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Operator: Good morning, and welcome to the Camping World Holdings Conference Call to discuss Financial Results for the First Quarter Ended March 31, 2026. [Operator Instructions] Joining on the call today are Matthew Wagner, Chief Executive Officer and President; Tom Kirn, Chief Financial Officer; Lindsey Christen, Chief Administrative and Legal Officer; Brett Andress, Senior Vice President and Investor Relations. I will now turn the conference call over to Lindsey Christen, Chief Administrative and Legal Officer. Please go ahead. Lindsey Christen: Thank you, and good morning, everyone. A press release covering the company's first quarter ended March 31, 2026 financial results was issued yesterday afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website. Management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks may include statements regarding our business plans and goals, macroeconomic and industry trends, customer trends, inventory strategy, future growth of operations and market share, capital allocation and future financial results and position. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the Risk Factors section in our Form 10-K, our Form 10-Qs and other reports on file with the SEC. Any forward-looking statements represent our views only as of today, and we undertake no obligation to update them. Please also note that we will be referring to certain non-GAAP financial measures on today's call, such as EBITDA, adjusted EBITDA and adjusted earnings per share diluted, which we believe may be important to investors to assess our operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial statements are included in our earnings release and on our website. All comparisons of our 2026 first quarter results are made against the 2025 first quarter results, unless otherwise noted. I'll now turn the call over to Matt. Matt Wagner: Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. I'm pleased to report that despite a challenging RV industry backdrop, we delivered a first quarter that demonstrates the discipline and operating leverage we discussed on our last call. These results are a validation of the steps we believe will grow adjusted EBITDA and generate strong free cash flow for the full year. Market conditions came in softer than expected, but the underlying quality of this quarter is what I want you to take away from this call. On a year-over-year basis, we reduced SG&A by more than $29 million or 7.5% and improved our SG&A as a percentage of gross profit by 135 basis points. This is the transformation showing up in the numbers. On this call, we'll walk through the 3 priorities I laid out to start the year, growing new and used unit share, driving SG&A efficiency and accelerating Good Sam. Then I'll close with our outlook for the year. Our new unit sales outpaced the industry. According to SSI, new unit retail sales through February were tracking down in excess of 15%. We believe we outperformed the broader new RV sales market in every major category, driven largely by our exclusive brand strategy. Within the new Fifth Wheel segment, we're up nearly 10% year-to-date, driven by the introduction of private label products that hit compelling price points with unique features. On the used side, SSI data shows that the used RV industry has grown in 6 of the last 8 months through February, reinforcing our strategic focus on this end market. While we saw positive signs of growth within certain categories, our same-store used sales were down 2.6% in the quarter. We attribute the decline into January and February weather disruptions that limited our ability to aggressively move assets. More importantly, the year-over-year trajectory of our new and used volume improved as we moved through March, with new and used units in April trending to end the month slightly positive year-over-year. Moving to inventory and SG&A. Our message has been simple. Disciplined execution drives profitability and our metrics at the end of April reflect that focus. As of today, our total same-store RV unit inventory is down over 10% year-over-year, and we have purchased over 20% less units year-to-date year-over-year. Even on fewer units in inventory, our daily sales velocity for the month of April is positive versus last year. Our new model year 2025 inventory now sits at roughly 8% of total new inventory, down over 50% in units versus the same time last year. On SG&A, I'm very pleased with our progress. The 135 basis point improvement in SG&A to gross profit and the $29 million reduction reflects a fundamentally lower cost basis, not onetime savings. This includes $19 million of compensation reduction in the quarter and the consolidation of 13 store locations over the last year that sharpened the efficiency of our footprint. On top of $29 million SG&A reduction fully realized in the quarter, we also executed about $10 million of additional annualized cost rationalization, bringing our year-to-date total to nearly $35 million of annualized cost savings. Looking ahead, we see the potential for significant cost takeout opportunities from the AI initiatives we're rolling out across the enterprise, with the bulk of that opportunity sitting within our IT spend. We expect these initiatives to drive material hard dollar savings and improvements in dealership productivity and the customer experience. Longer term, we believe we are building a leaner, stronger company with greater operating leverage, and we expect that to translate into enhanced earnings and free cash flow. Good Sam also made great progress in the quarter, continuing its top line growth pace while stabilizing margins to roughly flat year-over-year. We expect to complete our Good Sam ERP overhaul in the second quarter, which will allow us to accelerate entry into adjacent marketplaces. And using AI, we have developed and deployed a custom in-house CRM solution specifically for our extended service plan business, and it's already showing early signs of productivity, conversion and revenue uplift. Good Sam remains a cornerstone of our long-term growth and the early margin stabilization we are seeing reinforces our conviction in the opportunity ahead. Less than 4 months into this year, we believe the new RV industry is likely tracking towards the lower end of our 2026 retail outlook, calling for 325,000 to 350,000 units, while the used RV industry is likely playing out towards the midpoint of our range, which is between 715,000 to 750,000 units. We believe that the momentum we have built on new market share, on inventory, on SG&A and on good Sam keeps us on track to grow adjusted EBITDA year-over-year. Today, we are reiterating our full year 2026 adjusted EBITDA guidance range of $275 million to $325 million. With that, I will turn the call over to Tom to walk you through our financial results in more detail. Thomas Kirn: Thanks, Matt. For the first quarter, we recorded revenue of $1.35 billion. New and used unit declines were partially offset by a richer mix with new vehicle average selling prices up approximately 4% year-over-year. On the new side specifically, we believe our unit volumes outpaced the industry in the quarter. As expected, vehicle gross margins were under pressure in the first quarter as we moved through assets in certain aging buckets. New vehicle gross margin declined 148 basis points to 12.2% and used vehicle gross margin declined 91 basis points to 17.7%. We expect this gross margin trend to continue through the second quarter, consistent with our commentary on last quarter's call before beginning to improve in the back half of 2026 as we expect velocity and aging improvements to take hold. New ASPs should also continue to increase at a similar rate year-over-year as we progress through the second quarter. Within Good Sam, we were pleased by the sequential improvement in gross margin from Q4, which is consistent with our expectations to yield returns on the significant operational investments we've made over the past 18 months. We believe Good Sam margins should show year-over-year improvements through the balance of the year. Our first quarter adjusted EBITDA of $28 million compares to $31.2 million in the first quarter of 2025. The decline in gross profit was largely mitigated by the $29 million SG&A reduction. We ended the quarter with $200 million of cash on the balance sheet, and our net debt leverage ratio improved to 5.6x compared to 8.1x at the end of the first quarter of 2025. Our cash flows from operating and investing activities improved markedly year-over-year as we remain focused on our inventory turn goals and CapEx restraint. We also paid down $56 million of debt in the quarter. Our capital deployment framework continues to focus on strengthening the balance sheet while retaining growth capital within the business. With that, I will turn it back to Matt. Matt Wagner: Thanks, Tom. I'll close with this. This is my first full quarter as CEO since stepping into the role at the top of the year. And while we're still in the early innings of the plan we laid out on last quarter's call, I am proud of what our team has accomplished so far. We took share, we pulled down costs, and we strengthened our balance sheet. Operator, we're now ready to take your questions. Operator: [Operator Instructions] And your first question comes from Bret Jordan from Jefferies. Patrick Buckley: This is Patrick Buckley on for Bret. On the F&I per unit, it looks like a pretty healthy step up. Can you talk a bit more about the dynamics there and what drove that and maybe the outlook moving forward? Matt Wagner: Yes, it has been a really fascinating dynamic where historically speaking, when our average sales price goes up, that F&I penetration typically goes down a little bit. And oftentimes, it's an immaterial amount, maybe 25 to 50 basis points. But we have seen some interesting dynamics recently within the F&I segment. Specifically, we've been tracking the amount of down payment that consumers are coming into the finance office with. And therefore, they also are looking to add on a number of different finance products in the back-end. More specifically, we've recognized a pattern that those consumers that are buying more expensively priced assets, oftentimes in excess of $50,000 average sale price are actually coming down with a higher down payment than we've seen historically, whereas those consumers that are buying lower-priced assets, oftentimes under, say, $25,000, they're actually coming to the finance office with a little bit lower down payment amount. In either cohort, though, we're still seeing a higher product attachment. That is all the Good Sam affinity products that we offer, be it roadside assistance, extended service plans, tire wheel protection, et cetera. So largely, our inventory strategy has been derived from these trends that we've been seeing not only over the last few months, but even leading into this year, that there's clearly this K-shaped economy that's forming here. And those customers that are oftentimes buying those higher average sale price assets do have a willingness not only with more money that they're coming to the finance office, but also to protect their asset and becoming a part of our whole Good Sam affinity network. Patrick Buckley: Got it. That's helpful. And then on the recent used value trends, a bit of a decrease in ASPs. I guess is there anything notable driving that? And a bit of a follow-up there. We have seen some headlines on negative equity value in light vehicles and cars. Are you seeing any trends like that in your customers? Matt Wagner: We've spoken extensively over our last few earnings calls about just the negative equity position that a lot of consumers have found themselves in coming out of that pandemic period in particular. We're not seeing that negative equity trend being amplified similar to what I saw in that same article you probably read within the automotive industry. Rather, we're seeing more of a corrective self-healing environment in this industry, where we've been in this environment for the last going on 5 years now, where you've seen declining demand on the new RV sales side, which I believe is a high corollary to what that negative equity position has been historically. So when I think of just that ASP coming down, it was kind of an immaterial amount. And we're keeping a watchful eye on that. But I wouldn't put too much stock in Q1, which I would oftentimes regard as a very volatile quarter, where we know about 20% of our volume in terms of new and used unit sales oftentimes comes out of Q1. Really, it's in the meat of the selling season where I think you can more effectively assess what the trends are going to be. And we're seeing it in Q2, Q3, there is a stabilization here compared to what we had projected for the year. We believe that we're still on pace for our used ASPs to land in that $31,500 range, give or take. And we believe that there should be stabilization here as we look into out years. Operator: And your next question comes from James Hardiman from Citigroup. James Hardiman: Congrats on a strong quarter given a lot of moving pieces, a lot of curveballs thrown at you guys. And I guess maybe along those lines, obviously, rough weather to start the year. And then just as the weather seems to be getting a little bit better, war started in the Middle East. So maybe walk us through some of what you saw over the course of the quarter and beyond to help us discern the weather impact from the Middle East impact and how you're thinking about that going forward? Were it not for the Middle East situation, do you think you'd be raising today? Just trying to understand sort of the moving parts there. Matt Wagner: James, thanks for the question. This really was quite a textured quarter, and I wish it was a lot smoother and a lot clear to be able to explain. But I can tell you, we entered the year firing on all cylinders. We had a great show season. And actually, our success at show seasons prevailed throughout the entirety of the quarter, which really manifested itself in, I believe, our outperformance on the new RV sales side, regardless of whatever the backdrop was that we were confronted with. But you are correct that when we had to shut down in excess of 60 of our stores for at least a day between January and February, that was clearly the biggest disruption that we saw. In our last earnings call, we spoke about we think that we missed out on about 1,500 unit sales. And coincidence or not, we were actually off on same-store unit sales about 1,700 units. So perhaps that was the biggest driving factor. And as we transition into March, in particular, that was also kind of a choppy month, where we had a couple of weeks stretch where we did very well in particular. And then we had a couple of week stretch where we were just kind of scratching our head and so why were we off a little bit? So either way, though, we saw a lot more stabilization as we started to exit March and enter into April, where things started to come into clear focus and picture as to what we believe we could experience throughout the balance of Q2 in particular. And we took a lot of thoughts in the fact that we ended March strong. We're now trending throughout April. And obviously, today, we're closing a lot of deals, and we're looking to wrap up the month of April, but we are trending to be positive on a same-store basis, new and used combined. Used obviously trending up high single digits year-over-year on a same-store basis, new about flat to slightly down, which we believe is still an outperformance of what we're seeing. More to come here, though, as this year progresses. But to start the year, we believe that we weathered a very volatile environment exceedingly well. James Hardiman: That's really helpful. And then the headline here is obviously that you guys are reiterating the $275 million to $325 million. Obviously, it's never quite that easy, but nothing changed. I think you guys called out new RV from an industry perspective, maybe at the lower end of the previous range, used in line. But maybe within the context of the full year EBITDA guidance, any other puts and takes we should be thinking about, whether it's ASPs or margin within that broader context? Matt Wagner: I think the numbers that we previously provided for our full year outlook of ASPs and margin in particular, really hold true still, where we did have a bit of an outperformance even based upon our expectation of some margin on the used side. And that's largely attributable to the fact, as I said previously, that Q1 is a volatile quarter, and it's not necessarily going to be the principal driver of the overall annualized results. But as we think through the balance of the year, we know that we can control much more of our SG&A structure. And that's where you saw as evidenced by our Q1 results that we were very focused on ensuring that we are optimizing every component of this business, and we're going to remain focused on all of the SG&A opportunities that still exist out there. We're providing updates as we complete different objectives as opposed to projecting what we think we will get done. And we'll continue to over the ensuing quarters ensure that we're hitting our goals in this guidance range with the things that we can control. Operator: And your next question comes from Joe Altobello from Raymond James. Joseph Altobello: A few questions on the inventory initiatives. You've talked about taking turns on new and used up by roughly, I think, half a turn or so by the end of this year. Is that still your target? Is the bulk of that going to be done by the end of the second quarter ahead of the model year changeover? Or do you think some of that spills over into the second half? And is the hit on that EBITDA still around $35 million? Matt Wagner: We believe that you should be looking at those turnover goals on an annualized basis, in particular, because how we calculate that for purposes of just the markets in particular, is looking at a quarterly snapshot of any inventory balances as compared to a trailing 12-month total COGS amount attributable to that inventory. So as such, the annualized turnover number takes a little bit of time to actually percolate throughout the entire system. So we will make very good progress, we believe, throughout the balance of Q2 in terms of rationalization of inventory that we'd like to continue to push through. And that's going to be aged multiyear new 2025 units, which, by the way, we reduced those 50% from the last time we even spoke with you. Never mind when you look at year-over-year. So we've made really good progress on the new side of derisking that in particular. On the used side, just as well, we didn't quite sell as much volume as we wanted to in Q1. So we know in Q2, this is our greatest opportunity where demand just seasonally adjusts and seasonally becomes a bigger opportunity for us to continue to push assets through the system. We would anticipate that our Q2 ending inventory balance on used will actually probably be close to down if we had to project out. And as we look through the balance of the year, that's where we're being very diligent about replenishment as well as ensuring that we have this nice balance of good fresh product coming in with margin augmentation while continue to push out some assets that are a little bit aged at this moment. So when we think of these actual annualized turnover goals, I look more so over the total balance of the year as opposed to trying to break it down quarter-by-quarter. Joseph Altobello: Okay. So it will be gradual. Is that kind of what you're saying? Okay. And then the second question on the Costco partnership. Curious how that's going and maybe what we could see from an EBITDA contribution. So I believe that's not in your guidance at this point. Matt Wagner: It's not. And admittedly, this is a partnership that both parties want to ensure it's executed flawlessly. So we've started out a little bit slower in that relationship than we would have preferred. We sprung it up really fast, and we've been working diligently with the Costco auto buying program to ensure that we just have the best experience for these Costco consumers. So while we were just a little bit unhappy with how certain lead flows were going, the general pricing logic, we actually took a little bit of a pause for a moment. And we've been working with them over the last 6 weeks now to actually recreate the entire online product listings pages, product detail pages. We came up with a whole new pricing algorithm. So we'll start to see the fruits of that labor, we believe, beginning in May, when that's when we'll have our first warehouse roadshow begin. And this actually coalesces very nicely with seasonally the opportunities that we see. May oftentimes is going to be the largest unit volume month for the industry and for us as a company. And June oftentimes represents the highest revenue month as a company and as an industry. So this will be the best opportunity for us to have gone through this exercise, ensure that we are flawlessly executing this and really more to come here. We're hopeful over the next 3 months when we speak with you that we'll have really good feedback to provide back. Operator: And your next question comes from Tristan Thomas-Martin from BMO Capital Markets. Tristan Thomas-Martin: So early in the year, we were hearing quite a bit about kind of like the pre-COVID cohort coming back and trading in. So I'm curious if you could maybe -- one, is that true? Can you quantify it? And maybe how did that trend over the course of the quarter? Matt Wagner: In the early phase of this year, Tristan, we've not yet seen a material increase in trade-in percentages yet. We have recognized though that those consumers that had bought in that 2018 to 2021 time period are starting to come back in. And that's just evidenced by us looking at the general average model year of assets that are coming back into inventory right now. So we do believe that there has been some self-healing of these consumers that were confronted with negative equity. But as we said in the last call, we would anticipate by the end of this year to be in the early innings of what we think will be a trade-in cycle that will continue to materialize with greater frequency and really magnitude over the ensuing 3 to 5 years, where at that point, beginning in '27, '28, the industry should start to see the benefit of a double stack effect. And what that means is, those consumers that were buying in 2020, '21, '22 that have just been sitting on the sidelines here for a little bit longer than we historically had anticipated, but they'll also be augmented by those same consumers that benefited from the deflation that existed in the RV industry in 2024. So in other words, you'll have a 2020 and the '21 cohort as well as the '24 cohort, all coming back into the marketplace all around the same time period. And this is now where we believe it's more of a theoretical debate of the industry has never quite seen this before. So how big is that order of magnitude, don't quite know yet, but we'll continue to provide you more insights as we have them readily available. Tristan Thomas-Martin: Okay. Awesome. And then just given all the talk around kind of raw material inflation, how are you thinking about model year '27 pricing, both like-for-like and then kind of your mix? Matt Wagner: So we, obviously, in 2026, have seen roughly a 5% to 7% increase compared to model year '25. We've been working diligently with our manufacturing partners to ensure that we are focused on affordability. That has been a problem that has plagued this industry off and on over the last 5 years. We've already started to receive some model year 2027 motorized units, and we're pleased to report as of this moment, we're only seeing about a 1% to 2% price increase, which we believe is roughly in line with what consumers can handle based upon inflation. And we all know, ideally, these prices be relatively stabilized as opposed to seeing any sort of inflation or deflation. Towables are starting to -- or will be hitting lock over the next, I'd say, 1.5 months to 2 months here. So we'll have a clearer view as to what those price increases could or will be. Based upon conversations, they could be anywhere from 1% to 3%. We're hopeful that there'll be different opportunities for us to work with our manufacturing partners and supplier partners just to ensure that we are keeping as many consumers in this industry and actually attracting that many more customers back into this industry. Operator: Your next question comes from Scott Stember from ROTH Capital Markets. Scott Stember: Can we talk about the products and parts and service side? I know the narrative over the last year, 1.5 years has been prioritizing used reconditioning work over some of the more like warranty and customer pay work just because of what's available from a service day perspective. Is there any change to that narrative going forward, particularly as the wear and tear cycle on these multiple millions of RVs that have been sold since the pandemic starts to kick in over the next year? Matt Wagner: So the narrative still remains relatively the same, given that our focus on used, in particular, is going to drive a lot of the service needs. And as you know, Scott, when we actually recondition that asset, that service revenue gross profit actually moves to that used asset in so much as you're actually improving the value of that asset. So that has worked against us in terms of looking at the parts, service and other category. But I can tell you in terms of our actual parts component of that segment, we've seen a nice improvement in customers coming back in and looking for those replacement components. But what we need to do is do a better job as a company is continue to ensure that those customers are not only buying that part from us, but they're also leveraging our service capacity. And we need to get a little bit better here as we move through the balance of this year, but really with a focus on the back half of this year into next year to ensure that we're growing more external service work more effectively. This entire industry has had a capacity issue, inefficient supply chain issue. And we believe we've been working on a lot of creative methodologies and tools to ensure that we do a much better job in the ensuing quarters, but more importantly, years. Scott Stember: Got it. And then last question on the balance sheet, nice improvement on the leverage ratio. It looks like cash flow in the first quarter was up nicely over last year. Can you give us some expectations where you would expect maybe free cash flow to find its way by the end of the year as well as the leverage ratio? Thomas Kirn: Sure, Scott. As we think about -- I mean, free cash flow for our company, I mean, if you take our guidance range and you back out our term loan interest and our real estate interest, maybe $10 million to $15 million of cash taxes. Our goal this year in terms of net CapEx is to be south of $100 million for the year when you back out sale leasebacks that we're executing on projects that were previously completed. So that's kind of how we're thinking about managing and tightening the CapEx line as we move through the balance of the year. Operator: And your next question comes from Andrew Didora from Bank of America. Andrew Didora: Matt, I just kind of wanted to dig in maybe a little bit more on SG&A. You clearly got off on the right foot here to start the year. The way we look at it, it has been running just over $1.5 billion for each of the past 5 years or so, I guess, when we exclude stock comp. Do you think you can flex below that? Or can you maybe give us a little bit more insight into how you think about the opportunity within that line item? Matt Wagner: I'm not going to give a specific range yet. And I'd rather we continue down the path that we're on right now, where we are very focused on implementing a variety of different processes, tools and rationalization methods to ensure that we maintain this pace that we're on today and continue to provide feedback. I could tell you as a proof point, over the last few months, we've been heavily invested in researching all different opportunities that exist with AI. We've set up a lot of different teams separately to figure out different ways to optimize different SaaS environments or software environments and also to eliminate unnecessary consulting contracts that exist out there. As just one proof point, you heard in my prepared remarks that we spoke about how we created our own bespoke CRM for just one specific business line of just our extended service plan business. And using that as just one proof point in particular, we had originally budgeted for this year $800,000 to stand up that specific environment, plus we are anticipating ongoing maintenance associated with that environment of roughly $400,000 to $500,000 a year. If we were to break that down, that would oftentimes be just a normal environment that we had a third-party tech company come in, help us out with, and every business can speak about the fact that once you bring in this environment, you'll have ongoing support and maintenance costs associated with it. We were able to stand up that entire environment with 3 individuals in particular, taking the product and technical lead, which is really just sweat equity. We were able to then turn it over to the rest of our IT organization to ensure that we are fully in compliance, fully safe and secure, and we're able to stand up our infrastructure team to actually execute all of that in 26 days. And we believe that on an ongoing basis, it will require the time of maybe 1/4 of the time of one FTE to maintain that environment. And then it just naturally gets inbuilt in our overall infrastructure and security environment as well. So when you think of just that as one specific proof point that we needed to prove to ourselves that we could start to scale up this environment faster and faster, we see a lot of opportunity, specifically within the IT spend. Andrew Didora: Got it. That's some helpful color. And maybe just for my second question, I was going to ask the CapEx question this year, but I guess kind of how should we think about that maybe over the next 3 years once you exclude any SLBs that you do? And I guess on that note, how can you improve maybe your EBITDA to free cash flow conversion over time? Matt Wagner: I think, as we look forward, I mean, for this year, obviously, I mentioned south of $100 million is the goal for this year. There are some onetime projects in there or what we believe are onetime projects in there for some new builds and some larger construction items. We haven't typically published a maintenance CapEx range in the past, but I think there is room in there to get that closer to the $75 million range from a maintenance perspective. And then as we continue to grow our footprint or see other opportunities to move facilities or if we have needs on the real estate side to move facilities, that's where you see us historically have to flex and maybe purchase some real estate. And then in a subsequent year, sell that real estate to a REIT as we kind of move in and out of facilities. So that's where historically, you've seen the number move a little bit year-to-year, and that may be the case going forward. So I don't want to peg it to an exact number, but that's sort of the range for maintenance and also what we're looking at for this year as a goal. Operator: And your next question comes from Noah Zatzkin from KeyBanc Capital Markets. Noah Zatzkin: I guess just on the kind of March and April commentary, it would appear that your comments kind of point to meaningful share gains versus at least what we're hearing from others out there in terms of how the industry kind of trended in March and April. So I guess, first, is your sense that, that's the right way to think about it? And if it is, what do you think has kind of led to the share gain acceleration? Matt Wagner: No, as you know, by the way, we'll have some more Stat Survey Information over the next week that will provide us insights into March's retail activity. And that's where we largely rely upon that as the independent third party to provide us actual insights based other than just speculative behavior within the industry or even us speculating on it. But we do believe, based upon January and February's results that we have had a significant outperformance. And I believe that's attributable to our replenishment and our inventory strategy associated with our exclusive brands. And even as we look at our specific exclusive travel trailer brands in the month of April, we're trending to be up in excess of 20% on just our exclusive travel trailer brands year-over-year, which was a relatively difficult comp for that same lineup of brands. So when I juxtapose that against traditionally OEM brands that exist out there, we're not performing quite as well with those OEM brands. So I think of how creative our team has been of not only continuing to work with manufacturers and suppliers to ensure that we have very creative floor plans, but most importantly, we're hitting the affordability curve of consumers in this industry, and we're attracting greater consumers into the industry. We believe we've been best-in-class at least our exclusive brand strategy, especially over the last 2 to 3 years. Noah Zatzkin: And maybe just one on the industry. Any sense for kind of industry inventory levels right now? Anything in terms of what you're seeing on promo from others? Just kind of a state of what you're seeing out there would be helpful. Matt Wagner: I wish we had better insights into what the actual rolling stock of inventory was in the entire industry. It's almost impossible for us to calculate. We've tried in a variety of different ways. But given the very nature that there are wholesalers that exist in the industry, and there's a lot of rental units that are sold, sometimes [ FEMA ] has a contract with different dealers and those don't necessarily get registered as cleanly. It has been really difficult for us to zero-in on what actual rolling stock inventory is. But based upon just us working with different competitors, knowing different competitors, it does appear that there is quite a promotional environment that exists out there, which is why we try to be pragmatic about our approach to inventory and to pricing for the year and be very realistic about what the margin profile could look like for the balance of the year. Operator: And your last question comes from Alice Wycklendt from Baird. Alice Wycklendt: Matt, I think you touched on it a little bit in your comments on F&I with kind of the consumer down payments. But maybe I wanted to step back big picture and hear maybe what you're seeing in the credit environment more broadly from a consumer financing perspective. Thomas Kirn: I'll handle a portion of the question, and then I'll turn it to Brett Andress as well to speak more intelligently about our relationship with the lenders that we have. But as of right now, we've not seen any sort of different behaviors in terms of like credit profile or approval rates. We have been working very effectively with our lenders to ensure that we're doing our best to maintain current rate, if not driving them down. But in terms of the overall creditworthiness of our customers, we feel really good with what we're seeing right now. Brett Andress: Yes, Alice, I would say from a consumer lending pricing standpoint over the last couple of months, we have actually seen rates start to drift down at a rather increasing rate actually over the last couple of weeks. So with all the rate vol out there, I think that has been encouraging to us as we go into the season. Hopefully, some of that vol starts to probably ease itself, and we can find some additional cuts as we go through the season, but it has been more favorable over the last couple of weeks from a pricing standpoint. Alice Wycklendt: Great. That's helpful. And then maybe just a little bit of housekeeping question. I mean your location is down 10 year-over-year, but up, I think, 3 sequentially. How should we think about your plans for the number of locations over the next 3 quarters or so? Matt Wagner: Actually, last month, we did close on an acquisition, tiny little M&A in Indiana, which fit through the very disciplined framework that we spoke about on the last call, where we were able to acquire the store for a little goodwill. It's in a very favorable market with good brands where we have low market share. And we were fortunate in so much of being able to pick this up and just fill out our map. We'll continue to be diligent about looking at different M&A opportunities, but we also want to be very disciplined about how we're approaching them as opposed to we could, in many situations, just buy brands off of dealerships that want to get out of the industry or just want to unwind whatever they're working on within their localized market. And this is frequently as we get opportunities to buy a dealership, we're able to turn that back around then and say, do we really want to acquire the fixed costs associated with that dealership? Or do we really just want the brands and consolidate the marketplace. And we've taken that latter position in quite a few environments where we were able to work with, I believe, 3 dealerships now year-to-date. We're able to acquire either all the brands or some of the brands off their lot. So what we're going to end up with for the year, tough to say. We're going to be opportunistic and continue to look through the framework of does it make sense for us from a goodwill perspective? It's going to be highly accretive. Are we able to get in there for a low rent factor if we could acquire the real estate for a reduced amount? And do we have low market share there. Operator: And there are no further questions at this time. Mr. Matthew Wagner, you may proceed. Matt Wagner: Thank you for everyone's time this morning. We're quite pleased with our results in Q1. We still know we have much more work to do, and we look forward to speaking with you all again in the next 3 months. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day.
Operator: Good day, everyone, and welcome to the PBF Energy First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin. Colin Murray: Thank you, Anjali. Good morning, and welcome to today's call. With me today are Matt Lucey, our President and CEO; Mike Bukowski, our Senior Vice President and Head of Refining; Joe Marino, our CFO; and several other members of our management team. Copies of today's earnings release and our 10-Q filing, including supplemental information, are available on our website. Before getting started, I'd like to direct your attention to the safe harbor statement contained in today's press release. Statements that express the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. Consistent with our prior periods, we'll discuss our results excluding special items, which are described in today's press release. Also included in the press release is forward-looking guidance information. For any questions on these items or other follow-up questions, please contact Investor Relations after today's call. I'll now turn the call over to Matt Lucey. Matthew Lucey: Thanks, Colin. Good morning, everyone, and thank you for joining the call. Indeed, today is a moment. With the disruption in the Middle East, the world is in greater need of the products we produce and therein lies the momentous opportunity for our company to perform and reward our shareholders for owning such critical infrastructure. Within PBF, the spotlight is squarely on Martinez. We are bringing Martinez back online and will shortly be supplying the California market with our full capabilities. This could not be coming at a better time for the West Coast and California markets. There are 3 main areas of focus in terms of the restart of Martinez, the cat feed hydrotreater, the alkylation unit and the FCC. The cat feed hydrotreater and alky are up and both are running. With the FCC, we expect to be making finished products this weekend. While the rebuild effort was completed in February, there is no question the restart took longer than expected. It was critical for us to ensure that all the work accomplished at Martinez over the last 14 months was capped off with a safe restart. Moving on to the broader environment. The events in the Middle East have caused the largest disruption ever in the oil markets and the effects are indeed dramatic and constructive for PBF. Initially, approximately 15 million barrels per day of crude and 5 million barrels per day of product were trapped inside the Straits of Hormuz. The loss of crude barrels was most acutely felt in Asia, but the shortages have cascaded to other markets. 80% of the crude flowing through the straits was destined for Asian refineries, and those refineries in turn, supplied products to many markets, including the U.S. West Coast. As refining runs in Asia have been rationing due to lack of inputs, the loss of products has affected every market. Compounding this impact, the products stranded in the Arabian Gulf have tightened markets in Europe and subsequently, the Atlantic Basin. In the near-term, the markets will continue to adjust in real time to demand signals for both crude and products. Global pricing will dictate trade patterns. Increasingly, markets are calling for both U.S. crude and U.S. products to meet demand. While the U.S. has been somewhat insulated, there are signs that demand is being impacted globally by both pricing and supply issues. It has never been more evident that U.S. refining is critical infrastructure, and this is most apparent in regions like the West Coast and the East Coast that are short refining capacity and rely on imports from unstable sources to meet demand. It will take some time for trade patterns to normalize both during and post the conflict in the Middle East. Refining fundamentals should remain strong throughout, supported by tight refining balances, coupled with low product inventories around the world. Prior to this event, refining balances looked constructive and the inevitable restocking should provide a favorable backdrop for quarters to come. PBF remains focused on controlling the aspects of our business that we can control. To be successful and enhance value for our investors, we must operate safely, reliably and responsibly, and we must do it as efficiently as possible. And with that, I'll turn the call over to Mike Bukowski. Michael A. Bukowski: Thank you, Matt. Good morning, everyone. Before updating on the progress of our refining business improvement program, I'll provide a few comments on first quarter operations and our Martinez refinery status. Outside of the West Coast, our refining system ran reasonably well. All of our refineries navigated record cold temperatures with minimal disruptions. On the West Coast, as Matt mentioned, Martinez is in the final stages of its phased restart. The process to restart it has been methodical and required many levels of safety and process checks to ensure that all equipment was correctly manufactured and installed before we introduced hydrocarbons. The cat feed hydrotreater and alkylation unit have been operating and producing finished products as well as the intermediates required for the start-up of the fluid catalytic cracking unit this weekend. The Martinez team and the supporting cash too numerous to mention worked tirelessly to get us to this point. My thanks to all involved in the project. Additionally, while Martinez operations were being restored, Torrance underwent a turnaround early in the first quarter and with that event complete has a clean runway for the remainder of 2026. I'm happy to report that we're seeing progress from our RBI program. We achieved our 2025 target of $230 million of annualized run rate savings. This goal includes approximately $160 million of OpEx reductions against our 2024 benchmark and is incorporated in our full 2026 budget. While the ongoing Martinez process is causing some noise within the first quarter results, we are very comfortable in meeting or even exceeding our stated targets. While we are improving our maintenance and operational efficiency and reducing energy consumption, our main priority will always be to the focus on safe, reliable and responsible operations across our system. With that, I'll now turn the call over to Joe Marino for our financial overview. Joseph Marino: Thanks, Mike. For the first quarter, excluding special items, we reported adjusted net loss of $0.88 per share and adjusted EBITDA of $68.7 million. Our discussion of first quarter results excludes the net effect of special items, including $11.5 million in incremental OpEx related to the Martinez refinery incident, a $106.5 million gain on insurance recoveries, a $313 million LCM inventory adjustment, a $9.4 million gain relating to PBF's 50% share of SBR's LCM adjustment for the quarter and approximately $9.4 million of charges associated with the RBI initiative, as well as other items detailed in the reconciling tables in today's press release. PBF's results reflect several unfavorable conditions that manifested in the first quarter, both operationally and commercially. Capture rates for the quarter were negatively impacted by West Coast operations, the higher flat price environment, increasing the headwind of low-value products, higher RINs expense and derivative losses recognized in the quarter. These capture headwinds more than offset benefits from improving jet and diesel spreads and certain crude dips. Operationally, our Torrance refinery was in planned turnaround during January and February, while our Martinez refinery restart was delayed. We built up inventory levels in the first quarter, primarily in anticipation of the planned restart of Martinez. This occurred as global pricing for hydrocarbons surged on the back of the conflict in the Middle East, resulting in losses in our typical hedge program. Our results for the quarter reflect an aggregate derivative loss of a little over $200 million. Approximately half of this loss related to unrealized amounts expected to be mostly offset in the second quarter as the physical barrels run through our refining system. The $106.5 million gain on insurance recoveries related to the Martinez fire is a result of the fourth unallocated payment agreed to and received in the first quarter. This brings our total insurance recoveries to $1 billion, net of our deductibles and retention, including the amounts received in 2025. Important to note, while the bulk of the spending related to Martinez is behind us, the claim is ongoing, and we expect to recover incremental funds as we continue to work with our insurance providers towards potential additional interim payment and finalization of the claim in an expeditious manner. Shifting back to our normal quarterly results discussion, also included in our results is an approximate $8 million EBITDA benefit, excluding LTM impacts related to PBF's equity investment in St. Bernard Renewables. FCR produced an average of 16,700 barrels per day of renewable diesel in the first quarter. FCR's production was as expected, but results reflect the impact of improving market condition in the renewable fuel space with the finalization of the RVO in March. With the setting of the 2026, '27 RVO, the market is now the ability to stabilize and should result in favorable margins. PBF's cash used in operations for the quarter was $324 million, which includes a working capital draw of approximately $340 million, mainly due to movements in inventory and the impact on our net payable position as a result of rapidly moving commodity prices. On our last call, we mentioned our expectations for elevated first quarter CapEx and working capital outflows, primarily related to Martinez restart and normal seasonal inventory patterns. The capital spending for the Martinez rebuild is essentially behind us, and we expect working capital to normalize as operations restart in full. Cash invested in consolidated CapEx for the quarter was $320 million, which includes refining, corporate and logistics. This amount excludes first quarter capital of approximately $189 million related to the Martinez incident. On the surface, the Q1 figure might be slightly higher than expected, and this is because it includes approximately $100 million of net carryover from 2025 that had not been cash settled at year-end. The balance is our normal quarterly incurred amount, including the turnaround at Torrance. Given that and the noise related to Martinez rebuild, it would be helpful to more broadly consider the 2025 and 2026 capital programs over a 2-year period. We ended the quarter with $542 million in cash and approximately $2.3 billion of net debt. At quarter end, our net debt to cap was 36%, and our current liquidity is approximately $2.4 billion based on current commodity prices, cash and borrowing capacity under our ABL. Our net debt increased in the first quarter due to planned capital expenditures, continued spend on the Martinez restart and working capital outflows primarily related to a build in inventory. Going forward, inventory should normalize as operations ramp up, and we should see a resulting tailwind in working capital cash flows. Additionally, with our capital spend for the Martinez rebuild predominantly behind us, we expect to further progress our Martinez insurance claim and receive additional payments. Once realized, these factors alone should principally offset the increase in net debt experienced in Q1. Maintaining our firm financial footing and a resilient balance sheet remain priorities. As we look ahead, we expect these periods of strength to focus on reducing both our gross and net debt. Operator, we completed our opening remarks, and we'd be pleased to take any questions. Operator: [Operator Instructions] The first question comes from Manav Gupta with UBS. Manav Gupta: I want to start a little bit on the global macro side. The way we are seeing things, Matt, is 2Q and 3Q are a tale of 2 halves, those who have the crude and who can run and those who don't have crude, and they may have the best kit out there, but they don't have crude. And you are in this category where you have the crude and you can run. So, can you help us understand, given relatively low U.S. nat gas price and availability of crude, does that mean that U.S. refining has an advantage over most of their global peers at this point of time? Matthew Lucey: Manav, I don't think there's any question on that. I think the outlook for the second quarter and the third quarter look extraordinary only because the world is going to be in desperate need of our products. And as you say, we're insulated from a natural gas perspective, heck we're insulated from a physical security perspective. We have the best steel globally with a very stable workforce. And indeed, we have access to crude. Obviously, the pricing on crude is determined on a global basis. But when you stack up the U.S. industry compared to the rest of the world, it stands out. And then when you look within the U.S., I think particularly PBF's coastal complexity is incredibly well positioned within that. Manav Gupta: Perfect. And a quick follow-up here and this is a question we have pretty much got all morning. What gives you the confidence that this time, Martinez will be able to restart within probably a week or so and there will not be any further delays? Matthew Lucey: I'll turn that over to Mike. Michael A. Bukowski: So, the delays that we saw over the past couple of months were primarily focused on the process to verify the equipment to make sure it was constructed, installed properly. And now we're at the point now with 2 units up in operations. We always had a phase start-up. It's always going to be the cat feed hydrotreater. It's always going to be the alkylation unit. Those 2 units started up without incident. They -- we got up safely. And we're essentially -- if you make the analogy of a football game, we're in the fourth quarter on the process on the FCC. The unit is heating up and we're a day or so away from putting feed in the unit. So, it's very close. We've got all the checks that we've done. We've had a lot of the major hurdles that you typically go through in an FCC start-up. So, that gives us the confidence. Matthew Lucey: The frustration on the duration is certainly understandable. But the alternative simply wasn't considered in terms of rushing through anything. And so, all the steps that we're taking were done in the name of caution and safety and reliability. It obviously was an extraordinarily large disruption. And as such, it took a bit longer. That being said, we're here on the precipice of this whole incident being behind us. Operator: The next question comes from Alexa Petrick with Goldman Sachs. Alexa Petrick: We wanted to ask on the East Coast dynamics. But that region looks tight from a product perspective, but there's also a lot of moving pieces around crude access, freight rates. So, can you just talk about the exposure there and how you're seeing capture rates shake out? Matthew Lucey: Yes. It was in my comments. I mean, whether you're talking about the East Coast or West Coast, you're relying on imports and so how critical our infrastructure is within those pads. It's highlighted. It gets highlighted every couple of years, whether it's through hurricanes or other events, whether when Colonial went down clearly in this event now with the global market completely disrupted. But our assets are running well. They -- like I said, they have access to crude. And so, I think we'll be rewarded handsomely for operating them reliably over the coming quarters. Tom? Tom Nimbley: Yes. I mean I would just add in terms of what we've seen, particularly over the last several reporting weeks, right, where we're seeing draws across the country. And you're at a situation also where even in the past couple of -- in the past month or so, right, where in terms of the U.S. has been exporting product, not just off of the Gulf Coast, but out of the East Coast as well. So, we're at a situation where inventories have been depleted and obviously depends upon how long the disruption in the Straits of Hormuz continues, right? But the longer it goes, obviously, we stay in a very point of friction. But on the flip side of it is that when we would look at it in terms of resolution in terms of the conflict, you then potentially also have OPEC in a fractured state with the announcement of UAE looking to depart the organization. So, I think that all sort of fits within the sort of constructive outlook and the situation where in terms of markets that are deficit products, it is going to be challenging in the short term to find that resupply from any other region, because it certainly would appear at this point that Asia is buying the minimum amount of crude that they can purchase to basically satisfy their local demand or the region's demand, and there's no expectation that they're going to be continuing to pull crude from the Atlantic Basin to then resupply just in terms of the sheer amount of time that takes and the uncertainty in terms of what could happen during that 60, 90, 120-day supply line. Matthew Lucey: And importantly, also for the East Coast and the West Coast, with the Jones Act being put on the shelf for a period of time, we're actually able to run non-traditional crudes to the East Coast. Indeed, we'll be running some WTI and some other U.S. barrels on the East Coast during the second quarter. So, we'll have access to the crude. At the end of the day, as we said in the comments and Tom highlighted, the world is going to be desperate for our finished products. Alexa Petrick: Okay. That's helpful. And then our follow-up is just on capital allocation. Any more color you could provide on the optimal capital structure with Martinez back on and elevated margins, how should we just think about that cash flow generation being used? Matthew Lucey: I'll hand it over to Joe, but just one overriding sort of 10,000-foot comment I would make, consistent with all the comments that we've made for the last number of years. When there are periods of excess cash flow generation, we will look to our balance sheet first as just the core business model of how we run our business in terms of driving to a very conservative balance sheet. Obviously, it's a cyclical business, capital-intensive business. And during periods where the cycle is against us, we have that balance sheet to lean into. But that's requisite on times where we are generating excess cash where we return the balance sheet to our expectation. Joe, any other? Joseph Marino: Yes. No, I would reiterate that we do maintain -- always look at our capital allocation framework comprised of the 3 pillars of invest in the business, invest in the balance sheet and shareholder returns. But as Matt indicated, our current market conditions persist, we'll have an opportunity here to accelerate delevering as a means of transferring value from debt to equity, which would be a priority in the near-term. We did lean into the balance sheet in the last 12, 24 months, and I think we'd be looking to get back to levels we had come into 2025. Operator: The next question comes from Joe Laetsch with Morgan Stanley. Joseph Laetsch: So, I wanted to ask on the West Coast. Can you just talk about what you're seeing from a local crude pricing and availability standpoint here? Are these barrels pricing off of ANS right now? And then is there any competition that you're seeing from Asia pulling barrels away? Matthew Lucey: I'll make a comment and hand it over to Paul. You have to appreciate our position on the West Coast. And we've talked about this a fair amount in regards to -- and we've spent a lot of time talking about products and 300,000 barrels a day of gasoline and jet that needs to be imported to meet demand. And to the degree you bring in those products, those products -- you have to be able to attract those products from the rest of the world and the logistics to get there are significant. But on the crude side, we talked about it less. We've seen an increase on California production with some production coming on over the last quarter. And importantly, PBF has its own pipeline infrastructure with our M70 pipeline delivering to Torrance. So, the crude pricing in California is particularly interesting because if you look at pricing of crude around the world, the California production coming out of Valley, some of the most attractively priced crude in the world. And we have our own proprietary line that will be bringing that is bringing it to our refinery in Torrance. So, we feel like that's going to be a real competitive advantage for us going forward. Any other comments, Paul? Paul Davis: I mean on the indigenous crude, it prices against ICE. That's the format that it trades on. It trades at a discount because of the quality. It is a very heavy sweet barrel, high TAM material, somewhat captured because it can't go offshore. So, it trades at a pretty good discount to ICE, which is obviously a pretty good discount to ANS. As far as the pull on the -- from Asia, the Asian program did pull a lot of ANS away from the West Coast in the current trade periods and the next trade period. So, it's a good supplement to some of the air grades that have been lost for those guys. So, yes, we're seeing a pretty good pull. Joseph Laetsch: Great. That's helpful. And then on the refining business improvement program, can you just talk about how that's progressing? So, I understand the $230 million was achieved in 2025. Can you just talk a bit more about the path to the $350 million by year-end '26? Matthew Lucey: Sure. I'm just happy to report we're on path. But Mike, why don't you give? Michael A. Bukowski: Sure. Yes. So, the way we structured the program is we took the savings that we -- the run rate savings that we had achieved last year. That was $230 million that included capital. So, just from an OpEx perspective, it was $160 million. We put that into our budget. And then in the first quarter, we are right on that plan right now. And you'll see as the quarters go by, an increase in savings from quarter-to-quarter as other savings initiatives are implemented as well. So that by the year-end, we would expect to achieve those savings. Operator: The next question comes from Paul Sankey with Sankey Research. Paul Sankey: Can you hear me, okay? Matthew Lucey: Hearing, Paul. Paul Sankey: Can you -- you've talked a lot around these questions. So, if I could just sort of keep digging a bit here, please. Matt, did you say -- can you just say when Martinez is going to be completely up and running all units, best guess. Did you say that's happening? And then can we talk a little bit -- you said some interesting stuff about how the crude slate is changing. For example, you mentioned the Jones Act allowing you to take WTI. I was wondering, for example, is that WTI price at Cushing? And can we dig a little bit into how your crude slate is changing given the whole new situation? And again, you've addressed this, but are there major issues where for example, jet fuel, how are you dealing with that? And is that getting exported? Can we kind of go through what the next 2 months will look like? Because I think the current market is guaranteed to be here for the next 2 months. And then if Hormuz starts opening up, I assume that all of that will reverse, but any longer-term comments would be helpful as well. Matthew Lucey: Okay. There's a lot. So, just in regards to Martinez, as we said, essentially, we expect literally over the next couple of days. And so, we'll be very, very pleased to get there. But as soon as this weekend, we should be up with sort of all our units up and running, which is good news. Again, frustrating on the duration, but very, very good news looking forward. In regards to running nontraditional crews, everything has been disrupted and the size and scale of this disruption is sort of hard to imagine. I just keep coming back to -- at the end of the day, there's a lot of interesting conversations about crude. But at the end of the day, the only thing that matters is products. The disruption to the product market is extreme, and we're best positioned to capitalize that throughout the country, but particularly our coastal markets. When you look at our based operations and sort of the daily impacts, the U.S. East Coast is probably impacted the most in terms of what crudes it's running. Paulsboro historically ran Aramco barrels, and we've been able to make adjustments there. But to a great degree, Chalmette, Toledo certainly and the West Coast is running what it traditionally ran. I don't think we're going to give you quite the detail you're looking for in terms of exactly how to pricing, but I commend you for trying. But yes, I mean, at the end of the day, like I said, I just go back to products, products, products. And to the degree that we can reliably produce them, we will be handsomely rewarded because they're in desperate need. Paul Sankey: Fair enough, Matt. It was very good say. Tom Nimbley: Paul, it's Tom. I would just jump in. I mean, I think certainly for us in terms of -- I mean your comment, maybe the next 2 weeks, 2 months or certainty, right? I mean is that I think as we look at the sort of acute problems that the market has been doing or going through, it really depends upon just really how far you are from the Straits of Hormuz, right? So, Asia felt all these pinch points soonest, then it cascaded more so into the European product markets. And then it's now filtered into the U.S. market or the Americas, and we're certainly seeing that on products and particularly in terms of what gasoline has done over the last several weeks in terms of catching up because initially, this was just a crude problem and a distillate problem and a jet problem, right? Now in terms of the balances, now it's a gasoline problem. And then therefore, also if Straits of Hormuz opens, right, then it's going to be a situation where the recovery is going to happen soonest in terms of how far are you from Straits of Hormuz, right? And obviously, the Americas are the furthest away from the Straits of Hormuz in terms of that. That's the sort of commentary relating around sort of months, quarters, et cetera, in terms of the recovery time. Paul Sankey: Yes. It's interesting that the Jones Act is helping you lack of it. Operator: The next question comes from Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: I can't tell you how happy I am to hear you talk about translating value from debt to equity, but I'll take that one offline. My 2 questions is, first of all, I'd like to maybe dig in a little bit on capture rate. At the simplest level, what we're trying to -- we've all been through these kind of spikes before, maybe not quite like this. But when you see extraordinary margins, the risk, I think, is that the market takes those extraordinary margins and assumes capture rate remains the same of those margins. You guys talked about headwinds. You talked about RINs. Obviously, you talked about crude slate. I wonder if you could just dumb it down and say, well, how do you anticipate your capture rate on these extraordinary margins to trend? Will it be the same? Will it be higher? Will it be lower? That's my first one. My second one is just real simple on business interruption. And maybe it's just a balance sheet question. You haven't really given us a lot of disclosure on how much of the current balance sheet is still a net positive that will go away. In other words, when you pay out the remainder of the repairs, net it against how much you actually still get in the growth of business interruption. And then the root of my question is, you've been offline during extraordinary margins in the West Coast. You were supposed to come back up in December. Do you still get business interruption in the first quarter? I'll leave it there. Matthew Lucey: Okay. Sure. So, capture rates in extraordinary periods of time, which we clearly are in, it will be very, very difficult for you, quite frankly, for the investment community to pinpoint capture rates as you have a lot. Obviously, flat price, RINs and massive, massive basis differentials that are swinging wildly on a daily basis. Indeed, jet on the West Coast today is trading over $1 NYMEX distillate mark. So, it will be very difficult task to bring precision to capture rates in these extraordinary periods. Capture rates by them self -- by definition are rules of thumb. And in this period of time, rules of thumb don't necessarily equate perfectly. We'll try to be as helpful as we can in that regard navigating it through. But there are obviously a lots of puts and tails. But at the end of the day, I keep coming back to products, products, products. And the fiscal price for our products will be evident as we go because of how short they are at the moment. And so yes, and on top of that, the last barrel in the plant may look expensive compared to historic sort of runs. But again, the product prices are going to carry that. In regards to BI, indeed, our coverage does extend into this year and we will continue sort of to work with the insurance companies who've been very, very good partners. I've said that, I think, on every single call. And I'll turn some of the insurance stuff over to Joe. But indeed, it wasn't your question. But again, the addressing the balance sheet and transferring that wealth from leverage into equity is a core principle of how we run this business. So, let there be no confusion on that. Any other comment on the insurance side? Joseph Marino: Yes. I would just say, given the fact that the claim is ongoing and the insurance proceeds we've received to date have not been allocated. I can't really give you any more detail on the breakup between DI at this point. But we'll say that importantly, the rebuild costs are substantially behind us at this point, and we do expect further progress payments on the insurance side through the end of the claim. Douglas George Blyth Leggate: I understand there's no precision here, but nevertheless, I appreciate the color. Operator: The next question comes from Philip Jungwirth with BMO. Phillip Jungwirth: The turnaround schedule for the year originally contemplated Martinez hydrocracker in 2Q. Is this at all impacted by the later restart? And or just what's the status here? What would this turnaround entail or imply as far as crude throughput for the facility? Matthew Lucey: Yes. We've been working that, obviously. That was originally like per our last call, we were talking about that in the second quarter. We're working through that now. I would say there's a high degree or a high probability that, that turnaround that we actually move that towards the end of the third quarter. That hasn't been completely finalized yet. They have to go through a number of checks. And again, safety, reliability, responsibility, running responsibly is sort of the prerequisite for everything. And so, we're working through that. But I expect that work will be pushed out towards the end of the third quarter. Phillip Jungwirth: Okay. Great. And then can you talk a little bit about SBR and the outlook here? We don't get a ton of detail on profitability, but clearly, the margin profile for RD has improved. Any color as we head into 2Q? And then separately, just how are you viewing your RIN exposure currently net of SBR? Matthew Lucey: All right. So SBR, look, this is -- it's a happy moment. There's no doubt the reason -- one of the reasons we invested in the project in the first place. So, the prospects, the outlook for SBR is quite strong today. It's quite honestly, the strongest it's ever been since we've been up and operating. So, the first quarter had positive EBITDA, but the outlook going forward, and we just completed a catalyst change, the outlook going forward looks very, very constructive. And to some degree, it holds the story together for PBF as the hedge against RIN prices that we didn't have 3 years ago. And so, we're very pleased to have SBR in our portfolio. And indeed, I think on our next call, you'll see sort of how helpful it is. In regards to RINs, they seem to be on a one-way freight train going up. RINs are upwards of getting close to $13 a barrel. I've described the program for over a decade as being broken, which is true, maybe nothing is more true than that, but it actually very well may break literally where there's not sufficient RIN generation because, of course, high RIN prices, low RIN prices, you still blend the same amount of ethanol. There is an ethanol blend wall. So, it relies on RD production and bioproduction. And if that doesn't meet the RVO, you could get into a situation where not only is RINs dramatically in pricing the price of gasoline, where it's actually constricting supply because if you can't -- if you import, so if you go to the coast and you need to attract imports, that importer has to buy a RIN. So, the price that he's looking at deducts the RIN price. So, that sort of speaks to the requirement on the coast to be able to attract those products. But if the RIN is unavailable and he can't be compliant, the product won't come. And so, will we get there this year? I don't know. To a great degree, it will depend on bioproduction and renewable diesel production around the world, I guess, to some degree. The RVL, as I said, is the highest it's ever been and completely stupid in regards to impacting the price of gasoline. The easiest lever the administration has to lower the price of gasoline today would be to address the blend wall, and there is countless ways they could do that. But it is what it is. And as I said, we're very, very pleased to have SBR. We think it's going to be contributing nicely. Operator: The next and final question that's Jason Gabelman with TD Cowen. Jason Gabelman: You discussed the Martinez hydrocracker turnaround and potential to push that out. But can you talk more broadly about the opportunity to push out maintenance later this year into next year and just how maintenance looks over the next couple of years, given we could be in a period where margins are higher for a decent amount of time here? Matthew Lucey: Yes, higher for longer. Yes. I'll just say in the short, short term. We obviously -- just looking at the next couple of quarters, we have a very, very clean runway. And so, the opportunity is certainly extraordinary in the near term. Mike, why don't you make some comments? Michael A. Bukowski: Yes. The second and third quarter are pretty clean. We do have some things coming up in the fourth quarter. We always evaluate right around this time, actually moving some things around. There are some things that we may be able to do. There are some things that are kind of locked in. I'm not going to get into specific turnarounds and the likelihood of moving them at this point. I will say that this year was probably one of our heavier turnaround years in terms of our major turnarounds. We consider a major turnaround, whether it's a conversion unit or a crude unit combined together. So, this is one of our heavy years in recent history in terms of the scope. But the next couple of years, we tail off a bit and we're a little bit later in '27 and '28. So, specifically, I'm not going to mention any turnarounds can be moved, but we are -- we do those evaluations right around this time. Jason Gabelman: My other question is on the results for the quarter. You mentioned derivative losses impacting 1Q, I believe. You didn't quantify it. Can you talk about what that looked like for 1Q and what that maybe will look like for 2Q or how we should think about that going forward, just given in the current environment, I think some of these derivative losses could be a bit outsized. Joseph Marino: Yes. So, we recognized a little over $200 million of mark-to-market on derivative losses during the quarter. At the end of the quarter, there was about $100 million of unrealized. So, there's still some offsetting physical barrels that will flow through to offset that and likely be a benefit in Q2. And then as far as Q2 actual derivative impact will depend on where prices go from here. Matthew Lucey: The derivative program, just so everyone understands is a risk-reducing program in that we will hedge inventory that is above and beyond our normal baseline. And with the disruption we had on the West Coast at -- when we are entering the February 28 or March -- early March, we had approximately 6 million barrels above and beyond what we normally have in our portfolio. And as such, we were managing the price of that. Anecdotally, I think the company did an exceptional job of sort of navigating the unprecedented volatility that we saw in managing those barrels. But as our inventory works down, the need for that hedging exercise is eliminated. And so, I suspect by the end of the second quarter, you're not going to see similar callouts. But again, it's a situation where at the end of the first quarter, you're marking those derivatives to market even though you still have the inventory that you're then going to realize the physical side during the second quarter. Operator: We have reached the end of the question-and-answer session. And I will now turn the call over to Matt Lucey, CEO, for closing remarks. Please go ahead. Matthew Lucey: Thanks again for your time and attention this morning, and we look forward to speaking with you in July. Have a good day. Operator: Thank you. This concludes today's conference, and you may now disconnect your lines at this time. Thank you for your participation.
Operator: Hello, everyone. Thank you for joining us, and welcome to Kimco Realty's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to David Bujnicki, Senior Vice President of Investor Relations and Strategy. David, please go ahead. David Bujnicki: Good morning, and thank you for joining Kimco's quarterly earnings call. The Kimco management team participating on the call today include Conor Flynn, Kimco's CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; David Jamieson, Kimco's Chief Operating Officer; as well as other members of our executive team that are also available to answer questions during the call. As a reminder, statements made during the course of this call may be deemed forward-looking, and it is important to note that the company's actual results could differ materially from those projected in such forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to the company's SEC filings that address such factors. During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco's operating results. Reconciliations of these non-GAAP financial measures can be found in our quarterly supplemental financial information on the Kimco Investor Relations website. Also, in the event our call was to incur technical difficulties, we'll try to resolve as quickly as possible. And if the need arises, we'll post additional information to our IR website. And with that, I'll turn the call over to Conor. Conor Flynn: Good morning, and thanks for joining us today. When we spoke in February, I laid out a clear set of priorities for 2026. Convert our record signed but not open pipeline into cash flow, recycle capital aggressively to close the gap between our public and private market valuations, modernize the operating platform to drive speed and efficiency while continuing to push occupancy and same-site NOI growth, all underpinned by the structural strength of our grocery-anchored portfolio. Three months in, I'm pleased to report we are executing on each of these fronts. Let me walk you through the highlights. David Jamieson will provide additional detail on leasing. Ross will cover the transaction market, and Glenn will take you through our financial results and outlook. The momentum we built in 2025 has carried into 2026. For the first quarter, we outperformed as we delivered FFO of $0.46 per diluted share, a 4.5% increase over the prior year, driven by higher minimum rents, strong tenant retention and favorable credit loss. Same-property NOI grew 1.7%, which is consistent with the cadence we outlined in February that the first quarter would mark the low point of the year as we lap prior year rents related to JOANN's, Party City, Big Lots and Rite Aid. Our tenant credit profile is also as strong as I can ever remember. Customarily, credit loss tends to be higher during the first quarter as challenged retailers look to get through the holiday season. This year, we didn't experience any meaningful bankruptcy activity and don't foresee that materially changing over the course of the year. As we look ahead, we anticipate accelerating same-site NOI growth through the balance of the year as rents commence from our signed but not open pipeline. Speaking of leasing, our team delivered 576 deals totaling 4.4 million square feet with new lease spreads of 23.8% and combined spreads of 11.3%. That volume reflects the deep broad-based demand that characterizes our markets. Most importantly, our signed but not open pipeline grew to $77 million of annual base rent, a new all-time record for Kimco, representing 410 basis points of leased versus economic occupancy spread. That is contracted visible cash flow sitting in the pipeline waiting to convert, and it's the single clearest indicator of where our earnings are headed. Occupancy came in at 96.3% pro rata, 50 basis points higher than a year ago and down just 10 basis points from our all-time high at the end of last year. I'll let Dave provide more detail on leasing in a moment, but I want to highlight a milestone that speaks directly to the power of our platform. When we closed the RPT transaction just 2 years ago, that portfolio carried an occupancy gap of roughly 130 basis points lower than Kimco's legacy assets. At the end of the first quarter, we not only closed the gap, we surpassed it, as the RPT portfolio occupancy is slightly higher than Kimco's. Importantly, even at these occupancy levels, the portfolio continues to have a meaningful runway of below-market rents, providing a significant mark-to-market opportunity as leases roll. Now allow me to touch on the macro environment. Geopolitical uncertainty has injected some volatility into the broader economy and near-term retail sentiment, including the rise of fuel prices and its impact on the consumer. We are not dismissing that, but it is also where the durability of Kimco's portfolio becomes more apparent. Our tenant base is anchored in discount and necessity-driven retail, grocers, off-price, fitness and everyday services, the categories that have historically demonstrated resilience precisely when discretionary spending comes under pressure. The first quarter validated that thesis as our traffic at our centers was up more than 2% year-over-year. Retailers are looking beyond the near-term macro issues and remain focused on the long term as demand for quality space remains strong, supported by the scarcity of high-quality vacant space and virtually no new supply entering our markets. The structural backdrop remains squarely in Kimco's favor, and our leasing performance reflects that. Demand across the portfolio is strong, spreads are healthy, and we see no signs of that changing. In closing, Kimco entered 2026 with the strongest operational foundation in our company's history, and the first quarter reinforced the financial power of our platform. Strong demand, a record signed but not open pipeline, disciplined capital recycling, the strongest balance sheet we've ever had and one of the most resilient tenant bases in the sector give us the building blocks to continue delivering at the top of the shopping center space. I'll now turn it over to Dave for an update on leasing activity in the operating portfolio. David Jamieson: Thank you, Conor. I'll cover our first quarter leasing results, the SNO pipeline and the progress we're making on our operating transformation, all of which point to a compelling growth trajectory as we move through the year. Then I'll hand it over to Ross. The first quarter demonstrated that the embedded growth in this portfolio is real and accelerating. We closed 576 deals totaling 4.4 million square feet with new leases delivering spreads of 23.8%, a clear reflection of the mark-to-market opportunity ahead of us. Renewals and options came in at 12% and 7.9%, respectively, and overall blended spreads across new leases, renewals and options were 11.3%. That extends our streak to 15 consecutive years of positive leasing spreads, a track record that speaks to the enduring pricing power of our real estate. New leasing activity remains strong in both deal count and GLA, reinforcing that retailer demand for our centers is deepening, not plateauing. Package leasing continued to build momentum as we secured 4 leases with Dollar Tree, signing several of those in under 30 days. And in our lifestyle portfolio, we signed 2 leases with Anthropologie and executed our first deal with Patagonia. This activity validates the strategy behind our dedicated lifestyle operating team that signals growing institutional interest in this segment of the portfolio. Average new lease rents for the quarter came in near $29 per square foot, the highest we've ever reported. This is a significant data point. It tells us that the mark-to-market opportunity in this portfolio is not narrowing, it is expanding. As below-market leases continue to roll, we are capturing that embedded upside at record rent levels. Overall, retailer demand is broad-based and diversified across anchors, junior anchors and small shops, spanning grocery, off-price, fitness and general merchandise. The pace of new deal execution through Q1 surpassed the comparable period last year, and the pipeline heading into Q2 remains robust. Crucially, retailers are not pulling back. They are committing to long-term store opening programs, which is the strongest possible signal of confidence in the open-air format and specifically in Kimco centers. Retention reinforces the growth story. Excluding bankruptcy-related activity, we had 47 fewer vacates, a direct reflection of strong store level performance and the scarcity of viable alternatives for tenants in our markets. They are staying because they are growing in our centers. Small shop occupancy rose 80 basis points year-over-year to 92.5%, near historic highs, and that trajectory has room to continue. Looking ahead, we are positioned to unlock meaningful incremental growth in occupancy and rent through our active repositioning and redevelopment pipeline. The grocery-anchored redevelopment program is a particularly powerful catalyst with approximately 15 anchor grocery projects. The SNO pipeline is where the near-term growth story comes at the sharpest focus. As Conor mentioned, the pipeline stands at a record $77 million in annual base rent with occupancy up from 390 to 410 basis points since year-end. Over 60% of the current SNO is projected to commence in 2026, with commencements weighted toward the second half, meaning the earnings contribution ramps into a period where visibility is high. Our singular operational focus is velocity, converting signed leases to cash paying rent as efficiently as possible. We are already tracking ahead of plan. Projected cash flow rent from 2026 commencements has increased to $31 million, up from an original budget of $28.5 million, a $2.5 million improvement that reflects both the strength of the pipeline and the operational progress we've made in accelerating commencements. Q1 actual commencements will contribute approximately $13 million in 2026 with over $18 million projected from leases commencing in Q2 through Q4. The growth ramp is in front of us, and it is well defined. This acceleration is directly attributable to the structural changes we put in place. Although we officially go live in Q3, we are already seeing the benefits of the new structural changes via earlier contractor engagement and tighter coordination across leasing, construction and asset management under this new operating model. The organizational transformation we outlined last quarter is not a future benefit. It is already showing up in the numbers. To sum up, the fundamentals of this business are strong and the growth vectors are clear. 15 consecutive years of positive leasing spreads, a record SNO pipeline with $31 million in projected '26 commencements already tracking $2.5 million ahead of plan, and improving tenant retention, record new lease rents and a grocery-anchored redevelopment program, enhancing merchandising, traffic and long-term growth and an organizational structure and technology platform that are making us faster and more efficient. The investments we outlined last quarter are already showing up in execution. We are not waiting for growth. We are building it quarter-by-quarter. With that, I'll turn it over to Ross for an update on the transaction market. Ross Cooper: Thank you, Dave, and good morning. As we anticipated, the first quarter was relatively quiet from a transaction volume standpoint. While activity was intentionally measured, we use this period productively, advancing our disposition pipeline, continuing to underwrite and analyze acquisition and structured investment opportunities and maintaining the discipline that defines our capital allocation approach. This measured start to the year was consistent with our 2026 plan, and we remain confident in achieving our full year transaction guidance with activity weighted towards the second half. Open-air retail has firmly established itself as one of the most sought-after asset classes in commercial real estate with investor demand supported by strong sector fundamentals, record occupancy, limited new supply and durable necessity-based cash flows. As a result, cap rates have remained low and resilient with best-in-class grocery-anchored centers in top markets trading in the low to mid 5% range. The recently announced acquisition of Whitestone REIT by Ares Management, an all-cash transaction valued at approximately $1.7 billion is the latest evidence of how aggressively private capital is pursuing our sector and highlights the persistent disconnect between private market valuations for high-quality open-air retail and where our sector trades publicly. Closing the gap remains a key focus for us. In the first quarter, we maintained a disciplined approach to capital recycling, completing the sale of 2 flat low-growth ground leases at cap rates blending to a mid-5% level. We are actively marketing a handful of additional assets, including other ground lease parcels and select residential properties, and we continue to be prudent in structuring these dispositions to shelter gains where possible through 1031 exchanges. This tax-efficient approach is consistent with the strategy we executed last year and is an important lever in maximizing after-tax returns as we recycle capital from lower growth assets into higher quality investments. Against that backdrop, our ability to source opportunities through proprietary channels continues to be a critical differentiator. On the structured investment side, we were active in the quarter, committing capital to new opportunities at attractive yields, each carrying future acquisition rights under a ROFO or ROFR. As a result, we're slightly ahead of plan on structured investments and continue to build a deep pipeline of potential future acquisition opportunities that is largely insulated from open market competition. These investments continue to demonstrate the value of our proprietary deal flow. Looking to the balance of the year, we are actively evaluating additional assets to acquire and properties on which to provide structured investment financing. We expect transaction volume to build meaningfully through the second half, and we remain confident in achieving our full year targets at spreads consistent with our guidance. We are not in a rush. Our proprietary sourcing advantage allows us to be selective, and we will continue to prioritize quality of execution over pace. In summary, with a fortress balance sheet, $2.2 billion in total liquidity and a robust proprietary pipeline, we are well positioned as we move through 2026. With that, I'll pass the call to Glenn. Glenn Cohen: Thanks, Ross, and good morning. As the team has outlined, Kimco delivered a strong start to 2026 with 4.5% FFO per share growth, favorable credit trends and continued balance sheet improvement. I'll focus on the key drivers behind the quarter, followed by the balance sheet and our outlook. The key driver of our FFO result of $0.46 per diluted share was higher pro rata NOI led by $8.3 million of higher minimum rents, a direct reflection of the contractual escalators and mark-to-market activity embedded in our rent roll. I do want to call out a few items that affected comparability this quarter. First, the quarter benefited from approximately $7 million from accelerated below-market rent associated with early lease termination-related recaptures. This is noncash in nature and is reflected in our GAAP revenue line. It is also important to note that first quarter results benefited from the timing of percentage rent that is seasonally weighted toward the first quarter. As a result, we do not expect the percentage rent income collected in the first quarter to be indicative of the remaining quarters as this dynamic is fully reflected in our full year outlook. Also, G&A expense of $37 million was elevated due to the timing shift of our annual equity award grant into the first quarter. Last year, this expense was recognized in the second quarter. The biggest driver of the expense is related to retirement-eligible employees in which the full grant value is immediately charged, resulting in approximately $6 million of higher incremental expense in the quarter. As this is a timing issue, there is no material impact for the full year and is also fully reflected in our outlook. Turning to the balance sheet. We ended the quarter with consolidated net debt-to-EBITDA of 5.2x or 5.5x on a look-through basis, including pro rata JV debt and preferred stock. These are the best levels we have reported since we began tracking this metric and reflect the cumulative benefit of our deleveraging efforts over the past several years. Liquidity remained strong at approximately $2.2 billion, including $170 million of cash on hand and full availability on our $2 billion unsecured revolving credit facility with no borrowings outstanding. During the quarter, we further improved our capital position by renewing our revolving credit facility, reducing the borrowing spread over SOFR by 5 basis points and extending the initial maturity to March 2030 with 2 6-month extension options. We also reduced spreads on $860 million of outstanding term loans, generating roughly $600,000 of annual interest savings while adding extension options on certain tranches. Looking ahead, our 2026 refinancing activity is already a known headwind and fully reflected in our current outlook. The majority of maturities fall in the second half, providing flexibility on when we choose to address. We have a broad set of financing alternatives available to us, including the unsecured bond market, our recently launched commercial paper program, the term loan market as well as the convertible market, and we will be opportunistic with execution. Now for an update on our 2026 outlook. Given the positive start to the year, we are tightening our full year 2026 FFO outlook to a new range of $1.81 to $1.84 per diluted share from the previous range of $1.80 to $1.84 per diluted share. We are updating our outlook based on improved visibility across key drivers, including the following: First, we've raised the full year outlook range for same-site NOI growth to a new range of 2.8% to 3.5%, driven by improved visibility into the timing of new rent commencements from our SNO pipeline and better-than-expected credit loss. As a result, we are tightening our full year credit loss assumption to a new range of 65 to 90 basis points compared to the previous range of 75 to 100 basis points. As we previously noted, we expect our same-site NOI growth to continue to accelerate each quarter going forward for the rest of the year. Finally, our outlook remains dependent on the timing of capital activity, including debt refinancing, acquisitions, dispositions and redevelopment spending. All other outlook assumptions remain substantially unchanged at this time. In closing, it was a solid quarter of operating growth, better-than-expected credit performance and continued balance sheet strengthening, which positions us well for continued growth. And with that, we'll open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Goldsmith from UBS. Michael Goldsmith: On the capital allocation front, you sold a couple of flat ground leases in the quarter. It sounds like you've been marketing more as well as maybe some of the apartment opportunities. So how has the market been for these ground leases and apartments? And how fast do you think you can accelerate some of this capital recycling? Ross Cooper: Yes. Thanks, Michael. It's been a really strong market as evidenced by some of the execution that we've taken so far and what we're seeing in the pipeline. So we feel really good about the strategy, the guidance, our ability to execute. We do have a fairly substantial pipeline on the disposition side as well as on the acquisition structured side, a couple of hundred million of additional dispositions that are at various stages as well as a similar amount on the reinvestment side. So feeling really good about the execution and what we're going to be able to accomplish as the year progresses. Operator: Your next question comes from the line of Ronald Kamdem from Morgan Stanley. Caroline Long: This is Caroline on for Ron. As you mentioned, lease occupancy was up year-over-year, but slightly down quarter-over-quarter. I was just wondering if we could hear a little bit more on what you're seeing in terms of occupancy upside in '26 and what plans you have to capture that? David Jamieson: Sure. Yes. On Q1, it was primarily driven by the American Signature bankruptcy. So without that, we would have been flat to slightly positive. So when you look at the momentum that we're seeing at the start of 2026, obviously, 155 new leases. With retention rates for the first half of the year, we're seeing at over 95%, which is near our all-time highs as well. The cadence of tenants that are wanting to stay in place, exercise renewals or exercise options, renegotiate renewals and then the new lease activity due to the lack of really any new supply all driven by these demand factors is boding really well for the balance of the year. When we look at Q2 in terms of our pipeline right now, we're on cadence to what we saw last year, and we have great momentum on those 2 boxes that we've got back in the beginning of this year. And for example, with American Signature, our mark-to-market on those is over 25%. So not only are going to be backfilling with higher credit tenants, but the opportunity to drive rents further north. Conor Flynn: Yes. The only thing I would add is the real upside for Kimco and our investors is the growth in economic occupancy. We have a very wide spread in the signed but not open pipeline. But when you see that meaningful uptick in economic occupancy as we progress through the year, that's really what will be a differentiator for us versus the peers. Operator: Your next question comes from the line of Michael Griffin from Evercore ISI. Michael Griffin: I know, Conor, you just talked there about the economic to leased occupancy delta narrowing. If we're at 410 bps, call it, this quarter, do you expect that to narrow to 200 bps by the end of the year? I know you're still about 200 bps below your all-time record high economic occupancy. So maybe talk a bit about the cadence and expectation of that delta progressing throughout the year. David Jamieson: Yes. So I first want to take a step back and talk about what creates the SNO pipeline in this 410 basis points. Obviously, the top line is your leased occupancy and the bottom line is your economic occupancy. So starting first with leased occupancy, we're at 96.3%. Our all-time high is 96.4%, but we see that there's room to run north of that. For example, we're about 110 basis points below our all-time high in anchor occupancy. So if we continue to reach that level and continue to push small shops, you should see lease occupancy grow. As a result of that, that's future cash flow benefits that we would be getting that we have not yet realized, but that would continue to further expand the SNO pipeline. So that's a good thing. And so we want to continue to see that cadence. On the bottom side, there's the economic occupancy. As Conor just mentioned, we want to continue to see that grow. And right now, we're still below our all-time high of about 94.5%. So we have room to run there, and we continue to see that to accelerate through the back half of the year. So not only are tenants now open and operating, but they are also paying higher rents than the previous rents. So that also demonstrates future cash flow growth. So it's not to say that you necessarily want to see it compress as a good thing as much as you want to see the cash flow growth come online and you want to continue to rebuild that cadence and that pipeline to demonstrate even further cash flow growth over the coming years. So we see both trending upward as our goal and objective for 2026. Conor Flynn: Yes. I think the nicest part about where we sit today is retention rates are at all-time highs and actually ticked up in the first quarter. So again, that churn that has been relatively constant in retail has actually slowed down meaningfully. And the demand side is still there, and we're seeing it being -- continuing on the robust path that's on. So that's why I mentioned that the upside that Kimco has versus our peers is that economic occupancy lift as we move through the year and forward past that. Operator: Your next question comes from the line of Samir Khanal from Bank of America. Samir Khanal: I guess my question is around the noncash GAAP revenue. It sounds like you did around $21 million in the first quarter and your guide is like $45 million to $55 million. Talk about kind of how to think about the cadence for future quarters and what kind of drove that for the first quarter? Glenn Cohen: Sure. So in the first quarter, we actually had some larger below-market rents that came back. We had a couple of leases where we early recaptured those boxes, and that generated an extra $7 million in the first quarter. So again, it is weighted more towards the first quarter. When we look to the back half of the year, second quarter, third, fourth quarter, again, we're expecting right now normal cadence of it. So again, you'll probably look at somewhere in the $8 million to $10 million a quarter of transactions that relate around this non-GAAP revenue. So it really is more of this one-timer event in the first quarter lifted by these 2 large below market rents we got back. Operator: Your next question comes from the line of Juan Sanabria from BMO Capital Markets. Juan Sanabria: I'm just wondering or hoping you could talk to a little bit about how you think about the importance of size and liquidity and being more relevant, I guess, in investors and their mind share, particularly the non-dedicated REIT guys, a generalists in the environment today and kind of going forward and the need for scale. Conor Flynn: It's a great question. I think when you look at Kimco today, we are a compelling investment to the generalists. I mean I think when you look at our relative discount on any different level, you look at our multiple relative to the peer set in our sector, which is at about a 15% discount. You look at our net asset value discount, which is really the sum of all the parts of our assets, we're trading at a discount there as well. And then you look at the private capital formation and look at the example just at Blackstone alone, their second highest conviction is in open-air grocery-anchored shopping centers behind data centers. And you look at the transactions of privatizations of public REITs, you look at ROIC, you look at Alexander & Baldwin, you look at Whitestone and you look at the compelling factors of the cash flow growth that we're seeing, and you look at the relative multiple against other sectors as well versus Kimco with an A-/A3 balance sheet, top of the charts earnings growth, one of the lowest G&A loads, I think we actually have a very compelling offering to the generalist community. And REITs today obviously are dealing with higher interest rates and higher fuel prices, but we feel like we have the supply and demand dynamic that really shines relative to other sectors and relative to other peers in our sector. So we actually feel like the size and the relative strength of the balance sheet, the growth profile and the team gives us the opportunity to capture mind share when we go out to generalists, and we do that consistently outside of just the normal REIT sector and REIT conferences. We feel like we have a compelling offering as Kimco really shines on all those metrics and the offering opportunity we present today. Operator: Your next question comes from the line of Alexander Goldfarb from Piper Sandler. Alexander Goldfarb: Just a question on -- from the tenant perspective. Given this environment where space is quickly sort of vanishing, if you will, and basically nothing is being built, are you seeing a difference in how the tenants approach leasing? Meaning are you seeing either the CEOs more involved or the tenants rethinking how they go out to landlords to lease space or how they think about their leasing? Or they pretty much have their set game and they're doing not what they've always done, but I'm just trying to understand from the tenant's perspective, it's got to be different, I would think, just given you're close to 98% anchor lease, 92% small shop, like I got to think that their game is different than years ago when there was a lot more availability. David Jamieson: Yes, Alex, great question. I'll sort of break it down to a handful of things. One, you're absolutely right and the tenant is changing their approach. They're becoming much more flexible in terms of how they view their prototype. They're becoming much more aggressive in wanting to get out in front of new opportunities and/or potential future opportunities and a willingness to sign leases much sooner. As a result of that, as you've seen with us doing the package deals, most notably, obviously, in Q1, we did a bunch of Dollar Tree deals. It's not so much that we did Dollar Tree deals, but it's more important about the pace and the cadence in which we got those done. There was a few examples in that package in which they got their committee to approve it in, I'd say, early to mid-March, and then we had the deal signed by the end of March. So there's a huge motivation on their part to move much quicker and much faster and work with us as a landlord partner to find a way and a means to do that. Second to that is on the economic structure. Obviously, when you have a competitive set, you can start to negotiate and work through terms and the idea of value engineering boxes, lowering CapEx cost to deliver the space sooner is really, really important, not only for them, but also for us. So we found other ways in which to work with our retail partners to get the leases signed. But on the back end, leveraging our relationships and our skills to obviously value engineer to lower CapEx cost and then to get the tenants open sooner is of huge value to the retailers. So for example, with our Sprouts package, our construction team has been working tirelessly with their team to try to pull forward those open dates through the course of this year, which is a real value to them to help them hit their open-to-buy. So it's really becoming this healthy dynamic between the both parties, and we're working very constructively together, which was also part of the impetus of when we went through this reorg to make sure that we're functionally aligned on the leasing side to unlock the full potential of our scale. Operator: Your next question comes from the line of Cooper Clark from Wells Fargo. Cooper Clark: On the 3,700 multifamily units entitled for development that you cited as a near-term opportunity over the next 3 years, could you walk through where yields are today if you were to start those projects? And then also where you think some of the multifamily dispositions in the pipeline you mentioned earlier may trade on a cap rate basis? David Jamieson: Yes, sure. So on the near-term projects, you're usually seeing gross yields in the 5s, mid-5s or so, low 5s, depending on where you are in the market. Maybe in some secondary markets, you go slightly higher than that. As a reminder, for us, we do a capital-light strategy with the pref program. So our yield on invested capital for Kimco is much higher than that. Recently, we completed Coulter on a gross basis, it was in the 5s. Our invested capital was in the 8s. So we're seeing meaningful value in the approach and want to be extremely selective on when we activate these projects. So that's a pipeline that we're monitoring. over the next 3 years, as you articulated, and we'll look to activate it. As it relates to the sales, I'll pass it over to Ross. Ross Cooper: Yes. I mean on the disposition side, we continue to see really strong pricing on multifamily, in some cases, high 4s, low 5s. If you look at the multifamily that we've activated that we own in our portfolio, you have to keep in mind that those projects were very targeted for the best locations, some of the best mixed-use projects within our portfolio and having the amenity of the retail that we provide in those assets really helps fuel the demand from investors for that product. So as we are very measured and disciplined in what we look at from within our portfolio, we can be extremely selective in which of our projects we look to crystallize that value. And then again, going back to our strategy, taking that really low cap rate capital that we can then reinvest in higher-yielding multi-tenant shopping centers that is very much a part of our go-forward strategy. Operator: Your next question comes from the line of Greg McGinniss from Scotiabank. Greg McGinniss: According to some Q1 broker reports, it looks like market rent growth might be slowing despite the limited new supply, low vacancy. And then we saw that your vacant anchor leasing is assuming 30% mark-to-market this year, which implies, I think, like $17 per square foot rents, which is kind of below where you signed anchors over the last few years. So a couple of questions. One, are you experiencing any of this kind of slowdown in market rent growth? And two, of those 34 anchors, I guess, how many are re-leased? And is that lower rent per square foot assumption location specific? Or is there some sort of pullback that you're seeing? David Jamieson: No, there's no pullback. So I mean, just in this quarter alone, our new leases on anchor leases was over $20 a foot, which is in the supplemental as well. So you're seeing meaningful mark-to-market adjustments. Obviously, at $13 on existing base rents, there's real upside there, as you alluded to and what I just reinforced. As it relates to the 34 over -- almost 100% of them are resolved, 96 to be more specific at this point with the balance sort of trailing towards the end of the year, which is sort of natural cadence for negotiating. So no meaningful slowdown there. Really for us, it's always looking at that embedded value on the mark-to-market and how we can push those rents further north. And obviously, on the demand side, it's continuing to prove out in a positive way. Again, on our new lease side, we just posted $29 a foot on new lease rents, which is the highest we've ever had in Kimco. Conor Flynn: I think one thing to watch, too, is the retention rates being so high that existing tenants are unlikely to give up a space today because they know the economics across the street or down the road are going to be much more challenging for them to meet than what they currently have. And if you have a proven store, you have less risk in terms of projecting sales going forward. So what we've seen is retailers really lean into their assets that they currently have, reinvest in those stores and make the compelling argument that what they have is really the best economic deal they're going to find in that market. Operator: Your next question comes from the line of Rich Hightower from Barclays. Richard Hightower: Just to go back to the downward revision in expected credit loss for the year. Can you just break that out between sort of known situations? Obviously, you had some known situations in the first quarter, but known versus theoretical sort of based on the economic environment and what the potential flex in that number could be as we go throughout the year? Kathleen Thayer: Thanks for the question, Rich. So we're really encouraged by the 52 basis points that we experienced for the first quarter. We're not really seeing any slowdown when it comes to our small shop tenants. There's no creep that we're really seeing. On the bankruptcy front, we know that Painted Tree just filed. It's a small impact for us. There's only 5 leases there, so we don't anticipate anything significant in the credit loss line for that. But obviously, it's early innings of the first quarter, and there's a lot of uncertainty out there in the macro environment. So we feel comfortable with that revised 65 to 90 basis points on an annual basis at this point. But nothing really specific that we're seeing again on any tenants for the rest of the year. Operator: Your next question comes from the line of Craig Mailman from Citi. Craig Mailman: I just want to go back to the conversation about kind of being near peak lease rate and the SNO pipeline. I'm just kind of curious, the trajectory looks very good into '27. But is there anything that you guys are doing internally on sort of operating the portfolio as you get to this peak level? Does it give you more flexibility to I guess, negotiate tougher or remerchandise at a more aggressive pace to where it could kind of slow the trajectory of breaking through that peak because you guys are intentionally trying to maximize revenues rather than optimize kind of the lease rate. Just kind of curious if there's anything on that side of the equation that we should think about from just a growth perspective here in '27 or maybe even '28? David Jamieson: Yes. I mean our #1 objective is maximizing cash flow growth. So I'd say you start with that and then the occupancy side is a secondary benefit to that. So when we're looking at the opportunities to backfill vacant space, we're exploring sort of what's the highest and best value for the box and for the center. So if we're able to backfill a space at a mark-to-market adjustment and see a meaningful spread from prior rents at lower cost, that's a great opportunity, assuming everything else is relatively stable within the center or it's the best mousetrap within the market. Secondarily, if we see an opportunity where we can add grocery, as you know, that's a major priority of ours. We're over 86% grocery anchored within the portfolio at this point, and we want to continue to push that as far as we can. We may create vacancy to support that initiative because what we're seeing on our active grocery projects, currently, we have 15 active projects under construction right now. We're seeing meaningful mark-to-market adjustments and premiums on the small shop space of upwards of 25%. So that ties back to driving cash flow growth for the future. Obviously, in that case, you may take some occupancy offline for that benefit, but the future long-term benefits of stable, higher rents with higher growth is much more valuable. So we always look at the available options on the table and are driven solely by the fact of what will be best to drive future cash flow growth for the company. Conor Flynn: Yes. The only thing I would add and going back is, again, the economic occupancy is relatively low so that as that continues to improve, we'll get triple net as well as the base rent and that the margins will improve. And then if you bring down the CapEx load, which we're starting to see as well, on the go-forward asset management of the portfolio, your free cash flow will continue to improve, which allows you to invest accretively across all of our different levers for growth. And so that early flywheel, I would say we're in the very early innings of that. So we're really excited because we see this as a trajectory to really enhance and improve the growth profile all over the last 2 years, we've been at the very top of the sector in terms of earnings growth. Operator: Your next question comes from the line of Floris Van Dijkum from Ladenburg . Floris Gerbrand Van Dijkum: So the SNO pipeline, obviously, very, very attractive, I think, 36% higher rents than your in-place rents. I guess the question I had for you are also going down to the bottom line, as you think about your portfolio occupancy getting higher, your retention rates being higher, how do you forecast your leasing costs and your AFFO going forward? Obviously, you've had a number of anchor bankruptcies in the past, and you're still working on getting those anchor spaces filled and presumably recognizing the leasing costs. How should investors think about your AFFO trajectory or your FAD trajectory going forward? David Jamieson: Yes, Floris, great question. So as we continue to construct and open the signed leases and get the tenants operating in our shopping centers, that CapEx load should start to taper over time as your economic occupancy starts to grow to Conor's point earlier. So that should be the natural trend that you ultimately see on the back end. And then just overall, with the continued negotiations that we mentioned earlier in the call about value engineering and finding improvements in our use of capital and lowering those costs to get deals done is a continuation of just good prudent leasing discipline that we continue to exercise. Conor Flynn: Yes. The only thing I would add, Floris, is that AFFO growth, that inflection point is what's driving the best and brightest in the private capital markets to lean into grocery-anchored shopping centers. We're at the very early innings of that inflection point. And when you look at other sectors, nobody has the supply and demand dynamics that we have. The new supply under construction actually ticked down to 0.2%. That's the lowest of any commercial real estate sector. And then you look at the occupancy levels and the demand side, it really is going to be, I think, a significant inflection point where you have a lot of pricing power, not a lot of supply and the existing tenants are trying to grow and are going to be trying to jump in front of one another to push rents. So it's an exciting point in sort of Kimco's history to be where we can point to that spread and signed but not open, also while driving really strong earnings growth at the same time. Operator: Your next question comes from the line of Haendel St. Juste from Mizuho. Ravi Vaidya: This is Ravi Vaidya on the line for Haendel. I wanted to ask about the guidance here. Regarding the bad debt, how much of that was driving the uptick in the guide? Was bad debt changed by the number of outperformance that was done in the first quarter? And what was embedded regarding buybacks initially and post-guidance range? Glenn Cohen: Sure. So credit loss was certainly better in the first quarter. We came in, as Kathleen mentioned, at 52 basis points. Overall, if you think about every 10 basis points is about $1 million in change. So a little bit of help certainly coming from the credit loss side of things. Again, the impact and the beat for the quarter really is operationally. Minimum rents were higher by about $8 million, and that's the primary driver overall for why FFO was $0.01 higher during the quarter. With regards to share buybacks and things like that, again, we are always watching daily looking at what our cost of capital is. In the very beginning of the quarter, we bought back a little bit of stock when the stock was under $20. So we took advantage of that in a very small amount. Obviously, during the first quarter, we've seen good improvement. But again, we're still trading at a pretty significant discount when you look at where the overall trading is at. I mean we have probably an implied cap rate in the 6.8% level. Our FFO yield where we're sitting today is around 7.7%. So we're always keeping a constant eye on the opportunity. But for right now, there's really not a lot baked into the guidance in terms of share buybacks. Operator: Your next question comes from the line of Wes Golladay from Baird. Wesley Golladay: Can you talk about your overall apartment NOI exposure from ground leases? And I assume it's all through ground leases, but maybe you can clarify that as well. David Jamieson: Yes, it's relatively small in terms of our impact right now. Conor Flynn: So the evolution of the apartment activation projects, really, we started with ground leases really as a no cost to Kimco, where we entitled the project ourselves and then looked at the parking lots where we could activate where we wouldn't have to take any retail offline. And that's really where we started the journey. And that clearly, we have a ROFR on that as well. So the thought process being as the apartment is developed and if that developer ever wants to sell it, they're selling a leasehold while we can potentially match and acquire it from a fee position. So there should be a nice spread that we can compress there. After that, we decided to contribute the land into joint ventures and add some preferred into the structure, as Dave mentioned, is what we did at Suburban Square with Coulter, which allows us a higher return on invested capital than what the actual gross returns look like. And that usually lines up with about a 50-50 joint venture where we can ride the upside of the NOI growth. And so we continue to manage the pipeline of activation to see where it makes sense. Obviously, there was a lot of supply delivered in the apartment sector on this last year. A lot of it is being absorbed and certain markets are showing sort of a turn and a relatively strength here in the spring. So as we look forward, we'll continue to look for CapEx-light activation opportunities where, again, we can contribute our land, which really has a 0 basis because it's parking lots in our shopping centers. I often talk about this that like we have, I think, one of the most underutilized forms of commercial real estate. We have a single-story building that comprises about 20% of the FAR of the asset. And the rest of it, that 80% is just parking lot that's not generating any revenues. And with driverless cars here, there's a lot of opportunities for us to continue to see parking ratios get lowered, which allows us to activate more of the parking lot for highest and best use. And that's why we've been leaning into this entitlement program that, again, allows us to unlock that future value for our shareholders, and we have a number of different ways to do it, but does not put a lot of capital at risk. Operator: Your next question comes from the line of Paulina Rojas from Green Street. Paulina Rojas Schmidt: In your investor presentation, you highlight that Kimco trades at a discounted multiple relative to peers. And I have 2 related questions. So first one is, what do you attribute that disconnect to? And second, what do you think the market needs to see to change that assessment? Conor Flynn: I was going to ask you that question. That's a good one. I think there is a combination of things that obviously being large and liquid sometimes is in your favor. But when a sector is out of favor, it sometimes works against you. So I think that may be part of it. Consistency of earnings growth, I think, is a calling card for Kimco. For a while, we wanted the balance sheet to improve dramatically, so that will be a pillar of strength for Kimco. We now feel like we've checked that box with an A-/A3 credit rating. When you look at the components of our growth, we continue to see us transforming the portfolio into more of a grocery-anchored shopping center portfolio. Historically, Kimco has been a little bit of a mix of portfolio assets. We're obviously now 86% grocery-anchored with a number of assets under construction to add grocery. So again, I think as the sector becomes more in vogue, hopefully, now that tide is changing, where you see the opportunity set changing for Kimco because we've been able to drive significant earnings growth without any real cost of capital advantage. So I don't know any other sector or any other peer that had north of 5% and then north of 6% earnings growth with no cost of capital advantage. So in essence, no external growth. Everything we're driving is from organic internal growth. And so now that we're at a point where we feel like the organic growth is accelerating, and we're looking at potentially external growth on top of that, we feel really good about the trajectory changing and hopefully our multiple re-rating. Operator: Your next question comes from the line of Caitlin Burrows from Goldman Sachs. Caitlin Burrows: Maybe just on the transaction side, I think you guys said you're confident you can meet your goals for the year. But wondering if you can discuss that a bit more, especially on the acquisition side since it seems like it's a pretty competitive market. So how do you expect to source those deals? Are there certain characteristics of the type of properties you're underwriting to make Kimco more likely to come out the winner? And is there anything in particular that you have lined up at this point? David Jamieson: Thanks, Caitlin. It's a great question. Yes, to your point, it does continue to be very competitive, but I do want to reiterate our conviction in the guidance and the strategy and our confidence in our ability to execute. I think if you go back and look at the last 5 years, we've acquired close to $10 billion in assets. So I have the utmost faith and confidence in our team. We're really good at acquiring assets, integrating it into our portfolio, creating value. But we're going to continue to stay disciplined. We have to be very strategic about what we buy and making sure that it's accretive as opposed to putting up a mark for a particular earnings call. So we're excited about the pipeline, the activity, the opportunities. I do think that we have some differentiators as it relates to our inside track on certain deal flow, whether it be from the joint venture platform where we have certain assets that are going to be recycled where we have both the first and the last look. with our JV partners. We've been very successful over the last several years, acquiring our partners' interest in several select joint venture opportunities. And then again, when you look at the structured investment pipeline that we have, we've been very active putting out capital. So this first quarter was a good start to the year. We had about $38 million that was net funded, but that's over $70 million of net committed because there are some future fundings with some of the deals that we've done. So with those deals and the ROFO and the ROFRs, we continue to see additional deal flow oftentimes before it hits the market or we get the last look on it. So we'll be selective, but we're seeing a lot of opportunity. And as I mentioned at the beginning of the call, we have a couple of hundred million in the pipeline right now that we're excited about that checks all the boxes for us in terms of quality growth demographics. So we're very confident that we're going to get our fair share and absolutely hit our guidance targets. Operator: Your final question comes from the line of Mike Mueller from JPMorgan. Michael Mueller: I apologize if I missed this, and I know you gave some color on the SNO ramp. But about how many years out do you think it is until you're back to a normalized lease-economic spread? David Jamieson: I mean when we look at -- when we go through '26 and '27 right now, again, we're at 92.2% on the economic. Our high watermark is around 94.5%. We have room to run there. When you look at -- as I mentioned in my earlier comments, the leased occupancy, we're at 96.3%. Our all-time high is 96.4%. But what I look at is like our anchor occupancy is actually down about 110 basis points, and we're continuing to see meaningful growth on the small shop occupancy. So I still think there's room to run there. I do anticipate as economic occupancy comes online and that cash flow growth starts to get realized in our earnings, you'll start to see economic compress towards -- as we start to move into 2027. But preserving it, if your economic is growing, your lease is growing, it's not a bad thing to continue to see a healthy spread there because that's just continuing to fuel the future pipeline for cash flow growth. Operator: We have reached the end of the Q&A session. At this time, I will now turn the call back to David Bujnicki for closing remarks. David Bujnicki: Great. Thanks to everybody for joining the call today. We look forward to meeting up with a number of you at some of the upcoming investor events that we have. Otherwise, if you have any follow-up questions, please reach out. Have a wonderful day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the Crocs, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Abigail Ritter, Investor Relations and Strategic Finance for Crocs, Inc. Please go ahead. Abigail Ritter: Good morning, and thank you for joining us to discuss Crocs Inc. First Quarter 2026 results. With me today are Andrew Rees, Chief Executive Officer; and Patraic Reagan, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask you limit to one per caller. Before we begin, I would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the safe harbor provisions of the federal securities laws. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially. Please refer to our most recent annual report on Form 10-K, quarterly report on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties. Certain financial metrics that we refer to as adjusted or non-GAAP are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I'll turn the call over to Andrew Rees, Crocs, Inc. Chief Executive Officer. Andrew Rees: Thank you, Abby, and good morning, everyone. Thank you for joining us today. We delivered a better-than-expected first quarter, fueled by broad consumer relevance for both of our brands. Patraic will discuss our quarterly performance in more detail. But first, I will share a few financial highlights and a review of our brand strategies. For the first quarter of 2026, we delivered better-than-expected enterprise revenue of $921 million, with the Crocs brand down 2% and HEYDUDE brand down 13% as we work to return both of our brands to growth. Healthy direct-to-consumer growth, including Crocs brand up 11% despite pulling back on promotional activity and HEYDUDE up 8% despite lower performance marketing spend. International revenue for the Crocs brand was up 7% on a reported basis, consistent with our expectations despite an unanticipated impact of the war in the Middle East. Best-in-class inventory management with total footwear units down high single digits and overall inventory turning up more than 4x. Our powerful value creation model continues to support meaningful return of cash to shareholders in the form of repurchases. With second quarter repurchases now underway, quarter-to-date, we have bought back 800,000 shares. Now turning to a discussion by brand and starting with Crocs. We had a strong start to the year as consumers responded positively to product newness across all categories. We continue to make excellent progress against our 5 strategic pillars. First, we are driving brand relevance globally as the clog market share leader. During the quarter, our focused clog franchises, Crocband, Crafted and Echo performed well, enabling diversification of our overall clog portfolio. The reintroduction of Crocband has been well received with strength seen across channels, colors and iterations. The Crafted franchise is building globally and consumer response has been strong with canvas and floral embroidery uppers. We continue to scale our existing Echo franchise with new Echo RO colorways and expanded distribution. Within our Classics franchise, we are prioritizing maintaining tight inventory control and driving further segmentation across our key partners in North America. Second, we are scaling our product pillars outside of clogs through new category expansion. Our sandal business started the year off strong, and we expect this pillar to approach $0.5 billion in revenue this year, up double digits from 2025. Our 3 core style franchises, Getaway, Brooklyn and Miami are capturing incremental shelf space and winning with consumers. Earlier this spring, we introduced our personalizable 2-strap Saturday Sandal across channel and saw exceptional response from both consumers and retailers. Moving beyond sandals, we launched the Classic Ballet flat, which saw a notable sellout globally. In response, we're chasing supply, and we further strengthened our assortment within this trending style. Momentum was further amplified by our first quarter LoveShackFancy collaboration, which sold out completely. Our broader personalization pillar saw standout performance within bags and accessories during the quarter, led by the Disney collaboration featuring Mickey Mouse on a number of products. We also saw continued strength in elevated Jibbitz during the quarter. Third, we are fueling consumer engagement through disruptive social and digital marketing. In February, we kicked off a multiyear global partnership with the LEGO brand by launching the highly disruptive LEGO Brick clog, which quickly became one of our best-performing partnerships on social media and drove significant consumer engagement and digital traffic. Also in February, we released Charmed To Meet You, our first micro drama mini-series on RealShorts, a platform where Gen Z consumers are increasingly spending time consuming bite-sized content. The launch drove over 10 million views, reinforcing our ability to engage with consumers through bold, innovative and disruptive channels. Fourth, we continue to create compelling consumer experiences across all channels. Beginning with social commerce, we continue to scale and deepen our consumer touch points across both digital and social. In fact, Crocs was recently awarded Top Seller of the Year on TikTok Shop for 2025, underscoring our ability to continue to reach consumers on their preferred social channels. In March, we activated at the NBA All-Star week and introduced our updated Echo Clog, the Echo 2.0, a key second half product launch this year. We also released the Ripple, a bold silhouette designed to engage the sneaker community through a number of events from ComplexCon in Hong Kong to our SoHo store in New York City. Globally, we continue to expand our presence on TikTok Shop as this is a critical social selling platform over the medium to long term. During the quarter, we scaled meaningfully in the U.K. and Malaysia. And looking forward, we'll be launching in Japan, landing Crocs as the first major footwear brand on the platform in the country. Fifth and finally, we're continuing to gain market share across the world in our international markets. In the first quarter, we saw broad-based strength across our Tier 1 markets, led by direct-to-consumer channels. We saw outsized growth in our high-priority markets, China, India, Japan and Western Europe. In China, we hosted our first ever Super Brand Day on Douyin, which not only outperformed our expectations, but also drove strong consumer touch points through celebrity live streaming. In India, performance was led by growth in our digital traffic stimulated by Let Them Talk campaign, which introduced the Echo RO for a local cricketer and celebrity KL Rahul. In Japan, performance was driven by strengthening brand presence in Tokyo Retail with high consumer affinity for personalization in our DTC channels. Lastly, Western Europe saw notable growth across the U.K., France and Germany, led by digital marketplace performance. Sandal started the year strong in the region, and we see meaningful opportunity to scale this category going forward. During the quarter, we opened approximately 40 mono-brand stores in kiosks, including 6 owned and operated stores internationally. To strengthen our international opportunity further, on April 1, we converted our Malaysia distributor business to a directly owned and operated, which resulted in the absorption of 21 highly productive retail stores. We see this as an opportunity to take further share in this vibrant market in 2026 and beyond. Now turning to HEYDUDE. The first quarter came in ahead of expectations tied largely to outperformance in DTC despite significant reduction in performance marketing spend as we continue to deliver against our 3-pillar strategic plan. First, we are building a community laser-focused on our core consumer. During the quarter, we launched several relevant collaborations, including our partnership with the Houston Rodeo. This was supported by retail presence at the rodeo for the third consecutive year as we continue to drive authentic connections with our core HEYDUDE consumer. In addition, we released collaborations with Chevy, Jelly Roll and Naruto, while accelerating the growth of our HEYDUDE community through scaling social commerce. In fact, during the quarter, HEYDUDE received the Top Growth Seller of the Year award on TikTok Shop, and nod to the progress and commitment we've made to scale this strategic channel. Second, we are building the core and thoughtfully adding more. We're building our leadership within the slip-on category, led by our icons, the Wally & Wendy. Stretch Sox continues to drive our core business, and we are seeing momentum building in our newest Stretch Jersey franchise. This style, which we fondly refer to as a T-shirt for your feet, launched in all channels during the quarter and outperformed expectations. As we look into spring, we're seeing our sandal business start to gain material traction with key highlights, including the Maui Breeze franchise and sandal extensions of some of our already successful lines, the Austin Slide and the HEY2O Flip. Beyond sandals, we continue to see strong response to our work offering led by the Wally Comp Toe, and we are excited to expand further into this category as we move throughout the year. Third, we are focused on stabilizing the North America marketplace. Our first quarter outperformance signals a meaningful step in our journey to return the brand to growth in the back half of this year. During the quarter, direct-to-consumer revenues increased 8%, led by strength in digital marketplaces. Wholesale declined as anticipated, while we remain laser-focused on managing our in-channel inventory levels. Wholesale sellouts, while still below our aspirations, improved sequentially versus the fourth quarter. Importantly, we're receiving positive feedback from our key partners around new products like our HEY2O work and sandals offering as well as our core products like Stretch Jersey franchise and new introductions of our Stretch Sox platform. Turning back to the enterprise. I wanted to address the conflict in the Middle East as it relates to our business. As of today, it's too early to fully quantify the impact. However, we see this affecting Crocs in 3 ways: One, reduction of revenues from our Middle East distributor business, which has been contemplated within our annual guidance; two, increased raw material and transportation costs associated with elevated oil prices; and three, a broader impact to the global macro economy, which is uncertain at this time. Patraic will speak to our guidance later in the call, which we feel prudently captures the current environment to the best of our ability. Before concluding, I wanted to highlight the publication of our 2025 Crocs Inc. Comfort Report being released today. This annual report highlights our commitment to and progress against our purpose to create a more comfortable world for all. To conclude, we are focused on executing our near-term initiatives to drive diversified growth across both brands, DTC and wholesale as well as domestic and international markets. We believe we have compelling strategies to grow both brands enabled by a clear consumer focus, innovative product and marketing and our global go-to-market capabilities. I will now turn the call over to Patraic. Patraic Reagan: Thank you, Andrew, and good morning, everyone. During the quarter, we made continued progress against both brands strategic initiatives, which I'm confident will continue to lay the groundwork for sustainable long-term growth. We're off to a good start in 2026, finishing Q1 slightly ahead of our expectations on both the top and bottom line. And while we're encouraged by the positive start to the year, we recognize work remains to return the business to growth. Now let's move to our results. For the first quarter, we delivered enterprise revenue of $921 million, down 2% to prior year on a reported basis or down 4% on a constant currency basis. Our results were led by the direct-to-consumer channel for both brands as consumers responded favorably to new product offerings across categories. This was offset by planned wholesale declines as we continue to optimize and manage this channel for long-term profitable growth. For the quarter, Crocs brand revenue of $767 million was down 2%. Results were led by our International segment, up 7% on a reported basis, including strength in China, India, Japan and Western Europe. North America was down 6%, including DTC up 5% despite a meaningful reduction in promotional activity, offset in part by wholesale declines. The HEYDUDE brand delivered revenue of $154 million, down 13% to prior year. D2C was up 8%, driven by outsized digital marketplace performance and new store opening contributions. Notably, this growth was delivered against a continued lower level of performance marketing spend, thus driving higher profitability. The wholesale channel was down 26% as we continue to carefully manage our inventory to sell-through levels, consistent with our return to growth plan. I'll now move to adjusted gross margin. Enterprise adjusted gross margin of 56.9% was down 90 basis points to prior year, driven by 100 basis points of incremental tariff impact as well as product mix, offset in part by brand mix. As Andrew mentioned, we saw accelerated success in our new product offerings in both brands. This success is an important driver of top line performance and is key to our diversification strategy. As a reminder, select new products come with slightly lower product margins. Crocs brand adjusted gross margin was 59.5%, down 120 basis points, and HEYDUDE brand adjusted gross margin was 44.5%, down 210 basis points. Moving to expenses. Adjusted SG&A dollars were flat to prior year as we recognized the partial benefit from our 2025 and 2026 cost savings initiatives, offset in part by choiceful direct-to-consumer channel investments aimed at driving revenue. Adjusted operating margin of 22.3% was down 150 basis points to prior year. This excludes $5 million of specific costs related to the implementation of our cost savings initiatives. Adjusted diluted earnings per share of $2.99 was ahead of our expectations and flat to prior year, and our non-GAAP effective tax rate was 18%. Now turning to a discussion of our strong balance sheet and exceptional cash flow. We ended the quarter with $131 million of cash and cash equivalents and over $800 million of borrowing capacity on our revolver. Our inventory balance as of March 31 was $398 million, up 2% to prior year, including the impact of higher tariffs. Inventory footwear units were down high single digits to prior year, reflecting our actions to manage inventory flow into the marketplace. Enterprise inventory turns were above our goal of 4x on an annualized basis. While we ended the quarter with $747 million remaining on our existing share repurchase authorization, our powerful value creation engine has enabled our second quarter repurchases to be underway. Quarter-to-date, we have repurchased 800,000 shares for $74 million, and we continue to deliver against our commitment to return meaningful cash to shareholders. Net leverage ended the quarter at the low end of our target range of 1 to 1.5x. Now moving on to our full year 2026 outlook. Based on our better-than-expected first quarter results, we now expect enterprise revenue growth for the full year to be up 1% to down 1% on a reported basis, assuming currency rates as of April 27. Our updated guidance also reflects the country-specific impact from the war in the Middle East as well as related pressure from elevated distribution and logistics costs. Moving on to revenue guidance by brand. For the Crocs brand, we continue to expect revenue to be flat to up 2%, led by international growth and offset in part by declines in North America. Our guidance continues to anticipate direct-to-consumer outperforming wholesale globally as evidenced by our first quarter results. For HEYDUDE, we now expect revenue to be down approximately 5% to 7%, an improvement from our previous guidance of down 7% to 9%. This revenue range embeds our increasing confidence in both direct-to-consumer and wholesale channels returning to growth in the second half of the year. We continue to expect adjusted gross margin for the year to be slightly up versus last year despite the impact of tariffs, which are partially offset as a result of cost-saving initiatives, primarily in our supply chain. Adjusted SG&A dollars are implied roughly flat to prior year, in line with our prior guidance as we recognize the benefits of our previously announced cost savings programs while also investing in growth drivers for the business. Taken together, we continue to expect adjusted operating margin to expand modestly from the 22.3% level we reported in fiscal year 2025. This excludes approximately $25 million of nonrecurring costs. Moving to tax. We expect the underlying non-GAAP effective tax rate, which approximates cash taxes paid to be 18% and the GAAP effective tax rate to be 23%. We are raising our expectations for adjusted diluted earnings per share to be in the range of $13.20 to $13.75. Consistent with our previous guidance policy, this range does not assume any impact from future share repurchases. For the year, we continue to expect capital expenditures to be in the range of $70 million to $80 million. Regarding capital allocation, as I highlighted earlier, we are committed to, first, investing behind both of our brands to fuel long-term growth; and second, returning our significant free cash flow to shareholders through share repurchases. Now turning to our second quarter outlook. For the second quarter, we expect revenues to be down slightly at currency rates as of April 27. Within this, Crocs brand revenues are expected to be up 1% to 3% and HEYDUDE revenues are expected to be down 12% to 14%. Adjusted operating margin is expected to be approximately 24.7%, which embeds adjusted gross margin down approximately 150 basis points to prior year, driven by the impact of tariffs, consistent with the commentary on our last call. Adjusted diluted earnings per share is planned to be in the range of $4.15 to $4.35. Finally, before closing, I want to provide an update on the February Supreme Court rulings on tariff refunds. While we believe we are well positioned to collect refunds on the incremental tariffs we paid in 2025 and into this year, we have not currently embedded any upside from this within our guidance. To close, while we are pleased that our first quarter results exceeded our expectations, we continue to remain focused on managing the business for long-term profitable growth while generating and deploying our exceptional free cash flow enabled by our best-in-class value creation model. At this time, Andrew and I are happy to take your questions. Operator? Operator: [Operator Instructions] Unknown Analyst: Can you hear me? Operator: Yes. Unknown Analyst: Okay. Great. Andrew, could you talk more about the recent trends you're seeing in sell-through for the Crocs brand in North America in both channels? And how are you thinking about DTC and particularly looking forward here? And do you see any risk that momentum slows as you get past the core sandal season? And then, Patraic, just more broadly, the financial outlook as you get closer to the embedded second half ramp in revenue and profitability. Just can you highlight the factors that are giving you confidence in the second half projections here? Andrew Rees: Thank you, Jonathan. So let me kick that off. So I think -- look, I think the biggest and most important thing, I'll address it for Crocs, but it frankly is also true for HEYDUDE, right, is newness -- the consumer is responding to newness. As we've introduced newness, and I'll keep my comments focused on Crocs for a second, and I'm sure we'll get to HEYDUDE. As we've introduced newness in sandals, in clogs, and I think we've talked also in our prepared remarks around Ballet flat and other styles, we definitely see the consumer responding. We see them responding here in North America with accelerated demand and strong sell-through. And frankly, we're also seeing response for the Crocs brand and those same new products in many of our international markets. So I think that gives us some strong underlying confidence. And I would emphasize, as you kind of alluded to here in question, in your question, some of that newness is in sandals, but some of that is outside of sandals. It's in clogs and it's in other silhouettes. So I think that's really important. I also think from a relative -- from a DTC perspective, we're also continuing, as you would hope any company would continue to get better about how we execute our DTC business, whether it be digital, whether it be stores, whether it be selling on TikTok and social selling. That's been a nice driver of consumer engagement. And I think there's evidence of some of our marketing activations, some of our storytelling relative to Gen Z or younger, more influential consumer is working. So I think what I would say is we have a lot of confidence around our newness, around the trajectory of our business despite some headwinds that we do see in the global marketplace. And then I'll let Patraic talk a little bit more to the specific elements of the guide. Patraic Reagan: Yes, Jonathan, Great question. And let me kind of level this up and start just from a strategic standpoint. So we've now effectively communicated the 5 strategic pillars for Crocs and the 3 strategic pillars for HEYDUDE over the course of the last many quarters. And I think if you look into what is inherently in that, it is appealing to our consumers, driving product newness within those pillars. And a key component of that is diversification, which ultimately, from a product standpoint, translates into new products both within Crocs and within HEYDUDE. And so we're seeing that really come to life in terms of green shoots within both businesses beginning in Q4 of last year and accelerating into Q1. And so that's really kind of gives us the basis of confidence in terms of the second half. Now while we feel great about that, the second component is really going back to last year. And if you recall, during the second half of last year, the team took several strategic actions but very painful in the moment to pull back on promotions, pull back on paid search, pull back on inventory going into the marketplace for both Crocs, particularly in North America and HEYDUDE more broadly. And in the second half, we start to lap those actions. And as we lap those actions, those also provide a tailwind for us as we get into the back half of the year. So if you take those 2 together, number one is continuing on our product newness and diversification strategies. And then secondly, combine that with starting to anniversary the actions that we took last year, we feel really confident in terms of where we're headed from a second half perspective. Operator: And the next question comes from Rick Patel with Raymond James. Rakesh Patel: Can you unpack the impact of higher costs that you alluded to? First, how do we think about how much of a drag freight surcharges could be presenting on gross margins for the year? And second, does guidance contemplate an impact from higher resin costs given the increase in oil prices? Or do you see this as more of a 2027 event? Andrew Rees: Yes. I think maybe -- I think you're obviously alluding -- you're driving at the impact of high oil. Maybe I'll just kind of start off by setting this up is with what I see as the impacts of the sort of the Middle East conflict on our business, which are threefold, right? Number one, we do see some drag in revenue associated with selling directly to our Middle East distributors. They simply can't take further receipts at this point, right? And so we have embedded that in our guidance. So our -- if you like, if you think about our kind of Crocs, and that really only impacts Crocs, we're maintaining our guidance despite some negative impact from revenue that we anticipated in the Middle East that we have no longer put into our future forecast. Number two is increasing costs. At this point, the biggest impact of increasing cost is really transportation. So it's fuel surcharges relative to inbound freight and outbound freight in all of our key markets. And that cost is embedded in the guidance we have provided, right? The third impact that is -- we don't really see today, but if this drags on for a sustained period of time, it is inevitable, it will happen, right, is a slowdown in the macro global economies, right? Our global economies are not built to sustain $120 oil, and that will have an impact. We don't really see that impact today. As we look closely at our consumer behavior here in North America, in Europe and in Asia, we're not seeing a discernible trend relative to, I think, what is reported as a weak consumer confidence. We're not seeing a discernible trend. But obviously, that risk and concern remains. Patraic Reagan: And then, Rick, just to jump in and add a little bit more color and context. First and foremost, any -- as Andrew mentioned, any impact from Middle East is fully contemplated in the guidance that we provided today. And so I think within that, a couple of things. One, really, Crocs, we pride ourselves on being both agile and resilient. And I think what you see happening with us right now is we're leaning into that agility. We're leaning into that resiliency as we kind of read and react to what's happening in that part of the world. Everything Andrew said in terms of the 3 buckets, obviously, absolutely true in how we're thinking about it. The only thing I would add is that within our supply chain, we're really on an always-on offense in supply chain to continue to create and seek out efficiencies that we can either drop to the bottom line or potentially reinvest back in the business. And then the second component I would say is you heard us talk over the last couple of quarters about some of the cost efficiencies that we're putting in place and going after both within SG&A as well as within COGS. And at the time, we talk about choices that we make within that in terms of accelerating our business or dropping dollars to the bottom line. But it's actions like those that we take that give us the ability to be able to continue to raise our guidance that we did today despite the fact that we see unanticipated conflicts like the Middle East. So I think it goes in testament to who we are as a company and our ability to be both agile and resilient. Operator: And the next question comes from Adrienne Yih with Barclays. Adrienne Yih-Tennant: I guess the first is just a quick clarifying question on the tariffs. So what level of tariffs are you still embedding in the rest of your guidance? I know that the statutory is collecting 10% right now. So just the differential between collecting 10% on the, I guess, Section 132 and then what's embedded in the overall guidance. And then in terms of inventory into the channel, are you seeing any changes in either conversations or the willingness to buy on the forward order book? Andrew Rees: Adrienne, I'll take your second piece first, and then Patraic will give you chapter and verse on tariffs, which is continues to be an interesting and complicated situation. So inventory into the channel, I would say, very consistent with exactly what we said last quarter and the quarter before. We have put a tremendous amount of time, effort and money into cleaning up our inventory in channel for -- this is primarily in North America for both of our brands. We feel really good about where we are. In terms of their posture, we find most of our major wholesale customers being appropriately prudent, right? So their biggest controllable is inventory, and they're managing their inventory closely, and they're certainly not being very assertive with their plans. They are looking to brands to support them with at-once inventory. But we feel great about where we are relative to our inventory levels. And certainly, they are responding to newness and chasing and reordering newness that's selling well. Patraic Reagan: And Adrienne, moving on to the question about tariffs, as Andrew said, chapter and verse on this, quite a few chapters. And we -- frankly, we continue to see the tariff landscape evolving. And what we're trying to do is, again, as I mentioned on the response to the question earlier, we're trying to continue to adapt and lean into our mentality of being agile and resilient and responsive as we continue to manage it. That being said, where we are right now, speaking specifically to Q2 we're essentially managing through a blended rate. If you think about how tariffs have evolved over the past year, it's -- we've had a few chapters in terms of how they've been announced, how they've evolved, how they've landed, then we had the Supreme Court ruling, then we had a response. And so what we're trying to do is just be extremely agile in terms of managing our way through that. So what we do have is we have a bit of a blended mix that's in front of us right now. As we get into second half, though, what we feel better about, although around tariffs, we don't feel great about anything. But what we do feel better about is that tariffs now become part of our base. And that's really important. It's really important because it takes down the degree of variance that we're managing through because we have those costs now at least embedded in our base. And so as we think about the second half and as it relates to tariff, while I'm not providing any guidance specifically right now, I mean, how you can think of it as a high level is that if we get some good news related to tariff from the administration, we'll have a bit of tailwinds. If we get more challenging news in terms of escalation, then we'll have a little bit of headwinds. And I think though, the more important thing around this is that everything that we know today that is included within tariffs and is embedded in our outlook is embedded in our guidance, and as we continue to see more clear direction coming through, we'll update and make sure that we're providing clarity to the investment community. Hopefully, that helps. Operator: And the next question comes from Kendall Toscano with Bank of America. Kendall Toscano: So the return to growth in North America D2C for the Crocs brand was obviously a very positive surprise. It sounds like a lot of that was driven by a strong response to new product offerings. But curious now how you're thinking about the balance of the year and whether that level of growth, 5% for North America D2C is something that continue -- could continue. Andrew Rees: Yes. I mean what I would say, Kendall, we're obviously not guiding channels by country, et cetera. in terms of giving you specific numbers on that. But what I would say is, look, I think the underlying drivers of that performance, and we agree, it was great to see it as an important signal of what we're doing as a brand from a product marketing and distribution perspective, an important signal that it's working. We feel like that they're at the fundamental level and should continue, right? So the drivers of the DTC performance, as I kind of alluded to in an earlier question, were, I think, introduction of newness and it's broad-based newness. It's clogs, it's sandals, it's new products. It's personalization, it's accessories. And we do believe that DTC will continue to outperform wholesale. And I think there is also some element of effective execution within that as well, right? So we feel good about it. We think it's an important signal, and we hope it continues but we're not providing specific guidance at that level. Kendall Toscano: Got it. Okay. That's helpful. And then other question was just on gross margin. And so the first quarter came in down 90 basis points versus the expectation for flat year-over-year trends. It sounded like the tariff headwind came in, in line with the 100 basis points that you expected. So curious what kind of drove the downside? Was it all in relation -- or was it mostly in relation to new product offerings you called out carrying a lower gross margin? And if so, how should we think about the impact of that for the remainder of the year? Patraic Reagan: Yes, Kendall, it's a bit of that, and let me elaborate just a bit. So I think first and foremost, we were really happy with Q1 performance in both brands. And a lot of it really goes back to talking through what we discussed earlier in terms of new products and the green shoots that we're seeing and consumers responding favorably. As it gets into the gross margin results for the quarter, there's really 2 components that were driving that. Number one is new product mix, as you alluded to. And important from a strategic standpoint, and I want to make sure that I emphasize this, extremely important from a strategic standpoint as we execute on our diversification strategy that new product is hitting for us. From that, we can start to look into profitability of new product, et cetera, over the longer arc of time. But first and foremost, from a growth standpoint, important that we're landing from a new product and innovation perspective. And so that turned out to be a little bit more headwind than we thought it was going to be when we planned the quarter but not necessarily a bad thing. The second component is related to brand mix. And so during the quarter, as it relates to what we thought 90 days ago, we saw the HEYDUDE brand outperform our expectations in the quarter, which, again, although a drag on gross margin rate within the quarter, it is very much aligned in terms of our return to growth strategy within HEYDUDE and gave us the confidence to actually raise our guidance on HEYDUDE revenue growth for the balance of the year. So as you think about the 2 key components of the margin performance versus what we talked about last -- in our last quarter call, those are the 2 key drivers in the quarter. Operator: The next question comes from Tom Nikic with Needham. Tom Nikic: I wanted to follow up on North America wholesale. And I recognize that you're not guiding by channel, geography, et cetera. But obviously, it's been negative for quite a few quarters in a row. And I think by the end of this year, depending on how the rest of the year shakes out, it will be something like 30% below peak. But do you feel that given some of the improvements that you've seen in the DTC business that potentially you've got line of sight into the North America wholesale business stabilizing potentially over the near to medium term? Andrew Rees: Yes. So I think the short answer is yes, right? So we feel like the North American wholesale business is exactly where we expected it to be at this point in time, right? So the work that we've been doing with our partners in the channel is, I would say, moving along exactly as we thought it would, which is rightsizing inventory in the channel, making sure that inventory is turning at the appropriate rate, introducing newness, whether it be sandals, clogs or other styles and then also working with them effectively on what they're going to prebook and making sure that we have kind of appropriate inventory to be able to capitalize and maximize at once. So we think it's playing out exactly as we thought it would. And the short answer is we definitely see it stabilizing. And as we continue to build the brand, diversify the brand and provide more and more reasons for consumers to purchase, we're quite confident we can grow the business for Crocs in North America. Operator: And the next question comes from Brooke Roach with Goldman Sachs. Brooke Roach: I wanted to follow up on Rick's question on the Middle East. Is there any way you can unpack your expectations for input costs if higher oil prices persist? If oil remains at this level, how long would it take you to begin to see those higher product costs flow through the P&L? Can you frame the magnitude of the potential cost headwind that you might see? And then lay out the key levers that you're thinking about to pull to protect profitability? How important would price be in this situation relative to other levers of opportunity? Andrew Rees: Okay. That's a very detailed question, Brooke. So -- and we're not going to provide all that detail. So -- but we can give you some qualitative input that hopefully helps you to understand it a little bit, right? So what I would say is that absolutely, high oil prices for a sustained period of time does provide some upward cost pressure to the resin component of the business. I actually probably might point you to transportation as a bigger cost pressure to be quite honest, because if you look at transportation, both in and out, I think that's potentially a bigger impact. But I would say we have a very well-diversified supply chain sourcing engine, transportation contracts, relationships, et cetera. We are very well equipped to manage this. There are some components that will provide upward cost pressure. But I would also say we've been extremely proactive over a couple of years -- a number of years now, and we'll continue to be proactive about looking for opportunities to save costs in our supply chain, whether that be cost of goods based on country of origin, whether that be tariff optimization due to tariffs -- differential tariffs by country, whether that be investing in automation and robotics within our DCs. We have lots of strategies to mitigate cost. So what I would say is that I think Patraic mentioned earlier, we've kind of baked all of that into the guidance we're providing, and I think we're well able to manage this. Patraic Reagan: Yes, Brooke, just to kind of add on to Andy's comments, as you said at the tail end, everything that we know today has been fully contemplated into our guidance, which is why we alluded to it in prepared remarks. And I think the other thing to think through is as we've gone through the last year in terms of leaning into our agility, flexibility within how we manage the business, we've now got a track record of being and having very demonstrable success in terms of squeezing out efficiencies within both supply chain and within SG&A. And so while we don't necessarily want to be leaning into those areas based on what's happening in the Middle East, we know that we can. And so I think we're in the same boat as a lot of other companies where we're anxiously waiting to see what happens over the next 30, 60, 90 days or so, and we'll continue to adjust accordingly. So -- but I think the big message here is that all that we know today is reflected in our guidance for 2026. Operator: And the next question comes from Anna Andreeva with Piper Sandler. Anna Andreeva: We wanted to follow up on international wholesale at Crocs. It's come in softer for the past couple of quarters now, and you guys have mentioned controlling the sell-in. Can you just elaborate on that? Is there any door rationalization that's taking place internationally? And just how should we think about the progression in this channel in '26? And then just a follow-up on gross margin. Should we expect the Crocs brand to continue to pull back on promotions in DTC? You will lap the beginning of those actions, I believe, next month. Obviously, a lot of the newness you guys talked about that's resonating. So just additional color on that. Andrew Rees: Yes. Yes. Thanks, Anna. So what I would say about our kind of Crocs International business is it remains very strong, right? So our overall Crocs International business, we see growing strongly for the remainder of the year. And frankly, we see a multiyear pathway for continued growth in our significant international markets. I was just recently in both Japan and China and really pleased with how our brand is performing in those markets, and we highlighted that in our prepared remarks, very strong growth in both of those markets and obviously, 2 of the largest international markets. DTC growth has been stronger than wholesale. And some of that is a result of the countries where we're seeing the most growth because some of the countries where we're seeing the most growth rely on a DTC-driven distribution model and have very strong digital penetration. The consumers have -- the overall digital penetration is really high in those markets. And in most places where we're operating on digital, we manage that ourselves and have DTC revenue. I think the wholesale business has been exactly on track with where we expected it with one exception. We do see impacts for the Middle East, right? So our business into the Middle East, it is a distributor business, that was a wholesale sale for us. So that's a drag. It was a small drag in Q1 and that it will be a drag through the remainder of the year, and we've anticipated that and built that into our guidance. And then -- so I think those are the things that I'd probably highlight from an international perspective, okay? I'll let Patraic address your additional question on gross margin. Patraic Reagan: Yes. From a gross margin standpoint, as it relates specifically to promotional cadence and overall promotionality. And what we're seeing in -- maybe more broadly in the marketplace is we're still seeing that the consumer is stressed and that retailers are leaning into promotions as a way to drive both traffic and sales. Now as it relates to us, slightly different in terms of where we are. So as we think back to second half of last year, we made conscious decision in really both of our brands to pull back on discrete promotional components within both Crocs and HEYDUDE. We are still on that journey as we kind of go through the first half of this year. We expect that as we get into the second half of the year that we'll continue to kind of function at a more what we call normal level of promotionality, which is what we're executing on today. And so I think the way to think about it is we've been on this journey, which is a multi-quarter journey in terms of pulling back second half. We also feel that effect in the first half of this year, which also has an impact on revenue compares on a year-over-year basis, and we'll start to see that more normalize as we get into the second half of this year. Operator: And the next question comes from Peter McGoldrick with Stifel. Peter McGoldrick: Andrew, you discussed consumer resilience in Europe, Asia and North America despite Middle East disruption. And in the past, you've given some really helpful commentary around the consumer backdrop. So this commentary sounds like things are holding up better than anticipated. So I'm curious if you could tell us how the consumer backdrop has evolved to today and what's embedded -- any changes that are embedded in the outlook, if any? Andrew Rees: Yes. Thanks, Peter. Yes. I think what I said, and I'll just reiterate that, we don't -- I wouldn't say resilience is quite the right word. I said we don't see a discernible negative trend is probably the way I would say it, right? So given that, I think how our potential to succeed, to do well, to drive sales and profitable sales, I think, is good, right? So we -- in an environment when the consumer is not discernibly negative, we believe we offer incredible value to the consumer. We have a great roster of new product introductions that are clearly gaining traction with the consumer. And if we offer them a great value, a compelling new product, new colors, new colorways, new augmentations, the ability to personalize their products, we can get them to transact and purchase. So we do feel good about that. I think sustained $120 oil does provide a drag -- a differential drag on some different markets. I think the ones that we are most concerned about or thinking a little bit, I would say, observing closely would be kind of Western Europe and some parts of Southeast Asia, where we see governments putting in place some degree of energy control measures. So what I would say is that, look, they do appear to be holding up, right? We see that here in North America. We see that in many of our markets, and we continue to succeed. So I think we're focused on doing what we need to do to succeed in this consumer environment. Operator: And the next question comes from Aubrey Tianello with BNP Paribas. Aubrey Tianello: I wanted to follow up on Crocs International. Is the 10% revenue growth for the year that you guided to 90 days ago still the right way to think about it? And then what does guidance assume in terms of FX? I think it was about 100, 120 basis point benefit at the enterprise level last time you guided. Patraic Reagan: Yes, I'll take that question. So let me just kind of level it up a little bit to -- on the international basis. So international is -- as we continue to talk about is a key strategic pillar for us. It's a key growth area for us. And within 2026, it will be the first year that Crocs Inc. is predominantly an international-driven company. So our revenues will be slightly more in international this year for the first time than North America, and we feel great about that. From an international perspective, before I get into guidance, I just want to also just reiterate that we feel like we had a really strong quarter from an international perspective. When we think about our Tier 1 growth countries like China, Japan, et cetera, we're double-digit growth in our key Tier 1 countries. So we continue to see and believe that we've got a lot of white space in those areas. As it relates to guidance, I think roughly about a quarter ago, we guided to 10%. And I would say that we're still very much in the high single digits to approaching 10% within international. The only area that I would say has given us a little bit of friction is what Andrew alluded to earlier is Middle East. And I think that's how we're thinking about it. So we're very bullish on international and continue to be bullish. The other example I would say, just from a quarter standpoint is you see our continued commitment in terms of the takeback of our Malaysia distributor business. And I was actually in the market towards the end of last year and got to see a number of the over 20 stores that come with that takeback. And we're really excited about this, very productive, very profitable business in an area of the world that has got a high affinity for Crocs. And so I think if you think about those few components, Peter (sic) [ Aubrey ] we feel really good about where we are. And as it relates finally to FX in terms of where we are today versus 90 days ago, the FX is slightly worse but it's not impacting our guidance and outlook on the year in a meaningful way. Operator: And the next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Just on the flat SG&A dollars guide, that includes the cost saving program. Maybe speak to some of the areas you're reinvesting in and some of the benefits you're seeing? And then how we should think about your willingness to reinvest more if you see a return? Or on the flip side, are there areas where you could still pull back? And then on wholesale, you talked to your retail partners doing more at once. Maybe just speak to your supply chain flexibility in the case that there is more demand and your ability to meet that. Andrew Rees: Yes. So what I'd say -- so I think the most important thing from an SG&A perspective is the couple of different rounds of cost-saving initiatives that we've talked to you about have all been completed, right? So we have attained those cost saving goals. Some of those are in SG&A and some of those savings are in cost of goods or in COGS relative to go up in gross margin. So we've achieved those cost savings. That has given us some flexibility as we go into the year to invest in some critical areas. Those areas are generally some of our DTC capabilities, whether that be physical stores or more likely -- or more importantly, sorry, digital selling. So we're investing in a higher proportion of DTC sales, which carries more SG&A and -- but also carries some strong gross margin and strong operating profit. We're also investing in marketing for both brands to make sure that we create future demand for a lot of those new product introductions that are working. So I think -- and in terms of supply chain flexibility, look, I think this is a bit of a balancing act. We're really good at managing our inventory and managing our supply chain. We keep lean inventories, which I think is an overall strength for the company. It allows us to flow a lot of our operating profit through to cash flow and use that to reward shareholders. And -- but we do also try and forecast some of our newer products and best-selling items to have some backup inventory to lean into at-once. And frankly, that's on both brands. I think our entire conversation this morning has been on Crocs. Nobody has asked a single question about HEYDUDE. But those capabilities apply to both, and we are able to capture some nice additional business based on our at-once performance. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Andrew Rees: Thank you. I would just like to thank everybody for their great questions, their attention and their interest in our incredible company. So much appreciated. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by for the Cigna Group's First Quarter 2026 Results Review. [Operator Instructions] As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded. We'll begin by turning the conference over to Ralph Giacobbe. Please go ahead. Ralph Giacobbe: Great. Thanks. Good morning, everyone. Thanks for joining today's call. I'm Ralph Giacobbe, Senior Vice President of Investor Relations. With me on the line this morning are David Cordani, the Cigna Group's Chairman and Chief Executive Officer; Brian Evanko, President and Chief Operating Officer; and Ann Dennison, Chief Financial Officer. In our remarks today, David, Brian and Ann will cover a number of topics, including our first quarter 2026 financial results and our financial outlook for 2026. Following their prepared remarks, David, Brian and Ann will be available for Q&A. As noted in our earnings release, when describing our financial results, we use certain financial measures, including adjusted income from operations and adjusted revenues, which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP. A reconciliation of these measures to the most directly comparable GAAP measures, shareholders' net income and total revenues, respectively, is contained in today's earnings release, which is posted in the Investor Relations section of the cignagroup.com. We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance. In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2026 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent reports filed with the SEC. Regarding our results, in the first quarter, we recorded after-tax special items charges of $322 million or $1.22 per share. Details of the special items are included in our quarterly financial supplement. Additionally, please note that when we make prospective comments regarding financial performance, including our full year 2026 outlook, we will do so on a basis that includes the potential impact of future share repurchases and anticipated 2026 dividends. With that, I'll turn the call over to David. David Cordani: Thanks, Ralph. Good morning, everyone, and thank you for joining us today. This call is somewhat bittersweet for me as it is my last quarterly earnings call after many years at Cigna Group. As CEO, I participated in close to 70 of these calls with you, and I'm pleased to be able to share strong results again on this call. Today, I'll focus my remarks on our strong first quarter performance and how we continue to deliver in a dynamic operating environment. And then I'll take a moment to address our leadership transition on July 1, when Brian Evanko will step into the CEO role to drive our company's next chapter of growth, and I'll transition to the role of Executive Chair. Following my remarks, Brian will provide a more detailed update on our business platforms and performance, and then Ann will review additional details about our financial results and outlook, and then we'll move to your questions. So let's get started. I'm pleased to report that the Cigna Group delivered strong performance in the first quarter, including total revenues of $68.5 billion and adjusted earnings per share of $7.79, all while we continue our disciplined track record of reinvesting back in our businesses to fund growth, addressable market expansion and innovation. With our performance, we are raising our full year 2026 adjusted EPS outlook to at least $30.35, reflecting our disciplined approach and steady execution in an operating environment that continues to be shaped by many forces. Two of these forces are clearly rising to the top for customers and employers. First, affordability; and second, the need for health care that is more personalized and as a result, easier to navigate. We are addressing these expectations in an environment where health care demand continues to rise and the cost of new services like pharmaceuticals continue to grow at a rate greater than inflation. Against this backdrop, over the course of my tenure, there are 3 key attributes that our company has demonstrated time and again to fuel a successful track record of performance rooted in purpose and innovation. First and perhaps most importantly, we've been steadfast in our commitment to put the customer at the center to make the health care journey more affordable, personalized and overall easier to navigate. This commitment is what spurred us to improve our prior authorization process as outlined in our first customer transparency report, which was released last month. Our goal is to make the process faster and more seamless while ensuring that care is delivered at the right time and right place appropriately and safely. To that end, we have removed hundreds of tests and procedures and services from prior authorization process in the United States, decreasing the volume of medical prior authorizations by about 15%. Our commitment to the customer also drove us to take an active role within the industry, which last week announced further progress towards standardization of the prior authorization process. This is enabling greater automation and more seamless, efficient access to care while maintaining appropriate safeguards. This announcement reflects continued progress on the voluntary commitments our industry made in June of 2025 in coordination with HHS and CMS. Second, our company is taking a strategic and disciplined approach to the way we shape our business portfolio, which Brian will address more in a moment. Through our approach, we remain sharply focused on where we can deliver differentiated value, and we feed those businesses with additional capabilities and resources. And where we cannot, we make the decision to exit. This process has honed our focus on the addressable markets where we have a right to win for the benefit of our customers, patients and clients, which has been a critical driver in our success for many years. Finally, we have a proven ability to innovate and perform even in the most challenging environments, whether that has been periods of accelerated medical costs or during the COVID-19 pandemic, just to name 2. In moments like these, when customers' needs and behaviors change quickly, we remain relentlessly focused on market centricity, customer centricity and micro segmentation. The introduction of our transformative rebate-free pharmacy service model is the most recent example. This multiyear investment in innovation will deliver the lowest price to the consumers for their brand drugs, which will be 30% lower with full transparency each and every time. And this model further deepens partnerships with independent pharmacists, including those critical ones in rural communities. We call this offering [ Signature ], a name that reflects a new era in pharmacy services. Now before concluding my remarks, I also want to speak briefly to our upcoming leadership transition. After my nearly 17 years as CEO of the Cigna Group, we are on track for our carefully planned transition on July 1, when Brian will succeed me as CEO and take on the role and I will take on the role of Executive Chair. Brian has a strong history of prioritizing customer and client needs and decision-making grounded in our clear mission and enduring sense of purpose. Looking ahead, he is committed to further the use of data and AI to drive affordability and personalization, which in turn drives value and sustained growth. With a strong foundation and clear focus, I'm excited for Brian to take the helm to guide the Cigna Group to its next chapters of growth. And I look forward to working closely with Brian in my role as Executive Chair. Now let me wrap up and summarize the quarter and our results. We delivered strong performance, giving us the confidence to raise our full year guidance for 2026. We delivered total revenues of $68.5 billion and earnings per share of $7.79. Looking ahead, our increased adjusted EPS outlook of at least $30.35 reinforces the sustained growth, durability and strength of our company. We are delivering in a highly dynamic environment, and we continue to invest with purpose through a customer-first orientation, driving disciplined portfolio shaping and innovating to personalize and modernize health care for the benefit of our customers and clients. We have a clear strategy and the right leadership team in place to capitalize on those opportunities ahead. And with that, I'll turn the call over to Brian to discuss our results in more detail. Brian Evanko: Thanks, David. Good morning, everyone. First, I want to take a moment to thank David and acknowledge his strong leadership, both within our company and throughout the industry. Through his 35 years of service with the company, he has left an enduring legacy defined by an unwavering focus on meeting customer needs, a relentless partnership orientation toward others and a deep commitment to the communities that we serve. It's been a privilege to work with him for so many years. Looking to the future, there's no question that the status quo in health care is unsustainable. Costs continue to rise as does demand for health care services, an untenable equation. In this environment, the experience that I have gained over my nearly 3 decades with the company have sharpened my understanding of the needs of those we serve and strengthened my commitment to continue to deliver on our mission. I'm humbled and honored to take on the role of CEO in July with a focus on the Cigna Group becoming the clear leader in consumer-focused and AI-enabled health services with an emphasis on clinically complex patients, making care more affordable and more personalized for those we serve. In my remarks today, I will cover several topics. First, I will share a few ways we are shaping our portfolio for the future aligned to our strategy. Then I will review our first quarter business performance across our growth platforms. And I will go a bit deeper on ways that we are harnessing data, advanced analytics and AI to deliver more affordable and more personalized health care services. Turning to our portfolio. We have a disciplined and consistent approach to ensure that our businesses are aligned to and support our strategic direction and can deliver differentiated value in the market. Over the years, this approach has guided our decisions to either add to or subtract from our portfolio, which in turn has positioned our core health care businesses for sustainable growth. For example, last year, we added key capabilities in the highly attractive specialty pharmacy market. Our acquisition of CarepathRx provides us with further depth in infusion-related services. And our investment in Shields Health Solutions provides us the opportunity to partner more closely with hospitals and health systems who serve patients with complex care needs and rely on specialty medications. On the other end of the spectrum are the businesses we have divested where the assets no longer support our strategic direction or have reduced management focus from our core growth platforms. Our divestiture of our group life and disability business, which also meaningfully reduced the company's exposure to economic downturns is a prime example. As is the more recent sale of our Medicare businesses. Divesting each of these assets enabled greater focus and investment in the remaining businesses within our portfolio, supporting our forward-looking growth path. In keeping with this portfolio shaping discipline, today, we are announcing 2 additional actions. First, we are planning to exit our individual exchange business at the end of this year. We did not make this decision lightly and appreciate the importance of ensuring patients have continuity through the transition. There are no changes to coverage or networks related to this announcement, and we will support members through their open enrollment transitions into 2027. Second, as our industry continues to make strong progress on standardizing and automating prior authorization services, we have decided to initiate a strategic review of alternatives for eviCore. eviCore is a part of enabling how care is evaluated and delivered across the industry, including working with numerous health plans to perform reviews and prior authorizations on their behalf. As David mentioned, prior authorization plays an important role in health care, and we will explore options to continue delivering the highest level of service for health plans and the industry at large while maximizing long-term value. We see the potential for different approaches to standardize prior authorization across the industry, improving transparency for customers and clients, reducing the administrative burden for providers and creating efficiencies for the industry. Both of these actions reflect a deliberate strategy to sharpen our focus on our core platforms where we have the capabilities, positioning and expertise to deliver differentiated value for the benefit of those we serve. Turning to our performance in the first quarter. We started the year with strong results across both Evernorth Health Services and Cigna Healthcare. Overall, Evernorth earnings were slightly ahead of expectations. This was driven by the strength of our Specialty and Care Services businesses, which delivered adjusted earnings growth of 20% in the quarter, reflecting continued attractive volume growth. As the specialty pharmacy marketplace continues to grow, we are well positioned across our suite of solutions, our strong supply chain and our expertise in inventory management and complex drug distribution. Our ability to deliver a strong clinical support model continues to have a positive impact for patients and clients alike. We see this through higher adoption and adherence rates once patients begin taking biosimilars and specialty generics, leading to better overall outcomes. Turning to Evernorth's Pharmacy Benefit Services business. Our results were in line with expectations. Our first quarter results reflect previously discussed impacts of large client renewals and investments as we progress toward our transformative new rebate-free model, aptly named [ Signature ]. This week, we met with hundreds of leaders from our largest pharmacy benefit services clients, and there are a few consistent themes we're hearing from clients and prospects alike about the direction of our business. First, our forward-thinking innovation is resonating for its focus on the consumer, offering the lowest out-of-pocket cost at the pharmacy counter and helping clients navigate through a very complex and fluid external environment. As clients continue to face budget uncertainty driven by new drug launches and midyear market disruptions, our new simplified model will give clients clear visibility into economic value and greater predictability. Second, they appreciate that we are proactively leading through regulatory and legislative changes. We continue to hear from clients and prospects that they are seeking clarity, predictability and value for consumers. Our [ Signature ] model directly addresses these priorities and supports plan sponsors as they address their obligations today and in the future. Finally, our clients value our partnership in meeting their needs today while anticipating future needs. This feedback is reflected in a strong start to our 2027 Pharmacy Benefit Services selling season. Finally, turning to Cigna Healthcare. Our earnings exceeded expectations in the quarter and grew 18% year-over-year, powered by solid persistency, continued disciplined execution and MCR favorability. Our strong earnings performance is further enabled by our innovative offerings and focus on consumer experience improvements. Recently, Cigna Healthcare was ranked #1 by J.D. Power in digital experience satisfaction among commercial health plan members for the second consecutive year. We are also seeing Clearity, our new co-pay-only medical plan launched late last year, generate strong market interest. In addition to its simplified product design, Clearity features externally derived clinical quality measures and a single digital front door that gives customers integrated access to care and their historical claims data through our myCigna app. Taken all together, we're pleased with our strong first quarter performance across both Evernorth and Cigna Healthcare. The positive first quarter results and market momentum are further powered by our embrace of data and modern technology. By leveraging the combined power of data, advanced analytics and AI, we're able to drive greater customer and client satisfaction through improved affordability of care and greater personalization of services. Let me offer a few examples, starting in our Specialty and Care Services businesses. Today, we are using Agentic AI, together with our clinical expertise to improve customer and patient experiences. This is enabling us to transform how prescriptions are processed, efficiently schedule prescription orders and proactively identify patients who may need additional service. We do not use AI for clinical decision-making, but rather AI capabilities increase the speed and strengthen the decision quality of our highly experienced clinical teams. In Pharmacy Benefit Services, we are utilizing AI to enable better care and service to our customers. This includes leveraging AI in our [ Signature ] model to improve member communication and notifications and help patients make decisions on their care journey and enhancing our capabilities to deliver the lowest out-of-pocket cost for consumers, including with GLP-1s, where we continue to evolve as new oral solutions enter the market and prices decrease. And in Cigna Healthcare, we are using AI-enabled capabilities to improve outcomes through risk prediction models, identifying complex patients earlier and connecting them with our clinical teams. Our predictive high-cost claimants model identifies members with increasing care needs earlier in their clinical journey. This then enables targeted clinical engagements that improve affordability, reduce acute utilization and drive measurable cost savings. To date, for those customers engaged in this model, we see an average of $2,000 per member per year in savings, resulting in the elimination of unnecessary provider and ER visits. This improved high-cost claimant prediction capability has benefits across Cigna Healthcare, for example, in the stop-loss business. More broadly, we are proactively helping our customers in highly personalized ways. The combination of our AI tools and contact centers and improved customer digital experiences led to a 20% drop in total inbound calls for digitally eligible customer in our Cigna Healthcare U.S. employer business and a 25% reduction for pharmacy benefit services members when compared to just 2 years ago. Ultimately, these capabilities allow us to go beyond administrative enhancements and deliver better health outcomes. As I wrap up, I'd like to reiterate a few points. Some of the notable headlines from our strong first quarter include continued momentum in our specialty businesses, underscoring powerful secular growth, our differentiated capabilities and our expanded suite of solutions. With progress on constructing our new [ Signature ] pharmacy benefits model and positive market reaction to our innovation and evolution and Cigna Healthcare results exceeding expectations with performance supported by our innovative offerings and focus on the customer experience. As a result of this combined strength, we are pleased to increase our earnings guidance for the year to at least $30.35 per share. This is made possible by the great work of our teams and also through our continued deliberate focus on disciplined portfolio shaping, which ensures that the appropriate resources and support are pointed toward the growth of our core businesses. This morning, we announced the thoughtful sunsetting of our individual exchange business at the end of this year as well as evaluating strategic options for eviCore. Our results are also enabled by continued investments into harnessing the power of data, advanced analytics and AI, driving new value creation and improved personalization and affordability for our customers. As we look to the future, I'm excited about the progress we've made to date and how we're leading the way building what's next in health care. With the most experienced leadership team in the industry and continued partnership with David as Executive Chair, I am confident we are well positioned for continued growth and success. We look forward to hosting an Investor Day in September. We will share more and discuss advancements in each of our core businesses. Now I'll turn it over to Ann to cover our financial performance. Ann Dennison: Thank you, Brian, and good morning, everyone. As Brian mentioned, we started the year with a strong first quarter performance. Key consolidated financial highlights for the first quarter include revenues of $68.5 billion and adjusted earnings per share of $7.79, representing 16% year-over-year EPS growth. With the first quarter results, we are raising our full year 2026 adjusted earnings per share outlook to at least $30.35. This outlook reflects the positive momentum in our businesses while maintaining a prudent view of the current environment. Now turning to our segment results. I will first comment on Evernorth. First quarter 2026 revenues grew 9% to $58.4 billion, while pretax adjusted earnings grew 2% to $1.5 billion, slightly ahead of expectations. Specialty and Care Services showed strong growth with pretax adjusted earnings up 20% to $1.1 billion. This performance reflects continued momentum in our fastest-growing business, including strong demand for specialty drugs and increased biosimilar and specialty generic adoption, which are key levers for delivering affordability and value to patients and clients. Additionally, the income from our investment in Shields Health Solutions contributed to the growth in the quarter. Pharmacy Benefit Services pretax adjusted earnings decreased 28% to $394 million, in line with expectations. The year-over-year decline of approximately $150 million in the quarter reflects the previously discussed renewal and extension of large client contracts as well as investments associated with the transition to [ Signature ], our new rebate-free pharmacy benefits model. As those investments ramp through the year, the trajectory remains consistent with our prior commentary and expectations for the business. Taken together, Evernorth's first quarter results reflect the deliberate evolution towards [ Signature ] and greater focus on higher-value care services and specialty capabilities. Turning to Cigna Healthcare. First quarter 2026 revenues were $11.5 billion and pretax adjusted earnings were $1.5 billion. The medical care ratio for the first quarter was 79.8%. Cigna Healthcare results were favorable to expectations in the first quarter, driven in part by lower flu volumes and weather-related care deferrals. This year, we also have seen a higher proportion of individual exchange members enrolled in bronze plans, which results in a lower first quarter MCR, but does not change our outlook for the full year. As Brian mentioned earlier, as part of the strategic shaping of our portfolio, we have made the decision to exit the individual exchange beginning in 2027. This will allow us to focus on areas where we can best offer differentiated value to make a more meaningful difference in the health and experiences of those we serve. Our financial expectations for our ACA exchange business in 2026 remain unchanged. Overall, we are pleased with Cigna Healthcare's strong first quarter results. Now turning to our outlook for full year 2026. Our first quarter performance was strong, and we are raising our full year 2026 consolidated adjusted earnings per share outlook to at least $30.35, maintaining a disciplined and prudent approach to the full year. Regarding the cadence of earnings, we expect second quarter adjusted earnings per share to be approximately 25% of the full year outlook. In Evernorth, we continue to expect full year 2026 adjusted income from operations of at least $6.9 billion, and we expect second quarter pretax adjusted earnings seasonality to be similar to historical patterns. For Cigna Healthcare, we now expect full year pretax adjusted earnings of at least $4.525 billion, and we expect pretax adjusted earnings in the first half of the year to be slightly above 60% of the full year outlook. We expect the second quarter medical care ratio to be slightly above the high end of the full year range, with the sequential increase reflecting typical seasonality and business mix compared to prior years. Our full year medical care ratio guidance remains unchanged. Turning to our 2026 capital management position. First quarter operating cash flow was $1.1 billion. We continue to expect the majority of 2026 operating cash flow to be realized in the second half of the year, consistent with our prior commentary and last year's pattern. Our debt-to-capitalization ratio was 42.3% as of March 31, a 70 basis point improvement compared to year-end 2025. We expect this ratio to be lower by year-end 2026 as we balance debt repayment with other uses of capital, including share repurchase. Now to recap. Our first quarter results reflect strong contributions from both Evernorth and Cigna Healthcare, disciplined execution and the resilience of our diverse portfolio of businesses, giving us the confidence to raise our full year 2026 adjusted earnings per share outlook to at least $30.35. And with that, we'll turn it over to the operator for the Q&A portion of the call. Operator: [Operator Instructions] And our first question comes from A.J. Rice with UBS. Albert Rice: David, best wishes to you as you move forward. And Brian, congratulations to you on the new role. I wondered maybe just to drill down a little bit more into what you're seeing as you roll out to the -- to your clients, the new PBM model. I know it doesn't go live for external clients until 2028, but you're well into the '27 selling season. And I'm trying to think through if I'm making the transition to the new model as a client, do I need to give you more than the typical notice? Does it take longer lead time for me to make that transition? When do you think you'll get indications from clients as to the uptake there? And maybe just expand a little more on the comments around strong selling season. How much is being driven by this discussion versus just the general market environment? Brian Evanko: A.J., it's Brian. I'll try to take each of those components of your question. I appreciate the kind words and both David and I appreciate hearing that from you. So thanks. It's been a pleasure, obviously, working with you for many years. As it relates to [ Signature ], our new rebate-free pharmacy benefits model, maybe I'll just step back and give you a little bit of context for how we got here and how to think about the next couple of selling cycles to your point. If you think about the challenges we have here with health care in America, the affordability of prescription drugs continues to be one of the top challenges facing both patients and therefore, the entire pharmacy benefits industry. And this is particularly acute for high-cost branded prescriptions, which today represent just 10% of all the prescriptions in America, but nearly 90% of the total drug spending. And all key stakeholders, whether that's employers, whether that's brokers, whether that's drug manufacturers themselves, acknowledge that the status quo is unsustainable. So the market feedback thus far as it relates to our new rebate-free [ Signature ] model has been positive as clients and brokers invest the time to learn more of the details of our new model. As I noted earlier, we had hundreds of our largest clients together just this week and received a variety of helpful input from them. Importantly, this model though is designed with the patient at the center and our price assure capability guarantees patients the lowest possible out-of-pocket cost when they fill their prescriptions, whether that's through our negotiated price, whether that's the patient's co-pay or a cash pay alternative. And if the patient does utilize a direct-to-consumer cash pay alternative, we'll ensure that, that out-of-pocket applies to their deductible. So after we got it through some of these details, clients and brokers are excited about this model, intrigued to learn more about it. And our legacy rebate-free model, it serves the time to place yet we're seeing increasing instances of unintended consequences where patient affordability is suffering. Additionally, we're seeing employers and other clients reviewing their obligations to employees and their family members and see the [ Signature ] model as a simpler way of ensuring that those needs are met. So our capabilities are multidimensional and bespoke in the sense that they can meet a variety of unique client needs. So as it relates to the selling season and how to think about this, the [ Signature ] model will become our standard model in 2028. And as we've shared before, we expect at least 50% of our Evernorth Pharmacy Benefit Services members to be in the [ Signature ] model by the year-end 2028. The PBS selling seasons tend to be long, as you know. So by the end of this year, we'll have a much better picture as to the level of market interest to adopt [indiscernible] 1/1/28. Right now, we are largely in the 2027 selling season, which is largely our existing models with continued evolution. Some of the things we're seeing so far in 2027, though, we're on track for mid-90s or better retention again, which is consistent with historical norms. We ended 2026 with over 97% retention. Additionally, we've already secured some key new business wins for 2027 in pharmacy benefit services, underscoring that our current solutions are resonating in the market. So we're meeting the needs today, and we're preparing to meet the future needs with our new [ Signature ] model, which steps over many of the affordability challenges that are in place today. So hopefully, that helps a little bit with reconciling all the different moving pieces. As it relates to 2027 in our Cigna Healthcare book of business, our fully insured customers will fully adopt the new model. That's just a standard part of the renewal cycle with those individuals. But we're really excited about the future and the [ Signature ] model points the way for the industry. Thanks for the question. Operator: Our next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Maybe just asking on the two, I guess, new data points about the reshaping the portfolio. Any way to think about the impact from the exchange side as far as capital you might recapture next year? And then the eviCore transaction, is that something that you were approached by? Or is that something that you decided to do strategically? And should we be thinking about this as a transaction that would be slightly accretive? Or is this kind of a neutral transaction economically? Brian Evanko: Kevin, it's Brian. So both of the portfolio shaping actions that we announced this morning, the sunsetting of our individual exchange business as well as exploring strategic alternatives for eviCore were decisions we took proactively. So you should not think of those as a response to any sort of other market activity. Those were proactive, deliberate portfolio shaping decisions that we took after stepping back, continuing our long tradition of disciplined decision-making with the long-term orientation. As it relates to the individual exchanges, really, there were two primary drivers of our decision to step away from that business. One, we did not see a clear path to scale this business to achieve meaningful impact within the context of the Cigna Group's aggregate size. And the second factor is management focus for the organization. This is a small business for us today, and it's been shrinking in recent years. So the decision will allow us to further intensify focus on our core growth platforms across the Cigna Group, notably our rapidly growing Specialty and Care Services businesses. Our industry-leading Pharmacy Benefit Services business and our flagship U.S. employer business within Cigna Healthcare. To your point on capital, we'll free up some amount of capital, but I wouldn't view that as particularly material again in the context of the Cigna Group. As it relates to eviCore, our announcement to explore strategic alternatives, again, is the result of a disciplined assessment process. And you can think of this one really being driven by two primary factors as well. Similar to my comments on the individual exchanges, the potential size of this asset within the context of the Cigna Group's portfolio made for a challenge relative to the ability to scale it and consume management attention and time. And secondly, as David discussed in his comments earlier, the continued progress around standardization and automation of prior authorization processes led us to step back and assess the future of the business within our portfolio. Over the past 18 months, we're proud to have voluntarily announced a series of commitments to improve the methodology and tools around prior authorizations, all of which ultimately are designed to simplify customer and provider experiences. And some of those commitments were specific to us, the Cigna Group. Others were in partnership with HHS and other industry participants. For example, just last week, we had a joint announcement related to the standardization of information that's required for many of the most commonly requested procedures. So all of these prior authorization enhancements through standardization and technological progress open new doors for our eviCore business, which could potentially result in a partnership or a combination with other complementary industry participants. But there is no transaction to discuss. This was a proactive step we took to shape the portfolio. Hopefully, that helps. We look forward to providing more details on all of this in the coming months. Operator: Our next question comes from Lisa Gill with JPMorgan. Lisa Gill: I just really had two things I wanted to better understand. One was just the cadence of the costs. You talked about $150 million in this quarter for the renewal plus the transition to the new model. How do I think about that for the rest of the year? And then secondly, very strong results when I think about specialty. Can you talk about some of the key drivers from a specialty perspective? Is this growth in existing clients? Is profit being driven by some of the comments you made earlier around biosimilars? Just if you can give us any color on how to think about your specialty business. Brian Evanko: Lisa, it's Brian. Maybe I'll start with just a few framing comments and then Ann can pick up on some of the drivers from a financial perspective. But overall, we're really pleased that our Evernorth business in total was slightly ahead of expectations, powered by the strength in the Specialty and Care Services portfolio. As you think about the specialty business, this is a space with really strong secular tailwinds, as we've discussed before. And we see the space growing, call it, mid- to high single digits on a pure secular basis. And then we have strong differentiated company-specific capabilities to deploy against that. And so in the quarter, we saw strong volumes. We also saw strong biosimilar adoption, and we had contribution from the Shields investment that we made late last year. So Ann can unpack that a little bit further. In the Pharmacy Benefit Services business, we were pleased with the performance of that as well, being in line with expectations and a solid start to the year. And you'll recall, we had two discrete headwinds stepping into the year, one being our proactive large client renewals and the second being the investments to build out our new rebate-free [ Signature ] model. And as I was discussing earlier with A.J., as we continue to deliver on the present, we're simultaneously preparing for tomorrow through the build-out socialization of our new [ Signature ] model with all key industry stakeholders, and that will be ready to scale in 2028. So Ann, maybe you can pick up a bit on the two components of Evernorth. Ann Dennison: Sure. So I'll start with Specialty and Care first. And as Brian said, we're pleased with the results. We expected a strong first quarter in Specialty and Care, and we came in slightly ahead of expectations. We remain excited about the space, as Brian talked about. The strong performance in the quarter. So solid specialty volume growth. I'm going to point to three things. That's one. The second is a continued mix towards more cost-efficient therapies, so biosimilars and specialty generics. Those are delivering meaningful savings to patients and clients while also lowering reported revenue and supporting higher margins for Evernorth. And then the third, and Brian touched on this, the contribution from Shield. So those are the three big drivers for the quarter. Taken as a whole, we're confident in delivering Specialty and Care at the high end of the growth range for this year. So that's Specialty and Care. For PBS, I just want to double down, results were in line with our expectations and consistent with the prior commentary that we've given around proactive renewals and extension of the three large clients as well as our planned investments to support our transition to [ Signature ], our new rebate-free model. So in the first quarter, if you just look at the dollars, PBS earnings were down about $150 million compared to last year first quarter. As you think about the run rate of that and then a ramp-up of some of the spending around [ Signature ] is weighted towards the back half. The numbers are in line with our prior commentary and our guide -- our overall guide for Evernorth. So with that, again, PBS was in line with expectations, and we remain focused and excited about our transition to [ Signature ] and confident in our shaping of Evernorth for the full year. Operator: Our next question comes from Scott Fidel with Goldman Sachs. Scott Fidel: David, it's been quite 1 over those last 70 earnings quarters with you. So I appreciate all that dialogue over the years. And Brian, congratulations to you. And I guess, Brian, just in sort of the context of some of the strategic sort of updates that you've been talking about and some of the -- as you sort of transition into the C-suite. Interested if you could maybe also frame it around the 5 growth pillars that have been sort of at the core of the growth strategy for a number of years, but there's also been some evolution across some of those markets as well. Curious around how you see the continuity around those 5 growth pillars? Or do you see potentially making -- putting your personal touch on those -- that approach to some degree as well? Brian Evanko: Scott, I appreciate the question and the kind words. I'm sure David does as well. Maybe I'll just give you a little bit of framing for how I'm thinking about the future of the Cigna Group when I step into the CEO role in July. And I'll share a little bit of the problem statements that face our industry, a little bit of where we're focused. And hopefully, that merges with your point on where we're going to be focused from a growth standpoint. So first off, I'd just start by reiterating my gratitude to David and our entire Board for such a thoughtful planned transition as I step into this role. I'm simultaneously humbled and excited, if you will, to be stepping into such a big job here and also feel a strong sense of accountability to our customers, clients, business partners, shareholders as well as my coworkers and their family. So we're fortunate to be right now performing so well across the Cigna Group as we outlined in our release this morning. So I'm able to build on that historical success carry forward the momentum we have and really attack the biggest problems in health care going forward. And the problems that we see really are threefold. The first one is affordability. Second one is, at times, there are fragmented customer and patient experiences. And the third one is we have a reactive sick care system. So our strategy at the Cigna Group is focused on addressing each of these opportunities. Now we have three strong high-performing growth platforms that we continue to invest in. And to the point I was making earlier around portfolio shaping, these three will continue to be fed with financial and human capital going forward. One is our Specialty and Care Services platform, which now represents about 35% of the company's income and is growing 8% to 12% per year, as Ann just referenced earlier. Secondly, our Pharmacy Benefit Services platform also within Evernorth, about 25% of the company's income is going through the transformation that I was alluding to earlier, and we're confident on the long-term durability of that. And then finally, our Cigna Healthcare business, which represents the other 40% of the company's income, which is our high-performing health plan business, underpinned by our flagship U.S. employer business, which has shown a long track record of growing at above market rates. So those are the growth platforms we're going to be very focused on going forward in terms of scaling and delivering against our long-term commitments to our shareholders as well as to our customers. Now when I take the CEO role in July, there are a few areas of greater intensification that I'd just like to highlight for shareholders. One will be the way we harness data, advanced analytics and AI to drive even more personalized, affordable customer experiences; two, a relentless drive to more affordable types of care. So think generic drugs, biosimilars, more cost-effective locations for medical procedures. And third, shifting further upstream into care journeys through preventive care, diagnostics and encouraging behaviors that promote health and wellness. And finally, through an investor lens, there are three commitments I'll make to all of you: one, strong organic execution of our strategy; two, disciplined capital deployment and continued portfolio shaping, always with a long-term lens. And finally, I believe that our equity has significant appreciation potential from current levels. Through continued strong execution, thoughtful strategic decisions and providing the right visibility to investors, we see meaningful shareholder value creation opportunity. So hopefully, that feels familiar to you. We'll be continuing the momentum we have now and intensifying in a few of those areas you just made reference to. Thanks for the question, Scott. Operator: Our next question comes from Charles Rhyee with TD Cowen. Charles Rhyee: And first, let me echo congrats to both of you in your -- going forward here. Maybe if I could follow up on Lisa's question and drill down a little bit more on biosimilars and the strength we saw in specialty. Perhaps how much of the results we saw in the quarter were driven by formulary changes really to try to drive biosimilar adoption, which I think can be also positive for Accredo. And I'm thinking in particular around biosimilar STELARA, which I think you're also manufacturing through Quallent. Maybe talk a little bit about how the synergies between the different parts of the Evernorth business is helping in this regard? And perhaps how much of that was -- is driving this kind of growth? And is that something we should expect, particularly as we see more biosimilars coming to market over the next few years? Brian Evanko: Charles, I'll start on this one. So I appreciate you highlighting the strength of our specialty platform, as I made reference to earlier, really pleased with the strong momentum there. And we believe biosimilars and specialty generics are critically important to driving affordability for the health care system at large in the future. If you think about the journey we've been on here, we introduced a HUMIRA $0 out-of-pocket a couple of years ago. And the penetration of those biosimilars have continued to grow. And so it took a further step forward into the first quarter of '26. Similarly, our STELARA $0 patient out-of-pocket was available first in May of last year. So if you're doing the year-over-year, it was not in the first quarter of '25, it is in the first quarter of '26. We've seen nice growth in the penetration of that. over the course of the 10 months or so since we introduced it. And this year, we're excited about generic Revlimid, which is especially generic that will have supply constraints ease and that will add to contributions as the year unfolds. And finally, I would just remind you, we made our investment into Shields in the third quarter of last year. So as you think about the way that the timing will unfold on the financial contribution there as you model the balance of the year. But those are all areas we're really excited about. In addition to core volumes that continue to grow, we saw particular strength in the quarter in a few areas like severe asthma and hepatology and fertility that saw outsized percentage growth rates in volumes in specialty. So really excited about that platform in the future. I think David wants to weigh in with a few thoughts here as well. David Cordani: Thanks, Brian. And Charles, thanks for the question. I just want to amplify two pieces that Brian articulated and then drill down for one more moment. One, our model still embraces choice. So affording choice with the diversity of who we serve. And second, what you heard is the incentive alignment. So whether it was HUMIRA or STELARA, STELARA designing it with a $0 out-of-pocket for the consumer, for the patient, very strong value delivered to all stakeholders, the employer of financier as well as the consumer. The piece I want to click down on and complement the team on, the team was able to harness effective use of AI to identify the conversion strategies in a highly personalized way, which had high NPS low friction and high continuity for both the patient and the physician. The result of that is the conversion. The result of that is more value delivered, but higher satisfaction and then staying power of the conversion to the biosimilar. So it's an example where Brian talked before about harnessing data and AI, those fuse together in a highly personalized basis to deliver the outcome on the biosimilar, but to do it in a very customer patient-friendly way and a physician coordinated way. Thanks for your question. Operator: Our next question comes from George Hill with Deutsche Bank. George Hill: Brian and David, again, congratulations to both of you guys. I was just hoping you might update us on your 340B exposure given where you guys are with Carepath now and Shields. And kind of how should we think about how -- and I don't know if you would be willing to quantify what both of those units are contributing to the business right now, from an operating earnings perspective and just kind of how to think about the exposure to that segment given what's going on in the drug space. Brian Evanko: George, it's Brian. Appreciate the comments and the question. So as it relates to 340B, you can think of that as a component of the Specialty and Care Services platform within Evernorth that we just made reference to. And actually, if you go way back at the time we acquired Express Scripts, looking at the Accredo asset at that time, realized it did not have very much 340B activity within it relative to others in the space. So over time, we built a suite of capabilities that allow us to partner with hospitals and health systems more effectively to help them manage their 340B related activity. So we had a small acquisition several years ago, Verity. More recently, our acquisition of Carepath and the investment we made in Shields all allow us to serve hospitals and health systems in a way that allows them to optimize their relative performance around 340B. So you should think of it as indirectly supporting, again, hospitals and health systems through our service-based offerings as opposed to being a scaled 340B contract pharmacy as it relates to the portfolio. So overall, it's a component of the specialty and care services portfolio, but the lion's share of that business continues to be our core Accredo specialty pharmacy as well as our CuraScript distribution capability. So I you to think about it in that way as opposed to being its own P&L, if you will, within the broader Evernorth portfolio. Operator: Our next question comes from Justin Lake with Wolfe Research. Justin Lake: I wanted to focus on Evernorth and specifically on the reported noncontrolling interest in the quarter of $226 million. NCI has increased dramatically over the last few years, and this quarter, it more than doubled versus Q1 '25. So just given how significant this item has become, I wanted to dig in here for a minute. My impression is this NCI is driven by your GPO, which is, I believe, both of joint ventures. I wanted to confirm a few things. First, what are the main JVs driving this NCI? On average, what percentage of these JVs are owned by the company versus your partners? And what specifically is driving the 100% plus increase in the quarter? For instance, did the partners get a significantly larger piece of the JV? Or is this completely driven by a doubling of earnings from the JVs? Ann Dennison: Justin, so I'll start. So just to frame it a bit, we support health plan clients in a variety of ways, including procurement, value-based services, and we work across a broad set of relationships with health plans and related entities. Through these partnerships, clients benefit from our ability to drive value, and we're able to deliver flexible, competitive solutions. So the NCI line item includes minority earnings from a number of joint ventures and partnerships, which you mentioned. There are multiple different structures and ownership levels. So the growth in NCI doesn't directly correlate to the same levels of growth in our earnings. If you're looking at the year-over-year increase in the NCI line, that was primarily driven by a new joint venture with one of our largest clients and the additional economics are passed back as part of the previously discussed renewals that we did. So JVs can have various structures for this one, the new one that drove the increase. Despite us holding a majority share, most of the economics are passed back and have no impact on our earnings. This was known and fully contemplated in our guidance for the full year, and we are really pleased and happy to continue to be a partner of choice for the largest most sophisticated purchasers. I hope that helps. Operator: Our next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: With some of the optimization in the portfolio kind of announced today, I guess, should we really think about this or really read this as you're really trying to push into specialty? Like how central is specialty to the strategy? How do we think about this in the context of your capital deployment priorities from here? And on the flip side of that, what is the commitment to other parts of the insurance business? And remind us of the synergies across the integrated model, how that aligns with this sort of new AI-enabled consumer-driven health care services company? Brian Evanko: Erin, I think there are a few different topics in there that I'll try to weave together as best I can. So as it relates to the portfolio shaping that we announced this morning, as I was responding to Kevin earlier, think of the choices here as being proactive decisions based on a deliberate review of management focus, relative size and scale as well as the degree of standardization and automation, for example, that's transpiring in eviCore. So you should think of those as the core drivers. As it relates to specialty, we're already a scaled player there, and we love the space. So there should be no doubt about that. But that's not at the -- it's not trading off growth in our other growth platforms at all. So you should think of we want to continue scaling our specialty business for sure. We want to continue to scale Cigna Healthcare for sure, and we want to continue to transform the Pharmacy Benefit Services model. So all three of those growth platforms will continue to get resources and investments as opposed to it being a specialty alone. That said, we do continue to see further upside in our specialty business. If you look at our capital deployment in the last couple of years, it's gone in an outsized way into the specialty space with our acquisition of Carepath and the investment we made into Shields. And going forward, we'll continue to have a balanced capital deployment framework. Once I become CEO, you should not expect to change as it relates to the way we think about deploying capital. We'll continue to prioritize internal reinvestment. We'll continue to pay an attractive shareholder dividend. We'll continue to make sure the capital structure is appropriate in terms of leverage ratios, and we'll use share repurchase and strategic M&A on a targeted basis. And our focus from an M&A standpoint at the current time continues to be targeted strategic bolt-ons. But to your broader umbrella, we're very excited about the specialty space. We'll continue to invest there. We'll look to scale it. But again, it won't be trading off against other parts of the company's growth platforms. And looking forward, we do continue to see attractive opportunities to weave together our multidimensional capabilities across the Cigna Group. So many of our Cigna Healthcare clients value the fact that they have a combined medical, pharmacy, behavioral offering that brings together the best of the company into one singular offering for the benefit of patients and their families. So hopefully, that helps to hit on a few of your different pieces in the question there. Operator: Our next question comes from Jason Cassorla with Guggenheim. Jason Cassorla: Congrats to David and Brian as well. Maybe for the health care MLR, (sic) [ MCR ] the 79.8% in the quarter versus the slightly below 81% you had guided to. Was that delta completely explained away by flu weather and the exchange seasonality? And then maybe just broadly, can you delve in a bit deeper on what you're seeing in terms of employer cost trend? Any utilization categories where you're seeing favorability? And you've focused and highlighted site of care. Just not sure if you're seeing or maybe can you update us on some of the mix shifts maybe perhaps helping out cost trend or if you're seeing anything from an absolute service category from utilization either trending better or worse? And then maybe lastly, can you just help us bridge a little bit on the second quarter MLR coming in slightly above the higher end of the full year guide would be helpful. Ann Dennison: Okay. Thanks for the question. So I guess just starting, as I noted in my prepared remarks, the Cigna Healthcare results were ahead of expectations. And I would characterize that as driven by strong fundamental performance, including retention, rate execution and cost trends across both U.S. employer and individuals. So if you look at the quarter, during the quarter, we observed lower flu respiratory volumes as well as weather-related care deferrals, which benefited results. And then on the individual business, we saw the higher percentage of bronze plan members, which carry a lower MCR at the beginning of the year and a higher MCR at the end of the year. In terms of any drivers, I wouldn't -- or categories, I wouldn't call out a single driver as outsized or a category as above our expectations. The contribution was fairly balanced. Cost trend remains high, and we planned and priced for it. So that's on the quarter itself. When you think about the sequential increase from first quarter to the second quarter, that reflects both normal seasonality and other seasonal and timing factors that are unique to this year. So with regard to normal seasonality, as a reminder, the Medicare business, which we divested last March, had a flatter MCR seasonality than our other businesses. So this year, normal seasonality will be steeper going from 1Q to 2Q. For other seasonal and timing factors that are unique to this year, I'd point to two things. I mentioned the higher proportion of Bronze members in the individual business that's compared to prior year. So that results in a steeper pattern throughout the year with the steepest jump happening in the second quarter. And then there are also timing factors, including weather-related and care deferrals that impact the seasonality that will impact the quarter. But overall, we're pleased with the strong start to the year. The full year guidance range of 83.7% to 84.7% remains unchanged and at this point of the year reflects prudence. Brian Evanko: Jason, just if I could add two quick things to Ann's very comprehensive summary there. We're really pleased with the performance of the overall Cigna Healthcare business and also excited to be able to raise the guide for the year based on what we're seeing so far, which includes an appropriate degree of prudence for the balance of the year. As Ann said, we continue to plan for and price for sustained elevated cost trends. On the positive side, they have not accelerated. They remained elevated. So to the extent we do eventually see some deceleration, that offers some upside to our outlook. But we're excited with the performance of this portfolio for sure. So thanks for your question. Operator: And our last question comes from Dave Windley with Jefferies. David Windley: I wondered if you could highlight or discuss uptake in the GLP-1 programs that you have -- that you've highlighted in the past in Enreach, EnGuide, EnCircle. And then any other similar programs that you would highlight as particularly attractive or popular among your customers right now? Brian Evanko: Dave, it's Brian. So maybe I'll just talk about the GLP-1 space more broadly and then hit on some of the programs as we work our way through this. As we discussed on prior calls, GLP-1s are a very visible example of the broader wave of drug innovation that's transpiring in America and around the world, quite frankly. And as it relates to coverage for weight management in particular, we continue to see on a client level, the percentage of clients covering weight management be relatively stable from 2025 into 2026. Now those clients are increasingly looking for programs such as EnCircle and Enreach to provide the clinical and lifestyle support to make sure that the weight management programs are designed -- are working as they're designed to be, meaning we're not seeing micro dosing. We're not seeing people start and stop on the protocols, et cetera. So that's really the intention of those programs. And we continue to see -- we had 12 million-plus enrollees in the EnCircle program. That number has continued to grow each month across our overall employer book of business. But as I made reference to, the coverage rates are about 50% in our Evernorth book of business, which tends to bias toward larger employers. They're about 20% in our Cigna Healthcare book of business, which tends to bias towards smaller employers. But when you think about where we are with GLP-1s more broadly right now, the ongoing tension here is affordability versus employee and family member satisfaction. So employers know there's a very popular benefit. They also know that it's a net cost right now to their overall health care programs. On the bright side, as oral versions are introduced and you see supply constraints ease, this should help with future affordability by driving down the net cost of the GLP-1 drugs. But the tension between employee demand and employer affordability will continue to persist. Now one of the things we've been very focused on in addition to our great clinical programs is innovating around financing solutions. So we're seeing some employers and plan sponsors cover the full cost of GLP-1 drugs. Others will cover a portion but ask for co-pays to be paid by the employee or family members. Others are sponsoring coverage on more of a supplemental benefits chassis where the employee will pay the full amount. However, they'll benefit from our thousands of real-time clinical safety checks and clients then have the option of selecting additional lifestyle and clinical support programs for their members who utilize GLP-1s. So all these moving pieces are contemplated in our 2026 guidance. We continue to lean in through our Evernorth platform and take a leadership position in supporting employers and other plan sponsors around their GLP-1 strategies. Hope that helps, Dave. Operator: Thank you. At this time, I'll turn the call back over to David Cordani for closing remarks. David Cordani: Thank you. I'll wrap up briefly here. First, thanks for your time and your questions. Second, we're clearly proud of the results we delivered in the first quarter and confident we will deliver on our increased guidance for 2026. I do want to reinforce after 17 years of leading the organization, how much I appreciate our colleagues around the world and the commitment they bring to work every day in serving our customers and patients, in partnering with our clients, in the relentless orientation around innovation and active volunteerism to make the communities better. On a final note, I've valued my interactions with each one of you throughout the investor community during my tenure as CEO, and I look forward to continuing to serve the Cigna Group as the Executive Chair. Thanks for your time, and have a great day. Operator: Ladies and gentlemen, this concludes Cigna Group's First Quarter 2026 Results Review. Cigna Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for 10 business days following this call. You may access the recorded conference by dialing (866) 405-7290 or (203)-369-0603. There is no passcode required for this replay. Thank you for participating. We will now disconnect.
Operator: Good day, and welcome to the O'Reilly Automotive, Inc. First Quarter 2026 Earnings Call. My name is Ali, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press 1 on your touch tone phone. I will now turn the call over to Jeremy Fletcher. Mister Fletcher, you may begin. Jeremy Fletcher: Thank you, Ollie. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our first quarter 2026 results and our updated outlook for 2026. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend, or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended 12/31/2025 and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Brad Baum. Brad Beckham: Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts first quarter conference call. Participating on the call with me this morning are Brent Kirby, our President, and Jeremy Fletcher, our chief financial officer. Greg Hensley, Executive Chairman, and David O'Reilly, our Executive Vice Chairman, are also present on the call. I am excited to begin our call by thanking our over 93,000 team members for the incredible results they were able to deliver in the first quarter. Their hard work and absolute dedication to excellent customer service produced a strong start to 2026 for O'Reilly with an 8.1% increase in comparable store sales. This was above our expectations for the quarter and, when combined with our new store sales and contributions from our international business, drove double-digit total sales growth of 10.2% in 2026. Our team successfully translated these robust sales results into an impressive 14% increase in operating profit through our focus on profitable growth and expense control. We coupled this strong operating performance with the return of excess capital through our share repurchase program to deliver a 16% increase in diluted earnings per share in the quarter. Thank you again, Team O'Reilly, for keeping our culture strong and providing the best customer service in the business. Now I would like to take a few minutes to walk through the details of our first quarter comparable store sales performance. Our comp growth of 8.1% solidly surpassed our expectations, and we were pleased to see above-planned contributions from both sides of our business in the quarter. Our professional business continues to be the larger contributor to our total comp results, with our first quarter results marking the third straight quarter we have posted double-digit professional comps. We also saw strength in our DIY side of our business, which generated a mid-single-digit comp during the first quarter. While DIY was the smaller overall contributor to the total comparable store sales growth in the first quarter, it was an equal driver of the alpha we delivered versus our expectations coming into the quarter. This outperformance was driven by better-than-expected growth in ticket counts on both sides of the business. We believe there were some favorable industry tailwinds that aided our results in the first quarter that I will discuss in a moment. However, we are just as confident our sales momentum also reflects share gains our team is winning on both sides of our business. Next, I want to provide some detail on the cadence of our sales results as we moved through the quarter. We know every year that first quarter is often our most volatile quarter as we experience variability in our business resulting from the timing and severity of winter weather and the timing of the onset of spring. In addition to this, the timing and magnitude of individual income tax refunds can also be a factor impacting our results through much of February and into March. Beginning with January, winter weather was favorable and largely as expected, providing a strong start to the quarter. Moving into February, weekly volumes began increasing as tax refunds started to flow to consumers. Our business often receives some level of benefit from tax refund season, but it is not always a direct correlation to average refund size or total refund dollars, as weather and general economic conditions can play a role in the extent to which consumers spend these refund dollars and where they are spent. This year, we do believe the combination of an increase in average refund size, as well as higher total refund dollars, coincided with favorable weather to produce a benefit for our business. Warm and generally dry conditions in most of our markets provided a supportive backdrop for consumers looking to perform vehicle maintenance in conjunction with the benefit from tax refunds. While we surpassed expectations each month, our business strengthened as we moved through the quarter relative to both our plan and on a one-, two-, and three-year stack comp basis. April has had the expected degree of seasonal moderation in volumes relative to March, but our business continues to be strong in both DIY and professional. From a category perspective, our results were driven by broad-based strength across the business with solid results in many of our undercar hard part categories coupled with continued healthy performance in our maintenance categories including oil, filters, and fluids. Even in light of widespread strong comp contributions across a broad range of categories, we still see some evidence of consumer caution. Discretionary categories were not as pressured from a relative comp perspective as we have seen in the past few quarters, but this was mainly due to the soft comparisons as we are lapping periods of pressure in this small subset of our business. I will discuss in more detail in a moment, but our outlook assumes a continuation of this uncertain stance by consumers. Growth in average ticket was a mid-single-digit contributor to comps on both sides of our business. While average ticket growth represented the larger driver of our comp for the first quarter, these results were essentially in line with our expectations. As I referenced earlier, it was really the growth in transactions that exceeded our expectations. Coming into the quarter, we assumed average ticket would benefit from same-SKU inflation of approximately 6%, and actual results came in right in line with those expectations. As a reminder, the front half of 2026 is expected to receive a larger benefit from same-SKU inflation, as we do not compare against the more significant cost and associated price increases in 2025 until the third quarter. Turning to guidance. We have maintained our full-year comparable store sales guidance range of 3% to 5%. We are very pleased with the strong start to 2026 that our team has been able to deliver. The first quarter results exceeded our plan and right now have pushed us to the top half of our full-year range. However, we remain cautious in our outlook for the consumer. Rapid increases in fuel costs have the potential to impact consumer spending even in predominantly nondiscretionary sectors like our industry. While the more fundamental long-term demand drivers of miles driven and the average age and size of the vehicle fleet are expected to remain supportive and change very gradually over time, spikes in prices at the pump and the impact it can have on other day-to-day spending in the life of a consumer can cause short-term reactions. So far, our first quarter results and trends thus far in April have not indicated a pullback in consumer demand. However, we remain cognizant that sustained inflation pressure on the consumer or potential for future shocks could create volatility in demand. Likewise, we are always cautious to not overreact to first quarter results, which can be susceptible to demand variability driven by weather and tax refund dynamics. Given these considerations, we have kept our sales and operating margin outlook for the remaining three quarters of the year unchanged from our previous guidance. It goes without saying that our team is highly motivated to sustain our first quarter momentum as we move through 2026. Ultimately, we will lean on our business model of service and availability to grow our business with both our existing and new customers the same. We have confidence in the health of our industry and even more in our ability to take market share in any market backdrop. Our store and sales teams operate with a high degree of discipline within their markets. We expect to win business by delivering value through deep win-win relationships, excellent customer service, and superior product availability. As our teams focus on partnering with our professional customers who recognize this value and place us in a position of preferred supplier as a result of the consistent execution of our team. This same high standard of customer service also drives our DIY business, since these customers are just as dependent on the trusted advice of our professional parts people to help them solve problems, go the extra mile, and in turn keep their vehicles on the road and well maintained. Before I wrap up, I would like to note that we are increasing our full-year diluted earnings per share guidance to a range of $3.15 to $3.25. Our increase in EPS guidance is driven by our first quarter sales and operating performance and the impact of shares repurchased through the date of our earnings release yesterday. We are pleased to be delivering an increase to our full-year guide after kicking off the year and look forward to the opportunity to focus on our fundamentals and generate strong results throughout the remainder of the year. As I wrap up my prepared comments, I would like to take the opportunity once again to thank Team O'Reilly for your hard work and commitment to growing our business. Now, I will turn the call over to Brent. Brent Kirby: Thanks, Brad. I would also like to begin my comments this morning by congratulating Team O'Reilly on a strong start to 2026 as your hard work continues to earn business and take share. Today, I will further discuss our first quarter gross margin and SG&A results and provide an update on the progress toward our expansion and capital investment plans for 2026. Starting with gross margin, our first quarter gross margin of 51.5% was a 19 basis point increase from 2025, which was in line with our expectations. Within the first quarter, our gross margin did encounter some pressure from seasonal product mix, but we were pleased to be able to offset this pressure with acquisition cost reductions and improved leverage of our distribution cost driven by solid DC productivity and strong sales volumes. The acquisition cost environment remains stable and the pricing environment continues to be rational across our industry. Our first quarter gross margins were not materially impacted by the changes within the tariff environment as our net tariff exposure has remained relatively stable. Additionally, at this point, neither our first quarter results nor our outlook include any benefit from tariff refunds. We actively monitor these topics as they develop and are being proactive to ensure our sourcing is competitive and reflects the scale of our company. The conflict in Iran and resulting constraints on global oil supply have the potential to be disruptive to certain categories, particularly motor oil, and could impact supply chain costs such as freight. However, we did not see a material impact in the first quarter and have not adjusted our full-year outlook assumptions for these factors. We have strong relationships with our supplier community and have been working through challenging situations surrounding international trade and geopolitics for an extended period of time now. While every situation can be unique, our expectation is that our merchandise teams will continue to successfully navigate these environments and that we will be able to leverage our long-term relationships with supplier partners as well as our scale to ensure that we lead the industry in availability. We are maintaining our full-year gross margin guidance range of 51.5% to 52%. At this stage, we believe we have the ability to manage the current dynamics surrounding product acquisition cost and freight within our full-year guidance range. Our supply chain teams work to not only actively mitigate cost increases, but also to diversify our supplier base and seek alternative sourcing options when necessary. A significant benefit to us on this front has been the continued development of our private label brand portfolio. Our private label penetration has climbed to over 50% of total revenue, and we will continue to work to prudently leverage the strength of our proprietary brands. The benefits of our private label strategy range from improving margins and customer brand loyalty to improved sourcing capabilities. As we have control over the product within the box and can seamlessly source a single SKU from multiple suppliers when supply chain constraints emerge, having the ability to adjust orders and demand across a broader base of suppliers is an important tool for our teams to leverage in order to maintain a strong in-stock position. Moving to SG&A. Our teams generated an impressive 34 basis points of SG&A leverage as they diligently managed our cost structure and delivered robust sales results. Our total SG&A dollar spend was at the higher end of our expectation for the first quarter due to incremental spend to support elevated sales volumes. This produced average SG&A per store growth of 5.5% for the first quarter, and we are still expecting our full-year SG&A per store growth to run 3% to 4%. Our first quarter SG&A was expected to drive the highest average per store growth rate of the year, and we expect our per store growth to moderate as we move through the year and compare against the SG&A ramp that occurred throughout 2025. Within our SG&A, gas price increases had a muted impact on balance for the quarter. We do operate a large delivery fleet across our stores, and quick, timely delivery of product to our professional customers is an incredibly important part of our value proposition. As a result, there is certainly the potential for some level of impact to our SG&A, but this is heavily dependent on the extent and the duration of fuel price increases. When managing our cost structure, and in particular, when gauging our response to cost pressures over a short time frame, we always view our business through a long-term lens with a focus on serving our customers and supporting high levels of service and availability. In keeping our SG&A and margin guidance unchanged for the remainder of the year, we have considered the potential for modest pressure from rising fuel prices and the opportunities we have to manage those pressures within the broader context of our overall cost structure. We are raising our full-year operating profit guidance range by 10 basis points to an updated range of 19.3% to 19.8%. This reflects the flow-through of operating cost leverage from our strong first quarter results and our unchanged outlook for the remainder of the year. At the midpoint, this updated guidance range projects full-year operating margin expansion of 9 basis points over 2025, which is a testament to Team O'Reilly's dedication to profitable growth. Inventory per store finished the first quarter at $874 thousand, which was up 8.5% from this time last year and up 0.5% from the end of the year. We are still targeting growth of 5% per store by the end of 2026. Our inventory position at the end of the first quarter was slightly below our expectations resulting from the strong sales performance and the timing cadence of inventory additions. Our turns remained strong at 1.6 times, and we are pleased with the productivity we have seen from our inventory investments and our efforts to continually enhance inventory deployment within our tiered distribution network. We absolutely believe that our industry-leading inventory availability is a factor contributing to the share gains that we are compounding. We will continue to aggressively capitalize on opportunities to bring our inventory closer to the customer. Lastly, to touch on our store growth and capital investments in the first quarter. We opened a total of 59 net new stores across the U.S., Mexico, and Canada. Domestic new store performance continues to meet our high expectations, and we are pleased with the opportunities we have across the U.S., both to backfill existing markets and expand into new greenfield markets. Our international markets continue to make progress in building the O'Reilly store growth engine, and we remain on track for our 2026 store opening goal of 225 to 235 net new stores. Capital expenditures for the first quarter were $244 million, and we still expect a total capital expenditure investment in 2026 of $1.3 billion to $1.4 billion. The major projects driving this expected level of spend are on schedule, and we are excited for the growth opportunities in store for us in all of the markets that we operate in. Before I turn the call over to Jeremy, I want to once again thank our entire Team O'Reilly for their continued hard work and unwavering commitment to our customers. Now I will turn the call over to Jeremy. Jeremy Fletcher: Thanks, Brent. I would also like to thank all of Team O'Reilly for their continued hard work and dedication to our customers. Now I will fill in some additional details on our first quarter results and updated guidance for 2026. For the first quarter, sales increased $424 million driven by an 8.1% increase in comparable store sales and a $91 million non-comp contribution from stores opened in 2025 and 2026 that have not yet entered the comp base. For 2026, we continue to expect our total revenues to be between $18.7 billion and $19 billion. Our first quarter effective tax rate was in line with expectations at 22.5% of pretax income, comprised of a base rate of 23% reduced by a 0.5% benefit for share-based compensation. This compares to the 2025 rate of 21.3% of pretax income, which was comprised of a base tax rate of 23.2% reduced by a 1.9% benefit for share-based compensation. For the full year of 2026, we continue to expect an effective tax rate of 22.6% comprised of a base rate of 23% reduced by a benefit of 0.4% for share-based compensation. We expect that the quarterly rate will fluctuate due to variations in the tax benefit from share-based compensation and the tolling of certain tax periods in the fourth quarter. Now we will move on to free cash flow and the components that drove our results. Free cash flow for 2026 was $785 million versus $455 million in 2025. The increase in free cash flow was primarily driven by robust growth in operating income, a reduction in net inventory, and timing of CapEx spend. For 2026, our expected free cash flow guidance remains unchanged at a range of $1.8 billion to $2.1 billion. I also want to touch briefly on our AP to inventory ratio. We finished the first quarter at 125%, which was up from 124% in 2025 and above our expectations. For 2026, we expect to see moderation resulting from our planned incremental inventory investments and expect to finish the year at a ratio of approximately 122%. Moving on to debt. We finished the first quarter with an adjusted debt to EBITDA ratio of 2.03 times, flat to our ratio at 2025. We continue to be below our leverage target of 2.5 times and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program, and during the first quarter we repurchased 10 million shares at an average share price of $92.45 for a total investment of $923 million. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance spelled out earlier includes the impact of shares repurchased through this call and does not include any additional share repurchases. Before I open up our call for your questions, I would like to thank our team for their commitment to the excellent customer service that drives our success. This concludes our prepared comments. Operator: We will now open the call for questions. Operator: Thank you. We will now begin our question-and-answer session. If you have a question, please press 1 on your phone. If you wish to be removed from the queue, please press 2. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please limit your questions to one question and one follow-up question. Once again, if you have a question, please press 1 on your phone. Thank you. Our first question today is coming from Simeon Gutman with Morgan Stanley. Your line is live. Simeon Gutman: Hey. Good morning, everyone. Hey, Brad. I wanted to ask about market share. The data I look at, it looks like the spread for O'Reilly versus the industry is actually accelerating. Granted, we do not know what everyone's first quarters look like, but the last time we saw this was somewhat in the post-COVID period or the COVID period where you took a lot of share versus the industry. So I wanted to ask if your data more or less says the same thing, if that is corroborated, and then are there any trends? Is it markets where you are investing? Is it broad-based? And then how you think and where it is coming from? Thank you. Brad Beckham: Yeah. Hey. Good morning, Simeon. Happy to talk to that. First off, I cannot jump into that question without just bragging on the team. We are extremely proud of the entire team. When I think about store operations, the sales team, I think about the supply chain teams, all of our teams are just executing at a high level. And, yes, I think directionally, we look at a lot of data. As you know, we probably spend less time worried about what everybody else is doing than we do trying to figure out how to get our company to the next level when it comes to share gains, comparable store sales, and taking that to the bottom line and really investing not just for the short term, but more importantly, for the mid and long term. But, yes, I think directionally, when we look at the data that we see both internally and externally, we do agree with you that our team continues to drive solid share gains, beyond maybe even what we have seen the last couple of years, and on both sides of the business. Our teams are highly focused on taking share from all types of competitors. When it comes to retail and professional, the same. And so, yes, we concur with what you said there, Simeon. Simeon Gutman: And just following up on the same topic, this is a wild guess, the percentage of your customers where you are the primary distributor and then is that percentage of that share at being primary, is that continuing to tick up? If you are willing to tell us where that number might sit. Brad Beckham: Yep. Just maybe talk broadly about kind of our customer buckets on the professional side. Very pleased overall when we look at our performance by market, by customer type, and kind of the way we look at where we sit on the call list at a micro level. Seeing really broad-based performance when it comes to both existing customers, as I spoke about in my prepared comments, as well as seeing a lot of success with new customers, whether it be in new markets or new customers within existing markets. And I always like to point out that no matter if you are looking at the most mature part of our company, kind of in Missouri, Oklahoma, Kansas, Arkansas, Texas, Iowa—when you look at those markets versus a brand-new market, we are still very immature even in our most mature markets. You know, we have 10% share. We are going to continue to aggressively go after the remainder of that business in North America. And, you know, we do not disclose exactly what that percentage looks like to that part of your question, but just feel really good about overall performance across all markets and all customer types, both with new customers and existing customers the same. Operator: Thank you. Our next question is coming from Gregory Melich with Evercore ISI. Your line is live. Gregory Melich: Thanks. I would love to follow up on what you were seeing in like-for-like inflation, the 600 basis points, and how do you think about the changing input costs and how that could impact that as we go through the year? Do we still expect that to decelerate to, let us say, 2% as we lap the tariff increases? Or could it possibly only decelerate to three or four points, especially given what you mentioned on gasoline costs and how that flows through the SG&A? Jeremy Fletcher: Yeah. Good morning, Greg. Thanks for the question. This is Jeremy. Want to make sure—I know lots of questions about this and I think reasonable speculation about what could happen for the balance of the year. Just from a clarity perspective, as we think about where same-SKU would go this year and what we have baked into our guidance, that really is unchanged for us at the 3%. And I think that for us is as much just our approach to these items as much as it is anything else. It has just historically been our approach that we try not to speculate too much on the future movements in prices without a lot of clarity around what we are going to see or candidly really mostly what we have already seen. And so what informed our outlook from an inflation perspective this year is really how we saw price levels change last year, where that had stabilized, and how we have entered and moved into 2026 and have not really seen fundamental shifts or movements. Brent mentioned it in his prepared comments, but we have kind of seen a normal acquisition cost environment, some puts and takes. And so for us, as we move through the remainder of the year, we would expect that we will still have some year-over-year tailwind based upon where prices are at today in second quarter, and then we will start to compare against the price increases from last year as we move into our back half. As we think about the back half, still think that we will benefit from average ticket growth and shrink. That has been a consistent in our business and really in the industry for a long time. Within that number, we still have a muted inflation expectation. There is obviously the potential that that could change if we see fuel prices faster, but we have got to see where that goes and how sustained and how long term that is, what the industry does. We would expect the rationality within the industry to continue on that. But it is also pretty early in that ballpark. We would have to see just more broadly what that market looks like as we roll through the rest of the year, and that is really our approach and how we would think about what that broader framework would be like for the remainder of the year. Gregory Melich: Great. And my follow-up, if I could, was on the consumer demand and tax refunds. You mentioned it several times. I guess looking back now at the end of the quarter and into April, is it fair to say that maybe tax refunds is an extra couple 100 basis points of demand versus what you were thinking back in February? Or how should we even think about that? And that cadence as we go into the spring and summer? Brad Beckham: Hey. Good morning, Greg. It is Brad. I will try to answer that the best we can. We want to be a little bit careful trying to quantify what was tax refunds, what was weather. There is a case to be made, from the seat we sit in, that there was, to your question, maybe some pent-up demand. The consumer has been under pressure for many quarters now, more so in the discretionary areas, but even to some extent, as we talk to you about what we see in a little bit of deferred maintenance, some pushed-out repairs that can be pushed out even though that is minimal. And so there is a case to be made that what we saw was some catch-up. Part of that we feel is or should be attributed to tax refunds. Part of that, we feel like even though there was some choppiness week to week from a weather perspective, weather on balance was a tailwind for us, we feel. And so there were just a lot of moving pieces. We just want to be careful trying to quantify what we think that is, but we definitely feel like tax was a helper, and we feel like weather was a helper overall. Jeremy Fletcher: Yeah. Maybe the only thing that I would add to that is those are the typical types of things that we see in first quarter. Sometimes it is hard to assess. It is the reason why we said within the prepared comments we tend not to overreact to what we see in this part of the year, and we said that in years when results were not as favorable for us. Ultimately, we think that works itself through the system, and you get a pretty good read on that as we move through second quarter. For sure, we would want to make clear what Brad referenced earlier. We still feel like we are performing well compared to what the opportunity is in the industry. So it is a balance of the two. Hard to know at this stage where it is at, but when we look to the balance of the year, the thing that I think still has us most excited is the ability to execute our model, to provide industry-leading service, and to continue to grow our share of the market. Operator: Thank you. Our next question is coming from Christopher Horvers with JPMorgan. Your line is live. Hi. Good morning. It is Christian Carlino on for Chris. Christopher Horvers: On oil price shock, is it fair to say you generally pass along any product cost inflation from commodities or higher ocean freight but you probably absorb the impact of higher domestic fuel costs from moving inventory within your supply chain and doing the DIFM deliveries. Jeremy Fletcher: Chris, you are breaking up pretty badly. Christopher Horvers: Can you hear me now? Operator: Operator. Jeremy Fletcher: Are you there? Christopher Horvers: Can you hear me? Operator: Hello? Jeremy Fletcher: Operator, maybe we can move on to the next call and come back if we can. Operator: Okay, sir. And can you hear me clearly? Hello, sirs. Can you hear me clearly before I move to the next caller? Okay, folks. If you could bear with me one moment, please. Okay. I believe we have everyone back together. Is that correct, sir? You can hear me now? Brad Beckham: Yes. Yes. Yes. Operator: Okay. I believe it was your line that had broken up, so I have left Christopher on the line. Christopher, can you try asking your question again, sir? Christopher Horvers: Yep. Hi. Good morning. It is Christian Carlino on for Chris. My question was on the oil price shock. And is it fair to say you generally pass along any product cost inflation from commodities or higher ocean freight, but probably absorb the impact of higher domestic fuel costs from moving inventory within supply chain and doing the DIFM deliveries? And if that is right, is there a point where you start to pass on the cost of higher domestic freight, whether that is through surcharges or another method? Jeremy Fletcher: Yeah. Thanks for the question, Christian. I think it is probably a good framework with which to look at that. When we think about product acquisition cost into the U.S., the freight component, we have historically thought about that, I think, as a component of the cost of the product and what it takes to get it. And I think that is consistent with the framework Brent outlined earlier about how we can consider sources of supply and the flexibility that we have there. So historically, for us, a lot of times, it has also meant that our suppliers have taken care of a big portion of that. And so what we see there, we view from that lens of product cost, and it is no different for us than any other kind of components of input cost that we would pass through to a customer in pricing—obviously after having worked with our supplier community to be able to work to mitigate that. If we think about just the operating cost of our business—and that shows up in our distribution cost within gross margin and then also within SG&A—our cost of fuel is a part of that. It is an important part, but it is, obviously, not the biggest part of that spend. And it is generally, I think, viewed by us within the broader context of how we manage our cost within our distribution and within our store operating cost in that way. And I think, just to reiterate maybe what Brent said on that topic, we feel like that while we could see some pressure there, it is manageable within that broader context of our expense outlook for the remainder of the year and within the ranges of how we have talked about our margin guidance from that perspective. Ultimately, for any of those types of costs, from an operating cost perspective, to the extent that they are sustained and we think they are broad-based, our industry, I think, has the ability to pass that through. Historically, that has not really been decoupled from a similar acquisition cost type of pressure. So, generally, what happens is products get more expensive, and you have some inflation to pass along, and it helps to cover pressures in those other areas. We would anticipate as we move forward that they would continue to operate in a similar fashion. Christopher Horvers: Got it. That is really helpful. And I think you had talked about maybe roughly 5% comps quarter-to-date when you reported the fourth quarter. So that would put the exit rate maybe in the double-digit range for the first quarter. So is it fair to say that quarter-to-date trends are continuing to hunt in that double-digit range? I guess just when you put together comparisons and weather and stimulus benefits fading, how are you thinking about the shape of comps in the second quarter and beyond? Jeremy Fletcher: Yeah. So just from a clarity perspective on the cadence in the first quarter, felt like we started solidly and then improved as we moved throughout the quarter. It is always a little bit of a challenge to talk about nominal comps because the compares differ. We feel well with how we finished the quarter in February and March. We were also up against, I think, a pretty challenging comparison within March and ended up in a good place on that side of our quarter. As we move here into April, we have seen a little bit of moderation off of the strength in March. I think that is pretty consistent with what we have seen from a seasonal perspective a lot of times. Still, I think, running well—strong, better than maybe we would have expected—but pretty early in the quarter, and obviously we have a lot of quarter left and what the business looks like as we move into the beginning of the summer months. Christopher Horvers: Got it. Got it. Thank you very much. Best of luck. Brad Beckham: Thanks, Christian. Operator: Thank you. Our next question is coming from Mike Baker with D.A. Davidson. Mike Baker: Great. Thanks. Can I focus on costs, please? And this was an issue when you reported the fourth quarter—some cost overruns. Your costs were still high this quarter, but presumably a lot of that was due to increased labor to support the high comps rather than the legal and health care situation that had been impacting you. But could you just remind us where you are in improving your cost? Your guidance clearly shows that improving throughout the year. What of the 9% increase this quarter was just because of the higher comp versus that legal situation, and how does that evolve throughout the year? Thanks. Jeremy Fletcher: Yeah. Thanks, Baker. This is Jeremy again. I would tell you—great question. In our actual results, we would tell you they were pretty much in line with what we thought, a little bit higher as Brent mentioned in his comments, and it is mostly just on the pace of the business being faster. When we look at it from a year-over-year perspective, we had had an expectation that first quarter, in particular, and then a little bit in the first half, we would see a higher per-store SG&A growth rate just because of the cadence of what we saw from the pressure perspective in the back half of last year. So when we just look at the growth rate in first quarter, it is still, I think, made up of similar things that we saw last year—obviously important, core operational costs to run our business, continue to, I think, lean into areas that make a lot of sense to help move our business forward—but then also more pressured items on a year-over-year basis for things like the insurance and the other types of liabilities that we have been talking about for a couple quarters now. That type of exposure for us was very much in line with what we had, and I do not think there was any kind of trend change from what we saw in the back half of the year. It was in line. But we knew it would be more pressure just given the comparisons from a year-over-year perspective. So, really, I think from that standpoint, the only kind of difference for us as we moved through the quarter is as we saw the business pick up and had the opportunity to address the incremental transactions that we were driving in our business as well as the incentive comp that goes along with that, we ended up maybe more towards the high end of a range we would have set for ourselves in the first quarter. But beyond that, everything else was in line with what we would have thought. Mike Baker: Okay. That makes sense. If I could ask—we will call it a follow-up, but it is probably a different subject. Back to the tax refunds, you said maybe there was some spending of pent-up demand there. How about the other way? Could that be a pull forward? And so when you have spikes related to either weather or tax refunds, how does that impact quarters? In other words, people did their maintenance in the first quarter with their tax refund dollars. Does that impact spending in the second and third quarter historically? Brad Beckham: Yep. Great question, Mike. And this is Brad. Being in this business—having the fortune to be in this business for almost 30 years myself and all that being at O'Reilly—what I am getting ready to say is less data driven, just more about instinctually coming out of a quarter like we just came out of that we have been through many times, some better, some not. I generally feel like that—and we generally feel like—that it would be more of what I said earlier, that there was some pent-up demand. When I look at category performance, and even though we have not seen a lot of deferred maintenance or trade down in terms of bigger ticket jobs, we did talk about that some in the previous quarters. So it makes sense for us when I look at the retail business by category, I look at the professional business by category and all the work that Brent and the merchandise teams do. Again, we feel like it would be more catch up than it would be pull forward. I am not saying that that could not be, to some degree, a factor, but not as much how we are feeling about how things played out. Mike Baker: Thank you. Operator: Thanks, Mike. Our next question is coming from Bret Jordan with Jefferies. Bret, your line is live. Bret Jordan: Hey. Good morning, guys. On the private label discussion, you talked about getting over 50%. I guess, is there a reasonable target for that? And when you think about private label penetration by market, where you are really established—sort of back at that Missouri area—are you meaningfully higher where people know your brand versus as you push to the Northeast? Is there less private label mix where you have got sort of room to make up? Brent Kirby: Yeah. Hey, Brett. This is Brent. Good question. I can start on that one, and the other guys can chip in. The team has done a fantastic job. You know, David Wilbanks and our merchandise team do a fantastic job developing a good-better-best line design across our proprietary brands, and we have just continued to see them grow in brand penetration. Our strategy, though, is still we are going to have relevant national brands where it makes sense as part of our line design by category, and teams do a great job of mixing those in. So we do not have a stated goal that we are going after there in terms of percent penetration. We let the customer vote with their wallet. Just like we talked about in the prepared comments, the great thing about that private brand portfolio is it does give us that sourcing capability that is much broader and we can source from multiple suppliers the same SKU—quality in the box, form, fit, and finish—and the teams have just done a fantastic job with that. So we want to go to market that way. Customers vote with their wallets. Where our national brands—and we have got some fantastic national brands as well—compete head-to-head with those proprietary brands, we want the consumer to have the choice for both, but we do not have a stated goal that we are going after there. We are just pleased with the performance of the team and the portfolio. Brad Beckham: Hey, Brett. This is Brad. Brent said it extremely well. Maybe just on the second part of your question. We really do not see that as well as we are established in most mature markets, there is not really a disparity between what we see in our new expansion markets in terms of how they are adopting our proprietary national brands. Again, I just want to give credit to Brent, to David Wilbanks, the merchandise team as well as our sales team. We have the fortune of having this diversified branding—not just one brand, not just O'Reilly like we do in oil—but we have these brands that used to be national brands that we have acquired over a long period of time that the customers just trust. So whether it is a mature market or whether it is a brand-new market like the Upper Mid-Atlantic, we see customer adoption of things like Precision chassis and U-joints—it used to be a national brand; it has been our own brand for a long time—Murray air conditioning, Syntec oil. It does not matter if you are talking about the DIY side or the DIFM side, we see our proprietary brand performance performing very well equally both in mature and immature markets. Bret Jordan: Great. Quick question on motor oil. Do you think—you called out some supply chain impact. Is that likely just to be seeing significant price inflation? Or are there issues? I think some of the synthetic sourcing in the Middle East might be challenged. Is there actual risk of some supply shortage versus just higher prices? Brent Kirby: Yeah. I can start on that one too, Brett. There is some consumer motor oil and a lot of that—while we are energy independent as a country—a lot of that does come from the Far East. And there is some pressure across our supplier base right now on pricing there, and that is something that our merchandise teams are working with those oil suppliers on. So there could be some pressure there, again depending on the duration of the conflict and how long some of the oil price inflation persists. But our teams are working through that. We feel confident in our ability to do that. Bret Jordan: Great. Thank you. Operator: Our next question is coming from Scot Ciccarelli with Truist Securities. Scot, your line is live. Scot Ciccarelli: Thanks. Good morning, guys. An SG&A follow-up, actually. We saw 5.5% SG&A per store growth, but labor is by far your highest SG&A item. And I believe employees per store are down a few percent for the fourth quarter in a row. So I guess my question is, is the growth rate of the SG&A being driven more by wages rather than hours? Or is it all coming from those other items you mentioned, liability costs, etc.? Jeremy Fletcher: Yeah. No. It is a great question, Scot. I think principally when we look at that, the first place you have to go is just wage rates, and we have been, I think, kind of pleased with the trajectory of that trend for a little while. Obviously, there were a few years that were pretty heightened and turnover was a pretty big challenge. But we have felt good with where that has gone. Obviously, there are some puts and takes. Our focus is on having excellent customer service within our stores, having team members that we can try and help form relationships on the professional customer side, help our DIY customers. And so to the extent that we are able to retain team members, you can see some rate pressure from that as well. When we look at the rest of it, we do, I think, have the ability and flexibility to manage the mix of full-time and part-time in our stores. And I think over the course of time, that has kind of influenced a little bit how you might otherwise look at just the per-team-member counts. To the extent that we need to support increased transaction volumes, we have done that with hours, but we have also felt like that over the course of the last several years as we have continued to make investments within our team—been able to really, I think, help support how they function and they can provide service to customers—we have also seen some benefits from a productivity perspective, which is kind of what we would have expected to see given how we have leaned into that area of our business over the last few years. Brad Beckham: Yeah. And Scot, I may just jump in. This is Brad. Jeremy said it really well. Very good observation on the pieces of our SG&A. I just have to brag on Jason Tarrant and the store teams, all the field leadership out there overseeing our stores. They just continue to do a phenomenal job walking the fine line of giving excellent customer service—industry-leading customer service—on all hours of operation while really managing our labor well, even though we continue to grow SG&A at the rate we do. To your point, we have invested in wages. There has been a lot of wage inflation, but they have been able to take on that wage inflation, continue to reduce store-level turnover, improve retention, and, to your point, we have seen really solid productivity in return. They are also doing a great job just with a continuous improvement mindset in the way that we push labor from the office, the way that we reduce tasks in the stores to make sure that all of our store managers and store teams really have the ability to focus on serving customers—great teamwork focused on the customer-facing team member, focused on the customer. And, even though it sits in gross margin, our DC teams continue to do the same thing—continuous improvement, reducing turnover, improving retention—and overall giving better service and levering expenses. Scot Ciccarelli: Very helpful. Thanks, guys. Brent Kirby: Thanks, Scot. Operator: Thank you. Our next question is coming from Maksim Rakhlenko with TD Cowen. Your line is live. Maksim Rakhlenko: Great. Thanks a lot. So first, just on the consumer front, what is the latest thinking around the level of gas prices where there could be some impact on miles driven? Historically, I think you guys talked about $4 a gallon, but maybe that is now moving a little bit higher as there has not seemingly been much change, at least on a national level, for miles driven. So just curious how you guys are thinking about that. Brad Beckham: Yeah. Hey, Max. This is Brad. Great question. So maybe just to kind of pull it up again—lot of history through fuel price cost, both with diesel and gasoline. What we have seen over a long period of time is that it takes a sustained level of heightened fuel prices to really start even to a minimal level affecting miles driven. What we have seen is that, even though that takes a longer period of time—more sustained high levels, which we have not seen yet; still very early to tell really what is going to happen with fuel costs—really what we have seen is it taking, we have always kind of thrown out the number of a sustained level over $4 a gallon. And when you look at the broader U.S. market and the majority of the markets we operate in, we have not seen that yet. Diesel prices have been very high. Obviously, gasoline prices have crept up. But as we mentioned earlier, on the business front, aside from expenses, on the sheer consumer front and what we are seeing from consumer demand, we have not seen an impact that we would tie directly to gas prices, and we are not really great at predicting where this is going to go in the future. But it would take a sustained level of heightened gas prices and well north of that $4 a gallon, if history repeats itself, for us to see any kind of impact to miles driven. Again, just with the caveat that we said earlier that the short-term spike at the pump can just create a shock with a consumer that—even though we define the consumer today as still relatively healthy—low-income to middle-income consumer, that is our core customer, has seen a lot of inflation over the last couple years and a lot of other ways that they operate their household and everything they do. And so you could see some short-term shocks, but it would take a sustained level of well over those numbers that we have yet seen. Maksim Rakhlenko: Okay. Great. That is very helpful. And then can you speak to the competitive environment with the folks on the independents and WDs? How are they dealing with an increasingly challenging operational backdrop? And then ahead, is your take on O'Reilly's ability to take market share at a faster pace, maybe, than what we have seen historically? Brad Beckham: Yep. Absolutely, Max. A little bit hard for us to speak from the independent side. Obviously, we have a lot of insights, but we try to stay in our own lane and focus on what we know is going to take share versus exactly what an independent parts store or a WD or some of the larger regional players are exactly doing. But we do feel like a sizable part of our share gains currently is coming from the weaker or smaller independent player. Within that independent space, you have a lot of different cohorts of competitors. You have everything from true mom and pops that maybe are a part of a buying group to some of the 8- to 10-store chains all the way up to some of the most sophisticated private equity–backed type independent WD players that are scaled across the U.S. And so I think when you start at the bottom and talk about the small independents—with interest rates, with holding costs of inventory, inflation, and inventory investments that are needed to truly compete—I think there probably is quite a bit of disruption going on right now, to some degree maybe a little lesser degree with those mid-size competitors. And then, you know, we never take anybody for granted, but for sure do not take the more scaled competitors on the WD side for granted because they are scrappy. They never lose their grit. They are well run. And they are figuring out how to navigate this, even like the largest of players. So that would be how I would categorize the competitive landscape on the independent side. And then, to your point on just outsized share gains as we move forward—number one, I want to be careful because we want to stay humble. We want to stay hungry. We do not take anything for granted. We do not take any competitors for granted, first and foremost. That said, we have a lot of conviction right now in the high level of execution that our team continues to deliver. We have got a lot of good things in flight. We are executing well. We feel like we have the right strategies on both sides of the business to continue to take share in any market backdrop. To say what will be outsized versus what we have seen in the last couple of years, I think we just want to let our numbers do the talking. Maksim Rakhlenko: That is awesome. Appreciate all the color. Thanks a lot. Brad Beckham: Thanks so much, Max. Operator: Thank you. Ladies and gentlemen, unfortunately, we have reached our allotted time for questions. I will now turn the call back over to Mr. Brad Beckham for closing remarks. Brad Beckham: Thank you, Ali. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our second quarter results in July. Thank you. Operator: Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the American Financial Group 2026 First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Diane Weidner, Vice President of Investor Relations. Please go ahead. Diane P. Weidner: Good morning, and welcome to American Financial Group's first quarter 2026 earnings results conference call. We released our results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's website under the Investor Relations section. These materials will be referenced during portions of today's call. Joining me this morning are Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group; and Brian Hertzman, AFG's CFO. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide 2 of our webcast. Some of the matters to be discussed today are forward looking. These forward-looking statements involve certain risks and uncertainties that could cause our actual results and/or financial condition to differ materially from these statements. A detailed description of these risks and uncertainties can be found in AFG's filings with the Securities and Exchange Commission, which are also available on our website. We may include references to core net operating earnings, a non-GAAP financial measure in our remarks or in responses to questions today. A reconciliation of net earnings to core net operating earnings is included in our earnings release. And finally, if you're reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy. And as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now I'm pleased to turn the call over to Carl to discuss our results. Carl Lindner: Well, good morning, and I'll begin by sharing a few highlights of AFG's 2026 first quarter results, after which Craig and I will walk through more details. We'll then open it up for Q&A, where Craig, Brian and I will respond to your questions. We are pleased to report an annualized core operating return on equity of 17% for the first quarter, which was driven by strong underwriting margins. Our compelling mix of specialty insurance businesses, entrepreneurial culture, disciplined operating philosophy and an astute team of in-house investment professionals continue to position us well for the future, enable us to continue to create value for our shareholders. Craig and I thank God, our talented management team and our great employees for helping us to achieve these results. I'll now turn the discussion over to Craig to walk us through some of these details. Craig Lindner: Thank you, Carl. Please turn to Slides 3 and 4 for a summary of earnings information for the quarter. AFG reported core net operating earnings of $2.47 per share at a 2026 first quarter, a 36% increase from the prior year period. I'll start with an overview of AFG's investment performance and financial position and share a few comments about AFG's capital and liquidity. The details surrounding our $17.1 billion investment portfolio are presented on Slides 5 and 6. Excluding the impact of alternative investments, net investment income at our property and casualty insurance operations for the 3 months ended March 31, 2026, increased 8% year-over-year due primarily to higher balances of invested assets. As you'll see on Slide 6, approximately 2/3 of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 5.25%. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents, was 3.1 years at March 31, 2026. The annualized return on alternative investments at our P&C portfolio was slightly negative in the 2026 first quarter compared to 1.8% for the prior year first quarter. A number of factors contributed to the lower returns with the most significant impact attributable to a $13 million mark-to-market loss on our $133 million investment in the CLOs that AFG manages. The mark-to-market loss reflects the deterioration in the broadly syndicated loan market in the first quarter of 2026. Longer term, we continue to remain optimistic regarding the prospects of attractive returns from our overall alternative investment portfolio with an expectation of annual returns averaging 10% or better. Recently, there's been an increased focus on insurers' exposure to private credit. AFG has direct private credit exposure, which we define as direct lending to private companies approximating $250 million, which represents 1.5% of total investments. We also have indirect private credit exposure via investments, which are almost exclusively investment-grade rated and benefit from significant structural subordination. We own investment-grade rated bonds issued by BDCs and private credit funds aggregating approximately $800 million, which represent less than 5% of total investments. In addition, we own AAA-rated middle market CLO tranches as disclosed at our supplement. We believe that even in a severely adverse economic environment, the significant structural subordination in these securities provide meaningful protection against any material risk of loss. As of March 31, 2026, the market value of our direct and indirect exposure to private credit is approximately equal to cost. In April of 2026, AFG reached definitive agreements to sell the Charleston Harbor Resort and Marina. Subject to receipt of necessary third-party approvals and satisfaction of customary closing conditions, the transaction is expected to close in the second or third quarter of 2026. AFG currently expects to recognize a pretax core operating gain of approximately $125 million on the sale. This transaction was not complicated -- contemplated in AFG's original business plan assumptions. Please turn to Slide 7, where you'll find a summary of AFG's financial position at March 31, 2026. During the quarter, we returned nearly $260 million to our shareholders, including $60 million in share repurchases, a $1.50 per share special dividend and a $0.88 per share regular quarterly dividend. We expect our operations to continue to generate significant excess capital throughout the remainder of 2026, which provides ample opportunity for acquisitions, special dividends or share repurchases. We evaluate the best alternatives for capital deployment on a regular basis. We continue to view total value creation as measured by growth in book value plus dividends is an important measure of performance over the long term. For the three months ended March 31, 2026, AFG's growth in book value per share, excluding AOCI, plus dividends was 3.1%. Our strong operating results, coupled with the effect of capital management and our entrepreneurial opportunistic culture and disciplined operating philosophy, enable us to continue to create value for our shareholders. I'll now turn the call over to Carl to discuss the results of our P&C operations. Carl Lindner: Thanks, Craig. Please turn to Slides 8 and 9 of the webcast, which includes an overview of our first quarter results. Our Specialty Property and Casualty businesses are off to a strong start this year, producing a 66% year-over-year increase in underwriting profit. Looking at a few details, you'll see on Slide 8 that our Specialty Property and Casualty insurance businesses produced a strong 90.3 million combined ratio in the first quarter of 2026, an improvement of 3.7 points from the 94% reported in the first quarter of 2025. First quarter 2026 results include 2.2 points from catastrophe losses compared to 4.5 points in the first quarter of 2025. First quarter 2026 results benefited from 4.4 points of favorable prior year reserve development compared to 1.3 points in the first quarter of 2025. Each of our Specialty Property and Casualty groups reported higher year-over-year underwriting profit. In first quarter 2026 gross and net written premiums were 6% and 3% higher, respectively, than the comparable period in 2025. We continue to benefit from the diversification across our 36 businesses and achieved premium growth in the vast majority of them as a result of a combination of new business opportunities, a good renewal rate environment and increased exposures while maintaining discipline and focusing on underwriting profitability. Average renewal rates across our Property and Casualty Group, excluding workers' comp, were up approximately 5% for the quarter. That was in line with the previous quarter. Average renewal rates, including workers' comp were up approximately 3% overall. We have reported overall renewal rate increases for 39 consecutive quarters and we believe we're achieving overall renewal rate increases that enable us to meet or exceed our targeted returns. Now I'd like to turn to Slide 9 to review a few highlights from each of our Specialty Property and Causality business groups. Details are included in our earnings release, so I'm going to focus just on summary results here. The businesses in the Property and Transportation Group achieved an excellent 87.6% calendar year combined ratio overall in the first quarter of 2026, an improvement of 4.9 points from the 92.5% reported in the comparable 2025 period. Nearly all the businesses in this group reported higher year-over-year profitability led by Agricultural and Transportation businesses. First quarter 2026 gross and net written premiums in this group were 11% and 6% higher than the comparable prior year period. The increase is primarily attributable to growth in our crop insurance products with higher premium sessions, along with new business opportunities, higher exposures and a favorable rate environment in several of our transportation businesses. Overall, rates in this group increased approximately 6% on average in the first quarter of 2026. Our Commercial Auto businesses produced a solid underwriting profit in the first quarter. After 15 years of rate increases, continued refinement of underwriting and claims routines and investments in our loss control and risk management practices, we're seeing progress in commercial auto liability. And I'm especially pleased to report a small underwriting profit in commercial auto liability for the quarter. We still have more work to do and remain focused on achieving rate in excess of prospective loss ratio trends. In fact, our rates in this line were up approximately 14% in the first quarter. And taking an early look at crop insurance, industry estimates for the 2026 planted acreage for corn and soybeans overall are generally unchanged from 2025 levels. And planning progress is ahead of historical averages. Generally speaking, for the vast majority of our insured crops, the corn planting window runs from mid-April through the end of May, and the soybean planting window runs from late April to the end of June. It is really early in the growing season. Current commodity futures for corn and soybeans are trading about 7% and 5% higher, respectively, than 2020 spring discovery -- 2026 spring discovery prices. Our crop results for 2026 will depend on the harvest yields and prices in the second half of this year. Now the businesses in our Specialty Casualty Group achieved a 95.8% calendar year combined ratio overall in the first quarter, an improvement of 1.8 points from the 97.6% reported in a comparable period in 2025. First quarter 2026 gross and net written premiums both increased 2% when compared to the same prior year period. growth from new business opportunities and higher renewals in our targeted markets and workers' compensation businesses were partially offset by heightened competitive conditions in our excess and surplus lines business. Excluding our workers' comp businesses, renewal rates for this group were up approximately 6% in the first quarter, consistent with the prior quarter. Pricing in this group, including workers' comp was up about 3%. Now on the Specialty Financial Group, we continued to achieve excellent underwriting margins and reported an exceptional calendar year combined ratio for the first quarter of 2026, an improvement of 7 points from the comparable period in 2025. Gross and net written premiums in this group increased by 6% and 1% respectively, in the 2026 first quarter compared to the same 2025 period, primarily due to growth in our lender services businesses. Net written premiums were tempered by our decision to seed more of the coastal exposed property business in our financial institutions business beginning in the second quarter of last year. Renewal pricing in this group was up about 1% in the first quarter of 2026, consistent with the prior quarter and reflecting the strong margins overall earned on these businesses. Craig and I are proud of our proven track record of long-term value creation, and we feel AFG is well positioned to continue to build long-term value for our shareholders for the remainder of this year and beyond. I will now open lines for a Q&A portion of today's call. And Craig and Brian and I would be happy to respond to your questions. Operator: [Operator Instructions] The first question comes from Hristian Getsov with Wells Fargo. Hristian Getsov: My first question is on the marina sale. Can you quantify what the yield or NII contribution was from that asset? Do we think about revising the go-forward NII? And any specific you could provide for the use of the proceeds once the sale is completed. Craig Lindner: Brian, you might have exactly what's reported in the financials. Last year, we did about $16 million of NOI on the property. Brian Hertzman: If you think about the proceeds all how to invest with the $125 million estimated pretax gain, we're going to have more than sort of triple the cost basis to reinvest. If you think of it that way, to replace that income, just investing so ever our normal returns, I think we'll sort of replace the investment income depending how we do, what we do with the money, but just reinvesting that proceeds at, say, 5% or 6% would replace the income from the property. Craig Lindner: Yes. I'm doing a kind of pro forma, I think it really depends upon what we do with the cash. Half of the asset is owned in the parent company. Half is owned in the P&C business. I mean, if we repurchase shares, you get one answer. If you just invest in bonds, you get a different answer. But -- or if we invest in our business earning high-teens returns on capital. So the question is what do we use the proceeds for. I think there's some opportunities for us to to redeploy that capital and have it not be dilutive? Hristian Getsov: Got it. And then for my second question, I noticed you pulled the comment from the press release that the P&C pricing was ahead of loss trend. Can you talk through where pricing is relative to the trend now? And was that common in prior periods primarily on the pricing including comp, which I think was down a point quarter-over-quarter. It also applies to the pricing metric ex comp, which was stable. Carl Lindner: Yes. I'm very pleased with our our pricing results in the first quarter. Outside of workers' comp, really, the quarter price increases for each of the segments in that we're in line with the fourth quarter. Workers' comp pricing was down around 3% in the first quarter. The good news along with that is, when you look at the loss ratio trends in our workers' comp book, they continue to be very benign, and in some cases, positive. And our workers' comp results continue to be excellent in the first quarter. So actually, very pleased. I think overall, it's probably good news if -- when almost all of our businesses are earning the targeted returns, it allows us potentially to be more competitive and just cover loss ratio trends, not necessarily exceed them. Now that said, in certain businesses where we still have some work to do. As I mentioned, commercial auto liability. We'd like to see that continue to make a bigger underwriting profit. We're taking a rate that's in excess of prospective loss ratio trends. I think the same is true in Specialty Casualty with our excess liability and umbrella business, where we're getting priced that continues to be very strong. So I'm very pleased with our first quarter pricing results. Craig Lindner: Should go back to your first question on Charleston. So Brian, just is giving me the amount that was expected to be reported in 2026. I gave you an NOI number of $16 million. The amount that we had in our plan from Charleston was $12.3 million. So it must be a depreciation that accounts for the difference. Hristian Getsov: Got it. And then, I guess, just sticking with the return. So originally, when you laid out your business plan assumption, you were looking for 8% for the full year. Does the first quarter result change that perception, or do you expect like a meaningful acceleration as we go into the back half? Craig Lindner: I would say, given the start to the year, 8% is probably an aggressive number. We give assumptions that go into our initial plan, but don't intend to update those during the year. Certainly, our expectation is for better performance from the old portfolio for the balance of the year. Operator: And the next question comes from Andrew Anderson with Jefferies. Andrew Andersen: Could you walk through some of the drivers of the expense ratio increase? Maybe how much of that is structural versus timing from investments and tech or growth initiatives, or how much of it might be on contingent commissions? Brian Hertzman: Sure, Andrew. This is Brian. So if you look across the segments, there's different things driving the different segments. Overall, we continue to invest in our future with IT initiatives around customer experience, IT security and data analytics. So that does have some upward upward pressure there, but that's relatively modest. If you look at Specialty Casualty, the expense ratio is up a little bit. Some of that is mix of business. And some of that is in our -- some of our excess and surplus businesses. We're getting slightly lower ceding commissions from reinsurers. So on ceding commissions reduced underwriting expenses, beginning a little bit lower ceding commission has modest negative impact on the expense ratio in casualty, but we still feel really good about those reinsurance contracts and the results overall from those businesses. And then in the financial segment where you see the biggest uptick, that's kind of a bit of good news in that our financial institutions business, some of the commissions that we paid to brokers and agents vary with the profitability of the business. So with that business being very profitable for another quarter in a row, that shows improvement in the loss ratio. But then in the expense ratio because of the higher commission, the contingent commission goes up and makes that expense ratio go up a little bit. Andrew Andersen: And then on consolidated premium growth, I think the business plan was for 3% to 5% for full year. It sounds like crop pricing as early reads are positive. I don't know if you could share what you were kind of thinking in terms of consolidated full year planned growth relative to crop insurance, but it seems like it's starting out better than perhaps the last couple of years from a pricing perspective? Carl Lindner: Yes. I think we would see -- when you look at where the spring discovery prices end up, went up a little bit, went down a little bit and -- on corn. So I mean, we think that when all is said and done, our gross written premium is going to be flat. And because we're -- due to some changes in our quota share, our net written premiums will be up nicely. So that's kind of what the growth perspective is there in crop. Operator: And our next question is going to come from Michael Zaremski with BMO Capital Markets. Michael Zaremski: On the Specialty Casualty segment, if we kind of look at the underlying loss ratio good results. I think there is some kind of positive seasonality there. Did that come through in a big way? I guess I'm trying to tease out whether you all feel better about kind of turning the corner on social inflationary lines and starting to see some maybe directionally better loss ratios on those lines in this segment. Carl Lindner: Yes. I mean, I do think we feel -- we do feel better in that. I wouldn't make too much out of any one quarter. We always kind of caution. You can have some variability quarter-by-quarter on that. But yes, I think we are more positive. I mean that said, as I just mentioned, in lines like excess liability, where social inflation creates loss ratio trends that are higher. We're still very much focused on pricing that either equal or exceeds the loss ratio trends in that. So I think in past conference calls, I talked about being through pretty much the re-underwriting and restructuring in excess liability on limits reductions and our nonprofit business, getting off business. And both our nonprofit business and our excess liability umbrella businesses are showing growth in the first quarter. So happy to see that there is a positive trend on the growth side there also. Michael Zaremski: Got it. Switching gears is helpful to share repurchases, a bit higher than expected, although I see the share count not too different than expected, so maybe there was some movement there. Anything we should read into on share purchases that you might be leaning into a bit more at current valuations or just normal kind of activity? Craig Lindner: Yes. This is Craig. So we have a lot of excess capital currently expect to generate a significant amount of additional excess capital for the balance of the year. And we just thought at the prices that we were able to repurchase stock that was a very good use of some of our excess capital. I think we paid a little over $127 a share and felt that was a very good value. Michael Zaremski: Got it. And just maybe just stepping back in terms of the competitive environment, I think one of the main questions we continue to get is industry is earning very healthy returns. Should we expect kind of the competitive levels to continue to incrementally increase as as the year plays out. It feels like that's a direction kind of the right direction unless you all feel like they're maybe some level of some lines have kind of reached the floor on how much further they can kind of change in price? Carl Lindner: Yes. I think it's more status quo. I think what we're seeing in the first quarter is what we're going to see for the rest of the year. And as you mentioned, I mean, we're in plus different businesses and competitive conditions are different in each. And there are some businesses like commercial auto and commercial liability where the industry is still feeling the pain. And I think where we're getting our shop in order, it could provide some nice opportunities for a little bit better growth for us there. Clearly, in things like excess liability, everybody is still challenged by the loss ratio trends there. So I think -- so I was kind of happy to see some disruption here on the -- among fronting companies here recently and around issues around casualty. I've always been pretty skeptical about how many of the MGAs or MGUs or the private equity capital coming behind and reinsurers coming behind a lot of these entities writing volatile casualty business. If anything, I think those that have been pricing below us and commercial auto liability and excess liability and some of the more volatile lines, I actually think there's probably going to be more problems that are going to surface over the next 12 months rather than status quo at least in some of those -- some of the more longer-tail casualty lines. Operator: And our next question will come from Paul Newsome with Piper Sandler. Unknown Analyst: This is Cam on for Paul. I know you mentioned a little bit of pain in commercial auto, and we've certainly seen some companies dealing with that this quarter and in some quarters in the past. I'm just curious if the trend on inflation and severity in commercial auto if you're seeing any acceleration in that trend, or is it more so relatively stable than what we've seen in the past couple of quarters? Carl Lindner: I think it's been pretty consistent. Really, it's been consistent for years being high single digit, even low double digit in some years. We're really pleased that, again, I'm paused after having to be on the conference calls over the last 8 years, telling you I want to get commercial auto liability to an underwriting prop. I'm happy to report, we've done that in the first quarter. So when you look at our overall commercial auto results then earning really solid returns at this point with us getting the commercial auto liability to [indiscernible] rent profit. Operator: And our next question is going to come from Meyer Shields with Keefe, Bruyette, & Woods. Meyer Shields: I just want to stick with the commercial auto side, if I can, because it is impressive where you've come. When you talk about can you talk about the bringing more work to do, is that rate or is that other underwriting actions within the book? Carl Lindner: No, I think it has to do with continuing to take rate that exceeds loss ratio trends in order to get the commercial auto liability from a small underwriting profit to a meaningful underwriting profit. Meyer Shields: Okay. That's helpful. I just don't know if there's anything else going on. And then Brian, one follow-up question on Specialty Financial. I totally get the variable compensation. But last year's loss ratio in this segment was actually lower and the expense ratio was all flower. So I'm wondering what else is going on underneath the surface. Brian Hertzman: So there are a couple of other things there. One is the commissions that we plan that business over long periods of time. So the commission -- if you had some bad quarters, they kind of roll off and good quarters roll in, it can make the cumulative commission higher. There's also a mix of business impact there in that -- some of the other businesses in financial that run at a higher loss ratio than that financial institutions business also grew this quarter. And I think another thing to look at, too, is those commissions are based on the profitability overall. So if you can get an accident year loss ratio ex cats, cats were higher last year than this year in the Financial segment, so that would have also had an impact on commissions making this our a better year from a including cats perspective. Operator: And the next question will come from Hristian Getsov with Wells Fargo. Hristian Getsov: I just have one more follow-up. Any indirect impact on your portfolio that we should think about from the Iran complex, particularly just thinking about like the huge uptick in fertilizer costs and then just overall inflation acceleration? Like how are you guys thinking about that? Carl Lindner: Yes. I think we're in good shape so far. I mean, the near-term impact to us is negligible or pretty modest and manageable in that higher fertilizer and fuel costs really don't impact this year much. I think most of the fertilizer and that was already purchased by farmers, and they're in the process of planning. I think future impact kind of has to do with how long the -- - this conflict goes or this war goes on that. But as far as other in other lines of business and that we really have pretty modest exposure in that. Operator: [Operator Instructions] I am showing no further questions at this time. I will now turn the call back over to Diane for closing remarks. Diane P. Weidner: Thank you, Michelle, and thank you all for joining us this morning and for your questions. We look forward to connecting with you again when we share results at the end of the second quarter. We hope you all have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International, Inc.'s First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation, we will open up the lines for questions. I will now turn the call over to Allie Summers, senior director of investor relations. Please go ahead. Allie Summers: Good morning, and thank you for joining us. Before we begin, please note that today's discussion includes forward-looking statements as defined under U.S. securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information, please refer to our filings with the SEC, including our most recent Forms 10-K and 10-Q. These statements speak only as of today, and we undertake no obligation to update them. A reconciliation of any non-GAAP financial measures referenced in today's remarks is included in our earnings press release available on the Investor Relations section of choicehotels.com. Joining me this morning are Patrick S. Pacious, our president and chief executive, and Scott E. Oaksmith, our chief financial officer. Patrick S. Pacious will discuss our business performance and strategic progress, and Scott E. Oaksmith will review our financial results and outlook. With that, I will turn the call over to Patrick S. Pacious. Patrick S. Pacious: Thank you, Allie, and good morning, everyone. We appreciate you joining us today. We delivered first quarter results in line with our expectations, signaling an inflection point in underlying trends toward rooms growth, RevPAR improvement, and lower capital intensity. The work we have done over the past several years has now positioned us as a more accretive, asset-light growth model with significantly lower capital intensity and stronger unit economics, which is reflected in the continued expansion in our average royalty rate. Taken together, this supports more consistent earnings growth and increasing returns to shareholders. At Choice Hotels International, Inc., our strategy is built on a straightforward, repeatable model. Improving franchisee economics drives demand and rooms growth, which we convert into higher-quality earnings and free cash flow. We reinvest that cash in high-return, capital-light opportunities and return excess capital to shareholders in a disciplined and increasingly predictable way. We are now seeing this translate more clearly into our results. First, U.S. net rooms growth is inflecting and improving sequentially, with gross openings up 32% year over year, first quarter hotel openings at a five-year high, and exits at their lowest level since 2023. Our U.S. pipeline is also expanding sequentially, providing greater visibility into future growth. At the same time, our international portfolio continues to scale as an additional growth engine. Second, franchisee unit economics are improving, driven by stronger revenue delivery and lower hotel development and operating costs. This is resulting in stronger returns across the system, reflected in our strong voluntary franchisee retention rate and continued expansion in our average royalty rates, with improving RevPAR now flowing through a higher-quality, more revenue-intense system. And third, as we move beyond a period of elevated investment that has achieved its strategic objectives, capital intensity is now declining materially, with development outlays coming down. As market conditions continue to improve, we intend to accelerate capital recycling, further enhancing our ability to return capital to shareholders and drive a more consistent capital return profile. We were pleased with the quarter, and in the 46 states not impacted by hurricanes, RevPAR was up 1.8% year over year, driven by gains in occupancy. Looking ahead, as we move past last year's hurricane impact, demand continues to benefit from tax refunds and is expected to be further supported by event-driven travel this summer such as the FIFA World Cup and the U.S. 250th anniversary. More broadly, we are seeing strength across our core segments, supported by several structural trends that are already driving performance today. Affordability remains a key factor in travel decisions, aligning directly with our value-oriented brands and core middle-income customer. We are seeing continued strength in small and mid-sized business travelers and group demand. Employment growth continues in sectors such as healthcare, construction, and utilities, driving workforce-based travel from customers who rely on our hotels. In addition, repeat stays from the rising number of retirees and road trips provide a stable base of demand. We are also seeing a shift in guest expectations toward accommodations that feel more like home, supporting strong demand for our extended stay portfolio. Importantly, these are not future tailwinds. They are trends we are seeing in the business today, contributing to a stable and diversified demand base across cycles. So when you step back, the story is clear. Room growth is inflecting, unit economics are improving, and capital intensity is declining, positioning us to deliver more consistent earnings growth over time. Importantly, we believe we are uniquely positioned to capture demand in segments where we have a structural advantage. Let me build on that by focusing on what is driving the durability of our room growth. Our growth is driven by a conversion-led development model where we have a clear advantage in speed and capital efficiency; a brand portfolio aligned with both guest demand and owner returns; and improving unit-level economics that continue to drive developer demand across our core segments. Globally, we grew rooms by 1.7% year over year, with growth improving sequentially. In the U.S., developer demand remains strong, with franchise agreements awarded up 65% year over year in the first quarter. We have made meaningful progress in reducing the time from signing to opening, enabling faster revenue generation. In the first quarter, U.S. conversion room openings increased 59% year over year, and approximately 60% of franchise agreements executed in the quarter are expected to open this year, providing strong near-term visibility into growth. Importantly, a meaningful portion of our openings come from conversions that never appear in our quarter-end pipeline, underscoring the speed of our model. We also focus on segments where we are structurally advantaged. Extended stay remains a key growth driver, with 11 consecutive quarters of double-digit rooms growth, and now represents more than 40% of our U.S. pipeline. Supported by strong unit-level economics, a dedicated extended stay field organization, and a leading hotel pipeline, we are well positioned to extend our leadership in this category. In midscale and economy transient, we are seeing strong developer interest, with U.S. franchise agreements awarded up 38% year over year and pipelines continuing to build, driven by improving unit-level economics and owner returns. As part of our focus on enhancing franchisee returns, we have reduced the cost to build and convert hotels, including lowering prototype costs by up to 25% across key midscale brands and simplifying property improvement requirements. A clear example is Country Inn & Suites by Radisson, where the redesigned lower-cost prototype is driving renewed momentum with franchise agreement growth of 50% year over year for the brand. In economy transient, our portfolio strategy continues to improve system quality and guest satisfaction, supporting continued developer engagement with the pipeline increasing 26% sequentially. International continues to scale as an important growth engine, with net rooms up 13% year over year in the first quarter. In Canada, we are seeing strong early returns following last year's transition to a direct franchise model, with net rooms growth of over 30%—the strongest performance in more than a decade—and a pipeline up 55% year over year, alongside improving revenue and guest satisfaction. As we continue to enhance the Choice Hotels International, Inc. value proposition internationally, we see a meaningful opportunity to drive both system growth and stronger franchise economics over time. Our hotel development pipeline remains a powerful engine for future earnings growth. Importantly, 97% of rooms in our global pipeline are in higher-revenue brands, which we expect to be approximately 1.7 times more accretive than our current portfolio. Taken together, these trends reinforce our confidence in our ability to deliver durable global net rooms growth, supported by a structurally advantaged portfolio, a high-quality and more accretive pipeline, and a development model that enables consistent, capital-efficient expansion. Turning to unit economics, our growth is supported by structurally improving franchisee economics driven by enhancements to our revenue generation engine and lower franchisee operating costs. Importantly, the mix of customers we are attracting is becoming more valuable over time. The segments where we are growing—business travelers and groups—generate higher spend per stay, while loyalty is driving more repeat stays. Together, this translates into stronger franchisee economics. Loyalty is a key driver of our higher-quality demand and customer lifetime value. Our Choice Privileges program now exceeds 75 million members, up 7% year over year. Earlier this year, we launched the next evolution of the program, building on the strong momentum we delivered last year through continued enhancements designed to further strengthen engagement and drive repeat stays. We are already seeing this translate into our results, with loyalty contribution increasing over 300 basis points in March year over year, as new members generated higher revenue per member than prior-year cohorts. In business and group travel, we continue to see strong performance, with small and mid-sized business revenue up 14% and group revenue up 9% year over year, supported by recurring event-driven demand such as youth sports. This performance reflects our ability to effectively capture and convert these higher-value demand segments across our platform. Technology is an increasingly important differentiator for Choice Hotels International, Inc. We have a long-standing advantage, having been an early mover in migrating both our infrastructure and data to the cloud, which underpins how we deploy AI across our business. That foundation enables us to move faster, deploy capabilities at scale, and translate innovation into real business outcomes for our franchisees. We are already seeing this in action. For example, our recently launched AI-enabled EasyBid platform is improving response time to group RFPs by approximately 30%, which is translating into conversion rates that are roughly 250 basis points higher and driving incremental group business for our franchisees. Through our long-standing partnership with AWS, we are the first major hospitality provider in the U.S. to standardize on a common AI foundation, allowing us to move beyond pilots and rapidly deploy capabilities across our business, embedding them across guest experience, franchise operations, and distribution. We are also extending these capabilities through our partnership with Salesforce, where we are deploying intelligent agents across our field organization to improve franchisee operations, strengthen how our hotels capture group demand, and enable faster, more data-driven decisions, giving us the flexibility to rapidly deploy and scale new capabilities across our platform. Together, these capabilities are improving franchisee returns and driving continued expansion in our average royalty rates. Looking ahead, Choice Hotels International, Inc. is well positioned for continued growth with a clear path to more consistent, higher-quality cash returns. U.S. rooms growth is inflecting, unit economics are strengthening, and capital intensity is declining. With a structurally advantaged higher-quality portfolio of hotels, a more accretive pipeline, a capital-light model, and a differentiated cloud-based technology platform, Choice Hotels International, Inc. is positioned to deliver durable earnings growth and create long-term shareholder value. With that, I will turn the call over to Scott. Scott E. Oaksmith: Thanks, Patrick, and good morning, everyone. Let me start with our first quarter results. For the first quarter, revenues excluding reimbursable revenue from franchise and managed properties increased 3% year over year to $217 million, driven by global rooms growth and expansion in our average royalty rate. Of particular note, international performance was strong, with revenues excluding reimbursable revenue from franchise and managed properties increasing 63% year over year. Adjusted EBITDA was $126 million, compared to $130 million a year ago, and adjusted earnings per share were $1.07 compared to $1.34 a year ago. The year-over-year decline in adjusted EBITDA primarily reflects the timing of certain SG&A costs. The decline in adjusted EPS further reflects a temporary adjustment to our effective income tax rate in the first quarter. These items were anticipated and are expected to normalize over the balance of the year, consistent with our full-year guidance. As a result, we are maintaining our outlook across all key metrics. Let me now turn to the key drivers of our performance. Three themes shaped our first quarter results. First, U.S. net rooms growth improved, supported by strong openings and lower exits. RevPAR trends improved through the quarter, and finally, capital intensity declined as investment in Cambria and Everhome—having achieved its strategic objectives—is now being significantly reduced. Starting with net rooms growth, in the first quarter, we grew global rooms 1.7% year over year, led by a 2.5% growth in our higher-revenue segments and highlighted by a 37% increase in room openings. Developer demand remained robust, with global franchise agreements awarded up 72% year over year. Importantly, in the U.S., performance improved meaningfully, with nearly 6 thousand gross rooms opened in the quarter, and net exits declined 52% year over year and improved sequentially, reaching the lowest level in recent years. As the quarter progressed, hotel development momentum accelerated, with March accounting for approximately 70% of first quarter U.S. franchise agreements executed. Growth was broad-based, led by extended stay and strong momentum in midscale. Conversion activity remains a key driver of our growth, expected to account for over 80% of openings for the full year. U.S. conversion franchise agreements increased 63% year over year, while the U.S. conversion pipeline grew 17% year over year and expanded sequentially, reinforcing our visibility into future openings. Relicensing activity increased significantly year over year, reflecting both brand strength and continued franchisee confidence. Taken together, these trends reinforce our expectation that U.S. net rooms growth returns to positive territory in 2026, with sequential improvement already evident in the quarter. International growth also remains robust. Turning to RevPAR, our global RevPAR declined 80 basis points year over year on a currency-neutral basis in the first quarter, primarily reflecting the lapping of hurricane-related impacts in the prior year. International RevPAR increased 2.6% year over year on a currency-neutral basis, led by strong performance in Canada and the Caribbean and Latin American region. In the U.S., excluding a 410 basis point impact from prior-year hurricane-related demand, first quarter RevPAR increased 1.8% year over year, supported by sequential monthly occupancy gains—an important leading indicator for future RevPAR performance. On a comparable basis, RevPAR turned positive in February and remained positive in March. Preliminary April trends remain positive, supporting our expectations for continued improvement. Performance continues to trend favorably relative to our expectations, supported by constructive underlying demand. Moving to royalty rate, a key driver of our earnings growth, in the first quarter, we increased our U.S. average royalty rate by 11 basis points, reflecting continued growth in higher-revenue brands and ongoing improvement in our franchisee value proposition. We remain confident in the trajectory of system-wide royalty rate expansion, supported by a higher-quality pipeline and ongoing investments in demand generation. Turning to our partnership business, which remains a key priority, franchisee-facing service offerings included within our franchise and management fees continue to gain adoption during the quarter, driving over 10% year-over-year revenue growth. These offerings are also supporting the continued expansion of our non-RevPAR franchise fees. Partnership revenues were $24.7 million in the first quarter, compared to $25.4 million a year ago, primarily reflecting the timing of transactions in certain programs, resulting in some year-over-year variability. We continue to expect partnership service and fees to grow in the mid-single digits for the full year. Together, these revenue streams diversify our earnings base and represent an attractive high-margin growth opportunity over time. Turning to capital, a key component of our strategy is the meaningful reduction in capital intensity as we move beyond the peak investment phase for Cambria and Everhome, both of which have now reached the scale to support ongoing asset-light expansion. Importantly, large-scale, balance sheet-intensive brand incubation is no longer central to our model as we shift towards more capital-efficient ways to grow and scale our brands. With strategic objectives achieved and peak investment winding down, capital deployment is declining and capital recycling is expected to increase materially. In the first quarter, we generated approximately $25 million of proceeds and reduced development outlays by 51% year over year, and we remain on track for net capital outlays of approximately $20 million to $45 million for the full year, approximately 70% lower at the midpoint than 2025 levels. As hotel transaction activity improves, we expect additional opportunities to accelerate capital recycling, further expanding capital capacity. We ended the quarter with total liquidity of $474 million and net leverage of 3.2 times adjusted EBITDA, comfortably within our targeted leverage range of three to four times and providing strong financial flexibility. In the first quarter, we used $23.2 million of cash in operating activities, primarily reflecting working capital timing and higher franchise agreement acquisition costs associated with a 37% year-over-year increase in global room openings. Operating cash flow is tracking in line with our expectations, with variability driven by seasonality and timing. Our capital allocation framework remains disciplined and unchanged. Our first priority is to deploy capital to high-return, capital-light organic investments that strengthen our brands and enhance franchisee economics, including our revenue engine and scalable technology capabilities. We then support a stable dividend. Finally, we return excess free cash flow to shareholders, primarily through share repurchases, supported by our expected free cash flow generation and consistent with our targeted leverage range. As part of our increased focus on shareholder returns this year, we are providing greater visibility into our capital return profile. We expect to repurchase between $175 million to $225 million of shares in 2026, supported by expected free cash flow generation and strong balance sheet capacity. Year to date through March 31, we returned $75 million to shareholders, including $62 million in share repurchases, with 2.3 million shares remaining under our current authorization. Our disciplined capital allocation approach, together with the strength of our asset-light business model, positions us to improve free cash flow conversion excluding franchise agreement acquisition cost over the next several years, moving towards 60% to 65%. For full year 2026, we are maintaining our guidance across all metrics, including adjusted EBITDA of $632 million to $647 million and adjusted diluted earnings per share of $6.92 to $7.14. Our outlook reflects continued growth across higher-revenue hotels and markets, royalty rate expansion, sustained international momentum, and further contribution from partnership and non-RevPAR revenues. It also reflects continued cost discipline, with adjusted SG&A expected to grow in the mid-single digits, supported by operating efficiencies across the business, including the scaling of AI-enabled tools. Our outlook excludes the impact of any additional M&A, share repurchases completed after March 31, or other capital markets activity. As we look ahead, we are well positioned to deliver more consistent earnings growth and stronger free cash flow, supporting long-term shareholder value. With that, Patrick and I are happy to take your questions. Operator: We will now open the call for questions. If you have dialed in and would like to ask a question, please press star-one on your telephone keypad to join the queue. If you would like to withdraw your question, please press star-one again. Your first question comes from the line of David Katz with Jefferies. Please go ahead. Patrick S. Pacious: Go ahead. You might be on mute. David Katz: Just getting myself unmuted. Thanks for taking my question. I would like to talk about the aspirational levels of net unit growth out into the future—yours compared to the peer set. What do you think the levers are? What do you think the prospects are? And how do you see Choice Hotels International, Inc. getting to accelerate NUG in the future, please? Patrick S. Pacious: Well, good morning, David. Great question. When we look at our net unit growth, we saw in the quarter a sequential improvement. As you know very well, we are a conversion-led model, and that has been the driver of growth, and the speed and efficiency with which our conversion pipeline is moving. As we mentioned, the conversion pipeline is up 17%, franchise agreements are up 65% overall, and when we look at that visibility, it gives us a lot of confidence that this inflection point that we are seeing in net rooms growth is happening. Keep in mind, the new construction environment has been very muted given the interest rate environment. So as we see new construction come back—those brands that rely primarily on that—we can see an acceleration in our net unit growth into the future. We feel really good about the inflection point that we have seen, particularly here in the U.S. We feel good about where the franchise agreements sold last year and again into the first quarter are, and the fact that they are conversions for the most part really gives us a lot of visibility and confidence in getting those openings done this year. David Katz: And just to double back on a portion of my question, is there a future at some point where NUG is a low- to mid-single-digit number? Or should we look at this conversion-led model in a different context? Patrick S. Pacious: I think it is possible to get back to those levels that you are talking about when the new construction environment comes back. We are seeing an acceleration in the extended stay segment that has continued to be strong. As new construction comes back, that will only get larger. As an industry, we have been doing much more on the conversion side of the house, and I think the lack of supply growth will incent developers to come back as RevPAR strengthens into the future. So we do see an underlying trend in the future that can get us back to those higher levels. David Katz: Appreciate it. Thank you very much. Patrick S. Pacious: Sure. Operator: And the next question comes from Daniel with JPMorgan. Please go ahead. Analyst: Hi. This is Michael Hirsch on for Dan today. Thank you for taking my questions. A question on consumer health, especially given the rising fuel prices in the U.S. Have you seen any impact on your bookings, or more broadly to consumer sentiment? Patrick S. Pacious: Actually, Michael, we have seen kind of the opposite. The consumer has been pretty resilient given the rise in gas prices. We saw higher gas prices back in 2022 and that really did not temper demand. As I said, we have seen in the last two months a continuing strength in the consumer. The other things that give us a lot of positive feeling going forward are really the affordability trend that is going on in the country that aligns very well with our value-oriented brands. We are seeing a shift in the workforce, as we mentioned in the remarks. You are seeing employment growth in sectors where people have to travel to do their work, and those travelers rely on our hotels. We are also seeing a shift in the way guests want their hotel room to look more like home, and that helps our extended stay hotels. And then, as we have talked on prior calls, we continue to see a rising number of retirees who have discretionary income and discretionary time, and we know we over-index on that type of guest as well. So we feel pretty good about the underlying trends that are supporting the RevPAR projections that we have for this year. Scott E. Oaksmith: And just to follow up on Patrick’s point, when you really look at our business travel, we were really strong during the quarter. Overall, business travel was up 3%, and particularly, our small and medium business was up 14%, and our groups business was up 9%. So really good performance during the quarter. Analyst: Thank you. And a quick follow-up on what Patrick mentioned for U.S. RevPAR—understanding the first quarter was impacted by the hurricane comparison—what are your expectations for U.S. RevPAR in the second quarter and second half of the year? And are there any other calendar considerations that we should keep in mind? Scott E. Oaksmith: We are encouraged by the strengthening trends we saw throughout the first quarter and really saw occupancy strengthen, and that positive momentum continued into April. At the same time, we are still early in the year and being mindful of the broader macroeconomic environment. So while performance has been trending favorably relative to our expectations, we believe it is prudent to remain cautious, and we have upheld our current guidance. But should the economy continue to perform well and these macro risks recede, we think we are well positioned to trend towards the higher end of our forecasted range. For now, we believe a more measured approach is in our best interest. Operator: And the next question comes from the line of Michael Bellisario with Baird. Please go ahead. Michael Joseph Bellisario: Good morning, everyone. Thanks for taking my questions. First, on the RevPAR underperformance—and I get that the hurricane impact in retrospect was greater than you thought—but maybe help us with the two-year stack. I presume your hotels lost market share. Why do you think that was the case, and when do you think that ultimately starts to recover for at least those affected hotels? Patrick S. Pacious: Michael, we look at a couple of things. The first is the key point in all of this is occupancy. We saw strength of that indicator all last year, and that grew again in the first quarter. So we are seeing demand come back into the hotels, and that is a really strong fundamental for the cycle to shift and move in the right direction and make it durable. Then, on top of that, as owners get more comfortable with the demand environment, they raise price. The other thing that is important to note is when you open 6 thousand rooms in a quarter, the ramping of that as well has an impact on RevPAR. So we are very comfortable with the RevPAR projections that we have for the full year. When you take the hurricanes out—just as a reminder, about 20% of our portfolio sits in the four states that were impacted by the hurricane—so it had a very significant effect on our Q1 numbers last year. As we look into April and beyond, it will be a much easier year-over-year comparison. Scott E. Oaksmith: Just to put a finer point on that, when you look at the various regions outside of the South Atlantic where those four states are, every region had positive RevPAR throughout the quarter—up about 1.5% to 2%. So it really was a regionalized hurricane impact to our results. As we said in our prepared remarks, if you pull out the hurricane impact, the entire system was up about 1.8% for the quarter. Michael Joseph Bellisario: That is helpful. And then real time—stock is down 14%—the market does not like surprises; that is what we got today. How do you plan on handling communication better, telegraphing some of the moving pieces in the model on a go-forward basis? Patrick S. Pacious: We are very happy with the improving underlying trends that we are seeing. We are seeing unit growth inflecting, RevPAR improving, capital intensity declining. These are all things we talked about on the February call. While the financial results were in line with our expectations, the underlying trajectory of the business is much stronger than the quarterly year-over-year comparison suggests. We are going to keep communicating the positive story that we have and the results that we are achieving. Operator: Alright. Thank you. And the next question comes from the line of Patrick Scholes with Truist Securities. Please go ahead. Patrick Scholes: Hi. Thank you. Question for you regarding market share. I know when, coming out of COVID, you were pretty vocal and granular when you were receiving market share gains. Along that same line, what was your market share change year over year versus last year in the most recent quarter? Thank you. Scott E. Oaksmith: In terms of index, if you take out those hurricane states that we mentioned, we were generally in line with the performance in the various local markets that we are in. The heavy skew, as Patrick mentioned, of our portfolio in those four states—about 20% of our product—has skewed our comparisons when you look at the overall STR numbers. On a localized basis, we are in line with the performance of the overall segments we operate in those local markets. Patrick Scholes: Okay. But let us not take those out. What would it be for the whole portfolio? Scott E. Oaksmith: As we mentioned, the hurricane had about a 400 basis point impact. So if you look across the chain scales, our performance in those markets certainly pulled down the overall results. Outside of those numbers, we feel really good about the way our hotels are performing against their local comp sets. Patrick Scholes: So I cannot get a number like you had given before. Is that correct? Scott E. Oaksmith: It really is by segment, Patrick. In the past, we have provided some other RPI gains against the various segments that we operate in—economy, midscale, upper midscale. We do not have those to provide today, but we are happy to follow up. Patrick Scholes: Okay. It would be helpful. Thank you. Operator: And the next question comes from the line of Robin Farley with UBS. Please go ahead. Robin Margaret Farley: Great, thank you. Two questions. First, looking at the STR numbers and some other companies raising RevPAR guidance for the remainder of the year—understand the hurricane comps were an issue, and it sounds like that would have dissipated by now in April—is there anything else from a geographic perspective, other than the hurricane issues in Q1, that would mean Choice Hotels International, Inc. would not participate in this better outlook than how things looked at the start of the year? And second, on the line for equity and loss of affiliates, some of those losses have been coming in bigger. I understand that Canada is now wholly owned and so there was a shift there. Is there development spend or what other things are making that line look like a heavier loss than it had been historically? Patrick S. Pacious: It is important to remember Q1 is one of the lowest contributors from a travel perspective for our type of travelers. That also plays into why we maintained our RevPAR guidance. As we said, we are seeing very positive trends, particularly in March and April. It is occupancy-driven, which is critical from the standpoint of durability, and we feel really good about that. As we get into Q2 and Q3, where we have much more of that summer drive travel—and this year in particular, we have event-driven travel—I think you will see that pick up, and we will be able to give a clearer view into the rest of the year at that point. Scott E. Oaksmith: Another point on April performance: we are now past the hurricane impact—that dissipated by about March. Our preliminary results in April are positive. Underlying trends that we saw in March outside of the hurricane states have pulled through in April. We are pleased with the underlying trends, and as we said, there is some broader macro uncertainty out there, but absent that, we feel like we are trending towards the higher end of our guidance on RevPAR, assuming this continues. In terms of your question around the equity gains and losses, those are really reflective of some of the development we are doing with the Everhome properties. We had several properties open over the end of Q4 and the beginning of Q1, so it is really just the timing of ramping of hotels that is reflected there. As we mentioned earlier, we are at the back end of the investments that we have done for Everhome and for Cambria now that both have met their strategic objectives, and you will see a meaningful step down in the capital intensity of our investments there. As those hotels ramp up, those losses will turn to profits. Operator: Thank you. And the next question comes from the line of Stephen Grambling with Morgan Stanley. Please go ahead. Stephen Grambling: Thanks. A follow-up on the international front: as that starts to ramp up and becomes a bigger part of the base, how do you think about the contribution from a profitability standpoint? Is there a certain number of rooms or certain pockets that need to get to a certain level before it becomes more meaningful in terms of EBITDA contribution? Patrick S. Pacious: The significant change was the shift to more of a direct franchise model—taking master franchise agreement markets and turning them into direct franchise markets—where the contribution is significantly higher, the margins are higher, and royalty rates are higher. It is really a story around looking at the markets where it is more strategic for us to be in that geography in a direct franchise world as opposed to what we might have been doing prior to that. We have today about 10% of EBITDA being driven by the international business, and we are starting to scale that up, particularly here in the Americas, so we do see that becoming a much bigger contributor over time. Scott E. Oaksmith: We are really pleased with that, and the Canadian acquisition that we executed last year showed strong results during the quarter, with RevPAR up a little over 5%, rooms growth about 3.5%, and the pipeline up 55%. We are optimistic on the growth in that market for us. Stephen Grambling: Maybe one other follow-up: on a free cash flow standpoint, at this point on a TTM basis, it looks like—even including some disposition proceeds—you are at about $50 million. What are some of the one-offs we should be thinking about and how to think through the trajectory of free cash flow? Is there still some spend to get through before we see that accelerate? Scott E. Oaksmith: We did have some timing issues in the quarter, which pulled down our operating cash flow slightly. Our key money was slightly higher from Q1 2025 to Q1 2026, driven by a 37% increase in room openings compared to the prior year, and the mix of hotels opening really shifted with strong growth in our more accretive segments with strong returns, which contributed to a slightly higher key money disbursement. This is really timing. Our algorithm in terms of free cash flow remains intact for the remainder of the year as we continue to move back towards that historical 60% to 65% free cash flow conversion. On balance sheet investments, a really strong quarter where net outflows were down 50%, and we were actually net recyclers of capital during the quarter with about $4 million net back to Choice Hotels International, Inc., whereas we spent about $40 million the year before. We expect that to continue to meaningfully step down. We expect net outflows to be down about 70% year over year, and as the transaction market improves, we see opportunities to accelerate the recycling of that capital by selling hotels with long-term franchise agreements. Operator: And the next question comes from the line of Brent Montour with Barclays. Please go ahead. Brandt Montour: Great, thanks for taking my questions. I wanted to circle back to AI. It seems like everybody in your space is in a race to roll out apps and other AI-based search technology to enhance direct bookings within the top of funnel and the customer journey overall. Can you give us the state of the union in terms of where you are in rolling out that tangible technology versus your peers? Patrick S. Pacious: Great question. For us, technology has always been a structural advantage. We are likely the only company that has both our infrastructure and our data all on the cloud—two key ingredients to bring AI to the enterprise at scale. We see it as really driving our franchisee economics. We mentioned EasyBid—it is already providing meaningful results to our franchisees, improving top-line revenue while cutting their costs. Unit economics is where we are placing a big bet. On the customer journey, we are leading in with OpenAI and Google, and we are working with other large language models to make sure our hotels appear in answer engines. We have taken a direct and purposeful approach to how we are going to use AI to drive the unit economics of our hotels. The deployment is incredible, and adoption rates from our franchisees are enormous—much higher than prior rollouts of tools. Next week we will have our franchisees together in Las Vegas; a lot of time will be spent engaging with these new tools. We are excited by the upside to both hotel-level economics and what we can do corporately to drive higher productivity and lower costs. It is hitting on three levels—the consumer, franchisee economics, and our own efficiency. Brandt Montour: And a follow-up on demand. You said the reason you did not raise guidance for RevPAR was prudence around macro. You also see the U.S. inflecting. What is the macro tail risk within the domestic travel picture—if anything—or is it the unknown unknowns? Patrick S. Pacious: I would put it as the unknown unknowns. We have been through a couple of years where nobody had certain things on their bingo card when they put their forecast together. We have seen travel impacted by government shutdowns, tariffs, and other factors not in anyone’s forecast. We look at our business—we have good visibility into April—but rather than get ahead of our skis, we feel good about the RevPAR range we have, which is fairly wide given our trajectory and the close-in booking window. The prudent decision was to keep it where it is. Operator: The next question comes from the line of Trey Bowers with Wells Fargo. Please go ahead. Analyst: Hey, thanks for the question. Following up on the cash flow dynamics, the key money outlay in the quarter due to the solid gross additions—should we still expect that to be in the $100 million to $110 million range this year, or will better-than-expected gross additions raise that number? Longer term, should we think about a tie ratio of gross room additions to key money, or could key money come down even with a better NUG environment? Scott E. Oaksmith: No change to our overall outlook for key money spending for the year. This was timing-related compared to the prior year with strong openings that were in line with our forecast at the beginning of the year as we have been talking about the inflection in U.S. rooms growth. In terms of an algorithm, every key money deal is underwritten on a deal-by-deal basis. It depends on the strength of the deal, where we are putting the brands, and the overall environment. There is not a one-to-one relationship between number of openings and key money. As the new construction environment rebounds and the RevPAR environment improves over the next couple of years, we think you will see key money per deal step down more meaningfully, as that money is less needed to help defray costs. We monitor this closely and are very pleased with the returns when we do use key money, but it is really a market condition dynamic. Analyst: That is great color. Thanks, guys. Operator: And the next question comes from the line of Meredith Jensen with HSBC. Please go ahead. Meredith Prichard Jensen: Good morning. A quick follow-up on what Brandt asked around AI. Your take seems unique, given your background in technology. Could you unpack your comments about having a more narrow or strategic focus than some others? Is that because you have a view on AI economics over time or that scalability is less knowable now? Patrick S. Pacious: It is a pivot point companies have to make. At Choice Hotels International, Inc., our history is to invest in technology we can scale to our 7.5 thousand hotels, and AI lets us do that much faster. We have deepened our partnership with AWS because, to deploy at scale, you have to build the scaffolding to do it, and partnering with someone already hosting our infrastructure lets us experiment and improve quickly. We develop proprietary tools, and we see an opportunity to drive higher productivity out of our workforce and bring significant change to franchisee operating models. That is why we have been talking about four-wall EBITDA improving meaningfully because of AI. Tools are moving from telling you what happened to being teammates that guide the next best action. These tools are delivering meaningful value to our franchisees, so we have focused efforts there. Also, AI is not free—tokens cost money—so you must be measured in deployment. We shared one example already, and it was built and deployed rapidly with significant franchisee adoption. We expect an acceleration of tools that bring meaningful value and drive higher returns. Meredith Prichard Jensen: That is helpful. And on the loyalty program—you had a refresh earlier in the year. Can you speak more about momentum in engagement, changes in redemption rates with added flexibility, and new opportunities the new card program might unlock? Patrick S. Pacious: Tapping into affordability, we pursued a counter strategy to make points more valuable, not less—“rewards within reach”—so you get something after five nights instead of ten. That meets our customers where they are. As we said, we saw a 300 basis point increase in loyalty contribution in the first quarter. We are seeing more members and more revenue per member. We are excited about the refresh and the upside it brings. Loyalty members are repeat stayers; they stay more often and spend more. It is the right demographic to keep growing and keep that part of the revenue engine moving in the right direction. Operator: Thank you. There are no further questions at this time. I would like to turn the call back to Patrick S. Pacious for closing remarks. Patrick S. Pacious: Thank you, operator, and thanks, everyone, for joining us this morning. We look forward to speaking to you again in August when we report our second quarter results. Have a great rest of your day. Operator: Thank you, presenters. Ladies and gentlemen, this concludes today’s conference call. Thank you for joining. You may now disconnect.
Operator: Good morning, and welcome to the Core Laboratories First Quarter Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead. Lawrence Bruno: Thanks, Valentina. Good morning in the Americas, good afternoon in Europe, Africa and the Middle East, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratories First Quarter 2026 Earnings Call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer; and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into 6 segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level review of important factors in Core's Q1 performance. In addition, we'll review Core's strategies and the 3 financial tenets that Core Lab employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance. I'll then review Core's 2 operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Lab technologies as well as highlighting some of Core's operations, recent client interactions and major projects worldwide. Then we'll open the phones for a Q&A session. I'll now turn the call over to Gwen for remarks on forward-looking statements. Gwendolyn Schreffler: Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed in our most recent annual report on Form 10-K as well as other reports and registration statements filed by us with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our comments also include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our first quarter results. Those non-GAAP measures can also be found on our website. With that, I'll turn it back to Larry. Lawrence Bruno: Thanks, Gwen. Moving now to some high-level comments about our first quarter. The military conflict in the Middle East introduced geopolitical uncertainties that created meaningful disruptions across the Middle East countries in which we operate. As the company announced on March 23, the conflict closed many client offices and resulted in project delays. In addition, the suspension of maritime hydrocarbon transportation from the Middle East region forced operators to halt hydrocarbon production. For Core Lab, the disruption to hydrocarbon transportation routes extends beyond the Middle East region and into the company's global assay laboratory network that services the market for the maritime transportation and trading of crude oil, natural gas and refined products. The biggest impact of the conflict have been on Reservoir Description and the service side of Production Enhancement due to their roles in actively supporting reservoir rock and fluid characterization studies, completion diagnostic programs and hydrocarbon assay work all of which require predictable client activity levels and field access for sample acquisition. To date, Production Enhancements, completion products have been comparatively less affected by the Middle East conflict although shipments of energetic products into the region were delayed or temporarily suspended. As a result of these factors, Core lowered its forecast for the first quarter of 2026 revenue and earnings compared to the guidance we provided in our earnings call on February 4. The situation remains volatile and unpredictable shifts in the conflict will affect our operations. Other factors also impacted the first quarter. Demand for assay services was also negatively impacted by the ongoing geopolitical conflict in Russia, Ukraine. Attacks on hydrocarbon transportation and refining infrastructure, along with evolving western sanctions continue to create demand uncertainties and operational inefficiencies. Early in 2026, severe cold weather in North America affected onshore client completion activities and resulted in the temporary closure of Core Lab's manufacturing facilities. Additionally, adverse weather in the Mediterranean Sea related to Storm Harry temporarily suspended the demand for lab services across several countries and caused significant damage to one of the company's facilities creating further revenue and margin headwinds for the quarter. We are still in the progress of restoring service at the damage location. Looking at Reservoir Description, first quarter revenue was down 11% from Q4 of 2025 and flat compared to Q1 of last year. First quarter operating margins in Reservoir Description ex items were 6%, down sequentially by nearly 800 basis points and margins also down year-over-year. Despite the multiple factors impacting Core Lab's first quarter results, the company maintained its focus on creating new technology offerings, maximizing operating efficiency and on leveraging its global network to continue to support Core's clients. In Production Enhancement, first quarter revenue was down 13% compared to Q4 of 2025. Ex items, first quarter 2026 operating margins and production enhancement were 5%, down from 7% in Q4 of 2025. Sequential margins were impacted by the Middle East conflict, which delayed certain energetic shipments to the region and halted completion diagnostic field programs. [ Soft ] sequential U.S. land activity amplified by severe cold weather in North America also reduced U.S. completion activity and resulted in the temporary closure of Core's manufacturing facilities. These headwinds were partially offset by strong demand for Core's proprietary completion diagnostic services across both onshore and offshore markets outside of the Middle East. The company continued its long-standing commitment to shareholder returns during the quarter, returning free cash to our shareholders through our quarterly dividend and by repurchasing more than 51,000 shares of company stock, representing a value of $900,000. Q1 marked the sixth consecutive quarter of share buybacks. Core intends to continue to use free cash to fund our quarterly dividend, pursue growth opportunities and improve shareholder value through opportunistic share repurchases. Looking ahead now to the mid and longer term. Core Lab has persevered through previous conflicts in the Middle East. The company and its dedicated employees remain committed to serving our long-standing clients throughout this vital region. Despite near-term headwinds, Core Lab's global operations, asset-light business model and diversified technology portfolio continue to position the company for long-term success. For 90 years, Core Lab's resilience, technical leadership and unwavering client focus has enabled the company to deliver differentiated, scientific and technological solutions that help its clients derisk their operational decisions. Core strengths together with disciplined capital deployment, continued free cash flow generation and the company's commitment to returning excess capital to its owners will drive long-term value creation for the company's shareholders. As we move ahead, Core will continue to execute on its key strategic objectives by: one, introducing new product and service offerings in key geographic markets; two, maintaining a lean and focused organization; and three, maintaining our commitments to returning excess free cash to our shareholders and strengthening the company's balance sheet. The interest of our shareholders, clients and employees will always be well served by Core Lab's resilient culture, which emphasizes innovation and the application of technology to derisk client decisions along with dedicated customer service. I'll talk more about some of our latest innovations in the operational review section of this call. Now to review Core Lab's financial tenants that have guided the company's shareholder value creation through our more than 31-year history as a publicly traded company. We will continue to pursue growth opportunities. The company will remain focused on its 3 long-standing financial tenets, those being to maximize free cash flow, maximize return on invested capital and returning excess free cash to our shareholders. I'll now turn it over to Chris for the detailed financial review. Chris Hill: Thanks, Larry. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls excluded the impact of any FX gains or losses and assumed an effective tax rate of 25%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, the financial results for the first quarter of 2026 includes a charge of $3.7 million for noncash stock compensation expense associated with the future vesting of performance shares for certain employees who have reached eligible retirement age. We also recorded $600,000 of additional costs associated with exiting certain facilities as we continue to optimize our global footprint. The comparison periods for the first and fourth quarter of 2025 also include items that were discussed in those calls and highlighted in our earnings release for those periods. These items have also been excluded from the discussion of the financial results today. You can find a summary of those items in the tables attached to our press release for the first quarter of 2026. Now looking at the income statement. Revenue was $121.8 million in the first quarter, down 12% compared to the prior quarter and down 1% year-over-year. Core Lab will typically experience a seasonal decline in revenue from the fourth quarter to the first quarter of each year. However, as Larry mentioned, in the first quarter of 2026 was also negatively impacted by the escalation of the conflict in the Middle East along with severe weather events in North America and Europe. Of this revenue, service revenue, which is more international, was $94.3 million for the quarter, down 12% sequentially and 1% year-over-year. Our service revenue associated with crude assay services and regional studies continue to be impacted by the geopolitical conflicts in Russia, Ukraine, but particularly in the Middle East this quarter. Additionally, severe weather across North America, Europe and the Mediterranean region negatively impacted certain laboratory operations and disrupted client activity this quarter. Offsetting some of the decline this quarter, we continue to see increased demand for our well completion diagnostic services, particularly in the Gulf of Mexico. Product sales, which are more equally tied to North America and international activity were $27.5 million for the quarter and were down 12% from last quarter and down 3% year-over-year. Our international product sales are typically larger bulk orders and can vary from 1 quarter to another and were down sequentially in the first quarter of 2026. The decrease in product sales this quarter when compared to the fourth quarter of 2025 was partially offset by a higher level of product sales in the U.S. Moving on to cost of services, ex items for the quarter was 81% of service revenue, which increased from 75% in the prior quarter and 77% last year. The sequential increase was primarily caused by the conflict in the Middle East, which resulted in a sharp decrease in revenue as the -- and our clients were forced to suspend operations. As discussed in our previous calls, the service side of our business has been more impacted by the geopolitical conflicts and expanded sanctions, the volatility in crude oil prices and more recently, the geopolitical conflict in the Middle East caused disruptions to both our operations in the region and demand for crude assay services tied to the trading and maritime movement of crude oil and derived products. The company will continue to manage its cost structure as effectively as we can through these temporary disruptions in certain regions. Cost of sales ex items in the first quarter was 94% of revenue, which is relatively flat compared to last quarter and was 91% last year. The company continues to face challenges with increased costs for raw materials and logistics, some of which we've had to absorb. Despite these challenges, we remain focused on improving cost efficiencies and anticipate the manufacturing absorption rate in future quarters will be in line with projected product sales. G&A ex items for the quarter was $11 million, up a little from $10.6 million in the prior quarter. For 2026, we expect G&A ex-items to be approximately $42 million to $45 million. It is also important to note that 100% of our corporate G&A expenses are allocated and absorbed into the financial performance of the reported segments. Depreciation for the quarter was $3.8 million and increased slightly compared to $3.7 million in the last quarter and the first quarter of last year. EBIT ex items for the quarter was $6.6 million, down from $15.7 million last quarter, yielding an EBIT margin of over 5%. Our EBIT for the quarter on a GAAP basis was $1.9 million. Interest expense of $2.9 million for the first quarter increased from $2.6 million in the prior quarter and the same quarter in the prior year. As mentioned last quarter, the increase in the interest expense is associated with the higher interest rate on the new term loan under our credit facility, which was used to retire $45 million of senior notes in January 2026. Income tax expense and an effective tax rate of 25% and ex items was $900,000 for the quarter. On a GAAP basis, we recorded a tax benefit of $300,000 for the quarter. Net income ex items for the quarter was $2.7 million, down 72% sequentially and down 59% from first quarter of last year. On a GAAP basis, we had a net loss of $800,000 for the quarter. Earnings per diluted share ex items was $0.06 for the quarter compared to $0.21 in the prior quarter and $0.14 in the first quarter of last year. On a GAAP basis, we had a loss per diluted share of $0.02 for the quarter. Turning to the balance sheet. Receivables were $108.3 million and decreased approximately $5.3 million from the prior quarter. Our DSOs for the first quarter were at 74 days, up from 69 days last quarter. The increase in DSOs was primarily driven by the escalation of the conflict in the Middle East, which impacted revenue for the quarter and also slowed collections. We will continue to focus our collection efforts in the affected region and anticipate that our DSO will improve in future quarters. Inventory at March 31, 2026, was $57.8 million, up $3.3 million from last quarter end. Inventory turns for the quarter were 1.8% and down from 2.1% last quarter, which is primarily associated with the decrease in international bulk sales this quarter. And now to the liability side of the balance sheet. Our long-term debt was $117 million as of March 31, 2026, and considering cash of $22.8 million, net debt was $94.2 million, which increased $3.9 million from last quarter. Our leverage ratio is currently at 1.2 compared to 1.1% last quarter. Our debt is currently comprised of our senior notes at $65 million, a term loan of $50 million and $2 million outstanding under our bank credit facility. As stated earlier, in the first quarter, we made a single draw of $50 million on a term loan under our credit facility and retired $45 million of senior notes in January of 26. Looking at cash flow for the first quarter of 2026, Cash flow from operating activities was $4 million and after paying approximately $3.5 million of CapEx for operations, our free cash flow for the quarter was $500,000. As discussed in prior quarters, the capital expenditures associated with rebuilding our U.K. facility, which was damaged by fire are covered by the company's property and casualty insurance and have been excluded in the calculation of free cash flow. The capital expenditures associated with rebuilding the U.K. facility in the first quarter were $1.4 million. Looking ahead to the rest of the year, we will continue our strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities. Excluding the CapEx associated with rebuilding the U.K. facility, we expect capital expenditures to remain aligned with activity levels and for the full year 2026 to be in the range of $15 million to $18 million. Core Lab's operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures for the operations has historically ranged from 2% to 4% of revenue even during periods of significant growth. That same level with laboratory infrastructure, intellectual property and leverage exists in the business today. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing and projecting company's financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations. I will now turn it over to Gwen for an update on our guidance and outlook. Gwendolyn Schreffler: Thank you, Chris. Turning to Core Lab's outlook for the second quarter of 2026, the IEA, the EIA and OPEC are projecting crude oil demand growth in 2026 of approximately 600,000 to 1.4 million barrels per day, supporting constructive long-term market fundamentals despite near-term volatility. The IEA also continues to highlight that accelerating natural decline rates in existing producing fields remain a significant long-term supply risk, reinforcing the need for sustained investment. Recent disruptions, including the closure of the Strait of Hormuz and damage to regional refining infrastructure have reduced global crude oil supply by approximately 20%. These geopolitical events are likely to support the need for new oil and gas development to address energy security risk. In the U.S., year-over-year production is expected to remain measured, as capital discipline and maturing shale plays offset efficiency gains. Combined, these trends suggest that new hydrocarbon exploration will come from international offshore conventional reservoir targets. In the near term, geopolitical instability in the Middle East, sanctions and evolving trade policies, along with OPEC+ production decisions will continue to contribute to market volatility. However, a multiyear cycle of international offshore exploration and development activity will be required to support future demand. Core Lab maintains a constructive multiyear outlook and is positioned to support ongoing client investment needs. Recent changes in client activity levels across the Middle East are directly impacting Core's operations. Client-driven project disruptions have led to delays in project execution and logistical constraints. For Core Lab, the disruption of hydrocarbon trading routes extends beyond the Middle East region and into the company's global lab network, which services the maritime transportation and trading of crude oil, natural gas and refined products. The impact has been more pronounced in Reservoir Description and the service side of Production Enhancement due to Core Lab's unique role supporting regional client studies, reservoir rock and fluid characterization completion diagnostics and hydrocarbon assay testing. These services rely on predictable fuel access, sample movement and laboratory operations. Production Enhancement products has been comparatively less affected. However, shipments of energetic systems into certain countries have experienced delays. U.S. land completion activity is expected to remain below prior year levels with modest improvement likely driven by small to midsize operators. Growth in demand for Core's diagnostic services production optimization technologies and proprietary energetic systems are expected to partially offset softer year-over-year U.S. onshore activity. However, costs for certain imported raw materials use in production enhancement continue to increase and remain subject to tariffs and supply chain volatility. Client discussions indicate that international projects outside the Middle East are proceeding. However, circumstances in the Middle East create difficulty in forecasting the pace and timing of activity recovery for the effective region. Collectively, these factors support expectations for modest sequential operational improvement for Core Lab. In summary, Reservoir Description's second quarter 2026 revenue is projected to range from $77.5 million to $82.5 million, with operating income of $3.5 million to $5.4 million. Production Enhancement second quarter revenue is estimated to range from $45.5 million to $48.5 million with operating income of $2.8 million to $4.7 million. So in summary, Core Lab's second quarter 2026 revenue is projected to range from $123 million to $131 million, with operating income of $6.4 million to $10.2 million, yielding operating margins of 7%. EPS for the second quarter 2026 is expected to range from $0.06 to $0.12. The company's guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange and assumes an effective tax rate of 25%. With that, I'll turn the call back over to Larry. Lawrence Bruno: Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity and exceptional service to our clients. I'd particularly like to thank our dedicated staff in the Middle East for the uncertainties and stresses they've recently had to endure during the conflict. As we celebrate our 90th year, our staff's collective expertise and their dedication to servicing our clients has been the foundation of the company's success. Looking at the macro, even as global energy markets work through near-term economic headwinds and volatile commodity prices, the IEA, EIA and OPEC are forecasting year-over-year growth in global crude oil demand to range between 0.6 million and 1.4 million barrels per day for 2026. In addition to the forecasted growth in demand, new production will be needed to be brought online to offset the natural decline from existing producing fields. Combined, these trends will require continued investment in the long-term development of new onshore and offshore crude oil fields. U.S. tight oil production has been by far the largest component of non-OPEC oil production growth since 2010. The most recent EIA short-term energy outlook for U.S. oil production projects approximately 13.5 million barrels per day for 2026, essentially flat to 2025 and with modest growth expected in 2027 in response to projected stronger commodity prices. Growing global oil demand, combined with moderating incremental U.S. production growth, continue to support the thesis that future supply will need to come from new discoveries and field developments, largely driven from long-cycle offshore investments outside the Continental U.S. The most recent IEA long-term outlook under its current policy scenario shows global oil demand continuing to rise through 2050 to approximately 113 million barrels per day. As highlighted in the IEA September 2025 analysis, global field-by-field data show that the natural decline in existing producing oil fields is accelerating and has become a dominant long-term supply risk. The IEA estimates that absent reinvestment, global oil production would decline by approximately 8% per year due to natural field depletion. As a result, the majority of upstream capital spending globally is now required to simply offset decline rather than to meet incremental demand growth. The IEA also noted that nearly 90% of upstream investment since 2019 has gone towards sustaining existing production rather than expanding supply. The IEA states that significant annual investment in oil and gas resource development will be required for many years to come to ensure energy security and market stability. The U.S. EIA's long-term reference case forecast shows even higher crude oil demand through 2050, approaching 120 million barrels per day, reinforcing the conclusion that continued investment in new crude oil production will remain necessary. In summary, current demand forecasts support a multiyear investment cycle in which U.S. onshore production growth slows and in which future global supply growth will increasingly be driven by capital investment in long cycle international conventional offshore opportunities as well as with unconventional plays in the Middle East, trends that continue to support the demand for Core Lab services. Current supply disruptions and renewed concerns about energy security only strengthened the case for a geographically broad-based cycle of new hydrocarbon exploration appraisal and development. Core's Reservoir Description and Production Enhancement technologies are directly aligned with the investment imperatives required to find and develop new oil and gas fields and to improve recovery from existing fields. Now let's review the first quarter performance of our 2 business segments. Turning first to Reservoir Description. For the first quarter of 2026, revenue came in at $82 million, down 11% compared to Q4 of 2025. Operating income for Reservoir Description ex items was $5 million, down from $13 million in Q4, yielding operating margins of 6%. Incremental margins were negatively impacted by 2 factors: the conflict in the Middle East and severe weather in North America and in the Mediterranean. While demand for Reservoir Descriptions lab services remained strong in several regions across our global network, ongoing international geopolitical conflicts along with sanctions that were enacted in 2025 and further expanded throughout the year and yet again in Q1 of 2026, continue to produce headwinds that negatively impacted the demand for laboratory services tied to the trade and transportation of crude oil and derived products. Now for some operational highlights from Reservoir Description. In the first quarter of 2026, Core Lab continued to advance its integrated digital data strategy through the delivery of key reservoir data sets via our proprietary rapid platform. These data sets include a wide array of laboratory data and mark an important milestone in the company's ongoing effort to standardize and digitize reservoir data across our global portfolio. By making these data streams more accessible and easier to integrate into Core's clients' existing workflows, Core Lab is improving turnaround times reducing friction and data transfer and helping clients make faster and more informed decisions. This digital offering continues to reinforce Core Lab's differentiated position as a technology-led provider of high-value reservoir solutions. Core Lab's proprietary rapid database delivers the highly structured, well organized, geological petrophysical and engineering data that will form a critical foundation for developing artificial intelligence initiatives by both Core Lab and its clients. Moving now to Production Enhancement, where Core Lab technologies continue to help our clients optimize well completions and improve production. Revenue for production enhancement for the first quarter of 2026 came in at $40 million down 7% year-over-year. Q1 2026 operating income for Production Enhancement, ex items was $2 million, yielding operating margins of 5%. Margins were negatively impacted by soft sequential U.S. land activity and severe cold weather that both reduced U.S. completions and temporarily closed Core Lab's completion product manufacturing facilities. In addition, the Middle East conflict reduced client activity in the region and delayed certain energetic product shipments. Diagnostic Services benefited from strong demand in complex U.S. land completion designs and on offshore projects, domestic and international markets. Now for some operational highlights from Production Enhancement. Early in the first quarter of 2026, Core Lab was engaged by a national oil company in the Middle East to address a significant excess water production issue affecting multiple wells, which had led to shut-ins. The client deployed Core's [ GTX expand Extreme High temperature casing patch solution ] to address the issue. Core Lab's [ GTX X-Band ] proprietary technology is specifically engineered for harsh cyclic steam injection environments where temperatures can reach up to 600 degrees Fahrenheit. The [ GTX X-band ] installation significantly reduced water cut from the well from 99% down to 40% and thus materially lowered water disposal and environmental remediation costs. Based on this success, the client initiated an additional 10-well campaign using Core's proprietary [ GTX expand ] technology. Also in the first quarter, an independent operator in the Permian Basin deployed Core Labs FLOWPROFILER solid oil tracers across a 30-stage horizontal well to evaluate stage-by-stage oil contribution within an upper bench test in an existing reservoir. Core's FLOWPROFILER engineered delivery system is designed to stay within the proppant pack of each individual [ frac ] stage and then slowly release the oil tracer as the produced oil moves past the engineered particles and into the production strength. Flowback analysis of the produced oil provided clear insight into the production performance along the lateral length, showing that the strongest oil contribution came from the heel and to sections of the well, with materially lower contribution from the mid-lateral. Core Lab's FLOWPROFILER diagnostic results are allowing the operator to optimize future drilling targets and completion design. Importantly, based on the success of this program, the client plans to deploy FLOWPROFILER in 5 additional wells, highlighting the value of Core's differentiated technology. That concludes our operational review. We appreciate your participation, and Valentina will now open the call for questions. Operator: [Operator Instructions]. The first question comes from Don Crist from Johnson Rice. Donald Crist: I wanted to touch on the Middle East. Obviously, it's unfortunate what's going on with the conflict there. But I just wanted to ensure that your facilities are undamaged and once this conflict is resolved, everything should bounce back to pretty much normal. I mean, is that the correct read on the situation? Lawrence Bruno: Yes. Absolutely, Don. And so first of all, thanks for the question. And first of all, no damage to any of our infrastructure. Our staff has been beyond admirable in their ability to cope with a very challenging situation here. I do think it's important to understand that the flow of oil and refined products that normally underpins our -- some of our revenue in Reservoir Description in the region to essentially come to a halt. And when that happens, we have all the costs and none of the revenue. And so we're doing what we can to mitigate those costs. What we think will happen is as the situation gets resolved, there's going to be a strong rebound. I hesitate to use the word surge because that's going to depend on things out of our control, but a strong rebound in oil movement out of the region and into the rest of the global network. What we tried to illustrate in our comments was we have a revenue opportunity on that assay work in the region. And then once it leaves a region and makes port in some other part of the world, we have another revenue opportunity. So it extends beyond the region for us, but we think there's a very quick rebound in the flow of our work on -- tied to the maritime transportation of crude oil and refined products, natural gas as well out of the region. And then I think beyond that, the office closures that -- and I'll call it the slow down of field access that impaired acquisition of more upstream crude oil and rock samples, that will start picking up. We've seen some early indications of that during the cease fire, and we've kind of dialed that into our thinking already. But we think that things are poised for a nice rebound for us across Reservoir Description and then products will start moving in there as well. Donald Crist: Yes, that's exactly as I thought that everything should get back to pretty quick. I wanted to touch on a topic that we've heard across many conference calls this earnings cycle. And it's the fact that worldwide supplies or storage has fallen significantly and a lot of investors are now thinking that there's a significant disconnect between the physical market and the paper market. You're in that physical market much more than a lot of other companies. I don't know if you have an opinion on that? And is it influencing any NOCs and IOCs around the world to get more urgent in developing resources closer to home from an energy security standpoint. Any comments around that? Because we're hearing that from a lot more investors now whether they believe it or not. Lawrence Bruno: Yes. I do think that the worldwide supply -- we've been burning through -- there was apparently around 400 million barrels of oil committed out of strategic reserves that are flowing into the system. If you roughly balance that off at 20 million barrels a day disrupted from the Middle East, and I think it might be a little less than that, some stuff coming out at [ Yanbu ] in Western Saudi Arabia. But call it, 20 million barrels a day and then also refined products and all, I think inventory levels on both crude oil and on refined products are being consumed pretty quickly here. And so I think that is inevitably going to drive people to think about the longer term, hey, I don't want to be in this position whenever -- if I can avoid it. And so I would say, Don, long before the war started, we saw reinvestment and directional changes in places like Malaysia and Indonesia. And in other parts of the world to say, hey, we've got to get some things going closer to home than we have in the past to avoid disruptions that might be shipping related, conflict-related canal related depending on the 2 big canal systems in the world that move oil around. And so I think there's a growing awareness that you need to derisk your energy supply, and that's going to mean a very -- as I've said in my comments, there are a broad geographically based investment in new studies, new appraisals and get -- make sure that oil can get to market. Whether it comes from -- to get into the Western hemisphere, that could come from West Africa as well but it could also mean more stuff in the Gulf of Mexico, more stuff in South Atlantic margin happen to be developed. Donald Crist: Yes. That supports what we're hearing there as well. I wanted to touch on one -- Lawrence Bruno: I think the European situation maybe amplifies that they're pretty concerned about flow of oil from the Middle East right now. Donald Crist: Understandably. And my last question, I'll turn back to queue. We saw a press release at Olivia this week where a major is going to start assessing the reservoirs in Libya. I don't know if you can talk specifically about that, but I think that kind of supports what has been talked about for the past couple of quarters that North Africa region is going to be developed sooner rather than later. I don't know if you have any comments broadly on that. Lawrence Bruno: Yes. Don, I think several quarters ago on our earnings call, we talked about having conducted a client Technology Day focused on 2 things. Improving recovery from existing fields and an unconventional development, and we held that in Tunisia to address opportunities in Libya and in Algeria and into Egypt as well. Very well attended, 50 client companies represented here. And so we've had a number of discussions with operators and with government agencies about Core Lab's involvement and our availability and readiness to participate in getting those Libyan and other regional assets up to speed for the older fields that need a lot of remediation and for unconventional plays. There is a nice unconventional opportunity in North Africa. Very close to the European market. I think it plays out very nicely. And Core Lab has been on top of that, and we've got some of our top hands engaged in those conversations. Operator: The next question comes from Sean Mitchell from Daniel Energy Partners. Sean Mitchell: Congrats on 90 years. That's great. Lawrence Bruno: I'm going to follow up Sean, I have to look it up. Silver anniversary is 25. 50 is gold. 90th anniversary is the Granite anniversary. So I think it's quite appropriate that it's a rock of some type. Sean Mitchell: There we go. Maybe following on. Thanks for all the color on the macro. Maybe following on to what Don was asking about. Just when we think about recovery time lines in the Middle East, reopening the Strait is really just the first step. There's obviously storage that can move quickly, but restarting production requires tanker repositioning, infrastructure coordination and really damage assessment across the value chain. From what you're seeing on the ground, do you think the market is underestimating how complex and potentially prolong this recovery could be? Any color on that front? Lawrence Bruno: Yes. I mean I think there are some prior and Core Lab has been through these. I talked about our confidence that we'll navigate through this. There are prior disruptions, whether it was the wars in Kuwait and Iraq where there was considerable field damage. It doesn't appear that some of the, I'll call it, the metal -- there's not as much bent metal at this point. as there was during some of those conflicts. So I think that doesn't have to -- that won't take as long as get going. But I do think it will be -- there'll be, I'll call it, a strong push and a rebound in trying to move as much crude oil and refined product as possible. And then longer term, I think there's going to be maybe infrastructure opportunities, not all of which will affect Core Lab. I think there'll be more pipelines built to try to avoid choke points in the future. I think we saw some comments coming out of the UAE about that. And I think it's going to be a costly process to get oil back into the system, get strategic reserves refilled. And I think the refining infrastructure hits that have occurred in the Middle East are going to compromise for a while natural gas and some crude oil exports. Sean Mitchell: Got it. Got it. And then maybe just as that process plays out where you're bringing production back on, I'm assuming this might create some incremental demand for reservoir diagnostics and optimization? Lawrence Bruno: Yes. I mean I think the clients are going to want to make up for lost time, so to speak. And so we have seen, by the way, and it relates to this a little bit, we have seen a few operators outside of the Middle East come to us and say, for example, Hey, we want to increase production, take advantage of the higher price here. We want to run some [ PVT ] fluids testing to make sure that we understand exactly the phase behavior if we start depleting the reservoir a little faster here, are we going to some type of physical change in the properties of the oil, viscosity change or bubble point potentially being impacted. So we are seeing that. And I think that can ripple through the Middle East. If people try to put more oil back on the market in the short term. There'll be some opportunities there for us to help them assess what [ ratcheting ] up production might mean for their reservoir models for the long term. Sean Mitchell: Got it. Well, as always, guys, appreciate the color, especially the macro commentary and the current environment. It's super helpful. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Larry Bruno for any closing remarks. Lawrence Bruno: Okay. We'll wrap up here. In summary, Core's operational leadership continues to position the company for improving client activity levels in the coming quarters and years. For 90 years, Core Lab has navigated geopolitical conflicts and uncertainties, and we will do so again. We have never been better operationally or technologically positioned to help our global client base, optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused reservoir optimization company in the oilfield service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividend, we'll bring value to our shareholders via growth opportunities, driven by both the introduction of problem-solving technologies and new market penetration. In the near term, Core will continue to use free cash to repurchase shares and strengthen its balance sheet, while always investing in growth opportunities and evaluating various methods to increase shareholder value. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with our continuing achievements. So thanks for spending time with us, and we look forward to our next update. Goodbye for now. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 AMETEK Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kevin Coleman, Vice President, Investor Relations and Treasurer. Kevin, you have the floor. Kevin Coleman: Thank you, Stacy. Good morning, and welcome to AMETEK's First Quarter 2026 Earnings Conference Call. Joining me today are Dave Zapico, Chairman and Chief Executive Officer; and Dalip Puri, Executive Vice President and Chief Financial Officer. During the course of today's call, we will be making forward-looking statements which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties and that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to historical results will be on an adjusted basis, excluding after tax, acquisition-related intangible amortization and excluding acquisition-related costs. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks, and then we'll open up the call for questions. I'll now turn the meeting over to Dave. David Zapico: Thank you, Kevin, and good morning, everyone. AMETEK delivered an excellent first quarter, highlighted by double-digit sales growth, exceptional orders growth, robust core margin expansion, record EBITDA and a high quality of earnings that exceeded our expectations. We also raised our full year earnings guidance to reflect our first quarter results and the outlook for the balance of the year. Today, we also announced that we signed a definitive agreement to acquire First Aviation Services, an attractive acquisition, which strategically broadens our defense aftermarket capabilities. I'll provide more details on first aviation shortly. Now let me turn to our first quarter financial results. First quarter sales were $1.93 billion, up 11% from the same period in 2025. Organic sales were up 5%. Acquisitions added 5 points with foreign currency tailwind. Orders were outstanding in the quarter with broad-based and meaningful growth across all AMETEK divisions. Overall, orders were a record $2.2 billion, up 23% versus the prior year organic orders were up 22%, leading to a record backlog of $3.87 billion. Operating income in the quarter was $517 million, a 14% increase over the first quarter of 2025. Operating margins were 26.8% in the quarter and core margins were an impressive 27.9%, up a robust 160 basis points versus the prior year. EBITDA in the quarter was a record $620 million, up 11% versus the prior year, with EBITDA margins a strong 32.1%. Our excellent operating performance led to strong cash generation with free cash flow to net income conversion of 107%. Diluted earnings per share were $1.97 and up 13% versus the first quarter of 2025 and above our guidance range of $1.85 to $1.90 per share. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. EIG had an excellent first quarter with double-digit sales growth, strong operating performance and a meaningful inflection in orders. EIG sales in the quarter were $1.26 billion, up 11% from last year's first quarter. Organic sales were up 2% and acquisitions added 7 points with foreign currency, the balance of the growth. Organic orders for EIG were up an impressive 25% in the quarter. This growth was broad-based across all EIG divisions and end markets with notable growth within our defense, power, in semiconductor businesses. EIG's first quarter operating income was $376 million, up 6% versus the prior year. Core operating margins were outstanding 31.4%, up 40 basis points from the prior year. The Electromechanical Group also delivered excellent results in the quarter. with continued strong sales and orders growth along with exceptional operating performance leading to sizable core margin expansion. EMG's first quarter sales were a record $664 million, up 13% versus the prior year. Organic sales were again up double digits at 11% with foreign currency at 2-point tailwind. Sales growth was broad-based with our Automation Engineered Solutions and Aerospace and Defense businesses, all delivering excellent growth in the quarter. Additionally, EMG organic orders were again outstanding, up 16% versus the prior year. EMG's operating income in the first quarter was $171 million, up 33% compared to the prior year period. While EMG's first quarter core operating margins were up sharply to 26%, a considerable 410 basis point increase versus the first quarter of 2025. I wanted to take a moment to expand on the strength and breadth of AMETEK's order growth in the quarter. The 22% organic orders growth reflects the ongoing strength within our aerospace and defense markets as well as the continued strong growth across our automation and engineered solutions markets. Importantly, it also reflects a meaningful inflection in orders for our process instrumentation and power businesses in the quarter. As the strong pipeline of opportunities we have been highlighting is translating into substantial orders growth. Contributing to the order strength were several large orders in the quarter, which help fill in our full year sales outlook. These large orders are aligned with attractive market segments, including defense, space, power and semiconductor, all markets where AMETEK is poised to benefit from strong and growing demand. Within defense, we are seeing broad-based strength, including within our -- within missile defense, UAVs and naval applications. The growth in defense budget is being driven by modernization of defense capabilities and the ongoing geopolitical conflicts, creating a strong global growth outlook for defense spending, including from NATO allies. Our Aerospace and Defense businesses was recently selected to provide a range of technologies in support of three UAV programs, one program in the U.S. and two with NATO allies. Products being provided on these programs include ruggedized thermal management systems, power distribution equipment, advanced sensors and embedded computing app solutions. Our EMIP business also provides highly engineered specialized fluid transfer solutions for critical military and defense applications. And in the first quarter saw strong orders growth across many key defense platforms, including in support of nuclear submarines. Within nuclear, we're also seeing strong commercial nuclear demand in orders. AMETEK businesses provide a range of highly specialized products to this market, including fluid transfer solutions, radiation detection equipment and uninterruptible power solutions in support of nuclear power facilities. Switching to space and satellite communications market. Our current micro technique business recently received a sizable order to provide ultraprecision machining solutions and manufacturing services in support of critical RF components used in low earth orbit satellites. Kern's advanced precision machining solutions are targeted for mission-critical applications, which require maximum accuracy, stability and repeatability. And lastly, our Abaco business, a leading provider of ruggedized embedded computing solutions continues to see strong demand with a significant win in the semiconductor capital equipment market. Abaco recently secured an agreement to provide advanced computing technology to support AI-driven demand for advanced semiconductor tools. Abaco's orders were excellent in the quarter, with strong defense orders in addition to strength in the semiconductor market. Overall, the breadth and strength of our orders in the first quarter reflect the continued trust of our customers and our continued delivery of key technology-driven products that meet our customers' most critical needs. Before we move too far off the topic of key programs and our ability to deliver and the most critical and demanding of applications, I want to take a moment to highlight a particularly timely example of our differentiated technology. AMETEK Sensors and Fluid Management Systems, a leader in advanced specialized sensing solutions for the aerospace, defense and space markets provided critical solutions used on the recent ARTEMIS 2 mission that eclipsed the record for the furthest man space mission. Our [ SFMS ] business provided thin-film pressure transducers that supported mission-critical life support infrastructure on the [ ORION ] multipurpose crew vehicle. This application demonstrates our ability to serve even the most demanding of applications and our ongoing commitment to reliability, precision and accuracy. Congratulations to the AMETEK Sensors and Fluid management systems team on this exciting success and also to the four other AMETEK businesses, FMH, UEI, NSI and Zygo [ Pixellink ] that also supported the ARTEMIS platform of specialized technology. Now turning to acquisitions and capital deployment. With our robust balance sheet, Strong cash flows and disciplined approach to capital deployment, AMETEK is well positioned to continue driving long-term value through our disciplined acquisition strategy. We are managing a very strong pipeline of acquisition opportunities across a wide range of deal sizes and markets and are encouraged by the strong pipeline of high-quality acquisition candidates. As Dalip will touch on, our significant financial capacity provides the opportunity to deploy well over $5 billion in capital while maintaining an investment-grade credit rating. Our top priority for capital deployment remains acquisitions and we expect to remain active in this area. We were pleased to announce this morning that we have signed a definitive agreement to acquire First Aviation Services, a leading provider of defense and aviation MRO services as well as proprietary part design and manufacturing. The combination of First Aviation with AMETEK's MRO business will provide attractive market expansion opportunities and additional scale for our A&D aftermarket businesses. First Aviation is privately held and has six U.S.-based centers of excellence. They have approximately $80 million in annual sales. And the acquisition is subject to customary closing conditions, including regulatory approvals. Alongside this acquisition and capital deployment strategy, we continue to invest in our businesses to ensure AMETEK is strategically positioned for long-term sustainable growth. For 2026, we continue to expect to invest an incremental $100 million to support our growth initiatives, with the majority of this investment going into RD&E and sales and marketing initiatives. These investments continue to deliver excellent returns. In the first quarter, our vitality index which measures sales of new products introduced over the last 3 years was an outstanding 25%. Now we'll take a moment to highlight an example of an exciting new product from our RTDS Technologies business. RTDS is a leader in real-time digital simulation of power systems, infrastructure and hardware testing in the loop. The real-time electromagnetic transient simulators enable detailed studies of power systems, allowing engineers to anticipate system and device behaviors that threaten stability, resilience and performance of the power grid. RTDS recently updated their simulator platform with new features, including a data center module and an updated workflow that provides more accurate representations of third-party power solutions. This innovation helps data center operators model the power electronics required for key components, such as the uninterruptible power supply systems and the variable frequency drive used in power and cooling systems. This new product led to two new notable orders in the first quarter in support of data center testing applications from large power equipment providers. Congratulations to the RTDS Technologies team on this exciting new product development. I'd like to take a moment to discuss the conflict in the Middle East and how AMETEK is navigating this evolving dynamic. AMETEK has only a small sales exposure to the region with approximately 2% of sales into the Middle East. Most of that small exposure is within our EIG process subsegment and is tied to energy markets. We do not expect a meaningful direct impact on AMETEK given the small exposure. However, like everyone, we are not immune to the broader macroeconomic uncertainty. We are continuing to monitor developments in the region especially for impacts on the energy market and potential spillover effects. With all that said, I am confident that AMETEK will continue to navigate this period of increased uncertainty based on the flexibility and durability of our operating model and our proven track record of performing well in challenging environments. Now shifting to our outlook for the balance of the year. For 2026, we now expect overall sales to be up high single digits on a percentage basis with organic sales now expected to increase mid-single digits versus the prior year. With the strong results from the first quarter, Diluted earnings per share for the year are now expected to be in the range of $7.94 to $8.14, up 7% to 10% compared to last year's results. This is an increase from our prior full year guide of $7.87 to $8.07 per diluted share. For the second quarter, we anticipate overall sales to be up high single digits on a percentage basis with adjusted earnings of $1.96 to $2 per share, up 10% to 12% versus the prior year. To summarize, AMETEK delivered an excellent first quarter. Our outstanding results reflect the strength of our portfolio and the resilience of our operating model. Our businesses are aligned with attractive secular growth trends and are well diversified across end markets, customers, technologies and geographies. We are leaders in niche markets where our differentiated technology solutions play a mission-critical role in our customers' most demanding applications. Our highly engineered products are designed into applications governed by strict regulatory and compliance requirements, creating high switching costs. We primarily serve customers in long cycle industries with long asset life spans, resulting in a low obsolescence risk. Taken together, these advantages position AMETEK for sustained long-term success and we see significant opportunities for continued value creation. Our culture is deeply ingrained across the organization, our competitive positions are strong and continuing to expand. Our operating model is durable, flexible and scalable. Finally, we are supported by an experienced and proven team that has consistently performed through a wide range of market conditions. I will now turn it over to Dalip Puri, who will cover some of the financial details of the quarter, then we will be glad to take your questions. Dalip? Deane Dray: Thank you, Dave, and good morning, everyone. As Dave noted, AMETEK delivered an outstanding start to the year, highlighted by excellent orders, sales and earnings growth, robust core margin expansion and strong cash flow generation. . Now let me provide some additional financial highlights for the first quarter. First quarter corporate general and administrative expenses were $30 million or 1.5% of sales. For the full year, we continue to expect corporate general and administrative expenses to be approximately 1.5% of sales. First quarter other operating expenses were $1 million, largely in line with the first quarter of 2025. First quarter interest expense was $21 million, up $2 million from the first quarter of 2025. The effective tax rate in the quarter was 19%. For 2026, we continue to anticipate our effective tax rate to be between 18.5% and 19.5%. As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full year estimated rate. Capital expenditures in the first quarter were $25 million, and for the full year, we expect capital expenditures to be approximately $160 million or about 2% of sales. Depreciation and amortization expense in the quarter was $105 million. For the full year, we expect depreciation and amortization to be approximately $430 million, including after-tax, acquisition-related intangible amortization of approximately $210 million or $0.91 per diluted share. For the quarter, operating working capital was 17.5%, and a 60 basis point improvement versus 18.1% in last year's first quarter. Operating cash flow was $452 million, up 8% versus the first quarter of 2025. Free cash flow was also up 8% year-over-year to $426 million. Free cash flow conversion was strong at 107% for the quarter. For 2026, we continue to expect free cash flow conversion to be approximately 110% to 115% of net income. Total debt at March 31 was $2.2 million, down from $2.3 billion at the end of 2025. Offsetting this debt is cash and cash equivalents of $481 million. At the end of the first quarter, our gross debt-to-EBITDA ratio was 0.9x, and our net debt-to-EBITDA ratio was 0.7x. We continue to have excellent financial capacity with flexibility to deploy well over $5 billion on growth initiatives and our active acquisition pipeline while retaining an investment-grade credit rating. While acquisitions remain our #1 capital allocation priority for use of our free cash flow, we also seek to provide our shareholders with opportunistic share buybacks and a consistently increasing dividend. In February, we announced a 10% increase in our quarterly cash dividend to $0.34 per share, our seventh consecutive year of 10% plus annual increases in our dividend payout. I would also like to note that we have enhanced our financial reporting this quarter by including AMETEK's gross margin reporting and a related reconciliation on our Investor Relations website, with adjusted gross margin at a strong 51% in the quarter, this enhanced disclosure provides investors with greater visibility into AMETEK's margin performance and additional details to better understand our cost structure, and the underlying drivers of our profitability. Going forward, we will provide an updated gross margin disclosure quarterly on our website. In summary, our businesses had a great start to the year. Our exceptional operating capabilities delivered excellent revenue and earnings growth, robust margin expansion and strong free cash flow conversion. With a proven strategy, significant capital deployment capacity and a strong track record of execution, we are confident in our ability to drive further growth and value creation in 2026. I'll now pass it back to Kevin. Kevin Coleman: Great. Thank you, Dalip. Stacy, can we please open the line for questions? . Operator: [Operator Instructions] Our first question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: Dave, you normally, at this point, take us for a tour of the key end markets, but your prepared remarks really covered that well, so I appreciate it. But maybe just -- and you also highlighted the really small exposure to the Middle East. But how about just the rest of the regions and maybe the idea of -- are you seeing anything at the margin in terms of buying hesitancy? You certainly don't see it in the orders, but take us through the regions and any kind of sentiment in terms of macro pressures that you might be seeing? David Zapico: Sure. I'll start with the performance around the geographies. And we really had balanced growth. U.S. and international markets were both up mid-single digits. The strongest growth was in Asia. In the U.S., we were up mid-single digits, had very strong growth in our A&D and Materials Analysis business. Europe was up low single digits. That's where we had strength and power, strength in our automation businesses, but modest headwinds from the Middle East, we had about, I'd say, $15 million of discrete orders that due to safety reasons and disruptions that didn't ship during the quarter. So that would have ended up a little bit higher, but that occurred. And we have not seen any cancellation in orders from the Middle East. In fact, we're seeing quotations to really rebuild infrastructure, the energy infrastructure. So it's going to be when this thing settles down. In terms of getting back to the geographies, in terms of Asia, Asia was up low double digits, driven by strong China. China was up high teens, and it was driven by our process and power markets. So across the board, it was a balanced growth solid in all geographies really performing well. Deane Dray: Good to hear. David Zapico: Yes. And we're not seeing any cancellations or delays or anything at all. In fact, March was an all-time record of any quarter for orders at AMETEK. So it's strong. It feels extremely good, and April is not over yet, but I just looked at it and it's on target for another good month. So we're in full steam ahead. Deane Dray: Great to hear. Now just a follow-up question, and you are likely limited in what you can say. There were some unconfirmed media reports about a potential sizable deal you all are looking at. And David, I don't often see your name in the Wall Street Journal. But this is an asset we're familiar with, but the size would be bigger than what you typically do. We know you have that capacity. But just implications on a larger deal for AMETEK. Was it -- would it box you out of doing bolt-on deals over kind of the near term, but whatever you can share with us would be helpful. There's a lot of interest. David Zapico: AMETEK policy is not to comment on market rumors or speculation related to M&A activity. I just go back to what I said before, our pipeline is strong. There is a mix of larger, medium and small technology deals and we're looking to create great deals for our shareholders. We announced the MRO deal today, First Aviation service. We're really happy about that. We have -- as Dalip said, we have significant financial capacity that provides the opportunity to deploy well over $5 billion in capital and still maintain an investment-grade credit rating. And M&A is our top priority for capital deployment. And I mentioned a few quarters ago that that's the way we're going to differentiate our performance over the next few years. So we are really engaged with a lot of different businesses and a lot of different opportunities, and we're going to make good disciplined deals for our shareholders, for sure. And as you know, at AMETEK, acquisitions are the combination of a set of process, well-defined processes, integration is our secret sauce and returns are very important for us. Deane Dray: That's all really good to hear, best of luck. Operator: And for our next question. Our next question comes from Andrew Obin of Bank of America. Andrew Obin: Just a question. You highlighted large orders, and I appreciate that maybe some of them fairly lumpy. But do you get a sense that there's any pull forward from second quarter in terms of orders and there's going to be something unusually weak about second quarter orders given the strength in Q1? David Zapico: Yes. I don't think there was much pull ahead at all. In fact, if you go back and look at my last couple of calls, we were signaling that this was going to happen. And what you really saw is continued strength in our EMG businesses, and EIG businesses just popped and we were talking about them usually following EMG about 6 months or 9 months and has happened. So I don't know, some of the orders that we've got are for shipments to fill out the year. But I don't see any kind of pull forward or any kind of slowdown, that doesn't mean that we're going to have a 25%, 23% orders in the next quarter. But the markets for us, we've created a business that's in niche markets or technology is really, really needed for key infrastructure for key technologies for key mission-critical platforms, and we're just in the right place, and we're feeling good about the business. Andrew Obin: And David, how do you think about -- given your order cadence, your top line outlook is fairly conservative as it always is, that's what AMETEK does. But what are you thinking about sort of risk consumer risk and just overall macro risk in the second quarter, you said orders are good, but any red or yellow flag that you're seeing in your end markets so far quarter to date? And are you adjusting the behavior in business units, any sort of business plans to maybe prepare for some turbulence. David Zapico: Yes, that's a good question. And I'd start with, we're obviously performing very well. We've had strong execution, disciplined operation, and we're gaining momentum across the portfolio. We feel very good about our businesses performing. But there's obviously some ongoing geopolitical uncertainty, and we're remaining prudent with our guidance. We have places in our business, we're laser-focused on material input costs. We believe we're going to be able to offset any inflationary costs with pricing. So we expect to offset inflation, including tariffs with pricing but we feel good. But we're laser focused on changes in the macro. And with our distributed structure, we have business leaders out there close to their customers looking at everything, and we're making sure that we have the right focus on it. So from what we know now, it feels good to us, but we're laser focused on what could be a bigger change. And -- but as I said, we're confident in our guide, and we feel really good about the momentum in the portfolio. Operator: Our next question. The next question comes from Nicole DeBlase with Deutsche Bank. Nicole DeBlase: I guess maybe just kind of piggybacking on the questions that were asked about orders already, sorry to dive into this further, Dave. But just on the large orders, I think you mentioned that there were a few that came in during the quarter, but you're basically saying that you don't think that this order results should be viewed as onetime. So does that mean that the large -- if we look at like your pipeline of large order activity, it's similarly strong and you expect to book further large orders as we move forward? David Zapico: Yes, I would expect the bookings to continue to reflect some larger orders. And I think that what we're seeing is we had a period where the industrial economy at below 50 PMI is for an extended period of time. That's changing. We were signaling that's changing. And our EMG business picked up. And historically, EIG has picked up 6 or 9 months later. And we said that the last couple of quarters, and it's just happening like we thought it would. And EIG is just beginning to pick up. So I think the order strength will continue, but I wanted to highlight some of the orders to somewhat lumpy, and I wanted to highlight them both to let people understand the areas that we're in and they are great technology and also to understand some of that is for shipments throughout the rest of the year. Nicole DeBlase: Got it. Okay. Clear. And then I just wanted to spend a little bit of time on the medical end market. I don't think that was mentioned a whole lot in the prepared remarks. Dave, could you just talk a little bit about what you're seeing there? David Zapico: Yes. I mean it's about a little over 20% of our exposure. In Q1, we had a great quarter. It was up low double digits. And once again, it was led by Paragon. Paragon is just performing extremely well. And for that full year, there's some tougher comps in the rest of the year. So we have the full year we expect mid-single digits largely due to the comps. But -- we have other business in there like our Record business. It also had a very good quarter. So Paragon and Record led us and the strength in Paragon continuing is notable. Operator: Our next question. The next question comes from Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: I wanted to get your take on just kind of what's going on in the world. related to your Aerospace and Defense businesses given the heightened geopolitics. I know you guys have a number of mesh offerings. So it's hard to know in real time what you see going forward. But can you comment on any impact positive or negative to A&D? David Zapico: Yes. Well, I think what we saw in the quarter, our A&D business continued strong activity, high single-digit growth in the quarter, and the growth was broad-based. All segments continued strong demand with notable strength in our defense markets. And our A&D businesses are very well positioned to benefit from growing demand given our broad portfolio of differentiated technologies. And we now -- we increased our outlook for the year. We increased it to from high single digits to up approximately 10%. And that's what balanced commercial and defense activity. And the way I look at it is, if you look at our 18% of the -- in A&D, about 60% of that is defense and about 40% of that is commercial. Defense is knocking it out of the park. The [ OE ] part of commercial and the business jet market are doing very good. Our M&A -- or MRO businesses that service airlines had an excellent quarter for orders. So the one area that we're watching closely is some of the international markets related to aviation fuel availability and fuel costs. That's a small part of our portfolio, less than 2%. But at the same time, we're watching it. But right now, we don't see -- we have good backlogs, good execution and I think that if we see something, it will come in the flying airlines flying public first, but right now, we're not seeing it. But the key thing is the vast majority of our aerospace portfolio, we're taking our whole portfolio up. And even the part that we're watching closely had a fantastic first quarter. Andrew Buscaglia: Yes. Good to hear. And along those lines, you make an acquisition in the quarter, First Aviation on the MRO side, which is interesting. I didn't see did you disclose the price you paid or deal price? And then is there any other details. I think I saw $80 million in revenue, but any other details you can disclose on that. David Zapico: Yes, sure. I'll provide some more details on it, Andrew. And at the high level, our MRO businesses were largely commercial biased. And we were looking for something that really added a defense aspect to it because of the strength in the market, and we're really pleased to find First Aviation services. It's engineering-driven provider of aftermarket services and proprietary parts. The primary markets defense. They also have some business jet and commercial pieces of it, but it's primarily a defense business. They have about 2/3 of our business are on MRO service and they actually have about 1/3 of it is on proprietary parts that we have businesses that have the parts and the services together, we typically do best with them. So they're really into [ PMA ] and [ DER ] approved repairs. They had new capability to us. Rotorcraft and fixed-wing platforms. There are a lot of good military programs. It expands our military -- our MRO capabilities to additional critical systems includes propeller blades, rotor assemblies, landing gear, some advanced electronics. So it's a sizable and growing proprietary aftermarket solutions business, strong engineering capabilities nicely expands our defense MRO and just fits like glove and with our existing MRO capabilities. So we're really excited and getting this business to closing and welcoming the First Aviation team to AMETEK. Operator: Our next question comes from Scott Graham with Seaport Research Partners. Scott Graham: Congratulations on the quarter. Dave, could you continue the matrix as you just did for A&D with that first quarter organic and full year for process power and automation. And then secondarily, I don't know if this is possible to do this, but would you be able to maybe carve out some of the larger projects that were in the orders? And maybe tell us what sort of maybe the trend line for bookings was on that basis? David Zapico: Yes. I'll start with the -- I'll finish the walk around the company. I did it for aerospace and defense and covered some of it in my opening remarks, but there's some details still that it's probably you're interested in. I'll start with the Process business. And it was up mid-teens in the first quarter and driven by acquisitions and low single-digit organic growth. And we have a solid pipeline of orders we highlighted during our last earnings call. These translated into broad-based order growth in the quarter, and we remain encouraged by continued momentum and a growing pipeline of opportunities across our process markets. So now for the full year 2026, we're increasing our guide for process. We now expect organic sales for Process segment to be up low to mid-single digits, so increasing it from low to low to mid. We talked about aerospace. We're increasing it from high single digits to approximately 10%. Go into power, next. Power subsegment deliver low single-digit sales growth with strong record level orders. Our power business continues to see strong demand across a growing pipeline of opportunities for power generation, backup power, data center microgrids and power simulation systems. I highlighted one of the new products in the orders received for power simulation systems in my prepared remarks. Looking to 2026, we continue to expect organic sales to be up mid-single digits for that subsegment. And finally, our Automation & Engineered Solutions, excellent quarter, again, with high single-digit organic sales growth, broad-based, both our automation and engineered solutions business and our EMIP business and demand across attractive niche markets remains solid. And we continue to expect organic sales for Automation & Engineered Solutions business to be up mid-single digits. In terms of digging in on the orders, I was trying to -- in my prepared remarks, do that a little bit. We talked about a big order in the semiconductor market from Abaco, we're providing computing solutions. That's -- we talked about the space satellite market that is really doing well with we have specialized machining solutions that can make precision components like no one else. So we're actually building machines, and we're doing some contract manufacturing for the lower orbit satellite systems. I talked a bit about defense and what's going on in defense and our strength in UAVs and our strength in missile defense systems. I talked about the nuclear industry and both on the commercial and the civil and defense very strong for us, and we've got a substantial order for the submarine program. And these are -- these programs are things we're winning because of our technology because, we work with customers. These are highly engineered technologies. There are not a lot of people that can do these things, and we just think we're well positioned for where the world is going. We're in the right places, and we feel really optimistic right now. Unknown Executive: And if I could just add, in terms of the order strength, as we said, it was broad-based. And is there were some large orders in the aerospace and defense area, but every subsegment saw double-digit organic orders growth. and every division was up at least 5%. And automation was very strong. And really in process, our metrology and material analysis business is also a really strong order growth. So it's really broad-based. It really wasn't any -- it wasn't driven by lumpiness in orders in certain areas. Operator: Our next question comes from Joe Giordano with TD Cowen. Joseph Giordano: There seems to be emerging concerns that potentially aerospace aftermarket, I guess, on the commercial side is peaking. It doesn't seem like there's real evidence in your business of that. But what are you kind of hearing seeing? And what would you really be looking at to see if something like that was starting to form? David Zapico: Yes. As I mentioned before, that's the third-party aftermarket, the smallest part of our MRO businesses, and we watch it very closely, and we have some specialized capability and the U.S. is extremely strong right now. We're involved in some retrofit programs that are driving the business. So there may be a bit of a counter market there. And in Europe, Europe and Asia, the MRO. If there's a place that turns down, it will probably be that area, so we're watching that closely. But again, this is less than 2% of our sales. And the fact is we had an incredibly strong first quarter. The order rates are continuing to have strength. But as the conflict goes on in the Gulf, and there's a bit of a shortage in aviation fuel. We think it will -- the weakness may show up first in Asia, second in Europe and the U.S. seems pretty insulated right now, but it will be last. But that can all change in a week. So we're making the call the best we can. And right now, we feel good. And if we think there's any downside, it's extremely modest. Joseph Giordano: And then I was interested, you mentioned Abaco, computers into semiconductors. I tend to think of that more as like defense-oriented field applications. Can you talk about like where -- what you guys are doing there on semis and how that business is sitting in? David Zapico: Yes. So Abaco makes advanced computing solutions. And when you have the most precision applications have to work in the most durable environments, use the Abaco equipment. And along with the needs and the data explosion in defense right now where everybody is more data to process an RF systems and things like that. It's a great demand driver. Abaco also has a business where we're selling that technology to the semiconductor market. So really in the quarter, there was a semiconductor tool manufacturer that's using the semiconductor pool manufacturers dealing with a ramp-up in demand from AI and everything that's going on in the semiconductor market, and they're using the Abaco computing technology to control their tool. So we were pleased to book that order in the quarter. Operator: [Operator Instructions] Our next question comes from Nigel Coe with Wolfe Research. Nigel Coe: Obviously, a lot grand covered here, but thanks for the question. So the guide increase from mid- to high singles to high singles and the -- obviously, the bump in corporate as well. Is that in the realm of 2 points of sales accretion versus the prior plan? That's how I think about it. And what I'm going with this is twofold. One, the $0.07 increase in the guide, obviously, a nice surprise. But seems like if it is a 2-point increase in sales? And then secondly, with the EIG, I'm just curious, given the order strength and the broad-based nature of the order strength, I'm just wondering how we should think about the second half core growth profile for EIG. David Zapico: Yes. The first point is probably an increase more like 1.5 points, and it was really driven by process and [ era ]. So that kind of puts that in the bucket. And really, I go back to my original comments, it's a conservative guide. We have a strong start to the year. excellent execution. Orders were outstanding. But then you have the geopolitical uncertainty. And we balanced it all, and we're very confident in our guide. We think it's prudent to do what we did. Nigel Coe: Okay. No, it does seem conservative. And then maybe going back to Deane's question at the front end around -- obviously, you don't speculate on press rumors. But I'm just curious, AMETEK has evolved from doing a lot of bolt-on deals to much larger deals under your leadership. I'm just wondering how you view the risk reward of larger deals versus small bolt-ons? Just I'll leave it open at that. David Zapico: Yes. I think the -- there's an important risk reward. And you have to make sure what you're buying is -- matches our strategy, matches what we're trying to do and we can add value to it. So we have naturally increased the size of deals over the past 10 years. We're still focused on niche markets. we're still focused on the areas that we're currently operating in. And I think that I plan on continuing to expand a lot. And it's, again, an unblemished record. We've never had a write-off of goodwill. We're very conservative. We're -- we look to get a return on every deal, returns on capital are very, very strong for us. It's part of our basic operating model. That's what we do. Our growth model is to add M&A to our portfolio of niche businesses. We don't have any over-dependency on any one market, any one technology, any one customer. So we just think we have a bulletproof model that's robust, and we'll continue to add acquisitions in no way are we going to do at an acquisition that's the size of AMETEK and no way where we had an acquisition is half the size of AMETEK. So we're still looking at these I'll call them bite-sized deals that are a small percentage of our market capitalization, and we're going to continue to do that. And the environment for us is providing a lot of opportunities for us. So we're assessing a lot of opportunities. We haven't made a decision on any of them, but we're going to pick the ones that we add the most value for our shareholders. Operator: Our next question comes from Julian Mitchell with Barclays. Julian Mitchell: Maybe just moving away from the top line for a second, looking at operating leverage and kind of incremental margins, is the sort of guide based off a steady improvement year-on-year in operating leverage as you go through 2026. Just wanted to clarify that. And if you see any movement in kind of price net of cost within the year moving around? David Zapico: Right. So if you want to dig into margins, Julian, in the first quarter, we had an excellent operating quarter. So our reported margins were up 50 basis points. But our core margins, so we take out acquisitions and we take out FX, they were up 160 basis points, just outstanding. And if you look at both of our groups. EIG had core margins up 40 basis points, driven by excellent productivity and EMG reported core margins up 410 basis points. So they got month productivity plus leverage from the excellent sales growth. If you want to dig into that and say, what were the incrementals on the dollar of sales over the incrementals. Our incrementals were greater than 50% for the company, core incrementals. So when you back out the acquisitions and you back out FX, core incrementals were up 50%, both on the whole company. EIG core incrementals were greater than 50%, and EMG core incrementals were greater than 50%. So really strong. And related to the guide for the year, we're expecting 35% incrementals, and core margins will be up around 50 basis points. So -- and again, I'll go back to -- it's a prudent guide. There's a lot of uncertainty out here related to potential inflation and things like that, we're laser-focused on. So performing extremely well, plan to continue performing very well for the year, and those are the numbers that are outstanding in the quarter. And we plan to continue driving it forward. And we have a track record of being able to navigate through changing conditions, and we're laser-focused on what we think we need to do. Julian Mitchell: That's very helpful. And then just to circle back to the EMG segment and the top line outlook there. So as you noted earlier, for medical specifically, you've got tough comps later in the year. And the overall EMG segment, the comps very tough on sales in the second half. But at the same time, your orders are growing double-digit organic still. So I just wondered sort of are you kind of baking in like a mid-single-digit exit rate on organic growth for EMG just because of the comps. Is that the right way to look at it? . David Zapico: Yes, you're in the ballpark. You're in the ballpark. That's the way I look at it. Operator: This concludes the question-and-answer session. I would now like to turn the call back over to Kevin Coleman for closing remarks. Kevin Coleman: Thanks, everyone, for joining our call today. And as a reminder, a replay of today's webcast can be accessed in the Investors section of ametek.com. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Welcome to the First Quarter 2026 Caterpillar Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alex Kapper. Thank you. Please go ahead. Alex Kapper: Thank you, Adria. Good morning, everyone, and welcome to Caterpillar's First Quarter of 2026 Earnings Call. I'm Alex Kapper, Vice President of Investor Relations. Joining me today are Joe Creed, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division and incoming CFO; and Rob Rengel, Senior Director of IR. In our call, we'll be discussing the first quarter earnings release we issued earlier today. You can find our slides, the news release and the webcast recap at investors.caterpillar.com/eventsandpresentation. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We also make certain statements that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. For today's agenda, Joe will begin by sharing perspectives about our results and sliding initiatives across our segments. Then he'll discuss our full year outlook and insights about our end markets followed by a stat update. Andrew will provide a detailed overview of results and Kyle will share key assumptions looking forward. We'll conclude by taking your questions. Now let's advance to Slide 3 and turn the call over to Joe. Joseph Creed: All right. Well, thanks, Alex, and good morning, everybody. Thanks for joining us. Our team delivered a strong start to the year driven by resilient end markets and disciplined execution in operating environment. Sales and revenues were $17.4 billion, up 22%, and we delivered adjusted profit share of $5.54, an increase of 30% versus last year. Backlog grew to a record level of $63 billion, an increase of $28 billion or 79% compared to the first quarter last year. All 3 primary segments contributed to both the year-over-year and sequential backlog growth. Also, total first quarter orders, an all-time record, providing a solid foundation positive momentum. Our strong balance sheet and MP&E free cash flow allowed us to deploy $5.7 billion to shareholders through share repurchases and dividends in the quarter. Solid sales and revenues growth combined with robust order activity demonstrate the strength of our business and our focus on solving our customers' toughest challenges. Now I'll discuss first quarter results in more detail. Sales and revenues were $17.4 billion, an increase of 22% versus the previous year and in line with our expectations. Adjusted operating profit margin was 18%. First quarter adjusted operating profit margin and adjusted profit per share of $5.54 were better than we anticipated, mainly due to favorable manufacturing costs, including lower-than-anticipated tariff costs. Costs related to tariffs introduced since the beginning of 2025 were approximately $600 million in the quarter. This was favorable to the estimate we provided in January, primarily due to an adjustment to the computation of those in 2025. Andrew will provide a little more detail in a moment. Now I'll review first quarter retail statistics. Sales to users grew in all 3 of our primary segments. In Power and Energy, sales to users grew a robust 32% with growth across all applications. Power generation grew 48%, driven by strong demand for large gensets and turbines used in data center applications with an increasing mix towards prime power. Sales to users in oil and gas increased 16% and were driven by reciprocating engines, turbines and turbine-related services sold in the gas compression applications. Industrial growth was driven by engines sold into multiple applications. Construction Industries total sales to users grew for the fifth consecutive quarter, up 7%, increases in North America were slightly better than we anticipated, mostly due to nonresidential construction. Rental fleet loading increased and our dealers' rental revenue continued to grow in the quarter. Sales users declined slightly in EAME and were below our expectations due to timing in key projects. Middle East was slightly lower, but was partially offset by a better-than-expected activity in Africa. Asia/Pacific was about flat and below our expectations due to timing of customer deliveries, while growth in Latin America was slightly better than anticipated. For Resource Industries, first quarter sales to users increased 6%, which is below our expectations, primarily due to timing of customer deliveries. Mining sales to users were higher year-over-year with growth across most product lines. Heavy construction and quarry and aggregates were about flat. Rail remained at relatively low levels. Turning to Slide 4. I'll cover a few highlights since our last earnings call from each of the segments, starting with Power and Energy. Yesterday, we announced another exciting opportunity to provide Pro Power up to 2.1 gigawatts of large gas generator sets for prime power generation in support of data center, oil and gas and industrial applications. The orders will enter the backlog on a rolling basis. We expect to deliver generator sets over the next 5 years and anticipate long-term services growth opportunities in the future. This represents the sixth agreement with at least 1 gigawatt of Caterpillar equipment for prime power applications. Moving on to Construction Industries. Last month at CONEXPO, we launched CAT compact, a streamlined customer experience designed for small contractors and growing businesses that value simplicity and speed. It brings everything together in one destination, enabling customers to buy, rent and service compact equipment with ease. We believe this will expand our relevance in the compact equipment industry and make it easier for our customers to do business with us and our dealers fitting to our 2030 target for CI of 1.25x sales to users growth. And finally, Resource Industries completed the acquisition of RPMGlobal in February, bringing a leader in mining software technology into our portfolio. As we highlighted at our Investor Day, RPMGlobal's capabilities complement our existing technology, strengthening our ability to deliver integrated solutions that help customers improve safety and productivity across their operations. We see this as a long-term investment in technology-enabled growth that will help solve our mining customers' toughest challenges. Now on Slide 5, I'll provide an update on our outlook. While there is increased uncertainty due to geopolitical events and elevated energy prices, our end markets have been resilient. We are closely monitoring the environment, and we are not forecasting material impact to our 2026 outlook at this time. We now anticipate low double-digit growth for full year 2026 sales and revenues. The increased outlook is driven by resilient end markets and solid execution by our team. Notably, we're tracking ahead of our lending capacity expansion plans for the year. Order rates are very strong across a wide range of products, driving backlog growth in all 3 primary segments. We also expect growth in services revenues for the full year. As a result, we anticipate stronger growth across all 3 primary segments compared to the outlook we gave during our last earnings call. With the improved sales and revenues outlook, full year adjusted operating profit margin will be higher than we expected in January. As a reminder, our operating profit margin target range is progressive with sales and revenues. Adjusted operating profit margin is estimated to remain near the bottom of the target range corresponding to the now higher top line expectations. Our full year margin expectation reflects the strategic investments we're making to execute our growth strategy as well as the ongoing impact of tariffs. The situation around tariffs remain fluid, while we continue to execute our mitigation plans. Kyle will discuss our revised estimate for tariffs in more detail. I remain confident that we'll manage the impact of tariffs over time as we aim to operate around the midpoint of our adjusted operating profit margin target range. We're also increasing our MP&E free cash flow expectations to be higher than 2025, reflecting our improved outlook and strong top line growth. To further support our outlook, I'll discuss our key end markets starting in Energy. The 2026 outlook remains positive. Robust backlog was driven by continued momentum in both power generation and oil and gas. We anticipate growth in power generation for both reciprocating engines and turbines, driven by increasing energy demand to support data center build-out related to cloud computing and generative AI. We continue to see demand for prime power trend higher as data center customers look for alternative power solutions to keep pace with their growth. Oil and gas expect moderate growth for the year. Reciprocating engine sales are expected to increase, driven by strong demand in gas compression applications. Solar turbines oil and gas backlog remains healthy with continued solid order and inquiry activity. As a result, we anticipate another year of strong turbine sales. Services revenues in oil and gas are also expected to increase in the year. Demand for products in industrial applications is projected to grow modestly in 2026. For Construction Industries, we continue to expect full year sales to users growth, supported by strong order rates. Overall, the outlook for North America remains positive as sales to users are anticipated to grow versus last year. Construction spending remains at healthy levels supported by the IIJA with the remaining funds to be spent over the next few years. Also, investment in critical infrastructure programs and data centers is contributing to overall construction spending levels. Dealer rental fleet loading and rental revenue are both projected to increase compared to 2025. In EAME, Europe is expected to remain stable, supported by nonresidential construction and construction activity in Africa is projected to remain strong. While softening in the Middle East is anticipated, as of now, we expect the impact on EAME sales to users to be limited. In Asia/Pacific, outside of China, softer conditions are expected. In China, we anticipate moderate conditions with full year growth in the above 10 ton excavator industry off of low levels of activity. Growth in Latin America is expected to continue. We're seeing continued positive momentum in Resource Industries with strong backlog growth. Robust order rates across most products drove the highest quarter for order intake since 2012. For 2026, sales to users are expected to increase, primarily driven by rising demand for copper and gold and positive dynamics in heavy construction and quarry and aggregates. Most key commodities remain of investment threshold. Customer product utilization is high and the age of the fleet remains elevated. While some commodity prices have increased recently, customers remain focused on the long term. We continue to expect rebuild activity to increase slightly compared to last year. Rail services and locomotive deliveries are both anticipated to grow for the year. Now let's turn to Slide 6 for an update on our strategy. Over the past year and even since our Investor Day last November, our largest customers in the broader data center industry have significantly increased their expectations for capital spending. That has translated to accelerated order rates for us. In fact, since we first announced our initial capacity expansion plans in January of 2024, our large reciprocating engine backlog has grown by more than 3.5x. Customers are committing to longer-term orders with some orders well into 2028. In addition to order growth for backup power, we're also seeing higher demand for prime power applications, which will lead to long-term service opportunities and higher demand for aftermarket components. As we've discussed, our large reciprocating engine capacity also serves a wide range of applications in addition to power generation, including oil and gas and mining, which are all expected to benefit from long-term secular growth trends. As a result of these trends, I'm excited to announce that we are increasing our large reciprocating engine capacity from 2x 2024 levels to nearly 3x 2024 levels. Over the last 2 years, we've maintained a disciplined strategy of scaling capacity in direct alignment with our growing backlog and long-term order visibility. By working closely with our customers to forecast their future requests, we ensure that our capacity expansions are additive to our OPACC growth. Today's announcement reflects the continuation of this disciplined and measured approach. The additional investment will begin as soon as possible but primarily occur from 2027 through 2029. As a result, MP&E capital expenditures are expected to average between 4% and 5% MP&E sales through 2030. Based on our record backlog and customer forecast, we estimate a positive cash payback on the entire reciprocating engine investment, including what was previously announced by the end of this decade. As a result of the additional capacity, we're increasing our 2030 growth targets. We now expect the compound annual growth rate for total enterprise sales and revenues to be between 6% and 9% between within '24 to 2030. The target for power generation sales has increased to more than 3x sales by 2030 from a 2024 baseline. We continue to see attractive growth opportunities across all our segments due to our role in providing the invisible layer of the tech stack, the critical minerals, the reliable power and physical infrastructure that the modern world depends on. We believe we are well positioned to deliver long-term profitable growth. And finally, earlier this month, we announced that Kyle Epley will succeed Andrew Bonfield as CFO effective tomorrow. It's been a very privilege to work with Andrew. His leadership has been instrumental to Caterpillar's success, and he's brought exceptional financial expertise and relentless focus on disciplined decision making and a deep commitment to our customers and shareholders. He's made our global finance organization a strategic advantage and has impacted long after his retirement. I've worked closely with Kyle for over 20 years and have great confidence in his ability to build on Andrew's legacy. He's an outstanding leader with deep institutional knowledge and a proven track record of partnering with the business to deliver results. Kyle is also deeply involved in developing our refreshed strategy and will help drive achievement of our 2030 growth ambitions. With that, I'll turn it over to Andrew and Kyle. Andrew R. Bonfield: Thank you, Joe, and good morning, everyone. I'll begin with a... Operator: Pardon the interruption. We have lost audio to our speakers. Please stand by. [Technical Difficulty] Andrew R. Bonfield: Sorry, I'll start again. Thank you, Joe, and good morning, everyone. I'll be doing the summary of the first quarter and then provide more detailed comments, including performance of the segments. I'll then discuss the balance sheet and free cash flow. Kyle will conclude with remarks on our expectations for the second quarter and our current full year assumptions. Beginning on Slide 7. Sales and revenues was $17.4 billion, up 22% to prior year, which was in line with our expectations. Adjusted operating profit was $3.1 billion, and our adjusted operating profit margin was 18.0%, both were stronger than we had anticipated. Moving to Slide 8. The 22% increase in sales and revenues compared to the first quarter of 2025 was primarily driven by strong growth in sales volume and favorable price realization. The stronger volume was mainly driven by the impact from changes in dealer inventories and higher sales of equipment to end users. As we expected, dealers recorded a seasonable inventory build in Construction Industries compared to the slight decrease in the first quarter of 2025. The bill was slightly higher than we originally anticipated, supported by the expectation of stronger sales to users for the rest of the year. Sales were in line with our expectations with favorability in Power and Energy and Construction Industries, offset by lower-than-anticipated sales in Resource Industries. One note before I move forward. We will now report changes in dealer inventories in total and for construction industries needs, removing the total machines analysis. Remember that typically over 70% of dealer inventory in Power and Energy and Resource Industries is backed by firm customer orders. So dealer inventory changes in these segments are mainly a function of timing within the commissioning pipeline and less indicative of changes in demand or demand planning. Construction Industries products are generally more reflective of dealer inventory available on the lot. And this level of transparency along with sales to use should help you more accurately model this segment. Moving to operating profit on Slide 9. Both operating profit and a adjusted operating profit in the first quarter of 2026 increased by 20% to $3.1 billion mainly due to the profit impact of higher sales volume and a favorable price realization, partially offset by unfavorable manufacturing costs and higher SG&A and R&D expenses. The adjusted operating profit margin was 18.0%, which was only a 30 basis point increase compared to the prior year despite higher tariff costs. Margin was stronger than we had expected. This was mainly due to favorable manufacturing costs, including lower tariff costs and beneficial cost absorption and lower freight. Excluding the impact from tariffs, our first quarter margin was significantly higher than the prior year reflecting the higher sales volume and favorable price. For the tariffs introduced since the beginning of 2025, the first quarter costs were approximately $600 million. This was favorable compared to the $800 million estimate provided in January, primarily due to an adjustment related to the computation of tariffs incurred in 2025. This adjustment is reflected in operating profit within corporate items and only impacts the first quarter. Segment margins are not impacted. Moving to Slide 10. Profit per share was $5.47 in the quarter. Adjusted profit per share was higher than we had anticipated at $5.54, excluding restructuring costs of $0.07 versus $0.05 last year. Data center profit per share included a discrete tax benefit of $0.15 in the quarter. The favorable adjustment to our tariff costs benefited the quarter by about $0.31. Excluding discrete items, the provision for income taxes in the first quarter of 2026 reflected a global estimated annual effective tax rate of 23.0%. Finally, the year-over-year impact from the reduction in the average number of shares outstanding, primarily due to share repurchases resulted in a favorable impact on adjusted profit per share of approximately $0.13 compared to the first quarter of 2025. On Slide 11, I'll review the performance of the segment, starting with Power and Energy. Keep in mind that our comments now reflect the realignment of the rail division moving from power and energy to resource industries. For Power and Energy, sales of $7.0 billion increased by 22% versus the prior year. Sales exceeded our expectations driven by strength in power generation. The sales increase versus the prior year was mainly due to higher sales volume. First quarter profit for Power and Energy increased by 13% versus the prior year to $1.5 billion. The segment profit -- 20.6% was a decrease of 170 basis points versus the prior year. mainly driven by tariffs, which had about a 270 basis point impact on the segment's margin. As we expected, higher manufacturing costs were also impacted by spend relating to our capacity expansion including depreciation. Favorable volume and price were partially offset to the manufacturing cost increase. The margin was stronger than we had anticipated primarily due to the benefits of some litigation efforts to reduce tariff costs. Sales volume also supported the stronger-than-expected margin. Now moving to Slide 12. Construction Industries sales increased by 30% in the first quarter to $7.2 billion. This was higher than we expected mainly due to stronger-than-anticipated volume from higher dealer inventory build supported by continued momentum in our end markets. The 38% sales increase was primarily due to the very strong sales volume growth and favorable price realization, which included the benefit from geographic mix. Higher sales volume was mainly driven by changes in dealer inventories with a more typical $1.5 billion increase in the first quarter as compared to a slight decrease in the prior year. As Joe noted, sales to users growth was healthy with a 7% this quarter. First quarter profit for the construction industry was $1.5 billion, a 50% increase versus the prior year. The segment's margin of 21.4% was an increase of 160 basis points versus the prior year, mainly driven by the favorable price realization and the profit impact of higher sales volume. This was partially offset by tariff costs, which had an impact of about 550 basis points on the segment's margin. Margin was stronger than we had expected, mainly due to the lower-than-anticipated manufacturing costs, including cost absorption and the impact of stronger sales volumes. Turning to Slide 13. Resource Industries sales increased by 4% in the first quarter to $3.8 billion, driven by higher sales volume and favorable currency impact. The year began a bit slower than we had anticipated, primarily due to timing as volume was affected by some short-term production delays. First quarter profit for Resource Industries decreased by 39% versus the prior year to $378 million. The segment's margin of 10.0% was a decrease of 700 basis points versus the prior year driven mainly by tariff costs and an impact of about 500 basis points on the segment's margin. The margin was lower than we had anticipated, primarily due to the lower-than-expected sales volume and the timing of discounts, which impacted price realization within the segment on a short-term basis. Moving to Slide 14. Financial Products revenues increased by 9% versus the prior year to $1.1 billion, mainly due to higher average earning assets across OEMs. Segment profit increased by 14% to $245 million. The increase was primarily due to higher average earning assets and margins at Insurance Services, partially offset by higher SG&A expenses. Our customers' financial health remains strong. Past dues were 1.39% in the quarter, down 19 basis points versus the prior year. The allowance rate was 0.86%, matching the fourth quarter of 2025 for our lowest ever level reported in any quarter. Business activity at Cat Financial remains healthy. Retail credit applications were roughly flat, while retail new business volume grew by 8% versus the prior year, our highest first quarter in over 15 years. In addition, used equipment inventory levels continue to remain low and conversion rates remain above historical averages as customers choose to buy equipment at the end of their lease term. Moving to Slide 15, MP&E free cash flow was nearly $600 million in the first quarter, which was higher than we had expected and about a $350 million increase versus the prior year, impacted by stronger profit. The course included our annual payment of 2025 short-term incentive compensation, CapEx spend was about $700 million. Moving to capital deployment. We deployed $5.7 billion to shareholders in the first quarter. After the dividend payment to $5 billion was for share repurchases, which has included a $4.5 billion accelerated share repurchase, or ASR, that may last for up to 9 months. Our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $4.1 billion in addition to $1.3 billion in slightly longer-dated liquid marketable securities to employ our cash. So after more than 90 quarterly or biannual calls, it is finally time for me to retire. I could not have scripted a better set of results to be my final call. It has been an honor and privilege to serve alongside the CAT team and to work with Joe and Jim, the Board, our executive officer and our employees and dealers around the world as we've delivered on our strategy through a wide range of environments. I'm extremely proud of what this team has accomplished, and I am confident that the foundation we built together and the growth opportunities ahead. I also want to thank the investment community for the thoughtful engagement here at Caterpillar. Finally, Kyle has worked closely with me since our beginning Caterpillar, and I have watched his development as a key member of Caterpillar's leadership team. His knowledge of the business and involvement in the development of the strategy was an invaluable help to me as CFO, and I could not have been more pleased that the Board elected him as my successor. As I step away, I am confident that Caterpillar is well positioned for the future and that the finance organization is in very capable hands with Kyle Epley as CFO. With that, thank you again. Kyle Epley: Thank you, Andrew. And I'm honored to be the next CFO of Caterpillar, and Andrew, I am very grateful for you and all the guidance you provide to me over your years at Caterpillar. So now let's go through our outlook assumptions. Turning to Slide 16. I will start with the second quarter. We maintain a watchful eye on the environment as the geopolitical landscape remains complex. Our assumptions are based on what we see today and what we believe is most likely. Keep in mind that our assumptions reflect the realignment of the rail division and Resource Industries, we filed an 8-K in late March to recast historical periods and establish in a baseline for you to evaluate segment-level performance and expectations. Based on what we see today, for the second quarter, we anticipate another quarter of strong sales growth versus the prior year. We expect volume increases and favorable price realization in each of our 3 primary segments. We anticipate volume will be driven by a higher growth rate in sales to users compared to the first quarter, with a minimal change in Construction Industries during dealer inventory. If we look at the second quarter by segment, we anticipate strong sales growth in Power and Energy in the second quarter versus the prior year, driven by continued strength in power generation, and in oil and gas and favorable price realization. We expect strong sales growth in Construction Industries in the second quarter versus the prior year, mainly due to strong sales to users supported by the backlog and favorable price realization. We anticipate a more typical sequential sales increase in the second quarter as compared to the first. In contrast to the sizable sales increase we saw a year ago, following a lighter first quarter, which was impacted by the lack of dealer inventory build. In Resource Industries, we also expect strong sales growth versus the prior year primarily due to higher sales of users. We also anticipate favorable price realization with the primary driver being geographic mix. Now I'll provide some color on our second quarter margin expectations versus the prior year. Excluding tariff costs, we expect higher margins at the enterprise level, primarily due to price realization and higher volumes. But partially offset by higher manufacturing costs and SG&A and R&D expenses. The higher manufacturing costs assume unfavorable cost absorption and investments to support higher volume and capacity investments, including depreciation. SG&A and R&D expenses will reflect investments and higher compensation expense. Despite the ongoing impact of tariffs, we also expect higher margins in the second quarter versus the prior year. We anticipate tariff costs of around $700 million. This remains a headwind compared to the impact last year, which was around $400 million. We expect about 50% of the tariff cost to be incurred in Construction Industries and 25% in both Power and Energy and Resource Industries. Now on to the second quarter margins by segment. In Power and Energy, including tariffs, we anticipate a slightly higher margin percentage compared to the prior year on stronger volume and favorable price realization. This is partially offset by higher manufacturing costs including tariff costs and expenses related to our capacity expansion projects. In Construction Industries, including tariffs, we anticipate a higher margin percentage compared to the prior year as stronger volume and price particularly offset by higher manufacturing costs, primarily driven by tariffs and SG&A and R&D expense. In Resource Industries, including and excluding tariff costs, they had a lower margin percentage compared to the prior year due to higher manufacturing costs and SG&A and R&D expenses. Higher compensation expense and strategic investments related to technology, including autonomy, are driving the higher SG&A and R&D expenses. Favorable price realization and higher volume are expected to be partially offset. Note that for Resource Industries, we anticipate the benefit from price realization to improve as we move through the year. Now on Slide 17, let me provide a few comments on the full year. As Joe mentioned, we now anticipate sales and revenues growth in the low double digits for the full year of 2026. This is versus our expectations from last quarter. The increase in our full year sales and revenue expectation is supported by solid sales to users growth amid resilient end markets, the fact that Power and Energy is tracking ahead of our 2026 capacity growth plan and continued robust fundamentals and industry growth in North America. We've had strong sales growth across each of our primary segments, driven mainly by volume and price. Now on to margins for the full year. Excluding tariff costs, we expect to be in the top half of the adjusted operating profit margin target range. Compared to the prior year, favorable price realization and volume are partially offset by higher manufacturing costs related to capacity and higher SG&A and R&D related to increased incentive compensation and strategic investment spend. Including tariffs, we continue to anticipate that the adjusted operating profit margin will be near the bottom of the target range. However, with the improved sales and revenues outlook, full year adjusted operating profit margin will be higher than we expected in January. As I mentioned, the situation flex, but we now anticipate full year 2026 tariff costs in the range of $2.2 billion to $2.4 billion based on our current volume assumptions. This figure reflects adjusted 2026 full year impact of tariffs implemented since the beginning of 2025 and in place over the course of this year. This compares to the $2.6 billion estimate we provided last quarter. Let me provide some additional context on our tariff assumptions. The bottom line is our expectation for tariff cost in the second through fourth quarters has not changed significantly since January. Based on the recent ruling on IEEPA tariffs by the U.S. Supreme Court, we removed these tariffs from our estimate and added Section 122 tariffs. We expect to ramp up our actions to mitigate our tariff costs in the back half of the year. The recent updates to Section 232 guidance have a roughly neutral effect, and we are not currently in any IEEPA-related refunds as a result of the Supreme Court's decision. Moving on. We continue to expect restructuring costs of approximately $300 million to $350 million in 2026. And our anticipated global estimated annual effective tax rate remains approximately 23% for '26, excluding discrete items. We now anticipate MP&E free cash flow will be higher than the $9.5 billion last year, an improvement versus our expectations last quarter, reflecting our improved outlook. While our CapEx forecast for 2026 remains approximately $3.5 billion. As Joe discussed, we are increasing our large reciprocating engine capacity from 2x to nearly 3x 2024 levels with additional CapEx spend occurring primarily from 2027 to 2029. We now anticipate MP&E CapEx spend to average approximately 4% to 5% of MP&E sales through 2030. Capital spend for our large engine capacity expansion is supported by strong demand signals and confidence in a positive cash payback by the end of the day. We believe these investments will support future absolute OPACC dollar growth. which is our definition of winning. So now turning to Slide 18. Let me summarize. We delivered a strong start to the year with better than expected earnings. In this dynamic operating environment, we now anticipate higher sales and revenues growth in '26 compared to a quarter ago. We will remain disciplined and measured in our strategic investments while maintaining our strong balance sheet and we will continue to return substantially all of our MP&E free cash flow to our shareholders through dividends and share repurchases. Finally, we will continue to execute our strategy for profitable growth. With that, we will take your questions. Operator: [Operator Instructions] Please note, we are only allowing 1 question per analyst. And your first question comes from the line of Rob Wertheimer from Melius. Robert Wertheimer: Congratulations to Andrew and Kyle. It's been a pleasure getting to know you both. My question is on large engine capacity expansion. It sounds like most end markets for big engines are pretty good. But is there any one that kind of predominated in the additional capacity expansion decision whether prime or Bower, oil and gas, whatever. Do we think about the timing as being kind of linear or lump sum at the end of the expansion period in 2029? . Joseph Creed: It's Joe. It's -- definitely you think of the size of those industries right now and where the growth is really happening. We are seeing -- one of the things I'm really happy about is it's not just power and energy, we've had really good oil and gas quarters as well over the past few quarters from an order standpoint and health of the business. But just the pure size of it is really driven by power generation and that's where we're putting the capacity. And even over the last 6 months, the last 2 quarters, we've seen the orders go up pretty consistently. And if you go back to the industry with data centers and just the amount of CapEx announced in that industry since a year ago is quite significant. So that's the main driver of why we feel comfortable putting this capacity in place, we have the benefit that it does over multiple industries, and we do think -- I do think we're going to move a lot of natural gas, and I'm excited about the oil and gas business and what its outlook is over the next few years. It's still a lot of prime power. So we still see a lot of cloud. It's not just AI. When we move into use of AI, we're going to use a lot more data. So the backup power opportunity provides a good base for us. But it is fungible capacity. We're seeing a lot more mix towards prime. And then also that drives when it's gas compression or prime power drives a lot of aftermarket, which this capacity will also allow us to serve that aftermarket opportunity, which I think gives us great services growth opportunity beyond 2030. From a timing standpoint, with the second part of your question, we're going to try to put this capacity in as soon as we can. The data centers are trying to move quickly. We've been talking to customers. So we're going to start right away. I think you should see heavy investment in '27, but we'll be investing still in '28 and '29. We also hopefully, our expectation is to get incremental units out of this latest capacity announcement as early as 2027. So it will happen fast. Operator: We'll move next to Jerry Revich at Wells Fargo. Jerry Revich: Congratulations, Andrew and Kyle. Joe, I'm wondering if we could just go back to your prepared remarks, you mentioned you booked Prime Power large recips for now 6 data center projects, considering just the full scope of products that you have for us behind the meter offering. Can you just talk about what you're seeing in the architecture plans. We're hearing about increasing use of recips plus turbines in series of projects going forward. And if that happens, you folks would be in a pretty good position. So I'm wondering if you just outlined, is that what you're seeing, what kind of developments are you seeing in architecture and if you're willing to give us the number of gigawatts booked for recip buying power, that would be helpful. Joseph Creed: Yes. I think I don't know that we -- I even have on the top of my head the number of gigawatts on prime power, but from a trend perspective, I think when you step back, what you're saying is exactly what we're seeing from our customers, each side is a little bit different. So I think all that depends on the site, the size of the facility, their access to gas, the footprint and power demand. So our teams are in early with customers. And you're right, I think we do have an advantage of having -- when you're going to string together a number of products behind the meter and you need multiple products, us having turbines and recips is an advantage for us, we can configure it one way or the other or a mix and a lot of it's driven by timing to and how fast we can get on product. . So each one is a little bit different, but it does present an opportunity for us. And I think we're seeing as a trend more and more data center sites asking for behind-the-meter power. And so that's translated into, as I said in prepared remarks, I think 6 announcements over 1 gigawatt, but also multiple projects as well that are less than 1 gigawatt where we're supporting customers with prime power. Operator: We'll go next to David Raso at Evercore ISI. David Raso: I just want to thank Andrew, obviously, one of the best CFO runs I've seen in my career. So congrats, enjoy your retirement. And obviously, congratulations, Kyle. I want to talk long-term targets. The change from a 6% CAGR to now a 7.5%, you can account for that almost, really almost more than the change just from the increase in your target today for power gen sales going from double to triple over that same time frame. . And just given the ecosystem around power when it's that strong, be it oil and gas, construction, mining, I'm just curious why you left every other part of the business with the same view. I would just think there'd be some ecosystem benefit if you're raising your power gen thoughts that dramatically. Joseph Creed: Thanks, David. So when you think about it, you're right, when you do the math, it comes out to the increased power gen, but that's really what's different, right, today from where we were at our Investor Day. As I mentioned, you look at the amount of CapEx spent in -- by the data center industry, particularly as it relates to power, we need to add capacity to do that. So that's incremental opportunity for us. Keep in mind, we have healthy growth ambitions, and we projected those out when we had our Investor Day. So it wasn't like the other 2 segments didn't have growth. We have growth across all 3 parts of our business. So we're pretty comfortable with the new 6% to 9% raise, and we're happy to be able to raise it, particularly so soon after really putting those targets out just in November. Operator: We'll take our next question from Tami Zakaria at JPMorgan. Tami Zakaria: So with an improved top line outlook for the long term that you just updated this morning. Wondering what keeps your view on the margin opportunity unchanged versus the Analyst Day. Wouldn't you expect better fixed cost absorption? Maybe D&A steps up, but I would expect pricing could also be better given surging demand. So trying to understand what underpins this sort of high 20% incremental margin versus historically you have seen higher. Andrew R. Bonfield: Yes, Tami, it's Andrew. Just if you remember when we actually set the targets, the average progressive, remember, they're progressive margin targets. At the moment, they go out to $100 billion. Obviously, at some point in time, that may be updated as we get closer. But remember that we had progressive targets of around 31%, which is the same average that we had than the previous margin targets which we think is fair and reasonable. Obviously, the aim always is to do better, and that's always one of the things we'll continue to focus. But today, we have headwinds, for example, caused by tariffs. So our target is really to get back to the middle of the range over a period of time and to mitigate the impact of tariffs as we speak. But that's really the driver. I think obviously, we're also in a situation when we add capacity because we do accelerate the depreciation. Just to remind you, that does have a drag on margins as well, particularly in Power and Energy over the next few years as they bring that on. So it's not all incremental margins based on the old capacity rate. So you don't get quite the same amount of leverage as you would have done previously. Joseph Creed: Yes, I think that's an important point that Andrew made, right? The progressive targets as we're adding sales, it's a 31%. That's just to stay at the same point in the range that we are. We're at the bottom. And as we've said many times, our goal is to work our way back up towards the middle of the range. So to do that, we're going to have to have better pull-throughs in that 31% as we work our way out. So that's primarily the reason. And we are spending, right, and we're adding the capital to do this. If you look at where we've been in the past, the last 7 or 8 years, we've not needed the capital to increase our sales because it's come back within the footprint that we have before. Now we're moving to higher sales levels than we've ever had in the company. So we're going to have to spend a little money to get there. . Operator: We'll take our next question from Angel Castillo at Morgan Stanley. Angel Castillo Malpica: I just want to echo everyone's congratulations to Andrew, I wish you all the best, and Kyle, looking forward to working with you. I wanted to spend a little bit of time on the capacity addition. I guess, can you talk about just the decision to add more capacity in the large engines as opposed to perhaps increasing investments on the gas turbine side. I guess I'm trying to understand if at all, this is any kind of read-through on how you view the demand of either product? And then I know you said essentially the capacity here is fungible between prime and backup. But curious if you could just talk a little bit about more specifically the backup supply/demand backdrop. I think we've been seeing some rising concerns that as we kind of move to an 800 BDC or behind the meter that you could potentially more and more of that being kind of displaced or designed out? And again, you have the benefit of having that fungibility, but just curious if you could talk about that supply/demand and what you're hearing from your customers on that backup opportunity. Joseph Creed: Yes. I think part of the explanation there is a large part of the base increase in the capacity is backup power, right, which is what we've done to back up data centers, and we've been leading that for a long time, and we continue to grow. That will be driven by continued more data on the cloud. So more tokens are being used, more data is going to be needed. We look at our own internal -- look at what we're trying to do internally with automating our factories and automation, what we're doing in the office, what we're doing with autonomy and our machines, right? We're going to use a lot more data and we just look at the growth and the use that we're going to have, and we're not the only company out there doing that. So I think useful need to go up. All these projects for right now that we're seeing for prime power, we're not seeing customers not have backup power or making sure that they have the ability to run with backup plans. They're not just going with one option. So we haven't seen that trend continue. So I think the backup power is going to continue to be there. Not every data center is going to go behind the meter either and those are going to drive a lot of backup demand. So as we look at it, we feel pretty confident in this investment in raising in capacity. Look, I've been around a long time. I know there are no such thing as sure things. But when you think about all the capacity investments we've made in my career, this is a better line of sight to getting the return than anyone we've ever made. And we don't need to be at all this capacity to be OPACC positive and grow OPACC. So that gives us confidence to make this investment at this point in time. Operator: We'll move next to Michael Feniger at Bank of America. Michael Feniger: Andrew, congratulations. Just when we think of 2030, that 50 gigawatt number you guys laid out at the Investor Day, is there any way we can get an update on that given the announcement today? And Joe, just when we look at the pricing in Power and Energy, it's still around this 2% number. I realize there's going to be some new products and maybe there's not a lot of like-for-like, but just generally speaking, should we be expecting that number to gradually rise through this year and into '27 as we see some of this backlog get delivered? Just directionally, how should we kind of think about that figure going forward? . Joseph Creed: I'll take the second one first. From a pricing standpoint, I think 2 things I would say, we're taking orders well out in the future. Those have -- we take orders that are multiple years out, they have price escalators in there typically that are agreed with frame agreements. So we plan to see -- it won't be today's pricing, it will be whatever the appropriate pricing at the time is. When it comes to the capacity increase -- well, the other thing on pricing, keep in mind, power and energy is a big segment. So that 2% is over the entire segment. So obviously, where we're capacity constrained, we're able to do a little bit more, a large part of that business is industrial and smaller power generation, marine, there are other parts of the business for the smaller product, where we aren't constrained. It's a competitive environment. So that number you're seeing is weighted across the entire segment. When it comes to capacity, so the 3x and the way we've said 2x capacity now going to 3x, that's sort of factory output in the way we look at it in units. From a gigawatt standpoint, we gave the 50 gigawatts. The mix is a little bit different in this. So you can't really equate this increasing gigawatts to what's in the 50 base, but we estimate this will give us another 15 gigawatts capacity annually when we're done with this installation. Operator: Our next question comes from Jamie Cook, Truist Securities. Jamie Cook: Congrats on another great quarter, and thank you, Andrew, for all your help throughout the year. Congrats on a fantastic career and look forward to working with you, Kyle. Congrats as well. I guess my question, just to generate back on Power and Energy again. I guess Tami asked the question on why margins shouldn't be going up which you answered. I guess my other question with regards to margins. Should we assume the variability of margins narrowed relative to, I think, the 400 bps pegged on each revenue cycle or throughout the cycle just to power your visibility and service aftermarket becomes a larger percentage of the business you're thinking the volume margin should narrow. And then just the follow-up, just again, you're announcing capacity increases, a top line increase relative to just where we were in December. Is there anything going on structurally from a market share opportunity for Caterpillar that perhaps we're underappreciating. Joseph Creed: Yes. So thanks, Jamie, we probably addressed that margin question, right? We're really happy with Power and Energy operating margins. When you think about one of the reasons we sort of reorganize ourselves, there's a lot of synergies that we get with the rail group being with the mining group, but it also gives you a good view of our Power and Energy business. And I think if you compare where we're at from an operating margin standpoint to the industry, we are leading in that space, and we have a really, really healthy business and it's continuing to grow, and it's an area we continue to invest. I don't know that as that business grows, I think that we have any intention right now on narrowing that operating margin range. There are a lot of things that can go in to make that happen. Just look at our backlog growth, in this quarter, one of the things that I'm excited about, we added another almost $1 billion sequentially. We did almost saying from the third quarter to the fourth quarter last year, and we saw the percent of backlog delivered in the next 12 months come down quite a bit because it was heavily Power and Energy was a big part of that. We're pretty similar this time, which shows that all 3 of the businesses are taking healthy orders right now. So our intent is to grow all 3 of our segments. And so we don't have any intention of narrowing the bandwidth on the margin targets. Andrew R. Bonfield: And just to remind you, Jamie, remember, our definition of winning is absolute OpEx growth in not necessarily margins. So the margins will always be there to give flexibility to enable us to invest. I mean one of the great things we're doing is we are putting central investment of dollars behind to get to those growth targets, which I think is really a positive even in an environment where we are seeing higher costs as a result of tariffs. Operator: We'll take our next question from Chad Dillard at Bernstein. Charles Albert Dillard: So how is CAT helping the Tier 1 and Tier 2 suppliers ramp power gen capacity along with CAT. Curious to get your perspective on where you see the biggest bottle next arm. And then also by 2030, what share of, I guess, now 65 gigawatts of large engine production will be prime vs back up? Joseph Creed: Yes. I don't know in 2030, I'm not sure we'll -- we can tell you exactly the mix between prime and backup. What we're seeing right now is a trend much more towards prime, but backup is growing quite significantly at the same time, as we said, I don't know that you'll see a mix change. I think both of them are going to change. By then, the more prime we sell, the more gas compression we sell, the more oil and gas, we'll also see a heavy shift towards the aftermarket as well for 2030 and beyond for services growth opportunities. We -- as far as working with the supply base, that is a big part of the investment is not only within our 4 walls, but it's also working with the supply base to make sure that they can ramp and we have a big team that's working nonstop with them to make sure a lot of it's forecast visibility. So the more visibility we can give them to the forecast, the better they can react. And that's one of the reasons, frankly, why we've been able to be running a little bit ahead of schedule on the capacity we're installing right now is we've had great performance out of the supply base. So right now, we don't see any major issues. And that's the first quarter and being ahead is allowing us to have more confidence, which is why we gave a little bit better outlook for this year as we think we can maintain that as we go throughout the rest of this year. Operator: We'll move next to Kyle Menges at Citigroup. Kyle Menges: Congrats to Andrew and Kyle. I wanted to follow up on some of the RI commentary. It sounds like in Resource Industries backlog is growing nicely at a pretty significant quarter of order intake. I'd just love to hear kind of what's driving that. How much of it is perhaps new mines versus existing mines coming back and replacing fleet? And yes, I just would love to hear more of what's driving the strength in the RI backlog. Joseph Creed: Yes. I think you could -- I mean, when it comes to new versus existing, there aren't a tremendous amount of new mines that are going in, you kind of see where they're at. We continue to work with customers. The age of the fleet is pretty old. So we'll see customers continue to update their fleets. And as we look forward as well, the technology that we can bring in on new equipment, we think will help drive some of that fleet turnover as well. But it's really driven right now by strong mining, particularly copper and gold that's driving the backlog growth. The other thing in RI to keep in mind, the North America construction industry has been very resilient when you think about what's driving it, and that has a carryon effect into heavy construction. So that's also in the RI backlog and contributing to the strength that we've seen in the orders there. Alex Kapper: Adria, we have time for one more question. Operator: Today's final question comes from the line of Mig Dobre from Baird. Mircea Dobre: Andrew, thank you, and all that in retirement. Maybe we can continue the conversation on mining here. Your comments on orders being the strongest since 2012 really kind of stood up. I mean it's a little bit at odd with negative pricing still with margins you're seeing impacted by tariffs near term. But I guess my question is, as you see this demand cycle manifest itself, how do you think about the segment operationally? Whether we're talking about the manufacturing footprint, whether we're talking about pricing, can we actually see mining get back to the kind of margins that you've experienced back at the prior feedback in 2012? . Joseph Creed: Yes. I mean I think we had slightly negative pricing in the first quarter, and that's a little bit due to timing. And keep in mind, the mining delivery cycle is much longer. So as we take orders, delivery, what we're delivering now the orders from quite a while ago, when you look at the RI segment now, it has the rail group in it. So I think you just make -- going back to 2012 is not going to be apples-to-apples when we look at it. But we're going to continue to invest in the business. The strong orders are a great sign of what we think is to come. It's a competitive industry as well. So we want to make sure we're being competitive as we go into each tender. The other thing I would keep in mind when it comes to margins, particularly right now, our eyes relative size to the other segments, a little bit smaller on the top line. So we're going to make the investments that we think we need to be competitive in autonomy and other things. So if you have an autonomy investment, in RI and you have an autonomy investment in CI, it's going to have an outsized impact on the operating margin percent in RI for now. But as we continue to build that segment and we get operating leverage back, we would definitely expect the operating margins to get better. We think they'll get better even this year from what you saw in the first quarter. But as we continue to grow the segment, our goal would be to get those operating margins up as we move forward. So thank you for all the questions and your engagement today. One, I just want to say, congratulations to Kyle, I look forward to working closely with him executing our strategy. And Andrew, again, thank you for everything that you've done. You've been an amazing CFO. And if you look at the track record of the company during your tender is probably like no other CFO we've ever had. So you will be missed, and we appreciate everything you've done, but you're leaving us in a great place and in great hands. And thank you all for joining us. We truly appreciate your questions. I'm very proud of the Caterpillar team's strong performance in the first quarter. Our first quarter results demonstrate the resilience of our end markets and our disciplined execution. With a record backlog and a focus on delivering for our customers, we're well positioned to continue creating long-term value for our shareholders. With that, I'll turn it back over to Alex. Alex Kapper: Thank you, Joe, Andrew, Kyle, and everyone who joined us today. A replay of our call will be available online later this morning, we'll also post a transcript on our Investor Relations website as soon as it's available. You'll also find a first quarter results video with our CFO in an SEC filing with our sales to users dated. Click on investors.caterpillar.com and then click on Financials to view those materials. If you have any questions, please reach out to me or Rob. The Investor Relations general phone number is (309) 675-4549. Now let's turn it back to Adria to conclude our call. Operator: Thank you. That concludes our call. Thank you for joining. You may all disconnect.
Operator: Ladies and gentlemen, welcome to Martin Marietta's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded and will be available for replay on the company's website. I will now turn the call over to your host, Ms. Jacklyn Rooker, Martin Marietta's Vice President of Investor Relations. Jacklyn, you may begin. Jacklyn Rooker: Good morning, and thank you for joining Martin Marietta's First Quarter 2026 Earnings Call. With me today are Ward Nye, Chair, President and Chief Executive Officer; and Michael Petro, Senior Vice President and Chief Financial Officer. As a reminder, today's discussion may include forward-looking statements as defined by United States securities laws. These statements relate to future events, operating results or financial performance and are subject to risks and uncertainties that could cause actual results to differ materially. Martin Marietta undertakes no obligation to publicly update or revise any forward-looking statements, except as legally required, whether due to new information, future developments or otherwise. For additional details, please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our own and the Securities and Exchange Commission's website. Supplemental information summarizing our financial results and trends is available during this webcast and in the Investors section of our website. As a reminder, our full year 2026 guidance summary on Slide 5 reflects continuing operations only. Definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measure are provided in the appendix to the supplemental information in our SEC filings and on our website. Today's earnings call will begin with Ward Nye, who will discuss our first quarter operating performance, 2026 outlook and supporting market trends. Michael Petro will then review our financial results and capital allocation details, after which Ward will provide closing remarks. Please note that all comparisons are to the prior year's corresponding period. A question-and-answer session will follow. Please limit your Q&A participation to 1 question. I will now turn the call over to Ward. C. Nye: Thank you, Jacklyn. Good morning, and thank you for joining today's teleconference. Before reviewing our first quarter results, I'll take a moment to discuss the leadership appointment we announced earlier this week. As you may have seen, Chris Samborski was appointed Martin Marietta's Chief Operating Officer, effective May 1. Chris is a highly respected and proven leader who most recently served as President of our West and Specialties division. Under his leadership, both businesses delivered meaningful growth and strong operational execution. Since joining Martin Marietta in 2018, Chris has consistently made a significant and positive impact in every role he's held. His deep operational experience, disciplined leadership style and strong commitment to our culture make him exceptionally well suited for this role. With Chris serving as COO, Kirk Light will assume leadership of our West and Specialties divisions while continuing in his role as President of our South West division. In addition, our East Division President, Oliver Brookes; Central Division President, Bill Padraic; Vice President of Operational Excellence, Ronnie Walker; and Vice President of Safety and Health, Jessica Cosan, will report directly to Chris. This appointment and enhanced leadership structure reflects a deep bench of talent across our divisions, districts and functions, all focused on consistent execution, continuous improvement and a shared commitment to our one culture. I'm pleased to welcome Chris to his new position, and I'm confident that as COO, he will continue to play a critical role in helping guide Martin Marietta to even greater success. With that, I'll now turn to the quarter. 2026 is off to a strong start with revenues increasing an impressive 17% to $1.4 billion, a new first quarter record. Organic aggregate shipments growth of 7.2% meaningfully exceeded our guidance, benefiting from an early start to the construction season in the Midwest and Colorado as well as continued strength in infrastructure and heavy nonresidential demand across our geographic footprint. As we look ahead, underlying fundamentals across the business remain favorable. Notably, the quarter's results reflect a 14% improvement in both adjusted EBITDA from continuing operations as well as adjusted earnings per diluted share from continuing operations. I'm especially pleased to report that our teams delivered the strongest first quarter safety performance in the company's history as measured by both total and lost time incident rates. This achievement reflects the strength of our culture, unwavering commitment to world-class safety and the operational discipline embedded throughout the organization. The quarter was also highlighted by the February 23 closing of the Quikrete Asset Exchange, our largest aggregates acquisition to date. Importantly, this transaction accelerated our aggregate sludge strategy by shifting the portfolio away from more cyclical cement and concrete assets, enhancing the quality and durability of our earnings profile, while providing $450 million of cash to redeploy into aggregate acquisitions accordingly. And consistent with the company's SOAR 2030 strategic plan, on April 19, we entered into a definitive agreement to acquire New Frontier materials, a complementary bolt-on to our central division that produces over 8 million tons of aggregates annually. This transaction is expected to close in the second half of the year subject to regulatory approvals and other customary closing conditions. Looking ahead, our M&A pipeline remains active and is primarily focused on pure-play aggregates opportunities across attractive SOAR aligned geographies. As highlighted in this morning's release, our core aggregates product line delivered record first quarter shipments of 43.9 million tons, a 12% increase and record revenues of $1.1 billion, representing a 14% increase. Our Specialties business also achieved new all-time quarterly records with revenues of $143 million, up 63% year-over-year and gross profit of $45 million, an increase of 17%. Despite ongoing macroeconomic uncertainty and volatility, we continue to benefit from a business intentionally built for durability and resilience, enabling us to remain focused on what we can control regardless of underlying economic trends. With April's continued strong product demand, the impact of April 1 price increases and ongoing optimization efforts, we're reaffirming our full year 2026 adjusted EBITDA from continuing operations guidance of $2.43 billion at the midpoint. Turning to wind market trends. We continue to see a constructive backdrop for U.S. infrastructure, our most aggregates-intensive and countercyclical end market. Sustained federal and state investment continues to provide meaningful multiyear funding visibility as we look ahead to the next surface transportation reauthorization. Notably, a significant portion of authorized funding under the Infrastructure Investment and Jobs Act or IIJA, has yet to be deployed with nearly half of highway and bridge funding remaining undistributed as of late February. Policymakers are negotiating a 5-year successor surface transportation bill with committees targeting reauthorization by October 1, following the current IIJA's expiration on September 30. While the timing remains subject to the legislative process and could include an interim continuing resolution, industry commentary from the American Road and Transportation Builders of America, or ARPA, indicates that state departments of transportation retain multiyear visibility into their project pipelines and continue to plan under assumptions of stable federal funding. As a result, we do not expect a short-term continuing resolution to disrupt construction activity in 2026 and for the near future. Beyond infrastructure, heavy nonresidential construction demand continues to be driven by robust data center and power generation activity. Aggregates-intensive LNG work along the Gulf Coast is also gaining momentum, including projects such as the one at Port Arthur LNG, which Martin Marietta is actively supplying. Warehouse and distribution construction trends continue to recover as shipments inflected positively in the third quarter of 2025 and have continued to trend favorably. By contrast, affordability pressures tied to higher interest rates continue to influence the pace of light nonresidential and residential construction activity. Taken together, all these trends underscore the durability of long-term construction demand across our footprint and bode well for our company and shareholders. I will now turn the call over to Michael to discuss our first quarter financial results. Michael, over to you. Michael Petro: Thank you, Ward, and good morning, everyone. As Ward noted, our core aggregates business delivered record first quarter revenues of $1.1 billion, up 14% year-over-year, driven by organic shipment growth of more than 7% and approximately one month of acquisition contributions. Daily shipments have continued to trend above expectations in April, led by infrastructure and nonresidential strength in our East Division. Organic pricing in the first quarter was negatively impacted by geographic mix driven primarily by robust organic shipment growth of more than 20% in our Central and West divisions, which carry lower average selling prices and gross margins than our East and Southwest divisions. Reported aggregates gross profit declined 3% to $288 million as stronger volumes and underlying organic pricing improvements were more than offset by geographic mix and purchase accounting impacts. Including a noncash $22 million charge associated with the fair market value step-up of Quikrete inventory as well as higher depreciation, depletion and amortization expense which is now disclosed within our product line reporting. Importantly, underlying organic cost of goods sold per ton, excluding pass-through freight cost and timing-related items is tracking below our implied 3% guidance as cost optimization efforts continue. Other Building Materials revenues declined 5% to $116 million and consistent with typical first quarter seasonality, posted a $16 million gross loss driven by customary asphalt plant winter shutdowns in both Colorado and Minnesota. Our Specialties business delivered revenues of $143 million and gross profit increased 17% to $45 million, both all-time quarterly records, reflecting contributions from the July 2025 Premier Magnesia acquisition and organic pricing gains, which were partially offset by lower organic shipments and higher energy costs. Turning to capital allocation. Completion of the Quikrete asset exchange on February 23 marked a significant milestone, concluding our SOAR 2025 divestiture program, providing $450 million in cash and simultaneously representing the largest aggregates acquisition in our history. With this transaction complete, we've now launched SOAR 2030 supported by a strong balance sheet and a focus on aggregates-led acquisitive growth. The Quikrete integration is progressing ahead of plan with results since closing, exceeding both our EBITDA and margin expectations. Further, we expect to realize synergies of approximately $50 million over the coming years as we normalize unit profitability. Importantly, the $450 million of cash proceeds, combined with the company's significant free cash flow generation, provides ample capacity to advance our very active M&A pipeline and opportunistically repurchase shares during times of market volatility. Consistent with this capital deployment framework, we repurchased $200 million of shares in the first quarter and announced the acquisition of New Frontier Materials, which complements our differentiated position along the I-70 corridor from Kansas City to St. Louis. Please note that our reaffirmed 2026 guidance does not include contributions from New Frontier as the transaction has not yet closed. Consistent with historical practice, we will revisit guidance at midyear. With that, I will now turn the call back over to Ward. C. Nye: Thank you, Michael. The first quarter of 2026 marked the launch of SOAR 2030 and an important milestone in the continued evolution of our company's portfolio. Our increasingly aggregate led foundation was strengthened by the closing of the Quikrete Asset Exchange and further reinforced by additional bolt-on aggregates acquisition activity already announced this year. Combined with our high-performing differentiated Specialties business, these actions have created a resilient and durable enterprise. This streamlined and focused portfolio supported by attractive long-term demand drivers, advantaged market positions and culture deeply rooted in safety, commercial and operational excellence reinforces our confidence in SOAR 2030 and our ability to deliver sustainable growth and enduring value creation for our shareholders. If the operator now provides the required instructions, we'll turn our attention to addressing your questions. Operator: [Operator Instructions] And our first question comes from the line of Trey Grooms with Stephens. Trey Grooms: So given the more challenging near-term cost environment, particularly around diesel and potentially softer residential demand backdrop. Ward, could you walk us through some of the key assumptions that are supporting your decision to reiterate the full year EBITDA guidance, specifically, maybe how you're thinking about the cadence of pricing through the year, including any catch up to the higher diesel costs and what level maybe of incremental or midyear increases is embedded in that outlook? C. Nye: Trey, thanks for the question. Good to hear your voice. So several things. One, as you noted, we are reaffirming our guidance for the year relative to EBITDA. We feel very confident in that. As you know, this actually excludes anything from New Frontier because that hasn't closed yet. Secondly, we tend to come back at midyear and reassess our guidance. I'll tell you right now, I'm feeling pretty optimistic about what that reassessment is going to look like. So I'm looking forward to that in midyear. I would say several things. One, if we just think about some of the reasons why, if we're looking at our shipment trends. As you may recall, when we announced our guide in February for the year, we said if there was any place that we thought we were being a little bit probably conservative on. It may be on the shipment outlook. You can see how that came through in Q1. You can also tell from the prepared remarks today and the headlines to the release that April has come out of the box very attractively as well. So my guess is we're going to see shipments probably trending to the higher end of the guide. Relative to pricing, I'm not looking at pricing and having any concern about how I think that's going to roll out for the year. We did call out in the prepared remarks, I know Michael said that what we saw in the Central and West groups, in particular, was volumes of 21%. I mean that's a big number. And keep in mind pricing there is notably lower. And by that, I mean dollars per ton lower than it is in the East and the Southwest. And so what we've seen so far in April is we're seeing that mix flow back to the type of cadence that we would ordinarily expect. So we're seeing the East really catch up nicely with that. Keep in mind, too, I anticipate we're going to see a greater realization of midyear price increases this year than we saw last year. Clearly, the diesel impact and others will be a driver on that, that is not taken into account in our guide. So again, it's something that gives me a lot of confidence in what we're doing. I know part of your question very specifically with diesel and how we see that. So if you think about the fact that we're going to consume, let's call it, 55-ish million gallons of diesel fuel this year, that's assuming the diesel prices peak probably in Q2 and then return not to lower levels, but probably somewhat more moderated levels in Q3 and Q4. We feel like the overall impact from diesel headwinds, and that's including other items impacted by it -- will be about $36 million in the aggregates business, probably [ $50 ] million for the entire company. So it's not going to be anything that's material. The other thing that I would remind you is if we go back in time and remember what diesel pricing looks like, back when Ukraine and Russia first started their conflict. Diesel spiked and then we saw that headwind for a while. And then we actually saw a nice margin expansion actually later that year. This is not as pronounced as that was at the time. So I feel like it's very manageable. And again, to your point, with what's going on in infrastructure and what's going on with heavy nonresidential activity, I think the volume backdrop will continue to be very attractive. But Trey, I hope that helps. Trey Grooms: That did. That was super helpful, Ward. And specifically on that $36 million you're talking about for 2Q, I'm guessing it'd be more weighted there. Any color just for our modeling? C. Nye: It is weighted more then. I'll give -- I'll turn it over to Michael to talk to you a little bit more about any modeling questions you may have. Michael Petro: Yes, Trey, you're absolutely right. So we're thinking about $20 million to $25 million of it coming through in Q2 given where spot rates are. But just in terms of the organic cost cadence as compared to last year. Remember, in Q1 of last year, we had sub-2.5% COGS per ton growth. And then we had 6-ish percent in Q2 and Q3 and 4 in Q4. So we've now passed the tough cost comp growth. And so we feel very good about the implied cost per ton through the balance of the year, assuming we do get a little bit of diesel headwind embedded in there as well. Operator: And our next question comes from the line of Kathryn Thompson with Thompson Research Group. Kathryn Thompson: And appreciated your color and prepared commentary on the reauthorization of IIJA. So we've been speaking to a wide variety of contacts all this still reauthorization. And the general theme is no bill is going backwards on funding. The house is -- what we're hearing is $550 billion, sounds like it fits pretty close to what you're also saying, but I think the important thing, too, just to clarify is how much of this is going to be true surface transportation versus the $350 billion from the prior bill that was for surface? And if you could further suss out how much of that is of surface is true highways and bridges versus other things that could potentially fall into that category? C. Nye: Welcome. Thank you for the question. So I would say several things. We're totally aligned with what you're hearing, and that is nothing in this is going backward. I think it's really important to note that as we're looking at what's likely to come out of the house and the Senate. Neither committees of jurisdiction are planning to include broader infrastructure components like energy, broadband programs or others that made up more than half of the 2021 infrastructure law. So I think to your point, this is going to be a highway bridge Rodsand Street's core infrastructure bill, and we don't see anything that's changing that overall notion. As we're looking at it right now, from my understanding of the House is targeting May to mark up the legislative text, so we'll certainly know more than, but I think the numbers that you've indicated are certainly what I've heard from Chairman Graves and others who are on that committee. I also think we're likely to see numbers notably ahead of that coming out of the Senate. So as this goes to a conference, I think we're going to see a nice solid, robust core surface transportation bill that's going to come out. I think they're still aiming to have this done in time so they don't have to have CR. I do think if they have to have a CR, it's likely going to be one. I think it's likely to be relatively short. And of course, Kathryn, as you know, if they do end up with a CR, what that means is the federal highway funds will continue to flow to the states in an uninterrupted fashion and will remain at the current levels that are actually very high and attractive. The other thing that I think goes on here, but I think it's important to remember, is if we look at Martin Marietta state DOT budgets, those budgets, not in every instance, but in the vast majority of instances, are up year-over-year, which tells us that they're anticipating not seeing any interruptions from the federal side as well. So I've tried to address does timing look like. I've tried to address what it's looked like coming out of the house because I think that's going to lead. I try to address what we see coming out of the Senate. And I've tried to address a CR that if we have one, frankly, we're not the least bit concerned about. So Kathryn, again, I hope that helps. Operator: And our next question comes from the line of Adam Thalhimer with Thompson Davis. Adam Thalhimer: Three-part question on M&A. Can you give us any early thoughts? I know it's only been a couple of months on Quikrete. On New Frontier, are there any kind of unique synergy opportunities there? And then lastly, on the M&A pipeline and outlook for deals from here? C. Nye: Now, you're hitting us with a hat-trick coming out of the box -- so I'd say several things. Quikrete has frankly exceeded expectations. And the integration has gone really well. The business is performing better than we expected. I mean we saw $17 million of EBITDA, which on an annualized basis is going to be well ahead of anything that we saw. The fact is we worked through and are continuing to work through very sensibly the markup in the inventory. I mean that's the purchase price accounting that we always have to manage. . When we came out with that transaction, as you recall, we said we thought we'd have around $50 million of synergies. I don't think we see anything in that number that causes us any degree of heartache whatsoever. And hopefully, we can see more on that. Relative to New Frontier, we're really excited about that transaction. So if you think about what that's doing, again, the purchase of Quikrete, we bought very attractive assets in Virginia, attractive assets in Missouri and Kansas and attractive assets in British Columbia. And what New Frontier is doing is it's adding more assets in what for us is a very attractive market position in Missouri right now. And we're excited about the transaction, not just because of where it is. the really high-quality team that's coming with that as well. So we're excited to welcome them to Martin Marietta, hopefully sooner rather than later. It's an interesting transaction because as we noted in the prepared remarks, this is about 8.5 million tons annualized of aggregates and about 1.5 million tons annualized of asphalt. But keep in mind, this business is a lot like the tiller business that we bought years ago, meaning. It's an FOB asphalt business. So we're not involved in lay down there. It's truly a materials business. And again, we think this is going to be nicely accretive to what we're doing in the middle part of the country. But as Michael called out in his commentary is really a differentiator for us. Relative to the pipeline, it's looking pretty attractive. Look, as we discussed at last year's Capital Markets Day, we've identified at least 300 million tons a year businesses that are in store-related markets that we think are compelling to us. As I indicated in my commentary as well, we continue to be focused largely on pure aggregate transactions. And I think New Frontier is a great example of that. I mean, 8.5 million tons is not a trifling acquisition. And we continue to see that opportunity for more, and we look forward to doing that very successfully this year and into next year and beyond. So Adam, I hope that hit the 3 parts. Operator: And our next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: I look at the contract awards data that we can see, you've seen very strong contract awards growth in your states really for a number of years. And I think the last 12-month number looks good. But I think for some of the states, maybe we've seen a deceleration in some softer awards just looking at the last 3 to 6 months, if I look at the ARPT data. And understanding these awards are like very, very chunky, especially in the beginning of the year, and you've got a big lag between awards and revenue recognition. I'm just wondering if there's any states where you've been surprised on the contract awards data either positively or negatively? Or just kind of like how we should think about that flowing through as the year progresses? C. Nye: Anthony, thanks for the question. I would say several things. One, if we look at the ARPA data, there's nothing that's been in that that's been surprising to me. I think the other thing that's worth noting is ARPA will typically say that value of contract awards can be particularly volatile in the first quarter. And that's really as state and local governments typically simply bid less work in the early parts of the year. I think importantly, and I'm trying to give you a guide on how to think about it going forward, as your question indicated, I look at the spending authority. And I think that's really important to look at relative to our leading state. So if I'm looking at Texas, which matters disproportionately to us, that's up almost 15%. If I'm looking at Colorado, which is one of our leading states in the west, something nearly 7%. If I'm looking at Georgia, which is a critically important state to us. We're the largest aggregates producer in Georgia, that's up almost 7.5%. And then in California, it's been interesting to watch that. They're up almost 6.5%. So again, as we're looking at what's coming out of the federal government as we're thinking about timing and choppiness that's not unusual, particularly in Q1. And as we're looking at that level of spending authority, in our top DOT states on the public side, it actually gives me a great deal of confidence. The other thing that helps in that respect is simply looking at what's happened so far this year. Now keep in mind, if we're looking at Q1, about 18% of our volume for the full year is going to go in Q1. So I mean, it's not necessarily a driver of anything that's going to happen for the rest of the year. which is why we never, for example, update our guidance at the end of Q1. You have a much better feel for it when you get to half year. But I do think this is notable. If I'm looking at tonnage that went to highways and streets in Q1 versus the prior year quarter, they're up 23%. So I mean I think that gives us a good sense of where it's heading right now and takes me back to some of the commentary that I gave early on if we're being conservative anywhere, it's probably on the volume outlook. And I think as we look at the volume outlook, we're very bullish on the way public is going to pull through. So Anthony, again, I hope that helps you as well. Anthony Pettinari: No, that's extremely helpful. I'll turn it over. Operator: And our next question comes from Tyler Brown with Raymond James. Patrick Brown: Hey, first off, congratulations to everybody on their new roles. It sounds like some movement there, so that's great. But hey, big picture, there are a lot of moving pieces in the numbers this morning. I think pricing was maybe flat on a reported basis. Gross profit per ton was down. You had Quikrete, geo mix, purchase accounting, I mean, all of that's having a big impact. So Michael, is there just any way that we could cut through the clutter, just get some color kind of how ASP and gross profit are looking like on more of a like-to-like basis? Is that mid-single-digit pricing, high single-digit unit profitability algorithm still very much intact. I've just been getting some questions this morning. Just some color there would be helpful. Michael Petro: Yes. No, sure, Tyler. What I would say is, on an organic basis, our guide for the full year would still remain firmly intact, which would see a gross profit up, call it, double digits for the year. Now how that plays out through the balance of the year, as Ward mentioned, there's probably going to be more volume. So volume trending to the high end. In fact, I mean, as we sit here closing April, we're at the high end of a full year guide with how much volume we've already banked. And with the pricing, it's just difficult to make up in a calendar year the pricing that we saw in Q1 given the geo mix over the balance of the next 3 quarters. So what we said is, look, we're seeing that broaden out with the East division, higher ASP leading the way in April. So we're starting to see that geo mix shift on ASP, which also flows through to the margin because it's not only higher ASP, it's lower cost to produce in the East as well. So we're going to see that come through here in Q2 and into the balance of the year. But making that up might be difficult. So we're saying, "Hey, look, organic pricing might be towards the 4% absent any mid-years, but we're going to be out, and in fact, we're already out with midyears pretty much across the entire country, where we expect to see a lot of that is also in the East and where we completed acquisitions this year. So there's nothing in the organic guide that gives us any pause. In fact, we feel pretty confident in that. And then getting to the full year EBITDA guide, as Ward mentioned, Quikrete has actually come out of the gate much better than expected in just one month with $17 million of EBITDA, 42% EBITDA margin, so nicely accretive and their volume is actually exceeding expectations, but at a little bit lower reported ASP. But remember, we always said it was ASP dilutive but margin accretive. So what do we mean by that, is a relatively low cost of production operations. So we're going to start to see that flow through. Once we eat through the inventory markup, which, as Ward mentioned, there's about $44 million of that left to chew through in Q2. But of course, that's an add back to EBITDA, but it's going to be a hit to add gross profit in Q2 just for modeling purposes. But does that answer your question, Tyler? Or any more color you need? Patrick Brown: Yes. Just -- no, just that the algorithm that you guys laid out at Capital Markets Day is firmly intact. That's kind of the takeaway. Michael Petro: Yes. On a price cost spread basis, absolutely. Yes. And think about that really over a 5-year period, not in a quarter or a year. So what we said is there's a long history in this industry -- Martin Marietta specifically of delivering 200 basis points of spread over a 5-year interval. And what we're saying is this year, given -- or this 5-year period, we expect to expand that by about 50 basis points. So look at that over a 5-year period and not in any particular quarter. C. Nye: And Tyler, let me add one more thing to because I think this is more -- because you nailed it in that there are a lot of moving parts right now. So cutting through and trying to get to really clear numbers is important. And the cost performance is something that I want to make sure you have a clear look at too, because I'm looking at that through 2 different lenses. Number one, what does it look like organically? Number two, what does it look like on a consolidated basis? And here's what I would tell you. If we're looking at organic ags cost of goods, I would say several things. One, take out the external freight because that's simply a pass-through. We had some odd one-offs on rail maintenance and track repair expenses. If we're really looking at it same on same, COGS per ton went up about 2.7% organically. If we're looking at it on a consolidated basis and again, taking out the fair market inventory markup, the external freight and just the acquired DD&A. COGS were up around 1.7%. So I think to mid point, that cost price spread that we anticipate seeing is fully intact. And part of what I'm taken by, as you may recall, we actually took our CapEx guide down very purposely coming into the year. because we felt like we had invested in the business really responsibly the last several years, and that really came through in what we're seeing in lower repairs and supply expenses as well. I wanted to come back and give you even more color relative to, okay, these are the things that we talked about at Capital Markets Day. These are the things that you built into a model over time and are they firmly intact. I don't think there's any question as we drilled in and look at these that they are. Michael Feniger: Yes. No, very, very helpful and very much appreciate D&A disclosure. Operator: And our next question comes from the line of Phil Ng with Jefferies. Jesse Barone: It's Jesse on for Phil. Just on Quikrete, was there any disruption in them announcing pricing to start the year just with the pending transaction? And I know it kind of closed a little bit later than maybe you expected. Are you still able to announce kind of mid-years in some of those territories that you just acquired? C. Nye: Thank you for the question. And the short answer is, we are expecting mid-years in those markets. We have already put our correspondence to our customers indicating as much. And obviously, we -- as we've indicated for the ASPs overall that Quikrete had in their business were not at the same level that Martin Marietta typically is. So our aim is to try to get that closer to something that looks normal across our enterprise. So yes, that is very specifically -- one of the areas in which we anticipate midyear price increases. Jesse Barone: Okay. Great. And then just one quick follow-up. You've had specialties in the Premier business for a couple of quarters now. Anything that's kind of sticking out to you, either incremental opportunities or anything that you're kind of more convicted in having owned it for a couple of quarters? C. Nye: What I would say that our conviction remains the same. It was a very attractive business. Now we have the synthetic and natural magnesia. It's a business that continues to have earned the right to grow. -- executing against their plan very, very well. It's not necessarily a seasonal business. So again, I think that's important to have within a seasonal business because it gives you such good stability all the way through portions of the year. So everything we look at in that we like, their safety culture is becoming more aligned with ours. Their margins still have room for improvement, and the core business is running very well. So nothing there to be concerned about from my perspective. Operator: And our next question comes from the line of Angel Castillo with Morgan Stanley. Angel Castillo Malpica: I just wanted to go back to the midyears. Just wanted to go back to the midyears conversation. I was hoping you could talk a little bit about what you're seeing perhaps in the asphalt markets versus ready mix. I think ready mix has seen some push out to April. I guess are you able to try to get mid-years in the ready-mix side as well? Or are those -- how do you kind of address the energy or inflation that you're seeing across those markets? C. Nye: So I would say several things. As we think about hot mix for itself, several things that are worth noting. Number one, we can actually store a lot of liquid. So if we're looking at our fiscal position today, particularly in Minnesota because part of what we bought when we bought Tiller, a very significant tank farm. We use winter fill to go through that. I think from an energy perspective and otherwise, we're going to be in a very good position in our asphalt business. Equally, if we think about the asphalt business, it's not a huge portion of it that's in California, but California also has indexing that's basically there. So as it flows through, we're going to be in fine shape on that. And again, to keep in mind from an EBITDA or other perspective, these downstream businesses are not going to add huge amounts of EBITDA to it. It's really, in some respects, more to take the stone and push it through those markets. So I think we're going to be in a perfectly good spot there. I think relative to concrete, again, if you're looking at where we have concrete now, it's really a pretty concise marketplace. It's really in Arizona. We're talking about a concrete business now that on an annualized basis is going to have, let's call it, about 1.2 million cubic yards. So if you go back several years, and remember, look, this used to be about a 10 million cubic yard business and now it's down to about 1.2 million cubic yards. Arizona is an attractive ready-mix market for us. We are seeing some price increases there. So we would anticipate that business performing very much in line with the way that we indicated. And again, given what we can do on asphalt and liquid storage, we don't feel like the energy component is going to be a threat to that business on the hot mix side either. Angel Castillo Malpica: Very helpful. And then what I wanted to follow up on your comments that April is off to a very good start and pushing your shipment volumes perhaps to the higher end. I guess can you talk a little bit more, particularly on the -- I guess, on the private side, I think you've given a lot on the public side, that's really helpful. But just as it pertains to what you're seeing here in April and what you saw in sounds like weather a lot a little bit maybe of activity to start earlier on, but are you seeing projects that maybe weren't in the backlog move forward faster, just greater confidence? Or how do we kind of reconcile the strength in some of that volume what you might be seeing on the private side, just with some of the rising costs, rising interest rates and other factors that we're hearing? C. Nye: Sure. I'll pivot nice the private side and say several things. One, if we're looking in the quarter on what we saw relative to warehousing. And warehousing was up 57%. If we're looking at what we saw relative to data centers. Data centers were up 62%. If we're looking at what we're seeing in degrees of different forms of energy, for example, LNG for us during the quarter was up 20%. If we go and take a look at what's going on in shale. I mean, shale was up on a percentage basis a ridiculous percentage amount simply because it's coming from such a low base. But part of what I think is important to remind people probably back in 2010 or '11, we were sending about 7.5 million tons of stone per annum to the different shale plays across the United States. So think about what that means. That's about 1 million tons less than the New Frontier business that we just bought. So again, as I'm looking at what's happening with warehousing. And so I look at what's happening with data centers. As I look at what's going on relative to energy. Those are the types of things that, as we look you said, at the private side that gives us that degree of confidence. But what I'm taking on the warehousing in particular, this isn't just an Amazon show anymore. It's much broader than that. We're seeing it with Walmart. We're seeing loss distribution centers. Dell Hays is building a nice distribution center in North Carolina right now. But -- to be even more specific, if we go through and look at the LNG project pipeline today, on projects that are currently supplied by Martin Marietta, they're going to consume about 10.6 million tons. So if we look at projects we believe are potentially coming our way relative to LNG and otherwise. I mean, that's another 33 million tons. And I'm sorry, I that first number I gave you on projects was in fact, LNG, and that was on projects at 10.6 million. Data centers are right at 3.27 million tons that are estimated and well over 2 million just for this year. So again, if we're looking at the heavy side of non-res, there's nothing there that doesn't look pretty attractive to us. Now to your point, on residential and like non-res you get the same story that we do and that is those are highly interest rate affected areas. They are not booming in any respect right now. So what I'm really taken by is we're putting up double-digit volume growth, and we've got those interest rate sensitive portions of our business that are, frankly, not doing anything right now. But here's what we know. If we're looking at the overall housing market in the United States generally in Martin Marietta states specifically, everything that I've seen indicates that it's going to require about 4 million additional homes simply to restore a balance. So as I'm looking at these areas that are more interest rate sensitive, to me, it's not a matter of whether they return, they're going to return. It's a matter of when they return. And then if we come back to this notion, do I think infrastructure is in a place that it's going to be steady for a while. And by that, I don't mean quarters and months, but years. I think it is. If we look at the rate of growth in energy data centers, warehousing, et cetera, that, too, to me, looks like it's probably a multiyear run. And I think somewhere in there, you're going to see private decide they're -- they're going to stop being spectators and get in the game. So Angela, I hope that gives you some specifics around the areas of what you asked. Operator: And our next question comes from the line of Steven Fisher with UBS. Steven Fisher: Just wanted to follow up again on the midyear price increases. It sounds like you're pretty confident in them. Can you just remind us how much of that is sort of an automatic I think you mentioned California has indexing. So how much of that from a process perspective just flows through versus negotiated? And have you gotten any preliminary feedback from customers on this, are people just sort of resolved that this is going to happen because of all the inflationary pressures on fuel and everything. So that's one question. And then just a clarification on what you assume for the residential markets for your residential business in the second half of the year? . C. Nye: So Steven, I would thank you for the question. I would say several things, Steven. One, let's make sure we're keeping buckets really clear. So when we're talking about the indexing of thing, that's really more relative to liquid and what's going on in asphalt and places like California. So really put that in the same bucket that I do midyear pricing in stone. So what I would say is this, we saw midyear pricing last year in aggregates. We saw it principally in areas where we had done new acquisitions. I think we will certainly see that again. But I think it's going to be more broad-based than that because of the inflationary trends that you've highlighted. So if you want to say, look, we're not going to about 1,000 on it. But if you say we've added 300 last year that would have put you in the hall of fame. Look, we're going to not be at 300 and we're not going to be at 1,000, but we'll be somewhere between those two. And I think it's going to be a really attractive percentage for all the reasons that you said. I think customers are seeing inflation in what they're trying to manage from their cost perspective. We are as well. And this is just something that if we're going to be responsible stewards of our business, we need to do this. So I wanted to break out and differentiate what you spoke specifically in California with really what we're talking about on midyear and give you a sense of what realization I think we're likely to see in that respect. Steve, I assume -- I hope that helped. Steven Fisher: Yes. That was very helpful. And if you had a comment on the resi business expectation for the second half, that would be great as well. C. Nye: Yes. We came into the year with very low expectations of resi, and I don't think it's going to disappoint us. I think it's going to continue to -- there's just not going to be anything that's going to be, at least in my view, a real pop on that. And that's exactly why we came into the year with it case the way that we did. So resi is moving exactly as we thought it would. And that's why I'm taking with the rest of it. You're seeing a nice volume pop with resi not yet at the party. At the same time, we go back to that notion that I shared before. Martin Marietta has built its business very purposefully in states that have significant population inflows coming in. And the housing markets in most of our MSAs is pretty tight. So I think it's a matter of time, but it's not going to be this year. Operator: And our next question comes from the line of Rohit Seth with B. Riley Securities. Rohit Seth: You started talking about the network optimization a couple of quarters ago. I want to get an update on how things are trending in the first quarter. C. Nye: Thanks for the question. It continues to go quite well. And as you recall, we said at the time, we would probably come back at half year and give you a good sense of how that's working. But again, if we go back to the notion and the numbers that I went through a little while ago, really looking at organic costs up 2.7%. Looking at consolidated costs, the way that we look at them, up 1.7%, really looking at repairs, supplies. I mean if anything, frankly, those are, frankly, in the green for the quarter. So we continue to feel like the program itself is working. It still has some maturity to go through, and we look forward to having a more robust conversation with you about that at half year. Rohit Seth: All right. And just to clarify on the guidance, in terms of the upside leverage that you guys have, it's the mid-year pricing that's not in the guidance, the network optimization that you're going to address at midyear is also not in the guidance and then the NFM acquisition as well, correct? C. Nye: That's exactly right. So those are all -- I'm going to say, more than potential upsides to the guy. Those will all be, I think, meaningful upside to the guide. Operator: And our next question comes from the line of Garik Shmois with Loop Capital Markets. Zack Pacheco: This is actually Zack Pacheco on for Garik today. Just a quick one on the bidding environment. Just curious, given oil inflation pressure, are you seeing any rebidding right now? Or is that not really something popping out? C. Nye: Yes, it's a good question. And the short answer is no. We really haven't seen that. It's been pretty steady, pretty consistent. No real surprises there. If we see anything that's different in that, we'll obviously talk about it at half year. But as we're sitting here toward the end of April, it has largely been a nonevent, but it's a good question. Operator: And our next question comes from the line of Mike Dudas with Vertical Research. Michael Dudas: Maybe one from -- Michael, looking at the balance sheet and before you ended the quarter and on a pro forma basis, given the acquisition and any working capital or cash flow changes, will net levels of that be fairly similar? How should we think about that when we see the close of the transaction? On the acquisition and the capacity you have for further acquisitions, Ward, is the pipeline weighted and your thoughts weighted towards adding to some of your existing levels or maybe some of the levels that you just recently purchased -- or companies in look the last couple of years? Or is Martin Marietta really to step out in some other areas to put store into place outside of its current regions? C. Nye: But let me take part two of that, and Michael will come back and take part one of that. So here's part of the glorious position that we find ourselves in today. With the coast-to-coast business now that we have, particularly after the transaction with Heidelberg that put us in California and Arizona, that's put us number one, coast-to-coast, number two, with a footprint now in every mega region. And now with things like the transaction that we did with Quikrete, for example, an even more significant footprint in the Northwestern United States as well. So I think what's going to happen is a practical matter, is transactions that we would do will all tend to have something of a bolt-on feel to it relative to the concept of how close is it to an overall Martin Marietta business. And I like that because the most dangerous transactions you do is when you go into a brand-new area of the country. You don't have a team there, you don't have a history there and you're having to go in and kind of reinvent yourself. I don't think we're in positions that we need to do that anymore. Now does that mean the transactions financially on occasion won't look like a platform transaction? No, it doesn't mean that at all. So what I'm taken by and I continue to be taken by is the size and the scope of some of the potential transactions that we're looking at or that we may be looking at. So we may come to you at some point this year, next year or others, with transactions financially that you would say that looks and feels like a platform transaction. But when you look at it geographically, you're going to say, but it's going to act like a bolt-on transaction. I think that might be the best of both worlds. Now with that as an aim, Michael can come back and talk to you about where we sit financially. Michael Petro: Yes. From a balance sheet standpoint, these transactions, New Frontier pro forma specifically to your question, would not really move the needle on our leverage ratio because remember, we had the cash proceeds coming in from the Quikrete transaction, number one. And number two, we just sit here at the end of sort 2025, generating over $1 billion of free cash flow after dividends that we've said we'd back to work, primarily in aggregate led M&A. And so we -- the pipeline that we're talking about here, we think that fits right within that free cash flow generation redeployment. Operator: And our next question comes from the line of David MacGregor with Longbow Research. David S. MacGregor: Ward, you were asked earlier about bidding. I guess I wanted to come back to that kind of bigger topic just -- and get your sense of how you're seeing state DOTs responding to project cost inflation. Are you seeing them skew the resources to larger or smaller projects? Maybe how much push forward to '27 are you seeing any cancellations as they focus limited resources on their top priority projects? And maybe how quickly they're revising engineers' estimates? C. Nye: So great questions all there. No, we're not seeing anything pushed out, David, number one. Number two, we continue to see them trend toward larger as opposed to smaller projects, which I think underscores the view that I think going back to the IIJA conversation that we had, I don't think states tend to see any break in the funding and the way that they're going about this because I think they feel like is going to get done timely, if it doesn't be 1 CR, then we're into a new cycle. When I went through those numbers that I gave you before, just simply talking about what it looked like in Q1 when we said streets and highways were up 23%. If we think about the fact that we're sitting here today and still half of that money is still yet to be deployed. I think state DOTs want to get that in play and they want to get in place sooner rather than later. I think equally, when we come back and look at our state DOTs more specifically and think about what's Texas thinking? What's North Carolina thinking? What's Georgia thinking? What's Florida thinking? These are states that need to add capacity. And I think they're very focused on capacity, which again takes us to what I think will continue to be an increasingly aggregates intensive type of work. that are not seeing the same degree of population inflows that we're seeing tend to default to more maintenance and repair. And that's simply not as aggregates intensive as either building new roads or building new lanes. And I continue to think that's where our DOTs are largely to be focused right now. David, did I answer all your questions? Or is there another component I did not answer? David S. MacGregor: No, that was pretty good, Ward. Maybe just -- I wanted to get your temperature on midyear pricing as well and any features of how you're pursuing the increases this year that could make it more impactful to second half realizations than they would normally be -- post just the compounding benefit into the new year? C. Nye: Well, I think we'll clearly see the compounding benefit into the new year. I mean that's always there. I think the question that you're asking is a good one to that is how much of it are you going to realize during the course of the year? History tells us, typically, we'd realize about 25% of it during the course of the year in which it was put in, then you'd have the compounding benefit going into the next year. If we continue to see this rate and pace of work on non-res and res, I think you could see a higher realization than that historic 25%. I'm not willing to get in over my skis on that at this point. So I would ask you not to model that in, but at least that's what it looks like historically. But again, if you go back to those numbers that we're seeing on the up, on infra, the up on warehouse, the up on data, the up on energy, I don't see that abating here over the next few months. So David, that's what makes me at least think there's a likelihood that you might see greater realization. Operator: And then our final question comes from the line of Ivan Yi with Wolfe Research. Ivan Yi: Last week, CSX on the earnings call highlighted a large expansion of a Martin aggregates loading facility in Florida. Can you just comment this on this a little more, how much are volumes increasing through this facility? And is this supporting data center growth in particular? And lastly, what are the cost advantages you're experiencing from shipping more rail versus truck? C. Nye: Ivan, I'll take the front end that, Michael will take some of that as well. So we'll split this up a little bit. So if you go back and think about it, Ivan, we send more stone by rail than any other stone produced in the country. So we're going to ship about 30 million tons per annum by rail. Obviously, we'd like to do more of that because you have to have two things to make that work, a rail producing quarry in a rail yard in a market that needs the product. What we're primarily doing in Florida is, historically, it's been by rail, an infrastructure play for us. Because what we're doing is we're the largest importer of Granite into that marketplace. So we're coming in by granite by rail, which means we're coming in by CSX. So you mentioned we're coming in by Norfolk Southern. And we're also coming in by Panamax vessels out of Nova Scotia. So those are our vehicles literally to bring Granite into a granite starved state. So again, if we look at Florida DOT and the way it's going to continue to grow, asphalt producers in that state will prefer a granite product because it's not as absorptive of liquid asphalt. If we go back to the notion that liquid has moved pretty considerably in price, you're over $500 a tonne, usually on average if you can put an asphalt mix down and back off on the liquid, that's actually very helpful. The other thing is Granite tends not to polish the same way that Limestone does. So if you're looking at a top coat on asphalt, it's better. Now relative to other data center and related activity in Florida, number one, we have grown our overall presence in that market with what you've seen with Bluewater and what you're seeing with Younis Brothers as well. So we have the ability to hit more of that market by truck than we ever have before. We're ramping up our ability to continue to hit that market by rail. Michael, anything you want to add? Michael Petro: Yes, I would just say, given our rail network, not specifically in Florida, but more so in Texas and East Texas, in particular, one thing that we started seeing in Q1, and Ward mentioned it is the Haynesville shale coming back online. So that's the direct pipeline down to the LNG export facilities. So we have rail terminals in East Texas and West Louisiana that we can reach that others simply can't. So we saw an acceleration there. And then we also have now West Texas terminals where we can get down to Abilene and around Stargate, and we can get out to Amarillo, Texas all the way from Mill Creek, Oklahoma to serve a large data center project there. So what you'll start seeing is those projects start to come online over the balance of the year. You will actually see that ASP mix headwind that we had in Q1 start reversing into a tailwind as we sell those products, FOB, the terminal typically pretty attractive ASPs because you have the embedded rail freight in those. So I hope that answers your question there. Operator: And that concludes our question-and-answer session. I will now turn the conference back over to Mr. Ward Nye for closing remarks. C. Nye: Happy. Thank you, and thank you, all, for joining today's earnings conference call. We're very pleased with the company's strong start to 2026 marked by outstanding safety results, solid operational execution and resilient financial performance. The results reflect the strength of our strategy, the quality of our portfolio, and most importantly, the dedication of our employees across the organization. Heading into the year's busier construction months, Martin Marietta enters the remainder of 2026 in a position of strength. Our aggregates led portfolio concentrated in the nation's most attractive markets, supported by a differentiated Specialties business and a strong balance sheet provides us with the resilience and flexibility to perform consistently across cycles and continue compounding long-term value for our shareholders. We look forward to sharing our second quarter 2026 results in the summer. As always, we're available for any follow-up questions. Thank you again for your time and your continued support of Martin Marietta. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the Quanta Services First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Kip Rupp, Vice President, Investor Relations for introductory remarks. Kip Rupp: Thank you, and welcome, everyone, to the Quanta Services First Quarter 2026 Earnings Conference Call. This morning, we issued a press release announcing our first quarter 2026 results, which can be found in the Investor Relations section of our website at quantaservices.com. This morning, we also posted our first quarter 2026 operational and financial commentary and our 2026 outlook expectation summary on Quanta's Investor Relations website. While management will make brief introductory remarks during this morning's call, the operational and financial commentary is intended to largely replace management's prepared remarks, allowing additional time for questions from the institutional investment community. Please remember that information reported on this call speaks only as of today, April 30, 2026, and therefore, you're advised that any time-sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995, including statements reflecting expectations, intentions, assumptions or beliefs about future events or financial performance. You should not place undue reliance on these statements as they involve certain risks, uncertainties and assumptions that are difficult to predict or beyond Quanta's control, and actual results may differ materially from those expressed or implied. We also present certain historical and forecasted non-GAAP financial measures. Reconciliations of these financial measures to their most directly comparable GAAP financial measures are included in our earnings release and operational and financial commentary. Please refer to these documents for additional information regarding our forward-looking statements and non-GAAP financial measures. Lastly, please sign up for e-mail alerts through the Investor Relations section of quantaservices.com to receive notifications of news releases and other information and follow Quanta IR and Quanta Services on the social media channels listed on our website. With that, I would like to now turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke? Earl Austin: Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services First Quarter 2026 Earnings Conference Call. I want to begin by thanking our employees for their continued absolute performance mindset, dedication to safety and commitment to delivering mission-critical infrastructure solutions for our customers. Your work and dedication is what makes everything possible. Quanta is off to a strong start of the year with our first quarter results reflecting robust double-digit growth in revenues, adjusted EBITDA and adjusted earnings per share, along with record backlog. These results reflect the strength of our diversified solutions-based business model and our portfolio approach, enabling us to adapt to the evolving industry dynamics while consistently delivering execution certainty and profitable growth across varied market conditions. I want to spend a moment on what we shared at our Investor Day on March 31 because I think it is the right context for everything we are doing. Quanta has transformed, and our strategy for the next 5 years is firmly in place. What ran through everything we presented in our Investor Day was one word, certainty, execution certainty, labor certainty, supply chain certainty, schedule certainty. That is what our customers need right now, and that is what this company is built to deliver. Utilities are being asked to double in size. Technology customers are demanding speed at scale they haven't dealt with before. Everything we have built over the past decade, our craft workforce, the integrated solutions model, the vertical supply chain investments, it all comes back to delivering that certainty at scale. And that is the conversation we are having with the customers every single day. We listen to our customers, and we are becoming more deeply embedded in the way they plan and execute their capital programs. We are in the rooms where customers are planning their entire multiyear capital spend. We are negotiating much of the work directly. Our success is aligned with their success and with positive outcomes for the rate payer. That was not the case 5 years ago. We are there now. The trust we have built over decades, combined with the investments we have made in our craft workforce and integrated solutions model is how we created a durable compounding business that is well positioned to capitalize on large visible and durable market opportunities. To that end, on the fourth quarter call, we announced an investment of $500 million to $700 million over the next several years in our power transformer manufacturing facilities and vertical supply chain strategy, which will double our power transformer manufacturing capacity. Additionally, we're nearly doubling our off-site manufacturing, fabrication and logistics facilities over the next several years for an aggregate of approximately 6.7 million square feet of facilities as part of our integrated fabrication and supply chain solutions. We are experiencing significant demand for these services, particularly for data centers, and these programs are just a couple of examples of Quanta's ability to provide total solutions across converging markets that are designed to deliver speed and certainty. The versatility of our craft workforce and our solution-based approach is what derisks all of us for our customers and for our investors. That fungibility, the ability to move our people across a $2.4 trillion total addressable market converging around utility, generation and large load is what allows us to flex across markets, expand scope and keep delivering. We have outlined an opportunity to more than double the earnings power of this company by 2030. When we look at our 15% to 20% adjusted EPS growth target with the opportunity to stack above that. I want to be clear, this is not easy, and the strategy has to be in place to deliver those numbers. We believe it is. Our guidance is prudent. It has always been prudent. And the results we reported this morning reflect exactly the kind of execution this plan is built on. I will now turn it over to Jayshree Desai, Quanta's CFO, to provide a few remarks about our results and 2026 guidance. And then we will take your questions. Jayshree? Jayshree Desai: Thanks, Duke, and good morning, everyone. This morning, we reported first quarter results with revenues of $7.9 billion, net income attributable to common stock of $221 million or $1.45 per diluted share, adjusted diluted earnings per share of $2.68 and adjusted EBITDA of $686 million. Based on the continued momentum evidenced by our record $48.5 billion of backlog, the strong performance during the quarter and improved visibility into the remainder of the year, we are raising our full year financial expectations. We now expect revenues to range between $34.7 billion to $35.2 billion, adjusted EBITDA to range between $3.49 billion to $3.65 billion, and adjusted EPS to range between $13.55 and $14.25. As Duke mentioned, we hosted an Investor Day on March 31 and outlined an opportunity to more than double the earnings power of this company by 2030. This quarter represents a great start to a 20-quarter stretch during which time we intend to deliver against that expectation along with continued improvement in our consolidated margins and returns. Over the course of our 5-year plan, we remain committed to maintaining an investment-grade balance sheet and an acquisition strategy that's governed by our target leverage profile of 1.5 to 2x, and the returns that we would otherwise generate by repurchasing our stock. One quarter in, the results reflect exactly the kind of disciplined compounding performance we committed to at Investor Day, and we remain focused on delivering that consistency for our stakeholders over the course of this plan. Additional detail and commentary on our 2026 financial guidance can be found in our operational and financial commentary and outlook expectation summary, both available on our Investor Relations website. With that, we're happy to take your questions. Operator? Operator: [Operator Instructions] Our first question is from Nick Amicucci from Evercore ISI. Nicholas Amicucci: I just wanted to drill in a little bit. Obviously, Duke and Jayshree, you guys had kind of mentioned the opportunity to improve margins on the Underground and Infrastructure. It seems like obviously, that was -- it seems like that was one of the drivers here in the quarter. I just wanted to see, is that kind of -- should we kind of view that as more of a pull forward on that side of the house? Or is that -- was that somewhat contemplated as we think about just guidance going forward and kind of the 2030 time line? Earl Austin: Yes, thanks for the question. When we looked at the Underground, the word mix coming in with DSI in that segment as well as just broad-based what I think is execution in the segment. We did a nice job, and I do believe that's where your earnings improvement are coming from UI. So not to say we can't improve some of the Electric segment. But as we discussed, that's where you're going to see the incremental margin improvement. I do think it continues to get higher and we have the ability to operate in double digits. Nicholas Amicucci: Great. And then as we kind of think about, too. We've heard just even over the past 30 days since the Investor Day, we've seen a lot more, I guess, rhetoric and just kind of commentary from a lot of whether it's developers or utilities in general or even the hyperscalers just on the notion of kind of more of a bridge power type of approach. Is that something that is kind of an incremental opportunity just thinking that we can go first somewhat off-grid, if you would, and then kind of provides the opportunity to then build out on the transmission side? So you kind of get 2 bites at the apple. Is that a fair assessment? Or is that kind of overstating? Earl Austin: I mean everyone has a different solution to the issues of lack of generation. So I think when we look at it, the easiest to know, I think the best way is to connect to the grid. And most of our customers want to go to the grid at some point. There is bridge power solutions. They're out there. There's Bloom and others that we're involved with on jobs, and I do think that is a good bridge power in many ways, and it will end up being backup power for the most part at some point. So to have a microgrid at that scale with that intermittency in the type of learning that the chips have, it's very difficult. And not many people can build those microgrids and run them. Utilities are very good at it, and it's much easier for them to do it than it is to try to run a microgrid from a technology company. So yes, it's complicated and the lack of generation is creating some opportunities for us on bridge power and many things. But we're involved in all of it. I would tell you, large majority, vast majority are going to the grid at some point. Operator: Our next question is from Andy Kaplowitz from Citigroup. Andrew Kaplowitz: I'll stick to one question maybe in a couple of parts. Like you mentioned in your prepared remarks that much of the additions to backlog were new large load facility project awards. And I think it's fair to say that you're seeing much more of these types of awards. So these always tend to be over $1 billion relatively consistently. And how much of that acceleration that you're seeing is simply that you've been able to educate your customers that Quanta can essentially do it all as you've told us. Would you expect large load orders to continue to ramp up from here? Earl Austin: Yes. I'm not sure who said that about backlog. It wasn't me. But I would tell you, there was a large -- it's largely across all segments, all disciplines. The backlog went up, including some 765 that was probably less than 25% of the increase, but it was broad-based. It was some large load center, but it was a T&D and across our segments. So I would tell you like that's -- it was normal course to me, there was no like something that stood out to say, "Oh, this is a large project that drove that beat. I expect our backlog to continue to rise." Operator: Our next question is from Steven Fisher from UBS. Steven Fisher: I know you guys just only gave 2030 targets, but I wanted to look out maybe even a little bit longer term because it seems like a part of the narrative being reflected in the stock is this longer term good visibility that you have. So Duke, I mean, you've made some comments here and there about having some kind of programmatic discussion or opportunities beyond 2030. So I was hoping you could perhaps elaborate a little bit on those opportunities. To what extent is this mainly transmission projects? Does it include other data center opportunities directly? Is it renewables? And to what extent do you have any more formalized agreements that go out actually that far beyond 2030? Earl Austin: We're looking at work beyond 2030 for sure. I do think you'll see an elongated cycle. I don't think you're looking at something that's stops in 5 years. You're seeing decades of type -- it took us, I don't know, 70 or 100 years to build the grid that is there today. I don't think you can double the size of it overnight for sure, not in 5 years. So it's going to take a while to do that. You're seeing orders out on combined cycle engines into 2030, if I'm not mistaken. So if you're just getting orders in 2030, it would tell you that the CCGTs take 3 years to build once they hit the ground and you're in 2033 at a minimum on the orders you get today. So I think when you think through it, the transmission, the infrastructure, and what we see in front of us with robotics, the way the grid is used, the power electrification, I just see more demand, more demand in generation and the electrification of the world. So I just -- we see it for a decade plus. Operator: Our next question is from Julien Dumoulin-Smith. Brian Russo: It's Brian Russo on for Julien. Yes. Just to follow up on your relationship with NiSource. The utility recently announced the Alphabet GenCo expansion on top of the original Amazon program. Just curious if that creates incremental scope for Quanta? And more broadly, is the GenCo model generating additional pipeline opportunities, conversations beyond NiSource, particularly in that Midwest region? You had mentioned an opportunity of about $5.7 billion related to NiSource. Just wondering what your thoughts are on expanding that market opportunity? Earl Austin: Yes. We continue to expand that opportunity in the Midwest. I think you're seeing more demand, and we talked about that early on to be a program, and I think we'll continue to evolve and none of the CCGT or even any of the generation for the most part, that's been announced is not in our backlog. We discussed air permits and things like that. Is that as we get air permits and things -- as that progresses, you'll start to see that come into backlog, probably the later half of the year and beyond. But we continue to have a good relationship and looking at that programmatic spend that you're seeing and they're announcing. So we're right in the middle of it. We're right there with the client on both sides of that. And again, we talked about [ 5, 7 ] that's growing every day. So we like the area. We NiSource, and I think it will continue to grow. Brian Russo: Great. And just one follow-up on the backlog. You mentioned 765 was, I think, less than 20% of the increase. How should we think about the relationship with the AEP and the cadence of those transmission projects stacking up in the future backlog over the next 18, 24 months? Earl Austin: They keep announcing a bigger capital spend, and we keep supporting it. So I think you can look at our backlog and look at the way that the relationships are going with utilities and expect us to incrementally grow our backlog along with the utilities. We have a great relationship with AEP. As they announced 765, we're right in the middle of it with them, both on equipment as well. As you can see the investment that we made in the equipment. In the quarter, we purposely put it in the script to show you that we're moving forward on significant dollars against that 765 build in the vertical supply chain. So we're right there together. And we have a U.S.-based supply chain that I think derisk us and AEP, and that has led to work and great opportunities together across the board on our system. So we're excited about it, and we're just getting started. It's very early. And I think you'll continue to see building a backlog, and this is just what I would consider the 765 we put in was really in MSA that is normal course. So I'm excited about what we can do there, and we're just getting started. Operator: Our next question is from Ati Modak from Goldman Sachs. Ati Modak: Duke, I guess on the orders, you mentioned orders duration for CCGTs. Can you help us understand if the gas generation opportunity is something you expect to actively lean into and grow as a core focus over the years or should we think of that as more of a nice opportunities has come through from the JV type solution? I guess I'm trying to scale -- understand what the scale of that opportunity could look like for you specifically. Earl Austin: It depends on the risk. I think we're comfortable on the single cycle as we're comfortable on many things when it gets to a combined cycle. We'll be prudent about how we take risk on them. And I've been around a long time. I've seen failure, and we're not planning on that. So I believe as the market progresses, as we progress as a company in those type markets, you'll continue to see it grow. We're highly focused on it. It's something that we see as a great addressable market that the inbound calls are daily and I believe we can build them, but we're going to build them under contract structure that makes sense for us and the client and the rate payers. So it just takes a bit. They're long-cycle type work, and it will take us a while to get to contract, now many of them. But it's something that you can't stick your toe in the water, you've got to jump in, and we're going to execute very, very well. And we're going to make sure that we've derisked ourselves against the market. So it's something we're focused on. Operator: Our next question is from Sangita Jain from KeyBanc. Sangita Jain: I have one for Jayshree. Jayshree, you left your free cash flow guidance unchanged. Just wondering why? I know your CapEx went up, but it only went up by like $50 million at the midpoint. So can you help us understand what you're thinking through. Jayshree Desai: Sangita, really nothing to read into that. We gave a good range when we guided in the fourth quarter about our free cash flow. And yes, while we were pleased with the performance in the first quarter, it's just early. We don't really need -- we didn't feel the need given the expectations where we are today to change that with the $500 million range that we provided you guys in the fourth quarter. Having said that, yes, do I feel like we have greater confidence about being at the higher end of that cash flow range? Yes, I do. So as the year progresses, you can expect us to update you accordingly. Operator: Our next question is from Brian Brophy from Stifel. Brian Brophy: Yes. Congrats on the nice quarter. You talked about meaningfully growing your off-site construction capacity in your opening comments. Can you talk about what you're seeing there that is driving these investments? Did you see any meaningful awards in that business in particular this quarter? Remind us how significant of a business that is and just the margin profile there. Earl Austin: I mean the announcement was supporting both our manufacturing capabilities, I mean, what we -- in the prepared remarks, which would be our transformer manufacturing, which is the majority of the capital. We have increased our size substantially on a prefab and premanufactured type product that Cupertino was a first mover for multi-decades. So we're supporting that. We're growing that business. It's a labor force multiplier, the way I see it, and it allows us to really expand and work with clients across the country. As we see that market, we'll continue to expand it. But it's much more of a programmatic spend, and it's not something that you're going to see as large chunky projects. It just continues to be MSA-type driven programmatic spend against the AI build, both cloud-based and learning-based type products. So I think when we look at it, we'll continue to expand that due to the fact that labor constraints, and we can force multiply what we have, the fungibility of our labor as well. So we like the area. We're investing in it and the inbounds are daily. Operator: Our next question comes from Steve Fleishman from Wolfe Research. Steven Fleishman: Can you hear me okay? Jayshree Desai: Yes, Steve. Steven Fleishman: So I guess two. First, just on the gas plant opportunities. I know you mentioned you're going to be careful on your risk controls on the combined cycle. Just how confident are you that you can get significant share with while also being careful? Are you losing business to competitors that are not necessarily as risk averse? Just any thoughts on that? Earl Austin: I mean it's a big market, Steve. So when we look at it, I think capacity, it comes down to cross-skill labor, multi-trade labor that we had. And so we can either work for others or do it ourselves in many ways. We've built a nice programmatic spend in areas that I think will continue. We have others that are coming in. It was not something that the company was focused on 5 years ago. And when the risk gets less and we're able to do it in a prudent way for the ratepayer, and we're derisking certain aspects of those things, the single cycles don't bother us, the combined cycles do. So as we get into that, we look at it from a risk profile and work with the client. And I think it's the right way to look at it. If you try to fix them, they get expensive. And the risk out 5 years from now is substantial when you start looking at it. So I think we're defining those risks, working contingencies, making sure that everyone is looking at it right. And for the most part, our sophisticated customers we work with realize it's the right way to look at total cost, and we're able to do that in a way that benefits everyone involved. So we'll continue down that model, and it's worked very well. We're not going to win them all. It wasn't something that we expect to win them all. It's a great business for us. If it -- we have not acquired against that. We built this organically, and we'll size it to the market. It's not something that I think Quanta will grow with or without it. Steven Fleishman: Great. And then just on utility interconnection issues, just -- I'm curious if you're doing things that would help accelerate that? Is there things that you can -- this 3-mile island restart not being interconnected until 2031 potentially was kind of shocking. Just what are things that can be done and maybe your involvement to kind of accelerate people getting interconnected? Earl Austin: Yes. I think, look, the transformer manufacturing investment matters a ton when you start talking about 36 months on transformers, things like that. And then you have inbounds from Europe that are held up in overseas and things of that nature. We've really derisked the transformer piece of that. So it would help there. We can build large voltage, high voltage line faster than anyone in the world. And I think we've set ourselves up nicely to bring jobs in faster. That said, I think it's more about the impacts to the ratepayer and getting past that. We need every incremental piece of capital spent for transmission benefits to ratepayer. And that's what we have to do as an industry is make sure that we're telling the right story so we can move these faster permitting reform will certainly help speed that up. But the queues are complicated. We're in the middle of them all the time, and it's a moving target in many ways. So we're constantly in the middle of trying to help expedite that through technology. We have a large planning group that works with utilities. But the target moves and we continue to try to bring it in, in the field. So that said, the more we're involved upfront, the faster it goes, as far as I'm concerned and benefits the ratepayer all the way through. So we're all looking at permanent reform and ways to mitigate and get these things in the queue quicker, no doubt about it, and we're doing it, I think, in many, many areas. Operator: Our next question comes from Alex Rygiel from Texas Capital. Alexander Rygiel: Congratulations on a nice quarter. Government policies and regulations have a tendency of shifting market opportunities. Can you talk about the few that are most relevant to you today and how you're positioned to take advantage of or sort of reposition yourself for change? Earl Austin: Yes, Alex, I think when we think through generation, our renewable business, we haven't talked much about this morning, we had a nice quarter. We really did. And I think we built backlog on it. So like while we don't say much about it, it becomes a dirty word at times. I really like the solar batteries and even the wind and areas, it makes a lot of sense. And so -- but you've seen us position ourselves nicely in the CCGTs and the gas generation. So it's all forms of generation now for us, and we're trying to be the solution that people are asking for with the fungibility of craft skill labor across those markets. So we can move across markets. We see markets that no one sees. And we're able to take the labor, build on the front side of it, talk with technology, talk to our customer and we listen. And we're listening to them over this decade of making sure that we can move in the areas that we see provide the most benefit to our people and to the ratepayer and our stakeholders. So we've done it. We continue to do it. That's one example, telecom. It's growing a bit. We see BEAD. We see that connecting data centers as well. So we'll grow that business. I like our verticals right now and our supply chain as well. So there's not much that we can't solve here. We just have to continue to execute underneath and the shiny objects are the shiny objects, but our execution and the guys, the men and women on the field are just, as far as I'm concerned, are the best in the world. Alexander Rygiel: And then secondly, obviously, plenty of opportunities domestically. But international obviously is feeling the same kind of opportunities develop. At what point does Quanta get more aggressive in the international market? Earl Austin: We kept our Australian assets, and they've done a really nice job there. And we can jump from Australia need be to really Europe and across the world. I don't see that any time frame in the near future. But it's certainly maybe for the next guy or lady. It's very difficult to go international, and we have plenty of growth that we see here for a period of time, but we're certainly set up to do that if need be. Operator: Our next question is from Manish Somaiya from Cantor Fitzgerald. Manish Somaiya: Two questions. One, the demand picture looks fairly robust across the board, but have you seen any signs of potential weakness in any of the markets geographically or end markets by sector? And have any of the constraints changed? I know in the past, we have talked about craft labor, supervision, all that stuff being a challenge. So that's question one. And then as part of that, if you can just touch on the M&A pipeline. What opportunities are you seeing geographically and by business? And where would you want to do something if the right opportunity arose? Earl Austin: I'll go backwards. So M&A, we see plenty of opportunity there. There's great businesses, 100-year-old companies that have long-standing what I would consider execution across many, many markets. And our ability to execute on M&A as you've seen it over the last decade, you'll continue to see it going forward. The inbounds are strong. People believe in what we're doing, people believe in our strategies, and they want to sell their businesses here. We're happy to have them and happy that they want to be here. So you'll continue to see that. I think you're starting to see the strategies come together here and the things that we invest in. There's not one market. We have some holes in the business in certain regions. We had the holes in the business in certain -- from my standpoint, certain verticals. So we invest in them. But the great businesses are there. We're not doing this for a labor strategy. We're building labor nicely underneath. We added relatively 5,000 to 6,000 organically last year, and we'll do that again this year plus. So I've said this before, labor builds labor, a journey makes a journey, and money doesn't do that. The more journey you have, the more you can scale. And we realize that, and we invest in it constantly and have for over a decade, well over a decade. So it's not -- M&A is not a labor strategy for us. So that's out and the rest of it is just we've given, I think, good guidance on what we think for our strategy, and we'll invest against it. And also, when you think about -- you talked about labor a bit as well. The fabrication facilities, the things that we're doing there, premanufacturing on both sides of that, whether it be DSI, multi-trades, we're using that investment with technology to really expedite what we can do in the field and take risk out of it. I mean you're starting to see the seasonality of the business even change a bit. I can't tell you that, that's what that looks like yet because I haven't got my head around it. But the first quarter, it doesn't fall off as much. And we had some Northern climbs that were tough, and you've seen us operate through those markets this quarter. And I think you're going to build a business that is resilient across 4 quarters and predictable. So I like what we're doing there. And the end markets continue to -- I have not seen holes in them. There will be stops and starts when we get this big, and we start adding this much backlog and the business grows, we're not going to add the same amount of backlog every quarter. Those things are -- it just moves around, but consistently on a CAGR basis, I expect our backlog to continue to rise for as far as I can see it over time. Now it might not be quarter-over-quarter, but it will certainly be year-over-year at this point. And we like what we see out there, and I'm not seeing holes in the markets that we serve. Operator: Our next question comes from Philip Shen from ROTH Capital Partners. Philip Shen: You took your technology and load center outlook up substantially, increased from 70% to 110% of revenue growth. So we heard a lot of hyperscalers has increased CapEx for the year last night. What do you see for the coming quarters for this end market? Can you give some additional color on your conversations with the hyperscalers? And is there a potential that the segment could grow even faster than what you've laid out? Earl Austin: Yes. Just to comment on the slide that you're discussing, that's directional. And if it was up to me, I wouldn't have that slide. But I'll defer to the team on it, but it is directional. So you're right, it is growing fast, and it is a fast-paced market. We've made acquisitions against it. So you can expect that to grow faster than things that we haven't made acquisitions. It's a great market. We've talked about the technology being $1 trillion-plus TAM. And you can see what the capital being spent from all the larger hyperscalers out there. So yes, I mean, it's going to grow faster, and we continue to lean into it. The opportunities are daily, and we'll take advantage of those opportunities when they come in from balance of plant data centers to pieces thereof. I just think we're doing a nice job there. We talked about it. We had a strategy. We're executing against it. And we did -- we are looking at 100-plus percent growth in it due to acquisition, due to strategy, due to a lot of things. But organically as well, it's growing nicely, and we'll continue to see it grow. We're early. I think we've only been doing this like 1.5 years. I mean you can see like how big the businesses are already. If you do the math, it's a huge business, and it will continue to grow. I think people have come in here daily because we can execute. We can execute and we're certain and we can do it fast. And we have the craft on the backside. We're not building homes. So we're certainly something that we can do and do well. We're excited about it. Philip Shen: Great, Duke. Second one here. Maybe this is more for Jayshree. Can you give some color on why the '26 EPS guide percentage increase was less than the Q1 EPS beat? How much of the Q1 earnings beat was a pull forward potentially? You guys beat by 30% on the adjusted EPS line on Q1 or in Q1, but the EPS guidance was only raised by 7% in 2026. Were there some one-timers? Jayshree Desai: Yes. I'm not following that math, Phil, I'll admit. We had a nice -- we raised our EPS. We took forward our beat in the first quarter, and we also raised our guide in the back half, and that's reflected in our adjusted EPS. We had a little bit of a -- most of that was EBITDA strength for the year as well as a little bit of a tax beat that we carry forward. But the beat should be reflective of both the first quarter as well as our views of the back half of the year. Earl Austin: Yes. Look, I would also say, we take sort of an approach to it, Phil. I think when we look at it, we certainly are prudent about it. It's not normal for us to move the back side unless we feel fairly confident about it. The way I did the math, we raised it $50 million past the beat. But maybe I have -- maybe my math is wrong. Anyways, I got to pass CEO math. Jayshree Desai: That's right. Anyway, I think we're good. Operator: [Operator Instructions] Our next question is from Jamie Cook from Truist. Jamie Cook: Congrats on a nice quarter. I guess, Duke, a lot of the questions to you are more sort of on the acquisition front, which you guys have been very successful about. I guess my question is more on potential for portfolio optimization on the divestiture side. You and I talked about businesses that perhaps -- or I've asked you about businesses perhaps that detract from growth margins or returns. And as we've become more of this broader power plan, I'm just wondering if there's parts of the portfolio that aren't meeting financial metrics, where there's an opportunity there, I guess, to enhance the growth in margins or returns as these other businesses are just lower margin and return? And I guess just my second question, a lot of the acquisitions you've done have been more small mom-and-pop companies that you've known for years. To what degree do you see something more perhaps transformational happening in the space or have a need for that to happen just given how fast the market is growing and the ability to just do something quicker to be able to meet customer demand that's out there? Earl Austin: Thanks, Jamie. We look at the portfolio against the strategy constantly. I do think we always try to optimize, whether it's not invested capital, staying in it for the long haul. So we're always looking to optimize our portfolio. And if we can get the right returns on things, if it's the right timing, we have no issues divesting. That said, we're able to use craft in many ways across segments, across business lines that I think we've done a nice job with where it may look like a pipeline business, but it's not. And so we can do other things there that we have and optimize it all for purpose. That said, we will continue to look at those things. I think as we look at the small mom-and-pops are now $1 billion. So they went from $100 million to $1 billion in many ways. So there's no longer a small mom-and-pop per se. They're all large businesses now that have grown in markets that we like, especially the good ones. So we're able to really lean into those, and it's the same relationships that we've had for decades and are now $300 million, $500 million businesses. And I don't see us -- I think we transformed this business 5 years ago per se when we started leaning into the front side of the business, when we started leaning into technology, leaning into other markets. So the transformation has been done. Now it's all additive. And I think we talk about it a lot around here, that flywheel is moving fairly rapidly at a breakneck pace. So as we see that, we're growing organically nicely and we're growing double-digit plus there as well as we're able to see acquisitions that are growing faster than that. So our acquisitions are coming in and growing much faster than the whole and they're not little. So I think there's no -- we don't see any reason why we can't either buy our stock back or pay a dividend, but more importantly, you'll continue to see us make acquisitions against the strategy is probably the primary use of capital going forward. Operator: Our next question is from Justin Hauke from Baird. Justin Hauke: Great. So I've got kind of a 2-part question in one. But really, it's just about, Duke made the point the seasonality is almost changing in your business. And if you look at the revenue this quarter, it was up sequentially, which essentially almost never happens for you because weather-wise, there's just not as much productivity in the winter. So I guess the 2 parts of the question are, one, what markets or what specifically came in so much stronger than kind of the way that you had expected the quarter to come out? And then the second part of the question would be, the book-to-bill, 1.6x this quarter was also very strong. Usually, you guys will call out something like a big award or anything else, but there wasn't anything in there. So was there anything lumpy in the bookings this quarter or just kind of broad based? Earl Austin: No, it was a broad-based backlog, but I discussed the 765, it's the first like meaningful 765 that came in, it's less than 25% of the beat, so call it less than $1 billion in there. But that was the big -- it was an MSA type over a multiyear period that can grow and expand, not with the client that we've discussed. So I think that said, that's the thing that was in there. But across the board, really. And I think there's opportunities to continue that over time on a CAGR basis, for sure, the CCGT business is growing nicely. We're highly focused on it, and we have nothing in there on that, which I think you guys are seeing the opportunities out there. It's something that could be substantial, and they are chunky. We talked about things stacking. I think it's going to stack. You're going to start to see it show up in the revenues, show up in the profitability of the company over time. And we look back and we're at 30% EPS growth with no acquisitions in the quarter. I think we've done a nice job to set ourselves up, and you'll see the company stack in the back half and beyond. Operator: Our next question is from Adam Thalhimer from Thompson, Davis. Adam Thalhimer: Great quarter. Congrats. Two questions, I guess. First, on the revenue beat at Electrical was so substantial. Just curious what drove that. And then I'm curious on the Iran war. How your customers are responding to that and higher commodity prices? Earl Austin: Yes. I mean I'm not seeing -- obviously, diesel is up a little bit. But I think when we look at that, it's just such a little piece of our spend. Our guidance contemplates anything like that. And we don't rain diesel, everything is contemplated in our guide. So not concerned with that. Like any other American, I'm worried about the troops, worried about them getting home, and we appreciate what they do over there and keep us free. We're able to do the things that we're doing today. And bless them and our country. But that said, that's all on here, is how do we help the troops, how do we make sure they get home safe and we have jobs for them when they get here. So that's what we're doing on our part. I'm not hearing anything. Obviously, there's certain areas that you're hearing, but nothing that would affect us or what we're doing. Our supply chain looks good. There's a little stuff running around, but we're able to execute around those things and I'm not seeing anything that would impact our customer or ourselves at this point. As we see it, I mean, look, natural gas, LNG exports, I think it's a form of national security. You're going to continue to see LNG, that energy is national security, and we're going to build it. We're going to drill here. We're going to drill for gas. We're going to do a lot of different things here while we have renewables and other things as well. So I think the national security aspect of what we do for energy matters and it's showing up more so than ever, which is good for our business on both sides. The natural gas business pipeline business is great. So we're excited about it all, and I'm not seeing it impact to customer. Operator: Our next question is from Maheep Mandloi from Mizuho. Maheep, please unmute your line and ask your question. We'll take our next question from Michael Dudas from Vertical Research Partners. Michael Dudas: Can you hear me now? Operator: Yes, please go ahead. Michael Dudas: Duke, you said in the past when asked about all the market activity and excitement and all the development and such that even if a small percentage of that came through, business would be great. I just want to get your sense, given the visibility on what you guys are seeing across the board. Are some of the orders and development and the discussion is more real now than they would have been 6 or 12 months ago? And even in light of just extraordinary capital expenditure numbers that the hyperscalers are putting out. Earl Austin: Yes. I mean I think you're seeing our utility customers firm up what they believe is real large load request. As that firms up, I've seen it actually pretty steady. I'm not seeing the falloff that others may think that's out there, it's a very real, the load that we see. I think we've got to watch the ratepayer. We've got to make sure that the load that's coming on is beneficial to the ratepayer. We're seeing that show up in rates. We're seeing decreases in rates due to load and infrastructure. And so as we see that investment on the Northeast and all across the country, it should drive rates down. We've got to talk about it, those impacts. But I think the load is real. I mean, obviously, there's some outliers here or there, but there's growth underneath those. And it's not just data centers. I mean you're seeing onshoring of chips, you're seeing onshoring of robotics. You can see what Elon is doing with robotics. So that's driving load and all the things that support that. And we just see a big market that is not just AI. The fungibility of our craft, both sides of it, both segments, our ability to mechanical as well as electric to move that craft across vertical markets, I think is, from my standpoint, that's what we continue to drive home that compounding of that portfolio over time. And that's what is allowing us to do it is all those markets that we see. Operator: Our next question is from Maheep Mandloi from Mizuho. Maheep Mandloi: Sorry about earlier. Sorry if I missed this earlier, but could you talk about like the -- if M&A is part of the 2026 guidance here? And you didn't do an acquisition in Q1. But any thoughts on how the acquisitions could shape up the guidance for the rest of the year? Earl Austin: Any acquisitions we do on a go-forward basis should be additive to the guidance that we give. And I expect us to do acquisitions over the next 9 months. So you can expect that to be in there, but it's -- we're not contemplating any of that in what you see today. It's exactly what the business looks like today. We made no acquisitions in the first quarter, and that's what the guidance is. The growth on it is 30%, and it's based upon all the things that we did last year as well as setting the company up for the future. So that's what's in there today. I do expect us to do some M&A over the next 9 months, probably over the next 2 or 3 years. I mean, we continue to see the inbounds that are robust and a way to deploy free cash. So I'm not seeing a slowdown on that. There'll be quarters and there could be years we don't do an acquisition. We're not -- the company can grow nicely without them. When we do see them, it's extremely additive to our approach and the way we look at our portfolio and all the opportunities that we see. Operator: Our next question is from Liam Burke from B. Riley Securities. Liam Burke: Duke, you mentioned in your prepared comments that many projects now are being negotiated. Is this an increasing trend in the business and this would imply that it's pressing your competitive advantage even further? Earl Austin: Yes. I mean I think it's the right answer for the client. When we look at it, you're looking at total cost and things with the large supply, I mean, we're the top 5 buyer of HV equipment, there's ways that we can help there, it's just a smarter way to do business in these markets that you're really discussing total cost and so -- versus having a discussion on a widget. So I think we've tried to put ourselves as a solution across these verticals, and it's allowing us to negotiate our total cost basis versus a one-off project and be prudent about it. We work with the regulated customers, and we know what that market looks like. They have a tried and true record as well, and we can work together on what's the right answer for each client and tailor it that way. And for the most part, we've always negotiated a lot of work, and I think we're continuing to do so. It's just larger. The programs are bigger. The certainty of labor is something that I think is really important for us to make sure that the client and our clients lean on us for that, and we're able to really deliver that certainty. They have capital spends they need to spend. And we need to get -- the queues are getting backed up, things are pressured, and we're being asked to do a lot. And I think this company has stepped up and is providing those solutions that are necessary to make the infrastructure of North America move. And I'm excited about it, and I'm excited where we sit. And yes, I mean we're looking at total cost all the time, but it's a prudent approach to the ratepayer to drive the rates down. Operator: Our final question is from Chad Dillard from Bernstein. Charles Albert Dillard: So what would it take for Quanta to do full turnkey data center builds at scale rather than just doing a few here and there? Is this something you can achieve on an organic basis? Do you need to do more M&A? And then I'd just be curious to understand where that strategy would rank within your set of priorities? Earl Austin: I mean MVP, the type of things that we do in the high-voltage interconnections are the sweet spot for us at this point. We are doing some balance of plant data centers today. If our clients push us that way and asked us to do that, we can do it. We can do it with the people that we have. Yes, if we do it at scale, we need to add. And I think depending on what the client -- how sophisticated the client is on the other side will depend on how much or less we need to add. But from a programmatic spend, project management, QA/QC, all the things that you would expect, we have all that internally, engineering. We probably have 2,000-plus engineers internally. We're able to scale those things. And I think the company will look at all projects coming in and try to deliver on both sides of that, where there's areas that we can be successful, we'll lean into those with customers. But I think we'll continue to -- we'll evolve it. We're also cognizant of other builds that we need to be on and other customers. So as we look at it, yes, I do think the company will do balance of plant data centers and other things. I just -- we continue to see the inbounds coming in, and it's all due to the fact, the certainty of cross-skilled labor. If you're just someone that does not have it, it's very difficult to say you're going to show up. And I don't have to be there that day if I work for someone else. I don't. I can not show up. And that's the issue that you'll start to see in the markets as they get -- as you start to see constraints. So I think for us, we just got to continue to deliver on what we know how, and we're very good at specialized craft and providing solutions, we'll do it. And if they want us to build the whole thing, we'll do it, we'll do that as well and provide generation and maintaining it if they want it. Charles Albert Dillard: That's helpful. And then just shifting gears a bit. I'd love for you to talk about your Canada operation in electrical infrastructure. Just what you're seeing on the pipeline there? How are you thinking about how that geography unfolds in '26, and then maybe even over the next couple of years? Earl Austin: Yes. I think we had some pipe work last year going on at this time. We don't -- we're not involved in anything right now, but I see over the next few quarters, we'll start to see projects come in on the pipe side. We have a nice team up there that certainly can execute. So I think you'll start to see awards on that. In Canada, our data centers up there are moving around, our renewable business up there is nice. It's just slower. It's slower to recover. We're optimistic. We're using engineering in the U.S. We're doing a lot of different things, a way to leverage that workforce. And the margins are picking up. It's not where we want them to be at this point yet, but neither is the economy. So we're doing a good job there, mitigating risk and making sure that we're utilizing the labor and what we've invested in Canada for the future and for what's going on in the States here. So yes, we like the market. It's growing. It's certainly not at parity with the U.S. yet, but we continue to see improvement. Operator: There are no more questions at this time. I'd now like to turn the call back over to management for closing remarks. Earl Austin: We want to thank the men and women in the field. They are the very best in the world. They make these numbers, and they are the ones that deserve the credit. We'd also like to thank you all for participating in the conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you. This concludes our call.
Operator: Good morning. Welcome to the WTW Earnings Conference Call. Please refer to wtwco.com for the press release and supplemental information that were issued earlier today. Today's call is being recorded and will be available for the next 3 months on WTW's website. Some of the comments in today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release issued this morning as well as in the most recent Form 10-K and other subsequent WTW SEC filings. During the call, certain non-GAAP financial measures may be discussed. To provide direct comparability with prior periods, all commentary regarding the company's revenue growth results will be on a non-GAAP organic basis unless specifically stated otherwise. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company's website. I will now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead. Carl A. Hess: Good morning, everyone. Thank you for joining us for WTW's First Quarter 2026 Earnings Call. Joining me today is Andrew Krasner, our Chief Financial Officer; and Spike Lipkin, our Chief AI Officer, who will share his perspective and touch on our integration efforts following our acquisition of Newfront. Julie Gebauer, our President of Health, Wealth & Career and Lucy Clarke, our President of Risk and Broking, are also joining us for our Q&A session. As a first order of business, I want to note my deep appreciation for our colleagues in the Middle East, who've remained available to address client needs even as their lives have been disrupted by conflict. I also want to express our ongoing commitment to supporting our colleagues and clients as they manage this stressful environment. Now I'll turn to our results. In the first quarter, we delivered 3% organic growth with adjusted operating margin of 22.3% and $3.72 of adjusted diluted earnings per share. Revenue came in at the low end of our plan as we saw the effects of a more challenging and volatile global market environment during the quarter, particularly considering our meaningful presence in the Middle East region. Despite the slower-than-expected growth, our ongoing efforts to enhance efficiency helped us generate operating leverage and 70 basis points of year-over-year margin expansion. External conditions in the first quarter were mixed. We saw high health care inflation, regulatory changes and a higher volume of corporate transactions, along with elevated geopolitical risk, economic uncertainty, market volatility and rapid technological change. These conditions created both opportunities and challenges for our business. Throughout the quarter, clients sought our counsel to better manage cost and risk, asking for advice, contextual judgment and specialized expertise to weather dynamic markets. At the same time, we saw short-term headwinds as conditions in the Middle East caused clients in the region to postpone advisory projects. Unfavorable market movements and uncertainty also weighed in on economically sensitive businesses and led some clients to pause more discretionary spending and delay some decisions. Nonetheless, we continue to see solid traction in the market for our solutions with our strategic focus on specialization, data and analytics and smart connections resonating with clients. We remain confident in our long-term outlook and our ability to accelerate performance and drive growth through our investments in our solutions, talent, technology and data. Notably, our AI-enabled solutions are gaining scale and generating growth as they deliver better outcomes for clients. For example, in HWC, Rewards AI, which applies generative AI to WTW's proprietary data for compensation benchmarking, now serves over 2,500 client users. Our HR AI Assistant Expert was named a 2026 Lighthouse Tech Award winner in the category of practical AI, recognized for delivering measurable efficiency gains and value for HR and Benefits teams. And we expect many clients to undertake AI workforce transformation projects that we will deliver with our newly developed WorkVue agent, which evaluates the automation potential of all roles across an organization. In Risk & Broking, following 2 successful pilots in the second half of 2025, we're implementing an AI-powered operating system across the business. This accelerates the core technology that we've developed in our broking platform and integrates our risk and analytics modeling tools into our service platforms. The result is radically improved insight on risk and an expedited placement process. During the first quarter, we also introduced some elements of Newfront's proven technology to enhance the front end and add more agentic capabilities, substantially reducing the administrative burden on our people and transforming our ability to serve our clients. In claims, we're rolling out our digital global claims platform that builds on our broader CRB strategy. The platform uses AI and advanced analytics to reduce process complexity, shorten claims life cycles and improve outcomes for our clients. It also gives us better insight into claims performance standards across carriers and geographies. These investments use technology to strengthen and scale our human-led judgment, advocacy and accountability. The same applied innovation mindset also extends to how we're helping clients manage complex and fast-moving risk environments. Recently, our physical risk climate team was recognized for its work with a large semiconductor client for whom we developed new solutions to help manage climate and infrastructure-related vulnerabilities across multiple geographies. These capabilities enable clients across the technology industry to quantify and prepare for risks that fall outside traditional frameworks. Against that backdrop, we saw several notable client engagements this quarter that demonstrate how WTW is helping clients navigate complexity by combining data and analytics insight and technology. In Health, Wealth & Career, a large global employer in the consumer cyclical sector selected WTW for support on a quick burn project to prepare for a divestiture. The client valued our Divestiture in a Box offering that incorporates prepackaged solutions with technology-enabled delivery. In another HWC win, the CHRO of a global technology company recognized that HR needed a trusted partner, a partner with deep expertise on work design, jobs and skills to help them develop an AI strategy they could execute. Our work and rewards and employee experience teams were engaged to build an end-to-end solution, including a talent and skills framework, a transformation road map, a process to build newly needed skills, and an overall change management strategy. Our subject matter expertise and our AI tools differentiate us. In Risk & Broking, we're particularly proud of the team who recently won all lines for a global Fortune 100 company in the U.S. following a multistage process that highlighted our analytics expertise and strong global coordination across our specialties. Starting with a comprehensive property and casualty review in the summer of 2025, we delivered actionable insights that established credibility and set us apart in the RFP with our advanced analytics, global connectivity and technology-enabled service platform. This win underscores the strength of our globally integrated specialty model and our ability to translate analytics into measurable client value and will result in strong revenue growth for us this year. Another recent win by our surety team highlighted our global reach and ability to solve complex specialty placements. We were selected by a leading global supplier of nuclear technology to address the consolidation of a fragmented surety program previously managed by 2 global brokers. Additionally, we were tasked with structuring and executing a major syndicated surety facility designed to support the client's ambitious $80 billion project pipeline over the next 3 years, one of the largest nonconstruction surety syndications currently in the market. Securing this mandate positions CRB surety as a key strategic partner and provides a robust platform for our continued growth within the nuclear energy sector, where we expect strong growth over the course of 2026. Finally, we secured a significant win in the rapidly growing AI and digital infrastructure industry with one of the leading companies in the construction and operation of advanced data centers. Our team won the entire program from a broker relationship that spanned over 15 years, covering both construction and operations by showcasing our construction specialty and analytics expertise as well as our ability to advise on complex construction risks in almost every country in the world. Our support for the client extends beyond core services. For instance, we just assisted with a bond required for a project closure in Europe, filling a gap left by their previous surety broker. The client has appointed us on their next 3 data center projects without a competitive process, and we'll see that work come through in 2026. Innovation also remains a significant driver of our efforts to enhance the efficiency. WE DO, our enterprise delivery organization continues to support our businesses in deploying automation and AI and optimizing utilization of our global delivery centers. As AI adoption rises across the company, we're seeing increasing benefits to efficiency and productivity. For example, last July, we introduced our [ Call Note Assist ] tool. Since then, it's been used to summarize over 1.6 million calls in our outsourcing contact center, enabling a 33% reduction in post-call wrap-up time. DocLLM, our proprietary AI document ingestion tool, extracts and organizes key terms such as exposures and insurance clauses, significantly streamlining compliance and portfolio oversight. And our CRB affinity team has used AI to achieve a 90% reduction in endorsement processing time. With that, I want to step back and underline what we're seeing and expect to see in our business regarding AI. Clients are not choosing between human expertise or technology. They expect both. They want trusted advice and a trusted partner to help them navigate the complex environment, adding analytical rigor and sound judgment to the decisions they're facing. And they want applications and platforms that give them real-time access to data and insights regardless of how difficult it might have been to attain the information or how much effort it would have taken to analyze it previously. This is why I believe WTW will lead and benefit from AI solutions in the long term. Our position in the industry and our structural advantages give us the opportunity to use AI to drive growth and efficiencies in ways that newcomers, carriers and clients cannot or do not have the incentive to pursue. Let me explain. First, -- our services are complex, highly specialized and mission-critical for nearly all companies. Clients value working with trusted advisers like WTW because our guidance comes with real accountability. In making complex or important decisions, expert judgment matters and the potential upside of bypassing experienced accountable advice is not worth the downside of getting it wrong and dealing with the repercussions. Second, AI enhances efficiency but does not enhance trust and alignment. AI streamlines workflows and lowers cost to serve, but it does not deliver the judgment, adequacy and accountability that both clients and carriers expect. AI can inform decisions, but it does not negotiate with carriers, advocate on behalf of insurers in the claims process or provide bespoke advice to help navigate through complexity. For buyers of our offerings, the risk of foregoing that value proposition getting it wrong is considerable. Third, our structural advantages are hard to replicate. Our aggregated proprietary data, deep relationships and global scale, which have been developed over time, create meaningful benefits for clients and carriers. In HWC, we have decades of longitudinal workforce data, actuarial IP and deeply embedded outsourcing platforms. In R&B, we have proprietary data, which encompasses risk and placement insights across carriers and geographies. Finally, AI itself is increasing demand. In addition to growing client interest in more sophisticated analytics and advice, including guidance about AI workforce transformation, AI is creating new AI-related risks and amplifying existing risks in cyber and other markets, fueling demand for novel insurance solutions that we believe we are well positioned to create and implement. To give you deeper insight into this, I'd like our new Chief AI Officer, Spike Lipkin, to share some of his thoughts. As you know, with our focus on portfolio optimization, WTW recently acquired Newfront, a San Francisco-based startup, which grew at the leading AI-powered broking platform. Spike co-founded Newfront and led its efforts to disrupt insurance broking, and as WTW's Chief AI Officer, he'll help shape how AI advances WTW's long-term strategy and integrate Newfront's technology with WTW to create a true end-to-end digital ecosystem. His experience building Newfront and planning and executing this integration gives him a unique and valuable perspective. With that, I'll turn it over to Spike. Eugene Lipkin: Thanks, Carl. I'm excited to be here because AI is clearly central to WTW's strategy, and it will become a key driver of value for both our clients and our business. Gordon Wintrob and I started Newfront in 2017 because we believe that advances in technology would create new risks around cyber, IP liability, property, which would expand broker revenues and at the same time, reduce the cost of delivering services. While all of this has happened, there's even more opportunity ahead, and we still believe that insurance brokers, especially those with scale and data like us at WTW, will be massive beneficiaries of AI advances. At Newfront, we built infrastructure to take advantage of these developments to provide better client and colleague experiences. The results are clear. Colleagues who use our technology sell about 50% more than those who do not. And our client attrition rate drops by half when clients use our tools compared to those who do not. However, over 8 years, we found that this highly advanced technology, global reach, expertise and access to proprietary data are still tremendously important. AI is no substitute for WTW's meaningful influence with carriers to drive better client outcomes. Moreover, AI is most effective when supplied with a vast amount of proprietary data, which WTW has. Our conclusion was obvious. Lasting advantage would accrue to scaled platforms that combine data and specialized expertise with AI to supercharge the entire system. After evaluating a range of options, we made a deliberate decision to move to WTW where we saw the foundation for that advantage in 2 ways. First, its position as an industry leader in data and analytics; and second, its operational agility that comes from being a genuinely integrated enterprise rather than a collection of siloed businesses. This level of integration is uncommon in the industry and critical for success. As models become widely available, much of the business impact will depend on employee adoption and reskilling. This is much more straightforward in an organization with shared processes, consistent standards and aligned incentives than one fragmented across independent business units. Moreover, the data lives in one place rather than across a series of disconnected platforms. We believe this gives WTW a significant competitive advantage, which is why we chose to join them and build an end-to-end AI-powered broking platform together. We're now working at pace to integrate Newfront's technology into WTW's environment to create this intelligence platform that unlocks significant growth and efficiency opportunities for the entire enterprise. Our goal is to allow colleagues to spend more time on client-facing work and less time on administrative tasks. We also believe having the leading technology will attract talent to WTW, especially those in search of novel digital tools to deliver better client outcomes. An AI fluent workforce is a massive competitive advantage in this industry, which has historically lagged in technology adoption. Our detailed road map to integrate Newfront's existing tech into WTW's business starts with North America. Several tools are implementation ready, and we are embedding engineers with professional teams and seeing early successes. For example, several AI tools are being utilized by client-facing teams, like Coverage Gap Analysis, our AI-powered coverage review tool. We are also quickly rolling out Navigator, which centralizes clients' insurance programs in one platform, and Partner Management, our AI-driven third-party insurance compliance tool. And our Newfront professional teams are already benefiting from the WTW platform with several large notable wins that combine Newfront Tech with WTW resources to bring on clients we never could have won on a stand-alone basis. For example, a multistate midsized health care provider selected us as their health and benefits broker because of WTW's deep health care expertise and cost management approach combined with Newfront's technology capabilities. In another case, a rapidly growing energy client selected us because of Newfront's technology combined with WTW's energy expertise. Additionally, in CRB, the combined expertise of Newfront and the WTW team enabled us to retain the P&C placement for a high-profile AI developer. As we shared when the acquisition was announced, we expect momentum to build over time as we build the intelligence layer for insurance. We are keenly focused on implementation as addressing this component is more than half the challenge. This is the most exciting moment our tech team has ever experienced, and we are committed to preserving our early lead. We expect the next few years to be some of the most exciting and impactful in our business, and we're thrilled to be advancing our work at WTW. Carl A. Hess: Thank you, Spike. We're excited to have you on board as part of the leadership team, and we look forward to sharing more on AI development and our integration progress on future calls. Before I hand it off to Andrew, I want to reiterate our confidence in our strategy and the investments we're making in AI, talent, innovation and data to both protect and expand our competitive position over time and deliver value to clients and shareholders. Despite the short-term headwinds that impacted the first quarter, we remain confident in our ability to deliver on our near-term goals of mid-single-digit growth, continued margin expansion and free cash flow margin improvement. With that, I'll turn the call over to Andrew. Andrew Krasner: Thanks, Carl. Good morning, and thanks for joining us today. In the first quarter, we delivered organic revenue growth of 3%. Adjusted operating margin was 22.3%, expanding 70 basis points over the prior year. Adjusted diluted earnings per share were $3.72, representing a 19% increase compared to Q1 2025. While revenue came in toward the low end of our plan, our first quarter results reflect our commitment to strong operational execution and the benefits of our investments in talent and technology. Our strategy is resonating despite ongoing macro uncertainty, and we remain focused on executing our strategic objectives and creating long-term shareholder value. Turning to our segment results and starting with Health, Wealth & Career. Organic revenue increased 3% in the first quarter, with growth driven primarily by continued strength in Health and Wealth, partially offset by softer results in Career and Benefits Delivery & Outsourcing. We remain confident in HWC's full year outlook for mid-single-digit growth and continued margin expansion even with the headwinds from economic uncertainty and geopolitical pressure impacting parts of Career. Health was our strongest performer this quarter with revenue up 6%. All geographies delivered growth led by strong performances across international and Europe, supported by solid client retention and the strength of new business wins. Overall, Health continues to demonstrate the strength of its recurring revenue base. We continue to expect high single-digit growth in Health for 2026 based on demand driven by high health care costs and the important role of specialty solutions. Wealth revenue grew 4% in the first quarter, driven by higher levels of retirement work across all regions alongside growth in our investments business. In retirement, growth was supported by continued demand for project work, recurring actuarial services and the expansion of our global Life site offerings. Investments grew with solid new business wins and increased OCIO activity. Overall, Wealth performance continues to reflect the durability of its recurring and regulation-driven revenue base. Wealth is off to a good start this year, and we continue to expect growth at the high end of the low single-digit range in 2026. Our Career business declined 3% this quarter, primarily due to geopolitical disruption in the Middle East causing a significant pullback on projects. This change in activity did not impact our other HWC businesses, so regional exposure is very modest at the overall HWC level. The Career business also experienced strong growth in Europe and Asia, while seeing somewhat slower pipeline conversion in North America. We expect momentum to improve later in the year based on our expanding pipeline and outlook for our compensation benchmarking practice. We also expect to gain traction with our new AI workforce transformation offering, which is resonating well with clients as they focus on redesigning work and jobs to reflect the transformative impact of AI. As Carl mentioned, this offering features our WorkVue agent to support business leaders in thinking about the automation potential for different roles. Even so, with the ongoing uncertainty related to the Middle East conflict, we believe it is prudent to expand our guidance range to low to mid-single-digit growth for the full year for Career. Benefits Delivery & Outsourcing declined 1% this quarter. The results reflected an expected contraction in the Individual Marketplace business, partially offset by continued growth in outsourcing. Individual Marketplace performance was impacted by lower commissions in the first quarter, consistent with our expected pacing for the year. Outsourcing delivered modest growth, supported by expanded projects and administration engagements. Overall, BD&O performance tracked in line with our expectations. As a reminder, our Individual Marketplace business generates about 80% of its revenue in the fourth quarter due to the timing of the Medicare enrollment period. Given that seasonality and our expectations for 2026, we anticipate that the full year growth from Individual Marketplace will be driven by fourth quarter activity. We continue to expect low single-digit growth for BD&O for the full year based on our unchanged expectations for Individual Marketplace and our pipeline of new client implementations in our Outsourcing business. HWC's operating margin in the first quarter was 27.3%, an increase of 60 basis points compared to the prior year or 40 basis points, excluding the tailwind from foreign currency, adding to our track record of consistently delivering margin expansion, which we will continue to build on in 2026. Moving on to our Risk & Broking segment. First quarter revenue growth was 2% compared to 7% growth achieved in Q1 of last year. As anticipated, Q1 was a softer growth quarter for CRB, reflecting an exceptionally strong prior year comparable and the timing of new business activity. Against that backdrop, CRB delivered organic growth of 2% for the quarter or 1% excluding the impact of book of business settlement activity and interest income against the strong 9% growth CRB achieved in the prior year quarter. While we had expected a slower start to the year, Q1 actuals tracked toward the lower end of our planning range. This was primarily driven by a miss in our new business target, some of which timed into future quarters. To a lesser extent, we also saw a more competitive pricing environment. We had strong client retention and solid growth across specialty lines with notable contributions from our surety, credit risk solutions and M&A specialties. Construction also delivered a solid quarter, supported by continued momentum in data center programs. It's worth emphasizing that one quarter, particularly Q1, does not define the trajectory of the year for CRB. Given the strength and visibility of our pipeline, we remain confident in our ability to drive profitable growth for the full year. However, reflecting the slower start to the year, we are narrowing our full year outlook for CRB organic growth to mid-single digits. This does not change our long-term expectations for this business. The specialization strategy continues to resonate, positioning us to help clients manage geopolitical volatility while disciplined investments in revenue-producing talent continues to support sustainable organic growth. Moving on to our Insurance Consulting and Technology business. Revenue was up 5%, marking its strongest performance in several quarters, driven by increased technology sales. Demand for ICT software solutions remains healthy, particularly for Radar, our leading decision engine, where AI-enabled capabilities are increasingly being used to deliver sharper pricing, underwriting and claims insights. Consulting activity remains subdued in some areas, and we do not expect a material pickup in the near term. This was a great start to the year from our ICT team, and we continue to expect low to mid-single-digit growth for ICT for the full year. Turning back to R&B's results overall. Again, given the slower start to the year, we are narrowing our full year 2026 growth outlook for R&B to mid-single digits. R&B's operating margin was 22.6% in the first quarter compared to 22% in Q1 2025, an improvement of 60 basis points on a reported basis. Excluding the net tailwind from foreign currency, book of business activity and acquisitions, margin improved approximately 10 basis points. We remain committed to delivering 100 basis points of average annual adjusted operating margin expansion over the next 2 years. Now let me turn to our enterprise level results. For the first quarter, adjusted operating margin was 22.3%, representing approximately 70 basis points of expansion versus the prior year or 30 basis points, excluding the tailwind from foreign currency. This performance reflects strong operating discipline and expense management and the continued benefits from actions we've taken to simplify and streamline the organization. As we flagged on last quarter's call, we saw a meaningful impact from foreign exchange this quarter, resulting in a tailwind to adjusted EPS of $0.25 for the first quarter. Based on our current outlook and spot rates, we expect foreign exchange will create an incremental $0.10 tailwind in the remaining 3 quarters, resulting in a $0.35 tailwind for the full year. Our U.S. GAAP tax rate for the quarter was 18.6% versus 21.5% in the prior year. Our adjusted tax rate for the quarter was 20.3% compared to 22.7% for the first quarter of 2025. We continue to expect our '26 tax rate to be relatively consistent with that of 2025. Free cash flow was negative $65 million for the first quarter of 2026, an improvement of $21 million from the prior year. The year-over-year increase was primarily driven by operating margin expansion and the abatement of transformation program cash outflows, partially offset by increased transaction and integration expenses. For the full year, we continue to expect to expand our free cash flow margin. During the quarter, we returned $388 million to our shareholders via share repurchases of $300 million and dividends of $88 million. From a capital allocation standpoint, our priorities remain unchanged. We continue to expect share repurchases of at least $1 billion, subject to market conditions and potential capital allocation to organic and inorganic investment opportunities. Share repurchases continue to be our primary form of capital return alongside dividends as we maintain flexibility to invest in the business and pursue disciplined strategic M&A aligned with our long-term priorities. With that, let's open it up for Q&A. Operator: [Operator Instructions] Our first question coming from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan: My first question is on R&B and the organic revenue slowdown you saw in the quarter. I think you guys said new business was below plan. Can you just expand on that? And was that the full driver of, I guess, the organic deceleration? And within new business, did you see -- was it more pronounced the slowdown in the U.S. and Europe? And I guess, is your expectation, why are you convinced, I guess, that this is just a 1 quarter slowdown and growth will get better over the balance of the year? Carl A. Hess: Elyse, thanks for the question. So just to put the context here, right, R&B had 2% organic growth in the quarter. That was on top of 7% we delivered in the prior year quarter. As we anticipated, Q1 was a softer growth quarter for CRB, delivering 2% organic growth, 1%, excluding both book of business and interest income. That does reflect an exceptionally strong comparable of 9% with the same exclusion in Q1 of '25 as well as the timing of new business activity. As we indicated, the current quarter results tracked to the low end of our planning range. However, we do think our specialization strategy and the investments we're making in talent, data and technology are continuing to resonate in the marketplace and driving sustainable growth. And of course, ICT's 5%, we think was a strong result as the technology pipeline conversion improved. Lucy, anything to comment in terms of this quarter and the outlook? Lucy Clarke: Yes, sure. And thanks, Elyse. Why don't I start by giving you a little bit of context then give some detail about the results itself and make some comments about the rest of the year. Our expectation for CRB was that Q1 would be our lowest growth quarter of the year. This expectation was largely due to the strength of the comparable, which Carl mentioned. In Q1 last year, CRB had 9% growth ex interest income book of business activity with particularly strong new business generation. We did, though, come in at the low end of our own planning range. The majority of the below-plan results is due to a miss in our new business target, some of which will time into future quarters. And our early view is that we returned to normalized growth in April. While we don't disclose organic growth rates at the geography level, I can say that North America had the best performance and international trailed the other geographies in the quarter for a couple of reasons: First, international had the toughest comparable because of an outstanding performance in Q1 '25. And second, it's the region that has the most new business exposure to geopolitical headwinds. To a lesser extent, our growth was also impacted by an even more competitive pricing environment than we expected, particularly in the large and complex segment. Although we have returned to normalized growth in April, given the slower start to the year and those ongoing price headwinds, we are taking a prudent approach and narrowing our full year outlook to mid-single digits. In terms of the rest of the year, we continue to see healthy client activity, deliverable pipelines in all of our specialties. And of course, we expect increased contributions from our new hires as we progress through the year. We have exciting momentum coming out of the integration of the Newfront team in North America. Newfront brings not only exciting tech developments, which will benefit the production capacity of all the WTW people, but I should also mention the incredibly talented people with important specialist capabilities who we feel very privileged to welcome to WTW. In terms of strategic hiring, we're continuing with this successful strategy with our strategic hires from previous years continuing to make healthy contributions, and we had a significant cohort of new investment hires start in Q1, giving them the full year to ramp. And finally, we've returned to normalized growth patterns in April. I would call out, I guess, a specific area of uncertainty, not unique to us, of course, being the Middle East, where we expect decision-making to be slower and projects to be delayed. As I mentioned, we did see continued deterioration in pricing during Q1. So considering the performance and the rating environment, which we did call out as a potential risk to our path to high single digit in Q4, we think the narrowed outlook of mid-single-digit for CRB is prudent given the evolving macro backdrop, and we continue to expect low to mid-single-digit growth for ICT for the full year. Overall, we remain well positioned despite the volatile environment, and we're confident we can deliver mid-single-digit organic growth in R&B in '26, along with 100 basis points of average annual margin expansion over the next 2 years. Thankfully. Elyse Greenspan: And then my follow-up question maybe is just picking up where you ended on the margin, right? So I think in the prepared remarks, you guys said ex currency book of business activity and acquisitions that the margin within R&B expanded by 10 basis points. So obviously, right, that is below the 100 basis point average. Can you just help us think through, I guess, what drove that in the quarter and why you would expect the drivers of margin improvement picking up throughout the course of '26? Carl A. Hess: Yes, sure. Sure, Elyse. We did expand margin by 60 basis points on a reported basis. And as you noted, excluding the net tailwind from foreign currency book of business activity and acquisitions, margin improved about 10 basis points. Looking ahead, we expect our continued investments in technology to provide a strong platform for ongoing operating leverage and efficiency across the business to help achieve the 100 basis points of margin expansion on average over the next 2 years within the segment. Maybe, Lucy, do you want to provide a little bit more color there? Lucy Clarke: Yes, sure. Thanks. Elyse, I think our Q1 margin result reflects our ability to lower our operating margin to meet our margin expansion commitments even in a low growth quarter. We are maintaining focus on disciplined expense management and continuing investments in enhancing efficiency while also taking into account a cost base that includes staffing and capabilities built for the stronger growth expected throughout the remainder of the year. As Carl highlighted in his remarks, we do and our investments in AI and automation continue to be key drivers of that margin expansion across the whole business. One of the specific examples he mentioned was that our Affinity team has achieved a 90% reduction in endorsement processing time using AI enhancements. Advancements like these really improve the client experience and make work more efficient for our people. And more meaningfully, we are doing some very important work on our own operating system. During the last half of 2025, we launched 2 pilots, one in North America and in the U.K. During Q1, we added some significant new front enhancements and have now started the global launch of our AI-powered operating system, Neuron. As Carl mentioned, this accelerates the core technology that we developed in our broking platform and integrates our risk and analytics modeling tools into our service platform. This enables our users to do all their work from a single screen with no data entry. Just one small example to put it into perspective a little bit. Today, in our existing systems, each single piece of data is entered between 3 and 12x. And of course, each single client transaction will have many hundreds of data points, most entered manually. This will have a sizable impact on speed and accuracy. Neuron has been launched in Cyber North America and property in the U.K., and we have launches in other geographies and other lines planned over the next few quarters. This will radically improve the service we give to our clients as well as be a meaningful driver in our ability to deliver operating leverage in our mid-single-digit revenue growth. Operating leverage and efficiency gains will remain the primary drivers of our expected 100 basis points of average annual margin expansion, and we remain confident in our ability to deliver on this plan. Thankfully. Operator: And our next question coming from the line of Rob Cox with Goldman Sachs. Robert Cox: First question, just staying with the focus on R&B for a moment. Is it fair to characterize the R&B growth as a situation where you're expecting some level of this Middle East uncertainty to persist in growth rates in coming quarters? And to follow up on your question or on your comment on pricing for large and complex business, I was thinking your revenue model would be less susceptible to pricing changes in that segment, but maybe that's not the case in international. Any comments would be helpful. Lucy Clarke: Yes, sure. Thanks. Just in terms of the first part of the question about the Middle East. To date, in Risk & Broking, we've seen puts and takes with an overall neutral impact, some delays to projects, but offset by some higher activity in some of our impacted specialty lines. But just calling it out as a developing situation that we're monitoring. In terms of the pricing question, yes, we do have -- in our specialty businesses, we do have some that are susceptible to large and complex pricing, and that's been reflected in what we saw during the first quarter. Robert Cox: Okay. And then I'll just pivot to HWC. I wanted to ask on the outlook there, given the headwinds that you guys called out in that business. What makes you confident that you can deliver the mid-single-digit growth given the uncertainty there? Is it just that the Middle East disruption is focused on the career business and you don't think that will blend or bleed into other businesses? Carl A. Hess: Yes. Thanks, Rob. So I mean, at the segment level, HWC delivered 3% organic revenue growth for the quarter, and that was driven by primarily strength in health and wealth, and that's despite headwinds from economic uncertainty and geopolitical pressure. Career, as you cited, right, declined 3%. That was lower levels of project activity. Clients deferred some discretionary work and the situation in the Middle East and some broader economic caution we did see an effect. Demand for advisory services slowed in North America, partially offset by some regulatory-driven work and strength in some select international markets. We do expect momentum to improve in career as pipeline conversion increases and regional headwinds moderate later in the year. Julie, do you want to talk a little bit more about what you're seeing in career and in this segment? Julie Gebauer: Yes. Sure, Carl. And thanks for the question, Rob. Look, we did face these headwinds in career, the Middle East geopolitical situation and the caution around discretionary spending. And we do view those as temporary. We know they're not going to go away immediately, but we expect them to have less of an impact later in the year. Then I think it's important to highlight a few things that did not impact Q1 that we expect to impact the rest of the year positively. And there are 3 of them. First, results don't yet incorporate the strength that we expect to see in product revenues. We've got good participation in our compensation surveys, and that's a leading indicator for benchmark revenue growth later in the year. We also have a positive outlook for Embark portal implementations. The second thing is that we've built healthy pipelines, especially in Europe and Asia, healthy pipelines for technical advisory support on things like EU Pay Transparency, M&A transactions and total rewards. And as we think about timing of that pipeline, those pipeline conversions, we expect revenue in these areas to contribute to growth over the rest of the year. And then third, our teams are also focused on a new area of emerging demand, and it's related to the impact of AI on an organization's work in workforce and total rewards. We're building a really strong pipeline for new offerings in this area. This AI workforce transformation solution, which you heard both Carl and Andrew mentioned in their prepared remarks, is a terrific solution. It features our WorkVue agent, which evaluates the automation potential for all roles across an organization, and we expect to see meaningful growth in this area in the latter part of the year. So when we combine those positive developments with a tougher start to the year, our outlook for career is to reach low to mid-single-digit growth for the year. And as Carl said, this does not change our mid-single-digit guidance for the segment overall. [indiscernible] Health, which we had 6% organic growth, that was driven by solid client retention, wins in global benefits management and local brokerage appointments along with double-digit health care inflation. We've got a very healthy pipeline there, and momentum is building for specialty solutions and cost management projects. So we expect growth to accelerate throughout the year, and that will lead to high single-digit organic growth for the full year. And then we've got the positive impact of Newfront on top of that when we look at total growth. And then in Wealth, we had strong performance in our retirement businesses in all regions. We have new actuarial clients, new LifeSight clients. We're doing more technical support for things like data cleanup, derisking, workforce management activity. And alongside that, our investments business also grew this quarter, and that came on the strength of new funds that we introduced last year, new business wins and OCIO activity. And these trends in Wealth, we expect to continue across the businesses, and we think that will result in organic growth at the high end of the low single-digit range. And again, here, we've got total growth where we'll benefit from the close of our Flowstone deal in early April and the expected close of our Cushon acquisition this quarter. And then in BD&O, we performed as we expected in the first quarter. And just an important reminder, as Andrew pointed out earlier, that individual marketplace in this business generates approximately 80% of its revenue in the fourth quarter, and that's what's going to drive annual growth. So for the year, in BD&O, we're holding to our guidance of low single-digit growth. And overall, put this all together, we're very confident in our outlook for HWC to deliver mid-single-digit growth and will add to increase margins again this year. Operator: Our next question coming from the line of Andrew Andersen with Jefferies. Andrew Andersen: I wanted to go back to HWC, and you had called out stronger international health growth. Are you seeing any regional divergence in demand trends more broadly or pricing or even any changes in client practices around compensation approaches? Carl A. Hess: No. I mean we're seeing strong demand for our services for health across the globe, particularly strong in international markets. Do recognize that our North America business is a mix of consulting and brokerage and the consulting arrangements are typically less sensitive to health care inflation. So there is that nuance. Julie Gebauer: Yes. And Carl, I just might add that we do see health care inflation projected to increase across all regions at an average of more than 10%, and that's due to higher volume and higher cost. And we don't expect to see that decelerating in the near term. And as you said, the cost increases are going to most directly impact the revenue for fully insured clients. And for other clients, it is driving greater demand for our technical advisory services. Andrew Andersen: And then maybe Spike, how should we think about some of the tangible impacts of AI? Where do you expect it to show up first, whether it be margin expansion or revenue growth? And maybe what are some milestones we can look out for as you scale into this new role and strategy? Carl A. Hess: Yes. So let me describe Spike's new role for everybody, and then I'll let him gladly comment on that. So after leading key pieces of the ongoing integration of Newfront WTW, Spike is going to serve as our Chief AI Officer, reporting to me and working to set our overall enterprise AI strategy. Spike's Co-Founder, Gordon Wintrob, is going to be our Head of AI Acceleration, and he'll focus on accelerating enterprise-wide adoption of AI capabilities. The track record here speaks for itself. Spike and Gordon helped build the industry's largest AI broking platform and delivering a smart, fast and efficient client experience through the combination of deep specialty expertise and cutting-edge technology. And Spike's new role will help define our enterprise ambition for AI and further embed it into WTW's overall strategy, operating model and culture. He'll also help shape how we use AI to advance our competitive positioning and create long-term value for our clients and shareholders. And now [indiscernible]. Eugene Lipkin: Great. So maybe I'll -- thank you. And maybe I'll start just talking a bit about the vision and then some of the near-term integration focus. So the vision is very straightforward. WTW becomes the intelligence layer for insurance, risk and human capital solutions. Every client interaction will be backed by a large proprietary comprehensive data set surfaced by AI and delivered through an expert who is aligned with client outcomes. This strategy is durable for WTW for 3 reasons: First, AI compounds with proprietary data and our HWC and R&B assets built on almost 200 years of client work are very hard to replicate. Second, firms that win with AI will be those whose data workflows and incentives are aligned across the enterprise rather than siloed across business units. WTW's integrated operating model is a real advantage here. And third, through Newfront, we now have a working playbook and engineers who have built it for what an AI-native broking actually looks like in production. Our strategy at WTW has as much to do with how we work as it does with what we build. A key skill we've developed over 8 years in business is how to successfully embed engineers with professional teams to build useful technology. The tools we built at Newfront were heavily used by our team and also used by 1/4 of our clients on a monthly basis. Tactically, we're running 2 tracks in parallel. We're scaling purpose-built agentic products like Coverage Gap analysis, Navigator and Partner Management, and we're driving AI adoption across the workforce. Those reinforce each other and AI fluent workforce is what compounds the value of each new model release. Andrew Krasner: And it's Andrew. Maybe I'll just comment on the margin part of the question. So we're already capturing AI-driven efficiencies. They contributed to the margin expansion we delivered in 2025 and the forward trajectory that we've committed to across both of our segments. Qualitatively, here's how I think about the time horizons for the continued impact. In the near term, the upside is what we do and similar programs are already producing, workflow automation, delivery center productivity, contact center efficiency, things of that nature. That's in the run rate. In the medium term, the larger opportunity is scaling Newfront's agentic products and driving AI adoption across the workforce. We expect that to compound as adoption deepens. Long term, the most durable benefit isn't really cost reduction at all, right? It's the advantage of combining proprietary data and integrated operating model and an AI-fluent workforce, which we believe is hard to replicate. The last point I'd note is that we are reinvesting a portion of these savings in growth, talent, technology and capability so not every dollar of efficiency will immediately drop to the bottom line and to the margin. Operator: And our next question coming from the line of David Motemaden with Evercore ISI. David Motemaden: I wanted to stick with the organic growth in R&B, the 1% growth this quarter on a core basis. Could you just talk about some of that new business that, Lucy, I think you said it was timing related. Could you just size how much of a drag that was in the quarter? And is that conversion of those -- of some of those deals? Is that what's coming back a little bit here in April? Lucy Clarke: Thanks, David. Well, I'm not going to size it for you exactly, but I will reiterate that the -- there was a particularly strong performance in international in Q1 '25. And that was where we saw some of our challenges. But that -- what we're seeing in April gives us confidence that we're good for mid-single digits for the full year. David Motemaden: Got it. And I'm assuming that means I think you had said April is normalized growth. So sorry to be super short term here, but I was a little surprised at just how much it decelerated this quarter. I mean is normalized growth, is that -- is it back at 5% this quarter? I mean -- or in April, I guess -- and what gives you the confidence that, that's going to continue? Lucy Clarke: Understand your surprise, and it is mid-single digit or better in April. And I'm sorry to be short term. Operator: And our next question coming from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman: I guess -- do I have 1 or 2 questions? I don't know, it seems like we're getting to the end here, but I'll ask, number one, an executive at one of the very largest carriers suggested that broker commissions are excessive and that they will come down in time. And I'm very curious as to what you think about that and how it will play out for Willis Towers? And then just in case I don't get to squeak it in. You've given great detail on HWC and R&B and why you think things are going to get better. When you say mid-single digit for both, it feels like it might be skewed toward the lower end of mid-single digit. Am I thinking about that wrong? Carl A. Hess: So thanks for the question or questions, Andrew. Let me address the first one. Carriers talking about broker commissions is not a new thing. And I guess the way we look at it is brokerage pricing has historically reflected risk transfer complexity and advisory value and not just cost plus economics. In fact, if you look at commission levels over time, you'll see steady levels in spite of significant technology advances as it's based on the value intermediaries bring to both clients and carriers. And so I look at it this way, while AI can reduce manual effort, it doesn't reduce the compliance burden of distribution, doesn't change the incentive structure between carriers, brokers and clients, and it doesn't diminish the value of brokers scale and relationships. And this dynamic is not new to our industry. Technology has consistently driven efficiency gains in insurance broking and advisory services over many decades. And through each successive innovation, WTW successfully adapted and continue to deliver organic growth and margin expansion over time. And AI represents just the next phase of this evolution. It enables productivity improvements while reinforcing the value we bring of human judgment, advice and client relationships. Andrew Krasner: And just on the growth question, we're not going to sort of pinpoint an exact sort of spot within mid-single digits going forward, but the mid-single-digit guide is across the enterprise and across both of the segments. Operator: And our next question coming from the line of Brian Meredith with UBS. Brian Meredith: Two ones here. First, just on R&B growth one more time here. I'm wondering if you maybe you can frame how much of your business is actually exposed to this Middle East conflict? And if it continues here going forward for the remainder of the year, what does that mean for your organic growth? Could you have to guide down here again? Lucy Clarke: Yes. Thanks. In terms of how much we could be exposed, I would just say it's one of our smallest geographies. And so while we think it's important to call it out, we don't expect it to have a major impact on our results. Brian Meredith: Very helpful. Thanks, Lucy. And then second one, maybe for Andrew. Given your stock is down about 26%, 27% year-to-date now, maybe you can frame kind of your capacity for share buyback this year? I know you said it's going to be greater than $1 billion, but maybe frame kind of how big could it potentially be given obviously your stock has been hit pretty hard. Andrew Krasner: Yes. So we've said $1 billion or greater for the year. That guidance hasn't changed. We looked at our cash position regularly, lean in from an absolute dollar perspective and also from a timing perspective when it's appropriate. Operator: And our next question coming from the line of Mark Marcon with Baird. Mark Marcon: My question was answered. I was curious as well about just the size of the Middle East since you ended up talking about that quite a bit upfront. So interesting that it's relatively small. Can you talk a little bit about how you're thinking about longer term, just the impact of AI on the margin improvement, particularly on the R&B side. Like you've already been talking about the 100 basis points of improvement. But how -- longer term, how much more efficient could we end up becoming? And how significant could that be? Andrew Krasner: Yes, sure. We're not necessarily going to quantify the impact over the longer term. I called out earlier a couple of places where we think it helps both from the cost side and the revenue side as it relates to the 100 basis points of margin expansion within R&B, technology advances and process efficiencies have always been a core part of that. I think AI is just playing a larger part in that than maybe we had anticipated when we sort of frame that at the end of 2024 at our Investor Day. Operator: And that is all the time we have for our Q&A session. I will now turn the call back over to Mr. Carl Hess for final remarks. Carl A. Hess: So thank you all again for joining us. I appreciate the hard work of our WTW colleagues globally who helped us navigate the start of the year. And thank you to our shareholders as well for their continued support of our efforts. Have a great day. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Silicom First Quarter 2026 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Silicom's Investor Relations team at EK Global Investor Relations at 1 (212) 378-8040 or view it on the News section of the company's website, www.silicom-usa.com. I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please? Kenny Green: Thank you, operator. I would like to welcome all of you to Silicom's quarterly results conference call. Before we start, I would like to draw your attention to the following safe harbor statement, during this call, we may make forward-looking statements within the meaning of applicable securities laws. These statements may include, among other things, statements regarding the company's strategy, market opportunities, customer demand, product development initiatives, industry trends, expected deployments of the company's solutions, financial outlook, revenue expectations, margins, operating expenses, profitability and future growth opportunities. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. These risks include, among others, those described in the company's press release issued today in its filings with the U.S. Securities and Exchange Commission, including its annual report, Form 20-F. The company undertakes no obligation to update any forward-looking statements. With us on the call today are Mr. Liron Eizenman, President and CEO; and Mr. Eran Gilad, CFO. Liron will begin with an overview of the results, followed by Eran will provide the analysis of the financials. We will then turn the call over to the question-and-answer session. And with that, I would now like hand the call over to Liron. Liron, please go ahead. Liron Eizenman: Thank you, Kenny, and good day, everyone. I'm exceptionally pleased to share a truly excellent set of quarterly results well ahead of our expectations. Over the next few minutes, I look forward to discussing why we are more excited than ever about Silicom's momentum and trajectory ahead. . The first quarter of 2026 has been an excellent one for Silicom. Our core business has now reached a clear inflection point with extraordinary momentum in financial performance well ahead of the expectations we shared with you only a few months ago. The highly successful implementation of our strategic plan is clear and our business is decisively outperforming on all fronts. Revenues this quarter came in at $19.1 million, representing a year-over-year growth of 33%, significantly ahead of our guidance range, which had originally expected an 18% year-over-year growth at the midpoint. This is the second quarter in a row of very strong improvement with both quarters well ahead of our original expectations. This quarter, even more so, we have seen a powerful upward inflection with the year-over-year growth accelerating significantly and essentially doubling from 17% last quarter to 33% now. Not only did we surpass our revenue expectations this quarter, but our momentum continues to accelerate, and looking ahead, we anticipate even greater achievement for the second quarter. We expect second quarter revenues to range from $20 million to $21 million representing accelerated 40% growth on a year-over-year basis at the upper end of the guidance. Given the strong improvement in visibility, we now have into the remainder of the year, we expect full year 2026 revenues to be in the range of $82 million to $83 million, representing an approximate 33% year-over-year growth. This exceptional performance is the direct result of the design wins achieved in previous years and the ongoing disciplined execution of our strategic plan. As those design wins ramp, we are seeing strongly expanding revenue contribution and materially improved visibility for the remainder of the year. We are seeing equally impressive traction on the design win front. As you recall, we set ourselves a target of between 7 and 9 design wins for 2026. We are only a third way through the year, and we have already achieved 4, halfway towards our target, which puts us on track to meet and partially exceed the upper end of this target. Design wins we achieved today will be the foundation for continued strong growth into 2027 and beyond. I want to spend a few minutes focusing on some of the recent design wins we have achieved since the start of the year. At the start of the year, the global networking and security-as-a-service leader expanded its deployment of Silicom Edge devices into multiple additional use cases, more than doubling our expected annual revenue from this customer, from around $4 million to between $8 million and $10 million, we found the incremental revenues already flowing through this quarter. This achievement highlights both the strength of our blue chip customer relationships and our strategy of growing by expanding existing engagements alongside winning new ones. In February, a Tier 1 cybersecurity customer a long-standing partner, selected one of our Edge systems as the platform for their next-generation high-end product lines. To date, we have received initial orders of over $1 million for 2026 and we expect this engagement to ramp to double that. We are in discussions for additional product lines at this customer. This design win is another great example of our long-term customer relationships generate additive revenue contributions across our product portfolio over time. In March, we announced the design win with one of the world's largest streaming service providers, which selected our high-speed networking adapter for deployment across its proprietary streaming infrastructure. We've already received an initial order for over $1 million with total purchases over 5 years expected at $12 million. In parallel, we are in active discussions with the customer about the customized special form factor network adapter for the same infrastructure. If this materializes, it would more than double our networking related revenues from this customer in the region of $25 million to $30 million. . In April, we announced a $3 million per year design win with a European leader in advanced encryption and secure communication solutions. After a successful evaluation, they selected an FPGA SmartNIC for deployment that includes post-quantum cryptography among its use cases, marking our third post-quantum cryptography design win to date and a key expansion of our PQC customer base. We have initial commitment of $1 million and beyond this, we are in active discussions about the next-generation higher-speed FPGA SmartNIC as well as a potential full system solution, combining a server with an FPGA SmartNIC opportunities that could meaningfully expand the partnership. Those 4 design wins demonstrate the breadth and the quality of our momentum across all our core product lines. Beyond the design wins already secured, our pipeline of opportunities is broader and deeper than it has ever been. It spans all our core product lines, Edge systems, SmartNIC and FPGA-based solutions and includes leading as well as fast-growing names across cybersecurity service providers, networking and other key verticals. We expect part of this pipeline to continue to convert into design wins over the coming quarters, providing the foundation for accelerated growth in 2027 and beyond. While the return to strong growth within our core business is the main story, we continue to invest in 3 venture style upside opportunities we spoke about last quarter. AI inference, post-quantum cyptography and white-label switching. I stress that we are not pursuing those opportunities to replace legacy core business, quite the opposite. Those growth opportunities are additive. It's precisely because our stable growing core business is performing so well that we have the platform, the relationships and the balance sheet strength to invest in those new growth engines. All of which leverage our IP and the same engineering talent that drive our core today. As I discussed last quarter, AI infrastructure investments are undergoing a fundamental shift from training models to querying the models at scale known as inference. This shift is being dramatically accelerated by the rise of agentic AI, where autonomous agents generate continuous high volume inference or growth on behalf of users rather than the occasional single query of traditional chatbot interactions. A single agent completing a test can trigger hundreds or thousands of inference calls and enterprises are deploying those agents across every function. The result is that the inference is rapidly overtaking training as the dominant driver of AI infrastructure spend, creating massive networking and interconnect bottlenecks at unprecedented scale and that's exactly the problem that Silicom excels in solving. We are making significant progress with 2 of the world's most promising contenders in the high-stakes race to architect the future of AI computing. Furthermore, we recently started in cooperation with the customer the development of a new inference specific product. We will share more data with those engagement progress. We view our rapid progress in expanding footprint in this high-growth sector as a potential game changer for Silicom. In summary, this is an exceptionally exciting and transformative time at Silicom. Our core business is accelerating at a remarkable pace, delivering 33% growth in the first quarter with the potential for even stronger growth in the second quarter, positioning us surely on track for a very strong full year performance. Our design win engine is firing on all cylinders with 4 already achieved out of our 7 to 9 targets for 2026, putting us well ahead of our plan and giving us increased confidence in our ability to meet and potentially exceed our targets. Our pipeline of core Edge systems, SmartNIC and FPGA solution is the strongest and most expansive we have ever seen. Combined with our robust balance sheet, this gives us exceptional flexibility to invest aggressively in both our core growth and our high potential venture style opportunities, all while maintaining a disciplined and conservative financial profile. . We are very excited about Silicom's strong and accelerating momentum in 2026 and are moving aggressively and with confidence to fully capture the opportunities ahead. We are highly optimistic about the significant value we are building and look forward to delivering strong and accelerating returns for our shareholders in the quarters ahead and over the long term. With that, I will now hand over the call to Eran for a detailed review of the quarterly results. Eran, please go ahead. Eran Gilad: Thank you, Liron, and good day to everyone. I will review the financial results and business performance for the first quarter of 2026. Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP to non-GAAP basis is available in the press release issued earlier today. Revenues for the first quarter of 2026 were $19.1 million, 33% above the $14.4 million reported in the first quarter of last year. The geographical revenue breakdown over the last 12 months was as follows: North America, 76%; Europe and Israel, 14%; Far East and rest of the world, 10%. During the last 12 months, we had won 10% plus customers, which accounted for about 10% of our revenues. Gross profit for the first quarter of 2026 was $5.7 million, representing a gross margin of 30% compared to a gross profit of $4.4 million or gross margin of 30.3% in the first quarter of 2025. Operating expenses in the first quarter of 2026 were $7.6 million compared with $6.7 million reported in the first quarter of 2025. Operating loss for the first quarter of 2026 was $1.9 million, an improvement from the operating loss of $2.4 million reported in the first quarter of 2025. The narrowing of the operating loss reflects the operating leverage we are beginning to see as our revenues return to strong growth and is a clear indication of the improving profitability profile we expect to deliver as our growth accelerates. We are very pleased with this positive trajectory, which has been tracking ahead of our expectations. Net loss for the quarter was $1.5 million compared to a net loss of $2.1 million in the first quarter of 2025. Loss per share in the quarter was $0.25. This is compared with a loss per share of $0.37 as reported in the first quarter of last year. Now, turning to the balance sheet. Our balance sheet remains very strong. As of March 31, 2026, our working capital and marketable securities amounted to and $109 million, including $63 million in high-quality inventory and $63 million in cash, cash equivalents and high-rated marketable securities with no debt. I would like to add a few words on the increase in inventory. We are intentionally building our inventory both to support our strong revenue trajectory and to safeguard our ability to ensure uninterrupted product delivery to our customers. This is a deliberate proactive step that we are taking and leveraging our balance sheet strength to do so, which effectively mitigates the impact of the current extending lead times for memory chips and positions us well to continue to capitalize on the growth opportunities ahead. That ends my summary. I would like to hand back to the operator for a question-and-answer session. Operator? Operator: [Operator Instructions] The first question is from Ryan Koontz of Needham & Company. Ryan Koontz: Really nice quarter. Congrats on the results and terrific outlook. I wanted to ask you a little more detail on how we should think about timing. I'm just trying to dumb this down a little bit for me, and folks maybe aren't that familiar with the story. But can you maybe break down like what's going well with the business here in the near term? And how these new design wins layer in? Is the improved momentum in the quarter, for example, is that due to your core business or are new design wins contributing yet? Can you just kind of give us a time view of what's going on here, would be really helpful. Liron Eizenman: So I think as we explained in the past, design wins usually take time until they materialize. So what we're seeing right now is not the design wins that we announced this quarter and maybe not even a design win that we announced, I don't know, 2 or 3 quarters, but it takes time until things materialize, until we see full ramp-up, and so some of the additive revenue that we're seeing right now is actually coming from design wins that we've done maybe even in '24 or '25, early '25, and it's building up. It's more and more momentum, more customers actually ramping up fully and some of them even better than what we anticipated. And this is what's leading us to the situation that we're now seeing this very nice increase. Ryan Koontz: And maybe in terms of the core business in the quarter, it sounds like there was some upside. Can you attribute that to different market verticals, maybe in both the print and the second quarter outlook. What's happening with the kind of current base of business that's driving the acceleration? Liron Eizenman: So it's maybe the core business. So everything, all the new stuff we're talking about, there's no significant revenue coming from that, so everything we're seeing, this is the core business. So we will see significant improvements or significant advantages, I would say, with the new stuff that the 3 pillars that we talked about, this will be on top of everything that we're seeing right now. But as for the core itself, it's across everything. It's across our SG&A. We see strong momentum there. We see it also with our Edge devices. We see it with our SmartNIC. It's across regions. It's just we see very strong momentum everywhere. Ryan Koontz: So it's not -- there's not one particular customer driving that. And maybe shifting to more of a forward-looking view on the -- both the encryption side as well as AI. Can you maybe go into some explanation of what your competitive advantage is here that allow you to get some of these new wins around AI in price and encryption? Liron Eizenman: Yes. So I'll start with encryption. So we've been building encryption products for years. This is not a new area for us. It's just that the post-quantum encryption is something relatively new to the world, not for us, those algorithms are just coming out in the last 12, 18 months, and since we are already a leader in encryption, we know who are the customers, it's our existing customers. We know the type of additional customers we can onboard. We know how to sell to those guys, we know the technology they need, so it was kind of a straightforward next step for us [indiscernible] something we needed to invest in order to be ready with the right product at the right time in order to be there. So this is for encryption. For AI, the problem that we are solving is basically a networking -- I would say, 2 problems we're starting. One problem is a networking problem. And this is what we've been doing for many, many years. So basically taking the same IP, the same R&D talent that we have and just building the right products for that or repurposing existing products to solve those problems. . And the other one is basically being the inference engine itself, what we call the auto monopoly basically instead of building an ASIC now for 3 years, the pace of improvement in running models is so quickly, we see advantages and new stuff coming every week, so if you freeze yourself now to an ASIC, you're basically losing everything new that will come in the next 3 years. If you're doing it on an FPGA that you can update in the field, you can actually, every week come with new things that will pop up, new strategies and new ways to do stuff, and we'll just accelerate what you did a week ago. Now we can do it 10%, 20%, 50% quicker. So this is why we think the auto monopoly is another key element. Ryan Koontz: So the faster innovation of FPGAs just gives you a big advantage. Back on the networking comment you made around AI, I assume that's delivered in the form of NICs typically on the AI infrastructure networking. Liron Eizenman: It's part of it, but I would say it's not necessarily simple NICs, it's our SmartNICs and some of them are -- would be new SmartNICs to develop. Some of them are existing SmartNICs. I would say most of them, yes, in the form of SmartNICs. Ryan Koontz: And then lastly, you touched on memory and inventory. It's obviously becoming a big concern industry-wide. It's been building, and we've been hearing lately about a lot of inventory builds and long-term purchase commitments from a number of networking peers of yours this quarter. Can you maybe give us a little more detail on your supply agreements and how you're thinking about the risks of memory supply and memory costs and how you pass those costs on to customers? Liron Eizenman: Yes. I mean it's -- as you noted, inventory is going up, there's no other way to work around it. If you want to be ready to supply products, especially when we are a company that is growing dramatically, there's no other way, you have to secure the inventory, you have to work very, very closely with the DRAM vendors and with the storage vendors, and that's what we're doing. We're qualifying additional sources all the time, trying to balance between the different vendors because not all of them are able to deliver everything that we need. I mean they are saying it publicly that they cannot deliver all the demand that their customers have, so we have to balance between different vendors. So a lot of work, a lot of work here, and yes, it's a challenge with the supplies, a challenge for the customers but we're navigating it very, very closely with the customers, explaining the situation to them for months now. This is not something new. Everyone understands the situation. We're trying to solve a situation, sometimes even in creative ways like changing specs of the product or exploring with the customer exactly what would make them happy and allow them to keep selling the product in the best way for them, and it's definitely something that takes effort from us, but we think it's going to be something that will allow us to build a relationship for many, many more years with those customers. Ryan Koontz: And you're able to pass those increased costs of memory on your customers as part of your contracts with your customers? Liron Eizenman: Most of it, yes. Ryan Koontz: Most of it, okay. But you're not anticipating major gross margin hit in the -- or at least like in the coming quarters? Liron Eizenman: No, absolutely not. Operator: [Operator Instructions] Next question is from Greg Weaver of the Invicta Capital. Gregory Weaver: Just a couple of quick ones on the inference side of things. What's your best guess in terms of revenue timing there? You mentioned the ramp that you're seeing in fiscal '26 isn't these new products? Liron Eizenman: Yes. I think probably more 2027, rather than 2026 in terms of significant revenue for inference. But we may see some this year definitely making some good progress, as I've said before. We -- hopefully, we can share more in future, but as we meet more milestones, but I'd say significant probably in 2027. Gregory Weaver: And you stated you were creating a new inference specific product with a key customer. Now is that 1 of the 2 guys you've referenced? Or is this a new player? Liron Eizenman: Yes. It's 1 of those 2 guys. Operator: There are no further questions at this time. Before I ask Mr. Eizenman to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available by tomorrow on Silicom's website, www.silicom-usa.com. Mr. Eizenman, would you like to make a concluding statement? Liron Eizenman: Thank you, operator. Thank you, everybody, for joining the call and your interest in Silicom. We look forward to hosting you on our next call in 3 months. Good day. Operator: Thank you. This concludes Silicom's First Quarter 2026 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
Operator: Good day, and welcome to the SCI First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to SCI management. Thank you, and over to you. Trey Bocage: Good morning. This is Trey Bocage, AVP of Treasury and Investor Relations. Welcome to our first quarter earnings call. We will have some prepared remarks about the quarter from Tom and Eric in just a minute. But before that, let me go over the safe harbor language. Any comments made by our management team that state our plans, beliefs, expectations or projections about the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements. These risks and uncertainties include, but are not limited to, those factors identified in our earnings release and in our filings with the SEC that are available on our website. Today, we might also discuss certain non-GAAP financial measures. A reconciliation of these measures can be found in the tables at the end of our earnings release and on our website. With that out of the way, I will now turn the call over to Tom Ryan, Chairman and CEO. Thomas Ryan: Thanks, Trey. Good morning, everyone, and thank you for joining us. I'll start with an overview of our quarterly performance, followed by a deeper look at our funeral and cemetery results and then conclude with our outlook for the remainder of 2026. For the first quarter, we generated adjusted earnings per share of $0.97, which compared to $0.96 in the prior year. Cemetery revenue and gross profit increased meaningfully, supported by double-digit growth in preneed cemetery sales production. This performance was more than offset by lower funeral revenue and gross profit, driven by a mid-single-digit decline in case volume, resulting in a $0.02 reduction in earnings per share from operating income. Below the line, the favorable impact of a lower share count and a slightly lower effective tax rate was partially offset by higher interest expense, which when combined, resulted in an additional $0.03 of earnings per share growth. Despite a meaningful decline in funeral case volumes during the quarter, the company delivered strong underlying performance across several key operating metrics. Preneed funeral and cemetery sales grew exceptionally well, reflecting continued success in building long-term customer relationships and future revenue visibility. In addition, average revenue per funeral service increased meaningfully, demonstrating the strength of our offerings and disciplined pricing execution. At the same time, we maintained strong control over our cost structure, effectively managing controllable expenses, minimizing the impact on margins in a challenging volume environment. Importantly, had funeral case volumes been flat for the quarter, we estimate earnings per share would have been approximately $1.12, representing roughly 17% growth over the prior year quarter. Taken together, these results underscore the resilience of our business model and our ability to execute strategically despite near-term headwinds. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues decreased by $17 million or just less than 3% over the prior year quarter, mainly due to a decline in core funeral revenue. Comparable core funeral revenue declined by $18 million or just more than 3%, primarily due to a 6.6% decrease in core funeral services performed. The decline in services reflects the impact of a strong flu season in the prior year quarter and is consistent with broader first quarter mortality trends as indicated by data from the CDC as well as reporting from other industry participants. While we saw a notable decline in first quarter volumes, it's important to put that in historical context. Outside of the COVID-impacted era, over the past 20 years, we have experienced 5 instances where first quarter volumes declined from 4% to 9%. In each of those periods, we saw a meaningful improvement as the year progressed, with full year results improving by an average of 400 basis points relative to the first quarter's decline. While each year is different, this pattern reinforces our expectation that performance can improve as we move through the balance of the year. This unfavorable impact from funeral volume decline was partially offset by a healthy 3.5% growth in the core average revenue per service. This core average growth was achieved despite a modest increase of 40 basis points in the core cremation rate. Nonfuneral home revenue increased by $2 million, primarily due to a 10% increase in the average revenue per service. We expect this impressive growth in the average revenue per service to continue as older preneed contracts that are maturing out of our backlog have higher cumulative trust earnings and more recent preneed contracts written will mature with higher value in the backlog due to our operational decision to no longer deliver preneed merchandise at the time of sale. Funeral gross profit declined by approximately $23 million, with the gross profit percentage down 300 basis points to just over 21%. This is primarily driven by a $17 million decline in funeral revenues. We also saw a modest increase in selling compensation, consistent with higher preneed funeral sales production and a greater mix of insurance-funded contracts, which accelerates selling expense recognition. Importantly, more than offering and offsetting this variable cost increase, the team held fixed cost growth to just over 1% for the quarter, well below inflation, which helped moderate the negative impact on margins. As a result, margins landed in line with expectations based on an 80% incremental margin framework and roughly 3% inflation on fixed costs. Preneed funeral sales production increased by $18 million or about 6% over the first quarter of 2025. Core preneed funeral sales production increased by $13 million or 6% Nonfuneral home preneed sales production increased by over $5 million or 9% over the prior year quarter. We feel great about our momentum in both channels as we have worked through the initial challenges of the insurance partner transition in the core segment. And as of the end of 2025, we have now rolled the insurance product into 100% of our SCI Direct locations. Now shifting to cemetery. Comparable cemetery revenue increased by $31 million or about 7%, primarily due to higher core revenue complemented by an increase in other revenue. Core revenues increased by $25 million as a $28 million or 10% increase in recognized preneed revenue was slightly offset by a $3 million decline in at-need revenue. The recognized preneed revenue growth came from a $20 million increase in property revenue and another $8 million in higher merchandise and services. Other revenue was higher by $6 million compared to the prior year quarter, primarily from an increase in endowment care trust fund income. Comparable preneed cemetery sales production grew an impressive $32 million or 10% in the quarter. Large sales drove $20 million of that increase with core sales contributing the remaining $12 million, supported by continued strong underlying sales velocity. This performance reflects the strength of our sales organization, which continues to expand preneed production despite lower first quarter funeral volumes. Ongoing investment in sales force retention and growth, particularly in our community-based teams has broadened our reach beyond location-generated leads. Cemetery gross profit in the quarter grew by $15 million or 11% with margin expansion of 120 basis points to approximately 33%. The increase was driven by higher-margin trust income, which lifted overall profitability. This was partially offset by above-inflation growth in fixed cemetery maintenance costs. Even so, margins came in as expected, consistent with our 75% incremental margin framework and roughly 3% fixed cost inflation. Now let's shift to discussion about our outlook for 2026. As we look ahead, we are reaffirming our 2026 normalized earnings per share guidance range of $4.05 to $4.35. While the first quarter funeral volumes presented a near-term headwind, we expect the year-over-year rate of decline to moderate as the year progresses, resulting in a 1% to 3% decline for the year. When combined with strong momentum in preneed cemetery sales, average revenue per funeral and continued disciplined expense management, we are confident in our ability to deliver within our stated earnings range. In closing, we remain firmly focused on building long-term value for shareholders, growing revenue, leveraging the strength of our scale and allocating capital with discipline to the highest and best use. As we move into a period of meaningful demographic tailwinds, we are exceptionally well positioned to expand our reach, serve more families and deliver sustained growth over time. In closing, I'd like to recognize and thank our entire SCI team for their ongoing commitment to our customers, our communities and each other. Your dedication continues to be the foundation of our success. With that, I'll turn the call over to Eric. Eric Tanzberger: Thanks, Tom. Good morning, everybody. Thanks for joining us today. And as Tom just finished, I'm going to start that way and take a moment to really sincerely thank our more than 25,000 associates across the entire SCI network. We are truly grateful for all of your dedication and most importantly, the compassion that you have for our client families. And we are very proud of the positive impact you continue to make in all the communities that we serve at SCI. So today, I'm going to start by reviewing our cash flow results and capital investments for the quarter. Then I'm going to take -- make a few comments on corporate G&A and our trust returns, and I'll conclude with an update on our cash flow guidance for the full year of 2026 and then talk a little bit about the overall financial position. So during the quarter, we generated very impressive adjusted operating cash flow of $335 million. This, by the way, was in line with our expectations and was an improvement of just under $20 million or 6% over the prior year. So a little bit more color on that because some of this is timing. So adjusted operating cash flow was positively impacted by a $20 million source of working capital related to an additional payroll tax payment that was made in the first quarter of last year. So additionally, though, there were stronger preneed cash receipts and other working capital that provided an additional $7 million source. But partially offsetting these sources were lower adjusted operating income of $4 million and $4 million of higher cash interest, which is primarily due to higher average balances on our floating rate debt, partially offset by the lower floating rates. We believe this growth in adjusted operating cash flow despite the softer volumes that we reserved in the first quarter really highlights the resiliency of our cash flow at SCI. So shifting to capital investment. We invested $108 million of capital into our existing funeral homes and cemeteries and real estate -- business and real estate acquisitions and of course, construction of new operating locations. So I'm going to break that down a little bit for you. We invested $66 million of maintenance capital back into our current businesses. Included in this maintenance spend, we invested $41 million into new cemetery development projects, $20 million into our current funeral home and cemetery locations, which improves the overall customer experience and about $5 million into our digital strategy and some other corporate investments. We also invested $17 million of growth capital in the quarter towards the construction of new funeral homes as well as the purchase of some real estate for future new build and expansion opportunities. Turning specifically to acquisitions. We invested $24 million into business acquisitions in the quarter, adding locations in several states, including Texas, Massachusetts, Alabama and North Carolina. We are excited about these high-quality funeral homes and cemeteries that are now joining our company, and we're very happy to welcome all of those associates to the SCI family. We have seen continued momentum in April and remain optimistic about the acquisition pipeline and believe we are on pace to achieve our $75 million to $125 million acquisition investment target for 2026. So now let's move on to capital distributions, primarily to our shareholders. We returned $190 million of capital to shareholders in the quarter through $143 million of share repurchases and $47 million of dividends. We repurchased just under 2 million shares during the quarter at an average price of about $80 per share, bringing the number of shares outstanding at our company to just over 130 million shares at the end of March. So shifting gears now, let's talk about corporate G&A, which spend of about $44 million in the quarter was down $1 million over the prior year but higher than our quarterly guidance range. This is primarily a result of higher accruals related to our long-term incentive compensation plans, which, by the way, was driven by outperformance in total shareholder return versus our peer group. We expect that corporate G&A expense going forward will average around the $40 million to $42 million per quarter. But as a reminder, this rate could be impacted by timing of these accruals related to the short- and long-term compensation plans, just like you saw this quarter. And finally, before transitioning to our cash flow outlook, I wanted to update you on our trust fund returns. So as you saw in the release yesterday, we ended the quarter with a 0.7% decline in our combined trust fund returns. However, importantly, in the month of April, we observed a market recovery with an estimated 4% to 5% increase in our combined trust fund returns, which really gives us confidence to say bring us back in line with our full year expectation of about a 7% trust fund return for the full year. Now let's talk about our outlook as it relates to cash flow. So as we talked about in the press release, we are confirming our 2026 adjusted operating cash flow guidance range of $1.0 billion to $1.06 billion. And as I really mentioned to you in February, we anticipate full year cash taxes to be about $120 million at a normalized cash tax rate of around 15% to 16% as again, we are benefiting from an investment we made in renewable energy projects in the current year. As we look beyond 2026, we anticipate returning to a normalized cash tax rate of about 24% to 25%. That would be absent any additional tax planning strategies or any regulatory changes that we don't know about. From an effective tax rate perspective, consistent with the guidance that we've talked about before, we expect full year 2026's ETR to trend in the line with 2025 at 25% to 26%. So in closing, I'm now going to provide some commentary about our liquidity and financial position. We continue to benefit from a favorable and disciplined debt maturity profile, complemented by robust liquidity. We ended the quarter with liquidity of about $1.7 billion, consisting of approximately $260 million of cash on hand and approximately $1.45 billion available on our long-term bank credit facility. We ended the quarter with a leverage ratio of 3.68x net debt to EBITDA. This is very similar to where we ended last quarter and again, at the lower end of our long-term leverage target range of 3.5 to 4x. So in conclusion, our solid balance sheet, enhanced liquidity position, consistent and predictable cash flow stream continue to bolster our capital deployment program, giving us significant flexibility to invest opportunistically for the long-term benefit of SCI, our associates and our shareholders. So with that, operator, this really concludes my remarks and Tom's remarks. I'm going to pass it back to you, and then we'll go ahead and open the call up for questions. Operator: [Operator Instructions] We have the first question from the line of Parker Snure from Raymond James. Parker Snure: On the funeral volumes, it'd be great just to hear how volume growth progressed throughout the quarter in kind of January, February, March? And then what are you seeing in early April, early days in the second quarter? Thomas Ryan: Sure, Parker. This is Tom. Thanks for the question. What we saw was out of the gate, really all 3 months were down. I think January and February were a little steeper and March was slightly better, but still down. And what we're seeing, Parker, and it's not unlike when we study the 5 years before, what typically happens is the first quarter is the worst, the second quarter is still not great and you tend to start trending in the back half of the year and seeing that volume come back. That's what we've experienced in the previous 5 times. And I'd tell you right now in April, we're seeing the same thing. April is still down. It's not as bad as the first quarter, but we're still kind of facing a little bit of a headwind. And again, we, I think, anticipate that, that would get better throughout the quarter and really see -- maybe get to see some positive comps in the back half of the year. Parker Snure: Okay. And then in terms of the guidance range, I may have missed this. I know you said that you now expect comparable funeral volumes down 1% to 3%. But on the preneed cemetery side, I think that's going to be kind of helping to offset that. It was up 9.7% in the first quarter. But just how are you guys thinking about that throughout the course of the year? The comps do get a little bit tougher, but just how are you thinking about preneed cemetery production within the full year guidance now? Thomas Ryan: Yes. I think Parker, this time, it's always hard to tell through 3 months. We're very pleased with the first quarter. But we still -- if we talked about guidance before, remember, I think I told you to steer you towards the low to mid-single digits. I think with the first quarter in the bank, we feel pretty good about mid-single-digit growth for the year. 10% is high step in it. But we do still feel very good about our momentum. Jay has got the team really focused on KPIs in the 4 of those. One of the channels is large sales. One of them is headcount. And so what we're seeing today, and I touched upon it a little bit on the call, is that we're growing the headcount. Part of that is we're trying to retain more of our employees, and that's being successful and then hire new ones. And we believe we've got better leads. Our next KPI is our lead-to-sale ratio. And so that's really focused on the quality of leads and our ability to follow those up. And then the third bucket before large sales is seminars. We found that seminars are a way that we can educate the consumer, get in front of them. And so Jay really pushed the initiative to say, let's expand the number of seminars we're doing, and we're seeing great success with that. And those are the types of things where you're out in the community, you're not getting your leads to the funeral home. And that's why I think we can say we grew velocity in a quarter even though funeral volumes were down. And by the way, funeral volumes are a great lead source, but we're finding other ways to get out to the consumer and seeing real success there. So we feel great about the momentum. You're right, the comps get a little tougher as we go along the year, but still very confident that we can get to that mid-single-digit growth for the year. Parker Snure: Okay. Yes. No, that's great. And then if I can just squeeze in one last one, kind of more of a math question on EPS seasonality. So if I look at the first quarter, $0.97. And then if I just kind of look at the last couple of years, 2Q is down somewhere in the range of $0.08 to $0.10. So that would imply something like $0.88 in the second quarter. That gets you to $1.85 for the first half. And if I look at the last 3 years, the first half seasonality is somewhere around 50%, maybe just below that. So that would kind of imply something in the high $3 of EPS, maybe $3.70 to $3.90. So I guess the question is like what is different this year in terms of like the second half ramp than a normal year that kind of gives you confidence in getting to the guidance range? Thomas Ryan: Yes. I think the real difference is, of course, just this down volume. And so I'd say if you can get that volume back, you're going to shift quite a bit of profitability to the back half of the year. So in your instance, it would probably assume where you get into those low 3s that you keep the volume at down 6% for the year. We believe because history tells us, and we believe, again, that, that's going to trend back the other way. So you're just going to push some of that funeral profitability that was in the first half of the year to the back half of the year. And that's how we're looking at it. We're modeling a couple of different scenarios like we said, it's hard to be precise, but we think 1% to 3% is a fair estimate at this point in time. And obviously, at the end of the second quarter, we'll have better data to make that a little more finite for you. Operator: We have the next question from the line of Tomo Sano from JPMorgan. Tomohiko Sano: So regarding funeral volumes, I believe the main reasons for the decline in the first quarter was tough year-over-year comps due to last year's strong flu season. Was this trend seen across the entire industries? And do you believe it had any impact on SCI's market share? Thomas Ryan: Yes, Tomo, we do not think it's market share. We don't have a lot of public competitors, but we do talk to a lot of our friends in the private world, and we've got suppliers in different places. And so -- and then you add that with -- I've mentioned CDC data, we've got January and February, and they're kind of right on where we see -- some of our other competitors actually have worse comps. Some of our suppliers have worse comps. So we feel, number one, that it's not a market share issue, and therefore, we believe it will bounce back. And the other checks that -- my sanity checks that I use, Tomo, is typically, our SCI Direct business, I can't remember when we had down volumes in SCI Direct. It's always a leader, and we may be a drag in the core. The other thing is pre-need going at-need is typically a lot better than the walk-in business, what we call the pure at-need. And in both those checks, for the first time in a long time, SCI Direct has down volumes in low single digits, but down volumes. And again, that just tells me that this is real, this is a death rate thing. Hard to predict all the reasons why. But it is a tough comparison. We did have a bigger flu season last year. And history tells us it's going to work back. And I tried to point out on the call that if you just give us flat volume, this would have been a 17% earnings per share growth quarter. That's how good we performed in other metrics. Unfortunately, we didn't get the volume. So it wasn't 17%. But we're optimistic that we're ready for that. We're working hard, doing things to have better advantages in competing on the funeral side, competing on the sales side. So anyway, hopefully, that answers your question. Tomohiko Sano: Yes, it's very helpful. And just a follow-up on the -- in the face of declining volumes, what specific actions or initiatives were implemented at the field level to address these challenges in terms of the cost to control, the labor retentions and managing input costs, please? Thomas Ryan: Yes. So a lot of them are just in place. We -- I think I've spoken before that the field has the ability when volumes are down to manage labor costs. How many people we're bringing in, part-time help versus full-time help. And so they're really good at leveraging that model without us having to say anything. So a lot of that is built into the DNA, built into the systems that we utilize. And so they're very good at leveraging those costs, and we really don't have to say a thing. So I feel good about the team's ability to pivot. And when you get that volume back, it's going to be -- the incremental margins on these things are huge. And so I look out at the rest of the year and say when that comes, we're going to have some nice comps to go back against the prior year quarter. So that's predominantly it. Clearly, we'll talk about you can manage travel costs, you can do different things, but we're really focused on the long term in making sure that we've got high-quality service that we're taking care of our customers and taking care of our employees and the volumes have come. So that's our position. Operator: We have the next from the line of Scott Schneeberger from Oppenheimer. Scott Schneeberger: I have 2 preneed questions, one cemetery, one funeral. I'll start with cemetery. You guys outlined a bunch of initiatives, Tom, you did about what you're doing headcount and seminars, and it sounds like a lot of good progress on that front. So question -- a 2-part question. What's the sustainability of it? And then historically, you guys have provided what large sale contribution is and maybe what non-large sale contribution is in the quarter. Can you share a little bit about that in the first quarter and how you see that shaping up over the balance of the year as well? Thomas Ryan: Sure. So Scott, the -- if you start with the cemetery, I think I mentioned, we had $32 million of production growth. $20 million of which was year-over-year improvement in the large sales and again, defined as $100,000 sales or better. And then $12 million of it came from what we call the core business. And the preponderance of that was in velocity. So we didn't have -- I think our average revenue per contract was slightly up, but most of it came from velocity. So that's kind of the breakdown. I think if you're talking about large sales, I think we ended in like the low $40 million for the quarter, and that's a solid quarter for us, particularly with the new -- we used to use $80,000 as our limit, now it's $100,000 -- so that was a big win. But I think the bigger win, like I've said before, the large sales are going to come when they come. It's hard to -- sometimes they're going to push into a different quarter, sometimes not. But what I'm really pleased about is I think we've now had 4 or 5 quarters in a row where we've seen contract velocity increase. And I again put that back to what I mentioned before is Jay and the team focusing on the key metrics that are going to drive those contracts. And seminars is a key thing, headcount is a key thing and really pushing the lead sources outside of the funeral home to be able to grow even when you have challenging volume environment. The other thing I'll mention, and we talked about it earlier since you asked, the cremation cemetery strategy. I think we talked to you guys a while back that it's our belief based upon some studies and surveys that we did with consumers that there's a real lack of understanding of what we have to offer to the cremation consumer on the cemetery side. So we were good at the funeral side, but we weren't getting the point across, at least consistently. So we worked really hard, and we actually piloted 10 markets in the first quarter. And I would tell you that it was very successful. And again, it's only 10 markets, so I don't want to get overly excited, but it's really focusing on communicating with the consumer through advertising, through in-lobby presentations, different types of media and presentation materials. And what we're seeing was a real difference maker in those 10 markets versus what we saw in the other markets. So that's just on its beginning, and we're intending to roll out, I think, another 80 or so markets in July. So really, really happy about that, that we feel like that's a market that we haven't addressed as aggressively as we should have been, and we're on it now. So a lot of good momentum on the cemetery sales side and feel good about directionally where we're headed. Scott Schneeberger: Great. Appreciate that color. The second question, the funeral -- is funeral at preneed -- excuse me, funeral preneed. And just curious, I mean, this is not a 1-quarter dynamic. This has been ongoing, but you're delivering very strong preneed funeral growth in an environment where volumes in at-need funeral are challenged. So maybe there's a bit of overlap in what this answer is going to be, but how have you been doing that? Can you just speak to what's the strength behind the preneed funeral? Thomas Ryan: Yes. I think a couple of things. First and foremost, you're exactly right. I'm going to say the same thing, particularly the seminars. The seminars are put on in markets. They probably are not at one of our locations. They're probably at a restaurant, somewhere, a hotel. So the draw that you're getting for the attendees has nothing to do with your funeral home traffic. So over time, I think we're pushing more and more of these leads outside of our locations. And therefore, we're less sensitive to volumes as they walk through the door. So I think our focus on that particularly probably has driven a lot of it. The other thing that I wouldn't, not point out to you is we had a lot of change in our preneed funeral, right? We had a new partner in our insurance core business, and we had SCI Direct last year that was transitioning from a trust product to an insurance product. So just think of the forms, the explanation, the presentations. There's a lot of detail that goes into that, and it was a bit of a distraction over, call it, a 12- to 18-month period. And I think what I'm pointing out now is, hey, that's behind us. I mean, obviously, we'll get better and better at utilizing the new contracts, the new tools, the new payment plans. But we're really starting to see that stride take. And then again, I would point back to the lead sources are more outside the funeral home, and we're able to generate better leads, have better closing rates. And so some of the same things we talk about on the cemetery side. Operator: We have the next question from the line of Tobey Sommer from Truist. Tyler Barishaw: This is Tyler Barishaw on for Tobey. Just wanted to double-click on the cremation in the cemetery point you just made. When you think about maybe run rate when this is at full implementation, do you have a sense for how much this could contribute or margin opportunity maybe? Thomas Ryan: Yes. I think where it's going to show up is in the revenue growth and pretty high-margin products. We really don't -- and I hesitate to do that, Tyler, because like I said, 10 markets does not make an initiative. So feel free to ask me as we continue how successful it is. But I would just tell you, we're very excited because in each of these 10 markets, it exceeded the average of everybody else in some markets by quite a bit. And I think it's just -- it's an obvious -- we woke up one day and said, we're not -- we don't have a way to get in front of the consumer in a consistent way to educate them about it. And again, when we did this consumer survey research, it really was eye-opening to us, and we learned a lot about, hey, maybe we're focusing too much on funeral and burial, and we've got to have the tools and the resources to educate these consumers. So I don't have a number for you yet. I think it will just be a nice complementary growth to all the other things that we've got going, as I mentioned before, with lead sources and growing the sales force numbers. So a lot of good momentum. Tyler Barishaw: Makes sense. And then just thinking about the funeral segment, how should we think about margins for the year on a gross margin basis despite the funeral volume contraction? Thomas Ryan: Yes. I mean if you obviously, out of the gate, I think we talked before, if we got to flat funeral volume, we think we could grow margins, call it, 40 to 60 basis points going forward. And we talked about the sensitivity, right? So if you back into 80% gross margins on funerals lost, you can back into the number. So at this point, we'd be forecasting that margins are going to be slightly down for the year versus what we experienced in the prior year. Having said that, once again, comps are a weird thing. I like our comp first quarter of 2027, right? I mean I think we might have a pretty good one. So it is what it is. But I think for this year, you'd anticipate that our gross margin percentage will be slightly down as compared to the prior year number. And then go back to that, can we grow it at 40 to 60 bps? I think so. Give us flat to slightly up volume, and we'll do that. And if you give us a little bit more volume, it will be a lot more. Operator: We have the next question from the line of Joanna Gajuk from Bank of America. Joanna Gajuk: So I guess maybe just a follow-up on the cemetery because clearly, that's where the outperformance was. And I'm sorry if I missed it. So how are you kind of thinking about the full year now versus your prior expectations for growing low single to mid-single digits? And I guess, can you also break it up for us, if you can, expectations for the large versus core sales performance for the year? Thomas Ryan: Sure, Joanna. So I think on the cemetery, you're right, we guided to low to mid-single digit. I'd say based on the performance we saw in the first quarter, we're confident in saying it's mid-single digit. And that would be somewhere between 4% and call it, 7%, depending on how the year shakes out. That's kind of where our head is. Then if you go to -- when you think about the breakout, we obviously had quite a good comparison in the first quarter. It was an easier comp. If you go back to last year, we didn't have a great large sale quarter. So we beat it by quite a bit. But I think both -- we expect both channels to end up being nice growth trajectories. Obviously, we've got quite a great growth trajectory in the first quarter, and that's going to come down over time as we got tougher comps. But we still feel like we can grow both channels in the remaining 9 months on a year-over-year basis. And again, large sales are harder to predict because they come when they come. And sometimes they slip from June to July or they slip from September to October, and that's okay because eventually, we'll get them. So we feel good about both channels. And I think overall expected growth rate is in the mid-single digits. Operator: Does that answer your question, Joanna? Joanna Gajuk: So yes, I have a follow-up. Actually, I was talking about -- I was muted -- to things. So yes, I was asking, so with this growth now for the cemetery just more like mid-single digits, how should we think about your assumptions around the gross margin in that segment? It sounds like the funeral segment while with the volumes being down, the gross margin will be lower. So should we expect better, I guess, margin here given the kind of the elevated growth? Thomas Ryan: Yes. I mean if we get the growth rates we think, you probably should see gross margins grow anywhere from 60 to, call it, 100, 120 basis points for the year. If we can get 4% revenue growth on the cemetery, we can grow at about, call it, 50, 60 basis points. So if we end up in the 5 or 6, you see a little better. So we got 9 months to go. We'll see. But overall, we'd expect cemetery margins to go up for the year. And like I said, funeral to be slightly down. Joanna Gajuk: And if I may, last question on the capital deployment and specifically the acquisitions. So are you seeing sort of more interest, less interest, any competitive dynamics around multiples and such? And it sounds like you mentioned before that the volume decline, the funeral volume decline of Q1 was kind of [ real behavior ]. But I think if I read it right, you said something along the lines that some of your competitors are actually doing worse. So is it changing sort of your outlook in terms of consolidation opportunities? Eric Tanzberger: Joanna, this is Eric. I think we'll continue to be very excited about the pipeline. We have a lot in the pipeline right now. We closed about $25 million so far in the first quarter, a couple more in April as well. And it continues to build. It takes time to make sure that we have a win-win situation with the third, fourth, fifth generation families, but we continue to be excited about it, and I think it will be a good story the rest of the year. In terms of funeral volumes, we just have -- we have the CDC data like you do. We obviously have heard our vendors and other vendors and such. And it sounds like that maybe we're a little bit better than what some of the other figures that are out there, including the CDC, probably a little bit better in January and February, which is out there in the public realm. So that's all we're saying. It's clear to us that this is not a SCI market share issue during the first quarter. We've definitely seen it before. But ultimately, these volumes, I don't think short term like this is going to affect the M&A program to come full circle back to the original part of your question. It's a long-term process with long-term relationships. We'll continue to work those long-term relationships, and we feel pretty good about what's ahead of us in terms of the pipeline. Joanna Gajuk: Okay. Great. And if I may squeeze in a last one and sorry, going back to your outlook for the year. So just to make sure, right, you kind of talk about the funeral volumes worse, and I guess that comes with lower margins, but the cemetery better and then potentially, if this gets closer to like 6%, 7%, the gross profit margin would be even better. But your guidance range for your EPS is pretty wide. So is there something to be said about orienting us towards one end or the other of that range? Thomas Ryan: No, Joanna, I think, obviously, with funeral volumes the way they are, we didn't perform at a level we originally wanted to do. So it all kind of gets back to how much comes back in the back half of the year. And so we still feel comfortable about it. I think what you're saying is it is a large range. Right now, with the funeral volumes the way they are, you're probably more likely to be in the lower half of the range versus the higher, but we're not there yet because, again, if these volumes come back, if we continue the trends we're seeing in cemetery, we could push in the upper half of this, too. So that's why we left it where it is. We honestly have a couple of different -- a variety of models and some of which if we get some funeral volume back, we can do really well this year. If you don't, clearly, you're going to be on the lower end of that range. Joanna Gajuk: All right. So you're still standing by the -- by the range, right? Thomas Ryan: Standing by. Operator: We have the next question from the line of A.J. Rice from UBS. Albert Rice: Just a couple of things to tie it all up. Just you mentioned a couple -- been asked a couple of times about the large sales. I know you've got a lot of initiatives in the cemetery side, sales and marketing initiatives. Do you think that there are any of those that are particularly directed toward the large sales so that this level of performance might be a more sustainable thing? Or is it still going to be more quarter-to-quarter volatility depending on what comes in, in any given quarter? Thomas Ryan: Yes. I think, A.J., a couple of things to answer that. And overall, let me just say it's a positive. I think the large sale concept, we now have in a lot more areas of the country. So we really -- obviously, Rose Hills and some of the California parks in Vancouver, we've had large sales for a long time. Now we continue to, I think, build even more spectacular properties that are higher level. I think what we find is as we build bigger and better things, you're surprised by the people that will buy them. So the average ticket will go up. And that's one way to drive your sales and then the other is velocity. And one of the things we've done, particularly in the Asian communities and the Chinese and Vietnamese in particular, we take Qingming as an opportunity to present new inventory. I think we did Qingming in 3 markets, if you go back 10 years. And now, Jay, we probably do it in 30 markets across the country. So I do think there's a likelihood to have more consistency in these numbers. And so the only thing I caution, A.J., I think it's going to continue to grow. It's going to get better is you could have a quarter where it's down $10 million this quarter and then you're up $15 million next quarter. So I never get that excited about large sales. It's a little bit like Eric is talking about visibility on acquisitions. We know the pipeline. We know the discussions that are happening. When someone is going to spend $5 million, $10 million, Jay knows about it, and he's telling me about it. So we're talking about it. And these aren't sales that happen in a day. They've got attorneys involved. They've got -- I want to design a particular building. So we're seeing the customers that are out there interested in our creative inventory, interested in personalizing it. And so that's why we feel highly confident. We've got more inventory on the ground to sell, and we're getting better and better at it, and we're doing it in more and more places. It's not just in California and Vancouver anymore. We're getting those sales in Missouri and obviously, Florida, North Carolina, Tennessee, Nevada, obviously, Texas, too. So just seeing it in more locations, more pockets and excited about the future and the things that we can continue to do in stretching the imagination. And I'd love to have a $20 million private sale one day, right? I mean it sounds incredible, but it will happen. Somebody will get it. Albert Rice: Yes. Yes. And then I appreciate Eric's comments on the trust fund earnings, returns and that dipped in the first quarter, but has rebounded early in the second. Is there anything -- I know that, that volatility in the trust fund returns tends to take a lot longer to show up in the results. Is there anything you're trying to signal with respect to the impact it may have had on the first quarter or positioning us for the second quarter to think about that? Or are you just making note of the fact that it's been volatile? Eric Tanzberger: I mean more of the latter. It's a lot like predicting volume with what's going on in the world, A.J., right? I mean I think trust fund income will be somewhere between $300 million and $350 million, call it, $325 million at the midpoint. That's a pretty wide range for me to say 3 months into it, but that's the volatility that we all know that we have out there in the markets. But we're marking to market every month. So we're pushing stuff through every month. But the contracts have to mature out of that backlog that's mark-to-market is why it becomes a muted effect over a longer period of time. Albert Rice: Right. No, that makes sense. And then just an interesting comment you had, and I'm just wondering how much of an impact that's having? And is this just sort of an unusual thing in the quarter or not? You said that you had above inflation fixed cemetery maintenance cost. Sort of what's going on there? Was that just sort of a 1 quarter phenomenon? Or is there some level of incremental spend you're having to do on cemetery maintenance that's going to persist? Thomas Ryan: Well, I think we -- this is the category that's hardest. And again, it's very labor-intensive. You're talking about water, you're talking about fertilizers, you're talking about equipment. It's a big, big expense. Some of it's outsourced, some of it's in-sourced. And it just tends to be the one that's hardest to control. And also, I think it's a reflection of how does your park look. And for us, because we've got great cemetery sales, we've got all this high-end inventory, we're spending money to make it special. And so I'm not surprised by it. It's just sometimes we'll manage to say cemetery maintenance could be 3% to 4%. Well, if it comes in at 5%, it's a little bit over, right? So that's the kind of thing, A.J. I wouldn't expect it to trend down or anything like that. But I think we're getting better at controllable buckets of that cost to where it will look more like inflation that's in the marketplace versus slightly ahead. So it's -- we're getting there. Operator: We have the next question from the line of Parker Snure from Raymond James. Parker Snure: Yes. Just one more follow-up. Can you just remind us on the timing of Qingming and when that selling season kind of ends up flowing through your numbers? From my understanding, it's kind of late first quarter, early second quarter, but just how much was Qingming attributable to some of the preneed cemetery sales in the first quarter? And just kind of how do you expect that overall season to kind of play out? Eric Tanzberger: It's usually late March and early April, Parker. So it actually crosses over the quarter. And it depends on -- each market has events for the community, community-facing events, and it kind of depends on when they plan it, to be honest with you, and where the end of the month lands. I don't think this was any out of the ordinary of a prior year or anything like that. I don't think it was a huge larger piece or a much smaller piece in the first quarter of '26 than the first quarter of '25. So I think it's just kind of right on pace. Tom's comment was more about that's a great opportunity to lay out your new larger sales though and your plans for that, which we utilize a lot across some of our larger cemeteries. Operator: This concludes our question-and-answer session. I would now like to turn the conference over back to the SCI management for closing remarks. Thomas Ryan: Thank you, everybody, for the time today. We appreciate you. We look forward to talking to you with our second quarter results in July. Have a great week. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Hyatt First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to Adam Rohman, Senior Vice President of Investor Relations and Global FP&A. Thank you. Please go ahead. Adam Rohman: Thank you, and welcome to Hyatt's First Quarter 2026 Earnings Conference Call. Joining me on today's call are Mark Hoplamazian, Hyatt's Chairman, President and Chief Executive Officer; and Joan Bottarini, Hyatt's Chief Financial Officer. Before we start, I would like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K quarterly reports on Form 10-Q and other SEC filings. These risks could cause our actual results to be materially different from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. In addition, you can find a reconciliation of non-GAAP financial measures referred to in today's remarks under the Financial section of our Investor Relations website and in this morning's earnings release. An archive of this call will be available on our website for 90 days. Additionally, we posted an investor presentation on our Investor Relations website this morning containing supplemental information. Please note that unless otherwise stated, references to occupancy, average daily rate and RevPAR reflect comparable system-wide hotels on a constant currency basis and closed hotels in Jamaica are excluded from comparable metrics in 2026. Percentage changes disclosed during the call are on a year-over-year basis unless otherwise noted. With that, I will now turn the call over to Mark. Mark Hoplamazian: Thank you, Adam, and good morning, everyone. We appreciate you joining us today. Before I begin, I want to acknowledge recent events in the Middle East. We are closely monitoring the evolving situation and remain in regular contact with our hotel teams who've done a remarkable job of managing operations during trying times. And I'm extremely grateful for the professionalism and care with which my colleagues have conducted themselves throughout. The quarter also saw isolated security concerns in Mexico and Hyatt colleagues, guests and our hotels were thankfully unaffected. The safety of our guests and colleagues remains our top priority, and I'm proud of the care and resilience that our teams continue to demonstrate. At times like these, our purpose to care for people so they can be their best, continues to guide our actions. Turning to operating results. This morning, we reported first quarter system-wide RevPAR growth of 5.4% and performance exceeded our expectations, driven by continued strength in our luxury brands globally. RevPAR growth in the United States was ahead of expectations, and we saw strong growth across most international markets. Leisure demand from premium customers was exceptionally strong in the quarter, increasing approximately 7% compared to last year, with the strongest demand realized by our luxury brands. Business and group travel was also solid with business transient RevPAR up 2.4% in the first quarter and group RevPAR up nearly 4% compared to last year. Our core fee business remains durable and our diverse global portfolio has proven resilient in the face of demand fluctuations, including certain macro and geopolitical disruptions. Our differentiated brands continue to deliver results over the long term and reinforce our position as a preferred brand portfolio for guests. We continue to see this preference reflected in our World of Hyatt loyalty program. We ended the first quarter with approximately 66 million members, an increase of 18% compared to the first quarter of last year. And World of Hyatt members accounted for nearly half of total occupied rooms globally during the quarter. World of Hyatt's success goes beyond scale. We are focused on generating higher value demand. When our members stay with us, they spend nearly twice as much compared to a nonmember, highlighting the engagement from our premium customer base. The value proposition of our loyalty program continues to resonate with our members. Enhancing Hyatt's attractiveness to owners and developers. Development activity during the quarter was very strong, we ended the first quarter with a record development pipeline of approximately 151,000 rooms, up more than 9% compared to the first quarter last year. We continue to see strong interest in our newest brands with owners recognizing the value of our brands and the strength of our commercial engine. In the first quarter, we signed a number of new franchise agreements across Hyatt Studios Height Select and unscripted by Hyatt brands in the United States and have many more in discussion. In total, the pipeline for new hotels in our Essentials Brand Group increased nearly 25% compared to the first quarter of 2025. Outside the United States, our development engine is strong. with significant signings activity during the quarter. We're seeing broad interest across our brand portfolios throughout the world, reinforcing our confidence in our ability to drive durable, capital-efficient fee growth over the long term. We achieved net rooms growth of 5% for the first quarter of 2026, in line with our expectations as we lapped a quarter of outsized openings last year. We had several notable openings in our lifestyle brands, including the Anda Lisbon, which strengthens our lifestyle brand presence in Europe, Diana's Shanghai ITC a luxurious and modern addition to our already strong brand presence in Greater China and the Livingston, our first hotel in Brooklyn, New York. These openings reflect our continued focus on expanding our portfolio in high demand markets with differentiated offerings. With many exciting additions to our lifestyle portfolio slated to open in 2026 and further strengthening our position as a leader in lifestyle offerings at scale. We also continue to see strong momentum in our Essentials brands, entering 7 new markets during the quarter. This included the expansion of our upper mid-scale portfolio with several UrCove by Hyatt openings as well as the third Height Studios property in the U.S. These brands are an important driver of our growth strategy, allowing us to expand our brand footprint in markets where we have significant white space while also offering attractive economic returns to owners. We expect our net range growth to accelerate over the course of the year as we benefit from meaningful opportunities to convert hotels into our system, along with openings from our pipeline. Now shifting to an update on transactions. We continue to make progress on the plan to sell Hyatt Grand Central New York and could be in a position to close that transaction in the fourth quarter of 2026, if various closing conditions are satisfied. We will continue to provide updates on this transaction as we reach key milestones. During the quarter, we elected to terminate the purchase of sale agreement for the sale of the Anda London Liverpool Street. And separately, we are no longer under contract for two other properties that were previously signed, our decisions not to move forward were specific to the individual transactions and reflect our continued discipline around pricing and terms. To be clear, our broader plans for additional asset sales and our confidence in the transactions market remain unchanged. We remain active in the market and are in discussions regarding certain assets to further realize value from our owned portfolio. Our approach remains consistent with our previous track record, ensuring we realize attractive values when we sell hotels and ensuring we execute transactions in a disciplined manner that retains the sold properties within our portfolio and increases shareholder value. As we look forward into 2026 and beyond, I'm confident about our future. We have significant competitive advantages that drove the strength in our core business in the first quarter. We are focused on elevating Hyatt so we can respond faster, innovate more and perform at a higher level. in an increasingly dynamic environment. At its core, elevating Hyatt and maximizing our potential comes down to three integrated areas working together, our brands, our talent and our technology. Increasing brand equity is a key component of how we drive value for our stakeholders. Our sharpened brand focus strengthens differentiation, enhances the guest experience and drive stronger performance across our portfolio. This makes it that much more attractive to owners and developers supporting our expectations for long-term growth and growing free cash flow. Brands create the most value when they are executed consistently, and that comes down to our people. We are focused on developing leaders who could execute at a high level while continuing to innovate as enabled by our culture. We've built an organization grounded in quality, responsiveness, performance and continuous improvement. Strong brands and great teams performed best when enabled by the right data and the right technology that we are leveraging to uncover deeper insights. These insights will allow us to better engage with our guests, support our colleagues and enable faster, more informed decision-making. We navigated a very dynamic quarter with several events requiring speed and responsiveness that our colleagues handled exceptionally well. I'm proud of our colleagues around the world who live our purpose every day, which I truly believe allowed us to deliver such strong quarterly results. I'll now turn the call over to Joan to provide more details on the quarter. Joan, over to you. Joan Bottarini: Thank you, Mark, and good morning, everyone. In the first quarter, RevPAR exceeded our expectations, increasing 5.4% compared to last year, driven by strong demand across our global portfolio and continued strength of the high-end traveler. In the United States, RevPAR increased 3.3% compared to last year. Performance was led by our full-service hotels, which benefited from strong leisure demand, including at our resorts, which had a particularly strong March. Group RevPAR was up 1.2% in the face of more difficult comparisons in Washington, D.C. due to the January 2025 presidential inauguration. We also saw improvements in select service RevPAR, which increased 1.8%, led by business transient demand. Outside the United States, RevPAR growth was even stronger, increasing over 8% and reflecting robust international travel demand. Greater China grew RevPAR over 12% in the quarter, supported by improved domestic leisure demand, particularly during the Lunar New Year holiday in February. Along with improved international inbound travel, including from the United States. Asia Pacific, excluding Greater China RevPAR increased over 11%, driven by strong inbound travel and demand across key markets. Europe continued to perform well, with RevPAR growth of 7.5%, supported by strong leisure travel and solid group demand benefiting from the Olympics in Milan. RevPAR in the Middle East and Africa declined by approximately 4% compared to last year due to the conflict in the Middle East. Net package RevPAR in our all-inclusive portfolio increased 7.4% and compared to last year despite the security concerns in Mexico beginning in late February. Overall, our first quarter results reflect strong demand for premium leisure travel globally and a healthy commercial travel backdrop. Turning to our financial results. Our core fee business continued to perform well in the first quarter, supported by our top line performance, with tell level profitability, increasing scale and the quality of our portfolio. Gross fees increased approximately 9% to $333 million, driven by strong performance across our managed portfolio, fees from newly opened hotels and the newly structured management agreements from the Playa portfolio. We also grew incentive fees approximately 14%, reflecting solid hotel level profitability, particularly in international markets. In the first quarter, owned and leased segment adjusted EBITDA declined by approximately $2 million adjusted for the impact of asset sales. Distribution segment adjusted EBITDA declined versus the prior year due to temporary factors, including the closure of hotels in Jamaica because of Hurricane Melissa and lower demand in Mexico due to security concerns. The distribution segment was also impacted by lower demand for 4-star properties a dynamic we have shared that will take time to return to previous levels as travel spend improves for this consumer segment. Overall, adjusted EBITDA for the quarter reflects the strength of our core fee business. As of March 31, we had total liquidity of approximately $2.2 billion, including $1.5 billion of capacity on our revolving credit facility. In the first quarter, we repurchased $135 million of Class A common stock, returning approximately $149 million to shareholders through share repurchases and dividends. We ended the quarter with $543 million remaining under our share repurchase authorization. We remain committed to our investment-grade profile and our balance sheet is strong. Looking ahead to the rest of 2026. We are operating in a dynamic environment that varies from region to region. RevPAR in the Middle East is expected to be down significantly compared to last year, impacting fees by approximately $10 million for the balance of the year. Pace for our all-inclusive resorts in the Americas is up in the low single digits in the second quarter due to lower demand in Mexico. While we expect positive net package RevPAR growth in the Americas, we do not expect to see the same level of growth for the remainder of the year compared to the first quarter due to the disruptions from the security concerns in February. Overall, these disruptions are expected to have a modest impact to results. We are increasingly positive about the outlook for the United States. Forward-booking trends in the United States are strong for the balance of 2026 with group pace for full service hotels up in the mid-single digits for the remainder of the year. We continue to hear positive feedback from our group and corporate customers about their intent to travel this year, and we expect the strong leisure trends to continue. We are also seeing improved select service trends as we lap easier comparisons starting in the second quarter. Outside of the United States, we also expect performance in Greater China and the rest of Asia to be very strong in the balance of 2026. We believe the improved performance in the United States supports increasing our full year system-wide RevPAR growth outlook to between 2% to 4%. RevPAR in the United States could grow between 2% and 3% for the full year, reflecting the improved trends that I just reviewed. We expect moderately higher growth in international markets compared to the United States overall, but growth will be lower compared to our expectations last quarter, primarily due to the impact of the conflict in the Middle East. We expect net rooms growth of 6% to 7% for the full year with continued momentum behind our new brands, driving another year of strong organic growth. We are raising our gross fees outlook for the full year and expect fees to grow between 9% to 11% in the range of $1.305 billion to $1.335 billion. We are maintaining our full year adjusted EBITDA outlook range and we expect adjusted EBITDA to grow at a strong rate of 13% to 18% in the range of $1.155 billion to $1.205 billion. This outlook reflects stronger performance in our core fee business, offset by revised expectations for the Distribution segment, which we believe will decline by approximately $25 million for the full year compared to 2025. including $15 million in the second quarter from the impact of the security concerns in Mexico. We are maintaining our adjusted free cash flow outlook for the full year in the range of $580 million to $630 million an increase of between 20% to 30%. This reflects the conversion of adjusted EBITDA to adjusted free cash flow of at least 50% for the full year. Finally, we expect to return between $325 million and $375 million of capital to shareholders for the full year through share repurchases and dividends. For the second quarter of 2026, we expect global RevPAR growth of around 3%, which reflects solid growth in the United States, including the start of the FIFA World Cup in June and continued strength in international markets, except for the Middle East. Gross fees could grow in the mid-single-digit range in the second quarter compared to last year. We expect adjusted EBITDA for the second quarter to be up in the mid-single digits compared to what we reported in the second quarter of 2025 after removing $17 million of pro rata JV EBITDA consistent with our updated definition and $14 million of owned and leased adjusted EBITDA for the period of ownership of supply portfolio. Please refer to Schedule A 9 in this morning's earnings release for the 2025 adjusted EBITDA baseline by quarter which excludes pro rata share of JV EBITDA and asset sales that were completed last year. In closing, our first quarter results reflect the strength of our core fee-driven earnings, our results demonstrate the performance of our brands and the resilience of our premium customer base across brands and geographies in the face of a dynamic operating environment. As we look ahead, we remain confident in our ability to deliver continued growth, supported by our strong pipeline, differentiated brand portfolio and disciplined approach to capital allocation. We believe we are well positioned to navigate a dynamic environment while continuing to deliver meaningful long-term value for our shareholders. This concludes our prepared remarks, and we're now happy to answer your questions. Operator: [Operator Instructions]. Our first question comes from Lizzie Dove with Goldman Sachs. Elizabeth Dove: So we've seen, obviously, this really meaningful positive shift in the U.S. demand dynamic. There's been some talk of the C-shaped economy, but it also seems like your higher-end customer is still doing very, very well. And so, maybe you could just unpack a little more about what you're seeing real time, what's embedded in that 2% to 3% you raised it to in the U.S. in terms of business in leisure and how you expect that? Joan Bottarini: Sure, Lizzie. Yes, we had a result in the first quarter that exceeded our expectations and leisure transient in the quarter in the U.S. alone was up 4%, and group RevPAR being up 1.2 with the comparison we had to the inauguration last year was a strong result and even probably more, I guess, in excess of our expectations was select service RevPAR was strong, and that was driven by business transient improving. So all of those trends that we saw that were in excess of our expectations. We're looking at the second quarter and the rest of the year. and factoring that into our outlook. I mentioned that we expect the U.S. in the second quarter to be between 2% to 3% growth. And that's going to be helped in part to by the group business that we're seeing from FIFA in June, and that will carry over into July a bit too. So for the full year, we believe we have a strong and reasonable expectation given what we're seeing, I mentioned group up in the mid-single digits for the remainder of the year in the U.S. and business transient and leisure transient, the booking windows are still modest, but we feel really confident about our outlook now for the U.S. Mark Hoplamazian: I'll just add a couple of comments, Lizzie, thanks for the question. First, on the group front, we have sequentially over the last approximately 9 months grown group share. And our RevPAR realization has steadily increased over that period of time. Part of that has to do with a new approach into -- in terms of how we go to market. And that reflects the quality and the positioning of the groups that we are actually attracting differentially. Secondly, whether you look at STR chain scales or you look at the luxury brand group that we've defined for ourselves, they were the strongest RevPAR growth sectors -- segments in our portfolio. If you look at our brand group, for example, we were up in the double digits, RevPAR growth in the first quarter. And we also had the most expansive index growth, so market share growth, almost 5 points of increase in share in the first quarter. So we really -- if there's any sign of weakness in terms of the high-end customer, we have not seen it. Of course, I think we are playing the game differently and also really focused on the clients that we serve and how we go to market. And I think our relative performance is a reflection of that. Operator: Your next question comes from the line of Stephen Grambling with Morgan Stanley. Stephen Grambling: I wanted to turn to the distribution segment a little bit. I recognize that you had some kind of one-off things that are impacting it. But how should investors think about the drivers of this segment longer term? And separately, do you still see synergies from this business within the overall portfolio, if you will? Or is this more kind of a standalone at this point? Mark Hoplamazian: Thank you, Stephen. First of all, the way we think about the business is, it has been -- it's been hit by a couple of isolated issues that have had an obvious impact. And you heard what we -- what our outlook is for the year. There's some FX in that as well, but a lot of it is the change in volumes that relate to Jamaica being largely shut down in relation to the core bookings that we had last year into Jamaica before Hurricane Melissa. And then secondly, the Mexico security concerns. I would say that we view both of those as isolated. The second thing is we see actually more -- if I had to say, do we see more opportunities than risks. The answer is absolutely yes. and they really derived from 2 things. One is, in the same way that we have revamped how we go to market in certain areas within our core business. We have done the same in relation to ALG vacations. And we have an AI strategy road map for new capabilities that we're building that will make us more effective and more efficient and I think drive more volume. And the platform itself is highly enabled to be able to serve others on a white label basis. And we see growing opportunities in that domain because there are a lot of larger -- there are companies with large customer bases that are looking to offer more and different types of services to their customer base. And package travel is one key area. So we see really significant opportunity. Having said all of that, the principal reason we own this business is because of its interface and integration with IC, the height inclusive collection because it's still a significant revenue generator for that business, and it strategically serves a purpose of being able to have greater visibility into things like Lyft. We buy, I don't know, I would hazard a guess, it's in excess of $1 billion, probably more like $1.5 billion of airline seats every year as part of the packages. So we have extremely close relationships with all the carriers as well as charter operators. That visibility gives us a lot to go on in terms of how we forecast and what the outlook looks like for each market. So I would say there is a strategic rationale. It does fit with the inclusive collection. If that were not true, I'm not sure that we would own this business, but it is true, so we own it. It happens that we are not looking at this as sort of just a cog in the wheel. We're looking at it as a real business with a real opportunity in the future. Joan Bottarini: And the only thing I would add to what Mark said -- sorry, the only thing I would add to what Mark just said is, structurally, about half of the business serves 5 star locations and half of the business serves 4 star locations. So when you think about the performance of our portfolio and the demand that we saw despite the securities concerns in Mexico, that there was redirection of a lot of that business into other locations. So that is something that has benefited our portfolio, but on the temporary side with respect to Forestar we're seeing actually after the disruption late February and into March, that pick up, stabilize and grow. So when we look at the second half of the year, that's where we're seeing the impact from the first year -- excuse me, from the first quarter and the second quarter to get much better and particularly into the third and fourth quarters of this year. Mark Hoplamazian: So while we're on this topic, I do want to provide a couple of pieces of data that I think will provide context first. In terms of gross fees, Mexico represents about 10% of our total gross fees. The Dominican Republic represents about 6% and Jamaica represents about 1%. And so as we talk about these markets, I think it's important for everyone to understand the relative size. Secondly, we were positive the heightened [indiscernible] had positive RevPAR growth across each of those markets -- sorry, not Jamaica. Jamaica is still wildly disrupted, so let's leave that out. But up 3% in Mexico, up 11% in the Dominican Republic, really where you saw the massive change was March. So Mexico was down 5%, but the Dominican Republic was up 16%. And that is a direct reflection of the channel shift that we actually played a big role in because we have the largest tour operator in North America. To actually cascade business that wasn't going to Mexico because of security concerns into the Dominican Republic. So that's just a hard data point for you to actually understand in terms of the strategic value that ALGV provides to the business itself. Operator: Your next question comes from the line of Michael Bellisario with Baird. Michael Bellisario: Mark, on the demand front and sort of your big picture outlook kind of taking those together. Just how are you thinking about or maybe sensitizing just the whole potential range of outcomes with all the macro uncertainties out there, just higher gasoline, higher airline ticket prices, reduced flight capacity. Just how are you thinking about that? Are you seeing anything yet in the booking pace that maybe gives you any pause? Mark Hoplamazian: Not at the moment. I think we're very sensitive to what's happening with airfares because airlines will have to adjust their affairs to accommodate fuel price increases. And of course, the biggest issue is the persistency of the current situation overnight last night, oil moved quite a lot. And -- but again, I think there's a danger in trying to make predictions off of momentary strategy -- or sorry, policy positions that the participants and the board might be taking. So we are looking at a situation in which if there is a persistence of higher oil prices and that keeps going up. I think the biggest hit in terms of demand will be at -- in -- amongst lower income households. That's true across retail as well as hospitality. It's -- that's really where a disproportionate amount of the pain will be felt. I think airfares have already gone up. And depending on what market you're looking at, they've gone up between 5% and 10%, maybe a little higher than that in certain markets. And that hasn't really affected our volumes. They've shifted as I just described, but it hasn't affected our volumes. And I think, once again, this goes back to the actual client base that we have. We're not serving primarily the market of lower household -- lower household incomes relatively speaking. It's really very concentrated in higher-income households. And also households that have financial assets, investments in the stock market and so forth. So there's a [indiscernible]. And so -- we don't see any significant demand shifts at this point. But we are paying close attention to this because at some level, ever-escalating oil prices and inflation will have an impact. Operator: Your next question comes from the line of Richard Clarke with Bernstein. Richard Clarke: Just want to follow up a little bit more on some of the Caribbean dynamics. So I think at the full year results, you would have expected the Jamaica hotels to reopen by the end of this year. I think it looks like that's going to move to early '27. So what impact does that have on this year's numbers? And just on Mexico, are you seeing demand there now normalizing? Is that what you're saying for the second half that Mexico will be back to normal levels of demand beyond the second quarter? Joan Bottarini: Richard, I think you were referring to Jamaica. And we have removed Jamaica for this year. So impact to this year is nothing greater than what we've presented in our EBITDA and fee outlook. And we provided a walk during our investor presentation -- in our investor presentation in the fourth quarter on that specifically. So that's the story with Jamaica and we'll keep you posted as far as reopening and our expectations in 2027. With respect to Mexico, we are seeing a moderating of the impact that we -- that I mentioned that we saw in late February and into March. So we feel good about what we're seeing in the last couple of weeks. So week-on-week, we're actually seeing pace getting better. And as Mark mentioned, airline capacity has not gotten larger, but airlines are actually managing this with load capacity. So there's still quite a bit of demand that's going into these markets as we look out into future quarters. So the second half of the year, we feel good about that we'll be able to pick up -- and our outlook overall is positive for the Caribbean and for our net package RevPAR in the Americas. Part of that is due to the improvement in Mexico and part of that is due to some of this redirection of travel into other markets where we have hotels. Operator: Your next question comes from the line of Shaun Kelley with Bank of America. Shaun Kelley: I just wanted to ask about some of your global expectations. Could you just give us a little bit more color on how you're thinking about Middle East and Africa trending through the balance of the year? And then just maybe some of the offsets globally as -- I don't know if Asia is seeing any redirected business is now staying more in that market and not kind of crossing over to Europe or just how you see some of those kind of global puts and takes. Joan Bottarini: So I'll start with what our outlook includes Sean. And then maybe Mark will want to add as well as far as the macro. But Middle East, right now, what's built into our outlook is a more pronounced impact in the second quarter, which is embedded in our EBITDA outlook that we -- that I shared -- so we expect demand in the second quarter to be more impacted and then to improve in the second half of the year sequentially quarter-over-quarter. So kind of by the end of the year, getting closer to maybe flat, but we'll see because it's very uncertain as far as how this will evolve over the coming quarters. But that's what's embedded within our outlook. And the one region that has been exceptionally strong is China. And I mentioned the growth in the quarter of 12%. And the region overall, excluding Greater China, is up 11%. We're seeing strong results into April on a preliminary basis. So that has also been a region that has exceeded our expectations. In China, this is -- we had the Lunar New Year holiday in the quarter, which always gives a boost, but we're also seeing group slightly up and BT about flat. So across all demand segments, China looks like a region that we can continue to rely on growth for the remainder of the year. Mark Hoplamazian: The only region I would add a little commentary to about Europe. Which was up 7.5% in the first quarter stronger than we anticipated. There are ongoing. There's more and more talk about fragility, economic fragility in Europe, especially around energy prices and the escalation of energy prices. Again, this is an example where I think there's going to be a difference between how economy budget mid-scale performs in Europe versus full service and luxury. And so we actually have a positive outlook in Europe for the remainder of the year. It seems like in 20 -- I remember thinking in 2022, the '23 would be Europe's big breakout year. It turned out to be true. I thought '24 could be good. It turned out to be great. '25, I thought couldn't beat '24, it beat it. -- so Europe has actually been, at least for our portfolio, have been very resilient. And I've learned over the last 3 years that counting your about is a mistake. So I would say we have a pretty positive outlook on Europe. Operator: Your next question comes from the line of Smedes Rose with Citi. Bennett Rose: I appreciate all the color around Mexico and the Middle East. Maybe just kind of switching gears a little bit. I was just curious as to your comments at the beginning of the call about terminating your sale of the Andaz in London and not moving forward with a couple of other asset sales. Could you maybe just -- I don't know if you can provide any more color around what sort of broke those deals that would certainly be of interest. But then also, how are you just thinking about the transaction environment overall? Is it getting more favorable relative to your last call and maybe this time a year ago? And any kind of I don't know, would you like to be able to complete additional asset sales, I guess, as we move through the balance of the year? Mark Hoplamazian: Sure. Thank you for the question, Smedes. I think with respect to Liverpool, for those of you who don't know, the hotel sits on top of rail lines that are part of network rail. That's the U.K.'s national rail system and adjacent to the liver posted station. And the redevelopment that we had a part in with respect to a developer coming together with the MTA from Hong Kong to redevelop the entirety of that site had a number of conditions associated with it, including approvals from network rail that didn't -- were not issued. We don't believe the opportunity is dead. We believe that the deal that we had signed up doesn't have the authorities that it needs to move forward. I don't believe that, that means that there won't be a redevelopment, I believe it will take a different shape. And you can imagine, we remain in very close contact with all the parties involved. And I'm actually optimistic. It's a great location and a great hotel market. adjacent to some of the biggest businesses in the city of London. And when I say adjacent, I mean literally across the street from. So we have great corporate drivers and the hotel has got a great reputation as a social event destination. So I'm very optimistic we can find our way to a different type of deal, but it will take some more time for Network Rail to make some additional decisions about how the sequencing of that project unfolds and so forth. In the meantime, the hotel is performing very well. So we don't -- we're getting paid to wait, so to speak. So that's really the whole story there. And I would describe it as a setback, not a not something that we are turning off because we won't be able to sell it. Secondly, we won't -- we will not do the redevelopment by the way. We will only participate by way of selling the property into a redevelopment plan. That's -- so we're not going to undertake a mass redevelopment in the City of London. The other hotels actually were relatively small deals. We mentioned a few calls ago that we have a few hotels that are -- we would put in the category of portfolio cleanup. They happen to be unleased property. So it's a ground lease that the hotels operate on. So they're not material we ended up with market-specific reasons why we elected not to proceed with two of those properties with two properties that we had previously had signed. And we believe that the markets will perform well this year will get paid to wait. And we will we will look to put another deal together in the future. Finally, yes, we are working on other opportunities to have additional asset sales. So when I mentioned our plans with respect to asset sales and our outlook on the transaction market remains unchanged. What that means is our intention to continue to sell properties. And I do think that the market for property sales is much more constructive this year than it was last year. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore. Duane Pfennigwerth: So just low singles EBITDA growth in the first quarter. It sounds like mid-singles in the second quarter. Can you just big picture walk us through the building blocks of why we would get so much acceleration in the back half? Joan Bottarini: Sure. The -- as we look at the core business, we've been talking about how strong we have been performing and how we anticipate continuing to perform, including our net rooms growth expectations. So when you look at the total year RevPAR, total year net rooms growth, that's going to lead to very strong fee growth for the year. And in the second half, I mentioned that the distribution segment will recover. There will be better performance, particularly in the fourth quarter because we are experiencing easier comps in that quarter. So there's a couple of factors related to all of those items built into the second half of the year. There's also structurally -- if you'll recall, we renegotiated the Playa contracts. And in the second half of the year, we don't have the headwinds from the franchise fees that we had in the first quarter. So that helps us in the pickup on the fee growth into the second half of the year. So there's a couple of structural items. There's improvement in the distribution business that we're confident in and in the core fee business will remain strong going into the second half of the year. Also, I would mention, Duane, the G&A that we posted in the first quarter was a little bit higher than our expectations, mostly due to timing. So as we look at the last 3 quarters of the year, we'll have lower G&A expense as well. Operator: Your next question comes from the line of Dan Politzer with JPMorgan. Daniel Politzer: I think you spoke a little bit about general drivers of demand, but something that I think we came into the year hearing a lot of that was World Cup, Americas 250th things of that nature. So I mean has there been any change in kind of the outlook there as it impacts your business, especially in the kind of the peak summer season? Mark Hoplamazian: No, I think there's been no change in the outlook, it's positive. The pace that we're seeing into the cities that are hosting World Cup, are very strong. And we -- New York is, I think, a significant driver of that because that's where the finals will be. So the July pace for New York is really extremely strong. And interestingly, we've got real group business, significant group business that's also pacing well ahead in those cities. So it's not just transient, which is inherently shorter term. And so our visibility to how much transient we actually pick up between now and the time that we get to World Cup is low, but our visibility on the group side is quite good. And the pace increases for those markets is in the mid-teens in terms of group pace. So I would say we thought it was going to be strong in those particular cities, and we continue to feel that way. Operator: Your next question comes from the line of David Katz with Jefferies. David Katz: I wanted to just go back to technology and AI, in particular, it's obviously a growing topic across the industry. Mark, I'd love your perspectives on sort of where you're at, where you'd like to get to and how you see it evolving for Hyatt in any industry. Mark Hoplamazian: Sure. We have really made significant progress over the last 2 years, more than that, about 2 years and 4 months now of really putting together our entire environment and then building out a number of genic platforms. I would say one should never measure success based on how many agents you have deployed in your company. And I don't believe that any particular platform or tool is a durable competitive advantage. So however, what I do think is if you combine advanced advancements and facility with building platforms that have actually generated real impact to date, which we have. And we become more and more practiced at the human elements that are required in order for that to really generate value. I think that's really where competitive advantage can be uncovered. So there are two dimensions to that. The first is the level of expertise and, frankly, reps repetitions of creating great tools and great platforms. And being able to pivot and continuously modify and optimize those platforms even as the models themselves learn, they're self-learning embedded in that, as you know. The second dimension is the expansion of the adoption of regular use of AI tools. We have enterprise-wide licenses on a few platforms, and we are looking to extend and expand. And I have to say every -- literally every week that goes by in my team meeting, I hear new and different applications that hotel teams have come up with that I'm blown away by. And I think it's true that the adoption rate and level of expertise varies across the company. But we've heard about some really remarkable advancements. And I think it's the combination of that enablement at the center with a special focus on expanding and scaling adoption with the entrepreneurship at the local level, the combination of those 2 things is really where magic can happen. And so we continue to see revenue focused activity is our #1 focus. It happens that in every case, every revenue-facing initiative that we've undertaken has also resulted in productivity gains. And the question is, what do you do with that productivity gain. And in many cases, we redeploy those resources to actually optimize further and hone and get more specific around insights that we've derived on our customer base to be able to go to market differentially. And I think that's why our performance has just -- in our core business has strengthened over this period of time, and I think it's 1 key driver of that is the application of AI. So that's our philosophy. That's how we're approaching this. We see the big opportunity is to actually really elevate the level of humanity and the interactions that we have with our guests and our own colleagues by taking a lot of administrative work out of the system entirely. And that's really a powerful motivator for us given that we're very much a purpose-driven business. Operator: Your next question comes from the line of Chad Beynon with Macquarie. Chad Beynon: Great to see the increased pipeline of executed MNF contracts that you announced in the print -- just with respect to the Middle East conflict, should we expect any type of construction start delays or overall activity delays? Or do you think this pipeline should be executed kind of as planned? Mark Hoplamazian: Yes. Given the nature of what we've got in the region, which is more concentrated in Saudi than anywhere else, we don't see any impact in 2025 -- sorry, '26. I forgot what year we're in. Operator: Your next question comes from the line of Trey Bowers with Wells Fargo. Unknown Analyst: This is [ Nick Wikel ] on for Trey. I just want to dig in a bit more on NUG, and try to figure out like which brands you're seeing the most uptake in, maybe the mix between like conversions and newbuilds for the year and you just hit on the impact or potential impact from the Middle East. So any color would be great. Mark Hoplamazian: Yes. Super encouraging. When we look at the pipeline increase year-over-year the activity level has gone up a lot. A lot of that has been in our Essentials brands, our slot service brands, up 25% in terms of pipeline size year-over-year, which is notable to say the least. We've had a sequential improvement in hotels under construction. It's up 10% quarter-over-quarter. About 1/3 of our hotels are under construction now. I would say as we our outlook currently includes about 2/3 of our room openings this year gross room openings this year coming from our pipeline and 1/3 or maybe it's 65, 35 or something like that being in the year for the year. And of that, in the year for the year openings figure, we already have 60% that we've identified and have opening dates for. So we feel really good about where we stand at the moment. And yes, the activity in the U.S. in the Essentials brands is really, really strong right now. I think we've hit a vein with Studios Select and unscripted. Of those brands select has really taken off. And we have quite a few, if I count them correctly, probably over 30% of the conversions that we see already planned for the year are select -- Hyatt select hotels. So -- and I think it will grow from there. So I'm encouraged across the board, but I have to say in the U.S., the Essentials portfolio is really the strongest category. Which will really help us fill in a lot of markets in which we have no representation whatsoever. We opened 7 new markets in the first quarter, and I think we're going to end up opening a huge number of new markets this year. Operator: And the final question will come from Meredith Jensen with HSBC. Meredith Prichard Jensen: I was hoping you might speak a little bit more about the loyalty program. I know you gave the membership and the strong growth. But I was hoping if you might dig into a little bit more about spend, redemption behavior, how that's evolving kind of over regions and customer cohorts and perhaps adding any insights you might be getting from your credit card partnerships, that kind of thing, that would be great. Mark Hoplamazian: SP1772067257 Sure. First of all, in terms of the nature of the spend, I think it's like 60% or 65% of the room nights are paid for. with the remainder being redemption. So it's a very healthy ratio of our guests actually there as paying guests and not simply as redemption. Of course, we not only welcome but celebrate those who are redeeming their points because that is the flywheel with respect to loyalty. The demographic profile of our membership base continues to grow stronger, and we see that in the total spend of our members versus our nonmembers. I referenced some data in my talking point, so you can refer back to those. But roughly speaking, it's -- they spent twice the amount that nonmembers spend. And that relates to both engagement and also total spend per stay increasing over time. The other thing that we have really been intrigued with is as we work closely with partners of ours and sponsorship initiatives that we've undertaken, we're seeing not only high engagement, but also more interrogation, more data fidelity and robustness of the data on our customer base that is really attractive to other high-end platforms. And there's an adage where you want to go to where the money is. And so I don't remember the exact percentages, but a very high proportion something like 75% of the spend -- travel spend is represented by the top 40% of travelers. And that we play primarily in the top 20% of the travelers. So they are the highest spending guests. And I just think that we have new and different ways in which we're going to be able to add value for them. and it's primarily through experiences. And our focus on -- within that continues to remain very tightly focused around well-being. So I think that's how we think about it. It's some comments I made about experiences and emotional connectivity versus transactional caught a lot of attention. And really, I didn't mean that the transactional aspects were not important they are. But that's not how we think about what's most meaningful and most valuable for our members. It's really about the emotional connectivity we can establish the care that we can extend not only in through well-being and other experiences, but also in just how we approach our members. So that's our approach. We are small enough and differentiate enough to really make this model work very powerfully. And I think that's why you're seeing such persistent significant growth in the membership base, which will continue to evolve to our benefit. So thank you for that. I want to thank everybody for all of your time this morning. We're incredibly excited about where we stand and the principles that -- and the strategies that have left us in a very strong position I do want to remind everyone that we have an Investor Day in Chicago on May '28, and I have a request. If any of you who are coming are not currently world of hype members, first I'm shocked, Secondly, please sign up and join. And then after you've joined book through the World of Hyatt app or hyatt.com because many benefits will flow in your direction if you do. And then for those of you, most of you, if not all of you, who are already world of Hyatt members, thank you. And don't forget to book through your World of Hyatt or hyatt.com. So thank you for that support, and I wish you all a great rest of the day. Operator: Thank you. This concludes today's conference call. Thank you for participating, and have a wonderful day. You may all disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lilly Q1 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mike Czapar, Senior Vice President of Investor Relations. Please go ahead. Jeffrey Holford: Good morning. Thank you for joining us for Eli Lilly and Company's Q1 2026 Earnings Call. I'm Mike Czapar, Senior Vice President of Investor Relations. Joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Lucas Montarse, Chief Financial Officer; Dr. Dan Scaranki, Chief Scientific and Product Officer; Adriane Brown, President of Lilly Immunology, Dr. Carol Ho, President of Lilly Neuroscience; Livia Yuffa, President of Lilly USA; and Global Customer capabilities; Jake Van Naarden, President of Lilly Oncology and Head of Business Development; Patrick Johnson, President of Lilly International; and Ken Kuster, President of Lilly CardioMetabolic Health. We're also joined by the Investor Relations team, Jim Greffet, Susan Hegland, Mark Kimon and West Tal. During this call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to various factors, including those listed on Slide 4. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent filings with the SEC. The information we provide about our products and pipeline is for the benefit of the investment community, intended to be promotional or otherwise influencing prescribing decisions. As we transition to our prepared remarks, please note, our commentary will focus on non-GAAP financial measures. Now I'll turn the call over to Dave. David Ricks: Thanks, Mike. 2026 is off to a strong start. During the quarter, we delivered robust revenue growth, advanced our pipeline across all 4 therapeutic areas, announced multiple business development transactions and invested to drive our future growth. Earlier this month, we achieved an important milestone as orforgopron was approved by the U.S. FDA under the trade name Foundayo. Foundayo has been proven highly effective for weight management offering the benefits of GLP-1 therapy in a pill form and can be taken at any time of day without food or water restrictions. Foundayo is a new molecule, a new modality for agonizing GLP-1. And it's a new brand. This is the first time a new incretin medicine has been launched with obesity as its indication first. While the Foundayo launch has just begun, we're encouraged by momentum against our 2026 launch priorities. These are broad digital and traditional distribution availability, high levels of awareness with consumers of this new option for weight management, educating a broad group of HCPs, helping them start new patients and get comfortable with a new GLP-1 molecule. And of course, building broad access in commercial, Medicare via the bridge program, and later Medicaid access for patients. And while the U.S. approval is an important first step, there are over 1 billion people around the world with obesity and related conditions that could be helped by taking an [indiscernible] ton like Foundayo. Recall that a key advantage of Foundayo is scalability and that oral GLP-1s for obesity have not yet been introduced outside the U.S. Regulatory reviews are ongoing in over 40 countries for obesity and type 2 diabetes. And we plan to submit Foundayo in the U.S. for type 2 diabetes later this quarter. Included in the U.S. type 2 diabetes submission will be the results from the ACHIEVE I trial, which we shared a few weeks ago. In the seventh positive Phase III registration trial, Foundayo showed cardiovascular safety and the lower risk of all-cause death in adults with type 2 diabetes and obesity without increased cardiovascular risk. In addition to the obesity and diabetes programs, we're actively studying Foundayo in 6 Phase III programs in other diseases, and we will continue to generate new data for this important new medicine in quarter in the quarters and years to come. On Slide 5, you will -- we list the Q1 financial metrics and the highlights of our progress related to the strategic deliverables of Lilly. Revenue grew 56% compared to Q1 2025. Our key products currently defined as Elis in Luria, J. Perka, Kasamla, Monjaro, Umba and [indiscernible] grew by more than $7 billion. Within key products, our immunology, oncology and neuroscience medicines collectively grew by 160% compared to the same quarter last year as we continue to invest to drive growth across all of our therapeutic areas. In addition to the progress on Foundayo, we achieved several key pipeline milestones since our last earnings call, including positive Phase III data for [indiscernible] in combination with a time-limited regimen in adults with previously treated CLL, positive Phase III data for Egis in pediatric atopic dermatitis. -- positive Phase III data for Taltz plus Zeon in adults with psoriasis and obesity. -- positive Phase III data for ratatretide in adults with type 2 diabetes and the initiation of a new Phase III programs for aloralentide, sofetobartin mypatecan and brinepatide. Consistent with our capital allocation strategy to expand investments in business development, we announced agreements to acquire multiple companies with clinical stage programs. Orna Therapeutics, a company with an in vivo CAR T pipeline to treat autoimmune diseases. Syntessa Pharmaceuticals, a company developing a new class of medicines for the treatment of excessive daytime sleepiness and other neurologic conditions. Colonia Therapeutics, a company developing an in vivo platform to treat multiple myeloma in other cancers and Ajax Therapeutics, a company developing next-generation JAK inhibitors for people with blood cancers. We expect to remain active in business development to complement our internal portfolio, while maintaining the discipline to create shareholder value. We also distributed $1.5 billion in dividends in the first quarter and executed $2.4 billion in share repurchases. 2 important updates occurred this quarter to expand access to obesity medications. First, we launched Lilly Employer Connect. This is a platform introduced as a new way for employers to offer obesity management medicines to their employees. While it's still very early, for this innovative model, we're encouraged by the level of employer interest. Second, CMS announced the extension of the Medicare GLP-1 bridge program, which provides access to obesity medicines to people with Medicare. The program will begin no later than July 1, 2026, and run through December 2027. This program has the potential to help improve the health of millions of seniors while capping their out-of-pocket costs at $50 per month. Now I'll turn the call over to Lucas to review our Q1 financial results. Lucas Montarce: Thanks, Dave. As shown on Slide 6, Q1 was another strong quarter of financial performance. Revenue grew 56% compared to Q1 2025, driven by Seman and Monjaro and solid momentum across all therapeutic areas and geographies. Gross margin as a percentage of revenue was 82.6% in Q1, a decrease of approximately 1 percentage point versus the same quarter last year. The change was driven primarily by low [indiscernible] prices. Marketing, selling and administrative expenses increased 19% as we continue to invest in promotional activities to support ongoing and planned new product launches. R&D expenses increased 28%, driven by continued investments in our pipeline, including 42 active Phase III programs. Our non-GAAP performance margin was 50% and an increase of approximately 7 percentage points from Q1 2025, driven by revenue growth. Non-GAAP earnings per share was $8.55 including acquire R&D charges of $0.52. This compares to non-GAAP earnings per share of $3.34 in Q1 2025, inclusive of $1.72 of acquired [indiscernible] charges. On Slide 7, we quantify the effect of price, rate and volume on revenue growth. U.S. revenue increased 43% in Q1, primarily driven by volume growth from [indiscernible] and Monaro as well as contributions from our immunology, oncology and neuroscience portfolio. U.S. price declined by 7%, including the impact of the previously announced direct to patient prices for [indiscernible]. U.S. price was positively impacted by a onetime adjustments to estimates for rebates and discounts, primarily impacting Suven and Mounjaro. Excluding this impact, U.S. price will have declined 10%. The Europe revenue grew 37% in constant currency, driven by sustained strong volume growth of Mounjaro. In Japan, revenue grew 42% in constant currency driven by Mounjaro for type 2 diabetes. In China, revenue growth accelerated with the inclusion of Mounjaro on the national reimbursement drug list for type 2 diabetes. And in Rest of the World, revenue more than doubled in constant currency as Mounjaro achieved rapid share gains in Latin America and Asia. On Slide 8, we provide an update on the performance of our key products. Within immunology, we continue to increase our presence in atopic dermatitis with Atlas. U.S. new patient starts increased by 90% compared to Q1 2025. and we steadily gained share within the specialty dermatology market. We continue to focus on patient activation and expanding HCP engagement to drive additional case each are of market. In oncology, [indiscernible] posted a strong quarter of growth, gathering additional momentum in the U.S. from the expanded post-BTK indication in CLL. Worldwide sales grew 79% compared to Q1 2025, and we continue to hear positive feedback from physicians globally. We believe [indiscernible] has the potential to be a foundational therapy across multiple settings and regimens within CLL. Although it's still early, in Lurio performance in the U.S. was encouraging during its first full quarter launch, achieving over 35% share of [indiscernible] new patient starts in metastatic risk cancer in Q1. For the third market growth also increased, largely driven by the launch of Enurio. In neuroscience, Kisanla continues to be the U.S. leader in amyloid-targeting therapies. The market continues to steadily increase as diagnostic capabilities for Alzheimer's disease expand. We expect European launches to begin contributing to growth throughout 2026. Finally, in cardiometabolic, Mounjaro and Suven global revenue was $12.8 billion combined, contributing $6.7 billion of growth compared to Q1 2025. As seen on Slide 9, the U.S. incretin analog market continued robust growth in Q1. The recent approval of all GLP-1s expanded the market, enabling more people to benefit from the GLP-1s. Within the U.S. increasing analog obit market, total prescriptions grew by over 80% in Q1. And Suven prescriptions grew at even faster rate. Suven performance was driven by continued strong uptick in self-pay channel as well as steady growth in the Commercial segment. However, the loss of Medicaid access in certain states had a negative impact on Q1 prescription growth in the high single digits. We recently launched Suven in the U.S. in a new equipment device that includes a full month of supply of medicine in 1 pen. Sales pace continues to be an important segment for Sean and accounted for approximately 45% of total Suven prescriptions in Q1 and 55% of new prescriptions. In the U.S., Type 2 diabetes incretin analog market, total prescriptions grew 11% and Mounjaro gained another 3 percentage points of market share compared to the end of 2025. Outside the U.S., Mounjaro continues its steady progress within the incretin analog market. Slide 10 shows aggregate trends in the international incretin analog market. The total international market has increased by 77% since the same period last year, as measured by IQVIA gross sales. In Q4 last year, Lilly came the [indiscernible] outside the U.S. and the strong growth of Mounjaro in Brazil, U.K., Korea and China, among others, has resulted in additional share of market gains in Q1 2026. We expect continued strong performance outside the U.S. but with share of Michel leadership already established, increased patient activations will be key to drive sustainable growth. Lastly, on Slide 11 is an update of [indiscernible] launch. Early feedback from payers, physicians and patients is encouraging. Foundayo was broadly available in pharmacies on April 9 and is available on more than 12 major telehealth platforms. Discussions with payers have been productive and commercial access has been confirmed at 2 of the 3 largest U.S. pharmacy benefit managers, effectively mid-May. In addition, the GLP-1 bridge program will start no later than July 1, which brings new access to anti-obesity medicines for people with insurance through Medicare. While HCP Chile awareness campaigns went live shortly after approval, we began in-person promotion to CPs on April 17. We expect to drive brand awareness and differentiation through full-scale consumer promotion, including direct-to-consumer TV advertising beginning in Q3. We are focused on commercial execution to drive long-term growth. On Slide 12, we provide an update on capital allocation. Moving to Slide 13, we share updated expectations for 2026 financial guidance. We have increased the top and the bottom end of the revenue range by $2 billion and now expect full year revenue to be between $82 million and $85 billion. This reflects a strong underlying performance of Monjaro and SEB in Q1. The midpoint of the new revenue range represents 28% growth compared to 2025. -- we still expect price to be a headwind in the low to mid-teens for the full year. We expect our non-GAAP performance margin to be between 47% and 48.5% driven by higher revenue. Our tax rate remains unchanged, and we now expect non-GAAP earnings per share of $35.50 to $37, an increase of $2 to the top and bottom of the non-GAAP earnings per share. We are pleased with our Q1 results and confident in our ability to deliver another year of industry-leading growth. Now, I will turn the call over to Dan to highlight our progress on R&D. Daniel Skovronsky: Thanks, Lucas. In our last earnings call, we've been busy with portfolio progression and significant business development in each of our major therapeutic areas. I'll share updates by area, beginning with cardiometabolic [indiscernible]. In addition to the U.S. approval of Foundayo for obesity, we also announced positive top line results from ACHIEVE I, the seventh and final Phase III trial in our global registration programs for type 2 diabetes and obesity. This trial evaluated the time to first occurrence of MACE events for Foundayo compared to insulin glargine in adults with type 2 diabetes and obesity or overweight toward increased cardiovascular risk. . As shown on Slide 14, Foundayo met the primary endpoint of noninferiority with a 16% lower risk of MACE 4 events. And Foundayo met the secondary endpoint with a 23% lower risk in these 3 events. Additionally, at a preplanned analysis not controlled for multiplicity, the survival advantage for patients of Foundayo was 57% compared to insulin glargine. These data add a new dimension to Foundayo's well-characterized effects on reducing A1c and weight as demonstrated in multiple previous Phase III trials. Now with the results from ACHIEVE IV, cardiovascular safety and a lower risk of all-cause death are added to the clinical profile. Adverse events were generally consistent with other increases [indiscernible] therapies and no hepatic safety signals observed and ACHIEVE IV, nor across the 7 positive Foundayo Phase III registrational trials. ACHIEVE IV is also the last trial required for the U.S. Type 2 diabetes core registration package. We plan to complete the U.S. submission for type 2 diabetes in late Q2 and anticipate regulatory action before the end of this year. Moving to retatrutide, our GLP-1 and glucagon triple agonist -- we announced positive top line results from TRANSCEND P2D-1, the first Phase III trial of reditrutide in people with type 2 diabetes. Given the potential counterregulatory impacts of glucagon activity on blood sugar control, we were excited to see profound improvements in hemoglobin A1c, as shown on Slide 15. We -- to pay to placebo, reditrutide lowered A1c by an average of 1.7 to 2.0 percentage points across doses. Importantly, we saw that participants lost an average of 11.1 to 16.6 kilograms were 25 to 37 pounds. While cross-trial comparisons of limitations, these data suggest renotrutide can deliver [indiscernible] control in line with the most widely prescribed anchored therapy for type 2 diabetes, tirzepatide, while delivering additional weight loss. This is critically important given the difficulties people living with type 2 diabetes face. -- we're trying to lose with a significant need for better weight as medications for this population. With these data in hand, we're optimistic that redatrutide can meet this need. Adverse events seen with redatutide were generally consistent with what had been observed in clinical trials of acreage-based therapies and discontinuation rates due to adverse events were 5% or less across all arms. We look forward to presenting detailed TRANSCEND T2D 1 results at the American Diabetes Association scientific sessions in June. Together with the positive Triumph 4 results in obesity, and knee osteoarthritis. We are beginning to establish a favorable clinical profile for Retatrutide, consistent with our goals for this molecule. The next Retatrutide trial to read out is [indiscernible], an 80-week study in people with obesity. We look forward to sharing top line results later this quarter. Also in cardiometabolic Health, we initiated 3 additional Phase III programs for Eloralintide. In addition to the ongoing Phase III obesity programs, we initiated Phase III programs in OA pain, obstructive sleep apnea and as an add-on therapy or lease. As a selective amylin receptor agonist, or SARA, Eloralintide has shown a unique profile of Phase II trials with GLP-1 like weight loss and improved tolerability. We're eager to explore additional indications for this promising molecule in what we expect to be a very robust Phase III program across a number of potential indications. We also recently completed our acquisition of Ventix Biosciences, which brings a pipeline of small molecule therapeutics, including NLRP3 inhibitors designed to treat inflammation across a broad range of diseases. Both NLRP3 inhibitors are now shown in the Lilly pipeline. We also announced a licensing agreement with CSL for clazakizumab for certain indications, and that molecule will be reflected in our pipeline chart once Lilly trials have begun. Moving to immunology. We reported 2 important data sets for [indiscernible] genotypes. First, in the ADO Phase IIIb OBI-label extension study, [indiscernible] delivered durable disease control for up to 4 years with 1 month [indiscernible] dosing. Nearly all patients achieved meaningful skin improvements, 75% achieved near complete skin clearance and 80% maintaining their results without the need for topical for corticosteroids. For people living with chronic relapsing diseases like atopic dermatitis sustained control delivered with [indiscernible] goal. We're pleased that our once every 8 weeks maintenance regimen is currently under FDA review, and we expect regulatory action later this year. If approved, less frequent dosing may be a more convenient option to improve the patient experience and further differentiate uplift from competitors. The second readout was the Phase III adorable line trial. [indiscernible] delivered positive outcomes for children as young as 6 months old with moderate to severe atopic dermatitis. As shown on Slide 16, 63% of children treated with [indiscernible] achieved significant skin improvement as measured by EASI-75. In addition, 44% achieved clear or almost clear skin as endured by IGA 0 score. This makes edges the first and only selective IL-13 inhibitor with positive Phase III data in this age group where there are fewer approved medicines than in adolescents and adults. We plan to submit these data to regulators later this year for potential labels. Also in immunology, reported positive top line results from together PSO the Phase IIIb study of ixekizumab plus tirzepatide in adults with psoriasis and obesity. And together, PSO, 27% of participants on tirzepatide plus ixekizumab achieved the co-primary endpoint of total skin clearance and 10% or more weight loss compared to less than 6% of patients on [indiscernible] alone. These results are the second successful trial, highlighting the benefits of treating psoriatic disease and obesity with concomitant ixekizumab and tirzepatide therapy. This result provides further evidence that incretins they have a broader role in treating immunological diseases. We have additional ongoing Phase IIb combination trials in immunology studying mirikizumab plus tirzepatide in Crohn's disease and ulcerative colitis. We continue to assess other immunology settings where incretins may provide additional benefits. We also announced business development in immunology with our agreement to acquire Orna Therapeutics. One's in vivo CAR T pipeline includes potential best-in-class programs. to reset the immune system and address B-cell-driven autoimmune diseases. We look forward to exploring the full potential of Ormes platform together with the Orga team. Turning to oncology. We announced positive top line results from a Phase III pertibrutinib trial, [indiscernible] this ambitious study evaluated pertibrutinib in addition to a fixed duration regimen of venetoclax and rituximab and in patients with previously treated CLL or SLL. Purtibrutinib significantly extended progression-free survival compared to the fixed duration regimen and was the first medicine to utilize and outperform a venetoclax control containing control arm in a Phase III in the history of CLL drug development. As shown on Slide 17, Petabit has now been successful in 4 Phase III studies in CLL, each with compelling efficacy and profitability. [indiscernible] has been studied across early and later line settings of CLL, demonstrated efficacy as a monotherapy and in combination and showed efficacy head-to-head against chemo immunotherapy, a covalent BTK inhibitor and now a venetoclax-based regimen. The breadth of evidence suggests pertibritnib has potential to become a foundational therapy in CLL. SeafromBrewen CLL-313 and Brewin CLL14 and are currently under review by regulators for potential label expansion into the first-line setting. And we plan to submit the results of BRUIN CLL-322 to regulators later this year. Building on the Breakthrough Therapy Designation received gene for platinum-resistant ovarian cancer, we initiated second Phase III trial, both [indiscernible] our fully receptor alpha in about drilling conjugate to platinum-sensitive ovarian cancer. We also announced the acquisition of Colonia Therapeutics, Colonial's lentiviral in vivo CAR T platform they show very promising early clinical results in people with multiple myeloma, and we look forward to rapidly advancing the lead program in the [indiscernible] team as well as building future medicines using this technology platform. Earlier this week, we announced the acquisition of Ajax Therapeutics, the lead program, the Phase I JAK2 inhibitor for myelofibrosis and polycythemia vera builds on Lilly's established capabilities in blood cancer. Moving on to Neurosotis. We initiated a Phase III program for bernefatide, or GILTI dual agonist in major depressive disorder. This trial will assess it pranepatide can delay time to relapse -- with significant unmet need in psychiatry, where rates remain high despite available veins. We've also begun Phase II trials of brenepatide in opioid use disorder and schizophrenia and initiated Phase II trials for 2 pain assets, a [indiscernible] inhibitor and an AT2 receptor attacks. Lastly, we announced an agreement to acquire Contessa Pharmaceuticals, which will expand our neuroscience portfolio and capabilities into treating fleet disorders. Sytesa, a leader in a Rex and science is advancing a pipeline of orexin receptor 2 agonists the targeted neurobiological system governed in the fleet way cycle. The lead candidates, emanarexton, has demonstrated a potential best-in-class profile. We look forward to welcoming the Cintessa team to Lilly later this year and continuing the development of these important molecules. Slide 18 shows pipeline movements since our last earnings call and Slide 19, which is the full list of key events expected in 2026. I'll now turn the call back to Dave. David Ricks: Thanks, Dan. We're pleased with the progress to start this year. We executed well both in driving business results and bringing new medicines to patients. We posted another quarter of impressive revenue and earnings growth. Here top line results from 5 positive Phase III trials, announced 4 acquisitions, initiated 6 new Phase III programs and launched an important new Lilly Medison. -- productive quarter and yet a lot more to come in 2026. Let me turn the call over now to Mike for the Q&A session. Christopher Schott: Thank you, Dave. We'd like to take as many questions as possible. So consistent with prior quarters, please limit yourself to a single one-part question. Paul, please provide the instructions for how to join the queue and then we're ready for the first caller. . Operator: [Operator Instructions] First question today is coming from Jeff Meacham from Citi. Unknown Analyst: Maybe this 1 is for Dave. Investors seem to be acutely focused on pricing and incretins with not a lot of emphasis on volume I know you don't want to get too specific, but can you talk about, at a high level, the margins under a wide range of price scenarios for for Lilly. How do you see the investments you've already made in, say, manufacturing? And how does that add to the dynamic and what that means in terms of the competitive note. . Unknown Executive: Great. Thanks, Jeff. Dave, do you want to take us talk about pricing and anchor [indiscernible]. David Ricks: Sure. Thanks for the question, Jeff. Maybe a couple of things to point out, now that we're 5 or 6 quarters deep into the sort of post shortage world, and we can really pursue expansion on volume in an aggressive way. I think you can see something is a little different about the obesity and weight loss category from what we think about in other pharmaceuticals, where the barrier is typically more informational not price sensitivity. But here, clearly, because the out-of-pocket nature, 75% of ex U.S. business for Mounjaro was out of pocket. U.S. is a meaningful portion as well. that we see quite expansionary volume, perhaps nonlinear to price reductions. Of course, there's a floor on that, and we have sensitivity on our cost structures, et cetera. But pretty much every time we reduce pricing, we see a pretty large expansion. You also see built into this, the primary pricing effect in Q1 are actually negotiated outcomes with governments. -- both the MFN package we negotiated with the Trump administration, you cut out-of-pocket cost, you see strong growth. Like Lilly's eons really had quite a strong quarter in Q1 and with at slightly lower prices. And then in China, we negotiated for diabetes access at a meaningful price reduction, but you can see the volume far outstripping the price concession. So kind of a different dynamic. And I think if investors can think about this category, perhaps unlike other pharmaceutic categories in the past. In terms of margin sensitivity, it remains true that for this category for us at least, the unit economics are really driven by fixed costs that are either sunk in the past or unmovable depending on the volume in the present. And as a result, both covering the amortized R&D costs as well as CapEx is a concern from an accounting perspective. But at the margin, we do have Latitude. That said, we want to invest in future medicines. And I think that's probably the biggest, as we've said before, as we think about long-term operating margin for the company, the x factor. If we have good projects, we won't hesitate to invest in them, whether it be existing medicines, I think you see kind of a record load of Phase III NILEX at Lilly right now or for new medicines. And we've got a very full Phase II and Phase I pipeline that we are deploying capital against -- so we've got a lot of latitude here, Jeff, and I think this market works a little differently, and we're all sort of just getting used to that. But I think good news for Lilly and our incumbent position. Operator: The next question will be from Chris Schott from JPMorgan. Christopher Schott: Great. Congrats on the progress. I just wanted to dig a little bit more into international Mounjaro. And can you just share some of the learnings from -- I think it's been a much better expected launch than we all had anticipated here as we think about the ramp going forward and longer-term opportunity? And maybe as part of that, can you just should we expect any impact to the ramp from the entry of generic sema in select markets? Or is this such an early stage of penetration where that's less relevant. Unknown Executive: Great. Thanks, Chris. For the question about international Mounjaro and the potential impact of generic sema, we'll go to Patrik. Patrik Jonsson: Thank you very much, Chris. When we look at the first quarter, it's truly a strong growth of all our prioritized products across international, but of course, particularly in Mounjaro. And now we have fully launched in more than 55 countries. -- and we have seen a very strong speed of uptake and also a rapid market share gain. Also in the more we launched the second half of 2025, referring to Brazil, in Korea, where we currently have an estimated market share of 60%. And of course, also the China Type 2 NRDL reimbursement. When we look at the generics, we only have a few weeks of data from India, but it seems like it's really stimulating the growth in the overall obesity market. And that includes our product. And the Mounjaro has actually been holding market share quite nicely. When we look at the Mounjaro prescriptions, they are about 10% higher in recent weeks compared to the period prior to generic center. So I think it just underscores that dual agonist trumps single agonist. Moving forward, I think we should expect a very strong continued year-on-year growth and some sequential growth. We saw in the slide earlier that we have a market share above 53% OUS, and that's an average. And in many international markets, we have a market share along the lines of what we see in the U.S. with set bound. And when you get to that level of share, incremental share gain is getting harder. And of course, we will focus our efforts on patient activation, driving increased penetration in the chronic rate managed market and end market growth. And also secondly, what we have seen during the second half of the year has been some seasonality, mainly driven by the holiday season in Europe, where patients tend to take a holiday -- drug holiday break or actually delay the initiation of the new therapy starts. But overall, strong growth across regions. Seems like generic semaglutide is stimulating market growth, and we continue to do well. We expect a continued strong year-on-year growth -- sequential growth driven by patient activation. Operator: Next question will be from Seamus Fernandez from Guggenheim. Seamus Fernandez: Great. So Really, we just wanted to get a better understanding of how the market as you see it is starting to segment and could segment going forward? More as you look forward to the potential introduction of Retatrutide amidst the Foundayo launch as well as then the follow-on to that being the [indiscernible], -- where do you see the market really opening up with each of these potential assets reaching forward? Unknown Executive: Great. Thanks, Seamus. For that question, we'll go to Ken talk a bit about the [indiscernible] portfolio and we see the market segment. Kenneth Custer: Yes, sure. Thanks for the question, Seamus. I think it's reasonable to expect in this large and growing market and opportunity in obesity that was the number of patients around the world living with over later of ECD numbering perhaps in the billions, but many of them are going to want different types of medicines that are tailored to their individual needs and preferences. -- we're in early innings in that regard. We're now sort of bringing the third segment, I guess, in. We've had GLP-1 single agonist and then dual-agonists and now oral medicines, but we see many other sort of plausible opportunities to tailor medicines to different groups. As you noted, Retatrutide is 1 of those ideas, which very obviously could play to individuals who are seeing greater weight loss, although I will say we see opportunities for Retatrutide elsewhere and across the spectrum of obesity. Eloralintide, we can position that a few ways based on the Phase II data that we've seen -- the first of which is that this could be a great medicine for patients seeking a non-GLP-1 based mechanism, perhaps due to tolerability of experience or tolerability that they are fearful of. It may also be a good drug that could be added on top of existing incretin therapies to provide incremental weight lowering. But there's many other ideas out there, Lilly is investing in. That includes medicines to a veto even less frequently, perhaps those that dial in addition -- excuse me, additional metabolic benefits and maybe some that are sort of ultra-long acting using genetic medicine approaches. We see all of these as compelling ideas. And we also feel we're in a leading position in most, if not all, of those spaces. In terms of how the market will ultimately shake out in terms of percentage of use across those different ideas. It's hard to prognosticate that, but many of these ideas are tied to common manufacturing platforms and we're making the investments to support any of them should they prove to be really the most favorable option for managing [indiscernible]. Operator: The next question will be from Alex Hammond from Wolfe Research. Alexandria Hammond: On Medicare Access, can you walk us your strategy to activate these patients -- and when do you kind of see this playing out in terms of either maybe a 4Q dynamic or more of a 2027 as these patients pull through? And I guess, as well, with the attractive price point, how do you think about persistence in this population? Unknown Executive: Okay. Thanks, Alex, for the question about Medicare access and sort of staging over time, we'll go to Ilya. Ilya Yuffa: Yes. Great. Thank you for the question. Obviously, we're excited about having Part D access starting to activate for obesity medicines starting in July. And the way that we think about it, there are little or deep beneficiaries that are able -- so the path to that with having a long trajectory with the boot program of starting in July through 2027 is an important aspect. Obviously, that will take time to build. We need to have the education across physician-based pharmacies as well as consumer base to understand the whole half of different medicines that we have and available for treating obesity. And so that will be a gradual path in '26 as it starts and then continued growth in '27. And obviously, the $50 month co-pay is an important element of affordability for seniors. We've already seen for Zepbound as well as Mounjaro. We've had wind persistency overall relative to other chronic conditions. -- and we continue to see that. Obviously, the $50 co-pay and affordability will only just add to that in addition to all of the health benefits and experiences that people will have over time. So we're excited about expanding access very soon. Operator: Next question will be from Evan Seigerman from BMO Capital. Evan Seigerman: Bigger picture, strategically, as you think about the next levers of growth for the business, -- what do you need to see from either the I&I, neuroscience or oncology franchises to kind of match the scale of the obesity metabolic businesses or particular assets? Is it BD or something else? Unknown Executive: Great. Thanks, Evan. We'll go to Dan to talk about some of the important programs that he's focused on to drive growth in the future. . Daniel Skovronsky: Yes. Thanks, Evan, for that question, and it's an important 1 to us. or you're asking about scale, but I point out in growth rate those businesses are growing extremely fast. Even without the obesity and metabolic business, Lilly would be the fastest or really 1 of the fastest-growing pharmaceutical companies in the industry. So we're proud of what we're doing in those 3 areas. And I think each of them has very significant unmet medical needs. -- that we can scale into as our medicines are successful. So we like what we got. We like the direction we're going. Of course, in each of those areas, we also see opportunities to get a lot bigger, and we've highlighted some of the themes already in the areas -- you'll also see us address some of that through business development. So for example, the Sytesa acquisition allows us to play in a new area here in sleep wake medicines. The Warner acquisition allows us to play in new areas of immune reset for example. Operator: The next question will be from Asad Heider from Goldman Sachs. . Asad Haider: Congrats on the continued strong execution. Maybe just going back to Foundayo. Appreciate all the color on early launch dynamics, which is sort of playing out along the lines of your messaging that the initial launch trajectory is going to live below that of oral [indiscernible], but then there's going to be an acceleration as we move into the back half of the year. So just now with a few weeks of launch under your belt, I think you said 15,000 patients have started taking the drug already. What's your level of confidence on that launch curve framing in the context of the early experience? And then related on the guidance range are you able to provide any high-level commentary on what type of contribution was factored in for Foundayo recognizing that you said that the revised range reflects mainly the strong underlying performance of Mounjaro and [indiscernible]. Unknown Executive: Great. Thanks for the question, Asad. Ilya, do you want to talk about some of the early launch metrics that you're tracking and the feedback you're hearing? And then maybe just a short comment from Lucas about the gut . Ilya Yuffa: Sure. Well, first, it is early days, but we're pretty pleased with the trajectory and encouraging first start to launch. Obviously, we just started active sales force promotion just over a week ago, having broad availability in the supply channel just 2 weeks ago. Really, we're encouraged by the initial leading indicators. And the way that we think about it there are probably 3 key factors and catalysts of growth. And those 3 are: one, growing the familiarity among health care providers on the clinical profile of Foundayo, building out the access and growing the awareness of Foundayo with consumers, and we're making progress on all 3 fronts. And so on HCPs, if you think out the early indicators, we now have over 8,000 prescribers of Foundayo, 1/3 of which who have not previously written an oral GLP-1. And so this is expansive. And the current sentiment so far what we're hearing is really positive on the overall efficacy and kind of the no house factor on a daily oral GLP-1. So that's an important aspect. We'll continue on the execution related to HCPs around sampling, continued promotions through our sales force, as well as educational seminars and we're fully in the field with our promotional offers with HCPs. So good progress there. On access, we've confirmed commercial access at 2 of the large PBMs as by middle of May, so just in a couple of weeks. And to the earlier question on Medicare and Medicare Access will start at the beginning of July. And so those are continued catalyst of growth upcoming in the next couple of months. And so we see that as an important unlock and expansion as well. And then on the third piece on consumer front, we now have just over 20,000 patients treated to date. And what important element there is that 80% of those found prescriptions are new to class. So this is expansive in bringing new people into being treated for overweight or obesity. We've done a number of aspects already around the direct-to-consumer on digital, social media and others. But obviously, we will continue those efforts on a full-scale direct-to-consumer and TV launch in Q3. Important there is just to ensure that prescribers have familiarity around the profile of Foundayo before we do that. So bottom line, I think we're pleased with the progress. Early indicators are positive and moving in the right direction. And the trajectory will build over time. This is a new brand, new medicine we're bringing to the market. So we're pleased and really [indiscernible]. Unknown Executive: Maybe on the second part going to the guidance Asad just to highlight a couple of things. Of course, again, the increase on our guidance driven by the strength of the entire portfolio that we mentioned during the call, starting, of course, with the increase in portfolio, both in the U.S. and our U.S. In terms of orders, you've heard already from Eli about how we continue to see progress and very encouraging feedback that we hear from payers, physicians and patients as well. We set up the plan at the beginning of the year, and it's very early days. We have 3 weeks of data at this time. So is tracking to our expectations, and we will continue to see how this progresses over the year. But we feel very confident on the trajectory that we've seen so far. Operator: The next question will be from James Shin from Deutsche Bank. James Shin: This one for Dave. With Bridge extending into 2027, Dave, what's the next for balance? Is Lilly working with stakeholders on revisions to secure longer-term Medicare access? Unknown Executive: Thanks, James. Dave, do you want to share a few comments about the bridge balance dynamics? David Ricks: Sure. Yes. Look, when we signed the agreement with the administration, we all knew Bridge was going to be put in place because it was a midyear launch. And -- and we had understood at the time that there was a commitment to '27, if as a contingency, the Part D plans did not choose to opt in at a certain rate. Of course, we now know they didn't. And maybe that's not so surprising. . They operate on our margins. There's been other disturbances and market events in the Part D program, for instance, the iPad products, et cetera, that have changed their economics. And unfortunately, I guess, not being a part of those discussions, but they couldn't cross with the major players for calendar '27. So the government is doing what they said and they're extending bridge. I think for manufacturers, there's some puts and takes in that. But the fact that there'll be access to the consumers at $50 a month, I think, is a very compelling proposition. As Ilya highlighted before, will drive great persistency. And in an 18-month window, I think we will start to see population-level health improvements if these are used at scale. That will then set up the '28 discussion. I would expect the government to lean hard into getting Part D plan participation in '28 and normalizing obesity care as a standard preventative treatment and something that should be used to treat comorbidities of obesity within the senior population. We may have the evidence to support that as we exit '27. It may need a little more time, but I think they're going to push to help make that happen. And I think that normalization is overdue in the commercial market. So it will be a good leading indicator for us across the U.S. business. We'll continue to work with the government closely through that period and of course, try to work with them to activate patients and make sure they can find success on our medicines. So stay tuned, probably more news as we exit '26 on the actual '28 plans. Operator: The next question is coming from Mohit Bansal from Wells Fargo. Mohit Bansal: Congrats on the progress. I just want to touch upon the employer Connect program that you are embarking upon. So it seems like the insurance our commercial insurance has been relatively stable-ish year-over-year. So this seems to be the way to grow it and employees are worried about their cost long term and everything. So would love to understand what are the steps to convince employers to buy in into the [indiscernible] Connect program and the mechanics of it. . Unknown Executive: Thanks, Mohit. -- Ilya, do you want to make a few comments about Employer Connect and the progress and focus? Ilya Yuffa: Sure. Thanks, Mohit. Yes. Listen, as you mentioned, the overall commercial access has been pretty steady around 50%. And one of the key aspects that we're excited about is having an employer connect platform, where we work with a number of third parties to actually go out and talk to different employers about the value of covering obesity care. But -- there are several consider a little bit different with our Employer Connect program. One is a transparent price that is known to all of the employers and providing the flexibility and design around the employee employer, employee contribution towards obesity coverage. And so we do think that this is a positive element to increase the number of employers to opting in. Obviously, the selling cycle time line for making decisions for '26 has already passed. So while we are currently having positive conversations and positive feedback from employers around this new platform that will most likely have a gradual impact in the back half of '26 and most likely incremental opt-ins for '27 and then as part of that, obviously, there's more data on real evidence and also components of where employers do cover what are the benefits to their employees overall, both in their health and productivity over time. And as that data comes out, that will only reinforce the positive decision to provide coverage for obesity care. Operator: The next question will be from Terence Flynn from Morgan Stanley. Terence Flynn: Congrats on all the progress. I had a question broadly. You talked to the portfolio that you're going to be -- you currently have, but you're also rolling out across the incretin area. And so as you think about the evolution, I guess, of the DTC channel, what are some of the things you're considering to kind of leverage Lilly's scale in that channel -- and then also anything that you think will help there from the commercial side in terms of driving additional coverage in terms of having scale across the portfolio. . Unknown Executive: Thanks for the question, Terence. We're going to Dave to talk a bit about the portfolio strategy and leveraging DTC. David Ricks: Sure. And Ilya and Patrik can jump in here. I think you're pointing out something that as you've all been developing part of the story here for our growth, which is consumers wanting to take charge of their own health and activate the digital platforms to control weight and obesity. I think this is here to stay, and it's a big part of our business now and probably something we need to continue to invest in. We're doing just that. So you should expect continuous improvement in that experience for consumers in the U.S. and then expansion [indiscernible] with the current offerings. . I would also say this notion as we move into other kinds of medicines that could be more preventative could be quite a useful platform to reach more people. We all know that the financing of the current health care system has to struggle everywhere. And with all the noise around PAs and other barriers to care people need people want to take into their own hands. And I think, of course, we need to do that within the confines of the regulations in law, but there's a lot of room for improvement for consumers, and it's a great outlet potentially for us. So -- let me ask Ilya or Patrik to add to that if they have anything to add on LillyDirect and our offerings. Ilya Yuffa: Yes. Sure. Just maybe a few key components of what we've seen on Lilly Direct, even with Zepbound, you've seen that currently, around 55% of new patient starts are coming through self-pay for most of which is coming through the direct or telehealth players, which is a component of reducing some of the frictions in place and even early in our launch of Foundayo with limited promotion, we're seeing that, that reduced friction level and understanding direct-to-consumer is an important number. About 45% of our volume for Foundayo early on is coming through lillydirect. And so we continue to look at ways to improve on the experience both providers and for consumers in the way they get their health and enter their journey for disease. And obviously, it plays a significant role for obesity currently. Patrik Jonsson: Similarly outside of U.S., I referred earlier to us being at a very high market share in most of the markets already and patient activation is going to drive the most of it coming growth and we have seen that the markets are responding to patient vaccination efforts, although it's a slower ramp, but that's going to be key, taking into account the low penetration of [indiscernible] outside of the U.S. Operator: Next question will be from Umer Raffat from Evercore. Umer Raffat: I thought I'll spend a quick second on Zepbound's commercial dynamics in U.S. And really, what I'm trying to understand is, for example, 1Q 7 million [indiscernible] and $4.1 billion sales for Zepbound in U.S., meaning it's about $580 per prescription. And even if you adjust for some of the onetime adjustments, it's still about $550 per Rx, whereas -- we understand the cash pay prices to be about $450 or so I mean that prices too. I guess what explains that delta or maybe IMS is just not capturing some of your online channels. Unknown Executive: Lucas to talk a bit about the pricing dynamics in the U.S. Lucas Montarce: Yes, Umer, thank you for your question and quick math that your math is pretty spot on, by the way. So -- just to highlight, yes, and even normalizing by these [indiscernible] period adjustments. First of all, again, going back to the initial question on pricing, if you are out what we agreed on MFN side as well back in November and then the NRDL access prices has been relatively stable quarter-on-quarter. I think it's going back to what we discussed last time about maintaining that price discipline. We continue to see that happening while we continue to grow significantly on the volume side as well. And yes, again, going back to your analysis on the pricing, yes, you have the Lilly Direct prices that, as you know, we have adjusted down starting in December. And those prices have been very stable on that front as well. And then the rest, basically by difference, you get into the commercial business, mainly that that's the different portion that it gets to that net $550 that you highlighted. David Ricks: Maybe just 1 add, I think it isn't widely appreciated is there is a reasonable amount of medical exception and OSA usage that moves across channels at close to an undiscounted price. So I think that's probably the piece of your math meta you might want to take a look at. Operator: The next question will be from Courtney Breen from Bernstein. Courtney Breen: I know there's been a huge amount of focus on kind of the first few weeks of Foundayo and specifically kind of the launch strategy and activation of the different channels -- perhaps Ken, it would be helpful if you could talk through how does this compare to kind of a traditional primary care launch -- what things are you accelerating? What things are you holding back and for what reasons, particularly in the context of the fact that you've got extreme amounts of inventory pre-prepared for the launch of this product. Unknown Executive: Okay. Thanks, Courtney. Ilya, do you want to make a few more comments about the Foundayo launch vis-a-vis primary care? Ilya Yuffa: Sure. Again, maybe just probably the 3 elements I discussed earlier are probably the same for all of our primary care launches where you need to grow the prescriber base and understanding of the profile of the medicine, and that's what we're doing here with Foundayo building out access. And quite frankly, this is actually gaining access very early in launch. -- both on the commercial side, having 2 of the 3 being activated in the next couple of weeks and getting Part D, which is usually lags in July is a faster ramp on access, and so we're excited about that aspect. The piece that is probably on the primary care side, an important element that many have noted around DTC. And we activated from day 1 in the first week, a number of both digital, social media, and out-of-home advertising on the brand itself. But it does take time to build out consumer understanding and awareness of the brand. The current sentiment, if follow the total number of impressions and what consumers are saying about the profile Foundayo is resonating. So both the efficacy as well as the overall profile on not having food and water restrictions. And so that element is positive. Now obviously, having full DTC launch we're still activating that probably earlier than normal because there is familiarity around GLP-1, but we do want to take a moment and have to be disciplined in the approach of making sure that physicians actually understand what Pandao is before activating fully. But overall, this is following an accelerated path in primary care. And if I compare, we've had the opportunity to launch many brands within primary care with Trulicity, with Mounjaro, Zepbound, Jardiance, all of which have gone towards leadership in those categories in a competitive space. So we feel pretty good about all of the actions we're taking, the 3 key factors and the pace at which we are activating all 3 components. David Ricks: [indiscernible] just to reiterate one thing, which we said earlier, but just so it's not lost the 3 major products that are used in BCD in the United States are all line extensions. So the molecule was on the market before. And in some cases, the brand name was used before. So consumer awareness, which is the brand name and the molecule itself, which is the physician part, we're starting from a much lower baseline. We've got to build that, but we're hugely confident we'll be able to build it. We've launched many, many primary care drugs that are new successfully. . And then the final thing I'll say is that related to your inventory. I mean that really speaks to the international rollout. That's why we keep mentioning there's 40 different countries under review, and we expect that to happen also in one of the most accelerated cadences perhaps in the history of the industry. So expect launches as we exit this year into next year in quite scaled markets. And we know from what we're seeing on this call with Mounjaro and International, there's a huge opportunity for Foundayo around the world. Unknown Executive: Great. One last quick question, and then we'll go to the close. Operator: Final question today will be from Dave Risinger from Leerink. David Risinger: So Dave, I was hoping that you could just frame your vision for employer coverage in the United States. So in the U.S. Pharmaceutical business, employer coverage is most important for drugs, particularly drugs that treat various medical conditions beyond cosmetic and so I understand that you have the employer direct initiative, but I'm just trying to get my head around what you think will happen with regular employer insurance coverage in coming years versus coverage that will involve greater cost sharing by participants that engage with Lilly Direct for consumers to pay more out of pocket than they are paying today under regular employer coverage. David Ricks: Okay. Thanks, Dave, for the question. Obviously, an important factor in -- we do think, just as a policy matter, that obesity and overweight medications should be broadly covered. I think a big step in this journey is actually the July 1 Medicare. There's often spillover benefits into commercial from there. And I think setting a standard that people in America should expect if they've paid into their insurance program or their employer has that will cover their health needs. That said, I think the likely path from here to what I think will ultimately begin to look like other chronic medication markets like diabetes and hypertension, I think we will get there with this category. But it won't be a straight line. It won't be a straight line. It won't be kind of everything we want on day 1. Why? Because the economics you're mentioning, -- it's a very broad disease. 70% of adults have overweighted obesity and potential candidates for these medications. And it's the last thing in. And we know that despite the fact that it could be 1 of the most valuable health care interventions available, it's the last 1 we see, so it's easier to say no to. But we do see progress there. As Ilya said, Employer Direct is all about creating new options to get to guests with employers, alternate pathways -- we'll continue to publish data, as I'm sure Novo-Nordisk will that demonstrate that pretty much all of these drugs in this category have had profound effects and are probably cost effective at their current prices. And of course, prices have been trending down. So we'll continue to make progress. I should also say we have a number of new indications coming in per Umer's question earlier, that actually is a pretty good unlock for us when we get indirectly indicated populations with acute comorbid disease. So all those things are pulled together and in some future year, we'll look back and say we got there. But it's going to be more incremental progress quarter-on-quarter. And we'll keep updating the Street with what to expect as we issue our guidance. Unknown Executive: Dave, do you want to [indiscernible] comments to close? David Ricks: I will. So again, I appreciate everyone dialing in today on our call and your interest in Eli Lilly and Company. We hope you'll join us later this year. We're announcing a Lilly Investment Community Update Day. This will be on Monday, December 7, and details on location and exact timing to follow. Please follow up with the IR team if you have any questions that we didn't address today, and hope you have a great day. Thanks. Operator: Thank you. And ladies and gentlemen, this does conclude our conference for today. This conference will be made available for replay beginning at 1 p.m. today running through June 4 at midnight. You may access the replay system at any time by dialing (800) 332-6854 and entering the access code 662964. International dialers can call (973) 528-0005. Again, those numbers are (800) 332-6854, and (973) 528-0005 with the access code 662964. Thank you for your participation. You may now disconnect your lines.
Operator: Good day, and welcome to the Hanover Insurance Group's First Quarter Earnings Conference Call. My name is Betsy, and I'll be your operator for today's call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead. Oksana Lukasheva: Thank you, operator. Good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer; and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Dick Lavey, Chief Operating Officer and President of Agency Markets; and Bryan Salvatore, President of Specialty Lines. Before I turn the call over to Jack, let me note that our earnings press release, financial supplement and a complete slide presentation for today's call are available in the Investors section of our website at hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today other than statements of historical fact, include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements can relate to, among other things, our outlook, profitability growth and strategic initiatives, the impact of recently revised policy terms and conditions and targeted property actions, economic and geopolitical conditions and related effects, including economic and social inflation, tariffs as well as other risks and uncertainties such as severe weather and catastrophes that could impact the company's performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements, and in this respect, refer you to the forward-looking statements section in our press release the presentation deck and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios, excluding catastrophes, among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can found in the press release, the slide presentation or the financial supplement, which are posted on our website. With those comments, I will turn the call over to Jack. John "Jack" C. Roche: Thank you, Oksana, and good morning, everyone. We're off to a very strong start in 2026, posting excellent first quarter results and setting the stage for continued success. Our performance in the quarter highlights consistently tight execution across the enterprise as well as the durability of a portfolio that has been deliberately shaped for resilience flexibility and strong performance across varying market cycles. Underlying margins across the book continued to trend favorably due in large measure to recent pricing and targeted underwriting actions. At the same time, we continue to benefit from our strong balance sheet and our high-quality investment portfolio, which once again generated attractive turns through disciplined asset allocation and investment management. We achieved record first quarter performance, including operating return on equity of 20.3% and operating earnings per share of $5.25. Our all-in combined ratio improved nearly 2.5 points to 91.7%, while our ex cat combined ratio improved by a similar margin to 85.4%, both first quarter records. While weather activity was elevated in our footprint, our results demonstrate that our underlying earnings engine is performing exceptionally well. Additionally, we are encouraged by the better-than-expected impact of enhanced terms and conditions and targeted property actions, which we believe the meaningful favorable development on prior year catastrophe losses demonstrates. We generated balanced net written premium growth of 3.2% in the first quarter. We are executing thoughtfully in areas where property conditions are softening. This approach is enabling us to preserve margin integrity while positioning us for enhanced growth opportunities. Our 2026 plan assumed first quarter growth would represent the low point for the year. Turning now to our segment results, beginning with Personal Lines. Our performance in the quarter reflects a business that is tracking well, even as external conditions remain fluid. We increased Personal Lines net written premiums by 2.7% and reflecting the effectiveness of our state-specific growth strategies. We continue to prioritize profitable growth in our underpenetrated states while carefully managing our exposure in the Midwest to align with our strategic diversification priorities. As the quarter progressed, we saw positive new business momentum, reinforcing our confidence in the trajectory of our Personal Lines business. Importantly, pricing levels for the total Personal Lines book continue to exceed loss cost trends, and we remain confident in our ability to preserve margin integrity. Quoting activity, close rates and conversion metrics also remain healthy, reflecting strong alignment between price, risk selection and customer value. And we maintained excellent profitability in the quarter as evidenced by a year-over-year improvement of more than 1 point in our underlying loss ratio. Overall, our Personal Lines business is well positioned with our preferred full account strategy, disciplined pricing and stable customer behavior despite the increased competitiveness in personal auto in many states. Moving to Core Commercial. We delivered solid growth of 4.3% in the quarter led by a strong resume growth in small commercial and building momentum in middle market. Our results reflect an improved execution and are well aligned with our profitability objectives. Small commercial net written premiums accelerated sequentially from the prior quarter, driven by double-digit growth in new business. Transactional flow, digital engagement and consolidation activity all made positive contributions and are tracking to expectations. And we believe we are extremely well positioned with our small account customer base and strong agency position as evidenced by improved retention. Looking ahead, we expect our growth initiatives will enable us to continue to drive our top line while maintaining underwriting discipline. Middle market growth was positive in the first quarter, reflecting improved momentum, which we expect to build on going forward. Against the backdrop of softening property conditions, we are maintaining underwriting discipline where pricing pressure is evident with a continued focus on margin preservation. At the same time, we are implementing pricing and underwriting actions across commercial auto and umbrella to address continued industry loss ratio pressure while segmentation efforts are enabling us to refine our portfolio towards more attractive risk profiles. Overall, we are pleased with the solid growth we delivered in core commercial, supported by strategic positioning of our portfolio and strong momentum in Small Commercial. Turning to Specialty. Our performance continues to validate the inherent strengths of our specialty business, our clear focus on pricing for risk and returns and our ability to generate strong profitability ahead of expectations. Growth of 2.3% reflects our measured posture in areas characterized by heightened competition, particularly in property exposed lines like Hanover Specialty Property. Top line pressure also reflects our strategy to keep our powder dry, protecting higher-tiered accounts and selectively pulling back from underpriced lower quality business where returns are less attractive. As an example, net written premiums declined in our programs business during the first quarter. And while profitability in our book of business is quite good today, we are taking a cautious approach relative to the MGA environment and remaining very selective in our distribution relationships. At the same time, we have seen double-digit momentum in management liability, surety and specialty GL, upper single-digit growth in E&S and positive growth in Professional Lines and marine. Pricing discipline remains a cornerstone of specialty execution. Loss costs and margin focus continue to guide our pricing decisions, particularly as competition intensifies in a softening property environment. Looking at Specialty subsegment highlights for the first quarter. Professional and executive lines are taking advantage of a new operating model to enhance execution across underwriting capacity planning and workflow modernization. Cross-selling and pipeline discipline are further improving mix quality, supported by closer coordination with our core Commercial Lines team. E&S grew 8.1%, supported by liability focused offerings with property growth tempered in response to competitive market conditions. Our team remains focused on expanding our presence in the small E&S market, where we continue to see attractive opportunities. In marine, quarterly growth was expected to be a low point for the year, and results actually came in slightly above expectations. We continue to benefit from our leadership in the marine market today, and we expect growth to return to upper single digits for the rest of the year. Our marine team remains focused on selectively allocating capacity and pursuing opportunities that help maintain margin quality and agency relevancy. As we think about the year, we expect overall specialty growth to ramp up from here. We remain confident in our ability to drive top line growth across our highly diversified specialty book, while we continue to deliver very strong profitability through disciplined execution and targeted investments. Stepping back from the segment results, the impact of our technology investments is increasingly visible across the organization. We are advancing everyday innovation alongside operating model transformation by accelerating our quoting processes, improving speed to answer and in strengthening claims execution, we are delivering better outcomes for customers, agents and employees. We are intentionally building reusable AI capabilities for the most common enterprise task to reduce complexity, strengthen execution and enable scale. For example, risk scoring and AI-enabled triage are helping underwriters prioritize submissions and streamline intake and decision-making built on an enterprise ingestion foundation now used across many underwriting customer service and claims operations, these capabilities continue to scale. All in, this represents a disciplined transformation across the organization, grounded in robust data, modern technology and responsible AI. And positions the company to operate more efficiently and scale with confidence. We will continue to refine our strategy and business model in ways that enhance the alignment between risk, price and capital provide our agents and customers with the most innovative and responsive products and services possible and drive top-tier results. While volatility, particularly from catastrophe activity will always be a factor in our industry, our underlying performance continues to demonstrate the effectiveness of our past exposure management actions and stability across a range of conditions. We plan to continue emphasizing disciplined underwriting as we pursue selective growth where returns are compelling, deploy capital efficiently and further invest in the capabilities needed to navigate an evolving P&C market. Most importantly, we remain confident in our ability to deliver sustainable, profitable growth and attractive long-term value through a consistent execution-driven approach. Our unique selective distribution partnership model with the best independent agents in the country continues to boost this confidence. In fact, this month, we held our annual President's Club conference which includes the top 5% of our agents. During the conference, we had many excellent conversations with our agent partners about our business strategies, operational tactics and ways we could best work together in this complex marketplace. Feedback from our agents has been very positive, particularly with respect to our underwriting and claims transformation efforts. We have successfully navigated dynamic industry environments before, remaining sharply focused, acting decisively and executing with discipline, and we are committed to doing so going forward. With agility, alignment and performance at the core of our strategy, we are confident in our ability to deliver on our goals for 2026 and in years ahead, delivering value for our shareholders and many other stakeholders. With that, I'll turn the call over to Jeff. Jeffrey Farber: Thank you, Jack, and good morning, everyone. We are very pleased with the strong results we delivered in the first quarter, which are a testament to the outstanding execution of our team and the diversification of our businesses. Each part of the business contributed to our impressive results with personal lines remaining at outstanding margins, specialty profitability outperforming our expectations and core commercial posting solid healthy margins, all bolstered by our investment portfolio, which continues to provide very strong returns. Catastrophe losses were 6.3 points of the combined ratio. We recognized 3.1 points of favorable prior year catastrophe development largely from lower severity on 2025 events. We believe this reflects stronger than originally estimated benefits from terms and conditions changes and other property management and risk prevention actions. As an example, on hail events, we have observed lower severity as a result of increased policy deductibles in both personal and commercial lines. We are very encouraged by what we are seeing reinforcing our optimism that these actions will drive better stability in our underwriting results going forward. Current accident year catastrophe losses were primarily driven by an unusually severe hail and wind event in the beginning of March, with the heaviest impact in Illinois and Michigan and to a lower extent, winter storm firm in January, which impacted many states across the country. Together, these 2 events made up over half of current year cat losses. As claims develop and mature, we will be in a good position to assess the favorable impact that our underwriting actions achieve. Excluding catastrophes, our combined ratio was extremely strong at 85.4% and reflecting a 2.4 point improvement over the prior year quarter with loss ratio improvements in each segment. The expense ratio for the quarter was 30.7%, in line with our expectations. We continue to take a diligent approach to expenses, aligning costs with strategic priorities while making targeted investments to support future profitable growth. For the full year, we continue to expect an expense ratio of 30.3% as the benefit of growth leverage skews towards the latter part of the year. First quarter favorable ex-cat prior year reserve development of $25 million included favorability across each segment. In specialty, favorable prior year reserve development was $14.2 million or 3.9 points with widespread favorability across multiple coverages. In personal lines, favorable prior year reserve development was $9.2 million or 1.4 points with favorability in home and to a lesser extent, in auto driven by property coverages. And in core commercial, favorable prior year reserve development was $1.6 million or 0.3 points with minor adjustments by line. Our reserve position remains strong and aligned to the current uncertain environment. Now I'll further discuss each segment's current accident year results, starting with personal lines. This business generated an excellent current accident year ex-cat combined ratio of 83.8% for the first quarter, a 0.7 point improvement from the prior year period. The benefit of earned pricing in both auto and home and favorable frequency helped drive a 1.1 point improvement in the underlying loss ratio driven by homeowners. In this line, we delivered an outstanding ex-cat current accident year loss ratio of 46.7%, improving 2 points from the prior year quarter and favorable to our expectations helped by the benefit of strong earned pricing. We also continued to observe lower attritional loss frequency and partially attribute the benefit to deductible changes leading to fewer smaller claims in both cat and ex cat results. Our personal auto ex-cat current accident year loss ratio was 66.7%, an improvement of 0.2 points compared to the prior year quarter. we are seeing continued stability in collision frequency aside from the impact of severe winter weather. Personal Lines grew 2.7% in the first quarter with PIF flat sequentially, which is an improvement from the fourth quarter of 2025. We continue to expect PIF growth in 2026. Both auto and home achieved strong pricing increases in the first quarter with auto up 6.7% and home up 10.8%. And umbrella pricing increases also continued to be strong at approximately 19%. Now turning to our core commercial segment. We delivered a current accident year ex cat combined ratio of 91.5%, a 3.6 point improvement from the prior year quarter. The current accident year loss ratio, excluding catastrophes, of 58.8% was 2.9 points better than the prior year quarter. The first quarter of 2025 included some elevated property large losses while large loss performance was within expectations in the first quarter of 2026. Core commercial net written premiums grew 4.3% in the quarter propelled by increased momentum in both Small Commercial and middle market. Small Commercial grew 6.4%, improving over 1.5 points compared to the fourth quarter of 2025. Middle market net written premiums increased 1.5%. Price levels remain healthy and elevated, particularly in commercial auto and umbrella. Moving on to specialty. This business continued to perform very well with a current accident year ex-cat combined ratio of 85.4%. The current accident year loss ratio, excluding catastrophes, was 49% in the quarter. coming in better than our expectations and our low 50s target for this segment, driven by property favorability, while liability remained within expectations. The continued exceptional performance and profitability of this segment highlight the quality and positioning of our specialty business. While growth was pressured in the quarter, it reflects our prudent approach and focus on protecting the strong profitability of the business. We are working tirelessly to ramp up premium growth. Turning to our recent investment performance. Net investment income increased an impressive 19.6% in the quarter, driven by growth in our asset base from strong earnings, the benefit of higher reinvestment yields and improved partnership income. Our investment portfolio continues to provide steady returns, helped by disciplined positioning and broad diversification. Roughly 88% of our total invested assets are in cash and investment-grade fixed income, highlighting the high-quality composition of our portfolio and the relatively modest size of our other exposures. Our fixed maturity portfolio weighted average rating is AA- with 95% of Holdings investment grade. Earned yields on the fixed maturity portfolio were 4.42% in the first quarter up from 4.08% a year ago, and we continue to reinvest at higher yields than what is maturing. Portfolio duration, excluding cash, remained relatively stable at approximately 4.4 years consistent with our long-term asset liability alignment approach. Moving on to our equity and capital position. Our book value per share increased 1% sequentially to $101.8 driven by strong earnings in the quarter, partially offset by an increase in the unrealized loss position, share repurchases and the quarterly dividend. Excluding unrealized book value per share increased 2.8% sequentially. We continue to actively participate in share buybacks, repurchasing approximately 503,000 shares totaling $87 million in the first quarter. Additionally, we repurchased approximately $14 million worth of shares through April 28. We remain dedicated to responsible capital management and prioritizing shareholder value. Our second quarter cat load is expected to be 7.9%. To wrap up, we had an exceptionally strong start to 2026 and are confident in our strong market position headed into the rest of the year. The company continues to perform well across the board, helped by our diversified business and earnings stream as well as our extremely talented team. With that, we are ready to open the line for questions. Operator? Operator: [Operator Instructions] The first question today comes from Michael Phillips with Oppenheimer. Michael Phillips: I want to start, Jack, I guess, with what I think is immediately a generic topic but an important one that I think could separate Hanover from here over the next couple of years. That is where the market specifically commercial market is headed I'll start with an answer here, hopefully not the answer, but I'm going to sound too familiar. We don't follow the market down. We're laser-focused on margin says everybody. Obviously, I guess it's a matter of degree. But can -- Jack, can you talk about any structural things within Hanover that if we are a fast forward the next year, give us confidence that, that commercial renewal rate deceleration for Hanover won't be as dramatic as your peers. John "Jack" C. Roche: Yes, Mike, thanks for the question. I would start off with the fact that we have the most diversified business and earnings stream in the history of the company. And that is essential as we face off on a market that is, I think, going to be showcasing many cycles as opposed to on total cycle that affects all businesses in all geographies the same way. So to be in a position where all of our major business units and most of our geographies are contributing to our profitable growth. That is powerful in itself. Within Commercial Lines, having a pretty diversified portfolio across small commercial, middle market, 9 specialty businesses, again, is an extension of that enterprise view. We work, as you know, in the small to lower end of the middle market. We have a good balance between property and casualty. We have a strong alignment with our agency plant I think we're particularly well served by leveraging those profit margins into appropriate pricing that doesn't generate a lot of marketing activity in this dynamic marketplace. So I think the secret sauce for us is we've figured out how to make money in a lot of different places, and we can navigate and pull different levers across the way without being kind of stuck in one business segment that's in a down cycle. Michael Phillips: I think it's a good story. I appreciate the thoughts. I guess sticking just specifically with small commercial, or one could maybe argue that there might be more pressure longer term from advances in tech, at least from a distribution angle. Is that something at all you feel you have to think about? John "Jack" C. Roche: Well, we constantly think about not only how we navigate the contemporary challenges and opportunities, but also where the longer-term view is going to be. I think like some of our better competitors have articulated Small Commercial is much more complex than I think people fully appreciate in terms of how fragmented it is across the distribution system and how you have to both have a kind of point of sale or portfolio approach to some parts of small commercial and how you have to have a separate operating model that gets out the appropriate level of underwriting for kind of the upper end of small commercial. And then furthermore, you look at small specialty and how much business really extends into that more specialized line. So I wouldn't say that there's a moat necessarily around it. But you have to have made a lot of investment. You have to have a lot of history and data around where the profitability is by line of business, by geography and by business segment. And if you do that well, I think you can manage through at least the short-term pressures, the longer-term view, we are very optimistic about because Dick can share with you, we are heavily invested and excited about some of the transformational opportunities that will take what we do today and, frankly, make ourselves more efficient and more competitive into the future. Operator: The next question comes from Paul Newsome with Piper Sandler. Jon Paul Newsome: I was hoping you could touch a little bit more on your comments you made around the program business. And I always kind [indiscernible] of you tell exactly what's in there. And if the sort of specific areas within those areas -- within programs, market-wise, geography, whatever you think is interesting that where you might see unusual more than what we'd expect pricing concerns as well as in terms of condition changes? John "Jack" C. Roche: Yes, Paul, this is Jack. I'll make a couple of comments here broadly and then let Bryan speak to Hanover programs. But I'll remind you and others that we write program and programmatic business across many business units in our enterprise. As a matter of fact, I don't think there's a single business that doesn't have at least some programmatic business with individual distributors across the various lines and businesses. And frankly, our Hanover Programs business in total is smaller than the program business that we write across the enterprise and other specialized businesses. So what we articulated in our prepared remarks is that programs in the Hanover programs area that we've been working on to improve its profitability. We've achieved that profitability that we were seeking and have greatly improved it. But on the margin, we're trying to keep our powder dry for what we think is the next round of opportunities and so I would say we shrunk a little bit following through on that discipline that we have and not taking in any material new programs but we're quite optimistic about how we can translate that into eventually stronger growth in the future. Bryan, do you want to build on that? Bryan Salvatore: Yes. I mean, first of all, I think you said a lot of that quite well, right? So I think what I would add, I'll just call it out, right, the program business that I think you're referring to is the smaller part of our total program portfolio, which actually performed very well. And as Jack pointed out, we have worked very diligently on that Hanover programs booked is actually performing well. And frankly, the pricing in that part of the portfolio is actually quite strong. So we feel very good about that. And then what I think what I would add is I really do think it's important this notion of keeping our powder dry, right? So we finished -- we're finishing up some of that cleanup work. And I would tell you what we see our agents doing is increasingly leading towards this. this area, right, to be able to work their portfolio. And so all the work that we've done, I would say we feel really well positioned to support them across multiple lines in programs outside of programs, I think we're well positioned, and this is an important space to our agents. Jon Paul Newsome: That's great. And then maybe some thoughts on the comments that you made about commercial auto and some of the other severity hotspots, some of your peers this quarter and in the past have really gotten behind the ball here in terms of what's going on. Just from your perspective, are we seeing an acceleration of some of the severity issues? Or just -- is it just continuing at sort of the high levels that we've seen in the recent past? John "Jack" C. Roche: Yes. I think I would kind of echo what I said on the last quarter call was that there is a maturation of the trends in my mind, but at a very high level. So we know that the severity of liability cases, whether they're commercial auto or slip trip and fall or other types of liability claims are dramatically higher than they were historically. But as we've gotten further away from the COVID kind of court closures and we've started to see how those litigation trends come through and some of the jury and judge awards, it is clearly starting to mature. But I wouldn't say that I think what you're going to see is different carriers are in different places with their book mix, with the reserve position with how they've actuarially addressed the loss trend analysis and we feel really good about the way we've managed through this. But we get up every single day, paying attention to these liability trends because they are elevated. Paul, this particular quarter, our commercial auto results were fairly benign in both the current year and prior year. There's not all that much informational content in that statement because I think that commercial auto the industry has reached a plateau of fairly high severity that we're all dealing with in terms of managing through that and making sure we get substantial rate. Operator: The next question comes from Mike Zaremski with BMO. Michael Zaremski: Great. Switching gears to personal lines. Just looking at the continued excellent results. for you all, especially, but also on the industry basis. Should we expect pricing power to moderate more materially kind of towards peers? Or are you guys -- since you have a more differentiated portfolio, especially regional as well, do you expect to kind of keep pricing well above the industry average. Maybe you could throw in how to think about retention there as well. John "Jack" C. Roche: Yes, Mike, I'll let Dick obviously speak to some specifics about the personal lines business. But I think your articulation of our where we play and how we're different is an important part of the answer. We are the best account writer in the 20 states we choose to do business in, in the IA channel, and that gives us some real, I think, staying power. That said, we live in a competitive business. I think our account strategy itself is now really paying huge dividends because there's no doubt that in the direct channel and even in the captive channel, there is real pricing pressure coming, particularly on auto. But having home as part of our proposition is a meaningful part of the way in which we differentiate ourselves, but also keep ourselves out of that pure auto pricing market. Richard Lavey: Yes. So a lot of great points there, Jack. I just reemphasize sticking to our strategy, right? Both geography and customer segment is what we believe will help us continue to kind of outperform and I think stands up better in a competitive market, the full account, 90%. The other fact that we have 76% of a common effective date, so that brings efficiencies to having both policies or multiple policies renew on the same date. But I'll just add, we have an amazing state management capability kind of working as a co-CEO, if you will, with a field leader in each state, driving those agency relationships at the desk level and the analytic tools and practices that we've built over the years is just allow us to stay on top of the trends and kind of be laser-like in how we outperform in the marketplace. Looking at new business through the comp raters and adjusting quickly our dials, the studying intensely the customer behavior on renewals, specifically price elasticity and making sure that we're doing the right kind of renewal pricing to maintain and keep our best accounts. So we just honed and finetuned our capabilities. And we just -- we know who we are, we stick to our strategy, and we're not immune, but we think we can outperform particularly as we continue to push ourselves up market with higher [indiscernible] Prestige product is having tremendous success, and that gives us confidence about the future. Michael Zaremski: Okay. Great. Maybe just shifting gears to the also excellent results in specialty, if we focus on the core loss ratio continues to usually track below the low 50s, which is great. Just curious, has there been any items you want to call out that kind of have been better than expected, we should just continue to keep in mind? Bryan Salvatore: Yes. John "Jack" C. Roche: Go ahead, Bryan. Bryan Salvatore: Yes. So I'm actually quite pleased with the performance of almost all of our portfolio, as I say, pretty much all of our portfolio, right? The core loss ratios across our lines of business are really strong. the profitability that we delivered was broad-based. So I don't know that I would call it a single area. I would probably highlight that property continues to be very strong from a profit perspective. Again, really good profitability across this portfolio. Some of that was from hard work in parts of portfolio, a lot of discipline in our pricing and our portfolio management. But beyond that, I wouldn't say [indiscernible] area. I just a really good blood-based product. John "Jack" C. Roche: Mike, I would just add that one of the strengths of being able to play primarily in the retail agency side of that business across multiple businesses, it gives us the ability to based on the way the market cycles are changing. And I think we used the example of management liability last quarter where we faced several quarters of some pricing pressure, and we held on to our book of business, but we lowered some of our growth trajectory. And as we finished up 2025 and headed into we were able to re-elevate our growth because we maintain that profitability and the pricing discipline started to come back into the business. So I believe that's the secret to being in the more specialized businesses do you have that core profitability? Do you have multiple areas that you can bob and weave so that you're not trapped into one business that is going to be too cyclical. Bryan Salvatore: And just to really quickly add that you mentioned before, our focus on that small to middle market space definitely benefits us, especially [indiscernible] Michael Zaremski: And just a quick follow-up, just for maybe education. You continue to highlight Marine. Maybe you can just -- I think when a lot of us think about marine, we think of kind of the more syndicated large account marketplace kind of Lloyd's of London type business. Maybe you can just give us a quick flavor of what the typical marine account looks like. Bryan Salvatore: Yes. So there is quite a bit to Marine. Quite a number of lines of products there, right? I'll go back to what I said before. Even there, we focus on the middle market to smaller space. the vast portion of our business in terms of pit in smaller accounts. And a lot of that is builders risk, contractor's equipment, what you would call inland marine. And then the other thing I would say relative to what people often refer to as Ocean Marine, our book, I don't think it looks like a lot of others that you might be thinking of, right? We do not write a lot of haul coverage we write marinas. We write brown water stuff, things that are traditionally better performing. So we're very fortunate because I think of our agent relationships that we've really built one of the larger marine practices in this inland marine space and what I think of as lower severity ocean marine. Operator: The next question comes from Meyer Shields with KBW. Unknown Analyst: This is [indiscernible].My first question is on specialty. Just a follow-up on that -- we see that there's a pricing slow down this quarter. I'm just curious what's driving that? And also you mentioned that you'll see specialty growth ramp up in here. What areas are you focusing on given the kind of slowdown in the overall specialty pricing? Bryan Salvatore: Yes. Thank you. So I think the first thing I would call to your attention is that we are very deliberate about our pricing, right? And I think worthwhile to consider. And I think it ties a little bit into your Part B of your question, right? This is a very diversified portfolio. Nine businesses, 19 separate product areas focused on the small to middle market space all traveling on that same path, right? So we did feel some -- we felt pricing pressure in the property space, one of our most profitable areas and we're managing that in a very disciplined way. I'll go back to something Jack pointed out before about management liability, we have a track record in our businesses of appreciating the profit margin, understanding that we have to compete with doing that in a measured and deliberate way, sometimes sacrificing near-term growth so that we're well positioned to grow going forward. . And so that's the way we're thinking about pricing in this environment. And I do see the ability to continue to drive growth in the areas we had success. I think that was the other part of your question. So management liability, surety, E&S, our specialty general liability. And then I would add that we see an increase in growth in areas like marine and perpetual liability as well. Jeffrey Farber: Jane, we had planned for the first quarter of 2026 to be the lowest growth quarter of the year. And that, combined with the optimism that Bryan has for the various areas gives us confidence that we can ramp up the growth from here in specialty. Unknown Analyst: Got you. Very helpful. My second question -- just a quick one. Is there any underlying reserve movements on the casualty lines? Jeffrey Farber: I'm not exactly sure how to answer that, Jane. We do every single quarter we look at our entire book. And so we're always making adjustments in terms of our overall reserves. If your question is about prior year development, specifically in core casualty, there were essentially no -- almost no movements in individual lines of business. Operator: The next question comes from Rowland Mayor with RBC Capital Markets. Rowland Mayor: I wanted to quickly ask on the Cat PYD. Was that a result of a specific review of how you had booked the business? Or are you continuing to hold some conservatism around kind of the underwriting changes in Personal Lines? Jeffrey Farber: So we look at our cat reserves every single month. And as we did at the end of March -- in April, we looked at '24 and '25 reserves. And we certainly don't want to get short. So we look at those in a prudent way. But we were really surprised that the level of severity and to a lesser extent, frequency on both personal lines and commercial lines, particularly from 2025 events had rolled off more favorably than we had originally estimated. So it was lower large losses in commercial lines. And in Personal Lines, it was less severity of the terms and conditions are having a very meaningful impact across both personal and commercial lines. With respect to conservatism, we always try to be conservative, but I would not anticipate the level of favorable development that we had this particular quarter to be repeating. Rowland Mayor: That's super helpful. And I'm just wondering on that with the terms and conditions coming in better than you had previously thought. Does that change how quickly you want to grow the homeowners business or the Personal Lines PIF? John "Jack" C. Roche: This is Jack. I hope eventually, the answer is yes. We're going to remain cautious, but the silver lining of having some cat activity, particularly in some of our more penetrated footprint is that we really get to sharpen our analysis about the effectiveness of the terms and conditions and how we're pricing those and the impact it's having on our property aggregations. So for right now, as we said in our prepared remarks, we're not making major changes, but I would be disappointed if eventually all of that didn't translate into the appropriate level of earnings volatility and the ability to grow the business more than we've been willing to do over the last couple of years. Operator: The next question comes from Bob Huang with Morgan Stanley. Jian Huang: So I think most of my questions were addressed. But one thing I want to unpack a little bit is as we think about the broader innovations in technology, a lot of companies have their willingness and their aspiration for AI and innovation. Just curious in that increasingly tech-driven environment where do you think you fit in from a competitive perspective? And how do you think the competitive environment will evolve because of technology? John "Jack" C. Roche: Bob, thanks for the question. Super important time for us to address that with our investment community. I'm really excited about the way the organization is leaning into the opportunities that technology and AI are presenting I think you saw that a few quarters ago, we asked Dick Lavey to take on some additional responsibility in this area to make sure that we -- the innovations were business led in conjunction with the technology teams. We're making a ton of progress. And we look forward to updating you further about the impact that we believe we can make with those like we'll do that later in the year when we update our 5-year forecast as our current 5-year forecast comes to a conclusion at the end of '26, but if you want to highlight kind of your view of the momentum we're building. Richard Lavey: Yes. Great. And I thought Jack's prepared remarks did a really nice job highlighting what we're doing. I'll just maybe make a couple of overarching comments, and they give you a couple of examples, perhaps to make it come alive and then end with, I think, a specific response to your question about the impact on competitive. But yes, so it's been over a year since I stepped into the role of COO and I took the responsibility of just helping our organization frame our strategy overall transformation to kind of tackle the highest order of priorities that we believe are going to bring us some benefit realization, doing that in partnership with Willie, our CIO. But with a keen focus on scaling our company, right, to bring more growth and efficiency and have been working intensely with the business leaders and functional leaders and also spending time externally to your question, understanding technology vendors, competitor actions. And I can say on balance as [indiscernible] of that, is that we -- we feel terrific about our progress. We are right in the game with what others are tackling. And as Jack pointed out, and you've heard me say this before, too, we're tackling really the common activities across our value chain, in underwriting, claims and operations. So 2 very quick examples. This idea of -- in the underwriting space, probably the most impactful, and that claims but this ingestion and triage agent that will help us receive codify and synthesize submissions and get it to the right person with the right scale as fast as possible with a running start on insights frankly, is be the biggest benefits that come out of this transformation effort. E&S is our first business that is going to benefit from that ingestion and triage agent, which is really very ripe for this -- for efficiency. We had 70,000 submissions in E&S last year, a portion of which is frankly missed opportunity because of underwriter capacity. So these tools bring us underwrite capacity and effectiveness in helping them sort through the piles of submissions and then triaging focusing on the more promising activities. So other businesses also underway, middle market, small commercial marine. In the claims side, an AI agent, we have 8 agents that are built to help us synthesize really complex contracts, medical records, claims files, searching for and summarizing specific answers to [indiscernible] question about indemnity clauses, name parties, limits, risk transfer provisions, things like that. And these documents will be 100 to 300 pages long. So what used to take out now takes minutes. So you can imagine the benefit of the adjusters on that. Lots of work on medical records, looking for severity, fraud, settlement insights, that kind of thing. So speed, accuracy, effectiveness. So I just -- we're so bullish about the benefits that this brings, really importantly, we're doing all of this in kind of a LEGO block modular architecture to make sure that we can reuse these agents as we build them across multiple places. So when you step back from all that, how you frame this question, is it going to increase the competitiveness I think if you don't -- if you're not investing in these, you're going to miss out. So yes, those that have invested are going to be more competitive because they're going to be able to get after the more promising opportunities more quickly with more precision. And so I think if you're not in that game, you're going to miss out. So we're confident and comfortable that we're right there with it. Operator: The next question comes from Mike Zaremski with BMO. Michael Zaremski: Just a quick follow-up on the competitive environment, maybe trying to tease out some pricing power trends. I think, Jack, you mentioned the pricing remains healthy and elevated in the social inflation lines. I think we saw a bit of -- we saw the acceleration stopping in terms of higher increasing pricing in some of those lines late last year and maybe coming down a little bit from healthy levels and some of your competitors have talked about pricing kind of reaccelerating a tiny bit. Just curious what you're seeing in those lines? Is it kind of steady upward bias downward? John "Jack" C. Roche: Yes. I would say in general, and I think Jeff addressed this to some degree that we're having real discipline and success we're showing real discipline and having success in the liability lines that are most susceptible and seeing kind of legal system abuse impact. Commercial auto, we continue to be very, very disciplined -- the general liability lines that are most suitable to slip, trip and fall type of activity. And I would say umbrella, not just in commercial lines but also in Personal Lines. We're getting really robust pricing. So I think the market is behaving pretty rational. And while some of the pricing pressure that the industry is feeling in property, feels like it's intensifying. Our belief is that, that is most susceptible to the larger end of the property cycle. And we're, for the most part, a property or an account writer in the small and middle market space. So we have the ability to think about account pricing and not get too hung up on pricing by individual line of business. So hopefully, that answers your question. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks. Oksana Lukasheva: Thank you, everyone, for participating on our call today, and we look forward to talking to you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to the Green Brick Partners, 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. I would now like to turn the conference over to Jeffery Cox. Please go ahead. Jeffery Cox: Good afternoon, and welcome to Green Brick Partners, Inc.'s earnings call for the first quarter ended 03/31/2026. Following today's remarks, we will hold a Q&A session. As a reminder, this call is being recorded and will be available for playback. In addition, a presentation will accompany today's webcast which is available on the company's Investor Relations website at investors.greenbrickpartners.com. On the call today is James R. Brickman, cofounder and chief executive officer, Jed Dolson, president and chief operating officer, and myself, Jeffery Cox, chief financial officer. Some of the information discussed on this call is forward-looking, including a discussion of the company's financial and operational expectations for 2026 and beyond. In yesterday's press release, the company detailed material risks that may cause its future results to differ from its expectations. The company's statements are as of today, 04/30/2026, and the company has no obligation to update any forward-looking statement it may make. The comments also include non-GAAP financial metrics; reconciliations of these metrics and the other information required by Regulation G can be found in the earnings release that the company issued yesterday and in the aforementioned presentation. With that, I will turn the call over to James. James R. Brickman: Thank you, Jeff. I am pleased to announce our first quarter results, particularly given that we achieved these results against the backdrop of ongoing and persistent affordability challenges faced by many consumers in the housing market, as well as increasing uncertainty and volatility for consumers caused by domestic and global events and trends ranging from increasing gas prices to job concerns in this new AI era. Despite these challenges, our team's effort and disciplined approach led to another excellent quarter for our business and our shareholders. Net income attributable to Green Brick Partners, Inc. for the first quarter was $61 million, or $1.39 per diluted share, on total revenues of $465 million. We delivered 908 homes in the quarter, only two less than in Q1 2025, and we had 1,037 net new orders. We achieved this despite, as we mentioned on our last call, losing about seven selling days in January due to inclement weather in DFW, our largest market. Orders have increased sequentially each month of the quarter, with market sales outpacing the same period in 2025. This was more in line with a normal spring selling season. We believe our aggressive, great balance sheet and low financial leverage provide us with the flexibility to navigate and take advantage of evolving market conditions. At the end of Q1, our homebuilding debt to total capital ratio decreased to 11.5%, and our net homebuilding debt to total capital ratio decreased to 5.5%, among the lowest of our public homebuilding peers. We also have $475 million in available liquidity. Our industry-leading homebuilding gross margins of 28.9% give us the flexibility to profitably adjust the pricing of our homes to respond to market conditions. We believe the foundation of our industry-leading gross margin starts with our commitment to owning and developing land. We remain highly disciplined in how we control land. One of the primary differentiators from many of our peers is that we do not engage in off-balance sheet, high interest cost land banking arrangements that can distort a builder's economic leverage and risk, and that can give a land banker indirect control over a builder's lot purchase timing. At the end of the first quarter, 77% of our approximately 49,000 lots are owned. We have 3,400 lots owned or under contract in four joint ventures with other homebuilders or landowners. These joint ventures account for 7% of our total lots owned and controlled and only 2.9% of our total assets. These joint ventures are evaluated with the same underwriting criteria as our other land investments to ensure that we remain focused on attractive risk-adjusted returns and protect shareholder value. As many of you who follow our company know, this disciplined approach to land acquisition and development is not a new philosophy for our company. We have always believed that a self-development-focused strategy provides us with better capital efficiency and returns, allowing us to make higher margins, lower cost, and enhanced inventory control so that we can better determine the pace of land and lot deliveries. We generated strong operating cash flows of $56 million for the quarter. In the last twelve months, we generated [inaudible] in operating cash flows, and returned $74 million to shareholders through repurchases. Even with our land-heavy balance sheet and macroeconomic headwinds, we delivered strong returns during the quarter of 9.6% return on assets and 13.1% return on equity, among the very best of public homebuilding peers. Our disciplined, returns-focused approach and our experienced team of operators position us well for future value creation. This quarter, we began reporting on financial services operations as a separate segment due to the strong growth of our wholly owned mortgage company. Rendrick Mortgage was founded in 2024 and funded its first loan in 2025. During 2025, Green Brick Mortgage grew rapidly, and by the end of Q1 2026, was serving all of our Texas entities. For the first quarter, revenues for Green Brick Mortgage increased from $1.3 million to $5.6 million year over year as the number of funded loans increased by almost 250%. Pretax income from our financial services segment increased year over year by 139% in Q1 to $4.3 million. While the macroeconomic landscape presents short-term headwinds for the entire industry, we believe the core strengths that have driven Green Brick Partners, Inc.'s success over the past decade will enable us to continue to navigate any challenges with confidence and flexibility. As always, we will focus on maintaining operational excellence, centered on our disciplined approach to land acquisition and development, to position us for future growth and ensuring we continue to build out our team of experienced, dedicated employees who drive our growth and provide a quality home and buyer experience for our customers. We believe we are well positioned to sustain our peer-leading return metrics and provide long-term value to our shareholders. We remain focused on growing our business, particularly our Trophy brand. Trophy's continued growth in DFW and Austin, combined with our first community opening in Houston in Q1, presents significant opportunities for sustained growth for the next few years. This expansion allows us to continue serving the critical first-time and first move-up buyer segments while further diversifying our revenue base and strengthening our presence in key Texas markets. With that, I will now turn it over to Jeff to provide more detail regarding our financial results. Jeffery Cox: Thank you, James. I want to take a few minutes to address the Form 8-Ks that were filed yesterday in which we concluded that certain closing cost incentives offered to our buyers had been previously incorrectly classified as cost of residential units, rather than as a reduction of the transaction price. After evaluating these issues under ASC 606, we determined that we will restate our previously issued audited consolidated statements of income for the years ended December 2024 and 2025 included in the annual report on Form 10-K, and the unaudited condensed consolidated statements of income for the quarters ended in 2025 and 2024, to reflect the reclassification of closing cost incentives as a reduction in revenue rather than as a cost of residential units. This reclassification of closing cost incentives will not impact any prior period's reported gross profits, operating income, net income, earnings per share, cash flow, debt covenant compliance, shareholders' equity, or the strong underlying economics of the company's operations and business. The impact will be a reduction in home sales revenues and associated average sales prices, and an improvement to our gross margins. We are currently in the process of completing the restatement of our prior period financial statements and expect to file an amended annual report on Form 10-K. However, our comments today reflect these changes for prior periods referenced. We have also filed an 8-K that sets forth our preliminary assessments of the impact of this reclassification for the years ended December 2024 and 2025 as well as each of the quarters in 2025 and 2024. Our first quarter 2026 results are not affected by the pending restatement. Net income attributable to Green Brick Partners, Inc. for the first quarter decreased 18.8% year over year to $61 million, and diluted earnings per share decreased 16.8% year over year to $1.39 per share. SG&A as a percentage of residential unit revenue for the first quarter was 11.7%, an increase of 80 basis points year over year, driven primarily by mix and higher discounts and incentives. Given the challenging economic conditions and oversupply of housing inventories in our markets, discounts and incentives increased year over year as a percentage of home closing revenue to 10.1% from 6.8%. Our average sales price of $493,000 was down 4.1% sequentially and down 6.9% year over year. Home closings revenue of $448 million on 908 deliveries declined 7.1% compared to the same period last year, and our homebuilding gross margins decreased 320 basis points year over year and 140 basis points sequentially to 28.9%. Sixty-three percent of our Q1 closings were sold during the quarter, driven largely by our Trophy Signature Homes brand. We started 979 new homes, an increase of 13% year over year and 11% sequentially due to increasing buyer demand in the quarter. Units under construction at the end of the quarter were 2,119, down 7.7% year over year but up 3.5% sequentially as we increased starts in Q1 to better match our sales pace. We ended the quarter with 419 completed specs, an average of 4.1 per community, a reduction of 13% from Q4. We will continue to monitor market conditions and seasonal trends, and align our starts with our sales pace to appropriately manage our investment in spec inventory. Our goal is to maintain approximately 1.5 months of supply of completed spec in our communities. Primarily due to adverse weather in January, we saw a 7.1% decline in traffic year over year during the quarter. Net new home orders during the first quarter were 1,037, down 6.2% year over year. Average active selling communities of 103 were down 1% year over year. As a result, our sales pace for the first quarter decreased slightly to 3.4 per month compared to 3.5 per month in the previous year. As noted in our prior call, we still expect community count to increase in the second half of the year. Our backlog at the end of the first quarter was 649 units with backlog revenue of $381 million, a 35% decrease year over year. We experienced a significant shift because Trophy Signature Homes represented 40% of our backlog units compared to 27% in 2025. As a result of the increased mix of Trophy orders in our backlog, along with continued elevated discounts and incentives across all of our brands, backlog ASP decreased 13% to $587,000. In Q1, we repurchased 114,000 shares of our common stock for approximately $7 million, with $160 million remaining in authorized share repurchases. We will continue to repurchase shares opportunistically as part of our disciplined capital allocation strategy and efforts to return value to our shareholders. During Q1, we terminated our secured revolving credit facility, and as of quarter end, we had no outstanding borrowings on our $330 million unsecured revolving credit facility. At the end of the quarter, we maintained a robust cash position of $145 million and total liquidity of $475 million. We believe we are well positioned to weather the challenging market conditions and ongoing volatility, to opportunistically deploy capital to maximize shareholder return, and to accelerate growth as the housing market improves. With that, I will now turn it over to Jed. Jed Dolson: Thank you, Jeff. We continue to see a challenging sales environment within all our consumer segments, but we are encouraged by the positive response we have seen from first-time homebuyers who are most impacted by affordability challenges and a weakening job market. Our team responded well to these conditions, as evidenced by our relatively strong first quarter sales volume and low cancellation rate of 7.7% during the quarter, which continues to be one of the lowest cancellation rates in the public homebuilding industry. We believe it demonstrates the creditworthiness of our buyers, the quality of our product, and the desirability of our communities. Rate buydowns remain a necessary tool to drive traffic and sales, especially with first-time homebuyers and quick move-in homes, and we helped address the affordability challenges faced by many consumers by providing our homebuyers with price concessions, interest rate buydowns, and closing cost incentives. Incentives for net new orders during the quarter were 9.9%, an increase of 320 basis points year over year although a decrease of 30 basis points from the prior quarter. With our superior infill and infill-adjacent communities and industry-leading gross margins, we believe we are strategically positioned to adjust pricing as needed to meet market demand and maintain our sales pace. While we recognize the importance of preserving our margins, we also recognize that our industry-leading margins provide us with significant pricing flexibility to compete effectively in a volatile market and drive sales pace when appropriate. We are also excited about the progress of our wholly owned mortgage company. During the first quarter, Green Brick Mortgage closed and funded over 300 loans. The average FICO score was 742 and the average debt-to-income ratio was just under 40%, consistent with the previous quarter. We completed the rollout of Green Brick Mortgage to all of our Texas communities in the quarter, and we expect to roll out Green Brick Mortgage to The Providence Group, our Atlanta builder, in the latter part of 2026. As Green Brick Mortgage continues to expand its service to most of our communities, we anticipate that by year end, its capture rate will range from 70% to 80%, which should generate additional revenue as we increase the number of loans funded through our mortgage company. We continue to reduce our construction cycle times, which were down 25 days from a year ago to under 130 days. Trophy's average cycle time in Dallas–Fort Worth was under 90 days, the lowest in their history, and a testament to the efficiency and quality of our construction teams and trade partner base. While labor availability remains relatively stable across all our markets, we are monitoring potential cost increases related to the rise in oil prices. We remain engaged with our trade partners to monitor potential cost pressures and will adjust as necessary. As part of our efforts to position ourselves for future growth, during the quarter, we invested approximately $89 million in land and lot acquisitions and $78 million in land development, excluding reimbursements. For 2026, we expect land and lot acquisitions of approximately $400 million and land development outflows of approximately $420 million, excluding reimbursements. We believe our superior land position provides a competitive advantage that will be the foundation for strong growth in subsequent years. Approximately 38,000 of our lots are owned, with approximately 11,000 lots under option contracts. Approximately 75% of our total lots owned and under contract are allocated to Trophy Signature Homes. Excluding approximately 25,000 lots in long-term master plan communities, our lot supply is approximately six years. With approximately 49,000 lots owned and under contract, we remain patient and selective with future land opportunities without compromising the ability to grow our business in the near and intermediate term. With that, I will turn it over to James for closing remarks. James R. Brickman: Thank you, Jed. In closing, we remain confident in our long-term outlook and our ability to continue to deliver excellent operational and financial results. Our land strategy, diversified product portfolio, and strong balance sheet continue to differentiate Green Brick Partners, Inc. from our peers and support attractive returns for our shareholders over the long term. Like the rest of our industry, we continue to navigate a challenging environment, but I am hopeful that the market is starting to find a more stable footing and normalization. I believe that 2026 will be a year that we lay a foundation so that we can execute our strategy and accelerate our growth in the coming years. With all of these challenges, I would like to recognize our team for their disciplined execution and resilience successfully navigating this market. Our results would not be possible without their focus, leadership, and commitment. This concludes our prepared remarks. We will now open the call for questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. We ask that you limit yourself to one question and one follow-up and rejoin the queue if needed. Your first question comes from Ryan Gilbert of BTIG. Your line is open. Ryan Gilbert: Hey, thanks, guys. It is definitely encouraging to hear that demand improved throughout the quarter. Can you give us an update on how things are looking so far in April in terms of traffic and sales pace? James R. Brickman: Jed, why do you not take that? Jed Dolson: I would say April is looking very similar to March, so we are still on a strong spring season. Ryan Gilbert: Got it. And then just around your commentary about the challenging sales environment, but you are still seeing consumer response to the incentives that you are offering, I am just curious, James or maybe Jed, if you could expand on how long you think this can last, or if you expect a weakening labor market to pressure first-time homebuyers. It does not seem like that has been the case so far, but just looking ahead, what are you thinking? James R. Brickman: We are seeing strong demand. It is very elastic demand, meaning that the buyers are very educated, and a small movement in pricing can really accelerate sales velocity. One of the things we are very encouraged about is that because our pretax margins are so high—they are running around 17% or just under—we have tremendous flexibility if we need to get a buyer that wants a slight discount in the home even from current levels. Pretty much, we are not seeing that happening right now. We think that things may have bottomed, but if you can predict interest rates, I will tell you what our margins are going to look like, because they are highly correlated right now, and we are not getting a lot of relief from the interest rate front. Jed, do you have anything you want to add to that? Jed Dolson: I would just say the past week has been rough on mortgage rates, and that can cause—just a little change in mortgage rates can cause a 1% decline in gross margin for us. Ryan Gilbert: Okay. Got it. Thank you, guys. Operator: Your next question comes from Jay McCanless with Citizens Bank. Your line is open. Jay McCanless: Hey, good afternoon, everyone. First question I had: what are you seeing in the land market right now? Are land prices still continuing to go up, or are you seeing some areas where maybe you are getting a little bit of a break, or maybe land inflation is slowing down a little bit? James R. Brickman: That is a good question, Jay. What we are seeing is on C-minus and D-location lots, builders are wanting to peddle those. Obviously, the only buyer is other builders, and if a builder wants to peddle a lot in the C-minus or D-location, he wants to do it because he is not making margins. So it is really not attractive to another builder to buy, and it is not distressed enough to have us get interested. So that is what is taking place really in the perimeter locations—the further out perimeter locations. Interestingly, and conversely, high-margin land in the more infill or employment-centric areas is still in high demand. One of the things we are very excited about: we bought a large tract yesterday that we had been working on for—how long, Jed? Two years? Two years. It was complicated. It had a lot of moving parts. We are really excited about it because we have the balance sheet to take this down—other people do not. We have the management team to do the entitlement, sewer, water, and all of the other challenges that come with a large master plan property, and we feel really good about that because it is a barrier to entry. All these land-light guys just could not pull that kind of transaction off. Jay McCanless: Speaking of infill versus Trophy and some of your higher-end brands versus Trophy, which performed better during the quarter? Was it move-up? Was it entry level? What were you seeing in terms of demand between the different buyer segments? James R. Brickman: It was spotty, I think, is the best way to define it. Trophy was a star. We found that—and Jed can elaborate on that—there is a very large pool of buyers, sub-$350,000, and Trophy can meet that price point and still make really nice margins. Florida did good. Atlanta slowed down in its market. We were surprised because Atlanta was traditionally very strong, even in the infill markets. Jed, what do you want to add to that? Jed Dolson: I would just say that luxury continued to do well for us—and for us, that is homes priced in the $900,000-and-up range. We saw spottiness in, say, the $500,000 to $800,000 range where we had some good months, some bad months, depending on what submarket. We are really encouraged in Dallas that in March and April, we really hit good numbers with that buyer, which is typically a cultural buyer. To sum it all up, I would say we feel really good about luxury, and we feel really good about entry level, and the stuff in the middle is more challenging. James R. Brickman: And some of the stuff in the middle that Jed was talking about—this $500,000 to $800,000 price point—one of the reasons why we think it is so much slower are our immigration policies. Many of those homes are sold to physicians and higher-income people, and the current administration is making it uncertain for those people, and it is impacting housing as a result. Jay McCanless: Any concerns or issues with other builders maybe having built a little too much at that price point and having to be more aggressive on the discounting there? James R. Brickman: I think in some markets it is fairly isolated. Jed and I were talking about it this morning that it can affect some markets. Generally, I am not worried about it. And again, one of the reasons I am not worried about it is because if we are making a 17% pretax margin and we are competing against a builder that is making a 3% pretax margin down the street—that is land-light—those guys have given about all they can give, and we are just kind of waiting and seeing what happens. Jay McCanless: Congrats on Houston. Over time, how many communities do you think Green Brick Partners, Inc. can have in that market? And is it always going to be a Trophy market, or are you going to look to do some infill properties? James R. Brickman: Right now, strategically, what we want to do is enter any market that really has to be a top 10 to 12 city market because Trophy is going to be our scalable brand that goes into that market. To be effective, we are still going to self-develop, and we want to have a really experienced land team and a land acquisition team that has strategic advantages. That is going to make us really under larger markets. We are looking at San Antonio right now. I think the probability of us bringing other brands there is probably unlikely at this point, but you should never say never. Operator: Your next question comes from Alex Rygiel with Texas Capital. Your line is open. Alex Rygiel: Thank you. Given the mix of backlog of Trophy Signature Homes, should we model ASPs declining through 2026? Jed Dolson: I think it is a mix issue more than a backlog issue. As you know, we are seeing very strong demand at the entry level. If that becomes a bigger percentage of our sales, then ASP would go down. Alex Rygiel: And how do sales of the Houston market affect ASPs? Jed Dolson: Houston will continue to bring ASP down. When you look at the biggest markets based on Q1 starts, DFW is the largest, and Houston was the second, and there was a huge drop-off to Phoenix, which was third. Dallas was the third biggest by units, and we think we will probably end up being the second biggest this year by revenue, trailing only D.R. Horton. Those are really big markets, but to have really big markets, you need very affordable housing. So the ASP in Houston will be lower than Dallas, but those are two very strong markets. We are going to continue to grow our market share in Dallas, and we are excited about the early success in Houston. We look forward to, in the near future, being a more dominant player there. Alex Rygiel: And then as it relates to your comments about April being sort of in line with March, is that typical historically? Jed Dolson: We have gone and looked at a lot of historical trends recently, and so much of it correlates with what interest rates were for every April versus every March going backwards. For the most part, yes, what we typically see is April is just a little bit weaker than March, and then May—because of graduations and so forth and the beginning of summer—the spring season really concludes in May, and then you enter the summer season. Operator: Your next question comes from Rohit Seth with B. Riley Securities. Your line is open. Rohit, perhaps your line is on mute. Rohit Seth: Hey, thanks for taking my question. Just on sales pace—you had a good turnout in the first quarter. It looks like you have some levers with your strong margins. Do you think you can maintain the sales pace that you had in the prior year from 2Q to 4Q—kind of average about three homes per month? Jeffery Cox: Yes, Rohit, this is Jeff. I think that is very doable when we look at the historical trends that Jed mentioned earlier. We were about 2.97 last year in Q2 and 2.91 in Q3. When we look at how we performed this quarter compared to last year, we are down a little bit, but keep in mind, we did have that weather event that James referenced earlier in his remarks. So we tend to be trending generally for the same pace as last year. Rohit Seth: And could you remind me of the spread between Trophy Homes—I know there is a faster sales pace there—and the rest of the book? Jeffery Cox: Trophy was 51% to 52% of our sales in Q1, and we expect them to continue to increase that pace as we continue to grow the brand and expand in Houston and Austin. Seventy-five percent of our lots owned and controlled are allocated towards Trophy, so that will continue to increase over time. Rohit Seth: Is Trophy moving something like five units a month, something like that? Jed Dolson: It is really neighborhood dependent. I will answer it this way: we have some communities that have two different lot sizes where, in Q1, we averaged 20 sales a month. As defined by community count, that would be 10 sales. And then we had others where we averaged three or four. We can pull some better data for you for our next call on that. James R. Brickman: Some of our communities, particularly in the last phases where we have had success and are phasing out, we are milking margin intentionally and maintaining a slower sales pace. Rohit Seth: Is there maybe a margin floor where you are not willing to breach? James R. Brickman: No. We do not look at it that way. We are always modeling internal rate of return and sales pace and price. It is a little bit more complex than that because we also want to get our capital returned on our lots and look at the redeployment of that capital. So it is a little more complicated than just saying we will sell houses based upon margin. It is the sales pace that comes with the margin and the capital that comes in from that lot sale that goes into the calculus. Jeffery Cox: And obviously, when we are reporting 28.9% gross margins, and we have peers that are reporting 15% to 16%, we feel excited about the coming months and our ability to adjust prices as needed. Operator: This concludes the question and answer session. I will turn the call to James R. Brickman for closing remarks. James R. Brickman: Thank you, everybody, for attending our call. We are always delighted to have anybody call Jeff, Jed, or myself with follow-up questions and would really encourage you to do that. We can get into a little bit more detail about some of the master plan communities we are really excited about. Thank you for the call. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.