. First one is on Aerospace products. Market share continues to climb higher, up from 10% to 12% while the margin rate is healthy, but has taken a step back. Can you maybe talk about some of the puts and takes? How much came from higher work scope versus the market share in new customers. Joseph Adams: Yes. I mean we really don't have a specific breakout of the components. It's really a mix of things that go into it. And as we mentioned previously, as the customers get bigger, the potential orders get bigger, the work scopes get bigger. We are consciously going for a higher market share and to drive faster growth in EBITDA in an absolute dollar amount. And we think that moves the needle much more than anything else and really the opportunity to take advantage of this scale that we have today. and really capture as much of the market as possible is something that we've been working hard to get ourselves in a position to be able to do for years, and we feel like we're there at this point. David Moreno: Yes. And this is David to add to that, right? I think as Joe mentioned, the scale is intentional. It's obviously intentional on the aerospace products, but it's also intentional across the value it creates on our -- on the entire business, right, our strategic capital and our power business. So when we look about -- think about the value creation, there's no better lever than increasing market share for us as a top priority. Sheila Kahyaoglu: Great. And then maybe, David, you mentioned much of the '27 '28 modules should be committed to in the near term. Can you give us some flavor of what your customer set looks like and the underlying assumptions in terms of volumes and packaging capability as you get into the 2028 time frame? David Moreno: Yes. So we've made meaningful progress with customers. As I mentioned, we've had customers on site as well to look at the prototype, understand that. I think that's a very important piece of the sales process. So to give you a little more color, the customers really consist of 4 types of customers. #1 hyperscalers, #2 data center operators; #3 gas distributors and #4 financial sponsors. There's a lot of activity from financial sponsors who are actually -- who are providing a lot of capital in this space. We feel very good about being where we're at and we expect to be, as I mentioned, in a short matter of time sold out of 2027 volumes. The conversations we're having are beyond '27, they're multiyear multi-block conversations. So we're talking about conversations or orders into 2028 and beyond. And I think that's a very important piece is when we built this, we wanted to create a diverse group of customers, really with the intention of having them operate this base load for a long term. And I think we seen that, and we're very happy with the progress. And as I mentioned, I think we're kind of in the final steps here, and we hope to update you guys shortly. Sheila Kahyaoglu: Got It. Share in Aerospace and Power, makes sense. Operator: Our next question comes from the line of Ken Herbert of RBC. Kenneth Herbert: Joe and David and Alan and Nicholas. Maybe, Joe or David, can you just talk a little bit more about the relationship with your JV partner, Jereh Group? And maybe how that came about, why you picked them and the value uniquely they sort of bring to this FTAI Power opportunity? . David Moreno: Yes, this is David, Ken. So I can take that. Yes, we're very excited about our partnership with Jereh Group. They're one of the largest oil and gas equipment manufacturers across the world. And what they're going to be doing with us is they're going to basically handle everything except the turbine, right? What that means is the actual trailer, all the key components on the trailer, including the generator, the gearbox and all the controls. And that will allow us to focus on the Mod 1, which is our -- obviously our specialty around the turbine. Jereh, we selected Jereh because of their scale in manufacturing. They have manufacturing facilities across the U.S. Canada, the UAE and in China, so that scale is obviously an important theme, and it's something that we're going to continue to talk about as well as they have a lot of experience with aeroderivative packaging package turbines for, let's say, folks like GE Venova, Baker Hughes, Siemens, and that they can create a lot of value and everything but determined. So I think it's a really good marriage between both companies, and we have shared incentives to continue to work and scale this business together. Kenneth Herbert: Does the work with Jereh at all impact sort of your access to the post sales economics and we think around maintenance and spare parts and other ways to sort of monetize obviously, the FTAI power? David Moreno: Yes, I would say there's no real change to how we've talked about economics, right? So the overall unit economics will remain roughly the same in line. right? But obviously, a part of this will come through a joint venture. So the way that I will look on the face of the financials may be a little different, meaning revenue may be slightly lower and then we'll have earnings piece of this earnings through earnings in a joint venture. But overall, the unit economics remain the same. Obviously, as part of the Jereh Group handling the packaging. That means for us, we'd have to invest less in working capital around the packaging piece of the equation, which is obviously a good part -- but overall, they're best in class. They can package at scale and they're vertically integrated. So they add a lot of value there. So it does not have any impact on our overall margins. Yes. And I think we talked about this on the call, but we're obviously very focused on the long-term service agreement when we talk about economics to FTAI on the turbine. What that is, is effectively customers will pay for us to service the turbine. And I would think of that as very similar type economics as our aerospace business, where effectively, customers will pay us based on usage. And depending on usage, every 3 to 6 years, turbines will have to get replaced. And we're going to be handling that through our exchange business, which we're very excited. And what that means is, effectively, we can replace these turbines in 2 days or less. And we're excited because typically, the lead times of doing maintenance on turbines is actually a bit longer than the aerospace business. So we think that's going to be a huge competitive advantage. as well as a revenue stream, which we're very excited about. . Operator: Our next question comes from the line of Kristine Liwag of Morgan Stanley. Kristine Liwag: Maybe, David, since you're talking about power, I just want to touch a bit more on some of the things you said. So I just want to clarify, when you said that you're mostly sold out for 2027, does this mean that these things are accounted for and you're just waiting for ink to dry on the orders? That's the first question. And also the second question, can you provide more color in terms of how your interactions are with these hyperscalers? What's important to them? When you talk about being able to service these engines these turbines at a shorter period. Is that a key differentiator? Are they valuing this? And ultimately, how competitive is your offering to what they're considering right now? David Moreno: Yes. Yes. So we're in advanced negotiations. I'd say we're in kind of the final steps, and we expect, let's say, to be sold out imminently. So that's the first question. As far as the second question, what differentiates our product and what's important for our customer really it's 3 things, right? Number 1 is speed to power, right? So customers want units now, right? There's really a shortage of equipment out there. And our unit is mobile, and it can be installed in less than 2 weeks. So that's a big value add, very different than, let's say, an EPC or construction that takes, let's say, could take up to 18 months. Number 2 is scale. Customers want scale. I think now between our ability on the turbines as well as Jereh's ability on the packaging we have really scale that no 1 has today. And then number 3 is really reliability of the product, which includes, obviously, the reliability of the turbine. So it's the CFM56, it's the most durable engine ever produced and then as well as the maintenance or the servicing of it, which is a huge advantage, right? Ultimately, if you can service a unit in 2 days versus 6 months, that ultimately means you need less units and it's lower operating costs for our customers. So all that's very important, and I think they're very excited about the Mod 1. And again, we we've really been thoughtful about building the customer base, not just thinking about 2027, but thinking about the longevity of this platform. Kristine Liwag: Super helpful, David. And then you guys have historically talked about the power margins would be better or equal than aerospace products. With your investment now in higher market share for aerospace products within the margin pressure that that's yielding. Can you talk about where you think power margins could be in the long run? I mean, compared to when you guys have talked about the power initiative, this ability to turn around the maintenance in 1 to 2 days, it seems like a very significant opportunity. So does that materialize in better pricing, better margins. Anything to level set us on power margins and what to expect for '27 and '28 8 would be helpful. David Moreno: I would say our margins, right, when we talked about it, are going to be in line to our historical Aerospace margins, right? So I would say there's no changes based on our growth in market share on aerospace, that has no impact on power. We're obviously going to be providing more color as we progress through the specifics of these contracts. But you're right, the long-term service agreement is a key differentiator. It's really value add for the customer. And for us, it's recurring revenue, right? It really sets up a long-term base. Typically, the type of contracts we're going to enter are going to be long term in nature. so let's say, 10 years plus. And I think that's a very important piece because it's not only the day 1 sale, but it's also the ability to provide services on that equipment, which is a huge differentiator for our customers and something they prioritize when talking to us. Operator: Our next question from the line of Giuliano Bologna of Compass Point. Giuliano Anderes-Bologna: Congratulations on the continued impressive results in the scaling of the business. The one thing I'd like to focus on is the real acceleration in the module count in producing 270 this quarter. Can you tell us more about what's driving that acceleration in the module production because it seems like a pretty impressive acceleration in your production volumes. And be curious about the durability and where things should go from there because it very well. versus your stated targets for the year. David Moreno: Yes. No, no, we're proud of the execution from the team, right? And as we said all along, right, we've been really focused on execution, and that includes adding the capacity, which we've done. Number 2 is the people, right? We've been focusing on adding the right people and we've talked about the trading academy so that continues to be humming. And then obviously, number 3 is execution. So we're very excited. I think that's playing out in the numbers. As you mentioned, we went from 138 modules in Q1 in 2025 to 270. So pretty dramatic increase year-over-year. And I would point out that Rome and Lisbon are still ramping up. So I think we see a lot of momentum from those facilities and a lot of growth coming. So we're very excited. . I think Joe also mentioned this earlier, we continue to look for additional capacity east of Rome. I think that's a key priority for the business. We want to get ahead -- well ahead of capacity as we continue to go for market share. Joseph Adams: And I think also having a part supply deal from the OEM helps us scale as well, and that's a huge provider of parts, you need parts people and facilities to build an engine. And so we've really concentrated the last year on all 3 of those. And the result is we're able to double production year-over-year. Operator: Our next question comes from the line of Josh Sullivan of JonesTrading. Joshua Sullivan: Just wanted to touch base on the conflicts in the Middle East? I know your exposures be limited. But if this is a projected broader event, given the cost saving tools that FA offers, are you seeing any early conversations with new customers who might feel they're exposed to preparing? Joseph Adams: Well, I think -- I mean, when you get into these environments, liquidity becomes #1, 2 and 3 for airlines to focus on. And so any time that happens, you start having increased on sale-leaseback opportunities, asset sales avoiding engine shop visits. So yes, it's a direct result of when you get into these environments, the priorities change for the airlines customers, and we're there to partner with it. We're always offering help. We've done this in other past crisis. If you think about COVID or back when airlines have been -- the Russian situation. So we're always flexible, and we have a lot of access to capital. and we can save -- so we really go in and try to sort of sit down and work with the clients to figure out what they want -- what they need and what we can do and how to how to help them as opposed to sort of an adversarial relationship. It's really a partnering approach, which has worked very well. Joshua Sullivan: And then I guess kind of relatedly, are you seeing any acceleration in engine assets for sale in the Middle East or Europe becoming available as a result of the conflict. And I guess it's really a question on the retirement dynamic and how that's playing out in your view. David Moreno: Yes. No, it's early. So we're not seeing that yet. As Joe mentioned, obviously, for us, we want airlines to do well, the entire aviation industry is better when airlines are doing well, but we're well prepared with the tools that we have, right? I mean, Joe covered it, but the ability for us to do a sale leaseback with engine management really has 2 benefits. day 1, you create liquidity and day 2, you avoid the expensive shop visits. So we're really 1 of 1 that can execute at that scale. So it's still early, but we're prepared to help when the time is right. Joseph Adams: I mean the only thing you see in the beginning are if people were flying A340s or 747s or sometimes some regional jets that are either high -- really high cost or low revenue those can be taken out of operation, and that's sort of what you see in the early periods. But core fleets that people need to operate their schedule and they plan over multiple years and you can't get replacement capacity. It's been such a tight market. We don't expect to see much, if anything, on that changing in the next few months, even if this goes on. Operator: Our next question comes from the line of Brandon Oglenski of Barclays. Brandon Oglenski: Joe, can you speak maybe a little bit more on the customer profile of these larger airlines that you had in the quarter? And looking forward, as you seek to get more market share here. I think this might actually be very much a validation of the model that you have here. But I don't know, maybe you want to elaborate? Joseph Adams: Yes. I mean it's a great question because I mentioned last time that if I was talking to some of the big airlines 12 or 18 months ago, they would have been somewhat, we don't need this product, and we're a little bit more dismissive. But now we talk to airlines, virtually everyone in the world is a potential customer, if not an actual customer today. And the reason is, you can go to an airline and say, you tell me what you think you're going to spend to rebuild an engine, and I'll match that price or beat that price for you. And I'll get rid of all of the expenses you have to incur to manage that event like spare engines, engineering departments and the risk that the cost becomes -- you have a negative surprise in the cost overrun, all that goes away. And it's like who wouldn't want to do that. So it is a great pit. So when airlines hear that, and they think about it and say, why shouldn't I -- particularly if I'm moving into the new technology that believe and even if I have my own maintenance capabilities, why shouldn't I begin to use this product, at least for a portion. And then ultimately, a conversation becomes or if you like it for 10% of your fleet, why not 100% of your fleet. And we have conversations now where we go into an airline and we might have acquired some aircraft on lease to an airline through SCI, and the airline says, we go in and say, "Great news. You never have to do another engine shop visit on that fleet ever again. So you don't have to fight with our lessor, and you don't have to manage the engine shop visit and end up spending a lot more money, and they like, that's fantastic. Why don't you go try to buy all of my other leased aircraft from other lessors and convert those? And so they're actually helping us to expand the relationship. And ultimately, the goal is to manage for an airline -- their entire fleet. And once you get to the level of comfort, like why wouldn't they want to do that? So I would say virtually every airline in the world, I can't think of maybe a handful that might not, but almost everybody in the world is an actual or potential customer. Brandon Oglenski: And Nicholas, I think you -- congrats on the new role, but you improved liquidity with a larger revolver, but I think also enhanced the warehousing facility on SCI. Is that correct? Nicholas McAleese: Yes. Thanks, Brandon. So I think it's probably important to clarify first, they are 2 independent facilities from each other. So the revolver is related to the public company and is the primary source of liquidity. The warehouse upside was all related to closing out the deployment of capital for SEI One as we tracked about $6 billion number. But said that, we do have lenders in both facilities. across them. And then so as we become a bigger and bigger player on the SCI, we're able to see financial benefits. And we're both very pleased with the outcome of this is that we're able to improve terms on the public company given we're becoming a much larger player on the SCI. Brandon Oglenski: And can you just put that in context of your expected capital commitments or capital cost at the corporate level looking out the next year or 2? Nicholas McAleese: Yes. So for the first SCI, we did -- we have 19% of the $2 billion that we closed earlier in the year. the capital call for that, there's approximately $95 million remaining from that as of 3/31. We do expect that to be closed by Q2, and that will fully close that. As a reminder, SCI 1 is a closed-end fund -- so once we commit that capital, we'll then switch from being in investment mode to harvest mode. And at that point, we'll start doing distributions back to all of the institutional LPs, including FTAI for its 19%. Related to SCI 2, we are actively now in the equity fundraising mode. So from that, we will expect to deploy capital in the second half of the year. but the timing of that will ultimately relate to the cadence of when we first do our equity closing. Operator: Our next question comes from the line of Brian McKenna of Citizens. Brian Mckenna: Okay. Great. So there's clearly a lot of noise across private credit today, although most of that is within corporate direct lending, but what are your dialogues like today for SCI 2. We've been hearing that institutional allocators continue to deploy capital in a big way across private credit despite all the rhetoric out there, specifically into ABF opportunities. So I'm curious what you're seeing on this front. And then from your seat, what's ultimately driving such strong demand for your product? Joseph Adams: Well, I would say, ultimately, it's returns. And these are -- we're not seeing any impact from whatever the private credit side is experienced in withdrawals or redemptions because our investors are all committed into private equity style vehicles and nonredeemable structures. So it has no impact on our ability. And really what people like is an uncorrelated asset-based return that has high contractual cash flows. And that's a sweet spot in the market. It always has been. It is -- and we hit that perfectly. So -- and what we're able to show people is a higher return with lower risk, which is another thing that every investor I've ever met is always trying to find that. So we're able to show better returns than a traditional approach given our engine maintenance exchange program. and lower risk because we have less residual value exposure. So there's really nothing -- what we offer is a great product in today's world. And all of the investors in the first SPV or we're doing this with an idea that it would be a program and they would be able to do this over multiple funds over the next few years, and they're seeing great returns. And so they're very happy with what we've been able to do and are very committed to continuing to invest. Brian Mckenna: That's helpful. And then you're clearly building a great network here of alternative asset managers and large institutional allocators for SCI, but I'm curious. A lot of these large investors also own or are invested in data centers and energy-related infrastructure. I think you guys alluded to this a little bit, but is there an opportunity to leverage some of these relationships on the SCI side to further enhance the adoption and distribution of your power product over time? David Moreno: Yes, this is David. And the answer is absolutely. So we're -- we've talked about the demand being -- a lot of demand for leasing, long-term leasing. And we're thinking about it very similar to the way that we thought if you think about our Aviation business, where we can create these long-term contracted cash flows. And then our capital partners are very much wanting to invest in these type of assets. So we feel very good about being able to scale that. And I think that's a very capital-efficient way to do so. So absolutely. Joseph Adams: It also further differentiates our product because most equipment sellers don't offer financing. And so we -- when we go to the customer, we say like we did in aviation on the power side, you can either buy it and you can lease it or you can have a power purchase agreement. You tell us what you want. And that flexibility is hugely beneficial to today's world where there's a lot of demand for capital, as you can see. And people are trying to figure out how to make it go farther. So the flexibility that we can offer on the financing is extremely well received, and it's a perfect structure for an SCI power vehicle. Operator: Our next question comes from the line of Shannon Doherty of Deutsche Bank. Shannon Doherty: First one for Nicholas and congratulations on your new role. After the additional $5 million of expected insurance proceeds this year, will you be completely finished with the insurance claims? Nicholas McAleese: Thanks, Shannon. Yes, that's correct. So we settled on $44.6 million in Q1, of which we received $20 million -- $27 million of that -- the balance of that will be received in Q2 from cash proceeds. And then remaining that $5 million is consistent with our original guidance of $50 million. After that, that will be ultimately it and closed. Shannon Doherty: Great. And for my second question, any update on the progress of getting the remaining PMA parts approval with the -- we all know that parts inflation is an issue for everyone in the industry right now. So maybe you can provide us with some more color on levers that you can pull to manage costs? Joseph Adams: Sure. So -- I mean, just to recap, there are 5 parts in total that [indiscernible] has been working on 3 are approved. Those 3 represent about 80% of the total cost savings. So the last 2 parts are in process to getting approved. But the majority of the cost savings is already with parts that are already available in the market. So -- but they are in the works in terms of getting approval for those last 2. Operator: Our next question comes from the line of Myles Walton of Wolf Research. Unknown Analyst: This is Greg Dalberg on for Myles. I just had a quick follow-up on Giuliano's question regarding module production. I wanted to focus more on Miami and Montreal specifically just because looks like Montreal is down sequentially in 1Q in Miami was well above the full year run rate. So can you just talk about the dynamics specifically in 1Q and kind of how those play out through the year? David Moreno: Yes, I can take that. So Montreal is our most mature shop which that means they're going to handle the heaviest work scopes. So the product production mix is based on -- truly on work scope. So Montreal is doing, let's say, heavier shop visits while Miami is doing a bit lighter and then Rome today and Lisbon are doing the lightest work scopes. Unknown Analyst: Got it. And then a quick 1 for Nicholas. Just given the corporate expense in 1Q was embedded with some of the power costs. Can you talk about the full year expectation? Nicholas McAleese: Yes. So we had approximately $10 million in incremental expenses related to power, that's R&D expense, and that's -- but that's also incremental head count from building out the teams of engineers, technicians and support staff. So decomposing that you can assume that we will be approximately slightly less on an annualized level related stuff for 2026. But as in the future years, we plan on growing this into 100 unit production growth, we will be increasing headcount. So in outer years, you can expect that our expenses for Power will continue to grow. But ultimately, there is some onetime expenses in Q1, Q2, Q3 as we do or indeed that will immediately hit our P&L rather than being capitalized. Joseph Adams: But probably in 2027, it will be a segment, and we will not have it in corporate. It will be a sizable business, and we'll set it up as a separate reporting segment. And so all those expenses will be attributed -- allocated to the Power business at that point. Operator: Our next question comes from the line of Andre Madrid of BTIG. Andre Madrid: This is the first quarter in a while that I can remember at least that we didn't see some kind of acquisition being announced. Obviously, still remains a capital deployment priority. I guess just could you give more color as to what the M&A pipeline looks like? Maybe obviously not too deep in the details, but color around scale and maybe geographic location and capability. Joseph Adams: Yes. I didn't realize we've built an expectation. We have an M&A every quarter. But it is hard to control that. But I would say, on M&A, the activity is in 2 different categories. This one is adding capacity to the overhaul business. And we did allude to the fact that we expect by this time next year, that we'll have another facility somewhere east of Royal, Middle East. So we are -- we do have some candidates. We're working on that. it's often hard to control the timing of M&A. So -- but we've been very disciplined and we found great assets to add. And when we get the right structure and the right asset, we can move quickly. So we -- we're working on deals in that category. And then the second area where we've been active is in piece part repair and part manufacturing. And we have several deals that we're looking at in that space as well. So we'll continue to vertically integrate in our product offering. Anytime we can undertake an activity to reduce the cost of overhauling and building an engine. We're going to be very aggressive about that. And we've added -- last year, we added Pacific Aerodynamic and prime through the Bauer partnership. So we'll keep looking and hopefully add additional capability in the repair and piece-part manufacturing business in the future. Operator: I see no further questions at this time. I would now like to turn it back to Alan Andreini for closing remarks. Alan Andreini: Thank you, Marvin, and thank you all for participating in today's conference call. We look forward to updating you after Q2. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, welcome to Frontdoor's first quarter 2026 earnings call. Today's call is being recorded and broadcast on the internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer. He will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Davis. Matt Davis: Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's First Quarter 2026 Earnings Conference Call. Joining me today are Bill Cobb, Chairman and CEO; and Jason Bailey, Senior Vice President and CFO. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at www.investors.frontdoorhome.com. As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC. Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements. All forward-looking statements are made as of today, April 30, and except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures for the most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. I will now turn the call over to Bill Cobb for opening comments. Bill? William Cobb: Thanks, Matt Davis. Coming into 2026, we laid out an ambitious plan, grow the member base, deliver structurally higher margins and maintain a disciplined capital allocation framework to create shareholder value. I am happy to report that we are off to a fast start in 2026 and executing on each of these. Turning to Slide 5. Revenue grew 6% to $451 million. Gross profit margin remained strong at 55%. Net income grew 11% to $41 million. Adjusted EBITDA increased 3% to $104 million and we bought back $60 million worth of shares. Operationally, our member count trend continues to move in the right direction with growth in our first-year channels accelerating to 3%. Combining this with our strong execution in the renewal channel, we now anticipate total member count will grow approximately 1% for the year. This would be a major milestone and would mark the first-year of organic member count growth since 2020. Complementing our core business, our HVAC upgrade program continues to be a significant driver of growth and adds meaningful value for our home warranty members. Let's now turn to Slide 6 to take a deeper look at channel performance. Starting with the direct-to-consumer channel, where ending member count grew 3% versus the prior year period, marking the sixth consecutive quarter of year-over-year member growth, proof that our strategy is working. Our approach to DTC is anchored in 3 key areas, strengthening brand leadership, growing demand and improving conversion. First, strengthening brand leadership. We continue to benefit from strong brand awareness, which we further reinforced in March with the launch of our latest Warrantina campaign. Campaign results continue to be terrific, with improvements across key brand metrics, including unaided awareness up 6% to 28%, purchase consideration up 5 points to 35% and likelihood to recommend up 8 points to 63%. Second, we are growing demand through an optimized value proposition, a more refined targeting approach and enhanced performance marketing. These efforts are allowing us to drive higher intent to purchase traffic while maintaining discipline around our marketing investments. In short, we are improving both the quality and quantity of demand entering the funnel. Additionally, we have started to see increased demand from the integration of 2-10 onto our platform with better SEO performance and an improved user experience. And third, we are improving conversion. We continue to refine our sales funnel through optimized marketing content for LLMs, AI tools to improve sales performance and promotional pricing, all to drive stronger conversion. The beauty of our promotional pricing strategy is that we are able to deliver member count growth without compromising long-term renewal performance. Most importantly, the renewal rates for our promotional cohorts are consistently exceeding those of non-discounted member cohorts. Now moving on to the first-year real estate channel. While existing home sales remain near 30-year lows, home inventory continues to rise. This improvement in inventory is creating a more favorable selling environment for home warranties. To capitalize on this, we have been deliberately investing at the local level and leveraging targeted promotions to position our brands for success. Here's a great metric. Our attach rate has improved now for 8 consecutive months and was at nearly 6% of existing home sales in March. As a result, ending member count for first-year real estate grew 3%, the first time we have organically grown this channel in years. This is a very big deal. Now turning to renewals, where our performance has been nothing short of amazing. Renewal rates remain near record highs, supported by a combination of factors, continuous improvement in the end-to-end member experience and reduced cancellations driven by engaging with members at the right time with the right message. Now moving to non-warranty and other, we continue to scale during the quarter with revenue growth of 23% year-over-year to $41 million. HVAC upgrades remain the primary driver and we continue to optimize how we run the program. By routing a greater share of HVAC claims to higher converting contractors, we have seen significant improvements in both quote rates and orders. Let me now turn to Slide 7 to discuss our strategic priorities driving value creation. Last quarter, we were clear about the priorities that matter most for our business. First, member growth. Improving first-year acquisition trends, combined with strong renewal rates, gives us confidence that we expect to deliver approximately 1% member count growth this year. Second, we continue to scale non-warranty revenue in a disciplined manner. We have proven our ability to expand share of wallet while deepening engagement with our member base. Third, deliver structurally higher margins. Last quarter, we increased our long-term margin targets, underpinned by dynamic pricing and cost discipline. This margin performance translates into strong cash generation, which brings us to our final priority, disciplined capital allocation to drive long-term value creation. Our capital allocation priorities remain unchanged. First, we invest to accelerate growth through organic initiatives and selective M&A. Second, we maintain a strong balance sheet and financial profile. And finally, we return excess cash to shareholders and we are on track to complete our current share repurchase authorization by early 2027. Execution across all of these long-term goals is clearly reflected in our financial performance. With that, let me turn it over to Jason to walk through the financials and our outlook in more detail. Jason? Jason Bailey: Thanks, Bill. Good morning, everyone. Let's start on Slide 9, where I will quickly cover some of the financial highlights for the quarter. We are off to an excellent start in 2026. Our first quarter results reflect focused execution and consistency across the business. Versus the prior year period, revenue grew 6% to $451 million. Gross margins remained strong at 55%. Adjusted EBITDA increased 3% to $104 million. And lastly, adjusted diluted EPS grew 14% to $0.73 per share, reflecting strong earnings growth and the positive impact of our share repurchase program. Now let's turn to Slide 10 for a deeper look at our revenue performance. As I just highlighted, total revenue grew 6% to $451 million. This was driven by approximately 5% from higher realized price and 1% from higher volume, primarily due to the HVAC upgrade program. From a channel perspective, compared to the prior year period, renewal revenue grew 6%, driven by higher price. First-year real estate revenue increased by 3% as higher volume was partially offset by slightly lower pricing. First-year direct-to-consumer revenue decreased 5%, driven by our promotional pricing strategy aimed at increasing member count growth. This lower pricing reflects a higher mix of discounted first-year members from the past 12 months of new member acquisition, which was partially offset by higher volume as we added more new members. Lastly, non-warranty and other revenue increased 23% due to both higher price and volume driven by our HVAC upgrade program. Now moving down the P&L to gross profit and gross margin on Slide 11. Gross profit increased 5% versus the prior year period to $248 million, while gross profit margin held strong at 55%. For the first quarter, our gross profit margin reflects higher price realization of 5% or $19 million, disciplined cost management leading to low single digit cost inflation, slightly higher incidence or service requests per member, which includes approximately $1 million from unfavorable weather in the quarter. This gross profit margin also reflects the ongoing expected revenue mix shift as non-warranty and other revenue continue to scale within the portfolio. Turning to Slide 12 to review our net income and adjusted EBITDA. For the first quarter, net income grew 11% to $41 million versus the prior year period. Adjusted EBITDA grew 3% to $104 million. As planned, SG&A increased during the quarter to capitalize on the strong momentum from 2025 in the direct-to-consumer channel. Adjusted EBITDA margin remained strong at 23%, reflecting disciplined cost management and solid operational execution despite the higher levels of marketing investments. Let's now turn to Slide 13 to discuss our free cash flow and capital deployment. Our recurring revenue and capital-light business model continued to generate excellent free cash flow of $114 million in the quarter. As a reminder, we expect to convert adjusted EBITDA to free cash flow at a rate of over 60% in 2026. In the quarter, we returned $60 million to shareholders through share repurchases. We ended the quarter with a strong liquidity position of $698 million and a low net leverage ratio. More broadly, this financial strength supports the capital allocation strategy Bill outlined earlier, providing the capacity to invest in long-term growth, maintaining balance sheet strength and returning excess cash to shareholders. When stepping back, Q1 was another proof point of what our business model is built to do. We continue to deliver strong earnings, generate significant free cash flow and return substantial capital to shareholders while accelerating growth investments. Let's now turn to our second quarter outlook on Slide 14. For the second quarter of 2026, we expect revenue to be in the range of $635 million to $650 million. This outlook reflects a low single digit increase in renewal revenue, a mid-single digit increase in first-year real estate revenue, a low single digit decrease in first-year direct-to-consumer revenue and a mid-20% increase in non-warranty and other revenue. We expect adjusted EBITDA to be in the range of $198 million to $208 million. This reflects higher gross profit from revenue conversion, low single digit inflation, continued revenue mix shift to non-warranty and our strategic decision to increase sales and marketing spend with the strong momentum we are seeing in the first-year channels. Turning to our full year 2026 outlook on Slide 15. We are reaffirming our full year 2026 outlook with key assumptions remaining essentially unchanged, as detailed in our earnings release and shown on the slide. As a reminder, and for those of you that are new to our story, I want to take a moment to discuss how seasonality impacts our financial results. With our first quarter results and second quarter guide, we anticipate that 53% to 54% of our full year 2026 adjusted EBITDA will be generated in the first half of the year. This is similar to the split in 2025. This is a normal part of our business and the reason why I encourage our investors to focus on our full year performance and guidance as the true measure of how we are delivering results. While the geopolitical environment has become more complex, our execution across the business, combined with multiple levers we can deploy to offset inflation, give us confidence in our ability to deliver on our expected revenue and adjusted EBITDA growth for the year. With that, back to you, Bill. William Cobb: Thank you, Jason. Our first quarter results reflect a continuation of the strong execution you've come to expect from Frontdoor. I'd like to highlight 3 things as we wrap up. First, our member count growth. Our member count is now growing. The team is doing great work and we're seeing that translate into measurable progress. And as a result, we now expect our total member count to increase approximately 1% for 2026, a major milestone for our business. Second, we are continuing to deliver strong margins in line with our long-term targets. The operating model we have been strengthening over the past several years is allowing us to deliver consistent results. And finally, our business model is doing what it was designed to do, generate a lot of cash and return that to shareholders through share repurchases. We love the position we're in and we remain focused on executing with discipline as the year progresses. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question is coming from Mark Hughes of Truist Securities. Mark Hughes: Can you talk about the real estate channel? It seems like you're having good success there. I wonder if you might touch on the attachment rates. You said they've been improving in recent months. Was it 8% in March? Where did they bottom out at? Where historically have they gotten up to in a stronger market? William Cobb: Yes. If you recall, many years ago, and I'm talking 6 or 7 years ago, attach rates in the industry were around 30%. That has fallen through COVID and the real estate sluggishness into the mid-teens. What has happened is we have steadily seen improvements in our attach rate, which is a measure of our warranties divided by existing home sales. So in March, we hit 6% on that measure. And I think it reflects some really good work by our real estate team, some work we're doing on shifting our focus away from large MSAs to focusing really on the local real estate agent. We have added some promotional pricing there. It's not at the level of 50% off, but it enables us to basically get the attention of real estate agents. And we've seen -- we've spent a lot of time talking about the improvements we've made to our members with the app, our experts, et cetera. So it's a combination of factors and we're steadily moving up. And like I said, I watch that measure very closely, the attach rate and our team with 8 consecutive quarters of improvement. That's a lot of what we think is driving the better performance. Mark Hughes: Yes. And will the strategy be on renewal, you'll move that up pretty expeditiously like you've been doing in the direct-to-consumer channel? William Cobb: Yes, it continues to be around 30%. It's a big initiative for our teams to try to -- we tick up into the 31% level, but we've been kind of stuck at 30%. But if we can unlock that, that would be great. It used to be in the mid-20s. So we have made a lot of progress there. And as you saw in our 10-K, our renewal rates improved by 200 basis points in 2025. So I think that the combination of efforts is why we feel so good about where the renewal book is coming. And if we can continue to grow the first-year channels, the renewal book is catching up and that's why we are now at 1% ending member count growth, what we're forecasting for '26. Mark Hughes: And then one more, if I can. You talked about the 2-10 that you're integrating onto the platform, you're seeing some momentum as a result of that. Could you expand on that point? William Cobb: Yes. We now run it as one, and this was always the plan. We thought that the synergies we could start to drive in revenue. So we run HSA, AHS and now 2-10, all of our DTC actions, all of our real estate transactions, all of our renewal transactions are all on one platform. This gives our teams an ability to do specific initiatives. So for example, now 2-10 can do 50% off on the DTC channel. Now we can do the same kind of tactics that we've used to help drive the renewal channel. So that's why it makes it a lot easier for us to execute 2-10 as being part of the platform. Jason Bailey: Yes, I'd add, Bill, to the other good examples would be our dynamic pricing tools can be applied, our contractor algorithms. It's just a great... William Cobb: Yes. So we now have one integrated contractor relations team, one integrated customer support team, et cetera. Operator: And our next question is coming from Eric Sheridan of Goldman Sachs. Eric Sheridan: I want to go a little bit deeper in how you continue to get message around scaling marketing investments around your brands, around driving customer acknowledgment of the product set and customer adoption of products broadly. And how are you thinking also about applying marketing to the balance you want to strike between the warranty business and the non-warranty business over the long term in terms of the messaging you want to put in front of consumers? William Cobb: Yes. Our primary focus is on the warranty business because the non-warranty business is primarily, at this point, a B2B2C business where we work very closely with our contractors. But there's a halo effect on the brands that come from talking about American Home Shield and what that does for our members. So the way we operate is we talk about our marketing funnel. It starts at the top with our broad advertising message. We use the warranty as our main message. But that's a portion of our marketing investment because there are all the elements of search marketing, direct mail, social media. There's a variety of tactics that we use in our overall marketing. Then what we do with non-warranty is that we're really marketing to our members directly. So with a 2.1 million member base, we find that very efficient for us. That's why we call it relatively CAC-free when we talk about non-warranty. So -- and we have such a good relationship with our contractors. They're very excited about this additional piece of business that they can put in new equipment. And frankly, it has a downstream effect of less truck rolls because the equipment is so new. So we think it's a virtuous cycle working together. Like I said, the primary focus is on American Home Shield, but we have a number of techniques that we're using, including some of the AI tools I referenced in my remarks. And it's really come together. The marketing team's done a terrific job. Operator: And our next question is coming from Jeff Schmitt of William Blair. Jeffrey Schmitt: So the new promotional strategy in real estate seems to be off to a good start. Are you seeing competitors respond to that? Are some starting to do the same thing? Or do you anticipate that happening? William Cobb: We haven't gotten much intelligence that others have done that. Now we believe that they probably are taking a look at that. But right now we're trying to -- we're very focused on the local real estate agents. So that's where our focus is. But we haven't picked up a lot of noise around others trying to do that. Jason Bailey: Yes. I think I'd add, too, our focus there in that strategy is more, as Bill said in his remarks, about engagement. And so I think in addition to the promotional pricing, we can drive engagement by highlighting the app, our experts and kind of our overall improvements to customer experience. And so I think this is just another tool in our kit that allows our field sales team to really succeed. William Cobb: I think that's right, Jason, because I think what we try to think about is we need to keep bringing the agent new news, whether that happens to be during a promotional pricing period or the other elements that we've added to our arsenal. Jeffrey Schmitt: Okay. And then, so there's 5% of realized pricing in the quarter, that was better than we had expected. Did you push through another round of pricing increases in December? And at what level? Or was that more from your dynamic pricing? Jason Bailey: It's no incremental pricing since our last update. I think it's just the effectiveness of our dynamic pricing tools. We're pretty much in line with where we were expecting or where we are expecting the year to land. William Cobb: Yes. I think, Jeff, when we talk dynamic pricing, what we're really saying is we're constantly looking at, frankly, increasing our prices. But some members get a price decrease and that's the advantage of dynamic pricing. We're really priced to the person. So it really was a continuation of what we're trying to do with our [ 1/12 ] at a time recognized revenue base. We're able to -- while there's a disadvantage that it takes 12 months for it to be fully realized, there's an advantage that we can act very quickly and enact pricing changes and that's really what we've done. But I think we're pleased with that effort. I think it also ties back to the strong renewal rates we've had, which also enables us to show a nice increase in pricing. Jason Bailey: Yes. I think there's probably a little bit of timing in there in the compare to the Q1 versus Q1 of the prior year. We're still targeting that kind of low 2% to 3% full-year realized price impact. Operator: And our next question is coming from Ian Zaffino of Oppenheimer. Isaac Sellhausen: This is Isaac Sellhausen on for Ian. So the question would just be on the customer retention for the quarter. It looks like that was just down slightly compared to last year. Not sure if that is a timing thing, but maybe you could just touch on that piece of it, maybe in relation to the renewals channel specifically and then kind of your expectations for retention as you move through the year. Jason Bailey: Yes. It's down slightly in Q1. That's just timing of 2-10 rolling into the book. I think we mentioned at acquisition, their retention rates were lower than ours. Now that they're fully in our book, I'd say that's just a minor impact in the quarter. By year-end, we expect retention to be relatively flat. The other thing I'd kind of point to is our renewal rates continue to be strong. I think Bill mentioned earlier, we were up almost 200 basis points year-over-year at the end of '25. And now with 2-10 on our platform, that's one of the upsides we see just as we put our tools and techniques on the base, we'll see that their rates come up to higher. William Cobb: Yes. So Jason is right. It's a mix issue, but AHS retention rates continue to be very strong. Isaac Sellhausen: Okay. Understood. And then just as a follow-up, as far as the gross margin outlook for the year, you guys reaffirmed that. Maybe if you could just touch on the cost side, whether it be parts or equipment or labor, maybe just how things have trended in the first quarter and then the confidence you have in that as you move through the year to reach that margin target? Jason Bailey: Yes. We're at low -- I'd say low single digit inflation in Q1. Our contractor relations team has done a great job working with our contractor network. We feel good about our outlook for the year. I would obviously say Bill and I are monitoring macro conditions daily and working with the team. So we're pretty confident that we'll be right in line with our guide. The outlook is pricing flowing through, similar incidence rates to prior year and then low single digit inflation for the full year. Pretty normal weather is our expectation. And then we've obviously considered the mix of non-warranty as it grows all in that guide. Operator: And our next question is coming from Sergio Segura of KeyBanc Capital Markets. Sergio Segura: First question I just had was on the full year outlook. So can you maintain that? I guess last year, you had a pretty steady cadence of beating and raising. So you beat this quarter in 1Q. So maybe just walk us through why you chose to keep the annual outlook unchanged despite the stronger-than-expected performance. Jason Bailey: Yes, Sergio. I'd say the Q1 is just a little bit of timing on the beat. We're very confident in how we're operating. We just -- since we just gave the guidance and obviously watching all the macro news, we felt really good about reaffirming where we are. We think the team, both top line and bottom line, are operating very, very well. So that's just kind of how we ended up on reaffirming where we are. William Cobb: Yes. It's a little bit of an anomaly because we report Q4 so late. It's like 2 months into the year and then we come right back only a month into Q2 to report Q1. So -- but giving the guidance 60 days ago and we felt like we did beat. It wasn't a large beat, but we're very proud of it. And so we felt like let's stay, let's reaffirm guidance at this point, and then we'll see -- we'll take another look at midyear. Sergio Segura: Understood. And then the second one I had, which is somewhat related, has to do with just the geopolitical tensions we're seeing and the macro uncertainty that you mentioned. Any comments you can provide on how the higher and volatile oil prices might be impacting your input costs and how much of a swing factor that could be to margins for this year? Jason Bailey: Yes. Like I said a minute ago, Bill and I monitor this really probably almost hour to hour, day to day, Sergio. But the team is operating very, very well. In Q1, we were really successful. We haven't seen a huge impact from fuel costs. It's definitely an input for our contractors. But remember, we manage cost overall on a total cost per job. And the levers as we think about there are probably 4 or 5 key tools we use to kind of manage that cost base. One, I'd start with, we're always thinking about our mix of preferred contractors and how much business we have with them and trying to optimize that mix. Two, Bill and I continue to remain laser-focused on SG&A and how we control costs there and what levers we have. Three, we are in a great position with our supply chain and being able to manage among multiple vendors and suppliers as we think about where we want to put our volume. And then the last two would be probably the more normal things you think of, but that's how we manage our trade service fees and how we manage dynamic pricing if we need to go to that level. So I think we've got a lot of tools in our toolkit to help us manage through this as we think about kind of the big macro picture right now. Operator: Our next question is coming from Cory Carpenter of JPMorgan. Cory Carpenter: I wanted, Bill, to go back to a comment you made in the prepared remarks. I think you said renewal rates for the promotional cohorts are exceeding those for the non-promotional cohorts. Can you just expand a bit on that? Obviously, that's a bit counterintuitive. And then does that make you want to lean more perhaps even into that discounting strategy? William Cobb: Yes. It is counterintuitive, Cory. And we talk about this all the time and I press the team multiple times, but these numbers, right, I think it has to do with consumer behavior beyond just home warranties. This is a tactic that a lot of consumer services companies are using where you really discount your first year and then there's almost an expectation among consumers that I got a great deal in the first year, I'm going to have to absorb an increase in pricing. As we've said, however, we believe or we've proven, we've been at this for about 3 years now. So we've been able to see that we're able to climb back up to the, if you will, normalized pricing level within 18 to 24 months. So we test this all the time, but I think what has happened is that it just proves out that people and it has to do with what kind of service they get, do they have the right contractors, a lot of factors. The moment of truth is really the most important piece there. So I know it's counterintuitive, but we've been testing this and proving it out continuously. To your point about would this indicate that we would do more, I think that's something we pulse. We stay very close to this every month in terms of how we want to pull the trigger on promotions. We are now moving into early days of dynamic discounting so that it isn't just the broad brush. We'll continue to do broad brush promotions like 50% off. But we're encouraged about what is potentially going to happen with dynamic discounting. So I think we're very active in this field. Like I said, we've been at it for about 3 years and we feel good about it. And obviously, the important point is to make sure that those renewal rates continue to stay high. Cory Carpenter: And I wanted to ask one more question on macro. I know you touched on kind of the cost side question earlier, but I wanted to ask it more on the demand side. And there's been a lot of -- the potential for higher inflation and more stress on the lower end consumer. Are you seeing any change at all in consumer behavior? And maybe if you could just remind us of what your kind of mix of consumers demographically looks like? William Cobb: Yes. So let me take that. So the mix of consumers is about 50% below $100,000, 50% above that. The piece that we have not seen, no impact on demand, is because with the budget protection that our core value proposition brings, I think it actually kind of plays to our advantage. It may hurt us a little bit in the real estate sector with the real estate market continuing to be sluggish. But I think the core value proposition, which we try to hit very hard and we try to do this on a targeted basis, we talked in the past about targeting more millennials, targeting our Hispanic markets. So I think that has worked to our advantage. So to date, we haven't seen a softness in consumer demand. You can see that from some of our numbers. So -- and I think that speaks to the value proposition of a home warranty. Operator: And our next question is coming from Michael Rindos of Benchmark. Cory Carpenter: Can you talk a little bit about your relationship with SkySlope, how that works and how much business is coming through them? William Cobb: Yes. Jason has been very close to that relationship. So I am going to let him take that. I may add something. But go ahead, Jason. Jason Bailey: Yes, Mike. SkySlope, we have an ongoing relationship with them, and the announcement you saw was an expansion of that relationship. I think we were originally in 4 or 5 states and now we are expanding to over 40 states. It is -- the easiest way to describe it is think of SkySlope as a platform that makes things easier for real estate agents. And then for us, the way that translates is we're in that workflow. So it's easier to attach a home warranty. We're pleased with the relationship. And again, it's just another tool for our field sales team to be successful and kind of build on the momentum they already have. Cory Carpenter: Okay. And just as a follow-up, is that an exclusive situation that you have there? And also, as far as the growth in the real estate channel, where are you seeing the most growth on a regional basis? And how many competitors do you see in some of those markets? Jason Bailey: Yes. I will take that in 2 parts. The SkySlope relationship is not exclusive, but we're really comfortable with our position there and how well we work together. And then on a regional basis, we're seeing success. William Cobb: I think it is pretty consistent with our overall business, what we call the Smile states. And our biggest markets are Texas and California, Georgia, et cetera. I think as far as competitors go, in the real estate part of the DTC, we have a larger share, smaller share, about 1/3 in real estate because we have many more competitors. But from a geographic perspective, it's pretty consistent with the way our overall business plays out. Operator: Well, we appear to have reached the end of our question-and-answer session and indeed the end of the conference call. This does conclude today's conference, and you may disconnect your phone lines at this time. We thank you for your participation. William Cobb: Thanks, Jenny. Operator: Thank you so much.
Operator: Hello, and welcome to the Third Quarter Fiscal Year 2026 Cardinal Health, Inc. Earnings Conference Call. My name is George, and I'll be coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd like to hand the call over to your host, Mr. Matt Sims, Vice President, Investor Relations, to begin today's conference. Please go ahead, sir. Matt Sims: Good morning, and welcome to Cardinal Health's Third Quarter Fiscal '26 Earnings Conference Call, and thank you for joining us. With me today are Cardinal Health's CEO, Jason Hollar; and our CFO, Aaron Alt. You can find this morning's earnings press release and investor presentation on the Investor Relations section of our website at ir.cardinalhealth.com. Since we will be making forward-looking statements today, let me remind you that the matters addressed in these statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during our discussion today, the comments will be on a non-GAAP basis, unless specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the supporting schedules attached to our press release. For the Q&A portion of today's call, we kindly ask that you limit questions to one per participant so that we can try and give everyone an opportunity. With that, I will now turn the call over to Jason. Jason Hollar: Thanks, Matt, and good morning, everyone. We are pleased to report another strong quarter for Cardinal Health, building on the momentum we displayed over the past few years. This quarter's performance highlights the durability and resilience of our business and the team's disciplined execution. The results reinforce our conviction in the company's growth trajectory and ability to deliver long-term value creation. Our underlying operating strength continues to be led by our largest and most significant business Pharmaceutical and Specialty Solutions, and is amplified by contributions from our higher-margin growth businesses. Within Pharma, we delivered strong growth, highlighting the strength of our core. We continue to see benefits from our strategic focus on expanding our capabilities across Specialty, both downstream of providers and upstream with manufacturers. We are progressing the expansion of our MSO platforms, in particular with the Specialty Alliances multi-specialty offerings, delivering differentiated value to a growing network of physicians and enhancing patient care and access. The integration of Solaris into the specialty Alliance remains on track, and we are taking actions to realize synergistic benefits across our portfolio. In GNPD, we continue to execute against our improvement plan. Our focus on simplification and cost optimization initiatives is producing tangible results, and we continue to see notable strength in our portfolio of Cardinal Health brand products. Our deliberate actions to simplify operations, enhance supply chain resiliency and drive commercial excellence remain strategic priorities as the business navigates the dynamic tariff environment. Our other growth businesses, at-Home Solutions, Nuclear and Precision Health Solutions and OptiFreight Logistics continued to deliver robust results. Their sustained performance is a direct outcome of our continued strategic long-term investments in these areas, which are aligned with a favorable demand environment and positive secular trends in faster-growing areas of health care. The collective strength and sustained momentum across the enterprise, including our financial position, gives us the confidence to again raise our full year outlook for fiscal '26 and highlight our expectations for continued momentum in fiscal '27. And with that, I'll turn it over to Aaron to review our financials and outlook. Aaron Alt: Thank you, Jason, and good morning. Our team delivered strong financial results in the third quarter, reflecting positive and broad-based demand, operational execution and loyalty to our disciplined capital allocation framework. Our strong operational performance was supplemented by positive discrete tax planning benefits below the operating line and continued share repurchase activity. Given our confidence in the remainder of the fiscal year, we are pleased to be raising our full year fiscal 2026 non-GAAP EPS and adjusted free cash flow guidance. Let's begin with a review of our consolidated third quarter results. Total company revenue increased 11% to $61 billion. This growth was driven by strong demand in our Pharmaceutical and Specialty Solutions segment and in Other. Gross profit grew 18% to $2.5 billion due to benefits from our acquisitions and segment performance. While we maintained our focus on cost management, we also invested in the business with SG&A, inclusive of the impact of our M&A, increasing 17% on a headline basis. When you adjust for the impact of the M&A, our SG&A growth was 7%, reflecting increased volumes and purposeful investments in teams and technology across our business. The combination of these results led to an 18% increase in enterprise operating earnings to $956 million. Moving below the line, we recorded net interest and other expense of $117 million for the quarter driven primarily by the increased financing costs associated with prior acquisitions. Our non-GAAP effective tax rate for the third quarter was 10.2% due to the benefit of discrete tax planning items in the quarter. Included in our Q3 ETR was a multiyear benefit that contributed approximately $0.35 for the quarter. Average diluted shares outstanding were 236 million shares. This reflects the positive impact of the completion of our second quarter ASR program in January as well as the launch of an additional $250 million share repurchase program in the quarter, which was completed in April. This brings our fiscal year '26 total share repurchases to $1 billion, exceeding our fiscal year baseline target by $250 million year-to-date. The net result of these factors was third quarter non-GAAP EPS of $3.17, representing 35% growth. Diving deeper into the businesses, the Pharma segment delivered a strong quarter. Segment revenue grew 11% to $56.1 billion. This was primarily driven by existing customer growth across the portfolio. We continue to see strong overall pharmaceutical demand across product categories, including specialty, generics and consumer health. Within brand, volume growth also remains quite healthy though we did observe some fluctuations in mix that impacted the overall revenue line between GLP-1s, IRA changes and generics. Of note, during Q3, GLP-1s added 6 percentage points to our revenue growth. GLP-1 revenue growth remained robust at over 30%, but moderated from the prior quarter. The growth from GLP-1s was generally offset in the quarter by a 6 percentage point impact to revenue from inflation reduction at WAC pricing adjustments. Segment profit growth outpaced revenue growth significantly, increasing 18% to $784 million. This strong result was primarily driven by contributions from brand and specialty products. As previously shared, we maintained our economics on distribution contracts notwithstanding the impact of WAC changes. We also saw positive performance of our generics program, and we're pleased to again see consistent market dynamics. I want to highlight how our teams adeptly managed through the increased operational complexity resulting from heightened winter storm activity during the third quarter, a testament to the agility of our workforce and fundamental durability of our business model. As a matter of financial transparency, I will note that on a GAAP basis, earnings were impacted by $184 million pretax goodwill impairment charge related to our Navista business. The noncash impairment charge was primarily due to changes in the risk profile of the business plans, resulting in an increase in the discount rate. These changes reflect business model updates and base operational performance. The impairment does not affect our non-GAAP results. Our strong positive outlook for our Specialty business is unchanged. We are pleased with the above-market growth we are seeing in Specialty, including over 20% revenue growth in the third quarter, and we continue to expect our Specialty revenue to exceed $50 billion in fiscal 2026. In our GMPD segment, revenue was $3.1 billion. This was generally flat to prior year reflecting lower distribution volumes, offset by Cardinal Health brand growth. We were again pleased with Cardinal Health brand performance, which grew over 5% in the U.S., including timing shifts into Q2 that we called out last quarter. GMPD segment profit saw decreased to $25 million due to the adverse net impact of tariffs. That said, our segment results reflect solid underlying operational performance, and the team remains focused on executing our improvement plan driving cost efficiencies and managing the supply chain resilience to serve our customers effectively. As you are aware, our tariff exposure is concentrated in the GMPD segment. In February of 2026, the Supreme Court ruled tariffs imposed under the International Emergency Economic Powers Act unlawful, and work is underway to establish a refund process. Uncertainty remains in the timing, and administration of refunds, and we have not recognized any financial impact in the quarter, not reflected potential impacts in our updated guidance. To date, we have paid approximately $200 million in IEPA tariffs and previously noted sharing in these impacts with our customers. As a result, if circumstances change and become more certain, we would anticipate the potential future net benefit to Cardinal to be about half of that $200 million primarily driven by the repayment of the IEPA pricing that we've taken to our customers. Turning to our other growth businesses. at-Home Solutions, Nuclear and Precision Health Solutions and OptiFreight Logistics, we saw strong results. These businesses represent a key element of our long-term growth expectations. Segment revenue grew 31% to $1.7 billion and segment profit grew 34% to $179 million. This performance was driven by robust demand across all 3 businesses and the acquisition of ADS. The integration of ADS into our at-Home Solutions business is progressing well, and this combination has created a powerful platform for patients with chronic conditions that supports and can be supported by other parts of our business. Our Nuclear and Precision Health Solutions business is executing like MPHS, again saw over 30% revenue growth from Theranostics, a key area of innovation and investments. And OptiFreight Logistics continues to deliver its unique value proposition, helping health care providers manage logistics with greater efficiency and cost effectiveness, growing revenue nearly 20% in the quarter. Now turning to the balance sheet. Our capital deployment priorities remain consistent, investing organically in the business for long-term profit growth, maintaining our investment-grade credit rating, returning capital to shareholders and opportunistically pursuing value creation through strategic M&A. We ended the quarter with a cash position of nearly $4 billion after generating $1.7 billion of adjusted free cash flow in the quarter and taking several actions that align with our disciplined framework. We continue to invest heavily into the business with CapEx of $385 million so far this year across all of our businesses. We prepaid $100 million on our outstanding term loan, further reducing our Moody's adjusted leverage ratio to 3x. This places us comfortably within our target leverage range of 2.75 to 3.25x and demonstrates our commitment to our BAA2 rating at Moody's. As I noted, we also returned capital to shareholders through an additional $250 million accelerated share repurchase. Let's talk about the rest of fiscal '26. Our strong performance through the third quarter and our confidence in the fundamentals of our business leads us to raise our non-GAAP EPS outlook for the full year to a range of $10.70 to $10.80. That is a $0.50 increase at the midpoint, made up of approximately $0.13 from operational strength at Pharma and in our other growth businesses and the remainder below the line. This new range represents annual EPS growth of 30% to 31%. In pharma, we expect our fiscal 2026 revenue to come in at the lower end of our 15% to 17% range, reflecting the continued strong overall volume growth and the mix dynamics within brands that I referenced earlier. For segment profit, we are pleased to raise and narrow our profit growth outlook to 22% to 23%, an increase from our prior range of 20% to 22%. This change reflects our performance through the third quarter and is indicative of our confidence in the segment's continued operational execution with anticipated high teens profit growth in the fourth quarter at the midpoint. As you model the remainder of the year, please keep in mind that we have not fully lapped our large pharma wins from fiscal '25 and the GIA acquisition. Consequently, Solaris will be the primary inorganic driver to account for in your year-over-year comparisons. Additionally, I will note we are onboarding distribution volumes for GI Alliance and Solaris during Q4, which are reflected in our guidance. For the GMPD segment, we are reiterating our revenue outlook of 1% to 3% growth and holding our profit guidance to $150 million. We remain pleased with the progress against the GMPD improvement plan and are encouraged by both the consistency of our Cardinal Health brand growth and tangible impact of our simplification strategy. With our other growth businesses, revenue guidance is unchanged, projecting the full year between 26% to 28% growth. However, we are increasing our profit growth guidance to a range of 36% to 38%, up from 33% to 35%. This positive revision is driven by strong performance across all 3 growth businesses to date. As you model the remainder of the year, please continue to remember that we have lapped the acquisition of ADS in April, which will result in more normalized Q4 growth. Focusing below the line, we are updating our outlook for interest and other to approximately $340 million up from our previous estimate of $325 million. This is due to some Q3 adjustments within the other income and expense line, the majority of which was offset in tax and net neutral to the enterprise. Additionally, as a result of the discrete planning benefits in Q3, we are lowering our expected non-GAAP effective tax rate for the full year to approximately 19%, down from our prior range of 21% to 23%. Reflecting the impact of our share repurchase activity, we are updating our outlook for weighted average shares outstanding to approximately 237 million shares from our previous guidance of 237 million to 238 million shares. Finally, we are raising and narrowing our full year adjusted free cash flow guidance to a range of $3.3 billion to $3.7 billion from our previous guidance of $3 billion to $3.5 billion, which reinforces the robust and resilient cash-generating capabilities of our business model. In summary, our third quarter results demonstrate the broad-based strength of our business and the progress we are making against our strategic objectives. Before I close, I'd like to share some initial thoughts on fiscal 2027. The headline is that we remain confident in our long-term targets, and we'll continue to assess the various puts and takes for next year as we progress further through our annual planning process. We look forward to sharing details of our fiscal 2027 outlook during our fourth quarter earnings call, but before then a few items of perspective. While the health care landscape and regulatory environment remain dynamic, we have consistently demonstrated an ability to navigate change, reinforcing the durability and deep resilience of our model and our enduring value proposition. In our Pharmaceutical and Specialty Solutions segment, we anticipate positive demand and demographic trends to persist, supported by strong ongoing operating performance. There are several positive items informing our views. The scale and efficiency of our pharmaceutical distribution operations and our growing position in Specialty, including Specialty distribution, our MSO strategy and biopharma solutions. We will see benefits from the annualization of the Solaris acquisition in the beginning of the fiscal year and anticipate benefits of continued synergy realization. The three businesses and other are exceptionally well positioned to benefit from secular trends and to win in high-growth innovation areas like Theranostics. We plan to continue to strategically invest and position ourselves to capitalize on those trends. In our GMPD segment, the successful execution of our multiyear improvement plan is on track and gives us confidence in our continued potential to unlock value in this business. We continue to monitor the dynamic tariff environment and broader macroeconomic factors, including fuel and commodity exposure with improved ability to navigate change as a result of our multiyear focus on simplification and efficiency. All of this is supported by the fact that we are completing our third year of long-term, sustained investment in our businesses to ensure that the foundations of future growth are built before we need them. Below the line, we'll have the comparison to the discrete tax benefits this year while continuing to pursue opportunities to drive durable improvements in our tax position. We expect another year of robust cash flow generation and will be sticking to our knitting with respect to our disciplined capital framework, which creates opportunity for accretion through our baseline share repurchases. In closing, we are confident in our ability to achieve our updated higher guidance for fiscal 2026. Our priorities are unchanged, and we are executing against them. Our team is committed to our vision and will remain focused on its achievement while investing for long-term growth and value creation. With that, I'll now turn the call back over to Jason. Jason Hollar: Thanks, Aaron. Our Pharma segment once again led our performance, providing proof points of our strategy to strengthen the core and expand in Specialty. Our continued focus on the core with investments in infrastructure, technology and our people are delivering measurable improvements across the network. As an example, we continue to invest in our existing distribution centers through automation and productivity initiatives, which both improves our cost and expands our capacity. We are achieving record high service levels, which is a testament to our employees and the investments we've made focusing on the core. We continue to see consistent dynamics in generics with our Red Oak partnership and continue to have best-in-class performance in the strength of our generics program. Specialty continues to be an increasingly important driver of our strategy and results. Upstream, our biopharma solutions business is advancing its momentum, providing critical services to our pharmaceutical partners, evidenced by 3 new pharmaceutical therapies that our SYMEXYS patient support business onboarded this quarter with another 10 scheduled to be completed over the next 2 quarters. This growing pipeline underscores the trust and value we provide to manufacturers, bringing life-changing therapies to market. . We continue to see opportunity from our multi-specialty MSO strategy within the Specialty Alliance, which is proving to be a key differentiator in the marketplace, generating value for community-based physicians and their patients. Since last quarter, we closed three tuck-in acquisitions within the Specialty Alliance, adding physicians to our network and further extending our geographic reach into our 33rd state. Our model continues to unlock value through the synergies we create across our businesses. For instance, specialty Networks and the Specialty Alliance are now partnering to support a pharmaceutical company on a multiyear study focused on understanding real-world outcomes for patients receiving care at community gastroenterology clinics across the country. Specialty Networks will perform the analysis, showcasing how we connect our vast network of partners, physicians and patients to create long-term differentiated value. Turning to GMPD, we continue to demonstrate disciplined execution and make progress on our ongoing improvement plan. The team remained focused on growing Cardinal Health brand and relentlessly simplifying operations, and we made tangible progress on both fronts during the quarter. With the execution of our 5-Point Plan, Cardinal Health brand has now grown at least mid-single digits for five consecutive quarters, outpacing the broader market. Our other growth businesses, which remain an increasingly critical component of our long-term strategy were again, a significant driver of our performance this quarter. at-Home Solutions, we continue to see a strong demand environment, fueled by the ongoing shift of care into the home. To support the growing demand, we are investing to expand the capacity of our network, the breadth of our offering and in new technology to drive efficiencies and customer experience. We are pleased with the integration progress of ADS, which now marks 1 year as part of Cardinal Health. We have successfully migrated ADS volume into our distribution centers as well as onboarded nearly 1,000 new employees and nearly 500,000 new patients. This marks a significant operational achievement that positions us for enhanced efficiency and long-term growth. We are well positioned to capture ongoing growth as evidenced by the key synergies between pharma and home health, where we are seeing strong growth of our continued care pathway program, which we announced early this year, with the team now serving 165,000 patients and growing up nearly 20% since January. This progress is supported by our ongoing investments in technology and our core distribution footprint. To that end, we have signed a lease and are progressing with our new Sacramento distribution center, which will help us serve an even more customers on the West Coast. Nuclear and Precision Health Solutions continues to demonstrate its leading position, thanks to our differentiated offerings and specialized expertise. This quarter, we announced a significant expansion of our Actinium 225 production capabilities at our Center for Theranostics advancement, which will substantially increase our capacity to support the rapidly growing demand for novel targeted cancer therapies and strengthen our ability to meet customer needs today and into the future. To date, Nuclear's Actinium-225 has supported more than 15 clinical trials worldwide reflecting broad engagement with pharmaceutical innovators, a clear indicator of our ability to execute and scale in this complex and highly differentiated field. We continue to unlock opportunities for greater connectivity between our nuclear business and our Specialty businesses, exemplified by a recent supply agreement with the Specialty Alliance, which makes them our nuclear business' largest user of allusix for prostate cancer imaging. Our OptiFreight Logistics business also continues to perform well and expand its offerings, consistently demonstrating its leading value proposition for health care providers. Launched last quarter, the pharmacy solution from OptiFreight Logistics, inclusive of tech board products, shipment Navigator and tracking Beacon provides meaningful shipping process efficiencies and improved tracking visibility via an all-in-one platform to drive confidence, security and clarity for outbound pharmacy shipments. In closing, our results this quarter again demonstrates the clear progress we're making across the business. The relentless focus and dedication of our colleagues around the world underscores the vital role we play in ensuring critical products reach the right place at the right time for our customers, evidenced by the increased complexity our teams managed through to achieve record high service levels for the quarter. Our resilient business model and our foundational role as the backbone of the health care system give us great confidence in our ability to capitalize on opportunities ahead and to deliver sustained long-term value. With that, we will take your questions. Operator: [Operator Instructions] Our first question today is coming from Lisa Gill from JPMorgan. Lisa, I'm just going to put you back in the queue you could check your phone. And we're just going to move to our next question from Michael Cherny of Leerink Partners. Michael Cherny: Can you hear me? Okay. Perfect. Just one quick housekeeping and then one broader question. First, on the housekeeping side. Is there any way to quantify the accelerated SG&A investment that you mentioned in the quarter relative to positioning for future growth? And then broadly speaking, great to hear all the progress on Specialty. As you look at the portfolio now, where do you think -- if there are any kind of holes or shortfalls that you continue to see the opportunity to build out either organically or inorganically from here? Aaron Alt: Great. Thanks for the question. Happy to address them. We did call out in the prepared remarks that while SG&A was up 17% across the enterprise overall. If you exclude the impact of the M&A, it was up 7%. And I can assure you we are being quite purposeful and disciplined in thinking through our SG&A structure to ensure that where we are investing, particularly in technology and team, as I called out, it's focused on setting us up for success going forward. With respect to the Specialty portfolio, I guess I'll start and just observe that we are really pleased with the continued strength we're seeing in our specialty business. Indeed, across the pharmaceutical demand overall. But as we think about the Specialty portfolio, that was a key contributor to the excellent results that no Pharma had. GIA, Solaris, ION, all of the businesses that we've acquired have certainly partnered well with the existing Specialty capabilities, Specialty Networks, et cetera, and are performing as we expected when we brought them into the portfolio. As far as where to next, if your question is really about the inorganic opportunities, what I would observe is, while we will continue to be focused on Specialty, we have prioritized autoimmune and urology, and we'll remain focused there. But we are going to be quite disciplined as well, the right assets at the right timing at the right price, we will continue to lean in to support our growing Specialty platforms. Jason, anything to add? Jason Hollar: Yes. I'd just add that we're very pleased, Aaron, just used the word platform. And I think that's an important distinction of the investments we've made to date. We're clearly much more focused on the bolt-ons. We believe we have the capability, the business and perhaps most importantly, the teams in place to execute this strategy. And we see that there's a lot of opportunity, not just within each of these platforms, but how these platforms work together. You even heard in this call already, some of the examples of the areas that we're working not just between the MSOs but the MSOs and the rest of the Specialty business between MSOs and what we're doing with nuclear or our at-Home Solutions business. We have a lot of interconnectivity there, and it's all a component to our broader strategy to drive overall Specialty growth, which we reinforced again today is growing at over 20%. Still expect to exceed $50 billion of revenue this year. The only other thing to add outside, Specialty clearly our highest priority. We've been very clear on that point. The other acquisition that we've done in the last year that we just anniversaried here April 1, of course, is the at-Home Solutions business. So the other businesses are the other areas of potential opportunity for us. Secular growth trends that are part of the market that's growing very quickly. We are very well positioned in each of those 3 spaces. And if the right opportunity presents itself. I would use similar words as to Aaron just said, we will be very disciplined as to how we approach those opportunities. But we think the market is growing and we're well positioned. Operator: The next question is coming from Elizabeth Anderson of Evercore ISI. Elizabeth Anderson: I wanted to dive into other. Obviously, that continues to grow very nicely, and you just reseed the guidance for the fourth quarter. Are you seeing any sort of changes in trend there that give you the confidence to do that? Or how should we think about that as we sort of think about the back half of the year and then into 2027? Aaron Alt: Thanks for the question. We saw a strong performance across all 3 of the growth businesses affectionately known as other. Revenue was up 31%. Profit was up 34%. But if you really unpack that, Jason referenced the strong secular trends, the positioning -- the competitive positioning we have, that's contributing to good results within the business and indeed lots of positive perspective on where those businesses are going to take us as we carry forward. Strong demand has also been a key part of why those businesses have succeeded the way they have. I would highlight a couple of things. The core business within at-Home is doing well, and it has been reinforced by the ADS acquisition. The integration that Jason referenced earlier, it's going very well. We had highlighted in an earlier earnings call that we had a plan with opportunities to overperform, and we continue to see the goodness coming from the at-Home business supported by the ADS acquisition. And we pivoted from the integration of the supply chain, the distribution to now being focused on the systems, the back office and ensuring that we're providing the best-in-class customer experience that we aspire to for the patients being served by our at-home business. Within nuclear, boy, that Theranostic growth just keeps coming. The investments that we're making in supporting the 70 different therapeutics that are coming our way, really have created a pipeline of success for the business, some of which we're now starting to see, particularly within urology and oncology. So we're excited about that. And then OptiFreight, continues to perform, providing the excellent services to its customers with another good quarter as well. And so we were pleased to deliver a good quarter, and this business will, of course, contribute to our raise to our guidance and achieving our long-term targets. Operator: Next question will come from Erin Wright of Morgan Stanley. Erin Wilson Wright: Great. So some of the commentary on 2027 and the moving pieces was helpful. When we dig into that core pharma and Specialty distribution segment and the AOI growth assumptions that we should be considering remains strong, but how do we think about to sustain momentum into 2027? What would make you deviate from the long-term growth algo, in that segment? And how do we kind of reconcile with underlying utilization trends that you're seeing or you're expecting into 2027? And then also those continuing Specialty drivers? Aaron Alt: A couple of thoughts there. First, we remain confident that our business is quite resilient and has demonstrated durability notwithstanding a fair amount of change in the industry. And I think it's important to keep that in mind that as we talk about fiscal '27 as well. And that's part of why we're able to express the confidence in the long-term targets that we have really across the enterprise, but particularly within the pharma business. We have a strong core to our business, right? We have seen consistent positive demand, right? We saw it again this quarter. and the business is supported by positive demographic trends that aren't going away as we get one more quarter into our business. And so we think those are all things that are going to support the trajectory of that business. We will also continue to benefit from the Specialty expansion that Jason and I have just commented upon, right? And one thing we're particularly excited about as well is how the pieces are all now starting to fit together. Specialty Alliance working with nuclear. Biopharma really working with the broader portfolio. And so there's a lot of goodness there within the pharma business that we think is supportive of the long-term target. And of course, we'll provide more perspective as we get through our planning cycle at the Q4 earnings call. Operator: Next question will be coming from Eric Percher of Nephron Research. Eric Percher: I wanted to stick with Pharma and Specialty. And I'd like to get a little bit more on Navista and ION and the impairment. And I know you called out changes to the risk profile relative to a business plan. Can you give us a feel for whether that was near term versus long-term changes? And does it alter at all the oncology MSO strategy or economics of the platform? Jason Hollar: Sure. Thanks, Eric, and I'll go ahead and start and then turn it over to Aaron to walk through the mechanics. First of all, I'll just reinforce what Aaron already said, the broader strategy, we're very pleased with the execution, not just this quarter but this year but also the last several years. Exceeding this $50 billion this year, continuing to see over 20% growth in Specialty highlights our strategy is working within the collective assets that we have put in place. And I'll remind you that, that 20% growth is pretty consistent to what we said over the last 2 quarters, so each quarter this year, which was an acceleration from the mid-teens growth that we saw in the prior several years. So we've seen our specialty growth be strong and then it's accelerated this year into very strong competitive positioning. And then within oncology, it was even stronger this quarter, continuing on those trends as well, over 30% growth in oncology. So as a reminder, Specialty has a lot of components to it. Within Specialty, MSO is just one component within -- within the MSOs, oncology is just one component. And then we have, of course, Navista within that. So Navista is a component of that, and it was a combination of an acquisition, but also organic business. And we had a couple of different strategies in place. We had the equity strategy working with physicians to create this long-term cooperation, collaboration agreement with an equity component. And then we had the nonequity where it was more a transactional more contractual. And what we've seen is that while physicians like to have choices and like to have a different alternatives, ultimately, we're seeing the market voting for the equity arrangement, and that's where the market has moved. And why we're prioritizing our strategy to that component. It does not change the broader strategy of either on the MSO strategy or the broader Specialty strategy. And I think the underlying data certainly supports that. It's all coming together in a very accretive way. But with this pivot and strategy, it did have some knock-on effects that Aaron can walk through. Aaron Alt: I won't believe the point just to observe that as one piece of Specialty and one piece of oncology, and we're keeping score, right, on ourselves. As we've always committed we would tell you what we're going to do, do it and report back. And in this case, we have increased the discount rate applied to a small part of the oncology business. And -- but we remain pleased with the contribution that the specialty M&A is adding to our portfolio overall, the 8 percentage points or so within fiscal '26, consistent with the prior guidance that we've given. Operator: The next question is coming from Allen Lutz of Bank of America. Allen Lutz: Aaron, big free cash flow raise with a quarter to go. You mentioned or called out that revenue was maybe a little bit lower than your expectations. I think you called out IRA and maybe a little bit from GLP-1. We know that IRA is maybe more a headwind on the revenue side, but you were able to raise the free cash flow guidance. Can you talk about what gave you the confidence for what you're seeing? Was it better than expected? Was there a mix shift with a movement, I guess, more towards those IRA drugs that was actually a positive contributor to free cash flow? Was it more generics, just trying to understand what mix shift, if at all, impacted the free cash flow guide that was maybe a little bit better than you expected? Aaron Alt: Allen, thanks for the question. What I would observe is that -- it's amazing how what gets measured gets done. And I can't point to just 1 factor across the enterprise as being the single source of success for our ability to generate the adjusted free cash flow we did or indeed drive the increase -- the increase of the guidance. It was driven really across all of our businesses with the management teams focused on the intersection between our customer service levels and our inventory positions, ensuring that we're collecting that, which is due to us from an ARR perspective and focusing on the appropriate levels of AP with our suppliers. And so -- there were a series of initiatives that have been underway now for several quarters that are really generating the success that we are able to call out. I do want to seize on your question to maybe answer a question I haven't gotten yet or maybe for an emphasis on a point in the broader your pharma results, which is you called out the revenue. And I think this is probably a good point for me to observe that. The revenue growth within the pharma business was 11%, which I understand some were maybe expecting a little bit more than that. It's important to understand that we're in a quarter -- we're in the first quarter of a couple of things going on. Firstly, of course, we have the IRA WACC changes, which was a -- that was a negative relative to the overall growth rate and similarly -- sorry, [indiscernible] thank you. And similarly, GLP-1s is also in a period of change. And so while GLP-1s are growing extensively, still over 30%, they're growing less than they were before. And so we saw a 6 percentage point uplift from growth within GLP-1 is offset by a similar level of downdraft from IRA WACC. And then when you some other brand dynamics like some like the LOE to generics, which is a positive for profit, right? That's really what's going on within the revenue line, even though the profit line, the demand line was very strong, the profit line is very strong. So I just want to take this opportunity to reference what was going on there. Operator: We will now move to Glen Santangelo of Barclays. Glen Santangelo: Jason, I just want to follow up on some of those comments you were just making because I think there is obviously a lot of focus these IRA impact on the pricing and the revenue line. And I guess what the concern that some may have is, as these prices come down, it seems like on the fee-for-service side, you're clearly maybe being made whole, but maybe some are concerned about the buy margin on the 2% discount and then ultimately downstream when you look at practice profits if the price of these drugs are coming down, if these practices inherently become less profitable. Can you get squeezed in any way at the distributor level from the IRA price reductions beyond just the fee-for-service agreements. And I think that's what we're all trying to sort of figure out is the different components of the profitability there and if there's any vulnerability? Jason Hollar: Yes. Thanks for the follow-on question on that. Let's break it into the two components because I think you're right to talk about this in two different pieces. Aaron's comments were very much focused on the distribution side. That's by far the biggest component of our business, and it's relevant to start there. We remain incredibly confident in our underlying business model. When you think about the fees that we receive today for the services we provide, that should not change. The services are certainly not changing, and we remain the lowest paid component of the supply chain than anyone in the supply chain. So we feel very good about continuing to receive the fees that we currently receive for that work. And as a reminder, we announced the completion of the renegotiation of these contracts at the very beginning of the quarter at an analyst conference there. So this was all done prior to the quarter. It executed exactly consistent with that announcement because those agreements were already in place. Very similar to what happened with the insulin repricing the year before that. So there's a lot of precedents and frankly, it just makes sense, and it is consistent with we have [Audio Gap] be right to renegotiate the vast majority of our contracts for situations like this. So I continue to feel very, very confident with that. Now when you talk about other components of our business, MSOs in particular, as a reminder, the drug spend for our $4 billion, $4.5 billion of revenue in MSOs is pretty diversified. We have only about 1/3 of that being drug spend. And within that, we have a very diverse payer mix. So we feel very confident that the implications to our MSOs are going to be very manageable, if any at all, because ultimately, what we're all looking for is exactly what is the administration's intent for providers as it relates to these go-forward initiatives. We don't think the intent is to harm community providers that provide excellent service to their patients, excellent care at the lowest cost already today. So it all makes sense for them not to be harmed, but we recognize actions need to be taken. But even if they don't, we believe this is very manageable for Cardinal Health. Operator: The next question will be coming from George Hill from Deutsche Bank. George Hill: I'm going to dovetail right off of what Glen just asked. I guess I would -- Jason or Aaron, how would you guys characterize your fee-for-service pricing power as it relates to distribution agreements, especially in the face of some falling drug prices? And then I would ask as a follow-up. Like how have you guys analyzed that in the face of BFS risk as that's supposed to roll out and kind of get recalculated in the back half of this year? Jason Hollar: Yes. As it relates to unified service fees, I think it's just too early to talk about the -- exactly what the implication is going to be for the whole industry. I mean, this is far from just a distributor type of process change, if at all. And again, it goes all back to we feel very comfortable with the value we're providing. So just like in the initial shift to fee-for-service in the first place, which maintain those economics, we would expect there to be a similar type of transition if there is a transition that that's required. In terms of just the pricing power, it's quite simple. We have 1% margins. And I think we've been -- I've been very clear that branded products are at the low end, about 1%, right? I mean this is a blended margin of 1%. These products are at the low end. We have the right to renegotiate these rates. We get paid a certain dollar fee today the service we provide. It's clearly the best value for all those in the supply chain or they wouldn't be using the distributors in the first place. So there's nothing that changes in terms of value we're providing tomorrow. So we fully expect, we fully demand to be paid the same amount going into the future. Operator: Our next question will be coming from Stephen Baxter calling from Wells Fargo. Stephen Baxter: I appreciate the early comments on next year at this stage. I'm trying to boil down some of the business commentary and the below-the-line commentary. I guess I'm trying to understand whether you're suggesting that the benefits from lapping deals and ramping synergies you think could potentially offset the below-the-line items that we're going to be comping against as we move into next year and therefore, leave the kind of typical EPS long-term growth rate intact? Or do you think people need to be modeling maybe something more conservative at this stage? I just want to make sure I understood that right. Aaron Alt: It's a great question. Our job is to manage the entire income statement year-over-year. And what I want you to take my comments as being is providing initial perspective that we believe there are good reasons to believe in our long-term targets overall, the 12% to 14% non-GAAP EPS growth. We've talked about some of the operating reasons, the demand, the demographics, industry positioning, et cetera, all in supportive of the overall position. And as we do in every year and every quarter, we will continue to go looking for ways to optimize our below-the-line items, whether it's finding further durable ways to ensure we have the appropriate tax rate or also looking at our share repurchase plans. And so we have a lot of planning yet to do in our cycle but we are confident in our long-term targets. Stephen Baxter: [Audio Gap] you can talk about that's happening and have the volumes improved in April if it was a macro thing? And then secondly, you talked about the potential clawback on the tariffs. How do you account for that? You mentioned it's potentially upwards of $100 million versus the maybe the $200 million impact. How does that get accounted for? Does that drop through the P&L? Is it something that you're reserving for on the balance sheet now? I just want to sort of understand from an economic perspective, from a modeling perspective, from an accounting perspective, how that all works? Jason Hollar: Sure. Yes, this is Jason. I'll go ahead and start, and I'm sure Aaron will clean up then after that. In terms of volumes, I think the underlying industry volumes for the [indiscernible] fairly resilient anti-digit type of range. On the one area -- not one that's materially driving our numbers, but it is one that does have a little bit of an impact on the top line as well. We had called out in the past a large government customer, the VA that we did lose earlier in the year. And so that is a fairly low Cardinal-branded product customer. We also had a large customer that went through a significant merger. We had a part of the business better had another part. And so we did not carry over that piece of the business. Also a relatively low Cardinal branded mix customer, which is why you're seeing over 5% Cardinal brand growth in the quarter even though the top line was a little bit weaker. So we feel pretty good about the underlying industry strength the underlying positioning we have, and we're seeing continued strength on the most valuable parts of our business, which is that Cardinal-branded product. We're at the best service levels we've ever been at. We're in a really good position, certainly some supply chain complexities, but underlying a really good, strong position to continue to support our customers and grow that part of our business. As it relates to the tariffs, I think the message is trying to be simple and clear that we have the potential for a $200 million refund based upon the tariffs that we paid up to the IEPA announcement. And that is -- none of that has been put into our P&L at this point in time. What Aaron commented that we want to be really clear with is that we have directly received price increases from our customers over the last year as a result of these tariffs. And so about half of that $200 million, we ultimately -- if we receive it, we would expect to share in that about half range with our customers, implying that someday, we may have a $100 million earnings gain as a result of that change. But it is still too uncertain for us to put through any of that into the P&L. And so we have not recognized any of that. Aaron Alt: Yes, I'm just going to emphasize that last point. We haven't recognized impact in Q3. We've also now provided an update to our guidance reflective of that. The amount of any recovery that means by which the recovery occurs, the timing of the recovery, those are all uncertain at this point. And so I'm not going to get ahead of ourselves and provide you with a specific accounting and treatment until we have more clarity on... Jason Hollar: Yes. And while we're on the topic of tariffs, it wasn't exactly the question that was asked here, but we had a couple of questions so far in the '27 puts and takes. Just one thing to kind of double back on to what Aaron had referenced earlier. As it relates to unrelated to the tariff refund, but the ongoing tariffs that are still in place and certainly may change further with the 232 study that's ongoing. We would anticipate that from a year-over-year perspective, there is some opportunity as it relates to tariffs for the GMPD business, but we also all know that fuel prices are higher at this moment in time. And that also flows through to some of the commodity prices within our products. These are fairly modest in their nature. They're nowhere near the impact that we saw several years ago with the hyperinflation that was in place. So we have a tailwind associated with tariffs that we think at this moment will be likely from an operational standpoint. We also expect that it's likely that there's going to be this ongoing commodity impacts. Both are, I'll say, a reasonable similar ballpark. We'll get a lot more specific with this when we provide our '27 guidance. But you have a put and take there. That is, to some degree, offsetting, it will be dependent upon where things stand in 3 months, and we'll provide those at that time. But overall, we think that, that's not only manageable for the GMPD business, it's even more manageable for the overall enterprise. We have some impacts for fuel, but it's certainly the GMPD business is where we are most closely focused at this point. Operator: The next question will be coming from Charles Rhyee of TD Cowen. Unknown Analyst: This is Keith in on Charles. I just wanted to go back to the IRA topic real quickly. So given that you said you expect to be at the lower end of your rev guide for pharma. Is it a fair extrapolation to say that the IRA impact so far this year has maybe been a bit larger than your expectations? Jason Hollar: No. I think what I observed is there are a series of things going on within the revenue line or the revenue guide that we had provided, and we're trying to be transparent that as we are modeling as you are modeling the revenue impact to be thinking about, on the one hand, the strong demand we're seeing certainly as a positive, but also understanding the impact of GLP-1 growth given that they are relatively empty calorie dollars for us, the impact revenue don't provide a lot of profit for us. Similarly, when a branded product converts to generic, and we are seeing some notable LOE examples this year. That is a downdraft on revenue, but a positive for us from a profit perspective as well. And so we're just trying to provide some of the puts and takes that are going on within that revenue line. Operator: The next question will be coming from Steven Valiquette of Mizuho Securities. Steven Valiquette: Hopefully, I didn't miss this, but I think in some of the segment discussions with the talk about the soft distribution volumes, et cetera. It seems like some of the investors believe that that's been tied to weather impact. That was obviously pretty prevalent in some of the public hospital patient volumes, but it seems like a not really callout whether as a volume headwind in either GMPD or pharma unless I missed it. So even though the whole weather discussion is obviously irrelevant going forward. Just want to get your thoughts on that dynamic just within the just reported quarter really for any of the segments. Jason Hollar: Yes. Thanks for the question. And I don't think you missed much. We didn't dwell on that point, Steven. It's -- it was so many focus on prior days on what's important as our team did a fantastic job of maintaining record high service level across the enterprise in an environment that was fairly complicated. We have some global supply chain challenges, of course, but in the quarter, you're right to point out weather. I would characterize it as a slight financial impact across enterprise. It kind of popped up a little bit here or there, very little within our traditional distribution types of businesses, some excess costs associated with just getting the right people in the right spot and transportation reroutes and things like that, but it was very slight and not. Certainly not large enough to call out. The 1 area that was relative to the size of business, the MSOs had a little bit more of an impact just because of the nature of -- it's much more difficult to make up for lost volume on an MSO. When you think about like pharmaceutical or medical products, the next week, the next day, you can just send a second truck and you can kind of catch up nearly real time. With lost physician visits and procedures, it's harder to reschedule those. And so that's likely we lost a little bit of volume there, too, but I would consider that also slight in the big picture for the Pharma segment, a little bit more for the specific. Operator: The next question is coming from Daniel Grosslight of Citi. Daniel Grosslight: You mentioned that the ION distribution contract began transitioning in 2Q and the DIA and Solaris distribution contract will again this month. I'm curious how the ramp of distribution volumes have tracked versus your initial expectations? And then on the Solaris contract, I don't believe that was previously included in guidance. Can you confirm that and comment on how much of the pharma profitability guidance lift was driven by the Solaris distribution onboarding? Jason Hollar: Yes, on Eagle is always on that caught that. We are indeed confirming today the Solaris distribution volume is now in the process of ramping up with our pharma business. And so we're pleased with that development as we were when we achieved the GIA distribution contract and the Ion distribution contract as well. I want to emphasize, when we talked about the acquisition originally, but we do not include the impact of the distribution contracts in our financial models. That is a separate part of our business. And so it is good news for us to have the volumes coming in. Now it is late in the year. It's our fourth quarter. And so the impact to our fiscal '26 will not be material. Otherwise, we would have called it out. But as you think about the puts and takes for next year within our Specialty business, certainly now having Solaris ramping up is a positive for our... Operator: We now move to Brian Tanquilut of Jefferies. Jack Slevin: You've got Jack Slevin on for Brian. Maybe just one, a lot of questions has already been asked. Maybe one to just sort of clean up. I haven't heard too much discussion on it. There's been some reference to some of the energy cost and shipping trends you had that created headwinds for this business in 2022. Can you maybe just speak to if any of that applies right now, given some of the volatility we're seeing in energy prices or input cost of things like polypropylene? Can you maybe speak to what's different now versus what happened in 2022? Or if there's anything we should be worried about as it relates to some of those trends across the business? Jason Hollar: Sure. Yes. And I did touch on it, but I can expand further to try to answer the question of what's different now. Well, first of all, the shock we're talking about now is different. It's very much focused on not just energy but it's on oil. And that does take time to kind of filter through to some of the products from the polyethylene, polypropylene types of products. But what we're seeing is more of an oil shock right now. It does translate to fuel, and that's the comments I made earlier. The excess inflation that we saw several years ago was way beyond just fuel. It was a lot -- the container cost, you may recall, international freight was by far the biggest piece. We had very high labor inflation that carried on with that as well. And so while we did call out fuel 4 years ago, it was #4 on the list of items. Since then, we've also structured our agreements to be more flexible for us both with the carriers as well as our customers. It's not completely protecting us, but it gets back to the -- I think the word I used earlier, that I think is a good one of using here. It's certainly much more manageable than it had been structurally, but also based upon the type of issues that we have. And as it really to the product cost, really exam gloves is the one item that I continue to see and hear a lot of industry chatter about. That is one product category that we're already seeing cost increase quite a bit. Just as a reminder, PPE is a relatively small category for us, but exam gloves in particular, is relatively small. It's less than 5% of our Cardinal-branded product. So again, manageable even when we see significant dollars like that. It's important for those customers that are buying a lot of exam gloves, which are many, but it will be a relatively small pull-through today based upon those prices, and we will certainly continue to evaluate that. Also as a reminder, if there are further impacts the fuel tends impact the distribution activity. So that's a current period type of cost, and you kind of see it a little bit quicker. The product cost will take at least a couple of quarters before they'll start to flow through the P&L. So we've not seen a lot of product costs yet other than exam gloves. And when we do, we're going to have 2 to 3 quarters to be able to understand and see if we can mitigate and then, of course, delay the impact on the cost side so that we can see what happens with industry pricing at that point in time. Aaron Alt: I guess I would just close on that point of we're better positioned than we ever have been before in this business, and we are not backing away from our longer-term guidance with respect to the GMPD business either. Operator: And our last question will be from Eric Coldwell from Baird. Eric Coldwell: And I think most of mine were covered here. But I just want to circle back on two quick ones, if I may. First, on Navista and Ion and the changes you're making. I just want to kind of tie the bow on this. The topic of the impairment and the changes you're making -- just want to make sure that, that is 100% Cardinal-specific, how you're going to market, how you're interacting with the MSOs. And this is not any kind of a broader comment to the overall oncology or MSO marketplace. Is that a fair interpretation? Jason Hollar: Absolutely. And as I highlighted in my comments -- in Aaron's comments as well, over 20% specialty growth so far this year in the quarter as well, more than 30% growth in oncology. We're very pleased with our Specialty strategy, very pleased with our oncology strategy. This is entirely a focus of prioritization on the equity model of our MSOs. And Eric, do you have one other? Eric Coldwell: Discrete item. Could you just tell us what that multiyear capture was what the actual nature of that tax item is? Jason Hollar: Yes, Eric, we aren't in the practice of disclosing our individual tax positions. We take other than to observe that it was a multiyear opportunities that we did take in the quarter, which was about [indiscernible] Operator: We do not have any further questions. Now I'd like to turn the call back over to Mr. Jason Hollar for any additional or closing remarks. Jason Hollar: Yes. pleased with another strong quarter. Of course, we're looking to finish the year strong. But more importantly, as always, we're focused on the long term, doing the right things today to make sure we're successful tomorrow. So thanks for joining us today, and have a great day. Operator: Thank you, much, sir. Ladies and gentlemen, that will conclude today's conference. Thanks for your attendance. You may now disconnect. Have a good day, and goodbye.
Operator: Good morning, ladies and gentlemen, and welcome to Baxter International's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. . I would now like to turn the call over to Mr. Kevin Moran, Vice President, Investor Relations at Baxter International. Mr. Moran, you may begin. Kevin Moran: Good morning, and welcome. Today, we'll discuss Baxter's first quarter results along with our financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and reiterated outlook. The press release and investor presentation are available on the Investors section of the Baxter website. Joining me today are Andrew Hider, President and Chief Executive Officer; and Anita Zielinski, Interim Chief Financial Officer, Chief Accounting Officer and Controller. During the call, we will be making forward-looking statements, including comments regarding our reiterated financial outlook for the full year 2026 and the anticipated drivers of the second quarter and second half 2026 performance. The anticipated impact of various regulatory and operational matters, including ones related to our infusion pump platform and ongoing supply chain challenges and commentary regarding the global macroeconomic environment, including estimated impacts of tariffs and broader inflationary pressures. Forward-looking statements involve risks and uncertainties, which could cause our actual results to differ materially from our current expectations. Please refer to today's press release, the forward-looking statement slide at the beginning of our investor presentation and our SEC filings for more detail. In addition, please note that on today's call, all of our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. Non-GAAP financial measures are used to help investors understand Baxter's ongoing business performance. GAAP to non-GAAP reconciliations can be found in the schedules attached in our press release and our investor presentation. On the call, we will reference organic growth which excludes the impact of foreign exchange, MSA revenues from Vantive nd impacts associated with business acquisitions or divestitures. As a reminder, Continuing operations excludes Baxter's Kidney Care business, which is now reported as discontinued operations. Finally, Andrew, Anita and I will take questions following the prepared remarks, and we kindly ask that you limit yourself to 1 question and 1 brief follow-up so that we can give as many people in the queue and opportunity. With that, I'd like to turn the call over to Andrew. Andrew Hider: Thank you, Kevin, and good morning, everyone, and welcome Anita, who is serving as Interim CFO until we appoint a permanent successor, she will continue her duties as Chief Accounting Officer and Controller. I have full confidence that Anita's stewardship, supported by the diligence of our finance team will help ensure continuity and a seamless transition while also supporting our turnaround, including efforts to strengthen our balance sheet. I'd also like to thank [ Joel ] for his contributions and partnership during his time with Baxter. We wish him all the best. We have launched a comprehensive search for a permanent successor, and I look forward to providing an update when appropriate. In the meantime, my focus remains on executing our turnaround, including stabilizing the business, strengthening the balance sheet and driving a culture of continuous improvement. The Baxter team is working hard and made progress on all 3 fronts in the quarter. I'll cover this in more detail in a few minutes. For the first quarter, financial results were in line with our overall expectations, and we are on track to deliver on our guidance for the full year. Although we are not satisfied with where our performance stands today, we have a road map in place to improve results and drive shareholder value. I have clear insights to the challenges facing our business. We believe we are taking the actions necessary to fulfill the company's potential. As I have come to learn through my immersive 9 months as CEO and deep engagement with customers, employees and our leaders. Baxter is a foundation of good businesses with leading positions and the potential to outgrow our markets, expand margins and increase cash flow. We are focused on delivering not only better but also more consistent and predictable performance. With that, let me provide a high-level overview of our performance within the quarter. First quarter global sales from continuing operations totaled $2.7 billion, representing an increase of 3% year-over-year on a reported basis and a decline of 1% on an organic basis. Adjusted earnings from continuing operations for the quarter were $0.36 per diluted share versus $0.55 in the prior year period. As we stated in our last call, we expected the first quarter to be challenging, including difficult prior year comps. As a reminder, in the first quarter of 2025, we saw a onetime distributor build following Hurricane Helene, which benefited the MPT segment. Also in the prior year, operating margins realized a benefit due to the timing of certain functional costs being reclassified. In the quarter, we saw the expected headwinds from both tariffs and higher manufacturing costs, including absorption pressure operating margin. While we did not see a material impact from Novum LVP returns in the quarter, we believe it's prudent to continue to factor this possibility into our full year guidance. We remain focused on supporting our current Novum customers with their implementation of currently available mitigations. We continue to work diligently to finalize hardware and software corrections to resolve the active field actions. Once available, we will implement the corrections in coordination with regulatory authorities, including any necessary submissions. Looking at the overall demand environment, we continue to believe we are in attractive end markets. Advanced Surgery, for example, had another great quarter, growing 10% and we are sustaining a strong order book in our care and Connectivity Solutions business. We continue to monitor the direct and broader macroeconomic effects of higher oil prices and conflict in the Middle East. Our Middle East exposure is less than 2% of total revenue. Importantly, our exposure to fuel today is less than half of what it was historically, given the divestiture of the kidney business. That said, this is obviously a fluid situation, which we are actively monitoring. In the event, the landscape changes, it will not be Baxter specific, and we are prepared to navigate any unforeseen dynamic with rigor and agility. To support our customers, we are continuing to advance innovation in targeted areas of the portfolio. This includes positive response from customers and strong order growth from Dynamo, a smart hospital stretcher designed to improve patient safety and care team efficiency. In the quarter, we also launched the IV Verified Line labeling system, an automated solution that supports safer medication administration and the XR spine surgical table, which is designed to support surgical teams across a range of spine procedures. We also have an active pipeline of differentiated solutions with integrated AI functionality, designed to accelerate future growth. We are already leveraging AI in our Connected Care Foundation, which unifies Baxter's unique data set provided by [ Internet of Things ] devices like beds, pumps and vitals to provide actionable data and analysis. In addition, we are using AI in frontline care to develop products that strengthen clinical insights and operational efficiency. Overall, our performance in the first quarter was in line with how we expected the year to begin with a few puts and takes across the portfolio. Importantly, our results support the broader framework we laid out for 2026. And including known mechanical headwinds and a more challenging comparison to the prior year in the first half and improving performance in the second half. It is still early in our turnaround, but we are on the right track and showing progress on our 3 strategic priorities. The first of those priorities is stabilizing the business, specifically in areas that require increased focus. As an example, last quarter, we referenced back order challenges at 1 of our manufacturing facilities. That was impacting revenue and driving unfavorable mix within Pharma. During the quarter, we made significant progress in clearing back orders in addition to increasing throughput. The second priority is strengthening the balance sheet. That includes improving free cash flow to support deleveraging. I'm encouraged with the positive free cash flow generation in the quarter, which reflects early success in our effort to improve working capital efficiency. While we still have more work to do, this is a solid step in the right direction and reinforces my comments that the actions we are taking will strengthen cash generation and our overall financial flexibility over time. Our near-term capital deployment priority is debt pay down, and we continue to target net leverage of approximately 3x by the end of 2026. Once we reach our leverage goal, we will have a stronger balance sheet with more optionality to drive shareholder value, including strategic tuck-in M&A that enhances our customer offerings and growth profile as well as the option to return capital through share repurchases. Turning to our third priority, driving continuous improvement. It has been almost 6 months since we rolled out the Baxter Growth and Performance System, or GPS, which is focused on simplifying processes, leveraging data and strengthening performance management. In the time since launch, we have delayered management teams and pushed down P&L responsibility directly to leaders of each of our operating businesses. We are setting rigorous KPI measures to drive accountability and continuing to embed the operating discipline into our culture to enable better execution, consistency and improve performance over time. We have also started to deploy AI tools to accelerate efficiency gains within internal quality workflows, such as the customer correspondence and AI-assisted corrective field action communications scheduled to be deployed later this year. Looking forward, we will thoughtfully embed AI directly into internal process improvements, frontline workflows and manufacturing at enterprise scale, with the goal of strengthening speed consistency, reliability while also maintaining rigorous governance and a focus on patient safety. Baxter GPS is becoming part of how the company runs the business. We kicked off the year with 10 President [ Kaizen ] events. And we've now launched more than 230 continuous improvement events. We're building a stronger culture of continuous improvement through leader training and establishing a lean community of practice. Today much of our focus has been concentrated on cash flow, service reliability and speed to market. While we are still in the early stages of organization-wide adoption, we are seeing strong traction. Ultimately, the purpose of GPS is to enable a consistent approach across the enterprise to identify problems and opportunities earlier, the improved visibility, sulfide processes and drive accountability. This is not a short-term initiative. It is the new core of how we will operate going forward, and improve execution to deliver on Baxter's full potential. I want to take a moment to thank our more than 37,000 Baxter colleagues around the world for their resilience and dedication to our mission. As the [ ore has been rowing ] in the same direction and speed, the power we will collectively generate will be hard to stop. We continue to believe that our long-term earnings power is meaningfully better than today's level. We are taking decisive steps in the early stages of our turnaround to get us there. We have streamlined the organization for greater accountability. We have launched Baxter GPS to drive continuous improvement and competitive advantage. We have heightened our focus on innovation to better meet our customers' needs, all to drive improved performance and long-term shareholder value creation. I will now turn the call over to Anita to provide more detail on our first quarter results, including segment level performance as well as our 2026 guidance, which we are reiterating today. Anita, over to you. Anita Zielinski: Thanks, Andrew, and good morning, everyone. I'm happy to join the call this morning to cover the details of Baxter's first quarter financial performance as well as commentary in our outlook for the remainder of 2026. First quarter 2026, global sales from continuing operations totaled $2.7 billion and increased 3% on a reported basis and declined 1% on an organic basis. On the bottom line, adjusted earnings from continuing operations were $0.36 per share, a decrease of 35%. As expected and previously discussed, results reflect an unfavorable comparison to first quarter 2025, which benefited from a timing shift in expense recognition. This benefit in the prior year related to an updated estimate, which resulted in the reclassification of certain functional costs from SG&A to cost of sales. This was approximately a $50 million headwind in the quarter. Additionally, and as expected, we saw higher costs related to tariffs, which were not present in the prior year period and higher manufacturing costs, including lower absorption. . Now I'll walk through our results by reportable segment. Commentary regarding sales growth will be on an organic basis. Sales in our Medical Products & Therapy segment or MPT, were $1.3 billion and declined 2% in the quarter. Within MPT, sales of our Infusion Therapies and Technologies or ITT division totaled $981 million and declined 5%. Performance in the quarter reflects lower infusion pump sales due to the previously discussed ship and installation hold of Novum LVP and an unfavorable comparison to the prior year due to a onetime distributor build with an IV Solutions following Hurricane Helene. Within IV Solutions, performance in the quarter was in line with our expectations. As previously shared, clinical practice changes in the market have created a new baseline in demand. In Infusion Systems, results in the quarter reflected the net impact of lower sales due to the ongoing shipment and installation hold of the Novum LVP, customer returns and transition to spectrum. Sales in Advanced Surgery totaled $304 million and grew 10%. Results in the quarter reflected continued strong demand and increased volumes for our global portfolio of [ hemostats and sealants ], strong commercial execution across regions and steady procedure volumes. MPT's adjusted operating margin totaled 14.5% for the quarter. decreasing 480 basis points. This reflects the same drivers as total Baxter, including the unfavorable year-over-year comparison related to cost timing, tariffs, and higher manufacturing costs, including absorption. In the Healthcare Systems & Technology segment or HST, sales in the quarter totaled $705 million decreasing 2% due to a decline in the Front Line Care division. Within HST, sales of our Care & Connectivity Solutions or CCS division were $435 million, flat compared to the prior year period. The Patient Support Systems, or PFS portfolio, which is the largest business within CCS, saw growth in the quarter and continues to see momentum, including a strong capital order book within the U.S. This was offset by our Care Communications portfolio, which is impacted by the timing of installations. To date, we have not observed a slowdown in U.S. hospital capital spending. However, given the broader macroeconomic uncertainty, we continue to closely monitor the situation. Front Line Care sales were $270 million and declined 4%. Performance in the quarter reflects the timing of government orders and large customer deals. It also includes planned global exits in the portfolio. HST adjusted operating margin totaled 9.4% for the quarter, decreasing 380 basis points. These results reflect an unfavorable year-over-year comparison related to previously discussed cost timing and higher costs related to tariffs. Moving on to our Pharmaceutical segment. Sales in the quarter totaled $621 million, increasing 1%. Within Pharmaceuticals, sales of our Injectables and Anesthesia division were $301 million, a decline of 13%. Consistent with last quarter, the Injectables portfolio was negatively impacted by supply constraints and continued softness in certain [indiscernible] products. As Andrew referenced, during the quarter, we made significant progress in clearing back orders at 1 of our manufacturing facilities. Additionally, supply constraints associated with the disruption at a contract manufacturer contributed to the performance in the quarter. While we are working closely with the manufacturer to help improve supply of products, we do expect limited supply into 2027. Our Anesthesia portfolio also declined low double digits, reflecting continued softer demand for inhaled anesthesia products globally. Drug compounding grew 20% and continues to reflect strong demand for our services. Pharmaceuticals adjusted operating margin totaled 7.4% for the quarter, decreasing 340 basis points. This reflects the previously discussed unfavorable year-over-year comparison related to cost timing, price erosion and an unfavorable product mix within Injectables, driven in part by supply constraints impacting select higher-margin products. Finally, other sales, which represent sales not allocated to [indiscernible] and primarily includes sales of products and services provided directly through certain manufacturing facilities were $14 million in the quarter. MSA revenue from Vantive totaled $76 million. As a reminder, these sales are included in our reported growth, but they are not reflected in our organic growth. Now moving to the rest of the P&L. First quarter adjusted gross margins from continuing operations were 36.8%, a decrease of 500 basis points driven by the previously discussed headwinds and cost of goods sold. First quarter adjusted SG&A from continuing operations totaled $614 million or 22.7% of sales, slightly lower than the prior year. Adjusted R&D spending from continuing operations in the quarter totaled $124 million or 4.6% of sales. TSA income and other reimbursements totaled $42 million in the quarter, in line with our expectations. Altogether, these factors resulted in an adjusted operating margin of 11% on a continuing operations basis, a decrease of 390 basis points, reflecting the same underlying drivers discussed earlier in relation to earnings per share. Net interest expense and other expense from continuing operations totaled $67 million in the quarter. The continuing operations adjusted tax rate for the quarter was 18.3%, driven primarily by mix of earnings across jurisdictions. In total, adjusted earnings from continuing operations were $0.36 per share for the quarter. Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. First quarter free cash flow was $76 million. This compares to negative $221 million in the first quarter of 2025. The performance in the quarter reflects improved cash flow generation, including progress across targeted areas of working capital as well as continued focus on execution. We remain focused on strengthening cash flow generation and maintaining discipline around working capital, which are foundational elements of our financial strategy. Improving the balance sheet continues to be a key priority, and we intend to deploy cash towards reducing leverage in line with our capital allocation framework. Now turning to our outlook for the full year 2026, which we are reiterating. For the full year, we continue to expect total sales growth to be flat to 1% growth on a reported basis. This reflects current foreign exchange rates, which are expected to contribute approximately 100 basis points top line growth for the year. In addition, reported sales are expected to include a headwind of approximately $25 million from MSA revenues from Vantive, representing approximately 30 basis points of impact on reported growth. Excluding the impact of foreign currency and MSA revenues, we expect approximately flat organic sales growth for 2026. As it relates to the segments, there are no changes to our organic sales assumptions. In MPT, we expect full year organic sales to be flat to slightly up. This reflects the uncertain timing for the resolution of the Novum shipment and installation hold. Although we did not see a material impact from customer returns in the first quarter, we continue to believe it's prudent to include the potential impact from various customer responses in our guidance. Our guidance also assumes that the ship and installation hold will remain in place for the full year. In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both the Care & Connectivity Solutions and Front Line Care divisions. In Pharmaceuticals, we expect full year organic sales to be approximately flat. This reflects ongoing pressures in Injectables & Anesthesia related to softer market demand, continuing supply challenges and IV push utilization trends that have been discussed in prior quarters. We expect this to be offset by continued growth in drug compounding. Turning to our outlook for other P&L line items, beginning with tariffs. We continue to estimate a full year impact, net of mitigating actions to be approximately $80 million, which represents a year-over-year headwind of approximately $40 million as we experienced a full year impact. TSA income and other reimbursements are expected to range from $130 million to $140 million. We continue to expect full year adjusted operating margin from continuing operations to range between 13% to 14%. We expect our nonoperating expenses, which include net interest expense and other income and expense to total between $280 million to $300 million, reflecting higher interest expense and a lower contribution from other income. On a continuing operations basis, we anticipate a full year tax rate to range between 18.5% and 19.5%. We expect our diluted share count to average approximately 518 million shares for the year. Based on all these factors, we continue to expect full year adjusted earnings on a continuing operations basis, of $1.85 to $2.05 per diluted share. While we are not providing quarterly guidance, I will offer some additional color on how we expect performance to progress over the remainder of the year. Overall, we are reiterating the broader framework we previously laid out for 2026, including the rollout of [ no mechanical ] headwinds and a more challenging comparison to the prior year in the first half, followed by expected improvement in the second half. We now expect second quarter earnings to be similar to the first quarter with slight improvement in volumes. This reflects the continuation of the higher manufacturing costs, including absorption headwinds within ITT, which are expected to be more pronounced in the second quarter. As previously shared, as we move into the second half of the year, we expect to have fully rolled through the absorption headwinds in addition to realizing an anticipated benefit from the previously discussed actions taken earlier in the year to rightsize our cost structure. Within HST, we expect growth in the second half supported by new product launches, including Connex 360 and Dynamo. Our order in the U.S. continues to support visibility into improved performance in the second half. In Pharmaceuticals, we continue to expect the previously discussed headwinds to persist through the first half of the year. As we move into the second half, we anticipate a more favorable comparison and improved performance. Taken together, we continue to expect a second half improvement in organic sales growth, operating margin and adjusted earnings. For clarity, I will now provide a bridge from expected first half to second half margins. First, we expect improvement in volumes in the back half, consistent with typical seasonality we've seen in prior years and the associated incremental operating leverage that comes with it. This represents approximately half of the anticipated operating margin improvement from the first half to the second half, roughly 250 basis points of the total 500 basis point implied expansion. Second, we expect to realize the benefits from the cost structure actions taken earlier this year. This represents around 25% of the improvement to operating margins, roughly 125 basis points. To be clear, these actions are largely complete, and we expect them to be realized in the second half. And third, we expect to roll through the higher cost inventory produced in the second half of 2025 in Q2. This represents the remaining 25% of the anticipated improvement to operating margins or roughly another 125 basis points of expansion. With respect to free cash flow, we continue to expect free cash flow to be back half weighted, consistent with 2025. This reflects normal seasonality, the expected cadence of earnings and the expected benefit of recent cost structure actions. In closing, I just want to reiterate that I'm excited to see the traction within the organization from Baxter GPS. And I look forward to driving improved operational discipline and support more consistent execution across the business. With that, we can now open up the call for Q&A. Operator: [Operator Instructions] I would like to remind participants that call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Robbie Marcus of JPM. Robert Marcus: Congrats on the better-than-expected quarter. Two for me. First one, just wanted to get thoughts on how first quarter translates into the reiterated guide. How much of this is conservatism, how much of this is a pull forward or different assumptions moving forward. More specifically, especially as we look to 2Q, the Street's right around flat organic sales growth. How do you feel about that? And then I got a follow-up. Kevin Moran: Robbie, this is Kevin. Let me take this one just from a near-term modeling perspective. In Q1, I'd say it came in overall in line with our expectations. The 1 piece to call out there is we've been transparent about the potential risk of responses from Novam customers. We did not see a material impact in the quarter. But as Andrew referenced in his prepared remarks, we think it's prudent to continue to contemplate that in the guidance. As we move to Q2, I'd say, in line with our original expectations, we do expect some sequential improvement Q1 to Q2 on the top line, but still pressured year-over-year like we saw in Q1. And I think about it as pretty consistent year-over-year drivers from what we saw in Q1. So for example, the headwind from Novam sales, this will be the last quarter before we lap it. Andrew again talked about the risk of potential returns for Novum. We've talked about Pressures and Injectables. And we also said that HST's growth is going to come from the back half. And so the first half, we expect to be pressured and then we expect growth in the second half. And so to kind of sum it all up, the full year reiterated our expectation of approximately flat, kind of [ Novum ] pressures in the first half and then an improvement in the second. Robert Marcus: Great. Maybe if I could shift the focus to 2027. You have a good amount of TSAs and MSAs rolling off. There is still a lot of end market uncertainty. Maybe highlight if there are some of the key new product launches we can be looking for next year? And I guess the real concern out there from investors is, can EPS be a positive growth number, yes, next year. So if you're willing to comment on that, how you get there and some of the top and bottom line drivers? I appreciate it. Andrew Hider: Yes. Robbie, just a couple of items, and I'm going to start with what we've said. I'll walk through our view, and then I do want to walk a little bit on innovation. So look, while we're not providing guidance, as you're well aware, what we have gone through is that we're going to be rolling off the [indiscernible] and we expect to cover this, although we would expect to have modest growth within 2027. And we would also look to that to say we would expect to grow earnings modestly as well. When we look at our product set, not only we confidence -- we have confidence in our position with customers, and we're continuing to really outline and gain confidence in our ability to execute for our customers, we've launched some exciting new products. And I've outlined a few of these, but just to walk through. We talked about Connex 360 being a key [indiscernible] that we've launched and we've seen favorable insight from customers as well as engagement with customers as well as our Dynamo stretcher, which is a connected stretcher. And I'll tell you, we worked very closely with customers around the design, development and launch of this product and have had very strong feedback. Now it's a competitive market. And so certainly, we have to earn our right but we've seen very favorable discussions with customers and favorable uptick from engagement. So -- and I also highlighted 2 more -- while [indiscernible] still proving the point around, we are outlining novation and its impact on the future of Baxter. And we're going to continue to drive innovation as a key element of our future. We invest here. We expect a strong engagement with our customers through this process, and we would look to innovation being a -- certainly a key element of our overall growth in the future. Operator: David Roman of Goldman Sachs is on the line with the question. David Roman: Maybe we could just dive into a couple of businesses here. Maybe I'll start with MPT. There are a lot of moving parts here considering the dynamics with Novum IV conservation. But can you unpack for us a little bit what's going on beyond some of those businesses, for example, with the IV set business? How do you protect the pump disposal business, given the Novum dynamics? And I think that's something like 4 to 5x the size of your capital business and higher margins? And what are the things that can get this business back to growth besides just the stabilization in IV utilization? Kevin Moran: Yes. So a couple of things here, David. Let me start with our overall pump portfolio. And I outlined a bit around Novum, so I won't dig into that. We have launched Novum syringe, and that is a nice addition for Baxter. Additionally, we also have spectrum and spectrum, our LVP platform. So we continue to support the overall market. We expect that to be -- and we've had obviously strong feedback from customers, and we put this product on our IQX. So that allows us to have communication with our pump portfolio. And so overall, we feel we continue to have strong interest in our spectrum LVP pump. And we feel good about our offerings, especially the value proposition we bring to customers in this space. And with that, we would expect sets to be in line with that confidence. And just as a reminder, we do expect our pump revenue to grow in the back half of the year, and we're staying very close to our customer base through this. David Roman: And then maybe as a follow-up, I appreciate the bridge from first half to second half walk on operating margins. As you sit here today, a lot of things that you're laying out are contemplated on expectations for the second half of the year. Can you maybe just go into a little bit more detail about what are the signposts that you're seeing whether it's KPIs or orders or other customer dynamics that give you that confidence to embed such a significant ramp in the back half of the year? Kevin Moran: So maybe I'll walk through the conference, and then we can certainly go into buckets if needed. But overall, I'd say, first and foremost, we obviously -- and you've known this business, we do have a seasonality aspect that we've continued to look at and we are validating. Number two, when I speak to customers when we engage around our product set, we see strong interest. And we've looked at -- and there's some elements, right? We've talked to in the past, our IV Solutions business, and it's rightsizing, we would expect that to normalize within 2026, which we've outlined. Number two, we continue to look at HST as more a back half area, and we've seen continued strong interest in our product portfolio. With Q1, we did have a little nuance within Front Line Care on timing. We would expect that to normalize out throughout the year, and we would expect HST to grow at low single digits. So overall, we're feeling confident in our view and it's a credible path for our ability to execute and then really deliver on the growth -- or excuse me, what we've said in our earnings on growth, but also in our operating margin expansion. And so Overall, I would say we continue to look at the business. We continue to outline our KPIs to ensure we've got clarity and folks around executing within the year. Operator: Larry Biegelsen with Wells Fargo is on the line with the question. Larry Biegelsen: Andrew, I wanted to ask on inflation. What's embedded in the operating margin guidance for gross margin in 2026? And how are you absorbing the increased cost pressures from oil, freight, chips, et cetera. Since the Q1 call, oil, it looks like it's up about $50 a barrel since you last reported? And I had 1 follow-up. Andrew Hider: Yes. Larry. Let me walk through a couple of items here, and I'll outline how we view this as well as how we're executing towards it. To lay this out specifically, as we view oil and its impact, a reminder that we sold our Kidney Care business, and with that sale, we've gone, call it, less than 50% now is an impact on oil prices to our P&L. And so if oil stays flat as it is today, we do see this as something we can manage and mitigate and will not have a material impact in 2026. Additionally, as we see other areas, our team, and as you would expect, we've taken a very proactive approach to managing our supply chain and our supply channel. And so we are engaging very deeply with our suppliers. We were needed. We've started to look at dual sourcing, really outlining, ensuring we minimize the impact and use this as a competitive advantage for the long term. And so what I can state is as we -- as we look at our ability to minimize inflation, we've largely outlined how we want to drive this. That said, Baxter is not immune. And we continue to be very proactive, we continue to monitor. We use something called daily visual management around managing and ensuring we have our supply base. We're not immune to macro trends, and we continue to outline where we see issue, how do we impact and how do we drive that to minimize the overall impact on the business. Larry Biegelsen: That's helpful. And Andrew, maybe a high-level question. With more time under your belt now, anything more you can share about the turnaround plan and any strategic changes that we could anticipate at Baxter. Andrew Hider: Look, just to walk through, I took this job 9 months ago. And I'll tell you, I saw a compelling opportunity to create significant value, both not only near term but over the long term. And since then, my conviction has only gained to strengthened, and I am fully committed to restoring Baxter as an industry-leading company. And now why is that gain traction? I as a CEO, something called Standard work. And part of my standard work is to visit facilities, engage with our teams on how we produce product, how we drive operations as a strategic competitive advantage as well as customers. And I'll tell you the feedback from our customers is that Baxter is a trust brand. It is a brand in which they look to Baxter for innovation, for capability and to really enabling their workflow to be at a more systematic and simpler process. And so we have the ability to drive that. Now we're early in our journey. And so we've started to gain traction. We've started to see really the efforts around GPS, and I highlighted a few of those. And I guess 1 of them I would highlight is we've done over 230 events in Q1. Now no single event dictates success, it's the momentum and the build on our structure and our foundation for the future. And so look, this quarter, we met what we said we'd mean. By no means are we saying this is the end. We are laser-focused in here, we're laser focused on the future. And we've got a lot of work to do. but we've seen nice progress towards adoption of the fundamentals for how we want to get to the future and how to drive the business forward. Operator: Vijay Kumar of Evercore ISI is on the line with the question. Vijay Kumar: [indiscernible] just looking at the performance here, excluding the comps, you guys said up low singles [indiscernible] on an underlying basis, but the guidance is calling for flattish organic. So maybe just walk us through on why wouldn't Q1 trends sustain? What are you assuming for normal step down or returns, if you will, maybe comment on HSD order performance. I know there was some timing element. Would it orders grow and what gives you confidence for HSD growth in the back half? . Kevin Moran: Vijay, this is Kevin. I can take this one from a modeling perspective and reiterate some of the comments I shared with Robbie. So I guess, overall, Q1 came in line with the expectations. Again, the 1 item to note there is we've been very clear and transparent about contemplating the potential risk from responses from Novum customers. we did not see a material impact in the quarter. However, we think it's prudent to continue to reflect that in our guidance going forward. And when we think about Q2, it's going to be a lot of the same dynamics and year-over-year headwinds that impacted Q1. Injectables, Novum, the potential for Novum returns. We've said HST's growth is going to come from the back half of the year. And so we do expect some sequential improvement in volumes in Q2. However, it's still going to be pressured year-over-year. Vijay Kumar: Sorry, just on the order growth in the quarter? Kevin Moran: I'm sorry, can you repeat your question? Vijay Kumar: HST order trends in the quarter? Kevin Moran: Each -- I'm sorry, Vijay, we're having trouble hearing you. Trends of what? Vijay Kumar: Order growth for HST. Kevin Moran: That's the timing we saw in the quarter. Got it. Andrew Hider: Yes. So -- and Vijay, I'll walk through this, but let me get a little bit more specific. Within Q1, the HST performance was largely driven by our Frontline Care business, and there was some timing aspects within that portfolio, plus we did have some planned exits within the portfolio. And these were planned. CCS came in roughly flat for the quarter. And within that, we did see growth in PSS, which is the largest piece of our business for CCS, giving a lot of items here. Net-net, we do expect this business to grow low single digits for the year. Q1 did have -- for HST, a pretty big number last year. So as you recall, last year was a big comp to come off of. We would expect it to be weighted, our growth weighted to the back half. And we've seen strong demand for our Connected Care business. as well as how we look at the timing for FLC. And so overall, again, reiterating, we expect this business to grow low single digits and to be back half weighted. Operator: Matt Miksic of Barclays is on the line with the question. Matthew Miksic: Congrats on a great start to the year. Yes, I wanted to follow up on just a couple of things. One on the sort of general macro factors that are causing some concerns, I guess, and in the past had been a challenge for Baxter. I think the expectation was that was going to be tougher, David talked a little bit about oil components and chips and supply teams. One of the companies in this space report some issues around chips that had been a problem. How are you mitigating those? And so how far out into the future? Do you feel like you are kind of set through the end of the year or for the next couple of quarters? And then I had 1 follow-up. Andrew Hider: Yes. Look, and I'll walk from specifically, chips. So it's overall [indiscernible]. So from a memory chip standpoint, at this stage, we've not experienced material storages or supply disruptions. And now that said, versus that we're taking a very proactive approach to managing risk. And many areas that we're doing through disciplined forecasting, through supplier engagement, dual sourcing efforts, and certainly something that we continue to look at. As I stated earlier, Baxter is not immune. We've outlined this risk early on and we are taking countermeasures around how to minimize this and it's something we are going to continue to stay close to and something we're going to continue to monitor. But to date, we have not experienced a material shortage. Matthew Miksic: Okay. And then just a follow-up on some of the growthier areas. As we all know and as you know, sort of the search for growth drivers and innovation and shiny object, if you will, has been one of the quest of Baxter for some time. And listening to you the last 6 months or so and on this call, talk about some of the -- getting after some of the growth engines that you have within the portfolio in Surgery or I don't know if it's in HST or in Connected Care, it seems like a slightly different take on putting R&D to work to generate growth, maybe putting more wood behind arrows you already have. If you talk a little bit about that in the near to intermediate term, that would be great. Andrew Hider: Absolutely. And I'm going to start in an area and I will answer the question, but I just -- I want to be clear, we are -- we will be known as very disciplined capital allocators. And I say that to start because, obviously, I have outlined the debt repayment. But the second piece of that is invest for growth. And part of that is how we invest in innovation. And we've outlined that in the past, but as a reminder, I view innovation as base heads, not walk off grand slams. And why do I say base heads? Because we have -- we need to have that constant drive to always be in front of our customers, listening, turning that into actionable insights and driving products that overcome the obstacles that our customers face. We have put our -- we've now positioned our business to be decentralized. So think about us as being very focused on the end markets we serve and then building it into our process and how we drive innovation. And so as we look at innovation, it is an enabler for our future. Now things take time, and I want to be very clear on that. It's early days. It's early stages. We've started to see some movement. And why do I know that with confidence. We do QBRs, which is a quarterly business review with our innovation leaders similar to our businesses. So it's the same expectation around where we spend our money and understanding that drive and making sure that we are laser focused on driving growth and driving expansion for our customers to enable their success. And so we've had a couple of early successes. We have some early wins, and I outline a few of those Connex 360 as well as Dynamo as well as by the way, we've launched a few more products in the quarter that will -- there's certainly a niche area of focus offers a continued path for our customers to see the impact from innovation. And so I would just say, over time, you'll see us on that cadence of focusing on how do we expand our value for customers and ultimately drive it from an ROIC perspective back to our shareholders. Operator: Matt Taylor of Jefferies is on the line with the question. Matthew Taylor: I had a couple of follow-ups. I just wanted to know better what you were assuming for the Novum returns, just so we can understand if there aren't returns, what the upside could be? Kevin Moran: This is Kevin. So we haven't explicitly quantified what the potential risk is for returns. But as you can imagine, this is something we continuously evaluate from an accounting perspective and from a guidance perspective. Thus far to date, since the ship and installation hold, it has been fairly immaterial to our results. Again, but we just think it's prudent to assume that this potential could happen. We have talked about our total pump portfolio being less than 2% of sales, and that includes both Novum and Spectrum. So you can at least ring fence the size of our total pump portfolio, of which some of that would be related to Novum. Matthew Taylor: Got you. And then can I ask a follow-up on the inflation issues. You said that oil would be manageable in 2026. I guess my question is if it stays elevated, is it still manageable in 2027? Or can you provide any framing of exposure there next year as [indiscernible] hedges roll off, et cetera. Andrew Hider: So I'll just kind of reiterate what I stated a little earlier and then we can through the other aspect. What I stated earlier was if oil stays at its current level, we have been able to mitigate, and we would not see a [indiscernible] challenge on 2026. As far as 2027 goes, as you're -- well, we're not giving guidance today. That said, we're very focused on every aspect of our business that's going to be part of the supply chain and potential areas that we would want to mitigate. Operator: Joanne Wuensch with Citi is on the line with the question. Joanne Wuensch: I'll just put the 2 upfront. How do I think about the recovery in Injectables & Anesthesia. It sounds like that also has a back half improvement. And could you please comment on the CFO search? Thank you so much. Andrew Hider: Yes. So let me walk through this aspect. And on to Pharma specifically and get into a couple of areas on it. First, we have taken pharma. We've outlined as we've combined this with our ITT business. lot of synergies across that business. And simply put, we do -- what we do really, really well is take high-value solutions that are patient impact and we make it easy for our customers to utilize that in their setting. And we've been able to bring that together. And so the team is excited about what that brings. We have seen a couple of challenges couple of challenges in this business. And one of them -- and I outlined last quarter and into this quarter, we had a challenge in one of our operations. And the team a GPS approach. They outlined where we had the challenge, they took short term and drilled the business and aligning around long-term countermeasure to enable this business to longer term be back on track. And so we've been able to mitigate this, and we saw that trend throughout the quarter. Additionally, we also have a challenge with the contract manufacturer. And I'll tell you, having been personally engaged in this, this is going to take time. We are working very closely with them. We have people on site to work with them to improve the supply, but this will take some time, and we are staying very close to this as it's important for our customers to get this product back on track. As far as longer term, when we think about this business. The [ fit ], the area is really aligns around our ability to bring strong capabilities to the markets and compounding has been a piece of that as well around high value, high -- or excuse me, high growth, where we focus on ensuring that we also identify margin and how we attack the margin. As far as the CFO goes, look, that is well underway. We have started the search. We are seeing tremendous interest many of the variables that brought me to Baxter around our strong position with customers, the brand and potential for the future is the same that we're seeing. And so it's well underway. We're in a fortunate position with the need of being in place and a broader team continuing to execute, [indiscernible] on executing. And so we're focused on getting a CFO that understands execution as well as knows our business. And you can expect we'll update at the appropriate time. Operator: Jayson Bedford of Raymond James is on the line with the question. Jayson Bedford: Congrats on the progress here. Just a quick 1 for me. On the Novum fix, you mentioned that you'll be prepared for any necessary submissions. So I guess the question is, do you anticipate that you'll have to refile? And if so, will you notify us if you do? Andrew Hider: So as far as Novum goes, and I'm just going to walk through -- and we don't have any updates today. I want to be very clear. But I'm very pleased with the progress and level of engagement I'm seeing from our teams as they continue to address the open Novum field actions and support needed from our customers. As we stated, our guidance assumes that the ship and hold will remain in place during the year for Novum LVP. To be clear, we continue to diligently finalize additional hardware and software corrections to resolve the open field actions. And once those are available, we'll implement them in accordance with regulatory authorities and including any necessary submissions. And so we are moving. We have a strong portfolio with our Spectrum LVP, and we continue to stay very close with our customers through this process. Jayson Bedford: Okay. And just maybe as a quick follow-up. It sounds like the returns are not material, but is it safe to assume that you're seeing kind of a stabilization of returns, if I think of 1Q versus 4Q and 3Q? Anita Zielinski: That's correct. So in Q1, we did not see a material impact from the Novum LVP returns or exchanges, but we have factored this possibility into our full year guidance. And this guidance does assume that those shipment [indiscernible] hold installation remains in place throughout the year. Operator: Andrew Hider, I turn the call back over to you. Andrew Hider: Thanks, operator, and thank you for your questions today. As we shared, while we're still early in our turnaround, our team is moving with urgency and discipline and our efforts are gaining traction. Through Baxter GPS, we're aligning our organization around us shared standards of excellence and building a culture of continuous improvement. We're now operating from a stronger foundation and focused on driving more consistent performance, accelerating growth and meaningful innovation, expanding margins, strengthening cash flow, and reinforcing our balance sheet to create durable, long-term shareholder value creation. Thank you for continued interest. We look forward to sharing updates on our progress next quarter. Stay safe, and goodbye for now. Operator: Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.
Operator: Greetings. Welcome to Slide Insurance, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your moderator today, Garrett Edson with ICR. Thank you, sir. You may proceed. Garrett Edson: Thank you, and good morning. With us today are your host, Bruce Lucas, Chairman and Chief Executive Officer of Slide; and Andy Omiridis, Chief Financial Officer. By now, everyone should have access to our earnings release, which was published yesterday after the market closed and can be found on our website at ir.slideinsurance.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management regarding the company's future performance, anticipated events or trends and other matters that are not historical facts. Forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Slide. Our statements are as of today, April 29, 2026, and we undertake no obligation to update any forward-looking statements we may make, except as required by law. In addition, this call is being webcast, and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.slideinsurance.com. With that, I'd now like to turn the call over to our Founder, Chairman and CEO, Bruce Lucas. Please go ahead. Bruce Lucas: Thank you, and welcome to our first quarter 2026 earnings call. We appreciate your continued interest in Slide and are excited to be speaking with you today. We started off 2026 by delivering another quarter of strong execution across our business and reinforcing the ability of our tech-enabled coastal specialty focus to produce what we believe to be the best top and bottom line performance in our sector. Our performance was once again based on strong renewal rates on our existing book, expansion of our voluntary sales and the continued acquisition of Citizens policies. For the quarter, we meaningfully grew our gross written premiums by 49% year-over-year to $414.8 million. In the quarter, we continued to strategically capitalize on Citizens ongoing depopulation efforts. As a reminder, our extensive data capabilities and technology-driven underwriting process enables us to identify Citizens policies that offer compelling return profiles. While we plan to remain selective in pursuing Citizens assumptions this year, we expect to continue to grow our gross written premiums in 2026 year-over-year as a result of higher policy retentions, higher voluntary sales and the launch of new states. In addition to our strong top line results, Slide grew net income by 51% year-over-year to $139.5 million, which is another new quarterly record for the company. Along with net income, first quarter return on equity was once again strong at 12.5% and 50% on an annualized basis, reflecting the continued strength of our business. Meanwhile, our disciplined underwriting model continues to deliver industry-leading results with our combined ratio improving to 55.5% compared to 58.9% in the prior year quarter. Our first quarter performance continues to deliver robust profitability and attractive equity returns that create meaningful value for our shareholders. This strong start to the year positions us well to achieve our full year objectives. We have deliberately built a dynamic coastal specialty insurance platform with the strongest balance sheet in the sector, providing us with the financial flexibility to accelerate our geographic expansion throughout 2026. While we've established a strong market position in Florida, we're now strategically extending our proven capabilities into additional catastrophe-exposed markets. For example, South Carolina continued to deliver robust voluntary sales in the first quarter, and we're confident we will be able to build on this momentum moving forward. As we continue to progress through 2026, we remain committed to thoughtful geographic diversification in multiple states. Our geographic expansion will bolster our foundation for sustainable growth and long-term shareholder value. We are in the final process of completing our 2026 reinsurance program, and I anticipate completion of the reinsurance tower in the next 1 to 2 weeks. Year-over-year, risk-adjusted rate decreases are prevalent in the Florida market and the decreases have been substantial. I will not disclose the extent of the decreases in pricing at this time, out of respect for our reinsurance partners who are still negotiating with our peers. However, I will note that we increased our first event reinsurance tower by roughly $1 billion versus 2025. And despite this increase, reinsurance capacity significantly outpaced our demand as every layer of the reinsurance tower was oversubscribed on favorable terms. I'd like to thank our reinsurance partners for their unwavering commitment to Slide through hard and soft market conditions, and your partnership is greatly appreciated. During the quarter, we completed our $120 million stock repurchase program, and our Board authorized a new $125 million repurchase program in late March. In the first quarter, we repurchased approximately 7.7 million shares at a weighted average price of $17.75 per share. Since initiating our buybacks, we have repurchased approximately 13.3 million shares at an average share price of $17.30. Through our repurchase program, we have returned $230.9 million to shareholders and reduced our IPO dilution from 13% to 3%. This reflects our business model's ability to generate strong free cash flow, our willingness to opportunistically repurchase shares when we believe there is a dislocation in our valuation and our ability to successfully return capital to our shareholders in a highly value-accretive way. It is unusual for a recent IPO issuer to return IPO proceeds less than 1 year after going public, and there are a couple of reasons for our decision to aggressively pursue share buybacks. First, since our IPO was priced in June at $17 per share, we have significantly outperformed our expectations each of the last 4 quarters while providing strong guidance for 2026. Despite our consistently strong results, our share price remained close to the IPO price, which does not reflect our fair value. Second, our strong financial performance has meaningfully increased our free cash position, which continues to build. This growth in unencumbered cash has exceeded our near-term deployment needs, and we believe we have ample capital flexibility to support our growth initiatives even after repurchasing $230 million of common stock. Given our current earnings profile and outlook, we believe repurchasing shares at attractive valuations is a prudent use of capital that can enhance earnings per share and return on equity over time. We remain highly confident in our business plan and expected financial performance and believe our share repurchase program further supports our objective of delivering best-in-class returns on equity. Accordingly, the Board of Directors has authorized an additional $100 million share repurchase program. We will continue to evaluate repurchase opportunities in a disciplined manner, and we'll act when we believe doing so is in the best interest of shareholders. We expect to strengthen Slide's earnings profile and balance sheet throughout 2026, and we remain committed to deploying our excess capital in ways that maximize shareholder value. Finally, our success is built on the efforts of our exceptional team. I want to thank all our employees for their dedication and the critical role they play in Slide's performance. I'm proud of what we are accomplishing together, and I appreciate all of you. Thank you for your continued support of Slide. And with that, I'll now turn the call over to Andy Omiridis to provide some color on our excellent first quarter. Anastasios Omiridis: Thank you, Bruce, and good morning, everyone. In the first quarter, net income rose 50.8% to $139.5 million from $92.5 million in the prior year period, resulting in diluted earnings per share of $1.02. Our earnings profile continues to strengthen with growth in both top and bottom line driven by increased scale achieved following our IPO in June 2025. Gross premiums written reached $414.8 million, up 49.1% from $278.2 million in the first quarter of 2025. This growth was driven by a 46% year-over-year increase in policies in force, which now stand at 508,928, driven by growth of voluntary new business, renewals of previously acquired Citizens policies and further Citizens acquisitions. During the quarter, we also acquired an additional $92.3 million in annualized gross premiums or 28,783 policies from Citizens, capitalizing on selective attractive takeout opportunities. Net losses and loss adjustment expenses totaled $111.1 million in the quarter as compared to $83.8 million in the prior year period. As a result, our accident year loss ratio improved to 28.4% from 34.2%, reflecting the continued strong performance of our book. Policy acquisition and other underwriting expenses rose to $44.1 million from $28.6 million in the prior year period, driven by increased renewal policies from prior year assumed Citizens policies, resulting in increased policy acquisition costs in 2026. General and administrative expenses increased to $46.2 million from $41.4 million, primarily due to higher staffing levels to support our growth. These trends produced an overall expense ratio of 25.1%, down from 27.4% in the prior period and a combined ratio of 55.5%, an improvement of 3.4 percentage points year-over-year. The gains reflect the operating leverage we continue to build as we scale the business. Turning to capital management. As Bruce mentioned, we completed our $120 million share repurchase program during the quarter, and our Board authorized a new $125 million program in late March. In total, we have repurchased 7.7 million shares at a weighted average price of $17.75 per share during the quarter. As of the date of this earnings call, we have repurchased an additional 3 million shares for $53.8 million at an average price of $17.95. Since inception, we have repurchased 13.3 million shares for $230.9 million at an average price of $17.30. As of March 31, 2026, we had cash and cash equivalents of $1.2 billion and total invested assets of $720 million, consisting of 33.5% corporate bonds, 31.3% municipal bonds, 24.1% U.S. government bonds and 11.1% asset-backed securities and other. As a relatively new public company, I'd like to take a moment to outline our capital priorities. We have demonstrated our ability to generate strong free cash flow and have deployed that capital both to support attractive growth opportunities and to repurchase shares when we believe it is accretive over the long term. We expect to continue managing capital in this disciplined manner, always prioritizing the actions that create the greatest long-term value for our shareholders. I'm pleased to reaffirm that the full year 2026 guidance we provided on our February earnings call, we continue to expect gross written premiums between $1.85 billion and $1.95 billion and net income between $455 million and $470 million. Top line growth is expected to come primarily from sustained organic expansion, including double-digit increases in policies in force and premium outside of Florida, supplemented by selective opportunities in Florida that meet our targeted returns. Finally, we expect to file our Form 10-Q after the market closes on April 30, 2026. Thank you for your time. And operator, we are now ready to open the line for questions. Operator: [Operator Instructions] The first question comes from Alex Scott with Barclays. Taylor Scott: First one I had for you is just a follow-up on the reinsurance commentary you gave. It sounded like a fair amount of limit you added. So I wanted to check to see if you could give us an update on how much higher the modeled PML loss would be that would still be covered by your reinsurance tower? Has that meaningfully changed sort of the risk profile of your company? Bruce Lucas: Yes. Everything scales in tandem. So we've had obviously tremendous growth year-over-year at plus almost 50%. As you add more policies, your probable maximum loss on your reinsurance tower gets higher. And so apples-to-apples compared to last year, it's the same. But in total, we did increase our first event reinsurance tower by $1 billion. So the tower is at approximately $3.5 billion of first event coverage. And that is in line with what we did last year, although on a smaller book and smaller tower, they are proportionately identical to one another. Taylor Scott: Got it. Okay. That makes sense. And just to follow up on the reinsurance costs. I mean, to the extent you have savings, which it sounds like you probably will, and that's one of your biggest costs. Can you help us think through how that translates to the loss ratio and the benefit that we actually see coming through in the underwriting? Bruce Lucas: Yes. We don't have an external quota share, so it really shouldn't have any impact on underlying loss ratio. But yes, you are correct, Alex, that reinsurance is our single largest expense of the organization. So a decrease in reinsurance pricing is good for the Florida market and Florida cedents. But the underlying loss ratio should be unchanged because our only quota share is internal. Operator: The next question is from Paul Newsome with Piper Sandler. Jon Paul Newsome: I wanted to ask kind of a broader question about the Citizens takeouts. There seems to be a pretty wide range of views about whether or not you can take them out -- take Citizens takeout today versus in the past, given how active folks have been. Maybe you could just talk a little bit about why you folks remain confident and if there's any sort of particular thing that you think you have an advantage over your peers in doing those takeouts. Bruce Lucas: Yes, it's a good question, Paul. I mean, obviously, the Citizens opportunity is not as robust as it has been in prior years. But every company is different. It depends on your portfolio? Where your portfolio is located? How do the Citizens policies fit within that portfolio? Are there reinsurance synergies that are created or the debit sets that happen? So every company is going to look at the Citizens portfolio a little differently and the policies are going to model differently for everyone. We are focused on profitability, like our growth has been incredible, and we're certainly not reliant on Citizens this year. We think voluntary growth in new states is the real story for '26. But if we see opportunities in Citizens to add accretive policies that really fit well within our portfolio, we're going to do that. And we underwrite with a $6 trillion TIB underwriting set. ProCast has been proven 100 times over now. It gives very accurate forward reinsurance costs. We feel like that gives us an advantage to find policies that are accretive to the current portfolio. Jon Paul Newsome: And then maybe as a second question, could we have a little additional color on the competitive environment? Perhaps the biggest question I get today is given where you and other insurers or profitability is why -- why wouldn't we see a rush of competitors come into the market? And is there any early evidence that something like that might be happening? Bruce Lucas: Yes, Paul, we're not seeing it. We get this question every quarter and every quarter our answer is the same. While there have been some new entrants to the market, I will note those entrants come in with an extremely small balance sheet. They have to scale. They have to build systems. They have to hire people. It's a loss lead. Maybe Citizens can be attractive for them, maybe not. But obviously, that opportunity is not as robust as it was, say, 2 years ago. We're not seeing new capital flow in, and we're seeing some companies that got conditional approval in Florida, not able to raise the necessary funds to even operate. So we're just not seeing that at this time. I think the market has been pretty stable, and we're very happy with how we are positioned in Florida. Operator: [Operator Instructions] The next question comes from Tommy McJoynt with KBW. Thomas Mcjoynt-Griffith: We appreciate you guys giving us the full year guide for net income. And to be clear, that guide, I think you said does not include your assumption for a major CAT event in the third quarter, which we as analysts often want to bake in. Maybe you can help us frame what would happen to your net income if a prior event like a Hurricane Helene, Milton or Ian were to repeat, what would that do to your net income? We understand it's not as simple as plugging in the full first event retention just because there's offsets from claims processing revenues as well. Bruce Lucas: Well, if it's an event like Helene, there's virtually zero impact to our earnings. If there's an event like Milton, there's going to be a larger impact because it was a CAT 4 that hit Tampa. Whereas Helene was primarily a flood event. We're still finalizing in the reinsurance tower what our first event retention is going to be. But I would say that as a guidepost, we have consistently kept our retention to no more than 25% of pretax earnings. So even if you had a full event retention, I would expect pretax earnings to go down by about 25% for the year. And so maybe we run a 40% ROE. It's -- we're in a very good spot here. And the retention is also spread out across a very large reinsurance tower. So it's not like you have a $200 million loss and all of that loss is absorbed by the company. We spread that retention throughout different layers. We call it COPAR. And we like to do that just to hedge the risk and show the reinsurers that we have real skin in the game. But -- and event is not some armageddon for us. It's just a ding to earnings for the year, but those earnings will still be incredibly robust. Thomas Mcjoynt-Griffith: And are there any details that you can share around second and third event loss retentions as well, the sideways protection in the reinsurance tower? Or will we need to wait for more details on the reinsurance program? Bruce Lucas: Yes. Good question. Expect something similar in terms of structure to what we did last year. We do like to step down retentions on event too. We do buy third event cover, and that is a rarity in the Florida market. In fact, I'm unaware of anyone that does that besides us. So as we get a higher number of catastrophe events, our retention steps down for each event. But we're still in the process of finalizing what that will look like, but not dissimilar to last year. Thomas Mcjoynt-Griffith: And then just last one. When we think about the new business -- sort of new business that you're generating, both in the voluntary and what I'll call the Citizens assumption side, which one of those is a larger contributor to new business growth in '26? Is it still Citizens takeouts? Or are the voluntary channels in Florida and in the other states contributing more than that this year? Bruce Lucas: It's voluntary. That will be the larger channel for sure. Operator: The next question comes from Randy Binner with Texas Capital. Randy Binner: Just picking up on that question. Can you comment on the kind of the pace and the composition of the top line growth for the rest of the year? Is there going to be -- is it going to be for the voluntary business or the business in new states? Is it going to be pretty linear? Is there any seasonality? There's kind of a tough comp in the fourth quarter. It'd just be helpful to kind of understand high level, how you see the rest of the top line coming in for the remaining 3 quarters in the year? Bruce Lucas: Yes. I would expect top line to steadily increase as we move through 2026 with the launch of new products, new states, et cetera. We do have to watch our growth because we're purchasing a reinsurance tower, and that tower has projections as to what our in-force portfolio will look like at September 30. And -- so we have to kind of navigate within the tower on the top line growth, but we did model in some very strong top line growth into the reinsurance purchase. So we're able to kind of go full steam at this point and continue to fill the exposure set within our reinsurance tower. But I definitely think you're going to see an acceleration, particularly in the third and fourth quarters. Randy Binner: Okay. That's helpful. And then just one detailed question. Do you -- was there any PYD or Cat in the loss ratio in the quarter? Bruce Lucas: We had some CAT in there. We had some relatively minor events in the first quarter, but there is no PYD. The earnings number that we posted is 100% a quarterly function with no PYD in it. Randy Binner: Okay. Got it. And then just one more, if I could. The cash balance seems high. I'm a little newer to the story, so maybe I'm not up to speed on this. But it seems like some of the cash balance on the balance sheet could shift into investments that could generate a higher yield. Is that the right way to think of how the investment income line might develop over time? Bruce Lucas: I believe, yes. And the reason the cash balance is so high is because the company keeps crushing its own projections in terms of profitability, and it is meaningfully accretive to our cash balance. As a result of the cash balance accelerating, particularly over the last 4 quarters, we've been able to do things like return $230 million of equity back to shareholders. And we still believe that we have more capital on the balance sheet than we need to execute on the business plan. So we are working closely with our financial advisers. We are reinvesting those cash proceeds into higher-yielding assets. But at this point in time, nothing is a higher yield than just the underwriting. I mean when you're running 55 combined ratios, you want to continue to bolster and increase your underwriting capability. But it is a [ chance, ] and it takes time to deploy capital in an effective and thoughtful way. But it's a good problem to have, and we expect that problem to get a little bit bigger as we go through the year, and we start posting earnings numbers for the rest of the 2026 quarters. Operator: The next question comes from Matt Carletti with Citizens Capital Markets. Matthew Carletti: Bruce, I was hoping you could just spend a minute talking about some of the new states you talked about kind of New York, New Jersey, California and so forth. And just help us with kind of which ones you might find most attractive. Some of those have been in the news in different ways. Obviously, California has a bit of a capacity issue going on to the wildfires. There's been kind of proposed profit caps in New York, which I know it won't be a big state for you overnight and maybe it's a bunch of noise about nothing. But just curious kind of your views as you sit there and think about kind of where to put your chits as you kind of expand outside of Florida. Bruce Lucas: Yes, it's a good question, Matt. I would say #1 for us is definitely California. We've spent a lot of time developing on California product and partnerships, distribution, that launch is imminent. I mean it could happen this week. I mean we're that close. We're just putting the finishing touches on systems at this point in time. So we expect to launch that product in the near term, but we think there's a tremendous opportunity in California. We also do believe that New York and New Jersey are still very accretive. And the primary reason for that is there is a capacity shortfall in both of those markets. There are tremendous reinsurance synergies that we pick up as we scale in the Northeast. It's the blueprint and model that I kind of created when I was at Heritage and it was very successful. So I have a high degree of confidence in that execution strategy. We'll see what New York does on profit caps. I think that's going to be a much bigger issue for, say, a company that has 100% of their premium in New York not a company at the end of the year that will have 4% or 5% of its premium in Europe, if that. So it's not really an issue at this point in time. We're still on track and on schedule to launch all of our new states, and we feel pretty bullish about that growth opportunity. Operator: The next question is a follow-up from Alex Scott with Barclays. Taylor Scott: I wanted to see if you could comment a little bit more on some of your efforts on distribution in California ahead of the launch. I mean, is that -- is building out distribution something that takes a long time and sort of you have the blueprint and some of the initial foundation laid, but it will kind of come in over time? Or has a lot of that work been done upfront? I'm just trying to understand how impactful this launch could be on growth for the rest of the year. Bruce Lucas: Yes, Alex, good question. All of our distribution is in place. So we spent the time on the front end to identify the right distribution partners in a very large and differentiated market. California is huge. It's not like there's 2 or 3 markets. There's probably 20 markets within California. So all of that work is done. Really at this point, we're just fine-tuning some system issues, technical issues, but it will get launched here in short order. And we do think there's an opportunity to grow top line this year by $50 million to $100 million just in California, if not more. So we're really chomping at the bit to get the finishing touches on and launch the program. Taylor Scott: Got it. That's helpful. Follow-up I had is on just the prioritization of capital return. You're in a unique position where you have enough cash coming in to potentially grow and return capital. And I look at my own model even and -- even with a good amount of growth, premium to surplus is coming down in my model, which probably doesn't make a whole lot of sense. With the stock trading at what is -- at 5.5x price to earnings, I mean, a significant discount even to the arguably more volatile reinsurers and property CAT, will you continue to leverage buybacks to reduce your share count the way you did this quarter until that's corrected? Bruce Lucas: Yes, that's a great question. It's something that we talk about a lot is capital management. And you're right. This is a good problem to have. Most companies do not have the problem that we have on profitability and cash. But we are always, first and foremost, looking for the highest return on equity for our shareholders. That is our #1 mission at Slide. It should be everyone's #1. And so the first thing we do is we really pick apart the business plan. We look at the opportunities in front of us, the amount of capital that will be required, what we believe the ROE will be on those opportunities. And once we have that cash position set aside for the growth initiatives, we then start looking at excess cash, what's the best use of it. There are definitely instances where you'd want to have some redundant capital on your balance sheet. I think that is prudent. It helps us kind of hedge out any volatility in the portfolio. But we have been generating such rapid increases in profitability and free cash that buying back stock at an average of $17.30 a share, which is less than 2% higher than the IPO price, that's a no-brainer. We'll take that trade all day. When we went public in June of last year, there were analyst projections that were issued to the Street as to what we were going to do in '25 and '26. I think it's very safe to say that we have absolutely surpassed all of those expectations in a meaningful way, yet the stock had been kind of stuck right around that IPO price. When we see that type of dislocation, we're a strong and aggressive buyer. And as we continue to increase our earnings, increase our top line, you should expect us to be very active in share buybacks as long as the price is not indicative of fair value. Operator: Thank you. At this time, I would like to turn it back over to Mr. Bruce Lucas for closing comments. Bruce Lucas: I would just like to thank everyone for participating in our first quarter earnings call. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Good morning. Welcome to the Trane Technologies Q1 2026 Earnings Conference Call. My name is Lisa, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. [Operator Instructions] I will now turn the call over to Zac Nagle, Vice President of Investor Relations. Please go ahead, sir. Zac Nagle: Thanks, operator. Good morning, and thank you for joining us for Trane Technologies First Quarter 2026 Earnings Conference Call. This call is being webcast on our website at tranetechnologies.com where you'll find the accompanying presentation. We are also recording and archiving this call on our website. Please note that statements made today are forward-looking and may differ materially from actual results as detailed in our SEC filings. This presentation also includes non-GAAP measures explained in our news release and presentation appendix. Joining me today are Dave Regnery, Chair and CEO and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave. Dave? David Regnery: Thanks, Zac and everyone, for joining today's call. Please turn to Slide #3. I'll start with a few thoughts on how our purpose-driven strategy continues to fuel strong performance over time. The dynamic global environment and rising demand for power is pushing customers to think differently about energy. With our leading innovation, Trane Technologies is uniquely positioned to win. Our high-efficiency systems and smart controls help customers save energy, lower operating cost and increased resiliency proving that sustainability and performance go hand-in-hand. Our strategy is built on a strong foundation, our robust business operating system, a powerful cash flow engine and an uplifting engaging culture. This formula positions us to deliver differentiated long-term value to our people, our customers, our shareholders and our communities. Please turn to Slide #4. Q1 was another strong quarter, marked by exceptional enterprise organic bookings, up 24% and a record backlog of $10.7 billion, up over 30% versus year-end 2025. We delivered organic revenue growth of 3%, led by our Americas Commercial HVAC business and double-digit global services growth. This strong performance translated to adjusted EPS growth of 7%. Our Commercial HVAC businesses delivered outstanding performance, particularly in the Americas, where our commercial HVAC bookings reached an all-time high, up approximately 40% year-over-year, with Applied Solutions bookings up over 160%. Our third consecutive quarter of applied bookings growth of greater than 100%. The strength of our Commercial HVAC business is further underscored by our combined Americas and EMEA backlog, which is up approximately $2.7 billion over year-end 2025. This includes approximately $1 billion from our acquisition of Stellar Energy, a leader in modular data center cooling solutions. We are exceptionally well positioned for continued growth in 2026 and beyond. Our exceptional bookings and record backlog provides strong visibility to continued market outgrowth and revenue growth acceleration in the second half of the year. Our robust and rapidly growing Commercial HVAC pipeline across key verticals, including long-term capacity and master purchase agreements in data centers bolsters our confidence in the long-term outlook. Our services business, which represents 1/3 of our enterprise revenue, continues to be a consistent and durable growth driver, boasting a low teens compound annual growth rate since 2020. Additionally, we anticipate residential market tailwinds in the second half of 2026 driven by improving market fundamentals and easier prior year comparisons. The Americas transport market also continued improvement in fundamentals, strengthening the outlook for a late 2026 and 2027 recovery. Operational excellence is core to everything we do, and we expect to mitigate tariff and inflationary pressures through our business operating system. Altogether, we are raising our full year revenue and EPS guidance, which Chris will cover shortly. Please turn to Slide #5. As discussed in our Americas segment, Commercial HVAC continued its standout performance with bookings up approximately 40% and revenues up high single digits. In high-growth verticals like data centers, customers expect innovative, highly engineered solutions tailored to their unique needs. This plays directly to our strengths, including leading innovation, system expertise, proven operational excellence and the capacity to grow with our customers as their needs rapidly expand. These factors and the expertise of our direct sales force enabled us to capture a significant share of these opportunities. Turning to residential. Bookings were up low single digits, while revenues declined mid-single digits, exceeding our expectations entering the quarter. In Americas transport refrigeration, bookings were up double digits and revenues were up low single digits, significantly outperforming end markets, which saw truck, trailer and APU segments down double digits in Q1. EMEA results were solid and consistent with our expectations, excluding headwinds from geopolitical events in the region. In Asia Pacific, Commercial HVAC bookings were up high 20s and revenues grew low single digits in the quarter, led by the rest of Asia, where bookings were up approximately 50% and revenues were up low single digits. Now I'd like to turn the call over to Chris. Chris? Christopher Kuehn: Thanks, Dave. Please turn to Slide #6. Dave covered many key points from this slide earlier, so I'll keep my comments brief. Organic revenue growth for the enterprise was solid, up 3%, led by services growth, up double digits. Enterprise organic leverage was in the high teens and adjusted EPS growth was 7%, demonstrating the effectiveness of our business operating system and driving operational excellence throughout the P&L. Please turn to Slide #7. Margins across the segments were largely in line with our expectations, with the Americas and Asia operating margins up 10 basis points and 90 basis points, respectively. EMEA margins were impacted by expected first year acquisition and integration-related costs and lower revenues than forecast in the Middle East. We also maintained high levels of business reinvestment across the portfolio in the quarter, driving our flywheel of innovation and growth. Now I'd like to turn the call back over to Dave. Dave? David Regnery: Thanks, Chris. Please turn to Slide #8. Our outlook for 2026 remained strong, supported by our record bookings and backlog. Our Americas Commercial HVAC business is executing at a very high level, significantly outperforming end markets. We expect continued strength in data centers and other core markets like higher education, government and health care, just to name a few. Our Q1 book-to-bill was approximately 150% and and our backlog is up nearly 70% year-over-year, strengthening our visibility into 2026 and beyond. Based on our exceptional backlog and the timing of customer deliveries, we expect approximately 10% revenue growth in Q2 against a tough prior year comp of mid-teens growth. We expect revenues to accelerate to low teens growth as we move through the second half of the year. In residential, we had a strong start to the year. We expect Q2 to be flattish, pivoting to growth in the second half aided by easier prior year comps. At this early stage in the year, our outlook remains prudent with flat revenues expected for 2026. Turning to transport. Market fundamentals continue to improve and are increasingly supportive of a recovery in late 2026 and healthy growth in 2027. Our market forecast remains largely unchanged, with a mid-single-digit decline expected for full year 2026. We expect Q2 to be down roughly mid-teens based on the timing of large customer deliveries within the year. As we've discussed previously, given our strong mix of large customers, orders and revenues can be uneven from quarter-to-quarter. We significantly outperformed the transport markets in the first quarter and expect to outperform for the year. Turning to EMEA. Our results to date and expectations for the year are largely unchanged, excluding impacts related to the Middle East. First and foremost, we have prioritized the safety of our employees in the region. We do expect continued headwinds in the second quarter of approximately $50 million in revenues, representing an estimated $0.05 EPS impact in Q2. We continue to monitor the situation closely. In Asia Pacific, China remains challenging with dynamic macro conditions. We expect the rest of Asia to be stronger than China in 2026. Overall, our outlook for the region remains flattish for 2026. Now I'd like to turn the call back over to Chris. Chris, over to you. Christopher Kuehn: Thanks, Dave. Please turn to Slide #9. Our 2026 guidance reflects the market dynamics we've discussed, and operational excellence driven by our business operating system. It also incorporates our value creation flywheel, continued investment in innovation, market outgrowth, healthy leverage and strong free cash flow. We're increasing our organic revenue growth guidance to approximately 7%, the high end of our prior range of approximately 6% to 7%. Our reported revenue guidance moves to approximately 9.5% with unchanged estimates for approximately 2 points of M&A and 50 basis points of favorable FX. We're also increasing our adjusted EPS guidance range to $14.75 to $14.95, were approximately 13% to 15% of adjusted EPS growth, up from $14.65 to $14.85 prior. For Q2 2026, we expect approximately 5% organic revenue growth and adjusted EPS in the range of $4.20 to $4.25. For additional details, please refer to Slide 16. Please turn to Slide #10. We remain committed to our balanced capital allocation strategy, focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure optionality as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below our calculated intrinsic value. Please turn to Slide #11. We are on track to deploy between $2.8 billion to $3.3 billion in 2026 through our balanced capital allocation strategy. This includes approximately $900 million for dividends reflecting a 12% increase to $4.20 per share annualized in 2026. We deployed or committed approximately $340 million year-to-date for M&A and strategic investments. Our share repurchases year-to-date through April stand at approximately $300 million, and we still have approximately $4.4 billion remaining under our current share repurchase authorization, providing significant optionality. Our M&A pipeline remains active, and we will continue to be disciplined in our approach. Overall, our strong free cash flow, liquidity, balance sheet and substantial share repurchase authorization offer excellent capital allocation optionality as we move forward. Now I'd like to turn the call back over to Dave. Dave? David Regnery: Thanks, Chris. Please turn to Slide #13. The Americas transport refrigeration market remains dynamic, but the long-term outlook is strong. ACT projects the market to bottom in the first half of 2026 and recover late in the second half. ACT also expects a sharp rebound beginning in 2027 and continued expansion through the end of the decade. We expect growth as well, but anticipate a more gradual slope to the recovery. We're managing the down cycle effectively, outperforming end markets and continuing to invest in innovation, so we're well positioned as the market strengthens. . Please turn to Slide #14. In closing, our strategy is aligned to powerful secular tailwinds that position us to outperform megatrends around sustainability, digitalization, and rising energy demand are intensifying the need for our systems and services. Through breakthrough innovation and the strength of our people, we're delivering superior performance for our customers and advancing a more sustainable future. With our proven business operating system, record backlog and strong demand, we are well positioned to deliver differentiated shareholder value in 2026 and beyond. And now we'd be happy to take your questions. Operator? Operator: [Operator Instructions] The first question today comes from Chris Snyder from Morgan Stanley. Christopher Snyder: I wanted to ask about the Americas applied orders. Just kind of keep getting better despite the bar already being very high. I think this quarter, you're up 160%. I guess my question is, are customers ordering with longer lead times than they were 6 or 12 months ago. Like when you guys look at this backlog, is the delivery schedule meaningfully different versus a year ago? Just trying to figure a part of the strength is there's some extension in that lead times. David Regnery: A little bit confusion. Let me try to clear it up. Look, we have published lead times for all of our products. And the published lead time on the unitary could be relatively quickly, in many cases, we have stock products. so it could be next day, all the way up through our applied solutions where you could have lead times, say, 30 weeks. So from a lead time perspective, we're very, very competitive. In fact, we also offer a majority of our applied products, quick shift programs, which if a customer had an emergency, we'd be able to respond to at a premium, but we'd be able to respond. So that's kind of the lead time side of it. Now if you're asking when customers are asking for the products, a little bit of a different question. And that could be really -- I think in the past, we probably talked about on average, and averages are always a little bit different. So we would talk about a 6 to 9 months. In some verticals, we are seeing that being extended. Could it be 12 months, 18 months, in some cases for sure, depending on the customer, how much visibility they want us to have to make sure that we make sure our supply chain is ready as well. So it's it's -- I guess the answer is, if you're asking from a customer standpoint, for sure, it's a little bit longer. Customers want that security that they're going to make sure that we have their order, and we're able to execute to it. From lead times that we actually published that we actually can meet demand for customers, that is as it's always been. Christopher Snyder: And I appreciate you highlighting that distinction between like the customers' lead times in your own because it does seem quite important. Maybe if I could just follow up on some of the cost/tariff changes that are in the market. I guess any impact on your back half price expectations in response to that? And then just kind of maybe more broadly, we hear a lot about difficulty or challenges of producing in the U.S. and others say it's just straight up uneconomical. You guys have proved the opposite. Can you just maybe talk about the advantages of producing in the United States? And how have you been able to compete effectively while facing the higher labor costs that come from domestic production? Christopher Kuehn: Yes, Chris, thanks for the questions. I'll kick off, and I think Dave will jump in. But look, tariffs and inflation, look, it's certainly a dynamic environment with many changes since our last earnings call in January. On a net basis, we are expecting more inflation, including from raw materials and tariffs in the year than was estimated, say, 90 days ago. We do expect inflation will put some near-term pressure on price costs. However, we expect to manage this for the full year and it's baked into our guide. I'm not going to size the dollar impact for competitive reasons. However, let me just share some context that I think would be helpful. We've had an in-region, for-region manufacturing strategy for well over a decade in Trane Technologies. At the end of 2025, we had 21 factories in the Americas. Of that, 20 of those factories are in the U.S. and 1 factory is in Mexico. Since then, we've acquired Stellar Energy, which added production in Florida, which we're expanding, and we're expanding capacity with a new site to open later this year in Texas. So one more thing to add. Over 95% of our products sold in the U.S. are manufactured and/or assembled in the U.S. So look, we've had a very strong track record to manage through inflation and tariffs, maybe some short-term pressure, but we've got that managing our guide, and we'll continue to leverage our business operating system to mitigate the impact of inflation, including tariffs over time. We'll look at mitigating the cost with suppliers. We'll look at alternative sources of supply. And then we'll look at pricing as necessary to offset that cost. So at this point, I don't want to get ahead of our businesses on price for the year. Our guide was around 1.5 points back in January. It's probably a little bit higher than that, probably closer to 2 points at the enterprise level now, but we'll continue to leverage the business operating system and mitigate the cost where we can and price where we need to. David Regnery: Yes. And Chris, just a follow-up there on how do we stay competitive. Look, I'll brag about our operating system, right? We are a great operator at Trane Technologies. And we like our plants right here in the United States. We like creating jobs right here in the United States, and we do it, and we do it in a very competitive way. And every time I go to one of our plants, I just see all the improvements they're making from the last time I had an opportunity to visit and I just get so excited about what the future is going to look like for our company. So look, we have -- as Chris said, we have over 21 plants now in the United States, for real shortly like that, and we are very, very competitive, as you could see with our results. Operator: Julian Mitchell from Barclays has the next question. Julian Mitchell: Just wanted to start off with a question on operating leverage. I think organically, it was high teens in the first quarter and you've got that mid-20s sort of baseline for the year. Maybe kind of walk us through how we should think about the operating leverage playing out through the balance of the year organically. And I suppose the inorganic headwind to that shrinks progressively? Is that the fair way to look at it? Christopher Kuehn: Yes, I mean in the first quarter, I think leverage is consistent with our expectations. We did a little bit better in the residential business. We had a bit of a headwind in the impact in the Middle East due to the conflict. And you're right, it was around high teens organic leverage in the first quarter. We do see that improving as we move the year. So you can think around the second quarter is in that mid-20s kind of range. And then in the second half, we're in the mid- to high 20s. In terms of organic leverage, we continue to see an acceleration in the top line and then conversion to the bottom line in the second half of the year, consistent with our guide in January. We have even more conviction about the second half of the year and the guide for the year. And a little bit easier comps in residential, growing top line and transport. And we expect to have a very strict business in the second half of the year with the Americas Commercial HVAC executing on the backlog and when customers want products. David Regnery: Yes. The only thing I would add, Julian, is in our resi business, and we talked about this on our fourth quarter earnings call, we're level loading. So where in the past, we would ramp up our factory and over really produce in the first 5 months of the year and then bleed that down as we work through the peak season. We've changed our playbook there. So we're level loading. So yes, we are taking a bit of an absorption impact here in the first, I'll say, half of the year, but that will obviously come back in the back half of the year. Julian Mitchell: That's helpful. And then maybe just a follow-up question on the resi HVAC side of things. Any big differences you're seeing on the one-step versus two-step sort of movement there? And what's your confidence in terms of that inventory level in the channel? And any early reads on summer selling season as it's starting out soon. David Regnery: Good question. I mean, look, we're very happy with our first quarter in resi. It came in a bit better than what we anticipated down mid-single digits. As far as inventory goes in, look, as we said on our fourth quarter call, we thought it was set properly in the independent wholesale distributor channel and here we are at the end of the first quarter, and we say it's set properly. So no change to that. We have the desired inventory levels, and we're optimistic. I mean we -- at the end of the fourth quarter, we felt we could be down 5% on our resi business. We've now modified that. We think it's going to be a flattish year. But we'll see how it plays out. We're only in Q1. But early signs are we're executing well. And we're more bullish than we have been for a while in our resi business. And the team there is doing a great job executing. So we'll see how the rest of the year plays out. Operator: The next question comes from Scott Davis, Melius Research. Scott Davis: So look, I want to back up a little bit. I think last quarter, you talked about the applied orders widening out and beyond just data center. Can you give a little bit of color on that? What particular markets -- I'm assuming that continued just given the orders up 160% has to be pretty broad-based. But can you talk a little bit about some of the non-data center verticals that were strong for you? David Regnery: Yes. I mean I think I talked a little bit in the prepared remarks. But yes, it was broad-based, which is always encouraging for us. Look, everyone should understand, data centers was very strong, okay? Very strong. However, we had -- from a revenue standpoint, we had growth in the majority of the verticals that we track in, at least in the Americas. I think we had -- it was 9 of the 14 verticals had positive growth, so you could see that this is a broad based. We have -- I want to make sure everyone is aware, we have not lost focus on the core or what we call the core, even though data centers are very strong. I'll remind everyone that 95% plus of our account managers or sales force do not call on data centers. And they have deep domain expertise in these verticals. And that really allows us to win. So broad-based growth, mega projects continue to grow. Data centers continue to grow. And obviously, our order rates continue to grow, and it's going to be a great year for Trane Technologies. Christopher Kuehn: Scott, I'll add on the backlog. The growth in the first quarter was -- I'll use a little bit around numbers here is around $3 billion. And of that $3 billion, around $1.2 billion was from acquisitions, and of that was around $1 billion for Stellar Energy. So that means we had about $1.7 billion, $1.8 billion of backlog growth from the core, from organic growth in the business. So a very strong quarter in terms of backlog growth. We typically have seen plus or minus a couple of hundred million dollars to the backlog in any quarter over the last few years. So very strong momentum in orders and backlog and the pipeline continues to remain very strong. Scott Davis: And are you guys operating full out in your factories and your applied facilities right now? Are you fully capacitized at this point? Or do you still have a little bit of flex? David Regnery: Yes. I mean there's flex in some of the factories. Obviously, we're operating at a very high level right now. But capacity is one of those things where everyone will -- how you're defining it, right? Right now, the majority of our factories were only running two shifts. So -- in fact, some were only running one shift. So we certainly have that to fall back on. With that said, I would also tell you that we have expanded our capacity certainly over the last 3 years, and we have plans to continue that expansion. In fact, we're making those investments as we speak. Stellar, Chris talked about earlier. We also have expansions going into our -- some of our applied factories as well. Christopher Kuehn: Yes. And Scott, we did raise our CapEx target for the year. We're generally 1% to 2% of revenue. We raised it to 2% to 3% of revenue, a, to capture the expanded production in Florida and in Texas for stellar and also to make sure we are staying ahead of where we see the growth, especially in our applied commercial HVAC business. So still targeting greater than or equal to 100% of free cash flow even with that higher CapEx spend for the year. Operator: [Operator Instructions] We'll take the next question from Andy Kaplowitz from Citi. Andrew Kaplowitz: So -- like obviously, data centers continue to be strong. But I'm curious like if you look globally, you look at a market like Asia Pac, I mean, it's still a tough market, as you said, but you did have, I think, 50% growth ex China in bookings there. So you see maybe a little bit more broad-based growth. I don't know if it's led by data centers in places like that or maybe in Europe as well? David Regnery: Yes. I mean, data centers are strong globally, okay? Once you get outside of the U.S., they tend to get smaller in size, but they're strong everywhere. Look, we had some -- we have -- our Asia team, we're still calling Asia flat for the year. But outside of China, we had some nice growth, nice orders. Team's got a very robust pipeline that they're tracking there. So we're going to continue to execute. I'm still optimistic that we could hopefully do a little bit better than flattish in our Asia Pacific region for the year. And then the team is certainly executing to that goal as well. In Europe, look, I mean, Europe is actually -- was relatively strong for us in Q1. I mean orders were up as we expected as was revenue. So we're not concerned at all about Europe, and that team continues to be very innovative and satisfying their customers in creative ways. So we're happy with Europe. Obviously, the Middle East, we could all understand what's happening there, and we talked about that in our prepared remarks. But the good news is all of our employees are safe in the Middle East and let's hope that conflict gets over in the near term here. Andrew Kaplowitz: Agreed. And I'm curious about your continued outperformance in Americas transport pretty strong in Q1 versus the market. I know you expect a recovery late this year, maybe a more gradual recovery than ACT. But maybe you can talk about why you continue to outperform sort of the new products in the market and of the outlook as you move forward there? David Regnery: Yes. I'll sound like a little bit of a broken record here because we love to talk about the innovation that we're putting out into the marketplace. And the transport markets have been down for years now. I think we all know that. And we've been saying for a long time that we're going to continue to invest even in down markets because that's what makes great companies in the long term. And you see some of those innovations and the efficiency of our products, the quality of our products. It's -- you could go out and do a sample of the trucking industry and you'd see the gold star is Thermo King, it's a gold star for a reason. And that team will continue to execute. We're seeing some nice signs that hopefully, this market turns around. We're pretty confident it's going to turn here in the back half of the year. It's late, but 2027 looks like it's going to be a very strong market. And if you listen to ACT they would tell you it's going to be a strong market and continue to build through the rest of the decade. So we're well positioned there. And I'll congratulate my team there for execution quite well here in the first quarter. Operator: Next up is Amit Mehrotra from UBS. Amit Mehrotra: Dave, I just would like to see if you can talk about what you think your TAM is within data centers and how Stellar may change that. When I think about Trane and data centers, I think large applied chillers, but obviously, there modular systems now with Stellar and obviously, the orders and the conversion is very good. So can you just talk about what that does for your competitive offering within data centers and really kind of what it does for your TAM? David Regnery: Yes. Sure. Well, let me start with Stellar, okay, because I think that's a great business, and we're so excited to have to be part of the Trane Technologies family. Today, Stellar specializes in building modular chiller plants for data centers, okay? But if we start kind of with the end in mind as to where we see stellar. Think of this as a business that in 2 to 3 years is a $1 billion business. Think of it with mid-teens plus EBITDA serving many verticals, not just data centers. The skilled labor scarcity is not unique to the data center vertical. It applies to all of our verticals, and we know that this is a great solution to help alleviate some of those shortages. So we're very excited to have Stellar as part of the acquisition. If you look at it today, it's $1 billion in backlog. I think about half of that shipping here in 2026. Modest accretion in 2026 as we'll be investing pretty heavily there. Chris talked a little bit about some of the expansions, but we're really deploying our operating system. So we'll continue to deploy that and make a good company, an even better company. And so I think it's going to -- we'll continue to see benefits with our Stellar acquisition well into the future, and we're excited to have it be part of the family. The other addition that we made was in LiquidStack, which really expanded our offering in CDUs. So another nice addition that's off to a great start, and we'll continue to leverage that. They also have some technology, kind of futuristic technology as well that we think could be part of the solutions and data centers in the future. As far as our position in data centers, we like our position, right? We're thought of it as the thermal management experts, okay? We're working with hyperscalers. We're working with other influencers, chip manufacturers and designing what some refer to as reference designs, others refer to as data centers of the future. But look, we get called on for a reason because of our expertise. And as far as the TAM goes, it keeps expanding, okay? And the data center vertical keeps moving with innovation, and we keep pushing some of that innovation and developing that innovation. But it's a very, very strong vertical today, and it will be a very strong vertical well into the future. Amit Mehrotra: Great. And maybe just a follow-up to that. I don't know if this question is for Chris, maybe if you can talk about data center service revenue and when you expect that to kick in? Obviously, services 1/3 of the business mix right now. And maybe you can just help us think about how much of that is already data centers and really like the mix within mix is data center service revenue ramps up as the mix within that mix of service positive. Christopher Kuehn: Sure. I mean, again, with the end in mind, I mean, the service opportunity with the recent last few years' growth in data centers is still well in front of us. We've been in the data center vertical for decades. And so there's been a service component, but it's been 1 of 14 verticals prior to the last few years with the significant investments there, Amit. So that's very much in front of us. We think about complex applied systems. They require the OEM to be connected. They require the OEM to provide service and maintenance and I know the last thing a data center wants is to ever have a fall to go down. So making sure that those systems and cooling systems are operating efficiently and rotation through the products is obviously very, very important. And maybe one more thing I'll maybe add on Stellar. Maybe just from a modeling perspective, as Dave said, we expect about $500 million of revenue this year from Stellar. We had about the base of that business that we acquired is around $350 million of revenue. That was part of our January guide of around 2 points of revenue contribution from M&A. We also had anticipated about maybe 25% of growth off of that just based on where data center growth was going in our January guide. Now in April, we've got the entire $500 million in our guide. And think of that as probably around $50 million incremental revenue we got captured in April. But it's an exciting business. The pipelines remain very strong in that business as well. And to Dave's point, we've got a lot of investments to make to take this from a $350 million business to a $1 billion-plus revenue business in 2 to 3 years. David Regnery: Yes. Just one other comment on services. I think I've told most of you about our investment that we made here in North Carolina and our training facility. It's really the largest of its kind. I had the opportunity of the data to speak to a class. And this particular class was there, there were technicians getting certified in data center commissioning, okay? That's how detailed we are in our training. And I'll tell you, I was so impressed with the talent of our technicians and the excitement that they had on their face. I went home and I told my wife, I said, well, I come back -- when I come back next time I'm going to be a service technician. It's just somewhat -- it's going to be so fun and there's going to be so much growth in that space. But look, we're going to -- as Chris said, a lot of this data center service works in front of us, and we're making sure we're ready for it. And it's going to be a really fun journey here. Operator: I think you will make a great technician, by the way. David Regnery: I was okay with me being a technician, but I had to do it now. Operator: Andrew Obin from Bank of America has the next question. Andrew Obin: Dave, I think you're probably doing better than a technician. That would be my guess. But maybe a question, there's a lot of conversation about behind-the-meter power and sort of resulting changes in HVAC infrastructure in data centers. Can you maybe talk about absorption chiller technology at Trane? What do you guys have? Do you need to add capacity? And does technology need to evolve to support behind-the-meter needs? David Regnery: Look, I think behind the meter needs are not only in data centers, I'll start with that, but I'll come back to that. But as far as in data center sure, we're starting to see that. As far as absorption chillers, yes, that's a technology that has been around for a while, okay? It's certainly getting some conversation now in data centers. But I would tell you there's a lot of other types of technologies that we're looking at as well that probably have less water usage, and you could get some of the same benefits -- a little bit careful here. Think of it as adiabatic cooling type solutions that we're working on in clever ways. So that's another one. There's certainly a lot of conversation around direct current in data centers. So that's another technology that we're doing a lot of work on. All that's going to be in front of us. And if you look at -- and there's a couple of some of the larger chip manufacturers that will actually publish some of these reference designs. It's very interesting to go out and look at some of what our team is working on there, and it's pretty explicit as to what some of those technologies could be in the future. But the behind-the-meter, yes, that's happening. And I would also tell you that we have a philosophy that, that will happen in all buildings, right? And long term, we believe that all buildings will be smarter. All buildings will be more resilient. And we believe that we're going to be part of the solution there with our agentic AI software tools to make buildings a lot smarter. And that's really going to be part of our future growth projections that we have going forward because we know that most buildings waste about 30% of the energy that they pay for. And when you can solve that problem, is solving a great problem for the planet from a carbon footprint standpoint. They're also creating great paybacks for the customer. And you probably heard me say before, it is green for green, right? It's great because it's saving our customers a lot of money, and it's also really good for the environment. So data centers is 1 part of it, but don't leave out the core because that same concept is going to take hold there. Andrew Obin: Excellent. And maybe once again, stay on the data center topic. Your client Stellar Energy. Can you just talk about -- and also, obviously, you have How has dialogue changed with customers since these acquisitions? And specifically, your ability to increase your service presence inside data center with these acquisitions. How should we think about that? David Regnery: Yes. I mean I don't think our dialogue has really changed with the end customers. We kind of always led with our deep domain expertise. We like direct relationships with the customer, okay? So that's not new to us. We have the broadest portfolio in the industry. So we're able to make sure that we're thinking at a system level, not a product level. So that hasn't changed. Look, the service organization, and I've said this before, when customers, whether they be a hyperscaler or a colo, when they come and see the capacity that we have within our service organization, you can see their eyes light up because they see the expertise that we have. They see how we train our associates and they just -- it alleviates a big -- if they had a fear that if something went wrong, we'd be there, that fear gets alleviated very quickly. Operator: Next, we'll take a question from Noah Kaye, Oppenheimer. Noah Kaye: Maybe just to go back to transport and the outlook. You just give us a little bit more insight on what drives your back half conservatism versus ACT. Anything that you may be seeing from the pipeline to drive that? Or we're just kind of leaving this as upside for the year. David Regnery: Yes. I mean, look, we have several models, okay, ACT as one of them that we use to do our forecasts. And so don't just base everything on ACT. Look, we think it's going to have an uptick in the back half of the year. It's probably the oldest fleet of vehicles that we've seen in a long, long time, maybe 30, 40 years. I mean this -- these units eventually have to get replaced. They cost too much to operate if you don't. You have the spot rate that's now exceeding the contract rate, which is always a good sign. We're bullish that this market is going to start to come back. And when it comes back, it's going to come back relatively strongly. We don't quite have the same inflection point in 2027 is ACT those. We think they're being a little aggressive there because I'm not sure that the trailer OEMs could respond to that type of an increase. But we're bullish about -- I think it's going to trough here in the second quarter, and I think it's upside in the back half of the year and really for several years to come. So this is a great business, and it's had some tough years. But look, having personal experience of running this business at one time in my career, we will continue to be very, very successful in our transport refrigeration business. Noah Kaye: Yes. Maybe just want to ask about some of the improvements that the company made to the reference design for large-scale data center deployments. It's a little bit of a piece with your comments earlier on innovation, but there's more of a benefit from heat recovery integration, larger air cooled chillers. How far in front of kind of the market is this in terms of the innovation trend? Are you already starting to see this kind of reflected in your orders rates or your pipeline? David Regnery: Yes. I think you got to take a reference design and think it's probably out there. We could argue whether it's 12 months or 24 months, but it's probably somewhere in between there. I think -- like I said, I think you could think of buildings being smarter, I think you're going to see chillers being smarter. And we're doing a lot of work around that. And think of it as taking different elements that may not be part of that system today and embedding them in the system. So having a chiller that knows when to run in a free cooling mode only, or having a chiller that knows when to run in a vapor compression cycle and for how long, understanding weather patterns and the impact that they have on these micro grids that are being created here with these chiller farms and knowing when to cycle which units, that's all part of the efficiencies. And then you start thinking about the water flow. By the way, they're all closed loop systems, but the water flow within the system and the velocity and the needs and the pressure. So there's a lot of complications here, and I'll get over my skis relatively quickly, but I know that we have some smart technical engineers that work with the hyperscalers and the -- of the world that love to have these conversations. And little changes make a big difference, and it can have a big impact on the bottom line of a data center. Operator: Nigel Coe from Wolfe Research is up next. Nigel Coe: I want to go back to this AI reference design that you've been highlighting, Dave. But before that, I just want to make sure we cover just a couple of guidance points. The resi outlook for flat for the year, you got flat for 2Q. Seems like 1 comp, the back half looks super easy or rather super conservative. I just want to make sure I understand that. And I think that ACT did raise the reefer builds for the full year, you're not raising your market outlook. So just wondering what that disconnect about. David Regnery: Yes. Well, I mean I'll start with the TK side of it. Look, we didn't -- we thought that TK we think that ACT maybe was a little bit -- maybe wasn't very accurate at the end of the fourth quarter. So them raising their number didn't really change our outlook very much at all, okay? Like I said, we use ACT. We use other sources, including our own internal models. So we're happy that it's not a negative number for ACT. I think it jumped up, I think it's 6% now, what they're projecting. We'll see out of the year unfolds here, but we're off to a good start in the first quarter. Some of that had to do with timing of some large customers, as I talked about in our prepared remarks. But at the end of the day, we're starting to see some some growth signs in Thermo King, which I haven't been able to say in a long time. So I'm proud of what that team has been able to do. Christopher Kuehn: Nigel, I'll add on residential. We took the full year guide up to about flattish versus flat to down 5% in January. Off to a strong start, but it's also just the first quarter of the year, right? We're just about to enter into the cooling season calling the second quarter around flattish, and maybe around mid-single-digit growth in the second half. But I mean, our teams are ready. We've talked about inventory in the channel is in a very good spot just like it was 90 days ago. And we'll see how the year plays out, but we'll let like to put it out in this outlook and a lot of confidence in the full year guide. David Regnery: Let me know if you need a unit, okay, Nigel, you could help us out. Nigel Coe: Yes. Well, I just replaced my unit, but you never know, maybe another year or 2. And then just on going back to data center -- so go back to data center. You mentioned DC power and you seem to indicate you wanted to those opportunities. So I'm wondering, do you want to be a DC power sort of equipment provider? Or are you talking about sort of realigning your equipment to be DC power native. Just want to clarify that. And then on the AI reference design, to what extent is that helping drive higher content for Trane. I'm talking about chillers and the whole integrated unit as opposed to just selling pieces of the puzzle. David Regnery: Yes. I think on the DC question, absolutely. It's -- we're not going to get into DC power, but we're going to make sure our system can work on DC power. So think of it like that. As far as the reference design, look, every reference design I've seen as chillers in it. I would also tell you that in data centers, as in other verticals, we love to think of it at a system level, and we have the opportunity to think at a system level based on the breadth of our portfolio. So we're not wed to any particular component within that system. We just wanted all to say, Trane Technologies at the end of the day. And when we sit down with the influencers in the data center vertical and work on reference designs, we're plugging and playing lots of different products and derivatives of those products that could be in a pipeline of our own NPD pipeline for the future. We're very happy with our position in data centers. We believe that the data center vertical will be strong for the foreseeable future, and we know that we're going to be a big part of that. Operator: This does conclude the question-and-answer session. I'd like to turn the call back to Zac Nagle for any additional or closing remarks. Zac Nagle: I'd just like to thank everyone for joining today's call and wanted to let folks know we'll be around for questions, as always. So please feel free to give us a call. Also we're looking forward to seeing many of you on the road here in the second quarter, and we'll speak to you at the end of the second quarter on our earnings call. Thanks again. Bye. Operator: Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.
Operator: Good morning. My name is Matt, and I'll be your conference operator today. At this time, I would like to welcome everyone to the OneWater Marine Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Jack Ezzell, Chief Financial Officer and Chief Operating Officer. Jack, please go ahead. Jack Ezzell: Good morning, and welcome to OneWater Marine's Fiscal Second Quarter 2026 Earnings Conference Call. I am joined on the call today by Austin Singleton, Executive Chairman; and Anthony Aisquith, Chief Executive Officer. Before we begin, I'd like to remind you that certain statements made by management in this morning's conference call regarding OneWater Marine and its operations may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements. Factors that might affect future results are discussed in the company's earnings release, which can be found in the Investor Relations section on the company's website and in its filings with the SEC. The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. Please note that all comparisons of our second quarter 2026 results are made against second quarter 2025, unless otherwise noted. And with that, I'd like to turn the call over to Austin Singleton, who will begin with a few opening remarks. Austin? Philip Singleton: Thank you, Jack. Good morning, everyone, and thank you for joining us today to discuss our second quarter 2026 results, which reflect the challenging retail environment, a continued improvement in boat margins, portfolio optimization and a notable reduction in leverage. Revenue for the quarter declined 9% and same-store sales were down 8%, primarily due to event timing and portfolio changes. This year, the Palm Beach International Boat Show took place at the end of March, which shifted a meaningful amount of new boat sales into the June quarter. This timing shift accounted for approximately half of the decline in new boat sales during the quarter. Also during the quarter, we completed the sale of Ocean Bio-Chem as part of our broader portfolio optimization strategy, focused on core assets and long-term value creation. While we updated our guidance to reflect the impact of the sale in February, the absence of those revenues will create challenging year-over-year comparisons for the remainder of the year. Importantly, we continue to operate from a position of strength. Our inventory continues to be in the best condition it has been in years with a healthy mix and age profile, supported by disciplined production from our OEM partners. We remain focused on enhancing profitability and reducing balance sheet leverage. We are driving margin expansion with a more streamlined portfolio of brands and assets. This combined with our strong inventory positioning, contributed to a 110 basis point increase in gross margin. We also made meaningful progress in reducing debt, supported by proceeds from the Ocean Bio-Chem sale and strong operating cash flow, and we remain on track to achieve our leverage target later this year. Beyond positioning for a market recovery, the strategic actions we've taken are helping us build a more efficient, resilient business model. As we move into the core boating season, we are encouraged by customer engagement and remain focused on execution, selling boats, managing costs and positioning our business for long-term success. With that, I will turn it over to Anthony. Anthony Aisquith: Thanks, Austin, and good morning, everyone. The quarter reflected a continuation of trends we've been seeing in recent quarters. Industry retail demand remains pressured with SSI data indicating double-digit declines in the categories in which we compete. At OneWater, lower new boat volumes were partially offset by disciplined pricing and favorable mix in a slightly less promotional environment as evidenced by our higher gross margin. Our pre-owned business remained a bright spot with revenues increasing 5%, supported by improved availability. Across our dealers, premium categories and brands continue to perform better, which is encouraging considering our portfolio's strong skew towards luxury brands. Importantly, finance penetration remains within our target range with over 60% of our customers choosing to finance a portion of their purchase with us. This highlights the market is not cash only even in the current interest rate environment. Parts and service continued to provide stability for the business, while reported results were affected by the prior year contribution from Ocean Bio-Chem. The underlying business remains solid, supported by steady boating activity. Excluding OBCI, service parts and other sales increased for both the dealership and distribution segments. Finally, I'd like to highlight our inventory positioning, which remains a key differentiator. Dealership inventory is down 3% year-over-year and down 19% over the last 2 years. Beyond the reduction in dollars, our inventory mix and aging profile are well balanced, and we are in a position of strength as we move into the selling season. The boat show selling season was encouraging. boating activity is healthy, and we believe we have the right inventory to meet our customer demand and get people out on the water this summer. And with that, I'd like to turn the call over to Jack. Jack Ezzell: Thanks, Anthony. Revenue for the quarter was $442 million, down 9% year-over-year with same-store sales down 8%. New boat revenue decreased 12%, driven by a shift in the timing of the Palm Beach International Boat Show and lower unit volumes, partially offset by higher average unit price. Solid used boat activity supported a 5% increase in pre-owned boat revenue, driven by higher unit sales and average price. Service, Parts and Other revenue declined 11%, primarily due to contributions from Ocean Bio-Chem in the prior year period. As Anthony mentioned, excluding this impact, the underlying parts and service businesses increased year-over-year. Finance and Insurance income decreased in absolute dollars due to the reduction in new boat sales, but increased slightly as a percentage of total boat sales due to the improving interest rate environment. As a reminder, interest rate cuts enhanced unit economics for boats financed through OneWater. Second quarter gross profit decreased to $106 million compared to $110 million in the prior year period. Importantly to note that our gross profit margin expanded to 23.9%, an improvement of 110 basis points compared to the prior year. This margin expansion was driven by favorable mix shift, brand portfolio optimization and continued execution of our strategic priorities to enhance both gross profit. Selling, general and administrative expenses declined in the quarter by $2 million to $86 million compared to the prior year period. This reduction reflects the impacts of our prior cost reductions, our variable cost structure and ongoing expense management. The increase as a percentage of revenue was primarily driven by the lower revenue in the current period. Against the backdrop of global uncertainty and softer retail demand, we took additional steps to align our cost structure with current retail activity. Within SG&A alone, actions taken at the end of March, early April are expected to deliver approximately $6 million in annual savings. The net loss for the quarter was $13 million compared to a net loss of $375,000 in the prior year. The increase in net loss was primarily driven by lower sales, a $6 million noncash trade name impairment charge and the tax impacts associated with the OBCI disposition. Adjusted EBITDA was $16 million. Now turning to the balance sheet. We ended the quarter with $68 million of cash and total liquidity of approximately $73 million. Inventory was $551 million, down from $602 million in the prior year, reflecting disciplined inventory management and the sale of Ocean Bio-Chem. Long-term debt was $354 million and net debt-to-EBITDA improved sequentially and year-over-year to 4.1x. During the quarter, we repaid $57 million of debt, supported by the proceeds from the sale of Ocean Bio-Chem and strong operating cash flows. We remain on track to reduce leverage below 4x by the end of the fiscal year. Turning to our outlook. Year-to-date results have been largely consistent with our forecast for the first half of fiscal 2026. As a result, our expectations for the year remain unchanged from our February update following the closing of the Ocean Bio-Chem sale. We continue to anchor our outlook on expectations to industry will be flat to down low single digits year-over-year. When factoring the lost revenue from the exiting brands and the divestiture of OBCI, we expect dealership same-store sales to be flat year-over-year and total revenue to be in the range of $1.78 billion to $1.88 billion. We expect adjusted EBITDA to be in the range of $60 million to $80 million, and we expect adjusted earnings per diluted share to be in the range of $0.20 to $0.70. As we move through the core selling season, our focus remains on driving margin expansion, maintaining disciplined cost control and continue to reduce leverage. We are encouraged by the early season activity and customer engagement, and we anticipate that our more focused portfolio, strong inventory position and operational discipline will support our results through the balance of the year. This concludes our prepared remarks. Operator, will you please open the line for questions. Operator: [Operator Instructions] Your first question comes from Joe Altobello with Raymond James. Martin Mitela: This is Martin on for Joe. I first wanted to touch on same-store sales. Can we get a breakdown between units and price and get an impact from the exited brands? Jack Ezzell: Yes. I'd say the majority of it is led by price. Units were down in the mid- to upper single digits, seeing that shift to that kind of more affluent, higher ticket item. And probably, I'd say probably half of that number is driven by the shift in the Palm Beach Show and then maybe 1/4 is from the exiting brands. Martin Mitela: Great. And actually touching on that, the show. I think we calculated out $19 million in sales were pushed from 2Q because of that show timing. Is that -- are we expecting that to show up in the June quarter, all of it? Philip Singleton: Yes. Jack Ezzell: Yes. Go ahead. Philip Singleton: Well, I was just fixing to say when you start talking about the Palm Beach Boat Show, first thing you got to really talk about is how was that show and that show was fantastic. I mean, when you looked at the Palm Beach Show, by moving at those dates for some reason, it really spurred activity. I think we were up high double -- high teen digits both in unit and dollars for that show compared to last year. And the majority of that will fall into the next quarter. Now some of that stuff on the real big stuff might push out. But it definitely -- that timing is what impacted this quarter, and we're going to see the majority of that pick up. We're going to see a lot of it pick up in April. But it should -- most of it should filter in through the whole quarter, but there might be a couple that lag out into the next quarter. Martin Mitela: Got it. And I threw up the number, $19 million. Does that sound right to you? Or could you sort of calculate the... Jack Ezzell: No, it's a little high with respect to the sales that shifted, closer to $16 million, $17 million. Operator: [Operator Instructions] Your next question comes from the line of Greg Badishkanian with Wolfe Research. Scott Stringer: This is Scott Stringer on for Greg. I'm wondering how trends are in April and excluding the boat show. It seems like there's like a nice tailwind from the boat show there. Just wondering how trends are exiting the quarter here. Philip Singleton: Yes. I mean it's continuing on. I mean one of the things that's kind of given us comfort to maintain guidance with all the macro noise out there and what could be and all that stuff is just the door swings, the Internet leads, the amount of deals that flowed through in April. I mean April was a good month. We still are maintaining that trend of higher gross margin. And then the volume, excluding what swapped over from the boat show is trending in a nice direction. So we're still optimistic on what we're seeing from the day-to-day ground activity and what's happening as far as boat sales, we're just still a little nervous about what we're going to wake up and see on the TV and how that impacts consumer confidence over the next 60, 90, 120 days. I mean one day you wake up and everything seems fine in the next day you hear that gas is going to go to $47 a gallon. And so once that noise kind of simmers down a little bit, we could be on a pretty decent path to having a good year if we can get that noise to settle down because it's certainly trending in the right way right now. Scott Stringer: Got it. That actually leads to my next question. I was wondering about the impact of higher fuel prices on boat sales. Are you seeing any sort of impact there? Is that impacting one type of customer versus another? Just curious your thoughts. Philip Singleton: Well, I mean, I'm sure at some point in time, it's got to impact everybody, but the higher-end customers and the customers that we deal with don't seem to be impacted by the trend lines that we're dealing with right now. So you'd be an i*** to say that it doesn't impact it. Could it be better -- more -- a lot better than it is right now? Maybe. But it's still pretty damn good. And so we like that possible tailwind behind us when this stuff settles and what that could open up for us. If it's like it is right now with all the noise, how much better could it get? We just don't know. Operator: Your next question comes from the line of Kevin Condon with Baird. Kevin Condon: I think you noted some additional cost actions to help that SG&A line. Just wondering if you could add some color to what those actions are? And should we expect to see SG&A continue to track lower year-over-year in the coming quarters? Jack Ezzell: Yes, Kevin, that was the kind of the -- as we looked at how SSI has been trending, while there's -- it, I'll say, decelerated, right, because I think January's SSI was, I think, around 18 20, then February, March both got better. But just trying to get ahead of what's happening at retail, we did make some cuts, mostly in and around personnel, administrative and just some reorganizations within the company just to be a little bit leaner. So it's about a $6 million on an annualized basis. So we look to capture about half of that in the back half of the year. Some of that's coming out of dealerships, some of that's coming out of -- a big chunk is coming out of distribution as well. Kevin Condon: Got you. And then maybe to ask a follow-up. You talked about the inventory being in a good position. Just wondering what your stance on orders are going forward. Do you think you could potentially capture an uptick in demand should some of that noise settle like you referenced? Or would you need to meaningfully shift inventory or order levels to take advantage of any upside? Philip Singleton: Well, I mean, we're at the beginning of the selling season. And so we really don't have to make those decisions probably for another 90 days. And so we get to have a little bit better look at where we are. I think when you look at it from an industry perspective, inventory is way down in the industry. And so if we start to see going into the selling season, the trend that we're on now maintain, you start to see as you come into the fall, that maintaining again, then that means that you've got to start ordering more boats because the manufacturers just -- they can't go in and flip another light switch and all of a sudden produce 20% more boats. So the lead time is pretty important. I think we're still in a little bit of a wait-and-see mode, but it certainly feels better than it should with all the noise going on. So I would say that as we move through April and May, get into the end of that June quarter, if the trend line that we're on right now, we're going to be forced to order more boats for next year because the inventory is just going to get depleted. It's already at a point now where if you had any kind of felt an uptick, I'm not sure we have enough. And so you got to kind of get prepared for that. But it's a little bit too early for us to really call that because there's just, again, too much noise out there, and we just need to kind of get through the next 6 weeks, which are really the prime 6 weeks leading into the summer. Operator: There are no further questions at this time. We've reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.