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Operator: Good afternoon, everyone, and welcome to the CBIZ First Quarter 2026 Results Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Chris Sikora, VP of IR and Corporate Finance. Please go ahead. Chris Sikora: Good afternoon, and thank you for joining us on today's call to discuss CBIZ's first quarter 2026 results. We posted an investor presentation that tracks to our prepared remarks, and it is available on our Investor Relations website. Before we start, I'll remind all participants that you will hear forward-looking statements during this call. These statements reflect the expectations and beliefs of our management team at the time of the call, but are subject to risks that could cause actual results to differ materially from these statements. You can find additional information on these factors in the company's filings with the SEC. Participants should be mindful that subsequent events may render this information to be out of date. We will also discuss certain non-GAAP financial measures on today's call. As noted on Slide 3, a reconciliation between GAAP and non-GAAP financial measures can be found in the supplemental schedules of the presentation. Joining us for today's call are Jerry Grisko, President and Chief Executive Officer; Brad Lakhia, Chief Financial Officer; and Peter Scavuzzo, Chief Information and Technology Officer. I will now turn the call over to Jerry, who will start on Slide 5. Jerry Grisko: Thanks, Chris. Good afternoon, everyone, and thank you for joining us. We entered 2026 with a clear plan, and our overall first quarter performance was in line with our expectations. We delivered year-over-year growth in revenue, profitability and free cash flow while returning value to shareholders through highly accretive share repurchases. Our organic growth improved throughout the quarter and is up sequentially compared to the fourth quarter. We remain confident that we will exit the year growing at our mid-single-digit organic growth target rate and be in a position to return to our long-term growth algorithm. As we will discuss on the call, we also advanced our strategic growth priorities and made meaningful progress on our efficiency initiatives while continuing to invest in our AI capabilities, and we believe that we're positioned to be the clear leader in the middle market. I want to thank our CBIZ team members for their exceptional performance as we completed our first busy season as an integrated company, a significant milestone for our organization. Our teams delivered strong results for clients, coordinated effectively across the platform and maintained solid utilization during our most critical period. We are operating fully as one company with unified teams, aligned culture and vision, common systems and a strengthened go-to-market approach, and our scaled operating model is beginning to work as intended. In the fourth quarter of 2025, organic revenue growth was flat as we completed a year of significant transformation and integration. As we moved into 2026, we are beginning to realize the benefits of the foundation we put in place. Combined with a more favorable market backdrop, organic revenue growth improved as we progressed through the first quarter. Our Q1 growth in Financial Services was still impacted by headwinds related to prior client exits tied to our risk and profitability standards and residual integration-related productivity impacts that shifted some tax revenue into the back half of the year, as previously discussed and contemplated in our full year guidance. We estimate that these temporary factors reduced reported organic revenue growth by approximately 200 basis points in the first quarter. We continue to expect these impacts to abate by the second half. With our solid start to the year, we are reaffirming our revenue, adjusted EBITDA and free cash flow targets while increasing our adjusted EPS outlook, reflecting confidence in our underlying earnings power and the impact of our accretive share repurchase activity. Now moving to Slide 6. We are advancing our 4 strategic priorities to drive growth. These priorities will strengthen our ability to win new business, retain and expand client relationships and enhance pricing. First, CBIZ continues to attract, retain and elevate top talent. We are proud to have been recently named a Top Workplace in the nation by USA TODAY for the sixth consecutive year and see that reflected in our strong employee retention performance across the company. Also, we are capitalizing on the greater scale and investment opportunity of our new platform by bringing in high-caliber talent to CBIZ. Within Financial Services, our lateral hiring initiative is identifying and advancing high-impact, high-producing MDs with several new hires recently completed and a robust pipeline of senior candidates who are drawn to CBIZ. Within Benefits and Insurance, we have added a variety of net new quality producers in the quarter and expect high momentum to carry to the second quarter as we work towards our full year target of approximately 15% increase in producers. I'm also pleased to have Peter on the call today. With Peter's appointment as Chief Information and Technology Officer and President of CBIZ Technology, we're making a deliberate convergence, one leader, one platform, one road map. Peter brings close to 20 years of industry experience and is widely regarded as one of the leading voices in technology and AI in our profession. Second, we recently launched our spring national brand campaign, featuring targeted national televised ads across our key markets. This year, our focus remains on translating increased visibility into stronger engagement for our services and reinforcing our position as a trusted partner during transformational events. Our brand and marketing investments are a key complement to both our go-to-market and talent recruitment strategies. We have already seen these investments paying dividends with early traction reinforcing brand awareness and strengthening our connection with clients and talent. Our 12 industry verticals are an increasingly important driver to how we go to market and serve our clients. This structure was designed to lead with insights, anticipate client needs and deliver coordinated, tailored solutions that drive stronger retention, accelerated growth and reinforce our value-based pricing. We are making meaningful progress implementing this strategy, including the development of new industry-focused managed services that bring together capabilities across tax, advisory and benefits to address specific client needs. We are seeing positive results from the greater connectivity these industry verticals provide for our national experts. In Alternative Investments and Real Estate, collaboration between our national experts is enabling us to secure a variety of new engagements in areas where clients were unaware of our capabilities. As we continue to strengthen our industry practices, we are seeing increased new client pipeline activity across several key verticals, including Consumer and Industrial Products, Capital Markets, Alternative Investments and Construction. Finally, we are delivering a more coordinated client experience across our service offerings. With our highly recurring revenue base and strong client retention, our most immediate growth opportunity is expanding relationships with existing clients. We are already seeing good progress as we take a more systemic approach to cross-selling across services and geographies. We are systematically increasing the number of clients using multiple services, and we expect these efforts to contribute to organic growth over time. Taken together, we believe strong execution against these 4 priorities positions us to drive attractive levels of growth in 2026 and beyond. Now moving to Slide 7. I've asked Peter to join us today to provide you with a more detailed walk-through of how we're advancing our AI road map. But first, let me briefly reiterate how we're thinking about AI and why we believe our strategic approach to AI will be a catalyst for CBIZ breaking away from many of our competitors. Our business is built on long-standing client relationships and services, often delivered in regulated environments that require licensed professionals to take accountability for outcomes. These engagements serve as a critical third-party validation for lenders, investors and regulators, which creates a high bar for substitution and reinforces client stickiness. Further, our middle market clients rely on us for judgment, context, expertise, intuition and ethics and typically do not have the scale or capital to build and govern AI-driven solutions themselves. The combination of our trusted relationship with our clients and our continuing investment in improved tools, processes and systems, including AI, create a defendable moat around our position with our middle market clients. We have also largely transitioned to a value-based pricing model, which positions us to benefit from the AI-driven efficiencies. As we adopt AI, we expect it to enhance our ability to deliver insights, expand wallet share and improve margins while reinforcing and not replacing the valued role we play for our clients. With that, I will turn it over to Peter to share more detail on what we're delivering. Peter Scavuzzo: Thanks, Jerry. We spent the last several quarters building the foundation for how we deploy AI across the organization, and we're now entering the next phase of that work. Let me share what that will look like internally and externally and how we see it creating shareholder value. Just last week, we began the full rollout of our latest internal capabilities company-wide, moving from primarily AI-assisted workflows to more advanced agentic-based AI solutions. We intentionally timed this rollout following busy season to ensure our teams could remain fully focused on client delivery during our most critical period. The maturity of large language models, combined with the accessibility of advanced features within AI platforms and our own internal talent and execution has brought us to an inflection point where deployment risk is manageable and the productivity and efficiency payoff is measurable. Building on our commitment for ongoing AI-driven talent development, our latest platform release further strengthens professional growth and retention. Professionals join and stay where they're empowered to do meaningful work. By significantly reducing manual repetitive tasks, our AI initiatives are improving retention and making us a more attractive destination for the next generation of talent. We are already seeing this in our recent lateral hiring discussions. As it relates to the technology itself, our recent advances in AI-based data extraction and structuring capabilities position us to deliver faster, more insight-driven solutions for clients across a wider range of services. For example, on the work we are performing in one of our [ attest ] services, for year 1, our AI-based data extraction workflow is producing 20% efficiency with our anticipation in subsequent years that this efficiency will grow to 40%. At the same time, we are also using agentic AI to support revenue growth by enhancing how we generate and pursue revenue opportunities. We are developing AI-driven workflows to improve the speed, quality and consistency of RFP responses and enabling us to pursue opportunities we previously could not due to resource constraints. Beyond new client wins, AI-driven insights create natural conversation starters with existing clients. For example, enabling us to benchmark client performance and flag opportunities that our professionals can then act on. This is one way in which we will expand our relationship and wallet share. As these capabilities scale, we expect improved win rates, faster time to market and more differentiated offerings that support sustained growth and long-term value creation. Lastly, a critical part of our AI strategy also includes our partner ecosystem, which is the foundation for the tools we are putting in place. We are leveraging leading technology partners with deep expertise in our industries and combining those capabilities with our new AI platform, proprietary workflows and our domain knowledge. All of this is packaged together to drive productivity and efficiency and provide innovative solutions to our middle market clients, which are historically underserved from a market perspective. Our approach allows us to move faster, reduce execution risk and build a secure enterprise-grade foundation while remaining focused on what we do best, serving clients and delivering high-quality outcomes. Over time, this model gives us a scalable and flexible platform that can continuously evolve as AI capabilities advance. While still early on, we are making strong progress, and we'll continue to update you as our capabilities develop and we drive results. Jerry, back to you. Jerry Grisko: Thanks, Peter, and congratulations on your new role. We believe that companies that successfully implement AI and automation will reap the benefit of significant efficiency gains with the savings following through to the bottom line, resulting in margin expansion. We expect that industry leaders will then take a portion of these savings and redeploy them to capture new revenue opportunities and accelerate organic revenue growth. By freeing our professionals from manual, time-intensive work, we expect a favorable mix shift towards higher-value, higher-margin advisory project-based services, the deployment of a new AI-enabled offerings where compliance and professional judgment matter most and improved win rates as our scale and technology investments differentiate CBIZ from smaller competitors. We believe that AI will be a turning point for our industry with several breakout firms that have the scale and ability to invest in and train professionals to use technology to better serve our clients. At the moment, we believe that we are at the forefront of investing in and using these new technologies. Overall, we believe we are building the right foundation to leverage AI in a disciplined and scalable way, and we're excited about the role we will play in creating long-term value for our clients and our business. Slide 8 details how offshoring continues to be a meaningful opportunity for CBIZ. We are on track to achieve our target of increasing offshore hours from approximately 6% in 2025 to 10% in 2026. Our partners in the Philippines and in India are delivering high-quality work, and our U.S. teams are better engaging our global teams, which gives us confidence that we can accelerate our initial investment time line to further expand our global capabilities. Over the next several years, with the benefit of our existing offshore delivery centers, we plan to expand hours completed outside the U.S. to more than 20%. We believe achieving these levels, which are consistent with comparable companies, will drive significant growth and margin opportunities over time. To wrap up my remarks, I want to comment on the current business climate and our outlook. As I shared last quarter, our assumptions regarding the level of project-based activity largely drive the range of our 2% to 5% organic revenue growth outlook. With that in mind, I'd like to highlight a few encouraging trends we've seen since our last call. First, the market environment for advisory work has continued to be favorable with notable wins across risk advisory, credit risk, valuation and private equity driving strong pipeline momentum. Second, we are seeing increased activity in our Capital Markets group with more clients evaluating transactions as market conditions improve. Third, we are very pleased to have a favorable pipeline of new prospects across both Financial Services and B&I, and we expect our pipeline to continue to grow. It is our expectation that revenue growth should continue to improve each quarter as we move through the year. Finally, as Brad will discuss in more detail, we are pleased with the strong free cash flow we are generating, and we'll continue to redeploy that into debt repayment and opportunistically repurchasing stock at highly accretive valuations to create value for our shareholders. Now I'd like to turn the call over to Brad for our financial review. Brad Lakhia: Thank you, Jerry, and hello, everyone. My comments begin on Slide 10. Our first quarter results represented a solid start to the year and were in line with our overall expectations. Consolidated revenue increased 1.3% year-over-year to $849 million, with organic revenue growth of 1%. Adjusted EBITDA increased $3 million year-over-year to $244 million, and adjusted EBITDA margin increased slightly by 10 basis points. Adjusted diluted earnings per share was $2.50 compared to $2.33 in the first quarter of last year, a 7% increase, reflecting the strength of our business model, synergies we are capturing through enhanced size and scale and a lower share count. Turning to Slide 11. We remain very pleased with our free cash flow performance, which drives and supports our capital allocation priorities. Free cash flow improved $64 million year-over-year, primarily due to $53 million of proceeds received from the final purchase price adjustment. This improvement balanced our typical peak seasonal working capital use and enabled us to fund approximately $63 million in share repurchases through the end of April. Net leverage decreased to approximately 3.4x compared to approximately 3.9x at the end of the first quarter of 2025. The improvement was primarily driven by growth in pro forma adjusted EBITDA, along with modestly lower debt levels. Our weighted average fully diluted share count, which includes all future shares to be issued as part of the acquisition, declined by 2.6 million shares year-over-year. April year-to-date, we have repurchased approximately 2 million shares through open market transactions and under our Right of First Refusal Program. Moving to Slide 12. Please note a presentation update for this quarter. Our Financial Services segment now includes our former National Practices segment, which is now part of our Technology Services business. All figures presented today reflect this change and are on a comparable year-over-year basis. Turning to performance. Financial Services had a solid start to the year with results in line with our expectations. Revenue increased 2.1%, driven by strength across core accounting, tax and advisory and resulted in reported organic growth of 1.8%. As Jerry noted, results continue to reflect elevated but transitory client attrition related to the integration. We estimate this reduced first quarter Financial Services revenue by approximately 200 basis points versus last year. Excluding this impact, first quarter organic growth would have been approximately 4%. Looking ahead, we expect organic growth to accelerate as we lap these attrition and integration-related productivity impacts in the first half and benefit from our growth initiatives in the second half. We remain encouraged by year-to-date new wins and a strong pipeline. And in addition, favorable market demand for our advisory businesses continues with clear visibility 60 to 90 days out. On pricing, we continue to expect mid-single-digit rate increases, which are embedded in our planning assumptions. Our long-term financial services growth algorithm is unchanged, targeting mid-single-digit organic revenue growth and continued adjusted EBITDA margin expansion driven by top line growth and operating efficiencies. Turning to our Benefits and Insurance results on Slide 13. First quarter revenue was $108 million, representing a 4% decrease year-over-year. Coming into the quarter, we expected revenue to be down in the first quarter due to tough comps on project-related work and contingent commissions. Contingent commission declines are primarily driven by client attrition that occurred in 2025. The remaining portion of the decline was primarily driven by the unexpected departure of a single producer and his team in February. This was an isolated departure, and we do not anticipate any similar departures. On the contrary, we expect our net number of producers to continue to increase. As a reminder, our producers are subject to certain restrictive covenants, which we have successfully enforced in the past and intend to do so with this departure. Within the recurring portion of the B&I business, which is consistent with the overall CBIZ split of recurring versus nonrecurring revenue, demand fundamentals were strong and our pipeline remains healthy. In addition, we continue to attract and develop new validated producers, and our industry-focused growth initiatives are gaining traction. The recurring portion of our business, when normalized for the producer departure, was up approximately 4% in the quarter. B&I adjusted EBITDA in the quarter was primarily impacted by the flow-through impact from the nonrecurring revenue items as well as planned incremental marketing investments to support our growth initiatives. We're confident in our ability to grow at historical growth rates for the remainder of the year with B&I supporting our full year overall growth expectations. Turning to our 2026 outlook on Slide 14. We continue to expect revenue to be between $2.8 billion and $2.9 billion, representing 2% to 5% year-over-year growth. Our adjusted EBITDA is effectively unchanged, but is updated to a range of $465 million to $475 million to incorporate the comparative stock-based compensation adjustment. We've increased our adjusted EPS to reflect a lower share count driven by our share repurchases through April and our stock-based compensation adjustment. Adjusted EPS is now expected to be in the range of $4 to $4.10 per share, which assumes a weighted average fully diluted share count of approximately 60.5 million. Free cash flow guidance is unchanged and expected to be in the range of $270 million to $290 million, representing a 60% conversion at the midpoint of our adjusted EBITDA outlook. While our improvement in the first quarter was largely driven by a onetime benefit, we see ample runway in the near term to drive a higher conversion through lower integration-related spend, lower interest and improved DSO. On Slide 15, our capital allocation priorities are unchanged and are supported by strong free cash flow generation. Our first priority remains funding organic growth and maintenance capital. Second, we remain committed to delevering, targeting a net leverage ratio of less than 2.5x in 2027. And at our current valuation, we view share repurchases as highly accretive and a compelling use of capital and therefore, intend to remain active and opportunistic. The strength and scale of our business model, combined with our meaningful free cash flow gives us confidence in our ability to invest in growth, return capital through repurchases and achieve our leverage targets over time. With that, I'll turn the call back to Jerry. Jerry Grisko: Thanks, Brad. Our top priority in 2026 remains reigniting our growth engine and leveraging our scale. We have clear strategic growth priorities and efficiency initiatives that we are confident will drive value creation for all of our clients and our shareholders. We believe we have the building blocks in place to deliver on our long-term growth algorithm. Now looking forward, we're focused on compounding value through multiple growth engines. We see tremendous opportunity to not only retain business and expand within existing clients, but also to land new clients who seek the multiservice capabilities we now offer. The work completed in 2025 has built a strong foundation for operating margin expansion as we increasingly deploy technology and leverage global resources. And importantly, we remain committed to our high-return capital allocation priorities that are supported by strong and consistent cash flow. Finally, I want to thank our CBIZ team for your continued hard work and our shareholders for your ongoing support. We look forward to further engagement with you all in the months ahead. And with that, operator, please let's open the call for Q&A. Operator: [Operator Instructions] Our first question today comes from Jeff Silber from BMO Capital Markets. Jeffrey Silber: Peter, let me start with you. I really appreciate you being on the call. Given the tools that are out there, do you think it's possible that some of your clients might be able to do some of the work that you're doing from an AI perspective on their own, perhaps unbundling some of the services and perhaps putting some pricing pressure on some of the services you're providing? Peter Scavuzzo: Thanks for the question. I don't think the tools are able to provide the expertise and knowledge we can offer in the profession. That's a requirement in the regulated environment that we operate in. They could certainly produce some anecdotal information, but the profession requires, especially in the regulated industry, for us to provide all that expertise and know-how that we've created or built over the last several decades, which are critical for delivery. So I don't see that as being a pressing concern. Jeffrey Silber: Okay. That's great. And you gave some examples, one in terms of using AI a bit more efficiently in terms of answering RFPs. Are there other examples maybe from an expense perspective that you might be able to use some of the tools to help improve margins? Peter Scavuzzo: I think it's too early for us to speak on all of the things we're working on right now. We just took this next phase moving from an assistive to an agentic AI strategy. I would expect as the quarters unfold in the future, we'll have more examples that we can provide similar to ones that you just brought up. Operator: Our next question comes from Thomas Wendler from Stephens Inc. Tom Wendler: Happy to be up to speed on the company finally. I'm going to start off with the Benefits and Insurance. You had a departure there this quarter. Can you maybe remind us of the pace of increase to the producer count there in 2026? Jerry Grisko: Yes. Tom, this is Jerry. We are planning on having about 15% increase year-over-year. It's a little lumpy from quarter-to-quarter, but we're off to a good start, and we have a very strong pipeline. So we're confident that we'll be able to achieve that 15% target for the full year. Tom Wendler: Perfect. And can you maybe speak to the cross-servicing opportunity there as you get some of those Benefits and Insurance hires fully up to speed? Jerry Grisko: Yes. It's a great question, Tom. It's actually often why producers join us, right? So when you think about our go-to-market through industry, and let's just say you're a construction client, that construction client not only needs the tax work that we do and the attest work that we provide and the valuation work, but they also need surety bonds. And they also need -- they have a workforce and they need payroll and they have to provide them with health insurance. So what's a very attractive kind of draw to outside producers into CBIZ is that they have all of those arrows in the quiver now and they could bring it to life through those industry groups. So it might be a combination of, like I said, P&C, might be a combination of payroll benefits provider or an employee benefits plan, a 401(k) tax audit, a whole host of services. Brad Lakhia: Yes. Tom, this is Brad. Thanks, first of all, for initiating coverage. We're certainly glad to have you on board. I appreciate you and the Stephens team. I would just add to what Jerry said, if you look back about a year ago, we formally stood up the 12 industry groups. And so as we think about the last 12 months and not only the work around integration, but bringing these industry teams together, forming them, we are seeing a lot of really, really positive traction across the 2 segments, across all the service lines within the segments. And so we're really encouraged about the pipeline of opportunities that those industry groups are starting to pull together and seeing some early wins as a result of that collaboration. Tom Wendler: Perfect. And maybe I'll sneak one more in here quick. You guys are pretty active in the repurchase this quarter. Can you maybe give us some color on how we should be thinking about the pace of repurchases moving forward? Jerry Grisko: Yes, Tom, thanks. Appreciate the question. First and foremost, I'll restate the priority -- capital allocation priorities that I highlighted earlier. I won't restate them because I think you heard them loud and clear. But we feel right now, our valuation is it's candidly what we feel is quite undervalued. So as we think about current valuation levels, the level of accretiveness of share repurchases is quite compelling, as I commented on. So we're going to remain active. We still have a lot of flexibility to do that, driven by our strong cash flow supported foundationally by the recurring nature of our business model, the stickiness that comes with our client relationships and the strong retention we have. So we just feel like fundamentally, our business can support being more opportunistic there. But I'd also just say, Tom, we're going to continue to be focused on those opportunities to strengthen free cash flow, the things I mentioned, DSOs. You'll see lower integration spend as we move into 2027 next year. That will help our conversion and also help us accelerate our delevering strategy as well. Operator: Our next question comes from Andrew Nicholas from William Blair. Andrew Nicholas: I want to start off on price. I think you mentioned in your prepared remarks that you continue to expect price increases in the mid-single-digit range. Any color you can add to kind of recent pricing conversations, whether you're supported by kind of the macro backdrop, whether there's any pushback from a technology perspective? I know last year, amidst a choppy macro, there's a little bit more pushback. So just kind of curious for color on how those pricing conversations have gone over the past couple of months. Jerry Grisko: Yes, Andrew. First of all, we're just coming out of busy season. So we're not having a lot of pricing conversations now. We would have had those kind of at the -- entering into the season and as we firm up our engagement letters. But I will tell you, we're highly confident in our mid-single-digit pricing that we've put into the plan for the year. That is consistent with the pricing that we've achieved kind of historically through CBIZ. It was a little higher maybe in '23, '24, which is part of the conversation in '25. But in '26, at the mid-single-digit level, quite comfortable there and are not hearing really pushback on that pricing. I will also say around technology and AI and those things, we really value-based price. Our clients expect that we're going to get efficiencies from a number of sources like offshoring, AI, automation, et cetera. So we're really not seeing pricing pressure there either really in a big way. Brad Lakhia: Yes. And the favorable market conditions within the more nonrecurring advisory pieces of our business, Andrew, have continued, and we have line of sight to that, as I commented here over the next couple of months at least. So we see that as fundamentally pretty strong in terms of pricing within those parts of our business. Andrew Nicholas: Great. And maybe just to kind of follow up on the macro piece. It sounds like the backdrop has continued to improve, understanding that, that's one of the major kind of deltas or factors driving you between the top and bottom end of your top line guide. Just kind of curious as where we sit today, are you a little bit more constructive on those things outside of your control than you were when you gave the initial guide? And just kind of broadly, if you could expand a bit on the comment that organic growth improved as you move through the quarter. Is that predominantly a macro comment? Or are you getting some integration improvements that's helping you on a month-to-month basis as well? Brad Lakhia: Yes, Jerry and I'll probably team up on this one, Andrew. There's several things maybe to unpack there. I would say in terms of the guide, just like we said a couple of months ago when we put it out, the top end was predicated more on continued favorable market conditions, those conditions that we saw in the second half of last year. We're encouraged by the fact that we see that -- we've seen those continue in the first quarter. We have line of sight here for at least the next few months. So I would say a quarter doesn't make a year. And certainly, as we get here to the second quarter, if the conditions remain the way they are as we look to the second half of the year, that would give us encouragement to the top side. Also, just as a reminder, we're -- the back half of the year, we'll be lapping some of the integration related -- start lapping some of the integration-related productivity impacts and some client impacts as well. So as you think about the back half growth rates relative to last year and some of the comparability there, I'd ask you to keep that in mind. And then there was a third part, I think, to your question, Andrew, I'm sorry, I could not... Andrew Nicholas: Yes. I talked about kind of the month-to-month, you said organic growth month-to-month... Brad Lakhia: Yes. So I think a few things there. One is January started off a little bit more challenging for us than maybe we expected, largely just because of the fact our teams were really working together for the first time in busy season. That includes them using technology during busy season for the first time that for many of them was either new or updated across the entire service line in some cases. So we had some just bumpiness in January. We feel like we fully overcame that and then potentially some as we progress through the quarter. But then if we just strip that aside and look at some of the real growth as we looked at February of this year versus last year, March of this year versus last year, we're starting to see the improvement, the real more core organic improvement as well. So encouraged by that and gives us some encouragement -- further encouragement around just meeting our overall guidance as well. Andrew Nicholas: Perfect. And if I could just squeeze in a quick modeling question. I think last quarter, you outlined kind of a rough mix between first half and second half on both revenue and EBITDA. I think it was 55-45 on revenue and 70-30 on EBITDA. Is that still a good way to think about how the year plays out or any kind of puts and takes a quarter later? Brad Lakhia: Yes. No, I still say that applies. There might be some very, very minor tweaks. But overall, that's still what we're expecting. Operator: Our next question comes from Faiza Alwy from Deutsche Bank. Faiza Alwy: I wanted to follow up on the macro question. So I know this is obviously the busy season for you. 1Q is your highest revenue quarter. And so I'm curious, as we think about the improvement in organic growth from flat to up 2% this quarter, like how much of that is driven by sort of improving market conditions versus maybe better execution on your end in part because it is a busy season. So I just wanted to get a bit more color around that, just given the different mix of business through the course of the year. Jerry Grisko: Yes. Faiza, it's Jerry. I would say not improved macro conditions, I would say continued favorable macro conditions, right? So as you indicated, this is really kind of a heavy -- we just -- we're exiting a heavy compliance portion of our seasonality of our business. We'll have another one kind of in the third quarter. But in between there, it's a lot of more project-based discretionary advisory type work, which takes the type of climate that we're in to support that work. We're very comfortable, very pleased actually with the demand that we saw for that type of work in Q1. We're very pleased with the pipeline. We have about a 60-, 90-day visibility into that pipeline. Very pleased with that pipeline that we're seeing now. And so long as those conditions hold kind of constant through the year, we're quite bullish on our ability to hit the guidance that we had laid out earlier. Brad Lakhia: Yes. And then I'd just add, Faiza, if you weren't covering us this time last year, but the front half of last year had some, I'd say, comparability things I'd just like to highlight. One is market conditions in the front half of last year were more challenging and uncertain, although we came into the year thinking they were going to be better. So there's a year-over-year comparability and that nonrecurring advisory part of our business is very, very strong. So we're encouraged by that. And then just sequentially, because I think you may have been referring to like Q4 versus Q1 growth rates. It does -- we are seeing improved productivity from the integration itself, which is very, very encouraging. We expect that to only get better as the year progresses. Faiza Alwy: Okay. Great. That all makes sense. And actually, I wanted to follow up on that sort of productivity question. Maybe you can just give us an update on the integration progress. I believe for 2026, you had a couple of remaining items like just the common practice management system and the real estate footprint. And I guess where I'm getting at is you talked about sort of some of the lapping, some of the churn in the business in part due to the acquisition. And so I guess just asking for the level of confidence that you really are lapping that and that there aren't any incremental things to consider there? Jerry Grisko: Yes, Faiza, what gives us comfort on the churn and the client churn is that we're not seeing the same conditions that we saw last year. So obviously, that churn related to predominantly 2 things. One was some conflicted clients. Of course, those are -- that was transitory, that's out of the system. And the second one was really kind of the profile of the client, the risk profile, profitability profile. We're not seeing those same kind of conditions exist now because we've already kind of addressed that in 2025. The other thing that gives us confidence is as we look at the strength of our pipeline kind of across the board, just the new clients that we've won, the size, the profile of those clients and the pipeline of new clients on both sides of the business, both Financial Services and Benefits and Insurance, all point very favorable for us. So really encouraged there. Brad Lakhia: Yes. Let me add. Last year, as we were coming out of busy season and we were looking to obviously kind of go out win clients, address the pipeline that we had. We made some things difficult on our team as we came together, particularly around the attest side of our business, just around our client onboarding processes. So we've addressed that. We addressed that mid- start of last year. That's going very, very well. Our onboarding process for our clients has notably improved. Our teams are giving us that feedback. And as Jerry emphasized, the win rates that we're seeing and the quality of the wins is really strong, backed by a really, really, really strong pipeline. So I just want to reemphasize what he just said. Operator: [Operator Instructions] Our next question comes from Chris Moore from CJS Securities. Christopher Moore: Yes. Maybe another one on AI and efficiencies and just perhaps looking at it a little bit differently. So rather than looking at it from can your clients duplicate what you're doing on the AI side, a lot of the conversations that I've been having with investors is just the fear from a competitive standpoint that your clients will be looking for price reductions because there will be alternatives out there driven by AI. So I guess really the question is, from a competitive standpoint within the middle market, generally, you're competing with other firms that don't have the capability to invest what you're investing in AI? Is that the thesis? Or I was just trying to understand a little bit better how you're thinking about that. Jerry Grisko: Yes, Chris, exactly as you just described it. When we think about how well we're positioned today with our size, our scale, the investments that we're making in this area, the number of resources that we put against it, the tools that we now have, we could never have made those investments 18 months ago. And so when I think about competing in the market against firms that are substantially smaller than us, I believe that there's a great opportunity to take market share for no reason other than, again, they will not be able to make those investments. They will not be able to upskill their workforce in the same way and really kind of create new products and solutions to bring to the market. We wouldn't have been able to do it without the size and scale, and I'm sure they won't either. That creates a great opportunity for us in 2 ways to take market share kind of from that next level of competitor in the market. And also, we've had a little bit of kind of comments around others coming down market. It also allows us to go upmarket. So we see great opportunity from a market share perspective, both upmarket and downmarket as a result of the investment we're making in our size and scale in this area. Peter? Peter Scavuzzo: Yes. Just one added comment. I feel that AI and automation is strengthening our position and not weakening, and it's going to increase our ability to be more competitive. Christopher Moore: I appreciate that. Maybe just on the project work. So Jerry, you went into that a little bit. But specifically with respect to margins, are there certain buckets that are meaningfully kind of higher margin contribution than others? Jerry Grisko: I would say, Chris, overall, our advisory work is, in fact, higher margin than the more compliance work. Now it's -- let me remind you of the attributes of the business, 72% recurring, right, essential services. So we like that feature, right? That's a feature that's very stable, allows us to perform kind of regardless of the business climate, et cetera. But we also like the other kind of 28% that tends to be more project for all the reasons we talk about in the environments like we're facing now, like we're having now favorable environment, it allows us to bring greater value to the client relationship. It is, in fact, higher margin. At times, it can be higher growth. So very favorable there, too. And again, overall higher margins, the mix of those margins vary by service. Operator: And with that, ladies and gentlemen, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Chris Sikora for any closing comments. Chris Sikora: Thank you for joining the call today. If you have any questions, please feel free to reach out to the CBIZ Investor Relations team. Thanks, and have a great rest of your day. Operator: The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Pulmonx First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Now it's my pleasure to hand the conference to Brian Johnston with Investor Relations. Please go ahead. Brian Johnston: Good afternoon, and thank you all for participating in today's call. Joining me from Pulmonx are Glen French, President and Chief Executive Officer; and Derrick Sung, Chief Operating Officer and Chief Financial Officer. Earlier today, Pulmonx issued a press release announcing its financial results for the quarter ended March 31, 2026. A copy of the press release is available on the Pulmonx website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends, commercial strategies and future financial performance, including long-term outlook and full year 2026 guidance, the timing and results of clinical trials, physician engagement, expense management, market opportunity, guidance for revenue, gross margin, operating expenses, cash usage, commercial expansion and product demand, adoption and pipeline development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed with the SEC on March 10, 2026. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations to these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the press release, which is posted on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, April 29, 2026. Pulmonx disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Glen. Glendon French: Thank you, Brian. Good afternoon, everyone, and welcome to our first quarter 2026 earnings call. Here with me is Derrick Sung, our Chief Operating Officer and Chief Financial Officer. Pulmonx delivered total worldwide revenue of $20.6 million in the first quarter of 2026. Since our last update, we are increasingly encouraged by continued operational momentum, and we remain confident in our ability to achieve our previously communicated revenue guidance of $90 million to $92 million for the full year 2026 with a return to global growth in the back half of this year. We are making good progress in our efforts to address internal operational and executional challenges that have led to recent underperformance, and we remain highly focused on 3 key priorities: First, reaccelerating U.S. sales growth; second, advancing our market-expanding clinical initiatives; and third, aligning our cost structure to drive profitability. Let me take each of these in turn, starting with our progress on driving U.S. sales growth. A foundational element of reaccelerating U.S. revenue growth is having the right people and the right culture in place, and I'm encouraged by our progress. We have filled with top talent all our sales leadership positions and substantially all our U.S. field sales roles. We are also seeing clear improvements in our commercial team culture. Further, sales turnover has stabilized over the last 6 months, a marked improvement from earlier in 2025. We expect turnover from here to be in line with industry standards. We believe this stabilization is a direct result of our efforts to increase leadership transparency and streamline selling priorities to focus on our highest impact activities. These priorities are grounded in our previously discussed near-to-far approach, specifically, one, setting up high-quality and efficient valve programs; two, engaging with COPD-oriented clinicians aligned with hospital systems offering Zephyr Valves; three, working together with our champions to educate service line administrators to ensure appropriate resourcing of their programs; and four, concentrating our direct-to-patient efforts on geographies with established treating centers that have the capacity to accommodate interested patients. We are encouraged by early feedback from the field force and from our customers on this approach, which reflects greater focus, stronger engagement and a more consistent execution model overall. As the newer members of our team become increasingly productive, we expect U.S. sales performance to improve over the course of the year with growth reacceleration in the back half of 2026. Turning to our second priority, growing our addressable market with our AeriSeal program remains a key focus. Our CONVERT II pivotal trial is progressing well, and we are especially encouraged by our pace of enrollment since bringing on new leadership within our clinical affairs organization. Today, we are highly confident in our ability to complete enrollment of this trial in 2027, bringing us one step closer to expanding our total addressable market by approximately 20% globally. We see meaningful potential for AeriSeal to serve as both a revenue driver and a market expander for Zephyr Valves over the medium to long term and look forward to providing updates on enrollment progress in the quarters ahead. On our third priority, we have made substantial progress in aligning our spending with our strategic priorities. As previously discussed, we executed a broad cost reduction initiative in the first quarter. With these actions, our underlying expense trajectory has significantly improved, and we remain on track to deliver meaningful operating leverage and lower cash burn while maintaining investments in our key growth drivers. In closing, we have greater conviction in our strategy to refine execution to further penetrate the substantial remaining market opportunity for our products. While 2026 is a year of execution and transition, we are confident in the progress we are making. We have a better understanding of what drove prior underperformance. We have taken meaningful steps to address those issues. And we have aligned the organization around initiatives that matter most. We remain confident in the underlying strength of the business, the size of the opportunity ahead of us and our ability to deliver sustainable, profitable growth over time. With that, I will turn the call over to Derrick to provide a more detailed review of our first quarter results. Derrick Sung: Thank you, Glen, and good afternoon, everyone. Total worldwide revenue in the first quarter of 2026 was $20.6 million, a 9% decrease from $22.5 million in the same period last year and a decrease of 12% on a constant currency basis. U.S. revenue in the first quarter was $13.3 million, a 7% decrease from $14.2 million during the same period of the prior year. We added 15 new U.S. treating centers during the quarter. International revenue in the first quarter of 2026 was $7.3 million, a 12% decrease from $8.3 million during the same period last year and a decrease of 21% on a constant currency basis. The decline in revenue was fully attributable to the absence of sales to our distributor in China. As a reminder, we are currently awaiting the renewal of our Chinese registration certificate, which we expect to come in the second half of 2026. Excluding China, we continue to see solid performance across all our other international markets, which grew 22% as compared to the same period last year and 9% on a constant currency basis. Gross margin for the first quarter of 2026 was 78% compared to 73% in the prior year period. The year-over-year increase was driven primarily by the lower mix of distributor sales in our international markets. Looking forward, we continue to expect gross margin to be approximately 75% for the full year of 2026, trending higher in the first half of the year and lower towards the second half of the year based on the mix of distributor sales. Total operating expenses for the first quarter of 2026 were $29 million, a 6% decrease from the same period last year. Noncash stock-based compensation expense was $3.8 million in the first quarter of 2026. Operating expenses in the first quarter included approximately $1.4 million of onetime costs related to the restructuring initiative that we executed at the start of the year. Excluding stock-based compensation expense and the restructuring costs, operating expenses in the first quarter of 2026 decreased 8% from the same period of the prior year. We remain committed to decreasing spend in 2026 through our cost alignment efforts while maintaining investments in our key growth initiatives. To that end, we continue to expect full year 2026 operating expenses to fall between $113 million and $115 million, inclusive of approximately $19 million of noncash stock-based compensation expense. R&D expenses for the first quarter of 2026 were $4.9 million compared to $4.8 million in the first quarter of 2025. Sales, general and administrative expenses for the first quarter of 2026 were $24.1 million compared to $26.1 million in the first quarter of 2025. Net loss for the first quarter of 2026 was $13.7 million or a loss of $0.33 per share as compared to a net loss of $14.4 million or a loss of $0.36 per share for the same period of the prior year. An average weighted share count of 41.9 million shares was used to determine loss per share for the first quarter of 2026. Adjusted EBITDA loss for the first quarter of 2026 was $8.5 million, consistent with the first quarter of 2025. Excluding onetime restructuring charges, adjusted EBITDA loss was $7 million and 18% favorable to the same period of the prior year. We ended March 31, 2026, with $61.6 million in cash, cash equivalents and marketable securities, a decrease of $8.2 million from December 31, 2025. In the first quarter of 2026, we took meaningful steps to strengthen our balance sheet and extend our cash runway. First, we executed a cost restructuring initiative that reduced our ongoing operating expenses by over 10%. Second, we closed on a $60 million credit facility with a 5-year interest-only structure, extending the maturity of our existing debt out to 2031 and providing us with access to an additional $20 million in undrawn capital subject to certain revenue milestones. With these measures in place, we expect to burn roughly $23 million of cash for the full year 2026, which would be a substantial decrease from the $32 million of cash that we burned in 2025. Finally, turning to our revenue outlook for 2026. We are reiterating our full year 2026 revenue guidance of $90 million to $92 million. Our guidance contemplates sequential quarterly improvement in our year-over-year revenue trend with a return to year-over-year growth in both our U.S. and international businesses in the back half of the year. In the U.S., we expect our recently filled sales positions and our refocused commercial strategy to gradually drive improving sales productivity as the year progresses. Internationally, revenue growth through the first half of 2026 will continue to be negatively impacted by the lack of sales to our distributor in China. That said, we expect continued strength throughout the year from our remaining international markets with year-over-year sales growth in our international business resuming in the second half of the year. To conclude, we entered 2026 with a clear plan, and our first quarter reflects early progress. We remain focused on the work ahead, ramping our sales organization, advancing our clinical programs and delivering the financial leverage we've committed to. We are confident in the strength of our business and our team's ability to execute. With that, I'd like to thank you for your attention, and we will now open the call up for questions. Operator: [Operator Instructions] Our first question comes from Rick Wise with Stifel. Frederick Wise: Let me start off, if I could. I mean, obviously, getting the sales team in place, it sounds like it's largely in place critical. And it seems like you're seeing some good, encouraging, early progress here. Maybe talk to us about in more detail some of the points you made about going deeper in the accounts and some of the specific strategies you're using to see sales growth accelerate. And maybe just as part of that, help us -- maybe it's a question for Derrick, but help us understand what's dialed into the guidance in terms of productivity with these new people and today and what you're hoping for and what we might see? Glendon French: Rick, so we are -- well, first and foremost, we have been focused on narrowing the items that we're asking our U.S. sales force to do. I think one of the key things that we realized coming into this period was that last year, there were just too many balls in the air. So we've narrowed that focus, and it's in the areas that we commented on in the comments that just preceded. And we have, as you had mentioned, substantially filled all of our open positions. Our average tenure, as you might imagine, is not what it was a year ago, but we are bringing people up to speed quite quickly. We are focusing our activity on setting up high-quality and efficient valve programs, and we're doing that by engaging COPD physicians around these centers to be driving patients into those centers. We are looking to gain administrative service line level, administrative support to ensure that we have the resources to execute on that plan. And we're seeing positive impact from those efforts even in these early stages. But I think that one of the bigger issues for us is just getting our sales force up and running and trained and moving forward. And we are right where we expected to be at this point. So we feel good about the fact that we're full and that people are coming up the learning curve, and we certainly have some very bright spots with regard to the execution of the strategy that we've outlined. Frederick Wise: That's great to hear. Derrick, for you, maybe just help us just think through with the first quarter in hand, the 2026 growth cadence and thinking about the reaffirmed '26 guidance range you laid out, it implies 60 basis points for the year. This is sort of a transition. Are you -- do you feel like consensus has got it right in terms of the current sequencing? Should we be more back weighting it? I think consensus for the second quarter is like $22-ish million. And if that's the case, what gives you the confidence that the company can have the step-up needed from 2Q to 3Q, et cetera, to get to the numbers you've laid out? Derrick Sung: Sure, Rick, and thanks for the question. As it relates to guidance, we do expect to demonstrate a sequential quarterly year-over-year improvement in growth as the year goes on. And as Glen said, we feel very good about the performance in Q1. We're already demonstrating that, particularly in the U.S. Our year-over-year growth rate, while down 7% in Q1, is a meaningful improvement from our growth rate of -- our decline of 11% in Q4. And so we already feel like we've bottomed in Q4 in terms of year-over-year growth rates. And both in the U.S. and internationally, we expect to see -- and I think this is reflected to your question currently in consensus, but we expect to see that sequential improvement every quarter flipping to positive year-over-year growth in the back half of the year and even exiting the year with double-digit growth, both U.S. and international. In the U.S., what gives us confidence and the driver for that sequential improvement in year-over-year growth is, in fact, the addition of the new folks that we have brought in and the time that it takes to -- for the new reps to get up to speed and get up to productivity. So that does take some time, typically 6 to 9 months or so is what we've seen on average for new hires to get up to speed. And so as the year progresses and also as our focused strategies take hold in the U.S., we do expect to see that improvement sequentially across the year. On the international side, it's really a question of comps, frankly. So the decline that you're seeing in our international sales in Q1 is primarily all attributable to timing of sales into China. We are currently awaiting registration of our -- or renewal of our registration certificate in China. So there's a lack of absence of sales into China in the first -- this year, and we expect -- and in the first half of this year, certainly in last year, in the first half of 2025, there are a number of large orders that were placed into China. To put it into context, China is still a relatively small portion of our total sales, less than 5% of our total sales. But the timing of those sales drove tough comps in the first half of this year. So that's what's driving the optical declining growth rate and will drive that optical declining growth rate for the first half of this year. Our underlying business, as we talked about, is still strong. We grew 22% year-over-year reported in Q1. We've seen double-digit growth in our underlying direct international businesses for the past couple of years. We expect that trend to continue. And so in the back half of this year, that underlying strength of our OUS business, continued strength, will be more representative in our growth rates, and that's what we expect to drive the step-up in growth in our international business. Operator: Our next question is from the line of John Young with Canaccord. John Young: Appreciate the progress update provided today. I want to go to the U.S. accounts, 15 added in Q1. I think that was higher than any number that was added last year according to our model. I would love to know, is this due to the refocused sales team ramping quickly? And maybe how should we think about just the pace of account additions for the remainder of the U.S. for the year? And if I could ask my second question, too, related to the sales force, just what metrics are you guys focused on in monitoring the success of the revamped sales force? Glendon French: So 15 is, as you noted, a strong number relative to what we saw on a quarterly basis across last year. It's difficult to say whether that's anywhere close to the new normal. I think we're going to stand with the 10 per quarter expectation, which we laid out. But I'll let Derrick talk about that guidance if he wishes to. But that feels like the right sort of number. Some of these new accounts, I think, were lining up, perhaps, to happen late last year, maybe fell into this quarter. I think time will tell as to whether the mean is above 10, but I would keep that. With regard to metrics, at this point, we feel really good about the plan. We are focused on moving things in a fairly simplified basic way. And we're just trying to bring our people up to speed as quickly as we possibly can. We have some territories that are -- that did very, very well last year. They continue to be doing well this year, continuing to take advantage of the momentum that they established. And we see that in an array of different indicators. We've talked before about the importance of StratX and seeing that sort of coming through as the leading indicator for our performance, and we feel good about where we sit at this point. Operator: [Operator Instructions] It comes from Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: I know this has come up on, I think it was the previous call as well, but wondering if you can speak to kind of bigger picture growth aspirations. I know you're only a few quarters into this. And I think last time, the context provided was substantially better, which obviously aligns with the cadence of revenue growth throughout 2026. But now that you've had a little bit more time with the organization, are you comfortable providing any type of -- we expect to be a double-digit grower commentary or something similar in nature to that as you think about a longer-term business? Glendon French: Yes, Frank, you want to take that, Derrick? I mean, I'll go ahead. I'll start. You can add to it, Derrick, if you wish. We fully expect -- I fully -- I will speak for myself. I certainly expect us to be a double-digit grower. I think everybody on the team expects us to be a double-digit grower. I think we're trying to figure out when you look about -- you look across the period where we weren't meeting that expectation or we are moving sort of rapidly in the direction of not meeting that expectation was particularly in the United States, we're trying to get to the bottom of that. We think we were doing too many things, and we think we lost too many sales reps, and we think we can get back into a double-digit range. Where exactly in that range is still to be determined. I believe, obviously, outside the United States, we've thrown up a couple of 20% in a row roughly in terms of our growth in 2025 over 2024 and 2024 over 2023. And absent the matters that Derrick outlined, we're in that same sort of neighborhood in the first quarter as well in some of our key markets. All of our major European markets are double-digit growers in the first quarter. We don't report that, but that's the case. So we feel good about that. They're executing on a plan that looks very much like the U.S. plan, which is no coincidence. And we've got TAM expanders on the horizon that we're working very, very hard to push forward. We are excited about AeriSeal and look forward to talking more about that as we move deeper into the year. Derrick, did you want to add something to that? Derrick Sung: Yes, I would simply add that also contemplated in our guidance even for 2025, as I just mentioned, is that we will exit the year growing double digits in both our international and U.S. markets. So I don't want to get ahead of ourselves and provide any more guidance than that beyond '25, but -- or '26, I'm sorry, in 2026, I meant to say, our guidance contemplates double-digit growth as we exit the year. And I don't want to provide any more guidance beyond '26, but I just did want to add that additional commentary. Thanks, Frank. Frank Takkinen: Perfect. Maybe just for my follow-up on the Chinese registration renewal. Is there a reliance on that to hit the second half expectations for OUS growth? And then related to that, what needs to happen for that renewal? Is this more administrative in nature? Is there some risk to this renewal maybe not occurring on time with your guided time lines? Derrick Sung: Yes. Thanks, Frank, for that question. I'll take that. This is Derrick. So we do continue to expect the renewal of our registration certificate to come in the back half of this year. It is, I believe, an administrative process that we're simply working through. So it will simply take some time. But at this point, we don't have any reason to believe that we won't get that registration certificate renewed in the back half of the year. Now when we do get that -- when that renewal comes, I would say that our expectation is that the resumption of sales into China will be very gradual. There'll be -- accounts will need to be restarted, et cetera. So we're not expecting a bolus of sales to come in. It will take some time. And to that end, our current guidance doesn't contemplate a significant contribution from China even in our back half. However, as I mentioned, we will be anniversarying those tough comps from our China sales in the first half of 2025. And so I think that will -- we'll expect to flip back to positive international growth. And as Glen and I just mentioned, you'll see our international growth rates just really be much more reflective of the strong underlying growth in our direct international businesses that we're currently experiencing. Operator: [Operator Instructions] And it comes from Joseph Downing with PSC. Joseph Downing: I guess as you kind of reprioritize the existing base of treating physicians, can you just help to quantify same-store productivity, say, in your top quartile accounts versus, say, the bottom couple of quartiles? And in this, I guess, how much of the 2026 U.S. revenue plan depends on what's in the bottom 2 quartiles versus this top 25%? Glendon French: Yes. We -- I would say that we are focused on -- to the extent that we have some -- we've got a mix of things going on here, Joe. We've got uncovered territories that are now covered. So we need to reestablish those connections and get those moving. We tend to have a bias toward the accounts that are performing best and trying to move them along and take full advantage of the near-to-far strategy in relation to them, make sure that they're leveraging all the best practices that we've talked about in prior calls. And so I would say the top quartile would be more of the area of focus as opposed to the lowest quartile. We are, however, bringing in some number of new accounts that -- and where our standards for bringing our accounts online have changed quite a bit. We really raised the bar and expect those accounts to invest pretty heavily in terms of their time and efforts to get up and running and have patients that are ready to go. So there's far fewer people who are recently trained who are not doing procedures. So we actually are quite optimistic about the newer accounts that are coming online and are doing procedures right out of the blocks. So those probably -- those would be what I would consider outside the first -- or the first quartile or the top quartile or lower quartile, but rather just new accounts on top of that. But first and foremost, we're getting our team up and running -- back up and running and just trying to support the strongest of our accounts most predominantly and some of our newer accounts will also make some good contributions. Joseph Downing: And then just for my follow-up, I want to touch on LungTraX real quick. I know it's kind of being refocused or deemphasized a little bit, whichever way you prefer to frame it. But I'm just curious like what percent of U.S. accounts right now, I think it's the larger ones you said are still -- it's more effectively used in those kind of accounts. What percent of the accounts are using it? And then kind of what, like, ROI threshold would lead you to kind of selectively expand it again versus keeping it kind of at this narrow scope? Glendon French: So we pulled back our -- we were spending what in retrospect looked like a disproportionate amount of our time pursuing Detect, what we call LungTraX Detect. And so we -- I think we brought that to a level of time and attention that it deserves. We learned a great deal during the period of time where we were heavily promoting Detect in that it really fits into a specific subset of our accounts. We did some pilots across the last year or so, and we -- and it revealed that the technology works well in certain types of accounts. And so we're tending to target Detect. I wouldn't call it a deemphasis at all. We're just -- I think it's just a more focused approach to Detect in situations where we have determined that there could be sort of a great return for the hospital that invests in Detect in terms of patient flow and so forth. So as far as what percent of accounts, I don't think we report that. But everything you've heard before, which is in certain accounts, it can be great. We definitely have data that suggests that. It takes longer to get set up than we, I think, anticipated last year that it would. And those that are up and running, it took a little time to get them up and running, but there seems to be -- all indications are that when that technology is up and running and being used, it's a pretty solid contributor to our efforts in that account. Operator: Thank you. And this will conclude the Q&A session, and I will pass it back to Glen French for closing remarks. Glendon French: Thank you very much, operator. In summary, we have a clear plan, and our first quarter reflects early progress executing this plan. We remain focused on the work ahead, specifically ramping U.S. sales, advancing our clinical programs and delivering the financial leverage to which we have committed. We are right where we expected to be at this point. We are confident in our business and in our team's ability to continue to execute. I want to thank you very much to -- I'd like to express a thank you to our employees for your focused and considerable efforts and thank everyone on this call today for your time and your ongoing interest in Pulmonx. Have a good afternoon. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Hello, and welcome to Alkami's first quarter 2026 financial results conference call. My name is John, and I will be your operator for today's call. [Operator Instructions] I would now like to turn the conference call over to Steve Calk. Steve, you may begin. Steve Calk: Thank you, John. With me on today's call are Alex Shootman, Chief Executive Officer; and Cassandra Hudson, Chief Financial Officer. During today's call, we may make forward-looking statements about guidance and other matters regarding our future performance. These statements are based on management's current views and expectations and are subject to various risks and uncertainties. Our actual results may be materially different. For a summary of risk factors associated with our forward-looking statements, please refer to today's press release and the sections in our latest 10-K entitled Risk Factors and Forward-looking Statements. Statements made during the call are being made as of today. We undertake no obligation to update or revise these statements. Unless otherwise stated, financial measures discussed in this call will be on a non-GAAP basis. We believe these measures are useful to investors in understanding our financial results. A reconciliation of the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC. Now I'd like to turn the call over to Alex. Alex Shootman: Good afternoon, and thank you for joining us. We delivered a strong first quarter, achieving 29% revenue growth and over $22 million in adjusted EBITDA, both above expectations. We closed 6 new digital banking relationships, including 2 banks and 3 Digital Sales & Service Platform clients. In addition, we introduced our first integrated capabilities for the Digital Sales & Service Platform and a new product called Alkami Engage. Our first quarter performance continues to demonstrate Alkami has the potential for long-term durable growth and increased operating leverage. Alkami operates an attractive and predictable business model in a resilient, large and growing market. Our target market is over 2,000 regional banks and credit unions that rely on legacy infrastructure incapable of providing a modern digital experience. A portion of growth comes from displacing these systems. Given industry-standard 5- to 7-year contracts combined with stable win rates, we maintain good visibility into the long-term ARR growth that comes from new logo additions. Once on the Alkami platform, our investments in service and reliability, the mission-critical nature of our platform and high switching cost drive gross retention rates 8 to 10 points above typical SaaS companies. High retention rates, combined with clients adding users and adopting more of the platform, results in reliable long-term client growth. Every 5 years, our clients grow by more than 100% of their original platform investment, with our 2021 through 2023 cohorts spending above 2x their landing ARR and clients 2016 and older spending close to 4x their landing ARR. Additive to the land retain and growth algorithm for Alkami is our entry into the bank market. Four years ago, we launched an effort to use commercial banking capabilities built for large, complex credit unions to pursue market leadership serving community banks. At that time, banks represented 2% of our live online banking clients, and today banks are at 13%. Over this four-year period, we tripled revenue, expanded gross margin by over 700 basis points, and improved operating leverage by more than 2,000 basis points. Through different macroeconomic distractions and volatility in the financial services sector, Alkami has continued to deliver by adding new clients, keeping our clients, expanding our product offering and increasing margins. Client decision cycles create a unique characteristic for Alkami. Our online banking platform is in a replacement market with prospects on legacy platforms under long-term contracts. There are usually fewer than 300 potential clients in our target market that renew contracts in any given year. Within this group, a portion choose not to convert, given the effort and perceived risk. Among those who make a change, we consistently win 30 to 40 new clients per year. For example, the 6 new logos in Q1 is slightly above our historical Q1 average. New logo growth is consistent and will not spike unless customers choose to exit contracts early or see enough value to overcome conversion resistance. This consistency is a strength, but it also means the next phase of our growth will be driven by expanding the value we deliver within each financial institution. Increasing the value of the platform not only drives expansion, it also improves conversion, and this is why the MANTL acquisition was so strategic. The MANTL acquisition adds platform functionality to encourage conversions and expands our install base. Standalone MANTL new logo creation has been outstanding, with 61 clients added since the beginning of 2025. These are now Alkami clients we can target to cross-sell online banking. In addition to the new logos, at our recent customer conference we demonstrated differentiated capabilities that materially improve how financial institutions acquire and engage customers. Two weeks ago, we concluded Co:lab, our annual client conference. The conference continues to set records with over 600 customer attendees, of which 83 were prospects. Since the MANTL acquisition, we've been building deep technical connections between our online banking and origination platforms to deliver an integrated front end that enables our market to compete with mega banks and neo banks like Chase and Chime. We built this capability with seven clients as design partners, six of which have the code in production. We demonstrated live product with real results at Co:lab. In a side-by-side comparison against 2 leading mega banks and a digital-first fintech, we showed a complete customer journey from account opening through digital engagement. Using a live environment and real workflows, Alkami's Digital Sales & Service Platform, or DSSP, completed that experience in under 2 minutes compared to an industry benchmark of 5 minutes and to 3 contestants in the 3- to 4-minute range. DSSP has continued to perform for Alkami. Since the beginning of 2025, we've gone from 11 to 48 clients who have all 3 products that make up DSSP. Over half of all new logos since Q2 of last year have been DSSP. DSSP new logos see a 30% uplift in ARR versus our historic online banking offering. Our intent with DSSP is to increase the number of clients willing to convert, expanding our opportunity within the existing market constraints. We have not reflected this in our long-term model, and our outlook under current new logo assumptions continues to support attractive long-term growth for Alkami. Last quarter, we introduced a 2030 framework, and that model assumes 40% of ARR growth coming from new logo additions at numbers consistent with our historical average and 60% of ARR growth from expanding within our client base. Alkami is evolving from a vertical application in a replacement market to a vertical platform provider that drives growth for bank and credit unions, and this transaction is occurring because the market demands it. Historically, community banking technology was defined by core providers that controlled the system of record. Everything else, digital banking, onboarding, payments, was built around that core. For years, that architecture defined how financial institutions operated. That reality has changed. Digital has become the primary way customers experience their financial institutions. Our clients need technology not just to process transactions, but to sell and service financial products in a digital-first world. This is the role of the Digital Sales & Service Platform, a platform that provides a long tail of growth opportunities for Alkami and positions us to become the new primary technology partner for community financial institutions. In this market, leadership will not be defined by the number of institutions served, but by generating the most economic value from each financial institution on the platform. The investments we've made to integrate our acquisitions creates the functional capabilities of Alkami's DSSP that are winning in the market. However, the platform investments we've made create compounding value for Alkami and our clients. Alkami is a single instance, multi-tenant, industry specialized platform, and this gives us the opportunity to provide AI capabilities our clients are requesting. For details on Alkami's AI perspective, please review my prepared comments from our last earnings call. In the February 25 call, I spent over 50% of my time on AI and Alkami. Since that earnings call, I've had 39 face-to-face customer meetings, and AI was discussed in every one of them. Not one client mentioned building their own digital banking or origination platform, but every client wanted to talk about AI as an enabler for personalization, underwriting, fraud management, customer service, analytics, offer management, and more. With over 23 million account holders on our platform, we have a unique foundation to apply AI capabilities at scale. At our customer conference, we demonstrated working AI prototypes built on this platform. These included capabilities that allow clients to tailor Alkami to their needs through prompt-driven development, use natural language to query platform data and better understand their account holders and operations, and deploy co-pilots that support both banker workflows and account holder experiences. These capabilities are powered by our platform, including our data infrastructure and telemetry from Alkami Engage, a new product which captures real-time user interaction data across the customer journey. Importantly, these are not conceptual demonstrations. We're actively working with a small group of clients to test these capabilities and determine the appropriate commercial models. Given our platform foundation, bringing these capabilities to market is less a technical challenge and more a question of how to package and price them effectively for our clients. In closing, we are pleased with the integrated product capabilities we built into Alkami's Digital Sales & Service Platform. The market reaction has been positive. DSSP provides a foundation we can continue to build upon to differentiate Alkami. We are evolving Alkami from a system of record to a system of action, delivering measurable outcomes for our clients and increasing the value we create within each financial institution relationship. I'm proud of our business results this quarter and grateful to more than 1,200 Alkamists who continue to get it done and do it right. I'll now hand the call to Cassandra to discuss our financial results. Cassandra Hudson: Thank you, Alex. Our first quarter results exceeded our expectations, highlighted by strong adjusted EBITDA performance that underscores the durability of our model and the progress we're making in driving operating leverage. We continue to execute with discipline, delivering consistent growth while expanding profitability and investing strategically to support long-term value creation. Let me start with our updated outlook. For the second quarter of 2026, we expect revenue of $128 million to $129 million, representing growth of 14.2% to 15.1%. As a reminder, our second quarter revenue outlook includes the impact of a sizable termination fee recognized in the second quarter of 2025, which represents an approximate 3 percentage point headwind to year-over-year growth in the quarter. In the second quarter, we also expect adjusted EBITDA of $17.9 million to $18.7 million or 14.3% margin at the midpoint. This outlook incorporates the impact of our annual user conference, which is reflected in our normal seasonal expense pattern. For the full year, we expect revenue of $527.1 million to $530.9 million, representing growth of 18.8% to 19.7% and adjusted EBITDA of $94.9 million to $97.9 million or 18.2% margin at the midpoint, reflecting continued operating leverage as we scale the business. Our revenue outlook reflects several underlying assumptions consistent with what we shared last quarter. We expect continued cross-sell momentum across the platform, along with a steady cadence of ARR launches throughout the year. We also expect high single-digit ARPU growth, reflecting strong expansion within the base, partially offset by a modest moderation in user growth among existing clients. We expect a meaningful decline in termination fee revenue in 2026, which will reduce reported growth by a few percentage points. This headwind is partially offset by the contribution from MANTL. We expect growth to moderately accelerate in the third quarter due to a more favorable year-over-year comparison. Turning to profitability, we expect a full year non-GAAP gross margin of approximately 65%. In the back half of 2026, we expect adjusted EBITDA margin to be north of 19%, weighted toward the fourth quarter and in line with our typical seasonal pattern. Overall, we expect approximately 500 basis points of margin expansion for the year, driven by operating leverage in the model, efficiencies from our offshore operations, and continued cost discipline while also funding targeted investments in AI that we believe will drive product innovation and long-term efficiency. Lastly, we expect stock-based compensation to be approximately 14% of revenue for the year. As we discussed last quarter, our long-term model framework reflects what we believe are achievable targets based on the strength of our business today and the visibility provided by our long-term contracts. We continue to expect to achieve Rule of 45 by 2030. From a growth perspective, we expect a gradual increase in banks new logo wins supported by our Digital Sales & Service Platform alongside continued leadership in credit unions, reflecting the replacement-driven nature of our market. We also expect consistent execution in our add-on sales efforts and volume growth from existing customers together driving ARPU expansion and contributing significantly to our long-term growth. As well as total dollar churn of approximately 2% to 3% annually, with about half associated with our digital banking clients. Importantly, our long-term outlook does not assume incremental M&A. From a profitability standpoint, we expect non-GAAP gross margin approaching 70% over time as we improve execution on implementations and drive support efficiencies. Approximately 300 basis points of annual adjusted EBITDA margin expansion driven by scale and continued operational improvements, particularly across R&D and G&A, and stock-based compensation declining to approximately 10% of revenue. Turning to first quarter performance, revenue was $126.1 million, up 29% year-over-year. Subscription revenue grew 30% and represented 96% of our total revenue. As a reminder, we closed the MANTL acquisition on March 17, 2025. This timing contributed approximately 14 percentage points of year-over-year growth to Q1 2026. Growth rates will become fully comparable beginning in the second quarter. We increased ARR by 22% and exited the quarter at $494 million. Importantly, we have approximately $71 million of ARR in backlog pending implementation, representing 40 new clients and roughly 1.4 million digital users. We expect the majority of this backlog to go live over the next 12 months. As Alex highlighted, we continue to see strong momentum with our Digital Sales & Service Platform. From a financial perspective, DSSP is important because it is driving higher quality revenue across several dimensions. Clients adopting multiple components of the platform tend to have higher initial contract values, longer contract durations, and stronger retention profiles over time. This is already contributing to ARPU expansion and ARR we're seeing across the business. Additionally, as we integrate MANTL and expand our platform capabilities, we are increasing our ability to land with a broader set of products and expand within the client over time. This reinforces our land and expand model and supports the long-term durability of our revenue. We exited the quarter with 307 clients and 23 million registered users, an increase of 2.5 million users or 12% year-over-year. Over the past 12 months, we implemented 35 clients supporting 1.2 million digital users, and existing clients increased their digital adoption by 1.5 million users. Our contracts provide strong visibility into attrition, typically several quarters in advance. Over the past three years, we have churned less than 1% of our digital banking ARR annually. For 2026, we currently expect to churn four digital banking clients, which again represents less than 1% of ARR. This speaks to the mission-critical nature of our platform and the strength of our long-term client relationships. Revenue per user increased to $21.46, up 9% year-over-year, driven primarily by MANTL's contribution, strong cross-sell execution, and increased user adoption among existing clients. Remaining performance obligations were approximately $1.7 billion or 3.5x live ARR, providing strong visibility into long-term revenue. First quarter non-GAAP gross margin was 64.4%, roughly flat year-over-year, driven by the higher database technology costs we discussed last quarter. We view these costs as temporary and expect them to decline by the end of 2026. First quarter operating expenses were $59.4 million or 47.1% of revenue, representing 530 basis points of year-over-year improvement realized across all areas of operating expense. Adjusted EBITDA was $22.3 million above the high end of our expectations, with an Adjusted EBITDA margin of 17.7% and expansion of approximately 540 basis points year-over-year. We ended the quarter with $77.6 million in cash and marketable securities. In the first quarter, our operating cash flow improved 15% year-over-year. Free cash flow was consistent with prior year, and we repaid the remaining $15 million of our revolving loan. Finally, today we announced that the board of directors has approved our inaugural stock repurchase program of up to $100 million. This is an important milestone that reflects our confidence in both our long-term growth and our robust cash flow generation capabilities. We continue to believe in a disciplined and balanced approach to capital allocation that enables us to grow through additional acquisitions, delever the balance sheet through debt reduction, and opportunistically repurchase shares to deliver increased value to our shareholders. In closing, our results this quarter reflect continued execution against our strategic priorities and the strength of our platform. We are scaling with discipline, balancing growth and profitability while investing in the capabilities that we believe will further differentiate Alkami over time. The visibility in our model and continued momentum across the business position us to drive sustained long-term value. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Cristopher Kennedy from William Blair. Your line is now open. Cristopher Kennedy: Cassandra, you have the grow over in the second quarter, but you also talked about accelerating growth in third quarter and fourth quarter. Can you just provide a little bit more clarity as to the confidence in accelerating growth? Cassandra Hudson: Sure. Yes just to clarify, Cristopher, that growth acceleration will be in the third quarter in particular, and is really driven by a more favorable year-over-year comparison, just some timing dynamics that we experienced in 2025. As it relates to the headwind in the second quarter, that's really timing of termination fee revenue. You know, we do have that headwind in every quarter this year, but it is a little bit more pronounced in the second quarter in particular, which is why I called it out on the call. Cristopher Kennedy: Okay. Got it. Understood. Alex, you mentioned it, but any additional takeaways or observations from Co:lab when you were talking to your customers and kind of how they're viewing the current environment and AI? Thanks for taking the questions. Alex Shootman: First of all, Co:lab was an amazing event. You know, once again, we set record in terms of number of attendees. It was great to see 83 prospects, a good balance between credit union prospects and bank prospects. A couple comments. There was no let up in digital transformation. You know, this is a pretty big market. As I mentioned, over 2,000 credit union and bank customers that all have legacy technology. They're all smart. They all understand what they need to do. They are a little bit captive to these long-term contract dynamics that we talked about. Just continued demand in terms of demand for digital transformation. What was really exciting to see. For our market, and for those of you that don't bank with a regional bank or credit union, you may not really be able to appreciate this. For our market, what's been critical for them to compete with these large money center banks and fintechs is what we would call an integrated front end, a digital front door, whatever you might want to call it. It is the integration of digital banking and a deposit origination platform and a loan origination platform to be able to attract a customer, convert them into a customer, have them in digital banking, have them with a digital with additional products and all of that seamless, and so that the customer or prospect doesn't even know that they're in multiple different products. That has been the benchmark that these institutions have looked for, and that's what we showed from stage. I think what I was most pleased with is the audience reaction to real technology that we showed that will make a real difference for this market. Operator: Your next question comes from the line of Aaron Kimson from Citizens. Please go ahead. Aaron Kimson: Alex, you spoke again today in your prepared remarks about more banks being open to separating online banking from their core provider. Can you talk about what's driving that willingness, whether it's increased acceptance that the standalone digital providers like Alkami have the superior solution for online banking, the maturity of your solution with MANTL, or a change in the ease of integrating a standalone digital provider solution into the core, or maybe something else I'm missing? Thanks. Alex Shootman: Thanks. Once again, let's talk about the difference between the bank market and the credit union market. In a previous earnings call, I've got the specific numbers, so I'm going to give you the round numbers. I know we've got the specific numbers. In the credit union market, it's probably in the mid-40%, 45% of the customers that have an online banking application that is supplied to them from their core provider. In the bank market, it's been north of 75%. That's the part that we're beginning to see unwind. I actually talked to a prospect at Co:lab who is going to pay off four years of their remaining digital banking contract to move to a different digital banking platform from their from their core. I asked them, I said, "This is one of the first times that I've ever heard this. Why are you doing this?" They said, "In our market, we have to compete with Wells Fargo and KeyBank, and we're at the point where our digital capabilities are insufficient, and if we don't make this change, it's going to impact the business of the bank." You're starting to see that demand push create these conversions. The flip side of that is the more customers that see somebody come onto a platform like Alkami successfully go through the conversion, successfully bring their customers on board, then they're willing to make the change. It's ultimately a decision of value versus risk. That's why the integration of the data marketing platform and the onboarding platform and digital banking is so critical because when a bank sees the outcome of speed to bringing on a new customer, reduced cost to bringing on a new customer, increased speed to cross-sell, they start to have the conviction to make the change. Aaron Kimson: That's really helpful. Thank you. The second one is a little bit more direct. You've incurred $2.8 million in shareholder matters related expense over the prior 2 quarters with $2.2 million in 1Q. Can you provide any color on the nature of these expenses and if you anticipate them to be ongoing or settled for the near term after you added 2 new board members on March 31st? Thanks. Cassandra Hudson: Sure. Thanks for the question. You know, those costs are really defense related in nature. You know, we do expect to incur additional costs related to this item. You know, obviously it's difficult for us to predict how much they will be, though I don't think that we're going to be scaling at $2.8 million every quarter from here on out. You know, I think so we saw a little bit of a higher cost in Q1, and I would expect those to moderate from here on out. Operator: Your next question comes from the line of Jacob Stephan from Lake Street Capital Markets. Your line is now open. Jacob Stephan: Maybe just first kind of a note-keeping one here. Maybe give a deeper dive into the bank versus credit unions in the backlog. Cassandra Hudson: Let's see. I guess banks versus credit unions, it's pretty, I would say, evenly split, in terms of their size. You know, right now we have 13 banks in the backlog, and the rest would be credit unions. Jacob Stephan: Okay. Second one for me. I know you've kind of given some in-depth detail on user adds in the past. I'm wondering if you could kind of help us think through the adds in the last quarter and maybe over the last several quarters in terms of existing clients, how many of those were newly implemented customers, and just that kind of trend. Cassandra Hudson: I mean, in the past, you can kind of think of the trend as roughly half and half new versus existing. In Q1 in particular, just kind of flipping back to my script. We implemented 1.2 million digital users over the past 12 months and then 1.5 million related to existing clients. A little bit more weighted to existing clients over the past year here. Operator: Your next question comes from the line of Jeff Van Rhee from Craig-Hallum Capital Group. Please go ahead. Daniel Hibshman: Hey, this is Daniel on for Jeff Van Rhee. Just on MANTL and the pace of logo adds there, the 14 this quarter, maybe if you would want to compare that to previous quarters or expectations, just how MANTL is tracking relative to expectations. Cassandra Hudson: I mean, I think they continue to track very well, right? You know, with all of our products there is a bit of a cyclical nature to the sales cycle. You know, for us, Q1 tends to be a bit of a lighter quarter and Q4 tends to be our strongest quarter. You know, I think we continued to see really good performance, in Q1 for MANTL coming off of a really record 2025. Alex Shootman: I would just point back to the reason why we're pleased is you go back to beginning of 2025 and our DSSP clients, so that's clients that have acquired MANTL have gone from 11 to 48. And in the same period of time, standalone MANTL new logo clients of 61. You know, you figure that's a 5-quarter period of time. You know, I'm the ever-optimistic CEO, but I consider that to be outstanding performance to to make an acquisition like that. Just take a step back. The acquisition closed in Q1, right? We needed to integrate the two companies, and in that period of time delivered that kind of both new logo and cross-sell performance at the same time as integrating the technologies together into one experience that unites the front end of digital banking and origination. I'm frankly just super proud of the team for what they've done. Daniel Hibshman: Yes. Great. Alex, maybe if you could just talk a little bit. I liked your line about Alkami evolving from being a system of record to a system of action. If you could just expand a little bit more on what that means to you and in particular any examples you'd have of that. Alex Shootman: Yes. You know, what our customers are asking for is, historically the digital part of the financial institution was somewhat passive, right? It's relying on the account holder to know what they want to do and then come in and take action. As we all understand how systems have changed and how we interact with systems, now what our institutions are asking for is, "You have all of this data. You've got transactional data, you've got telemetry data, you've got core transactional data. I want you to start predicting things that we want the account holder to do, and then I want you to notify the account holder and ask them to do that. That's what I mean in terms of making a shift from a system of record to using the data and the analytics capabilities that we have and the predictive capabilities that we have. Now I want you to tell me to take an action or tell our account holders to take an action. Right? I notice that I know that. To give you an example: "I know that at this time of the month, every single month, your balance starts to drop, so I'm going to reach out to you and recommend an action for you to take so that you don't get into a bad financial situation." That's the kind of thing that I'm talking about when I say move from a system of record to a system of action. Operator: Your next question comes from the line of Andrew Schmidt from KeyBanc Capital Markets. Your line is now open. Andrew Schmidt: The sales force, the shift to a separate bank and credit union, sales forces. How has that evolved? Has that been effective in terms of building the pipeline, typically on the bank side? I hear you on the backlog. I'm just curious how that has progressed. Thanks so much. Alex Shootman: Yes. Thanks for the question. Our pipeline remains balanced. It's pretty evenly split between banks and credit unions. For us, the transition has been effective. It allows us more specialization in the bank market, and we remain happy that we did it. Andrew Schmidt: Got it. That's helpful. You know, obviously everyone is thinking through sort of more efficient organizational structure when we think about AI development, et cetera. I know you're probably pretty heavy users of this internally, but is there any like structural changes or process changes that need to be made as a result of just increases in model productivity, things like that to consider? Is it more kind of just product velocity output increasing on that side of things? Thank you. Alex Shootman: I mean, you could imagine that we're using every single model provider in all parts of the organization right now. We're not yet at the point where we're ready to come to our investors and say, "This is the benchmark productivity that we're going to run after." I think the biggest thing that we're seeing in terms of change is the front end of the software development life cycle. If you think about DevOps did a lot for us in the back end of the software development life cycle, in terms of how we would test code, how we would release code, how we would support code. That's where a lot of that transformation occurred. A lot of the transformation that we're seeing right now is just the speed in the front end of the software development life cycle and how quickly we go from what used to be something that was in a PRD that is no longer in a document at all and is now a fully functional prototype that we're reviewing with a client instead of having conversations through PowerPoint or through documents. That's where I see a lot of, frankly, a lot of promise for the organization. Within the support organizations we've fully wired the company from a data perspective for access for all of the support organizations to try to speed up the time at which it takes to respond to customers, and then ultimately the cost that it takes to respond to customers. I'm probably like every other software executive right now where we're watching our companies transform in months what we used to see happen in years. It's, it's actually a pretty fun and amazing to be in a software company. Andrew Schmidt: Yes. Makes sense. A lot of progress in a short period of time. It's great to hear. If I could just squeeze one more modeling question in. I think I heard the acceleration in the back half revenue perspective, because that makes sense as we move past the term fees, et cetera. Is it possible to have a 3Q, 4Q breakout of the cadence to expect and then for both revenue and EBITDA? I just want to make sure we have that right and we're not caught off guard, if that's possible. If not, that's fine, but thought I'd air that out. Thanks so much. Cassandra Hudson: No, no worries. Couple points, and I'll kind of talk about top line and EBITDA separately. On revenue, the acceleration is very specific to Q3. And it is due to a more favorable year-over-year comparison. There are some timing elements in the prior year that's driving that acceleration. You know, if you just kind of think about the nature of our model, right? It's very predictable. We have a steady amount of ARR launches happening this year. Very consistent dynamics from existing customer and ARPU growth. Just given that I think that kind of you can calculate what that implies from a revenue perspective for our model. Alex Shootman: Can I just say one thing, Andrew? Andrew Schmidt: Yes. Alex Shootman: Because you've followed us for a while. I, and I'm not trying to be coy, but I would just really encourage you to go back and look at the post Q2 commentary from last year, where we were very specific and said, we actually took down Q3 last year because we had a termination fee that accelerated into Q2. That's exactly what Cassandra's talking about, right? That's the exact -- it's no more complicated than that. Andrew Schmidt: Yes. No, it makes sense. Just to wrap it up, EBITDA? is EBITDA [ largely track ]. Cassandra Hudson: For adjusted EBITDA, we typically see adjusted EBITDA builds each quarter throughout the year. Q4 typically is the highest, both in, obviously, in terms of dollars, but more importantly the EBITDA margin. That trend we expect to continue. Alex Shootman: We got to give you props for trying to get Cassandra to go ahead and give you a Q3 guide. Andrew Schmidt: Exactly. You know I'm always pushing the envelope, Alex. I appreciate it. Operator: Your next question comes from the line of Elyse Kanner from J.P. Morgan. Please go ahead. Eleanor Smith: First maybe for Alex. As banks start to grow as a, as your total customer mix and backlog. Are there any unique challenges of serving banks or differences you observe from serving credit unions? Alex Shootman: For sure. It's really, I would call it, let's call it product technology and skills. From a skills perspective, what we've had to bring into the organization are people that understand how to do commercial data conversion. Converting a a complex business account and the data in the complex business account into Alkami is very different than converting the data from a retail account. That can be account data, payment data. All of that data set is very different, bank versus retail. From a product perspective, I think what we've mentioned over several calls is we've got a 3-phase treasury management build-out. The first phase of our treasury management build-out was to put ourselves in a position where we could effectively move a bank that was on a legacy core provider's platform into Alkami. That's the work that we've been doing over the last 12 months. I think we you know, we largely finish up that work at the end of, at the end of this quarter. There's capability build-out that we have to do. The cores themselves bank cores operate more from a batch perspective. Credit unions cores operate more from a real-time perspective. The core integration themselves and the way that we have to have Alkami, which is a data-hungry application. It's data-hungry because we want to create a great user experience. You create a great user experience by having all the information in front of the user. We've had to do some things with the way that Alkami interacts with the bank cores to make sure that the clients get good performance for their customers. Three big differences. The skills that we have to have in the organization, the application functionality that we have to create, and then the technical integration to the cores themselves. Eleanor Smith: Perfect, Alex. That makes a lot of sense. For Cassandra, are there any unit economics considerations that we should be aware of if Alkami signs a DSSP client versus a regular new logo digital banking client? Specifically, what are the implications to revenue ARR and profitability that we should consider? Cassandra Hudson: Well, I mean, one of the big benefits of DSSP is really around obviously we're selling all three products at once, and we typically see about a 30% higher ARPU on our DSSP deals as compared to a traditional new logo. That would be one. You know, that lends itself naturally to higher ARR especially over time as these banks and credit unions grow with their user base. You know, very, very profitable customers for us. I would say consistent unit economics from a implementation cost perspective. You know, we have to implement all three products and we kind of do that over the first 12-month term. Otherwise, I would say the dynamics there are relatively consistent. Alex Shootman: The part that is untested but we have optimism about, what we've delivered so far is just the first phase of functionality of the Digital Sales & Service Platform, and that's that those couple of use cases I shared. We're not going to stop building. What I get excited about is the opportunity to build new products that we have an opportunity to charge for, assuming that there's value in them, to bring to the clients. From my perspective, those would go into the Digital Sales & Service Platform at a a lower cost of sale in terms of what the customer is buying. Remember, what we just shared is 11 to 48 customers in five quarters. There's not yet a long track record where we're able to say, "This is the change in the unit economics. Operator: Your next question comes from the line of Saket Kalia from Barclays. Please go ahead. Saket Kalia: Alex, maybe for you, just to piggyback off that last question on DSSP a little bit. You know, clearly that tool, as you folks just talked about, adds a lot more value at landing. Maybe that's a little bit of a longer sales cycle. I mean, you talked about the 11 to 48. I guess as you look back, how is that sort of performing versus what you expected? As you think about that sales cycle, is that about in line with what you expected or is it longer or shorter? Curious about how it's sort of progressing so far across that still relatively small sample size. Alex Shootman: I got to tell you, completing an acquisition and then within a 1 year having that kind of cross-sell, that blew me away in terms of expectations. I'm pleasantly surprised. We don't have the data yet, but I actually think... If you think about what we're showing our client in terms of the experience that they have bringing on a customer, you get two kind of things folks are looking for. Can I attract a new customer, and can I sell more products? Having this integrated front end, when people see it, and they know how hard they've been trying to deliver it for the last 20 years across a set of 10 different technologies, my expectation is that the sales cycle's not going to be any longer. I don't want to predict anything. To me, I would hope it's shorter, but it's still governed by the market dynamics that we talked about, right. This is the market dynamics or the long-term contract. That governs the sales cycle more than anything else, really. Saket Kalia: Got it. That makes a ton of sense. Cassandra, maybe for you..... Alex Shootman: Yes, let me just... Saket Kalia: I'm curious -- sorry, please. I'm sorry. Alex Shootman: Yes. Sorry for talking over you. We don't have this in our model. Remember, the most important thing for us is not, can we win against a competitor? The most important thing for us is can we increase the number of people that decide to convert off their legacy technology? This is not included in our model at all. What I'm hoping is that DSSP creates enough value so that some of those folks that didn't want to go through the conversion effort decide to go through the conversion effort, and we unlock more opportunities within the market constraint that we have. Saket Kalia: Got it. Very clear. Thanks for that, Alex, by the way. Cassandra, maybe for my follow-up for you, I'm and it's a little bit of a broader question. I'm curious if there's anything that we should keep in mind this year from just a renewal perspective. You know, over the years, we've just been growing the customer base, and of course, those customers are going to renew. I mean, is there anything that we should keep in mind this year just around potential tailwinds to ARPU or gross margins or anything like that as you think about that renewal pool sort of steadily growing over time? Cassandra Hudson: Thanks for the question, Saket. I what I would point to is certainly there's gross margin benefit as we achieve higher levels of scale, and more and more of our customers have been on the platform for quite some time now. That does lend itself to higher gross margin. You know, upon renewal, we typically see customers increase their total contract value with us. They might buy additional product, and obviously continue to grow their user bases. Those benefit us, and we see that in increased ARPU as well as our NRR trends. I guess those would be kind of the three areas I would point to in terms of the renewal impact. You know, we don't have any real big concentrations in any one year where we have an outsized number of renewals. It's pretty evenly spread, just given how long our business has been humming here. Operator: Your next question comes from the line of Adam Hotchkiss from Goldman Sachs. Your line is now open. Adam Hotchkiss: I guess to start on the Alkami Code Studio launch. Curious, I realize it's incredibly early, but curious, as to sort of initial customer and prospect reactions to that. Any indications as to how you might charge for that going forward would be helpful. Thank you. Alex Shootman: Yes. Let me make sure that I've got some clarity. The product that we announced is Alkami Engage, and that's the product that is collecting the account holder telemetry information. The reference to Code Studio, if you look at my prepared remarks, what I shared was that we showed a prototype technology demonstration. That is not a product that we have decided to release yet, and it's for all the reasons that you framed. We had it in our innovation studio. People loved working with it. The two things that we're trying to work out really with any of these AI products are the more the commercial terms than necessarily the the technical terms. It's do we price it simply and then take the cost risk? I'm pretty sure if Cassandra and I showed up and said tokens are our profit guide, y'all wouldn't give us a pass. It's do we price simply and then take the cost risk, or do we introduce a usage metric that's not a usage metric that the client has any history with, and so it's hard for them to model? You know, I actually mentioned four different prototypes that we showed. You talked about Code Studio. That was just one of the four. That's what we're in deep discovery with our customers right now. We have a handful that are using each one of the prototypes to try to understand what the most effective commercial terms are for the, for the product. Given the platform that we have, The complication for us is not really, I don't want to minimize how hard it is to build a new product, but it's not really can we build AI capabilities? It's really how do we monetize these AI capabilities in a way that it's easy for the customer to buy and it's safe for the company from a profitability perspective. Adam Hotchkiss: Yes. No, that's incredibly helpful, Alex. I think that makes a lot of sense, especially given what's happened to token costs. Just to follow up on that, I'd be curious how that impacts your. And I realize it's maybe a bit difficult now, but how does that impact this launch and some of the beta testing you're doing impact your sort of 3 to 5-year view of the platform? Do you see Alkami becoming more customizable since the cost and accessibility of development is ultimately going to be coming down and you're going to be adding new features more quickly, using third parties, first party, et cetera, beyond what you currently have in DSSP? Is that sort of the goal in the roadmap, or am I missing the mark and there's something else to read into there? Thanks. Alex Shootman: Look, I don't mean to come across as snarky when I say this. That's not my intent. Like, all of our holy grail is to get more revenue and have it cost us less to deliver it. That's what we're really looking at all the time. We're not yet ready to change the long-term model that Cassandra's talked about. You know, Cassandra had talked about a long-term model that guides the Rule of 45. If and when we have enough evidence within our operations, either in terms of revenue lift or in terms of cost efficiency to change that model, then we'll announce that we're changing the model, and we'll give you the reasons why we're changing the model. We don't have enough evidence yet to change that longer term model. Operator: That concludes the Q&A portion of the call. Thank you for joining us today. You may now disconnect.
Operator: Good morning. My name is Cath, and I will be your conference operator today. At this time, I would like to welcome everyone to the Illinois Tool Works Inc.'s First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. And if needed, one follow-up question. Thank you. Erin Linnihan, Vice President of Investor Relations, you may begin your conference. Erin Linnihan: Thank you, Cath. Good morning, and welcome to Illinois Tool Works Inc.'s First Quarter 2026 Conference Call. I am joined by our President and CEO, Christopher A. O’Herlihy, and CFO, Michael M. Larsen. During today's call, we will discuss Illinois Tool Works Inc.'s first quarter 2026 financial results and provide an update on our outlook for full year 2026. Slide two is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2025 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide three, and it is now my pleasure to turn the call over to our President and CEO, Christopher A. O’Herlihy. Christopher? Christopher A. O’Herlihy: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, Illinois Tool Works Inc. delivered a solid start to the year with results that were in line with our expectations. In the first quarter, we continued to outperform our underlying end markets, delivering revenue growth of 5% and a 12% increase in GAAP EPS to $2.66. Through disciplined operational execution, we expanded operating margin by 60 basis points to 25.4%. We continue to capitalize on positive demand trends in our CapEx-related segments, with organic growth in Welding up 6% and Test & Measurement and Electronics up 5%. While our consumer-facing businesses contended with challenging end market dynamics, the Illinois Tool Works Inc. team executed at a high level on the profit drivers within our control. Our Enterprise Initiatives contributed 120 basis points to the bottom line, driving that 60 basis point overall margin improvement. We were equally encouraged by our continued progress on Illinois Tool Works Inc.’s organic growth agenda, specifically on customer-backed innovation, or CBI as we call it. We are positioning the company to consistently deliver 3% plus CBI contribution to revenue by 2030. As we have noted before, this is the key driver of our ability to consistently deliver 4% plus high-quality organic growth at the enterprise level. As we look ahead and based on our solid Q1 results, we are raising our full year GAAP EPS guidance by $0.10. Our new guidance midpoint of $11.30 incorporates a slightly lower tax rate and represents 8% year-over-year growth. Our full year organic growth projection of 1% to 3% remains unchanged, reflecting current demand levels adjusted for seasonality. For the full year, we expect operating margin expansion of approximately 100 basis points powered by our Enterprise Initiatives. Notably, all seven segments are projected to deliver positive organic growth and margin expansion in 2026. As we have said before, Illinois Tool Works Inc.’s unique business model, resilient portfolio, and “do what we say” execution demonstrated daily by our colleagues worldwide ensure we are well positioned to deliver robust financial performance in any environment and remain invested in our long-term strategy through any business cycle. As order activity continues to strengthen across several of our end markets, our production capacity, new product pipeline, and best-in-class customer-facing metrics position us to take market share and fully capitalize on these positive demand trends that we are now beginning to see. With that, I will now turn the call over to Michael to provide more detail on the quarter and our guidance for 2026. Michael? Michael M. Larsen: Thank you, Chris, and good morning, everyone. In Q1, the Illinois Tool Works Inc. team delivered a solid operational and financial start to the year. Starting with the top line, revenue growth was 4.6% driven by organic growth of 0.4%, a 3.9% contribution from foreign currency translation, and 0.3% from an acquisition. As Chris said, we were particularly encouraged by positive demand trends and strong order activity in our CapEx and semi-related segments. The combination of our product line simplification, or PLS, efforts and delayed sales to the Middle East reduced our organic growth rate by approximately one percentage point. For context, our annual sales to the Middle East represent approximately $100 million, which is less than 1% of Illinois Tool Works Inc.'s total annual sales. On the bottom line, operating margin improved by 60 basis points to 25.4%, with Enterprise Initiatives contributing 120 basis points. Incremental margins were approximately 40% in the quarter, and we expect both operating margin and incremental margins to move higher as the year progresses. Free cash flow grew 6% with a 69% conversion rate reflecting typical first quarter seasonality. We also repurchased $375 million of shares during the quarter. Overall, a solid start to the year with revenue growth of 5%, earnings growth of 12%, and some encouraging demand trends that bode well for the balance of the year. Please turn to slide four for a brief update on our Enterprise Initiatives. Since 2012, our strong execution on the Enterprise Initiatives has been the most impactful driver of margin improvement at Illinois Tool Works Inc. The 120 basis points contribution this quarter from our strategic sourcing and 80/20 front-to-back activities was in line with our expectations, and we remain on track for a full year impact of approximately 100 basis points independent of volume. Looking ahead, we expect these initiatives to continue to drive meaningful gains through 2030 as we track toward our 30% margin goal. Now let us move to the segment highlights. Starting with Automotive OEM, where revenue increased 4%. While organic revenue declined 1%, we outperformed global automotive builds which were down more than 3%. On a regional basis, North America was down 5%, while Europe was flat. China declined 3%, but significantly outperformed automotive builds, which were down 10%. Builds in China are projected to meaningfully improve sequentially in the second quarter, including double-digit growth in EVs where we are particularly well positioned. At the segment level, we continue to expect our typical 200 to 300 basis points of outperformance versus builds, which are now expected to be down approximately 2% for the full year. Operating margin improved by 170 basis points to 21%. Turning to slide five, Food Equipment delivered revenue growth of 2%, with organic revenue down 3%. Strength in Service, which grew 3%, partially offset a 6% decline in Equipment. North America was down 5%. A slower start than expected on the institutional side, particularly in the education end market, was partially offset by growth in restaurants, including QSR, which was up double digits, and Service, which grew more than 4%. Encouragingly, since January, we have seen gradual improvement in institutional demand trends, and at the Food Equipment segment level, we continue to expect positive organic growth and margin improvement for the full year. International business was flat and is projected to deliver positive organic growth starting in Q2. Test & Measurement and Electronics had a standout quarter, with 10% revenue growth and 5% organic growth, the highest growth rate in three years as the green shoots we talked about last quarter begin to look more like a sustainable recovery. Through this recent down cycle, our divisions stayed invested in their long-term growth strategies, including capacity and new products, and they are uniquely positioned to meet growing customer demand and fully capitalize on the growth opportunities in front of them. As a result, Electronics grew 10% this quarter, and the semi-related businesses, which represent about $500 million in annual revenues or about 15% of the segment, grew more than 15%. Looking ahead, market indicators like increasing fab utilization, encouraging customer signals, strong response to new products, as well as strong order activity all support the view that the positive demand trends that we are seeing in this segment today are sustainable in the near term. Moving on to slide six, Welding delivered another strong top line performance as revenue grew 7% with organic growth of 6%. Equipment grew 8% with a strong contribution from new products. North America was the primary growth engine, up 8%, with mid-single-digit growth in filler metals. The growth was broad based, with mid- to high-single-digit growth across our businesses including in both industrial and commercial. International was down 6% due to a difficult comparison of plus 14% in the year-ago quarter. Operating margin was best in class at 32.1%. Polymers & Fluids delivered 5% revenue growth and organic growth of 2% driven by new products and robust market share gains, primarily in automotive aftermarket, which grew 3%. Polymers was flat against a tough comparison of plus 6%, and Fluids was also flat. Operating margin expanded 150 basis points to 28%. Turning to slide seven, in Construction Products, revenue was up 3%, and encouragingly, this quarter marked the best organic growth performance in four years. Overall, organic growth declined 1%. North America was flat as our residential and renovation business delivered positive organic growth of 1%. In this segment, we remain well positioned for the inevitable housing recovery down the road. Europe was down 3%, and Australia/New Zealand was down 2%. Specialty Products revenue was down 1%, with organic revenue down 5% due to the impact of PLS activities and delayed Middle East sales. Despite the top line pressure and with the margin tailwind from recent PLS activities, the segment expanded operating margin by 40 basis points to 31.3%. With that, let us turn to slide eight for an update on our guidance. As we have said before, Illinois Tool Works Inc. is well positioned to deliver meaningful progress on both the top and bottom line in 2026. On the top line, we are maintaining our total revenue growth projection of 2% to 4% and organic growth projection of 1% to 3%. Per our usual process, this is based on current levels of demand adjusted for typical seasonality and prevailing foreign exchange rates. On the bottom line, we continue to expect operating margin to improve by approximately 100 basis points to a range of 26.5% to 27.5% as Enterprise Initiatives contribute approximately 100 basis points. We continue to expect that price/cost will be modestly accretive to margins after factoring in recent tariff changes and all known material cost increases, offset by corresponding pricing and supply chain actions. Our projection for incremental margins in the mid- to high-40s remains unchanged. Incorporating our first quarter results and the lower effective tax rate projection for the year of 23% to 24%, we are raising our GAAP EPS guidance by $0.10 to a new range of $11.10 to $11.50, representing 8% growth at the $11.30 midpoint. In terms of cadence, we are projecting a 48/52 EPS split between the first and second half of the year, which is less back-end loaded than 2025 and our previous guidance. Finally, we expect free cash flow conversion to exceed 100% of net income, and we are on track to repurchase approximately $1.5 billion of our shares in 2026. In summary, we are heading into the balance of the year with positive momentum on both the top and bottom line. All seven segments are projecting positive organic growth and further improvement in their industry-leading margins. Overall, Illinois Tool Works Inc. is well positioned to deliver on our guidance, including solid organic growth with best-in-class margins and returns. And with that, Erin, I will turn it back to you. Erin Linnihan: Thank you, Michael. We will now open the call for questions. Cath, will you please open the line and then inform callers on how to get back into the queue? Operator: Thank you. At this time, I would like to remind everyone, to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Andrew Alec Kaplowitz with Citigroup. Your line is open. Close enough. How is everyone doing? Christopher A. O’Herlihy: Good morning. Good morning. Andrew Alec Kaplowitz: Good morning. I know it is early in the year, but when you think about growth in the segments, is it fair to say that your CapEx businesses such as Test & Measurement and Welding are trending ahead of your expectations? Maybe consumer and Specialty, I guess, and Food Equipment was more institutional or a little below, and they just kind of net out. How are you thinking about growth by segment versus your original expectations? Christopher A. O’Herlihy: Yes. So, Andy, as we have indicated, we expect all seven segments to show positive organic growth this year. I think you have characterized the first quarter pretty well. What we saw is those CapEx-related segments like Test & Measurement and Welding, with Test & Measurement, obviously in semiconductors and Electronics, as Michael indicated, grew more than 15%. And I would say with continued order strength here in Q2. Welding, it has been a tough environment for a few years. We grew 6% in Q1, a mixture of strong order activity that again continues into Q2 and continued improvement in CBI. And I think encouraging on Welding, the strength was pretty broad-based. It was not just in industrial markets, which we started seeing in Q4, but it also, in Q1, bled into the commercial platforms as well. So certainly on those CapEx-related markets, strong order activity. And then on the more challenged consumer-facing markets, even though they are challenged, we continue to outgrow those markets. If we look at Automotive as a prime example where we again demonstrated a couple of hundred basis points of improvement over the market, similarly in Construction and even in areas like Polymers & Fluids, where in automotive aftermarket we showed a very healthy growth rate versus retail point of sales in automotive aftermarket. So I think it is a tale of two markets right now. We are seeing the industrial CapEx markets very strong with great order activity. But even in those consumer-facing markets, which are improving a little bit, we are outgrowing those markets. Andrew Alec Kaplowitz: It is helpful, Chris. And maybe a similar question on margin for you or Michael. You reiterated the incrementals for the year in the mid- to high-40s. Are you getting there at all differently? Because I mean, Test & Measurement and Auto look good, but Food Equipment obviously was lower. Was that just lower absorption in the quarter and it gets better from here? Are you seeing increased inflation impact you at all? How do you think about that? Michael M. Larsen: Yes. I think, Andy, overall, the incremental margin assumptions and the operating margin assumptions are unchanged from what we were when we gave guidance on our last call. We continue to expect incrementals in the mid- to high-40s, and we expect to improve operating margins by 100 basis points this year. Seasonally, Q1, as we talked about on the last call, always starts out a little lower, and then margins and incrementals improve sequentially as we go through the year. We also expect, based on current run rates, that we will see some increased operating leverage as we go through Q1 to Q2 and into the back half of the year. So overall, the margin expectations, as Chris said, are that every one of our segments will improve operating margins this year. Obviously, the ones that are benefiting from some positive demand trends in particular should be expected to maybe outperform a little bit on those incrementals. Just a word on Food: I would say certainly an anomaly in that segment in terms of the margin performance and the incrementals in the first quarter. It is really an isolated challenge in one particular end market on the institutional side, and it relates back to the month of January. We did see improving demand trends in Food Equipment, as well as in that particular end market, as we went through February, March, and April. But it is certainly something we will continue to keep a close eye on. I would just add while we are on margins that while some of the more growth-challenged businesses that Chris talked about—Polymers & Fluids, maybe Automotive, Construction—continue to execute at a very high level, you see that despite some of these top line challenges, they continue to expand margins, which is really encouraging. Andrew Alec Kaplowitz: Very helpful. Operator: Your next question comes from the line of Jamie Lyn Cook with Truist Securities. Your line is open. Jamie Lyn Cook: Hi. Good morning. I guess this is my first question, can you just help us understand, last quarter it sounds like you were pretty positive on short-cycle momentum, things improving, your confidence level today with some of the uncertainty related to the war with Iran and macro and whether you saw any change in the cadence of sales throughout the quarter or into April? And then my second question, can you just give us an update on CBI, the contribution expected for 2026, and whether you are contemplating other parts of the portfolio that were having a harder time with CBI so perhaps there are opportunities to refocus to certain product lines which are being more successful versus not? Thank you. Michael M. Larsen: Thank you, Jamie. Maybe I will take the first part and then hand it over to Chris for the CBI question. In terms of overall confidence, let us start with the context that we came in right along with our plan for the first quarter. We talked on the last call that we expected a step down from Q4 to Q1, and we actually, on the top line, did a little bit better than that. So I would say if anything, we are more confident today as we sit here. I think it is important to mention that our guidance today is based on the current levels of demand that we are seeing in these businesses. In some of these businesses, maybe Welding and Test & Measurement in particular, we are seeing order rates that are meaningfully higher than the organic growth rates that those segments put up in the fourth quarter and the first quarter. That is not included in our guidance today. Again, based on our past practice, this is based on current run rates. And while there may be a little bit more of a challenge in a place like Food Equipment, which we just talked about, we believe as we sit here today we have more than enough strength in those CapEx-related and semi-related segments to offset any challenges there. And like I said, we are more confident in our organic growth guidance of 1% to 3% today than we were on the last call. One last word on Automotive: automotive did have a slower start in China. Automotive builds in China were down 10% in Q1, and they are projected to be flat in Q2. So we are expecting a pretty meaningful ramp from Q1 to Q2 with sequential growth in the low- to mid-single digits. We expect meaningful sequential margin improvement of about 100 basis points, and we expect incremental margins to improve. If you look at the cadence that we outlined—you have the EPS split 48/52—we just did 23% in Q1, which is exactly what we said on the call last time. That would imply that for the second quarter, the EPS contribution would be about 25% to the full year. And as we sit here today, we feel very, very confident in our ability to deliver both Q2 and the full year. Christopher A. O’Herlihy: And then, Jamie, on your question on CBI and the opportunity profile, CBI can look a little different segment to segment, division to division. What I would say is that we have strong momentum right across the company on CBI, and we are really encouraged by the progress that we are making in every segment. We continue to see increasing strength in our pipeline of new products. It is one of the reasons why even in some of these slower growth markets we are outperforming those markets. We have had several successful new product launches this year across the portfolio. I would call out segments like Welding, Test & Measurement, Food Equipment, and Automotive. We delivered a 40 basis points CBI yield improvement in 2025, and based on what we see in Q1, we are tracking really well to deliver incremental improvement in 2026 on the path to 3% plus by 2030, if not before. Patent filings continue to be strong—up 18% in 2024, 9% in 2025—and we see additional increases in 2026. As we have said before, patent filings continue to be a very strong leading indicator of CBI at Illinois Tool Works Inc., given the customer-backed nature of our innovation, which means that more often than not, patent filings are there to protect important customer solutions. Increased patent activity is often pretty well correlated to future revenue growth. So we feel very positive about the engagement, enthusiasm, and followership around CBI, and we are now starting to see this come through in patent filings and yield. Thank you. Operator: Your next question comes from the line of Tami Zakaria with J.P. Morgan. Tami Zakaria: Hi. Good morning. Thank you so much. I have one question, and it is rather longer-term. As you think about your Food Equipment business, how do you view the proliferation of GLP-1 drugs and its impact on demand from restaurants and the hospitality industry? I see you had really strong growth in the quarter from restaurants—you mentioned QSRs—but just longer term, is GLP-1 on your radar as you plan for this segment over the coming few years? Christopher A. O’Herlihy: I would say, Tami, it is not something we are giving a lot of thought to. I would say GLP-1 is early days, and I would also say that if you look at Food Equipment, restaurants represent a smaller portion of our business, and particularly QSR represents a smaller portion of our business. The biggest portion is institutional. We have a sizable restaurant business, but a smaller piece is in QSR, which is probably more directly impacted. So I would say it is early to tell. It is not something that is on our radar at this point. But as you mentioned QSR, it is not a huge part of our business, although it is growing nicely. Michael M. Larsen: And I would just add, we have said before Food Equipment is one of the most fertile segments from an innovation standpoint. There is so much room for customer-backed innovation, and we would expect that to continue to only accelerate from here and offset any pressures like the ones that you are talking about. Tami Zakaria: Understood. Thank you. Michael M. Larsen: Mhmm. Operator: Your next question comes from the line of Stephen Edward Volkmann with Jefferies. Your line is open. Michael M. Larsen: Hi. Good morning, everybody. I was going to stick with Food as well because that comment kind of caught my attention. Do you think that that market is actually turning? Or is there something that you are doing that is kind of Illinois Tool Works Inc.-specific there? I will leave it there. Christopher A. O’Herlihy: I think it is hard to say the market is turning, Steve. I do think that we have some interesting innovations going on in that space. As Michael mentioned, the Food Equipment space is very effective from an innovation standpoint. We have new product launches in all product categories in 2026, really driven around critical customer pain points like energy, water, and labor savings, and all those trends are very relevant in QSR. I am pretty sure that a large part of our QSR growth is coming from innovation. Michael M. Larsen: And I would just add that we always talk about the strength of the Service business. While QSR, in particular, can be a little bit lumpy, the Service business is more of an annuity-type business. Our ability to put up 3%, 4%, 5% organic growth on a consistent basis at attractive margins kind of buffers some of that lumpiness that you might see in the businesses that you are talking about. Stephen Edward Volkmann: Got it. Okay. Thank you for that. And then, Michael, it sounded like there was a margin thing that happened in the quarter that was very specific. Should we assume 2Q is kind of back to normal? Michael M. Larsen: Yes. I think there is really nothing unusual about Q1, other than the slow start maybe in Food Equipment. If you look at how the quarter progressed, January started out a little bit slower because of Food Equipment, and then we improved from a growth standpoint in February and got even better in March. I think March organic was up 4%, and in April we are off to a really good start with organic growth. If you look at our full year guidance range of 1% to 3%, we are probably trending towards the high end of that range here in April. On margins, we expect a sequential improvement from Q1 to Q2. We just did 25.4%. We would expect more than 100 basis points of improvement sequentially from Q1 to Q2, so that would put it somewhere around 26.5%, and further improvement into Q3 on margins and as well in Q4. From a growth standpoint, from Q2 to Q3, revenues based on run rates again are about the same in Q3 and Q4. But that is all that we need to deliver some meaningful organic growth towards the higher end of the range in the second half of this year. Hopefully, that gives you a little bit of context. Stephen Edward Volkmann: Very much so. Appreciate it. Thanks. Michael M. Larsen: Sure. Operator: Your next question comes from the line of Julian C.H. Mitchell with Barclays. Your line is open. Julian C.H. Mitchell: Hi. Good morning. Good morning. Michael, sorry, there are a couple of other calls going on. But just to clarify your comment on the top line just now, were you referring to total company there in terms of the confidence of getting to the higher end of the range? Obviously, we had some questions on you were just over flat in Q1, and you have got 2% pegged at the midpoint for the year, and you tend to just guide with run rate, as you say. Is there anything happening on price later in the year that comes in because of cost inflation that gets the growth moving up? Michael M. Larsen: I think, Julian, as we have said before, the first quarter was right in line with our plan. The organic growth rate was as we described it on the last earnings call, and how the year is projected to unfold is based on our typical seasonality. In terms of price, since you asked, we had a plan assumption going into the year around price as well as price/cost. Given some of the inflationary pressures that we are seeing, just like everybody else, our divisions have reacted from a price standpoint. We now expect a little bit more price, and that will start to come through primarily in the second quarter and then carry forward into Q3 and Q4. So I think it is fair to say there might be a little bit more of a price impact there. But broadly, we are very close to our original plan as we sit here today, including the organic growth projection of 1% to 3%. Nothing has really changed relative to our guidance other than, as we said, we have seen some really positive demand trends in two segments in particular. Julian C.H. Mitchell: That is helpful. Thank you. And when we are looking at the operating margin guidance, you are off to a good start versus that 70 basis points or so acceleration that is guided for margins at the midpoint for the year as a whole. If we are thinking about some of the margins that were weakest—I think Food Equipment you have dealt with already—anything in Welding that we should think about over the balance of the year, the margins there perhaps picking up steam? And company-wide, is operating leverage fairly steady as you move through 2026? Michael M. Larsen: What I can tell you, Julian, is that as we sit here today, we would expect every segment to improve margins in Q2 relative to Q1. And then we would expect sequential improvement to those margins again in every segment in Q3 and into Q4. As you mentioned Welding specifically, those are best-in-class operating margins by a fair margin. So you would expect to see less improvement in the segments that have margins at or above 30%. You should expect to see a lot more improvement in places like Test & Measurement. There is a little bit of impact from some recent acquisition activity, but as volume and price begin to pick up as we go through the year, you are going to see some really solid operating leverage in the Test & Measurement business as well. Christopher A. O’Herlihy: Julian, I would just add that we have really good line of sight on at least 100 basis points of improvement with our Enterprise Initiatives. Andrew Alec Kaplowitz: That is helpful. Thank you. Operator: Your next question comes from the line of Bank of America. Analyst: Morning. Look, I think you have been very clear on expecting improvements in organic growth into the second quarter, calling out specifically for the Food Equipment segment. That is a positive. How about the Specialty Products segment? Michael M. Larsen: Yes. I think there was a little bit of an impact from the Middle East—kind of delayed sales in the aerospace business—which is sitting on significant orders and backlog. Those sales have been delayed. That and the combination of PLS efforts that are somewhat front-end loaded this year reduced the overall organic growth rate by three points in Specialty in the first quarter. We would expect that growth rate in Specialty to improve from here. I would say the equipment businesses in Specialty are performing very well, and then in some of the more consumer-oriented businesses there are some challenges, as you are well aware, as Chris talked about. There are places like the medical business that is growing leaps and bounds at this point in time. So it is really all those factors offsetting each other. As we said, we expect the Specialty business to deliver positive organic growth this year and meaningful margin improvement based on what we are seeing in the businesses that make up Specialty as we sit here today. Thank you. Analyst: And then with the Supreme Court's ruling against the AIPA tariffs, several manufacturing companies have filed for refunds. Where do you stand in that process for yourself? Christopher A. O’Herlihy: With respect to tariff recovery, given our “produce where we sell” philosophy, the direct impact of tariffs was largely mitigated at Illinois Tool Works Inc., and to the extent that there was an impact, we were able to recover this in price. In this regard, tariff recovery is not something that is on our radar, I would say, and we certainly do not have anything in our guidance for it. Analyst: Sure. Operator: And that concludes today's session. Thank you for participating in today's conference call. All lines may disconnect at this time.
Operator: Thank you for standing by. Welcome to the Benchmark Q1 Fiscal Year 2026 Earnings Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Paul Mansky, Benchmark Investor Relations. You may begin. Paul Mansky: Thank you, operator, and thanks, everyone, for joining us today for Benchmark's First Quarter 2026 Earnings Call. With us today are David Moezidis, our President and CEO; and Bryan Schumaker, our CFO. After the market closed, we issued an earnings release pertaining to our financial performance for the first quarter of 2026, along with a presentation, which we will reference on this call. Both are available under the Investor Relations section of our website. This call is being webcast live, a replay of which will be available approximately 1 hour after we conclude. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as in the appendix to the presentation. Please take a moment to review the forward-looking statements disclosure on Slide 2 of the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks which are not historical statements of fact are forward-looking statements, which involve risks and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, David will start with an overview, followed by Bryan's further detail of our Q1 results and guidance. We'll then turn the call back to David to share his perspective on sector trends and closing remarks. If you please turn to Slide 4, I'll turn the call over to our CEO, David Moezidis. David Moezidis: Thank you, Paul. Good afternoon, and thank you for joining us today. In the first quarter, we delivered revenue of $677 million and EPS of $0.58, both coming in towards the higher end of our expectations. Our first quarter performance reflects solid execution across the business and meaningful progress in our strategic priorities. As we look ahead, the combination of improving end-market conditions and our momentum in Semi-Cap and AC&C and the operational discipline we've been emphasizing gives us greater confidence in our outlook for the year. We now expect full-year revenue growth to be in the 9% to 10% range, up from our prior expectations of mid-single-digit growth. We also expect EPS growth to outpace revenue as we remain focused on execution and disciplined expense management. Turning to Slide 5. During the quarter, we saw evidence of improvement across a broad cross-section of our end-markets, reflecting the benefits of our well-balanced portfolio. Medical revenue continued to accelerate year-over-year and Semi-Cap returned to double-digit sequential growth. Within AC&C, the AI-related wins we've discussed on prior calls have begun to ramp, and our confidence continues to improve. Meanwhile, performance across the rest of the portfolio was in line with our expectations. These are early but clear signs that the customer-first initiatives we began implementing over the past 2 years are taking hold. That shows up in more disciplined customer engagements, clearer program prioritization and more consistent execution across the portfolio. We also delivered another quarter of solid bookings performance. This consistency reinforces our confidence in both the pacing of the year and the sustainability of our growth outlook. Operationally, we continue to drive leverage, with both operating income and earnings growing faster than revenue year-over-year. At the same time, our sustained focus on working capital efficiency drove another quarter of strong free cash flow despite stepped-up investments to support future growth. While we remain mindful of the broader environment, demand signals are stronger today than they were 90 days ago. Regardless, our priorities do not change; stay close to our customers, execute with consistency and continue to build a more resilient operating model. In short, we're encouraged by how the year has started and by the momentum we're seeing as we move forward. With that, I'll turn the call over to Bryan to walk through the financial details for the quarter. Bryan Schumaker: Thank you, David, and good afternoon, everyone. Please turn to Slide 6. Revenue in the quarter was $677 million, up 7% year-over-year and above the midpoint of our prior guidance of $655 million to $695 million. Non-GAAP EPS was $0.58, which was at the higher end of our prior guidance range of $0.53 to $0.59. As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, restructuring, impairment and other items as detailed in Appendix 1 of this presentation. For the first quarter, non-GAAP gross margin was 10.3%, improving 20 basis points year-over-year and decreasing 30 basis points sequentially, primarily due to volume. Non-GAAP operating margin of 4.8% was also up 20 basis points year-over-year, but down 70 basis points sequentially, driven by lower revenue and higher variable compensation. Our first quarter non-GAAP effective tax rate was 27.4%, slightly above our prior guidance range, driven by jurisdictional mix. Please turn to Slide 7 for the first quarter 2026 revenue performance by sector. Semi-Cap revenue, while down slightly year-over-year, increased 12% (sic) [ 2% ] sequentially, reflecting improved momentum as we progress through the quarter. As expected, industrial and A&D moderated year-over-year, down 3% and 2%, respectively. Meanwhile, medical revenue grew 24% and AC&C grew 41% year-over-year. Please turn to Slide 8 for our trended non-GAAP financials. Year-over-year, we saw a consistent improvement across revenue, profitability and earnings. This reflects continued discipline in execution and mix. Although these metrics were sequentially down this quarter due to seasonal volume and variable expenses, we expect both sequentially and year-over-year improvement for revenue, profitability and earnings throughout the balance of 2026. Please refer to Slides 9 and 10 for a discussion of our balance sheet, cash flow and working capital trends. In the first quarter, we generated $47 million in operating cash flow and $29 million in free cash flow despite investing in both inventory and capital equipment to support our future growth. As of March 31, we were $120 million net cash positive. Our cash balance was $325 million, representing a $3 million sequential increase. We had $145 million outstanding on our term loan and $60 million outstanding on our revolver, leaving $486 million in available borrowing capacity. We invested approximately $18 million in capital expenditures during the quarter. Our fourth PT building in Penang remains on track to begin operations in Q3. Based on the momentum we are seeing in the business, we expect full-year 2026 capital spending to track to the higher end of the 2.0% to 2.5% range. Demonstrating our continued commitment to return value to shareholders, we distributed $6 million in cash dividends and repurchased $6 million in stock during the quarter. At quarter end, we had approximately $117 million remaining under our share repurchase authorization. Our cash conversion cycle for the quarter was 67 days, which is a 19-day improvement year-over-year and consistent with our strong fourth quarter performance. A key contributor to that progress was disciplined inventory management. Inventory days declined 14 days year-over-year even as we grew the top line over the same period. This discipline translated into an improvement in turns to 4.8 as compared to 4.0 in the prior year period. Please turn to Slide 11 for our second quarter guidance. For the second quarter of 2026, we expect revenue to be within a range of $700 million to $740 million, representing 12% year-over-year growth at the midpoint. We expect non-GAAP gross margin to be between 10.4% and 10.6%, and non-GAAP operating margin to be between 5.1% and 5.3%. We anticipate GAAP expenses will include approximately $6.1 million of stock-based compensation and $0.8 million to $1.2 million of non-operating expenses, including amortization, restructuring and other charges. Our non-GAAP diluted earnings per share is expected to be in the range of $0.65 to $0.71. Interest and other expenses are expected to be approximately $3.5 million. We continue to advance initiatives aimed at structurally improving our tax rate over the long term. However, for the second quarter and full year, we expect our effective tax rate will be in the range of 26% to 27%. Finally, for the quarter, our weighted average share count is expected to be approximately 36.3 million. With that, I would like to turn the call back over to David for our outlook by market sector and closing remarks. David Moezidis: Thanks, Bryan. Let's turn to Slide 12 for our outlook by sector. Within Semi-Cap, since late last year, we've been sharing our view that a potential recovery in 2026 was showing more promise. This became more evident in the first quarter as revenues were stronger than expected, increasing double digits sequentially. Over the past several years, we supported existing programs, secured new wins and invested in capacity, including investments such as our Penang 4 facility in anticipation of an industry upturn. Looking ahead, we expect this to translate into both sequential and year-over-year growth throughout the year. Within industrial, revenue was in line with our expectations, and we see modest growth in 2026. Within the sector, we're seeing good performance from transportation and agriculture, while automation and HVAC saw softer conditions. Overall, we remain positive on the outlook for the sector longer term. Turning to aerospace and defense. Our commercial air business continues to perform well. After 2 years of double-digit growth, we expect A&D to moderate in 2026, driven primarily by program timing within defense. Importantly, bookings activity across defense and space remains strong, positioning the sector for a return to growth as these programs are expected to ramp later in the year and into 2027. Medical delivered another standout quarter in Q1, and we expect this performance to continue over the next several quarters, supporting our growth for the year. I'm particularly encouraged by the breadth of the growth drivers in medical, which includes our competitive wins, strong end-markets and new program ramps. Lastly, in AC&C, we delivered exceptional year-over-year results in the quarter, driven by the initial ramp of AI-related wins we've discussed over the past several quarters. These wins were enabled in part by our liquid cooling capabilities, which supported our HPC programs and are now seeing traction in clustered AI solutions. While still early in the ramp, our visibility continues to improve, leading us to expect strong growth from this sector in 2026. As a validation that our customer-first initiatives are working, I'm pleased that we were recently named HP Enterprise's 2026 Manufacturing Partner of the Year, a meaningful acknowledgment from a strategic customer. In summary -- turning to Slide 13. We are pleased with our first quarter performance and how 2026 is taking shape. The progress we're seeing did not start in Q1. It reflects the work we've put in over the past several years, which gives us the confidence to raise our full-year revenue outlook to 9% to 10%, with operating income and earnings growing faster than revenue, both sequentially and year-over-year throughout the remainder of the year. At the same time, we remain committed to investing in the business with customer satisfaction as our central focus. This includes continued capacity expansion around the world, as well as ongoing investment in our leadership and capabilities. Whether capacity, talent or manufacturing efficiency, these investments share a common objective to deepen customer engagement, accelerate innovation and support the opportunities ahead of us. With that, I'd like to thank our customers, our shareholders and the entire Benchmark team around the world for their continued trust, dedication and execution. Operator, we can now open for questions. Operator: [Operator Instructions] And your first question comes from the line of Max Michaelis with Lake Street Capital Markets. Maxwell Michaelis: Congrats on the quarter as well as the guide. First one for me, kind of want to stick to semi here. With Penang 4 opening up in Q3, can you remind me how much capacity -- excess capacity that will bring online? David Moezidis: Max, we don't discuss kind of how the capacity online is. But what we can tell you is the additional capacity that is coming online is setting us up to serve our customers inside of 2026 and positioning us for further growth in 2027. Maxwell Michaelis: Perfect. And then sticking with semi, I mean, when we think about this strength here going throughout 2026, are you seeing this broad-based strength across your entire customer base? Or is it kind of a onesie-twosie deal? David Moezidis: No, no. This is broad-based. This is definitely broad-based. And we started hearing the signals at Semicon in October, and I shared that information in one of our earlier calls. And those signals started materializing into orders. And now we're up and running, as you could see with our performance. Maxwell Michaelis: And then last one, just with AC&C. You talked about strong momentum with enterprise AI clusters as well as on-prem cloud infrastructure. Any other use cases you can touch on, or maybe potential visibility into future orders that you're in conversations with right now? David Moezidis: Well, what I can say is those are the 2 key drivers, but we're also anticipating as we exit the year and enter 2027, HPC is going to actually start picking up on its own and contributing nicely as well. Operator: And the next question comes from the line of Steven Fox with Fox Advisors. Steven Fox: I had a couple of questions as well. I guess, first of all, I was wondering if you could dial in on the operating leverage you're seeing as per the guidance for Q2. I was wondering, first of all, if there's any sort of unusual headwinds like as you ramp capacity that maybe is limiting that? And as your mix shifts, how do we think about operating leverage as you get into the second half of the year? And then I had a follow-up. Bryan Schumaker: Yes. So if you look at our operating leverage -- Steven, thanks for the question. As we've referenced, I mean, we expect kind of the bottom line to kind of grow to 1.5 to 2.0 is what we're thinking on dropping to the EPS, so as you get throughout the year. Now the current operating margin will be impacted a little bit as we've expanded kind of the overall growth by some variable compensation and a little bit of impact from just other corporate expenses due to some ramp and some other things. But overall, I mean, we feel good about the back half and being able to leverage up on the operating margin as we continue throughout the year. So, you see some of that from Q1, our guide in Q2 and then kind of throughout the remainder of the year, you'll see that coming through. Steven Fox: Great. That's helpful. And then just as a follow-up, David, I mean, you mentioned new programs that you've been working on for years, capabilities, et cetera, in the Semi?Cap space. Can you give us a better sense of like what's coming to fruition now that maybe changes the mix or supports the growth? I'm just trying to get a sense for how some of those efforts are paying off maybe in the next 6 to 12 months. David Moezidis: Yes. I would frame it into 2 areas. One is we're increasing our share of wallet with our existing customers. And two, we're actually winning new share with some new customers, so newer brands, newer logos, if you will. So it's contributing from both fronts. And from our perspective, this is an area that we made investments in over the course of the last several years, and we're starting to see the fruits of those labors. Steven Fox: And if I could just follow up on that real quick. When you talk about some of these wins, like does the product or the services you're providing in the future, is it similar mix to what you would say you've done over the last 2 to 3 years? Or there's any changes on that front? David Moezidis: Yes, Steven. I would say it's very similar for the most part. Now, you'll see products change with regards to the level of complexity, but how we serve our customers in the semiconductor capital equipment space is a combination of our precision technology solutions as it relates to machining and such, as well as electronic, mechatronics, system integration and PCBA assembly. So it's really the total breadth of services that we're able to bring to bear for our customers. Operator: And the next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Congrats on the quarter here. So, I'm just curious, in the Semi Cap, you say you expect sequential growth, but do you expect the second half to be much stronger still or... David Moezidis: Yes. Anja, this is David. We do. And we're looking at -- we don't typically go out and start providing specific sector growth rates, but we decided that for this sector specifically because there's been a lot of questions for us to share with you that we'll be somewhere around the mid-teens from an overall growth in this space. Anja Soderstrom: Okay. And then also for AC&C, how should we think about that? That was very strong for the quarter. And do you expect that to step up? Or is it going to be on the same sort of level as the first quarter? David Moezidis: Yes. I would say, as we continue our ramp, we expect it to continue to improve. Now to what extent, we'll report back at that on that next quarter. Anja Soderstrom: Okay. And then just remind me again for Penang, is that higher margin business? Or is it corporate average? Bryan Schumaker: Yes, Anja. This is Bryan. So yes, it is higher margin. So it's primarily focused on precision technology Semi-Cap. So, that's why it is bringing the higher margin. So just to take that into consideration and then you look at our overall portfolio, you have the growth that we're seeing in the Semi-Cap space and you also have the AC&C, which is the lower end that kind of offset. But yes, as far as PT goes and that expansion, it is on the Semi-Cap, the higher end. Operator: [Operator Instructions] Your next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Sorry, I just had one more. I wanted to squeeze in. Do you see any sort of difficulty in the supply chain or component availability at all? David Moezidis: Yes. Anja, we're starting to see select lead times increasing in pockets. And we're seeing the same challenges as pretty much everybody in the memory space. And really, we're doing our very best to get in front of it and make sure that we manage the supply chain properly. Operator: And we do have a follow-up question coming from the line of Steven Fox with Fox Advisors. Steven Fox: I was just curious, maybe some of this takes a little time to matriculate, but how do you think the conflict in Iran is impacting defense program run rates, maybe not this quarter but over the back half of the year? Is that something we should think about beyond just sort of the secular trends that you're writing? David Moezidis: Yes, Steven. Our view on that is even if you have immediate resolution, defense is going to perhaps remain strong for the next 12, 18 to 24 months as those investments will need to really be there for replenishment purposes. That's probably -- and that's my opinion on that. But from an order perspective and market share and bookings, we continue to see momentum there. We're winning defense programs. And as I shared in my script, we're also winning in space. So, we remain very positive in this sector, and we see it picking back up in 2027. Operator: I'm showing no further questions at this time. I would like to turn it back to Paul Mansky for closing remarks. Paul Mansky: Thank you, operator, and thank you, everyone, for participating in Benchmark's First Quarter 2026 Earnings Call. For updates to upcoming investor conferences and events, including a replay of this call, please refer to the Events section of our IR website at bench.com. With that, thank you again for your support, and we look forward to speaking with you soon. Operator: And this concludes today's conference call. You may now disconnect.
Operator: Hello, and welcome to the Xcel Energy Inc. 2026 First Quarter Earnings Conference Call. My name is Jordan, and I will be your coordinator for today's event. Please note this conference is being recorded. For the duration of the call, your lines will be in a listen-only mode. A question-and-answer session will follow the prepared remarks, and questions will only be taken from institutional investors and analysts. Reporters can contact media relations with inquiries, and individual investors and others can reach out to investor relations. I will now turn the call over to your host today, Mr. Roopesh Aggarwal, vice president, investor relations. Please go ahead, sir. Roopesh Aggarwal: Thank you, Jordan. Good morning, and welcome to Xcel Energy Inc.'s 2026 First Quarter Earnings Call. Joining me today are Bob Frenzel, Chairman, President, and Chief Executive Officer, and Brian Van Abel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer your questions if needed. This morning, we will review our 2026 first quarter results and highlights, provide updated 2026 assumptions, and share recent business and regulatory updates. Slides that accompany today's call are available on our website. Some comments during today's call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and SEC filings. Today, we will discuss certain metrics that are non-GAAP measures. Information on the comparable GAAP measures and reconciliations are included in our earnings release. In 2026, the ALJ for the Prairie Island outage case recommended an additional $4.241 billion disallowance of replacement power cost for power procured in 2024 associated with an extended outage at the plant starting late 2023. As a result, Xcel Energy Inc. recorded a charge of $37 million, or 4¢ per share, in the first quarter. Additionally, in 2026, Xcel Energy Inc. recognized $22 million, or 3¢ per share, due to an increase in estimated insurance proceeds for the Marshall Wildfire litigation. Given the nonrecurring nature of these items, they have been excluded from first quarter ongoing earnings. As a result, our GAAP earnings for 2026 were $0.89 per share, while our ongoing earnings, which exclude these nonrecurring charges, were $0.91 per share. All further references to earnings, drivers, and variances in our discussion today will refer to ongoing earnings. For more information on this, please see the disclosures in our earnings release. I will now turn the call over to Bob. Bob Frenzel: Thank you, Roopesh, and good morning, everybody. At Xcel Energy Inc., our mission is to make energy work better for our customers, helping them thrive. Our past quarter showcased our commitment to this mission through focused execution and delivering on our plans to strengthen and modernize the grid, expand our energy sources, and deploy innovative technologies to ensure that the energy we provide our customers remains reliable, affordable, and safe, both now and well into the future. And on these fronts, we are off to a great start this year. In the first quarter, Xcel Energy Inc. invested over $3 billion in new infrastructure to support our customers' and states' growing energy needs for increased resilience and cleaner energy, and we are on track to deliver our most extensive capital investment plan in the company's history this year. We identified additional transmission and generation needs in our states, delivering on our expectation of incremental investment above our base plan. We announced details of our contract with Google for a new data center in the Upper Midwest that we believe is a model for large load development that benefits customers and communities. We filed that contract with the Minnesota PUC. We continue to use our scale and our balance sheet to ensure that we have the right partnerships with critical suppliers, tier-one EPC firms, and developers to execute on budget, on time, and on scope on our growing portfolio of projects. We delivered strong ongoing earnings of $0.91 per share, and we remain confident in our ability to deliver on our annual investment plans and our earnings guidance for the twenty-second year in a row, one of the best track records in the industry. On our fourth quarter call, we announced progress on our data center pipeline with a signed ESA with a large data center in the Upper Midwest. During the first quarter, we provided further details about this groundbreaking agreement with Google. As demand for electricity accelerates across the country, we believe that utilities have a responsibility to lead with solutions that balance innovation, reliability, sustainability, and affordability. Xcel Energy Inc.'s customers already have some of the lowest energy bills in the country. In fact, when you adjust for inflation, the typical Xcel Energy Inc. residential energy bill is almost 25% lower today than it was ten years ago, and in nominal terms, Xcel Energy Inc. residential electric bills are approximately 30% below the national average. Under a 15-year agreement, Google will cover the entire cost of its service and infrastructure requirements to power its new data center, including 1,900 megawatts of new wind and solar generation and long-duration storage using Form Energy's innovative 100-hour iron-air battery. With credit protections in place, we estimate that this new data center will save customers $1 billion to $1.5 billion over the term of the ESA, helping keep customer bills low long into the future. In addition, and as part of our shared sustainability goals, water needs for the data center will be limited through Google's use of air-cooled technology in lieu of water-cooled. In April, we also reached a definitive nonexclusive agreement on our previously announced MOU with NextEra Energy to co-develop generation, storage, and interconnections to accelerate data center development across our operating companies. We expect this joint development agreement will deliver a balance of company-owned resources and purchase power agreements with NextEra across all forms of generation, including wind, solar, battery storage, and natural gas. We are already underway developing solutions for 2 gigawatts of new data center capacity with plans to expand in the near future. In April, we also filed our large load tariff in Colorado, with proposed terms that are similar in scope to our Google ESA and the Minnesota large load tariff filing. Data centers will commit to a long-term contract, minimum bills, termination fees, credit requirements, and incremental cost tests to ensure that our existing customers are protected from new large load customer needs. In the coming months, we plan to make similar filings in Texas, New Mexico, and Wisconsin. We believe our partnerships with hyperscalers, regulators, communities, and developers set a high bar for responsible large load development. We are partnering to ensure large load growth strengthens our overall system, benefits our local communities, and maintains our states' clean energy goals, and does not increase cost for our existing customers. These collective actions give confidence in our ability to deliver on our forecast to secure 6 gigawatts of data center load by year-end 2027 with in-service dates into the early 2030s. In October, we outlined our plan to meet the growing infrastructure needs of our customers. We detailed a $60 billion base investment plan to continue our energy transition and to make needed investments to strengthen our transmission and distribution systems. At that time, we also expected that our base plan would likely need to be augmented based on anticipated but unapproved transmission and generation needs. Through the first quarter, we now believe we have line of sight to at least $7+ billion of the $10+ billion opportunity that we highlighted last year. This incremental investment includes the 765 kV Crawfish Draw to Phantom transmission line in our SPS company that was allocated by SPP in February; two-thirds, or over 1,200 megawatts, of the generation and storage needed for the Google data center project; and 800 megawatts of generation approved by the Colorado Commission in February and April as part of the near-term procurement portfolio. From here, we continue to see additional infrastructure investment needed to serve our growing customer needs, including active generation RFPs in PSCO, NSP, and SPS; additional regional transmission investments in SPP and MISO; and the generation to support the 3 gigawatts of data center demand that we added to our target plan on the Q4 earnings call. As these opportunities materialize, they will drive additional growth and investment both within and beyond our five-year capital plan. As we continue to add to capital backlog, it is also important to execute on the projects that are in the queue. In the first quarter, Xcel Energy Inc. invested over $3 billion in new infrastructure for our customers. We brought online nearly 500 megawatts of new solar generation and utility-scale battery storage in SPS and in Colorado. In total, these projects will deliver system resiliency and reliability as well as $425 million of tax credit benefits to our customers over the life of the project. Across our entire portfolio of projects, 2026 to 2030, we expect customers will see more than $7 billion in aggregate benefits from PTCs and ITCs associated with various generation and storage projects, helping keep our customer bills among the lowest in the country. With continued growth across our industry, we also recognize that supply chains and qualified labor for generation, transmission, and distribution projects will become more constrained. That is why our recently announced alliances with GE Vernova and NextEra and strategic agreements with tier-one EPC firms across our portfolio of renewable and gas generation, transmission, and distribution projects are critical to delivering on our growing investment pipeline well into the 2030s. Finally, our field teams continue to operate at the highest levels and were recently recognized by EEI with an Emergency Recovery Award for outstanding effort to restore service quickly and safely following severe thunderstorms that came through our Upper Midwest service territory in 2025. And for the seventh year in a row, Xcel Energy Inc. was named a World's Most Ethical Company honoree by Ethisphere, which measures the company's corporate governance, culture of ethics, and environmental and societal impact. As we look forward to the rest of 2026, Xcel Energy Inc. will continue our focus to deliver customers safe, clean, reliable, and affordable energy; execute with excellence on our 2026 $14 billion capital investment plan, our most extensive in the company's history; realize the unprecedented opportunities for growth that we laid out in base and incremental investment plans; secure incremental large customer loads that can benefit all customers and meet this moment in our country's growing demand for energy; reach constructive outcomes on rate cases and resource solicitations; make operational and system hardening investments to protect our communities from the risks of extreme weather; and deliver on our earnings guidance for the twenty-second year in a row. With that, I will turn it over to Brian. Brian Van Abel: Thanks, Bob. Good morning, everyone. Starting with our financial results, Xcel Energy Inc. had ongoing earnings of $0.91 per share in 2026, compared to earnings of $0.84 per share in 2025. The most significant earnings drivers for the quarter include the following. Higher electric revenues due to rate case outcomes, nonfuel riders, and sales growth, partially offset by weather, increased earnings by 23¢ per share. Higher APDC increased earnings by 10¢ per share. Offsetting these positive drivers, higher interest charges and common equity financing decreased earnings by 18¢ per share, reflecting funding of our infrastructure investments and discipline to maintain a strong balance sheet. Higher depreciation and amortization decreased earnings by 5¢ per share, reflecting our capital investment programs. Lower natural gas revenues due to weather, partially offset by rate case outcomes, decreased earnings by 3¢ per share. Turning to weather and sales, Colorado overall experienced its warmest winter on record during the fourth quarter. As a result, impacts from weather to electric and natural gas sales reduced earnings by $0.09 per share. On a weather-adjusted basis, first quarter electric sales increased by 2.8%, driven by continued oil and gas growth in SPS and broader C&I growth across jurisdictions. For 2026, we continue to expect full-year weather-adjusted electric sales to increase 3%. Moving to recent regulatory activity, in our North Dakota electric rate case, the commission approved our previously announced settlement authorizing a $27 million revenue increase. In our South Dakota electric rate case, we reached a constructive black box settlement with staff for a net revenue increase of $26 million. A commission decision is expected in the second quarter. This Tuesday, we received the intervenor testimony in our Colorado electric rate case, which we believe provides a starting point for ongoing settlement discussions over the next month. Late yesterday, we received the ALJ report in our Minnesota electric rate case recommending a 9.8% ROE and a 52.5% equity ratio, with a final commission decision early in the third quarter. In the New Mexico electric rate case, intervenor testimony is due on May 1, and we expect the commission decision in the fourth quarter. As we look to our financing plan, Xcel Energy Inc. continues our commitment to maintain a strong balance sheet upon accretive growth with the balance of equity and debt. In the first quarter, we issued forward contracts over $1 billion of equity from our ATM program. Additionally, we issued an $800 million junior subordinated note at the holding company, which receives 50% equity credit with the rating agencies. This, combined with our unsettled forwards and collared forward contracts from 2025, addresses over half of our $7 billion of equity need in our five-year base plan. We also continue to make strong progress on the 231 of the 304 submitted claims; we have reached settlements with 79 of 107 potential claims presented for mediation by parties represented by attorneys. Finally, 26 of 73 complaints have been settled or dismissed and have reached the statute of limitations for property loss claims. We have updated the low end of our estimated liability to $460 million. We have committed $397 million in settlement agreements, including agreements with the subrogated insurance plaintiffs and the three largest claims by acreage. In total, we have $525 million of insurance coverage. Moving to guidance, we are reaffirming our 2026 ongoing EPS guidance range of $4.04 to $4.16 per share. We remain confident in our ability to deliver 6% to 8%+ long-term earnings growth and expect to deliver 9% EPS growth on average through 2030. Updates to key assumptions are included in our slides and earnings release. With that, I will wrap up with a quick summary. Xcel Energy Inc. posted strong ongoing first quarter 2026 earnings of $0.91 per share. We continue to lead a clean energy transition, ensuring safe, clean, and reliable service and keeping customer bills as low as possible. We have line of sight to $7+ billion of opportunities in our incremental $10+ billion investment plan. We have announced details of our data center agreement with Google, which we believe is a model for driving large load growth while protecting and throwing benefits to our other customers and communities. We partnered with multiple tier-one EPC firms, critical suppliers, and developers to ensure we have the resources needed to execute on a growing portfolio of investment opportunities on budget, on time, and on scope. We continue to work to reach constructive outcomes, including settlements in our active rate cases. We maintain a strong balance sheet and credit metrics and have addressed over half of our $7 billion five-year base equity need. We are reaffirming our 2026 ongoing EPS guidance of $4.04 to $4.16 per share. Finally, we remain confident in our ability to deliver 6% to 8%+ long-term earnings growth and expect to deliver 9% EPS growth on average through 2030. We will now open the call for questions. Operator: It is now the question-and-answer session. If you would like to ask a question, please press star then 1 on your telephone keypad. Your first question comes from the line of Richard Sunderland from Truist Securities. Your line is live. Analyst: Hey. Good morning, everyone. Bob Frenzel: Good morning. Analyst: Thank you. Starting with some of the regulatory progress this week, I guess Colorado with the intervenor testimony. Could you expand a little bit more on the sort of settlement potential over the next month that you referenced in the script, and any other takeaways you would highlight there? Then similarly on Minnesota with the ALJ recommendation, any other thoughts you could offer would be helpful. Thank you. Bob Frenzel: Absolutely, and good morning. I would start with Colorado Electric and take a step back from a macro view. We have the lowest bills in the country in Colorado, about 1% share of wallet. We have one of the fastest transitioning clean energy systems and generation fleets in the country, so we are achieving state policy, and we hope that is recognized by our policymakers. On the rate case, the intervenor direct testimony is relatively consistent with what we saw in the last case. In our last case in Colorado, we had a near-unanimous settlement, and we have settled three of the past four electric cases. We think we have a decent starting point. The procedural schedule shows the settlement deadline on May 28, so we will start settlement discussions and look forward to working with the parties early in May. Hopefully, we can reach a constructive settlement like we have in the last few rate cases. On the Minnesota side, we received the Minnesota ALJ report late yesterday after we had already shipped off our earnings release, so it is not referenced there. You will see details in our 10-Q that we file later today. We think it is generally a balanced overall recommendation. It is constructive to see a 9.8% ROE and a 52.5% equity ratio. We are digesting a few of the other trackers and pieces in it, but overall we think it is a constructive recommendation. Procedurally, we will see MPUC deliberations in June and then an MPUC order in July. We are working through a lot of rate cases and looking to reach constructive outcomes this year to deliver for both our customers and our shareholders. Analyst: Great, thanks for running through all of that. Turning to some of the data center activity, you had a lot of commentary around the Google agreement and the landmark effort there. On Slide 14, the 4 gigawatts contracted by year-end 2027—what are the gating factors to signing? The $6 billion to $8 billion incremental CapEx framework you called out elsewhere in the deck, is that applicable there? Any highlights on the financing side of those advances as well—any unique ways to finance that? Bob Frenzel: Let me kick it off, and then I will ask Brian to weigh in. Not surprisingly, yesterday's hyperscaler announcements continue to show high interest in data center development, and we are seeing a lot of interest across all eight of our states in terms of activity and backlog. At the top of the slide you mentioned is a 20 gigawatt backlog, and that continues to be greater than 20 gigawatts; the interest level continues to grow in our service territories. We have a gigawatt either built or through construction and another one that we are in front of the commissions with approvals on, particularly the Google transaction. As we said in our fourth quarter call, we expect to execute on enough ESAs this year to get to a 3 gigawatt target, and another 3 gigawatts next year. We are actively engaged with our customers. These are long and deliberate discussions to make sure that we can reach innovative and constructive outcomes like we did with Google. I think we have proven we can do competitive, highly renewable, low-carbon data center development in our regions. We have the most links in our company in the Upper Midwest, and that has been a focus area for us and a focus area with our JDA with NextEra. With the large load tariff filing in Colorado and the ability it allows us to bring generation, transmission, and the load together in a package to the Colorado commission—and we have those capabilities as well through both SPP and SPS processes in Texas and New Mexico—we do expect to file a large load tariff in Texas as well this year to help expedite that, but it does not preclude us from coming forward with contracts in the near term. We are active on the engagement front with all the hyperscalers and large data center developers. There is a lot of interest in the footprint that our company provides in terms of high penetrations of low-cost renewables that our existing customers have benefited from and we think these large load customers can benefit from as well. Brian Van Abel: Just a couple of things to make sure we get all parts of your question. You referenced the $6 billion to $8 billion number. That is something we have had in our slides before for what we view as the incremental investment opportunity to serve every gigawatt of data center. If you look at Google being a model, it is served with a lot of renewables and long-duration storage—very different than if you are serving it with just a CCGT. Moving forward our clean energy policies and priorities and meeting our state objectives gives us a really good investment opportunity in how we are going to serve these. On the slide about our $10+ billion investment pipeline, we talk about 10 to 12 gigawatts of RFPs in flight and the 3 additional gigawatts of data centers we expect to contract. Those 3 gigawatts of data centers will drive another 6 to 10 gigawatts of generation that we need. So it is a huge long-term opportunity to fill in the back end of this five-year plan and deliver transparency and growth visibility into the early 2030s. It is not only about filling in our investment pipeline here in the back half of this decade but really driving the investment pipeline in the early 2030s. We also have to mention the customer affordability opportunity this drives—we can bring forth the clean energy opportunity with the resources advantage we have in the middle of the country paired with the affordability benefits for our current customers. We are super excited about this opportunity. Bob Frenzel: You asked about alternative financing. We are certainly looking at all those alternative financings just like our peers are. Right now, our base plan to beat is how we have talked about it—funding incremental CapEx with incremental equity of roughly 40%. We are already ahead—one quarter into our five-year plan, and we have 50% of our equity taken down for our base five-year plan. We are staying ahead of it and will continue to deliver growth, happy to fund accretive growth with equity, and maintain that strong balance sheet because it is really important as you go through this cycle of long-term extended growth. Analyst: I appreciate the comprehensive response. Thank you. Operator: Your next question comes from the line of Nicholas Campanella from Barclays. Your line is live. Nicholas Joseph Campanella: Hey. Good morning. Thanks for taking my questions. Bob Frenzel: Morning, Nick. Nicholas Joseph Campanella: I appreciate all the regulatory follow-up. You have line of sight now to the $7 billion of incremental versus, I think, $10 billion of upside. Could you give us some clarity on the shaping of that spend and, as you roll forward the plan to 2031, how much of that is going to get encapsulated? Brian Van Abel: Hey, Nick. Good morning. On that slide—Slide 8 in our earnings deck—we highlight the different pieces of that $7+ billion. Think of the 765 kV transmission line in SPS; the goal is in-service by 2031, so a lot of that will be in our current five-year plan, using the back part of that five-year plan. The Colorado generation—800 megawatts, some gas and 600 megawatts of wind—again should be in service by around 2030, particularly the wind where the goal is to capture the production tax credits. We have not specified the in-service dates on the assets to serve Google; that is not public. If it is wind and solar, the goal is to get those in to capture the tax credits to ensure low-cost renewables, and long-duration storage has a longer potential runway in terms of tax credits. We always provide our comprehensive update in Q3, but that is a good way to think about how this rolls into the front five years with a little bit flowing into the early 2030s. Nicholas Joseph Campanella: Great. As you get to the back end of that plan, the large loads are going to be ramping, hopefully. At what point would you revisit the 40% equity financing assumption? Secondly, any thoughts on defending the Baa1 outlook with Moody's? Brian Van Abel: Longer term, it is important to maintain a strong balance sheet and good credit metrics. We understand where we are with Moody’s. Over the long term, we think about that 17% CFO-to-debt type of metric. In a large build cycle, it gets pressured a little bit, but it is important to maintain a strong balance sheet over the long term. In terms of the equity financing, that has generally been our rule of thumb. Every time we roll forward a new five-year plan, depending on cash generation, project timing, and tax benefits, we incorporate all that. So 40% is a rule of thumb, and we will continue to be consistent with what maintains our metrics. We think in this type of build cycle and capital investment, with volatility in the market, it is important to have a good balance sheet to weather through things. Nicholas Joseph Campanella: One more we were curious on is the MISO capacity print. It came down a little bit earlier this past week. Do you see that as a tailwind at all to the territories you operate in? As you think about capacity planning while you are doing data center development, how is that maybe changing thoughts there? Bob Frenzel: One of the interesting things about the MISO market and the capacity auction itself is it has been much more volatile and less predictable than some other regions given the large bilateral nature of MISO. The print itself is not something we look at in the near term because we have a bit of length in the Upper Midwest and have been able to sell into that market. Over time, it is not the signal that we use to drive new capacity additions and new load forecasting. So, relatively uninteresting in the short term for the MISO capacity auction. Our long-term forecast is in partnership with MISO—where we see asset additions, asset reductions, and load growth—which still leads to a really exciting region and an area that data centers definitely want to be energized by. Not much to the auction itself. Operator: Next question comes from the line of Julien Dumoulin-Smith from Jefferies. Your line is live. Julien Patrick Dumoulin-Smith: Hey. Good morning, team. Thank you very much. Let me nitpick on a few things you have already said. On Colorado intervenor testimony, hearing some decent confidence on settlement—you never say it is done till it is done—but how do you think about the prior guidance of 50 to 60 basis points of lag here? Is that attainable? What are the permutations? Also, given in parallel the comprehensive capital riders now available, how do you think about the future cadence of cases and trying to establish a longer duration here? Brian Van Abel: Good morning. Certainly, if we can reach a constructive settlement, the prior guidance remains intact. If you look at where staff and UCA are—about a 9.0% midpoint ROE for staff and 9.2% for UCA—it is a decent starting point for settlement negotiations. Our equity ratios are important in Colorado; overall it is really important to maintain credit quality in Colorado, so that equity ratio is a significant point. We have a good history and track record of settling on the electric side. On the riders and opportunity, there is an opportunity to have a longer-term path to not filing rate cases maybe every year as we have been. It depends on a constructive settlement here on the electric case to set that base framework. We look forward to engaging the parties over the next month to see if we can reach something constructive. Julien Patrick Dumoulin-Smith: Going back to the data center large load—what is the geographic footprint you are contemplating for incremental announcements? Different states have different tax regimes. You alluded to Texas filing something. How might that geography be proportioned relative to your others, and how might that impact the Colorado comments? Also, on the NextEra partnership, you throw 2 gigawatts out in that pipeline. Is that separate and distinct from the 3 gigawatts by 2027, and help tie the numbers out? Bob Frenzel: We started with generation length and transmission capabilities, and that has led people to be most interested in the Upper Midwest—the Minnesota, Wisconsin, and Dakotas—where we have more length in the near term. In the longer term, we are working on a large load tariff in Colorado. There is active legislation in Colorado around making Colorado a place with a framework to attract data centers. In the Southwest, Texas and New Mexico are hugely popular given the price of electricity and general attractiveness. When we talk to the large hyperscalers and developers, they like working with us because we have multiple regions of the country, and we can deliver solutions in different parts of the country that help them meet portfolio needs across a large swath of the United States. On the high-probability pipeline, we expect 4 more gigawatts to be contracted by 2027. That is inclusive of the 2 gigawatts we referenced with NextEra, and the NextEra partnership could be larger than that. We are actively engaged in two; it could be bigger to serve all four, and we are working on that. Julien Patrick Dumoulin-Smith: Inasmuch as nitpicking on cost, starting the year out well—any updates on Sherco and timeline there? Bob Frenzel: Yes, our plans are to continue to retire Sherco at the end of this year, and we have both the transmission and generation needed to serve that interconnection on a go-forward basis in the Upper Midwest as part of our long-term resource plan. Those plans are still intact, and we have not heard anything that would lead us to do anything differently at this point. Julien Patrick Dumoulin-Smith: Awesome. Best of luck. You have a lot cooking. We will talk soon. Bob Frenzel: Thanks, Julien. Operator: Your next question comes from the line of Carly Davenport from Goldman Sachs. Your line is live. Carly S. Davenport: Good morning. Maybe just a couple quick ones on Colorado. First, I think the PUC sunset bill came out of committee last week. What are your latest views on some of the provisions around securitization and potential changes like expanding the size of the PUC, and your thoughts around that? Bob Frenzel: You are accurate. Each of the agencies in the state undergoes sunset review; the PUC was up this year, usually on a seven- to ten-year cycle. The goal is to look at the effectiveness and efficiency of the agency and the necessity of the functions for the future of the state. One of the provisions in the legislation was the expansion of the use of securitization as a tool. We have been thoughtful in proposing securitization in cases where it makes a lot of sense. We have permission to securitize the remaining balance of Comanche 3 when that plant retires at 2030. We have looked at securitization for portions of our wildfire investment in the state. We proposed—and did not execute—on securitization around fuel costs, particularly around Winter Storm Uri. It is a good tool to have in the tool chest. We want to make sure it is used for the right things as we go forward. We are very engaged in the legislation as drafted; there is a little bit of time between now and the end of session. We continue to talk with all parties about how to bring efficiency and effectiveness to the state—whether it is speed of filings or decision-making on resource plans. There is a lot we think we can do in this era of energy growth to partner with the PUC as we move forward, working with all stakeholders. Carly S. Davenport: As we move more into the core of wildfire season in Colorado over the next couple of months, can you talk about expectations going in based on current weather forecasts and the mild winter you had in Colorado? Also touch on some of the risk reduction work you have done in the last couple of years to get ahead of that risk. Bob Frenzel: Thank you. I appreciate you recognizing all the great work the team has done over the last number of years. It goes in a number of buckets. We talk about situational awareness and our ability to understand weather patterns and take action on them more discreetly and accurately, with less customer impact—it has really grown over the last [inaudible]. Situational awareness is higher than it was [inaudible]. Public safety power shutoffs are, in limited cases, [inaudible]. They are modestly grown in our ability to [inaudible] and make it safe or cover the back end as best we can. Underneath situational awareness, [inaudible] hardened assets in fire-prone areas as sufficiently volatile weather might see it as we go forward. Communications to our customers, our new outage management systems, new customer notification systems, and more engagement on the community side have all improved. We are in a low snowpack in Colorado this year and drier conditions. We think with all the things we have done on the operational side, the situational awareness side, and the community engagement side, it is going to lead us to have a high-performing summer in Colorado. Carly S. Davenport: Great. Thank you for all that color. Operator: Your next question comes from the line of Jeremy Tonet from JPMorgan. Your line is live. Jeremy Bryan Tonet: Hi. Good morning. Bob Frenzel: Hey, Jeremy. Jeremy Bryan Tonet: Coming back to the Google agreement—if Google is willing to pay for newer technologies like Form, do you see this as a trend? Are you seeing these threads in your other conversations at this point as far as appetite? Bob Frenzel: Great question. We think about aligning with state policies and how we move this forward. One example is in Colorado, where an advanced geothermal bill is moving through the legislature. That could be another place where a hyperscaler could help fund an advanced geothermal project in Colorado, given the state's focus on the clean energy transition. This is a great blueprint as we think about longer-term opportunities not only in Minnesota but other parts of our service territory. New technology is generally more expensive; it takes investment to commercialize. This is a great model to align the data center and hyperscaler opportunity with our state policy objectives. I will add that these large customers are committed to the long-term sustainability of their own product. They are highly interested in our regions of the country where the wind blows and the sun shines, and we can deliver both renewable energy and innovative technologies. We have seen real receptivity at our commission levels to do that, particularly when it is protecting existing customers. We will continue to be innovative and sustainable, and we are working with a customer set that is aligned with us. Jeremy Bryan Tonet: Maybe taking a step back on your ability to win more data center load—you kind of stand out versus others. What are the key offerings—market-by-market or the type of solutions? What is key to the rate of wins you have posted? Bob Frenzel: The diversity of our company and regions, the ability to deliver various fuel sources and deliver speed to power to these customers, are really important. Speed is very important to these folks today, and sustainability is going to be very important to them as we roll through time. For example, how we handled the water situation—even in the land of 10,000 lakes in Minnesota, water is a key topic. The ability for us to partner with a large data center owner and come up with an innovative, creative air-cooled versus water-cooled solution can be a template for development going forward. We are talking with all the hyperscalers and data center developers. Depending on their customer mix and perspectives, they will find value across the portfolio of states we serve, and we are here to meet that moment. Brian Van Abel: On the execution side, if we are going to deliver a portfolio of clean energy resources, that takes a development team and scale. In our base plan, we have 10 gigawatts of generation and storage, 7 gigawatts of which are renewables. It takes a platform—our partnerships on the EPC and OEM side matter—because another gigawatt this year and three more next year take a significant pipeline of clean energy resources to execute. The hyperscalers have confidence in what we are doing and our track record delivering renewable projects, which is really important. Jeremy Bryan Tonet: Understood, very helpful. One quick last one—recognize this is premature—but seeing the ALJ just now, any thoughts on prospects for settling given this very early time of review? Brian Van Abel: On the Minnesota electric side, generally the most likely time to settle is leading into hearings, and we have had the hearings. We would be willing to discuss settlement, but the impetus is usually before hearings. We look forward to MPUC deliberations in June and seeing the order in July. Operator: Your next question comes from the line of Ross Fowler from Bank of America. Your line is live. Analyst: Morning, Bob. Morning, Brian. How are you? Brian Van Abel: Doing great, Ross. Thanks. Analyst: On the JDA with NextEra, do you see potential to expand that beyond 2 gigawatts? How are you thinking about expanding that? Bob Frenzel: The JDA itself is unbounded as far as I am concerned. We partnered with a national development platform to pair nicely with our very strong strength in generation and transmission development. We did this for speed to power, to expand the pie, and to deliver on this moment of the country's needs. It could be the partnership we go through for all of our generation needs for large loads. It is not exclusive; we can still have great relationships with other generation developers and data center developers. There is no limit on it. Analyst: We are all focused on growth, but what about the layer of execution risk behind that? You have the GE Vernova strategic alliance—on those five natural gas turbines, is that just in the queue or priced? Then generally, can you point to some things since you have a different execution risk profile than most? Bob Frenzel: We have 24 gas turbines through Siemens and General Electric that are slotted and in various stages of production and delivery over the next five years. I feel very comfortable with access to gas turbines and the ability to meet our base and upside cases. With respect to risk profile, we sit in a great spot. We are excited about where we sit with our key vendors and suppliers—GE Vernova being one, NextEra being another. We have negotiated and framework agreements with both EPC vendors and equipment vendors across transmission, distribution, and gas businesses. We have wind turbines available, solar, breakers, high-voltage transformers—a lot of equipment—and access to people through our partnerships. We feel very confident in our ability to meet our base and upside capital plans. Brian Van Abel: That is why you see the slide on base generation we are executing over the next five years. EPCs and OEMs see that we have a long pipeline—scale matters—and that is how we get partnerships with tier-ones. These are long-term partnerships; moving from site to site to drive crew efficiencies avoids mobilization and demobilization costs. There are a lot of efficiencies we can drive—ordering multiple gigawatts of CTs or wind turbines. Huge benefits of scale help de-risk execution and make us competitive in RFPs to deliver the most competitive projects for the benefit of our customers. Analyst: Definitely meant to be complimentary. Have a great day, guys. Thank you. Operator: Your next question comes from the line of Steve Fleishman from Wolfe Research. Your line is live. Steven Isaac Fleishman: Hey. Good morning. On Slide 8—the famous Slide 8—can you spend a quick minute on the non–check mark items and when we will have visibility on them? Also, how much of the CapEx would show up by 2030 on some of those? Brian Van Abel: Happy to take that. Nearest term is the SPS RFP. We received bids in January and are going through the evaluation. We will make a filing with the New Mexico Commission later in Q2. That is 1,500 to 3,000 megawatts nameplate capacity, a lot of renewables as part of meeting New Mexico renewable energy standards. I expect renewables related to that would come in prior to 2030—good opportunity to filter into the back part of our five-year plan. The NSP RFP—we recently received bids, are working through the evaluation, and will file with the Minnesota Commission later this year. That accelerates resource acquisition to secure renewables and capture tax credits—looking at 4,000+ megawatts of renewable generation and storage by 2030, which would also filter into our base five-year plan. In Colorado, we are working through the JTS and will file an RFP later this year. That will play out into next year; for renewables, the goal will be to get them in by 2030, but there is likely some baseload and thermal generation that could slip into the early 2030s depending on when we need the resources. On the 765 kV transmission lines in SPP, that is a competitive bid we will submit later this year; we likely will not get a decision until next year. On data centers, we will execute on 1 gigawatt this year, and the 3 gigawatts would be a significant opportunity next year; it depends on the resource mix. I view that as how we deliver longer-term growth visibility post-2030. We have great line of sight into 2030 and the early 2030s; we want to continue to extend that and give shareholders visibility into executing our long-term growth objectives. Steven Isaac Fleishman: Quick follow-up on the NSP and SPS renewables RFPs—do you expect most of that to be company-owned or some PPAs? Brian Van Abel: It is a balance. We have not disclosed details. Publicly we guide to 50/50. We have done better in some RFPs—in the last SPS RFP we did north of 75%. In Minnesota we have opportunities to reuse transmission interconnections. Our goal is to bring competitive projects for the benefit of our customers. We guide to 50/50 and aim to do better because we think we have really competitive projects. Operator: Your next question comes from the line of Sophie Karp from KeyBanc. Your line is live. Sophie Ksenia Karp: Hi. Good morning, and congrats on a good update here. Is there a way for you to quantify customer benefits from incremental data center load as it materializes like some of your peers are doing? Thinking through potential community relations issues—could it be helpful to show that benefit more directly? Is it possible? Bob Frenzel: It is a great question. On the Google data center—close to a gigawatt—it led to $1 billion to $1.5 billion of customer savings. That translates to about 1% to 2% residential electric customer net benefit. That is probably not a bad rule of thumb, but we have not given guidance on that. A lot of the benefit comes from sharing the fixed costs of the grid, especially transmission investment, where adding large load shares costs more broadly among more megawatt-hours. In particular, the addition of 1,900 megawatts of wind, solar, and storage is beneficial as we think about dispatch priority in the Upper Midwest—a knock-on effect beneficial for our customers. The carbon neutrality is also beneficial. We have not given firm guidance; it is probably in that zip code, and we can work on something like that in the future. Sophie Ksenia Karp: Thank you. That is all for me. Appreciate it. Operator: Our next question will come from the line of Anthony Crowdell from Mizuho Securities. Your line is live. Anthony Crowdell: Hey. Thanks for squeezing me in, guys. Two quick ones. You have been very aggressive in doing, I guess, 50% of your equity over five years just in the first quarter. Any cadence on the remaining half? Are you looking to take care of it all in 2026? Any color? Brian Van Abel: Generally, we do not give specific timing on equity issuances. We have been very proactive. The forward component in the ATM will be pushed out a couple of years, giving flexibility in when you issue and when you actually draw down the equity proceeds. That helps time with capital investment needs. We will continue to be proactive and get out ahead. We are pretty proud of having half of our equity need locked down one quarter into a five-year plan—three months into a sixty-month plan. Anthony Crowdell: Quickly on Smokehouse Creek—you give a lot of detail on the slide, appreciate it. You are still under the insurance cap—I think $525 million. You have been aggressive on working through settlements. Any color on resolving all of it, or out of the 107 potential claims, any color? Brian Van Abel: The statute of limitations on property claims hit the two-year mark in February. Those that have come in—we are early in the process, but our goal is to work expeditiously through them like we have through our settlement process. We have been very successful with over 300+ claims and lawsuits settled. We have a low-end accrual of $460 million and finalized settlements of approximately $400 million. It is really that $60 million delta that is the low-end estimate. We will continue to provide updates quarterly, and we feel really good about what we have done so far. Anthony Crowdell: Thanks so much. Congrats on a good quarter. Operator: Our final question will come from the line of Steven D’Ambrisi from RBC Capital Markets. Your line is live. Steven D’Ambrisi: Hey, Bob and Brian. Thanks for fitting me in. Hopefully, I can bring it home strong. Quickly, what do you think large loads do for earned returns or structural under-earning that you have in any of your jurisdictions as they come online? You have a 9% EPS CAGR, but rate base growth is very front-end loaded and the capital plan is back-end loaded, and we have talked about adding incremental capital to the plan mostly in the tail. How does the shape of earned returns look as you see rate base growth accelerating? Brian Van Abel: On earned returns, we have talked about closing the gap, particularly in Colorado, where we are working through things and have filed rate cases that go in effect next year in terms of full annualization. Structurally, there is 50+ basis points of structural lag; we will continue to work on that. On data centers and overall sales growth—whether it is oil and gas growth in SPS or diversified growth—we have an opportunity to drive better returns between rate cases or stay out of rate cases longer term as sales growth materializes. That is a great long-term opportunity—not only bringing affordability benefits with data center loads, but also helping stay out of rate cases over the long term. It will take a while for data centers to ramp late in this period, but it is a great long-term opportunity on both affordability and driving earned returns. Steven D’Ambrisi: Appreciate it, guys. Thanks very much. Operator: That concludes the question-and-answer session. I will now turn the call over to Brian Van Abel for closing remarks. Brian Van Abel: Thank you all for participating in our earnings call this morning. Please contact our investor relations team with any follow-up questions. Have a great day. Operator: That concludes today's meeting. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the California Water Service Group first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I will now turn the conference over to James Lynch, Senior Vice President. You may begin. Thank you, Demi. James Lynch: Welcome everyone to our first quarter 2026 results call for California Water Service Group. With me today is Martin A. Kropelnicki, our chairman and CEO, and Greg Milleman, our vice president of rates and regulatory affairs. Replay dial-in information for the call can be found in our quarterly results earnings release, which was issued earlier today. The call replay will be available until 06/29/2026. As a reminder, before we begin, the company has a slide deck to accompany today’s earnings call. The slide deck was furnished with an 8-K and is also available on the company’s website at calwatergroup.com. Before looking at our first quarter 2026 results, I would like to cover forward-looking statements. During our call, we may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company’s current expectations. As a result, we strongly advise all current shareholders and interested parties to carefully read the company’s disclosures on risks and uncertainties found in our Form 10, Forms 10-Q, press releases, and other reports filed with the Securities and Exchange Commission. And now, I will turn the call over to Martin A. Kropelnicki. Martin A. Kropelnicki: Thanks, Jim. Good morning, everyone, and thank you for joining us this morning to review our first quarter 2026. There are six primary areas that we want to talk about today. The first one being, obviously, the quarter, and I would say Q1 results were in line with our expectations given the fact we had a delayed 2024 general rate case. To remind everyone, in March we did get a proposed decision and there is a comment period that follows that proposed decision, which is 30 days. Our comments were filed, and then yesterday we received what is called a revised proposed decision that I have asked Greg to talk about a little bit more in detail later in our discussion today. I will generally say that the revised proposed decision we are very happy with, and we are on the docket day for approval at the California Public Utilities Commission. In terms of the quarter, again, the delay of the rate case meant there were items we could not book because of the delay. But given where we are, results were in line with expectations. I think the highlight of the quarter is the fact that our infrastructure investment for the first quarter was up 17%, and we continue to make good progress on our PFAS treatment and cost recovery from the polluters who polluted the grounds and the waters that we treat. On the business development side, there are two areas. We are focused on the Nexus acquisition deal, as well as we filed our change of control in Texas to advance our purchasing of a minority interest in BVRT, which is the Texas partnership that we have been involved in for the last five years. Yesterday, at our Board of Directors meeting, our board declared a 325th consecutive quarterly dividend, and that follows, of course, the 59th annual dividend increase that we had in January. Additionally, as I mentioned on our year-end earnings call, we have officially kicked off our centennial year of operations, which means we have been going out to the regions that we operate doing employee and customer celebrations, which has gotten off to a very good start. I will talk a little bit more about that later today. Before I get into some of the details in these six subject areas, I am going to turn it over to Jim to go through the financial results. Jim, I am going to hand it off to you, please. James Lynch: Alright. Thanks, Marty. As Marty mentioned, the proposed decision on our California 2024 general rate case is expected later this afternoon. Having said that, our first quarter results do not include the impact of the revenue requirement or any of the other provisions included in the revised proposed decision. Recall that the company does have an interim rates memorandum account and that does authorize us to retroactively apply the decision back to January 1 once it is finalized. So we are not losing out on any of the potential benefit from the rate case for the time that decision has been delayed. In 2026, revenue was $214.6 million compared to $204 million in 2025. Net income for the quarter was $4 million, or $0.07 per diluted share, compared to the prior year first quarter of $13.3 million, or $0.22 per diluted share. Moving to slide six, you can see the impact of activity during the quarter. The primary earnings drivers were rate increases, which added $0.11 per diluted share, and accrued and unbilled revenue, which added $0.06 per diluted share. The accrued and unbilled revenue increase was due primarily to warm and dry weather during the last month of the quarter. The revenue increases were partially offset by an overall decrease in consumption for the quarter, increased depreciation and interest expense related to new capital investments, and an increase in the effective income tax rate due to a reduction in tax credits, which, when combined with other items, reduced EPS by about $0.32 per diluted share. Turning to slide seven, we continue to make significant investments in our water infrastructure to ensure the delivery of safe and reliable water. As Marty mentioned, our capital investments for the quarter were up 17.6% to $129.5 million. Our total planned capital investments for 2026 are $627 million, and this reflects the amounts included in the revised proposed 2024 California rate case decision. It also includes our estimated expenditures in the other states. The constructive impact our capital investment program is having on regulated rate base is presented on slide eight. If approved as requested, the 2024 California GRC and Infrastructure Improvement Plan, coupled with planned PFAS investments and capital investments in our utilities in the other states, would result in a compounded annual rate base growth of over 11%. Moving to slide nine, we continue to maintain a strong liquidity profile to execute our capital plan. We continue to pursue tuck-in M&A opportunities as we progress on the acquisitions of Nevada, Oregon, and VBRT. As of 03/31/2026, we had $58.1 million in unrestricted cash and $45.6 million in restricted cash, along with approximately $470 million available on our bank lines of credit. We maintain credit facilities totaling $600 million that are expandable to $800 million, with maturities that extend into March 2028. We also have over $340 million remaining on the shelf we filed in connection with our ATM program, after completing approximately $6.1 million of program sales during the first quarter. Importantly, both Group and Cal Water maintained strong credit ratings of A+ stable from S&P Global, underscoring the strength of our balance sheet. Turning to slide 10, we just declared our 325th consecutive quarterly dividend of $0.335 per share. We also announced our 2026 annual dividend of $1.34 per share. This is our 59th consecutive annual increase and is 8.1% higher than 2025. And with that, I will now turn the call over to Greg to discuss the revised proposed decision on our rate case. Greg Milleman: As Marty mentioned earlier, we received a revised proposed decision on our 2024 California general rate case yesterday, and a final decision is expected later today or shortly thereafter. The revised proposed decision provides clear visibility into revenue growth, including approximately $91 million in 2026, followed by $43 million in 2027, and $49 million in 2028. Importantly, it continues key regulatory mechanisms like the Monterey-style RAM, and authorizes cost balancing accounts such as our pension cost balancing account, health care cost balancing account, and a new general insurance liability balancing account, which help stabilize earnings despite variability in customer usage and certain operating costs. While decoupling was not included, the decision introduces a new sales reconciliation mechanism and an updated rate design that better support fixed cost recovery. Overall, we view the revised proposed decision as constructive and supportive of continued infrastructure investment and long-term earnings stability. And now Marty will take us through the remainder of the deck. Martin A. Kropelnicki: Thanks, Greg. Just echoing what I said early on, I am very happy with the PD that is going to the Commission today for approval. When it is approved, we will issue an appropriate press release and related 8-Ks with more of the details of what is included in that final decision. I think it is fair to say from Greg’s perspective managing our rates department and Jim’s perspective as our CFO, we are very happy with the outcome and look forward to getting the rate case wrapped up and moving on with our plans for 2026. Moving on to slide 12, just a quick update on where we are with our Nexus project. As you may recall, we announced that we reached an agreement with Nexus to acquire their Nevada and Oregon operations. We have continued to progress very well working with Nexus. They are a great company to work with. We did file our change of control applications with both the State of Oregon and the State of Nevada. The State of Nevada has a six-month statutory decision timeline. Oregon does not. We are hoping the two will stay on track around the same time, and we could drive to close these transactions as early as by the end of the year. In the interim, the subject matter experts continue to work very well together, and we are mapping their processes into our systems. I have also had the pleasure of visiting all the sites in Oregon and Nevada and am very happy to say I was very pleased with all the employees that I met with. They are very professional and very sound operators, as well as an outstanding management team. In addition, since we last talked, I have had meetings with all the commissioners in the State of Oregon as well as the commissioners in the State of Nevada and their staffs. Those meetings have all gone well. When we conclude this acquisition of the Nexus assets, essentially, it will give us almost 100 thousand connections outside of the State of California in total, which is about 20% of our total connections, again diversifying out of California and expanding our footprint on the West Coast. In addition, and I think this is significant and we do not talk a whole lot about it, for those of you that have been with us for a long time, if you remember in 2008 and 2009, we started talking more about water and the wastewater business and recycled water. Back then, we really had one to two wastewater treatment plants that we operated. When we get this deal closed with Nexus as well as BVRT final buyout of the minority interest, we will have over 24 wastewater plants that we will be operating in the western half of the U.S. I think that shows our diversification out of California into wastewater and water, which I believe will play a very important role for water in the western half of the United States. Looking at slide 13, on the BVRT slide, we did file the change of control application with the Texas Commission. That is on file with them. In addition, we added another 210 connections to our existing system. We are waiting for the Texas Commission there as well, and then we will close on the minority interest that still remains in GVRT, and then that will become a wholly owned subsidiary of Texas Water Service Company. Moving on to slide 14, we have started officially celebrating our centennial anniversary. I would encourage everyone to take a look at our annual report. Our corporate communications team headed by Shannon Dean did an outstanding job going through “then, now, and next,” which is the theme of the annual report. I am also very happy that we have had over 41 thousand people visit our centennial website, which has a lot of information about the company, the rich history of the company, and how we grew from the idea that started with three World War I veterans to being a multibillion-dollar company that we are today. If you are interested in that site, I encourage you to look at it at 100years.lwatergroup.com. In celebrating our 100-year anniversary, we have scheduled a number of events throughout the State of California that include both employees as well as local officials. We held our first one in Bakersfield. That was a big success. We will have another one in Southern California in June. The overall goal of the program in celebrating this at a regional level is it allows us to increase awareness of the company’s track record among our local communities and our public officials that we are allowed to serve. In addition to getting people together to celebrate our success, we also are getting a lot of proclamations and resolutions, for example, from the Speaker of the California State Assembly, the City of Visalia, the City of Chico Chamber of Commerce, the Central Valley Asian Chamber of Commerce, and the San Joaquin Hispanic Chamber of Commerce, and there is more to come. It is fun to be out there talking about 100 years of service and reflecting on where we started to where we are today. We will now open the call for questions. Yami, let us open it up for our Q&A, please, for the guests on the call. Operator: Thank you. You will need to press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of an Analyst with Baird. Your line is open. Analyst: Hey, good morning, Jim, Greg. Good morning, guys. Thank you so much for the time, and I appreciate all the information here. Two questions for me, maybe a PFAS question and then a balance sheet question. I will start with the EPA talking recently about microplastics and potentially regulating some other substances outside the initial PFAS guidelines. Do you have any early thoughts on this, and specifically, might these be treatable within your current plans, or would this require further capital investment beyond what you have already laid out? Martin A. Kropelnicki: Good question, David. Some of you have heard me talk about UCMR, which is the Unregulated Contaminant Monitoring Rule list that the EPA publishes, and they update that list every so many years. If you really want to see what is coming down the pipe—no pun intended—on water regulation, you want to monitor that UCMR list, and microplastics have shown up and evolved on that list. It is certainly a hotter topic at the EPA right now, and it is something that is in water supply. You will likely see regulations established and an MCL to make sure there are no microplastics in the water. There is more to come from the EPA on that. Obviously, they go through a scientific process and come up with standards. Those standards get handed off to the states, and the state Departments of Health are responsible for implementing those standards at the state level. I believe we will ultimately have a standard on microplastics. I do, and I think as a society we have gotten a lot better at not putting microplastics into the ground or into the ocean. I think that part of it is improving, but I do think at some point we will have a standard that will evolve that we will have to treat for. As part of that process, the EPA will also talk about the appropriate methods and techniques to treat water that has microplastics in it. I think it is uncertain right now whether or not the current treatment that we are putting in place for PFAS will be effective for microplastics, and that will depend largely on the EPA. Analyst: Super helpful, thank you. Maybe then just turning to balance sheet. I appreciate all the comments on liquidity and available credit, but could you talk a bit about how you are thinking about equity issuance and capital needs more broadly throughout the balance of the year? James Lynch: I think—we feel very confident that we will be successful in closing both BVRT and the NexSys acquisitions in Nevada and Oregon. That will be incremental to our normal cadence of debt and equity issuances. We will take a look at the timing on when we anticipate that is going to occur and determine the most efficient way to approach the capital markets to fund those transactions when the time comes. There are some interesting instruments out there relative to forwards that will allow us to time it closer to minimize any dilution that could occur in terms of the difference between the time we raise the equity and the time we actually close the transactions, so we will be looking into that. We believe when the transactions close, it would likely occur towards the end of the year, and that is when I would look to raise the capital for those. Otherwise, we would continue to rely on our ATM and our normal lines of credit taken out by longer-term debt as we work through our capital programs and fund our other capital needs. Once again, everyone— Martin A. Kropelnicki: Jim, if you do not mind me jumping in, Dave, it is probably worth mentioning too—as you recall, we have our PFAS program, which is fairly substantial, and we have a separate application before the Commission that we are waiting to hear on because that will add further pressure on Jim on the capital side. But the flip side is we have been very successful on the litigation side. Just last week, we received another $6.5 million gross from the polluters’ trusts that have been set up. We have recovered about $66.5 million in gross receipts in our recovery process going after polluters, which nets us just about $50 million. That $50 million will be a direct offset to our PFAS program and help keep those costs lower for our customers. So we are approaching 20–25% of those estimated PFAS costs being covered through our legal efforts, and our legal team continues to do a very good job leading our industry efforts at getting recovery on that. That will help a little bit. For some perspective, we initially anticipated two segments of the program: one is treatment and one is well replacement, with our objective to get the treatment in by 2028, and the well replacements will take longer. Of the total amount we plan to spend on PFAS, about $60 million is for the wells and the remainder is for treatment. Analyst: Super helpful detail. I appreciate it very much, and best of luck tonight with the meeting on the GRC. It has been a long road and I am excited to have it behind us. Thank you. James Lynch: Thank you. Appreciate it. Thanks, Davis. Operator: If you would like to ask a question, press star 1 on your telephone keypad. There are no further questions at this time. I will turn the call back over to Martin Kropelnicki, CEO, for closing remarks. Martin A. Kropelnicki: Thank you, Demi. Thanks, everyone, for joining us today. The big thing to watch for moving forward is what happens at the Commission today. We are hoping for approval, and we are very happy with the revised proposed decision that is on the docket for today. As we move into the second quarter, what are we going to be focused on? We have to implement the results of the rate case. While that sounds like an easy task, there is a lot involved in doing that. There is a retroactive piece that goes back to January 1 that Jim and his team will have to work on, and we will give a lot of clarity around that as we wrap up the quarter and have the appropriate disclosures in our financials for our second quarter 10-Q. In addition, there are thousands of table changes that have to take place on the billing cycle with the new tariffs. The rates team, working with our customer service team, the accounting team, and the IT team, will be making those tariff changes and doing the appropriate testing to make sure our tariffs are accurately being billed. Assuming an approval today, we anticipate starting billing the new tariffs on July 1 of this year. In addition, we are staying very focused on our M&A side and really the Nexus transaction and the BBRT transaction, answering the Commission’s questions on the change of control applications, as well as doing all the integration work and being ready to quickly close, integrating those assets onto our platform once approved by the appropriate commission. It is going to be a busy second quarter, and then throw in the 100-year celebrations on top of that. We have a lot going on, but the team remains laser-focused on the tasks at hand. The last thing I want to do before we hang up is note this is Greg Milleman’s last earnings call with us. If you know Greg, he is not a person that wants a lot of hoopla or fanfare, but I could not let the morning go without recognizing his contributions to California Water Service Group. We recruited Greg from Valencia Water in 2013, where Greg served as senior vice president of administration. Believe it or not, we are Greg’s third job out of college. He started off with Arthur Andersen, then went to Valencia Water, and then he joined us. We brought Greg in as a manager of special projects. We were very impressed with him when we met Greg and did not really have a spot for him, but we thought he was a quality hire, a senior hire from within the water industry. Within a year, he was promoted to the director of operations, helping the operations team focus on deploying capital more quickly and more efficiently and making sure that plant is getting into service as quickly as possible. In 2017, he was named the interim director of rates to help lead our rate case efforts. In 2019, he was named vice president of rates for California, and then in 2022, when Paul Townsley retired, he took the helm as our vice president of rates and regulatory affairs to lead our overall rate strategy for all of our operating companies. Greg has only been with us 13 years, and from a Cal Water standpoint, that is not a lot of time—we have many employees with 30 and 40 years of service with the company—but Greg’s impact on the company has been nothing short of amazing. If you look at our rate cases over the decade that he has been with us, we have done the best with our rate cases under his leadership and his team. I would be remiss if I did not take this opportunity to tell Greg thank you and to wish him and Jen all the best in retirement, and we look forward to keeping in touch as we do with all of our retirees. So, Greg, thank you, and with that, Demi, we will wrap it up, and we will see everyone next quarter. Thank you very much. Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining, and you may now disconnect.
Operator: Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Services, Inc. First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. I would now like to turn the call over to Michael Perito, Head of Investor Relations. Please go ahead. Thank you. Michael Perito: Good morning, everyone, and thank you for joining us for our first quarter 2026 earnings call. Today’s presenters are President and CEO, Anthony J. Labozzetta, and Senior Executive Vice President and Chief Financial Officer, Thomas M. Lyons. Before beginning their review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today’s call. Our full disclaimer is contained in last evening’s earnings release which has been posted to the Investor Relations page on our website, provident.bank. Now I would like to hand it off to Anthony J. Labozzetta, who will offer his perspective on our first quarter. Anthony? Anthony J. Labozzetta: Thank you, Michael. And welcome, everyone. I appreciate you joining us today to discuss Provident Financial Services, Inc.’s first quarter 2026 results. I am pleased to report that we delivered another strong quarter of financial performance, demonstrating the continued momentum of our business and the effectiveness of our strategic initiatives. For the first quarter, we reported net earnings of $79 million, or $0.61 per share, representing solid profitability as we continue to execute our growth strategy. Our annualized return on average assets was 1.29%, while our adjusted return on average tangible common equity was 16.6%. Pretax pre-provision net revenue of $108 million, which grew 13.5% year over year, benefited from higher net interest income and notable growth in contingency income from our insurance platform, Provident Protection Plus. This represents 1.75% of average assets on an annualized basis, compared to 1.61% for the same quarter last year. We continue to focus on our balanced approach to sustaining growth across our business lines while also managing risk appropriately and generating sustainable positive operating leverage. Turning to our balance sheet, our commercial loan team generated new loan production of $649 million in the first quarter, up 8% compared to the same quarter last year. This production contributed to our commercial loan portfolio growth of $161 million, or 3.9% annualized. Commercial and industrial loan activity was particularly strong, growing at a 10% annualized rate. Commercial loan payoffs during the quarter were down significantly to $191 million, and overall, we remain positive about our loan growth guidance for 2026. Our commercial loan pipeline reached a record $3.1 billion as of March 31. This pipeline is well diversified and comprised of $1.3 billion in CRE, $1.1 billion in C&I, $400 million in specialty lending, and $200 million in middle market loans. This is the first time in our company’s history that both the CRE and C&I pipelines have exceeded $1 billion, reflecting the investments we have made in our commercial banking group to generate sustainable, diversified loan growth. Switching to deposits, our total nonmaturity core business and consumer deposits increased $66.5 million during the quarter, or 2.2% annualized. Seasonal municipal deposit outflows and an intentional reduction in brokered deposits during the quarter impacted our total deposit balances, which were down sequentially. Our average noninterest-bearing deposits were relatively stable, and we remain focused on deposit generation strategies to build core deposits in consumer, small business, and commercial verticals. While the overall deposit environment remains very competitive, our focus on relationship banking combined with our expanding digital capabilities and treasury management solutions positions us well to continue attracting quality deposit relationships that support our loan growth objectives. Provident Financial Services, Inc.’s commitment to managing credit risk and generating top quartile risk-adjusted returns remains unchanged. During the first quarter, we experienced net charge-offs of $3.1 million, representing just 6 basis points of average loans. Nonperforming loans increased to 73 basis points of total loans from 40 basis points in the fourth quarter, with the increase primarily attributable to a bankruptcy that impacted four related commercial loans totaling $82 million. I would like to provide additional context on this relationship. These loans have no prior charge-off history and require no reserve allocations due to strong collateral values. Appraisals received in 2026 reflect loan-to-value ratios for the collateral properties of 32.9%, 51.7%, 61.3%, and 81.9%, respectively. We are expecting resolution of these credits by year end. Based on the current cash flow and occupancy rates of the properties and our secured position, we do not foresee a material loss to the bank. Outside of this relationship, we would have seen improvements in all credit metrics during the first quarter, including levels of loan delinquencies, nonaccrual loans, and criticized and classified assets. Shifting to noninterest income, we are pleased with the performance during the quarter. Our Provident Protection Plus insurance platform, in particular, delivered exceptional results in the first quarter, with customer retention rates continuing at approximately 95% and significant year-over-year growth in both new business and contingency income. The strong contingency income we received this quarter reflects the quality of the relationships with our clients and carriers, and the effectiveness of our risk management approach. We are seeing increased collaboration among our insurance platform, the bank, and Beacon Trust, which is creating meaningful cross-sell opportunities and deepening client relationships across our organization. The pipeline in our insurance business remains strong heading into the remainder of 2026, and we continue to invest in talent and capabilities that will drive sustainable growth in this differentiated revenue stream. Beacon Trust remains focused on retaining and growing its customer base, and we are optimistic that the recent hires will help accelerate growth over the balance of 2026. Additionally, we have a strong pipeline for further SBA gain-on-sale over the remainder of the year. Our strong financial performance continues to build our capital position well beyond regulatory requirements. We delivered another quarter with significant year-over-year growth in earnings per share, profitability, and tangible book value, with our tangible common equity ratio ending the first quarter at 8.6%. During the quarter, we opportunistically took advantage of market volatility and bought back $12.4 million of our shares. Having said that, our top capital priority remains unchanged: driving sustained organic growth across our franchise while achieving top quartile risk-adjusted profitability. I am incredibly proud of both the efforts and production of our employees. I would now like to turn the call over to Thomas M. Lyons for his comments on our financial performance. Tom? Thomas M. Lyons: Thank you, Anthony, and good morning, everyone. As Anthony noted, our net income increased 24% versus 2025 to $79 million, or $0.61 per share, with a return on average assets of 1.29%. Adjusting for the amortization of intangibles, our core return on average tangible equity was 16.6%. Pretax, pre-provision earnings were $108 million, or an annualized 1.75% of average assets, a 13.5% increase from $95 million, or 1.61% of average assets, reported for 2025. Despite a lower day count, revenue topped $225 million for the second consecutive quarter, driven by net interest income of $194 million and record noninterest income of $31.5 million. Average earning assets increased by $264 million, or an annualized 4.7% versus the trailing quarter, with the average yield on assets decreasing 13 basis points to 5.53%. This reduction in asset yield was largely offset by a 12 basis point decrease in the cost of interest-bearing liabilities to 2.71%. Interest-bearing deposit costs fell 21 basis points versus the trailing quarter to 2.39%, while total deposit costs declined 16 basis points to 1.94%. While a reduction in net purchase accounting accretion attributable to lower loan payoffs resulted in a 4 basis point decrease in our reported net interest margin versus the trailing quarter, to 3.04%, our core net interest margin increased by 3 basis points to 3.04%. Given the macro developments since the start of the year, we are now modeling no further Federal Reserve rate actions for the remainder of 2026, versus three cuts in Fed funds in our initial modeling. As a result, we are slightly tightening our NIM outlook to 3.40% to 3.45%, inclusive of purchase accounting accretion. We also now expect approximately 3 basis points of core NIM expansion in the second quarter. Period-end loans held for investment increased $144 million, or an annualized 3% for the quarter, driven by growth in commercial, multifamily, and commercial mortgage loans, partially offset by reductions in mortgage warehouse, construction, and residential mortgage loans. Total commercial loans grew by an annualized 3.9% for the quarter. Our pull-through adjusted loan pipeline at quarter end was $1.9 billion. The pipeline rate of 6.24% is accretive relative to our current portfolio yield of 5.85%. Period-end deposits decreased $178 million for the quarter, or an annualized 3.8%. The decrease was driven by seasonal outflows of municipal deposits expected to return in subsequent quarters and a tactical decision to reduce brokered deposits in favor of lower-cost FHLB borrowings. More specifically, the pricing of brokered deposits was notably elevated in March, and we elected to utilize more borrowings at a cost savings of approximately 20 basis points, driving a more favorable impact to our net interest margin. Asset quality remains strong despite the increase in nonperforming loans that Anthony previously detailed, with nonperforming assets representing 58 basis points of total assets. Net charge-offs were $3.1 million, or an annualized 6 basis points of average loans. We recorded a net negative provision for credit losses of $2.1 million for the quarter, as required specific reserves on individually evaluated impaired credits declined, there was modest improvement in our CECL economic forecast, and changes in our portfolio mix warranted lower pooled reserves. This brought our allowance coverage ratio down 5 basis points from the trailing quarter, to 90 basis points of loans at March 31. Noninterest income increased to $31.5 million this quarter, with solid performance from our insurance and wealth management divisions, as well as increased BOLI claims and year-over-year increases in core banking fees and gain on SBA loan sales. Noninterest expense increased to $117.1 million this quarter, reflecting increased compensation and benefits costs and occupancy expense. Expenses to average assets and the efficiency ratio, however, both improved from the prior-year quarter to 1.95% and 52%, respectively. We now project quarterly core operating expenses of approximately $117 million to $119 million for the remainder of 2026, with the run rate in the second half of the year being higher than the first half. As we noted last quarter, in addition to normal expenses, we will be upgrading our core systems in 2026 and expect additional nonrecurring charges of approximately $5 million in connection with this investment, largely to be recognized in the third and fourth quarters. Our continued sound financial performance supported earning asset growth and again drove strong capital formation. Tangible book value per share increased $0.33, or 2.1% this quarter, to $16.03 per share, and our tangible common equity ratio increased to 8.55% from 8.48% last quarter. Common stock buybacks for the quarter totaled $12.4 million and 589 thousand shares, and we have 2.2 million shares remaining on our current authorization. We reaffirm our previous full-year 2026 guidance of 4% to 6% loan and deposit growth, noninterest income averaging $28.5 million per quarter, and core ROA targeted at 1.2% to 1.3%, with a mid-teens return on average tangible common equity. That concludes our prepared remarks. We will now open the call for questions. Operator: At this time, I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Your first question will come from Feddie Justin Strickland with Hovde Group. Feddie Justin Strickland: Hey, good morning. Just wanted to start on credit and the senior housing facilities. It seems like you do not really expect material losses there, but can you speak any more to the collateral, location, and the types of senior housing facilities these were or are? Thomas M. Lyons: Yes. They consist of independent living, assisted living, and memory care—no skilled nursing—and minimal exposure to Medicaid. There is strong demand for the properties, which is one of the reasons why we expect to see minimal loss as the bankruptcy gets resolved, in fairly short order, we think. As to location, East Coast. Properties range from $15.1 million to, for our share, $31.8 million as the highest loan amount. LTVs, as we disclosed in the release, go from 51.7% to 81.9%. Probably noteworthy is the highest LTV is actually on the lowest loan amount—that is the $15.1 million credit. More specifically, the properties are in New Jersey, Connecticut, Maryland, and Florida. Regarding fees, I think it is just an acknowledgment of some of the volatility in some of those line items; a piece of that was BOLI income. We do expect to see some seasonality in the insurance business, but we are anticipating continued improvement in the wealth management revenues as well over the course of the year to offset some of that to a degree. On SBA, that will be lumpy as well depending on production and where the gain-on-sale margins are at any point in time, so there may be a little bit of conservatism in that $28.5 million average. On loan accretion, there was a significant reduction in payoffs this quarter, which we actually like to retain the asset. If we are looking for 3 basis points of core margin expansion to roughly 3.07%, we are still anticipating a margin in the 3.40% to 3.45% range for the balance of the year, the difference being purchase accounting accretion. Operator: Your next question will come from Timothy Jeffrey Switzer with KBW. Timothy Jeffrey Switzer: Hey, good morning. Thanks for taking my questions. Really quick follow-up on your comments on the NIM. Can you talk about maybe how a Fed rate cut would impact, not necessarily 2026 numbers, but perhaps 2027? Is it accretive to earnings going forward if we get one or two cuts? And then on your loan backlog reprice, I know you have a good amount of loans over the next year or so. Can you update us on how much there is and what the gap is on new yields versus old? And lastly, could you walk us through some of the benefits and new capabilities the core upgrade from FIS will bring you, and whether there are any new products it will enable? Thomas M. Lyons: It is, Tim. I think consistent with last quarter when we talked, each cut is about 2 to 3 basis points of benefit to us on the current balance sheet. On the loan backlog reprice, the loan pipeline is just under 6.25%, and we still have loans coming off in the mid-5s, so there is some pickup. We have isolated that benefit to the NIM to be about 2 to 3 basis points over the 12-month period. It is about $5 billion in the total loan portfolio subject to repricing, but only roughly 60% of that we get a benefit from because about 40% relates to Lakeland-related portfolio dynamics affecting repricing. Anthony J. Labozzetta: So, Tim, to add a bit more color, the loan pipeline is at about just under a 6.25% rate. We can get you the exact dollar amounts offline, but the general impact to margin is the 2 to 3 basis points Tom mentioned as legacy mid-5% loans reprice toward the low-6% pipeline levels. Anthony J. Labozzetta: On the core upgrade, at a high level we will have more robustness around the lending area in terms of information and data flows. Branch account opening will be much faster and more robust. It also creates the foundation for us to attach other applications through APIs that work more efficiently. The FIS core is much more functional for a more complicated commercial bank that has a lot of verticals, so we can get the full benefit on the current core—those are some of the expected benefits. Operator: Next question will come from Stephen Moss with Raymond James. Stephen Moss: Good morning. Maybe just starting off here on the loan pipeline—looking good—just curious how you are thinking about the pull-through given economic uncertainty. I realize you updated or increased the loan growth guidance, but how you are thinking about those things? Anthony J. Labozzetta: I look at our pipeline, pull-through, and commitments—they are looking good. We are still thinking the guidance is good. We might overachieve the guidance depending on what happens with prepayments and market conditions, but I do not see anything right now, given the geopolitical circumstances, that would affect the guidance we have provided. Depending on prepayments, that will determine whether we can overachieve or come close. It is also a pretty good dynamic at Provident Financial Services, Inc. because of the way growth is distributed—it is very diverse. Just by normal dynamics, without us doing anything and just achieving our pre-loan objectives, we can still see the CRE ratio coming down because of capital build and diversification into other books like C&I, specialty lending, and middle market. That is a pretty good dynamic we are accomplishing here, which is our strategic focus. Thomas M. Lyons: As I indicated in my comments, the pull-through adjusted pipeline is about $1.9 billion. If you do the math, that is about a 60% to 61% pull-through rate. In terms of mix, about 47% is commercial real estate and multifamily, C&I is about 49%, and the balance is consumer at about 4%. Stephen Moss: And then on the deposit side, what are you seeing for competition these days, and how are you feeling about funding cost trends? Anthony J. Labozzetta: Competition is probably more heightened than I have seen in the last bunch of quarters. It is getting tougher not only on the deposit side but on the lending side. We are seeing spreads coming down and creative structures on deposit programs—people waiving fees or certain conditions, and pricing pressure. We are responding. We see good dynamics in our consumer and small business sides. On municipals, we have good RFPs moving into the second quarter. Our focus is to get our regional teams and TM teams more expanded so we can get more scale. We feel good about the prospects, but competition is stronger than I have seen in a while. Stephen Moss: On the reserve, with the CECL move down, should we think of this as a one-time adjustment, or how are your thoughts on where this reserve goes? Thomas M. Lyons: A lot of that is dependent on the forecast going forward. I would not expect material continued improvement in that forecast, given macro events. A big piece was the reduction in specific reserves. We had a really strong quarter for resolutions with very minimal losses. You saw net charge-offs of $3.1 million; about $2.5 million of that was previously reserved for, so no need to replenish those reserves. There are limited specific reserves on the remaining impaired loans that have been identified, and we are very positive on resolution prospects for a number of those credits in the coming quarter. We do not see a lot of loss content in the book overall. We also had some improvement in the portfolio, with construction loans reducing a bit, which required less pooled reserves as well. Overall, 6 basis points of charge-offs—we feel strongly about the quality of our underwriting and our credit quality going forward. Stephen Moss: Following up on the credits with the senior housing—are those nonperformers cross-collateralized? Any chance you have a weighted average LTV? Anthony J. Labozzetta: They are not cross-collateralized. They are in Delaware statutory trusts. The specific LTVs are outlined in the release; they go from 32.9% up to 81.9% on the smallest dollar credit. To give more color, these loans went into NPA not because of cash flow issues but because of the bankruptcy of the holding entity that caused payments to stop. That is why we feel strong about ultimate resolution: cash flows are intact, LTVs are strong, and we just need to go through the bankruptcy process. We feel a resolution can happen this calendar year, with minimal to no loss to us. It is hard to say absolutely no loss, but we think it is going to be a positive resolution. Operator: Your next question will come from David Storms with Stonegate. David Storms: Good morning, and thank you for taking my questions. I wanted to start with noninterest income. It was mentioned in prepared remarks that there has been cooperation between insurance and the rest of the business, helping to drive insurance growth. How much more integration or cooperation could there be here, and how applicable could that be to the wealth segment? And then a follow-up on the efficiency ratio, which has hovered in the low 50s—what appetite or ability is there to keep dialing that lower, and do any of the core updates have a significant impact on that? Anthony J. Labozzetta: We are seeing huge momentum. Insurance revenue grew about 21% year over year. The cross-functional dynamic of working with the commercial bank, Beacon, and the retail side is very integrated. Referrals are tracked, but it has become natural—people are doing it because of the value it creates for customers. There is ample room for continued insurance growth, and our focus is staffing up to support demand. There is still a lot of business within the bank that we can refer across, and the same is happening on the Beacon side—we saw positive flows this quarter and good referrals from the bank and insurance back into Beacon. We need to continue building the Beacon salesforce to handle inbound referrals. It is a differentiated revenue stream we can continue to build. On the efficiency ratio, we are constantly looking for operational efficiencies. A big part of today’s ratio reflects investments we have made in technology and infrastructure over the last several quarters; we are seeing revenue benefits from those investments. We will continue branch optimization and deploy technology tools for efficiency. Expect a “do more with less” approach going forward. I would expect the efficiency ratio to continue to trend down over time, though it will be sawtooth as we invest and then recapture positive operating leverage. Thomas M. Lyons: The new core system will help on efficiency—straight-through processing, onboarding, and automated boarding/closing should reduce manual touch and improve cycle times, supporting lower unit costs as we scale. Anthony J. Labozzetta: Kerry, before we move to the next question, I wanted to respond to the last question to Steve: the weighted average LTV on the four properties is 53%. They are not cross-collateralized, but that gives a sense of the size of the issue. Operator: Your final question will come from Manuel Antonio Navas with Piper Sandler. Manuel Antonio Navas: Good morning. Can you revisit the buyback pace going forward and how it is impacted with greater loan growth in the second quarter? You mentioned being opportunistic—what pricing would get you involved? And could you update us on places on the periphery of your geography where you have added talent or offices and their growth ramps so far? Thomas M. Lyons: The pace will depend on market conditions and our expectations for growth. You saw a significant bump in the pipeline rate, but we believe we have adequate capital and capital formation to continue to take advantage of market conditions when warranted. I do not want to define a specific price. We try to keep the earn-back on buybacks in the low three-year range at a maximum level, but it really depends on our current view about asset generation and capital formation at any point in time. Anthony J. Labozzetta: We have added talent in the Westchester market; down the Main Line in Pennsylvania around the Philadelphia area; and we are adding talent into the Cherry Hill area. As part of our growth strategy, that includes lending and deposit gathering, and we are also moving some of our business partners, like insurance and wealth, into those markets to penetrate further. Our strategic plan contemplates further expansion over time. Operator: There are no further questions at this time. I would like to turn the call back over to Anthony J. Labozzetta for any closing remarks. Anthony J. Labozzetta: Thank you, everyone, for joining the call and for your questions. Before we end, I would like to take a moment to congratulate Thomas M. Lyons. This is his last official earnings call. He has been a great leader here and has done so much for Provident Financial Services, Inc. You have been a great partner, Tom, and you will be missed by me and all of your colleagues at the bank. Thank you, Tom. We look forward to speaking with you all soon, and thank you very much. Operator: Thank you for your participation. This does conclude today’s conference. You may now disconnect.
Operator: Good afternoon, everyone, and thank you for joining us today for Ategrity's First Quarter Fiscal Year 2026 Earnings Results Conference Call. Speaking today are Justin Cohen, Chief Executive Officer; Chris Schenk, President and Chief Underwriting Officer; and Neelam Patel, Chief Financial Officer. After Justin, Chris and Neelam have made their formal remarks, we will open the call for questions. [Operator Instructions] Before we begin, I would like to mention that certain matters discussed in today's conference call are forward-looking statements relating to future events, management's plans and objectives for the business and the future financial performance of the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are referred to in our press release issued today, our final prospectus and other filings filed with the SEC. We do not undertake any obligation to update the forward-looking statements made today. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is also available in our press release issued today, a copy of which may be obtained by visiting the Investor Relations website at investors.ategrity.com. I will now turn the call over to Justin. Justin Cohen: Good evening, and thank you all for joining Ategrity's first quarter earnings call. This is Justin Cohen, and I'm joined today by Chris Schenk, our President and Chief Underwriting Officer; and Neelam Patel, our CFO. Ategrity delivered another quarter of record earnings, generating outstanding margins while gaining market share. We produced a combined ratio of 87.4% and grew gross written premiums by 23.1% in an industry that was relatively flat with both metrics better than guidance. We are winning by identifying underserved segments, building solutions that give our distribution partners an advantage and improving the quality and renewability of our portfolio. While competition is increasing, we are defining distinct markets where we can compete on our own terms. This quarter, we extended that momentum by launching several new strategic initiatives, including new regional strategies in Texas, Florida and New England while maintaining strict technical rigor in risk selection and pricing. We will discuss these initiatives in more detail later in the call. As our footprint expands, we are demonstrating operating leverage. Our expense ratio improved 2.5 percentage points year-over-year as earned premium growth outpaced expenses. We continue to optimize our business mix and leverage our centralized underwriting model to improve profitability and lower unit costs. At the same time, we are investing in the business, both to support our growth initiatives and to advance automation and AI across the organization. Turning to the market. Competitive pressure continued to intensify in parts of the E&S market this quarter, but its impact on our business remain limited. By focusing on small- and medium-sized businesses and delivering differentiated solutions, we continue to operate outside the more commoditized parts of the market. We are seeing this play out consistently across the portfolio, reinforcing our confidence that we can continue to build profitable market share. With that, I'll turn it over to Neelam to review our financials, followed by Chris to discuss our underwriting performance and go-to-market strategy. Neelam Patel: Thanks, Justin. We delivered another strong quarter with adjusted net income of $25.6 million, up from $8.5 million in the same quarter last year, driven by top line growth, improving margins and continued strength in our investment income. Gross written premiums were up 23% in the quarter and growth was broad-based. Casualty premiums grew 27% and property premiums grew 13%. Net written premiums increased 32%, which reflects higher retention year-over-year, while net earned premiums were up by 34%. Fee income was $2.2 million compared to $0.6 million a year ago, reflecting standard policy fees introduced over the course of 2025. Our underwriting income for the quarter was $13.3 million, up 87% year-over-year. That translates into a combined ratio of 87.4% compared to 90.9% last year due to reductions in both our loss and expense ratio. Our loss ratio came in at 58.8%, down 1 point year-over-year, driven by strong underlying results in our property business. We had favorable development this period equal to 0.5% of net earned premium. Catastrophe losses were 4% of net earned premium, down from 6.2% last year due to very few CAT events in the first quarter compared to the prior year, where we had modest losses from California wildfires. On expenses, the overall expense ratio improved 2.5 points to 28.6% Operating expense was 10.9% of net earned premiums, down 1.4 points year-over-year. That improvement was driven by earned premiums growing faster than operating expenses, along with the benefit of higher fee income. Policy acquisition costs as a percentage of net earned premiums declined to 17.6% from 18.8%. The improvement was primarily mix driven as growth has been concentrated in lines of business carrying lower acquisition costs and higher ceding commissions. Moving on to investment results. Net investment income was $12 million, up from $7.9 million last year, reflecting a larger investment portfolio. Realized and unrealized gains were $9.5 million, supported by strong results in our utility and infrastructure portfolio. Our effective tax rate was 20.6%, bringing the net income to $25.5 million. Adjusted net income was $25.6 million or $0.51 per diluted share. Turning to the balance sheet. Cash and investments increased by $42 million from the fourth quarter to $1.15 billion, reflecting strong operating cash flow. Book value increased by $17 million, driven by retained earnings, offset by a decrease in AOCI. Our book value per share ended the quarter at $13.13, up 24% since the IPO. Overall, the quarter reflects strong growth, underwriting discipline and increased operating leverage. With that, I'll turn it over to Chris to discuss underwriting and operating performance. Chris Schenk: Thanks, Neelam. Last quarter, we described our business as having multiple differentiated pathways for growth and how that has allowed us to operate independently of market cycles. This quarter is another validation of that model. In a competitive environment, Ategrity delivered another record quarter with all of our key metrics trending favorably. Top line growth of 23.1% with more than 50% coming from strategies unique to us. Expense ratio declined even as we continued investing in production capacity, technology, marketing and partnership management. Rate change remained positive. Cost of product indicators continued to track favorably. We are succeeding because our model is built on two key principles: a long-term view of customer value and a deliberate approach to creating new markets for growth. These are uncommon in E&S. At a fundamental level, all carriers operate within the same growth equation, renewal contribution plus new business production. These are driven by the same inputs. What is your renewal base? What is your retention ratio, average premium, submission growth, quote ratio and buying ratio. The difference in carrier results is driven by which levers they can move and which levers they're willing to move. For us, what we adjust is driven by our view of risk taking and that long-term view is measured in terms of customer lifetime value. For several years, we have optimized the inputs that matter to us. And as the market shifted, these became a clear structural advantage. On renewal inputs, since 2021, we have focused on writing durable, sticky business. That showed up this quarter in a record renewal base and our highest retention since going public. We optimized our retention rate through targeted rate actions while maintaining positive rate across the portfolio. On new business, the levers we can actively manage are submission growth, quote production and average premium. Submission growth was strong. This was driven by our distribution investments as well as our strategic initiatives. Quote production reached an all-time high, supported by the submission volume as well as the quality of those submissions. Our investments in AI and our operating model allowed us to process that volume efficiently while maintaining fast turnaround. Shifting to conversion. Conversion moderated modestly, but that was expected. Conversion is often the least controllable lever for a technical underwriting organization. We were able to win at a higher rate in areas where we have a regional strategy. And finally, average premium. As the competition intensified in larger accounts, we leaned into small and middle market risk in our core verticals where precision, speed and consistency matters most. Those dynamics combined improved the overall quality and renewability of the portfolio. Our results this quarter is straightforward. We retained more of what we wanted, and we added new business with higher expected lifetime value. Our model only works if we acquire business on the right terms, which is why we continue to build targeted growth pathways that position us where competition is less aggressive. This quarter, we launched three new regional strategies in areas with attractive economics and lower competition. Let me take you through how we did this. While headlines suggest that the E&S market is losing share to admitted carriers, the reality is there's a two-way flow, and we are focused on the inflows. Ultimately, there are 50 state-level markets, each with its own distinct dynamics and even more localized submarkets beneath that. Dislocations are constant, and our advantage is identifying them early. To be clear, what we're doing goes beyond simply tracking state-level trends. We analyze municipal level economic, legal and policy trends. We look at submission flows and loss experience, and we even look at admitted market filings to pinpoint opportunity. That work drove targeted strategies in Texas, New England and Florida in the last quarter. Those strategies are focused at a city and even at a neighborhood level. For example, along the I-10 corridor in Texas, we have seen wholesale trade moving into the E&S space, while in Springfield, Massachusetts, older mixed-use properties are flowing into the market. We have built strategies around these specific profiles, and we are offering solutions. And furthermore, we equip our partners with the insights through interactive city guides and targeted marketing, enabling them to source the business more effectively. In doing so, we're establishing ourselves as the go-to-market for these risks. This will, in turn, drive future submission growth, provide offsets should there be any declines in conversion rates. and it will allow us to win on our terms. And finally, this will all feed back into our future renewal base. This is how our differentiated growth strategies translate into above-market performance. Combined with our focus on lifetime value, they create a compounding growth model while preserving underwriting discipline, and this ultimately positions us for superior results going forward. With that, I'll turn it back to Justin. Justin Cohen: Thanks, Chris. Our model is standing out in an increasingly competitive market as we have built a repeatable advantage and are executing against it with discipline. Turning to our outlook. Our top line guidance for the second quarter of 2026 remains consistent with last quarter. We expect direct written premium growth of approximately 20 percentage points above the E&S market, reflecting continued market share gains and the strength of our model. From an underwriting margin perspective, we expect a combined ratio in the 87s, representing continued year-over-year improvement. We thank you for your time listening. And operator, can you please open the line for questions? Operator: [Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan: I was hoping just going back, I guess, tying it a little bit to your growth outlook. If you could just give us a sense when you think you're going to be 20% above, I guess, the industry for the second quarter. What are you thinking about just in terms of property versus casualty top line growth? Justin Cohen: Elyse, at this stage, we're not breaking out the growth by property and casualty, although what I would say is that we do believe that there is an opportunity in the second quarter for property to accelerate a little bit compared to the first quarter. Elyse Greenspan: And then if that's the case, I guess, -- what are you guys seeing from a pricing perspective -- sorry, go ahead. Chris Schenk: Yes. So the catalyst for growth, as we mentioned, are the regional strategies and our -- those are all packaged products. So that alone should give you a signal in terms of how they will move. Elyse Greenspan: Okay. That's helpful. But then what are you seeing, I guess, when we -- we've heard of a lot of just aggressive pretty substantial price cuts on the property side within the E&S market. What are you guys seeing from a pricing perspective, both in property as well as within casualty? Chris Schenk: So we -- there's two dynamics. There is there's CAT property where there's very aggressive competition. Those tend to be larger accounts also. We are not in that space. We -- that's not core to us. So we have not observed those dynamics. as severely as our peers had. When it comes to just large non-CAT accounts, we did see some more pressure there, and we chose to walk away because the rates were not right. We had more than enough opportunities in small and medium to compensate. Elyse Greenspan: Okay. And then I think you guys said there was 0.5 point of, I believe, was favorable development for the quarter. What drove that? Just some color on lines and accident years? Justin Cohen: Elyse, if you may recall from the last earnings call, we talked about how we have been very conservative in recent years on both property and casualty. In particular, we spoke about how property, we were booking at a prudent accident year ratio -- current accident year ratio, even though we hadn't quite seen the losses come through. As we went through this quarter, that continued. So we haven't seen that development that we expected. And even into this quarter as well, that trend continues. So we think we're very prudently reserved there. And that this quarter was a release of some of those reserves in property 2025. Operator: Our next question comes from the line of Pablo Singzon with JPMorgan. Pablo Singzon: Your attritional loss ratio, I think, was up year-over-year. And then I guess if you take a step back and look at it on an annual basis, it seems like it's been going up as well. And I assume that's mainly mix. I was wondering if you could talk to what's going on beneath the surface there? Justin Cohen: Yes. We have not changed our underlying liability loss pick. So there is a component of that, that is mix. And the other component is that, again, in this year, we are booking our attritional property in a conservative way relative to last year and especially relative to the losses that emerged in the first quarter that have actually emerged in the first quarter. Pablo Singzon: Makes sense. And then second question on reinsurance retention. So that stepped up year-over-year as you sort of communicated before. How will that ratio look for the balance of the year? And is there more appetite to bring it up in subsequent years? Justin Cohen: Yes. There is -- this year should be relatively consistent with regard to reinsurance. We had stopped or nonrenewed a casualty quota share formally this year. So we had done a half step in the beginning of '25 and half step in 2026. And so what you've seen in the first quarter is relatively consistent. There is some mix amongst quarters because there's more property in some quarters than others, but this is a good benchmark. Operator: Our next question comes from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman: And I'd like to get a sense of pricing a little more granularly. I know Elyse was asking. But on the property that you are writing, and I suspect that's a lot of the smaller property accounts as well as casualty, could you talk about the rate that you're getting there? Chris Schenk: Yes. So as part of our renewal playbook, we sought to -- we managed to lifetime value. So we actually had accounts that performed really well, and we give back some rates there, as I said on the call. Overall, we had net positive rate change. In terms of what we're seeing on new business -- there is the pressure on the CAT-exposed business. There's pressure on business in certain parts of Texas, certain parts of Florida. We have a regional strategy for Texas and Florida. We are -- where we are, there is less competition. So most of the market is competing for and competing on price. In Houston and Galveston, we are in Laredo and Waco and El Paso and San Antonio. Those are -- it's a different risk profile and also smaller markets. That's really what is driving the new business growth. And we -- as a result, new business rate levels are slightly above our -- what we would expect, if not flat. Andrew Kligerman: Got it. That was helpful. And with regard to those regional strategies, and that was an interesting comment, Chris, about being in some of the smaller markets in Texas, for example. Could you elaborate a little more on what industries you're looking for with these smaller businesses in smaller markets? Chris Schenk: Yes. So the binding constraint here is that we do not go beyond our core verticals as we go into a region and build our playbook. So we look for opportunities within our core verticals which we have talked about in the past, construction, hotel, hotels, restaurants, retail, residential real estate. So we are still sticking to our core verticals. We have some emerging verticals like wholesale trade, which we do in small business, and we're now expanding into middle market. That is -- I mentioned that one on the call. A lot of that is emerging in Texas. In addition, we have mixed-use retail. So those are effectively occupancies that are a little bit more complex because you have multiple types of businesses on the first floor of a building with an apartment building with apartments above. So that type of mixed occupancy is something that you need specialized knowledge for, right? So we are a restaurant and a retail on the first floor is something we can figure out. Those are the types of classes. So we are not deviating from our core specialist classes because, in fact, it's the specialized knowledge that makes the difference. Andrew Kligerman: That sounds very thoughtful. And if I could sneak one last one in. So with the policy acquisition costs at $17.6 million and the operating expense at 10.9%, just given the rationale that you provided, these seem like sustainable numbers. So 28.6% on the expense ratio seems like a decent run rate. Am I thinking about it right? Justin Cohen: Yes, Andrew, I think that's right. The 17.6% in the acquisition cost is a strong ratio, and it's been going down because we've been mixing into brokerage, which has lower commissions. There will be a very, very modest upward trend there in terms of one as the earning of the ceding commissions on the quota share go away, but that will be very modest. And we still do believe we have meaningful opportunity on the expense ratio over time because we are -- we have the scalable model. Chris Schenk: We have talked about AI. We have talked about technology that is in development right now. We have a number of solutions that are in pilot phase. And as those get fully implemented, they will provide for further leverage. And as we have been developing those, we are doing them in a relatively cost-effective way. So -- we're not building that legacy tech debt which one might assume based on what the historic cost around these types of solutions might have been. Operator: Our next question comes from the line of Alex Scott with Barclays. Taylor Scott: First one is on distribution. Can you talk me through sort of the timing of when you launch some of these new initiatives like the Texas-based initiative in New England? And is that -- are we starting to get new business coming through from that? Are we still in the phase where we're kind of building out distribution? And how will -- if we are building out distribution still, like how does that roll in over the next 12 months? Chris Schenk: So the way we approach the regional strategy, it does start with an appointment strategy. So that starts well ahead of our official launches. So New England launched 2 weeks ago, for example. But starting in September, the distribution buildup was in progress. So we actually did get some contributions from New England as a result, even though the official launch event, if you will, was just 2 weeks ago. Similarly -- similar for Texas, similar for Florida. There is a market -- there's an engagement phase where we get feedback from the market regarding solutions that we're willing to offer, and that alone starts to generate interest in doing business with us. Then there's an appointment phase and then there's the official launch event, which is really a marker more than anything else. Taylor Scott: Got it. Okay. Could you talk about gross versus net premiums and just how we should think about your retention and how that will be expected to trend here? Chris Schenk: Yes. So as you probably saw the retention is up meaningfully year-over-year, which we expected. And that was, as I referred to earlier, the cessation of the quota share on our primary casualty business, which was purely opportunistic in nature. So we are deploying capital through that, and that's why our retention ratio has gone up into the 80s, which we think is the -- in the low 80s is the right place to think about it going forward. Operator: [Operator Instructions] Our next question comes from the line of Matthew Heimermann with Citi. Matthew Heimermann: Two quick ones or one quick one and then a follow-up. Do you have losses in the quarter, right? Chris Schenk: We do -- it will be in the Q, but the -- I think the [ paid-to-incurred ] just to back into it, we're in the mid-50s. Matthew Heimermann: Okay. And then just for -- I don't know if this is for you, Chris or Justin or both. But just thinking about like with the regional strategy going focused on the smaller account sizes, I'm curious just what the -- what competitors you're potentially displacing there? And is it legacy carriers? Is it some of the MGAs that maybe are -- is it traditional MGAs or tech-enabled MGAs where maybe the cost structure is a little less advantageous relative to what you can do? Just be curious your thoughts on kind of who you might be competing with there, given it's different than the majority of the calls that we would listen to as we go through the quarter? Chris Schenk: Yes. So on the E&S side, very few carriers truly have a playbook for the places that we are -- where we're competing. We are positioning ourselves to absorb business coming out of the admitted market. Part of this is studying what is flowing in E&S and being proactive in designing solutions. That is very different than what many of our peers do. And in fact, is a more traditional E&S playbook would be take whatever comes in, wait to see what comes in, build solutions in a bespoke way for whatever comes across the underwriter's desk. We are studying what's actually exiting the market, building a solution. And as I mentioned on the call, we have these city guides, right? So we are actually giving our partners, our wholesale partners, wholesale distributors, the city guides, they're interactive. The up on their iPhone and they can have a conversation with their retailer that says, this is what's coming out of the admitted markets. I have a home for it. It's called Ategrity. And that is what we're doing here. So it's less about displacing more so kind of guerrilla marketing, if you will. Matthew Heimermann: Okay. And it does sound like it's fair to read you a few carriers doing this as it is other intermediaries who might be aggregating or it's just rifle shot -- excuse me, it's just kind of a shotgun approach for a retailer if they have one of these particular risks previously? Justin Cohen: You're asking do the retailers have this risk, the wholesalers to the retailers. I think as Chris was saying, we're helping -- we're providing the opportunity for growth for our retail partners more than anything else. Chris Schenk: For our wholesale partners... Matthew Heimermann: For our wholesale partners. Justin Cohen: Their clients are the retailers in a framework. Matthew Heimermann: My question was as they're going -- yes, but is that like -- sorry, I should have said wholesaler, not retailer. But the point was, is that wholesaler kind of like shotgun isn't quite sure where to go in the market in the past or it's still going to traditional carriers? Or are there, in your mind, some other intermediaries kind of playing in these channels? That's -- I get what you're doing. I'm just trying to figure out what the home -- what might have been in the past for this business if you haven't stuck in front of it? Justin Cohen: So that retailer did not need to work with a wholesaler because they would have been able to go to an admitted market. So in this scenario, now that they need to find a home for that specific profile, we are being proactive in telling them where that home is. That's what our wholesalers are doing. And that's why we invested in the marketing because we want to be the first in the door to make sure that we establish ourselves in that way. Operator: Our next question comes from the line of Alex Scott with Barclays. Taylor Scott: I just want to see if you could give us a feel for how persistency has been running. Any kind of metrics you can give us and particularly as you've kind of lapped some of these bigger initiatives, how is that trending? Justin Cohen: Yes. So our retention rate was the highest since we've gone public. And we had a larger renewal pool, so which means that our theory of kind of a highly -- high lifetime value for each account acquired is starting to prove out. And in fact, so with the newer strategies, in fact, though, with Project Heartland, for example, where we're now two or three renewal in, we are now starting to see that lifetime value target come into place, which we have not disclosed, but we do have a target. Taylor Scott: Okay. But you guys aren't willing to offer up just at a high level how persistency is running for the overall book? Justin Cohen: When you say persistency, you mean the retention rate? Policy retention rate? Taylor Scott: Yes. Yes, correct. Justin Cohen: We're not disclosing it. Taylor Scott: Okay, all right. Operator: We have reached the end of the Q&A session. I will now turn the call back to Justin for closing remarks. Justin Cohen: Well, thank you all for joining us this evening. We thank you for your interest in the company, and we look forward to speaking with you in the weeks ahead. Take care. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings. Welcome to the L3Harris Technologies, Inc. First Quarter 2026 Earnings Conference Call. At this time, participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Tony Calderon, vice president investor relations and corporate development. Thank you. Tony, you may now begin. Tony Calderon: Thank you, Tiffany, and good morning, everyone. Joining me today are Chairman and CEO, Christopher E. Kubasik, and CFO, Ken Sharp. Earlier this morning, we published our first quarter earnings release detailing our financial results and updated 2026 guidance. We also filed our 10-Q and provided a supplemental earnings presentation on our website. Before we begin, please note that today's discussion will include forward-looking statements subject to risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information, please refer to our earnings release and SEC filings, which will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release. With that, I will now turn the call over to Christopher E. Kubasik. Christopher E. Kubasik: Thanks, Tony, and good morning, everyone. I would like to start by thanking Kenneth L. Bedingfield for his two-plus years as CFO, and for taking on the missile solutions segment president role this past year. Ken is now focused full time on expanding solid rocket motor production capacity in support of the Munitions Acceleration Council program. I would also like to welcome our new CFO, Ken Sharp, to today's call. He joined the team in mid-March and has hit the ground running. I continue to believe L3Harris Technologies, Inc. attracts the best talent in the industry, and I am excited about what we are building here. Also, I would like to thank our employees for a great first quarter—one of the best we have had—and especially those employees that are forward deployed supporting our warfighter. The global security environment is evolving rapidly, and the implications for our customers are increasingly clear. Across the Middle East, Europe, and the Indo-Pacific, the threat environment is driving greater urgency around readiness, resilience, and modernization. Our customers are focused on capabilities that can be quickly fielded, and they are looking for partners that can deliver. This positions us well to drive industry-leading growth. Our strategy is aligned with customer demand. The Trump administration has made it clear that rebuilding the defense industrial base is a national security imperative. The Pentagon and Congress are increasingly supportive of multiyear procurement authorities and other mechanisms to improve throughput across the ecosystem. In support of that imperative, there has been a step change in the DoD budget request driven by the need for affordable solutions that can be produced at speed and scale. With a $1.1 trillion base budget request, and $350 billion in reconciliation funding, the proposed budget sends a strong signal that our nation must invest in the industrial base. Specifically, the president's request reinforces demand signals for critical missiles and munitions, SDA tracking layer, Compass Call business jets, and tactical communication modernization—all of which align with our core strengths. At the same time, our allies are expanding their defense budgets. There is a greater urgency around modernization in Europe and other key international markets. Our international book-to-bill was 2.2 for the quarter. Over the past five years, we have embraced the unique trusted disruptor strategy that positions us between traditional primes and the new defense tech companies. We are delivering at the scales expected of a prime combined with the agility and rapid missionization of new defense tech companies. Our consistently strong financial results demonstrate the success of our strategy. Everything we have done for the past five years is positioning us for sustained growth for the next decade. We have purposefully positioned ourselves around the fastest growing priorities including space sensing and missile defense, aircraft ISR missionization, resilient communications, and missiles and munitions. Our customers are moving with urgency. They need capability delivered at speed, at scale, and with proven performance. We are aligned with those requirements, and we are executing against them now. Capacity is the new capability, and that is what L3Harris Technologies, Inc. has. So let us get into the details. Our backlog has almost doubled to over $40 billion, and that does not yet include the $25 billion of orders for the Munitions Acceleration Council programs which are currently in negotiations. This record-breaking backlog also positions us to be more durable and predictable as we have increased to two times revenue coverage. In Q1 2026, revenue grew over $600 million, or 15% organically. Revenue has now grown organically in nine of the last 10 quarters. Our operating income increased by $125 million. We continue to expand and deliver industry-leading margins underpinned by strong program performance even as we continue to accelerate investments in our business. Segment operating margins have now increased for the tenth consecutive quarter. Our focus on transformation and being agile meant reducing unnecessary cost and streamlining our operations. Revenue per employee has increased by almost 25% over the past couple of years, driven by productivity improvements and aided by investments in technology, including AI. Earlier this year, we entered into an agreement to sell 60% of our space propulsion and power systems business, announced and closed the novel partnership receiving a $1 billion investment from the Department of War, and filed a confidential Form S-1 with the SEC last night to take our missile solutions segment public. We accomplished all of this while delivering an impressive first quarter. Key orders this quarter highlight our strategy in action. We achieved a 1.4 book-to-bill with awards in missionized aircraft, solid rocket motors, and software-defined communication products. Within Space and Mission Systems, we built on our fourth quarter marquee win, the South Korea airborne early warning and control aircraft program. We won another international multi-aircraft missionized business jet program just a few months later. This award with a NATO ally is valued at more than $2.2 billion with an initial $726 million order booked in the quarter. We also secured the Strategic Tanker and Transport Capability award in Canada with two contracts totaling approximately $700 million to support the Royal Canadian Air Force. Within resilient communications, international demand for software-defined tactical communication products remains very strong. This quarter, we booked $460 million of international orders with three NATO member countries who prioritize resilient, low probability of detect communications in contested environments. In missile warning and missile defense, we have invested in building differentiated positions. To date, we have secured 56 SDA tracking satellites, driving growth in our Space and Mission Systems business. We submitted our HVTSS follow-on proposal and look forward to a midyear award. Within our ISR business, we have produced over 100 missionized business jets over the past decade. In the quarter, we delivered the first two Peregrine business jets to the Royal Australian Air Force to advance their airborne ISR and electronic warfare capabilities. Our business continues to grow with 20 missionized business jets in production. Turning to resilient communications, we have an installed base of 1 million software-defined radios worldwide. We are well positioned to increase that by 20% over the next couple of years supporting customer needs for secure, upgradable systems that operate seamlessly in contested environments. Our missile solution strategy, including the $1 billion Department of War investment which we received in April, and our planned IPO represents a thoughtful and creative evolution in how we are positioning the business. We designed this model intentionally to move faster, unlock incremental shareholder value, and align more closely with customer priorities in a rapidly evolving environment. We continue to move quickly to accelerate the expansion of solid rocket motor capacity. Our customers are taking note of our investments, all of which are reflected in our 2028 financial framework. In February, we proudly hosted the Secretary of War in Camden, Arkansas, to highlight the progress on our solid rocket motor capacity expansion and to meet our patriotic workforce. Our missile solutions business is making excellent progress. Our team is in place. The S-1 is filed. Negotiations on multiyear procurement frameworks are progressing. And we expect to synergize contracts later this year. Our new missile company will be named Axyv, spelled A-X-Y-V. The Axyv name is inspired by the engineering of missile guidance and positioning: the A for axes of X and Y and the V for the velocity of the missile trajectory. Axyv conveys how we think about the business, with clarity of strategy, certainty of direction, and focus on agile execution. The company is built for momentum, with a portfolio designed to deliver at scale. As you can see, we delivered a strong first quarter, reinforcing our line of sight to our 2026 commitments and the 2028 financial framework. I will now turn the call over to Ken for the financial results. Ken Sharp: Thank you, Chris. I would like to start by saying it is an honor to join the L3Harris Technologies, Inc. team at such a pivotal time. I am excited to contribute to a mission that plays such a critical role in supporting the men and women who serve our country as well as those of our allies. I also want to sincerely thank the entire L3Harris Technologies, Inc. team for such a warm welcome. Our strategy as trusted disruptor continues to drive strong financial results. We have the capability to invest and deliver at scale while having a commercial mindset to anticipate customer needs, innovate, and rapidly bring solutions to the warfighter. This approach has allowed us to outperform our legacy peers over the last couple of years as we have fundamentally changed our processes, cost structure, and strategic focus. You can see this in a multiyear financial proof point Chris highlighted earlier. Revenue grew, as reported, over $600 million to $5.7 billion, yielding 15% organic growth. We experienced particular strength in our Space and Mission Systems and Missile Solutions segments. We also continue to experience strong international demand with growth accelerating over 20% as our allies modernize their technologies and invest more heavily in their national defense. Segment operating income increased $125 million to $902 million. The increase was due to revenue volume, improved program performance, and higher monetization of legacy assets, partially offset by higher growth in businesses with lower average margin and increased investment in research and development. Segment operating margin was 15.7%, up 10 basis points from the prior year. GAAP earnings per share of $2.72 was up 33% year-over-year. The increase reflects higher operating income, lower interest expense, and a lower effective tax rate, partially offset by lower pension income. Free cash flow was an outflow of $187 million, driven by working capital timing. The Q1 free cash flow is typical of our trends. As a reminder, we now report on a GAAP basis for both segment operating income and earnings per share. This change reflects our continued commitment to enhancing transparency and further improving the quality of our earnings. I would also note that the prior-year quarter had fewer working days. Lastly, our investment in innovation and capacity, which are hallmarks of our trusted disruptor strategy, increased 44% in the quarter. Turning to our segment results. Space and Mission Systems delivered revenue of $3 billion, up 24% year-over-year, driven by strength in a number of our sectors. Space and Mission Systems revenue benefited from a milestone associated with procurement of material on a new classified program. Segment margin increased 60 basis points due to improved program performance, partially offset by increased material purchases and increased investment in research and development. Communication and Spectrum Dominance delivered revenue of $1.9 billion, up 3%, driven by increased volume of resilient communications products, night vision devices, and the ramp-up on the Next Generation Jammer electronic warfare program. Segment operating margin increased 60 basis points due to higher sales of resilient communication products and night vision devices, and a favorable legal settlement. This was partially offset by higher investments in customer demonstrations, prototypes, and research and development. Turning to Missile Solutions. Revenue was $1 billion, up 18%, and segment margin was 12.5%, up 110 basis points. Revenue increased on higher production volumes across key missile, munitions, and space propulsion programs. Missile segment margins increased due to mix and volume and a gain on the sale of legacy assets, partially offset by net unfavorable EAC adjustments. I will now turn the call back to Chris. Christopher E. Kubasik: Alright. Thanks, Ken. Let me highlight a few examples that demonstrate our agile approach to innovation and growth. Within our missile warning and missile defense business, the DoD jointly recognized the government and our Space Systems team with the 2025 David Packard Excellence in Acquisition Award. This award acknowledged the success of this joint team on the HPTSS program. The system successfully demonstrated tracking against a hypersonic target. It is proven and ready to defend the nation. Turning to the threat from unmanned aircraft systems, we anticipated a need for low-cost counter-UAS systems. As a result, we invested ahead of need to develop this capability and converted an existing factory to integrate our VAMPIRE counter-drone systems. We are positioned to capitalize on the rapidly expanding pipeline for these critical counter-drone systems. Our VAMPIRE system is combat-proven with hundreds of successful drone engagements, providing a modular, highly effective, low cost-per-kill solution. And we supported the successful Artemis II mission, contributing over 100 critical subsystems and components including propulsion, compute, communications, and critical systems for the first crewed lunar mission in more than fifty years. This mission demonstrates the breadth and depth of our engineering talent and our ability to support some of the most complex missions in the world and beyond. Taken together, these examples highlight a consistent theme. We are aligned to the most important missions, delivering capabilities needed today, and building the capacity required to sustain that growth over time. Back to you, Ken. Ken Sharp: Perfect, Chris. Turning to our 2026 guidance on Slide 10. We are reaffirming the full-year revenue guidance of $23 billion to $23.5 billion, representing 7% organic growth at the midpoint. We are maintaining our segment operating margin guidance of low 16%. We are increasing both the bottom end and top end of our GAAP EPS range by $0.10 to $11.40 to $11.60. We are reaffirming our free cash flow guidance of $3 billion. Our cash generation will be weighted to the back half of the year. At the segment level, we are reaffirming our revenue and segment margin guidance. Our 2026 guidance and 2028 framework continue to include Missile Solutions as it exists today. Consistent with our past practices, we do not contemplate impacts from the planned Missile Solutions IPO, the Department of War investment, or the planned sale of a majority stake in our space propulsion business. When these transactions occur, we will update our guidance accordingly. Moving to our supplemental guidance, our non-service income increased $20 million to $290 million and total pension income to $310 million. With that, Tiffany, please open the line for Q&A. Operator: We will now be conducting a question-and-answer session. At this time, please limit to one question per person. If you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 1 if you would like to remove your question from the queue. If you have an additional question, please press star 1 again to get back in the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question today comes from the line of John Godin with Citigroup. Please proceed with your question. John Godin: Ken, I wanted to ask about SMS and CSD, and I am reminded of a very cool chart you had at the Investor Day that showed growth versus valuation, and it implied that SMS multiyear growth was going to be considerably higher than CSD. When I look at the consensus estimates that are out there, it is pretty tightly packed. So I would love to use the opportunity to chat about SMS and what that growth profile might look like over the next couple of years and understand if there is upside to that growth over time, how you guys see it. Thank you. Christopher E. Kubasik: Alright. Thank you, John. This is Chris here. I appreciate you referring back to that chart. I think that was an important chart, and something people want to go back and reference. SMS had a great first quarter, as you saw, and the pipeline is very strong. In our ISR business, about a decade ago we started investing to position ourselves for missionized business jets. A perfect example was the South Korea award in Q4. We talked about the NATO country, and it all started with the Compass Call. We currently have 10 under contract today, and if you look at the budget request, you will see another 12 bringing the fleet to a potential for 22—and I believe many, many more. So I think what is unique about this market, and just ISR alone, is how well we perform and how quickly we move as a team. Specifically, we can basically take a commercial aircraft and in 18 months missionize it, which is unheard of for a military aircraft. Everyone is wanting early warning systems. I think this is one of the best platforms out there, and I think the future of ISR is very bright as a result of that one market. Space—we have talked a lot about space. This is another decision strategically we made about five years ago to invest in space, to be a prime satellite manufacturer. We have won every SDA competition. We submitted the proposal for the follow-on to HPTSS. We would expect to win that here, hopefully, in a few months, and the space business is growing quite well. In maritime, which is also part of SMS, there has been a huge increase in the budget for Navy and Navy ships, so we have the acoustics, the optical, platform and communication systems. So absolutely, we stand by the guidance we gave for the year, which I think is better than most out there, and we will continue to monitor and see if any adjustments are appropriate as the year progresses. Operator: Our next question comes from the line of Ronald Epstein with Bank of America. Please proceed with your question. Ronald Epstein: Yeah. Hey. Thanks, guys. Good morning. Chris, could we go a little deeper on what is going on in the space business? I mean, there was so much growth there, and I do not know what you can say around Golden Dome and what is going on there. But I am certain if you can give any more color on that, everybody would appreciate it. Christopher E. Kubasik: Yeah, Ron. Good morning. I think I will put it in two big buckets. We have missile warning and missile tracking as one line of business, and we have the classified work. I will give you some insight, which will probably be unsatisfying, but nonetheless, those two lines are growing very, very well. On Golden Dome, there have been a lot of opportunities there. It has taken a while for the monies to be identified and freed up so that the Space Force can go ahead and start the acquisition process. I mentioned the RFP came out for the HPTSS follow-on. We, and I am sure others, have submitted our proposals, and that is currently under evaluation. There are some other capabilities that are classified that fall under the broad Golden Dome umbrella. But let me just say with our capabilities, we are responding to RFPs, and our ability to build these satellites relatively quickly, affordably, and get them launched and performing I think is a differentiator. Actually, later this year, our customer will be launching the Tranche 1 eight satellites, and I think that will be pretty exciting. On the classified, I can tell you that we have been awarded a sole-source contract for $600 million with the potential for billions of dollars of follow-on. That is a result of our past performance, a creative, innovative solution that is working and is pretty much a game changer. So I have to acknowledge the customers are doing what they said, and they are going to reward and recognize those companies that are in fact performing. And in this environment, where speed and capacity matter, we have the factories. We have talked about the 200 thousand-square-foot investment we made a few years ago. We are performing, and I believe that positions us well for growth. I would like to point out on the HPTSS, which is probably why we won that award, it demonstrated capability—the only one to my knowledge that did. So that is why I am optimistic that we should win the next award. Operator: Our next question comes from the line of Myles Walton with Wolfe Research. Please proceed with your question. Myles Walton: Thanks, and good morning. Chris, on the topic of awards, you mentioned $25 billion of orders pending with the Munitions Acceleration Council. Do you expect those negotiations to wrap up in the next quarter or two quarters? Is this going to flow through quickly in one fell swoop, or is it more the visibility of the pipeline, and it will come out over time? Christopher E. Kubasik: Yeah. Thanks, Myles, and good morning. Step one is the framework agreement, which I have to admit in my decades of being in this industry is a new concept. I would think of that as a term sheet, if you will. We are in negotiations, again, as a supplier providing the solid rocket motors to the two major primes—Lockheed and Raytheon, specifically. They have announced their framework deals. They tend to be seven years for most of these MAC programs, like PAC-3 and THAAD, and maybe some are five-year programs or frameworks. They have theirs in place. We are close to finalizing those frameworks as a subcontractor framework with a prime. That should occur here in the near future. There we are basically agreeing on the pricing, the schedule, and some of the key terms. Those documents will allow us and give us confidence to continue to invest, even though we have been investing, to accelerate our investments. The $1 billion from the DoW is additional cash that accelerates that investment. Then the next step will be for the primes to go ahead and turn their framework agreements into contracts, and then I think shortly after that, we would turn ours into contracts. We are targeting the end of the calendar year. We have plenty of business and backlog that we are upon. This would be the next tranche. I do not see any line breaks or anything. In fact, we will be ramping up. I have to give the Department of War credit for their innovative approach to acquisition here. What is going on now has never been done in the history of our country, and they are going fast. We, and the rest of the defense industrial base, are keeping up with them to the best of our ability. I think it is a once-in-a-lifetime opportunity, and we are seeing a major shift—all for the positive—going forward. The budgets are up. We have the new technology. It is performing. Demand is up. And at the end of the day, you need the capacity to build all this stuff. We have the capacity, and we are even increasing it more. So I feel pretty good about where we are, Myles, and appreciate the question. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question. Sheila Kahyaoglu: Good morning, Chris and Ken. Chris, maybe digging into Ron's question a bit more—you had such stellar growth in Space and Mission Systems. Can we talk about the ISR portfolio, how that did, how it is growing, how South Korea is coming in, and can you maybe talk about the international pipeline there? Christopher E. Kubasik: Yeah. Thank you, Sheila. ISR has been a complete turnaround over the last couple of years, and it is both domestic and international. Let me start with the domestic side. There are a fair amount of classified programs that we are working on. Again, we are platform agnostic. We are taking anything from, as you know, crop dusters all the way up to major large commercial aircraft and missionizing, modernizing, as we have always done. There probably is not a platform we have not worked on. I mentioned 100 different aircraft in the past decade. I highlighted Compass Call as an example. If we can get this budget passed and get an additional 12, that is a big deal for us. That is how I see the domestic side. On the international, we were just reviewing the other day. We have about a $40 billion pipeline just on ISR international, to answer your question. When you look at South Korea—and I know that was in the fourth quarter—but I think everyone on this call knows how long and how hard it takes to close these international deals. To have a marquee win like that and, literally months later, to get a call from a NATO customer based on that award and all the great work we are doing is unheard of in my career. So we have the momentum. There are other international opportunities. Everybody wants early warning systems. And airborne aircraft by modifying a commercial plane seems to be the best, quickest way to get that capability. That speaks for a bright future, and that is why you see the growth for not only 2026, but all the way through the 2028 framework that we laid out two months ago. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Please proceed with your question. Seth Seifman: Thanks very much, and good morning, everyone. I wanted to ask about the communications business and what you learned and your takeaways from the budget request, both in terms of the traditional programs in the Army and the Marines, but also this new C2 infrastructure and C2 transport lines in the Army budget with some significant resources. How do you think about those and your ability to participate there? Christopher E. Kubasik: Okay. Thank you, Seth. I was hoping I would get that question. Good morning. We will start domestically with the Army HMS program. This has been a long legacy for L3Harris Technologies, Inc. Happy to report that in 2027, the budget is $515 million. I think there were concerns, including myself, that early on the president's budget request or discussions were that that would be cut significantly. So $515 million is a big deal. Even more impressive is that similar amounts are outlined for the next five years. So Army HMS is well funded and hopefully eliminates a lot of the concerns out there about the future of that portfolio. When you switch to the Marines, 2026 was a little bit of an off year. Their budget was down to $200 million. As of today, they have requested $750 million. So $200 million to $750 million for the Marines. They love our software-defined radios. They see the need for resiliency in dangerous and contested environments. We add in our stealth waveforms, and the affordability of these compared to maybe other options out there gives me a lot of confidence that at least the domestic side is looking good. You may recall we won a sole-source IDIQ a couple of years ago for the Marines. I point that out because clearly the vehicle is in place—contractual vehicle is in place—if they want to move quickly. This continues to demonstrate the power of the commercial business model that we have talked about for at least a decade, and we will continue to talk about it. We have had it for close to twenty years. It is working, and I think this kind of budget and demand signal is attributed to the commercial business model, which is why I have been advocating for more and more commercial opportunities for the defense industrial base to compete on in that level playing field. The other piece that gets a lot of attention, rightfully so, is NG C2. That is a large budget—$2.8 billion, to be specific. We are absolutely supportive of the NG C2 strategy and initiative. There is a transport layer, as they call it, which is basically where our software-defined radios, I think, will play nicely. We have already been awarded two contracts under NG C2 for the transport—admittedly not huge contracts—but still two pretty early on. The rest of the money is also associated with the infrastructure. So the Army and other companies—we are working with the Army and other NG C2 companies—to ensure that our products and radios can seamlessly integrate into an open-systems architecture that is currently being developed. I feel pretty confident and optimistic about our radio business, whether you look at the domestic side or internationally. I will switch internationally. As I highlighted in my prepared comments, there were three NATO allies—I will not mention them by name here—who are in fact buying our products. Belgium and Netherlands are other opportunities we are working on. Those are targeted for Q4 of this year. All these programs, as we have talked about, are ten-year modernizations. They have road maps. We can see the quantities. We can see how our new products and investments are paying off. In general, all these countries are about 20% complete, so there is a long runway ahead of us. As I mentioned, 2.2 book-to-bill international. There have been concerns whether anyone, including us, can grow internationally for all sorts of political and other reasons. But as we have said, at the end of the day, they want the best technology, and we are winning business in those countries with indigenous capabilities and head-to-head competition. Ken Sharp: Alright. Just a quick add, Chris. One, they are spectacular radios and great to have them in the hands of the warfighter. We do expect the business to accelerate as the year progresses and get to our guidance estimate. Operator: Our next question comes from the line of Douglas Harned with Bernstein. Please proceed with your question. Douglas Harned: Yes. Good morning. Thank you. I wanted to continue on this theme on communications. In the past, part of what has enabled you to get the margins you have gotten in radios has been your own investment, your own IP. You said this quarter that you had higher R&D spend in both SMS and CSD. Can you talk about how you are looking at your own R&D investment going forward and what percentage of revenues you see that moving forward at, and then how you see that being used across your portfolio? Christopher E. Kubasik: Yeah. Good morning, and thanks for that question, Doug. We are proud of the fact that we were able to increase our margins while investing. It is a huge growth market. Nobody denies that there is a huge demand, and this is kind of a once-in-a-generation opportunity to build backlog and to differentiate ourselves. We are absolutely investing in the radio business. Specifically, we will be rolling out a new radio shortly. We call it the Falcon V—following on from the Falcon IV—but it has some great new technologies that I think will be well received, and the main focus there is on the high data rate, which again is a need and a desire by the customer. We have made those investments to allow for that to occur. As with everything, these are all ten-year modernization cycles. I mentioned that international is about 20% complete. When I look at the domestic market, they are maybe halfway through their modernization. These go on ten-year cycles. We have been investing. We are increasing. As we roll out these new capabilities, I think it is going to increase our market share. There has been no cutting back relative to that. We stick in that 2.5% to 3% of revenue for our R&D, but the reality is we will do whatever it takes based on the demand and the opportunities. As we have talked before, we have well over $1 billion of CRAD contracts. In some cases, the customer gives us R&D contracts. I would put that on top of it. We kind of kick around $2 billion or so a year we are spending in R&D, and if you throw in the Shield Capital investments, it is another way of accelerating it. I really do not look at it from a specific account. We are spending all-in maybe 10% of revenue, in my opinion, on innovation, growth, and R&D. Hopefully, that helps, Doug. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed with your question. Noah Poponak: Good morning, everyone. On the surface, the high rate of organic revenue growth and new order bookings growth in the quarter makes the reiteration of revenue guidance look a little conservative. I know you have the non-linear working weeks. If you could talk through how much was there pull-forward, is there conservatism, is it just the math of the working weeks? And then, Chris, you referenced your backlog coverage now being meaningfully higher. Does that make you feel more like there is upside risk to the near term, or more like the existing growth has longer duration? Christopher E. Kubasik: Thanks for that, Noah. It definitely gives me confidence in the longer duration of revenue growth. As I mentioned, once we get these MAC programs in, you can see $60 billion to $70 billion of backlog in the next twelve months for L3Harris Technologies, Inc., which, if you go back not that long ago, is pretty darn impressive. As I reiterated, everything we have been doing over these last three to five years had a purpose to align with the strategy that we have laid out called the trusted disruptor—which I know not everybody understands what it means—but whether you understand what it means or not, you cannot argue with the financial results, not just this quarter, but for the last three years. We are growing. We are adding backlog. If we can end the year or next twelve months with $60 billion to $70 billion of backlog, that gives me a lot of confidence in the future of growth and the visibility. Of course, we always have the potential to try to accelerate and pull some of that stuff forward. I think I will ask our new CFO, since I defer to my CFOs on guidance adjustments and take their recommendations. Sounds like they wanted us to increase revenue. Why did you not do that then? Ken Sharp: Alright. Thanks, Chris. Look, it is absolutely a great quarter. Great start to the year. Fifteen percent organic revenue growth, margin expansion, 33% EPS growth. So I can understand why you are asking the question. I will add we did increase EPS, so I will take credit for the $0.10 increase there, but just give you a couple thoughts. I am forty-five days into the job. We are in the first quarter. We have a lot of road in front of us. I feel incredibly confident with the business. I think you will see us in July—it is a great question to ask then. Hopefully, we will have made some moves there, but I do think there is a level of conservatism in there. The extra productive days—it is really hard to exactly put your finger on the dollar amount—but I think it is a couple percentage points at the end of the day, maybe $200 million-ish in revenue. That really was not the driver in the quarter. It is just a great business doing really solid performance. Christopher E. Kubasik: I will just add in, Noah. We stick with our guidance for the full year—around 7%—and it is one of those damned if you do, damned if you do not. If we ended the quarter flat, you would be asking how the heck you are going to get to seven. We come out at 15%. Gives you a lot more confidence in getting to seven. I like to start—having not had the experience much—start the year with a great first quarter, have an awesome second quarter, and then see where we are and give you an update. A lot of things still in the works, so we need to work some more, continue to perform, and we are feeling pretty pleased with how we came out so far this year. Operator: Our next question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question. Robert Stallard: Thanks so much. Good morning. Chris, you highlighted how classified work contributed to the strong growth in SMS. Could you give us an update on how big classified is as a percentage of the overall company, and whether you think it is going to grow faster or slower than the overall company? Thank you. Christopher E. Kubasik: Thanks for that, Robert. I know it is never satisfying when you give the classified answer, and actually more and more programs are becoming classified that were not historically. We are hanging out right around 25% to 30%. The actual number is 28%, an increase from the prior year. We see international growing. We see classified growing. Really, everything is growing. Again, that is a result of getting this portfolio in shape over the last five years. I know there was a lot of concern about some of the acquisitions. We only made two, and they are both blowing away the business case. We said at the time that we made these we thought they aligned with the future of warfare. It appears that they are. The stuff we divested, and will continue to look to monetize, are either not core to L3Harris Technologies, Inc. and belong with a better owner. I really like the portfolio, and I think that is why you are seeing these kinds of results, and we will continue to see how we make our 2028 framework. Operator: Our next question comes from the line of Peter Arment with Baird. Please proceed with your question. Peter Arment: Yes. Thanks. Good morning, Chris, Ken, and Tony. Chris, I do not think anyone would question the demand signals on supporting these multiyear agreements, but maybe you could give us a little color on how L3 is protected on the amount side if there are changes. I know you have probably thought a lot about it, but just curious to hear your thoughts. Thanks. Christopher E. Kubasik: Thanks, Peter. That is absolutely a key focus of these negotiations. The DoW understands we are leaning forward, as is the entire defense industrial base. We may have started sooner than the rest, but everybody understands that it is more like a commercial world—you make the investments to get the long-term returns. These five- and seven-year deals are a big deal. There is bipartisan support for this, especially on missiles and munitions. It is hard to predict the future. Hopefully, a lot of this will be funded through the reconciliation—that is ten-year money. You could argue that could be covered in that. There will be protections for changes in quantities and, I guess, in the unlikely event that a program is no longer funded or needed. Given the demand signal, it is hard to imagine that would occur—at least in where we are focused, which is missiles and ammunition. That will be the next step. The framework agreement—obviously at a high level there is an agreement relative to that. Now we just need to reduce it to writing. Great question, but clearly that is on the top of everybody's list for the entire industry, and I think we are all going to be aligned and get the protections we need. Operator: Our next question comes from the line of Scott Mikus with Melius Research. Please proceed with your question. Scott Mikus: Morning, Chris and Ken. Going back to Peter's question, at Missile Solutions you have an aggressive volume ramp over the next decade. How much of your material spend at Missile Solutions is with sole-source suppliers, and when you firm up your multiyear agreements with the Department of War, are you also going to lock in those key suppliers so you are protected on inflationary pressures? Christopher E. Kubasik: Thanks, Scott. The answer is yes to the second part. In fact, we have had long-term agreements with the majority of our top suppliers. We are working with them, as you would imagine, to allow them to ramp up as well. Many of those suppliers are making investments on their own, and the Department of War is also helping them either with equity investments or loans. That is going to be, as you imply, key to all of us ramping—the supply chain. That was one of the first discussions going back almost a year with the DoW. They understand the need for the supply chain. In fact, we are part of the supply chain as a first-tier supplier with the SRMs to the missile primes. Sole-source—maybe at the time of the acquisition there were a lot of sole-source providers. I do not think we really have anything significant at this time. We have clearly focused on getting multiple suppliers, especially with cases, nozzles, and igniters. There are several components that we ourselves are investing in to have an additional second or third source of supply. We are not afraid to make any changes we need to find a way to grow this business. You would imagine people are knocking on our door trying to work for us. The companies that are willing to invest and play along with what we are trying to accomplish are going to get more and more work. That is going to be the key. I would think by the end of the year, if not already, we do not have any single sources of supply. Operator: Our next question comes from the line of Pete Skibitski with Alembic Global. Please proceed with your question. Pete Skibitski: Chris, I was wondering if I could double click one last time on space, particularly on the space pipeline. You talked about the aircraft ISR pipeline that is very robust. Are you seeing the space pipeline—excluding even HPTSS—really growing meaningfully? It seems like the administration is putting a lot of emphasis on space surveillance, that mission area, maybe expanding that. That might be classified. Also this AMTI, kind of moving AMTI from aircraft to space. Are you seeing a real expansion of the pipeline there and might we see increased order flow even beyond HPTSS over the next twelve months or so? Christopher E. Kubasik: Thanks, Pete. I can assure you the pipeline here I am looking at is in the tens of billions of dollars. A lot of what I talk about is LEO, the low Earth orbit. There are opportunities that we are currently working on and bidding that are both MEO and GEO orbits that, as you would imagine, are all classified. There really is not a big international, if I am honest, with space. There are a few things that we are doing there, but it is all going to be Air Force, Space Force, as you suggested. There are a lot of competitions coming up, and our past performance seems to be positioning us well. There is absolutely a commitment. I would say the last three to five years has been a lot of one-off demos. I hate to go back to HPTSS, but that was one satellite—and it worked. Now they are ramping that up with the follow-on. That type of approach is occurring throughout that portfolio. Big focus on missile warning, missile defense, hypersonics, classified—some of the areas you mentioned. I can assure you we have the capability. Again, we do not prime everything. There are a few things where we are working as a subcontractor based on our payload capabilities. There are a few places we are a merchant supplier, which is nice because you get on whatever team wins. It looks good. The team just has to continue to perform. We will get these things launched, and the future is bright. I wish I could tell you more, but this is a classified area, and I think the financial results speak for themselves. We will now take the last question. Operator: Our final question today comes from the line of Gautam Khanna with TD Cowen. Please proceed with your question. Gautam Khanna: I was wondering if you could give us some color on the asset sale in the quarter and the legal settlement, and what is embedded for asset sales throughout the year. How far along are we in that process of portfolio shaping? Thank you. Ken Sharp: Sure. Maybe some quick color. We routinely look at our shop floor space, where the products are in their life cycle. Clearly, we want to continue to keep the floor space focused on things that are higher growth, innovative, delivering capability for the customer. From time to time, we get products that are probably 20- to 30-year maturity. They do not grow really fast. They are great products. They just probably belong in somebody else's portfolio. We tend to look to move those out, free up the shop floor space, and really keep our workforce focused on innovative products. In the quarter, call it 30 to 40 basis points of margin, give or take, in the missiles business that popped through. We also had negative adjustments on EACs in there as well. They kind of offset one another. For the full year, we will certainly update as we go. I do not think we have any specifics around product line sales built into our guidance at this point. Christopher E. Kubasik: As we close today's call, I want to again thank our employees for their continued focus and dedication in a dynamic and demanding environment. We have several factories working three shifts, so your efforts are much appreciated. Their work directly supports the men and women who are bravely serving our nation. Supporting the warfighter is at the core of everything we do, and we remain mindful of their safety and well-being during these times. Thank you all for joining us today, and we look forward to talking to you in the weeks and months ahead.
Operator: Greetings, and welcome to Valero Energy Corporation First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Donovan, VP, Investor Relations. Thank you. You may begin. Brian Donovan: Good morning, everyone, and welcome to Valero Energy Corporation's First Quarter 2026 Earnings Conference Call. I am joined today by Lane Riggs, Chairman, CEO and President; Gary Simmons, Executive Vice President and COO; Rich Walsh, Executive Vice President and General Counsel; Homer Bhullar, Senior Vice President and CFO; as well as several other members of Valero's senior management team. If you have not yet received a copy of our earnings release, it is available on our website at investorvalero.com. Included with the release are supplemental tables providing detailed financial information for each of our business segments, along with reconciliations and disclosures for any adjusted financial metrics referenced during today's call. If you have questions after reviewing these materials, please feel free to reach out to our Investor Relations team. Before we begin, I would like to draw your attention to the forward-looking statement disclaimer included in the press release. In summary, it says that statements made in the press release and during this conference call that express the company's or management's expectations or forecasts of future events are forward-looking statements and are intended to be covered by the Safe Harbor provisions under federal securities laws. Actual results may differ from those expressed or implied due to various factors, which are outlined in our earnings release and filings with the SEC. I will now turn the call over to Lane for opening remarks. Lane Riggs: Thank you, Brian, and good morning, everyone. I am pleased to report that it was an excellent first quarter, demonstrating our team's ability to optimize our refining system and deliver strong financial returns. In a period marked by considerable disruption in the commodity markets, our operations and commercial teams executed well. Early in the quarter, the availability of incremental Venezuela supply resulted in wider crude differentials. Our advantaged Gulf Coast refining network was well positioned to benefit from the discounted heavy sour feedstocks. Market conditions shifted sharply in March as the global supply of crude and refined products tightened. Our operations team responded decisively, adjusting the product slate to reflect market signals and delivering a record monthly jet yield. At the same time, our commercial and financial teams proactively managed commodity risk to mitigate unique adverse impacts of a highly dynamic pricing environment. Financially, we maintained a strong balance sheet while continuing to honor our commitment to shareholder returns. On the strategic front, we continue to make progress on the unit optimization project at our St. Charles refinery. This $230 million initiative will enhance our ability to produce high-value products, including alkylate. We expect the project to begin operations in 2026. Looking ahead, constrained global refining capacity and low product inventories in key markets should continue to support refining fundamentals. Our concentration on high-complexity refineries provides significant feedstock flexibility and direct access to global markets, which are especially beneficial in the current environment. Additionally, our disciplined financial strategy and capital allocation framework position us to perform well across market cycles. In closing, our strong performance in a volatile first quarter underscores Valero's operational, commercial and financial strength. We remain focused on things we can control: operational excellence, system-wide optimization, and disciplined financial decision making. Consistent execution across these priorities positions us to benefit from the current margin environment and will continue to differentiate Valero. With that, I will turn the call over to Homer. Homer Bhullar: Thank you, Lane. For the first quarter 2026, net income attributable to Valero stockholders was $1.3 billion or $4.22 per share, compared to a net loss of $595 million or $1.9 per share for the first quarter 2025. Excluding the adjustments shown in the earnings release tables, adjusted net income attributable to Valero stockholders for the first quarter 2025 was $282 million or $0.89 per share. The Refining segment reported $1.8 billion of operating income for the first quarter 2026, compared to an operating loss of $530 million for the first quarter 2025. Adjusted operating income for the first quarter 2025 was $605 million. Refining throughput volumes in the first quarter 2026 averaged 2.9 million barrels per day. Refining cash operating expenses were $5.13 per barrel in the first quarter 2026. The Renewable Diesel segment reported operating income of $139 million for the first quarter 2026, compared to an operating loss of $141 million for the first quarter 2025. Renewable Diesel segment sales volumes averaged 3 million gallons per day in the first quarter 2026. The Ethanol segment reported $90 million of operating income for the first quarter 2026, compared to $20 million for the first quarter 2025. Ethanol production volumes averaged 4.6 million gallons per day in the first quarter 2026. G&A expenses were $285 million for the first quarter 2026. Depreciation and amortization expense was $840 million for the first quarter 2026, which includes approximately $100 million of incremental depreciation expense related to ceasing refining operations at our Benicia refinery. Net interest expense was $140 million, and income tax expense was $401 million for the first quarter 2026. The effective tax rate was 23%. Net cash provided by operating activities was $1.4 billion in the first quarter 2026. Included in this amount was a $303 million unfavorable impact from working capital and $102 million of adjusted net cash provided by operating activities associated with the other joint venture member’s share of DGD. Excluding these items, adjusted net cash provided by operating activities was $1.6 billion in the first quarter 2026. Regarding investing activities, we made $448 million of capital investments in the first quarter 2026, of which $404 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance, and the balance was for growing the business. Excluding capital investments attributable to the other joint venture member’s share of DGD and other variable interest entities, capital investments attributable to Valero were $430 million in the first quarter 2026. Moving to financing activities, we remain committed to our disciplined capital allocation framework. Shareholder cash returns totaled $938 million in the first quarter 2026, resulting in a payout ratio of 59% for the quarter. And on January 22, our Board approved a 6% increase to the quarterly cash dividend, reflecting a strong financial position and our commitment to a growing dividend. Turning to the balance sheet, in March we opportunistically issued $850 million of ten-year notes at a 5.15% coupon to de-risk upcoming debt maturities later this year. The notes priced at a refining sector record-low ten-year spread of 102 basis points over treasuries. At quarter end, we had $9.2 billion of total debt, $2.3 billion of total finance lease obligations, and $5.7 billion of cash and cash equivalents. Our debt to capitalization ratio, net of cash and cash equivalents, was 18% as of 03/31/2026. Our cash balance was higher at quarter end, reflecting the opportunistic timing of the March debt issuance and our decision to move towards the high end of our long-term $4 billion to $5 billion cash target to preserve optionality in a volatile market environment. Overall, we ended the quarter well-capitalized while still honoring our commitment to shareholder returns. Turning to guidance, as we operate the Port Arthur refinery at reduced rates, we continue to assess the full extent of the damages and develop a plan for repairs. We expect the incident to result in additional capital expenditures in 2026, which should be covered by insurance, subject to our applicable insurance deductibles. We will update our 2026 capital investment guidance when we are able to provide a definitive cost estimate and expected repair timeline. Outside of Port Arthur, our previous guidance regarding capital investments for sustaining the business and growth projects remains unchanged. Our growth projects are focused primarily on shorter-cycle optimization investments that enhance crude and product optionality across our refining system, as well as efficiency and rate expansion projects within our ethanol plants. Collectively, these projects should strengthen the earnings capacity of our existing asset base. For modeling our second quarter, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.69 million to 1.74 million barrels per day, reflecting reduced rates at Port Arthur; Mid-Continent at 450,000 to 470,000 barrels per day; West Coast at 120,000 to 130,000 barrels per day, reflecting the idling of Benicia; and North Atlantic at 480,000 to 500,000 barrels per day. We expect refining cash operating expenses in the second quarter to be approximately $4.85 per barrel. For the Renewable Diesel segment, we expect sales volumes of approximately 320 million gallons in the second quarter. Operating expenses should be $0.46 per gallon, including $0.22 per gallon for non-cash costs such as depreciation and amortization. Our Ethanol segment is expected to produce 4.7 million gallons per day in the second quarter. Operating expenses should average $0.39 per gallon, which includes $0.04 per gallon for non-cash costs such as depreciation and amortization. For the second quarter, net interest expense should be about $145 million. Total depreciation and amortization expense in the second quarter should be approximately $730 million, which includes approximately $33 million of incremental depreciation expense related to our plan to idle the processing units and cease refining operations at our Benicia refinery completed this month. We expect incremental depreciation related to the Benicia refinery to be included in D&A through April. The second quarter earnings impact of this incremental depreciation is expected to be approximately $0.09 per share based on current shares outstanding. For 2026, we expect G&A expenses to be approximately $960 million. That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions. Operator: We will now open the call for questions. The floor is now open for questions. Today’s first question is coming from Manav Gupta of UBS. Please go ahead. Manav Gupta: Good morning, guys. Very strong quarter considering everything else that we are seeing out there. I just quickly wanted to pivot to the global refining macro, and I am trying to understand, as these prices are rising, what you are seeing for demand out there. Are you seeing any early signs of demand destruction in your system? You kind of alluded to it, so I just want to confirm this. As you look into the next at least six or nine months, you have some refiners like Valero who can run as they wish, and then there are some refiners who may have a good kit somewhere globally but they cannot run because they do not have enough crude. I am just trying to understand within your refining system, are you able to source any crude that you are looking for and run all out if you want to? Gary Simmons: Yes, Manav, this is Gary. Despite the fact that, as you alluded to, prices for transportation fuels are moving higher, domestic demand appears to be very resilient. If you look at our wholesale volumes year over year, we do show a reduction in sales volumes in our system. However, this is not really a reflection of demand, but a result of idling the Benicia refinery and exiting a position in the Boston market. When we look at sales, we would say U.S. demand for gasoline is flat to slightly up. Diesel demand is up a little. That seems to be consistent with what you are seeing in the DOE data as well, with the DOEs reflecting increases in demand for gasoline, diesel, and jet. The big change in demand year over year is the pull into the export market since the conflict in Iran started. The recent DOE data show exports from the U.S. are up 470,000 barrels a day year over year. The pull into the export market is causing inventory to draw in the U.S. Relative to the five-year average, total light product inventories in the U.S. have drawn 30 million barrels since January. Distillate inventories are at five-year lows. Domestic demand remains strong for diesel with good agricultural demand as we start planting season, and the freight indices are beginning to improve a little. Export demand for distillate, especially jet, has been very strong with interest for U.S. Gulf Coast barrels from all over the world. As we approach driving season, gasoline inventory is now at the bottom of the five-year average range. The trans-Atlantic arb to ship to PADD 1 from Europe is closed. Both domestic and export demand remain strong. The Jones Act waiver is allowing us to supply PADD 1 and PADD 5 more efficiently from the U.S. Gulf Coast. I think as we approach driving season, VGO availability will start to become an issue. It does not appear there is sufficient VGO to fill both FCC and hydrocracking capacity. Current economics would favor hydrocracking, which could reduce gasoline production moving forward. You have read a lot about global demand destruction since the straits have been closed. It really appears to us that this is not demand destruction; this is insufficient supply to meet demand. Our expectations coming into the year were that new capacity additions along with more bio-renewable fuels on the market would be sufficient to meet incremental demand. We thought supply-demand balances would be similar to last year and then you would start to see a tightening at the end of this year. But the conflict in Iran has really created a market with demand significantly outpacing supply. We had very little excess refining capacity globally, so it is going to be difficult to restock inventories even once the conflict is resolved. Randy: Manav, this is Randy. I think the short answer to your crude sourcing question is yes. Most of our system is located in the Mid-Continent and Gulf Coast, so crude availability is really not much of an issue. As we have seen in the stats this week, the U.S. has become a major exporter of crude, amplified by the SPR release. Any exports out of the U.S. have to overcome high freight and pretty steep backwardation. We are always optimizing our crude slate in the Gulf Coast, and this time is no different, just the volatility on price and freight have been more extreme than normal. With the high freight costs, we have made some changes in our system by cutting back waterborne crudes and running more pipeline barrels. In addition, with more SPR volume on the market, we have purchased more of that grade, optimizing against other crudes. Since January, with the Venezuela sanctions removed, heavy discounts were already very advantaged for our system, and since the Iranian event started, those trends have only continued. Canadian heavy crude today is trading at about a $16 discount versus WTI in the Gulf. The location of our system in the Gulf Coast makes it a very advantaged backdrop. Operator: Thank you. Our next question is coming from Neil Mehta of Goldman Sachs. Please go ahead. Neil Mehta: Thanks so much, team, and again really solid results. Not to focus too much on quarter-to-quarter stuff, but when you think about the second quarter indicators, they are already showing $30 on the Gulf Coast versus Q1 levels, which were $18. It harkens back to 2022 when at that point your share count was closer to 400 million. Today, it is closer to 300 million. Maybe that is a question for Homer. As we start thinking about modeling out Q2, any pluses and minuses that we should be thinking about and anchoring to? Anything about March profitability that can give us a sense of what Q2 could shape up like? And then one specific product to dig into is jet, Gary. There is a lot of talk about the potential for shortages in parts of the world. How are you thinking about that product in general, how you can maximize your production of it, where you are trying to get it to, and are these concerns about jet availability globally founded or unfounded? Homer Bhullar: Yes, Neil, I think if you look to the second quarter, definitely some headwinds and tailwinds. Steep backwardation in the crude market is a headwind. In addition to the backwardation, when you see the physical markets disconnect from the futures, it becomes very complex to see what that will do to capture rates. In terms of tailwinds, heavy sour discounts and our system’s ability to maximize heavy sour crude are tailwinds. The premium regrade for jet fuel is a tailwind, as well as premiums for secondary products. So there are a lot of pluses and minuses as we move into the second quarter. Gary Simmons: On jet, I would say the concerns are founded. Jet is incredibly short. We have been trying to maximize jet in our system. Typically, if you look at jet as a percentage of total distillate, that averages 26% in our system. In March, we got that up to over 30%—jet as a percent of total distillates. In addition, we have a couple of refineries that do not make jet today that we are moving into jet production mode to try to increase jet yields even further as we go forward. Operator: Thank you. Our next question is coming from Theresa Chen of Barclays. Please go ahead. Theresa Chen: This quarter has highlighted the earnings volatility that refiners faced, and the range of outcomes has been wide in part due to different commercial and financial strategies. Despite operating in the same macro environment, your results appear to have been less volatile. From your perspective, what has enabled that? Does it reflect differences in crude sourcing, product placement, or hedging strategies, or something else structural in the business? Relatedly, this environment is also stress testing the balance sheets and leverage thresholds across the sector. You chose to maintain a relatively elevated cash position, to Homer’s earlier point in the prepared remarks. How are you thinking about that capital strategy today, particularly as a buffer against the volatility? And shifting gears, how should we think about the trajectory of DGD profitability going forward, considering current macro conditions, feedstock considerations, and regulatory changes that we have seen recently? Homer Bhullar: Hey, Theresa, I will start on the risk side and hedging specifically. Under normal market conditions, our approach can be more formulaic and process-driven where we basically manage our exposure above or below LIFO with derivatives positions. But when we started seeing higher volatility in both crude and product markets, our team met frequently—daily—to review our positions, and we were more proactive in managing our exposure. For example, we maintained our inventory positions much closer to LIFO. That reduced our overall exposure to derivatives-associated price swings, and in addition, it helps ensure you do not have a significant draw on cash for margin calls. You can see that we had minimal impact on that through working capital. On cash, we did move our overall base cash position towards the high end of the $4 billion to $5 billion minimum cash balance we have talked about. This is why we moved to a higher cash balance after the pandemic—to ensure that our liquidity never comes into question. While we did not have a huge cash flow draw, hopefully this quarter highlights the value of a higher cash balance. Our cash balance coupled with our bank facilities left us with almost $11 billion of total liquidity at quarter end, so we are really well positioned for whatever the rest of the year brings. Lastly, we were also proactive, as I mentioned in the opening remarks, and we opportunistically pre-financed our upcoming maturities for the balance of the year at a record-low spread. We just try to be proactive on every financial aspect of our business—risk, balance sheet, and shareholder returns. Eric Fisher: On DGD, Homer did a great job explaining the risk management structure. It is a little bit different, and so the mark-to-market that we have on our forward feedstock positions will be a little bit of a headwind if we see the underlying commodities continue to rise like we did for the last month or so. That said, the RVO is a pretty strong tailwind. We see higher margins—certainly higher in Q2 than in Q1—and overall, a better 2026 versus 2025. Operator: Thank you. Our next question is coming from Joe Lache of Morgan Stanley. Please go ahead. Joe Lache: Great, thanks. Good morning, and thanks for taking my questions. As we look beyond the Middle East disruptions, can you talk about how you see the supply-demand balance shaping up over the next couple of years? It seems like the balance was already pretty tight before the disruption, and now there is refinery damage and the need to replace inventories to contend with. Does this change how you think about mid-cycle margins going forward? And on Port Arthur, I recognize you are still going through the assessments, but to the extent you can, could you talk through the refinery damage assessment process and potential restart timeline, and what are the signposts that we should be watching for from the outside here? Lane Riggs: I do not know that this changes our approach to mid-cycle margins. We take a fairly conservative approach because of our disciplined approach around capital investment. We like to take a conservative mid-cycle because we use it to justify the capital. But certainly, it will create a market that is very tight. Even before the conflict started, our view was that starting at the end of this year, global demand would outpace new refining capacity additions, and we would have several years of tightness. The situation has brought that forward. In our view, if you look at the lost total light product production that has happened since the straits have closed, it takes a minimum of at least three days to rebuild stock for every day that the straits have been closed. At this stage, it is at least six months to a year to start restocking inventories back to where they were. There is just not a lot of excess refining capacity out there, and as we move forward and global demand continues to grow, it makes that situation even tighter. Gary Simmons: On Port Arthur, on March 23 we had a fire in the diesel hydrotreater at Port Arthur, and the entire refinery was shut down as a precaution. All employees were accounted for. No refinery injuries were reported as a result of the incident. The investigation into the cause is ongoing, so I cannot share too much around that. Our operations team did an excellent job getting the smaller crude unit train back up in early April, along with the coker, hydrocrackers, the reformer, and a distillate hydrotreater. We are currently starting up the larger crude unit as we speak, along with the FCC and alkylation unit. We would expect by May 1 that throughput looks fairly normalized at the Port Arthur refinery. The diesel hydrotreater that experienced the fire, along with an adjacent kerosene hydrotreater, do remain down, which could negatively impact capture rates some in the second quarter. We expect to get the kerosene hydrotreater back by the third quarter. The diesel hydrotreater did sustain extensive damage; we do not have a timeline for the rebuild yet. As Homer mentioned, the impact is reflected in our throughput guidance for the quarter. Operator: Thank you. Our next question is coming from Doug Leggate of Wolfe Research. Please go ahead. Doug Leggate: Thanks for having me on. I am trying to understand what is going on with the physical crude impact on capture rates. We saw Maya, we saw Pemex cut their K factor in half. We are seeing Dated Brent at big premiums, and now apparently a flotilla of tankers coming to the U.S. Gulf Coast perhaps putting a bid under WTI. When you look at your slate, how is the physical side of the crude market impacting the capture rate? And for Homer, you have one of the best balance sheets in the sector, which means you have a lot of options for your surplus cash. If you look at the implied free cash flow forever—excluding the current windfall—is north of $7 billion at a 10% discount rate. How do you think about your valuation in the context of what you do with that cash, specifically as it relates to share buybacks? Randy: I will start on the crude side. For the most part, Gary mentioned before, part of the headwind on capture is the steep backwardation in the market. It hit some highs last month at $11 to $14; it is in the $6 range now, and it has moved higher over the last couple of days. Some of the grades are already included in the capture calculation, so that is already reflecting some of the movement. Outside of that, there are things that we are doing that are not captured in it—Venezuelan purchases, for example. Since the January sanctions removal, we have meaningfully ramped up Venezuela runs in our system, all done at better economics than our alternatives on heavy sour. As we touched on before, heavy grades in the Gulf Coast continue to look very attractive for our system. Homer Bhullar: Doug, thanks for your comment on the balance sheet. There is no doubt current margins are good, but as you can tell by our results, we put ourselves in a really good position to take advantage of that and not hang our strategy on just the current margin environment. We continue to optimize and grow the business with discipline around minimum return thresholds, and we are using a longer mid-cycle price set, as Lane highlighted earlier. We also continue to work hard to manage our costs, and all of this puts us in a great position for shareholder returns. With respect to buybacks, share repurchases are an efficient and flexible means of returning excess cash to shareholders in the broader context of capital allocation. Our balance sheet and cash position are in the best position they have been for a very long time. Our underlying commitments around the balance sheet, minimum cash, and shareholder returns will not change, but we may move within the bounds we have laid out depending on the environment. We clearly did that with respect to cash during the first quarter. Our net debt to cap is still below our long-term range of 20% to 30%, and we have plenty of coverage for other uses of cash. I think you will continue to see us return excess free cash flow to shareholders through share repurchases. This approach has reduced our overall share count by 42% since 2014, and our return on buybacks is close to 20% over that time period. Buybacks do create perpetual value by reducing the share count, so you should expect us to continue to operate in that mode. Operator: Thank you. Our next question is coming from Philip Jungwirth of BMO Capital Markets. Please go ahead. Philip Jungwirth: You mentioned earlier making some adjustments in the Gulf Coast on the feedstock sourcing side, and I was wondering if you could talk about any changes you have made specific to the North Atlantic region. You have Dated Brent in the indicator, but I assume you can do a bit better here, especially at Quebec City. Maybe also touch on the export side and how you are optimizing given market volatility and global demand for products? And we regularly get questions around some form of restriction on product exports. Based on your conversations, where would you put the level of government support here? What would be any unintended consequences? What other levers are there to pull to ease some of the upward pressure on gasoline prices, whether RVP or other things that could be done? Randy: Sure, Phil. For Quebec, it is mostly a 100% North American crude slate—taking barrels from Western Canada and from the Gulf Coast—that tends to avoid some of the spikes we saw in Dated Brent earlier in the month. For Pembroke, we did see volatility in the prompt-dated market that seems to have lined out as some of the initial panic buying subsided. It even got to the point where some people were reportedly cutting runs as Dated Brent spiked higher. Fortunately, we avoided some of the peak numbers on crude purchases. Looking ahead, our margin environment for Pembroke still looks favorable as we move forward. Rich Walsh: On export restrictions, there have been lots of conversations with the administration, and they are keenly aware and watching prices. They have already taken actions—the Jones Act waiver early on really helped. The reality is any kind of export ban actually makes the situation worse, and they are keenly aware of that. The U.S. is long crude and long refining production, and we are tethered to the world market. It is important to make sure that we get optimized and provide supply to global markets—this is a huge competitive advantage for the U.S. The administration fully understands that. They are looking at all the options and tools out there, but we are not positioned like some other countries that do not have the resources we have. Those kinds of strategies really do not make sense for us. I do not think there is meaningful potential for an export ban to happen. Operator: Thank you. The next question is coming from Jason Gabelman of TD Cowen. Please go ahead. Jason Gabelman: Thanks for taking my questions. The recent conflicts have resulted in pretty massive dislocations in the market. Do they change the way you think about investment opportunities and how you run the business in the medium term? For example, you talked about a potential VGO shortage in the country—could that be an area for investment to help close your own shortage, or are there other opportunities like that? And on futures curves and specifically futures cracks, the market broadly uses that to help price refining stocks, but there is not much liquidity on the back end of those curves. If it could take six to twelve months if Hormuz was open today to rebuild inventories, how do you think about where cracks are on futures in the second half of the year? Do you think we see a similar dynamic as during the Russia-Ukraine war where the back end trends higher through the year and ends up higher than what was represented early in the year? Lane Riggs: It is a good point. The Ukraine and Iran conflicts have really demonstrated the resilience of North America, largely due to a robust oil and gas industry. We sit in the Gulf Coast; we have the most flexibility on crude feedstocks, and we can export anywhere in the world. In terms of how we think about projects, we like to bucket them. We like projects that increase our commercial leverage. On your VGO question, that is an area we want to get through our gating system to position ourselves to be less dependent on VGO imports. We are not going to lose our discipline, but we see an issue highlighted by these conflicts. We also like reliability projects—the key is to be able to move your assets around and run reliably through all this. Finally, yield projects—better yields, essentially FCC projects, to upgrade what we are making. On ethanol, while it is not directly tied to the conflicts, you are seeing the world looking to blend more ethanol in the fuel mix. We have a positive view of the ethanol business and are investing in incremental growth and yield improvements, with the backdrop of improving carbon intensity. In renewable diesel, we have the SAP project hanging out there; we want to see policy. Everything in that space is very dependent on how policy works out across administrations. Gary Simmons: On the futures curves, our view is the back end of the curve is undervalued. It is somewhat hindering trade flows that need to happen. High freight rates along with steep backwardation are making markets that are short and need product today look to the future thinking they will be able to buy that product at lower values. In reality, it is the curve just rolling up, and we expect that to continue. Operator: Thank you. Our next question is coming from Matthew Blair of Tudor, Pickering, Holt. Please go ahead. Matthew Blair: Hey, thanks and good morning. You mentioned some of your commercial opportunities in areas like the North Atlantic. Do you also have opportunities on the West Coast and, in particular, are you using Jones Act waivers to ship both crude and products to the West Coast? And the ethanol results seemed pretty good—better than our expectations. Was that just a function of improving values on the co-products, or were you able to record any 45Z contributions in the ethanol segment? What is the overall outlook for 45Z and the potential contribution this year in ethanol? Randy: Matthew, we have utilized several Jones Act waivers, primarily for products—both renewables and conventional products—moving from the Gulf Coast to the West Coast and to Florida. Eric Fisher: On ethanol, Lane alluded to what we are seeing in global demand. As one of the largest exporters of ethanol, we are seeing a pull on ethanol. As hydrocarbon prices have increased, so has the value of octane, and ethanol—being an octane component—has become the cheapest form of octane in the world. That is why you are seeing a lot of interest, and countries can use ethanol as a supplement just like in the U.S. You see a lot of countries going from E0 to E10. Brazil is going from E30 to E32. India is going to E20 and talking about going higher. Everyone sees ethanol as a cheaper form of liquid fuel, so you are seeing demand. As far as the PTC (45Z), what we booked in the first quarter was $0.10 a gallon on 10 of our plants, using the original definition of qualified sales. What we will ultimately see once the guidance is published—hopefully by the end of this year, but it may not be until next year—is the next $0.10 to $0.20 across all our plants, across all our sales. Operator: Thank you. Our next question is coming from Paul Sankey of Sankey Research. Please go ahead. Paul Sankey: Good morning. You had mentioned the shortage of VGO, and I wondered if you could talk a little bit about where you might anticipate other actual physical shortages emerging in the oil chain. Secondly, Lane, you have talked in the past—Joe certainly has said this—that when you look at your inventories over time, you do not play inventories; you are working operationally to optimize your performance. Firstly, I assume that you are still doing that. Secondly, how do you see a situation where inventories deplete? I assume that the industry will not go to zero inventories. As we get these draws, when is the point at which prices go a ton higher, in your best guess? Lane Riggs: On other shortages, obviously VGO is an issue. If you think about how trade flows worked before all this started, net VGO flowed from Europe and the Middle East into the U.S. to satisfy the complexity—the FCCs and the hydrocrackers—here. Besides jet, which everybody knows about, in the U.S. we do not see other structural issues in terms of intermediates at this point. On inventories, yes, we continue to operate around our working inventory, which equals our LIFO inventories. Homer alluded to the volatility in the commodity market; we worked hard to avoid derivative volatility and to keep crude oil inventories from creeping above working levels that would create a short paper position. Gary Simmons: It is very difficult to tell at what inventory level prices inflect sharply higher. As I alluded to before, with steep backwardation, a lot of markets that are short product today are living hand-to-mouth, thinking they will be able to buy replacement barrels in the future at cheaper values. At some point, they will realize they need the volume, and you will see a reaction in price. At what inventory level that occurs, I do not have any specific insight. Operator: At this time, I would like to turn the floor back over to Mr. Donovan for closing comments. Brian Donovan: We appreciate everyone joining us today for the call. As always, feel free to contact our Investor Relations team if you have any additional questions. Have a great day. Operator: Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
Operator: Greetings, and welcome to the NWPX Infrastructure, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Scott J. Montross, President and CEO. Please go ahead, sir. Scott J. Montross: Good morning, and welcome to the NWPX Infrastructure, Inc. First Quarter 2026 Earnings Conference Call. My name is Scott J. Montross, and I am President and CEO of NWPX Infrastructure, Inc. I am joined today by Aaron Wilkins, our Chief Financial Officer. By now, all of you should have access to our earnings press release, which was issued yesterday, April 29, at approximately 4:00 p.m. Eastern Time. This call is being webcast and it is available for replay. As we begin, I would like to remind everyone that statements made on this call regarding our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent Form 10-K for the year ended 12/31/2025 and our other SEC filings for discussion of such risk factors that could cause actual results to differ materially from our expectations. We undertake no obligation to update any forward-looking statements. Thank you all for joining us today. I will begin with a review of our first quarter performance and our outlook for 2026, and then Aaron will walk you through our financials in more detail. We delivered a strong start to 2026. Net sales were up 19% year-over-year to $138.3 million, reflecting meaningful growth across both our Water Transmission Systems (WTS) and Precast businesses. Our strategy delivered record first quarter consolidated gross profit of $26.7 million, up 38% from last year, with our gross margin expanding 260 basis points year-over-year to 19.3%. That strength carried through to the bottom line, highlighting the operating leverage in our model and continued execution across the organization. We generated record first quarter profitability with earnings of $1.08 per share, and produced strong free cash flow of $25.7 million, or $2.62 per share, reinforcing the strength and consistency of our earnings profile and the resilience of our cash flows. Turning to our WTS segment, revenue reached a first quarter record of $93.5 million, up 19% year-over-year with strong margin improvement. Our performance reflected higher production volume, with tons produced up 18%, supported by strong project execution. This growth came despite adverse weather that caused unscheduled downtime across three WTS facilities early in the quarter. Selling prices were up 1% year-over-year driven by changes in product mix, and we also benefited from favorable project timing across several large water transmission jobs. In addition, we saw one of our strongest booking quarters to date with robust bidding activity and the emergence of a significant previously unplanned project that is under NDA, which will contribute positively to our 2026 result, all of which contributed to a substantial increase in our backlog, reinforcing the strength of demand across our markets. WTS backlog, including confirmed orders, ended the quarter at a record $430 million, up from $346 million at year-end and well above the $289 million level we reported this time last year. Looking ahead, we expect the 2026 bidding environment to be moderately stronger than 2025. WTS gross profit increased 42% year-over-year to $17.3 million, resulting in a gross margin of 18.5%, up 300 basis points from last year. This improvement reflects higher volume supported by strong customer demand, and the related efficiency gains and higher overhead absorption that come with that level of production, favorable product mix, and the overall solid operational execution across the segment. Now turning to our Precast segment. Precast revenue increased 19% year-over-year to a new record first quarter level of $44.8 million. Our performance was driven by a 14% increase in selling prices from a favorable change in product mix, and increased sales volume reflecting continued growth in the nonresidential portion of our business. At Park, production increased 30% year-over-year with strong growth in revenue per yard shipped. Despite borrowing costs that remain elevated as the Fed held interest rates steady in 2026, we are continuing to see signs of improvement in the nonresidential demand trajectory as we progress through 2026, specifically related to data center projects that have been instrumental in buoying the commercial construction demand. At Geneva, production and shipments had solid year-over-year gains of 78% respectively, despite seeing a moderate slowdown in the residential construction market, which has more than been offset by growth in Geneva’s nonresidential business. Leading indicators remain solid early in 2026 with the Dodge Momentum Index up 26% in March versus March 2025. The commercial sector was up 29% and institutional was up 20%, indicating positive signals for nonresidential construction activity this year and into 2027. Our Precast order book ended the quarter at $55 million, down modestly from $57 million at year-end and below the $64 million level at March 31. The Precast order book has remained stable for the last several quarters and continues to keep pace with higher levels of production and customer shipments. Stronger volumes and pricing drove a 30% year-over-year increase in Precast gross profit to $9.3 million, resulting in a gross margin of 20.9%, up from 19.1% last year. These results show that absorption rates are improving with higher throughput. We expect margins to continue recovering as nonresidential demand builds. Now turning to our strategic growth initiatives. As previously discussed, we are making solid progress expanding Precast capabilities across our network. We are also looking at where it makes sense to bring Precast into additional WTS facilities through our product spread strategy, which remains an integral part of our long-term growth plan. As part of that endeavor, we are seeing better capacity utilization at our Precast plants, strong momentum at our Geneva operations in Utah, and steady progress as we introduce Park and other Precast-related products into more WTS locations. At the same time, we continue to evaluate M&A opportunities in the Precast-related space that can accelerate our strategy, expand our manufacturing capabilities and efficiencies, and broaden our geographic reach and product portfolio. Consistent with this approach, we are looking at both single-plant acquisitions and larger opportunities that can support long-term growth and help us advance our Precast expansion. As previously announced, we completed the acquisition of Bouton Precast, a single-site producer in the high-growth Pueblo, Colorado market during 2026. The integration is off to a strong start and we are encouraged by the long-term growth potential we see in the Colorado market. I will now turn to our outlook for 2026. In our Water Transmission Systems segment, we expect higher revenue and margins compared to both 2025 and the prior quarter, driven by more favorable volume and product mix and the emergence of a significant previously unplanned project. We entered 2026 with a robust WTS backlog and elevated bidding levels, and both strengthened further in the first quarter, providing even greater visibility into near-term demand. Based on what we are seeing today, we expect full-year bidding levels to be stronger than what we saw in 2025 and we expect backlog to stay elevated throughout 2026. We remain encouraged by the level of activity across current and upcoming water transmission projects, which continue to come with improved economics and margins. For a more complete view of these projects, please refer to our investor presentation on our website. Turning to Precast, we maintained a stable and healthy order book in 2026 and we expect a stronger year for the Precast business overall. Demand remains healthy in the nonresidential market, supporting continued momentum across our Park and Geneva platforms. For the second quarter, we expect Precast revenue to be higher than the second quarter of last year and the prior quarter with stable margins driven by solid demand, higher production levels with improved absorption, and a strengthening order book. On a consolidated basis, we expect the second quarter to be stronger than we have seen in recent years. We believe 2026 is shaping up to be a historic year for NWPX Infrastructure, Inc. Continued momentum in our Precast business combined with strong bidding activity in our WTS business is indicating the potential for another record year. In addition, the significant previously unplanned WTS project noted earlier is additive to what we already expect for a record year. In closing, I am very pleased with our results, which set new first quarter records across nearly every metric. Our teams delivered exceptional execution throughout the quarter, and I want to thank everyone at NWPX Infrastructure, Inc. for their commitment to our strategy and to maintaining a strong safety culture. With the WTS backlog that is stronger than ever, a healthy bidding environment, and solid momentum in our Precast order book, we feel well positioned to carry this performance forward and continue building on the progress we have made across both segments. As we look ahead, our near-term priorities remain: one, maintaining a safe and rewarding workplace; two, focusing on margin over volume; three, intensifying our pursuit of strategic acquisitions; four, implementing cost efficiencies across the organization; and five, returning value to our shareholders when M&A opportunities are limited. I will now turn the call over to Aaron, who will walk through our results in greater detail. Aaron Wilkins: Thank you, Scott, and good morning to everyone joining the call today. Before I begin, I would like to mention that unless otherwise stated, all financial measures in my remarks refer to 2026, and all comparisons will be year-over-year comparisons versus 2025. I will begin with our profitability. We delivered record first quarter consolidated net income of $10.5 million, or $1.08 per diluted share, up from $4 million, or $0.39 per diluted share, reflecting the improving operating leverage on higher revenues and the continued strength in execution across the business. On the top line, consolidated net sales grew 19.1% to $138.3 million from $116.1 million last year. Our Water Transmission Systems segment also posted a record first quarter, with sales rising 19.1% to $93.5 million versus $78.4 million. This growth was driven by an 18% increase in tons produced due largely to project timing and a 1% improvement in selling price per ton due to product mix. Precast delivered a record first quarter as well, with sales up 18.9% to $44.8 million compared to $37.7 million. The results benefited from a 14% increase in selling prices due to product mix and a 4% increase in volume shipped. As a reminder, the products we manufacture are unique, and the average sales prices for both of our operating segments, as well as the Precast shipment volumes and WTS production volumes, cannot always be relied upon as comparable metrics due to variations in the mix between periods. We also achieved record first quarter consolidated gross profit supported by higher volume and favorable pricing and mix. Gross profit was $26.7 million, up 37.7%, representing 19.3% of sales, a 260 basis point improvement from $19.4 million or 16.7% of sales. In Water Transmission Systems, gross profit increased 42.3% to $17.3 million, or 18.5% of segment sales, a 300 basis point improvement from $12.2 million or 15.5% of sales. The increase reflects higher production volume and the associated operational efficiency gains, as well as favorable changes in product mix. Precast gross profit also reached a record first quarter, rising 30% to $9.3 million or 20.9% of segment sales, compared to $7.2 million or 19.1% of sales. The 180 basis point improvement in gross margin was largely driven by higher selling prices tied to product mix. Selling, general and administrative expenses were $14 million, up 1.5%, and represented 10.1% of net sales, a 180 basis point improvement from 11.9% of net sales a year ago, even with modest increases in incentive compensation expense. For the full year 2026, we now expect consolidated SG&A to range between $53 million and $55 million. Depreciation and amortization expense was $4.8 million compared to $4.4 million, and we continue to expect a full-year expense of approximately $20 million to $22 million. Interest expense declined to $0.3 million from $0.6 million, reflecting lower average daily borrowings. Income tax expense was $2 million, resulting in an effective income tax rate of 16% compared to $1 million or a rate of 19.8% last year. The effective rates for both quarters were primarily impacted by tax windfalls recognized upon the vesting of equity awards. Our tax rate can vary based on the level of total permanent differences relative to pre-tax income. For the full year, we currently expect an effective tax rate of approximately 24% to 26%. I will now turn to our financial condition. At 03/31/2026, cash and cash equivalents improved to $14.3 million from $2.3 million at year-end. Our debt balance totaled $10.7 million, and there were no outstanding borrowings on our credit facility at March 31. This resulted in a net cash position of $3.5 million as we continue to drive cash to the balance sheet to support our growth and shareholder return priorities. Our improved profitability, coupled with favorable changes in working capital, drove strong net cash provided by operating activities of $29.2 million, reflecting a more than 500% increase from $4.8 million last year. Capital expenditures were $3.5 million compared to $3.7 million last year. For the full year 2026, we continue to expect CapEx in the $20 million to $24 million range, including approximately $6 million for investment projects to support our Precast product spread strategy and broader Precast growth initiatives. As a result, we generated $25.7 million of free cash in the quarter compared to $1.2 million last year. For 2026, we are raising our full-year free cash flow outlook to $50 million to $56 million, up from a prior range of $40 million to $46 million. In terms of capital deployment for the quarter, we spent $8.9 million to complete the purchase of Bouton Precast, repurchased approximately 33 thousand shares of our common stock at an average price of $67.17 for a total of $2.2 million, and repaid $1 million in debt. These activities highlight our ability to continue to grow NWPX Infrastructure, Inc. while concurrently returning value to our shareholders. To close, we delivered a strong start to the year, with first quarter records for revenue under the current configuration, gross profit, and earnings. We also generated very strong free cash flow, further strengthened our balance sheet, and remained disciplined in our capital deployment. Our record Water Transmission Systems backlog and our solid Precast order book, coupled with the commercial team’s focus on pricing and our track record of superb operational execution, position us to achieve new heights in financial performance as we move through the remainder of 2026. Thank you to our employees for their continued concentration on workplace safety and to our shareholders for their continued support. I will now turn it over to the operator to begin the question-and-answer session. Operator: We will now open the call for questions. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question today comes from Julio Alberto Romero with Sidoti & Company. Julio Alberto Romero: Thanks. Good morning, Scott and Aaron. Scott, I appreciate the significant previously unplanned project is under NDA, so to the extent that you can, could you maybe help us understand, at a high level, how additive the project is to your 2026 outlook? Does it go beyond 2026, potentially to 2027? And then secondly, should we think of this as kind of a one-off, or does it have the potential to lead to additional phases or repeat business with that customer? Scott J. Montross: Yes, and like you said, we are under NDA. It is a government-related project. It is being produced at multiple of our plants. What I would tell you is it looks like this piece of the project, because there are, from what we understand, multiple other pieces of this project as we go forward into the future, is right in the area of about $50 million. The real question is it is a relatively short-fuse job that is scheduled to be produced in the late second quarter, third quarter, going into about the mid-fourth quarter of this year, and that segment is expected to be done. I think one of the challenging things right now is there is a little bit more of a question on how quickly you can get all the steel to do it, so there is a potential that some of it could leak into next year. But the understanding we have of these projects is there are multiple phases that are planned right now that go out into the future that could be additive to other years as we go into the future, and I think that is probably as clean of a look as I can give you, Julio, on the thing. Julio Alberto Romero: Absolutely. I really appreciate the color you gave with that answer. On your cash flow in the quarter, it was very strong, and it looks like your net contract asset position improved pretty meaningfully, driven by contract liabilities. Can you give us any more color on what drove that increase, and is it tied to that project, or any other larger WTS projects? Aaron Wilkins: Yes, hi, Julio. The cash flows for the business obviously can be a little bit challenging to forecast because they can at times be a little lumpy, which is normal. Really what happened, and what continues to be a focus for our Water Transmission Systems commercial teams, is to drive what I call special billings—trying to get the steel billed in advance of the project, get MOH payments and progress payments throughout the job. That is something that over the span of the last three years we are seeing growing success at. It is still negotiated individually with specific customers, but we are able to do that more often than we used to be able to do it. What happened was we had a $20 million collection on one of those special billings come in in the month of February or March. You will notice that our accounts receivable remains elevated, which means that we are still doing a great job of billing customers. That is because we have, also on a completely separate job, billed another customer for a little over $20 million, and that has since been received. The business model really has been driven to get the cash flows as a focus, and that is why, in part at least, I raised our guidance range for free cash for 2026. I think we are going to be more successful. I think there are more opportunities for the WTS team to do these special billings in the year compared to 2025, which was also a very successful year, by the way. And I think that the new job that Scott just talked to you about, those two elements were worthwhile for raising the range so quickly into the year. I will tell you, though, Julio, the thing that could still come, depending on the success—there is always timing, right? You could always be paid on January 1 for something that really was attributed this year, which is why I may be a little bit gun-shy. But it is very possible that cash flows could go up another clip of $10 million or more in the ranges to be broadcast in the future. So it is not unheard of to think of $60 million or more of free cash this year for the company. Julio Alberto Romero: Understood. Very helpful there. And one more for me: you have record backlog of $430 million in WTS, including confirmed orders. Can you help us think about where your capacity utilization stands for that segment, and would you be able to take on additional work from here? Scott J. Montross: Yes. We can take on a lot more work than we have right now with the capacity we have spread across the country in our plants. We would need to move stuff between plants, but we have plenty more room to take on additional work as we go forward. Capacity utilization—if we are much over probably 70% or 72% in the Water Transmission Systems business—that is probably about a high point for us at this point. You can obviously add additional shifts too if we need to, which we do at certain plants at certain times when it is busy enough. So yes, we have a lot more room to produce a lot more, Julio, and are ready to do so. Julio Alberto Romero: Excellent. Thanks for all the color, and best of luck. Scott J. Montross: Thank you. Thanks, Julio. Operator: As a reminder, if you would like to ask a question, please press star 1 at this time. We will pause for just a moment. At this time, there are no further questions. I would like to turn the call back over to Scott J. Montross for closing remarks. Scott J. Montross: I would just like to wrap up by saying thank you to everybody for joining the call, like always. We delivered a very strong start to 2026. I think we are at a point now where we can say that NWPX Infrastructure, Inc. is hitting on all cylinders with the things that we are seeing. The bidding, outside of the project that is under NDA, in the first quarter in Water Transmission was probably the strongest we have seen, and really probably the strongest booking quarter that we have ever had on the Water Transmission side of the business. So we have significant momentum going forward on the Water Transmission side. On the Precast side, again, we are seeing a lot of work around data centers. Data centers are one of the things that are really buoying the commercial construction side of the business now, and the two states that we are in on the Precast side—primarily in Texas and in Utah—are very strong data center centers. I think there are something like 140 projects going on in Texas that we are taking part in, and other projects going on in Utah, which is becoming more of almost a giga site for data centers where there are really large ones being built. Even with a little bit of the slowdown that has been discussed in the press on the residential side of the business, we are still seeing very strong Precast business, and where we have seen slowdown on the residential side—for example, at our Geneva business—that is being picked right up on the nonresidential side, and the Precast business continues to grow. The biggest thing is we continue to advance our strategy going forward with both organic growth and M&A; we are going to continue to do that. We expect a strong second quarter. When we looked at the projections for 2026, even before we had this special project come forward, we were projecting another record year and stronger than 2025, and this big project is just additive to that. We are hitting on all cylinders. We appreciate your support as shareholders and our analyst support. Thank you, and we will see you in late July. Operator: Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time.
Operator: Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2026 CVR Partners, LP earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one. As a reminder, today's call is being recorded. I will now hand today's call over to Richard J. Roberts, vice president of FP&A and investor relations. Please go ahead, sir. Richard J. Roberts: Good morning, everyone. We appreciate your participation in today's call. With me today are Mark A. Pytosh, our chief executive officer; Dane J. Neumann, our chief financial officer; Mike Wright, our chief operating officer; and other members of management. Prior to discussing our 2026 first quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events, or otherwise, except to the extent required by law. This call also includes various non-GAAP financial measures. Disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2026 first quarter earnings release that we filed with the SEC for the period. Let me also remind you that we are a variable distribution MLP. We will review our previously established reserves and current cash usage, evaluate future anticipated cash needs, and may reserve amounts for other future cash needs as determined by our general partner’s board. As a result, our distributions, if any, will vary from quarter to quarter due to several factors, including, but not limited to, operating performance, fluctuations in prices received for finished products, capital expenditures, and cash reserves deemed necessary or appropriate by the board of directors of our general partner. With that said, we will turn the call over to Mark A. Pytosh, our chief executive officer. Mark A. Pytosh: Thank you, Richard. Good morning, everyone, and thank you for joining us for today's call. To summarize financial highlights for 2026, net sales were $180 million, net income was $50 million, EBITDA was $78 million, and the board of directors declared a first quarter distribution of $4 per common unit, which will be paid on May 18, 2026 to unitholders of record at the close of market on May 11, 2026. In 2026, our ammonia plant utilization was 103%, with both plants running well and experiencing minimal downtime during the quarter. We also saw an increase in ammonia sales volume relative to the prior-year period, along with increased sales prices for UAN and ammonia. The tightness in the nitrogen fertilizer market that began in 2025 has only been amplified by the conflicts in the Middle East over the past two months, leading to higher prices for the spring. I will discuss further in my closing remarks. I will now turn the call over to Dane to discuss our financial results. Dane J. Neumann: Thank you, Mark. Turning to our results for 2026, we reported net sales of $180 million and operating income of $58 million. Net income for the quarter was $50 million, or $4.72 per common unit, and EBITDA was $78 million. Relative to 2025, the increase in EBITDA was primarily due to a combination of higher UAN and ammonia sales pricing and higher ammonia sales volumes. Ammonia production for the first quarter was 220 thousand gross tons, of which 70 thousand net tons were available for sale. UAN production was 335 thousand tons. During the quarter, we sold approximately 310 thousand tons of UAN at an average price of $343 per ton and approximately 73 thousand tons of ammonia at an average price of $687 per ton. Relative to 2025, total sales volumes were down slightly, primarily due to lower UAN production and sales volume as a result of some minor planned and unplanned outages at East Dubuque during the quarter. First quarter prices for UAN increased approximately 34%, and ammonia prices increased approximately 24% relative to the prior-year period. Direct operating expenses for the first quarter of 2026 were $63 million. Excluding inventory impacts, direct operating expenses increased by approximately $9 million relative to 2025, primarily due to higher natural gas and electricity costs and repair and maintenance expenses. Capital spending for the first quarter was $14 million, of which $8 million was maintenance capital. We estimate total capital spending for 2026 to be approximately $60 million to $75 million, of which $35 million to $45 million is expected to be maintenance capital. We anticipate a significant portion of the profit and growth capital spending plan for 2026 will be funded through cash reserves taken over the past few years. We ended the quarter with total liquidity of $178 million, which consisted of $128 million in cash and availability under the ABL facility of $50 million. Within our cash balance of $128 million, we had approximately $17 million related to customer prepayments for the future delivery of product. In assessing our cash available for distribution, we generated EBITDA of approximately $78 million and had net cash needs of $36 million for interest costs, maintenance capex, and other reserves. As a result, there was $42 million of cash available for distribution, and the board of directors of our general partner declared a distribution of $4 per common unit. Looking ahead to 2026, we estimate our ammonia utilization rate to be between 95% and 100%, direct operating expenses, excluding inventory and turnaround impacts, to be between $57 million and $62 million, and total capital spending to be between $28 million and $32 million. With that, I will turn the call back over to Mark. Mark A. Pytosh: Thanks, Dane. In summary, we had another strong quarter of operations with ammonia utilization over 100%, and the recent conflicts in the Middle East have caused prices to increase further for the spring. The spring planting season is underway, and it has gone well so far this year. The USDA is currently estimating approximately 95 million acres of corn will be planted in 2026. While this is a decline from the record levels of 2025, 95 million acres is well above the average level of corn plantings over the last five years. Yield estimates are approximately 183 bushels per acre, resulting in an inventory carryout level below 2025. Soybean planted acreage is expected to be approximately 85 million acres with a yield estimate of 53 bushels per acre, resulting in an inventory carryout roughly in line with 2025. December corn prices are approximately $4.75 per bushel, and soybeans are approximately $11.90 per bushel. The Trump administration and congressional leaders continue to discuss potential subsidy programs for farmers to help offset lower grain prices and higher input costs. As a reminder, the U.S. is a net importer of nitrogen fertilizers, resulting in domestic fertilizer prices being heavily influenced by changes in global fertilizer prices. Europe, Brazil, and India all compete with the U.S. for global fertilizer production. Geopolitical conflicts have impacted the global fertilizer industry for the past few years, beginning with Russia's invasion of Ukraine in 2022. The recent conflicts in the Middle East have caused further disruptions to global supply, with roughly 30% of nitrogen fertilizer production typically transiting through the Strait of Hormuz. In addition, multiple nitrogen fertilizer production facilities across the Middle East have been damaged or have curtailed production over the past few months due to limited natural gas supplies. Unfortunately, these events occurred at a critical time for farmers needing to secure crop inputs ahead of the spring planting season, as fertilizer inventory levels were already tight across the industry following the large planting seasons in the U.S. and Brazil in 2025. While it remains unclear how long these issues in the Middle East and Russia will persist, we will continue to focus on safely and reliably running our plants at high utilization levels to meet the needs of our customers during this challenging time in our industry. Natural gas prices in Europe have also increased amid the recent Middle East conflicts, currently trading around $14 per MMBtu, while U.S. prices have once again fallen below $3 per MMBtu. Damage sustained at LNG production facilities could take several years to repair, which would likely keep upward pressure on international gas prices relative to U.S. prices. The cost to produce ammonia in Europe has remained durably at the high end of the global cost curve, and production remains below historical levels, which has created sales opportunities for U.S. Gulf Coast producers to export ammonia to Europe for upgrade. We continue to believe Europe faces structural natural gas supply issues that will likely remain in effect through the next few years. The conflicts over the past few years in Ukraine and now Iran are a reminder of the value of U.S. production with adequate and secure feedstock availability. At our Coffeyville facility, we continue to work on a detailed design and construction plan intended to allow the plant to utilize natural gas as an alternative feedstock to third-party pet coke, in addition to increasing ammonia production capacity by up to 8%. We now believe we can achieve the feedstock diversification and capacity expansion of this project without investing the capital to source hydrogen from the adjacent Coffeyville refinery, which should significantly reduce the total capital spend associated with that scope of the project. We also continue to execute certain debottlenecking projects at both plants that are expected to improve reliability and production rates. These include the brownfield capacity expansion at East Dubuque that we intend to complete during the upcoming turnaround, in addition to water quality upgrade projects at both plants and the expansion of our DEF production and load-out capacity. The goal of these projects is to support our target of operating the plants at utilization rates above 95% of nameplate capacity, excluding the impact of turnarounds. If the two brownfield expansion projects are completed, we estimate our consolidated ammonia production capacity would increase by approximately 7%. The funds needed for these projects are coming from the reserves taken over the last few years, and the board elected to continue reserving capital in the first quarter. While the board looks at reserves every quarter, I would expect them to continue to elect to reserve some capital, and we anticipate holding higher levels of cash related to these projects in the near term as we ramp up execution and spending. We believe unitholders will see the benefits of these investments in the coming years as these projects are completed and brought online, improving reliability and performance. In the quarter, we executed on all the critical elements of our business plan, which include safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors, and communities; prudently managing costs; being judicious with capital; maximizing our marketing and logistics capabilities; and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for their excellent execution, safely achieving a 103% ammonia utilization, and the solid delivery on our marketing and logistics plans, resulting in a distribution of $4 per common unit for the quarter. With that, we are ready to answer any questions. Operator: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star followed by the number one. Again, as a reminder, to ask a question, press star followed by the number one on your telephone keypad. At this time, there are no questions. I will now hand the call back over to the presenters for any closing remarks. Mark A. Pytosh: Thank you, everybody. We appreciate you joining the call today, and we look forward to discussing our second quarter results in late July. Thank you very much, and have a good day. Operator: This concludes today's call. Thank you for joining. You may now disconnect your line.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Real Estate Finance, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to Kristen Griffith, investor relations. Please go ahead. Kristen Griffith: Thank you. Good day, everyone, and welcome to the NexPoint Real Estate Finance, Inc. conference call to review the company's results for the first quarter ended 03/31/2026. On the call today are Paul Richards, executive vice president and chief financial officer, and Matthew Ryan McGraner, executive vice president and chief investment officer. As a reminder, this call is being webcast to the company's website at nrep.nexpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's annual report on Form 10-Ks and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect the forward-looking statements. The statements made during this conference call speak only as of today's date and, except as required by law, NexPoint Real Estate Finance, Inc. does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes an analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures, see the company's presentation that was filed earlier today. I would now like to turn the call over to Paul Richards. Please go ahead, Paul. Paul Richards: Thanks, Kristen, and good morning, everyone. I will walk through our quarterly results, cover the balance sheet, and provide guidance for Q2 before turning it over to Matt for a deeper dive on the portfolio and macro lending environment. For the first quarter, we reported net income of $0.42 per diluted share compared to $0.70 for Q1 2025. The decrease was driven by small mark-to-market declines on preferred stock and warrants, as well as a decrease in the change in net assets related to consolidated CMBS VIEs. Earnings available for distribution was $0.43 per diluted share in Q1 compared to $0.41 per diluted share in the same period of 2025. Cash available for distribution was $0.58 per diluted share in Q1 compared to $0.45 per diluted share in the same period of 2025. We paid a regular dividend of $0.50 per share in the first quarter, which is 1.16 times covered by cash available for distribution. On 04/28/2026, the board declared a dividend of $0.50 per share payable for 2026. Book value per share decreased slightly by 0.3% from Q4 2025 to $18.96 per diluted share, primarily driven by unrealized losses on our preferred stock investments and stock warrants. Turning to new investments during the quarter, the company funded over $30 million on two loans; both pay a monthly coupon in the mid-teens. I want to highlight what is, in our view, the most important development of the quarter and, frankly, of this week. We have successfully refinanced $180 million of senior unsecured notes that were maturing on May 1. We replaced those 5.75% fixed-rate notes with a new $242 million total return swap facility priced at SOFR plus 375 basis points with a three-year term and one-year extension option. This transaction does several things. First, it removes the largest near-term liability overhang on our balance sheet. Second, the floating-rate structure aligns with our floating-rate asset base and gives us refi optionality as the curve evolves. Third, the upsizing gives us approximately $45 million of incremental capacity to deploy into our pipeline at the double-digit coupons we are seeing today. And fourth, the facility allows back-lever optionality on eligible positions, which expands our origination capacity without requiring additional unsecured note issuances. We engaged more than 20 counterparties across bank and nonbank channels to optimize the structure, and the SOFR plus 375 pricing came inside comparable mortgage REIT executions in the high-yield baby bond and term loan markets. Importantly, we did this without diluting common shareholders at a discount to book. Combined with the $21 million we raised in our Series C preferred and the re-REMIC execution I will discuss in a moment, we head into the back half of 2026 with one of the cleanest, most flexible capital structures in the commercial mortgage REIT sector. Capital recycling and book value accretion: We executed a re-REMIC of our FRAN 2017-K62 B-Piece during the quarter. We sold the B-Piece to Mizuho at 92.7, having purchased it at 68.69 in 2021, and reinvested into the HRR tranche of the new structure at an 18.5% yield. That single transaction generated $0.46 per share of book value appreciation, reduced repo financing by $75 million, and is expected to drive approximately $0.34 per share of annual CAD accretion going forward. This is the kind of execution that does not happen by accident, and it speaks to the value we extract from a portfolio of seasoned, well-constructed credit positions. Moving to the portfolio and balance sheet. Our portfolio is comprised of 90 investments with a total outstanding balance of $1.1 billion. Our investments are allocated across sectors as follows: 39.4% multifamily, 35.9% life sciences, 17.1% single-family rental, 3.9% storage, 0.6% marina, and 2.1% industrial. Our fixed income portfolio is allocated across investments as follows: 19% CMBS B-Pieces, 22% mezz loans, 24.5% preferred equity investments, 15.6% revolving credit facilities, 10.1% senior loans, 4.2% IO strips, and 4.6% promissory notes. The assets collateralizing our investments are allocated geographically as follows: 28.7% Massachusetts, 17.6% Texas, 5.9% Florida, 4.9% Georgia, 5.2% California, and 4.7% Maryland, with the remainder across states with less than 4% exposure, reflecting our heavy preference to Sunbelt markets, with Massachusetts and California exposure heavily weighted towards life science. The collateral on our portfolio is 81.2% stabilized with 59.9% loan-to-value and a weighted average DSCR of 1.32x. We have $665.2 million of debt outstanding with a weighted average cost of 5.2% and a weighted average maturity of 0.8 years. Our secured debt is collateralized by $571.3 million of collateral with a weighted average maturity of 3.8 years and a debt-to-equity ratio of 0.7x. Moving to our guidance for the second quarter. Earnings available for distribution: $0.43 per diluted share at the midpoint, with a range of $0.38 on the low end and $0.48 on the high end. Cash available for distribution: $0.54 per diluted share at the midpoint, with a range of $0.49 on the low end and $0.59 on the high end. With that, I would like to turn it over to Matt for a detailed discussion of the portfolio and the current market environment. Matthew Ryan McGraner: Appreciate it, Paul. I am excited to walk through another strong quarter for NexPoint Real Estate Finance, Inc., and to thank our team and our partners for executing in what continues to be a noisy macro backdrop, including and especially the exciting and accretive financing completed with Mizuho that Paul just mentioned. Now on to the verticals. On the residential front, this is where we have our largest exposure at roughly 56% of the portfolio between SFR and multifamily. We are now firmly in the supply trough that I have been describing on these calls for several quarters. The thesis is playing out. We are coming off of a record national multifamily supply cycle. Net deliveries peaked at approximately 695,000 units in the trailing 12 months ended Q4 2024. For context, that compares to roughly 282,000 units of average annual deliveries since 2001. CoStar now forecasts 2026 deliveries to fall approximately 49% from their 2025 levels, with another 20% decline forecast for 2027. 2027 and 2028 forecasts have been revised down meaningfully from prior estimates as well. On the supply side, multifamily construction starts are running approximately 70% below their 2022 peak, and that is locking in a multiyear supply trough. On the demand side, the structural backstop has not changed. The cost to own a home in our markets remains roughly three times the cost to rent, and there is no reasonable mortgage rate scenario that closes that gap quickly. Our on-the-ground leasing data is consistent with the inflection thesis. By putting it all together, we believe 2026 and 2027 will be meaningfully better than 2025 for residential operators and, by extension, for the residential debt collateral on our balance sheet. On life sciences, I want to spend a minute here because I know it is a sector that has attracted some discussion; I think the conversation deserves a little more nuance than it has been getting. Our exposure is concentrated, intentional, and increasingly de-risked. Our Alewife project is now 71% leased, anchored by Lila Sciences, a pioneering AI and life science company, on a long-term lease for 245,000 square feet with options to expand. The active pipeline of RFPs, LOIs, and leases on the project today represents approximately 92% of the remaining vacant square footage. This is a high-conviction underwrite into a project where leasing momentum and credit improvement are visible in the data, not aspirational. An additional and increasingly relevant point I want to drive home is the demand funnel of our life science collateral has widened materially because of AI, not in spite of it. AI companies need exactly the same purpose-built infrastructure that traditional lab tenants need: power density, cooling capacity, structural floor loads, ventilation, and vibration tolerances. They cannot retrofit older converted assets at any rent. They need the bones, and they will pay for the bones. Alewife is exactly that asset in the right submarket adjacent to MIT and the broader Cambridge cluster. Our life science exposure is not a generic bet on the sector. It is a concentrated bet on first-to-fill, infrastructure-grade assets in elite educational districts that are now also AI corridors. The credit profile of these assets is improving, not deteriorating, as the tenant universe widens. Moreover, our capital is largely placed in the last 12 to 18 months at a reset basis that primes billions of dollars of equity versus loans originated in the go-go days of the post-COVID liquidity craze where capital was much less discerning. On to self storage. Storage is in the cyclical bottoming process. Industry-wide second quarter earnings for the public REITs were consistent with guidance and largely in line with sell-side estimates. Expectation for the full year is roughly flat, with flat revenue and 50 to 150 basis point declines in NOI. Supply remains muted also. According to the data, facilities under construction are less than 3% of existing supply; that is the equilibrium benchmark. Forecasted deliveries over the next several years could be as low as 1% of existing stock, and combined with the difficulty of bank financing for new development, the cost of land and materials, and a higher-rate environment than the 2015 to 2020 development cycle, we expect supply discipline to persist and pricing power to return. Our NSP portfolio continues to outperform the industry meaningfully, with occupancy in the low 90s near the top of the industry, and rent growth and NOI performance materially ahead of the sector decline by almost 300 to 500 basis points. Moving to our pipeline. Today, it consists of approximately $190 million of NexPoint Real Estate Finance, Inc. investment across 11 active deals, three closed and eight under executed LOI, plus an additional $275 million of structured product opportunities, specifically across multifamily senior loans and CMBS pools. These are real deals at real spreads. The pricing power remains very much in our favor for disciplined capital providers like us. The pipeline's blended return profile is well in excess of our cost of capital and the new TRS facility that Paul mentioned, which is already driving modest increases in CAD, which we expect to see continuing throughout 2026. Before I close, I want to take a moment on something that I believe will be a meaningful differentiator for NexPoint Real Estate Finance, Inc. over the next several years. We are deploying AI across our underwriting, portfolio monitoring, credit risk, and operations functions, and we believe we are ahead of the commercial mortgage REIT peer group on this. On the underwriting side, we are piloting AI-assisted deal screening and diligence across CMBS, mezzanine, and preferred equity originations. The system ingests rent rolls, comps, and market data, and our target is a 50% reduction in underwriting cycle time. That means more deals are being evaluated, sharper credit work, faster execution, all without expanding headcount. On the portfolio monitoring side, we are deploying always-on surveillance across all 92-plus investments. Machine-learning-driven signals on occupancy, rent growth, debt service coverage ratios, and sponsor health flag risk before it shows up in the financials. We believe this will result in earlier identification of watch list assets and meaningfully tighten the feedback loop between credit underwriting and portfolio surveillance. We are also building predictive credit models for borrower default probability, LTV stress paths, and loss given defaults. This reinforces our existing disciplined underwriting with data-driven early warnings. It does not replace our investment committee process. In our operations and reporting, we are using generative AI to accelerate investor reporting, SEC filings prep, earnings supplemental drafting, and internal research, freeing our team for higher value analytical work. Our roadmap is the sequence foundation in Q2 and Q3 of this year, scale across the full portfolio by Q4, and full optimization throughout 2027. We expect this to translate into faster decisions, sharper risk management, and a more scalable platform for growth. A few closing points on capital and the balance sheet. Net debt to equity continues to run below 1x, among the lowest in commercial mortgage REIT space. Combined with the re-REMIC execution that Paul just mentioned and the new TRS facility, we do indeed have the capital structure flexibility to be opportunistic on origination and on our own stock. Speaking of which, at current levels, we continue to trade at a meaningfully deep discount to book value of approximately $19 per share. To be clear, we view buybacks at this discount as an accretive use of capital, and you should expect to see us continue to buy back stock opportunistically alongside funding the pipeline I just walked through. Given our liquidity position and having successfully refinanced near-term maturities, the two are not mutually exclusive. Our Series C preferred programs continue to provide flexible, nondilutive capital. Our book value is stable. Our dividend coverage is sound. Leverage is low, and the portfolio's credit profile is improving. That is a setup we feel very good about heading into 2026. To summarize, strong quarter on earnings and credit, a transformative refinancing on the liability side, a continuing supply-driven tailwind in the residential space, a de-risking and broadening demand picture in life science, a robust pipeline of accretive deployment, and an AI platform initiative that we believe will set NexPoint Real Estate Finance, Inc. apart over the coming years. As always, I want to thank the team here for their hard work, and now we would like to turn the call over to the operator to take your questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, to ask a question, please press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. One moment please for your first question. Your first question comes from the line of Jade Joseph Rahmani of KBW. Please go ahead. Jade Joseph Rahmani: Thank you very much. Rates are trending higher year to date, and I was wondering what you think the impact to the CRE recovery outlook will be, particularly around multifamily as bridge loans taken out during the COVID years are up for maturity. Matthew Ryan McGraner: Yes, it is a good question. What I can say is in terms of the last, I would say, four to six weeks with rates going up as a result of geopolitical tensions, the processes that we have seen that started prior to that time, in terms of the capital markets transactions both on loan sales and investment sales, have all continued without, I would say, material disruption. There have been, I would say, some slight walkbacks in terms of buyers underwriting a 5.5% all-in rate on a Freddie or Fannie agency, and then the 10-year moves against them, and so they will seek a little retrace. So there is, I would say, a little disruption in the capital markets, but nothing that would halt it, and liquidity is still very, very plentiful on the multifamily side. And I think what is even more important than that is we, and I think the broader public REIT universe in the reporting yesterday and today, are really starting to see the fundamentals in the multifamily sector turn and firm up. Concessions are getting weaker. In our own portfolio, for example, concessions are down by 50% from Q4. All of that is offsetting, I think, any near-term interest rate rise as it relates to multifamily. Jade Joseph Rahmani: Life science update has been quite impressive, and I was wondering if you could give some thoughts. Do you view the Alewife exposure as unique to NexPoint Real Estate Finance, Inc., or are you also seeing green shoots elsewhere in the portfolio? And then overall, do you view NexPoint Real Estate Finance, Inc.'s exposure as better than the market? One of the commercial mortgage REITs downgraded a loan to risk five and took a quite large reserve on that. They are also expecting an REO in life science and much of it is vacant in the sector, so just looking for some additional thoughts there. Matthew Ryan McGraner: Yes, you bet. I think the important point on our project in Alewife is, again, it is brand new, it is purpose-built with incredible infrastructure. And the land that the asset is built on was assembled over years, three to five years; it was not just a spec build. It was very intentional and in the cluster submarket. I think that, for one, is unique. Our own investment in terms of the loan-to-cost is roughly 30%. That is our unique sponsor relationship there and the ability for us to provide capital at a time, like I said, in the last 12 to 18 months where there was literally no capital available in the life science sector. So I think the loans that I have seen as well that you are referring to were, again, originated in a more speculative environment with more hope to lease, on the outskirts of the cluster markets where we have exposure. Cambridge and the Longwood and Fenway districts are going to be the first-to-fill locations, and we are seeing real depth in the project leasing in terms of demand coming out of big pharma and the venture space. I think the green shoots you could point to are the biotech index nearing cyclical highs, venture capital at a high since 2021, and then, again, the AI spend and the assets that AI needs just widen the demand funnel for our assets. We are in the right locations where they want to be, and they have the critical infrastructure that is demanded by their compute and other real estate needs. So I do think we are different. I do think our exposure is different, and I think it is, again, more recent at a reset basis versus loans that were originated perhaps in 2020, 2021, and 2022. Gabe Poguey: Hey, guys. Thanks for taking the question. I want to actually piggyback on what Jade was just asking. It sounds like Alewife is doing great. Some other exposures, you know, Holly Springs and Vacaville, California. You guys have low attachment points, but it looks like the senior mortgages are due maybe by the end of the year. Just any color you can give on expectations for the underlying asset, whether it is a refi or a sale, etc., I think would be helpful as it pertains to life science exposure away from Alewife. And then one more kind of just on the accounting side. In the other income, the $17 million, can you guys break out the components of that for us before we get the 10-Q, or do we need to wait for the 10-Q for that? Matthew Ryan McGraner: Great question, and thanks for it, Gabe. So Holly Springs and Vacaville are both advanced manufacturing assets, which, if anything, is stronger in the last six months than life science. The Holly Springs underlying collateral, I believe, is now topped out, has a tenant, and I think we will likely be refinanced out of that deal. The tenant is a battery manufacturer for the Department of Defense. They are seeing a ton of growth right now, and I see that exposure being reduced by a loan payoff at some point this year. Same thing goes for Vacaville. It has eight to 10 project names in and around both semiconductor manufacturing and advanced manufacturing in the pharmaceutical side. To your point, the attachment is very low there, so I think there are a lot of ways to win, and I would say that we would probably be taken out of that asset in the next 12 months as well. And then one thing that is on the horizon that could be good and bad is Alewife being repaid. With the success of leasing there, going from zero to 71% leased, and the tenant quality and the clustering that is happening—like I said, there are RFPs and LOIs on that asset that almost get it to 100% full—we could see that capital come back to us in 12 months as well. Paul Richards: Yes, hey, Gabe. Great question. I think we wait until the 10-Q for that one. It will give you a good breakdown of the other income, and we can provide a breakdown in the supplement as well going forward for better analysis. Operator: There are no further questions at this time. And with that, I will now turn the call back over to the management team for final closing remarks. Please go ahead. Matthew Ryan McGraner: Thank you again for everyone's participation this morning, and we look forward to speaking to you next quarter and providing another good update. Have a great day. Thanks. Operator: Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect your lines.
Operator: Thank you for standing by. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Textron First Quarter 2026 Earnings Release. [Operator Instructions] I would now like to turn the conference over to Scott Hegstrom, VP of Investor Relations. You may begin. Scott Hegstrom: Thanks, Joe, and good morning, everyone. Before we begin, I like to mention that we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press releases. On the call today, we have Lisa Atherton, our Chief Executive Officer; and David Rosenberg, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. With that, I'll turn the call over to Lisa. Lisa Atherton: Thank you, Scott. Good morning, everyone, and thank you for joining us. Today is an incredibly exciting and important day for Textron. Our first quarter results highlight a very strong start to the year. We generated $3.7 billion in revenue, representing 12% growth for the quarter. We also grew segment profit in the quarter by 10% to $320 million. This reflects strong performance across each of our A&D businesses, including robust commercial order activity at both Aviation and Bell. We also generated $1.45 of adjusted EPS, up 13% from a year ago. Turning now to Slide 5. In addition to announcing our first quarter results today, we also announced our intent to separate our Industrial segment from our A&D businesses. This is a consequential and exciting step in our evolution establishing new Textron as a pure-play A&D company aligned to its core franchises of Textron Aviation, Bell and Textron Systems. In terms of structure, we intend to explore multiple paths to affect this planned separation, including a sale of the industrial businesses or a tax-free spin-off into a stand-alone publicly traded company. We will work through alternatives on the approach over the coming quarters and are targeting a completion of the separation within 12 to 18 months. In the interim, we will continue to operate in the normal course of business. Turning to Slide 6. We believe these actions will drive long-term value for our shareholders. First and foremost, this establishes New Textron as a pure-play A&D company. Each of our A&D franchises are aligned with highly attractive end markets with tremendous opportunities in front of them. For New Textron, this separation also enhances clarity around our capital allocation and investments as well as our strategic flexibility. The MV-75 Cheyenne program is a perfect example. We are pulling forward our investment as we support the [indiscernible] acceleration of the program, which is aligned with our long-term growth strategy. As for Industrial, these same principles apply. The business will benefit from a tailored capital allocation and new strategic flexibility. The investment in growth in opportunities such as Pentatonic, Allegro and PACE technologies are good examples of this. While we've considered variations of this in the past, now is the right time as both our A&D and industrial businesses are well positioned for the future. In A&D, Textron Aviation is in a very strong position having increased its backlog by more than 4x since pre-COVID from $1.7 billion in 2019 to $8 billion at the end of this quarter. Bell is advancing rapidly on the MV-75 Cheyenne and will soon move into prototype deliveries and Textron Systems is also showing solid growth across programs of record such as Ship to Shore and at ATAC. In Industrial, Kautex continues to perform well and Textron Specialized Vehicles is operating from a stronger footing following last year's powersports divestiture. So overall, Textron is well positioned to pursue the separation of our A&D and industrial businesses. Turning to Slide 7. New Textron would have approximately $12 billion in revenue and $1.2 billion in segment profit as a pure-play company. Aviation is a leader in each of these segments and continues to see healthy demand and utilization across its portfolio. That is at the forefront of an outsized growth stage as the MV75-Cheyenne program ramps -- the business is positioned to significantly increase its revenue as we move from development to production over the next few years and benefit from the Army's planned production run of over 25 years. Systems has compelling growth drivers across several areas, including advanced materials for hypersonic applications, shipbuilding, manned and unmanned air, land and sea vehicles. The Trump administration's recently proposed fiscal year 2027 budget that calls for $1.5 trillion in defense spending would be a strong tailwind for the industry, providing increased visibility and stability across our defense offerings. Moving to Slide 8. The separation significantly improved the financial profile for Textron. New Textron would have top line growth, 150 basis points higher. Segment profit margin would be 120 basis points higher, and our strong backlog of $19.2 billion is 100% related to the A&D businesses. On Page 9, we see New Textron's A&D franchises. Each of which excel at turning advanced aerospace and defense capabilities into practical advantages for our customers and their missions. Some of these key offerings include the Citation Latitude, the #1 best-selling midsized business jet, the recently certified Citation Ascend and the upcoming Beechcraft Denali. The Beechcraft King Air franchise is the best-selling Turboprop in history. The MV-75 Cheyenne flying twice as far and twice as fast is a fundamental step function for military aviation. The Ship-to-Shore Connector, the ATAC programs of record and our unique advanced material capabilities, which were most recently seen in action with the Artemis mission around the moon are core to the Sentinel program. These all leverage our world-class engineering capabilities across design, test, certification and build with a long track record of innovation. Underlying these offerings, we have a large installed base, which supports a robust aftermarket business that has experienced steady growth over the last few years. Textron Aviation has built approximately 25,000 aircraft in its history and has the largest installed base in general aviation, nearly 4x the next largest. Bell has an installed base of approximately 13,000 commercial and military aircraft. These significant installed bases drive an attractive aftermarket business that represents over 30% of New Textron revenue. We are very excited about how this positions New Textron to drive value going forward. On the military side, Textron sits where aerospace precision meets defense urgency, and this is exactly where our future is being built. As we continue to scale the MV-75 Cheyenne program and move toward production lots, we expect that the revenue and margin profile will follow. Beyond MV-75, we are well positioned on new opportunities that can leverage significant technology from the MV-75 like the U.S. Marine Corps Future Attack Strike program and DARPA's 76 X claim. Flight School Next, a new program to train Army Aviators at Fort Rucker for which we are competing is also positioned as a potential growth opportunity for Bell leveraging our proven 505 helicopter. Systems is anchored by strong programs of record with the growth drivers to include Ship to Shore, ATAC and Sentinel. In addition, the ARV preproduction contract advances a future growth opportunity for the business. The defense spending environment provides a very favorable backdrop for the longer term where our offerings are very well positioned. As this relates to the Textron Aviation and Bell commercial businesses, we are in a great place with the investments we have made over the last decade. Our product portfolio is second to none. Textron Aviation has a proven track record of clean sheet development programs like the Latitude, the Longitude, SkyCourier and soon to be the Denali. We have also been very successful at upgrades like the recent Gen 2s and Ascend as well as the upcoming Gen 3s for the light jets. And at Bell, the 525 will be the first commercial fly-by-wire helicopter. Our sizable backlog illustrates the market demand for our products is significant and continuing to grow. Looking ahead, we are focused on increasing our operational efficiency and performance to drive growth and enhance profitability. We will do this by reallocating some of our R&D investment into our supply chains and factories. To be clear, there are no silver bullets there, but it is where we will be putting our focus. Turning now to Industrial on Slide 10. This is a $3-plus billion business with strong operations, well-established brands, leading market positions and real growth drivers. We believe it will thrive independent from New Textron. It is composed of Kautex and specialized vehicles. Kautex is a Tier 1 auto supplier. Its primary product line is fuel systems for the automotive industry. Kautex has also built a meaningful position in hybrid fuel tanks which is a growing part of the industry. The Pentatonic battery and closure business supports EV and hybrid platforms, including the [ Rivian R1 ] and a major European OEM start of production plan for 2027. It's Allegro cleaning systems is another growth platform focused on solutions to clean autonomous vehicle cameras and sensors. Specialized Vehicles is anchored by the EZGO golf car business. EZGO was one of the most recognizable brands in golf. Specialized vehicles also includes personal transportation vehicles, ransoms Jacobs and turf equipment, Cushman vehicles and tug ground support equipment. This business stands to benefit from near-term growth driven by the lease renewal cycle and market recovery. Overall, our industrial businesses have well-established brands, product offerings and strong market positions. Before I turn it over to Dave to give you an update on our first quarter results, I'll quickly highlight a few of our achievements in the quarter, starting with Aviation on Slide 12. We got off to a strong start to the year with 37 jet deliveries and 35 commercial turboprop deliveries. These are both up nicely from a year ago as we continue to drive throughput in our factories. We also saw strong aftermarket performance, which resulted in 10% growth in aftermarket revenues. In terms of market conditions, order activity continues to be healthy as we grew our backlog in the quarter while also delivering double-digit growth in jets and commercial turboprops. Some notable wins for the team include Luminaire, a European jet operator placed a fleet order in the first quarter, which will bring its total to 9 latitudes, supporting its charter operations across Europe and an order from Belgium's special operations forces for 5 SkyCouriers marking our first military order for the aircraft and highlighting the utility of the Sky Courier, not only in the commercial market, but also in defense and special missions applications. From an industry perspective, gammas recently released 2025 annual report underscores Textron Aviation's leadership in general aviation as we once again topped the industry in total business jet deliveries, total turbine aircraft deliveries and total turboprop deliveries. Moving to Bell on Slide 13. The Army has announced the name of the MB 75 aircraft as the Cheyenne. This underscores the continued commitment by the Army and marks a pivotal moment for the program. all subsystem critical design reviews, or CDRs, have been executed with the exception of completing the weapon system CDR later this summer. The Army is preparing the for Tilt rotor technology with support from the V-22, helping the Army's 101st Airborne in training exercises to develop the tactics, techniques and procedures to take full advantage of the additional range and speed. Sales progress is supported by a series of investments Textron is making to support successful development and acceleration of production. As I mentioned earlier, the Trump administration's 2027 budget calls for a significant increase in defense spending. As this relates to the MV-75 Cheyenne, the Future Years Defense Program, or FYDP, calls for $2.3 billion of funding for 2027 scaling to $3.8 billion in FY '31 across research, development, test and evaluation as well as procurement. The procurement budget also shows quantities of 8 units in FY '28, scaling to 12 than 27 in FY '31, consistent with the Secretary of the Army's direction to accelerate the program. Regarding near-term funding for the MV-75 program, the Army has informed us that it is actively pursuing additional funding to support the acceleration profile for the remainder of the government fiscal year '26. This funding aligns with the Army's Directive last summer to accelerate the program, which occurred after their FY '26 budget request was submitted. We remain confident in the Army's commitment to securing this funding as evidenced by the ongoing process and the strong funding request in the recently released fit-up. During the quarter, Bell completed the critical design review on the DARPA Xplan program, which is now called the X-76. Bell will now begin building a brand-new explant with first-of-its-kind stop fold technology. Bell was also recently down selected to the fourth and final phase of the Flight School next competition. As part of this phase, Bell conducted flight simulator and digital twin demonstrations at Redstone Arsenal. We expect the Army to select a winner for the competition later this summer. Turning to Slide 14. Systems also continues to grow its business. They generated double-digit growth in the quarter and continued to make progress on new pursuits. Earlier this month, Textron Systems received a preproduction development award from the U.S. Marine Corps for its advanced reconnaissance vehicle, or ARV program. This $450 million award will include delivery of 16 vehicles, 3 systems integration labs and 4 blast holes. Textron Systems was also awarded a prototype agreement from the U.S. Army for the low altitude stocking and strike ordinance program, or Lasso. Under the prototype agreement, systems will deliver a loitering munition system and demonstrate it to the Army. As you can see on Slide 15, both Kautex and Textron Specialized Vehicles are executing very well and generating improving financial results. The segment had positive organic growth in the quarter, and Kautex secured its largest award to date for its hybrid plastic fuel tank offering. Overall, we had a very strong start to the year, and I'll now pass it over to Dave to provide some more details on the financials. David Rosenberg: Thank you, Lisa, and good morning, everyone. Turning to Slide 18 of the earnings presentation. We had a strong start to the year with revenues in the quarter of $3.7 billion, up 12% or $389 million from last year's first quarter. Segment profit in the quarter was also strong at $320 million, up 10% or $30 million from the first quarter of 2025. During this year's first quarter, adjusted net income was $1.45 per share compared to $1.28 per share in last year's first quarter. Manufacturing cash flow before pension contributions reflected a use of cash of $228 million, compared to a use of $158 million in last year's first quarter. During the quarter, we repurchased approximately 1.8 million shares, returning $168 million in cash to shareholders. Before we get into the segments, I'd like to remind you that we realigned the Textron Aviation segment business across Textron Aviation, Textron Systems and corporate at the beginning of this year, eliminating Textron Aviation as a separate reporting segment. The results here reflect that realignment for 2026 for the 2025 comparison period on a recast basis. Now let's review how each of the segments contributed, starting with Textron Aviation. On Slide 19, revenues at Textron Aviation of $1.5 billion were up $269 million or 22% from the first quarter of 2025. Aircraft revenue in the quarter was $954 million, up $221 million or 30% from a year ago. This was driven by volume and mix as we increase Citation jet deliveries from 31 to 37 and commercial turboprop deliveries from 30 to 35. Aftermarket revenue in the quarter was $531 million, up $48 million or 10% from a year ago. Segment profit was $154 million in the quarter, up $32 million compared with the first quarter of 2025. This represents a profit margin of 10.4%. We also continue to see solid order flow in customer demand across our product lines, ending the quarter with $8 billion of backlog, up $276 million from the end of 2025. Looking at Bell, revenues of $1.1 billion were up $87 million or 9% from the first quarter of 2025. Military revenues were $795 million, up $161 million or 25% driven by growth on the MV-75 Cheyenne program, partially offset by reduced revenue on V-22 production on our military sustainment programs. Commercial revenues were $275 million, down $74 million, reflecting lower volume and mix. Segment profit of $72 million was down $18 million from a year ago, primarily reflecting an unfavorable impact from the mix of military programs and lower commercial volume and mix. Backlog in the segment ended the quarter at $7.6 billion. At Textron Systems, we had a good start to the year with revenues of $338 million, up $39 million or 13% from last year's first quarter. Revenue growth was driven primarily by higher volume on the Ship to Shore program and military training programs provided by ATAC, partially offset by lower net volume on other programs. Backlog in the segment ended the quarter at $3.6 billion, an increase of $255 million in the quarter. Segment profit was $42 million in the first quarter, which generated strong segment profit margin of 12.4%. Looking at Industrial revenues were $786 million, down $6 million from last year's first quarter. Textron Specialized Vehicles revenue was $300 million, down $42 million, largely reflecting a $55 million impact from the divestiture of the powersports business in 2025. Kautex revenues were $486 million, up $36 million or 8% from a year ago, primarily due to a favorable impact of $20 million from foreign exchange rate fluctuations and higher volume and mix. On an organic basis, revenues in Industrial were up $29 million or 4% given the first quarter of last year still included the Powersports business. Segment profit of $40 million was up $10 million from the first quarter of 2025, largely due to manufacturing efficiencies. Finance segment revenues were $16 million and profit was $12 million in the first quarter of 2026, as compared to segment revenues of $16 million and profit of $10 million in the first quarter of 2025. With that, I will turn it back to Lisa for closing remarks. Lisa Atherton: Thanks, Dave. And as we wrap up, Slide 21 just highlights a few of the many attributes that make New Textron a compelling pure-play aerospace and defense business. We have the best-in-class brands and best-in-class products with leading segment positions. But I also want to highlight that we have the people in place to maximize our future with a deep bench of technical expertise and a track record of innovation and execution at scale. This concludes our prepared remarks, and we are happy to open the line now for questions. Operator: [Operator Instructions] Your first question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Can you maybe -- the industrial separation has been a long time coming. Can you maybe provide a little bit more on what led to the decision? Why now? Was it just the growth in the MV-75 portfolio at the Cheyenne and how you see that if you could elaborate? Lisa Atherton: Thanks, Sheila. Look, it's just -- it's the right answer for both of our A&D and industrial businesses at this moment in time, and it provides clarity and simplification on our capital allocation and investments and frankly, it also just aligns them both with their respective natural shareholder bases. And we're in a position, as you point out, like why now as compared to a few years ago, it's a result of all the hard work and accomplishments that we've achieved over the last 10 years in order to position the various businesses to have the strength of their own -- to stand on their own. And we've won, we're scaling MV-75. As I mentioned, we've added to an upgraded the aviation portfolio. We've got all these clean sheet programs like the Latitude, Longitude, SkyCourier Denali upgrades on the Ascend, the Gen 2 with systems and their key programs of record now scaling and a good pipeline. We just have the synergies and core context of all of those businesses to come together as a strong pure-play A&D. But what's different is as now with Kautex and TSV, both are very well run and their end markets are in a stronger place and in good positions right now with the progress Kautex has made with offerings on Pentatonic and Allegro and how it is gaining customer traction and growth as well as TSV being anchored by 1 of the most recognizable brands in golf with EZGO and candidly, the divestiture of Powersports just puts them in a better operating position. So we just believe that now is the right time in order to make this move, and we're excited to see what the future holds for us. Operator: Your next question comes from the line of Myles Walton of Wolfe Research. Myles Walton: On aviation, can you speak to the market environment for order activity and anything that's changing given the ongoing Middle East conflicts. And then, Lisa, you mentioned repositioning some of your R&D funding into the supply chain. Could you just elaborate on what that means in the quantity? Lisa Atherton: Sure. Look, so regarding order activity, we had a very strong quarter of order activity across both aviation and Bell. They had their best Q1 bookings in 4 years, frankly, since Q1 of 2022. So really strong orders for the folks out there. And aviation, I highlighted the Luminaire and Belgium special forces in the prepared remarks. But as we see that strong order flow and ending the quarter with our backlog of up $8 billion for aviation in particular, and we also have some pretty strong bookings that they're working forward to in Q2. So Bell also is winning that new business in the commercial market. They had the quarter with purchase order of 7407 for the National Transmission Company of South Africa. We talk about in the defense side of the booking orders, and Bell was down-selected to the final phase of [ Flight School Next. ] As I mentioned, the preproduction contract for the AR and the Army's prototype agreement for the last or the low altitude stocking and striking ordinance. So all of this kind of leads to that very strong order activity in that backlog of $19.2 million that we highlighted across the business. When you ask about the repositioning of some of the funding towards the supply chain and factories, look, that's really the area that we need to focus across on our business. What we're trying to signal here is we're not looking to increase investment. We're going to maintain the same levels of investment that we have across the business. But we're probably going to take a portion of that, and I'm not going to kind of go into the details of what ratio that is, but take a portion of that and focusing on making our factories much more effective. There's a lot of tools and capabilities that are out there now that we need to enable our workforce to have a better, more streamlined factory flow. And so we're going to -- we're looking at that as we go through this strategic review, and you'll see us start investing in that. And hopefully, we'll see the yield of that of better production output. Operator: Your next question comes from the line of Robert Stallard of Vertical Research. Robert Stallard: A couple of questions for you on Aviation. First of all, was wondering if you could give us an update on what you think the cadence of deliveries will be in this division through the year and whether you expect this aftermarket growth rate to be maintained? And then secondly, on the Aviation supply chain. Did you see any improvement in that in the first quarter? Lisa Atherton: Dave, why don't you take the first and I'll hit the supply chain. David Rosenberg: Robert, so as we look at Q1, this was expected that we're about 100 basis points below the midpoint of the guide. Just kind of the key factor there is some of the inefficiencies from last year are rolling through the income statement in Q1, and that's causing a little bit of headwinds. So as we kind of think about the cadence for the rest of the year, we would expect improvement sequentially each quarter with the margin peak being in Q4. You should expect deliveries to increase each quarter this year, and we'd also expect efficiencies to improve throughout the year, especially in the second half. Lisa Atherton: So on your supply chain question there. I mean, look, we continue to work with our key suppliers. It's mainly around engines, as we mentioned on the call last quarter that we continue to [indiscernible] I'll say, fight through every day to get those in. But I will say we're not seeing as many systemic supply chain issues as we have over the past several years. So we are seeing things start to improve. As we look at kind of what we call out the door statistics of some of our platforms, those are starting to improve. Things still get lumpy along the way. We still have things pop up. But I would say we're starting to see a trend here of better performance at large. But it's -- there's nothing easy. The teams are still fighting through the different little fires that pop up. But overall trends, we are starting to see improvement of on-time delivery from suppliers, and we're starting to see folks performing at better, higher quality. Operator: Your next question comes from the line of Peter Arment of Baird. Peter Arment: Nice results. Lisa, maybe just quickly on [indiscernible] the year kind a low point, maybe just to give us a little -- the puts and takes you're thinking about for the year and just when you -- given your annual guidance, just how we should be thinking about from here just given the volume that you're seeing on the MV-75? Lisa Atherton: Yes. And I appreciate that. I think there's -- it was a good strong start to the year. I think it's a little early for us to start thinking about the guide. But if we continue to see strong performance, we'll evaluate that as we go forward for the back half of the year. I think on MV-75, I don't see us changing what we saw there was going to be flat kind of year-over-year of expected revenues. We do continue to see that acceleration pull from the Army, as we mentioned. And if they receive those additional funds, we'll see that kind of flow into the business, but we need to see the Army get those additional funds as they go through their procedures and processes to get those dollars. Operator: Your next question comes from the line of Seth Seifman of JPMorgan. Unknown Analyst: This is Alex on for Seth. Maybe I want to ask follow-up on the industrial situation. As you guys are kind of evaluating your options here between either selling the business or spinning it off, curious if you guys have any initial thoughts on which option you think is more likely at this point? And then two, when we're thinking about the 2 businesses here between Kautex and specialized vehicles, is the expectation that those would be spun off or sold together? Or could they be kind of broken up into separate pieces? Lisa Atherton: I think, Alex. So look, I think you kind of outlined all the options that we're looking at. And I don't think we necessarily have a course of action just yet that we're ready to declare. We are going to do the process and work to explore all of those alternatives. And I think that when we look at the spin, we just know that that's the certainty. It will be the longest path. We're going to do the work in order to prepare for that. But as we do that, we're exploring all avenues that you kind of outlined, selling them together or selling them apart. Those options are all on the table. And as the process evolves and folks are interested, we'll do what's in the best interest of our shareholders. So yes, I think we're -- we've got an exciting future ahead of us, but we'll keep you guys posted as we come along those decisions. Operator: Your next question comes from the line of John Godyn of Citi. John Godyn: Lisa, I just really wanted to think through the conflict in the Middle East and what that means for Textron, sort of to state the obvious. There's a lot of activity there and fuel prices have doubled. So on the aviation side, it's hard to believe that a doubling in fuel prices doesn't impact things. On the other hand, some of us on the call are old enough to remember the boom years in bizjet in and '06/'07, which were positively correlated to oil prices and all the economic implications of that? And then in your defense exposures, anything kind of pivoting on the back of what's going on in the Middle East? Any imminent demand signals or anything like that, how the portfolio is expected to respond to that would be helpful. Lisa Atherton: Yes, thanks. And I recall now I kind of missed that. Somebody asked a follow-on question on Iran. I didn't get that earlier as well. So look, to date, we have not seen a material impact on the ongoing conflict. We monitor the impact of those higher oil prices. And as you point out, has both positives and negatives to our various end markets. So -- and I think on the -- as you correctly stated, on the aviation and helicopter side, in particular, that's where we see some of that positive correlation. So we're watching that very closely. I think it's a little early days as folks use their capital there, but we will continue to monitor that and discuss that in future quarters. With respect to the defense side of the business, on all of our programs, I think you're starting to see them continue to perform. I think when we see this investment across all of the defense portfolio from the Trump administration's most recent fit-up is a signal from them that they see an increased need and robusting, I'll call it, the magazines or the various platforms in order to be prepared. And so I would say it's a secondary correlation to it, but you're starting to see support broadly across all the defense business. Programs, in particular, I wouldn't necessarily go into any specific programs on that in that way. Operator: Your next question comes from the line of Noah Poponak of Goldman Sachs. Noah Poponak: Two questions. Lisa, on Aviation, your discussion around investing in supply chain and manufacturing improvements suggests a view that supply should be higher. Curious how you -- when you look at the backlog and the coverage, how are you balancing you want to grow and you want to get customers' jets, but you also want to protect the downside nodes of cyclicality. Just how are you thinking about where you want supply over the medium term? And then, Dave, just on the Bell margin, if you could give us a little more color on the year-over-year change and how it progresses to get to the guidance for the year? Lisa Atherton: It's a great question. And you're exactly right. And when we look at the various type models, we want to make sure we don't disrupt this very strong backlog that we have. And so there are certain type models that if we put a little more investment, we could reduce the amount of time it takes to build those aircraft. Some of those type models are sold out for years. If we were to bring them in to say like 18 months or so as a lead time, I think that much more aligns with customers' expectations. And those are the areas in which we would do focused improvements on, in both the factories and the supply chain. David Rosenberg: So Noah, I'll take that question on Bell. So I mean, as a starting point, if we look at kind of Q1 of this year versus last year, we're obviously down on the margin percent as well as in dollars. So kind of 2 factors there to think about. We were off on commercial helicopter deliveries. Some of that was just timing of deliveries and contract milestones. Some of that was just delays in finishing up the last couple of helicopters for the quarter. We would expect on the commercial side for that to normalize out throughout the year, not too dissimilar to patterns you've seen in the last couple of years with a peak in -- We also had higher MV-75 revenue in the quarter, but the offset of that was some of our military legacy business was down. So net-net, that does result in overall lower margins. So I think what you could expect to see from a cadence perspective as we go through the next 3 quarters, as you'd see overall improvement, particularly because you'll have higher volume on the commercial side, getting us to where we're currently at on the guide of between 8% and 9%. Noah Poponak: Thanks. Lisa, I guess just getting some of the -- getting -- if I took the entire portfolio to 18 months, it would imply pretty nicely over 200 total deliveries. I guess maybe you're saying it's not everything should be at 18 months, but is it -- do you think the equilibrium is 200 or 220, or hard to put a number to it? Lisa Atherton: No, I think you're hearing the right ballpark, right? I think the right number is right there around 200. I think that's accurate. Operator: Your next question comes from the line of David Strauss of Wells Fargo. Unknown Analyst: This is Josh Corin on for David. I wanted to ask, I think you were planning on taking that charge on MV-75 later this year or early next as the program ramps. Is there any change to your expectation in the size or timing of the charge? David Rosenberg: No change in our expectation on the size, which was the cum catch-up was $60 million to $110 million. As we said when we announced it previously, it all depends on the timing of when the LRIP [indiscernible] is exercised by the government, and there's no change in our expectation right now that, that could be as early as the second half of this year or possibly could flow into the first half of next year and nothing's changed from our perspective, right, as we sit today. Operator: Your next question comes from the line of Gavin Parsons of UBS. Gavin Parsons: Lisa, you mentioned Textron is considered strategic alternatives on industrial in the past. I guess what are the hurdles to getting this done? And is there a minimum return threshold you're looking forward to ensure it's not a dilutive transaction? Lisa Atherton: Look, it's a little early to comment specifically on the level of dilution. It's going to depend on what that structure and value -- whatever proceeds we would get on that. But look, in addition to the benefits of clarity and flexibility, we had just had different natural investor bases and different valuation frameworks inside those investor bases. And so we're going to have to leave it to the market to assess that valuation, but I do think that New Textron has higher growth and stronger margin, which should support stronger valuation over time. And so I think on that side of it, it's is going to prove out to be a very well-done alternative for us. So in terms of in the past, I think the ideas there were around where we were as far as strength of the end markets of the industrial business, it just wasn't the right time. And as we see the positive growth and the positive performance out of both Kautex and specialized vehicles now just makes the right time for us to do this. Operator: Your next question comes from the line of Kristine Liwag of Morgan Stanley. Kristine Liwag: Lisa, post the industrial spend, and you'll have more time to allocate to the core aerospace defense. I was wondering, can you talk more about how you're thinking about potential capital allocation within that core business? Are there platforms or capabilities you would -- you plan to spend more time on focusing and are there areas you're willing to lean in more versus potentially rationalize? Lisa Atherton: Look, I think our intent here is to lean in more versus rationalize on the A&D space. And in fact, I think what we would look to do is as we have this pure-play combination and how they're anchored across the commercial and military aircraft, leverage the engineering capabilities we have across the business. And then we will look to see where we could be additive to that portfolio, particularly probably in the areas around systems. And what it is that systems does how we could grow that area of our business much more strongly. Kristine Liwag: Super helpful. And maybe a great follow-up on systems. I mean the U.S. accelerates towards drone dominance. We're seeing a lot more nontraditional players lower-cost competitors in this unmanned space where you have a fairly robust offering within systems. Can you talk more about how you balance cost, speed, autonomy with the performance that the DoD wants today, and also what that competitive dynamic is like and where you think systems could leverage the strength in that industry? Lisa Atherton: Yes. Thanks,. So I think when we look at what the strengths are across systems, not only is it decades and candidly, millions of hours of proven capabilities across the unmanned space across 3 domains. A lot of our offerings are, I will say, are more of the complicated and technical aspects of unmanned. Some of the lower entrants, I think, are much more attributable where what we have are capabilities that the services want to use over and over again. So it requires a more robustness in design and durability of the platform. So what you see in things like the Ripsaw platform that we are currently designing for the Marine Corps and what you see in our [ Arson ] 4.7 and 4.8 that provides a loitering ISR capability for many hours up to 13 hours. So I think what we see there is still continued strong demand for those. But we're also having growth opportunities in our unmanned surface vehicles, on the custody program and how they take their platform on the sea and put new capabilities, mine hunting capabilities into that platform system is providing the systems integration pieces that are much more complex than maybe what we see in some of other platforms. That said, we're also very open to working with folks and being partners in various entrants with various entrants, and you'll see systems do that over time. Operator: Your next question comes from the line of Ron Epstein of Bank of America. Ronald Epstein: Yes. Maybe 2 questions, just following up on some stuff that other folks asked. When you think about moving forward with an A&D focused business, how are you factoring AI and AI-driven autonomy into systems? And when I look at something like X-76, it seems like a platform that could generate a lot of interest. How are you thinking about that and the opportunity there? And one area where it does seem -- I don't want to say that tech underperformed, but maybe you could have done more, given all the technologies the company has is in specifically aerial unmanned systems, given the prowess you all have in electronic propulsion and everything you've done in Textron Aviation and all the stuff systems. So I don't know, sort of a broad question, but... Lisa Atherton: Yes. So I'll try to tackle the second question upfront in the sense of what you're talking about there is collaboration and synergies across the businesses. And what I would like to drive, it's how we're able to combine the engineering technology and talent that we have across systems, Aviation and Bell in order to come up with those ideas and platforms and breakthroughs, if you will, because we have that detail, as you mentioned. On the X-76, whether or not they would actually use AI autonomy in terms of the brain of the platform itself. Right now, the proving out of the X-76 is a stop bold technology itself. -- and it will be an unmanned platform. And so I think as that program evolves, you'll see a lot of the expertise that we have on the -- or the with the [ MOSA ] architecture will probably naturally follow it into the X 76. So there was just a lot of capability across Textron that I think we can now really come together in this pure-play A&D space. And I plan to continue to drive that. I mean we've done it in the past. We've got examples of where we have helped each other between the various businesses. but really driving towards an A&D strategy amongst ourselves that think would generate what you're alluding to. Ronald Epstein: And then, I mean, culturally, how do you achieve this, right, because you have no organization, I guess, in some parts that's used to being more independent. I mean you're going to have a core A&D engineering group that will serve the whole company. I mean, I don't know if you're there yet, but how do you think about shifting a culture to support it? I mean, just to be blunt, if you can't tell, I think this is a great idea. But in terms of executing it, how do you get the culture to buy into it? Lisa Atherton: Yes. I mean, as you know, culture takes a minute to evolve, but we are certainly on that journey. And part of my expectations is how we will continue to collaborate with each other. I mean things as simple as sharing each other strategic business reviews with each other. And so we're just driving various different opportunities for the businesses to be exposed to what the other business is doing as a way for them to say, "Hey, that's a great idea. I've got somebody over in this area that can help with that. " So I hope that you will see that continue to evolve over time, and I'm optimistic that the team is very excited about doing it. Ronald Epstein: Yes. And then maybe just one quick financial detail. the industrial business over the years, we heard that there'd be too much tax leakage to spin it or do whatever -- how should we think about that the tax impact? David Rosenberg: I mean, you obviously have the different [indiscernible] to tax impact. So you have the potential repatriation of cash, which would be we are thought about in terms of what the transaction expenses would be and then the tax leakage on the transaction itself. Both of those, we believe, would be manageable in whatever structure we end up doing. And as we mentioned in our release, we believe in a spin scenario, it would be done on a tax-free basis. Operator: Your next question comes from the line of Doug Harned of Bernstein. Douglas Harned: In Systems, I find this to be the most difficult business to really kind of look forward long term. AAC the Ship-to-Shore Connector, this has been going well. But if we think on more of a 5-year view, what do you see as the underlying differentiated capabilities there and the types of programs that you see you're best positioned for as you look longer term? Lisa Atherton: Yes. So I would say there's -- to stand out for me. First, being the Sentinel program as that A&D program continues to mature into a production program and as we are a key Tier 1 supplier to Northrop Grumman on that program, we will follow where that sentinel program continues to grow. So I think that's a key aspect of the systems portfolio. And then additionally, on the ground side of the business, the armored reconnaissance vehicle as well as the XM30, which we haven't mentioned so far in this call, Textron Systems is competing in both of those and those will both be decided in the coming 2 to 3 years. And I believe that you will see us have a position on 1 or both of those programs. So I think those underpin the go-forward on the systems performance. Douglas Harned: And then if you do the same -- sort of the same thing at Bell, when you look beyond MV-75, you mentioned the FSN program. Is -- can you give us a sense at all of kind of the timing and scale of potential new opportunities over the next few years and beyond what you're doing on MV75. Lisa Atherton: Yes. So timing and scale. So the Flight School Next program will be decided by the end of next quarter. So we will know how that's going to impact the future of Bell's prospects here within the next 90 days or so. So there's -- when we see what that comes out, and I don't want to go into numbers right now because we are in, I'll say, active negotiations there of Phase but it is a strong opportunity for Bell for the next, candidly, 25 years for Flight School Next. When you look at what the Marine Corps is doing with their H1 program, and frankly, I mean, we focused on MV-75 and X76, but there's still a lot of work going on, on the H1 and the V-22 platforms and the sustainment of those platforms for the coming decades. So there's a lot of work going on both in the nacelle improvement program for the V-22 as well as the structural improvement in electrical power upgrade program for the H1. So they have upside on both of those programs. That's just on the defense side. On the commercial side is the 525 platform, reaches its certification and moves into the commercial backlog, we'll start to see strong growth on that towards the back end of this decade, beginning of next. Operator: And your last question comes from the line of Gautam Khanna of TD Cowen. Gautam Khanna: Yes. Congratulations on the announcement. Wanted to ask if there are any dissynergies that you can point to? I know you talked a little bit about tax, but any sense of dis-synergies early on from the separation? David Rosenberg: So we've obviously, as part of this process, analyze all those, there'd be a minimal level of stranded cost that we can -- we do strongly believe we can manage through. But otherwise, there is nothing of a significant nature from a dis-synergy perspective, but the stranded costs are very minimal. Gautam Khanna: And Lisa to Kristine's earlier question, I just wanted to understand better. Is that -- do you think this is kind of the end of the portfolio review? Or what will be part of the AMD franchise is that you're looking to maybe scale back as part of this process? Lisa Atherton: Yes. So again, great question. And I would say I'm looking to lean in and grow versus scaling back. Operator: With no further questions, that concludes our Q&A session, and this also concludes today's conference call. You may now disconnect.
Operator: Good day and thank you for standing by. Welcome to CONMED's First Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook, its plans and objectives. These statements represent the forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance or results. The company's actual results may differ materially from its current expectations. Please refer to the risks and other uncertainties disclosed under the forward-looking information in today's press release as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call, except as may be required by applicable law. You will hear management refer to non-GAAP or adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credits or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will turn the call over to Pat Beyer, President and Chief Executive Officer, for opening remarks. Mr. Beyer? Patrick Beyer: Thank you. Good afternoon, and thank you for joining us for CONMED's First Quarter 2026 Earnings Call. With me on the call today is Todd Garner. The search for our new CFO is progressing well, and we look forward to providing you with an update soon. I ask Todd to join me today as he is assisting us as our adviser with our Q1 earnings report. I'll start and provide you with an update of our first quarter results and updates on our strategic priorities. Todd will then take you through the financials and our 2026 guidance in more detail before we open the call for your questions. Before turning to the quarter, I want to recognize our teams around the world for their continued focus and execution. Across the business, their work is making a real difference for our customers and for the company. During the first quarter, we reached an agreement to divest certain GI products. And in April, we reached a second agreement to divest our remaining GI products. As is customary, we will provide transition services under TSAs through the end of this year and into 2027. This decision was intentional and strategic. It allows us to concentrate resources and investment on our higher growth, higher-margin offerings and better focuses the organization on driving improved execution and delivering long-term shareholder value. I'll start by briefly reviewing our first quarter results. Total sales for the quarter were $317 million, a decrease of 1.3% compared to the prior year quarter. Excluding the impact of our previously announced exit from our gastroenterology product lines, total sales increased 3.8% year-over-year as reported and 2.1% in constant currency. Orthopedics delivered sales growth of 4.5% on a constant currency basis, while general surgery sales declined 7.4% in constant currency but were flat after adjusting for the gastroenterology exit. From an earnings perspective, excluding special items that affected comparability, our adjusted net income of $27.1 million decreased 8.5% year-over-year, and our adjusted diluted net earnings per share of $0.89 decreased 6.3% year-over-year. These were, of course, impacted by the exit of our GI business. Now I want to turn to our 3 key growth platforms: AirSeal, Buffalo Filter and BioBrace. These platforms sit at the center of our long-term strategy and provide a durable foundation for growth and margin expansion. Our decision to exit gastroenterology and place a strategic focus on minimally invasive surgery, smoke evacuation and orthopedic soft tissue repair reflects our intent to allocate capital, talent and attention towards the area where we see the greatest opportunity. I'll walk through each platform and highlight what we're seeing develop in the market. Starting with AirSeal, our clinical insufflation platform that is supported by 2 durable growth vectors, robotic and laparoscopic surgery. AirSeal benefits from a large installed base of over 10,000 systems globally, which continued to grow in quarter 1, giving us broad clinical presence and deep surgeon familiarity. AirSeal plays a critical role in complex procedures where conventional insufflation systems may be less reliable. AirSeal's clinical differentiation underpins its role in robotic surgery, particularly as these procedures continue to expand across subspecialties and migrate into ambulatory surgery centers. AirSeal follows surgeon preference. Beyond robotics, the laparoscopic opportunity remains significantly underpenetrated. In the United States alone, more than 3 million laparoscopic procedures are performed annually. And today, AirSeal is used only in 6% to 7% of those cases. We continue to see good traction in laparoscopy market, including continued growth in the first quarter. Taken together, AirSeal's installed base, differentiation among high acuity specialists, importance in ambulatory environments and expanding laparoscopic adoption support our confidence that AirSeal can deliver high single-digit to low double-digit growth over the long term. Turning to Buffalo Filter, our smoke evacuation platform. This continues to be one of our most compelling long-term growth opportunities. On the legislative front, we now have 20 U.S. states with smoke-free operating room laws on the books, covering approximately 51% of the population. We continue to see additional states moving towards legislation and expect this trend to persist, giving the safety benefits for health care professionals. We are continuing to see traction internationally, particularly in the Nordic countries, Canada and Australia. On the product side, our PlumeSafe X5 launched in the first half of 2025 continues to gain traction. Its smaller footprint, quieter operation and faster smoke clearance are resonating in outpatient and ambulatory environments. Importantly, we remain disciplined in how we are scaling this area. Our strategic focus is on direct smoke evacuation, where we control the customer relationship and capture the full margin profile. While OEM remains part of the portfolio, over time, we expect direct smoke to represent a larger share of smoke evacuation revenue, consistent with our broader focus on higher growth, higher-margin opportunities. Our third key growth platform is BioBrace, which continues to perform exceptionally well and remains a signature element of our sports medicine strategy. BioBrace is increasingly recognized by surgeons as a differentiated solution in soft tissue repair, addressing both the mechanical and biologic drivers of failure. It is the only FDA-cleared implant that delivers structural reinforcement while also promoting biologic healing, a combination that is reshaping how surgeons approach complex repairs. As surgeons gain experience with the technology, we are seeing broader utilization across both primary repairs and more complex cases. Clinical validations remain a critical component of the platform's long-term value proposition. There are currently over 30 published studies on BioBrace. Our 268-patient randomized controlled trial remains on track to complete enrollment in 2026 with publication expected in 2027. In the interim, the growing body of existing clinical data, along with the American Academy of Orthopedic Surgeons guidelines recommending augmentation in rotator cuff repair are reinforcing surgeon confidence and supporting adoption. We believe BioBrace is still early in its life cycle. As BioBrace becomes further embedded into surgical workflows and expands across additional soft tissue procedures, we see a long runway for sustained growth and increasing contribution to our orthopedics portfolio. From an operational standpoint, we finished 2025 strong and continue to improve supply chain performance during the first quarter. We are moving into a position in which we are able to provide customers with the consistent service they expect. This allows our orthopedic sales team to get back on offense and engage more proactively with surgeons and accounts. To support this momentum, we continue to expand capacity across both our internal manufacturing footprint and through qualified external partners. This dual approach gives us greater flexibility, improved resilience and positions us to support sustained growth. Importantly, these improvements are now showing up in our results. Orthopedics delivered mid-single-digit growth in the first quarter, marking the third consecutive quarter of at least mid-single-digit growth, a trend that reflects improving supply reliability alongside continued strength in our core platform. We are making sustained progress, and we believe we are on a clear path toward where we ultimately want to be, operating a more durable, high-performance supply chain that can support long-term growth. Our capital allocation priorities remain unchanged. We continue to balance organic investment in innovation, manufacturing and commercial effectiveness, disciplined acquisitions that strengthen our existing platforms and returning capital to shareholders, supported by strong and consistent cash generation. Our balance sheet continues to strengthen, and we believe CONMED is well positioned to invest in our business while maintaining financial discipline. In summary, we enter 2026 with a focused portfolio, improving execution and differentiated growth drivers operating in attractive markets. We remain committed to delivering reliable performance and creating long-term value for our shareholders. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our quarter 1 financial performance and discuss our 2026 financial guidance. Todd? Todd Garner: Thank you, Pat. All sales growth numbers I reference today will be given in constant currency. The reconciliation of GAAP to constant currency is included in our press release. The organic numbers referenced exclude GI sales from 2025 and 2026. As usual, we have included an investor deck on our website that summarizes the results of the quarter and our financial guidance. It also includes a reconciliation of GAAP to constant currency organic growth. For the first quarter of 2026, our total sales decreased 2.9% year-over-year. Organic sales increased 2.1% year-over-year. For Q1, total sales in the U.S. decreased 5.8% versus the prior year quarter, and total international sales grew 1.0%. Organic sales in the U.S. increased 2.8% and organic international sales grew 1.3%. Total worldwide orthopedic sales grew 4.5% in the first quarter. Total U.S. orthopedic sales increased 5.5%. And internationally, orthopedic sales increased 3.9%. Total worldwide general surgery sales decreased 8.5% in the quarter. Organic worldwide general surgery sales were flat over prior year. Total U.S. general surgery sales decreased 10.4% while total international general surgery sales decreased 3.8%. Organic U.S. general surgery sales increased 1.5% while organic international general surgery sales decreased 3.3%. AirSeal and direct smoke both grew in Q1, and we continue to expect AirSeal and direct smoke to be in the high single-digit to low double-digit range for the full year. But as expected and included in our original guidance for the year, in Q1, both product lines were below our expected range for the full year. We are seeing positive signs with AirSeal as more capital units entered the market in Q1 than robotic systems from the market leader. We are also seeing good early returns from our increased focus on laparoscopic procedures. The data points we can see give us confidence that AirSeal should continue to grow in the high single-digit to low double-digit range in 2026. The OEM smoke products were again a meaningful headwind in Q1. These non-focused products for us can be very lumpy quarter-to-quarter, and that was the biggest drag on general surgery sales in Q1. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the first quarter, excluding special items which are detailed in our press release. Adjusted gross margin for the first quarter was 57.4%, which is 100 basis points higher than the prior year quarter, driven by favorable product mix and positive foreign currency impact. Adjusted research and development expense for the first quarter was 4.8% of sales, 80 basis points higher than the prior year quarter. This increase was driven primarily by increased investment into our key growth drivers. First quarter adjusted SG&A expenses were 40.0% of sales, 130 basis points higher than the prior year quarter. As we said in January, we expect the first quarter to be the highest quarter of the year. On an adjusted basis, interest expense was $5.8 million in the first quarter. The adjusted effective tax rate in Q1 was 24.2%. First quarter GAAP net income was $13.8 million compared to $6.0 million in 2025. GAAP earnings per diluted share were $0.45 this quarter compared to $0.19 a year ago. Excluding the impact of special items, in the first quarter, we reported adjusted net income of $27.1 million, a decrease of 8.5% compared to the first quarter of 2025. Our Q1 adjusted diluted net earnings per share were $0.89, a decrease of 6.3% compared to the prior year quarter. Turning to the balance sheet. Our cash balance at March 31 was $35.0 million compared to $40.8 million at December 31. Accounts receivable days at March 31 were 65 days compared to 62 days at March of 2025 and 60 days at December 31. Inventory days at quarter end were 246 compared to 222 days a year ago and 207 on December 31. As we continue to focus on service levels, we have purposely built more inventory. Long-term debt at the end of the quarter was $860.2 million versus $834.2 million as of December 31. Our leverage ratio on March 31 was 3.1x. Q1 is typically our biggest cash outlay, and we continue to expect this ratio to hold at roughly 3x as we balance debt leverage and share buybacks. In Q1, we bought back approximately 858,000 shares for a total of $37.4 million. Cash flow provided from operations in the quarter was $13.5 million compared to $41.5 million in the first quarter of 2025. Capital expenditures in the first quarter were $2.9 million compared to $3.8 million a year ago. We continue to expect operating cash flow for the full year to be between $145 million and $155 million and capital expenditures between $20 million and $30 million, resulting in free cash flow around $125 million. No change from our prior guidance at the beginning of the year. Now let's turn to financial guidance. We'll start with revenue. We are pleased to be able to raise our organic growth expectation for 2026 to 5.0% to 6.5% from our prior range of 4.5% to 6.0%. Pat outlined the good signals we are seeing in the business, and we are pleased with the improving outlook. Currency has also improved slightly, and we now expect foreign exchange rates to be a tailwind to revenue of between 40 and 50 basis points. When we provided initial 2026 revenue guidance in January, we had recently announced our strategic intention to exit the GI product lines, but the only transaction that was complete was the agreement with Gore that was announced in December. In January, we did not have clarity on how or when we would exit the remaining product lines, and our guidance included that lack of clarity. In March, as Pat said, we closed on the sale of certain GI products to Micro-Tech. And in late April, we closed on the sale of the remainder of our GI portfolio to a strategic acquirer who we will be able to disclose in the coming few weeks. As Pat said, these agreements include a period of us providing product and services that may likely extend beyond 2026. So we now have much better clarity on what to expect for the remainder of 2026. In January, we estimated that we would sell between $21 million and $25 million of GI product lines in 2026. With these 2 agreements complete and happening faster than originally anticipated, our 2026 revenue guidance for the GI product lines is now between $14.5 million and $17.5 million, which is about a $7 million reduction from our prior guide at the midpoint. Fortunately, the lower revenue also comes with lower costs. And so our EPS guidance of $0.45 to $0.50 impact for the full year is still consistent with our January expectations. Because of our improving growth profile, despite that approximate $7 million of lower GI revenue for the year, we are raising the lower end of our reported range by $5 million and keeping the high end of the range the same. That results in expected reported revenue between $1.35 billion to $1.375 billion for 2026. We expect reported revenue in Q2 to be between $336 million and $340 million. And we've provided a detailed look at the assumptions of the organic growth and currency impact for the remainder of the year in our investor deck. We expect to refinance our debt during Q2 before the outstanding convertible notes go current. We have strong banking partners, and we are seeing attractive rates and plenty of capacity available to us. Given the historic trough in med tech multiples, we have determined that issuing new convertible notes at this time would not be in the best interest of CONMED shareholders. So our intent is to refinance with bank debt, which we expect could increase our full year adjusted interest expense, impacting adjusted EPS for the full year by at least $0.10. Despite this increase, thanks to the strength in the profitability we saw in Q1 and the increase in our organic growth profile, we are able to keep our adjusted EPS guidance for the full year unchanged at the range of $4.30 to $4.45. For Q2, we expect adjusted EPS to be between $1.09 and $1.14. With that, we'd like to open the call to your questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Travis Steed of Bank of America. Gracia Mahoney: This is Gracia on for Travis. On the first one, I wanted to ask a little bit more about the debt refinancing that you called out that you're starting in Q2. And just a little bit more about the strategy and what levers you can do to mitigate potential EPS dilution both in 2026 and then also in 2027 as well. And then I had one follow-up. Todd Garner: Sure. Thanks, Grace. So we're starting those discussions with our banking partners. We have a very strong banking group, some of the best banks in the world. We have ample capacity. We're seeing good rates. The change from what we thought -- what we planned for the full year is we thought that there would be a mix of bank debt and convertible notes that was in the prior original kind of intention. As we look at the historic low multiples in med tech, we determined that it was not in the best interest of CONMED shareholders to do new convertible notes at this time. So that raises the cost of capital just a little bit. As I said in my script, we see that as at least $0.10. I'm not being terribly precise there, obviously, because the negotiations are not done. We don't know exactly what we're going to get. And there's a lot of year left in cash flows and what the rates may do. And so it's going to be more than we originally thought as we laid out 2026, but thankfully, the strength in the business the results of Q1 allow us to keep EPS the same despite that increased headwind from interest expense. Gracia Mahoney: Great. Helpful. And then the second one, earlier this morning, just saw a company come out and talk about inflationary pressures. So I think that's top of mind. I was sort of wondering what you're seeing on the macro front in terms of inflation impacting margins and any framework to think about how that could impact CONMED over the rest of the year and what is sort of implicit in your margin guide there as well? Patrick Beyer: Grace, it's Pat here. Thanks for the question. Again, any macro geopolitical or economic margin pressure or price pressure would be included in guidance. I just want to let you know that. We are seeing some pressure on some commodity products like oil, gold that are affecting our cost of goods sold, but we're working hard with our vendors and our partners and our supply chain to mitigate as much as we can there. At a macro level, we're seeing some component prices go up. We're partnering with our supply chain to mitigate those, and we're also partnering with our hospital systems to partner with them on cost-effective clinical solutions. And we don't expect any more of the macro influences on the cost side to impact our guidance here. And so we've included that in there. Operator: Our next question comes from the line of Ross Osborn of Wells Fargo. Ross Osborn: Starting out with AirSeal, and apologies if I missed this, but what was the attach rate to DV5 during the quarter? Patrick Beyer: Ross, Pat here, and welcome. We did not state the attachment rate for the quarter. What I would say to you is the attachment rate for AirSeal in quarter 1 followed the guidance that we have given in the past, and that was on the DV5. We have guided between 10% and 20%, and we continue to be in that zone, Ross. Ross Osborn: Okay. Sounds great. And then for my second question, what is your level of visibility into state legislation on ORs may result in a tailwind? Patrick Beyer: And I'm sorry about that. And you're talking about smoke evacuation? Ross Osborn: Yes. Just curious regarding guidance, how much is baked in for new states coming on board? Patrick Beyer: Again, anything would have been built into it. Again, I think we stated 20 states have enacted 45% of the hospitals in the U.S., 51% of the population. We have line of sight of 13 additional states have bills pending, and we believe Maryland and Massachusetts are the most likely ones to pass. In fact, Maryland is actually at the governor's desk. And so we continue to see legislation play a role in the background as well as the clinical benefits of it, and societies continue to play as equal or more important role as societies like AORN are pushing for legislation and action from hospitals to standardize on smoke evacuation. Operator: Our next question comes from the line of Robbie Marcus of JPMorgan. Robert Marcus: Congrats on a nice quarter. Two for me. Hoping you could walk us through the bridge on second quarter. It seems like a larger-than-normal step-up in dollars. And I realize the last few years maybe aren't the best proxies for 1Q to 2Q. I know 2Q is historically a stronger quarter. Maybe just give us a bridge of how you get there on a dollar basis. What's getting better and how to think about that? And then I have a follow-up. Patrick Beyer: Sounds good. Todd can talk you through the dollars. And then if there's any questions on the background and clinical spaces, I'll jump in on that side. Todd Garner: Yes. And I know, look, we're only half an hour from releasing the deck on our website. But Robbie, I do want to make sure you see the deck, specifically, I think it's Slide 5. We provided much more granularity on the pieces of organic, the GI sales and currency. So that will just give you some extra visibility. And I would say, in general, if you remember, Q4 was a pretty strong quarter for us. Because of that, we were pretty cautious on the Q1 guide. It came in better than we expected, but we were right in that Q1 was a little softer because Q4 was so strong, particularly internationally. And so it is true that we are expecting to see an acceleration in Q2 better than what we saw in Q1. But I think that fits with how we saw the year to start with, and the signals we're seeing in Q1 have given us confidence that the Q2 numbers are in a good place. Robert Marcus: Yes. I see the slide. I guess I'm asking what businesses are getting better because it's just -- it's a larger dollar amount from first quarter to second quarter, especially with the GI numbers going down year-over-year. So I was wondering if you could kind of give us a bridge. What's getting better in second quarter to get us to that dollar amount? Patrick Beyer: Robbie, I'm going to be focused on the growth drivers. And so our orthopedic business and BioBrace will continue to accelerate its growth. We will continue to work through our supply chain historical challenges that have gotten a lot better, and we're moving more towards on offense. So you can expect the orthopedic business to continue to accelerate, number one. Number two, we called out that international would be much slower in the first quarter because of the big quarter 4 they had. Their absolute value dollars will accelerate in quarter 2. Then you're going to see the natural drivers of AirSeal and our smoke evacuation from a dollar standpoint and a growth standpoint accelerate there. The AirSeal business, although it grew, the absolute growth wasn't as much as we would have liked to have seen, but the absolute capital units that have hit the market were pretty attractive for us, and they accelerated in quarter 1, and we expect to see the disposable trends grow in quarter 2 and throughout the year. So that will also play a role in accelerating that absolute dollar growth value from quarter 1 to quarter 2, Robbie. Robert Marcus: Perfect. And then just quickly on gross margin. You had a really good result, your best one in many quarters. Any color there and just how to think about that through 2Q through 4Q? Todd Garner: Thanks, Robbie. We did -- we grew 100 basis points over the prior year quarter. Our full year guide for gross margin was 50 to 100 for the year. So we were at the top end of that for Q1. As we look at the rest of the year, we think we should be in that 50 to 100 every quarter. So Q1 was good at the top of the range, and we continue to have the guide of 50 to 100 basis points of improvement in 2026. Operator: Our next question comes from the line of Matthew O'Brien of Piper Sandler. Anna Runci: This is Anna on for Matt. I want to touch on the laparoscopic opportunity in AirSeal specifically. I know you've mentioned that market penetration is fairly low there for a while now. So I'm just wondering what the gating factor is there and how we should think about the laparoscopic application as a growth driver long term for AirSeal and then any investments you're making to accelerate penetration into that market. Patrick Beyer: Thank you. So as we think about laparoscopy, historically, we've done a strong job internationally where the robotic penetration was lower. Internationally, we're selling AirSeal in the laparoscopic market successfully. So we know there's an economic and clinical benefit to the hospital systems and patients around the world. To give some detail on the U.S., there are over 3 million procedures in the U.S. laparoscopically, and we address -- and we have a penetration rate of about 6% to 7%. So we have a strong programs in the United States towards standardization in the laparoscopic market. We know that the clinical benefit and the economic benefit is there, but we're taking a pretty focused approach. For example, in the laparoscopic market, 2 procedures, colorectal and hysterectomy have over 350,000 procedures done laparoscopically. These are complex surgeries in nature. They're 3 hours plus in length of procedure, and we know the benefits of AirSeal and stable low-pressure clinical insufflation make a real difference. And so we have an active program in the United States around standardization and laparoscopy. We had a good quarter 1 where our pipeline is growing strongly. And I commented that the actual units of AirSeal going into the market in the United States was really strong in quarter 1. We put over 50% more in quarter 1 in the market than we did in quarter 1 2025. So some good moves are happening there. Anna Runci: Awesome. That's great to hear. Super helpful. And then I also just wanted to ask on the supply chain. Just any additional color on the progress you've made there. And then once these issues are fully subsided, I'd imagine it might take some time for you to recoup any lost business or any dislocated business. So just wondering if there is an expected lag there and when you expect to fully be back on offense with the supply chain issues? Patrick Beyer: Yes. So I appreciate the question. So I'll remind you that at the end of 2025, we said we made real progress. The good news was it wasn't a moment, it was a movement, and we've continued to make progress. And the gains we made at the end of 2025, we've sustained. That's number one. Number two, it's allowed us to grow our orthopedic business, and we commented that we've had 3 quarters in a row where we've actually achieved minimum mid-single-digit growth. The good news is BioBrace had never gone on back order. So our sales professionals, even though they weren't on offense on our core orthopedic product lines, they were connecting with clinicians, taking care of clinicians, clinical issues and maintaining their relationships. So we believe that while we will not take all of the previous business we may have lost back quickly, we believe our relationships are strong with the hospitals. And as contracts continue to come up and we have opportunities, we'll continue to take the appropriate market share that we deserve and we've earned. And again, I would remind you, the sports medicine market is a large market, growing mid-high single digits. And our expectation is we're a winning company, and we would expect to, over time, move to that mid-single-digit, high single-digit growth trajectory. Operator: [Operator Instructions] Our next question comes from the line of Mike Matson of Needham & Company. Michael Matson: So just on Buffalo Filter, the OEM business, is there any way you can help us understand how big of a part of Buffalo Filter, that general surgery business that is? And what's the expectation around when that stops potentially being a drag on Buffalo Filter overall? Like when does it kind of get small enough or level off in terms of the declines? Patrick Beyer: Mike, the Buffalo Filter piece of our smoke evacuation is smaller than our direct, number one. We grew our direct business in quarter 1. And we believe over time, it will continue to get smaller. And we believe the leading indicators we saw in quarter 1 tell us that total smoke will in 2026 be high single digits, low double digits. And so over time, it will phase away, and we'll continue to focus on our direct business. Michael Matson: All right. And then just on the interest expense commentary. So it sounds like you're saying that there's -- it's going to be -- and I know it's rough numbers at this point, but approximately $0.10 greater impact from the added interest expense than you previously expected, but you're able to kind of absorb that and you're maintaining the EPS guidance. But I guess looking into '27 then, and I know you're not giving guidance for '27, obviously, but I mean, is it -- it's probably going to kick in midyear. So is that like a $0.20 annualized impact? And would that $0.20 be kind of a headwind in '27? Todd Garner: Yes. Fair question, Mike. We don't want to get ahead of ourselves. Obviously, we said that with where things are right now, we've determined to not access the convertible part of the market. That doesn't mean that we wouldn't between now and '27, right? So there's a lot of things that can move between now and then. We have a very strong cash engine. And so we'll give '27 guidance at the right time. But -- so I'd ask you to just kind of stay open-minded to where this goes. And I will remind you, we said at least this is still a little bit of a moving target. So we don't want to be too precise with it, and we certainly don't want to be precise into next year. Operator: Thank you. I would now like to turn the conference back to Pat Beyer for closing remarks. Sir? Patrick Beyer: Thank you, Latif. I want to thank everybody for joining us on the call. We entered 2026 with a clear focus on execution. We are concentrating on our key growth platforms and continuing to build a strong foundation for long-term performance. Exiting the GI portfolio further sharpens our focus and positions CONMED as a more disciplined company going forward. I'm really proud of our team and the positive impact they're having on patient outcomes as well as their continued commitment to creating value for our shareholders. Thank you for joining us today, and I want to thank you for your continued interest and support. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the TETRA Technologies, Inc. Q1 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Press star one again. Thank you. I would now like to turn the call over to Kurt Hallead. Please go ahead. Kurt Hallead: Good morning, and thank you for joining TETRA Technologies, Inc.’s first quarter 2026 earnings call. Speakers on today’s call will be Brady Murphy, President and Chief Executive Officer, and Matt Sanderson, Chief Financial Officer. Before we begin, I would like to call your attention to the safe harbor statement in our Form 10-Q. Some of the remarks we make today may be forward-looking and are subject to risks and uncertainties as outlined in our SEC filings. Actual results may differ materially from those expressed or implied. In addition, we may refer to adjusted EBITDA, free cash flow, and other non-GAAP financial measures. Please refer to our press release for GAAP reconciliations and note that these reconciliations are not a substitute for GAAP financials. As such, we encourage you to refer to our 10-Q that was filed yesterday. After Brady and Matt provide their comments, we will open the line for Q&A. I will now turn the call over to Brady. Thank you, and good morning, everyone. Brady Murphy: Welcome to TETRA Technologies, Inc.’s first quarter 2026 earnings call. I will walk through the very positive first quarter highlights, TETRA’s position in this uniquely uncertain time, and the progress towards our 2030 targets before turning it over to Matt to cover more detailed financials and the balance sheet. Despite the backdrop of one of the most tumultuous periods in the history of the oil and gas industry, we started 2026 with one of the strongest first quarter performances in the company’s past ten years. If we exclude the benefit of the Gulf of America Neptune project in the first quarter of last year, revenue of $156 million and adjusted EBITDA of $26 million were ten-year highs, as were the first quarter results for both Brazil and the Gulf of America. In addition, the industrial chemicals and production testing subsegments each delivered ten-year high revenues with strong margin contributions. What encourages us most about our results is that the operational and financial fundamentals for each of our segments and many of our subsegments are improving, even before the benefit of current elevated oil prices and potential increased customer spending activity. At current oil prices, we anticipate offshore projects could be pulled forward and unconventional activity in the U.S. will eventually respond. Combined with the significant growth opportunities laid out in our One TETRA 2030 strategy, which we will update later on our call, we feel very good about how TETRA is positioned for 2026 and the coming years. Regarding the ongoing conflict in the Middle East, and given that this region has historically accounted for about 5% of the company’s revenue, we do not expect an overall negative impact on our financial results. That is because what we have seen so far is activity in our core business regions of the U.S., Europe, and Latin America will likely offset any reductions that may occur in our Middle East business. This applies to our supply chain as well, since all of our chemical manufacturing plants are located in the United States and Europe, and our elemental bromine is sourced from Arkansas, which is also the location of our critical minerals resources. Over the longer term, it remains to be seen how developments in the Persian Gulf and the Middle East will impact the global oil and gas markets and our business. In general, we believe it could boost investment in U.S. and international unconventional activity and provide tailwinds to an already robust offshore and deepwater outlook. Completion Fluids and Products, our industrial chemicals business, had a record-setting first quarter with revenue up 15% year over year and 13% quarter over quarter. For the first time since 2021, when energy services were suppressed due to COVID-19, it accounted for over 50% of total first quarter segment revenue. Higher-pressure gas plays in South Texas and the Western Haynesville supporting Gulf Coast LNG plants are driving higher volumes of higher-value completion fluids. Increasing pressures in West Texas due to disposal well pore space are also contributing to higher-density fluids for well workovers. Looking forward, we are well positioned heading into our traditional European seasonal second quarter peak. Q1 revenue and adjusted EBITDA in Brazil were at a ten-year high. Although we did not execute any Neptune jobs, our first quarter fluids business in the Gulf of America, excluding Neptune work in the first quarter of last year, also recorded a ten-year high in revenue and adjusted EBITDA. Regarding Neptune projects, we are very encouraged by the growing pipeline. The trend toward deeper, hotter wells in the Gulf of America continues, as evidenced by very strong first quarter revenues for our highest-density zinc bromide completion fluid. The Water and Flowback business, despite U.S. frac fleets down 24% year over year and a slow January due to freezing weather, delivered overall revenue up 1% year over year and 3% quarter over quarter. Our production testing subsegment reached a ten-year high in Q1 revenue as our automated SandStorm technology continues to gain market share across the unconventional land operations in the U.S., Argentina, and the Middle East. Our strategy to grow this segment internationally has been successful, and for the first time in the last ten years, international production testing revenue was over 50% of the total PT subsegment revenue. Looking ahead to the rest of 2026, significant uncertainty remains for oil and gas prices. However, given our geographic footprint, we believe any headwinds from the Middle East will be offset by strength of our other geographies. We expect to gain further clarity on customer activity offshore and outside of the Middle East as we move through the second quarter. For now, we are maintaining our prior 2026 guidance of single-digit revenue growth over 2025 with completion fluid margins between 25-30% and Water and Flowback in the mid-teens. Turning to our strategic progress towards our One TETRA 2030 objectives: At our Investor Day last September, we outlined a clear strategic path for the company. Although much has changed in the world since that event, our view of the company’s key growth trajectories across deepwater, specialty chemicals, electrolytes for battery energy storage, critical minerals, and desalination of produced water has strengthened. We expect bromine demand to support our deepwater completion fluids and battery storage electrolytes to double by 2030, driving the need for and reliable access to cost-effective bromine, a critical feedstock. This has become more evident with the current events in the Middle East, as well over 50% of the global bromine supply comes from that region. Our bromine plant project in Southwest Arkansas continues to proceed on time and on budget. Phase two of the project is underway with phase three slated for 2027, and first production at the start of 2028. The plant is designed to have an annual capacity of up to 75 million pounds, more than double our existing long-term third-party supply agreement. TETRA’s electrolyte revenue grew meaningfully in 2025, as U.S. Energy Information Administration reports that a record 15 gigawatts of utility-scale battery storage was added to the grid in 2025. The EIA projects another record 24 gigawatts planned for 2026, representing a 60% growth rate. As artificial intelligence and cloud computing drive rapid growth in data center power demand, scalable long-duration energy storage is becoming increasingly critical. TETRA’s proprietary PureFlow zinc bromide is a key input for these systems, supporting safe, nonflammable performance at utility scale. TETRA’s OASIS TDS end-to-end desalination of produced water for reuse continues to gain momentum, with multiple engineering efforts and customer commercial engagements. Since achieving 24/7 steady-state operations 60 days ago, our Permian Basin pilot project has operated at over 96% uptime and continues to meet our performance specifications. We believe that behind-the-meter power generation, access to affordable natural gas and land, and other factors will drive significant data center growth in West Texas and accelerate the produced water desalination market well ahead of our 2030 targets. Regulatory agencies continue to focus on understanding the technology, setting permitting standards, and encouraging the industry to bring solutions to the produced water disposal challenge. TETRA is honored to participate in the National Petroleum Council produced water committee and to support the recently announced U.S. Environmental Protection Agency Reuse Action Plan 2.0. Regarding TETRA’s lithium and magnesium critical mineral resources in Arkansas, we continue to advance relationships with technology providers and conduct engineering studies. We have formed a joint venture with Magrathea Metals to advance domestic magnesium metal production and monetize this asset. The JV will leverage our specialty chemical processing expertise and large-scale magnesium resource base combined with Magrathea’s proprietary electrolytic magnesium production technology, which has been partially underwritten by the U.S. Department of War. In April, Magrathea successfully converted TETRA’s MacOver brine, rich in magnesium, into a high-purity magnesium metal at its small pilot operation in the San Francisco Bay Area. The JV, named Arkansas Magnesium, is currently conducting engineering studies for a first-of-a-kind demonstration plant planned for co-location at the Evergreen Bromine site in Arkansas. For lithium, a strong rebound in lithium carbonate prices over the past six months has led us to look at options to accelerate the development of our Evergreen 585,000 metric ton lithium carbonate resources. As a reminder, Evergreen is a 6,900-acre brine unit in Southwest Arkansas on which TETRA owns 65% of the brine mineral rights and ExxonMobil owns 35%. The combination of current LCE prices of around $25,000 per metric ton and efficiency advances in direct lithium extraction technology are making this a very attractive option to accelerate. More to come as we look at ways to advance this opportunity. With that, I will turn the call over to Matt. Matt Sanderson: Thank you, Brady. Good morning, everybody. Completion Fluids and Products revenue of $92 million and adjusted EBITDA of $26 million increased 10-12%, respectively, relative to Q4 2025. The sequential increase was driven by higher sales volumes in our industrial chemicals business and ongoing deepwater projects in the Gulf of America and Brazil that Brady referenced earlier. Year over year, Completion Fluids and Products revenue and adjusted EBITDA decreased 12-3%, respectively. As a reminder, our first half 2025 results included high-impact TETRA Neptune projects we previously noted we do not expect to repeat in the first half of this year. That said, the pipeline of deepwater and high-pressure, high-temperature completion opportunities continues to grow. With our best-in-class service delivery and unique fluid chemistry solutions, we are well positioned to participate in the forecasted growth in offshore deepwater activity. As Brady mentioned earlier, geopolitical unrest in Europe and the Middle East has led to a rapid shift in global market dynamics. As a result, offshore activity in the Middle East has slowed, and logistics into the region continue to face higher costs and shipping delays. Our exposure in the region is relatively small compared with our overall business, but some of our Q2 2026 completion fluid sales in the Middle East could be delayed. However, as mentioned, our calcium chloride and bromine-based completion fluids are manufactured outside the Middle East. As such, our fluid production has been unaffected, and we are seeing an increased number of spot sales inquiries from regions and customers we have not historically supported, which could more than offset any delays. For Water and Flowback Services, revenue of $65 million increased 3% sequentially and 1% year over year. To put our performance in context, during the same twelve-month period, U.S. frac activity declined more than 24% year over year. Adjusted EBITDA of $9 million increased 20% sequentially and 9% from the prior year. The improvement in profitability was driven by cost reduction initiatives and continued market penetration of higher-margin automation technology. Outside the U.S., project startups in the Vaca Muerta Basin will enable us to double revenue in Argentina in 2026 at margins that are overall accretive to this segment. Compared with the broader market conditions, our outperformance highlights the strength of our service delivery, our differentiated technology, and our geographical diversification. As commodity prices have increased, and a twelve-month strip price remains above what the market projected at the start of this year, we are seeing our customers consider increasing their activity plans for 2026. Should this occur, we are well positioned to incrementally benefit from any increase in activity in U.S. shale basins that may result from higher oil and gas prices. Regarding our capital structure, we had $36 million in cash and total debt of $182 million at the end of the quarter, resulting in a net leverage ratio of 1.5x. Cash used in operating activities was $12 million. Total CapEx was $19 million, including $8.4 million for our Arkansas bromine project. Total adjusted free cash flow was a use of $32 million and base business adjusted free cash flow was a use of $23.5 million. The use of cash was driven by higher incentive compensation tied to our strong 2025 financial results, our three-year return on net capital invested, and our exceptional total shareholder return performance. Cash use also reflected a build in our AR balance at the end of the quarter, and the seasonal inventory builds in Europe, which will be monetized in Q2. We expect to generate positive base business free cash flow in 2026, with that cash being reinvested in our Arkansas bromine plant. Overall, we are off to a strong start and remain confident in our ability to deliver solid financial results this year while continuing to advance towards our 2030 targets. The global market conditions continue to evolve, but overall, they are providing modest tailwinds for the markets that we serve. I will now turn the call back to Brady for his closing comments. Brady Murphy: Thanks, Matt. Again, despite the continued uncertainty caused by the conflict in the Persian Gulf, the long-term outlook for our business appears to be even better than when we had started the year in 2026. Overall, we are very confident in TETRA Technologies, Inc.’s ability to execute in these market conditions, make prudent financial decisions to support our growth, and continue to make progress towards our 2030 targets. With that, we will now open the call for questions. Operator: At this time, if you would like to ask a question, press star followed by the number one. Your first question comes from Bobby Brooks with Northland Capital Markets. Bobby Brooks: Hey, good morning. Thank you for taking my question. It seems like OASIS commercial discussions are progressing well, and what really stuck out to me in the script was the “multiple engineering efforts and customer commercial engagements.” Could you pull back the curtain a little bit more about what that looks like, and add some comparison to what that looked like at the start of the year or six months ago? Brady Murphy: Good morning. Sure, Bobby, appreciate the question. We are very encouraged with the ongoing dialogue that we have. Remember, we mentioned in our last call that we were engaging in a 100,000 barrels per day plant. We actually now have several parallel engineering studies going on for a smaller-sized plant as well as a 100,000 barrels per day plant. Those engineering studies take time, and we are still on track to have what we need from those projects to get into more commercial discussions with our customers before the end of the second quarter. We are encouraged by what we see from the preliminary engineering studies in terms of OpEx and CapEx and socializing some of those discussions with customers, but we still have a ways to go to finish those efforts, and we will continue to do so. We are in the middle of engineering studies that we will need to complete before we can really get into any long-term contracts, Bobby. Thanks, Bobby. Bobby Brooks: Got it. And then on the customer discussion side, it seems like since the Investor Day there have been more folks reaching out, wanting to hear about the technology and learn more. Is that trend still continuing? Any color on that dynamic? Matt Sanderson: Yeah, Bobby, this is Matt. Absolutely. We cannot disclose the customers that we are engaged with, but those engagements, dialogues, and engineering studies, like Brady referenced, have increased. And as you say, you picked up on the fact that it is not one engineering effort. This is from different customers and multiple opportunities. We are very encouraged. We are also very encouraged by the performance of our technology, our patented OASIS offering, and the economics associated with it. I think, as you are well aware, some of the challenges with disposal and the costs associated with disposal continue to rise. As we continue through our engineering efforts, we are able to demonstrate that the TETRA OASIS solution is, in our view, very cost competitive with alternatives. Operator: Your next question comes from Martin Malloy with Johnson Rice. Martin Malloy: Good morning, and congratulations on a solid quarter. My first question is on the deepwater side. I know there are no Neptune projects in your 2026 guidance. Can you talk about what you are seeing in terms of conversations with customers for deepwater completion fluids, and particularly with respect to Neptune potential projects in the second half of this year or next year? Brady Murphy: Sure, Marty. We have been feeling good about the deepwater outlook going back to our Investor Day when we outlined strong compound annual growth as we march towards 2030. I would say the recent events have only strengthened that outlook. As you look at cutting off the amount of oil that is currently happening in the Middle East, projects that were already looking very strong financially for our customers are being evaluated for what can be pulled forward. We are hearing some of that churn. We actually picked up work outside of the Middle East that we have seen already will offset whatever impact we see from our Middle East business, even though it is roughly 5% of our revenue. We have seen opportunities already well overcompensate that potential loss. So yes, we are seeing some churn in that regard, but it has already been a strong outlook in terms of our base business deepwater completion fluids. Regarding Neptune, as we said, the pipeline continues to grow. The wells are getting hotter and more challenging. Zinc is still an option in the Gulf of America, but it has its own challenges as you get hotter with corrosion and as you deal with production facilities. We are seeing that pipeline continue to grow, and we are also seeing opportunities outside of the Gulf of America continue to build. You may or may not see a Neptune project this year, but I would say the probabilities for next year are continuing to increase pretty significantly. Martin Malloy: Great. Very helpful. And a follow-up: in your press release, you talked about evaluating options to accelerate lithium and magnesium development. Is there more you can share now? Would that be in conjunction with accelerating the bromine project, is it dependent on that, or is this separate, related to the Exxon joint venture? Brady Murphy: We are accelerating the bromine project at the fastest pace we can. That project is our priority, and we will prioritize that project to have completion by 2027 and start in 2028. The benefit is that all the upstream—brine wells, pipelines, and some of the pretreatment plant capabilities to take out H2S from the brine field—will be in place for whatever additional plants we put on that site. As we mentioned, we are currently doing engineering studies and plan to put a demonstration plant for the magnesium JV with Magrathea, and we have already done quite a bit of engineering for a lithium plant that will be on the same site. That will benefit from a lot of the infrastructure and investments that we have already made for bromine, so there are a lot of synergies. We are not ready to publish any financial information on those projects yet, but as we move forward, you can anticipate we will at the appropriate time. Operator: Your next question is from Tim Moore with Clear Street. Tim Moore: Thanks. My first question is about battery energy storage. EOS has had some supply/manufacturing hiccups, which seem temporary. Do you get a rolling update on that, and do you have enough feed supply for electrolytes to quickly get it to them if they start ramping up more seriously after the summer? How are you thinking about that logistically on the supply side? Brady Murphy: Yeah, Tim, we do not want to comment or forecast ahead of EOS, but we are very plugged into their forecasts so we can plan for not only the bromine but the full electrolyte production that we need to produce. We do have good visibility into that, but we cannot talk about specifics. As we have mentioned before, in addition to our long-term supply agreement, we have secured additional third-party bromine supply that is in place to meet the forecasts we are getting from EOS. That is not a concern. Once we have our own plant operating in 2028, if they continue their path to the 8 gigawatt-hours of production they have stated publicly, we will be in a great position to supply their requirements and the deepwater growth we have projected. Tim Moore: That is helpful, Brady. Switching gears, on the Arkansas bromine project, it was nice to hear production still expected early 2028. Could you walk us through some of the next construction milestones, and where you would anticipate CapEx to uptick in the coming quarters? Brady Murphy: Sure, I will take that one, and Matt can add anything. The project is on schedule. We completed phase one. Phase one was important because standing the bromine tower up on-site was a logistics challenge. It is a large 130-foot titanium structure. Having that up and secured was a really important milestone. A lot of the actual on-site construction around the bromine tower, the pipelines from upstream, and the pretreatment still have to be constructed. Yes, there will be more construction activity in 2027-2028. We are projecting good cash flows for the rest of this year and 2027, so we are looking to finance as much of that as we can from our free cash flow, and if we do need additional capital, we have very good options available. For now, we are funding from our cash flow, and that is the plan. Operator: Your next question comes from Analyst with Stifel. Analyst: Hey, it is Pat on for Stephen Gengaro. Thanks for taking the questions. Could you talk about the opportunity you have for magnesium production, including any sense you have for demand and any color on the joint venture? I believe I saw the JV partner referenced 7,000 tons per year by 2029. Brady Murphy: We are having ongoing discussions. We have finalized the joint venture, which is great. We had our first formal board meeting a week or so ago. We really like this technology. As you are probably aware, the U.S. really does not produce any magnesium. The world is heavily dependent on China for magnesium production. Being on the critical minerals list, it has the attention of the current administration and the Department of War. It is a little premature to state how large the first commercial plant will be; we are having discussions along those lines. We will have plenty of brine flow to make the plant as large as we want, but there are other considerations like offtake agreements well ahead of time and potential government funding support. The demonstration plant will be small-scale to prove out the technology. For commercial scale, we have not made any final determinations yet. Analyst: Okay, thanks for the color. Shifting gears a bit, thinking about fluids, it seems like the timing of completions versus rig activity in deepwater would lead to maybe sharply higher 2027 fluids demand. Is that reasonable, and any way you would translate deepwater rig additions to the demand? Matt Sanderson: Patrick, on the earnings call back in February, we gave some soft guidance around what to expect in Completion Fluids and Products this year. We highlighted that we came off a very strong performance in 2025, where a lot of the rigs in the markets we serve were in completion activity, and then we guided that we expected those rigs to move into more drilling activity in 2026, shifting back to 2027 for higher completion activity like you referenced. As Brady touched on, the geopolitical events highlight global demand and where that demand is fulfilled. We are seeing projects coming online, FIDs, and leasing activity. These tend to be deeper, hotter, more challenging environments requiring higher-density brines and more exotic chemistries, which plays to TETRA’s strength. We are very pleased with what we are seeing already in 2026—modest tailwinds and a strong Q1—and we expect that 2027 completion activity, and the type of completion activity, will really benefit TETRA. Operator: Your next question is from Analyst with CJS. Analyst: Good morning. Thank you for taking my questions. My first one is: could you talk about your partner’s lithium project FID status and whether you may need to pursue your own investments there to keep the bromine project on time? And if you do decide to drill your own wells, would that be feeding into your own production endeavors if you want to accelerate that? Brady Murphy: Let me clarify. The wells that we drill in the upstream for the brine contain lithium, bromine, and magnesium. All three minerals are within the same brine. The wells we will be drilling for our bromine project that will feed the bromine tower already have lithium and magnesium in them, so we do not need to drill additional wells to extract lithium or magnesium. That is the real benefit: we are getting three critical minerals from the same upstream investment. The plant itself is a different issue. We are building the bromine plant now. The lithium plant will come later. We are not at a point where we are ready to FID a lithium plant. There is still more technology evaluation and engineering work to be done before we are ready. But as I said, current lithium economics make it attractive enough for us to put accelerated time into that. Analyst: Right, thank you. Are you expecting your partners to drill the wells, or are you expecting to drill your own wells? Brady Murphy: When you say our partners, who are you referring to? Analyst: Standard Lithium and Equinor. Brady Murphy: They have their own project on our brine leases. That is a separate project. They have the Reynolds Unit that has been approved. We get a royalty on lithium off of that production. They are partners with each other, but we own the brine leases and we get a royalty off that production. Our Evergreen Unit is where we will be drilling and producing brine for bromine and future lithium and magnesium. They will be drilling on their Reynolds Unit, where we get a royalty off lithium, and we also get the tail brine from that production when we need it in the future, and we have the other mineral rights within that brine. Hopefully, that clarifies it. Analyst: It does. Thank you. And what is happening in calcium chloride markets? Is that being impacted by the conflict in Iran and how that flows through supply chains and industrial demand? Brady Murphy: The calcium chloride business for us continues to perform extremely strong. It is a big part of our industrial chemicals business that had a record first quarter, up significantly year over year and quarter to quarter. We are not seeing any material change due to the current conflict. We really do not have supply chain issues related to that market. We do not have a large presence selling calcium chloride into the Middle East. Our European business is very strong. Our U.S. business is very strong. We mentioned on our last call we saw some new emerging markets related to chip manufacturing requirements. That business is performing very well for us, and we fully expect it to continue. Operator: Your next question comes from Analyst with Daniel Energy Partners. Analyst: First one is on international production testing. You talked about revenues being greater than 50% internationally. Where do you see that going over time, and could you walk through some of the markets where you are seeing strength today and how recent events have potentially changed your outlook there? Brady Murphy: Thanks. As mentioned, we are seeing strong performance in Argentina, and we expect to more than double our revenue in 2026. We also have some exposure in the Middle East, although it is relatively small, and we see opportunities in those regions to continue to deploy technology and automation. We have been very successful in North America automating and bringing differentiated technologies such as SandStorm and automated drill-out to our customers, and these technologies can be exported and deliver value in international markets. We are pleased with our geographical diversification. As the world looks at where energy is produced and how to secure it, it is not just U.S. land; other markets are looking at securing their own energy, and we are pleased to participate. Analyst: On that point, has the game changed when we think about energy security longer term and the opportunity set across multiple business lines, international and offshore, as a result of what has happened over the last eight weeks? Are you having incremental conversations with customers you may not have been having eight to twelve weeks ago? Brady Murphy: When you look at the current situation and the future energy markets where you want to be positioned, offshore deepwater is clearly a key market for future barrels. Also, unconventional activity in the U.S. and Argentina, because relatively speaking, it is a short cycle time to get additional production as you put more rigs and frac crews into the unconventional markets. We are also seeing more unconventional activity start to grow in the Middle East. We will see how the current environment may or may not impact that activity. The markets where we want to be right now—strong positions in Europe, the U.S., and Latin America; offshore deepwater; unconventional—are where we really want to be to support security of future supply. Matt Sanderson: The other aspect we touched on is that we are seeing increased inquiries for spot sales from different customers and regions than we have historically served for our completion fluids. More than half of the world’s bromine is derived from the Middle East. The challenges in that region are well publicized. Some customers are having those conversations with us, asking about supporting their business with our fluids, with bromine-based fluids being manufactured in North America from Arkansas. We are pleased with that. More broadly, everyone is appreciating that the world needs all forms of energy, and it will need all forms of energy for a long time. Operator: Your next question comes from Bobby Brooks with Northland Capital Markets. Bobby Brooks: Thanks for letting me jump back in the queue. Turning to the domestic onshore completion fluids market, what are you hearing from customers on their back half 2026 activity outlook? Are they in a wait-and-see mode on whether these higher oil prices are here to stay? Brady Murphy: So, Bobby, you are asking about our U.S. land completion fluids business, right? Completion fluids for us are largely an offshore business. We do have some land business for our completion fluids, but it is generally small relative to our offshore and deepwater markets. We are seeing interesting trends on land: very high-pressure Western Haynesville and South Texas gas wells feeding LNG projects require heavier-density brine for completion work, and in West Texas, pore pressures are getting so high that additional workover activity also requires heavier brine. Those two areas are where we see most of the growing land opportunities for completion fluids. It is still relatively small versus deepwater, but it is starting to grow in a meaningful way. Operator: Your next question is from Martin Malloy with Johnson Rice. Martin Malloy: Thank you for taking a follow-up question. I wanted to focus on Argentina. You cited projects coming on later this year, giving you confidence in the outlook. Could you talk more about the services you are providing down there? Are you expecting demand for the early production facilities—historically pretty profitable—to be utilized there, or is this more on the flowback and testing side? Matt Sanderson: Really, all of the above. We did see continued interest and secured some early production facility projects for this year. Also, technologies such as SandStorm automation, which has been deployed and proven in unconventional plays in the U.S., are being deployed into Argentina. We have SandStorm down there today. Historically, our business there was more levered to early production facilities. Now we are seeing a combination: an increased number of early production facilities and deployment of our differentiated technology for operators in Vaca Muerta. We are quite pleased with how that business continues to progress. Operator: There are no further questions at this time. I will now turn the call back over to Brady for any closing remarks. Brady Murphy: Thank you all very much. We appreciate your participation in our call, and we look forward to talking to you at our second quarter earnings call. We will conclude the call now. Thank you. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
Operator: Good day, everyone. Welcome to the NNN REIT, Inc. First Quarter 2026 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Stephen A. Horn. The floor is yours. Stephen A. Horn: Thank you, Kelly. Good morning, and thank you for joining NNN REIT, Inc.’s first quarter 2026 earnings call. I am joined today by our chief financial officer, Vincent H. Chao. NNN REIT, Inc.’s disciplined, efficient, and self-funded growth strategy continues to deliver results. Our proven long-term operating platform and consistent capital allocation focused on sufficiently accretive acquisitions remains central to our approach. We are committed to long-term value creation, navigating market conditions with discipline, and capitalizing on opportunities to support durable growth. As detailed in the press release this morning, NNN REIT, Inc. delivered a strong quarter. We closed 15 transactions comprising 41 properties for a total investment of $145 million, with an initial cash yield of 7.5%. At the same time, we maintained significant balance sheet flexibility, ending the quarter with $1.2 billion of total liquidity and an industry-leading weighted average debt maturity of nearly 11 years. Reflecting our consistent performance and visibility into the remainder of the year, we are raising our 2026 AFFO per share guidance to a range of $3.53 to $3.59. This increase underscores the strength of our portfolio and the effectiveness of our multiyear growth strategy. One additional item before I get into operations: if you have not reviewed our updated investor presentation released during the quarter, I encourage you to visit the website and take a look. Turning to operating performance, our portfolio of approximately 3,700 freestanding single-tenant properties across all 50 states continues to perform well. During the quarter, we renewed 36 of 43 lease expirations, consistent with our historical renewal rate of approximately 85%, and rental rates were 2% above prior levels. Additionally, we leased seven properties to new tenants at rent rates about 10% above previous levels, demonstrating the continued demand for our assets and the outstanding job our asset management team is executing at high levels. Our tenant base remains healthy with no material credit concerns currently. Occupancy increased sequentially by 30 basis points to 98.6%, now above our long-term average. This improvement reflects the strong execution of our leasing and disposition teams, who are actively repositioning vacant assets to maximize value. In several cases, the team has secured high-quality investment-grade tenants, further enhancing asset value and contributing incremental value creation. With only 53 assets remaining and active solutions underway, combined with the solid overall performance of the portfolio, we expect occupancy to continue trending upward in the near term. On the acquisition front, as I said earlier, we invested $145 million across 41 properties with a cash cap rate of 7.5%, and, more importantly, with a weighted average lease term of 19 years. The sale-leaseback nature of our transactions continues to provide accretive, risk-adjusted returns with long-duration, predictable cash flows. Regarding market conditions, cap rates in the first quarter remained largely consistent with recent quarters. While we are seeing some modest compression early in the second quarter, we expect relative stability going forward. As always, our platform is designed to operate effectively across many macro environments. We do benefit from a stable interest rate backdrop, and the 10-year has remained fairly range-bound, which continues to support transaction activity. We had elevated volume in 2025, and we are seeing a good amount of investment opportunity for the first half of the year. During the quarter, we sold 25 properties, including 16 vacant assets, generating $36 million in proceeds for redeployment. Dispositions of income-producing assets were primarily non-core, and we executed approximately 30 basis points below our acquisition cap rate. As discussed previously, we expect to take a more proactive approach to asset sales in 2026 to further optimize portfolio quality for the long term. As you know, tenant credit evolves, markets shift, and consumer behavior changes, which results in active portfolio management becoming essential to maintaining high-quality, durable cash flow. Our balance sheet remains one of the strongest in the sector. We ended the quarter with just $80 million drawn on our credit facility and maintained a weighted average of debt maturities, as I said before, of nearly 11 years. NNN REIT, Inc. is well positioned to fund the remainder of the 2026 acquisition pipeline and support continued growth. With a robust pipeline, strong financial position, and proven leadership, we are confident in our outlook. We remain committed to our self-funded model, disciplined capital allocation, and delivering sustainable long-term value for our shareholders, targeting mid-single-digit earnings growth plus a dividend we have increased for 36 consecutive years, one of only three REITs. I will now turn the call over to Vincent H. Chao for the financial results and updated guidance. Vincent H. Chao: Thank you, Stephen. Let us start with our customary cautionary statements. During this call, we will make certain statements that may be considered forward-looking statements under federal securities laws. The company’s actual future results may differ significantly from matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements are made. Factors and risks that could cause actual results to differ from expectations are disclosed in greater detail in the company’s filings with the SEC and in this morning’s press release. Turning to results, this morning we reported core FFO of $0.86 per share and AFFO of $0.87 per share, each flat over the prior year. As disclosed on page 8 of today’s earnings release, we booked $739 thousand of lease termination fees this quarter versus $8.2 million a year ago, representing a $0.04 headwind, without which AFFO per share growth was a solid 4.8%. Results were modestly ahead of our internal projections, with upside driven primarily by lower-than-expected bad debt and net real estate expense. Bad debt represented about 15 basis points of quarterly ABR and was better than our 75 basis point assumption. Our NOI margin was 95.9% in the first quarter, reflecting the efficiency of our triple-net lease structure. G&A as a percentage of total revenue was 5.9%, in line with our expectations, while our cash G&A margin was 4.2%. Annualized base rent grew 7% year over year to $935 million, driven by our strong acquisition activity, while free cash flow after dividend was about $52 million in the first quarter. Regarding our watch list, as Stephen mentioned, we are not currently tracking any significant near-term credit issues in the portfolio, and we are optimistic that we can outperform our bad debt assumptions for the year. That said, we remain proactive portfolio managers and will continue to look for ways to de-risk the portfolio ahead of potential future issues without incurring unwarranted dilution. Included in this quarter’s dispositions was one AMC as well as an entertainment property. Our occupied dispositions had only three years of remaining lease term and, despite the de-risking nature and shorter term of the properties sold, we were still able to generate an economic gain of over 6% on the sales, given our low cost basis in the assets, which is a key component of our risk controls. Turning to capital markets, during the quarter, we drew down the full $300 million available to us on our delayed draw term loan. The rate on the term loan has been swapped to a fixed all-in rate of 4.1%. We also sold roughly 1.7 million common shares on a forward basis through our ATM at just under $45 per share. We did not settle any forward equity, leaving us with expected future net proceeds of $74 million as of March 31. Our next debt maturity is our $350 million unsecured note due in December. As a reminder, we have an accordion feature that allows us to expand our existing term loan by $200 million, and IG credit spreads have recently revisited historical lows following a brief widening in the immediate aftermath of the Iran conflict. This gives us multiple options with which to address our pending maturity as well as financing our investment plans on a leverage-neutral basis. Moving to the balance sheet, our Baa1-rated balance sheet remains a competitive advantage that provides us with the flexibility to fund future growth while protecting against downside risk. At the end of the quarter, we had no encumbered assets, $1.2 billion of available liquidity, and just 1.6% of our debt tied to floating rates. Including the impact of our unsettled forward equity, pro forma net debt to EBITDA was 5.6x, unchanged from last quarter. Our debt duration remains the highest in the net lease space at 10.5 years, well matched with our lease duration of 10.1 years. On April 15, we announced a $0.60 quarterly dividend, representing 3.4% year-over-year growth, equating to an attractive 5.7% annualized dividend yield and a conservative 69% AFFO payout ratio. I will end my opening remarks with some additional color on our updated 2026 outlook. Based on our better-than-expected first quarter performance and our growing pipeline of investment opportunities, we are raising the midpoint of both our AFFO and core FFO per share guidance by $0.01 to new ranges of $3.53 to $3.59 and $3.48 to $3.54, respectively. The midpoint of our increased AFFO per share guidance represents an acceleration of year-over-year growth to 3.5% from 2.7% last year. Line item guidance, which is summarized on page 3 of our earnings release, remains unchanged, although I would highlight that we are tracking to the low end of the $14 million to $15 million range for net real estate expenses and towards the high end of our $550 million to $650 million acquisition guidance, based on our near-term pipeline visibility. With expected free cash flow of about $212 million, $130 million of expected dispositions, and $1.2 billion of available liquidity, we are well positioned to fund our acquisition plans for the year. From a credit loss perspective, we are lowering our bad debt assumption for the full year from 75 basis points to 60 basis points, reflecting the outperformance in the first quarter. Our assumptions for the balance of the year are unchanged, but as I mentioned earlier, given year-to-date trends, we are hopeful we can outperform our bad debt projections in the coming quarters. We will now open the call for questions. Operator: Can you hear me? Vincent H. Chao: Yes, we can hear you, Kelly. Operator: Okay, sorry about that. The floor is now open for questions. If you have any questions or comments, please press 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold just a moment while we poll for questions. Your first question is coming from William John Kilichowski with Wells Fargo. Please pose your question. Your line is live. William John Kilichowski: Hi. Good morning. Thanks for taking my question. Very helpful color in the opening remarks on the funding for the acquisition guide. If I think about the incremental $74 million that you have raised and the term loan, it sounds like you have capacity to go well above the guide here and you are trending up. What is keeping that acquisition guide sort of consistent here in 1Q? Stephen A. Horn: Hey, John. I will take that. We have a very robust pipeline and opportunity set that we are looking at currently, but the old adage applies: you do not want to count them until they are done. We are actively in negotiations, trading paper, but until they are in a well-advanced closing stage, we do not want to get above our skis here. Vincent H. Chao: Yes, but, John, you are correct in the sense that the $74 million of equity does give us a little bit of additional capacity. So at our typical 60/40 equity/debt mix, it would be about $125 million of additional capacity. William John Kilichowski: Very helpful. Thank you. And then the second one is just on the credit loss guide. Appreciate the updated color on the 60 basis points. Of that, what is pure conservatism versus what is something you feel like you have an outlook on? And maybe an extension of that would be the 7‑Eleven headlines on store closures. Have you had any discussions with them? Is there any impact to you that would be in that guide? Vincent H. Chao: As far as the credit loss assumption, there is very little in terms of embedded or something that we expect to happen other than there was a small amount—15 basis points—in the first quarter. Beyond that, there is really nothing material that is known that we would put into that number. Stephen A. Horn: As far as 7‑Eleven, we have never done quote business directly with 7‑Eleven. They acquired a lot of our large regional operators that we did business with over the years. Our average cost basis in our 7‑Eleven portfolio is about $2.2 million. We completed a significant renewal in 2025 with 7‑Eleven, and our average lease term with 7‑Eleven is about eight and a half years. We are very confident. We have not had any discussions indicating concern, and none of our stores are on the closure list. Operator: Your next question is coming from Analyst with Bank of America. Analyst: Morning. Following the recent ATM issuance, could you characterize your current overall WACC and your investment spreads today? Vincent H. Chao: The WACC does change on a daily basis, but if you are talking about near-term AFFO yields and debt mix, we are probably in the high-6% area—call it 6.75% to 6.8%. Analyst: And then for my next question, last quarter you expected cap rates to compress more in 2Q and 3Q. Is that still your view, or is it a higher-rate environment and reduced competition? Stephen A. Horn: My view is the same on cap rates as it was in the first quarter, and it is coming into reality. Our first quarter cap rates were in line with the past many quarters, and we expected second-quarter compression. I still expect that for the deals I see being priced, and then I see them staying at that compressed level. For modeling purposes, we always have a watch list—we are always watching tenants. Case in point, AMC is on our watch list; we have talked about that before. We were able to sell one in the quarter, and we were pretty pleased with that outcome given the nature of AMC sales. On net for the quarter, we came out with an economic gain—not a GAAP gain—for our occupied properties. That is the kind of thing we are going to look at. So yes, in the near term—meaning this year—we are not seeing any material concerns worth calling out. That does not mean we do not have tenants that we think are maybe medium- to longer-term ones that we are watching a little more carefully, and we will look to address some of those as we can. I will just add one more thing. Our active portfolio management is not just focusing on credit. You always have credit risk; credit changes. More importantly, you might have real estate risk and the probability of renewal at the end of the term. We are trying to get ahead of that, looking years out, and making the portfolio a more stable platform because things do change. Analyst: Thanks for the color. And then you also mentioned you leased seven properties to new tenants in the quarter. Are you able to share details on what industries these tenants operate in? Stephen A. Horn: It was a combination primarily of quick-service restaurants and convenience stores. I think there was one car wash in there. Analyst: Okay. Great. Thank you. Your next question is coming from Analyst with Citi. Analyst: Hi. This is Nick Kerr on for Smedes. Morning. Thanks for taking the question. Are you seeing or hearing anything from any of your tenants that might suggest any changes in underlying consumer spending habits, maybe across the restaurant or more of the experiential touch bases? Vincent H. Chao: Many of our tenants—about 10%—are public, so we do get those reads, and we also have our own conversations privately with our tenants. There is nothing I would say that is a broad-strokes takeaway. Certain restaurant tenants are doing better than others. To the extent there is continued pressure on the consumer, you would expect that to pressure some of the more cyclical businesses, but nothing has bubbled up that is a meaningful broad-stroke takeaway. Analyst: Got it. Thank you. And then you mentioned you are trending towards the high end of your acquisition guidance. Could you just remind us what your visibility into your pipeline is like from today, and then any color on what that quarterly cadence of acquisition volume would look like through the balance of the year? Stephen A. Horn: I encourage you to look at volume on an annual basis because quarter to quarter it can be very volatile. As I said in the opening remarks, our acquisition opportunity set is really healthy currently, and, as Vincent mentioned, we are trending to the high end of our range currently—if everything closes. Operator: Your next question is coming from Jenny Leeds with Morgan Stanley. Please pose your question. Your line is live. Jenny Leeds: This is Jenny on for Ron. First question on sale-leaseback: you talked about a lot of the acquisitions from longstanding relationships. Are you seeing any acceleration in sale-leasebacks given the current macro environment? Stephen A. Horn: I think that is reflected in our pipeline. There is a big opportunity with sale-leasebacks currently. It is elevated this year versus 2025, even though we had record volume in 2025. It feels like there are a lot of sellers using sale-leaseback for debt refinancings and balance sheet management. Jenny Leeds: That is helpful. Thank you. Second, can you confirm the latest status of Frisch’s and Badcock? Are they all cleaned up? What is the current status? Stephen A. Horn: All our Badcock assets are currently accounted for and cleaned up, and we had near 100% recovery—so we are in great shape there. For Frisch’s, we are well on our way. All the Frisch’s are within our 53 vacant assets, and we are working all the assets currently. We have a tremendous amount of interest in those assets, and I am expecting some really positive outcomes as we move through the year. Vincent H. Chao: With occupancy back to 98.6%, above our long-term averages, there is not strong pressure to fire sale anything or move too quickly. We are in a good position and can be a little bit pickier. Operator: Your next question is coming from Alec Feygin with Baird. Alec Feygin: Hey, thanks for taking my question. First one: what is the term income currently assumed in guidance? Vincent H. Chao: We do not give lease termination fee guidance per se. We have commented that we think this year will be a normalized year, typically between $3 million to $4 million. Again, not guidance, because these things are episodic. If it is the right thing to do for the business to take a lease termination fee because we can solve a future problem and get a fee on top of it, we will do that. Historically, $3 million to $4 million is about what we averaged—maybe a little less—and what we did in the quarter is pretty consistent with that. Alec Feygin: Got it. And second for me: are there any categories currently seeing a bid from private market participants where you can be opportunistic in asset sales—not from a real estate or credit perspective, but just seeing a high bid? Stephen A. Horn: There is not a particular segment with a distinct high bid right now. We are looking to sell about $130 million of assets in the market, and there is no big private capital market bid for those. If pricing were super attractive, we would consider it, but that is not what we are seeing at the moment. Operator: Your next question is coming from Michael Goldsmith with UBS. Michael Goldsmith: Good morning. Thanks a lot for taking my question. You touched a little on expected cap rate compression from the first to the second quarter. Is that just broad compression, or are there specific asset categories where you are seeing that compression? Stephen A. Horn: It is broad across our opportunity set. As you know, we do a lot of mining of our portfolio. The auto service and convenience store sectors are primarily where we are seeing minimal compression—around 15 to 25 basis points. Michael Goldsmith: Anything specific you think is driving that? Stephen A. Horn: As I always say, in the first half of the year people want to do deals, so the competition gets a little more aggressive and is willing to compress their spreads. Michael Goldsmith: And then in terms of specific categories, you mentioned that you leased to a car wash. Can you talk about your comfort level in that category? I think you mentioned that you sold an AMC. Are you able to provide the cap rate on where theaters are trading right now? Stephen A. Horn: We do not provide cap rates on individual deals. Overall, our income-producing dispositions were about 30 basis points inside our acquisition cap rates. Regarding car wash, to clarify, we did not buy a car wash this quarter—it was one of the seven assets we leased. That said, I am very comfortable with our car wash holdings. We have done them since 2005, our basis is extremely low, and we did not get into the “pie-eating contest” when there was a lot of availability for car washes over the years. Michael Goldsmith: Got it. Thank you very much. Good luck in the second quarter. Vincent H. Chao: Thanks, Mike. Operator: Star 1 at this time to enter the queue. Your next question is coming from John James Massocca with B. Riley Securities. Please pose your question. Your line is live. John James Massocca: Good morning. Sticking with the theme around cap rate compression you are potentially seeing in the pipeline and on the horizon for the remainder of the year, is that changing at all based on any changes in the competitive environment? With interest rates moving around and maybe some dislocation in certain other capital sources, are you seeing less competition outside of other REITs, and if you are, are other REITs filling that gap? What is the overall competitive environment for your potential partners here? Stephen A. Horn: For the 20-plus years I have been doing this, it has been a highly competitive environment. The names have come and gone, and a couple of us REITs have been around for the 20-plus years. Private capital has always been involved. It was non-traded REITs; now financial institutions are raising money and creating REITs. It is highly competitive—it always is. The names change. I do not view there as being more competition; I view it as people wanting to do more deals right now in the first half of the year. John James Massocca: Have you seen any pullback in non-REIT capital over the course of year-to-date, given some of the changes in that environment? Stephen A. Horn: Most of the non-REIT capital is playing in segments we do not play in—large industrial—so they can deploy vast amounts of money at one time. They are not buying a Taco Bell in Terre Haute, Indiana, with a franchisee. John James Massocca: Fair enough. And then I know you do not want to disclose the cap rate on the AMC asset sale, but can you maybe talk about who the buyer was? Was it another landlord, a tenant, someone looking to redevelop? Was this a true theater-to-theater transaction? Stephen A. Horn: It was somebody looking to redevelop the asset. John James Massocca: Okay. Alright. That is it for me. Thank you very much. Operator: There are no further questions in queue at this time. I would now like to turn the floor back over to Stephen A. Horn for closing remarks. Stephen A. Horn: Again, thanks for joining us on the call. NNN REIT, Inc. is in really good shape going forward. We are optimistic and look forward to seeing many of you in the next few weeks at NAREIT. Thanks, and good day. Operator: Thank you, everyone. This concludes today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good morning, and welcome to Carrier's First Quarter 2026 Earnings Conference Call. I would like to introduce you to today's host for the conference, Michael Rednor, Vice President of Investor Relations. Please go ahead. Michael Rednor: Good morning, and welcome to Carrier's First Quarter 2026 Earnings Conference Call. On the call with me today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. Except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring costs and certain significant nonrecurring items. A reconciliation of these and other non-GAAP financial measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Carrier's SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Dave. David Gitlin: Thanks, Mike, and good morning, everyone. Let me start by thanking our team globally who continue to deliver differentiated solutions for our customers and help preserve the planet for generations to come, while also delivering financial results that exceeded our expectations. Demand for our commercial HVAC and aftermarket solutions remained strong, while our shorter-cycle businesses have performed better than expected. Company orders in 1Q were up 11% led by global CHVAC up 35%, including CSA commercial HVAC up over 80%. Global data center orders were up over 500%, reflecting continued customer demand for our differentiated solutions. Our current data center backlog now fully covers our expected $1.5 billion of data center sales this year. Of course, we are targeting to exceed that number. Organic sales were about flat as CSA Resi and Light Commercial both performed better than expected. CSA Resi movement was better than expected and field inventory levels remain healthy. CSA Light Commercial was up nearly 10%, driven by share gains in large retail accounts and continued traction from our recently introduced highly efficient hybrid fuel rooftop units. In Europe, encouragingly, the increase in natural gas prices supported strong demand for heat pumps. With the ratio of electricity to natural gas in Germany below 3 for the first time since early 2023, strong demand for heat pumps has continued into April in Germany and across Europe. Both EPS and free cash flow were better than expected, and we returned about $500 million to shareholders through dividends and share buybacks. In summary, I am proud of our team for navigating macro headwinds and delivering better-than-expected results. Our growth algorithm is centered on products, aftermarket and system differentiation, and we are making strong progress across all 3. I'll start with products on Slide 4. Our CSA RLC business is a superb business with high share and strong margins, ROIC and free cash flow, and we continue to invest in differentiation. On the product side, for example, we recently introduced a new highly efficient fan coil with a significantly smaller footprint and lower weight, which is very attractive to our extensive dealer network as it is easier to install and service. We are also expanding our TAM with new system offerings focused on hydronics. Last year, we introduced an air-to-water heat pump that delivers heating, cooling and domestic hot water. In 2027, we will expand the Viessmann boiler lineup with an entry tier offering and will then further expand into the attractive North America domestic hot water adjacency through a differentiated system solution that combines our air-to-air heat pump expertise with Viessmann's deep knowledge of hydronics. Carrier Energy continues to progress well with utilities and key hyperscalers, and we plan to introduce our Gen 1 units in the market this summer. The resi digital ecosystem is another key opportunity. We expect that connecting homeowners, dealers, distributors and Carrier into a single 360-degree digital stack will provide greater customer satisfaction, increased renewal rates and parts capture as well as improved forecasting and working capital performance across the value chain. In Light Commercial, we're executing the same disciplined playbook. Our field retrofit kit is converting existing rooftop units into connected assets, improving operational insights and expanding parts, service and aftermarket opportunities. Our recently launched multistage ultra-high-efficiency WeatherMaster platform has the best-in-class efficiency to weight ratio. While I am highlighting CSA RLC as an example of product differentiation, we're seeing similar progress globally. In the fall, ahead of the heating season, CSE RLC will be introducing a new differentiated high-tier Viessmann branded heat pump that is complementary to our current premium offering. Our CSAME business introduced a new Toshiba-branded side-discharge VRF platform, featuring best-in-class efficiency, distinctive aesthetics, low noise performance and high reliability. So product differentiation is a consistent theme across the portfolio. Turning to Slide 5. On the CHVAC side, our product portfolio, field network support and operational capacity are night and day versus where we were at spin. We now have -- not only have a comprehensive product portfolio, we are winning head-to-head what you see in our orders, share gains and backlog. We've invested in the right products with new offerings such as 2- and 3-megawatt maglev bearing air-cooled chillers with free cooling and a range of water-cooled chillers enabling reliable data center operation in high ambient environments. And by the end of this year, we will have introduced an expanded suite of very attractive CDU offerings. Our high-margin controls business has also significantly increased share in the U.S. and is a key differentiator in our system-wide offerings. Significant capacity expansion and superb technical talent additions have supported growth in this important business. The team's great work and investments are driving results, as you can see on Slide 6. Sales in our global CHVAC business are up 80% since spin. Our backlog is up 130%. We've gained 500 basis points of share, and our margins are up 3x. Not only is the applied business driving great growth for today, the related aftermarket business will drive great growth for years to come. And the good news is that we have the aftermarket playbook to ensure that we capture the opportunity as you see on Slide 7. Similar to our commercial HVAC business, we have transformed the way we think about aftermarket. Our playbook starts with how we design products with aftermarket as a focus. We continue to expand our parts capture availability and partnerships to deliver growth. We've added highly scaled salespeople and technicians globally and we are focused on providing solutions for customers that meet their mid- and late-life upgrade and modification needs. Importantly, we continue to lean into the opportunities created by AI and digital connectivity with the number of connected devices in the field, up over 25% in the quarter. All segments have plans to deliver on their aftermarket targets, and we feel good about our start to the year and our expectation to deliver our sixth year in a row of double-digit growth. Last on systems on Slide 8. Data centers present a clear opportunity to bring together the full power of One Carrier to provide our customers with unique solutions. Our QuantumLeap offering leverages our unique capabilities and is gaining great traction with our customers. Since launching this integrated holistic offering about a year ago, we've won hundreds of millions of dollars in orders. Our differentiation lies in integrating previously discrete systems, including chillers, CDUs, our Nlyte data center infrastructure management system, our building management system, leveraging new digital twin capabilities, air handlers and complete life cycle support. Earlier this week, we announced our expanded investment in partnership with ZutaCore, which will further enhance our technology differentiation in this space. In transportation, we've been building visibility across the cold chain, which creates value for our customers and drive subscription and aftermarket revenues for us. Our Lynx subscriptions cover nearly 240,000 units, and we expect to triple this number in the next few years. Before I turn it over to Patrick, a brief comment on our full year outlook. Compared to our February guide, we are seeing an increase in input costs as a result of new tariffs, fuel and raw material prices. We expect to offset these headwinds dollar for dollar through supply chain actions, cost reduction and increased pricing. On the latter, we now expect to realize an additional 2 points of pricing globally this year. I am pleased with the better-than-expected start to this year, but with just 1 quarter behind us and still a lot of macro uncertainty, we are reaffirming our full year guide. With that, I will turn it over to Patrick. Patrick? Patrick Goris: Thank you, Dave, and good morning, everyone. Please turn to Slide 9. For the quarter, reported sales were $5.3 billion. Adjusted operating profit was $594 million, and adjusted EPS was $0.57. By comparison to last year, this was a challenging quarter, although company results were better across all metrics compared to our Q1 guidance. Better-than-expected total company sales and operating profit performance was mainly driven by CSA Resi and Light Commercial. The year-over-year decline in adjusted operating profit and adjusted EPS largely reflects lower sales and absorption in our CSA Residential business and continued headwinds in China Resi and Light Commercial. Adjusted EPS declined 12% as tailwinds from a lower effective tax rate and a lower share count were more than offset by the lower operating profit, I just mentioned. You will find a year-over-year adjusted EPS bridge in the appendix on Slide 19. Free cash flow in the first quarter was a cash outflow of $15 million, which reflects normal seasonality and was also better than expected. Moving on to the segments, starting with CSA on Slide 10. Organic sales for the segment were down 3%. Residential sales were down 12%, driven by movements that is the unit volume from distributors to dealers, which was down 8% in the quarter and lower field inventories, which were down about 35% year-over-year. As Dave mentioned, Light Commercial was up 9%. Commercial sales were up low single digits, in line with expectations, and we continue to expect significant sales growth in the second half, driven by data centers. Segment operating margin of about 15% was as expected and largely reflects the impact of lower sales and associated under-absorption in our Resi business. Moving to the CSE segment on Slide 11. Flat organic sales were a few points better than expected, driven by Residential and Light Commercial, which grew low single digits, offset by a mid-single-digit decline in Commercial. We're seeing a continued shift toward electrification and heat pump adoption in this region as evidenced by strong heat pump sales, up low teens and partially offset by continued declines in boilers down mid-single digits. Similar to the CSA segment, we expect a significant ramp in commercial deliveries in the second half mainly driven by data centers. Segment operating profit and margin performance was disappointing in the quarter, driven by lower commercial volume and higher temporary promotions only partially offset by RLC volume growth and strong productivity. RLC price increases and surcharges went into effect in April. Turning to the CSAME segment on Slide 12. We're seeing continued very strong performance in Commercial in this segment outside the China region with sales up high teens, led by strength in India and Australia. This was more than offset by ongoing weakness in Residential and Light Commercial China, leading to an overall 1% organic sales decline. Overall sales in China were down low teens with the RLC business down around 25% and Commercial down low single digits. Sales in the Middle East were down mid-single digits, impacted by the ongoing conflict in the region. The decline in segment operating margin to about 10% was mainly driven by the weakness in China RLC as expected. Moving to the CST segment on Slide 13. CST had a third consecutive quarter of solid organic growth with another very strong quarter in Container, partially offset by pressure in Global Truck and Trailer. Our Container business was up nearly 40%. The decline in segment operating margin reflects unfavorable business mix. Turning to Q1 orders on Slide 14. Total company orders in the quarter were up 11%, mainly driven by our commercial businesses globally, which were up about 35%. CSA commercial orders growth reflects some large data center wins in the quarter. We've seen positive momentum in RLC orders in CSE continue into April. CSAME remains a tale of 2 halves, with strong performance outside of the China region, offset by China RLC. Within transportation, Global Truck and Trailer order intake was weak, while Container continued to outperform. Moving on to Slide 15 and shifting to our 2026 organic sales outlook. As Dave mentioned, we had a better-than-expected start to the year, but given the current macro uncertainty, we are reaffirming our full year sales outlook of approximately $22 billion with organic growth of flat to low single digits. Think of our prior guide being a bit below $22 billion and our current outlook a bit above $22 billion, both round to $22 billion. This includes a roughly $250 million year-over-year revenue headwind from the exit of Riello, mainly reported in the CSE segment with the sale now expected to close before the end of the second quarter. The building blocks of our full year outlook have not changed and largely reflect our expectations for continued double-digit growth in commercial and aftermarket globally, offset by softness in our short-cycle businesses. Moving on to Slide 16, profit and cash guidance. Same as prior slide, we are reaffirming our full year outlook for operating profit and adjusted EPS, no change in CSA and CSE expected margins, and we now expect CSAME margins to decline approximately 50 basis points, reflecting the impact of the Middle East conflict offset by margin expansion in CST by approximately 50 basis points. A quick comment about Middle East. Our total sales in the Middle East were about $400 million in 2025 with the vast majority reflected in the CSAME segment and the balance in CST and CSE. The CSAME segment also benefits from equity income related to unconsolidated JVs we have in the Middle East, which is reflected in the updated margin guide for this segment. No change in outlook with respect to free cash flow and share repurchases. Moving to Slide 17. We expect adjusted EPS of approximately $2.80, up high single digits versus 2025. The bridge is unchanged from our February guide. As usual, additional guide items are in the appendix on Slide 20, and you will note there is no change for our February guide on these items. Finally, let me provide some color on the second quarter. We anticipate Q2 revenues to be just below $6 billion. This includes about $100 million more revenue from Riello compared to our prior guide and about 2 points of incremental pricing to offset increased input costs. We expect operating margin of about 17%, a 24% tax rate and about $0.80 of adjusted EPS. For cash, we expect normal seasonality, which would imply a few hundred million of free cash generation for the quarter. With that, I would ask Elizabeth to open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Jeffrey Sprague with Vertical Research. Jeffrey Sprague: Just on the -- maybe kind of unpacking the guide a little bit more, right, with 2% more price, the organic growth is unchanged. So maybe just kind of talk a little bit about maybe the price volume kind of trade-off you're expecting there. And also sort of interesting that we don't see margin pressure on kind of the inflation. Usually, we get kind of the arithmetic pressure there. Maybe that's inside the ranges. Could you touch on that? And how much of that inflation is 232 related versus general inflation? Patrick Goris: Okay. I'll begin with the comment you had about the revenue guide and organic sales growth for the year. Our original guide was $22 billion in revenue. Think of that, that was really a little less than $22 billion. We added 2 points of price, which basically still rounds to $22 billion, but we're a few hundred million dollars above $22 billion now and both end up being low single digits organic growth, Jeff. And so it's really in the rounding to the $22 billion, and it remains within our LSD organic growth outlook for the full year. In terms of the impact of pricing on the margin outlook, at the total company level, it's about a 30 basis point headwind to margins for the full year, which remains within the range that we've provided really on that. The third element of your question was related to input costs. Of the 2 points of price that we are realizing or expect to realize for the year to increase -- to offset increased input costs, think about 75% of that related to tariffs, and that is really 232 related. And think of the balance, the other 25% related to other input costs, which includes fuel and some of the commodities. Jeffrey Sprague: Great. Dave, and then just back to resi, kind of good to see this sort of initial evidence of things kind of normalizing and the like. Could you just elaborate a little bit more on what's going on in movement, kind of the signals you're seeing from the channel and just how you see the early part of kind of the season beginning to unfold here? David Gitlin: Yes. I'll -- I guess, Jeff, I'll start at 30,000 feet at kind of the macro level, which is that on the challenging side, the 30 year is above 6, and there's still some stress on the consumer with the high fuel prices, but I will say, on the other hand, there's clearly pent-up demand, both at a housing level, there's 4 million too few homes in the United States and for HVAC replacements because there was probably a bit of repair over replace last year. So we think existing home sales will be up in the mid-single-digit range, which would be very important. New home construction, probably flattish. And yesterday, it was reported that applications for mortgages to buy a home were up 20%, which was good to see. So there's some counterbalancing macro indicators. What we're seeing -- what we saw is that 1Q was better than we thought. We thought movement would be down in the 20% range, and it was kind of down more in the 10% to 12% range. So it was about -- it was a little bit better than what we thought. April has started better than we thought. But having said that, we'll go the way of May and June in 2Q. So orders were up in the 5% or 6% range in 1Q. And I think what's really good for us this year is that field inventory levels are very, very healthy. They ended the quarter, as Patrick said, down 35%. As we look at it today, they're still down about 35%. So we're being very cautious on managing field inventory levels. So things so far year-to-date are better than we thought. But again, we have a long way to go. Operator: Your next question comes from the line of Nigel Coe with Wolfe. Nigel Coe: Patrick, can you maybe unpack the 2Q guide? It looks like you point towards low single-digit core sales decline in 2Q and the 17% margin, maybe just unpack that between the Americas and other segments, please? Patrick Goris: Yes, you're right, Nigel, that for the second quarter, we expect flattish to down low single-digit organic sales and some inflow there by segment. We expect the Americas to be about mid-single digits down, with margins last quarter, I said, mid-20s. We're still in that range, probably closer now to about 24% for the Americas. In Europe, we expect organic sales low single digits, so positive with margins closer to 10%. And then we expect both Asia and Transportation to be down low single digits. Margins for total company down around -- margins, total company at about 17%, as I mentioned, and then Asia closer to 12% and transport in the mid-teens. Nigel Coe: Great. Any color on margins, Patrick? And in particular, just double-clicking on the mid-single-digit decline in the Americas. How does that [ shake out between ] residential? Patrick Goris: Yes. Sorry, I forgot that part of your question. The story is actually similar to Q1. If I look at our resi sales in the second quarter, we expect them to be down similar to what we've seen in Q1, meaning close to the about mid-teens, which means that we expect to see the similar headwinds from mix in the second quarter that we've seen in the first quarter, which explains the -- still the margin headwind from a mix point of view in CSA. Similarly, we expect Light Commercial to be down as well in about the mid-single-digit range. And so that basically our 2 most profitable businesses will represent a headwind on margins for CSA in the company in the second quarter of the year, just not as much as it was in Q1. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe just wanted to circle back to the price and cost aspect. So I suppose -- I think you said it's dollar for dollar offset. So if it's sort of 2% more price is maybe $400 million, and then it sounds like over $300 million of that is the result of the tariff movements. So I just wanted to double check that. And how should we think about the extra several hundred million of costs kind of phasing in through this year and then the mitigation efforts into '27 on the tariff front? And any sort of update on the phasing of price? Does that sort of match and move with the costs moving up? Patrick Goris: Yes. First of all, Julian, your math is correct. It is in that $400 million, $450 million range for the total year with the impact being overweight, of course, on the 232, as I mentioned earlier. In terms of phasing of the 2 points of price, we'll see more of that in Q3, Q4 than in Q2 because the -- as you know, this was all effective April 6. And so the pricing followed a little bit after that, but it is in effect now. So in Q2, it will be -- the net of the 2 will be a little bit of a headwind, and we expect that to become neutral in Q3, Q4 and for the year then as well. And so as you may recall, we're on LIFO, and so we see the impact immediately. And so there is a little bit of a gap in Q2, but there won't be a gap or at least that's our expectation in Q3 and after that. Julian Mitchell: That's helpful. And maybe just following up on sort of how to think about the CSA margin progression? Because I guess, as you said, you've got the most profitable parts of CSA are down decently still in the second quarter on the revenue front year-on-year in both R and LC but you're sort of saying the margin decline is much narrower year-on-year second versus the first quarter. So maybe just help us understand sort of the movement in CSA margins as we go through the year to hit that guide you have of the full year margin there being stable, up a bit? Patrick Goris: Yes, as I mentioned earlier to Nigel, we expect about 24% margins in Q2. We expect Q3 to be a little bit better than that, so mid-20s. And then we expect high teens in Q4 for the full year to be around 21% segment margins for the Americas. And so sequentially, very typical to go up for the Americas, of course, Q1 to Q2, given the ramp-up for the cooling season and distributors building inventory. And then in Q3, as I mentioned, we do not expect there to be a gap between price and the input cost headwinds. We see a little bit of that in the second quarter. And then, of course, year-over-year, we expect significant growth in CSA in the second half. It's going to be in the teens. And we expect very significant margin expansion given much better volumes in the absence of the really strong headwind of under-absorption we had in the second half of 2025. Operator: Your next question comes from the line of Scott Davis with Melius Research. Scott Davis: Do you guys think we're close to a bottom in China? It's been kind of sloppy for a while, and I know it's probably not the most visible market in the world, but a little color there on what your local guys are saying, I think, would be helpful. David Gitlin: On the residential side, Scott, it's really hard to call a bottom. It's just been bad for a while, and we're seeing no real signs of it turning. What I would say is that the team is taking the right actions to position us to start to perform better than we and the market have been performing. But it's hard to call a bottom on the housing side. I think there are other parts on the CHVAC side that actually look quite encouraging. Data centers, there's a lot of opportunity. We're in great discussions in China on the commercial HVAC side for data centers, where I do expect some good wins as we go forward. Some of the EV battery type areas continue even though that there are some challenges globally, that part of China continues to do well. It's an aging population. So things in health care are good. Semiconductor fab is good over there. So there are some verticals of real strength in China. So we were kind of flattish in 1Q on the CHVAC side. I think with the momentum around some of the orders that we'll start to see, I can see CHVAC starting to, I guess, you could say, "bottom", but on the housing side, there probably are challenges as we go through the year. Scott Davis: Okay. That's helpful. And just to switch gears a little bit. I would imagine you're pretty much sold out on data center and applied for '26. So when you get a new order in, what you say, in the month of May, I would imagine that's for '27 delivery. Is that -- or can you still book and ship in this calendar year? David Gitlin: No, we could still book and ship. I mean the reality is that we are very back-end loaded. So as it is, there's quite a ramp in the second half of this year for data centers. I mean, most of the growth is really in the second half. And we've actually taken orders for the second half of this year where we got to complete the design and then order the parts and deliver it in the second half. So it's a little bit back-end loaded, but we still have capacity to take additional orders. We had committed to $1.5 billion of data center sales this year. Our backlog, as it is today, at least covers that number. But we would still take some additional orders for this year. We are starting to book a fair amount for '27. We track that by quarter. So next year, we are not as back-end loaded as this year, but we still have additional capacity for some additional orders on top of where we're currently booked. Operator: Your next question comes from the line of Joe Ritchie with Goldman Sachs. Joseph Ritchie: So yes, a lot of helpful color already. Just I wanted to follow up on the pricing comments. There's some concern in the market just given what's happened over the past year on your ability and not just you, but the other OEMs as well to continue to push price through this. Dave, can you maybe just talk about your conversations with your customers, your dealers, distributors on your ability to continue to get pricing even in this -- if the tariff environment continues to worsen? David Gitlin: Yes. Look, no one likes it, to be honest. The distributors, we've had some tough discussions with them, the dealers as well. I will tell you that our extended channel gets it, though. They understand that when we get a sudden input cost increase, we'll take every action we possibly can to mitigate it with supply chain actions. We're actually doing everything we can to optimize activities in the United States. But we've done a lot of actions to differentiate ourselves through the product, through digital, through some new TAM introductions like around hydronics. So our channel knows that we wouldn't be doing it unless we had to. We are spending a lot on R&D to innovate. We are spending a lot on branding and with the Viessmann opportunity here in the Americas. So we all basically get together. We've been offsite with our distributors and our dealers. We stack hands and we say, let's go at it. Now if tariff change, we'll take not all of it off because some of the price increase was related to some of the fuel surcharges and other raw materials that Patrick mentioned. But I will tell you that to President Trump's credit and this administration listens, I know that industry -- a lot of industries have been talking to the administration about this, the new 232 tariffs. And we remain optimistic that something changes there. And if it does, then we would change the pricing that we put in place, both in resi and light commercial here in the Americas. But we have to take actions assuming they don't change, and we'll just have to see. But I'm confident that the pricing that we expect to stick will stick. And we're confident because of the investments that we've made that we will maintain the share. Joseph Ritchie: That's helpful. And then just a quick question on data centers. Clearly, you're expecting a pretty significant ramp as the year progresses. Just any color just around like how your CDU offering is going? Is that part of some of the order growth that you've seen at this point? And just talk to us about the trajectory there. David Gitlin: Yes. I got to tell you, I'm really proud of the team on the CDUs. We've looked at some of the acquisitions that have been out there, but we decided that we can not only organically design and develop and produce our own CDUs because it's effectively a mini chiller. It's what we do. But we could do it in a differentiated way. So we've already introduced our 1-megawatt CDU. We'll have a 3-megawatt that will be out in the third quarter or so. 5-megawatt will be out, I would say, towards the end of this year, maybe into early next year. And we've sold them to a few hyperscale -- a few colos. We're in great discussions with the hyperscalers. The ZutaCore investment, we already had one. We increased it a couple of days ago. And they're a great partner for us. It's a very, very strategic relationship that we have with ZutaCore. They're one of the few guys that has 2-phase solutions, which I think is where the puck is going overall. So it's nice to get in early with them. We'll continue to look at M&A in the liquid cooling space. But right now, our engineering team is doing a superb job designing our own products and the traction, I mentioned that we've won probably, I think, something like $300 million or $400 million of these QuantumLeap sales and a lot of it is in the CDU area. So that's gone very well, and I can tell you, we got a lot of irons in the fire globally to sell more. Operator: Your next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Dave, could you give us a little more color into what you're seeing in CSE? I know you mentioned the strength in heat pumps. You didn't change your revenue guidance. I don't think for CSE, but could you talk about what you're seeing? And then can you talk about CSE margin and the need to drive promotions? I know you focus on productivity and cost-out efforts in CSE. So does that help mitigate the margin pressure that you're seeing in that business? David Gitlin: Yes. Let me speak, I guess, Andy, specifically on the RLC side, and then we can expand it to overall CSE. But what we're seeing on the resi side is clearly sales were up in the low single-digit range. Orders were up in mid-single digit. But here's the good news is that it appears that with heat pump demand, we did see a bit of an inflection point here in 1Q. The ratio I mentioned in my prepared remarks that the ratio of electricity to natural gas in Germany is now about 2.5. And that's the first time it's been less than 3 since early 2023. And that's about the time that we were seeing the big demand for heat pumps in Germany and across Europe. Germany subsidy applications were up 30% in the first quarter. They were at very, very high numbers. So we saw demand for Germany heat pumps on the sales side up about 20% in Germany. It was up more on the volume side and low teens across Europe, and it was, frankly, in many countries in Europe, quite strong. Boilers were down a bit, but we expected that. So the disappointment, as you mentioned -- so look, I think on the sales side, we are seeing a moment around heat pumps that we've kind of long expected, and now we're starting to see that, not only in Germany, but across Europe. The margins were impacted by some of these onetime promotions that we did that were a little bit heavier than planned, and I will tell you the team recognizes that, and they've now taken actions to address that, and we've implemented both price increases and surcharges effective April 1. The good news is that we did convert about 150 new installers, and we converted over 500 homeowners that were first time to the brand, and we expect those conversions to be sticky. We've also -- we will be introducing this -- it's a high-end unit, but it's a little bit lower end than the premium current Viessmann brand. That's coming out in the fall. And I think that's going to be perfectly placed to address some of the key parts of the market, not only in Germany, but in places like Poland as well. So look, I think we did take some pricing actions. They were a little bit more than we planned. They are behind us. We've now increased prices and surcharges going in. The margins were a little bit disappointing, but we see margins for the full year getting back 100 bps year-over-year because we're taking cost actions, driving productivity. And I think we've actioned some of the pricing to compensate for what we did in the first quarter. Andrew Kaplowitz: Very helpful. And then can you give us more color into what you're seeing in the CSA Light Commercial, I think, up 9%, I think you said in Q1. You said it was better than expected. And I know you said down and Patrick said down in Q2, but can you talk about your share gains there, the potential that you can end up trending better than that, I think down high single digits that you have for the year? David Gitlin: Yes. I'll tell you, we had guided it down for the first quarter. I think a few weeks before the end of the quarter, I had indicated in one of the conferences that there was some upside. And it did -- the team did well. We were up 9% in 1Q. I'll tell you, the area that we're seeing the best strength is in retail, especially on national accounts. We've had some really major wins, which is helping us significantly on the share side. We get a little bit of favorability from price mix. We had some new products that were introduced last year that are doing really, really well in the marketplace, especially this hybrid unit. So -- and the other thing, we talk a lot about field inventory levels on the Resi side, which are very healthy, but they're very healthy on the Light Commercial side. They were down about 25% year-over-year, ending the quarter. So we came into 2Q pretty well positioned. I think that we're in the same boat as resi is that we're just being very careful to get out over our skis. There's a lot of macro uncertainty. There's some watch items around consumer confidence and inflation and some of the related pricing with tariffs. So we expect sales in Q2 to be down in the mid-single-digit range. We'll have to see. April was okay. And the team is doing well. But again, there is a lot of macro uncertainty, and that's why we haven't changed the full year guide down high single digits because it's kind of early, and there's still some uncertainty. But from a performance perspective, new products, major new wins with national accounts, team performing well. So pleased with the start to the year, and we'll have to see how the next couple of months and the rest of the year play out. But so far, so good. Operator: Your next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: Dave, I was hoping you'd give us the update on services. How do you feel about the growth there and the outlook for the year? David Gitlin: Great is the short answer. We -- this is kind of what we do. It's now -- I mentioned in the prepared remarks, the key for the whole aftermarket playbook is it has to be in the DNA of how you run the business. We have to design for aftermarket. We have to work all of our supplier contracts for aftermarket. Every distributor discussion has to include about not only our performance around fill rate, but it has to include getting to 100% of their part needs coming from us and what do we need to do with each other to make sure that we're getting 100% of our own parts. And this is something that has cascaded the world. We have a whole focus on talent in the aftermarket. We've recruited some great folks across the world in aftermarket, and we keep pushing some more and more of our top talent into this area. So we've said double digit forever. We got a playbook around mods and upgrades, connecting our devices, driving parts, driving service attachment, and I think we're in the very early innings of this. So we feel extremely confident. It will be our sixth year in a row of double digit. We target a number that's, I think, closer to 13% or 14% internally, and we expect our teams to drive that. Deane Dray: Great to hear. And then just as a follow-up, and I recognize this is a sensitive question, but are you able to comment at all about the recent litigation against the resi HVAC manufacturers? And if it helps you, we did an expert call where someone who has looked at this case, declared it to be weak. So I guess that it still has to play out, but I'd be interested if you're able to provide any comments. David Gitlin: Yes, Deane, I think weak is being generous to the plaintiffs. So I think the case is meritless and we'll defend it vigorously as you'd expect. And look, you're not going to find a more compliant company or a more compliant industry than us. So it's meritless, and we're going to fight it. Operator: Your next question comes from the line of Andrew Obin with Bank of America. Andrew Obin: Just a follow-up on ZutaCore and your comment on 2-phase cooling. There is chatter in the industry that with transition to sort of direct current, the industry already has too much on its plate to sort of manage a transition to 2 phase. I found your comment to be very interesting in terms of this is where the puck is going, clearly, your acquisition reflects it. Any commentary from you as you talk to your customers as to what the timing is of 2 phase for the industry? Do you think it's going to happen with the next rack generation? Or do we have to wait? David Gitlin: It's hard to answer that, Andrew. I think -- I would say it's not 10 years out and it's not 1 year out. So it's going to -- I think -- so there's the range for you. I do think we'll ultimately migrate in that direction. It's not going to happen overnight. So I think that we have a lot on our plate developing a whole host of single-phase CDUs. And look, there's some smaller M&A out there on the single phase. We'll continue to look or we'll continue to do DC-type investments because we're kind of doing well either way. We did look at -- we looked at some of these bigger plays, but we decided that what was best for us and our company is keep developing things organically with DC-type investments and maybe look at smaller acquisitions over time that round out our portfolio, but those are in the millions, not in the billions range. I think when we get to 2 phase remains to be seen, but is it in the next 5 years or so? Probably. Andrew Obin: Excellent. And just a follow-up question. What do you think -- what are your thoughts, people are getting more optimistic on Class 8 truck getting better. Historically, it's a nice market for you. How do you think about visibility on that recovery into the second half of '26 and also '27? David Gitlin: Yes. I mean we've seen some indicators on the Class 8 side that appear positive. So I think, look, there's -- if you look at truck trailer in the Americas, I felt like we were on the path for a good recovery, but some -- at the higher level, some of the fuel prices has really probably hurt them a little bit. I think on the good news side is that there's a lot of pent-up demand where people have been delaying big CapEx decisions over these last few years. So you're going to get to a point where a lot of our key customers in the Americas are going to have to and want to start spending more. And I think that was the plan coming into the year. Some of those decisions because of some of the fuel prices has probably been pushed to the right. So when I look at our overall CST business, the way I think about it is that Container has done very well, much better than we expected. Orders have continued to be great for 2Q. So we were expecting Container to be down a bit this year. I think Container ends up performing better. When you look at NATT for the full year, ACT is in the flattish range, maybe up low mid-single digits, but ACT has seen a few challenges. I think our European truck trailer business is about where we thought. So I think net-net, Ed and the team are doing a great job. I think we land the year exactly kind of where we thought with Container probably a bit better and NATT probably a bit worse. Operator: Your next question comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to ask about Americas Resi HVAC. Just with all the moving parts on the cycle changing quickly and then the macro changing maybe even more quickly, can you just kind of maybe provide some color on how the company is able to distinguish true demand in the market versus maybe potential channel build? I would imagine there's some supply chain concerns out there with the geopolitics and there's obviously pretty well anticipated Q2 price increases. I guess -- so maybe even just to put a finer point on it, if a customer places an order in mid-April, is that price locked in now ahead of this late April price increase? Or would it ultimately just be adjusted higher alongside any changes? David Gitlin: Yes. Chris, here's the way that I would try to answer that. I think given last year, we've done a much better job at really trying to understand true underlying demand and the amount of inventory that is in the field. We obviously know at an SKU level by distributor, by location, by SKU, what they have, and we try to work very closely with our distribution channel to make sure that we -- they don't have more than what we think they need and what they think they need. We don't have precise SKU visibility into the dealer network, but they're typically very small dealers. We have over 100,000 in the United States, and it doesn't make sense for them to hold a lot of inventory. So I think that we have a pretty good sense of trying to match supply and demand. We did announce a price increase that became effective April 27. That was known by the channel. April movement was better than we thought. And I think part of that was probably people trying to beat the price. Once the price is in place, April 27, it's in place. Now if something happens with tariffs, we'll take a lot of that pricing back away because it was related to tariffs, and we told our channel, if we get reprieved on the tariffs, the pricing will revert except for the pricing associated with things like the fuel surcharges. So was there -- was April movement a little bit better than we thought? Yes. Did we keep our guidance in place that we thought for the full -- for the quarter? Yes, because we do believe some of that might have been trying to beat the price. And then we'll have to see how the cooling season plays out. Christopher Snyder: I really appreciate that color. I understand it's almost an impossible situation to forecast. Maybe if I could follow up on Americas margins. Q1 met the mid-teens target, but just given that volumes came in high single digits better with positive mix on Resi and Light Commercial driving the beat, I would maybe expect a little bit more upside. So I guess the question is, did you start to already feel some of this cost pressure coming through in Q1, whether it could be maybe the fuel on the service side, some of the -- even the metal, given your LIFO exposure there? Patrick Goris: Yes, Chris, two elements there. One, as Dave mentioned, we're seeing a lot of activity on the data centers, and we're trying to do more than the $1.5 billion this year. We're making some investments in CSA to continue to enhance our capabilities in data centers and go after more opportunities. And two, there was a small FX headwind in the quarter as well. If you adjust for these two items, you would have had a margin that we would have expected given the higher sales. So not related to... Operator: Your next question comes from the line of Patrick Baumann with JPMorgan. David Gitlin: It's not an earnings call without Steve Tusa. We're not sure how to get through it, but go ahead, Patrick. Patrick Baumann: He'll be back at some point. On the pricing side, sorry to beat the dead horse here. But -- so the 2 points of increase, and you said 75% was Section 232 related, and it's flowing into second quarter to fourth quarter. And so when I run the math on the implication for the price that you're putting through on RLC, assuming it's kind of there, it's like a high single-digit percent increase on the revenue for that piece of business. Is that what you're expecting there from the tariff pass-through? And I'm asking because I thought the increases you put through were like at least what I saw was high single digits, but only for a portion of the resi product line that was sourced from Mexico. It seems like it's maybe broader than just that. Patrick Goris: I think your math is broadly accurate. And in addition to that, pricing is going up in every segment, given the higher oil prices and some of the commodity prices, but your math on Resi is accurate for CSA. David Gitlin: And what I'd add, Patrick, is we did not selectively raise price for only certain products in Resi. We raised it because then what you end up doing is disproportionately raising it for some and then not others. So we raised for our RLC business, both Resi and Light Commercial here in the U.S. We did have to raise prices kind of across the product portfolio. Patrick Baumann: And do you think -- are you seeing others react in a similar way? David Gitlin: We don't know. We -- people are going to do what they do. We've seen what probably you've seen people do publicly. But we know that all of us have cost input challenges and how others react on the pricing side is their call. We do have -- what we have is very good elasticity curve, so we watch that quite carefully. Patrick Baumann: Understood. And congrats on the orders in data center. I just wanted to go back quickly to the $1.5 billion guide there for sales this year. It doesn't sound like it's a capacity constraint issue as to why you're not increasing that. So is it just like lead times of when these orders are being booked? And then can you touch on profitability for data center sales? Just wondering, as sales continue to ramp for this business, the mix implications of that, you highlighted investments in the quarter. Just curious in terms of profitability relative to maybe the rest of your CHVAC sales in the Americas or however you want to describe it? David Gitlin: Yes. Look, I think that we kept it at $1.5 billion because we have a lot of execution to do in the second half of the year. If you look at our true bookings that we would be able to -- and what we think we booked and what we anticipate booking here in just 2Q, we would be able to exceed that number. We just got a big hill to climb here in the second half. So we felt it was prudent to keep it at $1.5 billion for now, and we'll have to see how these next couple of quarters play out. In terms of margins, the data center business is attractive. I mentioned that our overall CHVAC business margins are up 3x since when we spun and data centers are overall accretive to the CHVAC business. Operator: Your next question comes from the line of Joe O'Dea with Wells Fargo. Joseph O'Dea: Dave, I wanted to come back. I thought somewhat constructive comments in terms of 232 and I think touching on optimistic that something could change there. And so if you could just unpack that a little more and whether you think there could be exemptions, the time line for something to change? And then also kind of related, if it doesn't change, is there any realistic path to a 10% tariff rate or given the threshold that's just unrealistic? David Gitlin: Yes. I think the short answer, Joe, is I don't know. What I do know is that President Trump and his administration have created space for industry to comment on things that impact industry and American consumers and American jobs. And I know that we appreciate the administration's willingness to listen. What happens with 232, I would be lying if I said I knew. I don't know. I just know that there have been constructive discussions. Optimistically, I would love to see something change in that, but I really don't know whether, when or if something would change. We have to assume that they won't change. We do understand that there have been ongoing negotiations related to the USMCA. How those play out, we don't know and whether those would take over the recent 232 proclamation, we don't know. But we do know that the USMCA discussions have been going on. And our understanding from the sideline is those have been constructive as it relates to Mexico. Operator: This concludes our Q&A session. I will now turn the call back to David Gitlin for closing remarks. David Gitlin: Okay. Well, thank you to our team for continuing to perform very well in an uncertain environment. And thank you to our investors for your continued confidence in us. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation First Quarter 2026 Earnings Call. At this time, all lines have been placed on mute to prevent any background noise. At the end of today's presentation, we will have a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. I will now turn the conference call over to Dianna L. Higgins, Head of Investor Relations. Please go ahead. Dianna L. Higgins: Thank you, Kelly. Good morning, and welcome, everyone. Thank you for your interest in MGIC Investment Corporation. Joining me on the call today to discuss our results for the first quarter are Timothy James Mattke, Chief Executive Officer, and Nathaniel Howe Colson, Chief Financial Officer and Chief Risk Officer. Our press release, which contains MGIC Investment Corporation’s first quarter financial results, was issued yesterday and is available on our website at mtg.mgic.com under Newsroom. It includes additional information about our quarterly results that we will refer to during the call today. It also includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures. In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk in force and other information you may find valuable. As a reminder, from time to time, we may post information on our underwriting guidelines and other presentations or corrections to past presentations on our website. Before getting started today, I want to remind everyone that during the course of this call, we may make comments about our expectations of the future. Actual results could differ from those contained in these forward-looking statements. Our 8-Ks and 10-Q filed yesterday include additional information about the factors that could cause actual results to differ materially from those discussed on the call today. If we make any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. No one should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of our 8-K or 10-Q. With that I now have the pleasure to turn the call over to Timothy James Mattke. Timothy James Mattke: Thanks, Dianna, and good morning, everyone. I am pleased to report a strong start to 2026 as we continue to execute our business strategies while maintaining the momentum we have built over the past several years. Our performance demonstrates the strength of our business model, disciplined market approach, and long-standing commitment to meeting the evolving needs of our customers and the broader market, a commitment we have maintained since 1957. For the first quarter, we generated net income of $165 million, delivering an annualized return on equity of 13%. Our solid operating performance combined with the strength of our balance sheet drove book value per share to $23.63, an increase of 10% year over year. Turning to NIW, we wrote $14 billion of new insurance in the first quarter, an increase of 41% from last year and our largest first quarter of NIW since 2022. The increase was driven by higher refinance activity as well as what we expect was a modestly larger purchase market. Insurance in force at the end of the first quarter stood at approximately [inaudible], relatively flat quarter over quarter and up 3% from a year ago, with annual persistency ending the quarter at 84%, down from 85% last quarter. Both insurance in force and annual persistency are aligned with our expectations entering the year. Overall, we continue to expect our insurance in force to remain relatively flat in 2026. If mortgage rates were to decline more than currently predicted, we would expect the size of the MI market to benefit from increased refinance activity, although the growth in insurance in force would be offset by lower persistency, which is consistent with what happened in the first quarter to some degree. We continue to be pleased with the overall credit quality and performance of our portfolio. Our underwriting standards remain strong, and to date, we have not seen a material change in the credit performance of our portfolio. Early payment defaults remain low, which we believe is a positive indicator of near-term credit trends. Our capital structure remains robust, with $6 billion of balance sheet capital, and a well-established reinsurance program with a large panel of highly rated reinsurers continues to be a core component of our risk and capital management strategy. These reinsurance agreements reduce loss volatility in stress scenarios while providing capital diversification and flexibility at attractive costs. At the end of the first quarter, our reinsurance program reduced our PMIERs required assets by $3.1 billion, or approximately 52%. Our capital management approach remains unchanged. We prioritize prudent insurance in force growth over capital return. Market conditions have constrained insurance in force growth in recent years, and against that backdrop, our capital return activity reflects our robust position, continued strong credit performance and financial results, and share price levels that we believe are attractive to generate long-term value for our shareholders. Consistent with our commitment to disciplined capital allocation and long-term shareholder value, last week, the board authorized an additional $750 million share repurchase program. We actively monitor capital levels of both MGIC and the holding company, carefully balancing the amount of capital we return to shareholders with what we retain to preserve financial strength and resilience across a range of macroeconomic environments. In doing so, we consider both current conditions and expected future operating environments, continually evaluating the most effective ways to allocate capital to drive long-term shareholder value, an approach that has served our shareholders well. Consistent with this approach, earlier this week MGIC paid a $400 million dividend to the holding company, enhancing holding company liquidity and overall financial flexibility. With that, let me turn it over to Nathaniel Howe Colson to provide more details on our financial results and capital management activities for the first quarter. Nathaniel Howe Colson: Thanks, Tim, and good morning. As Tim discussed, we had solid financial results for the first quarter. We earned net income of $0.76 per diluted share compared to $0.75 per diluted share last year. Our re-estimation of ultimate losses on prior delinquencies resulted in $31 million of favorable loss reserve development in the quarter. This favorable development was primarily due to delinquency notices received in 2025. Cure rates on those delinquency notices have exceeded our expectations, and we have adjusted our ultimate loss expectations accordingly. As a quick reminder, delinquency notices we receive during a quarter span across various book-year vintages. For the delinquency notices we received in the quarter, we continue to apply the initial claim rate assumption of 7.5%. Looking at delinquency trends, our account-based delinquency rate increased 14 basis points year over year and 1 basis point in the quarter. Seasonal trends, which are historically a tailwind to mortgage credit performance in the first quarter, were less pronounced this year. Cures on new notices remain strong, and we expect the delinquency rate and the level of new notices to continue to normalize. Overall, both the number of new notices and the delinquency rate remain low by historical standards. The in-force premium yield was 38 basis points in the quarter, flat sequentially and consistent with what we expected. With another year of high persistency expected, and MI origination trends similar to last year, we continue to expect the in-force premium yield to remain relatively flat during the year. Investment income totaled $62 million in the first quarter, flat sequentially and year over year, as the book yield on our investment portfolio has been approximately 4% for the last year. During the quarter, reinvestment rates on our fixed-income portfolio continued to exceed our book yield, but our capital return activities have limited the growth in the investment portfolio and the resulting investment income. Underwriting and other expenses in the quarter were $48 million, down from $53 million in the first quarter last year. We remain focused on disciplined expense management. We continue to expect operating expenses for the full year to be in the range of $190 million to $200 million, as I shared in February. In the quarter, we continued to allocate excess capital to share repurchases, which totaled 7.2 million shares for $193 million. We also paid a quarterly common stock dividend of $35 million. Over the prior four quarters, share repurchases totaled $750 million and shareholder dividends totaled $138 million. Combined, they represented a 123% payout of the net income earned over the period. In the second quarter, through April 24, we repurchased an additional 1.7 million shares of common stock for a total of $47 million. In addition, the board approved a $0.15 per share common stock dividend payable on May 21. These actions are all consistent with our capital allocation approach. With that, let me turn it back over to Tim. Timothy James Mattke: Thanks, Nathan. A few additional comments before we open it up for questions. Housing affordability remains a challenge for many prospective homebuyers. Private mortgage insurance plays a critical role in supporting housing affordability by enabling low down payment borrowers to enter the market and achieve homeownership sooner. We remain actively engaged in industry discussions and regularly advocate for responsible policy solutions that improve affordability. Last week, FHFA announced advances in credit score modernization, and that the GSEs are moving forward with VantageScore 4.0 and FICO Score 10T with the intent of lowering costs for borrowers. We are fully supportive of these credit score modernization advances and are actively working with the GSEs, lenders, and their technology partners to operationalize these changes. In closing, our first quarter results reflect consistent execution of our business strategies and disciplined capital allocation. With our strong foundation and deep industry expertise, we remain well positioned to navigate dynamic environments and create long-term shareholder value. We will now open the call for questions. Operator: Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Terry Ma of Barclays. Your line is now open. Terry Ma: Hey, thank you. Good morning. I want to start with credit. Any color you can provide on the trends you saw this quarter? The default rate was up 1 basis point quarter over quarter versus the normal seasonality of down. Just curious if you can provide any color there. Nathaniel Howe Colson: Yes, Terry, it is Nathan. Thank you for the question. It is something that we looked into quite a bit this quarter. While I think broadly we did not see as much seasonal benefit as we have in recent years in the first quarter, there were a couple of unique items that we identified relative to the timing within the month that certain large servicers provide their delinquency information. As a practical matter, we get delinquency reporting beginning on the sixteenth of the month for loans that have two missed payments. The earlier in the month that servicers report, the more new notices they are likely to report just because those borrowers have had only sixteen days in the month to make a payment. We had a couple of servicers that gave us reporting earlier in March than they had in prior periods, so that may have accelerated or increased a little bit the amount of new notices and decreased the cures that we have seen. We do not have full April information yet, but from what we have seen so far in April, those trends look favorable and more in line with what we would have expected. Time will ultimately tell, but it did seem like there were a couple of unique items in the quarter. At the end of the day, long-term cure rates still are very attractive and have not shown much sign of slowing down, which has led to us consistently releasing reserves and having favorable development. All in all, I think the credit picture is still quite favorable. Terry Ma: Got it, that is helpful. As a follow-up, would the servicer reporting issue also impact roll rates? As I look at those between the buckets, those are also a little bit worse on a year-over-year basis. And then maybe just taking a step back, any commentary on how you are thinking about the level of gas and energy prices and how it may impact your borrowers? Nathaniel Howe Colson: I will take those. Certainly the same reporting for new delinquencies that I talked about is also the reporting for cure activity on previously reported items, so that could definitely have an impact. We are coming off historically good levels, especially for long-term cure rates, so we have always expected some normalization, and that may be happening to some degree. Even post the COVID crisis, we have noticed that earlier-period cure rates—one month, three months, six months—are running at lower levels than we saw pre-COVID, but later-stage cure rates—twelve months, eighteen, twenty-four—are much better, which is ultimately leading to a lot of that favorable development that I mentioned. The servicer reporting timing does impact both new notices and cures. Relative to energy prices and general price levels and the impact on consumers and on borrowers that we insure, any macroeconomic headwind is something that we are conscious of and think a lot about. To date, I do not think we have seen a lot of direct impact. Certainly, the power of interest rates—we saw that with refinance activity—more than 20% of our NIW with rates still not meaningfully below 6%. I do think that rates drive activity and behavior in our space a lot more than maybe higher prices for certain goods. It is something that we will actively monitor. The rate of unemployment is a key factor for us, but wage growth has still been strong and nominal GDP continues to run very high, so those are offsetting factors. Again, it is always an uncertain macroeconomic environment, and we try to maintain from a credit policy perspective, underwriting perspective, and a balance sheet and capital position that give us flexibility to react to whatever macroeconomic environment comes next. Terry Ma: Got it. Thank you for the color. Operator: One moment for our next question. Thank you. Our next question comes from the line of Bose Thomas George of KBW. Your line is now open. Bose Thomas George: Hey, guys. Good morning. Just on capital return, last year your payout ratio was 124%. It sounds like it is similar in the first quarter. Last year, looking at your capital, the AOCI reversal helped keep the capital fairly flat. That was not the case in the first quarter. So the question is, does AOCI play a role in how you think about the payout ratio, or will it continue at this level even if it pushes up leverage a little bit? Timothy James Mattke: Hey, Bose. It is Tim. It is a good question. Generally, we do not really think about AOCI as something that impacts our thoughts about capital return. It is much more of a GAAP concept, and we are looking at statutory and PMIERs. Obviously, we are focused on what might be happening with the investment portfolio, but again, those are viewed as temporary and unrealized, and we normally hold those to maturity. So that is noise. It impacts book value per share, but from a capital return perspective it is not a major consideration in our discussions. Bose Thomas George: Okay. So given your comments on the insurance in force being fairly flat, this is kind of a reasonable payout ratio for at least this year? Timothy James Mattke: Yes. With all the caveats we put out about performance, the macroeconomic environment—those are things that we pay close attention to in determining whether we should continue at the pace that we have been. Assuming those things stay relatively consistent with how they have been in the past, we have been very comfortable with the rate at which we have been returning capital. Bose Thomas George: Great. And then just on the positive development this quarter, it looks like a bigger portion than usual came from loss severity. Anything to call out there, or is that just noise? Nathaniel Howe Colson: I do not think there is anything specific to call out there. We did see a little bit of a decline in the exposure on new notices, but some of that has to do with which loans are curing and the exposure on the inventory. We have kept our reserving approach relative to exposure pretty consistent, so I think that is more about the underlying loans—what is curing, what is remaining—than any active change that we made. Bose Thomas George: Okay. Great. Thanks. Nathaniel Howe Colson: Thanks. Operator: Thank you. One moment for our next question. Thank you. Our next question comes from the line of Mihir Bhatia of Bank of America. Your line is now open. Mihir Bhatia: I wanted to start by going back to some of the questions around credit that Terry was talking about. I think you mentioned that you expect normalization of delinquency rates to continue. The portfolio has changed a little bit over time and with regulations, too. Can you help us with where you expect the delinquency rate to stabilize and what the path to get there looks like from here? Nathaniel Howe Colson: Thanks, Mihir. I think there are a couple of dependencies. For the last couple of years—this is not exact, but we have been between a 10 and 15 basis point year-over-year increase in the delinquency rate. That feels very consistent with normalizing credit conditions. We also have a unique book historically right now where we have a significant amount of our in force that is three, four, five, six years aged, and those are typically higher delinquency periods. Often they are not a significant portion of the in-force book because so much of those books have run off. That is not the case today. If that continues, we would expect gradual upward movement in the delinquency rate if the 2020–2023 books persist as they have. If we get into a rate environment where we are resetting a lot of the book toward more recent vintages—if rates were to go down and we were to write a lot more new business—that would be a tailwind for the delinquency rate. So part of the answer depends on what happens to rates and how much new business we write. The environment where the existing loans persist—even if the delinquency rate continues to tick up modestly—is a really good environment for us because we get the renewal premium on those loans, and that has been the way the last couple of years have gone for us with very good results. We can do well in either environment. In one environment, there is probably more pressure on premium rates because we would be resetting a lot of loans; refinances are typically lower LTV, lower DTI, higher FICO, so we would be resetting a lot of the premium to lower levels, but the delinquency rate would benefit. In an environment that continues to persist, there is probably more upward pressure on the delinquency rate, but we continue to get the renewal premium off those vintages, which is also attractive for us. Mihir Bhatia: Got it. Along those lines, you mentioned refinances have ticked up—it is up to about 21% of NIW—but your premium rate outlook is steady and persistency has stayed elevated. Your refinance share of NIW has gone from roughly 6% to 20%, but persistency is basically 84%–85% still. What is driving that dynamic, and where would persistency trend from here? Nathaniel Howe Colson: There was a slight decline in the persistency rate during the quarter, and again this is an annual measure. Refinance activity was a little elevated in the fourth quarter, but we have seen that taper off since then. If refinance activity remained at a 20% level of NIW, I do think that would work its way into the premium yield that we are seeing, and persistency would continue to tick down. If we look at what we would term the persistency run rate—just looking at the quarterly activity—it is closer to 80% than 84%. Our expectations now, with rates where they are today—more in the 6.25% to 6.5% range—we are seeing a falloff in refinance activity, and that is more in line with our expectations of a slightly larger purchase market and that a lot of the refinance activity for the year may be behind us. If that is not correct—if rates go down and there is a lot of refinance activity—then you would see lower persistency, higher NIW, and potentially, depending on how much volume it is and which loans are refinancing, slight headwinds to the in-force premium yield. But our expectations are for rates in and around where they are now and for moderation in refinance activity in the second quarter and the second half of the year. Mihir Bhatia: Got it. One last question and then I will jump back in the queue. In terms of new notice severity, it has increased a little bit sequentially. Are you seeing any vintage-specific pressures? Maybe also talk about early performance of the 2024 through 2026 vintages. Anything you are seeing there that makes you pause? Nathaniel Howe Colson: The number one driver of our new notice severity assumption is the exposure—the risk associated with the new delinquencies. As we have gotten relatively fewer delinquencies from the 2008-and-prior vintages with lower loan amounts, and more from the 2023–2025 period with much higher loan amounts, the average loan size and thus the average exposure is higher. The changing vintage mix—moving closer to today’s values—is far and away the driver of that increase versus anything regional or any change in our assumptions. Mihir Bhatia: Got it. Thank you for taking my questions. Operator: There are no further questions. I will now turn the call back over to management for closing remarks. Nathaniel Howe Colson: Thanks, Kelly. Timothy James Mattke: I want to thank everyone for your interest in MGIC Investment Corporation. We will be participating in the BTIG Housing and Real Estate Conference and the KBW Virtual Real Estate Finance and Technology Conference in May. I look forward to talking to all of you in the near future. Have a great rest of your week. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.