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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.
Operator: Good morning, and welcome to Tenet Healthcare's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin. William McDowell: Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's first quarter 2026 results as well as a discussion of our financial outlook. Tenet's senior management participating in today's call will be Dr. Saum Sutaria, Chairman and Chief Executive Officer; and Sun Park, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. And with that, I'll turn the call over to Saum. Saumya Sutaria: All right. Thank you, Will, and good morning, everyone. In the first quarter, we reported net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.16 billion, which represents an adjusted EBITDA margin of 21.6%. We are pleased with the start to the year, performing above our previously provided expectations. As anticipated towards the end of last year, the operating environment is dynamic. There are payer mix shifts, seasonal effects and insurance enrollment uncertainty in the exchanges and Medicaid that impact demand. Despite these challenges, we delivered a clean quarter characterized by disciplined operations, benefits from execution on our previously described expense opportunities, stable volumes despite headwinds and as a result, significant free cash flow generation. USPI generated $484 million in adjusted EBITDA, which represents 6% growth over the first quarter of 2025 and a robust 22% of our full year 2026 adjusted EBITDA guidance. We are pleased with USPI's start to the year as we set an aggressive EBITDA target as a percent of the full year for the first quarter that we were able to exceed. We have seen a pattern over the last few years with a modest shift towards an increased distribution of cases and, therefore, earnings into the first quarter. Given our focus on acuity, same-facility revenues grew 5.3% at USPI, highlighted by double-digit same-store volume growth in total joint replacements in the ASCs over prior year. Our operations in the first quarter were somewhat impacted by two major winter storms and uncertainty from vendor cyber attacks, however, our operating teams managed through them and were able to reschedule many of the procedures lessening the overall impact in the quarter. We have a robust pipeline of assets interested in joining USPI this year. As such, we've had a particularly strong start to the year investing $125 million in the first quarter to acquire 7 ASCs. Additionally, we have commenced patient care at 3 de novo centers. This represents half of our targeted full year spend already completed in the first quarter. Turning to our Hospital segment. First quarter 2026 adjusted EBITDA was $678 million, which was nicely above our expectations and represented 27.5% of our full year 2026 adjusted EBITDA guidance. We reported 16.7% EBITDA margins in the quarter, which were driven by disciplined expense management and growth initiatives, which offset the expected impacts of unfavorable payer mix and reductions in exchange enrollment. The results in the quarter reflect no significant changes in supplemental Medicaid program revenues compared to our original expectations. We have seen declines in exchange coverage with same-store exchange admissions down about 10% compared to first quarter 2025, but not yet at the level we assumed as the average for the full year. We continue to assess the overall environment for effectuation rates and the impact on future exchange volumes, but we believe we have the tools to manage this impact under a variety of scenarios. We continue to make investments in technology to enable growth and streamline operations. We are executing on the expense initiatives that we discussed on our fourth quarter 2025 earnings call and are recognizing the benefits. These initiatives include engagement tools, which are improving recruitment and retention efforts, process automation to address length of stay and capacity controls, which improve our clinical throughput. Among these things, we are executing on AI-related capabilities in our hospitals, physician practices and the global business center to drive further efficiencies, most of which have been useful for supporting extending the productivity metrics of our team. Importantly, we have learned that while all of these tools will not work in a pilot state, setting up a governance that either green lights for rapid scaling up or red lights for shutdown help us remain focused. We have included third-party EMR integrated solutions with -- which will increase our clinician productivity, decrease administrative burden and improve patient access through programs such as ambient scribe, automated discharge summaries and autonomous professional fee coding in various pilot programs. Additionally, we have increased back-office AI automation, which is improving productivity and consolidating third-party spend to reduce costs. For example, we have almost doubled or more the productivity of our Conifer analytics team. As we look forward, we are actively identifying and piloting agentic workflows to transform further business processes. So far, our work has enabled us to more than offset the expected and unexpected headwinds that arose in the quarter. Regarding full year 2026 guidance, as in prior years, at this time, we are not addressing the underlying outperformance in our business units during the first quarter. We're pleased with our year-to-date performance, we're reaffirming our full year guidance, and we'll address our expectations for the full year in the future. As a reminder, after normalizing for the non-recurring items that were reported in 2025 in the first quarter of '26 and excluding the headwind from the expiration of the premium tax credits, our 2026 adjusted EBITDA is expected to grow at 10% at the midpoint of our range. And finally, we continue to see significant opportunity to utilize share repurchase at our current valuations. We repurchased 1.35 million shares for $318 million in the first quarter of 2026 and expect to continue to deploy capital for share repurchase over the balance of the year. In conclusion, we adapt to the environment, focus on strong clinical quality recommit to helping our doctors have an easier environment to operate in and focus on delivering reliable earnings in this transitionary period. Our balance sheet is strong, and our diversified asset mix with a focus on ambulatory care gives us a significant strategic advantage in the market as we look ahead. And with that, I will turn it over to Sun for more details. Sun? Sun Park: Thank you, Saum, and good morning, everyone. We had a nice start to the year in the first quarter of 2026, generating total net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.162 billion. First quarter adjusted EBITDA margin was 21.6%, driven by disciplined operating expense management, including good progress on the expense initiatives that we outlined last quarter. I would now like to highlight some key items for both of our segments, beginning with USPI. In the first quarter, USPI's adjusted EBITDA was $484 million, with adjusted EBITDA margin at 36.7%. USPI delivered a 5.3% increase in same-facility system-wide revenues with net revenue per case up 5.6%, and same facility case volumes down 0.3%. As Saum noted, volumes were impacted by the winter storms early in the quarter, and while we were able to reschedule many of the procedures, there was an overall impact. Turning to our Hospital segment. First quarter 2026 adjusted EBITDA was $678 million, resulting in an adjusted EBITDA margin of 16.7%. This represents 27.5% of our expected full year '26 adjusted EBITDA. Same-hospital inpatient adjusted admissions rose 0.6% in the quarter and were impacted by a decline in respiratory admissions of 41% compared to first quarter '25. This driver represented a 90 basis point reduction in admissions growth in the quarter. Revenue per adjusted admissions declined 1.5% year-over-year in the first quarter '26 due to the impact of reduced exchange volumes within our overall payer mix and the year-over-year impact of the $40 million favorable out-of-period supplemental Medicaid revenues that we reported in the first quarter of 2025. Exchange revenues represented about 6% of consolidated revenues in the first quarter of '26, a 9% decline from first quarter of '25. Our consolidated salary, wages and benefits was 40.5% of net revenues in the quarter, consistent with our performance from the prior year despite the net revenue headwinds, demonstrating our ability to flex our operating model. Overall, operating expenses per adjusted admissions were also favorable to our expectations, which contributed to our outperformance in the quarter. In the first quarter of '26, we recognized a onetime approximate $40 million favorable revenue adjustment as a result of the completed Conifer transaction. This amount was included in our original guidance. And I would also note that this adjustment is not included in our revenue per adjusted admission calculations. We recorded supplemental Medicaid revenues of $304 million in the first quarter of '26, consistent with what we assumed in our guidance. Importantly, we did not benefit from out-of-period supplemental Medicaid revenues related to prior years in this quarter. We're pleased with our ability to manage through the various dynamics throughout our first quarter and feel we have the ability to deliver on our commitments over the balance of the year. Next, we will discuss our cash flow, balance sheet and capital structure. We generated $978 million of adjusted free cash flow in the first quarter. And as of March 31, 2026, we had $2.97 billion of cash on hand with no borrowings outstanding under our line of credit facility. Additionally, we have no significant debt maturities until late 2027. And finally, during the first quarter, we repurchased 1.35 million shares of our stock for $318 million. Our leverage ratio as of March 31, '26, was 2.24x EBITDA or 2.83x EBITDA less NCI, driven by our strong operational performance and financial discipline. We remain committed to maintaining a deleveraged balance sheet and believe that we have significant financial flexibility to support our capital deployment priorities and drive shareholder value. Let me now turn to our outlook for 2026. As Saum noted, we are not making any adjustments to our full year 2016 outlook at this time. While we had strong fundamental outperformance in the first quarter, have continued confidence in our ability to achieve our full year targets, it is early in the year, and we will plan to revisit our full year guidance as needed in subsequent quarters. As such, we are reaffirming the full year '26 guidance that we initially provided in February. Our outlook continues to exclude any contributions from potential increases in supplemental Medicaid programs that have not yet been approved and finalized by CMS. For second quarter '26, we expect consolidated adjusted EBITDA to be 24% to 25% of our full year consolidated adjusted EBITDA at the midpoint. We expect that USPI's EBITDA in the second quarter will also be 24% to 25% of our full year '26 USPI EBITDA at the midpoint. Turning to our cash flows for '26, we continue to expect adjusted free cash flow after NCI in the range of $1.6 billion to $1.83 billion. This range includes the payment of about $150 million in tax payments for the Conifer transaction this year. Excluding these tax payments, this would represent $1.865 billion of adjusted free cash flow after NCI at the midpoint of our '26 outlook. We remain focused on strong free cash flow conversion from our EBITDA performance, including the continued outstanding cash collection performance of Conifer, while continuing to invest in high-priority areas of our businesses. Turning to our capital deployment priorities. We are well positioned to create value for shareholders through the effective deployment of free cash flow. First, we will continue to prioritize capital investments to grow USPI through M&A. And as Saum noted, we have had a strong start to the year and have a number of future opportunities to support our $250 million annual target for USPI M&A. Second, we expect to continue investing in key hospital growth opportunities to fuel organic growth, including our focus on higher acuity service offerings. Third, we'll continue to be active in share repurchases. We continue to see significant opportunity at our currently compressed valuation multiple. And finally, we will continue to evaluate opportunities to retire and/or refinance debt. We are pleased with our strong start to the year and remain confident in our ability to deliver on our outlook for 2026. We continue to execute our strategy across our transformed portfolio of businesses resulting in a more predictable, more capital-efficient company that is well positioned to drive value through effective capital deployment. And with that, we're ready to begin the Q&A. Operator? Operator: [Operator Instructions] Our first question comes from Ryan Langston with TD Cowen. Ryan Langston: Payer denials this year appear to be broadly accelerating across the industry. Are you seeing this activity increase in your business? And maybe is it more MA versus commercial? And is the rise in uninsured -- or uncompensated care you're seeing primarily related to the exchange subsidy expiration, or is there anything else you could call out there? Saumya Sutaria: Yes. Thanks for the question. Payer -- I mean, denials, I would say, payer disputes, many of which can result in denials and back and forth are are high. They have been high, as I've said before, they're too high for what is appropriate, especially when comparing back to kind of pre-pandemic periods just as a marker. I don't think that in our business, we have seen a net impact of disputes and denials changing in this quarter relative to before, so meaning last year. So look, they're high, they have been too high, but we don't see a meaningful trend this quarter that's different. We can only guess obviously with the slight increase in uncompensated care that some of it has to do with the expiration of the exchange subsidies. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: If I look at the last number of quarters, there's been consistency of outperformance in the hospital segment overall. I wonder if you could talk maybe broadly because we haven't talked about markets in a general sense. Is there -- are there some markets where you've implemented strategies that you'd call out that have been particularly successful. And as you look across the portfolio, maybe discuss some markets that still have an opportunity for significant improvement as you deploy new strategies to improve their performance. Saumya Sutaria: Thanks, A.J., and I appreciate you calling out the strength of the hospital business over the last few years. We have been focused on a broad strategy of obviously increasing acuity focusing on our ability to succeed with our transfer centers, adding new surgical programs and increasing our emergency-related services, especially trauma programs and other things. And in a combined sense, that is a -- it's a global strategy. I mean, implemented locally, but we have opportunities and are implementing in every market that we have. As you're aware, based upon the portfolio shifts that we made, we remained in markets in which we thought the execution of our overall strategy would be successful. No, look, there are things like, for example, enrollment in the exchanges that differ state to state and what the impact will be. So there are some differences there in terms of what's happening, in terms of throughput and other things that it may impact even the uninsured piece. But if you step back and now sort of with my commentary today, which is that we're in this transitionary period, where there's some coverage changes that are occurring. We'll see how all that settles out. But when you look at the opportunity to find efficiencies, you look at the support services for the hospitals, and you look at some of the automation opportunities that I described. Once again, those are available in each market. Of course, some markets are bigger than other markets. So at a dollar level, you might get more impact in one market than another, but they're scaled appropriately and are available in each of the markets. So if you look at our earnings in the first quarter this year, they were driven by consistency across our markets in terms of the efficiency opportunities. Look, the other thing I would point out is just good old fashion discipline around flexing our cost structure. We kind of knew early in the year by the time we had given guidance that one of the winter storms that already come through, and we were able to maintain our SWB as a percentage of our top line by flexing even though the revenues were going to be a little bit more challenged. So some of this is just continuing to maintain the old-fashioned -- "old fashion" discipline of anticipating and flexing intraorder, which, of course, is also an opportunity available in all markets. I hope that helps. Operator: Our next question comes from Jason Cassorla with Guggenheim Partners. Jason Cassorla: I wanted to go back to your prepared remarks around your efforts around length of stay and throughput improvements you're clearly seeing the benefits there given length of stay has been down about 3% in each of the past 6 quarters by our math, but that improvement is coming despite your high acuity service line focus, which would naturally carry a higher length of stay. I guess could you just double a little bit more on the length of stay opportunity for you and what that run rate looks like as you move through the rest of the year and beyond? Saumya Sutaria: Yes. No, I appreciate the question. And you're right that the two are actually coupled in an interesting way, which is in order to maintain available capacity to always service the high acuity needs that arise in the community, whether from direct arrival at our hospitals or for outlying hospitals that might need help or support, which we always try to say yes to you have to make sure that your throughput and capacity management is good enough to have the availability of beds to be able to say yes, for those things. And so we see the two being very intricately linked in terms of a requirement to succeed in the high acuity strategy. Now look, you're right that as the acuity goes up, there's a length of stay headwind that does come with it because the cases are more complex and and longer. But look, we're pleased with the fact that we are managing that overall length of stay to something better than even breakeven in terms of our reported length of stay because that's creating capacity in our hospitals. And I would remind everybody that part of the strategy, of course, is capital avoidance on additional capacity that's really not necessary when you can improve productivity that way. So again, for us, all these things are intricately linked and look, we're pleased that some of these new tools that we're trying out are helping to add to our more traditional length of stay management that we've talked about over the last 4 or 5 years. Operator: Our next question comes from Brian Tanquilut with Jefferies. Brian Tanquilut: This is a tough quarter, so congrats on beating that [indiscernible] line. Maybe just on the Medicaid side. A lot of your peers have spoken about Medicaid trends, whether that's immigrants not land paperwork. And just curious, what are you seeing in the Medicaid book? And as we've seen uncompensated care step up here, which was across the space, right? How much of that is Medicaid versus maybe exchange members versus other dynamics? Saumya Sutaria: Yes. No, I appreciate it. And obviously, it's somewhat speculation. But I guess we sort of speculate based on our markets. So I'll be a little bit careful of how sure I am in my answers, but I would say that, look, Medicaid is down a little bit, and we see a little bit more of that in places like California, that does suggest that some of what's happened is either disenrollment or lack of renewal of enrollment with populations that may not have been qualified to begin with based upon at least federal regulations, so that's one fact point that we see. The second question that has been out there, especially because we are in a lot of important border communities where we do a lot of work for the broader communities that are there. Look, we do see a little bit of hesitation at times with those populations. We partner a lot with the important FQHCs in those markets. And there's just kind of this tone of hesitation. The impact at the end of the day has been on the hospitals minimal because obviously, we're there taking care of people who are sick and have needs. But on the outpatient side, for people who are doing more primary care and other things in the community, we're hearing about a little bit more impact and certainly hesitation from coming into consumer care. Operator: Our next question comes from Scott Fidel with Goldman Sachs. Scott Fidel: I think my question probably ties to the last two. But I wanted to ask it from just the -- from the acuity and case mix perspective, overall for the -- for both the hospital and the USPI, how those rates look year-over-year? And maybe you could layer in on the tailwind side, the proactive service line expansions and investments that you've made on higher acuity and then on the headwind side, obviously, some of these dynamics or dynamics relating to the dynamic environment that we saw in some of the end markets in the first quarter. Saumya Sutaria: Sure. Well, let's start with USPI. I mean there's no question there about the increase in acuity. I mean, I called out -- I mean, we've had -- we obviously are on the outpatient side, probably the largest single provider of outpatient joint replacements when you collectively look at almost 570 assets at USPI, many of which do orthopedics. And we're still posting double-digit growth in total joint replacement surgeries within the ASCs and off of a pretty high base. So it just suggests that demand is out there, right? If you create the right operating environment for these surgeons and give them an efficient safe way to do the work, the demand is out there. And so we continue pushing in our high acuity strategy. I mean you can see it in the revenues, and when you add to that as you asked for other service lines, the types of things we're doing in urology, the types of things we're doing in robotics, we're probably up to over 150 robotic surgery programs in the ASCs that are general surgery based. Those types of things are growing quickly. I mean the only services that are declining are the high-volume, low acuity areas, which is, as we've said, we're less focused on in this diversification path. So again, in summary, on the USPI side, the acuity is growing. The case mix is improving in the direction we want to. We have a good number of service line starts and physician additions. The assets that we're acquiring are also supportive more of the service line strategies that we're interested in. And our de novos that we open will also have the opportunity to do this type of higher acuity work. So I would say that, that looks very good. On the hospital side, the journey that we've been on is obviously -- I mean, we made this decision in the very early part of the pandemic. It's been 5 years that we've been really pushing this high acuity strategy. And you see it in the CMI, the margins, the net revenue per case, all of that. This quarter obviously has some differences that Sun can go into in terms of the comp to the first quarter last time with a bunch of onetime items. And look, the CMI for the first time, was down a little bit, but this is temporary, right? We had some weather-related issues. We had some -- we certainly had a decline in the intensity and volume of the respiratory business. But as I said, we made up for that significantly by flexing and also by focusing more on some of our other type of work in the hospitals. And I think the quarter ended up fine. Like I don't think anything changes going forward just because there was one quarter with significant respiratory impact. Operator: Our next question comes from Craig Hettenbach with Morgan Stanley. Craig Hettenbach: On the back of the $125 million invested in USPI in Q1, really strong starts to the year. Saum, can you just talk about the M&A engine what's working and also just context of why a tenant might be a preferred acquirer of choice out there in the marketplace? Saumya Sutaria: Yes. Well, I mean, I think what's working fundamentally what's working is that USPI has just got a multiyear track record of acquiring assets, adding value to them, both clinically our quality performance is consistent. Our ability to bring these facilities in network and do well is consistent our broad-based an ongoing supply chain and purchased services agenda helps to reduce costs and create efficiencies. And then our business development team is terrific in helping these centers oftentimes go from single specialty to multispecialty or help them design their OR operations if they're already multi-specialty to be able to do those more efficiently, as I've always talked about, right, the ability to do kind of "dirty and clean surgery" in the same center with the right protocols and the right scheduling. I mean all of these things are things that we work on consistently, but we're just ahead in the market when it comes to executing on these things. And I think physicians know that, I think many of the MSOs that we partner with know that, the health systems that we partner with not only know that, but because of the expertise of some of these health systems, they contribute actively to our quality improvement agenda and other things, I mean Baylor, Memorial Herman. I mean these guys are experts in many of these areas, and they contribute actively to the partnership in USPI to make those improvements. So look, I think all of those things has created a nice virtuous cycle of reputation enhancement as we do these things, and we deliver on what we say we're going to do. So we're still very selective. Our diligence processes are robust. We still say no to more centers than we say yes to. And that's fine because we still think that the opportunity for high-quality ASCs supports USPI's growth algorithm. Operator: Our next question is from Justin Lake with Wolfe Research. Justin Lake: Just a couple of numbers questions for me. First, your guidance assumes $250 million of exchange impact for the year. I apologize if I missed it, but do you have a number for the quarter maybe relative to what we would have thought maybe is a $60 million, $65 million run rate? And then on DPP, in your slides, you talked about $22 million to the DPP down $22 million for the year. I'm curious, does this include the $40 million decline because of that period so that you were actually up [ $18 ] million excess. Saumya Sutaria: Good question. Sun, do you want to take those maybe in reverse order. Sun Park: Yes. Justin, it's Sun. Yes, you're right on the DPP question. That includes the $40 million. So if you normalize for that for '25 out of period, then it would be a slight increase. So you're correct. On the [ HICS, ] we mentioned that exchange revenues in Q1 were about 6% of our consolidated revenues as a comparator in Q1 of '25, it was about 6.5% of our consolidated revenues. So if you kind of do the [indiscernible] a 9% to 10% decrease in revenues versus Q1. So I would say it's roughly at half of kind of the overall 1 year kind of 20% reduction in volumes that we kind of talked about in February. And we do expect with all the dynamics around kind of the first quarter and the grace period with some of the enrollees or re-enrollees that I think our guidance range of kind of 20% reduction and $250 million overall impact is still pretty consistent. Operator: Our next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Yes. I guess two questions. One, maybe following up on that one. So the Q1 impact is lower. Is that how -- is it lower but in line with what you thought Q1 would be because you always assumed it would ramp? Or was that potential area of the outperformance? And then you talked a little bit earlier about flu. I know one of your competitors had a pretty high margin decremental margin on lost volume in Q1. It sounds like you did a better job flexing costs. Any way to kind of size what you think the EBITDA impact was to both USPI and the hospitals from the flu and the weather disruption. Saumya Sutaria: Yes, it's Saum. I can take the latter part of it. I mean I don't know about flu specifically, but just I mean we look at respiratory ER traffic, admissions and other things. And similar to what we've heard, for example, respiratory admissions were down like 40% in the quarter. and it had an earlier effect. I mean, if I look at the quarter, January to February to March, things improved steadily month-over-month, week-over-week almost. So that by the time we were in March, in the early to middle part of March, we had a keen sense that the revenue and admission and volume intensity was increasing, but because we had kind of anticipated the impact early in the quarter, we had already done some of our cost flexing. And then, of course, as we talked about, previewed on our fourth quarter call, we had developed a more systematic type of cost agenda in the second half of 2025 that we executed that added to our savings. And so just -- it created a situation in which the anticipation of the need to flex plus other cost improvements plus the month-over-month improvement during the quarter, allowed us to outperform in the hospital segment, what our expectations were despite some of these headwinds. I -- in terms of what our expectations were. I mean we had sort of made a simple linear assumption. I would say that the outperformance in the quarter in the segment is a combination of the two things, one being the cost management and efficiencies; and two, being that the first quarter exchange impact was probably a little bit less than at least a simple linear assumption for the full year. Operator: Our next question comes from Ann Hynes with Mizuho. Ann Hynes: Maybe we can shift to the Washington outlook. Is there anything that you're paying attention to on the regulatory and legislative outlook, especially on the regulatory with the upcoming outpatient rule. Is there anything that we -- that is on your radar screen that we should be aware of? Saumya Sutaria: Sure. I mean, obviously, the -- we're keenly awaiting the outpatient rule, especially given the type of policy commentary that's been coming out of CMS, HHS, broadly and CMS supporting care in lower cost settings. And one of the ways to help that, of course, is to provide robust or more robust outpatient rate support relative to what was sort of as expected, but nothing incredibly positive on the IPPS side. So we're looking forward to seeing that. I would tell you, other than the commentary they're making, I don't have any proprietary insight to share. We, of course, have been following all of the discussion and commentary about the various parts of the sector. And look, from our perspective, we're just trying to stay on the right side of the value equation, having efficient health systems being accessible at all times, efficient in what we're doing and obviously providing surgical care at scale at half the cost sometimes of what it is to do the same work in a hospital. So with USPI, I mean. So look, I think all of those things we feel like we're well positioned as we look ahead. I mean I -- if you really look at USPI, and I know this question was asked maybe as a sub-question earlier by Kevin, USPI had an even cleaner quarter despite all the noise because it's the weather impact was there, but you don't really see that much of an impact from the exchanges or Medicaid in that business, as we've pointed out before. Operator: Our next question comes from Pito Chickering with Deutsche Bank. Pito Chickering: Looking at -- back to hospitals at your first quarter, I understand that there's $22 million of loan payments, offset by recoveries of $40 million this quarter. But when we normalize sort of the margins, sort of get to, I guess, the 15% range is generally where your guidance is. And if I think about margins for hospitals, generally, they the year is better than just the first quarter because of the strong fourth quarter. So I guess, can you just walk me through how we should think about the hospital margins with 1Q, excluding the $40 million as a bridge into the rest of the year? Saumya Sutaria: Well, I'll start on, if you want to add that. I mean, look, I think that if you come back, step back to our guidance for the year, which is in the Hospital segment, a 10% normalized year-over-year growth which there was obviously some discussion and dialogue about when we put it out there. We feel very confident that we're on track to that. Now some of that's going to be margin improvement. Some of that is because we had visibility from our work in the second half of 2025, which was going to be expense management, execution of expense management initiatives that we were designing this year that we would see benefit this year from and obviously a enhancing. So I don't know that the algorithm is exactly like it would be in a normal year. The respiratory volume impact in Q1 is a headwind to margins because those tend to be capacity filling and margin accretive, we overcame that, and as we sort of return to normal operations, plus have a year where we are executing on a broader efficiency strategy. I would say that we think that this year's performance will support margin growth in the Hospital segment. I don't know if you want to add to that. But like we feel very confident about the balance of the year. Sun Park: Yes, I think that's right. The only thing I would add, Pito, is if you kind of just look at our Q1 hospital margin of 16.7%, you're right, we should normalize for the onetime [indiscernible] for $40 million. And then the only other thing I would mention is, like we said, the exchange impact likely sort of grows over the rest of the year from what we had in Q1. So that probably damps down margin a little bit on a run rate basis. But when it's all said and done, as Saum said, kind of a year guidance, of sort of 15% implied margins, I think that's still right on our expectations. Pito Chickering: I mean on the impact, I get the guidance that you've given virtual in the first quarter, but the uninsured payer mix declined year-over-year in the first quarter, I thought that would have been increasing. So I guess, how does that fit within that [ HICS ] guidance you guys have provided. Saumya Sutaria: Well, I mean, look, I think we should watch and wait, right? I mean effectuation rates and other things are important to track the first quarter often is a relief valve for payment premiums and other things. So I would say we watch and wait. From our perspective, the way we think about this year is anticipate that the challenge could increase and plan accordingly in a disciplined way to manage to the earnings guidance that we have given. I mean, if -- obviously, if the impact is less or if the uninsured impact doesn't increase as much. Those are all opportunities for outperformance for us. I mean, I would just reiterate, we're not spending a lot of time thinking about downside risks right now. We're spending our time thinking about how the strategy in both segments plus our expense opportunities plus how this exchange uninsured Medicaid market plays out could create upside opportunities for us. That's where our mindset is right now after this quarter. Operator: Our next question comes from Whit Mayo with Leerink Partners. Benjamin Mayo: I just wanted to hear more about the reserving and revenue recognition for the exchange patients, what the underlying estimates are for attrition and maybe what the exit rate on the decline in volumes was within March. Sun Park: Hey, it's Sun. Listen, I think on a -- on your first question, we obviously pay through Conifer, very close attention, patient by patient, if we can, on their ex coverage status, premium payment status, all those details that you would imagine. And I think, again, we'll review this as the year develops and we get more data. But I think we're very appropriately reserved on our overall patient population, right, including [ HICS. ] And that sort of speaks to kind of the numbers that we shared in Q1, where admissions were down, as we said, 9% and if you do the algebra, I think revenues from [ HICS ] is down probably 9% to 10% as well. So it's sort of 1:1 is where we're sitting. So I think we're in a very reasonable situation there. And then like we said, we'll continue to observe the sales go. From a month-over-month trend perspective, I mean, our overall volumes, not just fix but overall, improved through the course of Q1 coming into March, which, again, I think, gives us some confidence into our rest of your guidance. On [ HICS, ] I don't know that there's any trends that we would point out. I think in January being sort of a great period for a lot of the enrollees, I mean I think that did help January numbers somewhat. But again, I think it's too early to kind of have any trend discussions. Operator: Our next question comes from Stephen Baxter with Wells Fargo. Stephen Baxter: I wanted to ask about the same-store revenue per admission decline of 1.5 points in the first quarter. I guess we do have a lot of moving parts with some of the Medicaid changes you discussed and also the exchanges. But on the other hand, you also have less flu, which I think would trend to push up some of those metrics. I hope to just get a better sense of some of the moving parts that impacted that metric? And then maybe a direct comment on what you're seeing on commercial and whether that's a headwind in the quarter that assume gets better through the balance of the year. Saumya Sutaria: Yes. I mean, why don't we should probably just start with the comp from the prior year and then the math because it's -- for us, it really wasn't that worrisome so. I don't know if you want to just walk through that perhaps. Sun Park: Yes. I think just on a popular [indiscernible] basis, I mean, we said NRAA was down 1.5% in the Hospital segment. A lot of that between the $40 million of [indiscernible] Medicaid, we run out in Q1 that we didn't have in Q1 of '26, and then the reduction in [ HICS ] that, as we talked about, presumably moved volume into uncompensated or other payer classes. Those two combined, I think, was worth 2% to 2.5% of NRAA headwind. So once you normalize for that, we're sort of at 50 bps to 1%. Then I think there are some other moving parts that we talked about. Tom, I don't know if you want to comment directly on flu. But yes, I think flu impacted our emissions, but in the scheme of our total adjusted admissions base and our net revenue base, it's a relatively small component. So whether or not flu was there not, I don't know that impacts NRAA that much. Saumya Sutaria: Yes. I mean the only other thing I would add is clarifying point, but also the onetime Conifer $40 million that we announced, even though it was part of the hospital segment, we excluded that in looking at the NRAA because that's appropriate. It wasn't related to the case volume. But just in case anybody is looking at the math that way. So I mean, in summary, look, I would say the biggest driver was the [indiscernible] period thing, and we had a very high NRAA in 2025 back to what my overall commentary. The acuity strategy is working very, very well, and we're not worried about it. And obviously, it did not have an impact. In fact, it was the opposite, we outperformed on the earnings despite the revenue, which is just right now, a marker of the flexibility and operating discipline, I think, that's required in this environment as things settle out. I suspect in the coming months and when we talk again, we'll probably have a lot more insight into how I sense that the desire for predictability, how the exchange market and uninsured at Medicaid will settle out for this year, which will give us a much better opportunity to kind of update our guidance for the year based upon the outperformance so far. Operator: Our final question is from Andrew Mok with Barclays Bank. Andrew Mok: You mentioned that 8 volumes were down 10%, and you had expected unfavorable payer mix. But when I look at the managed care mix disclosure, it actually looks relatively stable year-over-year. So can you help us understand what you saw on payer mix inside of that, including the moving parts on the government side. Sun Park: Hey, Andrew, it's Sun. -- sorry, go ahead, Saum. Saumya Sutaria: No, you go ahead, please. Sorry. Sun Park: Yes. Sorry. I was going to say, Andrew, yes, we did see the 10% reduction as we talked about. But I think your question on the rest of managed care sorbent that. One reminder, when we report managed care, we also include managed Medicaid and managed Medicare in that component. So I think we saw a reasonable strength in so the payer mix is, to your point, it remains to be stable as a percent of total revenues. So I think that did offset the [ HICS ] impact a little bit. Again, we'll see. I think Q1 in terms of payer mix trends, we were happy with, but I think there's some more trending and data that we need to see into Q2 before we can make some more detailed comments. Saumya Sutaria: And the only qualitative thing I was going to add there was just -- look, I think that as people come off the exchanges, they find different employment and other things, especially those that need health care have family they need to cover. We do think there's going to be some percentage of them that obviously pick up commercial coverage, and we've talked about that before. That's good. And then we did have strength in Medicare. I mean, we do a lot of work on appropriate utilization, appropriate admission rates from the ER appropriateness of interfacing with these plans on Medicare Advantage. And we have strength in the Medicare side in addition, which, again, is consistent with our acuity strategy given what these patients need. So I appreciate what you're seeing in those metrics. It does look better than I would have expected based upon the theory of the case of what could have happened with the exchanges. And again, it's just -- for us, it just all goes to the point that the trend line in Q1 of the type of headwinds was more mitigated than the simple straight-line assumption for the year. And again, we're pleased that it helped drive outperformance rather than a headwind we couldn't catch up to. Operator: We have reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: My name is Shyamali, I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's First Quarter 2026 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone key. If you would like to withdraw your question, press star then the number two. I would now like to turn the call over to Christina Jones, vice president of investor relations. Ms. Jones, you may begin your conference. Christina Jones: Thank you, and thank you everyone for joining on today's call. I am joined today by Olumide Soroye, Fortive Corporation's President and CEO, and Mark D. Okerstrom, Fortive Corporation's CFO. During today's call, we present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com. We will also make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and actual results might differ materially from any forward-looking statement that we make today. Information regarding these risk factors is available in our SEC filings including our Annual Report on Form 10-K and the subsequent Quarterly Reports on Form 10-Q. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. Our statements on period to period increases or decreases refer to year-over-year comparisons unless otherwise specified and our results and outlook discussed today are on a continuing operations basis. With that, I will turn the call over to Olumide. Olumide Soroye: Thank you, Christina. Let me begin on slide three. Q1 marked a strong start to the year with another quarter of solid performance. We remain laser focused on delivering on our strategic and financial plans for 2026 and continue to make encouraging progress on executing our Fortive Accelerator strategy. We have four key messages to cover today. First, our teams executed well in 2026, delivering solid performance in both segments. On a consolidated basis, we delivered core revenue growth of just over 5%, adjusted EBITDA growth of 13%, and adjusted EPS growth of over 25%. Please note that our core revenue growth in the quarter was aided by approximately 150 basis points of tailwind from additional year-over-year selling days in the quarter. Second, we continue our disciplined capital allocation approach with a relentless focus on optimizing shareholder returns over the medium to long term. In the first quarter, we completed approximately $500 million of share repurchases. We have now reduced our share count by just over 10% since we launched New Fortive Corporation in July 2025. Third, with three quarters of execution now behind us, our confidence continues to build in the power of the Fortive Accelerator strategy to unlock benchmark-beating returns for our shareholders over the medium to long term. I will spend a few minutes on this in the next slide. Lastly, we are reaffirming our full year adjusted EPS guidance range of $2.90 to $3.00. Based on our Q1 performance and trends to date, we believe results are trending toward the upper half of that range. Moving to slide four. Before we get into our Q1 results, I want to highlight some of the progress we are making in execution of three pillars of our Fortive Accelerator strategy. Starting with the first pillar, delivering faster profitable organic growth powered by our Fortive Business System Amplified. This quarter, we continued to increase our innovation velocity with several notable hardware product milestones and AI-enhanced product launches. As discussed last quarter, Fluke launched a new data center testing solution, CertiFiber Max, with the fastest throughput in the industry in late Q4. Customer response continues to significantly exceed our expectations, underscoring the strength of Fluke's brand and the effectiveness of our broader data center strategy. We are particularly encouraged by CertiFiber Max's ability to drive meaningful pull-through of other Fluke products into data center applications, including power quality, battery testing, imaging, and calibration solutions essential for both build out and ongoing operations and maintenance of data centers. In healthcare, we introduced Provation Mirror Documentation Assist, a real-time AI-powered voice-driven documentation capability enabled by deep domain expertise and proprietary data, and embedded directly into GI procedure workflows. This solution enables clinicians to capture structured documentation during the procedure, reducing the need to reconstruct details afterwards and enabling the clinical team to focus on the best patient care. On the commercial side, we continue to focus on faster growing end markets and regions, where we have made deliberate targeted investments to capture growth. At Fluke, we continue to invest in commercial expertise across high growth verticals such as data centers, defense, and distributed energy, and we are seeing solid early traction from our focused efforts. At ASP, we continue to advance our made-in-region strategies in India and China, supported by related commercial investments, and we are beginning to see positive impact of these efforts in our results. We are also advancing ASP's growth strategies in EMEA, with the European commercial launch of STERRAD Ultra GI. On our recurring customer value initiatives, we continued to make progress on driving deeper customer lifecycle engagement and improving revenue durability. In Q1, recurring revenue again grew faster than consolidated revenue in both segments. Our recurring customer value progress continued in our iconic hardware brands. Fluke continues to make progress on increasing recurring revenue, with double-digit services growth in the quarter. Industrial Scientific continued to see strong growth and share gains in our hardware-as-a-service product line. Moving to the second pillar, disciplined capital allocation is an integral component of our Fortive Accelerator strategy. Consistent with our priorities, we deployed another roughly $500 million to share repurchases in Q1. Since the spin-off, we have deployed approximately $1.8 billion to share repurchases representing 35 million shares or just over 10% of diluted shares outstanding. Our revamped bolt-on M&A engine and team is in place, and we will continue to evaluate opportunities for high quality accretive bolt-on acquisitions that meet our rigorous strategic and financial criteria. Looking forward, our capital allocation priorities remain clear: invest in organic growth, pursue bolt-on M&A where risk-adjusted returns exceed other uses of capital, return capital through share repurchases, and maintain a modest growing dividend, all with a focus on best relative returns and maximizing medium to long term shareholder value. Moving to our final pillar, building and maintaining investor trust. We were pleased to deliver solid performance ahead of expectations for a third consecutive quarter as New Fortive Corporation. That is a good start. We look forward to building on our momentum. We remain laser focused on executing against our 2026 financial and strategic plan and continue to have strong confidence in our 2026–2027 financial framework that we shared at our June 2025 Investor Day. With that, I will turn it over to Mark to walk through our financial results for the first quarter in more detail. Mark D. Okerstrom: Thanks, Olumide. I will begin with slide five. In the first quarter, we delivered total revenue of nearly $1.1 billion, up almost 8% year over year on a reported basis and up just over 5% on a core basis, benefiting from an approximately 150 basis point tailwind from the impact of additional year-over-year selling days in the quarter. We are pleased to see price and volume growth at both segments, driven by healthy customer demand and strong commercial and operational execution, leading to solid performance across the board. We were also pleased to see strong growth in software revenue, reflecting the underlying strength of our businesses and robust customer demand for our increasingly AI-driven new product releases. From a geographic perspective, we saw another quarter of solid performance in North America, which continues to be our strongest region. Europe improved sequentially, reflecting stabilizing conditions and solid commercial execution. Adjusted gross margin in the quarter was just over 63%, down about 100 basis points from prior year, which is largely consistent with the year-over-year gross margin trends we saw last quarter and was driven mostly by the net impact of tariffs that were introduced last year. Q1 adjusted EBITDA was $314 million, up about 13% year over year. This strong performance was driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by continued innovation and commercial growth investments. Adjusted EBITDA margin in the quarter expanded approximately 140 basis points year over year to just over 29%. We delivered adjusted earnings per share of $0.70 in Q1, up over 25% year over year, marking our third consecutive quarter of double-digit adjusted EPS growth. Strong adjusted EPS performance was driven by growth in adjusted EBITDA and the positive year-over-year impact of share repurchases. We generated $194 million of free cash flow in the first quarter, with Q1 conversion on adjusted net income in line with normal historical patterns. Our trailing twelve-month free cash flow conversion remains north of 100%. Moving to our segment results, starting with Intelligent Operating Solutions on slide six. Revenue for the segment grew about 8% on a reported basis, with core revenue growth of about 5%, modestly ahead of our expectations. Based on the product mix in the segment, the year-over-year impact of additional selling days in Q1 resulted in a roughly 100 basis point benefit for IOS, making normalized core growth in the segment broadly consistent with what we saw last quarter. Core growth was driven by both price and volume, reflecting solid performance across Professional Instrumentation, Facilities and Asset Lifecycle Solutions, and gas detection products. At Fluke, order volume was strong, with orders growth outpacing revenue growth, and our teams continued to execute with strong operational discipline while increasingly deploying investment dollars towards growth initiatives. North America continues to be the strongest growth driver and we were encouraged by another quarter of sequential improvement in Europe. Growth in Facilities and Asset Lifecycle Solutions accelerated from Q4, and was again accretive to the IOS segment, with particular strength in demand for multisite facility maintenance and marketplace software in North America. Our commercial investments and accelerated pace of innovation across these businesses are beginning to bear fruit. Our gas detection business continues to grow nicely, buoyed by strong demand and share gains from our hardware-as-a-service product line in North America, Europe, and the Middle East, as we begin to see our investments in the business show up in our results. Adjusted gross margin in the segment was just over 65%, down about 150 basis points year over year, which is largely consistent with the year-over-year gross margin trends we saw last quarter, primarily due to product mix and the net effect of tariffs. Q1 adjusted EBITDA in the segment grew 8% to $255 million, driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by targeted growth investments to support innovation and commercial initiatives. Adjusted EBITDA margin for Q1 was just over 34% in IOS, in line with the comparable period prior year. Moving to our Advanced Healthcare Solutions segment on slide seven. We delivered total revenue of $326 million. Revenue grew approximately 8% year over year and approximately 6% on a core basis. Our healthcare consumables and software product lines benefited from the year-over-year impact of additional selling days in Q1, resulting in a roughly 300 basis point benefit to growth for AHS. On a normalized basis, we saw slight acceleration in growth versus last quarter. Q1 growth was driven by solid demand for healthcare consumables, services, and software in North America. Low temperature sterilization capital demand improved modestly in Q1, though hospital spending pressures continue to persist. Our software products in the segment continue to deliver strong growth, driven by effective execution and strong provider demand for our gastrointestinal case documentation solution. Adjusted gross margin in the segment was about 59%, in line with the prior year period, with modest operating leverage offset by the net impact of tariffs. Q1 adjusted EBITDA in this segment was $84 million, up approximately 18% year over year, driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by targeted growth investments to support innovation and commercial initiatives. Adjusted EBITDA margin in Q1 expanded by about 200 basis points year over year to just under 26%. Turning to slide eight. Our balance sheet remains strong. We finished the quarter at 2.8 times gross debt to adjusted EBITDA, reflecting a modest increase in commercial paper to fund share repurchases in the quarter. We continue to have ample capacity to execute on our capital deployment priorities in 2026, and we remain steadfast in our commitment to disciplined capital allocation and an overall approach that seeks best relative returns. As noted earlier, we deployed roughly $500 million to share repurchases in the first quarter, reflecting continued confidence in our ability to deliver on our value creation plan. As a result, diluted shares outstanding were approximately [inaudible] million at the end of Q1. In addition to retooling our process and revamping our M&A team, integration and the execution of our value creation plans for the two small bolt-on acquisitions we completed in Q4 are both going according to plan. We continue to be on the lookout for high quality, accretive bolt-on deals that meet our rigorous strategic financial criteria. Moving to slide nine. We are reaffirming our full year 2026 adjusted EPS guidance range of $2.90 to $3.00 per share. Given the trends to date inclusive of Q1 performance modestly ahead of our expectations, we believe results are trending towards the upper half of that range. This outlook assumes a continuation of the market dynamics we experienced in Q1 and reflects current tariff rates. Let me provide a few additional considerations to assist with modeling. Based on current foreign exchange rates, we expect full year reported revenue of around $4.3 billion. We continue to expect core growth in the 2% to 3% range and, given strong order patterns, we believe results are trending towards the upper end of that range. In terms of the shape of the year, based on Q1 results modestly ahead of our expectations, we expect Q1 will comprise a slightly higher percentage of total revenue than historical patterns, with Q2 and Q3 broadly in line. We would note that Q4 has four fewer year-over-year selling days, resulting in a $15 million to $20 million revenue headwind in the quarter. We expect FX and M&A combined to be about a 150 basis point tailwind to reported revenue in Q2, moderating to roughly 50 to 100 basis points throughout the second half of the year. We are now modeling a Q2 effective tax rate in the mid-teens, Q3 in the high-teens, and Q4 in the high single-digit to low double-digit range. We are also expecting full year net interest expense of just over $135 million. Based on what we see today and based on these modeling considerations, we would expect Q2 and Q3 adjusted EPS to be broadly similar to what we delivered in Q1. As the year unfolds and we continue to execute on our Fortive Accelerator strategy, quarterly phasing may evolve. As a final note before turning it back to Olumide for closing remarks and Q&A, we are off to a strong start to 2026 at New Fortive Corporation, and we remain committed to unrelenting execution on the Fortive Accelerator three pillar value creation strategy and financial framework that we outlined at our June 2025 Investor Day. I will now turn it back over to Olumide. Olumide Soroye: Thanks, Mark. Let me close with a few observations on the quarter and where we are headed. Q1 represents a strong start to the year and further evidence of the progress we are making as New Fortive Corporation. We delivered solid organic growth, meaningful adjusted EBITDA growth, and a third consecutive quarter of double-digit adjusted EPS growth, while continuing to invest deliberately and execute diligently against our Fortive Accelerator strategy. We are seeing early traction from our innovation, commercial, and recurring customer value growth initiatives. We are methodically allocating capital in ways that we believe will generate the best relative returns over the medium to long term, and we remain steadfast in our commitment to building and maintaining investor trust. Our teams are aligned, our FBS operating cadence is strong, and our confidence in the 2026–2027 financial framework we outlined at Investor Day 2025 is fully intact. I want to thank our Fortive Corporation team members around the world for their commitment to our shared purpose of innovating essential technologies to keep our world safe and productive, and 100 thousand customers for placing their trust in us every day. With that, I will turn it back to Christina to open the call for questions. Christina Jones: Thanks, Olumide. That concludes our prepared remarks. We will now open the call for questions. Operator: Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. It may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question. Nigel Coe: By the way, Mark, thanks for the call out on the selling days. It is really helpful. Not all teams do that. Just on the Q2 plan, I just want to make sure we think about this correctly. You mentioned Q2, Q3 EPS roughly similar to Q1. Normally, we see Q2 step from Q1, but we have the selling days impact. So I am just wondering, the core growth in Q2 looking to be in that sort of mid-single-digit range, but pretty flat with sales in the first quarter, but up mid-single digits. And margins would also be fairly similar to Q1 as well. Mark D. Okerstrom: Nigel, thanks for the question. I think you are broadly in the zone. Again, Q2 we obviously do not have the benefit of days. We do have a slightly easier comp, I called out the FX tailwind that combined with M&A being about 150 basis points, and I think over the last couple of quarters we are starting to see just some momentum across each of the two segments, based upon our own execution with IOS a little bit ahead of AHS. Based on what we see right now, we are expecting those trends to continue through full year. Nigel Coe: Great. And then my follow-on question, I think, Olumide, you mentioned some success with some of the AI-driven product releases. Within AI is meant to be a negative, not a positive. So maybe just talk about that a little bit and perhaps a little bit more color on how the FAL portfolio performed in the quarter? Olumide Soroye: Yes, happy to take that. AI is certainly a disruptive technology that is shaping the landscape. As we have discussed previously, we feel very good about the businesses we have and how our teams are taking advantage of AI-powered innovation to drive growth in those businesses. Looking at FAL as an example, it is a great case of how we are using AI deployed on top of our mission-critical proprietary data-rich software solutions for customers to really deliver new value for them that is driving faster growth in that platform. We have talked about a few examples of ServiceChannel AI and what our team is doing with that, and you see that showing up in the numbers. We are very pleased with FAL’s performance in the quarter. It grew faster than the IOS segment core growth of about 5%. All the operating brands contributed to that growth, with ServiceChannel leading the pack with continued strength, especially in North America. The broad trends in all our key operational metrics—ARR, GDDR, MDR—are really good, and we are excited about the opportunity to see continued improvement in those metrics as we execute on our Fortive Accelerator strategy, including these AI-powered use cases. Everything we see, given the nature of those businesses and the quality of the quantitative data on performance, we feel quite good. Operator: Thanks, Nigel. Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question. Deane Dray: Thank you. Good day, everyone. Olumide Soroye: Hi, Deane. Deane Dray: Hey. There were a number of references about data center and Fluke is right in the middle of all of it. Can you just give us a sense of what the opportunity is? And there are some newer technologies like optical switching that should also position Fluke well. Any update there and kind of what the overall exposure is would be helpful. Olumide Soroye: Thanks, Deane. We are very excited about the data center investment cycle, and not just construction and build out, but frankly the larger and more durable opportunity for ongoing operations and maintenance of these massive data centers that are getting built out. Fluke already participates in the tool belt for data centers with a wide range of products—power quality monitoring and analytics, high voltage diagnostics, high density fiber testing, electrical ground fault detection, power calibration, thermal health, etcetera. New technologies like optical switching, to your point, will create additional demand for a lot of these products we already have. Even more exciting, frankly, is the tremendous job our Fluke team is doing on accelerating innovation that is aimed at data center needs that are not yet fully met. We talked about the CertiFiber Max product that we launched in Q4 of last year and the incredible customer response to that, and how our team is using that new product to pull through the entire suite of offerings we have for the data centers, and really working hard at getting specced in to hyperscaler standard maintenance tool sets for how they manage these data centers. We feel really good about the setup and the enduring tailwind that offers for us at Fluke. The exact magnitude of that is still ahead of us, but we are quite excited. Deane Dray: Great to hear. And then just can you address price/cost expectations for the year—ability to offset inflation and any tariff pressures at the margin? Mark D. Okerstrom: Yes, price/cost was north of one in the first quarter. We would expect that to persist. FBS continues to be at the absolute core of Fortive Corporation and that continues to drive value engineering and cost efficiencies as we move through the year. The tariffs, again, have been a headwind to our gross margins even though they are completely countermeasured from a bottom-line perspective. You saw that headwind show up in IOS this quarter. It is going to persist through partway through the third quarter when we are fully countermeasured, and then you will see that dissipate completely as we lap over the countermeasures in the fourth quarter. Operator: Thank you. Olumide Soroye: You are welcome. Operator: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question. Julian Mitchell: Hi, good morning. Maybe I wondered if you could flesh out perhaps some of the commentary on the orders strength you have seen recently. I think some other companies have not exactly been shy about touting large orders in recent months. So how are the orders progressing there? And any update on the cadence of demand in some of the shorter cycle hardware businesses like Fluke or AHS consumables in recent weeks or months? Any signs of pre-buy or broad changes in demand ex restock/destock—anything to call out there? Olumide Soroye: Great, Julian, happy to take that. We were really happy with the orders growth that we saw. Orders grew faster than our approximately 5% core and roughly 8% total revenue growth, which is a great signal about the trajectory of the business. The growth we saw was broad-based across the two segments—in IOS, Fluke, FAL, Industrial Scientific—as well as on the AHS side, ASP also had really strong order growth in the quarter. That is a result of good conditions in our markets, the strength of our operating brands, and the early positive impact of our Fortive Accelerator strategy. On short cycle, using a couple of examples: at Fluke, POS trends remain solid, book-to-bill was over one, healthy backlogs to end the quarter, channel inventories relatively normal in the U.S., continuing to get better outside the U.S. We feel really good about the trends we are seeing on short cycle. As you know, Fluke has been a very durable business with order growth in almost every quarter of the last five years despite PMI contractions in most of that time. That continued in the quarter as well. For ASP, on the consumables side, we saw the resiliency you would expect; even adjusting for the extra selling days, low temperature sterilization consumables continued to grow in a very durable way. All the signals were good for us. Julian Mitchell: That is very helpful, thank you. And then if we think about operating leverage or operating margins—there was very high operating leverage in Q1 year on year even with the tariff headwinds. I understand there was a selling days mechanical impact, but when we look at the balance of the year, anything we should bear in mind on operating leverage as we move through the year? I imagine there is not a big Section 232 tariff effect for Fortive Corporation. Any help there you could provide? Mark D. Okerstrom: Sure, happy to. Again, to reiterate, we are very confident in our medium-term financial framework, and that calls for 50 to 100 basis points of EBITDA margin expansion over the course of this year and next year—each year. That is the framework we are operating under. Really, the way we have been managing the business is taking costs out of areas where they are not particularly value-added—you saw us flatten the segment structures, take out corporate costs in addition to the stranded cost reduction—and reinvest that in initiatives that we believe will accelerate growth and deliver excellent returns. That is the formula. What you will see this year, though, is that because we have the days impact in the first half of the year and easier comps in the first half, in the back half of the year the comps get a little bit harder in Q3, and then you have the days impact in Q4. You will lap over a lot of the pretty significant cost actions that we took in the third and fourth quarter of last year. You will see a little bit less margin expansion in the back half of the year than we are able to deliver in the first half. But we feel super good about the overall margin trajectory of the business. FBS is working, we are reinvesting in initiatives, and although it is early, it seems to be driving growth. The financial framework is well intact. Julian Mitchell: That is great to hear. Thank you. Operator: Thank you. Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question. Andy Kaplowitz: Hey, good morning, everyone. Operator: Morning. Andy Kaplowitz: If I can follow up on AHS—you mentioned, I think, slight acceleration in Q1 despite some hospital CapEx pressure in the U.S. How would you characterize fundamentals? I know you answered Julian's question on consumables, but overall equipment—does the environment continue to get better here this year? Differences between North America and China—what are you seeing on the AHS demand side? Olumide Soroye: Happy to address that. We were pleased with the performance in the AHS segment and ASP’s role within that in the quarter. As a reminder, the segment did benefit from roughly a 300 basis point tailwind related to the additional days in the quarter, but even after normalizing for that, we saw some acceleration in the segment, reflecting the strength in consumables, services, and software. In terms of capital equipment, we have seen modest sequential improvement since 2025. As you might recall, that was the toughest period with the impact of healthcare reimbursement and related policies on hospital procurement of capital equipment. Q1 continued to show that improvement. Hospitals remain cautious about capital spending when the exact timing is discretionary, but we feel really good about lapping that year-over-year dynamic as we go into Q2 here, because Q2 last year is when it started. The underlying capital funnel we have is really strong, and as we lap this dynamic in Q2, we like the setup for the rest of the year. The U.S. continues to be the main pressure point on hospital budgets, but it is getting better, and with some of the made-in-country initiatives we have in China and India for ASP, that is adding some tailwind for us in those particular markets as they want locally made products. We feel quite good as we look at the rest of the year; things are getting better on the equipment side even though there is still some caution. Andy Kaplowitz: Very helpful. And then I want to follow up on FAL—you mentioned the strength in ServiceChannel and that FAL is stronger than core growth in IOS in Q1. Maybe you could talk about the outlook for Facilities and Asset Lifecycle for the year. Would you say that ServiceChannel, Gordian could all continue to be higher than that 2% to 3% core growth you are guiding? Any more color would be helpful. Olumide Soroye: Thanks for that. The leading indicators are what we are seeing on order growth and ARR, GDDR, and MDR in those businesses, and also the exciting actions our teams are taking with respect to the innovation funnel and commercial initiatives to invest in areas where we have momentum across the range of options, and to drive improved customer experience. All of those things are pointing north for us in those businesses. We feel good about the setup for the rest of the year for FAL and the role it continues to play in our mix. Operator: Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Please proceed with your question. Andrew Buscaglia: Thanks for taking my question. So I just want to reiterate that you are guiding to a similar level for Q2, and you are talking about some incremental things you are working on to drive some margin expansion. But guidance really, at the midpoint, does imply earnings moderating or even potentially declining in one of the quarters. Is this just conservatism, or what are you waiting to see in terms of moving that guidance higher? Mark D. Okerstrom: Thanks for the question. We feel very good about the momentum that we are seeing in the business and the early results of our execution on the Fortive Accelerator strategy across all three pillars, particularly the efforts we are making on commercial acceleration and innovation acceleration. What I would say is that it is early in the year; we have got a quarter under our belt. We have a lot of exciting things going on, and we like what we see, but it is just a little bit too early to get out ahead of our skis. Take the fact that we gave some color that we are expecting growth near the higher end of our range and adjusted EPS on the full year near the upper half as an expression of our confidence in what we see, and we look forward to updating you on the next call in terms of how it is going. Andrew Buscaglia: Fair enough. I wanted to check on M&A. You guys have been doing a good job managing on the cash flow side. What is the outlook like? You have got your footing post separation at this point. You have a better idea of where you want to go with your capital allocation priorities. What do you see in terms of M&A as it plays out this year? Mark D. Okerstrom: Thanks for the question. Capital allocation is a critical pillar to the Fortive Accelerator strategy, and we have been pleased to deploy capital with discipline, retiring just north of 10% of our share count since the time of the spin. We are really looking to deploy capital across organic growth initiatives, M&A, share repurchase, and a modest growing dividend based upon best relative returns. As it relates to M&A specifically, we have revamped our approach with more of a focus on bolt-ons. We put in place rigorous strategic and financial criteria. We have essentially rebuilt the team. We executed a couple of bolt-on acquisitions in the back half of the year, and those are going very well—the value creation plans are tracking and the teams are performing really well. We are also super excited that on Monday, Corbin Wahlberger will be joining us to run corporate development for us globally and run M&A. Corbin is well known in circles around this industry, so we think he is going to be a fantastic fit, and we are excited to have him join what is already a really excellent team. We will see what happens—obviously, if spreads start to expand on a relative basis, M&A becomes more attractive. We are putting ourselves in a position where we are building pipeline, the team is strong and getting stronger, and when the time comes where that becomes the best use of capital, we will be there, proactive, and ready to go. Operator: Alright. Thank you. Our next question comes from the line of Analyst with Baird. Please proceed with your question. Analyst: Hi, thanks. Question on Gordian. I think June is typically a more sizable month for that business with year-end government spending. You obviously did not see that last year. Any visibility to whether that normalized year-end spend materializes this year, or what is baked into the Q2 guide? Olumide Soroye: Yes, thanks for the question. A lot of the state and local agencies have June as fiscal year-end. Our team is doing a phenomenal job of being very close to customers and being there to serve them on any budgets that are left. We feel really good about the funnel that we have and expect to have a strong outcome. We have not presumed anything extra-normal in terms of the Q2 guidance. If we get more there than we got last year, we will capture the upside. We feel quite good about the setup and the work our team is doing to be close to customers as we go through Q2. Analyst: Okay, thank you. And then second one would be on the Detection business. Any color you can share on what you are seeing in the Middle East—any disruption tied to that? And then any discussions with customers about potential rebuild-related orders? Olumide Soroye: I will take that. With respect to the gas detection business overall, we are very pleased with how it did in the quarter. It was accretive to IOS segment growth overall. Demand was strong globally, with solid performance in North America, Europe, and the Middle East. In the Middle East, we are seeing increased demand, and we do not think the rebuild is at the peak yet. We are excited about the opportunity to show up for customers as that picks up in the region. Overall, sales in the Middle East are a small part of Fortive Corporation overall—low single-digit percentage of actual revenues—but that team, based on the order book, is feeling quite excited. Thankfully, our teams in the region are all safe and staying close to customers. We are feeling good about being able to help in a challenging context. Operator: Thank you. Our next question comes from the line of Analyst with JPMorgan. Analyst: Hi, good afternoon. Thanks for taking my question. I just have a quick follow-up on FAL. You commented that it grew faster than IOS—growth was about 5% during the quarter. Can you just clarify if that is what it was adjusting for the selling day impacts and how that compares to last quarter? Olumide Soroye: FAL performed very well, even if you adjust for the selling days, and that statement holds even adjusting for selling days. That is an indication of the great job our team is doing on building the order book over the last several quarters that is now beginning to show up in revenues as revenue recognition kicks in for those new orders. It feels quite good, and as I mentioned, the leading indicators looking ahead are also quite strong, excluding extra selling days. Analyst: Okay, great. And how does that compare to last quarter? Any color there? Olumide Soroye: Overall, we are seeing steady acceleration in the platform. One of the things we liked about Q1 is the broad-based nature of acceleration we saw, and FAL was no exception to that compared to last quarter. Analyst: Okay, great. Thanks. And just my last question—were the trends similar for the AHS software business? Mark D. Okerstrom: Yes, AHS as well. Continued very strong performance even adjusting for days, and again, as I said in my prepared remarks, our software revenue in totality is growing nicely ahead of the overall business. We really do not, as we look across the whole portfolio, see an exception to that. Those businesses, with the renewed focus on innovation acceleration and commercial efforts, are showing good early signs. Analyst: Okay, great. Thanks so much for the color. Operator: Thank you. Our next question comes from the line of Scott Graham with Seaport Research Partners. Please proceed with your question. Scott Graham: The old Fortive talked a lot about OMX and how FBS poured productivity into that. I was wondering if you might be able to give us some type of data point on this. I know you have enhanced those programs. Is this 50 to 100 basis point goal here for productivity—is there a sustainability to whatever your goal is? Any kind of data point or KPI you can give us would be helpful. Olumide Soroye: Thanks for the question. Starting from the foundation of our culture—our Fortive Business System and the relentless pursuit of better, including productivity and now increasingly growth—is stronger than ever. We have our President’s Kaizen Week next week with Fortive Corporation teams around the world focused on driving growth and productivity. The fundamentals of how we operate are only getting stronger, so you should expect good things from that. We have intentionally framed this 50 to 100 basis points of adjusted EBITDA margin expansion a year in our financial framework as the governing framework for productivity and the fall-through on high-margin incremental revenues that we drive. That is intentional because we want to give ourselves the space to invest productivity gains in growth that is going to sustain and accelerate outperformance across both segments. Within that framework, productivity is as big a piece as ever, and deliberate investment in growth is a bigger piece than it has ever been because, looking at the performance this quarter and roughly 5% core growth across the company, we would like to keep investing to make outcomes like that more the norm. Productivity remains as strong as ever, it is baked into that 50 to 100 basis points of adjusted EBITDA margin expansion a year, and we feel really good about the setup. Scott Graham: Okay, thank you for that. My follow-up is simple. It looks like FAL is kind of getting back to that mid-single-digit growth that I think you talked about at the Analyst Day. Is there an opportunity this year for Fluke to catch up? You have the new data center product, you are anticipating some pull-through—maybe later this year or next year. You have Fluke connectivity going, you are adding products to the tool belt as usual. It is a terrific business. I am wondering if it is going to potentially catch up to FAL this year in your view. Olumide Soroye: When Mark was talking about the 2% to 3% modeling consideration guide on core growth for the year and the fact that we are tracking towards the upper half of that range, all of that reflects the conviction we have about potential across the platform. Given that Fluke is almost 40% of what we do, you should translate that to mean we feel really good about the setup at Fluke and the chance to continue to make a really great business even more extraordinary—from a growth and margin performance and brand and customer loyalty point of view. Short answer: we see Fluke as a really exciting platform. We will continue to make that great business even better from a profitable growth point of view, and from a multiyear basis, we see no ceiling ahead of us. Operator: And we have reached the end of the question and answer session. I would now like to turn the floor back over to CEO, Olumide Soroye for closing remarks. Olumide Soroye: Great. Thank you, and thank you all for your interest in Fortive Corporation. I am incredibly excited about the job our team did in the first quarter to deliver really strong results and adjusted EPS growth of over 25%, which is again our third quarter of double-digit growth in EPS. More importantly, I am really excited about the momentum across our teams as we look ahead and feel really good about the setup we have for the year and for the multiyear extraordinary value creation opportunity we believe we have here for our long-term shareholders. Thank you all for your interest, and we will see you next time. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0. A member of our team will be happy to help you. Good morning, and welcome to Parker-Hannifin Corporation's Fiscal 2026 Third Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question and answer session. To ask a question during this period, you will need to press star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star 0. Please be advised that today's conference is being recorded. I would now like to turn the call over to Todd M. Leombruno, Chief Financial Officer. Please go ahead. Todd M. Leombruno: Thank you, Chloe. I would like to welcome everyone to Parker-Hannifin Corporation’s fiscal year 2026 third quarter earnings release webcast. As Chloe said, this is Todd M. Leombruno, Chief Financial Officer. Speaking with me today, as usual, is Jennifer A. Parmentier, our Chairman and Chief Executive Officer. Thank you all for your time and your interest in Parker-Hannifin Corporation. We truly appreciate it. Let us begin the call on Slide 2 and address our disclosures on forward-looking projections and non-GAAP financial measures. Items listed here could cause our actual results to vary from our forecast. Our press release, this presentation, and reconciliations for any and all non-GAAP measures were released this morning and are available under the Investors section on parker.com. Today’s agenda has Jennifer reviewing our record third quarter performance; then she will highlight two of our largest market verticals, that is aerospace and defense and transportation. I am going to follow with some details on our third quarter financial results. Then Jennifer and I will provide an update to our FY 2026 outlook, including updates to market verticals and financial performance. As usual, we will conclude with the Q&A session of the call, and we will try to address as many of the questions as possible. With that, please draw your attention to Slide 3. Jennifer, the floor is yours. Jennifer A. Parmentier: Thank you, Todd, and thank you to everyone for attending the call today. Q3 was a quarter of record performance enabled by the strength of our portfolio. We achieved top quartile safety performance with a 12% reduction in our recordable incident rate. This was our safest quarter ever and puts us in line with our goal of being the safest industrial company in the world. I did want to acknowledge the severe weather events that occurred in Texas earlier this week, where Parker-Hannifin Corporation team members live and work, some of whom may be listening to the call right now. We have a facility in Mineral Wells, Texas, where we employ over 300 team members. Their safety remains our top priority and thankfully those on-site at the time of the severe weather are safe. However, there was damage to our facility, which we are still assessing. We are thankful to all our team members as well as the responders and service providers who are assisting at our site and in the broader community. With that, let us share our results for the quarter. Our team delivered record Q3 sales of $5.5 billion, organic growth of 6.5%, and 40 basis points of margin expansion, resulting in 26.7% adjusted segment operating margin. Adjusted earnings per share grew 18% and year-to-date cash flow from operations was $2.6 billion. Orders came in at 9%, with a record backlog of $12.5 billion, and we are continuing to make progress on the Filtration Group acquisition. Integration planning is underway using our proven playbook. Moving to Slide 4, please. Many of you on the call today have seen this slide before: Why We Win. First, Win Strategy is our business system. We have a decentralized operating structure—85 divisions run by general managers with full P&L responsibility—acting like owners, close to their customers, and executing the Win Strategy every day. Next, we have innovative products to solve customer problems—85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers. And finally, our distribution network is the best in the world. It is truly an extension of our engineering teams providing solutions to all those small to mid-size OEMs that are participating in capital spending and investments. These partners are experts at applying our interconnected technologies. Moving to Slide 5. We have the number one position in the $145 billion motion control industry, a growing space where we continue to gain share. As a reminder, these six market verticals represent greater than 90% of the company’s revenue. We have a focused portfolio creating distinct value for our customers. Our powerhouse of interconnected solutions cuts across these market verticals and gives us a clear competitive advantage. Two-thirds of our revenue comes from customers who buy four or more technologies, and our growth is focused on faster-growing, longer-cycle markets and secular trends. As Todd mentioned, today I would like to talk about the aerospace and defense and transportation market verticals. Now on Slide 6. I would like to highlight how we utilize our focused portfolio of core technologies to solve problems and create value for customers in aerospace and defense—our largest market vertical representing 35% of Parker-Hannifin Corporation sales. We have been a trusted partner since the inception of the aerospace industry and today have products and technologies on every major aircraft program globally. Our portfolio is well balanced with approximately two-thirds of our sales from commercial programs and one-third from defense programs. We have proprietary designs across commercial transport, defense fixed wing fighter, business jet, and helicopter platforms. With the Meggitt acquisition, we increased our global footprint and are now very well equipped to serve current and future demand from OEM and aftermarket customers in the Americas, EMEA, and Asia. Demand remains robust; orders continue to outpace shipments and we are on track to finish our fourth consecutive year of double-digit organic growth. Parker-Hannifin Corporation is better equipped than ever before with complementary technologies to help shape the future of flight and deliver a compelling value proposition for our customers today and on next-gen commercial and defense programs in the years ahead. Moving to Slide 7, featuring our transportation market vertical, which represents 15% of Parker-Hannifin Corporation sales. Our suite of differentiated and interconnected components and systems create value for customers across internal combustion, hybrid, and electric vehicles. We are truly energy agnostic and well positioned to meet changing customer needs. Today, we win with a focused portfolio of innovative products and our application engineers who work closely with customers to specify Parker-Hannifin Corporation technologies that improve the safety, reliability, and fuel efficiency of their equipment. Parker filtration provides protection to the engine and fluid power systems. Our power takeoffs provide reliable power to work functions. Our valves, hose, and fittings control the flow of safety-critical systems. And our engineered materials provide critical sealing, shielding, and thermal management. In addition, our robust network of channel partners serve the aftermarket needs of end users around the world. Lastly, we are seeing an increase in OEM orders for heavy duty truck—our largest platform within transportation—and as a result are increasing fiscal year 2026 sales guidance for this market. I will turn it back to Todd to review third quarter highlights. Todd M. Leombruno: Thank you, Jennifer. We are on Slide 9, and I am going to start with a summary of financial results. As Jennifer said, our team delivered another set of new records this quarter: sales, adjusted segment operating margin, EBITDA, net income, and adjusted EPS. Total sales were up nearly 11%. Organic growth was 6.5%. Currency was favorable at 2.5% and acquisitions added 1.5% to the total. Adjusted segment operating margins were 26.7%, up 40 basis points from prior year, and adjusted EBITDA was up 20 basis points to reach 27.2%. We achieved two new first-time-ever milestones this quarter. Adjusted net income surpassed $1 billion for the first time ever, and that is a 19.1% return on sales. In addition, the adjusted earnings per share of $8.17—that is the first time we have been above $8 for a single quarter ever. As Jennifer said, that is a growth of 18% versus prior year. Our teams around the globe did an excellent job this quarter, resulting in another quarter of strong performance: organic growth, records across the board, and then 18% EPS growth. We are really proud of everyone for their efforts. We are well positioned, and we remain confident in delivering another record year in 2026. If we can move to Slide 10, we will display the walk to the $1.23 of additional EPS—that is that 18% increase. Main driver continues to be increased segment operating income dollars. That added $0.96, or 14% of the growth versus prior year. If you go to the next bar, income tax was favorable $0.18. There were a couple of discrete items that occurred within the quarter to drive the $0.18 favorable year-over-year comparison. Share count was also favorable; that drove 14% of improvement from prior year. That was based on all the discretionary purchases that we have done over the last year or so. Interest was just $0.02 unfavorable and that was driven by a slightly higher average debt balance that was slightly offset by lower rates. Corporate G&A and other were a little bit higher, just $0.03, due to some favorable market-based benefits that occurred in the prior year—so not an FY 2026 issue, that was FY 2025. The result is a record $8.17, really driven by strong growth and our team continuing to work the Win Strategy. I appreciate the team’s effort on safety—Jennifer mentioned it was our safest quarter ever—really focusing on our customers, achieving that growth, and strong operating results. Thank you to all. If we go to Slide 11, let us look at the segment performance. If you look at orders, we were plus 9% in total, with positive order rates across all of our businesses. Backlog increased to a record level of $12.5 billion. We generated record segment operating margins—40 basis points of margin expansion—and overall, just a great Q3. Looking at North America specifically, sales were $2.1 billion with organic growth of nearly 3%. That was slightly better than our expectations. Strongest markets within North America were in plant and industrial equipment, off-highway, and energy. Adjusted operating margins were up 10 basis points for a Q3 record of 25.3%. Orders remained robust at 7% compared to prior year. Looking at the international businesses, sales were a record $1.5 billion, up 13% versus prior year with organic growth attributing 3% of that. Asia Pac had another strong quarter of organic growth at plus 10%, EMEA was flat, and Latin America was down versus prior year. Moving to margins, margins were up 20 basis points on the international businesses, achieving a record of 25.3% for the quarter. International orders continued to be plus 6% on some really challenging comps of plus 11% in the prior year. Aerospace—same story here—another fantastic quarter for the aerospace businesses. Sales of $1.8 billion, up 15.5% versus prior year. Organic growth was 14.2% in aerospace, driven by continued commercial strength in both the OE portions and also the aftermarket. Margins were up 80 basis points and reached 29.5% for the quarter. We had double-digit OEM and aftermarket order growth that resulted in aerospace order rates of plus 14%, and backlog increased 15% in this segment and reached a record of $8.4 billion. We continue to see strength in the aerospace businesses. Each of our aerospace market segments delivered positive sales growth for the quarter. Just a great quarter for aerospace. If I could draw your attention to Slide 12, you will see our year-to-date cash flow performance. Year-to-date cash flow from operations was $2.6 billion, or 16.7% of sales—that is up 14% versus prior year. Year-to-date free cash flow increased 17% and came in at $2.3 billion. That is almost 15% of sales—14.9% of sales. Both the CFOA and the free cash flow dollars are all-time records at this point in the year. We have great confidence in our ability to generate cash and we are committed to actively deploying that cash to create value. You saw last week our Board approved an 11% increase to our quarterly dividend. That quarterly dividend is now $2 per share, and that increase will extend our record of increasing annual dividends paid per share to an impressive 70 years. In addition, in the quarter, we repurchased another $275 million of shares, which brings our year-to-date share repurchases to $825 million. That is a wrap on Q3 performance. Please draw your attention to Slide 14. Jennifer, I will hand it back to you to talk about the market verticals. Jennifer A. Parmentier: Thank you, Todd. Slide 14 shows our updated fiscal year 2026 organic sales growth by key market vertical. Aerospace is increasing from 11% to 12% organic growth as we continue to see, as Todd said, strength in commercial OEM and aftermarket. In plant industrial remains the same at positive low single-digit organic growth. Quoting activity remains strong. Customers are prioritizing spending on automation and productivity, and distributor inventories are stable and continuing to order to demand. As I mentioned earlier, we are raising our outlook on transportation from mid-single-digit organic decline to low-single-digit organic decline. This is driven by stronger heavy truck orders while automotive demand challenges persist. Off-highway remains the same at positive low single-digit organic growth. We see construction growth from capital and infrastructure investment while ag remains under pressure. We are maintaining energy at positive low single-digit growth with strong power gen activity. We see growth in midstream oil and gas but it is offset by upstream, which remains soft. And we are maintaining HVAC and refrigeration at positive mid single-digit growth. We see strength in commercial HVAC, refrigeration, filtration, and aftermarket. As a result of these changes, we are increasing our organic sales growth guidance from 5% to 5.5% at the midpoint. I will give it back to Todd for some more guidance details. Todd M. Leombruno: Thank you, Jennifer. I am on Slide 15. This is just some more details. We have one quarter left in our fiscal year, so I am going to give you some midpoints. Do not read anything into that other than the fact there is one quarter left and the ranges look a little silly when you are just talking one quarter. For reported sales growth, the forecast has been increased to 7%. Currency, based on March 31 spot rate, is expected to be favorable 1.5%. Acquisitions are 1% and divestitures are also 1%. For the full year, we are increasing organic growth to 5.5%—that is the midpoint. Aerospace organic growth is increased to 12% and industrial growth is now expected to be 2.5% for both North America and international. Adjusted segment operating margins—we are expecting 27.2% for the year. That is a forecasted increase of 110 basis points versus prior year, with margin expansion across all the businesses. The forecast for incrementals for the full year is 40%. Assumptions for corporate G&A, interest, and tax are all detailed in the appendix—no changes there. Full-year adjusted EPS has been raised by $0.50 to $31.20 at the midpoint; that would be an increase of 14.2% versus prior. In addition, we are also raising our forecast for full-year free cash flow to $3.3 billion to $3.6 billion—that is $3.45 billion at the midpoint. That would be 16.2% of sales with conversion at approximately 100%. With respect to Q4 specifically, we are guiding reported sales to be nearly $5.5 billion—that is a 5.5% increase versus prior year. Organic growth will be approximately 4%. Adjusted segment operating margins will be 27.4%. The effective tax rate we are expecting is 22%, and for the second time ever adjusted EPS would be above $8—at $8.16. As usual, we have more details in the appendix. With that, I will turn it back to you, Jennifer, and ask everyone to turn to Slide 16. Jennifer A. Parmentier: On our final slide, a reminder of what drives Parker-Hannifin Corporation. Safety, engagement, and ownership are the foundation of our culture. It is our people and living up to our purpose that drives top quartile performance and allows us to be great generators and deployers of cash. Todd M. Leombruno: Okay. Chloe, we are ready to start the Q&A portion of the call. Operator: Absolutely. We will take our first question from Mig Dobre with Baird. Your line is open. Mircea Dobre: Thank you. Good morning, and thanks for taking the question here. Maybe I will start with the topical items of late. You have not really called out what has been going on in the Middle East in any way that was material. If you look at your business, has there been any disruption or anything different that we need to be aware of? And also, there is an updated tariff framework. I am curious if there is any impact to be aware of as far as you are concerned. Jennifer A. Parmentier: First of all, I would say our first concern with the Middle East is the safety of our team members, and we are very happy that they are all safe. Direct revenue in the Middle East is very small and there is really no manufacturing. It is primarily a sales organization. Our teams are doing a fantastic job managing the supply chain, handling logistics, and doing everything they can to minimize the disruption to our customers. At this point, we are not seeing any material impact to demand. Regarding tariffs, it continues to be very dynamic. As always, our teams are doing a great job managing them to make sure that there is no impact to earnings. Price-cost management has been a core element of the Win Strategy for over 25 years, and we do not expect this to have any impact. We are very close to it, we analyze it regularly, and there is nothing we are concerned about not taking care of. Todd M. Leombruno: Mig, I would just add—this is Todd—it is a complex process. We will not recognize any income on those tariffs until we receive them. We are treating that as a contingency gain. You will not see us forecast or recognize any income until we actually receive any refunds. Mircea Dobre: Understood. Then my follow-up—sticking with your comments on price-cost—optically, even though this was a very good quarter, the incrementals on the industrial side looked a little bit lower than what we have seen of late. Is there any lag you are experiencing in terms of dealing with tariff dynamics or other inflationary aspects within your business? Any delay relative to implementing pricing to offset? Thanks. Jennifer A. Parmentier: I will take that, Mig. No delays, no concerns there with price-cost management whatsoever. We were below what we had forecasted in North America and international. In North America, this was driven by stronger OEM growth—notably off-highway and transportation. Distribution held steady but no real acceleration there yet. While we are not in the excuse-making business, the teams always plan for contingencies. This quarter, we had to recover from more weather-related disruptions than normal, mainly in North America. We are very proud of the teams, as Todd mentioned, for responding and delivering to customers. We did have a Q3 record margin for North America, and we are going to finish the year strong. Mircea Dobre: Super. Thank you so much. Todd M. Leombruno: Thanks, Mig. Operator: We will move next to Jamie Cook with Truist Securities. Your line is open. Jamie Lyn Cook: Good morning, and congrats on a nice quarter. Two questions. First, on incremental margins: for the full year, you are still expecting 40% incremental margin, which is above a normalized range or what you laid out at the Analyst Day. While you do not want to talk about 2027, as we think about the setup for next year and over the longer term, is there any reason why we should not believe incremental margins could be in the 40% range, or does mix—unlike the mobile side or whatever—impact that? Or can incrementals be structurally better? Second, Jennifer, given concerns about the Middle East and macro, your orders in industrial were very strong, in particular international with tough comps. Anything notable on the cadence of orders throughout the quarter or into April, or has your confidence level changed at all relative to last quarter? Todd M. Leombruno: Jamie, thanks for the congrats. We have been trained here to finish strong, and we are focused on finishing FY 2026 strong—our focus right now is on Q4. I will tell you we like the setup for FY 2027. You have seen our orders and our margin expansion over time. We are very much focused on creating great incrementals. We hold the team to a target of 30% to 35%, and obviously that varies based on where your business is. What we are focused on is growing those segment operating income dollars and compounding EPS. That has been very successful for us, and as a factor of that, I think if you just do the math, you are going to get incrementals somewhere where you are thinking. We will talk more about that in a couple of weeks. Jennifer A. Parmentier: For your second question, Jamie, orders were strong throughout the quarter. The industrial recovery continues. We saw more broad-based positivity on both short and long cycle than we did earlier this year. We feel really good about the guidance. As always, we stay close with the customer. We not only feel good about the guidance; we are not seeing anything right now that concerns us. Jamie Lyn Cook: Thank you. Congrats again. Jennifer A. Parmentier: Thanks, Jamie. Operator: We will take our next question from Jeff Sprague with Vertical Research. Your line is open. Jeffrey Todd Sprague: Hey, thanks. Good morning, everyone. Jennifer or Todd, could you spend a little more time on Aero? The organic growth in Q4 will be the slowest of the year against the easiest comp of the year. Are you dialing in some aftermarket pressure, or what is underneath that outlook in the fourth quarter? Jennifer A. Parmentier: I would say the aerospace Q4 forecast is approximately 9%, and that was raised from our previous Q4 guidance of 7.5%. We are not baking in any slowdown. Orders and backlog continue to be very strong—record backlog here in this long-cycle business. This is going to be our fourth year in a row of double-digit organic growth for Aerospace. We are not building in any slowdown. Jeffrey Todd Sprague: Is there any indication in orders of a shift between OE and aftermarket? Jennifer A. Parmentier: If you look at how we performed in Q3, commercial OEM was up 22% and aftermarket was up 14%. Strong orders in both areas. We feel good about the mix and the forecast. We were at 51% OEM in Q3 and 49% aftermarket. The teams are doing a great job with the higher OEM mix and still being able to expand margins. Todd M. Leombruno: Jeff, I would just add, backlog was up 5% sequentially in dollars. $8.4 billion is the total backlog—that is an all-time record. Jeffrey Todd Sprague: Okay, great. Thank you. I will leave it there. Operator: We will move next to Chris Snyder with Morgan Stanley. Your line is open. Christopher Snyder: Thank you. I understand that as the industrial businesses turn to be more longer-cycle exposure, there is a lag between when the orders convert to revenue. If we see industrial orders sustained in this mid-single-digit, maybe high-single-digit range for several quarters in a row, is there any structural reason why sales would not ultimately get to that same level of growth? Thank you. Jennifer A. Parmentier: Thanks for the question, Chris. I would not say there is any structural reason. In North America, orders have been plus 7% for the past two quarters. We noted in Q2 that these included long-cycle multi-year defense orders. In Q3, we saw orders due beyond this fiscal year, including defense, energy, and even construction orders scheduled into FY 2027, which is usually shorter cycle. We are guiding 3% organic growth for Q4, which would be the best performance so far this year. As Todd mentioned earlier, we like the way the setup is looking for fiscal year 2027. Christopher Snyder: When you look across industrial end markets, is the improvement driven by end demand going higher—what is put into the channel being consumed—or are there spots where distributors might be building a little inventory in anticipation of a cycle or supply chain concerns given events in the Middle East? Jennifer A. Parmentier: No, I would not say we are seeing any of that yet. They are still ordering to demand for rather quick consumption. We are not seeing any real acceleration or typical signs of restocking. We have not heard of any supply chain fears within the channel around the industrial side of the business. Christopher Snyder: Thank you, Jennifer. Operator: We will move next to Amit Mehrotra with UBS. Your line is open. Amit Singh Mehrotra: Thanks, operator. Good morning, everybody. I wanted to follow up on the point around distributors versus OE mix. Jennifer, you made a comment about stable distributor inventories ordering to demand and strong quoting. I am trying to triangulate those items to understand the psychology around inventory stocking. Are distributors becoming more sophisticated around inventory management, and so maybe there is a mix more toward growth with OE, which has margin consequences? Jennifer A. Parmentier: Over the last several years, our distributors have become very sophisticated in inventory management—even coming out of COVID—managing cash and putting processes in place to order what they need and sell it for consumption. When we talk about ordering to demand, we are not seeing the increase that would tell us there is restocking. Distributors have told us for quite some time that quoting activity is strong and sentiment has been positive, but their customers are being selective with capital investments and focused on automation and productivity. We are seeing an increase in OEM, with the raised transportation outlook and off-highway with construction. OEM is classically 10 to 15 points below distribution. Amit Singh Mehrotra: Historically, you talked about order strength centered on longer-cycle verticals. You broadened it a bit this quarter. Can you talk more about the true short-cycle piece and your observations over the last few months? Jennifer A. Parmentier: Long-cycle continues to pull strong—that is why we raised our Aerospace and Defense guidance. Power gen—long cycle—is robust. There is lots of activity in midstream oil and gas, and electronics is growing nicely. On the short side, the industrial recovery continues. We have been talking about a slow, gradual industrial recovery, and that is what we are seeing. Orders were more broad-based and positive on both short and long cycle on the industrial side than we have seen all fiscal year. Construction continues to improve, heavy-duty truck is improving, and in plant and distribution are improving. We are continuing to see positive low single-digit growth, and we are set up for a good fiscal year 2027. Amit Singh Mehrotra: Thank you very much. Appreciate it. Operator: We will take our next question from Andy Kaplowitz with Citigroup. Your line is open. Andrew Alec Kaplowitz: Good morning, everyone. Jennifer, could you talk about what you are seeing in the aero supply chain? One of your peers continues to have some issues there, but you have continued to execute well and seem to be absorbing a more difficult margin mix while still growing. As we start to transition to FY 2027, is there any reason why you could not continue to grow margin even if mix runs a bit more against you? Jennifer A. Parmentier: I remain confident in our ability to expand margins and committed to that as well. The aerospace supply chain is in much better shape than it has been. We have seen the big airframers increase their rates, which we are participating in. Over the last several years, we have invested quite a bit in our supply chain, and that has proved very beneficial. I do not have any concerns here. Andrew Alec Kaplowitz: And then continued strong performance in Asia Pac—plus 10% is impressive. Talk about the durability of that growth. EMEA is flat and kind of bouncing along—do you see improvement there or just bouncing along at flat? Jennifer A. Parmentier: The growth is coming primarily from Asia Pacific. Total backlog coverage in industrial increased to the high 20s, and international orders were plus 6% for the third quarter in a row—driven by electronics and some defense bookings. EMEA was slightly negative on a tough comp for orders, but there is strength in aerospace and defense, mining, and in plant industrial. Asia orders are strong, coming from electronics—data center—plus in plant and energy. Andrew Alec Kaplowitz: Appreciate the color. Todd M. Leombruno: Thanks, Andy. Operator: We will take our next question from Julian Mitchell with Barclays. Your line is open. Julian C.H. Mitchell: Hi, good morning. Maybe, Jennifer, could you flesh out the sub-segment assumptions on aerospace—what you are expecting in Q4 for the major pieces year-on-year and how they did in Q3? I think you have the commercial bits for Q3, but not military. Jennifer A. Parmentier: Let me give you a Q3 rundown, then Q4 guidance. In Q3, aerospace organic growth was 14.2%. Commercial OEM was up 22%, driven by production rate increases in both narrow and wide body. Commercial aftermarket was up 14%. Even though global air traffic growth is beginning to normalize, we still saw nice growth in Q3 and strong spares and repair shipments. Defense OEM was up 13%; demand for legacy programs continues. Defense aftermarket was up 8%—fleet upgrades and service extensions are contributing. Aftermarket mix was 49% and OE 51% in Q3. For Q4 and full-year updates, we are increasing full-year aerospace to 12%. We are raising commercial OEM to low-20s growth from approximately 20%. We are raising commercial MRO to low-teens growth from low double-digit. We expect defense OEM to be mid-single-digit growth—same as before—and defense MRO low single-digit growth—also the same as our last guidance. Julian C.H. Mitchell: That is very helpful, thank you. And then circling back to industrial orders and sales—several quarters of orders outstripping revenue growth—it looks as if diversified industrial backlog was just over $4 billion at the end of March, with a decent year-on-year and sequential uplift. Should we expect some recoupling of sales to those orders? Todd M. Leombruno: Julian, you are absolutely right. Both the industrial and aerospace backlogs improved, and we see that as a good sign. Operator: We will move next to Andrew Obin with Bank of America. Your line is open. Andrew Burris Obin: Hi, good morning. Just to check my math on industrials—organically, at the midpoint, does Q4 imply a tad slower than Q3? Is that correct? Todd M. Leombruno: No, we have it pretty much the same. Andrew Burris Obin: Okay, fine. Maybe a question on pricing. In the quarter, we have been hearing about industry talk around rebates and pushback. This has been before Section 232, and I know maybe not a direct impact for you. Has the conversation on price changed given Section 232, and can you talk about pricing trends in the quarter and what pricing looks like for the remainder of your fiscal year? Jennifer A. Parmentier: Conversations have not changed. When it comes to tariffs, as I mentioned earlier, it is dynamic and requires analysis and coordination; the teams are doing a great job. On the industrial side, especially with distribution, we are back to a normal pricing environment and will do that as we have in the past. In aerospace, there is still some opportunity for pricing and the teams are executing on that. We have done a great job covering inflation and making sure tariffs have not impacted our earnings, and we will continue to do that. Andrew Burris Obin: And on defense aftermarket—why not raise the guide given what is happening in the Middle East? I would imagine a lot of wear and tear on key platforms you are on. Jennifer A. Parmentier: This is long lead-time product—even in defense—anywhere from 9 to 15 months. We guide based on the deliveries that our customers want, and that drives the number. Andrew Burris Obin: Terrific. Thank you. Todd M. Leombruno: Thanks, Andrew. Operator: We will move next to Tim Thein with Raymond James. Your line is open. Timothy Thein: Great, thank you. Good morning. First question on mix dynamics within the industrial businesses in 2026. With distribution’s growth and what you are expecting next year relative to the total—if that business picks up, does that potentially portend a mix tailwind in 2027? Todd M. Leombruno: You look at our industrial business, it is exactly 50% OEM and 50% aftermarket. As these things rise and fall depending on the market, there is a nice diversified balance. When we see something pop, like last quarter, there was a slight mix issue, but these are small compared to the total. We look at the positives—orders have been positive in the industrial business for six quarters in a row. That helps us compound dollars and that leads to EPS growth. Jennifer A. Parmentier: Distribution primarily sits in our in plant industrial market vertical, and our forecast remains the same for the rest of the fiscal year: positive low single-digit growth. Timothy Thein: Understood. Then a broader competitive dynamics question. One of your big European-based competitors flagged more competition from some Asian competitors making inroads. Any changes you have seen globally on that? Jennifer A. Parmentier: I would not say I have seen changes, but our teams take all competition very seriously. We have pride in our products and the value they bring to customers. We manufacture in many regions of the world, which allows us to be very competitive locally. Competition is always something to keep an eye on. Our performance ensures that we not only keep what we have but gain share. Operator: We will take our next question from Joe O’Dea with Wells Fargo. Your line is open. Joseph John O'Dea: Hi, good morning. Thanks for taking my questions. Can you give a little more color on what you are seeing in Industrial International? We have seen very steady mid-single-digit order growth. You touched on the tough comp in Q3. Europe and Asia—what are you seeing, and any verticals to call out? Jennifer A. Parmentier: We are increasing full-year organic growth to 2.5% for international versus our prior guide of approximately 2%. In EMEA, we are maintaining slightly positive low single-digit. We are seeing gradual improvement in plant and in transportation—primarily heavy-duty truck. We have continued strength in mining and energy—both oil and gas and power gen. In Asia Pacific, we are increasing full-year to positive high single-digit versus positive mid single-digit in our prior guide. This is continued strength in electronics and semicon demand. In plant orders and shipments progressed but remain a bit mixed. Mining is strong and there have been improvements in energy. It is a mix between EMEA and Asia Pacific, and we will end this year at 2.5%. Joseph John O'Dea: That is helpful. And then on Filtration Group: initially talking about a six- to twelve-month window—some deals have taken a little longer to work through regulatory processes. Are you favoring the twelve-month side of that? And any color on priorities post close? Jennifer A. Parmentier: We still anticipate closing within twelve months of the announcement date. Closing remains subject to customary conditions and receipt of pending regulatory clearances—progress is ongoing. Integration planning is underway. Teams on both sides have been formed and are working together. We will put our integration playbook into place as soon as we close and get the Win Strategy into the organization as soon as possible. We announced $20 million in synergies by the end of year three—about 11%. The majority will come from the Win Strategy: lean, supply chain, and simplification. We are not providing phasing at this time, but we are very confident in achieving those. Announcement was last November, and we still anticipate within twelve months. Todd M. Leombruno: I would add on funding: we have our funding plan in place. There is no prefunding required, so you will not see any interest before we close the transaction. We will do exactly what we have done on past transactions. A little over half will be serviceable debt; the rest will be short- to medium-term notes. We do not expect leverage to surpass 3x when we close, and our delevering plan will get us back to around 2x faster than ever before. Joseph John O'Dea: That is great. Thank you. Todd M. Leombruno: Thanks. Operator: We will move next to Andrew Buscaglia with BNP Paribas. Your line is open. Andrew Buscaglia: Hey, good morning, everyone. Looking across broader industrials—what is life like if energy prices persist above $100 going forward? I would think Parker-Hannifin Corporation would benefit. You have direct energy exposure, but also ripple effects—maybe off-highway and in plant. What is the net impact for you if we still see energy prices sitting here six months from now? Jennifer A. Parmentier: It is too hard to forecast right now. What we have in our guide today is representative of the impact today and how it impacts overall Parker-Hannifin Corporation. We will have to see how this plays out, but I do not have any additional forecast to share. Todd M. Leombruno: I would add, the diversification of the portfolio is one of the strengths of the company. We often say we are agnostic when it comes to the power source. Looking at the market verticals we call out, there will be pluses and minuses across those, but overall the company will be able to capitalize on any benefits from changes in energy prices. Andrew Buscaglia: Fair enough. And on free cash flow—you nudged that up a bit. In light of the Filtration Group deal closing, are you still evaluating M&A into year end, or would you rather preserve some capital to get through the deal and then see where you are? Todd M. Leombruno: We have been very active and direct with our commitment to deploy capital. You saw us increase the dividend and do $825 million of share repurchases. Our leverage is very manageable. Even at full funding of Filtration Group, we may get near 3x, but we are not going to cross 3x. The pipeline is always active, being worked and measured. We are raising our free cash flow; if you look at CFOA, we will be close to $4 billion of cash generation this fiscal year. That gives us a lot of options, and we will be very diligent when deploying that optionality. Jennifer A. Parmentier: I do not think I could have said it any better. Operator: We will move next to Joe Ritchie with Goldman Sachs. Your line is open. Joseph Alfred Ritchie: Thanks. Good morning, guys. Todd, maybe a longer-term question on margins within the industrial business. Absent volumes, you have done a great job expanding margins. From here, what are the biggest levers—absent volumes—to continue to expand margins in the industrial segment? Todd M. Leombruno: It really is our commitment to lean and continuous improvement—Kaizen across the organization. We were just at some aerospace facilities, and you look at the margin those businesses are putting up, and you listen to our team members, walk the shop floor, and see the Kaizen activity and the efficiency it is driving. It is energizing to see. We are very confident—we have said it before, and Jennifer said it multiple times today—in our ability to continue to expand margins. That is what you are going to see Parker-Hannifin Corporation do over the long term. Jennifer A. Parmentier: Our team members have a mindset of “we are never done.” In those visits Todd mentioned, you see fantastic improvements they have made, and in the next breath, they are telling you what comes next. Again, our confidence in the team, our tools, and the Win Strategy—and our ability to create shareholder value—remains high. Joseph Alfred Ritchie: That is good to hear. I know we will get a guide in early August when you report. As you see your end markets now, you sound pretty sanguine on industrial. Is it fair to say that the expectation for next year would be at least a couple of points better than what you are seeing in 2026? Jennifer A. Parmentier: That is a fair question to try to get a guide. We purposely transformed Parker-Hannifin Corporation into a less cyclical, faster-growing, and more resilient company. Many of our industrial markets turned positive during this fiscal year and orders are strong. The Win Strategy is clearly working and will continue to drive growth, margins, and earnings higher. We will welcome Filtration Group this fiscal year. I am confident we will be able to guide fiscal year 2027 to another record year. Todd M. Leombruno: Chloe, I think we have time for one more question before we hit the top of the hour. Operator: Absolutely. We will take our last question from Nigel Coe with Wolfe Research. Your line is open. Nigel Edward Coe: Great. Thanks for letting me in here—appreciate the last question. Lots of questions on orders. Todd, what was the industrial backlog? I am getting $4.0–$4.1 billion. Is that right? Todd M. Leombruno: Your math is correct. Nigel Edward Coe: That is why you get paid the big bucks, I guess. And then on the Texas facility—really bad news—wondering about the scale of that facility and any disruption you are factoring in for Q4? Jennifer A. Parmentier: We are still assessing the impact, but we do not expect this to have any material impact to overall Parker-Hannifin Corporation. Nigel Edward Coe: That is great news. One quick one: the data center business—I know it is small but growing quickly. Is it moving the needle on growth rates? Any updates on size and growth profile? Jennifer A. Parmentier: It is still approximately 1% of our sales, but we have great exposure and it is growing nicely. It is not large enough to have its own vertical right now. This is a great example of how our interconnected technologies come together to provide value for customers. We are working with all the industry leaders. It is very fast growing; we can provide liquid cooling systems and subsystem components. With the increase in data centers, there is a secondary benefit around power gen, automation, and construction. This is a great overall impact for Parker-Hannifin Corporation. Nigel Edward Coe: Great. Thanks, Jennifer. Cheers. Todd M. Leombruno: Okay. This concludes our FY 2026 Q3 earnings release. We appreciate your time and attention and thank everyone for joining us today. As usual, our Investor Relations team of Jeff Miller and Jen Istecki will be available for any follow-ups or clarifications that anyone may have. Thank you all and have a wonderful day. Analyst: Thank you. Operator: This concludes today’s call. We appreciate your time and you may now disconnect.
Operator: Good morning, and welcome to the First Quarter of 2026 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investors section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Andrew Rojeski, Head of Strategy, Investor Relations and Sustainability for Pilgrim's Pride. Andrew Rojeski: Good morning, and thank you for joining us today as we review our operating and financial results for the first quarter ended on March 29, 2026. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of this release is available on our website at ir.pilgrims.com, along with slides for reference. These items have also been filed as Form 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer, will present on today's call. Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning these factors have been provided in yesterday's press release along our Form 10-K and our regular filings with the SEC. I would now like to turn the call over to Fabio Sandri. Fabio Sandri: Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the first quarter of 2026, we reported net revenues of $4.5 billion with adjusted EBITDA of $308 million. Our adjusted EBITDA margin was 6.8% compared to 12% last year. During the quarter, we were able to navigate a volatile market in the commodity segments, protecting the downside with the most stable parts of our portfolio. We also drove extensive progress in our growth investments, strengthening our portfolio of differentiated products that could provide higher and more stable margins while supporting the growth of our key customers. In the U.S., demand for key customers for retail tray pack remains strong in fresh. Prepared Foods grew from expansions across retail and foodservice. However, sales and profitability fell as jumbo commodity cutout and deli small bird values were significantly lower than last year. Margins were also impacted by planned downtime from plant upgrades to improve the mix and interruptions from winter storms during February. Europe's diversified portfolio maintained steady sales and margins compared to last year amid changing consumer confidence towards more value offerings, especially poultry and fresh and frozen meals. Back-office integration and network optimization continues to improve productivity and support further growth. Mexico fresh sales remained steady and branded sales increased double digits compared to last year. Prepared Foods continued to grow in retail and QSR. However, margins were compressed as excess production in the live commodity market and increased imports persisted throughout the quarter. Our projects to diversify our footprint in fresh to different regions of the country and increase our presence in prepared foods remain on track. Once fully operational, these projects will unlock additional sales growth and further diversify our profitability, enhancing our margins and reducing volatility. Turning to the supply in U.S. USDA reported ready-to-cook production increase of 3.4% year-over-year from increased headcounts, continued improvement in live performance and higher average life weights. Egg sets grew 1.1% compared to the same period last year, extending recent gains from a more productive layer flock. Similarly, chick placements increased 1.7% versus last year, reflecting modest improvements in hatchability during the period. Going forward, given the size of the layer flock and the growth in pullet placements, combined with the elevated hatchery utilization, the USDA expects chicken production to increase 2% for 2026, primarily driven by growth during the first half of the year. As for the other proteins, the USDA anticipates minor increase in beef supplies as higher imports offset domestic production headwinds and limited growth in pork production. When these factors are combined with additional chicken supply, the USDA expects net protein availability to rise by 1.6% compared to last year. Within the U.S., consumer sentiment declined to a 3-month low at the end of the first quarter as inflation rose amid higher energy prices. Consumers saw more value-oriented offerings. With this environment, chicken remained attractive given its relative affordability, resulting in increased volumes across channels. In retail, the fresh meat department posted dollar sales growth across proteins as volume grew in chicken, beef and pork. Results were uneven during the quarter as strong performance in January was followed by softer-than-expected demand in February and March as winter storms disrupted shopping patterns and pulled some purchases forward as customers stock up early. Chicken maintained a compelling value advantage on shelf compared to the other proteins. Boneless, skinless, breast pricing remained steady and spreads against ground beef continue to be at record levels. Boneless thighs continued their multiyear trend of strong volume growth, given sustained consumer interest. Deli continues to grow at a steady pace, given its role as a convenient and affordable meal solution for consumers. Appetizers, particularly popcorn chicken formats, along with gains in whole birds drove moderate growth. Frozen prepared products continue to deliver positive volume growth, led by popcorn chicken, chunks and nuggets. In foodservice, chicken offerings expanded again as operators lean into value proposition and responded to elevated beef pricing. As such, adoption extended beyond traditional chicken-focused chains, particularly among QSRs. While menu penetration increased, volume growth was constrained by inventory levels and uneven traffic patterns. Going forward, chicken continues to be well positioned as consumers increasingly prioritize strong perceived value. Chicken-focused QSRs delivered volume growth in the first quarter and outperformed full-service restaurants as inflation-constrained consumers continue to favor value-oriented quick service formats. Noncommercial channels also posted growth, supported in part by favorable pricing conditions. As a result, chicken volumes in foodservice remained stable to slightly higher overall, even as broader sector performance and traffic trend stays mixed. In exports, we continue to monitor global trade movements. In the Middle East, all vessels operating to the Gulf Coast countries were suspended at the end of February, given the military conflict. While the GCC is an important market for U.S. broilers export, strong domestic demand for dark meat, along with robust exports to Mexico mitigated this disruption. To date, we have not seen any material changes to dark meat values as pricing remained above 5-year average for the back half of the bird. Moving forward, we expect several international markets to reopen as the occurrences of commercial high path avian influenza has recently slowed and previously restricted control zones are no longer subject to limitations given the absence of new cases. Nonetheless, we remain vigilant on biosecurity, and we continue to leverage our geographical footprint and cooperate with various governments to ensure international customer needs are continuously met. Turning to the feed inputs. Pricing support for corn emerged from higher energy and fertilizer markets. However, generally favorable crop development in South America, along with larger-than-expected prospective corn plantings in the U.S. reduces risks of significant price increases. As a result, corn stay consistent with the 2025 level pricing. Stocks remain above 2.0 billion bushels, and the market focus is quickly shifting to planting and growing conditions in the U.S. for the upcoming season. In soy, both beans and meal appreciated during the first quarter, given the expectations that China will make additional purchases from the U.S. for the 2025 and 2026 crop year. Better-than-expected exports demand, along with increasing domestic interest for U.S. soybeans also provided further support. However, above-average yields from South America kept global soybean markets well supplied, limiting market upside. Like corn, the market focus for soy will be growing conditions in the U.S. The USDA currently forecasts soybean ending stocks to reach 350 million bushels, up 7% prior year. When combined with the expansion of the U.S. soy processing capacity and growth in global soybean stocks, meal prices are expected to remain manageable. As for wheat, global stock remained well supplied, increasing 24 million metric tons versus last year. Nonetheless, futures appreciated from relatively low levels throughout the first quarter, given geopolitical risks. Moving forward, favorable growing conditions in the Eastern Hemisphere for winter wheat, along with an increase in planted acres and a historic yield in the U.K. should unlock additional value. In the U.S., demand for chicken continued to grow across retail and foodservice. Equally important, we made significant headway in projects to reduce volatility, enhance margins and drive sales of our portfolio. Our progress has also improved our ability to meet increased key customer demand, especially during the upcoming months. In Big Bird, we implemented a variety of plant layout changes, equipment improvement and operation procedures across many locations to increase dark meat deboning and portioning capabilities to support key customers and our Prepared Foods operation that were previously done by external companies. Because of these investments, each site incurred planned downtime, along with additional expenses from project mobilization and production ramp-up. During this time, we also continue to invest in our team members through training and education on revised plant operations. In case-ready, both sales and volume grew as tray pack retail offerings to key customers grew above category. In early April, we also completed our conversion at the Russellville facility from Big Bird to retail to support the growth of one of our key customers. Our investments in Russellville and throughout the Big Bird network will create a more resilient portfolio, given our expanded capability to meet the growth needs of prepared foods, strengthening leadership presence in higher attribute offerings and portions and enhanced production efficiencies. In Small Bird, overall demand remained strong as volume increased compared to prior year. However, consumers are increasingly transitioned from bone-in to boneless offerings. When this factor is considered with the existing supply, the value for deli WOGs continue to be below the 5-year average impacting our sales. Moving forward, we'll continue to evaluate our production mix and ensure if sufficient flexibility exists to meet market demand. In addition, we will explore alternatives to reinvigorate the category through promotional investments and innovation, especially with our key customers. The recent inclusion in the Farm Bill that hot rotisserie will be included in the SNAP eligibility also provides a significant opportunity for the category. During the quarter, many sites were impacted by weather-related events, resulting in unplanned downtime and reducing service levels. When these factors are combined with weakened commodity market fundamentals, impact of our growth projects and small bird deli values, the U.S. fresh sales and profitability was reduced compared to last year. In Prepared Foods, our growth accelerated as we drove the highest retail volume in any quarter. Just BARE continues to lead growth in the frozen fully cooked category as retail sales rose nearly 40% compared to last year from increased distribution and improved velocity. In foodservice, our business continued to expand through growth in branded offerings along with increased distribution in schools and national accounts. Our efforts to support further growth through the construction of our new facility in the Walker County, Georgia remains on schedule. In the interim, we continue to rely on our network of co-packers to support the strong demand for our products. In Europe, our diversified portfolio drove steady volumes and margins compared to last year. Given persistent inflation, consumers increasingly migrated toward value and convenience. As such, our poultry and meal offerings resonated through groceries and each category grew faster than the overall channel. While fresh pork experienced similar growth, bacon and sausage categories declined. In our branded portfolio, Rollover benefited from marketing investments and grew faster than the category average, whereas Fridge Raiders maintained its presence in snacking. Margins for the Richmond remained strong. However, volumes were challenged as promotional activity intensified and consumers changed to more private label offerings. To foster growth in the category, we'll continue to drive our investments in marketing and innovation, given Richmond's growth potential and market positioning. In foodservice, challenges exist as consumers increasingly opted away from dining out and reduced visits to QSRs. Nonetheless, our poultry business remained strong as affordability and limited time offerings resonated throughout the marketplace. Even with the poultry's performance, overall volumes declined as demand for beef fell in Europe, limiting our growth. Moving forward, we will continue to drive distribution through new offerings and promotional support. Our operational excellence efforts made progress as we exceeded our budgeted improvement targets. We'll continue to focus on improvements in productivity, yields and overall costs. In Mexico, we continue to drive our strategies for profitable growth and reduced volatility. To that end, our fresh branded offerings continue to gain traction as sales increased double digits compared to last year. Just BARE led this growth as volume rose over 80%. In Prepared, sales rose nearly 9% compared to last year, further diversifying our portfolio. Like Fresh, our value-added branded offerings grew as sales from Pilgrim's rose 14%. While we've made progress in transforming our portfolio, elevated supply levels in the live commodity market and import pressures persisted throughout the quarter, reducing margins and overall profitability compared to last year. Our expansion efforts remain on track with expansions to different regions in South and Peninsula part of the country and our prepared expansion in Porvenir. Based on these investments, we can improve our ability to grow with key customers, reduce operational risk and further diversify our portfolio. Turning to sustainability. We continue to drive accountability and ownership down the organization to each of our plants. Based on this approach, with investments and operational improvements, we have surpassed our 2025 reduction targets against Scope 1 and 2 emissions intensity set at our sustainability-linked bonds. This achievement reflects our team's mindset and ability to leverage sustainability as a means to create a more efficient operation. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results. Matthew Galvanoni: Thank you, Fabio. Good morning, everyone. For the first quarter of 2026, net revenues were $4.53 billion versus $4.46 billion a year ago, with adjusted EBITDA of $308.1 million and a margin of 6.8% compared to $533.2 million and a 12.0% margin in Q1 last year. Adjusted EBITDA margins in Q1 were 7.0% in the U.S. compared to 14.3% a year ago. For our Europe business, adjusted EBITDA margins came in at 7.8% for Q1 compared to 8.1% last year. In Mexico, adjusted EBITDA margins in the quarter were 3.1% versus 8.4% a year ago. U.S. net revenues were $2.64 billion versus $2.74 billion a year ago, a 3.9% decrease. U.S. adjusted EBITDA came in at $185.5 million compared to $392.5 million in Q1 2025. U.S. margins declined due to significant reduction in the jumbo cutout value, lower sales prices in deli for small birds, impacts of the winter storms that hit the Southeast during the quarter, bird health issues and plant downtime from the implementation of our many growth projects. Our U.S. Prepared Foods business continues to demonstrate robust growth with retail sales of -- Just BARE increasing nearly 40% in the quarter compared to last year. In Europe, coming off strong seasonal results in Q4, adjusted EBITDA in Q1 was $105.8 million versus $99.5 million in Q1 2025, a 6.3% increase. The business has benefited from strength in poultry and meals during the quarter, along with the benefits of its structural reorganization, including integration of support functions and manufacturing optimization programs. Mexico generated $16.8 million in adjusted EBITDA in Q1 compared to $41.2 million last year and $8.5 million in Q4 2025. Sequentially from Q4, the Mexican business profitability improved with marginally better supply-demand fundamentals by the end of the first quarter. SG&A in the quarter was higher year-over-year, primarily due to an increase in legal settlements, associated legal defense costs, true-ups for year-end 2025 incentive compensation and unfavorable FX impacts for both Mexico and Europe. Our effective tax rate for the quarter was 23%. As I noted in our February call, we anticipate our full year effective tax rate to approximate 25%. We have a strong balance sheet, and we'll continue to emphasize cash flows from operating activities, management of working capital and disciplined investment in high-return projects. Our liquidity position remains very strong as we had nearly $1.75 billion in total cash and available credit as of the end of the quarter. Our liquidity position provides flexibility as we pursue our growth ambitions. As of the end of Q1, our net debt totaled $2.55 billion with a leverage ratio of 1.25x our last 12 months' adjusted EBITDA, below our target of 2 to 3x adjusted EBITDA. Net interest expense for the quarter totaled $31 million. Following the completion of our $250 million tender offer of the 2033 notes here in April, we anticipate our full year net interest expense to be between $105 million and $115 million. We spent $235 million in CapEx during the quarter, a substantial increase from Q1 2025 when we spent $98 million. The spending this quarter is primarily associated with the conversion of Russellville to support a retail key customer, progress on our new prepared foods plant in Georgia and the previously mentioned enhancements to a number of our Big Bird plants to improve our product mix and to support the growth of Prepared Foods. At this time, we maintain our full year CapEx estimate of approximately $900 million to $950 million. As we face macroeconomic volatility, we are proactively managing cost headwinds in freight, packaging and other key input costs with productivity initiatives and through procurement actions. Through our key customer relationships, we have regular interactions to discuss structural cost changes in our business. We always focus on what we can control, which is operational excellence with cost discipline. Our team is resilient, and we have consistently demonstrated that we can navigate changing market conditions. Our capital allocation approach will remain disciplined as we continue to align our investment priorities with our overall strategies to drive growth, enhance margins and reduce volatility. Operator, this concludes our prepared remarks. Please open the call for questions. Operator: [Operator Instructions] The first question comes from Ben Theurer with Barclays. Benjamin Theurer: Two relatively quick ones. So first, you've talked about it in the opening remarks as well as in the press release about some of the initiatives you've been doing in the first quarter, which caused downtime. But then at the same time, there were issues around weather, the cold front and all that kind of stuff. Could you help us understand maybe a little bit more as to what the financial impact was in the first quarter within your U.S. business on one side, like kind of like the onetime weather related and then on the other side, like these like transition costs that you were having. So just that we understand what the impact was between those on the results? And then I have a quick follow-up. Fabio Sandri: Yes, sure, Ben. I think we have significant impacts. I think, like I said, it is to improve our portfolio. So the impact is normally we overstaff the plants at the beginning because we need more people for the deboning operations and for the portioning operations. So we carry a heavier staff during at least 3 weeks before the shutdown. So we are prepared for the beginning of the operation. So there is a cost impact in terms of labor. Also, there is a ramp-up cost because after we start, we need to train all the people and we need to get to the efficiency that we expected. That takes up to 2 to 3 weeks. And of course, there is the 1 to 2 weeks where the plants were shut down. So that was significant in those plants that we shut down for improving the portfolio. On the cold front, I think it is multifaceted. We have the direct impact, which is the plants don't operate on the days that we have those ice storms because in the south, they are not prepared for ice and storms. So to keep the people safe, we decided not to operate during 1, 2 or 3 days depending on the locality. And that impacts our cost, but also impacts on the live operations because we have the birds on the field and those birds will need to be processed. And when we have 2 or 3 days without operating, you change the sizes of the birds that you expect. And those birds end up being processed on a Saturday or over time, and that impacts overall costs. It's interesting to mention that -- and we have on the prepared remarks on the very strong January that we have. And when you look at every week, I think there was also an overstocking or a pantry loading on those regions on retail to prepare for the storm. And that's why we have a weaker-than-expected February as people start consuming what they have loaded in their freezers during January. If you look at week-over-week, actually on week 4 of January, you have an increase of 25% of sales in retail. So that created out of stock for the retail, but also pantry loading for the consumers. So that's what created less than expected growth during February on the retail sales. So I think it is a multi vision of impact in terms of our operations because of the changes that we have on our portfolio and in the operations also because of the storm. Benjamin Theurer: Okay. Got it. But you can't really quantify that, correct, just to confirm. Fabio Sandri: Yes. I think we can quantify the operation on the shutdowns, but then the impact on the market, which is actually the most impactful one or the impact on the live operations when we have birds that are not the exact size that we want, you need to downgrade them for a commodity sales rather than a specific sales for a key customer, which a much better pricing. It is the biggest impact. So that's why it is hard to quantify the overall impact. Benjamin Theurer: Okay. And then just as we moved into March and maybe into April, things from a normalization point of view, clearly, we still have the very high production data. So what's that kind of like your outlook as you think into what you saw in the first couple of weeks of the second quarter and how to think about the second quarter in general, given just we're still running at a relatively high exits and placements data? Fabio Sandri: Yes. I think that's a great question. When we look at Q1, we were expecting a 2% increase on the quarter. But looking at the latest numbers from USDA, we are experiencing a 3.4% growth during the quarter. Most of this growth was in March. And as you mentioned, we started with exits that were limited at 1.1%. But after the storms and especially during the end of February, beginning of March, we saw some great growing conditions. And that increased livability that accounted for another 1% in terms of growth, another live weights that accounted for another 0.7%. And we saw an improvement -- a rapid improvement in hatchability also during February that accounted for another 0.6%. More impactful than that is that almost all that growth came in March. So when you look at the growth in March, it was close to 5% to 6%. And when you account for where that growth was impacted heavily the commodity segment. So that's why we saw some significant improvement in the prices during January and then a mild February and some challenges in March and early April. As we mentioned, given the egg sets that we are seeing and given the trend more to a normal levels of hatchability coming back during the summer and also livability as the weather gets warmer, we have lower livability and lower growth in the birds. We expected a more muted growth from those factors and more growth concentrated only on exits that we are running around 1.9%. So when you factor all those, USDA is expecting growth in the range of 2.5% for Q2. Then going forward to Q3 and Q4, we are seeing more moderate growth. USDA is forecasting a total growth for the year of 2%, and we are seeing on the second semester growth below 1% on a year-over-year basis. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: Sorry to beat the dead horse on this. But Fabio, please, can we get a quantification on what the downtime at a minimum was worth? I think it's just important to have that given you don't want folks probably to capitalize that going forward. So just kind of what that discrete item was worth in the quarter and then whether there's any kind of lingering impact into 2Q? Fabio Sandri: Yes. On the lingering effect, I think we don't have any significant lingering effect. The network changes during -- at the beginning of the year because we knew that we want to do those changes before the grilling season. We don't want to impact the market or our operations during the grilling season. The only ramping up operation is still on the Russellville front where we're still ramping up, but we don't expect a significant impact. Like I said, I think it is is multifaceted. There is a lot of impact on our operations in terms of yields, in terms of growth, in terms of downgrading birds that end up in the commodity segment rather than a more specific production. That's why it's so hard, but I will say that it's significant. Peter Galbo: Okay. Okay. And then maybe just to switch gears a little bit. You talked a little bit in your remarks about some of the SNAP changes that may be coming on rotisserie in particular. I would think that's -- given your expertise in that space, just that could be a nice tailwind. So maybe you can expand. I know it's really early days. There's nothing even formalized yet, but just kind of how you view that opportunity, particularly going forward in the U.S. Fabio Sandri: Thank you, Peter. Yes, that's significant for our Small Bird operation. As I mentioned, that has been a long-term trend of moving away from bone-in category to a more boneless category on the small birds. We've been talking about this for years on the chicken wars and as the bone-in category has been declining. And I think our strategy has always been to balance the bone-in on the 8-piece and 9-piece with the growth in the deli section of the retail, especially on the rotisserie. I think that has been a great strategy for us. But lately, we've been seeing a slower growth on the rotisserie on the retail. If you look at -- in Q1, it was only 1.2% growth, and we expected a much higher growth on the rotisserie birds than that. And I think the SNAP can help a lot. I think it is an important tool for the consumers to be able to combat inflation, being able to get a hot rotisserie, which is a competition for the foodservice, but it is a much better value for them. So I think that could give a boost on -- especially on the -- it's a bone-in category, right? Because it's a whole bird for the whole category. Operator: The next question comes from Andrew Strelzik with BMO Capital Markets. Unknown Analyst: This is Ben on for Andrew. So my first question is about the vaccination of the birds. And I was just wondering what kind of impact, if any, you've seen on your own supply chain productivity now that you started vaccinating. Fabio Sandri: Yes. I think I'll just take a step back. There are many types of vaccination, right? I think there has been a lot of discussion about vaccination against high path avian influenza. And that is something that we don't believe it is beneficial for the whole industry as it is isolated events, we have strong biosecurity and that could hamper or could reduce our ability to export our products as vaccination prevent us from access some important markets for the United States. So vaccination for high path AI, we don't think it is a good alternative. And we don't think that is meaningful for the broilers market. Now on respiratory diseases, AMPV and some others, we vaccinated the birds last year after some big events, especially in Georgia. And I think that has helped the livability in the industry. If you look at the overall livability, as I mentioned, it contributed for 1% of the growth quarter-over-quarter. So I think the vaccination against AMPV was important in some specific regions. And I think that helped on our livability and the industry livability, especially in some parts of Georgia. It is a significant cost to the live operations. And as we are seeing less occurrences and a more resilient bird, we may stop those vaccinations going forward. Unknown Analyst: That's super helpful. And my follow-up question is around freight and your exposure to -- or potential exposure to spot market rates for refrigerated freight. We've seen others in the industry deal with some pressure there. So just wanted you to remind us what your exposure is there? Are you more contracted out -- and are you not concerned with the availability of refrigerated freight in the near term here? Fabio Sandri: Yes. In terms of supply of freight, I think we're not concerned. I think we have a big fleet in the United States. We have a very efficient company. So I don't think that there is an availability issue. As for the cost, and I think there is an impact on the freight and there is surcharges, and we have contracts where we have the surcharge based on gasoline or diesel costs. And that is a significant cost to the whole nation. I think just in terms of the portfolio of freight that we have, more than 70% of our sales are with freight included as a specific number. So that is a direct pass-through because freight is not part of our cost. It is just a delivery cost that the buyer will pay. And some of those also are picking up at our operations. So the whole freight, it is a cost -- or from the buyer. So in terms of direct freight to the customers, it's either a specific line on the invoice that is a pass-through or is a pickup order that is not our cost. I think there is some impact on internal freight when we see the delivery of the birds and we see the delivery of feed to our growers. So there is that direct cost that impact us. But I think as we mentioned, we control what we can control. We're trying to identify opportunities to reduce the travel, reduce the freight, get more efficient trucks. So we were trying to reduce the impact of those in our direct cost. Matthew Galvanoni: I think, Ben, it's important just as Fabio talked about the freight costs that go direct to our customers, that freight cost is just from an overall freight spend is a much higher proportion than freight internally to move birds or to move feed between farms, et cetera. So... Operator: The next question comes from Pooran Sharma with Stephens. Unknown Analyst: This is Adam on for Pooran. For my first question, with the Russellville conversion complete now, are you able to give any more details on the expected ramp in volumes and margins with that new case-ready capacity? Fabio Sandri: Yes. I think on the retail, we've seen over time is the more stable margin. And I would say it is double-digit margins, and it's much more resilient and stable than the Big Bird. And when you look at the overall portfolio, right, and this is what we're always talking about, we like the exposure we have to the big bird complex. But we understand that it's very volatile. So in Q1 last year, we see some very strong profitability in that segment. Actually, it was the most profitable part of our portfolio. In this quarter, we see that profitability was much lower than that. And that's why we converted the plant is to have higher and more resilient earnings. It's also important to support the growth of our key customers. We talk about the growth in retail. And as retail increased on the fresh more than 1% this quarter, our key customers increased more than 3%. And I think that's important to mention that we will need to continue to support their growth. So we will need more capacity on the tray pack business. So it's a growth opportunity for us to support our key customers, but it's also an opportunity for us to have more stable, higher margins. Unknown Analyst: Okay. And then for my follow-up, with Just BARE retail sales up 40%, you noted it was on distribution and velocity. Are you able to give any more details on how much of that growth is coming from distribution velocity or pricing or innovation and how you expect those drivers to perform in the back half? Fabio Sandri: No, I think it's a great point, right? Just BARE is a great part of our portfolio is on the prepared side, as we talk about more profitable and more stable. We just reached the $1 billion threshold. And I think that's over the last 5 years, which is an amazing growth. And as we mentioned, there is velocity and there is distribution. We continue to gain distribution. I think the velocity is more a sales tool for Just BARE because if the retailers have Just BARE in their portfolio and their freezers, they see the velocity of the category going up because that the velocity of Just BARE is much ahead of the overall velocity of the category. So it is a sales tool that helps us gain distribution. It is our strategy, right? How can we help our key customers to grow faster than the overall categories. We do that on Fresh, and we do that also on the Prepared. And you also mentioned very important is innovation. We just launched the roasted category on the Just BARE. The Just BARE started as a lightly breaded product as you can -- as you all know. And we just launched the roasted part of that portfolio. That helps with having more shelf space. And we are looking into also on the nugget side, if the presence of Just BARE can be very, very complementary to our overall portfolio. Operator: The next question comes from Leah Jordan with Goldman Sachs. Leah Jordan: But see if you could provide more detail on what you're seeing in terms of consumer behavior across your different regions. We're hearing about softness in Mexico and the U.K. and pressures could be building here in the U.S. So have you seen any notable shifts in products or channels that you would call out? Fabio Sandri: Yes, sure. I think it's a global trend, if you look, that consumers are looking and are over concerned about inflation, about the wage growth and overall consumer sentiment. And what they are looking is as food away from home keeps increasing faster than food at home, we're seeing a shift from foodservice to retail. I think the good news for chicken on that trend is that the penetration on the foodservice despite lower traffic has increased, and that's why chicken has been growing in the foodservice category. But then going to the retail, as we mentioned, the consumer is doing more trips and lower baskets. So that is the trend that we are seeing and we continue to see, and I think that is global. When you go more in the details by geography, demand in Mexico was strong during the quarter. I don't think that the pressure on prices in the region was because of demand. Chicken is the most affordable protein in the category. I mentioned about the spread between ground beef and chicken to the record levels. Ground beef increased more than 30% over the last year and chicken prices are stable. So the demand for chicken continues to be really strong even in Mexico. In Mexico, it was more about the availability of other proteins like eggs and pork at the same price as chicken and the availability of chicken. As we mentioned that the growing conditions in Mexico are typically very difficult during this time of the year because of drought conditions. We've been seeing more rains in Mexico, and that has helped with the growing conditions. So the availability of chicken in Mexico was north of 10% in quarter-over-quarter. So that's what impacted the profitability in Mexico. But as we mentioned in Mexico, it's very volatile quarter-over-quarter, but it adjusts itself throughout the year, and we continue to expect in a growing economy, just like Mexico with good demand for our products for the supply and demand to be more in balance. Europe, it's similar. I think the difference is that the volumes are not growing as fast. It's not a growing economy just like Mexico, but the chicken continues to be the best category for us and for the industry compared to the beef and even pork prices because of affordability. And then it comes to the U.S., and I think the same trend remains, right? The consumer looking for stretching their budgets, doing more trips with smaller baskets and chickens continue to be a great value for it. And I think we talked -- just talked about Just BARE and I think the frozen category has been growing on the -- as well because it's affordable, but also convenient. And we have the perspective of the growth in the whole birds or the deli segment rotisserie in the retail if the SNAP vote goes. Matthew Galvanoni: And Leah, it's Matt. I'll just complement something that Fabio talked about with the U.K. I think also chilled meals is doing quite well there. We're seeing the consumer there going back to what Fabio was talking about with at-home eating and the chilled meals where we have a nice presence. We've seen that increase quite a bit, and it's been a good play for us, too. Operator: The next question comes from Thiago Duarte with BTG Pactual. Thiago Duarte: My question is related to CapEx. And the first part of my question is really what's the timing for the conclusion of the ongoing investments in the mix enhancements and capacity addition? And the reason I'm asking is because you're still running well above last year and what I believe your sustaining CapEx should be. So the timing for the conclusion of these main investments would be interesting to get. And the second part of the question is related to how much incremental capacity or production volumes you effectively believe these investments will bring and how much it's actually basically the conversion of your fresh mix into more prepared mix? That would be an interesting color to get as well. Matthew Galvanoni: Thanks, Thiago, for the question. It's Matt. When you think about timing on CapEx, we provided the guidance that this year will be about $900 million to $950 million in total CapEx. Our sustaining CapEx generally runs in that $400 million range. So you can do the math that the growth or the efficiencies kind of payback CapEx is $500 million to $550 million in a year. We spent $235 million in the quarter. We mentioned a lot of the different projects we have. We've got a lot of that behind us. We've got more to come just as you kind of finalize some things and get builds to come in, et cetera, et cetera. So we'll still see some of that roll through. But that $235 million, I think it really does sort of set up nicely for the pace that we talked about for the year. Now of course, we've got the big spend we have relative to our prepared foods plant that we're building in Georgia. That's not planned to go online until the end of the first half of next year. So we will still be spending quite a bit there. As it relates to kind of our -- the mix of our capital and the growth, I think what's been important we talked about, we want to support Prepared Foods, both by building the plant that we talked about in Georgia, but also a lot of the enhancements that we're doing to our Big Bird plants right now are to support that growth by doing portioning and things that external companies had done for us in the past. And so some of that meat that we would be selling in the past on the market will be sold more so to our Prepared Foods business internally as we think about it that way. So I don't know, Fab, if you want to complement anything on that? Fabio Sandri: No, I think on the incremental capacity, if you think about the conversion of Russellville actually reduces a little bit the overall tonnage because a big bird plant runs 9 to 10 pound bird and a case-ready plant it's between 6.5 and 7. So I think that reduces a little bit. And that's why we're also investing in our Big Bird plants to be able to run a little bit more pounds. Our intention is always to support the growth of our key customers. And when you look at the expectations on the market, it's around 2%, and that's what we want to continue to grow to support them. So around 2% in line with the market. Operator: The next question comes from Heather Jones with Heather Jones Research. Heather Jones: I wanted to go back to what you were saying about the price spread for -- between ground beef and breast meat in the U.S. And there's been a lot of feature at food service and et cetera. But one of the things that I'm hearing and honestly seem to see it in the data is that the pickup in breast meat demand or chicken demand in general at retail hasn't been as pronounced as would have been expected given that price gap. And one, wondering if you agree with that? And two, if so, why do you think that is? Fabio Sandri: An increase from $4.70 a pound at retail to $6.29. And at the same time, chicken price boneless breast has remained stable at $4. So I think there is some elasticity that we see. But what I believe it's happening is that as consumers are, like I said, stretched on their budget, they're moving from foodservice to retail. And when they move from food service to retail, they have more available income because the price of a food away from home is 3x the price of food at home. So they go to the retail, and they are buying the more expensive parts of beef, right? So they are getting the nice cuts. And then you have consumers that are trading down inside beef from expensive cuts to ground beef, and that is supporting the volume of ground beef. So it's a moving from food service to retail that supports the high parts of the beef. And then you have some trading down on the beef category from the high end to the ground beef. And then we see some trading down from ground beef to chicken. But I agree with you, I don't think that the elasticity has been as prevalent as we expected given the spread in prices. And I think there is a limit to it, right? I think that is -- it reached a point where it's so high, the distance that I don't think is creating any more demand for chicken. But the demand for chicken continues to grow, again, in all categories in retail, not only boneless breast. And I think another factor is what we -- the growth that we are seeing on dark meat deboning. And I think this is important to mention as well. We are doing that investment in our operations. I think the whole industry did that investment. The growth in the dark meat or in the boneless ties has been phenomenal at retail. And if you look at the prices at retail, the price of dark meat is actually higher than the price of boneless. But overall, it is a growing category. So you need to take both of those cuts in combination. And when you look at those cuts in combination, I think you see a much better elasticity and a much better demand on the chicken category. Heather Jones: Okay. That makes sense. And then my follow-up is, if I remember correctly, you were converting -- you converted Russellville to case-ready and to NAE. And so oftentimes, when companies convert to NAE, there's an adjustment period. And so wondering if that -- if you anticipate any impact like livability, whatever to continue into Q2? Or is all of that now back at normal levels? Fabio Sandri: That's a great point. We converted to NAE because we want to differentiate our key customers, right? I think just to justify the NAE change. It is a growing category. It is to make the differentiating factor for that key customer is a different package as well. So it's a saddle pack. So I think that's a differentiating factor as well, very convenient for the end user. At the beginning, we see some reduction in livability and in growth, but we have great housing. We have great procedures, and we expect to be similar growth conditions and similar mortality. There is always a little impact, but I don't think it is significant. And I think it makes sense when you look at the higher attribute and it helps our key customer to be differentiated in the marketplace. Operator: The next question comes from the line of Priya Ohri-Gupta with Barclays. Priya Ohri-Gupta: Two quick ones for me. One, I was wondering if you could just give us some more color around some of the competitive dynamics you're seeing in the European market? And then secondly, Matt, if you could just walk us through some of the thought process around the -- taking out the 33s and how we should think about maybe your debt profile going forward, just given how underlevered you are? Fabio Sandri: Yes. Thank you. Again, on Europe, because of our differentiated portfolio, we are seeing different dynamics in each category. As I mentioned, chicken continues to be favored throughout the world, but also in Europe because of affordability and availability. So we saw some growth in volumes and in prices. The more challenging segment has been on the branded portfolio, especially on the Richmond side, the competition from private label. Private label sausage is made with imported meat, especially from Germany and Spain, and we're seeing some very cheap imported pork meat from those geographies because of some challenges to get into China. So because of the lack of exports from Europe to China, we're seeing more available fresh pork from other countries other than U.K. U.K. has a high welfare. So on the retail, we see all the high welfare and it's well priced, and we have key customers and is actually doing well. But on the imported meat that goes into the whole -- on the food service and into sausages, we saw some very cheap pricing. And that with the lower price on the private label, that impacted our volumes in the branded, especially on the Richmond. But we are working with innovation. We're working with gaining distribution, and we're working with more promotional activity to gain those volumes back. And as Matt mentioned in another Q&A, the meals business is also doing really well. As the consumer is staying more at home and meals is a great affordable option for them. We're seeing our meal business, both the fresh and frozen to grow, and we also gained distribution on that. So I think it is how we expected our portfolio to work. So we have similar margins or resilient margins compared to the same year -- same period last year because of the diversification of our portfolio. Matthew Galvanoni: And Priya, regarding your question on the tender offer, our thinking was we had room under the previous authorization from the Board on debt buybacks. There's an opportunity to take some higher coupon debt out. We're confident in our future cash generation. And I think as you mentioned, our balance sheet right now is underlevered. And I think as we look at other growth opportunities, we're always looking to grow the company, could be through M&A and opportunities that we see out there. Our balance sheet is in the right spot to be able to do that if necessary to go back out to the market if necessary. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Fabio Sandri for any closing remarks. Fabio Sandri: Thank you, everyone, for attending today's call. During the quarter, we were able to navigate a volatile market in the commodity segments, protecting the downside with the most stable parts of our portfolio. More important, the underlying fundamentals of our business remain attractive, given chicken's affordability, continued consumer momentum across retail and foodservice and ample grain supplies. We continue in our journey, investing in our operations and in our teams to strengthen our portfolio, ultimately creating a higher return and reducing risk. This quarter, our team members simultaneously drove the business while navigating significant operational changes. This task was even more difficult given extensive weather challenges. As such, I would like to thank our team members for their determination, discipline and commitment to our company. We must continue those efforts with an unwavering focus on team member safety and well-being, along with an unyielding attention to quality, service and sustainability. Given continued progress, we can continue to build our legacy and achieve our vision to be the best and most respected company in our industry, creating the opportunity of a better future for our team members. Thank you, everyone. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by. My name is Liz, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DTE Energy First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Krupinski, Director of Investor Relations. Matt Krupinski: Thank you, and good morning, everyone. Before we get started, I'd like to remind you to read the safe harbor statement on Page 2 of the presentation, including the reference to forward-looking statements. Our presentation also includes references to operating earnings, which is a non-GAAP financial measure. Please refer to the reconciliation of GAAP earnings to operating earnings provided in the appendix. With us this morning are Joi Harris, President and CEO; and Dave Ruud, CFO. Joi Harris: Thanks, Matt. Good morning, everyone, and thank you for joining us. I'm happy to be with you today. I'll start by saying 2026 is off to a strong start, and that momentum gives us confidence in delivering an exceptional year for all of our stakeholders. As we have said before, our success begins with our team. We have a highly engaged organization that's executing extremely well. Our team is focused on doing what's right for customers and communities. And that strong employee engagement really shows up in our performance. A great example is our team's response to a couple of large storms we experienced in the first quarter. During a January weather event, the team restored 100% of impacted customers within 48 hours. And during the March storm, a more significant event, we restored service to over 99% of the customers within 48 hours. This kind of performance reflects the commitment, preparation and pride our employees taken their work. I'm incredibly proud of how our team continues to show up for our customers when it matters most. We continue to execute our customer-focused capital plan that strengthens the grid and improves reliability. These investments are essential to enhance the grid to support our customers and they're being made with a clear focus on customer affordability. That focus is reflected in our recent rate case filing, where we are targeting investments that drive the highest impact while carefully balancing customer affordability. Turning to data centers. We continue to see great progress. The 1.4-gigawatt Oracle data center included in our plan is approved and construction is underway. We've also executed an agreement with Google to serve a 1-gigawatt data center. This project represents incremental upside to our current long-term plan and the contract has been submitted to the MPSC IV approval. Beyond Oracle and Google, we continue to have constructive discussions with other potential customers. As those conversations progress, they represent additional upside to our capital plan over time. It's also important to highlight that this data center growth provides real affordability benefits to our existing customers. These large loans help spread fixed system costs over a broader base. And because these data centers use so much power, they absorb a significant portion of these costs, which will provide meaningful benefits to existing customers as these lows ramp. As I've said, -- we are off to a great start in 2026 and well positioned to achieve the high end of our operating EPS guidance. We are confident in our long-term operating EPS growth rate target of 68% through 2030. We and we remain confident in our ability to reach the high end of our guidance range in each year, driven by R&D tax credits and the flexibility they provide. The Google data center project and other data center opportunities provide upside to this plan. Let me move to Slide 5 to highlight our improvements in reliability. We delivered meaningful reliability improvements in 2025 driven by a combination of strategic infrastructure investments, targeted process improvements and more favorable weather conditions. From 2023 to 2025, we achieved a 90% improvement in outage duration, reflecting both stronger system performance and faster restoration. We recorded our best all-weather SAIDI performance in nearly 20 years, underscoring the impact of our sustained focus on reliability and placing us in the top quartile of utilities nationwide. Last year, we restored 99.9% of impacted customers within 48 hours, demonstrating continued improvement in storm response and operational execution. That momentum has carried into 2026 and as we continue to successfully execute our reliability strategy. Earlier, I mentioned the strong storm response our team delivered during the first quarter. That performance was on full display during the March storm when we experienced wind gust of more than 70 miles per hour for a sustained period. About 300,000 customers were impacted, and thanks to dedication and hard work of our crews, nearly all customers had power restored within 48 hours. When we look back at a similar storm several years ago, the progress is clear. That earlier event which was a little less severe, impacted more than 750,000 customers and restoration took significantly longer. The improvements we're seeing today reflect years of targeted investments, improved processes, and the commitment of our employees. This work continues to make a meaningful difference for our customers through less frequent outages, faster restoration and improved reliability and demonstrates that when we invest, it works. We are continuing our efforts to modernize our electric distribution system, including the installation of smart grid devices to improve outage detection and restoration times. We are also maintaining a disciplined focus on pole-top maintenance, executing a robust treatment program and advancing the ongoing rebuild of the 4.8 kV system, all of which are critical to long-term reliability. And those initiatives are already translating into measurable results. We remain on track to achieve our long-term goals of reducing the number of power outages by 30% and and cutting outage duration in half by 2029, reflecting our commitment to sustained improvement. Let me move to Slide 6 to provide an update on data center development. We continue to make steady progress executing and finalizing contractual agreements needed to support data center growth. The Oracle contracts are approved and construction is underway. -- with load ramping over the next several years. The growth is supported by existing capacity and planned energy storage and the contracts are structured to ensure Oracle will cover the full cost of energy and capacity they need while also providing significant affordability benefits to our existing customers. Our project with Google also continues to advance. The contracts have been filed with the MPSC for approval, and we expect their low to fully ramp by the end of 2028. The low ramp is supported by a balanced mix of resources, including renewable generation, energy storage, demand response and additional longer-term generation that will be identified through the IRP process. As a result, meeting Google's capacity needs could drive roughly $5 billion of incremental generation and storage investment through 2032. The Importantly, these investments are supported by contracts that protect existing customers. We have a 20-year power supply agreement with minimum monthly charges combined with a separate clean capacity acceleration agreement that covers renewable and storage investments. termination provisions, combined with credit and collateral requirements, are designed to protect existing customers and support affordability. This means that Google will cover the full cost of the energy and capacity they need while also providing affordability benefits to our other customers. Beyond these 2 projects, we remain highly engaged with additional data center opportunities. We're in advanced discussions that could represent roughly 2 gigawatts of incremental load with additional projects in our pipeline that could add another 3 to 4 gigawatts over time. Importantly, we also expect additional demand as these customers continue to expand once they are on the system. Collectively, these opportunities require investment in new baseload generation, renewables and related storage with the exact resource mix and timing to be refined through the IRP process. Overall, we see our strong pipeline continue to advance, with disciplined execution that delivers growth while remaining focused on reliability and affordability. Let me move to Slide 7 to describe the benefits these data centers provide and discuss our continued commitment to customer affordability. These data center projects bring on large steady load that helps spread fixed system costs and create meaningful affordability benefits for our existing customers. Once fully ramped, Oracle is expected to drive about $300 million of annual benefits to our existing customers, while the Google data center is expected to generate roughly $1.7 billion of benefits over the life of the contract. These savings strengthen our affordability story, complementing the strong continuous improvement culture that we have developed over the years. Continuous improvement is part of how we operate every day. and it underpins our ability to consistently deliver strong reliability while managing customer affordability. We've executed our investment plan with discipline while remaining highly focused on affordability for our customers. As the chart illustrates, our average annual bill increases over the past 4 years have been well below the national average and the Great Lakes region. One of our biggest sources of customer value is how we're using new technologies. Advanced analytics are driving efficiencies, lowering cost and improving maintenance and storm response. Delivering customer-focused efficiencies through technology remains a top priority for our team. Our transition from coal to natural gas and renewables is also reducing O&M costs and the tax credits available under the Inflation Reduction Act helped to make our clean energy investments more affordable for customers. Today, the typical residential electric bill represents less than 2% of the median household income, and our residential bills are 18% below the national average. We also continue to expand energy assistance for our most vulnerable customers delivering millions of dollars in energy assistance and donating significantly to support nonprofits across Michigan. Overall, we are well positioned to sustain our historical success in managing customer affordability while continuing to invest in the grid and support long-term growth. Let's turn to the next slide and walk through our regulatory strategy and the benefits we are delivering to our customers. Our electric rate case filing is an important step in supporting customer-focused investments in system reliability and grid modernization while continuing to manage affordability.. This rate case filing is predominantly driven by our distribution infrastructure investment plan, which is squarely focused on improving reliability and consistent with the recommendations from an electric distribution audit completed in 2024. This plan is focused on achieving our goal of reducing the frequency of power outages by 30% and and cutting outage duration in half by 2029. As part of this filing, we're requesting nearly $800 million of distribution investments to be incorporated into the IRM by 2030. This would support consistent, predictable infrastructure investments for our customers and could help delay future rate case filings. Our data center agreements are thoughtfully structured to enhance affordability and protect our customers -- as I have already highlighted, these contracts deliver significant affordability benefits with strong safeguards in place. As the loan from these projects ramp -- it creates the potential to extend the timing of our next DTE Electric rate case filing, delivering the benefits to our existing customers from these growth opportunities while we continue to invest in improving reliability. We have proposed a regulatory mechanism in this current case to capture any excess margin from the Oracle load ramp above what we have included in our filing. If the Oracle load ramp comes online by the end of 2027, and we receive other required regulatory approvals, we will refrain from filing another rate request until at least 2028. Looking longer term, our IRP will provide clear visibility into how we will serve growing demand, including the significant data center load. The IRP will lay out our approach meeting long-term generation and capacity needs with the filing expected in the third quarter of 2026. This is a transparent process that allows us to identify the most effective and affordable way to serve customers over time. Taken together, these efforts reflect a coordinated, disciplined approach to growth, combining thoughtful regulatory filings well-structured large load agreements and long-term resource planning to support reliability, affordability and visibility for our customers. So to wrap up, we're off to a strong start in 2026. We're executing our plan, making critical infrastructure investments staying focused on affordability for our customers, delivering reliable, high-quality service to communities we serve and driving continued strong financial performance for our investors. With that, I'll hand it over to Dave. Dave, over to you. David Ruud: Thanks, Joi, and good morning, everyone. As Joi mentioned, 2026 is off to a really strong start, and we remain well positioned to achieve the high end of our operating EPS guidance this year. Let me start on Slide 9 to review our first quarter financial results. Operating earnings for the quarter were $407 million. This translates into $1.95 per share. You can find a detailed breakdown of EPS by segment, including a reconciliation to GAAP reported earnings in the appendix. I'll start the review at the top of the page with our utilities. DTE Electric earnings were $218 million for the quarter. Earnings were $71 million higher than the first quarter of 2025. The main drivers of the variance were timing of taxes, rate implementation and colder weather partially offset by higher rate base and O&M costs. On the timing of taxes, if you remember, we called out a variance of negative $67 million in the first quarter of last year due to the timing of renewal projects being placed in service, which was a key driver of the variance for the quarter. Moving on to DTE Gas. Operating earnings were $210 million, $4 million higher than the first quarter of 2025. The earnings variance was driven by colder weather and IRM revenue, partially offset by higher rate base costs. Let's move to DTE Vantage on the third row. Operating earnings were $48 million for the first quarter of 2026. This is a $9 million increase from 2025, driven by higher custom energy solutions and steel-related earnings, partially offset by lower renewable earnings. On the next row, you can see energy trading earnings were $59 million lower than the first quarter of 2025. This was primarily driven by expected timing in the first quarter in the Power portfolio. We are highly confident in achieving the high end of the full year guidance range in Energy Trading as this timing reverses through contracted and hedge positions over the remainder of the year. Finally, Corporate and Other was unfavorable by $54 million, primarily due to the timing of taxes of $43 million and higher interest expense. Overall, DTE earned $1.95 per share in the first quarter of 2026, which positions us well to achieve the high end of our guidance range in 2026. Let me move to Slide 10 to discuss our balance sheet and equity issuance plan. We continue to focus on maintaining solid balance sheet metrics to support the significant increase to our capital investment plan that we need to execute for our customers. We are still targeting annual equity issuances of $500 million to $600 million in 2026 through 2028 with similar levels through 2030. We will continue to maximize the use of internal mechanisms, planning to issue up to $100 million internally. For our remaining issuances, we've established an equity ATM program to efficiently execute our funding plan. While those shares were issued under the ATM program during the first quarter, we have priced over $350 million of equity through forward sale agreements that we plan to settle later this year, which is about 2/3 of our full year target. Our 5-year plan fully incorporates the equity needs and continues to deliver 6% to 8% operating EPS growth with a bias to the upper end of guidance each year through 2030. Importantly, -- we remain focused on maintaining our strong investment-grade credit rating and solid balance sheet metrics as we target an FFO to debt ratio of approximately 15%. Let me wrap up on Slide 11, and then we'll open the line for questions. DTE continues to consistently deliver for all our stakeholders. Our 2026 guidance reflects operating EPS growth of 6% to 8% over our 2025 guidance midpoint and RNG tax credits give us confidence that we can deliver at the higher end of that range. Our 5-year plan provides high-quality, long-term 6% to 8% operating EPS growth through increased customer-focused utility investments, with utility operating earnings, making up 93% of our overall earnings by 2030. We are confident we will reach the high end of our guidance range each year, driven by RNG tax credits and the flexibility they provide. As we have stated, the Google contract and additional data center opportunities provide upside to our 5-year plan that will be incorporated after the contracts have been approved by the MPSC Overall, we are well positioned to execute our plan to improve reliability for our customers and strengthen the communities we serve. We're doing so with a strong focus on affordability, supported by multiple levers to manage customer rates including the significant benefits that data centers drive for existing customers, and we remain on track to deliver the premium total shareholder returns our investors expect, supported by a strong balance sheet and disciplined execution of our capital investment plan. With that, I thank you for joining us today, and we can open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Shahriar Pourreza with Wells Fargo. Shahriar Pourreza: Joi, I know you talked about the Google deal strengthening the 8% in the next deal, pushing you beyond 8%. I guess, first on Google and the status of the approvals. I mean, Michigan has been noisy. So I guess, how should we think about pushback given it is a contested case? What's been the feedback so far there? And what clarity would you need to put that into plan? Joi Harris: Well, thanks for the question, Shahriar. And the community is welcoming Google. So that makes this a really positive thing for the state. And we are seeing really, I think, positive comments in media about the Google contract. So we feel really good about what was filed. We are expecting to get an order in the September time frame, upturn be by September 10, at least that's what the contract specifies. And if you recall, the commission indicated that they're going to read the order, so there won't be a PFD. So that was a positive signal that puts us on track for that approval by September. So the community is welcoming. The narrative has been really good on the ground, and we feel good about to secure the contract. As we've said all along, that 3 gigawatts would get us to A+. And at least as Google contract has the potential to get us to 8, but we don't want to get ahead of the approval process. We're going to let this play out over the summer and into the early part of the fall and get that approval and keep moving forward. . Shahriar Pourreza: Got it. Perfect. That's consistent. And then just lastly, on the next deal announcement, are you still thinking sometime in that Q3 time frame and -- could we sort of see an update of that plan and the CAGR around the EEI time frame, embedding the next deal? I guess, how do we sort of handicap the next deal timing, et cetera? Joi Harris: Yes. I think we are targeting before the end of the year to have, I've always been consistent about that, having something done before the end of the year. And let me just say that we've got 2 gigawatts of hyperscalers that we are in late-stage negotiations. At least 1 of them has zoning already done. So we feel really good about that, and there's a pathway to zoning for the other. So the conversations are progressing quite well. In terms of the updates that we will provide as the contract is solidified, rest assured, we'll provide updates. Our approach will be to lay out our 5-year plan, no different than prior years during our third quarter call in -- and provided that we have any information or we solidify the contract at that time, we would incorporate it. But if not, it will show up sometime thereafter. . Shahriar Pourreza: Okay. Perfect. Big congrats guys. That's very consistent. Operator: Next question comes from the line of Michael Lonegan with Barclays. Michael Lonegan: So obviously, you highlighted you're pausing your -- you're potentially pausing your next electric rate case filing after the current 1 dependent on ramp-up of data center loan approval of regulatory items. So obviously, this is dependent on a constructive rate case outcome in the current case. I just wondering if you can share your assumption for a range of ROE and equity ratio outcomes in the case for that pause? And also how you're thinking about the IRM mechanism coming out of it. . Joi Harris: Yes. So thanks for the question. We enter every case with an expectation and belief that we'll get a constructive outcome, and that's what we've included in our planning assumptions. The investments that we have highlighted in case are all targeted towards the grid. -- which are necessary and also to transition to cleaner generation, and that's all underpinned by legislation. So we feel really good about the case that we put before the commission. The IRM is underpinned by our DSP and which is aligned with the Liberty audit that was completed in 2024. And this was a directive from the commission that we followed through on. So we feel very strongly about what we've put forward. And at least a clear understanding of how those investments are going to deliver value for our customers. In terms of ROE, what we requested is 10.25%. And then in terms of equity layer, -- we typically have included a 51% equity in our filing. And so we'll let this play out as we always do over the course of the next several months, we'll start to see staff and intervenor testimony and that will give us indications as to whether or not we're aligned with the commission, but we feel good about where we stand today. Michael Lonegan: Great. And then you got potential pause in electric, but shifting to gas, after the current pending case, when could we expect you to file the next gas rate case? Joi Harris: We're going to let this case play out. We did ask for an increase in the IRM, which was supported by the staff and their testimony, which is a really positive sign. We have some other large investments that we included in this case, which were supported as well. And this is all updating our transmission system and the gas business. So that's really, really positive for us. And once we get the final order, we'll determine the next filing cadence. Operator: Your next question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Can you hear me okay? Joi Harris: Yes. Julien Dumoulin-Smith: Excellent. Well, congratulations to the Joi and the team here, really nicely done. Congrats on the continued success. Maybe just take it up where Michael left it off here. I mean what is the stat dependent on? Just to pick it up there, just in terms of the timing with Google if it's approved and comes online as planned, how does that impact the electric state here? Can you elaborate just a little bit about some of the parameters here as you think about it. Obviously, Oracle is coming online at the end of '27 here. So -- but you can talk about different pieces. Joi Harris: Sure. The mechanism that we filed essentially takes any excess margin above and beyond what we've incorporated in the case and pushes it into a subsequent filing where we will propose how to flow back the benefit to the customers. And that gives us the potential to stay out for multiple cycles. And if you layer on the Google contract on top of it, once it's approved, that could very well give us the opportunity to push out cases even further. So that's how we've set it up in the case, Julien, and we are looking forward to getting feedback from the commission once they've had an opportunity to fully absorb the filing. We'll start to see testimony from staff in the next several months. And we'll have some indication as to whether or not there's good support. But generally, I think all of us are seeing that data centers are going to deliver the affordability benefits as promised. And this is a way for us to showcase it and deliver on the promise that we've made early on. Julien Dumoulin-Smith: Awesome. Excellent. That's what I thought. There could be a little bit of an extension factor there. especially, I suppose if you get a 1/3 to, right? Again, each 1 would incrementally push out that time line. Joi Harris: Yes. Load growth data center load growth will provide meaningful affordability benefits for our customers. We said that all along. And this is that projection coming to fruition. Julien Dumoulin-Smith: Yes, exactly. And just -- and that's a nitpick, but to come back on the other pieces of the business, if you will, everything else. Just -- so you're guiding here to flat earnings for Vantage by 2030. How do you think about that if you layer in the data center opportunity -- is another way to just talk about the pieces that go into the 6% to 8% here. And then also separately, how do you think about the Vantage Recycling avenue here, especially as we talk about Google and a potential card here. It would seem like that's more right now than ever. But I don't want to put words in your mouth. Joi Harris: Yes. Vantage has a really strong pipeline of opportunities that we continue to advance. The data center opportunity with Vantage is progressing quite well. We're down to the short strokes as I like to call it. And hopefully, we will have an agreement -- a full agreement in place over the next several weeks. -- and be able to communicate this more fully to the broader community. But it's an exciting opportunity that has the potential to expand even beyond where it is. Just given the technology that we're deploying, it's transferable. So recall, this is a behind-the-meter project that is roughly 350 megawatts since there is such shortage of power across the nation, this could be a very interesting opportunity for other hyperscalers and/or co-locators that are looking to expand their footprint. And so we've begun some preliminary just examination of where this might fit. But for right now, we're focused on the project that we have underway, and this fits nicely into the plan that we've already established. As for Vantage and recycle opportunities, -- as always, we look at Vantage and exam Vantage every year. And this business has served us well for over 20 years. That's not to say, though, that we're not always looking to create more shareholder value and so we'll examine for rotation opportunities along the way and provide you updates if anything materializes, but there's nothing imminent. Julien Dumoulin-Smith: I appreciate it. We'll talk soon. All the very best. Joi Harris: All right. Take care. Operator: Your next question comes from the line of Jeremy Tonet with JPMorgan. . Jeremy Tonet: Thanks for the details so far. Just looking to build a little bit more if I could. For the Oracle and Google data centers, how would you frame the ramp in sales growth as these projects come online? How should we think about that over time at this point? Joi Harris: The ramp in '20 -- well, the ramp for Oracle in 2026 is relatively small, but it shoots up exponentially beyond 26. So they get to their full ramp over the next couple of years. Same thing with Google. Google will start out relatively small and then expand to a gigawatt by 2028. So that's how the data centers are looking to ramp over the next couple of years. . Jeremy Tonet: And I guess to refine that a bit more, how do you think that compares to a minimum contracted level? Joi Harris: How does it compare to minimum contracted levels, . Jeremy Tonet: Do you think there's the potential for a faster ramp than maybe where demand charges stay. Joi Harris: Oh, I see. So I think what -- the contract and which is why we've included this mechanism, the contract allows for some flexibility -- and so we won't fully know until the facility is constructed. And what I can tell you is construction is progressing as planned. There's no indication that there is a slowdown of any sort. And so we intend to see Oracle attached to the grid by the end of this year and then begin to take electrons off the grid thereafter in terms of their minimum billing demand as they are ramping, it's aligned with their load ramp. So depending on the scale of their load ramp, and we have not published that. I don't think we've made that public for obvious reasons. But suffice it to say, so long as they stay on schedule, we see that they will be on a fast ramp. But if there is any delay, and they have that option to delay for 1 year. than the mechanism that we are proposing covers it. . Jeremy Tonet: Got it. That's very helpful there. And I just wanted to turn to customer benefits, if you could, in your approaches to $300 million annual in $1.7 billion overall customer benefits from Oracle and Google contracts. Just wondering how those contracts compare if there's any differences to think about there? And really just how do you think about future deals here, bringing similar scope of benefits? Or just what are you looking for in the future? Joi Harris: Yes. So the Oracle contract -- because we did not have to construct anything substantial, we are only building battery storage to support the load and they're covering the full revenue requirement for that battery storage. You've got a pretty significant affordability benefit. We do have to make some additional baseload additions to our fleet to cover off Google, and that will be identified in our IRP. So the affordability benefit, while sizable, is a little less than what you see in the Oracle contract for obvious reasons. . Jeremy Tonet: Got it. And how does this, I guess, inform your -- what you're looking for in any potential future agreements, I guess, as far as what the size or scale of benefits could shape up to be Joi Harris: Any deal that we arrive at has to provide affordability benefits for our customers. The -- that is the requirement of the law. And so our desire is to maximize that at every opportunity. And so it's going to be dependent upon the size and scale of the hyperscaler, the resources that we have to bring online to for them and their ability to flex their load over time, and that will dictate how much affordability savings that will flow to our customers. Operator: Your next question comes from the line of Richard Sunderland with Truist Securities. Richard Sunderland: Just wanted to circle back to some of the rate case discussion. Maybe just to put a finer point on the IRM side -- do you lose an IRM outcome consistent with you're asked for the stay out? Or is it really around this newly proposed mechanism you've been discussing that's, I guess, key for staying out? Joi Harris: Yes. It's around the mechanism that we're proposing. But I can tell you, the IRM, we're looking to grow it to $800 million by 2029, and we have approval for '26 and '27 already. And we feel really good about the IRM potential. We've aligned it to the DSP as requested by the commission and the DSP is in firm alignment with the Liberty audit that was performed in '24. . Richard Sunderland: Got it. That's very helpful. And then there's certainly a lot of attention around the state and kind of the data center dynamic on the local level. It sounds like for you, there's really a lot of continued interest, but trying to understand if you've seen any shifting in sort of your conversations and how the projects are approaching it on their side? And I guess while we're on zoning -- for that Oracle site, is there expansion potential there without additional zoning required? Joi Harris: I'll answer your last question first. I think Oracle is taking up a portion of the footprint. So there is some expansion potential there. As for what we're seeing on the ground, the hyperscalers and colocators have all engaged more fully with local government and local communities. And when they do that, we see that there is more acceptance and more willingness to allow those types of companies to take up locations in those communities, Case in point, [ Venberan ] Township, and there are others. So we are feeling really good about the hyperscalers and co-locators in our pipeline. Many of them have zoning or have a pathway to zoning and they are progressing quite nicely through our pipeline because of it. . Operator: Next question comes from the line of Bill Appicelli with UBS. William Appicelli: Just wanted to ask about the financing around the incremental $5 billion that you outlined here that the Google contract could drive. I mean how should we think about that? Can you just remind us on how you would finance that? And maybe back to the earlier question on capital recycling, would that pull forward some urgency or need for that? . David Ruud: Bill, this is Dave. Yes, the incremental capital that would come into the plan would be partially funded with equity. So we think about 40% equity on average depending on the timing of the cash flows also use converts and hybrids to support our balance sheet as we execute those investments. And you're right before, we weren't -- we didn't have a need for equity. So it does make us think about -- are there other opportunities and ways that we can maximize value across the company by finding some asset recycling that could help. But nothing -- obviously, nothing imminent there. So right now, we just assume some more traditional funding. William Appicelli: Okay. And then as far as future deals, I mean, is your view to run everything through the utility and under these contracts, would there be any desire to look to do something bilateral directly with hyperscalers as opposed to running it through the utility model? Joi Harris: Yes. Our focus is on growing our 2 utilities. And so we're going to continue to leverage the vast assets that we have and the electric companies to serve this load and future load. . William Appicelli: Okay. And then just lastly, on RNG. Is there anything market conditions wise there we should focus on? Or should we just assume that you're going to be able to fully maximize the earnings potential there at RNG on the tax credits? David Ruud: Yes. We have what we think are conservative assumptions in our forecast for the year at $50 million to $60 million. We are seeing now the DOE and -- the DOEs and the treasury are working through the rules right now. We think what we have is a conservative assumption right now, we're producing at a high level. So we feel like we have a good assumption there for RNG. William Appicelli: Okay. So is there a potential for a modest upside to that? Or is that just basically likely within that range? . David Ruud: We did see some upside last year because we started with some conservative assumptions, but we're waiting to see how these rules play out before we would do anything for this year. Operator: Your next question comes from the line of Michael Sullivan with Wolfe Research. Michael Sullivan: Maybe just following on Bill's question there. I know kind of each deal may look different in terms of resource mix, but the $5 billion of CapEx for the 1 gigawatt Google deal, is that like a decent rule of thumb for future deals? And then also the 2 gigawatts in late-stage negotiations, is that basically 2 customers of similar size? Would that be a fair assumption as well? . David Ruud: I'd say, Michael, on your first question, all these deals are pretty bespoke and what they're going to be providing as far as capital and when that will flow in. This 1 has -- the Google 1 has a lot of renewables and storage as well as some baseload. So I would say they'll all be somewhat bespoke and how they'll come in over time. And then on your second question, as far as new deals, there's an assortment of sizes in what we're looking at, but there are some that are among that scale of what we're seeing with Google One, too. Michael Sullivan: Okay. That's helpful. And then, Dave, just sticking with you, like any more color you can provide on just the trading rent for the quarter. I know you pointed to kind of some timing reversals going to still hit the high end of the segment for the year, but I think it's been a little bit since we've seen like a negative quarter just in absolute terms? Just any more color on the dynamic there would be helpful. . David Ruud: Yes. The shaping that we saw in the first quarter was contemplated in our guidance that we gave in February. As you said, we do remain confident in the full year guidance and hitting the high end because we have these hedged and contracted revenues are going to play out for us. So we did experience similar shaping in '23 and '24. So we expected it. And then additionally, some of the impact we saw in the first quarter was timing, and we know that, that's going to flow back through us through the year through some contracted position. So we do remain highly confident that we're going to hit the high end of our full year guidance of trading this year. Michael Sullivan: Okay. And then just in the spirit of like some of the asset rotation questions. Any thoughts as to whether this still remains like a core business or would it be monetized at all? Joi Harris: Yes. Trading is a part of our core business. But again, every year, we look at the nonutility businesses and we examine whether there's additional shareholder value that we can realize. And so we'll continue to examine that. But for now trading is part of the DTE company, part of the DTE family and will remain so. Operator: Your next question comes from the line of Andrew Weisel with Scotiabank.. Andrew Weisel: Thank you for all the details, and I appreciate all the insights on a strong update. First question, on the data centers, I appreciate the credit protections that you have in place and all the specifics to you in the prepared remarks. My question is, can you remind us of the concentration from these customers first? They're obviously going to represent a major portion of your sales volumes and revenues. I want to say 40% of the total is in my mind. Is that figure, right? And my real question is, do you have different requirements for different customers based on credit risk profiles. Would you have different protections in place or different credit or collateral requirements for Oracle versus Google and Alphabet. And what about hyperscalers that might be less high profile? Would you treat those customers differently? Joi Harris: So the credit protections are differ based on the strength of the counterparty. And so we examine them each separately and determine what credit protections are necessary. And then you are correct, yes, the concentration will be roughly 40% once they arrive at their full ramp. And so as we get more data centers online, we will examine their position. We'll examine the assets that we have to build on their behalf, and then we will establish the appropriate credit protections that will insulate our customers from stranded assets and also rate shop. Andrew Weisel: Okay. Could you comment Oracle specifically versus Google and Alphabet are those 2 being treated the same or differently? Joi Harris: I can't comment on that. That is commercial information that we have not made publicly available. But suffice it to say, we treat them accordingly. Andrew Weisel: Okay. Understood. That's fair enough. Second question, in terms of the storms, certainly impressive results in terms of the data on outage restoration and results, well done on that, very impressive. My question is, given the history of negative feedback on reliability, what kind of responses are you giving from key stakeholders like regulators, the staff, local community leaders, politicians? And on the cost side, to get those results? Were these storms more expensive than what you've historically spent in terms of prestaging and execution? Or is it more like you're being rewarded for the good investments you've been making over the past few years? Joi Harris: I'll answer the -- your last question first. The storms are not more expensive than prior years. And as you heard in my opening comments, similar storm actually that was less severe, resulted in 750,000 customers out. And this storm this year with 70 mile-hour wins, we only saw 300,000 customers out and we were able to get everybody back on within 48 hours. And that we are measuring at the circuit level how each circuit is performing under duress. And we can say definitively that these investments are, in fact, working. Where we've made the investments, the grid is holding up quite nicely to really extreme conditions. Your -- the first question was around how stakeholders are responding. I would just point you to the commission and their comments on the behind-the-meter podcast, where they're pointing to the improvements that are made in the grid and how DTE is performing as a result of the investments and the work that we've done to improve our processes. We're hearing from our customers and other stakeholders that things have improved, it's noticeable, but clearly, there's more work to be done. Operator: Our next question comes from the line of Paul Fremont with Ladenburg. Paul Fremont: Congratulations. My first question is how much of the $5 billion of Google investment would you expect would fall into your current 5-year capital spending plan? Joi Harris: Yes. Paul, thanks for the question. You could assume that some of the renewables, some of the storage would fall into the 5-year. And then we would begin to ramp the base load generation toward the back end of the 5-year and then it will carry beyond the 5-year time horizon. Paul Fremont: Right. So I would expect then that the 700-megawatt gas plant that will show up in the IRP would be mostly, if not completely beyond sort of the forecast period. Is that fair? . David Ruud: Well, actually, a lot of that comes in ahead of time and preparing the site and making some of the purchases we have to make, too. So I think it will straddle the 5-year and then a little bit beyond it. Paul Fremont: Great. And then when would you update your capital spending plan to include Google? Is that -- are you waiting for regulatory approval or -- Joi Harris: Yes that would be yes, that will be the timing that we would likely update our plan, and we're expecting to get an order early in September. And so by the time we are with you all at EEI, we would likely be in a position to talk to you about exactly when that $5 billion shows up and then what years. Paul Fremont: Got it. Perfect. And last question for me. Can you maybe update us a little bit about the governor's race and -- what so far any of the candidates have commented with respect to either affordability or with respect to their positions on data centers? Joi Harris: Yes. Yes, the field is forming. There are really 4 candidates now. The Republicans, there's a neck-and-neck race between John, James and Perry Johnson here in the state. We've got 1 Democrat in [ Joslin Benson ] and an independent in [ Mike Dugan. ] And we have been sharing our story around affordability, which is a good one. We've showcased our build growth on an absolute basis being in top decile at 5% compared to the national average, which is roughly 26%. We've talked to them about share of wallet and where we stand relative to the nation, we're at 1.8% and balance of the country is at 2%. And we had our best reliability performance in 20 years and a really strong performance in the first quarter, as I mentioned in my opening remarks. We've talked to them about the affordability benefits that data centers offer to our customers and how we intend to flow those back. Case in point, our most recent filing. The messages have been well received. Had just recently spoke with John James, and we'll have some follow-up discussions. I've had conversations with [ Joshin Benson ] and also with [ Mike Dugan. ] Generally all support data centers. They like the load growth and the opportunities it presents for our customers in terms of affordability benefits. But we are also focused on economic development and how we can continue to bring more growth to the state. So this has been a really constructive introduction, and we're going to continue those conversations as the race unfolds. Operator: Next question comes from the line of Anthony Crowdell with Mizuho. Anthony Crowdell: Follow-up to an earlier question on Vantage. Obviously, we read a lot in papers about just bringing your own generation interest with hyperscalers, especially in the RTO regions. Any interest in Vantage looking at opportunity in whether it's PJM or other parts of the country? Joi Harris: Anthony, yes, we are -- like I said, we've got to get this 1 first deal under our belt, but it is proving to be a very interesting vertical. We are seeing just the application certainly capable of serving other hyperscalers and/or co-locators in other jurisdictions. And so while we are hyper focused on closing out this first deal. We're scanning the environment to see if there's potential elsewhere and the counterparty that we're dealing with has interest beyond this first location that they're working on. So it could be a very interesting vertical like I've mentioned before. . Anthony Crowdell: Great. Just the last one. The 1 gigawatt for Google expected to be fully ramped by the end of '28, what infrastructure does DT need to put in or build to reach their full ramp by -- I'm just trying to think of what needs to be on the DTE side to get to the full ramp. Joi Harris: Yes. To get to their full ramp, we're going to build likely renewables, battery storage -- and remember, they've also incorporated a demand response in the contract. So those assets to serve them at least near term, will fold those into our 5-year update and of course, once we solidify our IRP and then we will begin to fold in the build-out of baseload generation even further. Operator: Your last question comes from the line of [ Rene Singh ] from Bank of America. Unknown Analyst: I just had a question on the mechanism you're talking about. Obviously, you're talking about being able to capture the excess margin. Just -- is this like -- is there a precedent for this in at the Michigan PSC maybe in a different customer cost? And I guess what triggers that mechanism? And also just -- is it just the rate case that is to be approved? Or is there any other regulatory approvals that it needs to go through? Joi Harris: I'll answer your last question first. Yes, there will be some additional regulatory approvals. The mechanism will be punted, if you will, to a separate filing and dispositioned accordingly. Is there a precedent? I'd say, yes, we did something very similar during the Cove years when we saw increased residential load, we were able to pass those savings on to customers to defray to keep us out of rate cases, but also to defray the cost of us doing true term. Unknown Analyst: Okay. That makes sense. And then just a secondary question more on -- as you kind of go down this 5 to 6 gigawatt pipeline, and you're thinking that you kind of need more capital-intensive baseload power. How do you see the economics and the contract structure is changing -- is it more demand response from the customers? Or is it a higher contract cost? Yes, just love to hear more about that. Joi Harris: It could be a demand response. But like I said, these are all bespoke agreements. It's going to be a function of the size and the interest that the hyperscaler has in particular assets -- and then obviously, where they choose to locate. So we are keeping all options open and certainly very interested in solidifying a deal before the end of the year. Operator: We have no further questions. Joi Harris: Thank you. Well, thank you, everyone. Thank you, everyone, for joining us today. I'll just close out by saying we are off to a great start in 2026 and we remain well positioned to achieve our goals for the year, and I'm very excited about our long-term plan and the opportunities ahead, and I look forward to seeing many of you on the road throughout the years. Have a great morning, stay healthy and stay safe. Thank you again. Operator: Ladies and gentlemen, that concludes today's call.
Operator: Good morning, and welcome to the Alerus Financial Corporation Earnings Conference Call. All participants are in a listen-only mode. Today's call will reference slides that can be found on Alerus Financial Corporation’s Investor Relations website. You can also view the presentation slides directly within the webcast platform. After today's presentation, there will be an opportunity to ask questions for analysts and institutional investors. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please note this event is being recorded. This call may contain forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's SEC filings. I would now like to turn the conference over to Alerus Financial Corporation’s President and CEO, Katie A. Lorenson. Please go ahead. Katie A. Lorenson: Thank you. Good morning, everyone. Appreciate you joining us today. With me today are Alerus Financial Corporation’s CFO, Alan A. Villalon; our Chief Operating Officer, Karin M. Taylor; our Chief Banking and Revenue Officer, Jim R. Collins; and Alerus Financial Corporation’s Chief Retirement Services Officer, Forrest Rexford Wilson. We delivered a strong first quarter to begin 2026, and more importantly one that demonstrates the progress we have made repositioning Alerus Financial Corporation for higher quality, more durable performance. For the quarter, we reported net income of $23 million, or $0.89 per diluted share. Return on average assets was 1.79% and return on average tangible common equity was approximately 22%. These results were driven by margin expansion, resilient fee income, disciplined expense management, and continued improvement in asset quality. We view this quarter as a clear validation that the strategic actions we have taken are translating into tangible financial outcomes. Our results reflect three structural strengths shaping the business. First, our balance sheet is fundamentally better positioned. Margin expansion in the quarter reflects disciplined funding management, the benefits of balance sheet actions taken last year, and a funding mix that continues to differentiate our franchise. Growth in highly valuable HSA balances, sourced through our benefits services platform, highlights the uniqueness of our funding model, with nearly a quarter of deposits sourced from our integrated and synergistic business lines. Second, diversification continues to matter. More than 40% of our revenues are fee-based, capital-light, and recurring. Our retirement, benefit services, and wealth advisory fee streams provide stability across interest rate and market cycles. Even as asset levels and market conditions fluctuate, underlying engagement, client activity, and long-term profitability across these businesses remain solid. Third, we continued our success in recruiting high-quality talent, adding team members in key markets in Wisconsin and Arizona, in addition to progressing towards our goal of doubling the number of wealth advisers across the franchise. Impressively, we have maintained discipline on expenses while continuing to make selective investments in technology and growth initiatives. Our focus remains on scalability, ensuring that as revenue grows, returns improve in a sustainable way. During the quarter, we remained focused on relationship-driven growth. Commercial and private banking continues to be an area of focus, with year-over-year C&I growth exceeding 10%, supported by healthy pipelines and strong client engagement. At the same time, we have remained intentional in reducing exposure to lower-return and higher-volatility segments of the balance sheet. The mix shift is improving risk-adjusted returns and strengthening the overall profile of the portfolio. On the funding side, deposit trends reflect the value of our diversified platform. Growth in core deposits, including commercial and private banking relationships in addition to our synergistic deposits, reinforces the strategic advantage of our integrated business model. As a result, the loan-to-deposit ratio improved to under 93%. Asset quality improved meaningfully during the quarter. Nonperforming assets declined, and criticized loan balances continued to trend lower. We made significant progress resolving previously identified credit issues. During the quarter, we charged down a nonaccrual and well-reserved C&I credit related to a longstanding client relationship negatively impacted by changes in government funding. This was a single event and not reflective of broader portfolio trends. We also made substantial progress in moving closer to resolution on our largest remaining nonaccrual relationship, which represents approximately 65% of total nonaccrual loans. As a result of portfolio improvement and credit resolution activity, we recorded a reserve release of $4.9 million during the quarter while maintaining an allowance for credit losses of 1.25% of total loans. Taken together, these actions underscore the strength of our credit discipline and our commitment to proactive risk management. Our capital position remains strong. Tangible book value per share increased to $18.15 and tangible common equity to tangible assets improved to nearly 9%. Capital ratios remained comfortably above regulatory requirements. During the quarter, we repurchased $6 million of common stock while continuing to return capital through dividends. Our approach to capital allocation remains disciplined and balanced, supporting growth while returning excess capital to shareholders. Most importantly, the company’s trajectory remains highly positive. The underlying fundamentals of the business—our talented team, balance sheet positioning, diversified revenue models, credit discipline, and operating focus—are stronger than they have been at any other time in our nearly 150 years as an institution. We remain focused on disciplined growth, continued execution, and delivering sustainable long-term value for our shareholders. I will now turn the call over to Alan to walk through the financial results in more detail. Alan A. Villalon: Thanks, Katie. Let us start on page 9 of our investor deck posted on the Investor Relations section of our website. In the first quarter, we delivered a strong start to 2026 and demonstrated the earnings power of the franchise following the balance sheet reposition completed late last year. We generated adjusted diluted EPS of $0.89, inclusive of $6 million of share repurchases during the quarter. Our results reflect continued core net interest margin improvement, disciplined expense management, and the benefit of our diversified business model with noninterest income representing just over 40% of total revenue. Profitability remained strong, with an adjusted return on average tangible common equity of 21.96% and adjusted return on average assets of 1.79%, improving 17 basis points from the prior quarter. Tangible book value per share increased 3.4% linked quarter to $18.15, and our tangible common equity ratio improved to 8.85%, underscoring continued capital generation. Turning to the balance sheet, we remain well positioned to support organic growth. Deposits increased 3.7% on a period-end basis, and our loan-to-deposit ratio improved to 92.8%. In addition, we continue to maintain robust liquidity of approximately $2.7 billion, providing flexibility to fund loan growth, manage through market volatility, and continue returning capital through dividends and share repurchases. Let us turn to page 16 to talk about our earning assets. At quarter end, loans were relatively stable versus the prior quarter. We continue to proactively reallocate capital to full relationships, primarily in C&I and private banking. Excluding this continued rationalization, end-of-period loans would have grown modestly. Overall, our loan mix remains balanced at approximately 50% fixed and 50% floating. On investments, we continue to benefit from the strategic portfolio reposition executed in the fourth quarter. During 4Q, we sold $360 million of available-for-sale securities, representing over two-thirds of total AFS securities at year-end 2025. This restructuring improved the overall average investment portfolio yield by 139 basis points from 4Q 2025 to 3.84% in the first quarter and has been a meaningful contributor to margin expansion. Currently, our balance sheet remains positioned slightly liability sensitive. On a rate cut, we will see slight margin improvement and vice versa on a hike. Turning to deposits on page 17, our funding profile continues to strengthen and remains a key contributor to margin expansion and balance sheet flexibility. On a period-end basis, total deposits increased 3.7% from the prior quarter, reflecting growth across both public funds and core client deposits. Importantly, we continue to see favorable mix improvement and operated during the quarter with only $8 million of brokered deposits. Noninterest-bearing deposits increased 6.2% linked quarter and now represent approximately 19.7% of total deposits. This shift meaningfully supports our cost of funds and improves the durability of our funding base. The quarter-over-quarter increase in deposits was driven by seasonal public fund inflows as well as steady growth from commercial and private banking clients. We are particularly pleased by the continued stability of our core deposit franchise, which reflects core operating and treasury management relationships rather than rate-sensitive behavior. As a result of deposit growth and selective loan originations, our loan-to-deposit ratio improved to 92.8%, providing additional on-balance sheet liquidity and positioning us well to continue to support organic loan growth going forward without relying on higher-cost wholesale funding. Overall, our deposit franchise remains a competitive advantage, supporting loan growth and providing flexibility as we navigate the evolving rate environment. Turning to page 18, net interest income remained stable at $44.9 million. Reported net interest margin expanded 8 basis points to 3.77%, a new post-IPO high. Purchase accounting accretion contributed approximately 25 basis points in the quarter. Excluding accretion, core margin was 3.52%, representing a 35 basis point improvement from the core margin in the fourth quarter. Drivers of the core margin improvement included a 21 basis point decline in the total cost of funds to 1.97% and a higher portfolio yield of 3.84% following the fourth quarter balance sheet repositioning. In addition, strong new business margins across both loans and deposits supported continued margin momentum. New loans were originated at average rates in the low- to mid-6% range, while new deposits were in the low- to mid-2% range. Turning to page 19, adjusted fee income, excluding the balance sheet repositioning and other one-time items, declined 3.2% from the prior quarter, primarily due to lower swap fee revenue. Importantly, fee income continues to represent over 40% of total revenue, demonstrating the value of our diversified model in a dynamic rate environment. Let us turn to page 20 for additional detail on fee income. In banking services fee income, adjusted banking fees declined modestly from the prior quarter, primarily driven by lower swap revenues. We do not include swap revenues in guidance due to inherent variability and client-driven timing. Importantly, our core transaction-based fees remain stable, supported by continued activity across our commercial and consumer client base. Mortgage fee income increased over 130% from the prior year, driven by increased originations, improved gain-on-sale margins, and a higher valuation of mortgage servicing rights. While originations remain seasonally lower, economics per loan improved, demonstrating our ability to generate solid fee contribution even in a muted volume environment. On page 21, highlights for retirement and benefit services: total revenue increased to $17.4 million, up 0.8% linked quarter. Assets under administration and management declined 5.9%. It is important to note this change had, and is expected to have, minimal impact on revenues, as the revenue was replaced with a new partnership onboarded during the quarter. Synergistic deposits within the retirement segment increased 2.3% linked quarter. HSA deposits grew 7.1% to approximately $218 million and continue to be a particularly attractive funding source, carrying an average cost of roughly 10 basis points. Turning to page 22 in wealth and wealth advisory services, revenue in the quarter was $7.2 million. On a linked-quarter basis, revenue declined a modest 2.7%, primarily driven by market-related pressure on asset values, as client retention remained strong. Assets under administration and management decreased 1.2% from the prior quarter, reflecting broader market performance during the period. From a fee mix standpoint, the decline was evenly split between asset-based and transaction-based revenue, consistent with lower market levels and typical first-quarter seasonality. Turning to page 23, our expense discipline continued to translate into positive operating leverage during the quarter. Reported noninterest expense declined 2.9% on a linked-quarter basis, reflecting lower incentive compensation as both mortgage activity and banking production were seasonally lower. Importantly, this decline was achieved while we continued to invest in the franchise. The increase in professional fees during the quarter was driven by the reclassification of certain vendor services previously recorded within business services and technology, rather than incremental new spend. Overall, expense trends remained well controlled, and we continue to demonstrate the scalability of our operating model as revenue growth outpaced expense growth in the first quarter. This discipline supports both near-term profitability and our ability to invest selectively in growth initiatives without compromising returns. Turning to page 24, asset quality improved meaningfully. While net charge-offs were 71 basis points, the increase was driven primarily by a single $6.4 million charge-off on one previously identified C&I relationship that had previously been placed on nonaccrual. This charged-down relationship still has remaining reserves of 78%. Importantly, nonperforming assets declined $15.4 million linked quarter and criticized loans were down 43% year-over-year. We recorded a $4.9 million reserve release, primarily driven by lower loan balances and an improved mix. Despite the continued positive trends, we maintain a reserve level above the industry at 1.25%. On page 25, capital and liquidity remained strong. Tangible common equity to tangible assets improved to 8.85%, and tangible book value per share increased to $18.15. We continued to return capital to shareholders through both our quarterly dividend and $6 million of share repurchases at an average price of $23.90, while maintaining substantial liquidity to support organic growth. Turning to page 26, our 2026 guidance has improved and reflects continued disciplined growth and positive operating leverage. We expect the following: loans to grow at a mid-single-digit rate for the full year despite more than $400 million of contractual maturities; deposits to grow in the low single digits—we have ample liquidity to support loan growth in excess of deposit growth; a net interest margin of approximately 3.55% to 3.65% for 2026; in the second quarter, we expect about 20 basis points of contractual purchase accounting accretion; also, for additional context, the exit rate of our net interest margin was approximately 3.65% for the month of March; adjusted noninterest income to grow in the mid single digits, driven by continued growth in our wealth and retirement businesses—consistent with prior guidance, swap fee income is not included, given variability; total net revenue growth in the mid single digits with noninterest expense growth in the low single digits, supporting positive operating leverage—we do expect second quarter noninterest expenses to be slightly higher due to a seasonal uptick in mortgage and banking production along with improved equity markets in our wealth division, which will push incentives higher; full-year return on assets is expected to exceed 1.25%. Finally, for each additional 25 basis point cut in rates, we would expect net interest margin to improve roughly 3 to 5 basis points. In summary, our first quarter performance demonstrates that the earnings power of the franchise is taking flight, and we believe Alerus Financial Corporation is well positioned for 2026 and beyond to reach new heights. We will now open the call for questions. Operator: To ask a question, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. Please wait for your name and company to be announced before proceeding with your question. The first question will be coming from the line of Brendan Jeffrey Nosal of Hardate Group. Your line is open. Brendan Jeffrey Nosal: Hey, good morning, everybody. Hope you are doing well. Maybe just starting off here on the retirement business. Can you unpack the decline in plan participants and AUA this quarter and help us understand why it is revenue neutral, as you pointed out in the release? Forrest Rexford Wilson: Yeah, Brendan, this is Forrest Wilson. Thanks for the question. I can say, since I got here, we have been putting effort into a much more aggressive approach to a growth strategy, really scrutinizing the mix of business that we take on more closely than ever and specifically looking at profitability, operational leverage, and complexity. In this past quarter, we were able to exit a large low-margin client that—[inaudible]—it was a legacy relationship that had significant assets that generated limited revenue. Both the size and—[inaudible]—added disproportionate operational complexity for our division. Coincidentally, additionally—[inaudible] Alan A. Villalon: Forrest, we are getting some feedback here. Can you start over? You are sounding a little muffled. Forrest Rexford Wilson: Yeah, sorry about that. Is that okay? Alan A. Villalon: Still muffled. That is okay, I can take it for us. Alan A. Villalon: Thank you. In regards to the drop in assets and participants for the quarter, it was driven by the exit of a large lower-margin legacy relationship and replaced with a new partnership that has much higher levels of profitability but lower levels of assets and participants. Forrest Rexford Wilson: Is that better? Sorry. Brendan Jeffrey Nosal: That is better. Alan A. Villalon: Alright. Sorry about that. Thanks, Katie. Katie A. Lorenson: No problem. Jim R. Collins: Yeah, as Katie mentioned, coincidentally we exited a large low-margin client that had significant assets, and we onboarded a very substantial new partnership that does have lower assets but is a much higher, more simplified business, which is in line with our strategy. So all in all, it was absolutely just an episodic event of this quarter, but it does reflect a deliberate focus on achieving higher-quality, more profitable business. It happened in the same quarter and is largely revenue neutral between the two. Brendan Jeffrey Nosal: Okay. That is helpful color there. I appreciate it. Maybe moving on to loan growth and demand. Can you spend a minute talking about what gives you confidence you will still hit the mid-single-digit growth guide for the year, just given the softer start to the year? Jim R. Collins: This is Jim Collins. We are staying the course. We started off a little slow on loan production, but we are moving out some investor CRE that does not fit our risk tolerance or is risk-rated credits that we are pushing out now. But our C&I pipelines are fairly robust in all markets except for ag. Our ag is relatively flat, which is fine with us. We still plan to hit single-digit growth for the year. We are still pushing out some credits in 2026 in the investor CRE buckets. Brendan Jeffrey Nosal: Okay. That is helpful. I am going to sneak one more in there. Just on the margin, Alan, I think you said the exit margin in the month of March was 3.65% versus the quarter’s reported 3.77%. Help us understand the evolution from the full quarter’s reported number to that exit margin. What were the puts and takes there? Alan A. Villalon: A lot of it had to do with deposit mix. We did see really good mix shift, especially on the deposit side, because we had good inflows there. We do expect lower purchase accounting accretion on a go-forward basis, hence why I wanted to give the exit rate. We are only anticipating 20 basis points of purchase accounting accretion in the second quarter, and it is probably going to step down from there because we continue to see accelerated payoffs that pull from the future into today. Those are the main puts and takes. Our cost of funds declined nicely too from the Fed cuts in the fourth quarter of last year. That is one of the big drivers along with the balance sheet repositioning. Brendan Jeffrey Nosal: Okay. Thanks, Alan. Appreciate you taking my questions. Alan A. Villalon: Thank you. Operator: Thank you. One moment for the next question. The next question is coming from the line of Jeffrey Allen Rulis of D.A. Davidson. Your line is open. Jeffrey Allen Rulis: Thanks. Good morning. Just circling back on the margin, Alan. To be clear, the 3.55% to 3.65%—are you excluding accretion? Alan A. Villalon: No, that is all reported numbers. That is for the full year. Jeffrey Allen Rulis: And you are including your expected accretion in that figure? Alan A. Villalon: Correct, but no accelerated payoffs for the remainder of the year. We do expect purchase accounting accretion to decrease as each quarter progresses. Jeffrey Allen Rulis: And I think you mentioned some adjustments in March, but that would imply flat to down. Is that margin compression going forward? What is the cautiousness there? Is it just easing of deposit benefits? Alan A. Villalon: Yes, partially easing of deposit benefits. We did see a couple of rate cuts late last year, but also in the second and third quarters we typically see outflows of deposits, especially from our public funds. That is going to put a little pressure on our deposit base because as we replace some of our lower-cost funding with higher-cost funding, that will put a little pressure on there as well. Jeffrey Allen Rulis: Okay. And, Alan, in the first quarter, were there any interest recoveries in the margin that impacted the 3.77%? Alan A. Villalon: No. Jeffrey Allen Rulis: Got it. One other question, to back into the loan growth side. Do you have gross production in the first quarter versus Q4? It sounds like you are pushing some credits out, but trying to get a sense for how that product looked on a core basis. Anything on production numbers quarter over quarter? Jim R. Collins: From a C&I standpoint, we had really solid C&I growth. I do not have the numbers in front of me per se, but we are driving mid-market C&I growth fairly well with full relationships. Some of the CRE that we put on the books two to three years ago—that is what we are moving off the books in the first and second quarters. You will continue to see the percentages of C&I grow quarter over quarter like you did last year. When you saw year-over-year 10% C&I growth, you will continue to see that through 2026 and 2027, as that has been our core focus the last three years. Jeffrey Allen Rulis: Would you say production in C&I was greater in the first quarter than in the fourth quarter? Jim R. Collins: No. I think it was a little bit lower than it was in the fourth quarter. Alan A. Villalon: I think the pipeline is building. The second and third quarters look very healthy. Operator: Thank you. One moment for the next question. The next question will be coming from the line of Nathan James Race of Piper Sandler. Your line is open. Nathan James Race: Hi, everyone. Good morning. Thanks for taking the question. Alan, going back to the margin discussion, if you strip out the accretion you mentioned in the quarter, that implies core loan yields are kind of 5.6% in 1Q. To get to your margin guide, I think that would imply a decent step down in loan yields, but it does not sound like there is anything unique in that core loan yield in terms of interest recoveries. I am trying to square the trajectory of loan yields, particularly within the context of what you mentioned in terms of new loan production coming on in the low- to mid-6%s. Alan A. Villalon: Thanks for that, Nate. Basically, we are just adding a little conservatism there. We still think our core margin will be in the mid-3%s. But as Jim could speak to as well, we are seeing competition pick up, especially on the deposit front. The benefit of those deposit cost-of-funds decreases is probably behind us right now unless we see another Fed cut in the future, because we are seeing more pressure on deposit costs in our footprint. Jim R. Collins: I would say in all markets, banks are focused on deposits just as we are. It is getting extremely competitive. It has been competitive the whole time. Everybody is sharpening their pencils, so that continues to tighten. Nathan James Race: Okay. That is really helpful. Thanks. Maybe a question for Katie on excess capital management. You are building capital at pretty strong clips, and even with some balance sheet growth returning, I think you are still going to be accruing capital quite nicely. How are you thinking about executing on buybacks as a more continuous capital management tool, particularly given valuation? Katie A. Lorenson: Yes, great question. Thank you. From a priority standpoint, consistent with previous quarters, we invest first and foremost in organic growth, but returning capital opportunistically—especially, as you mentioned, when valuations warrant it—continues to be a priority. We were active this quarter and intend to remain active in our buyback going forward. Nathan James Race: Really helpful. If I could sneak one more in on wealth management. Update on traction from the production-related hires you brought on over the last couple of quarters, and how you are thinking about that revenue line growing this year assuming some stability in equity market valuations? Jim R. Collins: We put on some hires at the end of last year, with a couple more coming at the end of this year. We are seeing some traction on new revenue from them, and we have additional hires we are looking to bring on in the back half of this year. We have had solid retention of clients as we put that platform on. If you recall last year, the first quarter was predominantly issues with the markets, but we should see generally good performance and additional revenue growth from new clients as we add new wealth advisers going forward. Nathan James Race: Okay. That is great color. I really appreciate it. Thanks, everyone. Operator: Thank you. If you would like to ask a question, please press 11 on your telephone. Our next question will be coming from the line of Damon Paul DelMonte of KBW. Your line is open. Damon Paul DelMonte: Hey, everybody. Hope you are all doing well today, and thanks for taking my questions. First, circling back on loan growth, it sounds like you still have some targeted CRE loans to work off the balance sheet. Thinking about the quarterly cadence going forward, should we expect flattish balances in the second quarter and then a nice jump in the third and fourth quarters to get to the full-year target? Jim R. Collins: I would look to that, yes. Damon Paul DelMonte: Great. Given the slower growth expected in the second quarter, should we model a very modest provision, especially given the sizable release of reserves this quarter? It seems like you feel you have rightsized your reserve given the credit profile. So should we expect a minimal provision that would just cover whatever charge-offs you have? Katie A. Lorenson: Damon, I think that is right. Going forward, our provision is going to be driven by loan growth and the macroeconomic factors. Damon Paul DelMonte: Okay. Do you feel like the mid-120s is a good ACL run rate over time, absent any macro deterioration? Katie A. Lorenson: When I look at our pooled reserve, we are north of 1%. I think 1.10% to 1.20% is a fair range, of course depending on what happens in the economy. Damon Paul DelMonte: Great. Lastly on expenses, Alan, did you say low single-digit growth for the full year off of last year? Alan A. Villalon: Yes, that is correct. Damon Paul DelMonte: Alright. Great. That is all that I had. Thank you. Operator: Thank you. We have a follow-up question from the line of Brendan Jeffrey Nosal of Hodei Group. Please go ahead. Brendan Jeffrey Nosal: Thanks. Looking at the mortgage banking segment, originations and sales were both seasonally down quite a bit, but revenue was actually up sequentially. I think you mentioned MSR fair value benefits. Can you size how much of a benefit the MSR was this quarter? Alan A. Villalon: Let me get that number for you. The other benefit was that in our pipelines in the fourth quarter, we had the rate cuts affecting our pipeline, so we actually had some mortgages in there that came in at higher rates, which allowed us to get bigger gain on sales. I would say that was the bigger driver for mortgage in the quarter, with less impact from the MSR. Brendan Jeffrey Nosal: Okay. And then one final one. You said in the prepared remarks that you continue to make progress on that one large nonaccrual loan still working through resolution. Can you offer a little more color on where you are on that credit, how you are reserved, and where ultimate loss content might end up? Karin M. Taylor: Sure, Brendan. We do continue to make progress and are currently negotiating a sale on that deal. We are getting more clarity around value as we go through that process, and so we actually decreased our reserve from about 17% in Q1 to about 8% in Q2. Brendan Jeffrey Nosal: Okay. Thank you for taking the follow-ups. I appreciate it. Alan A. Villalon: And, Brendan, to close the loop on the fair value mark, we are looking at a couple hundred thousand dollars for the MSR fair value mark. Brendan Jeffrey Nosal: Great. Thanks. Operator: Thank you. I will now be turning the call back over to Katie for closing remarks. This does conclude our Q&A session. Katie A. Lorenson: Thank you, everyone. I appreciate you all joining today. I want to take this opportunity to thank our team first and foremost. The results we discussed today reflect our culture, our talent, and our discipline across Alerus Financial Corporation. We have built a stronger organization in a relatively short period of time. I am very proud of how our teams continue to execute toward our long-term objectives. Over the past few years, the consistency of our fundamentals is evident. This quarter represents another pearl on the string—disciplined execution of our strategy that we have been articulating—and continued progress across earnings power, margin, funding, capital, and credit quality. Our overall credit quality has improved meaningfully. Trends in asset quality, criticized loans, and nonperforming assets continue to move in the right direction, and we remain confident that net charge-offs will normalize toward our long-term historical averages, which compare favorably to the industry. From a balance sheet and capital allocation standpoint, we are growing where we want to grow, with solid momentum in the verticals in which we have invested. We remain focused on consistent execution, and we feel great about the foundation we are continuing to build from, the momentum of the company, and we are grateful for all of the collaboration and hard work of our talented team members. Thank you again for your time today and for your continued interest in Alerus Financial Corporation. Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to International Paper's First Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relations. Ma'am, the floor is yours. Mandi Gilliland: Good morning, and good afternoon. Thank you for joining International Paper's First Quarter 2026 Earnings Call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer; and Lance Loeffler, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and reports filed with the U.S. Securities and Exchange Commission. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the first quarter earnings press release and today's presentation slides. So now let me turn it over to Andy Silvernail. Andrew Silvernail: Thanks, Mandi. Good morning, good afternoon, everyone. Let's begin on Slide 3. This quarter reinforced the importance of controlling the controllables in a dynamic operating environment. While inflationary pressures and weather-related disruptions created volatility, our focus remains squarely on enabling our strategy and improving execution. Today, we outlined the steps we're taking to manage external pressures strengthen execution across the business and address gaps where performance did not meet expectations, all in support of driving sustainable long-term value at International Paper. I want to start by being clear about what's working and what needs to improve. In North America, we delivered above-market growth for the third straight quarter with box shipments exceeding the industry by 3% as planned customer wins came through. We're seeing mill and box plant productivity improve as strategic investments and lighthouse practices take hold, and we're strengthening our footprint through investments that support long-term profitable growth. We are executing important improvements, but the gains have not been fast enough or consistent enough to offset the macro pressures. North American mill reliability has inflected positively. However, we need to accelerate the momentum. We have more work to do to reach best-in-class reliability and that's essential to delivering the cost and service performance we expect. We also need to improve execution. Unplanned costs have been higher than expected driven by both transformation activity and external factors. While some level of transition cost is inherent as we reshape the footprint and execute our transformation, we need to do a better job of identifying how to mitigate impacts and reliably overcome shortfalls. Let's turn to EMEA. We've made progress on cost-out actions with footprint and overhead efficiencies flowing through the P&L. The conflict in the Middle East has increased the overall challenge across both regions with more energy exposure in EMEA. We're doing a very good job of managing the exposures and pulling forward costs as quickly as possible. Importantly, we stayed focused on the broad improvement work while a small core team executes the separation. The EMEA market has been softer than expected with the macro environment impacting demand. We have modestly underperformed the market in terms of volume as we have held pricing. Our focus is maximizing total value by balancing the price-volume trade-offs in the soft market. We have, however, sharpened our commercial focus, and we want to make sure that we have the right price value trade-offs to maximize that profitability. In parallel, we are pushing hard on the transformation costs that are already underway, and we are focusing on execution and accelerating progress in a very challenging operating environment. We've made important progress in both North America and EMEA, aggressively reshaping our portfolio, footprint and operating structure. These changes have allowed us to radically change and improve investments in asset quality, reliability and cost structure. In turn, we've improved our competitive position, grown in North America, and positioned ourselves for further profit improvement in the back half of the year and beyond. I'm now turning to Slide 4. Let's take a look at the areas where our actions are translating into results. In North America, our team outpaced the market on volume growth for the third consecutive quarter. Even with the challenging backdrop, North American box volumes in the first quarter increased 2.5% year-over-year on a per day basis compared to a decline of 0.3% for the overall industry, which translates to nearly a 3% outperformance of the market. Looking ahead to the second quarter, we expect our North American volumes to be up about 3% with the industry again tracking flat. And on a full year basis, we continue to expect to outperform the industry by about 2%. Lastly, due to macro trends, our full year 2026 industry demand outlook is now approximately flat year-over-year compared to prior assumptions of flat to up 1%. I'm now moving to Slide 5. This page shows how our performance in North America is being supported by underlying improvements across the mill and box system. In the mill system, we're making steady operational progress. The winter storm impacted operational performance in late January and early February, but we saw strong improvements through March and momentum continuing into April. More broadly, capacity utilization has improved meaningfully over time, supported by elevated capital investment that's reversing a decade of underinvestment and improving reliability across the system. These gains are also reinforced by better operating discipline as lighthouse practices are rolled out across the mill system. On the box side, performance is improving as those same lighthouse practices take hold, particularly volume optimization and stronger daily management. As a result, box productivity has improved 7% since the third quarter of 2024 as we have continued to rationalize the footprint. Taken together, these actions strengthen our advantaged cost position by simplifying operations, moving volume to our most advantaged assets and putting capital to work where it earns the highest return. The key takeaway is that these are real measurable improvements from actions already underway. And on the next slide, we'll show how continued targeted investment is expected to build momentum and further strengthen our mill and box system over time. I'm now turning to Slide 6. Building on the productivity improvements and early operating results we just discussed, this slide highlights key strategic investments we're making across North America aligned with our strategic priorities of superior customer experience and high relative supply position. We've meaningfully accelerated investment across our network. These include targeted acquisitions, greenfield facilities, strategic conversions and more than 80 major investments across mill and box system, including corrugators, converting equipment and specialty capabilities with projects underway or planned primarily from late 2025 through 2026 spanning the U.S. and Mexico. Collectively, these investments will improve reliability, modernize our asset base and strengthen our competitive position to win with customers. We also recognize we are temporarily [ short paper ] in North America ahead of the Riverdale conversion. While that conversion creates a near-term headwind, there is a clear long-term tailwind, improving our system mix, expanding lightweight capacity and generating attractive returns as the project comes online. Overall, we are investing approximately 50% more per facility in 2025 through 2027 than the average of the prior 3 years. This level of investment reflects a deliberate shift toward rebuilding reliability, upgrading capabilities, and positioning the system for sustained performance and long-term value creation. Moving to Slide 7. We recently announced a bolt-on acquisition that fits squarely with our strategy, the NORPAC paper mill in Longview, Washington. This is a high-quality, top quartile asset that strengthens our West Coast footprint, which builds on our Springfield mill and box plant network across the region and lowers our overall systems cost. This location creates meaningful freight advantages in West Coast markets and its capabilities improve the efficiency and competitiveness of our integrated network. The mill includes 3 paper machines, 2 of which are producing recycled lightweight containerboard, enhancing our ability to meet growing customer demand for lightweight solutions and higher recycled content. Just as important, this acquisition gives us strategic flexibility, supporting growth in attractive end markets, while creating opportunities for further cost optimization across the system. Post integration, we expect this investment to deliver high teens or better returns over time, consistent with our disciplined capital allocation approach. Overall, this is exactly the kind of targeted, value-accretive investment we're looking for as we continue to optimize our footprint and build long-term value. Turning to Slide 8 and our EMEA business. As we saw in North America, the first step in our transformation is to simplify. Here's what it looks like in EMEA, starting with footprint optimization across the region. The data here reflects the actions that we have completed as well as many still in process. We also believe there are additional opportunities to optimize our footprint with additional actions being proposed or evaluated. When we shared this slide last quarter, we had approximately $160 million of run rate cost savings. Since then, we've continued to make progress, increasing run rate savings by roughly $40 million to more than $200 million in total. To date, 31 closures have been completed or are in process, which will result in net reductions of more than 2,800 positions. We'll continue to provide updates as we advance our actions in a disciplined and respectful way. I'm now turning to Slide 9. Before getting into the results and outlook, I want to step back and frame the macro environment that is influencing near-term results across both regions, particularly in the second quarter, starting with demand. In both North America and EMEA, overall market demand is softer than we expected coming into the year by about 1 point. This reflects a more cautious consumer, particularly as inflation pressures and uncertainty persist. We have not seen abrupt changes in order patterns in either region, but I'm cautious about demand. Visibility beyond the near term is limited. So we're staying focused on what we can control, strengthening the competitiveness of our network, onboarding commercial wins, investing in our assets and executing on cost-out. As we look at energy, in North America, energy cost exposure remains relatively contained as our mills generate more than 70% of their own energy and our principal energy input is natural gas, which is stable now and in the futures market. In Europe, our business has an effective hedging strategy in place to help mitigate the impact of higher energy prices. The exposure is significant, but our strategy should allow inflation pressure to be offset commercially, assuming recent market price increases stick. Now I'm turning to freight. Freight is having a significant near-term impact across both regions. In North America, sharply higher and volatile diesel prices are putting pressure on costs across the supply chain. Combined with an exceptionally tight freight market, this remains a strong headwind. As a reminder, rising freight costs are not passed through directly, they're recovered through pricing over time. And other impacts, in North America, higher diesel prices are also flowing through to OCC and chemicals, reflecting increased transportation costs and oil-linked inputs. In EMEA, OCC prices remain relatively stable given supply availability, but we do expect higher collection and distribution costs to begin showing up as we move into the second quarter. I'm on Slide 10. Now turning to our enterprise results for the first quarter. Overall performance reflects a challenging operating environment, normal seasonal volume declines and several deliberate actions we've taken to strengthen the business long term. On sales, year-over-year growth primarily reflects the additional month of DS Smith in Packaging Solutions EMEA. Sequentially, revenue step-down is expected due to normal seasonality across end markets. In Packaging Solutions North America, sales are also impacted by our decision to exit nonstrategic export business following the Savannah shutdown. Adjusted EBIT for the quarter was $188 million, benefiting from the absence of accelerated depreciation that we saw in prior periods. Adjusted EBITDA was $677 million and margins were 11.3%. We'll address the underlying margin drivers, including mix, cost timing and execution related impacts in more details as we move through the discussion. Free cash flow was $94 million in the quarter, which included a onetime $280 million tax refund. As a reminder, we also received $1.1 billion from the sale of the GCF business in the quarter, allowing us to pay down $660 million of debt, further strengthening the balance sheet. While earnings came in below our expectations, we must control what we can control. We are laser-focused on accelerating cost reductions in both regions, maximizing high-quality organic and inorganic investments and winning share intelligently. Now Lance will provide additional details on each business. Lance Loeffler: Thanks, Andy. Turning to Slide 11 and starting with our Packaging Solutions North America first quarter results compared to our fourth quarter results. Price and mix was favorable by $24 million, driven primarily by product mix as well as higher export pricing. Volume was $52 million unfavorable, reflecting the normal seasonal step down across all channels from a strong fourth quarter as well as lower export sales from repositioning containerboard into the domestic market. Operations and costs were $29 million unfavorable, primarily due to the winter storm impact of approximately $18 million as well as elevated costs due to reliability challenges. While we still experience some isolated reliability incidents each quarter, we are seeing progress. Improved operational performance across the mill system contributed $15 million of benefit in the quarter. Converting run rates continue to improve and the footprint rationalization is delivering cost-out each quarter. These improvements helped offset inflation and weather-related disruptions. Maintenance and outages were $17 million favorable, driven primarily by the timing of a planned outage. With reduced production in our mill system during the winter storm, our timing for certain planned outages shifted in order to support inventory build in advance of a heavy second quarter outage schedule. That deferral created approximately $20 million of timing benefit in the first quarter with the outage now expected to take place in the second quarter. Input costs were $43 million unfavorable, primarily due to a regional spike in natural gas prices and local utility costs related to the winter storm across our mill and box system, representing approximately $35 million. Overall, the January winter storm resulted in approximately $53 million of unfavorable EBITDA impact across operations, costs and inputs. In total, Packaging Solutions North America delivered $477 million of adjusted EBITDA in the first quarter. Moving to our second quarter outlook for Packaging Solutions North America on Slide 12. Price and mix are expected to improve, driven primarily by favorable product mix. That improvement is partially offset by the impact of the $20 per ton price decrease published in February. As a reminder, given normal price realization lags, the published price increases of $40 per ton in March and $30 per ton in April will benefit results beginning in the third quarter. Volume is expected to be favorable, reflecting a seasonal pickup and 1 additional shipping day sequentially. Operations and costs are expected to be slightly unfavorable sequentially, primarily driven by the downtime associated with the Riverdale paper machine conversion and costs related to the additional machine work that coincides with planned outages, offset by the nonrepeat of the first quarter weather impacts and the benefit from cost reduction initiatives related to distribution. Maintenance and outages are expected to be unfavorable sequentially as the second quarter represents roughly twice a normal outage schedule, which includes spending tied to the Riverdale conversion. Finally, input costs are expected to be favorable, primarily due to favorable seasonal weather, partially offset by higher OCC and freight costs driven by diesel prices. These items result in an adjusted EBITDA outlook for Packaging Solutions North America of approximately $380 million to $410 million for the second quarter. Let's turn to Slide 13 and walk through what's changed in our 2026 Packaging Solutions North America outlook. At a high level, the full year outlook reflects unfavorable impact of the macro environment, winter weather, and weaker-than-expected operating performance with published pricing actions providing a meaningful offset. We see North America industry demand roughly flat for the year, with our business growing approximately 2% above the market based on known customer wins. On the left-hand side of the slide, you can see our original 2026 adjusted EBITDA outlook of $2.5 billion to $2.6 billion has been updated to $2.35 billion to $2.5 billion. On the right-hand side is a bridge that explains what's driving this change. Pricing is the largest positive impact representing approximately $175 million, which reflects the cumulative price impact of February, March and April price index publications. That benefit is offset by several headwinds. The macro environment represents about a $200 million unfavorable impact primarily driven by higher diesel and chemical costs inflation in OCC and other raw materials as well as the impact of lower demand. Performance represents approximately $75 million of headwinds, primarily driven by operation reliability costs as well as operational and commercial challenges in our specialty business. And finally, winter weather in the first quarter created an impact of approximately $50 million, as I previously discussed. Taken together, these items explain the step down from our original outlook to where we are today. The next slide highlights why we continue to expect meaningful improvement in the second half as these pressures ease and execution benefits come through. Moving to Slide 14. With the full year adjusted EBITDA outlook of $2.35 billion to $2.5 billion, we now expect to deliver $900 million in the first half with a step-up of $650 million, significantly increasing our second half results. The right side of the slide walks through the primary drivers which are well understood and are being executed in detail by our Packaging Solutions North America team. The largest contributor is an uplift in pricing, volume, mix and seasonality, totaling about $300 million. reflecting published price flowing through, seasonal demand patterns and mix benefits as we move into the back half of the year. 80/20 initiatives are expected to drive roughly $150 million of cost-outs driven by footprint actions, productivity improvements and supply chain initiatives that are already underway. Planned maintenance outages contribute another $150 million as heavier outage activity in the first half rolls off in the second half. Conversion of the Riverdale paper machine in the mill's annual outage will be finished by the end of the second quarter. Those first half impacts of $100 million will not repeat in the second half. These benefits are partially offset by continued macro pressures, which we estimate as roughly a $50 million headwind in the second half, reflecting higher prices for diesel and chemicals. Putting it all together, these growth and timing impacts support an improvement of roughly $650 million. The key takeaway is that the second half improvement is driven by execution, pricing flow-through and normalization of known factors, and it underpins our confidence in Packaging Solutions North America earnings trajectory for the remainder of 2026. Turning to Packaging Solutions EMEA on Slide 15. The business delivered solid first quarter results amid a challenging and dynamic macro environment. Price and mix was $12 million favorable sequentially. Packaging margins expanded due to the EUR 40 paper price decline in January, which was mostly offset by lower paper margins tied to that same price decline. Volume was $3 million favorable sequentially. Although the post-holiday ramp-up in January was lower than expected, we were encouraged by improving trends as the quarter progressed. March volumes were up year-over-year on a same-day basis, indicating momentum heading into the second quarter. Operations and costs were $39 million unfavorable sequentially, primarily reflecting elevated costs as a result of onetime changes in segment allocations and incentive compensation. Higher European energy price volatility had a minimal impact on results in the quarter supported by our existing hedging program. All in, Packaging Solutions EMEA delivered $208 million of adjusted EBITDA in the first quarter. Moving to our second quarter outlook for Packaging Solutions EMEA on Slide 16. The key theme for the second quarter is peak margin compression as higher paper costs are realized ahead of pricing recovery. Energy-driven increases in paper prices are flowing through immediately while pricing actions and packaging lagged by roughly 3 to 6 months. This timing dynamic is pressuring margins in the near term before expanding as box pricing catches up. We expect pressure to moderate in the second half as prior paper price increases flow through our box contracts with margins progressively improving. Against that backdrop, price and mix are expected to be unfavorable for the second quarter. Volume is expected to be favorable sequentially primarily driven by recovery from the softness experienced in January and continuation of improving trends seen in March and April. We also expect incremental contributions from known customer wins secured in 2025 to build through the second quarter and into the second half. Operations and costs are expected to be unfavorable, primarily reflecting higher distribution costs flowing through the supply base as well as lower levels of energy subsidies. Finally, input costs are expected to be unfavorable driven by higher OCC and energy costs. These items result in an adjusted EBITDA outlook for Packaging Solutions EMEA of approximately $150 million to $170 million in the second quarter. Turning to Slide 17. I'd like to walk through what's changed since we originally set our 2026 outlook for Packaging Solutions EMEA and how that translates to the updated full year EBITDA target. Since we set our original 2026 outlook, the net impact of the change is approximately $100 million, lowering our adjusted EBITDA range from $1 billion to $1.1 billion to $900 million to $1 billion. The largest driver is on the commercial side, totaling approximately $100 million. This reflects a combination of lower expected sales volume and margin compression versus our original assumptions. In particular, as we moved into the year, volume was affected by deliberate trade-offs we made last year in our commercial approach. And we also saw pressure on contribution margins in parts of the portfolio. On costs, the net impact is flat. The continued pressure from higher oil prices impacting distribution costs is offset by favorable OCC costs and cost-out actions already underway across the business. Overall, outlook represents a cost volume squeeze in 2Q that eases in 3Q and 4Q with strong price momentum going into 2027, assuming price increases into the market stick. Turning to Slide 18. We outlined the key drivers behind the step change we expect in EMEA as we move from the first half into the second half of the year. The core of the second half improvement is margin recovery and commercial uplift. As discussed earlier, we saw energy and paper price increases in the first quarter. And given it takes 3 to 6 months for these increases to flow through to our box contracts, we expect packaging margins to expand in the second half of the year. On the volume side, the second half also benefits from 3 additional shipping days, normal seasonal improvement and the onboarding of new customer wins. Taken together, margin recovery and commercial volume uplift are expected to contribute approximately $110 million of incremental EBITDA in the second half. Beyond margin and volume, there are 2 additional contributors to the step up. First, we expect to realize $40 million of cost-out benefits in the second half primarily from footprint optimization actions that improve network efficiency, reduce fixed costs and support structural margin recovery. Second, we are assuming approximately $50 million of energy price improvement, reflecting anticipated cost normalization in the second half, assuming no further material escalation in the Middle East. Altogether, these factors result in second half adjusted EBITDA of $540 million to $620 million for EMEA. Combined with our first half outlook, this view supports our full year 2026 adjusted EBITDA target of $900 million to $1 billion for Packaging Solutions EMEA. With that, I'll turn the call back over to Andy. Andrew Silvernail: Thanks, Lance. I'm on Slide 19. Before we wrap up the EMEA discussion, I want to provide a brief update on our separation process. As we outlined on our January earnings call, we announced plans to create 2 separate publicly traded companies in North America and EMEA. Since then, a small core team has been working through the separation planning, and we've made meaningful progress over the past 3 months. Following the separation, International Paper expects to retain approximately a 20% ownership stake for roughly 12 to 18 months, and the EMEA packaging business is expected to be dual listed on both the LSE and NYSE. We also expect both companies to have investment-grade credit ratings. From a timing standpoint, we remain on track to complete the separation within the 12- to 15-month time frame we outlined in January, subject to customary approvals and conditions. This move is the right step to accelerate value creation for both businesses and will enable us to achieve best-in-class performance in each regional business. Let me close on Slide 20 by stepping back and reinforcing what matters most. At International Paper, our focus remains clear and consistent, driving long-term value creation. Our 80/20 approach continues to sharpen our attention on the most important value drivers, reducing complexity and improving execution across the company. Against the backdrop of a heightened macroeconomic uncertainty, including elevated input costs and ongoing pressures affecting consumer demand, we have updated our full year 2026 outlook for both businesses. In North America, we expect to deliver $2.35 billion to $2.5 billion of adjusted EBITDA. In EMEA, we are targeting $900 million to $1 billion of adjusted EBITDA. At the enterprise level, including corporate, that translates to $3.2 billion to $3.5 billion of adjusted EBITDA. Free cash flow of approximately $300 million to $500 million reinforces our commitment to disciplined capital allocation, a strong balance sheet and returning cash to shareholders. We are making real and meaningful progress in every part of our organization as we focus on controlling our own destiny while navigating the macro environment, we remain confident in our ability to drive long-term value creation at International Paper. With that, let's open it up for questions. Operator: [Operator Instructions] Our first question is going to come from the line of Mike Roxland with Truist Securities. Michael Roxland: Andy, I wanted to get a sense, with the revised guide, $3.2 billion, $3.5 billion this year. At the midpoint, the $250 million cut. Can you help us bridge how to get the 2027 EBITDA of $5 billion, particularly as -- is this cut, whatever incremental costs are set back to some degree? Andrew Silvernail: Yes, no problem. Thanks, Mike. So I think what I do is I focus on -- Lance took you through the bridge from the first half to the second half, which I think has been put through in a lot of detail there on kind of how that builds itself up, and the reliability of those elements and how they flow through the P&L. So if you look at the balance of that and then you add incremental price that will flow through in the year. So right now, in North America, you're talking about a net of $50 that's been published. So you'll get about half of that this year, you'll get half of that incrementally next year. And then in Europe, you have $100 -- EUR 100 price increase that's gone through. You'll get a piece of that this year and the bulk of that in the following year. And so you take those incremental items plus what was in our funnel relative to operating cost improvements and considered a very modest market growth kind of returning to overall normal market growth, about 1 point in the U.S. and 1 point to 2 points in Europe, plus share wins that we believe that we will have in the year. That all adds up right into the range that we're talking about. Michael Roxland: Got it. Just a quick follow-up. I mean, I don't believe the original guidance embedded much in the way of price. So really, the incremental here is you're going to be able to hit your guide because of the $50 per ton net in North America plus EUR 100 per metric ton as well. That's really what's going to help you get to those -- to hit your 2027 target. Andrew Silvernail: Yes. To be clear, Mike, this does not include any other pricing that may come through. So nothing that's been talked about in the market, this is -- the only thing that's included in there is what's been published so far. Michael Roxland: Got it. And then just quickly strategic customer wins, obviously, it's helping you drive your volume growth, pretty strong performance there. To the extent you can comment on what end markets do you see these gains? And can you also remind us how IP was able to secure these wins? I'm assuming that -- I don't think it was done on price given the company's refocused commercial mindset. Andrew Silvernail: Yes, a few things there, right? So we've seen pretty consistent wins here since the late part of 2024 and through 2025. And so it's been really a broad mix across end markets. So it's really across every product category that we've been in. We've won nationally and we've won locally in the U.S. And we've done a very nice job of what we call our central accounts in Europe. So think of pan-European accounts there. We haven't done as well locally in Europe as we have in the U.S. We need to get better from that regard. So it's broad-based, and it's national and it's local accounts that we've seen. To your point, we have not been aggressive on pricing. We have tried to really price to the market. I mean, as you know, with any large tender, right, price is a factor in there, but that comes after service and it comes after quality. That reliability of supply is the single most important factor for -- certainly for every customer, but as you're onboarding a large customer and we've done several here over the last year or so, that takes considerable time because they are exceptionally concerned about that cutover and not losing the ability to get their packaging supplies. So we've seen that very consistently. And we have, on purpose, very purposefully kept our discipline relative to market pricing. And I think that's very important. And we're starting to see those things play out in the marketplace as we're seeing inflation make its way through. So I feel really good about where we are commercially. As you know, we've radically restructured our sales force and our incentive system in the U.S. Europe is a little bit different model. We have -- there is a pan-European model and a local model that we're getting more synthesis from more synergy from, frankly, as those businesses come together, meaning the legacy IP and the legacy DS Smith EMEA, but it really is winning customer by customer. Operator: Your next question comes from the line of Mark Weintraub with Seaport Research Partners. Mark Weintraub: So for a while there, you were way behind [indiscernible] on market growth, you're losing a lot of share and you turned that around, and you saw it coming, and now we're seeing it. What we're not seeing is the reliability part of the equation playing out? Are you seeing things now that can give us confidence that, that's going to start showing up? And what are those things? Andrew Silvernail: Yes. I can, Mark. And if you go back to the slide -- sorry, I don't have the slide number right in front of me that shows the capacity utilization and the productivity improvements in the mill and the box plant. If you go back starting in the fall of 2024, when we really started to execute the overall changes, and that was a combination of starting to accelerate capital investment and the lighthouse approach. And the lighthouse approach is really a focused approach around how do you run a good system daily. How do you do that daily. If you've seen that, you see a 7% to 8% overall improvement in those systems, both the systems in North America, which I think is very, very important. Where we're missing, Mark, is in the transactional or transformation costs, think of things like network cost in terms of distribution and shipping, the cost of having assets on our books longer than expected and having to maintain them. We're eating some of that. We're also -- unfortunately, we're eating some contract cost of -- if you look back at the [indiscernible] contract, which ends this month. So in April, that ends, we'll eat about $20 million more than expected in that contract because of performance. So that's going to come out and those assets no longer need to perform. And so there are assets that, frankly, we're underinvested in and we're going to eat that. That's going to come out of the system. Our specialty business, think of it as bulk products and the like. That has missed our expectations, Mark. The market has been weaker. We've had some reliability issues. We've accelerated the investment in there. So the key to it -- and look, I'm in the same boat you are. It's -- you've got to see it to believe it. The key is that the core assets, the core large, CL assets that we are investing in, we are seeing the measurable changes in productivity that are driven by reliability. As you know, reliability is the underlying first step in productivity. Now we've got to drive down these ancillary costs that have been out there, and we have very good line of sight to that. So as an example, if you think of kind of cube utilization and transportation, we have driven that. We've gone very aggressively after that. We're still early in there, and we've driven huge improvements in the first stages of that. So that's an example of that across the system. So major improvements in the major assets, and now we've got to take care of the ancillary issues that are very solvable but they, frankly, are a pain in the butt and they're worse than our expectations. Mark Weintraub: Got you. So I do want to ask real quick -- I'm going to ask on NORPAC, just 1 real quick follow-up on this is, so it sounds like there's sort of a lot of quasi onetime stuff here that's like the transformation, the contract cost. Is there a ballpark number as to how much that might be impacting this year where, again, you can have a pretty high degree of confidence that it should show up next year because it's quasi onetime? Andrew Silvernail: Yes. It's at least $100 million. Lance Loeffler: That's right. Andrew Silvernail: Yes. Lance Loeffler: Correct. Mark Weintraub: Okay. Super. And then if I could quickly on NORPAC, $360 million. I mean, technically 3 big paper machines, so a lot of production capacity. So hard from the outside to square away all the numbers. And anything additionally you can tell us about EBITDA and what it can bring to you? Andrew Silvernail: Yes. So first of all, Mark, I am very excited about this. When I step back and if you think about our overall strategy around our mill network, right, which is to drive down the overall cost point, right, we want to drive to an advantaged cost position. That's one of our key pillars of our strategy. And second, as we're driving reliability throughout the system and then finally, driving overall returns. This is a great example of the kind of investments and changes we need to make. So if you kind of take a big step back for a second. We closed 3 North American mills last year, right, Savannah and Red River being the 2 big ones. In there. Both of those assets, we came to a conclusion after a lot of work that you were never going to earn an exciting return on investment or incremental investment in those assets. And so as we close those, we have fundamentally did 2 really big things. Number one, we moved a bunch of people and a bunch of investment to [ Mansfield. ] And if you recall, Mansfield was a huge bug [indiscernible] a year ago. and we have effectively eliminated that issue. I was at Mansfield very recently with the team they have just done a masterful job. And while certainly, it's not where we want it to be yet, if you compare that business that asset rather to where we were a year ago, it's pretty remarkable with what they've done with getting better capabilities overall, some new team members and a bunch of new investments. So that's kind of one big step going from an underperforming asset that's never going to return an attractive return to now to a really high-performing asset with a great team that can drive excellent returns. Second, you got NORPAC right? So NORPAC as you mentioned, it's on the West Coast. We're significantly short paper on the West Coast. We're shipping paper to the West Coast uneconomically. It allows us to go more towards the lightweight market that you know is critically important in that market. And to your point, it's a big asset with 3 paper machines, 2 in our core market. 1 that's not, it can be in the future if we choose to be. And so as I look at that trade of assets, it's exactly the kind of stuff we need to do. If you think of it kind of from a bell curve, you go from the left-hand side of the bell curve that's underperforming all the way to the right-hand side to high-performing with Mansfield and with NORPAC. In terms of returns, our belief on a full year basis as we get into '27, it's going to be high teens or better in terms of return on invested capital. So you can do your math out of that there. It's got solid EBITDA in its current system. But we've got some work to do, not on the asset itself. It's really a great asset, but really bringing it into our network. Operator: Your next question is going to come from the line of Anthony Pettinari with Citi. Unknown Analyst: This is actually [ Bryan Burgmeier ] on for Anthony. Just wondering if you could maybe share some high-level thoughts on sort of the supply-demand outlook in Europe. I think we've seen some closure announcements, maybe higher energy prices kind of pressure -- high-cost players. I'm not sure how you're thinking about just a broader supply demand outlook for the region. Andrew Silvernail: Yes. So it's -- I would say demand is modestly down compared to expectations. It's still growing in Europe modestly. We expect it to be about 1 point less than we came into the year when it's all said and done. I think that's a fair assessment, really driven from the consumer side is the consumers being overall more hesitant, and we all know the reasons behind that relative to the most recent impacts of the conflict in Iran. And so we expect that to continue for a little bit of time as the uncertainty is out there economically, kind of broad-based uncertainty that was first driven by trade and tariffs and now the conflict in the Middle East. So I think it will be a little bit weaker than expected but still positive. On the energy side, as we mentioned -- as Lance mentioned in his comments, we have a very effective hedging strategy that's in place that assuming that price sticks will buy us time to pass through into the marketplace, the EUR 100 that's gone through. That EUR 100 is worth about [ $300 million ] on an annualized basis in Europe, and it will obviously overcome the issues that we're facing in the short term. So if you look at our P&L, we're getting that kind of profit accordion squeeze in the short term, specifically in the second quarter until pricing starts to make its way through the system. Very specifically relative to kind of the marketplace and high-cost producers. I think one of the things that's very interesting and important as we look at what's happening in EMEA relative to the energy shock that the world is experiencing right now is when you look at the bottom quartile assets in the marketplace, there are 2 things that this -- makes their life very, very difficult. The first one is they tend to be older assets generally that have just more reliability problems and tend to struggle in terms of their overall cost position. They also are fossil fuel dependent much more so than the newer assets. And so when you combine those 2 things together, this situation right now is very, very painful. As best as we can tell, and it's our own analytics and the analytics that we use from the outside -- from outside experts. That fourth quartile is very likely under cash cost right now, right? So you're actually -- you're seeing that -- you've seen small pieces of action relative to that, whether it's temporary shutdowns, furloughs, you're seeing a few closures that have happened modestly. And I also think we've got to be realistic. Historically, people have looked at some kind of panacea, like all of a sudden, the fourth quartile will wake up and close itself. It's not going to happen. They're going to hold on as long as they possibly can, hoping that the price comes through the market. So we shouldn't expect this to be like a mass pivot point in the marketplace. That's really never happened. That being said, capacity is slowly coming out of the system as you see folks being under cash cost. So this is a very, very difficult time if you are a fourth quartile producer. Unknown Analyst: Got it. Really appreciate all that detail. Just one quick follow-up for me, and then I can turn it over. Just curious if there was any change in demand kind of throughout the quarter into April, just following the kind of cost spike that took place in March. Yes, I can go ahead and turn it over. Andrew Silvernail: Yes. So not really. It's actually -- we have not seen a major change. I think that from a pattern standpoint, as we all talked about, January in the U.S. was really strong, right? It popped up as I expressed very openly in our quarterly calls and in the one-on-ones I've had since then, we really believe that a big piece of that was the drawdown of inventory that happened in the fourth quarter, and that was a snapback and that proved to be accurate. And so folks who may have gotten over their skis about that, I think we're seeing kind of the normalization of that. And now we're kind of seeing the market in the U.S. is basically flat. The marketplace, it was down 0.3% overall in the first quarter that you saw. And I think what's important here is you got to look at it on a daily basis, right? So if you look at the market data, the industry data that comes out, the really important thing is looking at it on a daily basis. And that net down 0.3%. We think the second quarter is basically flat. The balance of the year is effectively flat for the industry in North America, and we'll outpace that. As we get into the second half, we'll start to comp -- we'll have a lot more difficult comps, so that will come down. Overall, we believe will beat the market by about 2 points. In Europe, I think you're going to see basically 0.5 point to 1 point of market growth. That's what it's feeling like right now. We were a little bit behind the market in the first quarter. And as we have been holding on price to value, we'll be targeted where we need to be to make sure we don't lose important business on price where we should get there. That being said, we are going to be very discerning on pricing to value, right? It's important that we keep that discipline for ourselves as we look at the marketplace. So Lance, anything you'd add there? All right. Operator: Your next question is going to come from the line of George Staphos with Bank of America. George Staphos: A lot of my questions have already been answered, but I want to ask a couple of things. First, a top-down, so if we sit back and look at 80/20, what have you achieved cumulatively across the enterprise in terms of cost out and commercial? And what's left to go through 2027. So through first quarter of '26, what have you gotten? And what is left to go that will help you build towards the ultimate '27 goal, I guess, if -- then I had a question, a 2-parter on Slides 13 and 14. Andrew Silvernail: Yes. George, I'm going to answer, and this is not going to be exact. I can put the pieces together for you and we can certainly get back to you on it, but I'll take you through in rough math, and Lance keep me honest. Lance Loeffler: I will. Andrew Silvernail: So in terms of total cost out, if you recall, in the last quarter, we talked about $700 million total that has come out of the system when it's all said -- thus far. When it's all said and done, we will take out more than $1 billion of cost in the system. So if you see -- if you look at in the U.S. I still think we've got $200 million or $300 million of cost that is latent within the system at normal operating rates. And so if I just kind of look at that, that's -- and where is that? That's sitting principally in those ancillary costs that we talked about, that $100 million that we're eating this year, and another couple of hundred million dollars of efficiency as you drive productivity through the mill system. That's how I look at the U.S., principally. You've also got some costs that haven't come out yet. As you know, we've outsourced IT. That process unfolds throughout this year, mostly in the first half. So you'll see some incremental costs come from there. Frankly, while you save a little bit of money on there, that's really a capability play more than anything else. In Europe, if you flip over to Europe, and I think this is really important. If you look at that -- go to that one slide in the deck that talks about what we have done so far. We have announced 31 facilities closures, an impact to 2,800 people that's unfortunate for them, but really critical to be done to rightsize the competitiveness of the company. That has about $200 million of annualized impact, and I would argue that there's probably another $100 million after that to go after. So as I break it down from -- just from a cost-out perspective, that's how I get to over $1 billion. Now you have some offsets to that, right? You've got we -- the shutdown of Savannah was basically a 1 for 1, call it, about $300 million of cost savings and EBITDA loss on the marginal piece. But on a return on capital basis, it's a home run for us. So that's how I break that out, George. Hopefully, that's effective. George Staphos: Yes. That's helpful. We appreciate it, Andy. The other question I had is a 2-parter on Slides 13 and 14. So in particular, I want to spend time on 14, the year is the year you're making progress. You're pretty candid about what's been not going the way you'd like. This step up -- to the second half of '26 in North America, you lay it out, but it's quite large. Of the items that you have in that $650 million, let's hold the macro to the side because you're not going to control that. Which of those line items do you feel least comfortable about? Said differently, why do you feel comfortable that you can see a 75% step-up in first half to second half EBITDA. The related question, when I do the math on your pricing on Slide 13, the $175 million, I get -- even if I adjust for half a year, I guess something less than $50 per ton across the system. Is that mix? Is that timing? What else is going on there, if you could help us bridge that. Andrew Silvernail: Yes, no problem. Thanks, George. So to answer your first question, on the step-up here, I think from a price, volume, mix seasonality feel very comfortable there unless something lackey happens in the world, right? So if you look at the world as it is today, I feel very reliable that, that part takes place on a half-over-half basis. The other thing -- the other part, obviously, that you feel really good about is the $150 million of timing of planned maintenance, right? We control that very, very well. So you've got $450 million of the $650 million that you feel really good about. The $100 million of the Riverdale conversion, that feels really good because that's cost that you're spending in the first half that you're not spending in the second half. The risk of that, right, is the ramp-up, right? That's -- any risk to that is a ramp-up. And we've tried to be conservative in the planning that's built into that $100 million. So I really think that the 2 big pieces that you say, hey, there's risk there, the $150 million of basically the stuff we're taking out of the system and the [ $50 million ] of the macro -- incremental macro, principally is tied to diesel early. I mean, when it's all said and done. So I think those are the 2 big things. So let's talk -- the [ $50 million, ] I can't control, right? I don't have really any control over that. So we'll see where that plays out. So it's the $150 million that really is -- if I were in your shoes, that's where I'm drilling into. And frankly, from an operating basis, that's where I'm drilling in -- that's what we're spending our time on. Yes. And so that's a bunch of things in there. But really, the few big things are executing the open items on footprint rationalization, right? So you've got to nail those. You've got the continuing to drive that capacity utilization in the mill system where if you look at post the ice storm. So if you look at post the ice storm, our mill system in North America is running the best it's run in at least a half a decade and maybe more than that. And so we're seeing the gains there. And then supply chain and procurement. Procurement is really supplier by supplier. And these are the things where we have negotiated contracts and you're seeing how those contracts flow through. And then on supply chain, in particular, it's really around cube utilization. So if you think of as we are moving, as we are shutting down capacity, both on the box system and in the mill system, right? You're having to reroute a lot of that. That has been more inefficient than I would like. And so there's an awful lot of focus there on driving cube utilization and planning of freight. And just to add a little bit of color. I mean we're seeing -- when we talk about those cost-out initiatives, that's about, I guess, in the first quarter, it represented about $20 million of benefit. Lance Loeffler: Correct. Andrew Silvernail: So we're watching it. We're counting it, and we're seeing it, George. To your other question on price on Slide 13, I mean, I think it's simply that. I think it's simply just the timing and the flow through of how all the volatility and the pricing publications have come through over the last 3 months. Yes. So that's nothing beyond that. But that's really, George, that's counted contract by contract, right, kind of when that price comes through and you have -- as you know, there are 2 things that happen. You have noncontract business which you can move -- you're moving on price immediately negative and positive, unfortunately, right? You're trying to hold on when it's negative, like that $20 pop down, you're trying to hold on. Thank goodness. We got -- that was rectified. But -- and then as the contracts come through, that really is a timing thing built in the mechanics of the contract, right? And so that $175 million that's in there, that is netting out the down [ $20 million ] and the plus -- now plus [ $70 million, ] so you can get the net [ $50 million. ] How that timing flows through contract by contract. Operator: We have time for 1 more question, and that question is going to come from the line of Phil Ng with Jefferies. Philip Ng: Despite the uncertain macro backdrop, encouraging here, I mean, your box shipments in North America pretty strong and you're expecting a pretty stable environment at large for the broader industry. If I heard you correctly earlier, you mentioned you were short on paper. So just curious, what are you seeing in the marketplace from a supply-demand standpoint. One of your bigger competitors talked about really tight market conditions, it led a price increase in June. So kind of help us tease that out just because we've been all anticipating this capacity closure, hasn't felt tight yet, but what do you think now as we head into a busier time. . Andrew Silvernail: Yes. I think what we should do is just focus on the facts -- what the mechanics are of the market, actually, what's really happening. So we are modestly short on paper ourselves, right? So we're in the market buying some paper. What you just said, we've heard the same things, but I can't really comment on that. The other thing that I think is noticeable is what's happening in the export markets because if you think about the export markets tend to be more volatile and they tend to be a leading indicator of what's happening in the marketplace. And the export market, you can see the facts, right? It's been really tight the way to say it. So we never comment on future pricing, things that haven't happened. But our view is that the market -- the paper market in the U.S. is very tight. Philip Ng: Okay. And you could confirm you haven't announced an increase yet for June in North America? Andrew Silvernail: We have not announced increase yet, but we don't really talk about future stuff, and we don't -- we avoid that. Philip Ng: Okay. Fair enough. And then the [indiscernible] here, Andy, and Lance, you guys have made a lot of tough decisions, and I respect what you guys are doing, but it's anything but easy from a macro standpoint, right? You've had a lot of [indiscernible] last year with tariffs and the Middle East war. And with that backdrop, you've had to revise your outlook a few times, right? So I guess in terms of your approach going forward, just from a philosophy standpoint, how are you taking things? Are you giving yourself a little more cushion for some of the choppiness that most of us didn't expect? And then you called out reliability issues. I understand long term, you guys are making the investments to be more reliable and put up good results. But how do you hold your people accountable in the very short term to execute better? . Andrew Silvernail: Well, let's talk about holding ourselves accountable first, right? So holding me accountable first. And I can't ask anybody else to do that unless I'm doing that to myself. And I think the really important thing here, right, is yes, Phil. If you'd asked me 2 years ago, I'm coming up on my 2-year anniversary, if on my bingo card was a global trade war, and bombing Iran, I would not have had those on the bingo card, right? And so -- but that's life. I get paid to deal with these realities. And frankly, I think in terms of the magnitude of what our teams have done in Europe and the U.S. It's pretty awesome. And I give them a lot of credit in a really tough environment, right? Because with all that hard work that's happening with 20% of the paper capacity coming out -- our paper capacity coming out in North America, 10% to 15% of our box capacity coming out in North -- box footprint coming out of North America, redesigning the entire corporate structure changing IT infrastructure, changing the commercial aspects, the massive restructuring in Europe, right? If you just kind of look at that, it's a huge amount of work that has happened that has been eaten up by the macro pressures. And the key thing here is to not lose focus on the strategy, right? We have 3 strategic pillars in this business. The first 1 is to drive an advantaged cost position, a superior customer experience is number two, and our relative market position is number three. And the great work that we're doing of the tough decisions on assets and unfortunately, how it impacts people's lives, we've had to do that for a singular reason, and that is to reinvest back in the business. And if you look at the reinvestments that we're doing back into the strategic assets of the business, I'll take the punches in the face that we've taken. What I'm not going to do is I am not going to back down on the strategy. And the reason I'm not going to back down the strategy is that the core of this business is a good structural business that can earn attractive returns on capital. It's d*** messy as we've gone through this, but we're doing the absolute right things. And so I'm going to stick with this, and we're going to drive through it. And I believe that the economics are there, and that's what we're working to. So that's the accountability that fundamentally sits with me and it sits throughout the entire organization. And the bottom line is this, is if you don't want to do it, if you don't want to be part of it, this isn't a place for you, right? This is a place that we are here to win. We are here to win to drive returns on these assets, to have a great place to work, which starts with being a safe place to work and invest in this business throughout. And then -- but the bottom line is we haven't given ourselves enough breathing room on this with the macro. I mean, look, I couldn't have called the macro -- and I'll be the first one to say that our performance on a quarterly basis, I'm disappointed in the fact that we have missed numbers. That is not something I am used to doing, and it's not something I like doing. And so yes, we're trying to give ourselves more cushion. We're trying to give ourselves more cushion in there with what we have. But I'll admit, right, it is a tough macro environment that we're out against, but the plan that we have that we put in place, I believe in 100%, and I am 100% committed to it. Thank you. Well, look, to close, I don't think I can say much more than I just said. So I want to thank everybody for your time and attention to IP. I want to thank our employees who are working their tails off to build a great business, and that's exactly what we're going to do. Thank you. Operator: Once again, we'd like to thank you for participating in International Paper's First Quarter 2026 Earnings Call. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the MAA First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, April 30, 2026. [Operator Instructions]. I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets at MAA for opening comments. Andrew Schaeffer: Thank you, Regina, and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team participating on the call this morning are Brad Hill, Tim Argo, Clay holder and Rob DelPriore. Before we begin with prepared comments this morning, I want to point out that as part of this discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the forward-looking statements section in yesterday's earnings release and our '34 Act filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non-GAAP financial measures and presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data. Our earnings release and supplement are currently available on the -- for Investors page of our website at www.maac.com. A copy of our prepared comments and an audio recording of this call will also be available on our website later today. After some brief prepared comments, the management team will be available to answer questions. [Operator Instructions]. I will now turn the call over to Brad. Brad Hill: Well, thanks, Andrew, and good morning, everyone. As highlighted in our release, we delivered first quarter results that exceeded our expectations, driven by the resilient demand in our footprint strong resident retention as well as our focus on expense management and some timing-related items. New lease pricing continued to reflect supply pressure in several markets, but despite this pressure, new lease pricing improved sequentially and supported by our continued strong renewal performance, blended lease-over-lease pricing improved 140 basis points from the fourth quarter. With the bulk of the leasing season ahead, we like our positioning and momentum going into summer with stable occupancy and better 60-day exposure than a year ago. Our high-growth markets are producing solid demand to absorb the new supply in a steady manner that we believe will enable continued stable occupancy, favorable renewal pricing, strong collections and overall earnings performance in line with the outlook we provided in our prior guidance. Our leasing traffic remains strong and positive migration trends, strong wage growth and stable employment conditions across our diversified portfolio and markets combined to drive solid demand. as evidenced by first quarter absorption exceeding new supply deliveries in our footprint. Operationally, our on-site teams actively supported by our asset management team continue to execute at a high level, controlling expenses while delivering an excellent resident experience as reflected in our sector-leading Google scores. As a result of our strong customer service and the ongoing single-family affordability challenges, renewals remain consistent, helping to deliver year-over-year blended lease improvement for 5 consecutive quarters. We continue to allocate capital in a balanced and disciplined manner, taking advantage of the current pricing dislocation of our existing portfolio in the public market to buy back shares as well as executing on initiatives to deliver long-term earnings growth while protecting our strong balance sheet. With acquisition cap rates around 4.5% for high-quality properties in our footprint, our excel growth efforts are predominantly focused on new development through our existing pipeline of owned and controlled land sites, representing over 4,300 units of future growth. We started construction on our first project for the year in April, a 286 unit community in the Kansas City market. Based on our current approval and construction time lines, we now expect to start construction on 4 projects this year, reducing our expected development spend for the year to $350 million. While this is down from the $400 million in our original forecast, it's up from the $315 million we invested in the 2 projects we started in 2025. The projects we expect to start this year will deliver in 2028 and 2029 during what we believe will be a more favorable supply-demand environment. As we look forward, we remain encouraged by underlying demand across our markets declining new deliveries and the strength of our resident base with continued strong collections and affordable rents at a 20% rent to income ratio. Our high-growth markets continue to offer attractive long-term appeal for employers, households and investors. With positive absorption, stable demand and market level occupancy is improving, we are optimistic we will continue to build momentum through the spring and summer, supporting improved new lease pricing as the year progresses. In addition to capturing increased organic growth from our existing asset base through the year, we expect a growing NOI contribution from a number of areas, including new initiatives to drive efficiencies and higher operating margin from our existing portfolio, our growing redevelopment opportunities as well as a growing development pipeline that continues to lease up. Today, we believe our more diversified and higher quality portfolio, our stronger operating platform and our stronger balance sheet position us to capture improving performance and to deliver meaningful shareholder value over the approaching recovery cycle. We're excited about the outlook over the next few years to all our associates across our properties and corporate offices, thank you for your continued dedication and focus. And with that, I'll turn the call over to Tim. Tim Argo: Thank you, Brad, and good morning, everyone. For the first quarter, same-store NOI beat our expectations with in-line same-store revenue, combining with lower same-store expenses to drive the favorability. From a pricing standpoint, new lease-over-lease growth improved 110 basis points sequentially from the fourth quarter, but continues to be under pressure due to elevated, but moderating new supply combined with more macro level economic uncertainty. On the renewal side, similar to the last several quarters, retention rates and lease rates remain strong. Renewal lease-over-lease growth improved 70 basis points sequentially from the fourth quarter driving blended lease-over-lease growth up 140 basis points from the fourth quarter. Average physical occupancy remained strong at 95.5% for the quarter. Additionally, we had another quarter of strong collections with net delinquency representing to 0.3% of bill grants in line with the last several quarters. From a market standpoint, many of the markets where we saw a strong performance in the fourth quarter and most of last year continued to show strength in the first quarter. We have noted on several occasions the performance of our mid-tier markets particularly in Virginia and South Carolina, Richmond, Greenville, the D.C. area markets and Charleston all demonstrated strong pricing power and strong occupancy in the quarter. Encouragingly, our 3 largest markets in terms of same-store NOI contribution, Atlanta, Dallas and Orlando, all outperformed the portfolio in the first quarter and blended lease underlease pricing. Austin, though improving, is still a challenge, particularly on the new lease pricing side. Charlotte, and Savannah are 2 other markets facing challenges in the wake of heavy supply pressure. In our lease-up portfolio, MAA, Liberty Row in Charlotte and MAA breakwater and Tampa completed construction in the fourth quarter and moved into our lease-up portfolio. We now have 5 properties in lease-up with a combined occupancy of 68.3% as of the end of the first quarter and an additional 2 development properties that are actively leasing units. Elevated concessions remain the case for some of these lease-up properties with up to 8 weeks of certain floor plans. However, these projects are still expected to achieve our underwritten yields as markets continue to improve and, therefore, retain their long-term value creation opportunity. We're off to a quick start in the first quarter on our various targeted redevelopment and repositioning initiatives. During the first quarter of 2026, we completed 1,386 interior unit upgrades, up from just over 1,100 units that we renovated in the first quarter of 2025. We achieved rent increases of $104 about non-upgraded units on average unit level spend of $7,349, representing a cash-on-cash return of approximately 17%. These units continue to lease faster than nonrenovated units when adjusted for the additional turn time, averaging about 9 days quicker. For our common area and amenity repositioning program, we are over 90% repriced at 6 recent projects with an average NOI yield above 10% and rent growth for exceeding peer MAA properties. Five additional projects were nearing construction and completion and will begin repricing between May and August. And then 6 additional properties are in the planning phase with expectations to be complete in time for repricing in the spring of 2027. Our WiFi retrofit initiative that began in 2024 and expanded in 2025 continues to grow. We have 27 live properties where the service is rolling out to residents as leases are signed. We are further expanding this initiative in 2026 to an additional 35-plus properties. As we head into the busier part of the leasing season, we are well positioned. Average physical occupancy for April is 95.5%, in line with April 2025 and 60-day exposure is currently 8.3%, 20 basis points better than where we ended April 2025. With increased absorption in our markets in the first quarter where the number of incrementally occupied units exceeded new deliveries, supply pressure continues to moderate. And despite the previously mentioned economic uncertainty, feed volume remained strong and ahead of last year. Strong renewal performance continued in the second quarter with retention rates and lease-over-lease growth rates on renewals accepted remaining consistent with what we have seen in the last few quarters. With an assumed backdrop of steady demand, we expect gradual seasonal improvement in new lease rates through the second and early third quarters along with consistent renewal growth and retention. As we get later in the year, improving fundamentals will become even more impactful to setting up a stronger 2027. That's all I have in the way of prepared comments. Now I'll turn the call over to Clay. A. Holder: Thank you, Tim, and good morning, everyone. We reported core FFO for the quarter of $2.13 per diluted share, which was $0.02 ahead of our first quarter guidance. For the quarter, same-store expenses were favorable to our guidance by $0.015 along with non-same-store NOI favorable by $0.01, offset by unfavorable interest expense of $0.005. Same-store repair and maintenance expenses personnel costs and marketing costs were all below our expectations and were reflected by our disciplined expense control along with expense timing. During the quarter, we funded approximately $100 million in development cost. At quarter end, our development pipeline was at $623 million, leaving an expected $234 million to be funded on the current pipeline over the next 3 years. As previously discussed, we did adjust the number of development starts from our initial guidance and accordingly lowered our development spend for the year by $50 million. While the size of our pipeline at a point in time can vary based on starts and deliveries during the quarter, we expect the pipeline to grow throughout the year as we begin construction on new projects. Our balance sheet remains in great shape to support this and other growth initiatives. At the end of the quarter, we had nearly $840 million in combined cash and borrowing capacity under our revolving credit facility, and our net debt-to-EBITDA ratio was 4.5x. At quarter end, our outstanding debt had an average maturity of 6.1 years at an effective rate of 3.9%. During February, we issued $200 million of 7-year public bonds at an effective rate of just over 4.6% using proceeds to repay borrowings under our commercial payment program. Also during the quarter, we repurchased 558,000 shares of our common stock at a weighted average share price of $130.46 for a total of $73 million. As for our full year outlook with the bulk of the leasing season ahead of us, we are reaffirming the midpoint of our same-store and core FFO guidance for the year while tackling the core FFO range. For the quarter, we expect core FFO to be in the range of $2 and $2.12 per diluted share or $2.06 per share at the midpoint. Our second quarter guidance reflects the typical seasonal increase in leasing as well as higher maintenance-related operating costs. The increase in interest expense from first to second quarter is largely attributable to the delivery of additional developed units and incremental borrowings associated with share repurchases and the litigation settlement. These impacts on interest expense are expected to be partially offset by proceeds from property dispositions. That is all that we have in the way of prepared comments. So Virginia, we will now turn the call back to you for questions. Operator: [Operator Instructions]. Our first question will come from the line of Eric Wolfe with Citi. Eric Wolfe: Based on your guidance, you're expecting blended rates to ramp through the year, I think you just said a moment ago that you're expecting sort of a typical seasonal impact in the second quarter. Could you just talk about sort of specifically what you expect to see over the next couple of months. I think last quarter, you actually gave sort of the guidance for first quarter blends. So I was hoping you could do the same for the second quarter blends and talk about whether you're finally starting to see some of the supply impact easing in some of your markets? Tim Argo: Yes, Eric, this is Tim. I'll answer that. And I'll walk you through kind of how we're thinking about our blended guidance for the year. So guidance remains 1% to 1.5% blended for the full year. As we reported, we did negative 0.3% landed in Q1, but we are starting to see some steady incremental improvement on the new lease side and then continue to see the steady renewals. So as we think about the rest of the year, to your point, like we expect new lease pricing to continue to accelerate through to about July and then start to moderate seasonally. Though we expect that seasonal moderation to be less so in the back part of the year and it typically is, as we continue to see the supply impact moderate, continue to think that renewals will be in that 5-plus range and stay pretty consistent. So if you see through all that, get to our 1% to 1.5%, you're kind of 1.3% to 1.8% blended for the last 3 quarters of the year. So you can kind of think about how that trajectory will work out from where we are here and using that seasonal curve that I've talked about. Operator: Our next question will come from the line of Jana Galan with Bank of America. Jana Galan: Sorry, Tim, a question for you again. Can you maybe speak to performance on both the concessions and supply absorption in Atlanta and in Dallas. Tim Argo: Yes. So Atlanta and Dallas, we continue to see some pretty solid performance, particularly in Dallas. If I look at ballast for a moment and you look at where we are from a pricing standpoint right now on an occupancy standpoint compared to, say, this time last year, we saw about a a 240 basis point improvement in blended pricing from Q1 '25 to Q1 '26 and steady occupancy along with that. Similarly, in Atlanta, we saw about a a 50 basis point increase from winded pricing last year to this year and about a 20 basis point increase in occupancy. So Atlanta probably started to recover for us a little bit early, and we've seen that continue to stabilize and move forward on Dallas was a little bit later, but we're seeing some good strength out of that. As I just mentioned and expect Dallas to be one of our stronger performing markets this year. We're seeing it pretty broad-based. There's still some pressure in all and McKinney areas, but towns performing well, some of the other suburban markets. And then similar Atlanta way, we're seeing still some of the the in-town and Downtown, Midtown, Buckhead submarket outperformed some of the suburbs, delis and smarter are still a little bit weaker, still seeing high concessions that for now, we're seeing consensus come down a little bit. They're not as broad-based in Dallas in some of the other markets. So we have seen some relief there, particularly in the urban areas, and then we talked about Atlanta, the concessions were coming down a little bit last quarter, and they may pretty consistent with where they were last quarter. You still had a month or so out there on average, but the submargins that I've talked about have come down quite a bit. Operator: Our next question comes from the line of Austin Wurschmidt with KeyBanc. Austin Wurschmidt: Kind of sticking with Tim here. One on new lease rate growth. I know you had some weather disruption in the first quarter I guess, were you surprised though at the pace of improvement in new lease rate growth versus the fourth quarter? And are you seeing that pace improve or accelerate, I guess, into the second quarter? Or is it more similar from what you saw from the fourth quarter of last year into the first quarter of this year? Tim Argo: Yes. I mean if you remember last year, we were seeing some some strong acceleration in new lease rates through about April and then it really kind of plateaued with ration day, and we saw it sort of peak there and not really get momentum past May. I think what we're seeing this year is more of a steady acceleration. To your point, February kind of stalled out for a little bit and brought Q1, new lease pricing a little bit down from where we expected, but then we saw it quickly return in March and then we're seeing some momentum place play out in April as well. And then we think about where we are with exposure and occupancy I would expect May to outperform where we were in May last year, where we, again, were kind of stalled out. So I would say we're seeing a more seasonal or more normal acceleration of new lease rates this year, last year, it was a little quicker, but then it slowed to a complete halt. I think we would expect that not to continue in all the steps we look at, where we are with exposure, where we are with lead volume, where we are with occupancy and kind of seeing what's out there with pre-leasing, we would expect that momentum to continue beyond May, unlike it did last year. Brad Hill: Yes. And I would just add a couple of points to what Tim is saying. Just speaking more broadly. I mean, I think one of the things that gives us encouragement about the trajectory, as Tim was mentioned a moment ago,as we go throughout the balance of the year. first, if you look at just the broad demand fundamentals in our region of the country, continue to to screened quite well really across the board. Job growth continues to be resilient. The other demand factors migration trends, population growth, all continue to be very resilient within our region of the country. And then if you look at just the momentum that Tim was just talking about, market-level occupancies in the first quarter continue to firm up. You look at absorption numbers exceeding deliveries in the first quarter with the renewal positioning that we have right now, as Tim mentioned, our occupancy is stable and our exposure is in a better position than it was this time last year, puts us in a really good position to continue the momentum that we've seen in April as we get into May and June. And so we feel like the momentum is building from the dashboards that we have to date. That momentum continues to build in the second quarter, which is what we need to see in order to continue to see new lease progression throughout the year, which aligns with what our expectations are for the year. Operator: Our next question will come from the line of Haendel St. Juste with Mizuho. Haendel St. Juste: Maybe a question on capital deployment. I understand the decision to lower the acquisition guide given market pricing and your cost of capital, but maybe expound a bit more on the decision to pull back on some of the new development starts. And with that lower use of capital, I guess, lower capital deployment overall suggest you might be more open to doing more stock buybacks here in the near term given the compelling yield on that side. Brad Hill: Yes. Haendel, this is Brad. Well, as I mentioned in my opening comments, the pullback in development spend, just development is a little bit fluid with timing of when deals can start approvals. Can take a little bit longer than you think things of that nature. So that's the nature of the reduction from -- as we mentioned in the prior call, we could start between 5 and 7 deals this year, just based on where we are in the approval cycle of those, it looks like be closer to 4%. But you never know, some of those could get approvals earlier and if the economics make sense, we could start those towards the back part of the year, but that's where we certainly expect to to be in terms of development for the year. And we continue to believe that's one of the best uses of our capital to deliver long-term value for shareholders. So we'll continue to focus on that. As Clay mentioned in his comments, we expect that size of that pipeline to continue to grow our spend for the year is down from what we originally expected, but still up from where it was last year, and we expect that on an ongoing basis to be into that $300 million to $400 million range. So no real change in terms of that. But I think in terms of share repurchases, as we think about really how best to allocate capital, we're really focused on generating high-quality compounding earnings growth that supports a steady and growing dividend. We really think that's the best way to to drive TSR performance over the full cycle. And when we do that, there are 3 things that we're considering when we decide where do we put our capital and the first is we want to take a very balanced approach. And that balanced approach really helps us take advantage of near-term opportunities, which right now just happens to be the share buybacks. And so you've seen us be active in that space. But we also want to be able to take advantage of opportunities that we think again, contribute to that long-term TSR performance. And that's where development comes in. We still think that's the best opportunity for us to drive long-term TSR performance. We're getting accretive returns. And today, those are in the mid-6s. And our development importantly has been able to deliver higher NOI growth about 50 to 100 basis points on a long-term basis versus our existing portfolio. So we want to be balanced in terms of what we're doing. The second thing is we want to protect our balance sheet capacity. And so you're not going to see us go out and leverage up our balance sheet because we want to protect what we're able to do with our balance sheet. And then the third thing really is -- we like our portfolio. We like where we're located. We like the markets we're in. So we don't have a need to go and really materially reallocate capital amongst our markets, which can drive certainly higher dispositions and capital redeployment. So that's really how we're looking at our various opportunities for capital allocation and where share repurchases falls within that. Operator: Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Just a question on the guidance. You guys talked pretty optimistically about the balance of the year, acceleration. You're talking about this year's leasing trends not not looking to scale like last year did, but yet you adjusted guidance, you basically tightened the range. A lot of your peers sort of left it open ended to revisit guidance in the second quarter. So based on your commentary, it would sound like you think there's potential for upside, but yet you trimmed the top end and tightened the range. So can you just talk a little bit more about your decision to revisit guidance now versus waiting to the second quarter? A. Holder: Yes, Alex, this is Clay. Just the real reason that we kind of brought down the guidance there, at least a range, keeping our midpoint the same as we came out with our initial guidance. But we were a little wider in our range as we started the year than what we would typically do. And we did that because of the macro uncertainty that Tim mentioned earlier, some of the demand concerns that were out there at that time. As we sit here today, that's lesson we've gotten 1 quarter behind us. And so we tightened that range down to a range that we would typically go out the year with. And so that's really all that we were reflecting by tightening the range. Still feel very confident in our overall guidance as we move in throughout the year, though. Operator: Our next question comes from the line of Adam Kramer with Morgan Stanley. Adam Kramer: Just wanted to ask a little bit about sort of the renewal growth with regards to concessions. And if there's any way to sort of maybe disaggregate or break down what sort of percentage of the renewal growth that you guys are able to sort of get each quarter comes from concession burn-off versus sort of gross rent increases? And then maybe just a second part there with regards to concessions and I think you mentioned it for some specific markets, but just maybe across the portfolio, what are you offering today in terms of concessions? And how does that compare for the same period a year ago. Tim Argo: Yes. This is Tim. So for the first part of your question, there's not a lot there. I mean, with our portfolio, we don't use a ton of concessions. We're were mostly in net effective pricing. If you look at our financial concessions represent about 0.6% of our net potential rent. So for us, the burn-off of concessions in our same-store renewal base is very minimal, probably maybe 10 basis points or something like that. It's more impactful in our lease-up properties. We're getting 8%, 9%, 10% renewals on lease-ups where there is some burn off concessions that is driving part of that, so you can kind of distinguish between those 2 there. As far as the concession market across our portfolio, across our markets, I would say, for Q1, pretty consistent with what it was in Q4. We're seeing 60%, 65% of our competitors offering some level of concession somewhere between 4 and 5 weeks is sort of a standard and so that's broadly across the portfolio. We have seen it tick down just ever so slightly as we got into April. Where not only the percent of competitors offer concessions come down a little bit and then a little bit decrease in the overall average concession. So I think that's perhaps a sign some of the momentum to come. absorption was positive this quarter. So fewer lease-up units out there. So we are starting to see it take down just a little bit. Operator: Our next question will come from the line of Michael Goldsmith with UBS. Ami Probandt: This is Ami on with Michael. We were wondering how much of an impact does hiring from new college grads have on your peak leasing season? Do you tend to see more people trading up into MAA units? Or are they more first-time renters? Tim Argo: It's pretty consistent at you. We've been looking at some of that, our younger age demographic with all the talk around some of the unemployment rates for that group in particular. And so if we look at Q1, for example, about 20% of our move-ins are 25 or under in age. And that's been really consistent over the last several years, that hasn't really picked up or down. And then we look at also to try to gauge some of that pressure? Are there more of of our residents needing a guarantor, indicating perhaps that their economic situation is great, and that's actually come down a little bit. So -- but I would say, on average, it's about 20-ish percent of our move-ins are in that 25 age group or under, but we're not seeing really any pressure or any changes in that as of yet. Operator: Our next question will come from the line of Jamie Feldman with Wells Fargo. James Feldman: Great. I think you had mentioned pulling back on development starts this year. Obviously, supply has come down in a pretty meaningful way, and some of your competitors are actually talking about ramping up into '28 and '29. Can you talk about that decision and how we should be thinking about development going forward? Is it more project specific? Or is there a bigger picture story we should be thinking about? Brad Hill: Jamie, this is Brad. Yes, I mean, again, the development of reduction for the year of $50 million really is just a couple of months delay on average in terms of starts for deals, and that's really deal specific to your point. That does not signal in any way a change in our posture toward development. We still continue to believe in the merits of developing in particular, the benefits of that for long-term TSR performance. So you'll continue to see us focus on development. I mean we own or control, I think, 16 sites with approvals for over 4,000 units. So that will be a continued focus of us. We'll continue to focus on spending $300 million to $400 million a year. The start level numbers for each year can vary a little bit as it can be a little bit lumpy. You've got to go through approved the approval process, which can take a little longer than you expect sometimes. So -- but -- our strategy and focus on development is the same as it has, and we'll continue to expand that pipeline to the $1 billion, $1.2 billion range that we've talked about previously. Operator: Our next question will come from the line of Steve Sakwa with Evercore ISI. Steve Sakwa: I guess kind of a big picture question. If I told you that you could double the size of your portfolio today, I guess, what are the pluses and minuses of managing a substantially large or larger portfolio than what you currently have. Is the data flow that much better that gives you better insight on pricing? Are there just more operational challenges? Like how do you sort of think about size and and whether you need to be much bigger than you currently are? Brad Hill: Well, I think certainly, size isn't everything. We have been through, obviously, to significant events in our recent history as an organization and those events are very, very difficult to do. And take a lot of time, and there's risk associated with them, but there certainly could be a lot of upside if they're done right, and the cultures align well between the organizations. I would say at the scale that we are today to double our portfolio size, I wouldn't think there's a material improvement in information flow, data flow and things of that nature that you mentioned. Cost of capital is probably very similar. It really is going to depend on, I would say, what we can get operational efficiency wise. Some of the things that we're doing on the operating side from centralization and specialization and how we're approaching podding properties and things of that nature. Having scale near to one another within a particular market is very meaningful in that process. So certainly, you could see some ability to drive some level of operating efficiencies depending on where the properties are located. Operator: Our next question will come from the line of Rich Anderson with Cantor Fitzgerald. Richard Anderson: So about a year ago, Brad, we had a dinner with the group, and there was some at least some indication from my perspective that this time a year later, we would be talking about a lot more in the way of stabilized new lease rate growth and so on. And obviously, it hasn't quite happened yet. I'm curious, in your mind, taking over CEO around that time 13 months ago, are you surprised by the tail of supply impacting that line item in particular? Or is everything kind of lining up the way you thought? We all know the biblical nature of the supply that came online in your markets over the past couple of years. I'm just curious if all this is coming as more of a surprise and not necessarily in alignment with past cycles of supply that you guys have been through. I just wanted to get your -- take your temperature on that topic. Brad Hill: No, thanks. Yes, I recall our dinner. And certainly, at that time, believe that we would certainly see better improvement on new lease rate side over the past year, which is what our expectations have been as related to our forecast for last year and going into this year. And I think it's also you mentioned the biblical size of supply, but I do think it's important to put that in perspective. in a 3-year period, we had 5 years' worth of supply delivered into our markets. And so there is a level of lingering impact associated with that supply. The good news is, though, that absorption is happening. Market level occupancies are improving. When we had that dinner, I didn't think that new lease rates would take as long as they have to see improvement that we've seen. But the good news is we are seeing improvement. The other positives are that the demand within our region continues to hold in there quite well. outperforming other regions of the country, sometimes a factor of 2 to 3. The other good news is that supply pipeline is significantly declining. If you look at the size of what's being delivered in our region this year, it's down 40% from last year. So while it is taking a little bit longer, if you keep in perspective, just the size and the magnitude of the decline that we're seeing in supply in our region of the country, which is declining to a larger degree than it is in other regions of the country, balanced with the fact that demand continues to be resilient. We're pretty excited about what the trajectory looks like for here. from here. Yes, last year, I would have hoped that it would have improved a little bit quicker, but that's not where we are. And certainly, I think as we look forward, based on supply and demand fundamentals, we're pretty excited. Operator: Our next question comes from the line of Mason Guell with Baird. Mason P. Guell: Do you expect to continue buying additional land parcels for the balance of the year? Brad Hill: Well, this is Brad. I think it depends. We will likely have additional land parcels that we purchase later in the year. But the way that we are approaching buying land at this point is we are not looking to land bank various sites. We do not want to buy land that is speculative. We want to buy land that we have a clear and near-term path to being able to put that land into production. So you could -- based on timing, you can see us buy a piece of land at some point this year that maybe starts construction next year. But and certainly not with the intent to buy it and hold it for a few years before we're able to start construction on it. That's not what we're looking to do. We want to keep the balance sheet very efficient and be able to put land into production pretty quickly after we buy it. Operator: SP1 Our next question comes from the line of Julien Blouin with Goldman Sachs. Julien Blouin: Maybe following on from Steve's question. I mean, you guys are probably the best authorities in the space on public to public apartment deals, just given the post and Colonial deals. Obviously, there's the initial G&A and overhead benefit that can be realized. But I guess you mentioned the podding benefit. How long does that sort of take to realize and then if we think about what's different today versus when you did the post and Colonial transactions, are there any additional benefits today, whether it's on, I don't know, the technology front, the AI front, WiFi rollout and scale with vendors that would maybe make a deal make even more sense today. Brad Hill: Julien, this is Brad. I think in terms of podding, that's more related to the quality of the property managers that you have and just opportunities that present themselves in terms of how quickly those can manifest themselves. Those can be relatively quick endeavors. But you got to make sure you have the right people. As you know, this is a very -- in any merger, this is a very people-intensive business. And so they can quickly determine whether or not you have success or not at a property level. So you've got to be really careful with what you're doing there. And I'm sorry, on the second part of his question. Julien Blouin: Any additional benefit on work there... Brad Hill: Yes. In terms of the other benefits, they're different than executed the post and Colonial merger is on the technology front, like you talk about, I think the cost of technology today continues to increase. But I also think the ability to spread that cost across obviously, a bigger footprint, bigger platform. One of the things that we've been focused on as an organization is continuing to improve our platform capabilities and be able to drive more out of our portfolio than what others are able to do. And part of that is the technology. Part of that is the centralization of specialization that we have and that we're focused on so that the marginal G&A cost associated and technology costs associated with adding additional units is less. So I do think that's a different difference today versus what it was 10 or so years ago when we've gone through mergers. Operator: Our next question will come from the line of Alex Kim with Zelman & Associates. Alex Kim: I wanted to ask about how lease-up velocity has trended so far year-to-date and kind of fitting that into the context of acquiring projects that are in lease up. Is that still a strategy that you maintain on a go-forward basis? Tim Argo: Yes, Alex, this is Tim. I answer the first part of that question. We have seen the lease on velocity pick up, particularly as we got into late Q1 and into April. Obviously, it's a little bit slower in Q1 -- Q4 and Q1, just with traffic patterns, seasonal patterns. But if we look at April, for example, the properties that are in our lease-up bucket averaged about 23 move-ins in the -- on average in the month of April. So we're starting to see that momentum pick up. We got a really good lead volume. We're starting we're not seeing things that get slower. We're not seeing concessions go up anything like that. We're starting to see the momentum there. And I think as we get into the spring and summer, much like we've talked about with our same-store portfolio, we would expect to continue to see some momentum in that group. Brad Hill: In terms of acquisitions, I think you asked if we're focused on buying properties and lease-up. I mean I think at this point, the best use of our capital is not acquiring. So we're not active in that market today. We continue to evaluate projects. I would also say we haven't seen as many lease-up trades lease-ups coming to market to trade as we have historically. I think the if a seller is bringing a property to market today, they want it is leased up and occupied as they get so that there's less risk out there for the buyer so that they can get better pricing at the moment. So we'll continue to look at lease-ups as they come to market. And if we find an opportunity that that makes sense, we certainly wouldn't -- for the right price, we wouldn't hesitate to execute there, but we're just not seeing a lot of opportunities in that front that makes sense today. Operator: Next question will come from the line of Ann Chan with Green Street. Ann Chan: So going back to other income, were there any unusual or nonrecurring items that caused a drag or a boost on other income in first quarter? And related, when do you expect the benefit from the delayed WiFi rollout in the '25 to start flowing to '26, if not already? A. Holder: And just to confirm, are you referring to same-store other income? Ann Chan: Correct. A. Holder: Yes. So in Q1 -- this is Clay, by the way. So in Q1, we have seen -- to your point, we have seen the continued rollout of WiFi that we saw a little bit there, but not much, not really driving that in the quarter itself. What we would expect again to really begin to see that benefit showing itself in the numbers would be as we move into the spring and summer leasing seasons, and we start having those leases turn and that would be the time that we would push the Wi-Fi revenue to the residents and along with the expense that we have for that as well. So that should come forward in the middle towards the latter part of the year. Tim Argo: Yes. I'll just add one point to that, it's Tim. We're expecting somewhere in the neighborhood of or so of revenue in 2026 related to those WiFi projects, which is certainly backloaded. As Clay mentioned, most of these projects got completed late Q4, early Q1, and we price those out the leases expire in the units turn. So expect a lot more impact from those as we get through the year, and then it will compound certainly in 2027 and beyond. Operator: Our next question will come from the line of Nick Yulico with Scotiabank. Unknown Analyst: This is Elemer Chang on with Nick. I just wanted to go back on the concession topic. And just ask, how is concession burn-off trending in some of your maybe underperforming markets of late, like Charlotte, Austin, Nashville, et cetera? And when do you expect you'll reach a normalized level of concessions in those markets this year? I know you mentioned concession usage ticking down through April and that you expect new lease rates will improve throughout the year. But I was just wondering whether that outlook is mostly driven by your stronger markets like Atlanta, Dallas, Orlando. Tim Argo: Yes, Elmer, this is Tim. I mean, we have started to see in some of those weaker markets, concessions come down a little bit. I've talked a few times about some of the more urban submarkets where -- and that have a lot of lease-up where they were averaging closer to 3 months. And I would say now that's more in the 8- to 10-week type of concession environments have come down a little bit there. Market like Austin, we have started to see it come down a little bit. We were pushing across the entire market, close to almost 2 months broadly, and that started to tick down slowly. We're particularly seeing better performance in the southern part of also Northern Austin, Georgetown and that area is still seeing a lot of pressure not seeing much lead there. Phoenix is probably another one where -- we started to see concessions come down a little bit. Occupancy in that market stabilized, at least for us over the last couple of quarters and now starting to see still underperforming broadly, but starting to see some good momentum out of Phoenix. You mentioned Charlotte, that's one that -- it's still right in the mix of it. It got double-digit percent of inventory delivered over the last couple of years. I think that one's going to be a struggle, I think, through 2026, and that 1 is probably more of 2027 recovery story in Charlotte, but feel great about that market long term, tons in demand terms coming there, but just a whole lot of supply there right now. Operator: We have no further questions. I'll return the call to MAA for closing comments. Brad Hill: All right. We appreciate everyone joining, and we'll see you soon in various conferences. Thank you. Operator: This concludes today's program. Thank you for your participation. You may disconnect at any time.
Operator: Thank you for standing by. Welcome to the Merck & Co., Inc. Rahway, New Jersey, USA, First Quarter Sales and Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Peter Dannenbaum, Senior Vice President, Investor Relations. Sir, you may begin. Peter Dannenbaum: Thank you, Julie, and good morning, everyone. Welcome to the First Quarter 2026 Conference Call for Merck & Co, inc. Rahway, New Jersey, USA. Speaking on today's call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Research Labs. Before we get started, I'd like to point out that we have items in our GAAP results such as acquisition-related charges, restructuring costs and certain other items that we have excluded from our non-GAAP results. There is a reconciliation in our press release. I will also remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of our company's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2025 10-K, identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck & Co., Inc., Rahway, New Jersey USA, undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. These slides, along with the earnings release, today's prepared remarks and our SEC filings are all posted to the Investor Relations section of our company's website. With that, I'd like to turn the call over to Rob. Robert Davis: Thank you, Peter. Good morning, and thank you for joining today's call. Advancing and delivering breakthrough science to address unmet medical needs remains the foundation of our strategy to create sustainable value for patients and shareholders. We continue to make tangible progress in accelerating and augmenting our pipeline. And with the recent new product launches, the transformation of our portfolio to a far more diversified set of commercial drivers is now well underway. Turning to our first quarter results. We delivered year-over-year growth with revenue of $16.3 billion, driven by continued strength in oncology, animal health and growing contributions from new products. We remain confident in our outlook for 2026, which Caroline will speak to in a moment. We also achieved several important pipeline milestones, the FDA approved IDVYNSO as a new treatment option for adults with virologically suppressed HIV-1, reflecting our ongoing commitment to innovation to address the evolving needs of people living with HIV. Additionally, the FDA granted priority review for I-DXd, our antibody drug conjugate being developed in collaboration with Daiichi Sankyo for adult patients with previously treated extensive stage small cell lung cancer. In ophthalmology, we initiated Phase IIb/III studies in neovascular age-related macular degeneration for MK-8748, our TIE-2/VEGF bispecific antibody. The second candidate from our acquisition of iBio. We also presented important Phase III results across multiple other therapeutic areas. Finally, in our Animal Health business, we have high expectations for long-term growth, driven by new and ongoing product launches. We're pleased to have introduced NUMELVI to the U.S. market, the first and only second-generation JAK inhibitor for allergic dermatitis in dogs. Our planned acquisition of Terns Pharmaceuticals with its promising candidate for certain patients with chronic myeloid leukemia is another example of our science-led business development strategy in action. TERN-701 has the potential to be a best-in-class therapy in a disease where there is an opportunity to further improve depth and duration of response for patients. Given the substantial unmet need for additional options, we believe TERN-701 has multibillion-dollar commercial potential and will be a significant driver of growth in the next decade. This transaction demonstrates our disciplined approach to pursuing business development when compelling science and value align. And we are confident in our belief that TERN-701 can benefit patients while generating value for our shareholders. Looking ahead, we continue to expect a particularly robust period of Phase III data readouts from novel candidates over the next 18 months. Our portfolio is undergoing a meaningful transformation to one with a rapidly expanding and diversified set of growth drivers. We're in the midst of initial launches of over 20 new products, almost all of which have blockbuster potential across a broad set of therapeutic areas. To move with the speed and precision this opportunity demands, we announced an evolution of our commercial operating structure. Our new business unit model, organized around products in therapeutic areas is built to drive accountability, sharpen focus and increase agility, ensuring that every part of our commercial organization delivers on the promise of our pipeline for patients. We're pleased to welcome Brian Ford to our executive team to lead our new specialty, pharma and infectious diseases business unit. While Yani Ushausen has been appointed to lead our new global oncology and MSD International business unit. Corp Guindo has taken leadership of a newly formed strategic access policy and communications unit. Each of these individuals brings deep experience to these important roles. Together, this leadership team and structure will enable strong execution of our strategy, which includes extending our leadership in oncology while building a powerful, diversified portfolio across a range of therapeutic areas. We're confident that this change will best position us to deliver on a potential commercial opportunity of over $70 billion by the mid-2030s from these 20-plus anticipated new growth drivers alone. We're also taking important additional steps to accelerate our ongoing transformation as it relates to artificial intelligence. Last week, we announced a multiyear partnership with Google Cloud to scale advanced AI, data and agentic capabilities across our company. This complements our recently expanded collaboration with Tempus AI designed to advance our precision oncology strategy as well as a recent agreement with the Mayo Clinic that will allow us to leverage Mayo's clinical insights and genomic data sets at scale. Together, these efforts support improved productivity across our organization and create a real opportunity to advance the innovation in our pipeline with greater speed and with a higher likelihood of ultimately reaching patients. As we look forward, we continue to see robust demand for our innovative medicines and vaccines around the world. We're investing behind our pipeline, optimizing our operating structure and are fully committed to our purpose of using leading-edge science to save and improve lives. We're encouraged by the progress we're making and look forward to the many significant milestones coming in the months ahead. In summary, we remain confident in our strategy and in our ability to deliver sustained growth and value for our shareholders. Before I turn the call over to Caroline, I want to recognize Sanat Chattopadhyay and Joe Romanelli, both of whom have announced the retirements from Merck. Sanat and Joe have made lasting contributions to our company and to the patients we serve, and I want to thank them for their many years of impact. And now to Caroline. Caroline Litchfield: Thank you, Rob. Good morning. As Rob noted, we delivered growth in the quarter driven by continued strength in Oncology and Animal Health as well as increasing contributions from our many compelling product launches. Our commercial and operational execution continues to enable us to generate strong results in the short term while we advance our broad and deep pipeline and invest in innovation to deliver long-term value for patients, customers and shareholders. Now turning to our first quarter results. Total company revenues were $16.3 billion, an increase of 5% or 3% excluding the impact of foreign exchange. The following revenue comments will be on an ex exchange basis. In Oncology, sales of the KEYTRUDA family of products which includes KEYTRUDA and KEYTRUDA QLEX, increased 8% to $8 billion, with global growth driven by continued strong demand from metastatic indications and robust uptake in earlier-stage cancers. Strong utilization in tumors that primarily affect women, including breast and cervical cancer, continues to be a key contributor to growth. In addition, we saw increased use of KEYTRUDA in combination with Padcev in locally advanced or metastatic urothelial cancer. In the U.S. growth benefited by approximately $250 million from the timing of purchases. We are pleased with the positive feedback following the recent launch of KEYTRUDA QLEX, Sales in the quarter were $128 million. On April the 1st, we received the permanent J code, and we look forward to having an even greater impact on patients and health care systems. Our broader oncology portfolio achieved another quarter of strong growth. Notably, WELIREG sales increased 43% to $199 million driven by continued uptake from ongoing launches in international markets and increased use in certain patients with previously treated advanced renal cell carcinoma in the U.S. We look forward to potentially reaching more patients with renal cell carcinoma, following positive results from the LITESPARK-011 and -022 studies. In Vaccines and Infectious Diseases, GARDASIL sales were $1.1 billion, a decrease of 22%, driven by lower demand in China and Japan, consistent with our expectations. In the U.S., sales declined 10%, primarily due to timing of CDC purchases, which was partially offset by price. In pneumococcal, CAPVAXIVE continues to progress well, with sales of $142 million, an increase of 31%. Outside of the U.S., sales were driven by uptake from ongoing launches in certain markets. In the U.S., growth was driven by increased demand from both retail pharmacies and nonretail customers, partially offset by a reduction in wholesaler inventory. In Cardiometabolic and Respiratory, WINREVAIR continues to have a positive impact on patients with pulmonary arterial hypertension. Global sales were $525 million, a reflection of the continued strong demand for this important therapy. In the U.S., we continued to see steady progress with more than 1,600 new patients having received a prescription and an increase in usage by patients with background therapies do not include a prostacyclin. Outside the U.S., we continue to progress with securing reimbursement and ongoing launches. Sales of OHTUVAYRE, a novel maintenance treatment for adults with COPD, were $131 million. As expected, sales were adversely impacted by the CMS reimbursement change as well as Medicare deductible resets. We are encouraged by the prescription trends, which began to recover in March. Consistent with our strategy to maximize OHTUVAYRE's strong potential, we are making investments to reach more patients and physicians, which we expect will accelerate growth in the second half of the year and beyond. Our Animal Health business delivered another quarter of strong growth, with sales increasing 6%. Livestock sales grew 8%, driven primarily by higher demand for ruminants and poultry products as well as price. Companion animal sales increased 4% due to new product launches and price, partially offset by a reduction in vet visits. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 81.9%, a decrease of 0.3 percentage points. Operating expenses increased to $15.2 billion, including a $9 billion onetime charge related to the acquisition of Cidara Therapeutics. Excluding this charge, operating expenses grew 2%, reflecting increased investments in support of our key growth drivers, partially offset by benefits of our multiyear optimization effort and recognition of a portion of the external funding for sac-TMT. Other expense increased to $318 million, primarily reflecting financing related to recent business development transactions. Our tax provision was $957 million. As a result of the nontax deductible onetime charge for Cidara, we had a pretax loss this quarter resulting in a tax rate of negative 43.5%. Taken together, we reported a loss of $1.28 per share. which includes a negative impact of $3.62 per share from the onetime charge related to Cidara. Now turning to our 2026 non-GAAP guidance. We have narrowed the range and raised the midpoint of both our full year revenue and EPS guidance. We now expect revenue to be between $65.8 billion and $67 billion, representing growth of 1% to 3%, including a positive impact from foreign exchange of approximately 1 percentage point using mid-April rates. Our gross margin assumption remains approximately 82%. Operating expenses are assumed to be between $36 billion and $36.8 billion. This range does not include the proposed acquisition of Terns or any additional significant potential business development transactions. Other expense is expected to be approximately $1.3 billion. We assume a full year tax rate between 23.5% and 24.5%, which reflects the nontax deductible onetime charge for Cidara. We assume approximately 2.48 billion shares outstanding. Taken together, we expect EPS of $5.04 to $5.16, including a positive impact from foreign exchange of approximately $0.10 using mid-April rates. It is important to note that this guidance does not include the impact of the proposed acquisition of Terns, which is expected to close soon. We expect the transaction will result in a onetime charge that will increase research and development expense by approximately $5.8 billion or approximately $2.35 per share. In addition, ongoing investment to advance TERN-701 and the assumed cost of financing will negatively impact EPS by approximately $0.12 this year. As you consider your models, there are a few items to keep in mind. For KEYTRUDA, recall that while growth benefited from the timing of wholesaler purchases in the first quarter, we will face a corresponding headwind in the third quarter. For ENFLONSIA, consistent with the first quarter, we expect minimal sales in the second quarter, given the seasonal nature of the product and continued high levels of RSV monoclonal antibody inventory in the market. We are actively engaging customers in advance of the RSV season and remain focused on educating health care professionals and parents on the importance of protecting infants from this potentially serious disease and expect shipments to increase in the second half of the year. Lastly, we expect SG&A expenses to increase over the remainder of the year as we invest to maximize the impact of our recent and upcoming launches. Now turning to capital allocation, where our strategy remains unchanged. We will prioritize investments in our business to drive near- and long-term growth, including new product launches and a robust pipeline. We remain committed to the dividend with the goal of increasing it over time. Business development remains a high priority as evidenced by our recently announced acquisition of Terns. We maintain the ability within a strong investment-grade credit rating to pursue additional, science-driven, value-enhancing transactions going forward. We are on pace for approximately $3 billion of share repurchases this year, as previously communicated. To conclude, we are confident in the outlook for our business driven by global demand for our innovative medicines and vaccines, including our many new product launches. We remain committed to bringing forward medically significant innovations that will enable us to deliver value to patients, customers and shareholders well into the future. With that, I'd now like to turn the call over to Dean. Dean Li: Thank you, Caroline. Good morning. Progress continued with a steady cadence of clinical and regulatory development. Today, I will provide updates in cardiometabolic and respiratory, oncology, infectious diseases and ophthalmology then conclude with key upcoming milestones. Starting with cardiometabolic and respiratory. The global burden of atherosclerotic cardiovascular disease remains significant. And with recently updated clinical guidelines recommending lower LDL-cholesterol thresholds, there remains a need for innovation that is broadly accessible. At the American College of Cardiology Congress last month, additional Phase III data were presented for enlicitide, our investigational oral PCSK9 inhibitor. Enlicitide is designed to reduce LDL cholesterol in a similar manner to PCSK9 antibody therapies with the simplicity of a daily pill. The Phase III CORALreefAddOn study demonstrated statistically significant and clinically meaningful greater reductions in LDL-cholesterol at 8 weeks compared to other oral add-on lipid-lowering therapies when added to background statin therapy. Of note, enlicitide also showed statistically significant greater reductions across key secondary endpoints, including apolipoprotein B and non-high-density lipoprotein cholesterol. The CORALreef program has generated compelling evidence for the efficacy and safety of enlicitide As a pill, enlicitide has the potential to democratize access to a potent lipid-lowering therapy. With clinical guidelines targeting lower LDL-cholesterol targets, the field of preventive cardiology is increasingly energized and focused on early, aggressive LDL-cholesterol reduction. Also at ACC, we showed full results from the Phase II CADENCE trial, evaluating WINREVAIR in adults with combined post- and pre-capillary pulmonary hypertension and heart failure with preserved ejection fraction. WINREVAIR met the primary endpoint of reduction from baseline in pulmonary vascular resistance compared to placebo. At the 0.3 milligram per kilogram dose, WINREVAIR prolonged the time to first occurrence of a clinical worsening event, which was an exploratory secondary endpoint with a hazard ratio of 0.18. Results provide compelling proof-of-concept and warrant further evaluation in Phase III. This is an underdiagnosed condition with an extremely poor prognosis. There are currently no approved therapies. Moving to Oncology, KEYTRUDA now has 44 FDA-approved indications across 19 tumor types as well as 2 tumor-agnostic approvals and continues to generate evidence further transforming cancer care. In the first quarter, the FDA and European Commission approved KEYTRUDA in combination with paclitaxel, with or without bevacizumab, for the treatment of certain patients with platinum-resistant ovarian cancer based on the findings of KEYNOTE-B96. This is the first PD-1 inhibitor based regimen to show a statistically significant improvement in both progression-free survival and overall survival versus paclitaxel with or without bevacizumab for these patients. We also announced findings from the KEYNOTE-B15 study demonstrated KEYTRUDA plus Padcev reduced the risk of event-free survival related events by 47% and risk of death by 35% for cisplatin eligible patients with muscle invasive bladder cancer. This is the first and only perioperative immunotherapy plus ADC regimen to extend survival for these patients. Based on these data, the FDA has accepted supplemental BLA filings for KEYTRUDA and KEYTRUDA QLEX under priority review and is targeting an action date of August 17. KEYNOTE-B15 is the sixth study of a KEYTRUDA-based regimen to demonstrate overall survival in an earlier stage cancer and, if approved, would mark the 12th earlier-stage indication for KEYTRUDA. We also continue to make progress across the broader oncology portfolio. WELIREG, our first-in-class oral HIF-2-alpha inhibitor initially approved for the treatment of certain patients with von Hippel-Lindau syndrome has now shown additional clinical data for patients with renal cell carcinoma across multiple stages of disease. The LITESPARK-022 study evaluating WELIREG plus KEYTRUDA in the adjuvant setting, demonstrated a 28% reduction in the risk of disease recurrence or death compared to KEYTRUDA alone. In addition, the LITESPARK-011 study, evaluating WELIREG plus Lenvima, demonstrated a 30% reduction in the risk of disease progression or death in certain patients with advanced RCC and versus cabozantinib. Supplemental applications for WELIREG in combination with KEYTRUDA or KEYTRUDA QLEX based on LITESPARK-022 were granted priority review by the FDA with the PDUFA date of June 19. The FDA also set a PDUFA date of October 4 for WELIREG in combination with Lenvima based on the LITESPARK-011 study. As announced last week with our partner, Eisai, the combination regimens from the LITESPARK-012 study did not meet the dual primary end point of progression-free survival and overall survival for the first-line treatment of patients with RCC and compared to KEYTRUDA plus Lenvima. The data from the study provides learnings to the broader program. Studies from the LITESPARK clinical program, including LITESPARK-033 and 034, evaluating WELIREG in combination with zanzalintinib, are ongoing. Together with our partner, Daiichi Sankyo, we announced that the biologic license application for ifinatamab, deruxtecan, or I-DXd, for the treatment of extensive-stage small cell lung cancer in certain patients with disease progression has been granted priority review by the FDA. This was based on results from the Phase 2 IDeate-Lung01 trial, and the Phase 1/2 IDeate-PanTumor01 trial. The FDA has set a PDUFA date of October 10. As Rob mentioned, we continue to identify external opportunities to strengthen and diversify our pipeline, most recently with the proposed acquisition of Terns Pharmaceutical. TERN-701, a novel oral allosteric inhibitor of the BCR::ABL oncogene is being evaluated for the treatment of certain patients with chronic myeloid leukemia and has the potential to be an important addition to our growing hematology pipeline. Clinical data has shown encouraging activity with promising rates of major molecular response and deep molecular response by week 24. Importantly, this includes responses in patients with high disease burden, who previously received multiple lines of therapy. We are eager to get to work with the talented Terns team to advance this program in a timely fashion. Turning to HIV. Last week, the FDA approved IDVYNSO, our once-daily, single-tablet 2-drug regimen of doravirine and islatravir, a next-generation nucleoside reverse transcriptase inhibitor that blocks translocation, indicated for the treatment of certain adults whose HIV-1 is virologically suppressed based on 2 Phase III SWITCH study. Approval was previously granted in Japan. IDVYNSO is the first approved 2-drug regimen that does not include an integrase strand transfer inhibitor. At CROI, additional data was presented demonstrating noninferiority and a similar safety profile at week 48 versus the 3 drug, INSTI-based regimen, Biktarvy, in adults who had not previously received antiretroviral treatment. In addition, IDVYNSO was shown to maintain virologic suppression at week 96 in adults who switched some other oral antiretroviral therapies, including Biktarvy. Islatravir, a potent long-acting antiviral that forms an anchor for additional regimen is currently being evaluated in late-phase trials as a once-weekly combination with Gilead s lenacapavir, an HIV capsid inhibitor, and separately in combination with ulonivirine, an internally developed non-nucleoside reverse transcriptase inhibitor. We plan to present data from our HIV pipeline at an upcoming medical meeting. Next to RSV. In February, positive new data were presented for ENFLONSIA for the prevention of RSV lower respiratory tract disease in infants and children under 2 years of age at increased risk for severe disease over 2 seasons from the Phase III SMART study. These findings will be shared with global regulatory authorities with the intent to obtain an expanded indication. RSV is a leading cause of infant hospitalization globally and is especially serious for children under 2 years of age at high risk for severe disease. These data provide additional evidence for ENFLONSIA for the prevention of RSV in younger children who remain at risk entering their second season. Earlier this month, the European Commission approved ENFLONSIA for the prevention of RSV lower respiratory tract disease in newborns and infants during their first season, based on the Phase IIb/III CLEVER and Phase III SMART trial. Next, in ophthalmology. We remain focused on retinal diseases associated with vascular leakage and neovascularization, with emphasis on improving structural and functional outcomes for patients and helping reduce the burden of certain retinal diseases. This month, we initiated 2 pivotal Phase IIb/III trials evaluating MK-8748, an investigational bispecific Tie-2 agonist/VEGF inhibitor for the treatment of neovascular age-related macular degeneration. The MALBEC and TORRONTES studies are the first trials in a broader late-phase development program for MK-8748. The decision to advance development is based on promising results from the Phase I/IIa RIOJA trial. In closing, we anticipate multiple events and milestones across therapeutic areas in the coming months, including, in oncology, please mark your calendars for our annual investor event at the ASCO Annual Meeting in Chicago on the evening of Monday, June 1, where we will outline progress on our oncology pipeline and strategy. On the regulatory front, as noted, potential approvals for KEYTRUDA plus Padcev in MIBC, WELIREG in expanded RCC settings and for I-DXd in extensive stage small cell lung cancer. In HIV, data from the Phase III ISLEND-1 and 2 trials evaluating islatravir and lenacapavir, a once-weekly oral 2-drug treatment regimen in collaboration with Gilead. In cardiometabolic and respiratory, the September 21 PDUFA date for WINREVAIR for the label update based on the Phase III HYPERION study and the Commissioner's National priority Voucher Process for enlicitide is progressing. In immunology, data for tulisokibart, our TL1A inhibitor, based on the Phase III ATLAS-UC trial in ulcerative colitis and Phase II ATHENA study in SSc-ILD. Finally, in ophthalmology data from the Phase III BRUNELLO study of MK-3000, our novel Wnt agonist, being evaluated in patients with diabetic macular edema and the Phase II portion of the RIOJA study of MK-8748 being evaluated for the treatment of patients with certain retinal diseases. I look forward to providing further updates throughout the year. And now I will turn the call back to Peter. Peter Dannenbaum: Thanks, Dean. Julie, we're ready to start the Q&A now. We'd appreciate if analysts would limit themselves to a single question today so we can conclude the call at the top of the hour. Thank you. Operator: [Operator Instructions] Our first question comes from Carter Gould with Cantor. Carter Gould: Maybe we'll start on the pipeline on MK-3000. How are you thinking ultimately about dosing the 1-year BRUNELLO data is likely not going to inform much on duration interval and the Lucentis comparison is going to leave lots of questions unresolved. I fully appreciate that 40% have suboptimal responses to VEGF, but can this reach your targets if it ultimately requires every 4-week dosing? Or put differently, are there reasons you have conviction about every week or every 12-week dosing? Dean Li: Thank you very much. So just stepping back, MK-3000 is our potential first-in-class novel candidate targeting Wnt pathway. -- for retinal vascular disease. Almost all the other mechanisms are based on VEGF. And as you've highlighted, up to 40% have suboptimal response to VEGF. In terms of dosing, frequency, when one sort of does these trials once start at every 24 weeks and upon doing that, then you go further from that. So we believe that one should focus on Q4 weeks, but one should not only focus on Q4 weeks. So your question, which I think alludes to, are we considering other frequencies, the answer is absolutely yes. But the initial focus is on 4 weeks because that is very important to get into the label. I just want to also highlight really quickly that it's not just MK-3000, it's MK-8748, which is the novel bispecific directly agonizing Tie-2 that we're also excited about, and that as well is advancing in Phase IIb/III trials in retinal vascular disease. Operator: Our next question comes from Jason Gerberry with Bank of America. Jason Gerberry: Had an update or a question on the WELIREG clinical update on LITESPARK-012 recently provided. And I wanted to get your sense, does this provide any concerning read-through to some of the ongoing readouts for LITESPARK-022 and the ability to see OS benefit there? And also, you have another frontline study with WELIREG, albeit in a post-PD-1 setting. So just kind of curious if you can speak to some of the read-throughs to some of the ongoing trials. Robert Davis: We were having a hard time hearing you, Jason. Let me restate the question. And then I think I'll get it. I think what you're asking, given the LITESPARK-12 outcome, how does that make us think about getting OS in some of the upcoming LITESPARK studies and what's our overall view as it relates to WELIREG. I think that's the way I was trying to ask. Dean Li: Thanks because I could not hear quite well. In relationship to the other ones like LITESPARK-022, LITESPARK-011, which have PDUFA date in June and October. I think we're very bullish in relationship to how those will turn out. And also in relationship to the question that you have of how -- what's the readout of this trial that had 3 agents involved, which is a PD-1, VEGF TKI and a HIF-2-alpha, I think we are studying that data, but I would be very cautious to sit there and say that has any negative implication to other trials where, for example, we have a VEGF TKI and WELIREG or a PD-1 and WELIREG. Operator: Our next question comes from Michael Yee with UBS Securities. Unknown Analyst: As we think about coming up to ASCO, where you will obviously have your SAC PMT featured in lung cancer, of course, obviously, PD-1 VEGF also featured in a plenary as well from a competitor, how are you thinking about the dynamic of a sac-TMT in the context of PD-1 VEGFs and your own Lenova asset and perhaps accelerating that? And maybe just give us a snapshot being as to where we stand on these 2 types of programs. Dean Li: Yes. So I'll answer the question too individually, but I will also answer what I think you're alluding to is the possibility of combinations of that. So in relationship to the PD-1 VEGF, we're very interested in the space. We shared some encouraging early data at AACR. And our construct of the leading PD-1 VEGF is most similar to ours. And so we're looking at our own data. But to be frank, we're also looking at the broader field as well. And so we're eager to move PD-1 VEGF Ford in our trials. And one of the issues that we think in our hands, a PD-1 VEGF, if it should be better than KEYTRUDA, we have a plethora of agents that would benefit from a combination with either KEYTRUDA or a KEYTRUDA plus or a PD-1 VEGF. So we're advancing that. In relationship to sac-TMT, I believe that at the ASCO, our strong partner and collaborator Kelen will provide optotroplung-05 in first-line non-small cell lung cancer. And I think people will look at that data very carefully because it may reflect on our global trials, which are not just within China but throughout the globe. In relationship to the question that you said is, is there any possibility of thinking about combining those to -- the answer is absolutely yes. And we're developing the information and also taking a scan to the outside world as to where and when to best combine a PD-1 VEGF with the rest of our portfolio. Operator: Our next question comes from Asad Haier with Goldman Sachs. Asad Haider: Congrats on all the progress. Maybe just a high-level one back to BD, you've been fairly active across a number of different areas, and you're saying you're ready to pursue additional transactions. So just level set us on where you still see the biggest gaps in your portfolio that could benefit from more BD as you scan the therapeutic landscape? What's the sweet spot now in terms of deal size? And is there a point at which the BD lever starts to diminish in importance just given your growing confidence in the growth trajectory out of the mid part of the next decade with the portfolio transformation that's already underway? Robert Davis: Yes. Asad, I appreciate the question. I would just start by saying we are very confident in the assets we have, the new assets we bought in through business development as well as the continuing progress we're making with our pipeline. So that continues and that grows. That said, we also continue to focus on business development. And as we've said in the past, we don't necessarily target specific therapeutic areas as the first question we ask. We always ask the first question, which is where do we see a significant unmet scientific opportunity where the science is compelling and can address. And in doing that, that allows us to think about where to focus. So we start with the science. We then asked the question, how does it fit strategically and then move to the value question and where we see science and value in line we move. So that has not changed. Our approach remains to be that as our focus. From a size perspective, we continue to look anywhere in the $1 billion to $15 billion range with that kind of being the sweet spot. But as we've consistently said, we have the capacity to go beyond that for the right strategic deal. And we will, if and when we see that. So that is where we're looking as far as the therapeutic areas where we do continue to see interesting science, obviously, oncology continues to be an area where there's a lot going on. We continue to look. Immunology is an area where we continue to see interesting opportunities as well as cardiometabolic is probably the 3 most likely areas, but we are willing to be opportunistic beyond that as well. And I guess, Peter, did remind me one part. When will we have less urgency to do a deal. My view is we can always do better. We can always grow stronger. And if we have the capacity, we will continue to invest. As Dean has said, we think in terms of one pipeline, whether it's internal or external. And so that mix of internal plus external will be an ongoing part of our strategy, you will not see that change. Operator: Our next question comes from Vamil Divan with Guggenheim Securities. Vamil Divan: I just had going back to Win Revere. I appreciate your comments about the cadence data in ACC. Just curious if you could provide any updated thoughts on how the discussions with the FDA are going on moving forward the Phase II program there, you remain confident on the clinical listening being can be the primary endpoint of the Phase III? And then just maybe any sort of rough estimate on how long you think you would actually take to execute a Phase III program in this indication. Dean Li: Yes. Thank you very much. So in relationship to Wind River, I mean it's reshaping the standard of care in PAH. And now the question is whether or not we can move it to a different segment of pulmonary hypertension, those people with heart disease. The patient population that we pick is a relatively small patient population of those patients who have pulmonary hypertension and heart disease. But it's probably one of the biggest unmet needs that I know of in this patient population, who at least the way that I would describe it is a very different patient population than that of PAH. And one could actually say is more complicated, is older and has more comorbidity. We think that the cadence gives that proof of concept -- as I had said previously, it's fine to talk about the primary end point reductions in PVR. But at least for me, in this patient population, it will be very important to have the endpoints that allow someone and when I mean someone, I mean patients, providers and payers to really see a compelling conglomerate of endpoints in the time to clinical worsening. And -- and that's where we will be having our discussions with the FDA. I think the other one that will be important is defining the inclusion criteria in relationship with the FDA and also the broader community in relationship to how do you actually operationalize the clinical trial, but also for everyone to be very clear that in our minds, this is a patient population that is an orphan patient population. Operator: Our next question comes from Daina Graybosch with Leerink. Daina Graybosch: Yes. I want to go back to ASCO and the data we're going to see from Kalon on OptiTROP-Breast05. That's a China study. And I wonder what should we keep in mind as we look at those outcomes on how it could or could not translate globally any differences in what you're doing globally? Or any other things to keep in mind. Dean Li: Yes. Thank you very much for that question. So just stepping up at a higher level, we think sac-TMT, it is a coke to ADC, but we think that it has some important differentiation. And we believe that the sac-TMT has a potential to be I think Elliot has often said a cornerstone and Margaria said a workhorse ADC. And we have 17 Phase III studies, 13 are in first movers. We have an in blast, non-small cell lung cancer, gyn, gastric and bladder. When we do our trials and when we speak to our close partner, Kalon, we use the fact that they are, in some sense, doing signal finding in registrational trials in China. And we recognize China is different, but these are important data for us. In relationship to the exact details of the sac-TMT and the Kian, I would just remind you that the OptiTROP-Breast05, they will have data. But I think it's very important to sit there and go, if -- how one thinks through that in terms of how that would read out. We are following their data very much. But I think that we are guided we are guided by the results. I do want to emphasize that in their OptiTROP, it's sac-TMT plus KEYTRUDA versus KEYTRUDA in PD-L1 positive first-line non-small cell lung cancer. And it's very important that if one wants to do an ADC plus KEYTRUDA versus KEYTRUDA in the United States, ex China, one has to look at where a PD-1 and what's the range with which the PD-L1 cut-off is. And so for us, this is the first Phase III combination study of sac-TMT and KEYTRUDA to read out. We have 50% of our Trou studies are evaluating KEYTRUDA combos in our TrophUse-007, our global study at ACTMTand KEYTRUDA versus KEYTRUDA in TPS greater than 50% in first-line non-small cell lung cancer. And I emphasize that simply because in the United States and ex China, TPS greater than 50% is where KEYTRUDA has an indication. Operator: Our next question comes from Steve Scala with TD Cowen. Steve Scala: What are the gating factors for FDA acceptance of the enlicotide application? And Dean, can you speak to the changes that you're pursuing on titration? What shorter durations are you pursuing? And is the 15 minutes you spoke to previously before or after administration of the drug? Dean Li: Yes. So I would just say that the enlicitide, as we've said out is we want to have the first and best-in-class potent oral PCSK9. It's designed in a very similar manner to antibody. And the data from the Phase III as a as we have discussed, I think lay out the value statement and relationship to its potency in terms of all the important by proteins. In relationship to the CNPV, the issue in relationship with the CNP is just for all of us to understand that the NPD process is a little bit different, which is we -- it's almost like a rolling submission, sort of way to think about it. And through that rolling ambition, at the end of that sort of rolling submission, that's when the FDA sits there and gives you a letter and a PDUFA date. And so we are actively in those discussions with the FDA. And then as we normally do when we get formal acceptance of the complete file, which is a little bit different in the CMPB we'll make an announcement. I will emphasize that in our discussion with the FDA, -- what is very important to them is us really showing them that the CMPD program is important that we're addressing an important U.S. public health crisis that we're delivering innovative cures and we're increasing domestic drug manufacturer and supply chain resilient. So those are all important to the FDA, and we are in really good conversations with them. And so I think that is going quite well, and it's progressing well. I would imagine that our estimation that we could get an approval at the second half of this year I see no reason to doubt that at this moment in time. In relationship to what you said in relationship to this issue of how you would take it -- we're also in the discussion with the FDA as to what the exact label is in relationship to how they will talk about prescriptions and when to take it and how to take it. And I don't want to get ahead of that conversation because those are extremely active conversations as we speak. Operator: Our next question comes from Chris Schott with JPMorgan. Christopher Schott: I just wanted to touch base on TL1A I think this one's got maybe a little bit less attention than some of your other late-stage readouts this year. But can you just talk a little bit about the role you're seeing TL1A playing in the IBD space? And maybe more broadly, when we think about immunology and IBD, there does seem to be more discussions about combination therapy as maybe the next step for the market. I'm just interested in Merck's approach here kind of building on the TL1A as I think about a broader pipeline? Dean Li: Yes. So I would begin to say that throughout the immunology sort of field, there are certain nodes that are really important 23 is an important note. TNF is an important note. And that's how the field is set up. We wonder whether TL1A is such a node and that -- and our hope is to laSocobar could be 1 of the first and best-in-class TO1As. So that's in that sort of framework. The other thing that you've just said, I think is really important is that there is increasing interest in combining different these nodes. This is something that was tried 10, 15, 20 years ago, and it didn't turn out well. But now the data suggests that in certain cases, you could begin to combine. When you look at the AE profile of tubasocopart, it's if you take the Phase II data, not just our Phase II data, but across the Phase II data. It is a member of the TNF superfamily, but from an AE profile, I might describe it as a kinder gentler AE profile than other NOTO-TNFs and with profound efficacy. So I think combinations will be employing. -- in relationship to what we hope to see in relationship to Phase III ulcerative colitis and chronic and Crohn's disease, we have readouts coming out we hope to be first mover, but I also want to emphasize that we also think that TL1A may be also distinguished not just to be an important note, but it may be important for not just inflammation or dampening but also for fibrosis. And we have Phase II data in SSC ILD and in HS that's coming in 2026. And that hopefully will define the unique role or the unique position that T1 has with all the other major notes. Operator: Our next question comes from Louise Chen with Scotiabank. Louise Chen: I wanted to ask you about the CADENCE study. There was some debate on the results that you recently presented at a medical meeting. And I'm wondering what you think the Street may be missing about the competitiveness of your product. Dean Li: So I'm not sure I know everything that you're referencing. In terms of the competitiveness of our product, I don't know how else to answer it is, I don't know from a competitive standpoint that there's any treatment for this patient population. And when I look out, I'm not so sure that I see something that, that will break that barrier. In terms of whether or not you can make a Phase III, but sort of models what happens in the Phase II. I think that's where the focus is. And that's been the focus in our conversations with KOLs, but also the FDA. And there is a clear understanding that this patient population, this patient population is 1 with a tremendous unmet need. And so I don't know that I would call it competitive sort of dynamic sort of thing. It's whether someone for the first time can have a compelling treatment for a patient population that is in dire need. Operator: Our next question comes from Omar Raffat with Evercore. Umer Raffat: I wanted to touch up on some incremental information that came out on your turns deal, which I don't think we discussed on the call you as did earlier. And by my math, it looks like the incremental patients may have had an MMR achievement rate of something like 2 out of 10 or something along those lines. Could you just speak to the -- that drop and how does that change or not change your overall thoughts about the drug's profile? Because presumably, that's like the real target population early in the launch? Dean Li: Yes. Thank you so much for that. So I would just say that in this -- in CML, there's multiple approved therapies, and it appears that there is significant unmet need. And the value proposition for us for turns to 101 is whether or not it has the potential to be a best-in-class Alister TKI with high selectivity and improved therapeutic index. When data is presented at some of these meetings initially when they're early, Oftentimes, they're stated in 1 way. But for us, it's really important to always look at that data, whether it's especially when you go to ASCO, AACR or ASH, we look at it immediately in the eyes of how do you think in terms of registration. And it's very important to translate whatever the abstract says to, what I would say, a more conservative ITT population consistent with regulatory standards. Given that, what was laid out at these public congresses is turn stated to 75% MMR and 36% DMR achievement rate. As the data evolved and we were looking at very specific patient-level data we believe that the MMR will be north of 50%. And within the confidence interval as had been publicly stated. And we think that in MMR in that sort of range is extremely compelling. And then the other point that I would just highlight is we also think that the DMR rate is also very interesting to look at and whether or not this drug could not only create a best-in-class in relationship to MMR, but whether it could catalyze the field to increasingly think of DMR as a treatment goal. Operator: Our next question comes from James Shin with Deutsche Bank. James Shin: Dean, have a question. Can you help us distinguish MK-6837 from sac-TMT? And then just going back to the TL1A question, is there a view within Merck that TL1A could stand alone in immunology because from a market or commercial perspective, immunogy seems to be very much a portfolio-driven strategy. Some of your peers have large portfolios, and there's a very competitive remote that's built with that? Dean Li: Okay. So let me ask -- let me tackle the immunology question really clearly. We're very focused on TL1A, but if you ask me is TL1A is our ambition to stop at TL1A, -- would we use TL1A as a beach at to expand and extend. The answer is we would undoubtedly move it to expand and to extend -- we had expanded from IBD to other conditions, and we would advance it to conditions where the combination of immunofibrosis would be really important. In relationship to other molecules, of course, if one had a leading TL1A that could advance through the series of different indications that we have, then in each 1 of those indications, you would immediately think of what's the combinatorial partner whether it be in IBD or HS or in SSC IOD. So we would immediately think about doing that as well. So we are focused on TL1A, but that focus does not create a situation where we're not thinking about not just whether we can be first and best, but what's next as well. And I think the other question was related to MK-6837. Is that correct? I didn't catch the other one. MK-6837 is another ADC, which had a unique payload, and we have discontinued that especially when you see the profound impact of sac-TMT and also in relationship to -- we've always said that we're very interested in the ADC field in changing the target but also changing the payload and thinking about combinatory or cycling different payloads as the field moves on in the antibody drug conjugate. Robert Davis: Maybe I could just add 1 little bit as a teaser, maybe to what you'll see as we go into next year and beyond. In our invisible pipeline we often refer to we have other assets in the immunology space that you're not seeing right now. So just to reinforce Dean's point, we aren't just a TL1A company. We have other things in development beyond that. And as we move forward in time, you'll start to get a better sense of that as we unleash that as it moves into Phase I. All right. Thanks, James. We'll squeeze one last question in before we end the call. Operator: Our last question comes from Geoff Meacham with Citibank. Geoffrey Meacham: All right. Dean, in HIV, just given the recent approval of Avito, can you talk about how you guys see the competitive setup and related, I know you have prep coming up, but how much of a strategic priority is HIV and infectious disease when thinking about the overall BD strategy. Dean Li: So in terms of our interest in HIV, there is a profound interest in really in our HIV program. And for those of you who've talked to Eliot Bar, the Chief Medical Officer, I think you can feel that just in his presence. Islatravir is a next-generation nucleoside reverse transcriptase inhibitor. It blocks translocation, and we have the daily program -- and increasingly, there is interest in going from a 3-drug daily program to a 2 drug. And of the 2 drug daily programs, I think we're the only ones without an entity backbone. So I think that's very important. -- critically also important is that we believe ezlotivir can anchor to weekly, and you see it in later lenacapavir, which is a 2-drug combo, which hopefully will be the first Q week and then loci with UL, which is in development, and there will be data being presented, I think, in due course, it could be the smallest pill could be favorable DDI profile and be extremely effective. And then as you said, to me, the monthly, if you could have 12 pills and protect people with MK 852 I think that would just be such an important contribution as a commercial product, but also as a global product for public health throughout the world. So if the question is, are we committed? And are we passionate about our HIV program? I hope that you heard from the tenor of my response, the answer is unequivocally yes. Peter Dannenbaum: Great. Thanks, Geoff, and thanks, everybody. Apologies for going over a few minutes. Give us a call if you have any follow-up questions. Thank you. Operator: Thank you for your participation. Participants, you may disconnect at this time.
Operator: Good morning, ladies and gentlemen. Welcome to Compañía de Minas Buenaventura S.A.A. First Quarter 2026 Earnings Results Conference Call. At this time, all participants are in a listen-only mode, and please note that this call is being recorded. I would now like to introduce your host for today's call, Mr. Sebastian Valencia, Head of Investor Relations. Mr. Valencia, you may begin. Sebastian Valencia: Good morning, everyone, and thank you for joining us today to discuss our first quarter 2026 results. Today's discussion will be led by Mr. Leandro Garcia, Chief Executive Officer. Also joining our call today and available for your questions are Mr. Daniel Dominguez, Chief Financial Officer; Mr. Juan Carlos Ortiz, Vice President of Operations; Mr. Aldo Massa, Vice President of Business Development and Commercial; Mr. Alejandro Hermoza, Vice President of Sustainability; Mr. Renzo Macher, Vice President of Projects; Mr. Juan Carlos Salazar, Vice President of Geology and Explorations; Mr. Jorge Navires, Chairman; and Mr. Raul Navidres, Director. Before I hand the call over, let me first touch on a few items. On Compañía de Minas Buenaventura S.A.A.’s website, you will find our press release that was posted yesterday after market close. Please note that today's remarks include forward-looking statements that are based on management's current views and assumptions. While management believes these assumptions, expectations, and projections are reasonable in light of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. I encourage you to read the full disclosure concerning forward-looking statements within the earnings results press release issued on 04/29/2026. Let me now turn the call over to Mr. Leandro Garcia. Leandro Garcia: Thank you, Sebastian. Good morning, and thank you for joining us today to discuss the quarterly results of the company. On Slide two is our cautionary statement, important information that I encourage you to read. Today, we will talk about our first quarter 2026 performance, our main achievements, and our priorities for the future. After the presentation, we will be available for the Q&A session, where our team will be happy to answer your questions. Next slide, please. I will start with a summary of our operational results for the quarter, followed by an update on our permitting status. Gold production was 30 thousand ounces, up 80% year over year, mainly due to the ramp-up operations at San Gabriel. As production volumes continue to ramp up, the company expects to begin recording sales in the second quarter of 2026. Silver production reached 3.9 million ounces, up 6% year over year, compared to 3.7 million ounces in the same period last year. This increase was mainly driven by higher production at El Brocal. The result is in line with the mine plan for the quarter. We focused on processing ore that had been previously classified as low-grade silver ore. Uchucchacua and Tambomayo also contributed to this result. At Uchucchacua, production increased due to higher throughput and higher silver. At Tambomayo, production improved as we prioritized higher-grade ore from the upper sections of the mine. Copper production in this first quarter reached 10.9 thousand tons, down 11% year over year. This decrease was mainly driven by lower production at El Brocal, as we focused on processing silver ore. Turning now to permitting, I will briefly review the permits received. During 2026, we received Stage one of the operating permit for San Gabriel. This approval authorizes us to start operations to process and commercialize the mine ore. Also at San Gabriel in April 2026, we received the water use license. This permit allows the storage and use of water at the Agani Dam. At Yumpag, the second ITS received in 2026 allows us to increase ore extraction to 12 thousand tons per day. In addition, we expect to receive the mine plan modification in 2026 as planned, which is required to achieve this level of production. At El Brocal, the first ITS approved in 2026 increases mine extraction capacity to 17 thousand tons per day, in line with the company's medium-term strategy. Finally, at Trapiche, the Environmental Impact Assessment was approved in 2026. This permit provides environmental certification for the construction and operation of the project. Overall, these permitting milestones help unlock capacity, support ramp-up, and increase operational certainty across our portfolio. Moving on to the next slide, I would like to summarize our first quarter results. Starting with revenues, total revenues reached $625 million in the first quarter, more than doubling year over year, reflecting stronger operating performance and a more favorable market environment. Looking at EBITDA from direct operations, we achieved $386 million, more than three times higher year over year, with margins improving from 41% to 62%. Stronger operations resulted in a net income of $355 million, a 142% year-over-year increase. On the capital allocation side, CapEx for this quarter totaled $81 million, mainly focused on San Gabriel alongside sustaining Trapiche, aligned with our growth priorities. After the quarter end in April 2026, Compañía de Minas Buenaventura S.A.A. received $59 million in dividends from our stake in Cerro Verde. Total dividends received year to date 2026 amounted to around $157 million. Finally, all of this is reflected in our balance sheet strength. The quarter ended with a cash position of $760 million and a total debt of $[inaudible] million, resulting in a net cash positive position. Moving on to cost applicable to sales. Starting with the corporate cash, changes are mainly explained by developments at El Brocal, where we see higher personnel costs. These are mainly driven by increased workers' profit sharing provisions, reflecting improved profitability. In addition, higher cement consumption and foreign exchange impact affected costs. These effects were partially offset by improved commercial terms. Silver cash increased due to higher personnel costs, together with higher commercial deductions related to escalates mainly at Uchucchacua and Julcani. Gold cash increased versus the same period last year due to higher personnel costs, lower throughput reducing scale efficiencies, and higher operation costs at Orcopampa and Tambomayo. On the next slide, we highlight our strong free cash flow generation in 2026. Solid operating performance supported by dividends received allowed us to close the quarter with a cash position of $760 million. To conclude the presentation, I would like to share a few final thoughts. First, San Gabriel entered the ramp-up phase during 2026 and began contributing to Compañía de Minas Buenaventura S.A.A.’s results in line with expectations. Second, we continue to make progress on permitting and regulatory approvals across the portfolio, supporting the disciplined execution of the company's long-term strategy. Third, execution across the portfolio remained consistent, delivering predictable results and reinforcing balance sheet strength and financial flexibility. Finally, cash generation remained robust and well diversified across direct operations and affiliate companies, supported by continued dividend inflows from Cerro del Rey. Thank you for your attention. I will hand the call back to the operator to open the line for questions. Operator? Operator: Please go ahead. Thank you. We will now begin the question and answer session. To ask a question, dial in by phone and press star then one on your telephone keypad. Make sure your mute function is turned off, and if you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question today comes from Carlos De Alba with Morgan Stanley. Your line is now live. Please ask your question. Carlos De Alba: Thank you. Good afternoon, everyone. So I have three questions, if I may. The first one is, can you provide more color and details on how San Gabriel ramp-up is going? What are the challenges, maybe bottlenecks that you are facing at this stage? And what is expected output for the second quarter at San Gabriel? The second question is on El Trapiche strategy. Clearly, you got now the environmental approval. You have a very strong balance sheet. Have you decided if you are going to pursue this project and build it on your own, or if doing it together with a partner is more likely? And then finally, on dividends, what are the expectations for further dividends from Cerro Verde in addition to the ones that you have received to date, including the $59 million in April? Thank you. Leandro Garcia: Thank you, Carlos, for your questions. Well, beginning with the first question about San Gabriel, as you know, we are in the first stage of the ramp-up. We have some challenges, but up to now, we are in line with expectations. Maybe Juan Carlos Ortiz can give you more details about how we are going with San Gabriel. Please, Juan Carlos. Juan Carlos Ortiz: Sure, Leandro. Thank you, Carlos, for your question. The projects that we have in the first quarter in San Gabriel were related to the conclusion of the commissioning, the training of our team, and starting to run all the machines as a sequence, as a system, right? It is crushing, milling, cyanidation, filtration of the tailings. So we have some progress on that regard. We are almost finishing with all the commissioning part, the mechanical assurance that everything is in place. Now we are training our people and starting the fine-tuning of every single circuit. For instance, we have some challenges with the high moisture of the ore getting stuck on the conveyor belt for the crushing circuit. This is going to be solved in the coming weeks, first, because we are entering the dry season, and second, because we are changing the system to remove the clays in the screening of the crushing circuit. Then in the milling circuit, we had some malfunction of an electronic device. We already found the trouble and we switched that part with a new one, so we are running okay right now with the grinding mill weight. In cyanidation, from the mechanical point of view, we have small challenges like the speed of the pumps and some resizing of some small boxes to avoid any potential spilling of the slurry. And in the filtration part, we are pretty much at 50% delivery from the vendor. We finished all the commissioning part, and now we are putting the filter presses to filter the tailings. With a 50% product, we are running with eight bars of pressure, and we are moving step by step up to reach the 14 bars that are considered in the design. From the progress in the processing plant to the tailings dam, we are starting right now in May. We will start putting the tailings out of the temporary reservoir, start to dry the tailings, and probably in June, we will start placing the tailings in the tailings dam. That is going to be the first time we do that in San Gabriel. We need to speed up; we anticipate some training process to be transferred to the team from the team of Tambomayo to the team of San Gabriel to do exactly what we learned to do in Tambomayo: how to dry the tailings, how to reduce the moisture, how to place the tailings in the tailings reservoir, and how to compact those tailings. So that is exactly the agenda of the second quarter. We are expecting to solve most of the, or the majority of, the most sensitive issues from the throughput and from the mechanical availability of the processing plant in the second quarter. And as we anticipated earlier in the previous conference call, the main constraint will be the area that we have available in the tailings dam. It is a narrow valley and we are starting working at the bottom of the valley, so we do not have that much area available. Every single lift that we compact, we gain additional area. So gradually, we increase tonnage as an average. We expect to finish at 2 thousand tons per day by December 2026 and reach full capacity, 3 thousand tons per day, by 2027. So that is pretty much what we are doing right now, Carlos. Leandro Garcia: Thank you, Juan Carlos. Going back to your second question about Trapiche, we are far from that decision if we go alone or we call for a partner to post-develop that project. We are in a stage of investigating all the geotechnical aspects and more drillings we need. Maybe Renzo can help us with what we are facing this year and the following two years until we reach the feasibility study. Please, Renzo, go ahead. Renzo Macher: Sure, Carlos. We are going to be continually de-risking the project in regards to acid consumption, acid pricing, and acid logistics. That is going to be one of our main goals. We continue exploration of the primaries, and we are going to be starting, as we finish the Environmental Impact Assessment study, with the next permit or the next social permit, which is the previous consultation permit in this case. Leandro Garcia: Thank you, Renzo. Going back to your question about dividends from Cerro Verde, well, we foresee an excellent year for Cerro Verde. The operations are going as planned. They do not have a dividend payment policy, but I think this year cash generation will be extremely good. We have some expectations. Daniel, please. Daniel Dominguez Vera: Thank you, Leandro, and thank you, Carlos, for your question. Yes, as Leandro was saying, Cerro Verde will generate a lot of cash this quarter or this year, considering that the price of copper is over $12 thousand per ton. We expect Cerro Verde to generate in excess of $2.5 billion of EBITDA. They have small CapEx, $350 million to $400 million. In taxes, they should be paying around $1 billion. They do not have any debt. So the free cash flow for this year in Cerro Verde, considering the current prices for copper, should be in the order of $1.2 billion to $1.3 billion. They already have cash in their balance, the minimum cash required for the operations. So they should be distributing around $200 million to Compañía de Minas Buenaventura S.A.A., from which they have already distributed $160 million from January to April. Operator: The next question comes from Tanya Jakusconek with Scotiabank. Please go ahead. Tanya Jakusconek: Great. Thank you so much for taking my questions. Good afternoon, everybody. I wanted to follow back on San Gabriel. I appreciate all of the hard work you are doing on getting the ramp-up, and there is always something going on mechanically and otherwise. But I must say I am surprised about the clay in the ore. I did not realize that there was clay in the ore. Can you just remind me what exactly, what mineral do you have, and how are you removing this? And are you surprised you have clay in the ore? Juan Carlos Ortiz: Yes, we do have two types of clay. I do not know how to pronounce it properly, but this is montmorillonite or a kind of expansive clay that we have in the deposit. It varies from 1% to 8% in different places of the deposit. When we transport the ore from the mine, when we strike the ore from the mine, we usually have between 4% to 5% moisture, no more than that. But when we put the ore in the stockpiling surface, during the rainy season, the moisture can go up to 40%, only from the rain coming down into the stockpile. And this clay, because it is an expansive or swelling clay—I think that is the technical term—generates a lot of problems in the crushing circuit because it is very sticky. It starts getting into the boxes in between the transfer point of the crusher into the conveyor belt, or at the end of the conveyor belt in the stockpile, or from the stockpile into the feeder to the mill. Solutions to that: there are two things that we are analyzing. One is using a screen where you use water so we can spray water on top of the ore while it is passing through the surface of the screen to remove the fine fraction. That is one option. It is not going to take that much time. And the other is using what we use in Brocal, what we also use in Colquijirca. That is a drum where we have screen around the surface of the drum so we can wash the ore as it travels through the drum. That is something that we have been using for many, many years when we process the ore from the open pit, and also we use that in Colquijirca because the ore underground also has, depending on the area, a high content of clay and complicated questions. That is going to be the solution for the clay areas underground for the next rainy season that starts in December–January next year. Tanya Jakusconek: Is this clay consistent throughout the ore body, or is it just in patches? And have you seen, once you get it through the crushing circuit and through the conveyor, does it negatively impact your recoveries? Juan Carlos Ortiz: No, it is not impacting negatively the recovery. We need to make a little adjustment in the density of the slurry in order to reduce the viscosity. If we go to 1.4 thousand grams per liter, the viscosity goes too high, so we need to go down to 1.32 thousand grams per liter in order to have a fluid slurry that has all the rheological properties as designed, and then the interaction between the cyanide, the gold, and the activated carbon works as planned. So it is not a sensitive issue. It is something that we need to find a way to operatively treat whenever we are bringing that material into the processing plant. Tanya Jakusconek: Okay. And sorry, did you answer if it is all the ore body or is it in specific areas? Juan Carlos Ortiz: We are studying that because we do not yet have a detailed distribution of the clay. We have information, but we have not developed a model of clay distribution in the deposit. We have a distribution of gold, silver, carbon, organic carbon, but we do not have a distribution of clay. So we are on that because we have the information in the logging record. We are building that model in order to make a proper blending and try to avoid being over, let us say, 6% total clays into the feed of the processing plant. Right now, we have certain days where we are at 8% and maybe sometimes 9% clays. That is when we start getting problems along with the rainy season. Today, in the dry season, this is not going to be a problem. Tanya Jakusconek: Thank you for the explanation on that. And the second item, maybe someone can answer for me. As you are aware, with the volatility of oil prices and other things going on around the world, I just wanted to understand how you in Peru are managing supplies coming into the country, and I just want to understand whether you are seeing any constraints in getting supplies into the country and/or to your mine sites, like we did in COVID times. Are you having to increase your working capital or stockpile selective consumables? So maybe just where are you seeing any pressures on the supply chain front for your company, if any? Daniel Dominguez Vera: Thank you, Tanya. We have not seen any major disturbance or problems in the supply chain. Diesel has increased in price rather than being difficult to get more diesel. The price has increased 50%, and also this component, diesel, is around 5% of the total OpEx that we have, so the percentage of increase in our costs is around 2% to 2.5%. We think that this will be the case for the entire year. Regarding other supplies like cyanide or sulfuric acid, we do not see any problems in the supply of these reagents or supplies. We have in our mines a one-month stock for continuous operation, and also in Lima, in the Port of Callao, we have an additional three months for our critical supplies. So we do not foresee any problems with any supplies. Tanya Jakusconek: So, Daniel, it is not a supply issue getting to site; it is more a cost issue of it is just going to cost you more. Daniel Dominguez Vera: Yes, exactly. Tanya Jakusconek: Okay. And then my final question, if I can, and someone in the team wants to take this. Maybe for us sitting in North America, just a flavor of, with the elections going on, what is happening in Peru from both fiscal regime and maybe social as well with a new leader in place. Can someone give us some insights into the politics of Peru? Leandro Garcia: Thank you, Tanya. Well, finally, the two candidates that will pass for the ballot are not finally defined. Keiko Fujimori is for sure there, but they are still counting the votes for Rafael López Aliaga and Roberto Sanchez. The important thing here is the new composition of the Senate and the Deputy Chamber. If you see those results, you will appreciate a decision that is more center and center-right. We do not foresee any changes in legislation. Of course, there will be some demands, but we feel comfortable with how this new Congress has been elected. That will warrant some kind of peace in terms of new ideas or things that normally social unrest can ask, no? The campaign has been quite easy; there have not been many problems in the regions. So we are confident that business area and business performance will go ahead well in the following years. Tanya Jakusconek: So can we assume that there are no changes to taxes and/or royalties? Leandro Garcia: There should be some voices that would ask, but I do not think that the composition of the new Congress will pass that call. Tanya Jakusconek: Okay. And what about on the permitting front? Is there the potential for this new government to make permitting and getting permits a lot easier? Leandro Garcia: Well, it depends on who is finally the winner. We try always to communicate the difficulty and the bureaucracy and the length that it takes to be granted a permit. It is a common ask from the mining sector and the investor sector to facilitate the granting of permits, right? Tanya Jakusconek: Yeah, we all hope, right? Thank you. Thank you for taking my questions. Leandro Garcia: Thank you, Tanya. Operator: The next question comes from Cesar Perez-Novoa with BTIG. Please go ahead. Cesar Perez-Novoa: Yep. Going back to the San Gabriel contained clay, if I heard correctly, when you install the screen mesh panel, which I think is what you are going to use, will that have an impact over OpEx at the mine, and will this have any additional CapEx spend? I guess not, but I want to confirm if this is technically feasible or not. Juan Carlos Ortiz: We are in the stage of developing the options. As I mentioned, we have two options: to have what we call a banana screen—that is something that has a shape with a higher slope at the beginning—and then you wash water on top. That machine costs in the order of $300 thousand. Probably, at the rule of thumb, three-to-one installed, the CapEx for that piece of machinery working on-site is around $1 million. That is going to be the additional capital we need to include to be sure that clay is not going to be a problem in the crushing and grinding circuit in the future. From the operating point of view, maybe, I do not know, $0.10 per ton. That is a very, very small additional cost that we expect to run these additional circuits in San Gabriel. So it is more the CapEx of the year, an additional $1 million, to add this component to the flow sheet of the processing plant. Cesar Perez-Novoa: Okay. No, that is very clear. Thank you very much. It is essentially an irrelevant cost for the incremental spend. Thank you. Juan Carlos Ortiz: Thank you. Operator: Ladies and gentlemen, with that, we will be concluding today’s audio question and answer session. I would like to turn the floor back over to Sebastian Valencia, Head of Investor Relations, for any webcast questions. Sebastian Valencia: Thank you, operator. The fourth question comes from Jordan Rosano from Calpasap: Have you seen some cost pressures related to personnel expenses? Is this something you expect to continue through the year? And could you provide more color on the main drivers behind this increase, and whether it is related to wage adjustments, higher headcount, contractor costs, or the ramp-up of San Gabriel? Daniel Dominguez Vera: The increase in the costs related to personnel is coming from the higher workers' profit sharing. As we are having higher profits in Compañía de Minas Buenaventura S.A.A. and in El Brocal, we have to pay more for workers' profit sharing. It has increased from $2.5 million last year to almost $19 million this year. Most of this goes to the cost of sales for each mine, and also it goes to administrative expenses. In terms of wages, there have been no major increases; we have increased only with the inflation rate. And in terms of headcount in the mines, specifically El Brocal, we have additional operators for new equipment, but these have not made a big difference compared to last year. So basically, the difference is due to the higher workers' profit sharing. Sebastian Valencia: Thank you, Daniel. And the final question comes from Jaime Yalde from Cinno R Capital: Is Compañía de Minas Buenaventura S.A.A.’s corporate policy still to remain unhedged in copper, gold, and silver? Daniel Dominguez Vera: Yes, Sebastian. Yes. Our policy right now is that we can hedge, but we prefer not to hedge. We will go with the market. As probably everybody is aware, we had a lot of problems with Tornado in the past for some hedging, and as far as I know, any audit from Sunat of the mining companies is positive. We prefer not to hedge for the time being. Sebastian Valencia: At this time, there are no further questions. I would like to turn the call over to the operator. Operator: That concludes the question and answer session of today’s conference call. I would like to turn it back over to management for closing remarks. Leandro Garcia: Thank you. Before we finish, I want to thank Alejandro Hermoza, our Vice President of Sustainability. This is his last conference call with us. He has been with us almost 25 years. He has been an important pillar of this team. And of course, we foresee Alex to continue being part of our family. The doors always are open, and we will miss a couple of coffees with you. Thank you, Alex, for all your effort, and the best for you in this new stage. And to all who were with us today, I would like to thank you for your time and effort dedicated to joining us. You are greatly appreciated. Thank you again and have a wonderful day. Operator: Ladies and gentlemen, that concludes Compañía de Minas Buenaventura S.A.A.’s first quarter 2026 Earnings Results Conference Call. We would like to thank you again for your participation. You may now disconnect.
Operator: Good morning, and welcome to American Water's First Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for 1 year on American Water's Investor Relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin. Aaron Musgrave: Good morning, everyone, and thank you for joining us for today's call. At the end of our prepared remarks, we will open the call for your questions. Let me first go over some safe harbor language. Today, we'll be making forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based on our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the first quarter earnings release and Form 10-Q, each filed yesterday with the SEC. This call will include a discussion of non-GAAP financial information. A reconciliation of our historical adjusted earnings per share to GAAP earnings per share and other disclosures related to our non-GAAP financial information can be found in the appendix of the slides for this call. And finally, all statements during this presentation related to earnings and earnings per share refer to diluted adjusted earnings and earnings per share. With that, I'll turn the call over to American Water's President and CEO, John Griffith. John Griffith: Thanks, Aaron, and good morning, everyone. As we announced yesterday, we started 2026 with financial results that were right on track to achieve our full year earnings guidance, which we are pleased to affirm again this quarter, along with our long-term targets. Adjusted earnings were $1.01 per share for the quarter and reflect a successful execution of our plan so far in 2026. We expect to again deliver 8% EPS growth in 2026, while continuing to provide high-quality, affordable service to our customers. We are well on our way to executing on our regulatory and capital plans for 2026 with rate cases completed in 2 states and investments in infrastructure progressing well. Our teams have also continued to advocate for our customers in various facets to start the year. For example, we've now secured approximately $185 million of net payments from PFAS manufacturers that will be passed on to customers or offset the cost of PFAS remediation. And in 2 more states, we've helped advance legislation in 2026 and that should set the foundation for expanded limited income customer bill assistance. These efforts align squarely with our mission to provide safe, clean, reliable and affordable service to our customers. In sum, for Slide 5, I am confident we'll successfully execute on our plans for 2026 and beyond. Moving on to Slide 6. As we announced yesterday, our Board of Directors approved an increase in the company's quarterly cash dividend of 8.2% to $0.8950 per share. We have grown our dividend consistently over the last decade, significantly outpacing virtually all of our utility peers. Looking ahead, we continue to expect to grow our dividend at 7% to 9% per year in line with our compelling 7% to 9% EPS growth target. Our Board and management team highly value our dividend and its contribution to our compelling total shareholder return for investors. In closing, on Slide 7, I'm pleased to share that we've achieved another milestone on the path to closing our proposed merger with the Essential Utilities. You may recall, as a part of the update I provided in February, we filed all of the required state regulatory approvals prior to the end of 2025. Last week, we received our first state approval for the merger in Kentucky. We expect to receive the next decision in Virginia in June. In other states, including in Pennsylvania and New Jersey, the cases are proceeding as planned with procedural schedules expected to continue through the summer and early fall. Also, late this summer, we plan to file the Hart-Scott-Rodino notification application related to the proposed Essential Utilities merger. Finally, we continue to expect the merger to close by the end of the first quarter 2027. With that, I'll hand it over to David to cover our financial and regulatory update in further detail. David? David Bowler: Thanks, John, and good morning, everyone. Starting on Slide 9, I'll provide some further insights into our financial results for the quarter. Consolidated earnings were $1.01 per share, which, as John noted, is in line with our expectations. Revenues were higher due to authorized rate increases to recover investments across our states, while O&M, depreciation and financing costs increased as expected. Our outlook for these categories for the year remains unchanged, which you can see from the full year waterfall included in the appendix. As you would expect, the majority of our EPS growth will occur in the second half of the year with revenue increases in key states expected to go into effect in Q3. Slide 10 provides a look at our balance sheet, and liquidity profile. Our total debt-to-capital ratio as of March 31 was 58% which has improved compared to our year-end following the repayment of the $795 million HOS note in February as we expected. On April 1, we completed a successful long-term debt issuance of $700 million at 5.2% that attracted strong demand. Our financing plan for 2026 also still contemplates settling the roughly $1 billion of proceeds from our equity forward in the middle of this year. Related to credit, we continue to have strong investment-grade credit ratings at S&P and Moody's. Both agencies note our trend of credit supportive regulatory outcomes and expect to sustain FFO-to-debt ratios that are well within the current ratings thresholds. Slide 11 covers the latest regulatory activity in our states. We received final orders in West Virginia and Maryland during the first quarter, both of which had reasonable outcomes in terms of revenues and ROEs balanced with our continued focus on affordability. West Virginia American Water now has over $1 billion of rate base and our team there continues to receive positive feedback from stakeholders in the state as a solution provider, which Cheryl will further talk about in a few minutes. On active cases, you can see we have general rate cases and progress in 5 jurisdictions. Our cases in Virginia, California and Illinois are progressing as expected and are just now entering key phases in their procedural schedules, as you can see on this slide. In New Jersey, our rate case is progressing with the next major step in the case in Rate Counsel and intervenor testimony due June 22. As a reminder, from our last case filed in 2024, we entered into a settlement agreement in August of that year, with rates effective in September of 2024. We expect new rates for the current case to go into effect later this fall. In Pennsylvania, briefs from all parties were filed earlier this month in line with the procedural schedule and a recommended decision from the administrative law judge is expected in May. We are encouraged by the tone of the case over the last several months. Prior to filing the case and through testimony filed, we have had the chance to highlight our numerous investments in water and wastewater systems for the benefit of our customers. And throughout this case, we believe our commitment to affordable service and our willingness to help our new communities in need of water quality and wastewater solutions has been recognized. While settlement wasn't reached before the procedural deadline of April 6, we feel confident in our filed positions and the investments we've made and plan to make to serve Pennsylvania American Water customers. We expect the final order from the commission in July and new rates effective in August. Turning to Slide 12. As John mentioned, yesterday, we affirmed our 2026 adjusted EPS guidance range of $6.02 to $6.12 per share. This represents our expectation of 8% EPS growth in 2026 compared to 2025, consistent with what we laid out last fall. We also continue to expect to achieve consistent EPS and dividend growth well within the 7% to 9% range through 2030 and beyond. With that, I'll turn it over to Cheryl to talk more about our capital program, legislative wins, and our recent acquisition activity. Cheryl Norton: Thank you, David, and good morning, everyone. Starting on Slide 14, we successfully invested in many important capital projects across our footprint in the first quarter of 2026. These projects are mostly focused on pipe replacement, aboveground treatment facilities, including PFAS remediation, removing lead service lines and investing in updated technologies like smart meters. These investments are crucial for us to deliver on our core mission of consistently providing safe, clean and reliable water and wastewater services, and we remain vigilant about utilizing our scale and expertise to control costs and keep bills affordable for our customers, which I'll speak more about in a minute. Slide 15 outlines 4 important pieces of priority legislation for us that were passed already in 2026. In Iowa, an infrastructure recovery mechanism is expected to go into effect on July 1 of this year that will allow us to recover certain investments more timely outside our general rate cases. In Indiana, we'll be able to adjust for power and chemical costs if they change by more than 3% during a certain period. This will become effective on July 1. These bills will help to reduce our overall regulatory lag and further demonstrate the constructive regulatory and legislative environments in these states. Additionally, as John mentioned, Maryland and Virginia both passed affordability-related bills that we pursued to benefit low-income customers. American Water continues to advocate for customer affordability legislation at the state and federal level. And lastly, on Slide 16, we continue to be well positioned for growth through acquisitions across many states with 105,000 customer connections currently under agreement from deals totaling $565 million. In order to meet our 2% goal for customer additions, we know that growth needs to come from multiple states. You can clearly see that our investment in dedicated originators who are focused on targeting and initiating acquisitions across our footprint is being reflected in deals under agreement in many states. In March, we completed the acquisition of the Nitro wastewater system in West Virginia for $20 million. This system, like many of those we acquire, needs extensive capital upgrades in the near future in order to remain in environmental compliance and would cause their citizens in the absence of a transaction to absorb the full rate impact of those investments. American Water plans on investing over $40 million in the next 5 years, and we look forward to serving the 4,600 customer connections in that community. And finally, the regulatory approval process for the Nexus Water Group Systems is progressing very well. We've received approval from the regulatory commissions in 7 of the 8 required states. Based on this progress, we now expect the closing to occur by June 30. With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have. Operator: [Operator Instructions] The first question is from Jeremy Tonet with JPMorgan. Aidan Kelly: This is actually Aidan Kelly on for Jeremy today. Just wanted to touch on the 2026 guide. Clearly, you guys reaffirmed today and continue to message higher second half results from the upcoming new rates in Pennsylvania, New Jersey. I guess on that front, will be curious if you could provide any more insight on if you assume ROE increases, especially in PA, do you kind of expect that to bounce back a bit? John Griffith: Thanks for the question. We certainly feel good about the merits of our case in Pennsylvania and expect to see a recommended decision from the ALJ in May and certainly all of the fundamentals from when we go back to the filing of our last case and the environment in Pennsylvania, I think, is well recognized in terms of the types and amount of water and wastewater investment that are required in the state, including along the lines of PFAS remediation, lead and copper, et cetera. So I'd say we feel very good about the fundamentals of the Pennsylvania case and same in New Jersey where there's a meaningful amount of PFAS investment that's required. And I think there's broad understanding across administrations and other stakeholders for the need of those investments. Aidan Kelly: Great. And then just one separate -- simple question on the merger process. Could you just remind us like what is required to get it through? Do you need full approval across Pennsylvania, Texas, North Carolina, New Jersey, Illinois and Virginia? Or is there a scenario where it could go through if some states don't approve, I don't know, if Kentucky just had approved to get signed there, but just curious procedurally, how that's kind of going. John Griffith: Sure. We need approvals in all of the states where approvals are required. And so there are PUC approvals required in 7 states. As you noted, we've received approval in Kentucky, statutorily will receive decisions in Virginia and Illinois this calendar year. But yes, you need all of the required approvals before we can close the transaction. Operator: The next question is from Paul Zimbardo with Jefferies. Paul Zimbardo: I just wanted to focus also on Pennsylvania. Just there's been a lot of kind of comments from the Governor's office and just more focus on utility bills, again, more the electric side. But just curious kind of what the engagement's been from stakeholders. I know you said going to get the settlement in Pennsylvania. But just curious kind of what the conversations and tone have been in Pennsylvania broadly? John Griffith: Yes. I'd say, Paul, it's a good question. It's something that we're thinking about all the time and very active on with the Governor's office and with stakeholders. And we frankly see a lot of alignment in our position relative to what we think is necessary in Pennsylvania in terms of affordability and also investment, right, particularly in the era of increasing environmental investments and frankly, just the state of water and wastewater infrastructure in the state. And again, from our perspective, utilities need to remain transparent, accountable, responsive to customer needs and we strive to be all of those things. And we also see the state being very constructive on growth and the need for growth. And in order to have that good economic development and kind of growth-oriented environment in the state. That requires having good healthy infrastructure, and we think there's broad recognition of that. So we feel very good about the fundamentals of where we are and what we're doing in Pennsylvania. Paul Zimbardo: Okay. And one other small one, more of a technical one. I saw the corporate alternative minimum tax update in New Jersey and something in the Q. Just any impact we should be thinking about earnings, cash flow or otherwise from that new corporate alternative minimum tax guidance? David Bowler: Paul, this is David. So yes, I mean there is a cash benefit for us. We filed for a refund for the '24 returns, about $84 million that we expect to get sometime this year. And then going forward throughout our forecast period. Prior to this change, we had $100 million or thereabouts throughout the forecast period CAMT payments. So there will be a, I'd say, a meaningful cash benefit for us. Paul Zimbardo: Okay. Great. So that $100 million, that's a multiyear number, so whatever is $20 million, $30 million a year kind of say that... David Bowler: Sorry, it's about $100 million a year. It trails off towards the tail end, but about $100 million a year. Operator: [Operator Instructions] our next question comes from Shar Pourreza with Wells Fargo. Andrew Kadavy: Actually, this is Andrew Kadavy on for Shar. So with the Essential merger pending in Pennsylvania and New Jersey, both net benefit states. Can you give a sense of what kind of customer benefits from the merger that you're highlighting for the commissions? John Griffith: Yes, Andrew, I'd say we've made our filings in the states, and we're going through public hearing processes now. And certainly, it's still early days in those processes, but we do feel like there's good broad support for what we're trying to accomplish in the States. As you're aware, Pennsylvania is an affirmative public benefit state, and we look forward to demonstrating that, which we think is very consistent with everything that we're pushing for in Pennsylvania and in all of our states, which is affordability and top-tier customer service. So I think we feel really good about our position there. Andrew Kadavy: And then shifting gears a little bit to your financing plans. How should we think about the timing of the debt issuance for this year? Should we expect that in second quarter, third quarter? And then would it all be in one chunk or would it be spread out throughout the year? David Bowler: Andrew, this is David. So I'm sure you saw, we just issued $700 million of long-term debt -- 10-year debt on April 1. And then for the balance of the year, we've got our equity forward that we expect to take those proceeds at this point today as around midyear is what we've assumed for modeling purposes. And then in the latter half of the year, we have another debt issuance, long-term debt issuance in the plan. So you can think about Q3, early Q4 for that. Operator: The next question is from Aditya Gandhi with Wolfe Research. Aditya Gandhi: I wanted to start off in -- I wanted to start off in Pennsylvania. You mentioned you weren't able to settle this time before the procedural deadline. One of your electric peers in the States settled their rate case recently. Recognize each case has its own unique circumstances. But can you maybe just speak to sort of your approach to this case, just given the fact that historically, you've been able to settle in Pennsylvania except this one and the prior one. And then also speak to your level of confidence in being able to get a balanced outcome from the commission? John Griffith: Yes. Thanks for that, Aditya. And I'll go backwards. I think we do feel good about our prospects for getting a balanced outcome in Pennsylvania. Since our last case, we've worked very purposefully across the state to continue doing what we always try to do, which is really a prudent investment in the state to meet all of our system needs while recognizing the need for affordability across customer classes. And we do think that those efforts are recognized. And so we certainly feel good about our prospects there. In any rate case, there's always -- you go down a path and there are opportunities to settle and then you move forward from there. Rate cases are a combination of financial issues, policy issues, and it's just a process. We feel good about the process that we've gone through so far in Pennsylvania. And again, just look forward to hearing what -- from the ALJ with a recommended decision in May. Aditya Gandhi: Got it. That's helpful color. And maybe just one more question from me. Following up on a previous question about the CAMT. So in your current plan, if I understood David's comments correctly, you're embedding about $100 million of cash tax payments annually. When you do refresh your plan this year with Q3, will you incorporate that benefit into your plan? And could we see some sort of reduction in your equity needs? David Bowler: Well, we will incorporate the change into the plan when we refresh in Q3, and we'll evaluate the need at that time on equity. Operator: As there are no more questions in the queue, this concludes our question-and-answer session. And this also concludes the conference. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. At this time, I would like to welcome everyone to the Royal Caribbean Group First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Blake Vanier, Vice President, Investor Relations. The floor is yours. Blake Vanier: Good morning, everyone, and thank you for joining us today for our first quarter 2026 earnings call. Joining me here in Miami are Jason Liberty, our Chairman and Chief Executive Officer; Naftali Holtz, our Chief Financial Officer; and Michael Bayley, President and CEO of the Royal Caribbean brand. Before we get started, I would like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors, we do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP items can be found on our investor website and in our earnings release. Unless we state otherwise, all metrics are on a constant currency adjusted basis. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our first quarter, the current booking environment and our outlook for 2026. We will then open the call for your questions. With that, I'm pleased to turn the call over to Jason. Jason Liberty: Thank you, Blake, and good morning, everyone. This morning, we reported first quarter results that exceeded our expectations, along with a record WAVE season that reinforced the continued strength in demand for our leading vacation brands. Revenue grew 11% year-over-year, earnings were 11% higher than guidance, and we returned $1.1 billion of capital through dividends and share buybacks. Our performance reflects consistently strong execution by our teams and the compelling value proposition and differentiated experiences, our brands offer consumers who continue to prioritize experiences. The consumer backdrop remains healthy, and demand for our vacation experiences continue to be strong. Across our portfolio, we see consistent engagement from guests, strong booking volumes and onboard spending that remains well above prior years. Before diving into the first quarter results, I want to briefly touch on recent geopolitical developments, starting with the Middle East. From an operational standpoint, two of our TUI Cruise ships sailing in the Middle East region were directly impacted by the conflict and therefore, had to temporarily pause operations. Both ships have since safely repositioned out of the area and are heading to the Mediterranean where they will welcome guests beginning in the middle of May. The most notable financial impact from the Middle East conflict has been on fuel costs. While we are approximately 60% hedged for 2026, fuel prices at current spot levels are expected to increase costs by roughly $0.62 per share this year. In addition to fuel, we saw a short-term moderation in demand trends for 2026 for high-yielding Mediterranean sailings, which modestly impacted our outlook for the upcoming summer season. The softer booking trends lasted for a few weeks, but we have now turned a corner and are experiencing improved demand for the limited inventory we have remaining for Q2 and Q3 sailings. Lastly, we experienced some disruption in demand for select West Coast of Mexico itineraries, driven by travel disruption concerns during the quarter. Demand trends for other products remain largely consistent with our expectations. Overall, our diversified portfolio and disciplined operating model position us well to manage through these dynamics, while remaining focused on delivering exceptional vacation experiences accelerating growth and executing our long-term strategy with conviction. We expect to drive another year of double-digit revenue and earnings growth, supported by a strong book position fortified balance sheet and robust cash flow generation. I want to thank our crew members and shoreside teams around the world. Their passion, focus and commitment to our guests are the foundation of our success and continue to set our company apart. Now turning to the results. We experienced another record WAVE season, highlighting the continued strong demand environment for our leading and trusted brands. Our book position is strong and remains within optimal prior year ranges at record prices. During the quarter, we delivered over 2.5 million unforgettable vacations at industry-leading guest satisfaction scores. Revenue grew 11% year-over-year and net yields grew 2%. Costs came in very favorably, and we saw better-than-expected performance from our joint ventures. As a result, adjusted earnings per share was $0.37 higher than our guidance. These results reflect the continued appeal of our vacation experiences, diversified portfolio and disciplined execution. Naftali will elaborate on Q1 results shortly. We closely monitor consumer behavior through millions of daily interactions on our commercial platform and with 170,000-plus guests on our ships every day. What we see is a consistently engaged consumer who prioritizes vacations and seeks quality, variety and value, which is exactly what we deliver. Based on our most recent research, our consumers remain very healthy, supported by excess cash, strong employment trends and a continued preference for consuming experiences over purchasing things. Travel remains a top priority, ranking as the #1 leisure category, where consumers intend to spend more. 31% of consumers say traveling more is a top priority for the next year, breaking behind only physical health and finances. Our vacation offer compelling value, flexibility and choice relative to alternatives. This continues to be reflected in the level of interest and engagement we see across our brands and the continued strength in onboard spending. Now let me provide an updated outlook for 2026. Revenue is expected to grow roughly double digits year-over-year, and net yield is expected to grow 1.5% to 2.5%. We continue to expect yield growth across our key products, including the Caribbean. As we enter the year, we saw strong demand for Europe, which are high-yielding itineraries, and that strength was embedded in the outlook we provided in January. Due to the geopolitical events affecting itineraries in the Mediterranean and the West Coast of Mexico, we've adjusted our full year net yield expectations. Our overall outlook for the itineraries remains largely aligned with our January guidance. We also remain committed to enhancing margins through rigorous cost discipline, continuously identifying efficiencies across operations, by prioritizing spend and utilizing technology and AI without compromising the quality of the guest experience. We are expecting another year of strong earnings growth and cash flow generation. Full year adjusted earnings per share is expected to grow double digits and be in the range of $17.10 to $17.50. This includes $0.74 per share from fuel headwinds, as well as lower income from joint ventures. We are also on track on our Perfecta performance program, targeting a 20% compound annual growth rate in adjusted earnings per share through 2027 and a ROIC in the high teens. Our large-scale leading margin profile and strong cash flow generation allow us to continue advancing strategic investments into our future while enhancing growth with capital return through competitive dividends and opportunistic share repurchases. Our vacation ecosystem integrates the best brands and ships unique destination experiences, and technology platforms wrapped around a loyalty program that connects it all. I want to spend a moment on how technology and AI are shaping the way we operate and how guests experience our vacations. Disruptive technology and AI have been embedded in our business for years, particularly in the area that require complex real-time decision-making at scale. As these technologies advance rapidly, we are continually discovering new ways to accelerate their integration throughout our ecosystem, making it easier for us to deliver amazing experiences and for guests to keep vacationing with us. Across our digital booking channels, guest engagement has undergone a fundamental shift since 2019. Digital penetration of bookings has more than doubled over that period with most of that growth coming through our app. Monthly active users for the app are 5x higher than 2019 levels, with adoption over 90%, confirming mobile as a way guests increasingly plan and manage their vacation. Today, more than half of onboard revenue is booked before guests ever step on board with the vast majority of those purchases made digitally. Guests are engaging earlier, planning more intentionally, and personalizing their vacations in ways that were simply not possible a few years ago. Our focus is on a unified intelligence layer that delivers seamless, relevant experiences and supports meaningful enhancements throughout the vacation journey from dreaming and booking to onboard experiences and service to post-cruise engagement. What differentiates us in this space is not access to tools, but the combination of a deep understanding of our guests, a fully integrated digital ecosystem the ability to deploy these capabilities across a multi-day end-to-end vacation experience and the commitment to excellence and innovation. Our ships are floating cities where we design and operate every guest touch point across numerous activities for a prolonged vacation period. That level of integration creates conditions where disruptive technology and AI enhance our moat in ways that are very difficult to replicate. We are deploying these capabilities in a disciplined manner, measuring performance, reacting to guest feedback and then scaling what works. We are in the early innings. And as we develop the capabilities further, it reinforces a flywheel that compounds over time. We also continue to make meaningful progress in other strategic initiatives. Our loyalty program is designed to better recognize and reward our guests, driving higher engagement, increased frequency and repeat travel. Since launching initiatives to drive cross-brand awareness in 2023, including our industry-first status match program in 2024, which allows guests to enjoy equivalent status across our brands, cross-brand bookings have increased significantly reinforcing the strength of our connected ecosystem. We recently launched our new Royal ONE co-branded credit cards, which further expand and strengthen our loyalty ecosystem, building our recent enhancements like Points Choice and Status Match. The Royal ONE, credit card is the most powerful way for our guests to earn rewards across our brands, allowing them to accumulate points faster and to redeem those points seamlessly across our ecosystem. Since 2019, cardholder accounts more than doubled, and as we continue to enhance the value proposition and deepen integration across brands, we believe there's an opportunity to double it again. We also recently announced orders for Icon VI and Icon VII, reflecting the success of the Icon platform and our confidence in its ability to consistently deliver industry-leading guest experiences and returns. We continue to innovate the Icon series to maintain high satisfaction scores and superior economics. Following the launch of Royal Beach Club Paradise Island last year, we recently opened the Royal Beach Club Santorini. Demand for the Beach Club has been very strong. developed with local stakeholders, it's the centerpiece of our ultimate Santorini Day, offering guests an elevated way to experience the island. We are also advancing the Royal Beach Club in Cozumel, now expected to open in early 2028. And are actively progressing Perfect Day Mexico and Costa Maya expected to open in late 2027 and ramp up in early 2028. Together, these initiatives are differentiating our experiences and are nicely accretive to yield growth. Finally, the upcoming delivery of Legend of the Seas, our third Icon class ship, is another exciting opportunity for us. Consumer receptivity is remarkable, it is in a very strong book position with prices higher than those that we saw for Icon and Star. In summary, demand for our brands continues to be very strong, and we expect another year of double-digit revenue and earnings growth. We are executing decisively key initiatives as we look to win a greater share of the large and growing vacation market. With that, I will turn it over to Naftali. Naf? Naftali Holtz: Thank you, Jason, and good morning, everyone. I will start by reviewing first quarter results. Adjusted earnings per share were $3.60, $0.37 higher than the midpoint of our guidance and 33% higher compared to last year. The outperformance was driven by better-than-expected revenue, lower costs and better performance from our joint ventures. In the first quarter, we delivered 12% more vacations than last year. Notably, we observed an increase in number of young guests, mainly Millennials and younger demographics as well as an increase in repeat guests compared to the previous year. We finished the quarter with net yield growth of 2%, which was above the high end of our guidance range. Yield performance was supported by all key itineraries and improvements in gross margin. Net cruise costs, excluding fuel, performed better than expected, driven primarily by continued cost discipline as we find more efficient ways to deliver the vacation experience without compromising the product. Adjusted EBITDA was approximately $1.7 billion, representing an EBITDA margin of 38%, an increase of more than 300 basis points year-over-year. Operating cash was $1.8 billion, an increase of 13%. As Jason mentioned, we had a record WAVE season, and our booked load factor is within historical ranges and at record APDs, reflecting strong demand for our vacation experiences and a healthy consumer. The Caribbean represents 57% of our deployment this year, and 50% of capacity in the second quarter. Caribbean yields are expected to be positive for the year even with elevated industry capacity reflecting the continued strength of demand and the differentiation of our product. Our competitive position in the region is further supported by our industry-leading hardware and destinations including the introduction of Legend of the Seas into the Caribbean in November following its redeployment from Europe as well as the continued benefit from the new Royal Beach Club at Paradise Island. Europe will account for 14% of capacity for the year and 18% of capacity in the second quarter. Bookings for the high-yielding Mediterranean itineraries, which began the year on an exceptionally strong trajectory moderated following recent geopolitical developments late in the first quarter, partially driven by increased air travel cost, airline capacity reductions and flight disruptions. These factors mainly affect the second and third quarters, when these high-yielding itineraries represent a larger share of deployment. In recent weeks, bookings from Mediterranean itineraries have been rebounding. Bookings for West Coast of Mexico itineraries, which represent 5% of capacity also moderated during the quarter, reflecting geopolitical-related considerations specific to that region. Lastly, Alaska is expected to account for 5% of total capacity and 9% in the second quarter. Now let me talk about our guidance for 2026. Our proven formula for success, moderate capacity growth, moderate yield growth and strong cost discipline is expected to drive significant earnings growth and higher cash flow generation this year. Capacity is expected to grow 6.7% for the year, with first and third quarters growing at a higher rate than the second and the fourth. Net yield is expected to grow 1.5% to 2.5%. Our yield guidance compared to January is influenced by region-specific geopolitical developments affecting the Mediterranean and West Coast of Mexico, which are mostly pronounced for the second and third quarters. Otherwise, expectations for the rest of the portfolio remained similar to January. As Jason noted, we continue to see very engaged consumer, which supports strong quality demand for both ticket and onboard. Furthermore, we have been investing in enhancing our commercial capabilities to remove friction and enable guests to book the best experiences for the vacation needs. As a result, we continue to see over 70% penetration in our pre-cruise booking engines with over 5 items purchased per booking and a year-over-year increase in spend per night. For the full year, net cruise costs, excluding fuel, are expected to be approximately flat, or 50 basis points better than our prior guidance, reflecting ongoing efficiency improvements and prudent cost management without impacting the guest experience. While we manage our costs more on an annual basis, the cadence of our cost growth varies throughout the year. As I mentioned on our last call, the first half cost growth is expected to be higher than second half, driven mainly by timing of dry docks and other year-over-year comparison factors. The most notable impact from recent geopolitical events is on our fuel costs. We expect fuel expense to be $1.35 billion for the year, and our forward consumption for the remainder of 2026 is 59% hedged at significantly below market rates. Our guidance is based on spot rates as we always do. However, fuel expense would be approximately 4% lower if rates were based on the forward curve. Based on current fuel prices, currency exchange rate and interest expense, we expect adjusted earnings per share between $17.10 and $17.50. Our earnings guidance includes a $0.62 headwind from fuel rates for the remaining of the year, as well as a $0.12 headwind from lower expected earnings contribution from TUI Cruises. We expect to continue to increase cash flow generation, allowing us to grow margins, continue investing in our strategic initiatives maintaining solid investment-grade balance sheet metrics and expanding capital return to shareholders. Now I will discuss our second quarter guidance. In the second quarter, capacity will be up 4.9% year-over-year. Net yields are expected to be up approximately 0.2% in constant currency. Year-over-year comparison elements, including increased dry dock days and impact from geopolitical events contribute almost 200 basis point headwind to yields in the quarter. We also expect a similar impact from these factors on third quarter yields. Net cruise costs, excluding fuel, are expected to be up in the range of 4.6% to 5.1% in constant currency. This quarter has almost 400 basis points of cost headwinds related to additional dry dock days and year-over-year comparisons as well as increased costs mostly related to crew travel resulting from air travel disruptions and reduce capacity. Taking all this into account, we expect adjusted earnings per share for the quarter to be $3.83 to $3.93. Earnings are impacted by almost $1 from the items I just mentioned for the quarter, including lower earnings contribution from TUI Cruises. Turning to our balance sheet. We ended the quarter with $6.9 billion in liquidity and leverage below 3x consisted with our goal of solid investment-grade metrics. During the quarter, we accessed the capital markets through a $2.5 billion investment grade bond offering. The transaction was well received and was significantly oversubscribed, reflecting continued strong institutional demand and confidence in our credit. Net proceeds were used to refinance existing indebtedness, including near-term maturities. Also during the quarter, we repurchased 2.9 million shares for a total of $836 million. This reflects our strong financial position and commitment to capital allocation priorities will be continue to invest in growth while also returning capital to shareholders. We have $1 billion remaining under our current program authorization. In closing, we remain committed and focused on our mission to deliver the best vacation experiences responsibly as we work to deliver another year of strong results. With that, I will ask our operator to open the call for a question-and-answer session. Operator: [Operator Instructions] Your first question comes from Steve Wieczynski with Stifel. Steven Wieczynski: So Jason, as we think about the rest of the year, we obviously have your second quarter yield guidance, and I have to assume based on Naf's comments that your third quarter yields are going to look somewhat similar to your second quarter given the exposure you have to Europe. So then if that's true, that would imply your fourth quarter yields are going to be growing, let's call it, somewhere in that mid-single-digit range to kind of get you into that 2% midpoint. So wondering what gives you the confidence the fourth quarter could grow that much. And I guess then that actually to me would imply that without the European headwinds you guys encountered -- you guys would have actually been able to raise your full year yield guidance. Am I kind of thinking about that all the right way? Jason Liberty: Yes, Steve. Well, first, thanks for the question and hello to everybody. But I think that's exactly the way to think about it. So the year is a little bit of a smiley face in terms of yield, and that's really impacted, as we said, by our commentary on the Mediterranean, and to a lesser extent, the deployment to the West Coast of Mexico. If you kind of like just kind of zoom out in the beginning of the year, demand from North Americans to go to Europe was really kind of off the charts, which is very much taken into our guidance. And so when the activities started to occur in the Middle East, you saw some level of moderation in demand for the Mediterranean. And when you think about it through the course of the year, we're obviously more pronounced with those itineraries in Q2 and Q3 and very little in Q4. And so as it points to all of our products are doing very well. By the way, Europe is doing well. It's just that it's less than what we had anticipated, while the other ones are doing well. And so when you look at what our book position in Q4, which, of course, has less on the Med product, but is in a very strong book position at very strong rates. You look at the comps with Legend and we have an easier comp in Q4. That's why we feel very good about the fourth quarter of this year. By the way, we feel good about Q2 and Q3. It's just that we did see that moderation, and we have -- and fortunately, that has now turned the corner over the past several weeks, but we have just less inventory to sell to be able to take that price. Operator: Your next question comes from Matthew Boss with JPMorgan. Matthew Boss: So Jason, maybe if we take a step back, so despite geopolitical developments and the elevated industry capacity in the Caribbean, your yield guide at the high end this year stands at 2.5% constant currency. So maybe could you speak to the drivers of durable growth multiyear, which seem intact here regardless of the macro and just how you see the company set up today relative to pre-pandemic? Jason Liberty: Sure. Well, first, I just want to just touch on the capacity in the Caribbean. That has been, I think, much more of an outside looking in observation or concern than it actually has been for our company. The reality of it is we own the Caribbean, especially the Royal brand owns the Caribbean. We have the best assets in the world in the Caribbean. And of course, we have a Perfect Day, and now we have the Royal Beach Club. And all those islands also attract an elevated amount of demand and people's willingness to pay more to have those elevated experiences. And so I think when we look at our business, our brands are positioned in, we think, the perfect segments for them. They are the leaders in those segments. They're supported by these great ships, and they are supported by these destinations which we continue to add on to. So I think we're positioned very well, and I think that our expectation is we'll continue to generate high-quality demand. And one of those points on high-quality demand, which I commented in my script, is we're getting more and more repeat customers inside of our ecosystem. So at this point, about 40% of our customers are coming from our current customer base. And historically, that was 1/3, 1/3, 1/3. And so I think that's a reflection of all the things that we're doing around loyalty, all the investments we've made on AI and other technology that helps curate and engage with our guests are highly effective. And of course, the tools that we have around pricing, et cetera, allows us to kind of meet our guests where they're looking to go and also what they're willing to pay. And that is creating more and more reps and more and more high-quality demand for us. And I think we say this all the time, the leisure marketplace is $2.1 trillion, $2.2 trillion. This industry is a very small [ sliver ], but this industry today as a core vacation experience. It's core to people's vacation considerations. It's no longer kind of a -- well then we consider cruise, cruise is very mainstream. And I think that's why you're seeing a lot of durability in demand for cruise. And you couple that with the reality that we still trade at about a 15% plus discount to land-based vacation also kind of helps inflate us around some of this noise. Operator: Your next question comes from Brandt Montour with Barclays. Brandt Montour: Great. I just wanted to circle back on the third quarter and the Med. And just maybe if you could put a little bit of a finer point on it. How much do you have left to book at this point in the year, how much damage do you think was done over the last few weeks? What are you sort of baking into your forward guidance in terms of how the conflict plays out and how bookings play out from here? Jason Liberty: Yes. Well, Brandt, what I would first start off is, I don't think I would describe we had a record wave period. So I wouldn't describe it as damage. I would probably describe it as the booking trends that we saw for the Mediterranean in the early parts of WAVE and when we gave guidance and even to the point where we -- of course, we put all that into the 10-K, all of our knowledge was just at levels that we had not seen before. And it moderated as we got out of the month of February, with the activity happening in the Middle East, driven by really two things. One of it was people's concern about vacation disruption. But more importantly is cost of air went up by almost -- more than 40%. It's now moderated down to like 15%. And so it was getting to a point where cost of a flight was more than the cruise. But that kind of settled out. And of course, we did have to address that demand. But where we sit there today, we're at the end of April. There's very little inventory left to sell for the quarter, and there's still very little inventory to sell for the third quarter. But of course, we are continuing to actively manage this environment. And if we see things continue to accelerate, that could be a positive light for this quarter and Q3. Operator: Your next question comes from James Hardiman with Citi. James Hardiman: So I wanted to sort of zoom in on the idea that we're turning the corner. Obviously, the weeks following the initial geopolitical disruption were probably the worst. But maybe some indication of where we stand today in terms of the booking trajectory versus where we were in February before a lot of this started, I don't know, if we're fully back or we're just heading in that direction. And then as we think about sort of the 2Q and 3Q, we're saying that's most pronounced. I'm just curious if that's because those are what's next or whether consumers are comfortable booking beyond the third quarter and into 2027, assuming that this disruption will go away, or will sort of worry about that when we get to that point in time. Jason Liberty: Yes, sure. So James, just to -- so we're clear on tenses, we are not turning the corner. We have turned the corner. Now I don't know what -- there's always statements that can be made and that can change the hearts and minds of the consumer, but the moderation that we saw has turned. It's just that we have limited inventory that's in place. We do not see this at all showing up next year in people's booking behaviors. And of course, we have guests that are starting to book next year clearly. And we're talking about a specific product. And so our commentary around the Caribbean and other products, you should hear is very good. And you should hear that bookings for Europe are very good. They are just a little bit less than we had anticipated when we started the year based off of a high-quality demand and really strong pricing. Naftali Holtz: And James, just one other thing on -- we used the word moderation because that's what we saw. We didn't see dip and then it's a return. It wasn't a very strong trajectory. And even following that, we saw that there is enough potential to even accelerate. And so there was a moderation at any time where the bookings were still good. Operator: Your next question comes from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I was wondering if you could maybe give us a refresh on Perfect Day Mexico. You mentioned opening late 2027 ramping '28. Could you maybe share some more details on the cadence of that ramp? And then just bigger picture, your latest thinking around the long-term structural yield growth opportunity there in the Western Caribbean market and particularly around the Galveston, Texas penetration opportunity? Michael Bayley: Lizzie, I'll talk a little bit about construction and cadence. Obviously, we are incredibly excited with Perfect Day Mexico. We have a lot of support for the project from the government in Mexico. And the project is proceeding. We obviously have announced, I think we said that we'll be having a soft opening in Q4 '27, as we move into '28, we'll fully opening the whole experience, which is, in many ways, very similar to often how we open up big traction or big events or new ships, for example. So project is generally on track and its impact in terms of the region, particularly out of Galveston and particularly as it relates to the Texas and the regional market is, is we believe, incredibly significant. We literally will have the biggest, best, most attractive destination experience for that whole Gulf region. And if you look at the opportunity that exists in Texas, it's a market which is much larger than Florida and its penetration rate is much lower than Florida. So we're expecting to -- I guess I'm going to use this word. We're expecting to own the Texas market as it relates to cruising into the Caribbean and Perfect Day Mexico, combined with Royal Beach Club and Costa Maya will be the centerpiece of that combined with, of course, our Icon class ships. So the combination of the hardware, the brand and the destination, we believe, is going to be a massive accelerator for overall financial performance for the business. So we're very excited about that. The project is really exciting. I mean I think what we've got planned is epic in its nature. It's really going to be a stunning experience. So we're very much looking forward to bringing that alive over the coming couple of years. We did have some issues. I think it was reported. There were a little blips in the radar as it relates to environmental issues that have now been resolved, and all of that is now behind us. So we're continuing on track. Jason Liberty: Yes. Lizzie, the last point, I just want to add on it because we are super excited about it. But I always think it's an important point to make the pictures and the videos you've seen of it, that is what it's going to look like. So we will very much live up, hopefully, maybe even exceed all the incredible marketing around it. So we're very excited. And as Michael said, it's owning the Texas market. It's also increasing a catchment area for the drivable market, and it's also going to unlock, we think, more potential in the West, you really kind of west of the Mississippi as the cost to get to Houston and so forth is less than other parts of the country. So we're super excited about it. And it's not that far away. Operator: Your next question comes from Robin Farley with UBS. Robin Farley: I had a question on yields, but also just a quick follow-up. Michael's comment may have just answered it, but it sounded like Mexico, there had been a little bit of a pause in construction because of that environmental stuff. So I just want to clarify if Michael's comment means that construction has resumed in Mexico there? Michael Bayley: Yes. Robin Farley: Yes, great. And then the other question was just sort of thinking about next year and if it's the 200 basis points impact in Q2, Q3, it sounds like the entire 100 basis point change is maybe a mid-single-digit sort of shift in where you had expected European yields to come in this year. Is it fair to assume that you would kind of fully expect that to come back in 2027 when we're kind of thinking ahead to the impact this year being kind of not necessarily coming out of next year? Just help us size that. Naftali Holtz: Yes. The comment about the European one is, there are other things that were already known around some of the structural aspects of it, right? So there was just more because of the geopolitical. But the bottom line is that you're right, this is for this year. We don't see those issues for next year. And we see also the bookings, as Jason mentioned, are strong for next year. We don't see the consumers being the impact of that. It's really a near term for right now for Q2 and Q3. Operator: Your next question comes from Xian Siew with BNP Paribas. Xian Siew Hew Sam: You talked about the co-branded credit card and several changes to the loyalty program and also how repeat guests are kind of stepped up. I'm kind of wondering what do you think is kind of the implications of that in terms of how they could impact net yield growth, maybe repeat guests are booking further ahead, maybe they spend more on onboard, kind of any learnings on how higher repeat penetration could be a benefit and where... Jason Liberty: Yes. Sure. Thanks, Xian, for the question. Yes. So first off, I think we should -- when we look at our repeat guests, one, they tend to sell on us more often. That's not a surprise. But they also tend to spend about 25% more than new-to-cruise or first to brand. The new-to-cruise index is a little bit higher when you get because of the short product, and that has introduced very high-yielding new-to-cruise consumers for us. But effectively, what we are trying to do and kind of go to the saying that we've said is to go from a vacation of a lifetime to a lifetime of vacations. And so we're trying. That's the reason why we're getting into River is we effectively want to use this platform of ours that our guests love and our guests trust to keep them inside of our ecosystem. And so when you look at things, whether it's the point's choice or whether it's the ability for our guests to sail on any of our brands and get recognized and get their points associated with that or now having a co-branded card that now covers all 3 of our brands. It's effectively things to continue to incentivize and recognize our guests to stay inside that. And then we look for what are making sure we have the experiences that they're looking for and that we're elevating the experiences and we're bringing new experiences like River online so that they continue to travel with us in that unlocks great lifetime value of the customer. It makes us more efficient because it helps leverage our ultimately our platform. At the same time, we also need to make sure we have the tools so that we're going to market, and we're connecting with them in the way that they want to, and that's why we have significantly evolved our digital capabilities, our guests are able to see where they are in their loyalty journey. Our guests are able to engage with us at any point in their dreaming or their vacation journey. And all these things kind of come together to have this kind of commercial apparatus and ecosystem to ultimately get more and more of our guests wrapping inside of our ecosystem. Naftali Holtz: And maybe just to add one more thing. If you kind of put everything that Jason just said together, it's really for us looking at the customer lifetime value, right? And so in addition for them having more frequency with us, shortened duration between the cruises, higher spend, lower acquisition cost is also another way to do it. And we believe we will also be able to serve them better because we know them better and we make sure that we tailor the vacation they need with all the tools we have. So it's kind of part together of the customer lifetime value. Operator: Your next question comes from Kevin Kopelman with TD Cowen. Kevin Kopelman: Great. I had a question on North American customers and higher airfares. Can you talk at all? Have you seen any consumer behavior change at all kind of reacting to the higher airfares in North America for your North America itineraries? And how do you see consumers' ability to kind of -- as well as those air fare increases as they're getting to ports as the year goes on? Michael Bayley: Kevin, we've seen a slight impact, obviously, because when the airfares go up, it does have an impact. The great thing is, is we've got a phenomenal global infrastructure. So for example, if you look at the European product in itineraries, when airfares goes up or it spikes and as Jason mentioned, it kind of spiked up and then it started to fall back down again. Then what we see is we see an increase in European customers booking, if there's a slight decrease in U.S. North American customers, which is -- which really does moderate itself out as the situation calms down. So I think that the benefit of our infrastructure, our global infrastructure from a sales and marketing perspective and brand presence has been really quite effective and always has been in these times when we see fluctuating air costs. Jason Liberty: And just -- I think, one thing I just want to add is the North American consumer, as we see it and as we commented in our remarks, is very strong. And at least for our customers in terms of where their balance sheets are, where their level of employment is their balance sheets, et cetera, and their propensity to vacation and their propensity to cruise to us, is really, I mean, at the highest levels that we have seen in the past. What can create outside of the comments we made about U.S. consumers, maybe you're getting a little bit concerns seeing about flight cost to Europe, which have now settled down. What was actually probably impacting them more domestically was just friction in the travel experience, right? And so it was the long lines to the airports and so forth. People will go through, well, can I just drive there or maybe wait until this kind of settles down, which can sometimes impact some of the close-in business. Fortunately, as you can see in our first quarter results, while we saw some of that, but we also saw the consumer breakthrough on that, and we saw a little bit more of our drivable markets kind of lift up. Operator: Your next question comes from Andrew Didora with Bank of America. Andrew Didora: Just two quick questions on costs. So I guess for Naftali, I guess, one, how do you think of rolling in new hedges in this high fuel environment? And then second, just on unit costs, you continue to do a really nice job here. I guess my question is at what level of capacity growth would we start to see maybe more inflationary type NCCx fuel growth in, say, I don't know, 2% to 3% range. Just curious of your thoughts on there. Naftali Holtz: Yes. So first on fuel, where, as I mentioned, we did see higher fuel, fuel costs, obviously, not surprising. And the way we manage our hedging program, and we are hedged 60% for the year. We're hedged a little bit less than 50% already add pre-conflict prices for next year and 25% roughly for '28. So we continue to methodically add hedges and make sure that we manage volatility through the course of a longer period of time. So we'll continue to observe. We feel very good with where we are, and we'll continue to absorb that and add where it makes sense. So that's on the fuel side. On the cost side, we subscribe to our formula. So we say our formula is moderate capacity growth, market yield growth, strong cost control. And so we subscribe to that formula, and we want to maintain a spread between our yield growth and our cost growth. And our focus is to make sure the first that we deliver the best vacation experiences. So we are very a nice about making sure that we don't touch the guest experience and actually enhancing that. And with that also comes yield growth, et cetera. So we're doing that. And then at the same time, we always find ways to do things better. And technology today helps us a lot. And so either it could be through supply chain as an example or other areas that we can just achieve more with these tools. And so we're utilizing those tools and that obviously comes to the benefit of the cost. So that's kind of how we manage the business. Jason Liberty: Yes. And Andrew, one other point I just want to make is that, I mean, at least talking for the Royal Caribbean Group, our business is growing in perpetuity. So we're adding 1 ship or 2 every single year for the foreseeable future. And so I think the combination of the technology that Naf talked about which is pervasive and the opportunities are always existing. But it's also just our responsibility to embrace as our business scales. And when we have that capacity growth coming in, there's always going to be a little bit of some headwinds on it when you're introducing new destinations as an example, but because there's no APCDs associated with it. But for the most part, we look at that as -- our group's challenge themselves on how do we scale our groups as capacity grows. Operator: Your next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: I guess I wanted to follow up on costs. Are you making any itinerary changes given higher fuel either currently or looking out to '27, '28? And then obviously, net cruise costs are coming in a bit lower. Is there anything you've pulled back on this year in terms of initiatives or spend that we should think of as deferring to '27? Or is this just harvesting some of those efficiencies that you just referred to? Naftali Holtz: Yes. So let me be very clear. When we talk about guest experience, our itineraries are the key part of it. And so the answer is absolutely not. We have great ship experiences. We have amazing destinations, and we want to maintain that quality of the experience. So the answer is we have not modified anything because of higher fuel costs. We always do, right? I mean this is not new, but we always try to find other ways to investments into energy efficiency, just better utilization of technology of how we use fuel, but that's not impacting the guest experience. And your second question was about [ deferment ] and the answer is no as well. as I said, all the things that we're doing is we're finding better ways in a sustained way because then that's not really improving costs. This is just deferring. So we're finding sustained ways to operate the business more efficiently while again, ensuring that the guest experience remains intact. Operator: Your next question comes from Vince Ciepiel with Cleveland Research. Vince Ciepiel: Just wanted to dig a little bit more into yield outlook for the year. Could you maybe comment on how you think new hardware, and you have Star, Xcel contribution, Paradise Island, RBC Santorini, like a lot of exciting new products out there, how they might be contributing to the yield growth overall versus the like-for-like impact? And then also on a regional basis, I think you had mentioned or used the term that Europe was doing well, I think, was the quote. Is it fair to assume that Europe yields will grow this year? Or kind of what does the guide assume? Jason Liberty: Yes. So I just want to help on the Europe question again. Europe is going to do very well this year. It is just less well than we had anticipated it was going to do a few months ago. And when answering like what's driving yield, the answer is it's all of it. Whether it's like-for-like, whether it's having more of a year of Star, Legend is coming on. It's the ramping up because we're still very much -- we ramp up these destinations very thoughtfully to make sure that the guest experience is at the very highest level. And so the answer is all of it is going well. And there is again, the onetime realities of the med doing a little bit less well than we had anticipated, but still great. There is the realities that the West Coast of Mexico had some hiccups, we generally think that is also a onetime situation, which provides for great tailwinds into 2027.. Operator: That concludes our Q&A session. I will now turn the conference back over to Naftali Holtz, CFO, for closing remarks. Naftali Holtz: We thank you all for your participation and interest in the company. Blake will be available for any follow-ups. We wish you all a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect and have a wonderful rest of your day.
Operator: Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. Q1 2026 Earnings Conference Call. [Operator Instructions] Mr. Devin Corr, Head of Investor Relations, you may begin your conference. Devin Corr: Thank you, Julianne. Good morning, everyone, and thank you for joining us for our first quarter 2026 earnings call. With me today are Michael Miebach, our Chief Executive Officer; and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions. You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a non-GAAP currency-neutral basis unless otherwise noted. Both the release and the slide deck include reconciliations of non-GAAP measures to GAAP reported amounts. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding Mastercard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the facts that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I will now turn the call over to our Chief Executive Officer, Michael Miebach. Michael Miebach: Thank you, Devin. Good morning, everyone, and thank you for joining us. We are a quarter into the new year. Much has happened but so much opportunity lies ahead. You've seen the release this morning so let's get into the highlights. Building on 2025 momentum, '26 is off to an excellent start. Net revenue growth was up 12% and net income up 15% in the first quarter on a year-over-year non-GAAP currency-neutral basis. Looking at the macro picture, the economic foundation remains generally supportive with healthy underlying consumer and business spending. However, the backdrop remains uncertain, driven by geopolitical tensions, which has put some pressure on cross-border travel. . Overall, labor markets continue to be balanced and wages are still outpacing inflation in most major markets. As we've done consistently, we are monitoring the situation in the Middle East and the global economy, and we will adjust as needed. Quarter 1 results were supported by the healthy spending I noted, and of course, our team's strong execution. But above all, this quarter continues to reflect the strength and resilience of our network. We have built and diversified our network over decades, navigating and innovating through every cycle. It's a foundation spanning 4 pillars: one, unparalleled global reach, we have hundreds of millions of acceptance locations and digital access points across 150 currencies. The last 5 years alone, we have grown acceptance locations maybe 70%. Mastercard powers payments when and where you need us. That scale brings participants into a single network where the more activity that flows through it, the more data is available and the more valuable it becomes for everyone, that drives the ability to capture and extend the secular opportunity; two, our franchise rules. Our franchise helps our network operate with consistency. The rules bring trust and protection for all participants, ensuring transactions are secure, merchants are paid, disputes can be resolved and people have 0 liability to unauthorized transactions. That trust allows global acceptance at scale; three, best-in-class technology. We invest to make payments faster and simpler. Core card network upgrades are already delivering faster transaction flow and near real-time settlement. These capabilities are live in South Africa today already driving new wins and incremental switching. And we look to extend into other markets over time. And remember, our payments infrastructure goes well beyond cards, including a counter account and we're now further embedding digital assets. Fourth, our differentiated value-added services and solutions, powered by data from our networks and AI, we have curated unique services that make the network secure, drive more payments and help our customers make smarter decisions. And many of these services are tied to and brought to market through the network. That's our virtuous cycle, strengthening the franchise and improving outcomes for customers. It's that strong foundation that uniquely positions us to power and protect tomorrow's digital economy even as innovations emerge and the macro environment changes. It's our differentiated services powered by our data and how we approach partnerships that underscore why customers continue to choose Mastercard. So let's take a moment on recent key innovations, agentic e-commerce and stablecoins. On agentic, the ecosystem continues to evolve. Our payment solutions are ready and we are engaged shaping what comes next with key players, including Google, Microsoft, OpenAI and other partners across the ecosystem. We're deepening our partnership with OpenAI, reinforcing their use of Mastercard Agent Pay, working to enable agent-to-agent payments and collaborating to embed our services across their solutions while using their tools as an enterprise customer. I'm also happy to share that nearly all Mastercards around the world are now enabled for Mastercard Agent pay. And we continue to develop our agent-related services. In quarter 1, we launched verifiable intent, a tamper-resistant record of what a user authorized when an AI agent acts on their behalf. In fact, the FIDO Alliance is now using it as a foundation for setting security standards in this space. And earlier this month, we announced a partnership with Craftsman, a leading blockchain infrastructure platform. Craftsman will integrate Mastercard Agent Pay and verifiable intent to enable secure Mastercard transactions AI agents in its ecosystem. This will initially launch on the Open Claw platform with plans to expand. There's a lot of moving pieces. But as agent-driven comms gains traction, our network is there with tokenized credentials powering the payments, bringing the security and trust and reach that everyone is looking for. It's very clear there is even more incremental opportunity in transactions and in services over time. On to stable coins, another rail to complement and expand our network. We leverage our existing card rails to make it easier for people to spend their digital asset holdings with cards. In quarter 1, we saw spend growth continue at a healthy clip across our crypto co-brands as cardholders gain access to our acceptance, protection and so on. This quarter, OK X, a leading global crypto exchange is expanding its Mastercard crypto card program into Europe. And remember, we also enable purchases of digital assets using Mastercard, and we allow stablecoin settlement, and we integrated stablecoins into Mastercard move, but we also see a broader need to connect stablecoin rails to fee out rails. This digital asset scale, complexity grows, the need for interoperable, reliable and trusted infrastructure grows. That is why we are excited about our planned acquisition of BVNK. We do not see a change in how consumers pay. Cards continue to deliver a seamless experience. But given the speed, 24/7 availability and programmability, we see clear potential for stable coin technology, especially when paired with our network and use cases like payouts -- me-to-me and cross-border B2B payments. BVNK has leading technology that serves us as an important enabler to send, receive, convert and hold stable coins. They also directly address the interoperability challenge in digital assets. They bring together liquidity providers, stablecoin issuers, market makers and more. BVNK also holds important hard-to-get licenses and offers critical compliance and regulatory tooling. So when you bring together the strength of our network, and you add continuous innovation, including most recently in agentic commerce and digital assets, you see continued leadership in payments. And that fuels the virtuous cycle across our 3 strategic pillars: Consumer Payments, commercial flows and value-add services and solutions. Let's take them one by one. Turning to the first pillar, consumer payments. I'll start with 2 exciting portfolio wins that reinforce the enduring value of Mastercard across the globe. One was CIB in Egypt. Our partnership will expand meaningfully with new markets and services. This includes the conversion of an affluent portfolio and the expected issuance over 5 million new Masters over the term of the deal. The second is a renewal and expansion of our partnership with Westpac, one of the largest banks in Australia putting Mastercard in the hands of more Westpac customers than ever before. We also continue to see strong momentum in the affluent space as issuers look to differentiate and deepen relationships with high-spend customers. Since launching World Legend last year, U.S. World Legend cards has demonstrated higher overall spend and more than 3x higher cross-border spend on an average monthly basis compared to the U.S. World Elite portfolio. Two growing value propositions that ring true to the segments they were designed for. Still early days in bringing World Legend cards to market but very encouraging. Our affluent value proposition, including the new globally connected Mastercard collection is resonating around the globe. In North America, our new World Legend has been launched by Rogers Bank with Safra National Bank to launch in the coming months. And Mastercard will now be the network of choice on the new United Airlines Canada co-brand program. In Latin America, Bancolombia and -- in Brazil are also launching new World Legend portfolios and we are excited to partner with Aeromexico in bringing their whole brand to Mastercard. And in Asia, HSBC Hong Kong is launching a set of affluent products, including World Legend. And in Indonesia, Bank Mandiri is launching a new private banking card in the super affluent segment. These card wins reinforce the importance of offering payment choice. We continue to scale Mastercard One credential a single Mastercard credential linked to multiple funding sources such as credit, debit and installments. We're launching with SoFI, it's SoFI Smart Card. And through partnership with Fiserv and Blossom Mastercard One credential will be more easily accessible to community banks and credit unions. Now turning to the second pillar, commercial and new payment flows. We continue to deliver value by building on our strengths. In the U.S. alone, small business fuel nearly half of GDP. We're proud to say that the U.S. Amazon small business co-brand card issued by U.S. Bank, will move to Mastercard. That is very exciting. These partners are value in Mastercard's differentiated SME offerings, including easy savings, analytics tools and our overall partnership approach. There's so much potential in commercial, and we are doubling down in segments where we already lead. Fleet and distribution continue to be long-standing strength for Mastercard, especially in the U.S., where we are the partner of choice for most of the industry's largest sweet players. This quarter, we added multiple new U.S. partners in this segment, including free, which enables card-based invoice payments for wholesale food distributors. And we are extending our capabilities outside of the U.S., where our expertise in the space helps secure ride, a European digital fleet and in-car payment system operator, converting its close-loop free program to open loop Mastercard. On B2B travel flows, issuers continue to select Mastercard for seamless B2B travel payments using virtual cards, for their online travel agency customers. While external events might drive slower growth in the short term, we have long-term conviction in the space and continue to pursue it given the sizable opportunity. This quarter, we signed high note in the U.S., Travelsoft and Juniper in Europe; and Bulla in Brazil, further securing commercial travel as an area of strength. At the same time, Mastercard move continues to scale, power financial institutions with the ability to offer near real-time money movement with transparency and with access to our more than 17 billion endpoints. This quarter, we extended our connections with Bank of Shanghai supporting SME trade, international tuition and remittances into and out of China. We will now further penetrate U.S. insurance disbursement flows with a renewed agreement with One Inc. and recently introduced an AP Mastercard move will now power Mastercard Global Commerce Suites for small business. This solution helps bank support small business cross-border money movement needs by bringing together payments with collections and expense management in one solution. Turning to value-add services and solutions. Demand remains high and we continue to drive strong growth. VAS is built on our data curated into differentiated products and ever alongside our payment network. The combined proprietary global real-time transaction data with petabytes of permission data from our services and solutions. That scale and quality of our data power smarter insights, stronger for tools and better outcomes for customers, especially in an AI-driven world. In March, we announced a new foundational generative AI model, leveraging capabilities from NVIDIA. Trained on our vast data sets that will help anticipate behaviors being the scope of traditional models, spotting unusual activity, predicting where a cardholder may spend next and signaling shifts in consumer behavior. These insights can then be embedded across our products or power new use cases. This early-stage work is very exciting. It's not just about the future. Our services are already helping customers solve real needs today, including with many solutions that are unique to us. You've seen how Mastercard has modernized dispute resolution over the years. That innovation continues to provide value and trust to our customers. Dispute resolution includes our unique network tools powered by Ethoca that help connect issuers and merchants post transactions. Collectively, Ethoca products grew around 25 plan year-over-year last quarter. Checkout.com will embed Ethoca alerts into their global digital experience enable merchants to enroll directly in precharge-back dispute resolutions. This is also a great example of one-to-many distribution. Inflation customers as consumer clarity enhances merchant details and cables receipt visibility, curbing friendly fraud, which third-party research estimates, cost issuers and merchants in the U.S. over $100 billion annually. Elsewhere, Westpac and Capitec will now leverage some of these network agnostic services as well as subscription management capabilities from MENA. Cybersecurity is mission-critical. And the stakes keep rising. As you know, we acquired Recorded Future in 2024 a leader in this space. Last year, we launched Mastercard Threat Intelligence, bringing Mastercard and recorded future capabilities together. In a short period of time, more than 500 customers are already engaged using the product, partners have taken down malicious domains responsible for the payment card -- impacting over 10,000 e-commerce sites. That's tangible value. In Open Finance, we power use cases from account opening and smarter lending to simple account-to-account payments and better cash flow visibility for small businesses. We continue to see traction across all. In health care, Optum Financial initially deployed our account opening verification services for HSA accounts, and they are now expanding into additional account types. Webster Bank's HSA Bank elected Mastercard Open Finance to support both identity verification and account linking, making onboarding increasingly seamless for its members. And that brings me to consulting and marketing services. offerings we have been growing for many years, built around payments expertise and fueled by our unique data to solve customer problems. We're enabling highly targeted insight-driven actions that generate measurable ROI. This is evident. Nearly 3/4 of our customers from 2024 returned to use these services again last year and increased their usage by more than 20% year-over-year. In fact, many customers embed these services within customer business agreements. DCBA linked services directly support growth, drive payment volume, increased customer acquisition and so on. Separately, this quarter, Intesa Sanpaolo expanded its services partnership with us to boost card penetration and usage, combining advanced analytics and portfolio optimization with always on marketing across both Intesa and its digital bank Easy Bank. Now that's a lot to fit into 1 quarter, but all these examples reinforce how we continue to execute and deliver on a proven strategy. We are a strong global network, deeply leveraging proprietary data extended through innovation, scale through partnership, diversified through our products and services. Thank you for your continued trust and partnership. And with that, I'll turn it over to Sachin. Sachin Mehra: Great. Thanks, Michael. Turning to Page 3, which shows our financial performance for the first quarter on a currency-neutral basis, excluding where applicable, special items and the impact of gains and losses on our equity investments. Net revenue was up 12%, reflecting continued growth in our payment network and our value-added services and solutions. Operating expenses increased 9% and operating income was up 13%. Net income and EPS increased 15% and 18%, respectively, driven primarily by the strong operating income growth in the quarter. EPS was $4.60 which uses a $0.10 contribution from share repurchases. During the quarter, we repurchased $4 billion worth of stock and an additional $1.7 billion through April 27, 2026. This quarter, we accelerated the pace of our share buybacks given current valuation levels and our strong conviction in our long-term growth potential. Now turning to Page 4, where I'll speak to the growth rates of our key volume drivers for the first quarter on a local currency basis. Worldwide gross dollar volume, our GD increased by 7% year-over-year. In the U.S., GDV increased by 4% with credit growth of 8% and debit growth of 1%. Excluding the impacts from the migration of the Capital One debit portfolio, our U.S. debit GDV growth would have been 7%. The migration of the debit portfolio is now basically complete. Outside of the U.S., volume increased 9% with credit growth of 9% and debit growth of 8%. Overall, cross-border volume increased 13% globally for the quarter, reflecting continued growth in both travel and non-travel related cross-border spending. As one would expect, starting in March, we began to see some impact on cross-border travel from the conflict and the Middle East. Turning now to Page 5. Switched transactions grew 9% year-over-year in Q1. Excluding the impacts from the migration of the Capital One debit portfolio, our Switch transaction growth would have been 10%. We continue to drive contactless penetration, which in Q1 stood at 78% of all in-person with Switch purchase transactions. This is up 5 ppt since the same period last year. In addition, card growth was 5%. Globally, there are 3.7 billion Mastercard and Maestro-branded cards issued. Turning to Slide 6 for a look into our net revenue growth rates for the first quarter discussed on a currency-neutral basis. Payment Network net revenue increased 8% primarily driven by domestic and cross-border transaction and volume growth. It also includes growth in rebates and incentives. Value-Added Services & Solutions net revenue increased 18%, primarily driven by growth in our underlying drivers, strong demand across security solutions, digital and authentication, business and market insights and consumer acquisition and engagement and pricing. Now let's turn to Page 7 to discuss key metrics related to the payment network. Again, all growth rates are described on a currency-neutral basis, unless otherwise noted. Looking quickly at each key metric. Domestic assessments were up 6%, while worldwide GDV grew 7%. The difference is primarily driven by mix, partially offset by pricing. Cross-border assessments increased 18%, while cross-border volumes increased 13%. The 5 ppt difference is driven primarily by pricing in international markets. Transaction processing assessments were up 15%, while Switch transactions grew 9%. The 6 ppt difference is primarily due to favorable mix and pricing, slightly offset by lower revenue from FX volatility. Other network assessments were $277 million this quarter. Moving on to Page 8. You can see that on a non-GAAP currency-neutral basis, excluding special items, total adjusted operating expenses increased 9%. The growth in operating expenses was primarily driven by increased spending to support various strategic initiatives, including investing in our infrastructure, geographic expansion and enhancing and delivering our products and services as well as the increase in foreign exchange activity-related expenses within the quarter. Turning now to Page 9. Let me comment on the operating metric trends for Q1 and the first 4 weeks of April. As we look across Q1 and April, growth rates of our operating metrics were impacted by timing of holidays, namely Ramadan and Easter. March would have seen the benefits from the timing, while February and April saw a negative impact. Looking at the Q1 operating metrics on a sequential basis. Switch metrics were generally in line with Q4 and underlying spend remains stable. Of note, U.S. Switch volume was flat sequentially as the strength in consumer and business spend offset the impact from the migration of Capital One's debit portfolio in the quarter. Excluding Capital One, on a like-for-like basis, U.S. Switch volume growth was over 1 ppt higher in Q1 as compared to Q4. Now on to Switch transactions. Excluding the migration of the Capital One debit growth -- sorry, excluding the migration of Capital One debit, growth was generally in line with Q4. Moving to our cross-border metrics. Our overall cross-border volume remains healthy with growth at 13% in the first quarter. Cross-border card not present ex travel grew at 18% and remained strong. And the sequential decline in cross-border travel was due primarily to the conflict in the Middle East and portfolio shifts. Now looking specifically at cross-border travel for the first 4 weeks of April, the sequential decline from Q1 is due to an acceleration of the impact of the conflict, the portfolio shifts and the negative impact from the timing I just mentioned. None of these factors relate to any fundamental change and underlying consumer and business spend remains healthy. Turning to Page 10. I wanted to share our thoughts for the remainder of the year. We delivered another solid quarter, fueled by the strength of our payment network and value-added services capabilities. Despite elevated geopolitical risks, the macro economy has remained largely supportive with healthy underlying consumer spending and the fundamentals of our business remain strong. With that said, we are operating in a period of heightened uncertainty, magnified by the ongoing conflict in the Middle East. Since the outbreak of the conflict at the end of February, we have seen restrictions on travel and a reduction in the world's energy supply. And as I noted earlier, we are seeing impacts from that in our cross-border travel metrics. But let's take a step back. We are a global company, and we are heavily diversified across geographies, products, consumer segments, services and so on. This diversification reduces concentration risk while enabling us to deliver consistently on solid top line and bottom line growth. So while the conflict in the Middle East is a headwind, our global diversified business positions us well to sustain growth, both in the short and long term. We are confident in our strategy, delivering value to our customers and partners across the globe and innovating to power the next wave of digital payments. As we look at Q2 and the full year, our base case assumes underlying consumer spending remains healthy outside of the impact of the conflict in the Middle East. We assume the conflict ends in Q2 and the related headwinds will be largest in Q2 and then progressively recover as we move through the second half of the year. As it relates to our expectations for the second quarter of 2026, year-over-year net revenue growth is expected to be at the low end of low double digits range on a currency-neutral basis, excluding inorganic activity. This includes our current estimates for the impacts from the conflict in the Middle East, without which we would have expected Q2 growth to be generally in line with the first quarter on a currency-neutral basis. We expect minimal impact from a disposition that we anticipate to close within the quarter and a tailwind of approximately 1 to 2 ppt from foreign exchange. From an operating expense standpoint, we expect Q2 growth to be at the low end of low double digits range versus a year ago, again, on a currency-neutral basis, excluding inorganic activity. We anticipate a 0 to 1 ppt benefit from the disposition while foreign exchange is forecasted to be a headwind of approximately 0 to 1 ppt for the quarter. On other income and expense, in Q2, we expect an expense of approximately $150 million. This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics. This higher sequential expense is primarily driven by the following: first, Q1 came in better than expected, aided by a few onetime items. We do not expect these to repeat in the second quarter. Second, we expect lower cash balances and higher debt levels in the second quarter. Cash balances tend to be seasonally lower in the second quarter. And as I noted earlier, we have accelerated the pace of our share repurchases. And lastly, a onetime unfavorable impact from the disposition I mentioned earlier. As it relates to our expectations for the full year 2026, net revenue growth remains at the high end of a low double-digit range on a currency-neutral basis, excluding inorganic activity. We anticipate minimal impact from the planned disposition and a tailwind of approximately 1.5 ppt from foreign exchange. From an operating expense standpoint, we expect growth to be at the low double digits range versus a year ago on a currency-neutral basis, excluding inorganic activity. We expect a 0.5 to 1 ppt tailwind from the disposition and a headwind of 0.5 to 1 ppt from foreign exchange on a full year basis. And finally, we expect a non-GAAP tax rate in the range of 20% to 21% for both Q2 and the full year. As a reminder, the Q1 tax rate was lower primarily due to discrete tax benefits including those related to share-based payments. And with that, I will turn the call back over to Devin. Devin Corr: Thank you. Julianne, you may now open up for questions. Operator: [Operator Instructions] Our first question comes from Will Nance from Goldman Sachs. William Nance: Michael, I wanted to ask on the VAS strategy and the growth you've been putting up there. I think there's been a focus on how you differentiate yourself with the strategy. And I think historically, Mastercard has been very forward leaning on embracing new networks and things like A2A payments. Can you talk about the evolution of that strategy maybe in the context of the planned divestiture and how some of these types of activities fit into the broader strategy around VAS? Michael Miebach: Right. Well, great question. So we've always believed in consumer choice when it comes to payments and business choice when it comes to payments. So it's clear that cards is a great answer for P2M, but it's not the answer for everything so a set of dedicated use cases and a lot of volume out there for us to go after to apply our service. So that was originally the idea to go into a what we called at the time, a multi-rail proposition account to account. So you know that history, acquisition of VocaLink and so forth and various other real-time payments assets around the world, and then we exported the stack to run about 12 subsystems around the world right now. So that strategy still holds. There is no question about that because real time is very much in focus. A lot of governments choose real-time payment systems to go and facilitate payments of all types across their respective markets, where a known and respected partner in this space. So strategy hasn't changed. We're really evolving is to ensure that we find more and more services that we can apply to these payments. So the franchise rules are different in that space than they are in a card space. But something like cybersecurity is particularly in focus as the counter account fraud and account scams are rising, our counter account protect solution, as being an excellent example of how we found a way where we can rally a market and drive value for us and for the market. So cybersecurity is in focus. Generally, this gives us a seat at the table with government in the current world where more countries are inward looking for more resilient infrastructure that puts us also in a very unique position. So strategy continues where we said we're not looking in to grow a lot more new geographies because we're in the markets that we want to be at. United States, U.K., Thailand, Philippines, large economies where this business runs at scale and very profitably for us. Sachin Mehra: And Will, it's Sachin, very quickly, I just want to clarify because you alluded to the disposition, the disposition I referred to in my commentary relates to Session M, which is our loyalty business, which is 1 of the acquisitions we had done a few years ago, and that's the sale which was announced, I guess, a couple of months ago. So that's what I was referring to in... Michael Miebach: And I glanced over that other market rumor because we don't comment on market rumors. Operator: Our next question comes from Sanjay Sakhrani from KBW. Sanjay Sakhrani: Sachin, I want to talk about the assumptions on the -- for the outlook on the war ending in 2Q. I'm just curious if you could just elaborate on the assumptions you're making on cross-border. I assume that's sort of where the biggest impact is. And then so where the offsets are that are helping you sort of raise the guidance because I'm sure some other things are outperforming and offsetting it. And then just one follow-up on the portfolio shift point you made. Does that impact cross-border for a year now going forward? I'm just curious if you could just elaborate on that. Sachin Mehra: Sure. So Sanjay, first, I'll kind of kick off by saying we have taken what we believe to be our best estimate as it relates to our base case as it relates to the conflict ending in Q2 because we had to predicate this on some assumption, and that's what we shared with you right here. So let's just start with that piece of it. The impact is most pronounced and assumed to be most pronounced in cross-border travel. That is a correct statement on your part. The second point I'd make there is that the impact would be in our assumptions, most pronounced in the second quarter. And while there will be some impact in Q3 and Q4, we expect that there will be a gradual recovery or progressive recovery, which will take place in Q3 and Q4 based on the assumption that the conflict ends in Q2. So that's kind of 2 things I want to kind of just mention. You also asked a Part 1b question to that, which was what are the offsets. So I think what you're asking is our full year guide, which by the way, on a currency-neutral basis is basically unchanged, right? The increase you're seeing in the full year guide is primarily being driven by a change in FX assumptions for the year. So on a currency-neutral basis, it's unchanged to what I shared a quarter ago. Anyway, notwithstanding the fact -- look, we started the year strong. Consumer spending is healthy. We're executing on our strategy. We had a first quarter which -- where we outperformed our own expectations. So we're off to good start in the year. That obviously provides a little bit of a buffer relative to 3 months ago versus today, notwithstanding the fact that there are other things which have moved around such as impact of the conflict, which is kind of offsetting that as well. So that's kind of component number one, which we've got to keep in mind. The other piece I'd mention is that, look, I mean, as you go through the year, a few things to keep in mind. I think you know this already, Sanjay, is that in Q2 of last year, we had the highest levels of FX volatility. So that creates the biggest headwind in Q2 of this year, right? We have some headwind from FX volatility in Q3, but it's less than what was there in Q2 so that's something to keep in mind. And then in Q4, we had more normalized levels of FX volatility. So the headwind kind of dissipates as you go across the end of the year. So that's kind of the second point. The last point I'd make is that from a value-added services and solutions standpoint, which represents roughly 40% of the revenues of the company, but the business continues to perform. We delivered 18% currency-neutral growth in the first quarter, another solid quarter and we're seeing strong demand for those capabilities. So that's something which, again, as I think about the rest of the year, we'll have to keep on executing, and that's kind of based in the assumptions and the guidance that I've shared with you. Michael Miebach: I can just add one point on that. I think it's a great question, important question. What happens here with the cross-border side is a general shift in spending patterns. So our customers are coming to us and say, "Well, what do you see in your data?" How is spending shifting. Where else is it going? Where do we meet our customers and their customers in terms of solutions that they need. This is something that we took to a science back in COVID because at that time, recovery insights were kind of a key thing. So we now have kind of like crisis insights. Within 24 hours, we had a website up for our customers in the Middle East to say here's shifting spending patterns. Take a look at it, let's work on it together. So this is an opportunity for us to lean in and drive forward, and that will be a compensating factor. Sachin Mehra: And Sanjay, I know you asked the question also as part of your question, 1C was the impact of portfolio shifts. Yes. And you're right. I mean the impact of portfolio shows will stay with us for quarters. Again, every portfolio is a different migration schedule, but that kind of factors in there. You are seeing a more pronounced impact on travel because some of the portfolios were more travel heavy. So that's something to kind of keep in mind. . Operator: Our next question comes from Harshita Rawat from Bernstein. Harshita Rawat: I want to ask about Switch transaction growth, Sachin, Michael. Historically, it used to grow kind of in the low double-digit to low teens range. More recently, the growth has decelerated a little bit to 9%. I know there's 1 ppt of Cap One debit in there. But maybe talk about some of the other drivers within that Switch transaction growth and some deceleration versus history. And then as we think about the high end of low double digit, medium-term revenue objective, maybe talk about the growing importance of valuated services in that algorithm and remind us about kind of your conviction in the sustained strong growth of that. Sachin Mehra: Sure. So on your question on Switch transactions, I think you kind of got the first part, which I shared in my prepared remarks, which is adjusted for the Capital One migration, we grew at about 10%. But I think your question was a little bit beyond the fact that it's 10%, you said we were growing at higher rates previously. I think one of the bigger factors that influences Switch transaction growth is the mix of our portfolio. And so I'll give you a real life example, right? So back in the days when we were operating in Russia, before we suspended our operations in Russia, right? We had significantly higher growth in Switch transactions. . And at that point in time, when we suspended operations, one of the things which I called out was that recognized that this market is a low average ticket size market. And so the fact that we no longer do business there, impacts us which transaction growth rates because average ticket size kind of plays a part, point number one. And then if you just extend that logic through to different parts of the globe, depending on where we're seeing more and less growth than what the average ticket size is that influences what our Switch transaction growth is. And the reason I say this is because mixes in geography are going to impact where our Switch transaction growth is. But fundamentally, what's going on in terms of the imperative for the business to continue to focus on driving Switch transaction remains. Case in point, for the longest time, we were not switching transactions in Japan. We're now switching to transactions in Japan. We were previously not switching transactions in a meaningful way in Mexico, that's something which has actually started to happen. So you know that as a matter of fact that the company is very focused on driving greater switch transaction growth for all the reasons we've kind of mentioned in the past, which is it not only generates revenue, it provides data. When you get data, you can deliver value-added services and solutions, which drives incremental revenue. So really important. And just as another metric point so that you're aware. In our most recent quarter, our proportion of switch transactions is now north of 70%. So the reality is we are executing on the Switch transaction strategy. We continue to remain very focused and believe that's an important area especially in light of what we shared with you at Investor Day 1.5 years ago when we talked about the sizable opportunity, which remains from a secular standpoint, in terms of Switch transactions, which still remain to be -- or other transactions, which still remain to be digitized, very much a focus area for us. Michael Miebach: Yes. So you mentioned the 70%. In 2020, it was 60%. So that's a very sizable increase. And we just think for a moment where it's coming from. It's coming a lot from -- we are -- I mentioned it earlier, lot of countries are looking to have their own payment systems. There's many domestic schemes out there. But it turns out that digital capabilities are really hard to do and they're really hard to scale. So that's part of our strategy, and that's how we're winning volume. It's a better proposition from a safety security perspective, tokenization, those are all things that we can bring to those countries, and that is what the biggest driver is so this is one of the key metrics for our company and our people to bring across the value that we bring there. and then compete against these domestic schemes. So a significant driver, and it has a lot of other digital capabilities. When we talk click to pay when we talk contactless, various other things that are just really hard to do for these kind of systems. So that brings switching on to us, and that's the -- that's fueling the services opportunity in turn. Operator: Our next question comes from Adam Frisch from Evercore ISI. Adam Frisch: A quick clarification and then a question, getting a bunch of questions from investors us. If the word will go longer or near-term impact would deem more destructive, what's the calculus on how that might impact your outlook, if at all? And then my question is on stablecoin and a shout out to Devin and Johan for a terrific call explaining the rest all for the BVNK deal a few weeks ago. Do you feel like the mounting challenges with getting the Clarity Act passed in D.C. delays the time frame for the industry in general? Or is there enough motion to keep the momentum going and having BVNK's capabilities helps you shape the trajectory a little bit more. Sachin Mehra: So Adam, on the first question, I'm really not going to go into multiple scenarios of how the work plays out, right? I kind of shared with us -- with you what the base case is and what the impact is. I also shared with you in my prepared remarks what the impact would have been had it not been for the war or rather the conflict occurring in Q2, where I said, basically, had it not been for the conflict, our growth rate in Q2 would have been generally in line with what we had in Q1. So look, the reality is things will move. We do understand that the conflict is something which is outside of our control, like Michael mentioned, it's not like we're sitting on our hands. We're working with our customers to try and find opportunities where we could be helpful to them and even in this environment. And if it's useful, maybe I can just size for you, really for the impacted countries, which is -- let's take the GCC in Israel, right? From a cross-border volume standpoint, right, GCC and Israel represent roughly of our cross-border volumes. And so -- and this is both inbound and outbound. You have to take both into consideration. Because, I mean, we have impact from an issuing and an acquiring standpoint. So it's important for you to just get a general size of what we're talking about here. Michael Miebach: Good. So coming to the other -- or the actual question versus a clarification. So Stablecoins, BVNK, Clarity Act, a lot going on. So first of all, I just want to go back to what I said when I shared our excitement about the BVNK acquisition. So fundamentally, what we see is that stable coins and tokenized deposits are actually not just stable coins here to stay. They're going to be an important part of the financial ecosystem, the financial fabric going forward. So we believe that tokenized Money will occupy a meaningful part of the money movement in the future. And the use cases I talked about the B2B, global payers, B2B, Me-to-Me, that's like funding my own wallet and all the are going to be use cases that will be there. So we have some regulatory clarity. We had with the Genius Act. There is such regulation in other markets. So it's not holding us back. We see it in the volumes that is happening. I talk about healthy clip in crypto. Now this extends into stablecoin -- already. There are use cases. So we're moving forward on that, which is why the timing of BVNK was important because it feels -- it's this unlocked moment at this time. Now we also think that when this world is growing at a higher speed, let's assume the Clarity Act is coming through, and then we'll be even more momentum on this, we're going to face a world that is a world of multiplicity. So it's going to be more coins. It's going to be more change. It's going to be more non-dollar-denominated coins out there, et cetera, et cetera. So that will bring about a future where interoperability and trust and licensing and who clients' needs are super critical. And that is where BVNK is a leader. And that is in my customer conversations, everybody is asking, what are you doing? How can we work together? What do I do first. We talk about BVNK, well, it's not closed yet, so I should say that. But we're very excited about it because we already see the demand. Everybody is trying to figure this out regardless of Clarity Act yes or no. Now on the Clarity Act, it would establish a clear regulatory framework for digital assets. That would be good, can be sitting here and speculating when it happens, but it doesn't hold us back. We believe that BVNK puts us in a position in-house natively to drive that interoperability and trust layer in that digital assets world, stable coins, tokenized bank deposits, et cetera. So very exciting, and it truly sets us apart. Operator: Our next question comes from Tien-Tsin Huang from JPMorgan. Tien-Tsin Huang: Just wanted to ask on the agentic side if that's okay in Mastercard Agent Pay, Michael, you talked about some of the partners and some activity on the ground. But can you just give us a little bit more detail on volumes or any surprises with respect to actual activity or actual demand. And I'm curious if you were to maybe talk about it in the context of who's pushing the hardest across all the players in the 4-party model. What are you listening to for clues on how to invest harder, et cetera? Michael Miebach: Right. So on agentic so this all kind of really got into motion in April last year, just about a year ago. This is kind of what we started to get out there with Agent Pay, other protocols where there -- this is when Google and others, Microsoft started to put out protocols that are commerce-oriented protocols. So that was a push for those players, LLM players, people getting in seeing a tremendous opportunity for them. And then the payment world, us with Agent Pay, we got and say, "Well, we got to facilitate those transactions." And we want to deliver everything that people are generally used to from us in a regular transaction. So that's what Agent Pay does, leveraging our tokenization capabilities. So we pushed equally hard. . In terms of where volumes are, we're still at early stage. So that is also true because a few things were not quite in place yet. So the question of what goes wrong, I talked earlier about disputes. What goes wrong in an agent transaction, how do you prove that? So the significance of verifiable intent cannot be underestimated. That is a really important step. We worked on this together with Google. That is now a standard. So again, part of the urgency needs to be we got to be in there with the trust that we bring and make sure that the standards are there. And that's what we're doing with great urgency and that is where our urgency lies. And then we're ready to see when the volume comes, where do we see some of the upside, new use cases spreading baskets on the consumer side, transaction opportunity, of course, there could be more services opportunities inside Tokens and Elite will be such an example. So all of this is happening. And then I haven't even started to talk about agents in the B2B space. So you heard us talk about Agent Suite, which we started to launch where we're going to get into the business of building agents with our customers in the B2B space, et cetera. So early stage on B2B earlier than on the consumer side, but I would think this is a much bigger opportunity and it fits right into our focus on commercial payments. So early-stage ecosystem building, covering your basis, that's what we're doing. Operator: Our next question comes from Darrin Peller from Wolfe Research. Darrin Peller: Just first a quick follow-up, Sachin, just when you think about the way to normalize cross-border for the effects of Ramadan and Easter shifting or any other normalization just to give us a sense of what you see as sustainable given the portfolio shifts. I'm curious if you could help us quantify that. Michael, I want to ask about Mastercard Threat Intelligence more broadly, we're all hearing about instances of fraud picking up around AI on payments. Are you seeing that inflection in demand really pick up pace for your value-added services and offerings around cyber and fraud. I mean clearly, that could be a nice boost sustainably for VAS. Sachin Mehra: So Darrin, I'll go first on your clarifying question. And I'm going to actually say with the cross-border travel metric, and I'm going to actually speak to the growth rate for Q1 compared to the first 4 weeks of April, right? Because that 8% number that you see there going down to 2% growth is driven by primarily 3 things. Number one, conflict, number two, portfolio shifts, number three, the timing of Easter, right, and Ramadan. These are the 3 factors. And I kind of laid them out in order of significance as well, right? But don't assume that the conflict is the biggest and then the other 2 are insignificant. It's kind of generally, directionally, the 3 of them are the key contributors to what you're seeing there. I think the more important thing, honestly, Darrin, out here is that by this very definition, what you're seeing. Let's take each one of them individually. Conflict out of our control, don't expect for that to stay with us over the long term. So fundamentally, nothing challenges the cross-border value prop as it stands. Number two, as it relates to the portfolio shifts. Look, we're very clear in our mind in terms of what our approach on portfolio wins and losses are. We want to win the right kinds of portfolios. We already maintain that. We've always maintained that, and we will continue to be very disciplined on that. So you're going to see wins, which you've seen more of -- and on occasion, you'll see things which will actually move away from us, which is part of what's going on from a portfolio ship standpoint. And I won't spend a lot of time on timing because timing of Ramadan and Easter is what it is, right? The week over week, you're going to see movements and changes on that. So that's what I'm going to share with you there. Michael Miebach: And every one of these calls, we talk about wins and losses and shifts. So if you just think about what I said earlier, Aeromexico, United Airlines, Canada, for travel agency wins. So there is a lot going on in the space. We've historically been focused and continue to see it as a strength and we'll lean in on that, but not always at all prices. Good. So on the safety security piece and Recorded Future, and the rising stakes in the world in an AI-powered world, that's absolutely true. We hear this everywhere. We see it everywhere. And it's not that new. It's just rising. So when we looked at Recorded Future and said our historic position in being a leader in fraud management and payment fraud management expanded to a multilayer strategy with risk recall where we looked at general cybersecurity stance of smaller businesses. That was a big part of our business. So we're not just fraud any longer. We're already talking to the -- companies. And then AI has been around for some time now. 2023 was really where it started to really accelerate. So bought Recorded Future in 2024, that was already with a perspective on, we got to look at broader threat vectors because companies -- our customers in our space, in the payment space, for them, it's very hard to defend. You cannot really outspend against all threat vectors. So we needed to have reliable information that we could give them that says, well, here's where your biggest risk is. This is where you really need to invest. And that's what Recorded Future has brought to us. And you can imagine -- right now, this is such a differentiated activity for us. Now in a world of geopolitical tensions and so forth, you can also see that a lot of governments are focused on this space. asymmetrical warfare, state actors, all of that is going on and recorded future puts Mastercard in a very unique position to be a trusted partner to provide those kind of insights. So when I look at the customer set of Recorded Future, it includes the intelligence community, government entities as well as private sector companies and so forth. So this has just been the perfect acquisition at the right time. And when we brought together our data set on the Mastercard side, that's Recorded Future as Threat Intelligence, that's a real synergy because then you have even more powerful data -- so how is it going? We closed in December 2024. We all got running last year and there is significant demand. So that continues. We put out a bunch of products. I mentioned Mastercard Threat Intelligence earlier, but there's others malware intelligence, autonomous threat operations, et cetera. So it is just the right thing at the right time. And we do expect that Security Solutions is going to be a continued significant growth driver for us. Yes, exactly that. Operator: Our next question comes from Andrew Schmidt from KeyBanc. Andrew Schmidt: Michael, appreciate the comments, Michael, on the selective deals. But if you just comment on whether the competitive intensity for deals has changed at all or whether that's relatively stable? And then Sachin, if you have any comments around how we should think about rebates and incentives trending this year or in subsequent years, that would be great. . Michael Miebach: Right. So selective is maybe a great word, but also -- we want to win deals. So that's our mindset. That is fueling transactions that's helping us getting after the cyclical opportunity, drive our Vasco, the virtuous cycle. So that is the mindset to start with. And that has been the mindset for years. So when it comes to competitive intensity around that because others might have the same mindset, I think that hasn't dramatically changed. I think our ability to provide value that has dramatically changed. So if you look at our services portfolio today and the kind of bells and whistles that we put on our Mastercard payment, that is a lot of value that we can bring and that we can have considered as we engage customers on what kind of value exchange works for these deals, and that's why we continue to win. So nothing dramatic I see on that front. So just being leaning in. But you say it's not every market where you would say, do I want to -- if I have a relevant market share and I'm well positioned in the market, then I might have a different consideration as if this is a new geography and I really want to grow my business. So we also make these kind of judgments as we grow our global presence. Sachin Mehra: Yes. And just picking up on Michael's comments, look, I mean, at the end of the day, we have a rich pipeline. Our teams are super active in terms of winning the right kinds of deals, and we will continue to stay focused on that. The impact, obviously, will come through in terms of what you see on rebates and incentives. But again, we look at rebate and incentives, but we also look at overall net revenue yield for the company. And you can see the net revenue yield for the company is increasing. More specifically on your question on rebate and incentives, what I'll share with you is in the second quarter, we expect for rebates and incentives as a percentage of our payment network assessments to be slightly lower sequentially as compared to the first quarter. . Operator: Our next question comes from Matthew O'Neill from Bank of America. Unknown Analyst: Just curious, if you take a step back from a high level, how does Mastercard think about a stable coin transaction versus a local currency transaction from an economic contribution standpoint, in a future with a lot more stable coin utilization, is Mastercard kind of economically agnostic? Are there opportunities for accretion or the opposite? Michael Miebach: Right. So let me start on that. So generally, when you see where are most of the volumes today, there's a lot of on and off ramp opportunities. So we have these co-brand programs. And in that, you basically have card economics. So that's just as straightforward. So now in this space going forward, where we drive interoperability layers and so far, as you can see, it just start to build out a whole set of new services and additional opportunities. So we see the space driving more value for us going forward. But for now, it's that volume, that is the most pressing need. How do I get on to in stablecoins. I have an offering at the other end of the transaction. So we got to be at all those spaces and invest to do that. So that's how I see it. Overall, I think it is a significant net new growth opportunity for us, which is why we felt we are going to deepen our capabilities through the acquisition. So we want to drive all of that value. It would be central network that facilitates that value exchange over those digital assets. Sachin Mehra: And the economics on the acquisition, right, once it's complete, I mean the value prop, which is coming through there, which is Michael talked about send. Basically, it was about convert, send, receive and store, right? That are these different attributes which come with the acquisition. The revenue model on that is basis points on volume. So you were asking us to how you generate revenue, that's kind of the mechanism and that's all an addressable market, which we don't participate in today. That's the accretive part of what Michael is alluding to. Operator: Our next question comes from Bryan Bergin from TD Cowen. Bryan Bergin: May I ask on yield. Can you just dig in on the key drivers in the TPA spread uptick? And any important considerations on pricing changes as you move through the -- of the year. Sachin Mehra: Look, again, from a pricing standpoint, a lot of what we do is, again, predicated on the value we deliver in the market. And so I use what I would tell you from a pricing standpoint, all of our planned pricing is already contemplated in the guidance that I've shared with you. And I kind of give you a little bit of color as to what the cadence by quarter looks like as well. without giving you specific numbers for Q3 and Q4. But the reality is all of that already contemplates what kind of value we plan to deliver and for which we plan to actually have pricing. So that's close share. . Operator: Our last question comes from Jason Kupferberg from Wells Fargo. Jason Kupferberg: Michael, in your prepared remarks, you mentioned how much growth we've seen in acceptance points. in recent years, and I think some of that will continue to come from geographic penetration. But can we get an update on how you guys are thinking about the most fertile new categories of acceptance over the coming years just as you continue to grow the network. And then, Sachin, just can you clarify on the vast growth currency neutral that you were actually steady on an organic basis year-over-year? Because I think you lapped Recorded Future? . Michael Miebach: Right. So acceptance, you saw the growth. So that is very significant. And it follows a very clear plan. So we are looking at going after domestic schemes. We are going after a closed loop. We're going after underpenetrated verticals. Those are all aspects how we're finding new volume and creating new acceptance. And this is not limited to the consumer side. This is also happening in the B2B side. One of the things I should say is underpenetrated verticals, very interesting. So insurance, housing, our programs with built just finding -- making sure that it's understood that cards can solve needs that are out there in spaces that we haven't historically been in. VCN is another such example. So driving VCN acceptance, which we continue to do. So underpenetrated verticals, I think, is a significant opportunity for us. And then it's the bread and butter business of just driving acceptance every day, small business, for example. Sachin Mehra: And Jason, on your question on VAS growth. So in Q1, we had approximately 18% growth in our VAS revenues. And that has no impact from acquisitions. In other words, there's no incremental impact coming through. if you're looking at it sequentially compared to Q4. In Q4 of last year, we had about 22% VAS growth and that had about 3 points of an acquisition impact in there. . Devin Corr: Thank you. Any closing comments, Michael? Michael Miebach: Yes. So it brings us to the end of the call. We overran a bit today, but there was a lot to cover. We appreciate your questions and your interest and your support. All of this work that we just discussed today is only possible because of the work of our teams around the world. The first quarter gave us some pause to really worry about the safety of our people in the Middle East, in Israel and GCC and that is hopefully coming to a conclusion soon. But it is that work that is so critical. So thank you very much, and we'll speak to you in the quarter. Operator: This concludes the conference call. You may now disconnect.
Operator: Thank you for standing by, and welcome to Jones Lang LaSalle Incorporated Q1 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Sean Coghlan, Head of Investor Relations. You may begin. Sean Coghlan: Thank you, and good morning. Welcome to the First Quarter 2026 Earnings Conference Call for Jones Lang LaSalle Incorporated. Earlier this morning, we issued our earnings release, along with a slide presentation and Excel file intended to supplement our prepared remarks. These materials are available on the Investor Relations section of our website. Please visit ir.jll.com. During the call, as well as in our slide presentation and supplemental Excel file, we reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures to GAAP in our earnings release and slide presentation. We also reference resilient and advisory revenues previously referred to as transactional revenues, which we defined in the footnotes of our earnings release. As a reminder, today's call is being webcast live and recorded. A transcript and recording of this conference call will be posted to our website. Any statements made about future results and performance, plans, expectations and objectives are forward-looking statements. Actual results and performance may differ from those forward-looking statements as a result of factors discussed in our annual report on Form 10-K and in other reports filed with the SEC. The company disclaims any undertaking to publicly update or revise any forward-looking statements. Finally, a reminder that percentage variances are against the prior year period in local currency, unless otherwise noted. I will now turn the call over to Christian Ulbrich, our President and Chief Executive Officer, for opening remarks. Christian Ulbrich: Thank you, Sean. Hello, and welcome to our first quarter 2026 earnings call. This morning, I'm pleased to report a very strong quarter for JLL to start 2026. The combination of our market-leading advisory businesses and resilient revenue base drove record levels of first quarter revenue and earnings. Robust growth across our core advisory businesses was broad-based, led by momentum in the office and industrial sectors in leasing advisory as well as growth across nearly all sectors and geographies in Capital Market services. Our data and AI advantage is driving productivity gains, increased market share and strong financial results across these businesses. Increased revenue and our disciplined operating rigor are unlocking strong profit growth and margin expansion. Adjusted EBITDA increased 24% and adjusted EPS was up 56%. Tailwinds for outsourcing and strong demand for project management supported the continued organic growth rate of our resilient revenues, which were collectively up high single digits during the quarter. The transformation of our Property Management business is also progressing, and we have now strategically exited or repositioned nearly 60% of the targeted contracts in Asia Pacific. Overall, we are building scalable, tech-enabled businesses with an advisory-led approach. We expect the revenue and profit of our resilient businesses to steadily grow over time, strengthening the through-cycle performance of the overall company. At our investor briefing in March, we introduced our Accelerate 2030 strategy, long-term financial targets and approach to advance value creation. This strategy is underpinned by a decade of progress, which has resulted in a resilient foundation, strong financial profile and a unique structural advantages. We have established scale in large, growing and complex end markets through our integrated global service offering. We have the balance sheet, strong cash generation and capital strength and agility to execute targeted capital deployment with a focus on ROIC. And our investments in proprietary data and AI capabilities over the past decade are expanding JLL's competitive advantage. These are strategically critical and differentiating levers that uniquely position us to build on our strong market position. With this as a backdrop, we've got high conviction that we have the strategy, talent, data-led approach and culture to drive synergistic scale, further increase our resiliency and deliver compelling value creation through the 6 imperatives of our Accelerate 2030 strategy. During the investor briefing, we highlighted the revamped strategy of our Investment Management business, LaSalle. LaSalle strategy is focused on achieving 2 primary objectives: investment outperformance for our clients as well as profitable growth and margin expansion for shareholders. We have been in the investment management business for over 45 years, operating various fund strategies globally with an attractive performance track record. We're strategically investing in LaSalle to accelerate growth of a resilient revenue base while also generating synergies with the broader JLL portfolio. LaSalle is uniquely positioned to differentiate and innovate with new products through the collective relationships, expertise, platform and technology from across JLL. In many ways, the strategy is embodied by the first close of our global decarbonization fund, Lp3F, during the first quarter. In partnership with Shell's business lines, the fund will execute a retrofit-led approach, spanning deep retrofits of vacant buildings, light retrofits and ground-up developments to address the growing scarcity of high-quality, energy-efficient properties. We have the expertise and capabilities to execute this strategy globally, including across energy, sustainability, project management and property management. Last year, we invested $100 million of incremental growth capital into one of LaSalle's flagship U.S. funds, JLL Income Property Trust, as we saw an opportunity to leverage our competitive advantage and potential to scale. Today, we are announcing the commitment of an incremental EUR 100 million investment in the LaSalle Encore+ Fund, one of our flagship European products to support its next phase of growth. This is a compelling organic investment opportunity for JLL with attractive risk-adjusted returns aligned with the strategic and financial objectives of our capital allocation framework. We continue to assess a pipeline of innovative investment opportunities with considerations for LaSalle's strategic growth plan as well as other capital allocation priorities across JLL. Our capital deployment decisions during the quarter reflect our capital allocation principles, balance sheet agility and through-cycle lens on leverage. We are committed to executing our Accelerate 2030 strategy with discipline and rigor aligned to our capital allocation framework. We repurchased $300 million of shares at an average price of approximately $301 during the first quarter, inclusive of the $200 million accelerated share repurchase plan. This reflects our stated commitment to be active on share repurchases with $2.7 billion remaining in our expanded authorization. With that, I will now turn the call over to Kelly Howe, our Chief Financial Officer, who will provide more details on our results for the quarter. Kelly Howe: Thank you, Christian. The robust first quarter growth on the top and bottom line is a product of our competitive position, focus on enhancing operating rigor and positive business momentum. Revenue increased 11%, inclusive of a 200 basis point foreign currency benefit and was almost entirely organic. We also generated healthy margin expansion over prior year. Commentary to follow is in local currency to articulate underlying operating performance. Our financial strength coming into the year allowed us to return meaningful capital to shareholders during the quarter, as Christian just described. This reduced our share count by nearly 2%. Looking ahead, we maintain considerable financial flexibility and are well positioned to drive significant stakeholder value as we fully activate our Accelerate 2030 strategy. Now a review of our operating performance by segment. Beginning with Real Estate Management Services, the revenue increase was led by Workplace Management and Project Management. Within Workplace Management, mandate expansions and, to a lesser extent, new client wins drove high single-digit growth. Higher volumes in the U.S., including from new data center wins delivered double-digit Project Management revenue growth, inclusive of a high single-digit management fee increase. Healthy underlying core business growth within Property Management was tempered by the elevated contract turnover we continue to action and discussed in prior quarters with management fees declining mid-single digits. As Christian mentioned, we have now strategically exited or repositioned nearly 60% of the targeted Property Management contracts in Asia Pacific. A portion of the contracts have been successfully renegotiated, partially limiting the revenue headwind, but also lengthening the time line and negotiations with clients. For full year, we expect the financial impact of contract churn to be largely offset by tailwinds from healthy core business growth and new wins in the Americas. Within Software and Technology Solutions, high single-digit software revenue growth mostly offset the continued pullback of discretionary technology solutions spend from certain large existing clients. For the segment, we are targeting mid- to high single-digit revenue growth for the full year with variances by business line and weighted to the second half. Workplace Management contract renewal rates are stable and our pipeline is strong, albeit second half weighted. Client activity within Project Management remains healthy, particularly in the U.S., positioning us for continued momentum over the near term. We continue to balance investing to drive long-term profitable growth with near-term business performance and sustained annual margin expansion. Moving next to Leasing Advisory. Revenue growth was led by continued momentum in the office sector, an acceleration in industrial and a meaningful contribution from data centers. The office leasing revenue growth notably outpaced the 1% decline in market volumes. On a 2-year stacked basis, Global Leasing Advisory revenue growth was 29%, and reflective of strong ongoing and broadening demand. The Leasing Advisory adjusted EBITDA and margin expansion was primarily driven by revenue growth, partially tempered by the impact of higher commission tiers being achieved earlier this year and business mix. We expect the commission tier headwind to moderate over the course of the year. Looking ahead, our leasing pipeline remains healthy. GDP growth outlook continues to be constructive and business confidence as measured by the OECD has improved even despite the fluidity of the macro environment, thereby providing optimism for continued growth in the near term. For the full year, we are targeting high single-digit revenue growth. We continue to invest in our talent and to augment our proprietary data advantage to drive long-term profitable growth. Shifting to our Capital Market Services segment. Investor bidding activity remains resilient, underpinned by robust liquidity [ and ] debt markets, a continued uptick in transactions of scale and stable pricing. Investment sales revenue grew 27%. Debt advisory revenue increased 30% and equity advisory revenue increased 75%. The continuation of the business momentum in the quarter is reflected in the 2-year stacked growth rates for investment sales and debt advisory of 42% and 81%, respectively. Our Investment Sales revenue growth in the quarter notably outpaced global market volumes, which is consistent with recent history and in part attributable to the strength of our people, global platform and proprietary data. Revenue growth as well as lower loan-related expenses versus prior year drove the increase in the adjusted EBITDA and margin expansion in the quarter. Looking ahead, our global investment sales, debt and equity advisory pipeline remains strong and underlying market fundamentals remain healthy. For the full year, we are targeting low double-digit top line growth and see meaningful runway for continued growth over the long term. Turning to Investment Management. Growth in advisory fees largely attributable to our capital raise activity over the prior 12 months was offset in part by the effects of meaningful disposition activity in Asia Pacific. As it takes several quarters to deploy new capital raised, we expect advisory fee growth to gradually pick up as the year progresses, driving low single-digit growth for the year. Additionally, we anticipate full year incentive and transaction fees to be towards the lower end of historical range and weighted to the fourth quarter. Shifting to free cash flow, balance sheet and capital allocation. Higher cash earnings were largely offset by growth-related working capital headwinds, particularly within net reimbursables. An increase in CapEx in part due to timing, more than offset the improvement in operating cash flow leading the seasonal outflow of free cash flow to be largely in line with a year ago. For the full year, we are targeting a free cash flow conversion ratio consistent with our long-term target of over 80%. Our cash generation over the trailing 12 months contributed to a reduction in net debt, which along with higher adjusted EBITDA led to an improvement versus a year ago in reported net leverage to 1.0x at the end of the first quarter, typically our seasonal peak period. Capital deployment priorities remain focused first on driving organic growth and productivity across business lines, weighted to areas of highest return on capital and long-term growth potential within our core services. Organically, we are continuously and diligently enhancing our platform and service differentiation as well as investing in our people strategy. Our acquisition pursuits remain focused on augmenting organic initiatives that enrich our capabilities as well as deepen our client relationships across multiple business lines, provide synergistic scale and enhance our enterprise resiliency. Returning capital to shareholders remains a top priority. As Christian described, the 275% increase in our share repurchase authorization to $3 billion, along with the $300 million of share repurchases during the quarter, reflects our commitment to returning capital to shareholders as well as the value we see in our shares. The majority of the shares associated with the $200 million accelerated share repurchase were delivered during the quarter at an average price of approximately $290. The remaining shares under the program will be delivered in the second quarter. Looking ahead, we intend to be programmatically active on our repurchase authorization. The total annual amount of repurchases in a given year will depend on the broader operating environment, our leverage outlook and valuation as well as relative returns to other investment opportunities inclusive of M&A. Regarding our 2026 full year financial outlook, we are encouraged by the continued strength in our pipelines and underlying business fundamentals. Considering our ongoing focus on driving operating leverage and the segment top line growth targets I mentioned earlier, we are targeting an adjusted EPS range of $21.80 to $23.50 for the year, reflecting 20% growth at the midpoint. This aligns with the adjusted EBITDA range we provided last quarter. The strong first quarter results put us on a trend towards the upper end of the range, though the current fluidity of the macro environment limits late-year visibility into our more economically sensitive businesses. Going forward, we intend to provide segment revenue and adjusted EPS as our primary annual targets as they better encapsulate how we holistically measure our business performance. Christian, back to you. Christian Ulbrich: Thank you, Kelly. Before closing, I would like to address the ongoing conflict in the Middle East. We have been growing our business in the Middle East for over 20 years with operations anchored in Saudi Arabia and the UAE. Today, this business represents a low single-digit percentage of revenue with strong growth potential. Since the onset of the conflict, our top priority has been the safety of our people and supporting our clients with operations in the region. From a commercial perspective, there has been no material impact on our consolidated results to date, and our pipelines have continued to build throughout and following the first quarter. That said, we have intentionally taken a conservative approach to leverage and are prepared for a wide range of outcomes. We are focused on first and second order risk to our businesses globally across a variety of scenarios to the extent tension persists and become a meaningful headwind to the global economy. I would like to take this opportunity to thank all of our colleagues around the world for their perseverance and focus. On the heels of the launch of our Accelerate 2030 strategy, we are excited by the significant runway for JLL to deliver long-term growth and value creation for stakeholders. Operator, please explain the Q&A process. Operator: [Operator Instructions] And your first question comes from the line of Anthony Paolone with JPMorgan. Anthony Paolone: My first question relates to the guidance. If I kind of back into what growth might look like for areas like leasing and capital markets later this year. It seems like it would be either consistent or maybe even a little bit inside of what you guys outlined at Investor Day for the next 5 years. So I guess, one, is that right? But then two, should we take that as just being conservative given the uncertainty in the environment? Or do you think that Capital Markets and leasing has basically recovered back to a normalized level here at this point? Kelly Howe: Thanks for the question. I'm happy to address that. Our guidance obviously reflects a range of scenarios, as I noted. We are, at this point, trending towards the high end of our guidance. As it relates to leasing and capital markets, our outlook is roughly in line with where we would expect growth rates to be over a longer-term period and in line with what we articulated at Investor Day. That said, as we look at the back half of the year, 2 things. One, we've got very strong comparables because we had very strong quarters for leasing in the fourth quarter, and we had very strong quarters last year for Capital Markets in the third and the fourth quarter. And so our guidance for this year reflects some proportion of lapping those very tough comps. And then if you look at the 2-year stack basis for those businesses, actually, the growth rate is very strong, including our guidance. And then I do think from a macroeconomic perspective, as Christian noted, we're seeing very little impact in our business today, but we are monitoring the situation very carefully. And if there was to be impact, it would come in the back half of the year, and that is reflected in the range of the guidance that we have provided you. Anthony Paolone: Okay. And then my follow-up is on Encore+. You noted the EUR 100 million investment there. But maybe can you step back and just give us a sense like how much capital has been raised there? What are you looking to raise there? Just trying to understand how important that is in sort of jump starting AUM and LaSalle and also the order of magnitude of maybe further co-invest to kind of get capital raising going across that? Christian Ulbrich: The overall capital raising environment has been relatively muted in the first quarter. The specific capital for Encore+, what we're expecting there, the team will provide you in a moment. What I would say is that there has been an ongoing trend, which has developed over several years now that when you, as a fund manager, kicks out those funds with your own investment that drives a lot of confidence into the product and that usually then brings a couple of other investors coming alongside and you have this jump start, which you want to see to a considerable kind of momentum in your capital raising. Team, do you have the numbers specifically for Encore+? Kelly Howe: Yes. So we're investing EUR 100 million. This is a core European fund. It's an open-ended fund. And so we do expect meaningful third-party capital raise. I don't have a specific number to provide you at this moment. Operator: And the next question comes from the line of Stephen Sheldon with William Blair. Stephen Sheldon: First, I just wanted to see if you could talk more about what you're seeing in capital markets. And specifically, have you seen any pushout in deals or delays given rate volatility and sort of continued geopolitical or macro concerns. So yes, just curious momentum there has kind of continued early into the second quarter. It sounds like it has based upon your comments, Christian, but I just thought it was worth asking. Christian Ulbrich: Well, Capital Markets started the year with really very significant momentum across the globe and which is reflected in our first quarter numbers. And this momentum also has continued in the second quarter. The U.S. market is pretty much unimpressed by the geopolitical environment so far. The European market, we have seen some deals being canceled. We have seen some deals being delayed. But the overall momentum was still so strong that, that is just taking away an additional outperformance, which we would see otherwise. And that is also pretty much the case in Asia Pacific. You may recall that Asia Pacific was relatively weak in 2025. They have very strong momentum, a lot of large transactions going on. We haven't seen those pausing, but you probably wouldn't see it in our numbers anyway. It's just what this conflict does, it takes away additional outperformance, which we would have seen otherwise without that conflict. Stephen Sheldon: Very helpful. Makes sense. And then as a follow-up in leasing, how should we be thinking about the potential range of incremental margins over the rest of the year? It sounds like the first quarter was bogged down by producers hitting higher commission tiers as you expected. So should we be expecting kind of better incremental margins there looking forward as kind of tiers were set? I know it can be volatile quarter-to-quarter, but just generally, how are you thinking about it over the rest of the year? Kelly Howe: Yes. Thank you for the question. My first advice is not to look at incremental margins on a quarterly basis, but really on a kind of 12-month trailing basis. That said, in the first quarter of this year, as you noted, our producers have hit higher commission tiers earlier in the year than we expected. That is due to the strong performance of the business and also kind of the geo mix of where the business is coming from. We expect the commission headwind to moderate through the year. That said, we continue to make investments in that business around talent and technology and data. And we expect for this year, 2026, our overall margin rate for the business to be relatively flat versus prior year. Operator: And the next question comes from the line of Jade Rahmani with KBW. Jade Rahmani: Just to confirm your last comment, the relatively flat margin rate, that's on Capital Markets. Is that right? Kelly Howe: That's on leasing, to be clear. On leasing. Yes. In Capital Markets, we, as Christian noted, have a strong pipeline. The momentum is good in Capital Markets, and we expect a strong incremental margin for Capital Markets this year for the full year. Jade Rahmani: Okay. Still in the 35% to 40% range? Kelly Howe: Yes. I'd say mid-30s is generally where we expect to be for incremental margin for Capital Markets. Jade Rahmani: Okay. I wanted to ask about AI and how you're managing the rollout because there are some concerns about potential disintermediation in this space down the road. And then I know that keeping data in a closed loop system is centrally important. So could you give any color on how you're approaching it with respect to what percentage of the sales teams are currently using AI and how you expect to manage that going forward? Christian Ulbrich: Sure. Well, as you know, we have been investing into technology and especially into our data platform now for over a decade. And we believe that we have by far the best data platform within our industry. All our products are tied into that data platform. So every data goes into that platform and we can bring all the data back to whatever type of product or agent we have created. The adoption rate within our organization is incredibly high. There's a lot of excitement amongst our colleagues to really use these new large language models. And so on that end, we feel real momentum. There are several agents becoming live per week on the citizen development side. And then we are working from a corporate central perspective on some very interesting approaches to really drive additional productivity, but also to change how we are getting to market and how we are solving a topic. To your second part of your question, point around disintermediation. I mean, we spoke about that at length during our Investor Day. For now, we are not concerned about any potential disintermediation. In fact, for now, we are very clear that AI is a tailwind for our organization, first and foremost, because we have this very, very rich data platform, which allows us to provide a lot of proprietary data to the benefit of our clients. And that data platform is growing with every transaction we are doing, with every service we are providing to our corporate clients. And then over and above that, even in those areas where people are speculating that there could be potential disintermediation, what has been mentioned the most is the value and risk advisory business, at the end of the day, there's also a very important aspect who is confirming the potential valuation where the brand aspect is absolutely significant, and we believe that the JLL brand will go a very long way on that end as well. So in summary, for now, we don't see any risk of disintermediation. Kelly Howe: And maybe just to follow up with a couple of data points for the first part of the question that Christian addressed. We spoke about this a bit at Investor Day, but we see 75% adoption across JLL across our core enablement products. And we've got -- we monitor this closely. We've got 25,000 employees who are working on our enterprise AI applications every day. We've seen a 60% year-over-year increase. We expect that to continue to grow. Jade Rahmani: Lastly, on the capital management side, what are your expectations for full year share repurchase given the accelerated repurchase late in the quarter? Kelly Howe: Yes. Thanks for the question. As I think both Christian and I noted around our capital allocation strategy and priorities, organic investment, return of capital to shareholders and strategic M&A are the 3 things that we're constantly balancing. We're very committed to returning capital to shareholders. As you noted, we did a $300 million capital return in the first quarter, $100 million of that is what we would consider to be programmatic, and we look to continue our programmatic share repurchases throughout the year and into the coming quarters beyond that as well. The $200 million was more opportunistic relative to market conditions. The exact amount of the programmatic repurchase in any given quarter or any given year is going to vary a bit depending on the operating environment, the external market, what other opportunities that we're looking at and returns on those opportunities. But we do intend to have a fairly programmatic approach to share repurchases as we go forward. Operator: And the next question comes from the line of Julien Blouin with Goldman Sachs. Julien Blouin: I appreciate the comments on the fluid macro, but I just want to understand your comments. I think if I understood correctly, you think the impacts of the conflict, if they were to come, would likely be felt in the back half of the year. I guess why is that the case? I would think that the impact would come quicker than that. And just comparing it to Liberation Day last year, which was similar in timing, though obviously a completely different issue. The impact was felt in 2Q. And then by the time we got to the second half of the year, sort of capital markets were back off to the races. Christian Ulbrich: Yes. Thanks for that question. I wouldn't necessarily compare the 2 things. The imposement of tariffs was an immediate kind of load to the economy and an additional cost. Here, we have a conflict. If the conflict would have been solved within 4 to 6 weeks, I would have said the impact outside of the Middle East would have been almost unnoticeable. But with every week, this is continuing. We have these higher energy prices and all the other implications around lack of fertilizers impact on the chemical industry, you name them. And so what people have stored, which helps them to bridge that impact is kind of fading away. And at some point, they all have to pay for that higher energy. Look at the airline industry, you have some airlines who have secured the pricing for this aircraft fuel they need and others don't. And those who don't are immediately feeling that impact now, and that will have repercussions on their performance in the broader economy. And so the lengthening out of that conflict will have a heavier load on the global economy. And frankly, especially in those countries where there is a very, very high dependency on purchasing energy and on purchasing fertilizers and other products, which are coming from the Middle East. It's least felt in the U.S. You see the pricing also in the U.S. of the gas station, but the U.S. is very independent. That's why we also see very little so far in our business environment in the U.S. But when you go to Europe, you feel it quite noticeable already. And then if you talk to our friends in India and in other countries who are heavily impacted, they would -- they are seeing great concern if that conflict continues over the summer. Julien Blouin: Okay. No, that's helpful. And then I guess on the office leasing front, I mean, results continue to be really strong. But I guess what are tenants and brokers telling you regarding their future plans for footprint? Are they confidently moving ahead with plans for later this year or next year? Or are you seeing any indication that first, they're trying to solve for sort of AI impacts to their go-forward headcounts and sort of office using employee bases before they sort of commit to space? Kelly Howe: Thanks for the question. Our leasing pipeline is quite strong. The indication that we get is that organizations are plowing forward with getting their people together, getting people into the office. In some cases, we've even gotten feedback from clients that they overshot on the downsizing through the pandemic and now need to correct for that. Ironically, I would argue that the AI boom has actually been also a boom for our leasing business as the ecosystems around all of the AI start-ups, AI and I would say, financial services has really caused an uptick in activity, particularly on the coast, San Francisco, New York. And so at this point in time, we're really not seeing an impact on our business from kind of what people are thinking about in terms of AI concerns, headcount, employment, et cetera. Operator: And the next question comes from the line of Seth Bergey with Citi. Seth Bergey: I just wanted to kind of ask about the commentary on kind of the office revenue outperformance. Is that kind of driven by market share gain or deal size mix? And can you just talk about if that's kind of in any particular geographies? Kelly Howe: I assume you're referring to leasing specifically. So I can go ahead and address that. Yes, our office demand was very healthy in the first quarter. It is driven both by an increase in transactions and an increase in deal size. So we've seen both. It is definitely driven by gateway markets. As I noted earlier, in particular, we've seen a lot of strength in places like New York and San Francisco, driven largely by kind of AI and AI organizations looking for space to get their people together and also financial services. Operator: And the next question comes from the line of Brendan Lynch with Barclays. Brendan Lynch: Could you provide a little bit more detail around the decarbonization fund within LaSalle and examples of similar projects in the past and kind of size of this current initiative? Christian Ulbrich: Well, this is a new initiative, and I'm not quite sure whether there are a lot of examples out there from other fund managers. What we are doing there is we are looking for mostly existing buildings, which are not up to the expectations of the higher-end potential tenants in the market. And we want to completely refit those buildings and turn them into a level that they can meet the expectations of the top tenants in the market. And that includes, obviously, that these buildings have to be very excellent in their energy consumption ideally net zero or close to that level. And we are starting with a couple of projects, which have been identified. The initial size in our first outlook is $300 million, which we want to operate with. And then obviously, we go into fundraising now. And hopefully, we bring that fund up to a decent level relatively swiftly. Brendan Lynch: Great. And maybe for a follow-up on the M&A pipeline. Are you primarily looking at geographic expansion or new capabilities or technology investments? Just any additional color that you could provide there around what you're targeting? Christian Ulbrich: Well, as we stated in our Investor Day, we see very significant growth opportunities in our core activities. And so we will focus, therefore, very much on those areas, which we already cover today as core services and look for -- if so, for opportunities to increase our market share in geographies where our market share may not be where we like it to be. And if there is an opportunity on the M&A side, we will look at it. But as we have said several times before, we are very confident that our organic growth rate will stay at the high single-digit level. And so there is no need to do any M&A. The M&A market overall has significantly increased in activity in our space. And we also see what we would call a little bit of nervousness on the seller side with regards to the price levels they can achieve. So it may become more attractive in the coming 6 months, also depending on how the geopolitical environment will pursue. Operator: The next question comes from the line of Mitch Germain with Citizens Bank. Mitch Germain: How should we think about how we measure the performance of the investments that you've made within the -- within LaSalle? I mean this is the second, I think, I believe, $100 million investment. So how do we think about maybe the economics and how it impacts your earnings and the types of returns that you're targeting? Christian Ulbrich: Well, Mitch, as we have said before, and we will be very consistent around that, every use of capital goes through a very rigorous analysis and it has -- first of all, the biggest hurdle it has to beat is it has to be better than share repurchases. So we looked at the proposal, which came from our LaSalle colleagues, the last one and now the one we have spoken about today, and it is well above the returns we expect from share repurchases. And obviously, there's numerous implications when we expand the footprint of LaSalle. It is not only the opportunity, which is directly within the LaSalle P&L, but there's also notable cross-selling with a broader platform of JLL. So we are very comfortable when they come with a convincing idea that this is, from a shareholder perspective, an excellent opportunity to use capital, and as I said, well above share repurchases. Mitch Germain: That's super helpful. And then the last one, Christian, I appreciate the color you gave on the recycling out of those Property Management contracts. I think you said 16%. So I'm assuming most of these contracts are about a year in term. So should we think that kind of by midyear or maybe 3Q that you've cycled through what you want to accomplish there? Kelly Howe: Yes. Yes. So we started on this initiative to really take a deep dive on the contracts last year and started cycling through second half of last year. We had, as I think noted earlier, expected to have that process wrapped up kind of halfway through this year. One of the things that we pleasantly -- that pleasantly surprised us as we got into that process was that many clients were actually interested in renegotiating terms of those contracts, which we view as a win. And so the upside is that, obviously, the outcome for us is better, but it's taking a bit longer to cycle through those and we expect that to go through the end of the year at this point. We do expect the headwind from that to be offset from strength in other parts of our business, namely in the Americas where we're seeing strong underlying growth in that part of the portfolio. Mitch Germain: Kelly, if I could just follow up, what sort of -- maybe renewals, not the right word, but what sort of stickiness have you gotten from that process? Kelly Howe: The specific contracts that we were targeting were in our Asia Pacific region. Many of them have been structured in a way that, frankly, were just unattractive to us from a financial standpoint. Very, very, very high pass-through costs, low portions of actual value-add fee revenue generating a portion of that. And so I would say the stickiness has been -- it's been about, I would say, 1/3 of those contracts, as we've gone through, have been interested in renegotiating to something that is more attractive, I would argue, for both sides, more attractive for them, but also more attractive for us from a commercial standpoint. Operator: And I'm showing no further questions at this time. I would like to turn it back to Christian Ulbrich for closing remarks. Christian Ulbrich: Thank you, operator. With no further questions, we will close today's call, and we are looking forward to speak to you again next quarter. Thank you. Operator: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to Brunswick Corporation’s First Quarter 2026 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today’s meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Stephen P. Weiland, Senior Vice President and Deputy CFO, Brunswick Corporation. Stephen P. Weiland: Good morning and thank you for joining us. With me on the call this morning are David M. Foulkes, Brunswick Chairman and CEO, and Ryan M. Gwillim, Brunswick’s CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today’s press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today’s results. I will now turn the call over to David M. Foulkes. David M. Foulkes: Thank you, Stephen. We delivered an excellent start to the year, building on the market recovery in 2025, with first quarter results significantly ahead of expectations despite the dynamic geopolitical and tariff environment. Global and U.S. boat retail were approximately flat on a unit basis compared to the relatively strong first quarter of last year, and premium sales were up. Q1 was the third consecutive quarter of improved relative retail performance, building confidence in our retail forecast for the year as we move into the core selling season in our largest markets. Strong OEM order patterns drove gains for Mercury Marine and Navico Group, while solid boating participation benefited our recurring revenue, parts and accessories, aftermarket, and subscription boating businesses. From an inventory perspective, boats and engine pipelines remain healthy and lean, well aligned with demand. Global boat pipelines are down approximately 2,000 units versus last year and flat sequentially versus 2025, reflecting our deliberate actions to closely match wholesale with retail. Our overall net sales of $1.4 billion increased 13% year over year with growth across all segments, driven by continued market share gains, strong OEM demand, accelerated new product and technology introductions, and disciplined operational execution across the enterprise. Our adjusted earnings per share of $0.70 increased 25% versus last year, with strong operating leverage from higher sales more than offsetting the impacts of the tariffs implemented after the first quarter of last year. We continue to execute our disciplined capital allocation strategy, repurchasing $20 million of shares year to date, and delivered our fourteenth consecutive annual dividend increase, underscoring our commitment to returning capital to shareholders while maintaining a strong balance sheet. In our core U.S. market, product demand and boating participation remain relatively unaffected by the conflict in the Middle East, although the health of the value consumer remains a focus. We have a relatively small direct exposure to Middle East markets, but are monitoring trends in Australia, New Zealand, and other more exposed markets as oil supply tightens. Our high exposure to the most insulated markets, particularly the U.S. and Canada, which account for more than 70% of total sales, balanced portfolio, lean channel inventories, and operational discipline position us strongly to effectively navigate the volatility. Turning to segment performance, for the third consecutive quarter, all segments delivered year-over-year sales growth. Operating margin expanded across the portfolio, except for Propulsion, which absorbed the majority of first quarter incremental tariffs. The strong performance reflected improving retail and wholesale trends, sustained boater participation, and disciplined operational execution across the organization. Propulsion sales increased significantly versus last year, with Mercury’s global and U.S. outboard unit orders increasing more than 15% over the prior year period, and record Mercury outboard share at recent boat shows, including 60% overall and 80% on-the-water share at Miami, and 70% share at Palm Beach, signaling the potential for further high-horsepower share gains. Overall, R12 share remains steady at 47%, with year-to-date retail share up 200 basis points, along with strong wholesale share gains. Our accelerated investments in future high-horsepower outboard platforms and all-new mid-range high-volume models will reinforce our long-term competitive advantage. Healthy boater participation and continued distribution gains drove higher sales and margin year over year in our Engine P&A business, with Land ’N’ Sea again increasing U.S. distribution share by 150 basis points. Navico Group delivered revenue growth and margin improvement, supported by new product launches and operational improvement actions. We introduced the SIMRAD NSO4 and B&G’s ZEUS SRX multifunction displays; at the Miami Boat Show, we received an innovation award for the Lowrance ActiveTarget 2XL fishfinder and continue to execute SIMRAD AutoPilot implementation plans with a range of OEM customers. Finally, our Boat Group segment grew sales and margin as wholesale shipments aligned with stable retail. Boat show revenue increased year over year despite weather impacts at some Upper Midwest and Northern market events. At the Palm Beach premium saltwater show, Boston Whaler and Sea Ray delivered high unit sales and a substantial 40% revenue increase versus last year. Freedom Boat Club added four new locations in the quarter, increased member trips by 20%, improved same-store sales by 10%, and earlier this month completed the acquisition of the largest remaining franchise club in the Freedom network, which serves the Boston and Cape Cod region. Moving on to external conditions, rate cuts enacted late in 2025 are a continuing tailwind for retail and floor plan financing as we enter the peak selling season. Our expectations for incremental rate relief have moderated; our forecast does not rely on additional cuts. Fuel prices have risen recently due to geopolitical events, but generally remain within historical bounds, and we are not experiencing any clearly discernible direct impact on retailer or OEM demand or on boating participation in our largest markets. The tariff environment remains dynamic, and Ryan will discuss the specific impact to our guidance later on the call. The tariff on Mercury Marine’s Japanese competitors remains in place, representing a potential structural advantage for Brunswick Corporation. Refunds related to previously paid IEPA tariffs are not yet factored into our outlook. Current dealer sentiment is improved overall, but still cautious, supported by healthy and fresh inventories and lower pre-owned boat supply, which supports new boat demand. While incentives remain elevated versus historical norms, they improved approximately 100 basis points last year and we are forecasting further modest improvement in 2026. Looking now at industry retail performance, the latest SSI data for March shows U.S. industry main powerboat retail down approximately 5% year to date. Against this backdrop, SSI reported that Brunswick Corporation outperformed the industry. Our global and U.S. internal retail unit sales were approximately flat year over year compared with the relatively strong 2025, prior to the impact of tariffs, with premium and core again outperforming value. From a pipeline standpoint, conditions remain very healthy. Global boat pipelines are down approximately 2,000 units versus last year, but flat sequentially versus the fourth quarter, and benefiting from wholesale-to-retail alignment consistent with our plan. In addition, our global boat order backlog at the end of the first quarter represented 71% of our second quarter wholesale forecast, up six percentage points from last year, providing improved near-term visibility. Turning to engines, U.S. outboard engine industry grew 6% in the first quarter, with Mercury retail units up approximately 11%. With a similar dynamic to boats, U.S. outboard pipelines were down approximately 10% versus last year, but flat sequentially versus the fourth quarter, reflecting wholesale-to-retail matching. Overall, the combination of sustained share gains, disciplined pipeline management, and improving wholesale-to-retail alignment gives us confidence in our outlook for 2026 and supports our expectation of a flat to improving market as we enter the peak boating season. Finally, I want to address the impacts of recent oil price volatility, which has been a frequent topic in recent investor discussions. From the boat buyer or boater’s perspective, historically there has not been a correlation between oil price spikes and boat sales or boating participation. A primary driver of this low correlation is that fuel costs represent a relatively small portion of total boat ownership expense, because on an annual basis, the typical recreational boat only uses about 20% to 30% of the fuel of a comparable passenger vehicle. From a Boat Group perspective, exposure to oil-linked materials is relatively small, representing a combined 2% of total cost of goods sold, and with the relevant materials being under long-term supply agreements. Our scale and sophistication also enable hedging programs for other key commodities, such as aluminum, further reducing exposure to spot price volatility. However, aluminum prices do remain elevated. Diesel prices have impacted boat and other transportation costs; we have implemented some surcharges. I will now turn the call over to Ryan M. Gwillim to discuss our first quarter financial performance and updated guidance. Ryan M. Gwillim: Thank you, Dave, and good morning, everyone. Brunswick Corporation’s outstanding first quarter performance came in ahead of expectations, with strong sales and earnings growth versus the first quarter of last year. On a consolidated basis, sales were up 13%, reflecting improved wholesale and retail trends, continued market share gains in propulsion and several boat categories, strong OEM demand for propulsion, components, and electronics, favorable changes in foreign currency exchange rates, pricing actions in each segment commencing in 2025, and solid boating participation driving aftermarket performance. Adjusted operating earnings were up 15%, supported by the increased sales, favorable mix, improved absorption, and disciplined cost management more than offsetting the impact of incremental tariffs implemented after the first quarter of last year. Absent the year-over-year enterprise impact from incremental tariffs, adjusted operating leverage was approaching 30%, driving adjusted EPS of $0.70 for the quarter. Free cash flow was negative in the quarter, consistent with seasonal and historical patterns, reflecting higher production levels and working capital investment ahead of the peak selling season. Compared to the prior year, free cash flow was down solely due to reinstated variable compensation paid in the quarter. Moving to our segments, Propulsion delivered a very strong start to the year with sales increasing 17% versus the prior year, driven by an improved market, global share gains, and strong OEM demand heading into the selling season. Adjusted operating earnings declined year over year solely due to the planned accelerated investments in product development and incremental tariff impact, which slightly more than offset the benefits of higher sales and improved absorption. Absent the incremental tariffs, pro forma adjusted operating leverage for Propulsion was north of 20% in the quarter, even after accounting for the high-single-digit millions of additional product development spend in the quarter. Moving to Engine Parts and Accessories, this segment once again delivered growth from its aftermarket, high-margin recurring revenue portfolio with sales up 14% versus the prior year, with significant growth across both products and distribution. Healthy early season boating participation, even with the recent increase in fuel prices, and continued market share gains in global distribution drove growth in the quarter. The higher sales and robust adjusted operating leverage at 27% led to a 24% increase in adjusted operating earnings, with a 140 basis point improvement in adjusted operating margin. Navico Group had another great quarter, transitioning from stability to growth, with sales up 7% over prior year and up across all business lines, supported by improving OEM demand, steady aftermarket performance, and operational efficiency. More importantly, adjusted operating earnings increased 64%, with adjusted operating margin expanding 280 basis points, reflecting the early benefits of product portfolio optimization, operational improvements, and disciplined cost control actions which more than offset incremental tariffs. We also discussed the inherent operating leverage in this high gross margin business, so it is fantastic to see 47% adjusted operating leverage in the quarter as our actions bear fruit. We continue to see encouraging traction from recent product launches, including SIMRAD NSO4 and B&G ZEUS SRX, and recognition for innovation with Lowrance ActiveTarget 2XL. While there is still work ahead, the results this quarter reinforce our confidence that Navico Group is on a sustainable path towards improved profitability. Finally, our Boat segment also had a strong quarter, with sales up 6% over prior year, driven by higher wholesale shipments matching stabilized retail conditions, favorable mix, and continued momentum in the Business Acceleration portfolio. Boat growth was led by our aluminum fish and pontoon brands, while Freedom Boat Club continued to deliver strong increases in members, trips, and locations as mentioned earlier. Adjusted operating earnings increased 63%, and adjusted operating margin expanded 130 basis points, reflecting healthy adjusted operating leverage of 25%, primarily driven by the higher sales and favorable mix. Dealer pipelines remain very lean with mostly current model year product, well positioning the business heading into the prime retail season. Lastly, I will discuss our updated outlook for 2026. As we enter the core retail selling season in the U.S., we are encouraged by the stable market conditions and the strength of our first quarter performance. Steady dealer and customer sentiment, exceptionally healthy and lean pipelines, disciplined wholesale-to-retail alignment, and sustained boating participation are sources of confidence as we move through the remainder of 2026. However, while direct sales and operational impacts remain limited, heightened geopolitical volatility has introduced new uncertainties. Earlier, Dave discussed the muted impacts to date caused by fluctuations in interest rates and fuel prices, but we remain cognizant of the potential impact on the health of our consumer, especially outside the U.S., from a prolonged conflict in the Middle East. Finally, the tariff environment remains dynamic and, during the quarter, IEPA tariffs were repealed and replaced with Section 122, and more recently, Section 232 tariffs on steel and aluminum were amended. The net impact of these changes is positive; we now believe our full-year incremental net tariff impact will ultimately land near the lower end of our original $35 million to $45 million estimate shared at the beginning of the year. Also, as Dave mentioned, refunds related to previously paid IEPA tariffs are not yet factored into our outlook or recognized in our financial statements. The result is materially unchanged guidance on the sales, margin, and free cash flow lines, but an increase to adjusted EPS guidance to $4.00 to $4.50, reflecting the lower full-year expected incremental net tariff impacts I just discussed as well as the first quarter overdrive, while also factoring in some cautiousness given the current dynamic macroeconomic environment. Overall, we believe our guidance reflects confidence in our operating plan, the resilience of our portfolio, and our ability to generate strong financial performance in a flat to slightly up retail environment. I will now pass it back to Dave for concluding remarks. David M. Foulkes: Thanks, Ryan. I want to highlight some exciting recent developments in one of our fastest growing businesses, Freedom Boat Club. As you know, Freedom is a profitable, high-growth recurring revenue business that continues to expand boating participation by making boating more accessible to a broader demographic. The model drives extensive synergy sales across the Brunswick Corporation portfolio, including through the purchase of Brunswick boats, Mercury Marine engines, parts and accessories, and Navico Group products, resulting in approximately $300 million of enterprise synergies since the 2019 acquisition. Since the acquisition, we have also grown the location count from 170 locations to 446 global corporate-owned and franchise locations, adding four more locations in the quarter. Last year, Freedom members made 640,000 trips in the U.S. Earlier this month, we announced the acquisition of the largest remaining franchise club in the Freedom network, serving the Greater Boston and Cape Cod region. This acquisition adds 21 locations to our corporate-owned total, as well as a strategic maintenance operations center that will drive synergies with other nearby corporate locations. It is also day-one accretive to earnings. Innovative new products and advanced technologies are central to Brunswick Corporation’s long-term value creation, differentiation, and share gain strategy, and during the quarter, we introduced many exciting new products across our portfolio, including the all-new Sea Ray SLX 360, and Boston Whaler Outrage 330 and 290 models, with Mercury power and Navico Group electronics; SIMRAD’s NSO4 multifunction display with Neon Android operating system; Mercury’s advanced keyless engine start system; an innovative Boost over-the-air outboard performance upgrade; and FLITEBOARD’s Race ultra high-performance model. All these products illustrate our commitment to constantly pushing the boundaries of marine innovation. Finally, I want to highlight the continued recognition our teams and brands are receiving across our enterprise. Through the first quarter, Brunswick Corporation has already secured nearly 50 awards and remains on track to surpass 100 awards again in 2026. This recognition spans product innovation, workplace culture, leadership, and corporate reputation, and reflects the strength and consistency of our operating model and values. We are appreciative of having received many national awards now for multiple years, but notably, for the first time in 2026, Brunswick Corporation was named to Fast Company’s Most Innovative Companies list, reflecting the wide recognition for our industry-leading innovation. Thank you again to all our talented Brunswick employees who make this recognition possible. Before we open the line for questions, I want to close by thanking our customers, channel partners, employees, and shareholders for their continued strong support. We are also excited to announce our Brunswick Investor Day will be held on August 11 at Mercury Marine’s global headquarters in Fond du Lac, Wisconsin. The event will include a facility tour, on-water product experiences, and live Q&A with Brunswick senior leaders. In advance of the event, a prerecorded video strategy presentation will be published to our website. For planning purposes, I kindly ask that you register your interest in attending using the contact information on this slide. Thank you for your attention. We will now open the call for questions. Operator: Thank you. We will now be conducting a question-and-answer session. The first question is from Craig R. Kennison from Baird. Please go ahead. Craig R. Kennison: Good morning. Thank you for taking my question. It really involves Mercury. You continue to pick up market share in a soft market, which could lead to record volume in a cyclical recovery. And then you also appear to have a winning product cycle and some tariff-related tailwinds. So I am just thinking with all of that in mind, you could give us an update on your capacity utilization and your ability to handle additional volume if there were to be a surge, and then provide a framework for thinking about incremental margin in that business? Thanks. David M. Foulkes: Thanks, Craig. Great question. Yes, Mercury is continuing, as you said, to gain share, and we have fantastic product. There was some belief a year or two ago that some of the share gain was temporary because of supply constraints and other things, but clearly it is not. It is very structural. We have the best product line, and as you have heard, we are investing even more in five new outboard platforms from mid-range up to new extensions to the high-horsepower range. So it is very exciting. We are well capacitized after the investments that we made in 2019, 2020, and 2021 to support all of the foreseeable volume. We do not anticipate any major additional investments to be able to support volume, certainly in the next year or so. As you heard from Ryan, Mercury is leveraging up very nicely, and absent the tariffs, we would have been approaching a 30% number in the quarter. Ryan, maybe you want to take over the leverage numbers. Ryan M. Gwillim: Yes. We always quote more than 20% operating leverage. Obviously, with tariffs, that number gets skewed a bit, but we would have been approaching 30% in the quarter had we not had the tariff impact, and that is not even encompassing the additional spend that Dave mentioned, where we were up high-single-digit millions quarter over quarter versus 2025 to really supercharge those engine programs. Operator: The next question is from James Lloyd Hardiman from Citi. Please go ahead. James Lloyd Hardiman: Hey, good morning. Thanks for taking my questions. I was wondering if you could walk us through demand trends that you have seen to start the year. Last time you reported, it sounded like January was off to a really strong start, and I think you have spoken to continuation of that in February. As I think about a flattish first quarter, I think that means that March must have been down. What have you seen in April? More broadly, how are you thinking about month-to-month trends given the conflict that started in late February and March? David M. Foulkes: Thank you, James. Monthly volumes are different as we go through the year, with March volumes being higher than January and February. We did see some high early volumes in January, which then stabilized over the balance of the quarter. Whether there was any real impact from the conflict is very difficult for us to determine, but the quarter ended effectively flat both globally and domestically. I would also note we continue to see premium outperforming value, and if there was some additional pressure in the quarter or hesitation caused by the conflict, it likely impacted the value buyer more than the premium buyer. As we have gone into April, we are up year over year versus April last year, which is what we would have expected given the Liberation Day pause that happened last year. We are encouraged by the start to the second quarter, and at the moment that trend seems to be continuing week over week, with continued strength on the premium side. We also saw good sales in our aluminum products, our premium aluminum products. SSI data showed some dips in the first couple of months of the year and is now converging back to a flat market, and we would expect that to continue. James Lloyd Hardiman: Got it. And then the outboard engine market continues to grow faster than the boat market itself. Higher attach rates and multi-engine configurations seem to be a driver, along with your share gains. In the context of your outlook, if the boat industry is flat to slightly up, how are you thinking about the outboard industry, and Mercury relative to that? David M. Foulkes: Almost all recreational boats are now effectively powered by outboards, so we are getting more volume that way. Multiple engines are also a driver. You do not necessarily see the offsets in our financials because some of the offsets are between our 400-, 500-, 600-horsepower outboards and other people’s diesel engines. There never was a 500- or 600-horsepower outboard alternative historically. We did not sell many sterndrive gas engines in that high power range; most sterndrive gas engines we sold were typically in the 200 to 400 horsepower range. So we are grabbing share away from some traditional propulsion like diesel in bigger boats. We continue to outperform the market for the reasons discussed. I am excited about new programs coming to market over the next couple of years which will extend the range upwards and refresh mid-range product. We must ensure our mid-range remains contemporary and outperforms competitors, so we continue to invest across the product line. Overall market conditions support our flat to slightly up scenario. We expect more Mercury share gain, a higher outboard attachment rate, and more multi-engine products since premium is growing faster than value. Value product tends to be single engine; premium is frequently multi-engine. Profitability is also driven by what we sell with engines—controls and rigging. We are selling more sophisticated controls, joysticks, and autopilots, all of which increase share of wallet and attachment for sophisticated controls. Ryan M. Gwillim: The larger portion of the boat market now being outboard also increases the TAM for repower. We are seeing more repower simply because there are more outboard-powered boats to repower over time. That also contributes to engine retail outpacing pure boat retail. Operator: The next question is from Xian Siew from BNP Paribas. Please go ahead. Xian Siew: Hi, thanks for the question. On the competitive landscape, you mentioned competitors may be having tariffs. Could you elaborate on pricing and offering dynamics and how that could evolve and support further share gains? David M. Foulkes: Pricing is pretty muted in outboards at the moment. Mercury put in place a 2% price increase at the beginning of this year. Our Japanese competitors are in that range as well. Pricing is constrained by the market and nobody really wants to take price even though there is margin pressure—some for us, but even more, I think, for our Japanese competitors. As the market normalizes over time, we will see how that goes. It is important for us to continue to gain share given the attachment rate for P&A that we get over time. There are fairly acute margin pressures among some competitors, based on commentary and announcements last year, but they are better to speak to their own positions. Xian Siew: And on the repower market, could you update us on its size for you? Previously, you mentioned maybe 20% of engine sales were repower. Has that grown? Ryan M. Gwillim: It is still about 15% to 20% of units sold. That has not changed materially. It differs by jurisdiction; some markets outside the U.S., like Australia and New Zealand, are very high repower. We are just seeing good volume throughout all channels. David M. Foulkes: Our share of repower is lower than our share of OEM. One reason is that repower is typically higher in saltwater markets where corrosion and higher performance take more of a toll. Saltwater is a market we have been expanding into more strongly over the last five to six years. We would expect a higher right to win in that market as our OEM share becomes more reflected overall. Over the next three to five years, we would expect share gains in repower as more of our product comes up to be in the repower cycle of about eight to ten years. Operator: The next question is from Anna Glaessgen from B. Riley Securities. Please go ahead. Anna Glaessgen: Good morning. On guidance, you mentioned lower tariffs flowing through the 1Q beat while also balancing with conservative macro assumptions. Could you provide more perspective on how that is informing guidance and, if we do not see disruption, what that could look like for the year? Thanks. Ryan M. Gwillim: We are three months into the year, and the first quarter is generally one of the smallest. We had a really nice start, and we did get a little bit of tariff goodness. IEPA going away and being replaced by Section 122 was a positive, but changes to Section 232 were a slight negative. Net, it did not take us outside our initial tariff range for the year; it moved us from the high end down toward the low end of the $35 million to $45 million range. The Q1 beat is a positive, and tariffs are another small positive. We are balancing that with caution regarding the consumer and global events as we enter the core selling season, where we make roughly 55% to 60% of our sales and profit. If the world stays where it is today, and the other shoe does not drop, we think we can get to the high end of the range or better. The point on guidance was to move up the bottom end and take some risk off the table, being prudent given world activities. Anna Glaessgen: Thanks. And on 1Q EPS upside versus initial expectations, to what extent were lower tariffs contributing? Were there any expenses shifted into 2Q? David M. Foulkes: No on both. Tariffs came in pretty much as we expected, and we did not push any expenses out of the quarter. It was a straight beat based on improved revenues and really nice leverage. We do have some additional tariff headwind in Q2 that informs Q2 guidance. We would prefer to be in a beat-and-raise cycle than take everything to the bank this early in the year. Ryan M. Gwillim: To be very clear on Q2, the only real disconnect between our guidance and what the Street was modeling was the tariff impact, and it is rather material. We said on the January call that Q1 was about two-thirds or 60% of our tariff impact for the year and the remainder is in Q2, and that holds true. There are mechanics—balance sheet, LIFO, cap variances—but the upshot is the first half is a “bad guy” outside the $35 million to $45 million range, and the second half is a “good guy” that brings us back down into the range. If you normalize Q2 just for the anticipated tariff impact, your EPS growth would be very similar to what we delivered in Q1. That is why the Q2 guide is just slightly down from what the Street anticipated—they had not fully caught up to all the tariff movements yet. Operator: The next question is from Gerrick Johnson from Seaport. Please go ahead. David M. Foulkes: Morning, Gerrick. Operator: Gerrick, your line is open. We will move on to the next question. The next question is from Joseph Nicholas Altobello from Raymond James. Please go ahead. Joseph Nicholas Altobello: First, on the industry outlook, you are still calling for flat to up for the year. Are you assuming any underlying fundamental improvement over the balance of the year, or does that just extrapolate current trends and then you are lapping the post–Liberation Day slowdown last spring? You also mentioned you are not anticipating any additional rate cuts. David M. Foulkes: Hi, Joe. We certainly are anticipating that at least early Q2 will be up over last year, and that is what we are seeing as we head into the second quarter. Dealers are pretty optimistic, and they have their ear to the ground. We are continuing to get good order patterns; show sales were good. The back half of last year was okay as well. We just need to get through Q2—particularly early Q2—with a bit of overperformance to realize a flat-to-up market. Premium continues to outperform value. Loan rates are still about 200 basis points down from the peak, around 7.5%. Dealers are still getting flow-through from last year’s cuts into floor plan financing, so that tailwind is present. We are also seeing a slightly improved discount environment, which is a good indicator of retail strength. Joseph Nicholas Altobello: Last year, inventories were a bit heavier across the industry than they are today, and there was a lot of promotional spending. How much benefit will you get this year from lower promotional spending? David M. Foulkes: We still think our estimate of about 40 basis points is a good one. We got about 100 basis points of benefit last year. Even with another 40 basis points, we will still be a couple of points above historical norms looking back to 2018 or 2019. There is room to run in a more normalized market as we move forward. Operator: The next question is from Gerrick Johnson from Seaport. Please go ahead. Gerrick Johnson: Great, thanks. I am back. I wanted to dive deeper into trends in your Boat Group—better sales growth in aluminum, rec was okay, and down in saltwater. Saltwater has been down for a number of quarters. Can you talk about what is going on within Boat Group and the segments there? David M. Foulkes: We are seeing particular strength in our Lund brand, our premium freshwater brand, driving a lot of the increase. We are also seeing really good performance with our Harris pontoon boats, which are outperforming the market. In both cases, we have strong premium ends of aluminum brands with a lot of recent investment in new products. Freshwater markets are typically dedicated to fishing, not highly leveraged to fuel prices; they do not go a long way—go to a spot and fish—or on a pontoon, something similar. On rec fiberglass, we rationalized our value portfolio, so that is really a product of our Sea Ray brand and, to some extent, the Bayliner brand being up—both premium brands. In saltwater, Boston Whaler, our premium saltwater brand, is actually up year over year. The softness is more on the value side of saltwater. Operator: Next question is from Molly Baum from Morgan Stanley. Molly Baum: Hi. Thanks for taking our question. First, on operational efficiencies you saw in the quarter—where do you see the most room to take cost out? Have you seen any benefit from the footprint rationalization on the value side of the boat business, and if not, when should we expect to see that? David M. Foulkes: The biggest efficiency benefits at the moment from footprint and other actions are in Navico Group and Boat Group. On Boat Group, the process of rationalizing those facilities is on track, but directly it is a headwind to us from a cost basis this year. It will flow through to more than $10 million of efficiencies next year, and we would expect to see the majority then. We continue consolidating production lines and introducing more operational efficiencies. There is notable work on value engineering across product lines—ensuring we put in what consumers want and deliver it efficiently. Navico Group continues to rationalize footprint and closed two smaller facilities at the end of Q4 or early this year. We are seeing benefits from that and other operational efficiencies. Navico Group’s footprint is now about right, investments in new products are coming through strongly with market share gains, and we saw a nice pop in margins that we believe is sustainable and will continue to grow. We will get some Boat Group benefit in the second half; Navico continues on its journey and has done a lot of work in recent quarters. Molly Baum: Got it, thanks. A follow-up: Can you remind us what level of IEPA tariffs you have actually paid on an annualized basis, and if all of those are eligible for refunds? You noted it is not included in guidance, but if you do get a payout, would all of those qualify? David M. Foulkes: Yes. We have begun the process of applying for IEPA tariff refunds. It is happening in phases; we have made our first applications. The total value of IEPA refunds we now estimate is about $50 million. We plan to recognize it as we receive the cash. We would expect some over the balance of this year and some next year. Operator: The next question is from Thomas Martin from BMO Capital Markets. Please go ahead. Thomas Martin: Good morning. On the value boater, removing macro pressures, what do you think it takes for them to come back to market? Or is it truly just the macro pressures keeping them out? David M. Foulkes: We are trying to meet them where they want to be met. I would differentiate between fishing-related boating and general-purpose boating. Fishing, including aluminum boats, is up—certainly at the premium end but also strong at the value end. If it is part of your lifestyle, you keep doing it. On the fiberglass side, on the value end, it tends to be more general-purpose runabout-type boating. There is more fungibility between spending on boating and other leisure alternatives, and potentially more pressure on discretionary spending. That is where Freedom Boat Club can play a big role in changing spending patterns—replacing a large capital outlay with a joining fee and monthly dues that provide access to a wide variety of boats with convenience. We have rationalized our product line in that area and are investing more in Freedom Boat Club. Thomas Martin: Thanks. And could you provide an update on how you are thinking about normalized boat demand? David M. Foulkes: In the short term, our expectations remain a flat to slightly up market. We believe there has been an inflection and the market is stabilizing after declines from 2020 through about 2024. We still see stratification between premium and value, but absent some major external change, we see no reason the market cannot return to growth as the causes of caution alleviate. We would anticipate modest regrowth of the market in the low- to mid-single-digit range in subsequent years. Ryan M. Gwillim: Supported by two factors: the used market is in really good shape, with relatively light gently used product on dealer lots, which supports trade-up and trade-in values. People who bought around COVID have more equity and can get more for trade-ins, improving dynamics and getting folks off the sidelines. Lastly, even in a very conservative U.S. boat market, new boat sales are at about half to 60% of replacement value, so there is a lot of room to run. We will discuss this further at our Investor Day in August. Operator: The next question is from Noah Seth Zatzkin from KeyBanc Capital Markets. Please go ahead. Noah Seth Zatzkin: Hi, thanks for taking my questions. On the guidance range, what are the differences between the $4.00 and $4.50? Is it fair to say retail environment expectations are consistent on both ends of the range? Relatedly, what shipment tailwind do you expect in a flat to slightly up retail environment this year? David M. Foulkes: On the range, as Ryan said earlier, if no other shoe drops, the top end—or better—is achievable. We are overlaying some caution based on external volatility, which could create additional caution, not necessarily in the U.S. market, but in some international markets. That overlay of caution gets you to the bottom end. Ryan M. Gwillim: On balancing retail and wholesale, if you assume a flat boat market, then wholesale is up mid-single digits on a unit basis—just to match retail, given lower wholesale to start last year. On engines, it is a little greater—probably up mid- to high-single digits on units—given engine pipelines continue to be lower, certainly in high horsepower. We have taken out 10% of the 175-horsepower-and-above pipeline each of the last two years. The balancing of retail to wholesale there is a good dynamic even in a flat market. Operator: Thank you. This concludes the question-and-answer session. At this time, we would like to turn the call back over to Dave for some concluding remarks. David M. Foulkes: Thank you, everyone, for your questions. A very encouraging quarter for us: solid retail, revenue up substantially across all of our businesses, margin expansion, really good earnings leverage, and continued really solid free cash flow. We continue to outperform the market. We are clearly firing on all cylinders now—all parts of our businesses are doing well. I am excited about both this year and the future in general. Our recurring revenue businesses are doing great, providing extremely strong earnings and free cash flow. As we said, setting guidance in this environment is trickier than normal, but we prefer to be in a beat-and-raise cycle than take everything to the bank right now given how early we are in the year. Finally, please reserve a spot at our investor event in August at our Mercury Marine headquarters in Fond du Lac. You will see the production of those fantastic engines that are leading the market right now, meet the leadership team, and experience some of our latest products on the water. Ryan M. Gwillim: Thank you very much. Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the Antero Midstream Corporation First Quarter 2026 Earnings Call. At this time, participants are in a listen-only mode. A question and answer session will follow a formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Dan Katzenberg, Vice President of Investor Relations. Thank you. You may begin. Dan Katzenberg: Thank you for joining us for Antero Midstream Corporation's first quarter investor conference call. I will spend a few minutes going through the financial and operating highlights, and then we will open it up for Q&A. I would also like to direct you to the homepage of our website at anteromidstream.com, where we have provided a separate earnings call presentation that will be reviewed during today's call. Today's call may contain certain non-GAAP financial measures. Please refer to our earnings press release for important disclosures regarding such measures. Joining me on the call today are Michael Kennedy, CEO and President of Antero Midstream Corporation; Justin Agnew, CFO of Antero Midstream Corporation; and Brendan E. Krueger, CFO of Antero. With that, I will turn the call over to Michael Kennedy. Michael Kennedy: Thanks, Dan. Good morning, everyone. I will start my comments on Slide three. The first quarter of 2026 was an exciting quarter for Antero Midstream Corporation as we continued to make progress on our strategic initiatives. We successfully navigated adverse winter weather conditions and delivered another quarter of EBITDA and free cash flow growth. In addition, we closed the company's largest acquisition to date in February, which was ahead of our initial expectations. These achievements highlight two of Antero Midstream Corporation's greatest strengths: a world-class asset base in the lowest-cost basin in North America and the hard work and dedication from our team. As we look ahead, recent geopolitical events and data center announcements highlight the significant demand growth for U.S. energy both domestic and abroad. Given this outlook, we are focused on enhancing connectivity within our operating areas, particularly in the dry gas area and the newly acquired assets, providing cost-effective integrated solutions for this demand growth. Our balance sheet, scale, and integrated planning with our investment-grade producer position us well to capitalize on these growth opportunities. Now let us move on to Slide four to highlight some of our 2026 growth projects. At the end of the first quarter, we commissioned our dry gas compression expansion depicted on the right-hand side of the page. This station utilized relocated and repurposed units to support our first dry gas Marcellus pad in over a decade. During the first quarter, we also commenced our initial water system integration efforts. This capital investment to connect Antero Midstream Corporation's water system to the acquired water system is on track to be completed by year-end and will allow AM to begin servicing completions on the acquired assets in 2027. Today, there are currently three rigs running on AM-dedicated acreage on the rich gas system, one in the dry gas system, and one on the acquired blended system. This balanced and consistent development program delivers low-cost volume growth and is expected to drive high-single-digit EBITDA growth for the foreseeable future. In summary, we are off to a great start in 2026 executing our capital-efficient growth plan. Beyond our base business, we continue to be active in opportunities to further extend and enhance that growth outlook to support the increasing demand for natural gas. With that, I will turn the call over to Justin. Justin Agnew: Thanks, Mike. I will start with our first quarter highlights on Slide five. During the first quarter, we took over operations of our newly acquired assets right in the middle of winter [inaudible]. As you can see from our results, we did not experience any outages during the storm, highlighting the benefit of integrated planning and communication between the upstream and midstream businesses. Adjusted EBITDA for the first quarter was $288 million, which was a 5% increase year-over-year, driven by an increase in gathering, compression, and processing volumes. During the quarter, we generated $192 million of free cash flow before dividends and $85 million of free cash flow after dividends, which was an 8% increase year-over-year. This cash flow was used to finance a portion of the acquisition and opportunistically repurchase shares on the open market. Importantly, even after a $1.1 billion acquisition and share repurchases, we exited the quarter with leverage in the low three-times range and over $800 million of liquidity. Looking ahead to the next few quarters, we expect an increase in capital expenditures as we take advantage of improved construction season conditions, in line with our full-year budget. In addition, we expect to see gradual EBITDA growth throughout the year driven by increasing gathering and freshwater delivery volumes. This cash flow profile results in declining leverage throughout the year towards 3.0 times at year-end 2026, in line with our long-term target. In summary, we continue to build on the growth and momentum from our organic investments and accretive acquisitions. These results place us on track to achieve our 2026 guidance, which remains unchanged, and position us well for capital-efficient growth over the next several years. With that, operator, we are ready to take questions. Operator: Thank you. We will now open the call for questions. At this time, we will conduct our question and answer session. Our first question comes from John Mackay with Goldman Sachs. Please state your question. John Mackay: Hey, guys. Thank you for the time. Maybe we will start on the in-basin demand side of things. There are a couple of projects floating around, a lot of eyeballs on Monarch, etcetera. I know you guys are saying it is kind of too early; you touched on this in the AR call as well. But do you mind framing up what you could see the opportunity set for AM looking like here, and if you want to use a generic kind of EBITDA per gigawatt or anything like that, just frame up how you are thinking about the AM side of things here? Michael Kennedy: We are not going to use a generic metric there, but AM is participating in all of those because the vast majority of these need some infrastructure—laterals off existing pipe that Brendan talked about, water infrastructure build-out from the existing infrastructure—and AM has a seat at the table in all those discussions. As I mentioned, we are the industrial builder of Northern West Virginia. We built all of this infrastructure. It has all been a greenfield expansion for us across gathering, compression, processing, and water as we built out the whole system here. So we are the builder of choice, and that is part of the attraction of what AR and AM bring. It is an integrated development between upstream and midstream. We have the resource, and we have the ability to build the infrastructure. John Mackay: Maybe just to clarify, any sense you could give on how long of a timeline would be needed to support a larger project? Michael Kennedy: We are mainly talking about everything in-state, so it would not be that long of a timeline. It would be our typical kind of high-pressure build in year one to two to three, not five years out. John Mackay: Great. And then second question for me: You mentioned the high-single-digit growth target. Could you frame that up a little bit around what that implies for AR's underlying growth? AR came out with a higher growth pace on the last quarter call. Just trying to figure out where that shakes out and then what the AM algorithm off that is. Thanks. Michael Kennedy: That is off the base business. You get to the high single digit just from integrating the water system in 2027, so just servicing AR from a water perspective gets you that high single digit. If AR actually does pursue three rigs and two completions crews and does not build DUCs and actually completes those, you would be in excess of that high-single-digit EBITDA growth in 2027 and 2028. John Mackay: I appreciate that. Thank you. Michael Kennedy: Thank you. Operator: Your next question comes from Ivan Scotto with UBS. Please state your question. Ivan Scotto: Hi, team. Thanks for taking the question. I wanted to ask for any additional color you have on how much capital is needed to fully integrate the acquired HG assets, and also how far along that process you think you are at this point? Michael Kennedy: I think it is $25 million, and we are probably halfway through. I mentioned that the water system, which we cemented in the first quarter, will be done by year-end. The gathering system, which was almost all already integrated, I think it was $5 million to connect that. So it is really around the water, and we are in the midst of it and should be completed by year-end. Ivan Scotto: Okay. Great. And then just looking forward, where do you feel most of your opportunity set is for incremental returns in the future? Michael Kennedy: I would say around these data center local power projects. Our base business delivers very high rates of return; it is in the high teens to 20% return on invested capital in the base, and we have that fully mapped out. We have built the whole backbone of the system—the whole water pipes and the large gathering system that we have—so the incremental returns will be building off of that and building off of our relationship with AR and our own ability to build industrial projects in Northern West Virginia. That is the next leg. The base is terrific, with high-single-digit EBITDA growth that we have had for quite some time and will continue going forward, but incremental growth and returns from that will be from these local demand projects. Operator: Thank you. There appear to be no additional requests for questions at this time. I will hand the floor back to our management team for closing remarks. Thank you. Dan Katzenberg: Thank you for joining us on today's earnings conference call. Feel free to reach out with any further questions. Have a good day. Operator: Thank you. That concludes today's call. All parties may disconnect.
Operator: Greetings, and welcome to the Empire State Realty Trust, Inc. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce Suzanne Lu, SVP, Chief Counsel, Real Estate. Thank you. You may begin. Suzanne Lu: Good afternoon. Welcome to Empire State Realty Trust, Inc. First Quarter 2026 Earnings Conference Call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the Investors section of the company's website at esrpreit.com. During today's call, management's prepared remarks and responses may include forward-looking statements within the meaning of applicable securities laws. These statements reflect management's current views and assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially. Empire State Realty Trust, Inc. extends no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC. During today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, same-store property cash NOI, EBITDA, and adjusted EBITDA, which we believe are meaningful to evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. Now I will turn the call over to Anthony E. Malkin, our Chairman and Chief Executive Officer. Anthony E. Malkin: Good afternoon, everyone. Yesterday, we reported Empire State Realty Trust, Inc.'s first quarter results. We began the year with solid earnings, steady execution across our portfolio, and continued contribution from the Observatory. We acquired a high-quality retail asset on North 6th Street with recycled investment as part of our concentrated effort to reallocate our balance sheet capacity towards growth, and completed financings which address our debt maturities all the way into 2028 and maintain balance sheet flexibility. Today's environment presents a wide range of macroeconomic outcomes, some of which could adversely affect our business. That said, as we have said consistently, we do not seek to predict the weather. We have an arc. From that arc, we operate from a position of strength and with great latitude. We derive our revenue from diverse income streams and a broad tenant base. A substantial portion of our revenue is from long-term leases, and we maintain high leased percentages, all supported by our balance sheet. We navigate freely and act decisively when opportunities arise. Pages five through nine of our investor presentation available at esrtreit.com highlight our ongoing program to trade into opportunities which provide better prospects for growth at our desired capitalization and levels of risk. Cash flow growth is key to our focus. The Manhattan office leasing environment remained healthy and active for our top-of-tier product. Tenant demand is strong and diverse, availability of high-quality space remains limited, and there is no new construction at our price point. Ryan will provide highlights on occupancy, leased percentage, and what we expect to achieve by year end. Much has been written about AI as a disruptor of office demand. In New York City, our leasing pipeline remains active, tour volume is strong, and tenants across industries continue to make long-term commitments to high-quality space. Office leases executed this quarter averaged over 10.5 years in term. Our commercial portfolio is 93.2% leased. Our leasing pipeline is healthy, and we expect occupancy gains for the full year. We are delighted to have leased the first floor at our 130 Mercer Street acquisition and have a strong pipeline of leases in negotiation which will hit in February, about which Ryan will speak. We achieved our nineteenth consecutive quarter of positive mark-to-market rent spreads in our Manhattan office portfolio, which reflects sustained demand for our best-in-class buildings. We continue to see an upward trajectory in net effective rents, and our portfolio is well positioned to deliver strong operating performance. Our iconic Empire State Building Observatory deck remains a market leader and a meaningful contributor to cash flow. NOI was $10.6 million in the first quarter, our seasonally lightest quarter. Revenue per capita increased approximately 1% year over year excluding gift shop license fees. Visitation from international and budget-conscious tourists, centric pass programs, remains soft and impacted our results. Against this backdrop, we focus on our domestic and direct sales program which support higher revenue per visitor and better margin performance while we await the return of our traditional international demand. Empire State Realty Trust, Inc. has been a leader in sustainability for more than a decade. The Empire State Building was the first building in New York State to achieve LEED version 5 Platinum status. We focus on measurable business outcomes which drive energy savings, operational efficiency, and high-performance buildings for our tenants and reduce risk for our shareholders and stakeholders. Our sustainability leadership attracts tenants and is part of their satisfaction when they renew and/or expand. Our entire organization remains laser focused on the company's five priorities: lease space, sell tickets to our Empire State Building observation deck experience, manage our balance sheet, identify growth opportunities, and achieve our sustainability goals. These priorities are directly aligned with long-term shareholder value creation. Christina, Ryan, and Steve will provide more detail on our results and outlook. Christina? Christina Chiu: Thanks, Jane. I will provide an update on our Observatory business and capital markets activity, which includes a high-quality retail acquisition on North 6th Street as part of our capital recycling and $184 million of financings that result in no unaddressed debt maturities until 2028. Our iconic Empire State Building Observatory continues to be a highly differentiated component of our platform, characterized by low capital intensity, strong operating margin, and dynamic pricing capability that helps mitigate inflationary pressures over time. We recognize we are in a period of heightened uncertainty with the potential for macro risks and geopolitical tensions to weigh on economic growth and tourism. As Tony mentioned, the first quarter is historically our seasonally lightest, which makes it difficult to draw meaningful conclusions from results this early in the year. The balance of the year typically represents approximately 85% of our annual NOI, with approximately 60% coming from the second half of the year. Our focus remains on the levers within our control: run the operations well, cultivate our brand, enhance the guest experience, broaden our marketing reach, control expenses, and be transparent with the market as external factors play out. Longer term, the Observatory has proven resilient through cycles and has attractive cash flow characteristics. CapEx is low, and a high proportion of NOI flows directly to our bottom line. Shifting to our investment activity, at the end of the first quarter, we acquired 4155 North 6th Street, a newly constructed, currently vacant prime retail asset at the corner of 10th and North 6th Street in Williamsburg, for $46 million, comprising approximately 22,000 square feet. This acquisition, together with our purchase of 80–90 North 6th Street in mid-2025, completed the redeployment of investment capacity from the December 2025 disposition of Metro Center without recognition of a taxable gain. In aggregate, we exited our last suburban commercial property and reinvested in approximately 37,000 square feet of prime retail on North 6th Street: one redevelopment asset on a strategic corner anchored by a key long-term lease we executed last year and one newly developed asset ready for lease. Our North 6th Street portfolio now totals 124,000 square feet and continues to perform strongly and in line with our expectations. These transactions reflect our strategy, as outlined on pages five through nine of our investor presentation, to rotate capital into opportunities with stronger growth prospects at our desired capitalization and risk profile. We built this position over approximately 2.5 years for roughly $300 million, all without leverage, which uniquely positions us to curate tenant mix, drive leasing momentum, and enhance long-term value across our holding. We built on Empire State Realty Trust, Inc.'s core strength in urban retail and achieved meaningful scale. We now own a dominant position and control four key street-corner locations in a sought-after, supply-constrained, and otherwise fragmented ownership market with a premium mix of tenants and significant mark-to-market opportunity over time. On our balance sheet, year to date, we have executed $184 million of financing. In mid-April, we announced the issuance of $130 million of senior notes in a private placement at a rate of 5.99% which will fund in mid-July and mature in 2032. Proceeds will be used toward paydown of existing debt, including our line of credit. We also closed on a $53.5 million mortgage refinancing for 10 Union Square East. The 10-year interest-only loan carries a fixed interest rate of 5.3% and replaces a $50 million loan that matured on April 1, 2026. With these financings, we have no unaddressed debt maturity until January 2028. Our balance sheet is a key strength. From our continued proactive approach to balance sheet management, we have enhanced flexibility and durability, reduced risk, and are in a position to capitalize on attractive investment opportunities as they emerge. We maintain ample liquidity, lower leverage versus sector peers at 6.3 times net debt to adjusted EBITDA, and a well-laddered debt maturity schedule providing significant financial flexibility. Our 100% owned asset portfolio with limited secured debt also provides capital structure optionality. We continue to underwrite new investments across New York City office, retail, and multifamily, evaluate strategic capital recycle opportunities that are accretive to long-term cash flow growth, and assess opportunistic share repurchases. New York City's strength is its underlying property fundamentals, and Empire State Realty Trust, Inc. is a pure-play New York City REIT aligned with live, work, play, and visit demand drivers. We continue to look for ways to further enhance the quality of our portfolio and grow cash flows through disciplined, value-driven capital allocation. I will now turn the call over to Ryan to review our leasing activity. Ryan Kass: Thanks, Christina. Good afternoon, everyone. In the first quarter, we signed 113,000 square feet of new and renewal leases. The average lease term for office transactions during the quarter was 10 years. We currently have approximately 280,000 square feet of leases in negotiation, up from the 170,000 square feet we cited in our fourth quarter call, and tour activity continues to be robust. In today's bifurcated market of haves and have-nots, Empire State Realty Trust, Inc. firmly is in the have category. Demand continues to concentrate in high-quality, modernized, amenitized, transit-oriented buildings owned by well-capitalized landlords with proven operating platforms. Our best-in-class portfolio enables us to capture this demand as reflected in our leasing pipeline. Last quarter, we highlighted that we will see fluctuations in our lease percentage during the year due to known move-outs. We also said that due to our number of larger space availabilities—we have 29 spaces to lease today, of which 16 are full floor—our lease percentage changes will likely be lumpy. Importantly, we remain confident in our year-end occupancy guidance of 90% to 92%. We started the year at 93.6% leased. We have approximately 210,000 square feet of known vacates through the balance of the year, and our present leasing plan will more than cover those vacates, and we will end the year above the year's starting number. Our office portfolio is currently 93% leased, which marks the thirteenth consecutive quarter above 90%. As of today, approximately 15% of our available office space is held off market for consolidation into larger availabilities. The first quarter marked our nineteenth consecutive quarter of positive mark-to-market lease spreads in our Manhattan office portfolio, underscoring our sustained pricing power. We achieved mark-to-market spreads of 6.8% in Manhattan office, which demonstrates our ability to grow rents and lock in long-term cash flow. Average lease duration was 12.2 years across the commercial portfolio. Notable leases signed during the quarter include a 13-year, 60,000-square-foot new office lease with Steve Madden for the entire third and fourth floors at 501 Seventh Avenue, and a 20-year, 22,000-square-foot retail renewal lease with JPMorgan at 1 Grand Place. New York City's leasing market remains strong and provides a favorable backdrop for execution. Demand is broad-based across industries, including finance, professional services, TAMI, and consumer products. Subsequent to quarter end, in April, we signed a 10.5-year, 38,000-square-foot new office lease for the entire third floor at 130 Mercer with a financial services tenant. This brings our lease percentage from 70% at acquisition to 80%, and we have two full floors left to lease. We launched our marketing campaign in January and are encouraged by the early traction, which supports our underwriting and is ahead of completion of our planned capital improvement. Activity remains strong, supported by the scarcity of institutional-quality space in the supply-constrained submarket. We are pleased to see our business plan take hold. Lastly, our multifamily portfolio continues to deliver solid performance. Same-store NOI increased 9% year over year, and net rents increased 6%. We ended the quarter at 96.4% occupied due to the vacancies in units which rolled out of 421a at Hudson Landing during the slower winter months, and we are now over 98% leased. Thank you. I will now turn the call over to Steve. Steve? Stephen V. Horn: Thanks, Ryan. For the first quarter of 2026, we reported core FFO of $0.20 per diluted share. Same-store property cash NOI, excluding lease termination fees, increased 5.5% year over year. The increase was primarily attributed to growth in base rent and tenant reimbursement income, as well as approximately $3 million of nonrecurring items recognized in the first quarter of 2026, which predominantly consisted of lease modification revenue and insurance recoveries. These increases were partially offset by operating expense growth. Adjusted for these nonrecurring items, same-store property cash NOI increased 1.3%. Our observation deck generated approximately $10.6 million of NOI in the first quarter, which is generally our lightest quarter. Excluding the gift shop, this represents a year-over-year decline of approximately $3.5 million. As discussed last quarter, the timing of gift shop revenue will be more heavily weighted to the fourth quarter due to a COVID-era license amendment that both reduced our fixed payments and lowered the thresholds for percentage-based payments to us. This provides us with upside tied to the recovery of international visitation. Revenue per capita increased by approximately 1% year over year excluding the aforementioned gift shop revenue. Turning to funds available for distribution, core FAD for the first quarter was approximately $33 million, up significantly from approximately $1 million in the first quarter of 2025 and above the $31 million we generated in the fourth quarter of 2025, despite the first quarter being seasonally light for the observation deck. This improvement reflects our meaningful reduction in FAD CapEx, which was approximately $22 million this quarter as compared to $53 million in the first quarter of 2025. As a reminder, the elevated levels of CapEx in 2024 and early 2025 reflected spend related to a significant lease-up we executed since 2021, which drove our commercial portfolio to over 93% leased today. Lastly, our guidance for full year 2026 remains unchanged. This concludes our prepared remarks. We will now open the call for questions. Operator: We will now be conducting a question and answer session. One moment please while we poll for your questions. Our first questions come from the line of Manus Ibekwe with Evercore. Please proceed with your questions. Manus Ibekwe: Yes, great. Thanks for taking the question. Christina, maybe starting with you. If you could touch a little bit on the opportunities you see in the market for 2026 that you are currently looking at underwriting. Obviously, I understand you cannot talk about details, but would be interested to get an update with a little bit more detail on the opportunity set that you are observing right now. Anthony E. Malkin: Could you repeat that question? We did not understand. Christina Chiu: 2026. Okay. Anthony E. Malkin: Yeah. Christina Chiu: Yeah. I think one thing that we have long discussed is we have been surprised by the lack of distress. We were hoping for more of a basis reset. We do sense that more recap opportunities may come online. A lot of the extensions of loans have already taken place, and the question will be, at some point, you have to deal with the maturity wall and predominant extension. So that can be a source. And in other instances, we look for opportunities where people are either at the end of fund life, want to wrap up their investment, and we can be part of the solution. As I mentioned, we continue to actively look at office, retail, and multifamily. And we will look for situations where we can extract and add value and be able to generate good return. Manus Ibekwe: Got it. Perfect. Thank you. And maybe one follow-up question on an item that was mentioned in the prepared remarks in terms of the 15% of space that is available that is held back for further consolidation of space. I was wondering if you could clarify a little on the leasing strategy there and how we should think about timing. Ryan Kass: When we spoke previously, that number was actually higher at roughly 20%. Because of the success of the Steve Madden transaction, and also we have been able to bring the portion of the One Grand Central large-block space online, we have been able to bring that down to 15%. There are four or five large blocks and full floors that we work to create over the next weeks to months, and that space will come online as quickly as possible. Manus Ibekwe: Okay. Thank you. That is it for me. Operator: Our next questions come from the line of Blaine Matthew Heck with Wells Fargo. Please proceed with your questions. Blaine Matthew Heck: You all have done a particularly good job of leasing spec or prebuilt suites within your portfolio over the past few years. So I wanted to ask whether there was a significant difference in demand for that type of space versus full floors. It just seems as though you are leaning a little bit more towards full floors with your existing vacancy, but maybe I am reading that wrong. Ryan Kass: The prebuilt portion of our portfolio is doing extremely well. Right now, we have single-digit prebuilt available, and we are actively showing it, in offers, and continuing to negotiate on those plans. What we do is, for every space, every floor, we have a master plan for the building and the floor, and we evaluate everything on a case-by-case basis—what will yield the best ROI for the portfolio. What we have found is right now, based on the current market demands and the conditions of the spaces, it makes sense to move forward with some of the consolidations that we spoke about previously. Christina Chiu: And I think I would not read too much into the commentary. At 130 Mercer, we happen to have three full floors, one of which we executed on leasing a full floor. So we seek to optimize availability. The common link in our leasing activity is we provide top-tier space in our price point and emphasize service, quality, and the experience at this segment of the market, and we provide that whether it is full floor or in prebuilt spaces. Ryan Kass: Agreed. And when we look at it, it is a healthy mix within our current pipeline of that 280,000 square feet. The prebuilts also act as a great opportunity to build a relationship and work with our tenants long term to renew and expand them, and that is a testament to the over 3 million square feet of expansions that we have done in the portfolio over time. Blaine Matthew Heck: Got it. Thanks. That is very helpful commentary. And then second, can you just talk a little bit more about the strategic rationale of buying a vacant retail property at this point versus maybe continuing to reinvest in your existing portfolio through share buybacks? Was that just more of a function of needing to reinvest your proceeds for the 1031 exchange? Christina Chiu: Yeah, sure. As we have mentioned, in our capital allocation, buybacks are definitely a part of the consideration. Very specifically, on the last two North 6th Street acquisitions, that represented a deployment of the Metro Center assets. If you think about it, we wanted to avoid recognition of gain, which would be leakage of proceeds. We wanted to exit out of a market where, although there can be rental and tenant demand, it requires meaningful CapEx and fundamentally does not have rent growth. In contrast, North 6th Street provides a combination of both current yield as well as outlook for continued cash flow growth over time, especially as that corridor continues to strengthen amid strong underlying property fundamentals and great demographics. So for us, that was a very specific capital recycling trade. It does not mean we will no longer do share buybacks. It is something that is most beneficial for shareholders if we were to deploy in that manner. And, separately, we have great liquidity where we can also do share buybacks over time. Blaine Matthew Heck: Okay. Great. Thank you. Operator: Our next questions come from the line of Seth Eugene Bergey with Citi. Please proceed with your questions. Seth Eugene Bergey: I just wanted to go back to the Observatory. With visitation trends down about 18% for the first quarter, I understand it is a seasonally weakest quarter, but what gives you confidence to achieve the guide for the rest of the year, and any color you can add on what you are seeing in April? Anthony E. Malkin: Of course, we update by quarter, so we appreciate your question for April. What we have seen to date is, in our slowest period, an impact from factors which are, we believe, significant to the market in general. We are aware that other attractions have done poorly in the first quarter. We have folks who disclose, and we have other folks through whom we have either information sharing or access to information. As we go forward, 85% of the year is in front of us, and so that is really where we hang our hat. Let us see what happens in this quarter. If you recall last year, we did look at things after the second quarter on the basis of what was accomplished there. What we see at this point is we still have a war on. We still have reduced travel into the U.S. We still have significant disruption in delivery of things like aviation fuel and gasoline and diesel for both people to travel internationally and locally. We are keeping a close eye on things. We think that changes there could drive changes in general for the year. It is not correct for us to make a change based on 15% of the year to date. We will keep a strong weather eye. Seth Eugene Bergey: Great. And then maybe just as a follow-up on 130 Mercer, now that you have executed some additional leasing on the building, how does the project compare to your initial underwriting? Ryan Kass: Overall, the lease is supportive of our underwriting. Net effective rents are in the high 90s for the transaction that we just completed. TIs are consistent, and the free rent is a little bit better. The transaction occurred faster than we had underwritten, and it is before the start of our capital improvement program. We launched the marketing in June. We are encouraged by the early traction and, again, completing a transaction ahead of our planned capital improvements. Activity is strong. There is scarcity of institutional-quality space down there. We are a differentiator for our large floor plate, the amenities, our financial stability, and our service. So, excited. Seth Eugene Bergey: Great. Thank you. Operator: Our next questions come from the line of Dylan Robert Burzinski with Green Street. Please proceed with your questions. Dylan Robert Burzinski: Hi, guys. I joined late, so I might have missed it. But did you share the yield-on-cost estimates for the recent retail acquisition? Christina Chiu: You missed it because we did not say it. On North 6th Street, we have said for our portfolio—the other assets we acquired—we acquired at high 4s to 5%, and we expected to be around 6%. That includes lease-up of some vacancy and delivery of storefronts under development. Given this is a lease-up—newly built, newly constructed, and ready for lease—we would expect yields higher than that, and we will provide more as we continue to make more progress. This is more of a value-add as compared to other existing income properties. Dylan Robert Burzinski: And just maybe going back to you being opportunistic on acquisitions in terms of property type. As you look at the market today, are you seeing more opportunities within any given property type? I know in the past it was likely office, but given office fundamentals in New York continue to be very strong, is that changing at all? Just trying to get your sense for what you are seeing in terms of opportunities out there today. Anthony E. Malkin: What we hear more about today is different capital structures have begun to reach the end of the road. There was the wall of maturities, there were extensions—kick the can down the road—and now we hear more about situations where the capital structure is broken, people do not want to put more money in, and they look to resolution. Most of what we hear about is in office. Different situations which we have seen and on which we have passed have come back. We will keep our eyes open. Interestingly enough, there is really more debt out there than there is equity, and the debt tends to end up getting involved or needing to be involved at more of equity-type returns and equity-type risks. We do not think that really works for a lot of these assets. So again, we keep our eyes open and remain omnivorous opportunivores. Dylan Robert Burzinski: Great. Thanks for the color, Tony. Operator: We will now turn the call back over to Anthony E. Malkin, Chairman and CEO, for closing remarks. Anthony E. Malkin: Thanks, everybody, for joining us today. At Empire State Realty Trust, Inc., we remain focused on a clear and consistent set of priorities: lease our space, drive Observatory performance, maintain a strong and flexible balance sheet, reallocate capital towards growth, and maintain our leadership in sustainability. These priorities keep the organization focused and aligned as we drive the business forward. With our high-quality portfolio and strong financial foundation, we are well positioned to execute in the quarters ahead and create long-term value for our stakeholders. Again, thanks for your participation in the call today. We look forward to the chance to meet with many of you at non-deal road shows, conferences, and property tours in the months ahead. Onward and upward. Operator: Ladies and gentlemen, thank you so much. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.