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Operator: Good morning, and welcome to the Bel Fuse First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead. Jean Young: Thank you, and good morning, everyone. Before we begin, I'd like to remind everyone that during today's conference call we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2026. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligations to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by those forward-looking statements due to a number of risks, uncertainties or other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are available in the IR section of our website. Joining me on the call today is Farouq Tuweiq, President and CEO; and Lynn Hutkin, CFO. With that, I'd like to turn the call over to Farouq. Farouq? Farouq Tuweiq: Thank you, Jean, and good morning, everyone. We appreciate you joining our call today. We delivered a strong start to fiscal 2026. First quarter performance reflected broad-based momentum across the business and continued execution, both operationally and commercially. We also delivered solid profitability, supported by disciplined operational performance and favorable mix. Before we get into the quarter in more detail, I want to highlight an important step we took during Q1 to better position Bel for continued growth. We completed a business unit realignment designed to align our teams around how our customers buy and how we win, enabling greater customer intimacy, faster decision-making and a more coordinated approach to delivering our full portfolio of solutions across connectivity, power and magnetics. This structure strengthens our ability to bring more of Bel to each customer, expanding share of wallet through integrated selling, improved program execution and tighter alignment between engineering, operations and the commercial teams. Accordingly, Bel now operates 2 focused business units. First one, Aerospace Defense & Rugged Solutions, or ADRS, which combines our legacy connectivity business with Enercon, focused on mission-critical applications across commercial aerospace, defense, space and rugged industrial environments, and Industrial Technology and Solutions, or ITDS, which integrates our pre-Enercon power and magnetics businesses, focused on data solutions, transportation and industrial markets where performance, reliability and scale matter. This structure sharpens accountability, accelerates decision-making and increases the speed at which we translate engineering into customer wins but also enables product-agnostic access to Bel's full portfolio, so customers engage with us as a solutions partner aligned to their end market requirements. In that context, I am pleased to share that we closed the acquisition of dataMate from Methode Electronics in March for $16 million. dataMate adds approximately $18 million in annual sales with margins in line with Bel and is expected to be immediately accretive. It will operate within our Industrial Technology & Data Solutions business unit. Strategically, this expands our ethernet and broadband portfolio in a highly complementary way and positions us to grow in data centers, industrial automation, smart buildings and broadband deployment. It also strengthens our U.S.-based manufacturing and engineering footprint. We're excited to welcome the dataMate team. They bring new customers, differentiated technology and strong talent, and we look forward to what we'll accomplish together. Turning to business performance. Within ADRS, results were driven by robust demand in defense and commercial aerospace with continued strength across key platforms and programs, supported by strong demand and stable OEM build rates. We also saw ongoing progress in space as production schedules and program content continue to expand. Robust bookings during the first quarter within ADRS were driven by both sustained program demand and continued traction with our channel partners, resulting in a strong foundation heading into the back half of the year. We're also beginning to see the fruits of our organic growth initiatives over the past year. In Slovakia, for example, we secured 2 new defense design wins that are progressing through final certification steps and remain on track to complete in the second quarter. The win was initiated by Enercon with ramping up the Slovakia entity to produce an Enercon design, highlighting our global ability to deliver to our customers locally. In addition, we achieved our first bundled Cinch and Enercon win on a new design in Israel, which is a great early proof point of that -- of what this broader integrated portfolio can do when our teams collaborate across the organization. Within ITDS, we continue to see healthy demand signals across networking and data infrastructure with momentum improving in data center connectivity and high-performance compute applications. Customer activity remains elevated as the industry invests in AI-oriented architectures, driving opportunities for power conversion and protection as well as high-speed interconnect solutions that support next-generation switching and server platforms. We are expanding our design win funnel and investing in engineering and operational capabilities to support these growth vectors, including manufacturing resilience and multisite capacity to serve global data center customers. As we think about the broader environment, we remain mindful of trade policy and tariff dynamics as well as demand variability by end market. We continue to work closely with customers to manage these conditions, including pricing and supply chain actions where appropriate. We are seeing some general upward pressure in certain material and logistics inputs, and we remain prepared to use the levers within our control, procurement actions, pricing discipline and operational execution to support the overall direction we've laid out. With that overview, I'll turn it over to Lynn to walk through the financial results in more detail. Lynn? Lynn Hutkin: Thank you, Farouq. From a financial standpoint, we had a solid quarter with continued sales growth, margin expansion at the gross profit line and healthy cash generation. Before walking through the results, I want to cover a couple of points of clarification related to our new segment structure. First, the realignment that Farouq mentioned became effective March 31, 2026. And as a result, our Q1 reporting and all prior periods presented have been recast to reflect the new structure. Further, we filed recast segment information by quarter for 2024 and 2025 in an 8-K filed on April 6 for reference. Second, beginning in Q1 2026, our end market sales figures will capture all sales into a given end market, including both direct-to-customer shipments and sales through the distribution channel. In the past, distribution channel sales were called out separately in total rather than allocated to individual end markets. We will provide prior period comparable figures where appropriate to help investors evaluate performance on a consistent basis. With those points in mind, let me turn to the quarter. In the first quarter, total sales were $178.5 million, up 17.2% from the prior year period. Gross profit margin was 39%, up 40 basis points from Q1 '25. The gross margin performance improved leverage of our fixed costs on the higher sales volume, partially offset by higher material costs and impacts from foreign currency fluctuation. Below the gross profit line, GAAP operating income was $23.7 million compared to $25 million last year, while adjusted EBITDA was $34.5 million versus $30.9 million in the prior year period. Now turning to results by reportable segment. In the Aerospace Defense & Rugged Solutions, or ADRS segment, sales for Q1 '26 were $99.8 million, up 20.1% versus Q1 '25. Growth was led by a $9.4 million increase in defense market sales, up 19% from Q1 '25 and a $3.9 million increase in commercial aerospace sales, up 22% from Q1 '25. ADRS gross profit margin was 41.5%, an improvement of 140 basis points from Q1 '25. This margin expansion was largely driven by improved leverage of fixed costs on the higher sales volume and a favorable shift in product mix. These benefits were partially offset by unfavorable foreign exchange movements, primarily related to the weakening of the U.S. dollar against the Israeli shekel and the Mexican peso. Within the Industrial Technology & Data Solutions segment, or ITDS, sales amounted to $78.7 million, up 13.8% from Q1 '25. Growth was primarily resulted from AI-driven strength in data solutions, coupled with the continued year-over-year recovery of sales into our enterprise networking customers. This growth was partially offset by lower transportation sales versus Q1 '25, particularly within the rail and e-mobility markets. ITDS gross profit margin was 36.6% compared to 37.3% in Q1 '25. The margin decline was primarily driven by higher material costs, particularly related to gold, copper and PCBs and unfavorable foreign exchange movements, particularly with the Chinese renminbi. Turning to operating expenses and cash flow. R&D expense increased to $8.5 million from $7.2 million last year, reflecting continued investment in technologies aligned with our targeted end markets. Of this increase in cost, we estimate approximately $400,000 related to foreign currency movements as we have a large engineering population in China and Israel. We anticipate R&D will run in the range of approximately $8 million on a quarterly basis going forward. SG&A increased to $36.7 million, up from $29.5 million in Q1 '25. Of the $7.2 million increase, we are estimating approximately $3 million was onetime in nature, including acquisition-related costs related to dataMate, segment leadership transition costs and a prior year benefit which was nonrecurring in the 2026 quarter. The remaining $4 million of the increase reflects targeted commercial and infrastructure investments to support growth in addition to an increase in commissions on higher sales and unfavorable foreign exchange impacts. On a go-forward basis, we expect SG&A expense to run at approximately $33 million to $35 million per quarter. We ended the quarter with $59.4 million of cash and securities. Net cash provided by operating activities was $13.8 million, up from $8.1 million during the first quarter of 2025. Capital expenditures were $2.6 million, generally in line with the prior period. During the quarter, we closed the dataMate acquisition, investing $15.2 million. To help fund that transaction while maintaining balance sheet flexibility, we had $7 million of net borrowings from the credit facility during the first quarter of 2026. To close on the financials, we delivered a very strong quarter, driven by solid execution and healthy demand across the business. Looking ahead, we see continued strength and momentum for the balance of the year and remain confident in our ability to perform. We are also operating in an environment of higher input costs, and we're actively managing that pressure by focusing on the levers we can control, pricing discipline, procurement actions and operational efficiencies. At the same time, we're enhancing our focus on the cash conversion cycle, improving inventory turns, receivables and payables discipline as a key enabler to generate cash, strengthen flexibility and accelerate Bel's growth strategy. With a strong quarter behind us and clear priorities in front of us, we're executing with urgency and discipline. With that, I'll turn the call back over to Farouq. Farouq Tuweiq: Thanks, Lynn. As we look forward ahead, our focus remains on executing our commercial and operational priorities while navigating the external environment, including ongoing tariff and trade-related uncertainties and demand variability across our various end markets. Looking ahead, we have a strong outlook for the second quarter. We are guiding sales in the range of $195 million to $215 million with gross margin in the range of 38% to 40%. This outlook is supported by robust bookings across the business in recent quarters and is driven by higher demand from our defense, commercial aerospace and data solutions customers. Before we open the line for questions, I want to recognize Pete Bittner on his retirement after 35 years with Bel. Under Pete's leadership, we strengthened our connectivity platform and delivered meaningful profitability improvement while deepening customer relations. We are grateful for Pete's contributions and wish him and his family all the best. With that, I'll turn the call back over to Kerri to open up the line for questions. Operator: [Operator Instructions] And our first question will come from Luke Junk with Baird. Luke Junk: Farouq, maybe hoping you could just provide some comments on book-to-bill trends. You mentioned robust bookings were one of the things that is supportive of the guidance. And within that, if there'd be any end market highlights you want to call out as well? Lynn Hutkin: So on book-to-bill trends, I would characterize them as robust in the first quarter here. And that was really seen across the full business, both in both segments and across most of our subsegments. I think the only exception would be in transportation. But when it comes to aerospace, defense, data solutions, a very robust book-to-bill in Q1. Luke Junk: Got it. Second, you mentioned that the ITDS growth was primarily AI-driven with strength in data solutions. Just hoping you could provide a little more color on what you're seeing. And I don't know if you're going to be speaking out the AI dollars specifically going forward. And Farouq, you mentioned serving global data center customers as well. I was hoping we can maybe double-click on that trend too. Farouq Tuweiq: Yes. I think we obviously have seen our customers benefit from all things, data center build-out, obviously, AI and data generation and everything that we're reading out in the world is additive to that effort. And we're seeing that across our portfolio. Specifically on the AI customers that we service, we're definitely seeing a very healthy pickup in their bookings and customers and orders, and therefore that downstreams to us. So I think we would say that we characterize it as a very, very healthy environment. The bookings continue to be more robust. The outlook continues to strengthen and all the good things. And I'll defer to Lynn here on more specifics around that. Lynn Hutkin: Yes. And Luke, so I know in the past we had called out AI-specific sales. As we're entering 2026 here, things are getting a little more blurred, and we had alluded to this last year where we had AI-specific customers, but also selling into our regular way enterprise networking customers where their demand was increasing due to AI demand as well. So I think going forward, we will be talking more generally about data solutions. But we did see it across both of those platforms, I would say, the AI-specific customers and into our more general enterprise networking customers where we saw strength in Q1 that, that was AI-driven. Luke Junk: Understood. Last question for me. Just curious to get your perspective on posture right now at U.S. and Israeli defense trends. It seems like there's a fairly obvious replenishment opportunity. Just how much of that is baked into the 2Q guidance sequentially. And as you look into the back half of the year, just qualitatively, the potential for some additional upside or just clarity on that opportunity. Farouq Tuweiq: Yes. And we talked about, obviously, the geopolitical events for us from an A&D business is helpful and additive. And we've said this in the past where we tend to be levered and a fair amount of exposure to all things on the missile side of the business. So whether it be things that are deploying or the launchers themselves, that's all additive to us. So as you had alluded to here, with the replenishment and the talk about national stockpiles and all that kind of discussion points, that is all additive to us. We agree that we think there has been a replenishment cycle going on starting out back in kind of the Ukraine days, it never felt like we caught up. And now we saw a lot of more usage of the stockpile. So we agree this will probably be a medium-term vector of growth and replenishment. Obviously, we are also seeing more overall investments going into new business and new platforms as the whole industrial A&D complex is being challenged to step up across the technological spectrum. So that all is additive to us. And we see in our business, whether the funneling and the opportunities are becoming a little bit more, a little bit bigger. So we do see more shots on goal. So whether it be the replenishment on existing platforms or new, we think that that's all additive. And also, as a reminder, we're not just seeing that, obviously, in the U.S. side of the business, but we're also seeing that in our European Israel business as well. Operator: And our next question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: It was great to hear about the first Cinch Enercon package win. Could you just discuss more how that win came about? And maybe what you felt was the piece that pushed the customer to give you that order? Farouq Tuweiq: Yes. I mean, I think, listen, it's -- I'm not sure -- I don't believe in one magical solutions in the sense that we didn't change one thing and it all worked out, right? We sell highly engineered complicated systems, whether it be on the components or on the system side of things. So we -- I would say, people are very busy, right? As we can imagine, A&D is -- our organization is very stretched in. And on top of that, we started partnering to make sure we deliver holistic solutions. So we were alluding to a couple of opportunities here to maybe just kind of expand the point. We had talked when we acquired Enercon potentially using our Slovakia facility to become our A&D footprint into Europe. And obviously, that takes a while to get certifications and sharing the drawings and ramping up the skill set. We had to invest in some CapEx. So we did do that. In conjunction with that, we were able to move some of the products. We had a European customer that wanted to have manufacturing done on the continent. That's where Slovakia came in. So all that effort, we were able to get the customer out to Slovakia. They saw the facility, they saw a signal capacity. Obviously, they know the products from the Enercon and engineering. So it was a very good team effort, both from engineering and operations and Enercon supporting Slovakia to get that facility up and going. And the customer saw it and was thoroughly impressed and we got a couple of POs thereafter. Now with the first one here, obviously, is the win, this becomes a very great one. On the other opportunity I was talking about basically -- can you hear me, Bobby? Robert Brooks: Just curious, is that like, first, is that a specific drone company or... Operator: Bobby, your line is open. Robert Brooks: -- making drones second... Operator: I think he's taking a phone call. Farouq Tuweiq: I'm not sure what's going on, so no worries. You can all appreciate how this goes. But I'll continue to answer your question. The other opportunity was taking an Enercon box, a power unit, and we put a Cinch component on it on the connector and cabling piece of it. So we're able to do the connectivity there. Now we end up solving obviously a few problems because we had both the power supply and the cable solution. So I think we got very good compliments from the customer. I think more importantly, it showed the team the art of the possible. And more importantly than these 2 wins, to be honest, is we are definitely seeing a more robust collaboration across the organization of ADRS. So when we hear the discussion that they're going through and the opportunities, I think people are significantly much more aware of the whole portfolio and going after it. I would also take a step further and say that we're seeing some of the A&D customers looking for more hardened industrial solutions. And now with our non-Enercon products, it's able to fill that gap. So we're able to fulfill the customer needs from a few different angles, I would say. But the discussion bottom line was significantly ahead of where it was, I would say, in the recent memory. I don't know if you're back, Bobby, but hopefully that answers your question. Operator: Our next question comes from Christopher Glynn with Oppenheimer. Christopher Glynn: I'm going to ask a question and try to stick around. Just if there's background noise, just tell me to mute it, please. So just continuing with the defense because it's such a large proportion of your business in such a dynamic area and then you're generating your own dynamism within that. I'd say with these initial kind of greenfield design wins in the defense sector in Europe, is that kind of consistent with the time line you would have anticipated from an integration pathway or maybe pulling ahead a little bit? Just kind of curious of the actuals versus your expectations. Farouq Tuweiq: Yes. I'd say maybe a little bit ahead/on time. If you recall back to kind of Q4 2024, when we did do the Enercon acquisition, we said I don't think we're going to see anything probably until at least '26, probably towards the end of '26. So if that is the correct metric, we said back then, here we are roughly in Q1, we're seeing some of the early wins. I would say what took a little bit longer than anticipated was getting all the certifications and facility approvals. Obviously A&D is a heavily, heavily, heavily regulated market. You can't just be moving things around globally and in e-mails and so on. So as a result of that, the approval process from the local authorities in Slovakia was longer than we anticipated, partially because they're seeing a lot more investment in the overall country. But putting that aside, we're sitting here, let's call it, April, we had some nice wins. We had customers come through this. So like I said, I would say we're probably slightly ahead of schedule on schedule, somewhere in the middle of that. Christopher Glynn: Okay. Makes sense. And just given the obvious dynamism in defense procurement and everything and hot regions, these kind of design wins to revenue, are they pretty quick? Farouq Tuweiq: I would say a lot of good things about defense, but quick might not be the characterization of the world. I would generally say, right, because also when you win a program, you got to prove it out, they got to do all their testing and then it kind of scales over time. But the key is when there's a lot of investment and, let's say, spotlight and all things defense, you got to make sure you're getting into these things early. So as they scale, you're there. I would say if we were to paint a very potentially let's say, range, if it's an existing product, I'd say you generally get an initial order, but I would probably say before you start seeing kind of volumes 12 to 18 months. And if it's a brand-new kind of product or technology that's being developed by the customer, then it could be a little bit longer. But the key is being getting the award side of it, right? Because then you're going to there -- it might go through a couple of iterations along the way. But if it's an existing product or slightly existing, maybe it's a modified, I'd probably say 12 to 18 months before you start seeing some real dollars. That's just the nature of defense design cycles. Christopher Glynn: Right, right. So the replenishment orders are more kind of the quicker lead time drivers that you're seeing right now? Farouq Tuweiq: Correct. And I will also caveat is my earlier commentary on defense, not necessarily the fastest movers, I would say that is probably still true. I would say we are seeing areas where things are moving faster, right? So there it seems to be some buckling of maybe the historical norms. I'd also say there's regional nuances, right? So I think maybe we're seeing some different speeds in Europe versus the U.S., maybe Israel will be the fastest. So I think it's changing a little bit, but I would say, largely speaking, it is a slower moving industry. Christopher Glynn: Okay. And yes, just a quick check on how we think about the back half. Second quarter is obviously a pretty striking step change upward in the run rates. And I think you had some nice latency to some market trends that's showing through. So I'm not particularly thinking that the second quarter guide has some surge demand kind of factored in. Maybe there's a little onetime, but you talked about almost $30 million sequentially and is just a sliver of that. So is that really just a fundamental step in the -- how the run rates are developing with your end market exposure? Farouq Tuweiq: Yes. As Lynn said, we are fortunate to play in a lot of great end markets. So much more than not are in moving in growth mode. And as we closed out the quarter and headed into April, we're just seeing that continued robustness across the portfolio. I would also say that distribution is one of the things we're talking about. It started off very good in April. So as we look at backlog, customer chatter, outlook and the kind of nature of the world, we think we'd expect a very healthy second half. Obviously, keeping in mind, we do hit with some seasonality in Q3 and Q4, right? So Q3, we hit kind of the European slowdown a little bit throughout the summer months and some Labor Day and 4th of July type events. And then we head into Q4, we start getting into some of the holidays, whether it be Golden Week or some of the ones in Israel and overall holidays. But putting that aside, we expect a very healthy second half and continued strength. Operator: And our next question will come from Greg Palm with Craig-Hallum. Jackson Schroeder: This is Jackson Schroeder on for Greg Palm. I want to start out with -- you guys talked on gross margin a little bit and the cost there, but curious how you're feeling about the levers you're pulling on that. I don't know if there's any kind of timing-related things on that, how we might see that play throughout the year, especially as it relates to new bundled design win in Israel and some of the organic initiatives that you have. So curious if you're doing anything within those new contracts or investments to kind of offset that going forward? Lynn Hutkin: Yes. So I think as we look across the full year of 2026, we're a little bit of a disconnect. As just mathematically, as sales grow, we will have better leverage on our fixed costs within COGS, leading to margin expansion. That's with all other things staying consistent. What we're seeing this year is a rise in input costs, primarily related to material costs. We do have some minimum wage increases around the world. And we are in an unusually unfavorable, I would say, FX environment where all 3 of the currencies that impact Bel are all moving in the wrong direction for us. So that's the Mexican peso, the Israeli shekel and the Chinese renminbi. So we do have things moving against us as sales are increasing. We are taking actions that are within our control, whether it's through pricing discipline or procurement initiatives or operational efficiencies, but those things take time to put in place. So what we're seeing is probably Q1, Q2, where there's more of a disconnect where we're paying those higher input costs, and we have not yet seeing the benefits of the initiatives that we're doing to offset those, so. Farouq Tuweiq: And then I'd also say, as we -- obviously we have done some pricing actions to offset these input costs. One of the things we got to be mindful about is touching the backlog. To some extent, to Lynn's point, we got to work through the backlog. So anything new, we've put price increases through. So we'll start seeing the benefit of that as -- maybe we might see some of that in Q2, but I think about it as Q3, Q4, where we'll start offsetting some of that. So I think that's a testament to the business here. We got a higher margin given the operational leverage and things we can control. And then the pricing elements that we did put through, we'll start seeing the benefits of those into Q3, Q4. Jackson Schroeder: Got it. Super helpful. And then I also wanted to talk on the new business structure here, strategic realignment. Curious how you're processing that as it goes through the P&L as you look at inorganic -- sorry, organic growth specifically as we lap Enercon, looking at like the geographic breakdown where we can kind of size where we should be seeing growth here by segment, by geography, if you could do that. Farouq Tuweiq: Yes. I'd say we haven't given forward guidance on the growth piece of it. We, at the end of the day, are in a very unusual environment. So we haven't given any kind of long-term guidance on that. I think the overall message, we expect -- we've always said we're an end market-driven business, and we obviously want to be a little bit ahead of that. So as we think of the end markets, we think there's robustness in there. I would also say that when we look at our A&D business, it's been growing for a bunch of quarters sequentially, right, from a growth rate perspective, and we expect some of that to continue. But by definition, right, maybe some things, the hot percentages start to go up. But overall, we expect robustness and continued top line growth. So I'll leave it at that. On the ITDS side, the data solutions, data centers, AI, kind of all the infrastructure around data generation and transmission and some of the broadband and kind of the other things we've talked about just now, we also expect robustness there. Obviously we have a little bit more nuanced game and strategy in that market where we can make sure we can drive margins and get good return on our business. I would say our industrial technology part of it, which would include some of our transportation and e-mobility type applications and other industrial, I would say that one is a little -- kind of a little bit later to the game, but we're seeing some nice things in that part of the ITDS business. So all in all, we expect the growth piece of it, but I'll leave it at that. Operator: And moving next to Hendi Susanto with Gabelli Funds. Hendi Susanto: Congrats on strong results. Farouq, I would like to understand more about your data center footprint and post the acquisition of dataMate. Like I think my first question is, is dataMate a growing business? What kind of sales trend? And then second one is when you talk about data center, AI data center, anything new, any new areas that you want to address, any new product portfolio that you want to develop? Farouq Tuweiq: Yes. So maybe the first question on dataMate, yes, we bought it with the expectation of growth. I would say we are a better home for it in terms of the end markets that they play in, the customers they serve and the kind of language that we do use. I would say, in certain of the products, which is their core products, they were the, let's call it, the dominant great reputation in our industry. So we're very excited for that team to join us. And when we look at the development product portfolio and things that they're working on, we're very impressed by. So yes, our expectation is that it grows or else I'm not sure we do the acquisition. And I think also what's the nice thing about dataMate, it gives us a footprint into manufacturing in the U.S. Obviously the team there, kudos to the dataMate team, it was a carve-out. So we had to relocate facilities, and those things are always bring a certain level of complexity, but we are in the new facility. We're up and going. The team did a great job. It was much more seamless than I probably had anticipated. So thank you to the team there. So that's the expectation of dataMate. I would say dataMate, there are some customers that they bring that we just haven't had inroads with historically that we hope to kind of land and expand the broader Bel portfolio. We have a much broader sales organization and reach globally that we think we can effectuate their growth. And I'd say more importantly, I think people are very excited internally to have access to that portfolio set and also just great engineering. The other thing I would say to your other question on the data centers, AI, I mean, look, we have a lot of SKUs that we're always seemingly winning new things. But at the end of the day, the drivers remain the same, which is AI build-out, AI deployment, data center build-out, data center deployment, routers and switches, right? That's kind of where we play. I would say that effectuates our legacy power and magnetics businesses from both sides. So I would say it's pretty broad-based. And as we've talked about, when we say AI, we think of that as a floor versus ceiling because sometimes we lose visibility to where our products are going. But when we look at the floor, which is the clear AI, we're seeing robustness in that growth. And so that's, let's call it the clear AI, if you will. Lynn Hutkin: And just to add on to that, so within Data Solutions, we've talked in the past how our AI exposure is largely within our power products. So if we isolate Data Solutions just within power products, that increased by $4.8 million or about 27% from Q1 last year to Q1 this year. And much of that was driven by AI. Hendi Susanto: Yes. And a then Farouq, a number of companies have talked about the possibility of price increases in the second half. You mentioned pricing action. What are the puts and takes in terms of expectation on price increase in general in your industries in the second half? Farouq Tuweiq: Yes. I mean, let's be honest, I don't think everybody welcomes us or anybody in the industry with open arms around price increases. But I think there's a general understanding and appreciation for the fact that things are going up. I would also say from an industry-wise, you are correct. It's become normal. I shouldn't say normal, but people have done it, and it's part of the world that we live in. So from our perspective, we need to do the right thing by our investors and make sure that we are passing on cost. Obviously, we try to mitigate where we can. But if not, then we will need to pass that on. And I think you hit on it correctly as we took pricing actions in Q1, but that's on the new business, right? So obviously, we have backlog, so we don't want to necessarily -- barring it being egregious or something really kind of crazy, generally, you want to update your price sheets and pricing for all the new stuff. So that's why we earlier said we'll start seeing the benefits of that, some of it in Q2, but we think about it more by Q3, Q4. Hendi Susanto: Got it. And then, Farouq, any insight into market recovery in industrials, especially on customers' and distributors' inventories? Farouq Tuweiq: Yes. So we're seeing -- I'd say distribution is a pretty broad -- obviously we touch a lot of end markets and a lot of customers, right? But I would say we've seen pockets of definitely robust strength, and we've seen pockets of still recovery side of things. So as a result of that, when we stitch it all together, we'd say it started getting a little bit more stronger as we can -- headed out of the quarter into April. So I would say we are seeing the strength in distribution, the recovery part of it, which I think is additive to our efforts and to earlier commentary as well. Operator: We'll go next to Theodore O'Neill with Litchfield Hills Research. Theodore O'Neill: Congratulations on the quarter. Two questions for you. The first one, last quarter you talked about weakness in the rail and e-mobility, and I'm wondering if anything has changed there? And my second question is about the strength in Q1. In the last 20 years, you companies reported a sequential growth in Q1 over Q4 only 3 other times. So what was driving the strength here in this sequential increase? Lynn Hutkin: So I'll cover the initial question first. So on e-mobility and rail, it's, I would say it's relatively more of the same from Q4. I think on the e-mobility side, Q4 was probably the bottom that we saw. There was a slight uptick from Q4 to Q1, but nothing meaningful. Both of those areas, I would call them still depressed in Q1, similar to Q4. And then what was the other -- I'm sorry, the other part of the question? Farouq Tuweiq: The broader industrial. Theodore O'Neill: The sequential increase in Q1 over Q4. Farouq Tuweiq: That's really rare. Lynn Hutkin: In general, right. So as our end market mix is changing, so you're correct that historically Q4 to Q1 we always saw a -- or generally saw a decline. And that was largely due to the Chinese New Year holiday and production interruption that we would see in the January, February time frame with our large dependence on the China workforce. As more of our business is becoming aerospace and defense-centric, we are less reliant on China. So it's just having less of an impact. So we're becoming less seasonal as our end market mix shifts more towards A&D. Operator: And we'll take a follow-up question from Bobby Brooks with Northland Capital Markets. Robert Brooks: I was just curious on diving a little bit more into the guide. Obviously really nice sequential growth. And even if you back out the benefit from dataMate, we're still looking at like really nice double-digit year-over-year growth. So could you just expand a little bit on the factors that underpin that outlook? And do you have a visibility with the strong bookings already year-to-date, that type of sequential growth can keep occurring in the back half? Farouq Tuweiq: Yes. So I'll just answer kind of generally before I turn it over back to Lynn, Bobby. Yes, our backlog continues to build and grow from year-end, strength to strength, Q1 was very healthy. Obviously delivery could be kind of spread out. From our perspective, yes, we're seeing that. We're also seeing the robustness of the funnel opportunity and new opportunities and also just general, let's say, industry chatter with whether it be our customers or distribution partners. But yes, we put a guide here based on some very good orders that need to be shipped and scheduled to ship in Q2. Obviously, not all of our backlog is for Q2. So we have backlog into Q3 and Q4. Obviously it starts to scale down post Q2, a quarter out roughly. So but when we look at again the forecast, the guidance, the discussions, what we have in the backlog, right, that's how we think about it. That's why we said, yes, we do expect robustness. Now to the specific level, I think it will be largely kind of very healthy, putting aside some of the seasonality that comes in Q3 and Q4. So we expect to have a very good year. I think I'll kind of leave it at that. Lynn, I don't know if you want anything to add. Lynn Hutkin: Yes. So Bobby, on the question about the Q2 guide, I think if you're comparing Q2 last year to what we're guiding for Q2 this year, the strength is really seen across both segments. Within ITDS, I would point to the Data Solutions portion, which is largely AI-driven. And then within ADRS, it's really commercial air, space, defense. We just have several of our end markets that are running very strong right now. So those are the key drivers, and it is supported by the orders received. Robert Brooks: Awesome. That's super helpful color. And then just one last one for me is you guys have done a really good job kind of finding strong acquisition targets. Obviously just the dataMate looks like more of that. Just was curious to get your -- get a feel on capital allocation and your appetite for more M&A moving forward? Or maybe is it a pause just to let the dataMate get the integration, or? Just curious to hear that. Farouq Tuweiq: Yes. No pause here. We are always out and active on the M&A front. Obviously, if you were to kind of set aside a little bit the dataMate acquisition, the cash flow even for -- usually Q1 is our biggest cash, let's say, usage of the year, given its bonus and we pay our big IT and insurance and all other kind of good stuff. But putting that aside, I think it was a very good cash flow, and we obviously were able to pay for dataMate. As we look out to the balance of the year, we expect healthy cash flow generation. We have a good amount of opportunity on the access to capital side of things. So when we look at that married up with internal bandwidth and ability to execute upon an acquisition, we like both of the sides. So we are open for M&A. We're actively looking at M&A. It feels like we always have some kind of discussion going on around M&A. So we are not hitting the pause by any stretch of the imagination. I think what we would need to be mindful of, maybe how messy it is and how much integration and the M&A needs to stand on its own merits. So from our perspective, we're wide open for M&A. Robert Brooks: And again, congrats on the great quarter. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Farouq Tuweiq for closing comments. Farouq Tuweiq: Yes. Thanks, Kerri, and thank you, everyone, for joining us today. A very important thank you to all of our team globally that delivered this outstanding Q1 and what we think will be a very healthy balance of the year starting out with Q2. So thanks, everybody, and looking forward to speaking again in July. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to Acadia Healthcare's First Quarter 2026 Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Todd Young, Chief Financial Officer. Please go ahead. Todd Young: Thank you, and good morning. Yesterday, after the market closed, we issued a press release announcing our first quarter 2026 financial results. This press release can be found in the Investor Relations section of the acadiahealthcare.com website. Today, Debbie Osteen, Acadia's Chief Executive Officer; and myself, Todd Young, Chief Financial Officer, will discuss the results. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in the press release that is posted on our website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Acadia's expected quarterly and annual financial performance for 2026 and beyond. These statements may be affected by the important factors, among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's first quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time, I would like to turn the conference call over to Debbie. Debra Osteen: Good morning, and thank you for joining us. I'm pleased to be with you today to discuss Acadia's results for the first quarter of 2026. Since returning as CEO, I have spent time in the business, listening to our teams, assessing operations and getting close to the drivers of quality and performance. Our mission is unchanged, and I continue to be impressed by the hard work and dedication of our clinicians and employees across the country and the important work we are doing to provide safe quality care for those seeking treatment for mental health and substance use issues. Across Acadia, we share a clear purpose, meeting a critical need and making a difference in the communities we serve. As the nation's leading pure-play provider of behavioral health services, we are uniquely positioned to address this growing unmet need with our 275 facilities serving more than 84,000 patients daily. We have a strong foundation. an integrated model of care, a deep focus on clinical quality and a proven operating approach. As I shared in our last call, we are focused on building on our strong foundation with operational discipline and consistent execution to deliver significant sustainable value creation. I have great confidence in our teams and in the near- and long-term direction of the company, and I am fully committed to supporting Acadia through this next phase of execution and improvement. Our first quarter financial and operating results marked a good start to 2026. We delivered revenue at the high end of our guidance range and exceeded the top end of our adjusted EBITDA and EPS range. Our revenue growth was driven by our acute inpatient psychiatric facilities with 14% growth compared to last year as we increased inpatient volumes by 6.2%. Our specialty team also delivered better-than-expected results by mitigating some of the challenges in Pennsylvania. On the CTC side of the business, while we grew 2.5% compared to the first quarter of 2025, growth slowed sequentially from quarter 4 as that business was impacted by the severe weather we noted on our February call as certain centers had to be closed during that time. The increase in volumes across Acadia reflects the continued strong demand for our services. Our revenue growth and strong focus on operational improvements and efficiencies at every level of the organization drove adjusted EBITDA to $144.2 million, $7.2 million above the high end of our guidance. Our good start in quarter 1 is allowing us to raise our full year adjusted EBITDA guidance by $5 million at the midpoint. Todd will walk through the financial results and our guidance in more detail. For 2026, our primary focus is operational execution and deriving more value from our facilities and recent bed additions. That starts with people, having the right leaders in place and supporting our operators in the field. It also requires clear decision-making and accountability at every level so we can drive stronger fundamentals and more consistent performance across all 4 lines of business. During my first 3 months, I have conducted talent reviews and reviewed our operational structure across our businesses to evaluate leadership at the facility level and the layers and scope of operational oversight above it. As a result, we have made leadership changes at multiple levels, including bringing new leaders into Acadia. As part of this review, we have reorganized and restructured our acute service line with 2 changes. First, we reduced the number of facilities and geography within each division to enable greater focus and oversight of our facilities. Second, we have created a new operating group for acute facilities, which will focus on our JV hospitals and recently opened facilities. This included hiring a new experienced leader for this group, who will be focused on continuing to build strong relationships with our JV partners and strengthening our referral networks. These changes in our acute service line are intended to support our teams in the field and improve execution. Alongside the talent work, my leadership team and I have been engaging directly with our teams to reinforce priorities and rebuild a culture of urgency around access to care and patient treatment. We have also focused on our referral relationships. These relationships are critical, and we are pleased with how the teams at the facility level are prioritizing these relationships and working with these partners. We currently have a strong, diversified referral base across all service lines and regions. Over the last 3 years, we have added over 2,500 beds in new facilities and through expansions in existing facilities. These investments expand access to care and increase the number of patients we can serve each day. The demand is there, and our goal is to meet that demand with high-quality patient care and ensure that we eliminate barriers for treatment through prompt response times. We are focused on execution, referrals and leadership at all our facilities, but particularly in locations that have not ramped as quickly as expected. We have completed in-depth reviews of facilities opened since 2023, and each of these facilities now has a clear action plan to expand access to care. As a result of this increased focus, this group's revenue and adjusted EBITDA results in quarter 1 were ahead of our expectations. We remain confident in this group delivering on $200 million of adjusted EBITDA growth relative to 2025. We continue to evaluate each facility and market on an individual basis, and we are applying learnings from past openings through a clearer, more standardized approach to new hospital launches. We are focused on our 2026 openings and have adjusted our planning process to support successful execution. In early February, we opened our JV facility with Tufts Medicine in Greater Boston. We have 24 beds open today, and once fully licensed, we will be able to serve 144 patients. During quarter 2, we expect to open 2 facilities in partnership with Premier Health Systems. our 144-bed JV facility with Orlando Health and our 96-bed facility with Methodus Jenny Edmondson in Iowa. Our joint ventures and the new beds added provide an opportunity to leverage our combined expertise and resources with a shared commitment to provide quality care and achieve strong clinical outcomes. While we are reducing our capital investment by over $300 million compared to 2025, we are finalizing investments in these new JV facilities while also adding beds to existing facilities. In the first quarter, we added 82 beds and are on track to add 400 to 600 beds over the course of the year. This focus on operational execution also drives a focus on efficiency. Over the last few years, Acadia has invested in technology, data tools and process improvements that give our facility leaders better real-time visibility into day-to-day operations. These tools help us make more informed operational decisions and deploy resources more effectively across facilities. We are aligning staffing resources more effectively with patient needs and operating conditions, improving workforce planning and reducing inefficiencies such as premium labor. We believe this more disciplined approach supports stronger operations, a better working environment for our teams and a more stable care environment for our patients while maintaining our commitment to quality, safety and care delivery. Our corporate team has also reduced headcount to reflect the renewed focus on supporting our operating teams effectively. This renewed focus on management and expense discipline across the organization contributed to adjusted EBITDA exceeding our expectations in quarter 1. As we have been evaluating all aspects of our business, the most important driver of our success is our people. We are pleased that for the eighth consecutive quarter, our staff retention has improved. We are focused on talent at every level because the right people with the right training enable us to provide the best care to our patients. We are measuring that care through enhanced outcomes tracking through more programs. The ability to measure and validate outcomes is especially important for collaborating with payers who are very focused on clinical health outcomes for their members. Positive outcomes are equally significant for our referral partners as they reinforce the rationale behind entrusting their patients to our care. As we look ahead, demand for our services remains strong, and we are focused on consistent execution across our care continuum. Above all, we remain committed to our mission and to providing high-quality care for patients and the communities we serve. With that, I will turn it over to Todd to review the financial details and our expectations for the second quarter. Todd Young: Thanks, Debbie. Turning to our first quarter results. We reported revenue of $828.8 million, representing a 7.6% increase over the first quarter of last year. Same-facility revenue grew 7.3% year-over-year, driven by a 5.6% increase in revenue per patient day and a 1.6% increase in patient days. Our Q1 revenue growth was driven by our acute and RTC businesses, which grew 14.2% and 6.3%, respectively. Acute performance was driven by increased patient volumes. In addition, we benefited from supplemental payments in line with the Q1 guidance we provided in February from Ohio and Tennessee that were not in our first quarter results last year. We were also pleased with the performance of our specialty business as it mitigated a portion of the expected volume losses in Pennsylvania from New York's decision to not provide care for their residents in our Pennsylvania facilities. We continue to be very focused on diversifying our referral base to surrounding states and Pennsylvania. The decline in our specialty facility revenue of 6.5% was driven by the previously discussed challenges in Pennsylvania and from closing specialty facilities in 2025. The closures created nearly a 6% headwind to growth. Our CTC revenue grew 2.5% compared to the first quarter of 2025, but it slowed sequentially as it was negatively impacted by the severe winter weather we called out on our Q4 2025 earnings call in February. The weather negatively impacted our total adjusted EBITDA in Q1 by $3.7 million, in line with the Q1 guidance we provided in February. Adjusted EBITDA for the quarter was $144.2 million or 7.5% growth over Q1 2025 and $7.2 million above the high end of our Q1 guidance. Our adjusted EBITDA performance relative to our guidance was driven by strong performance across our acute facilities, including, as Debbie mentioned, outperformance from our new facilities opened since 2023. We also delivered better-than-planned cost efficiencies at both corporate and at our facilities. We did have a $3.2 million benefit related to employee benefit costs that we expect will reverse in the back half of 2026. Our losses from start-up facilities were $12 million, $2 million better than our $14 million forecast, primarily from operating efficiency improvements. We had $3 million in net operating costs associated with closed facilities. On a same-facility basis, adjusted EBITDA was $199.5 million in the first quarter. From a balance sheet perspective, we remain in a solid financial position. As of March 31, 2026, we had $158 million in cash and cash equivalents and approximately $565 million available under our $1 billion revolving credit facility. Our net leverage ratio stood at approximately 3.9x adjusted EBITDA. With operating cash flow of $62 million and CapEx investments of $77 million in the first quarter, our free cash flow was a negative $15 million. Our free cash flow improved $148 million compared to Q1 of 2025. As we've previously noted, we expect our total CapEx in 2026 to be between $255 million to $280 million, with the second half of the year being lower than the first half as we opened our 3 new JV facilities in the first half of the year. We continue to expect positive free cash flow in 2026. We also collected $16 million in cash from the sale of 3 closed facilities. Moving to development activity. During the first quarter, we added 82 beds while closing 251 beds. The closures primarily related to 2 leased facilities in Pennsylvania and 2 other facilities that have been announced in 2025. Looking forward to 2026, as Debbie noted, we expect to add between 400 and 600 new beds, primarily through the opening of new facilities nearing completion. While we typically do not provide financial guidance for the second quarter, given the substantial out-of-period supplemental payments received from the State of Tennessee in the second quarter of 2025, we are choosing to do so this year to provide clarity to the investment community. In Q2, we expect to deliver revenue between $835 million and $850 million, adjusted EBITDA of $142 million and $152 million and adjusted EPS of $0.30 to $0.40. For the full year, our revenue guidance of $3.37 billion to $3.45 billion remains unchanged. While we expect to do better in mitigating our specialty headwinds in Pennsylvania, this improvement is expected to be offset by modestly higher-than-expected levels of bad debts and denials. With respect to our full year expectations for adjusted EBITDA, we are increasing the range from $575 million to $610 million to $580 million to $615 million. For adjusted EPS, we are increasing our range from $1.30 to $1.55 to $1.35 to $1.60. I want to note that given the significant EBITDA earned in Q2 of 2025 from the Tennessee supplemental plan, our 12-month rolling adjusted EBITDA is expected to be between $559 million and $569 million. As a result, our net leverage will be approximately 4.4x to 4.5x at the end of Q2. We expect this higher leverage to be temporary as we expect to end the year in the 3.9 to 4.2x range we guided to in February. Our team continues to focus on supplemental payment programs that we are confident will be approved in 2026, but we have not included any unapproved programs in our guidance. We continue to estimate that certain programs currently under regulatory review could add at least $22 million in incremental EBITDA to our guidance if they receive approval this year. Based on the latest insights regarding Ford's plan, the $22 million may be conservative. I will now turn the call back over to Debbie for closing remarks. Debra Osteen: I want to end our prepared remarks by thanking Todd for his contributions to Acadia, and I wish him well in his next chapter. I'm proud of the important work we are doing across Acadia to address a critical need in our nation. For 2026, our strategic priorities are aligned to improve our financial and operating performance through consistent execution. We are well positioned to apply our scale and expertise to help set the standards for care that address the escalating demand for behavioral health and substance use treatment. We will continue to strengthen our capabilities with discipline, deliver the highest quality patient care and create value for our shareholders. With that, we are ready to answer your questions. Operator: [Operator Instructions] . Our first question comes from Whit Mayo with Leerink Partners. Benjamin Mayo: Debbie, I was hoping that you could elaborate more on the correction plans that you have in place for the underperforming de novos. I hear the organizational changes, the standardization efforts. Just might be helpful to hear more about the specifics on what the action plan is. Debra Osteen: We have specific plans, as I mentioned, and they really focus on continued ramping of occupancy into the facility. They focus on access with our partner to make sure that we have communication in place. They also focus on service lines that we might do in each facility. So in other words, what services, what are the time lines? Do we need CON approval? Do we need other licensure for them? And what we've tried to do is we've been working with our partners to make sure we're aligned with them on these plans. We entered this with them to meet a need they had, and each plan is really tailored to the partner, but also to the market and to the facility and perhaps in some cases, the unique features that we see in some of the states. Benjamin Mayo: Okay. That's helpful. And then maybe just on the payer denials, just maybe a little bit more color on that. What's new in terms of payer behavior? It sounds like that's factored in the full year guide. And maybe just how much of the increase in AR days is influenced by that or is something else going on? Todd Young: Thanks for that question, Whit. Yes, we thought bad debts and denials have started to stabilize in Q4, but then they continue to get a little bit worse in Q1 than what we had previously expected. We do have good game plans in place to make sure we're doing everything to advocate for our patients and to improve on overall collections. We're having good responses, but they are running a little hotter than what we had expected them to. And so we've reflected that in the full year expectations. That being said, there is a lot of focus at our facility level with the finance ops teams on revenue cycle management and doing our best to make that less than what we've currently forecasted. Debra Osteen: And I'll just add to that with -- we are looking at our process and where the improvements can be. We're using tools to enhance what we're doing with respect to documentation, making sure we're in compliance with that. We are appealing denials, as Todd was mentioning. And we've also brought back Larry Hard on a temporary consulting basis. He, as some of you may know, worked with Acadia and retired, but he did an excellent job during my last tenure with just this area. And so he's come in and he's evaluating where and what we need to improve. And I think it's fair to say we have a lot of opportunity. Benjamin Mayo: Maybe just one clarification. Is there any -- was this one specific type of payer? Was it managed Medicaid, something else broad-based? Just maybe a little bit more detail. Todd Young: It's more broad-based, Whit. I wouldn't say there's any one specific area. So -- but that's why we're taking advantage of it across the entire enterprise. Operator: Our next question comes from Matthew Gilmor with KeyBanc. Matthew Gillmor: I wanted to ask about the seasonality with EBITDA implied in the guidance. It seemed pretty typical versus historicals, at least the way we were looking at it. I appreciate in the deck, you called out the Medicaid supplementals being higher in the back half and then you've also got the impact from the ramping facilities. How are you thinking about the seasonality? Are we correct that it's pretty normal? And then can you help size the EBITDA contribution from the Medicaid supplementals and the ramping facilities as we think about the back half EBITDA? Todd Young: Yes, Matthew, thanks for the question. I mean, overall, we feel great on how we've started the year and the performance on the EBITDA and our ability based off a good Q1 to increase our full year expectations. We've tried to be very clear on the cadence with the guidance, just given how volatile the quarterly results were in 2025 that creates some noise into that seasonality. But fundamentally, what we said at the start of the year and what's driving the back half now is the same thing. It's what you just called out. It's slightly higher supplementals in the back half on a run rate basis, just sort of the core embedded supplementals we have in our business. It's been the ramping facilities. As we noted, Q1 was better than we expected on the 23 to 25 cohorts. And so that continues to have a bigger incremental year-over-year contribution in the back half. So those are the big drivers. Plus, as Debbie mentioned in the prepared remarks, we have done a number of different cost programs and cost efficiencies at the end of Q1 that we think also provides benefits over the course of the year. Matthew Gillmor: And then as a follow-up on the New York Medicaid issue, it seems like you're obviously doing better there than you thought. I want to see if you could provide some details in terms of how you're backfilling the capacity with those Pennsylvania facilities. Debra Osteen: Yes, I'll take that. We have a very active business development team that is working with referral sources in surrounding states. And one of the states is New Jersey. Certainly, we also have been working with referral sources in Maryland, but we've also seen an increase in Pennsylvania referral sources. So it's a very concentrated effort to try and refill these beds. And I will say we're also still focused on working with New York to see if we can reopen those referrals. We're not at any place right now to talk any more about it because it's a process, but we are in conversation with them. And our referral sources there, I think, have really benefited from having these facilities. So we're focusing and working with those referral sources in New York as well. Operator: Our next question will be from Pito Chickering with Deutsche Bank. Pito Chickering: I guess 2 questions here. I guess, one more on bad debt denials. Are the payers pushing back on things like length of stay or the actual coverage once they've been admitted? And is that why the admission guidance was increased, but the patient days were left unchanged? Todd Young: So overall, the length of stay change we're seeing across the enterprise is more a math exercise, Pito, than it is anything changing in the business. We closed 4 specialty facilities last year, plus we now have the challenges on specialty in Pennsylvania. Those are all just longer average length of stays on average than acute. At the same time, we've been bringing a lot of new acute beds into our business over the last year, and that's continuing here in Q1 with the opening of Tufts and will continue in Q2 with the opening of Orlando Health and Methodist Jenny Edmundson. And so it's really just a math exercise of specialty beds being down, acute beds being up and those length of stays then working through as we presented. And as you'd guess, right, shorter length of stay in acute with more beds there, admissions are going to be higher while the length of stay of those patients is lower. Pito Chickering: Okay. Perfect. And then one more follow back on that's question. Can you actually quantify how much more supplemental payments we get in the back half of the year versus the first half of the year. Can you sort of quantify actually how the ramping facilities should be growing in the back half of the year versus first half of the year? And are there other things you put in our bridge like the benefit costs were reversing. So any way of quantifying the first half of the year bridge to the back half of the year? Todd Young: Overall, Pito, I mean, it isn't a massive acceleration in the back half given what we've guided to here for the first half on EBITDA. And so there's a lot of moving parts in our business, as you know. But right now, we're calling out a slight increase in supplementals, high single digits, low double digits, not $30 million sort of thing. And then as you can imagine, we're really excited about what we're seeing and the progress on the ramping facilities. those open from '23 to '25. They overachieved our expectations in Q1. And so that will be the other contributors. There's also our start-up facility losses, they sort of peak here in Q2, and those get better in the back half as well. So there's a lot of good things happening in the business that will help drive that small increase in second half EBITDA versus first half. Operator: Our next question comes from Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: I just wanted to dig into the acute operational restructure a little bit more, specifically around the referral efforts across the acute platform. I just wanted to get an idea of what inning we're in, in terms of the referral network enhancements that you're trying to put through there? And how should we think about the magnitude and timing of what you're trying to achieve in acute? Debra Osteen: Ben, the referral sources are really critical, as you know, to our business. And we've always had good, strong relationships with them, really, and I mentioned this in the prepared remarks through all of our service lines. What we're really focused on, though, is making sure that they're seeing our outcomes, making sure that we make it our access, we're not putting up barriers for them to refer. We are in communication with them about what services they believe their patients may need. And so there's a very strong team that works with our referral sources. In specialty, they are called treatment placement specialists, and they work with referral sources. We have a team in acute that service line as well as our RTC. So each service line has a group that's really in communication, but then we're also making sure they see what we're accomplishing with the patient. And as we have more outcome data, which we started to put on our website, we believe that we will be confirming really what is of most interest to them, and that is their patient gets better in our care. Operator: Our next question comes from Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on a good quarter. Maybe, Debbie, as I think about -- you've called out some of the changes you've made to leadership. Just curious how you're thinking about the operational or organizational structure where you've had a few months here now in terms of where there are opportunities to either reduce some of the infrastructure or some of the positions there that have been added over time. Just thinking through the G&A opportunity here and where else we can see some areas of improvement as you bring the band back, so to speak. Debra Osteen: Well, Brian, we have taken a very hard look at our corporate overhead who is in place, what's needed now by the facilities. And as you alluded to, there is a middle layer of management that I was able to see that had been added. And as we dialogued with the field and those that are using the support, there were decisions made to eliminate some of that middle layer. We think it's going to speed up decision-making. We think it's going to align better with where we see us going, and that is to provide this excellent patient care, but also improve our performance. So we've made changes there. As far as the structure around operations, as I mentioned in the prepared remarks, we reduced the number of facilities and also the geography that our division leaders were traveling to. And we have tried to make it more manageable, so that they can focus more intently on what are the issues, what do we need to do to problem solve and also to build and to grow, especially with the new facilities. And as I thought about it, and I think I had a lot of support here at the corporate office, there are a lot of common themes with our JVs. They're all different, and they're in different markets. But there are things that are common. So as I looked at it, I made the decision that we should align them under a person who can learn and to take those best practices from one JV to another and also to improve the ramping of those because we've added those beds primarily around the JVs. And I think that it's been embraced by the team. Everyone has been very positive about the changes. And I think they feel like their oversight is more manageable. And I think we're going to see the fruits of that as the year goes by. Operator: Our next question comes from Andrew Mok with Barclays. Todd Young: To the next caller, and we'll see if we get an later in the queue. Operator: The next question comes from Ryan Langston with TD Cowen. Ryan Langston: Todd, thanks for all the help. Best of luck at NVA. Maybe just one more on the bad debt. I heard you talk about improving documentation processes internally. I guess are those issues that you've identified, can you fix those in the short term? Or is that more of sort of a longer-term process to improve? Debra Osteen: Ryan, I'll start and then Todd can add. I think that documentation is the key to what we do, making sure that what we are offering and doing for the patient is in the medical record. And I think there's always room for improvement. But in this case, we have seen in our processes that have been evaluated that there are areas where we think we could better reflect the acuity. And we want to make sure that we are covering everything that our payer needs to see. We're very firmly in belief that the patient that is in our facility needs that level of care, and we want to make sure that, that's reflected in the record. And so I think the effort has been going -- ongoing for some time, but we really escalated that. And we're also using tools in some of our facilities to really create more visibility around that. And we're using -- very early stages of incorporating AI into our revenue cycle management. And we are using that to analyze our data. And also, we're looking at other products for that. But we think we can streamline some. But again, back to the key is the documentation that needs to be present. We also -- as the patient comes into our hospitals, we want to make sure that we are first providing active treatment, but then documenting that. And so that's been the view that we've been taking is just are we reflecting that? And is there a way to improve it. Operator: Our next question comes from John Ransom with RJS. John Ransom: The legacy management team talked about the fallout from the negative press on the specialty referrals just given people do Google searches and that stuff pops up essentially. Has -- I mean just given the results, are we finally kind of beyond that effect? Debra Osteen: Yes, we are, John. And we actually saw some very strong performance at some of our specialty programs that pull patients from around the country. Our commercial payer mix is up, and I think that team is doing very well. We have some very -- we have outstanding facilities, and I was very pleased to see the results and some of the facilities -- specialty facilities that pull from around the country. John Ransom: Yes. And look, just -- was there also -- I think you mentioned and not maybe hallucinating, but didn't you also mention that maybe the emphasis historically got a little to B2C and you had some commercial relationships that needed to be reestablished. Am I remembering that right? Or am I just making this up, which I do frequently, Debbie? Debra Osteen: I don't think you're making it up, John. I think that we had shifted our focus away from commercial. I'm not saying that we weren't still looking at it, but we've really strengthened that. And we've added to our GPS team. And again, those relationships have in my mind and what I've seen here are very strong, but we tried to do even more with really communicating why we're different because there is competition for those patients that travel. And I think the team is doing a very good job in making sure they understand what we're offering at our facilities. John Ransom: Great. And just lastly, I think quality sometimes is a bit nebulous in behavioral health. But what -- if you were to grab somebody for an elevator pitch and say these are the 3 or 4 metrics that we really focus on, and we think -- and of course, there's the absence of industry benchmarking, but what are you doing? And what sort of metrics on the acute side are you driving home to payers to say, here's why we're different and better in the absence of a robust industry data set? Debra Osteen: Well, the first area is patient satisfaction. What is their experience in our facilities. The second would be, are they coming in with -- as they come into our hospitals, are they leaving with an improved condition. And so we have measurement tools around that, and we're making sure that we use those tools to measure improvement. And I'm pleased to say that as I look at those measures that they are very, very positive. What we are doing now is really making sure we can do that across all our service lines, not just acute, but with specialty as well. But I think the improvement -- and then obviously, our payers use a readmission metric. And I think we measure that, too. Have they had to come back for care, what period of time. So all of that goes into looking at what are we doing for the patient and what are the outcomes that we're achieving. Operator: Our next question comes from Joanna Gajuk with Bank of America. Unknown Analyst: This is [ Joaquin Agada ] on for Joanna Gajuk. I just wanted to ask, could you give us an update on labor? How does wage growth, hiring trends? And how has retention been? Todd Young: Sure, Joaquin. Things are good. Overall, for the eighth consecutive quarter, our retention of our team improved. So that's just a huge value prop from just a training, from a disruption basis, all of that. So really pleased with what our teams are doing at the local facility levels to improve on retention overall. So -- on a same-facility basis, we were up 3.7%, but even better on a patient per day basis, it was 2% again, which was the same as it was in Q4. So overall, I think the team is doing a really good job of managing that. I think you heard some of that in Debbie's prepared remarks with regard to less premium pay, less inefficiencies in when staffing is happening. And the team and our nursing team overall has done some really good training to just improve that to help facilities understand how to manage the labor better while not sacrificing anything on quality compliance or patient care. So feeling very good about how that's trended. Obviously, overall numbers are up as we open new facilities, and that just improves over time as we fill the beds and occupy more. Unknown Analyst: Great. And I just wanted to touch up on your AI comment earlier. So what are your guys' future plans? And how are you looking about that to implement it further in the future? Todd Young: We're looking at different tools. We're doing some prediction of care just to have better understanding of different risks. We're looking at it with inside our electronic medical record systems to use those and doing pilots before we roll it out in total. But overall, we're very attuned to the changing environment that we're all living in and making sure we're not caught off guard by something that we're missing. Really strong IT team that's digging in here and providing us tools to get better. Operator: Our next question comes from Andrew Mok with Barclays. Andrew Mok: I wanted to follow up on the strong same-store admissions. I think they were up 6.5% in the quarter. One, can you elaborate on the drivers of the acceleration there? And do you think that's a leading indicator for patient day growth? And then secondly, start-up losses are still tracking around $15 million per quarter. When should we see that number start to diminish? Todd Young: Let me take the second question first. So it was $12 million in Q1, $2 million better than we expected. We pulled out our full year guidance to reflect that $2 million at the top. So now we expect $47 million to $51 million. We've said we expect $15 million in Q2. That's likely the high end of the number, Andrew, for the year from a quarterly standpoint. So again, progress on those fronts on that. From an admission standpoint, again, a lot of this is new acute beds coming on and those ramping of those new facilities. Because the length of stay in acute is shorter, admissions are higher on that. And then again, as we mentioned on an earlier answer, a lot of the average length of stay change we're seeing is really a mix as we closed specialty facilities last year, -- we've got the challenges in Pennsylvania. Those were longer lengths of stay that are coming out of the number while we're adding in acute beds with shorter length of stays into the numbers. So overall, we feel good about the referral network, as Debbie talked about, driving those admissions into acute. And so again, a lot of good forward momentum here that the business has and progress on filling up our beds and our new acute facilities. Debra Osteen: And I'll just add to that. Our inquiries for acute were up over 20% in the first quarter. Our RTC census was very, very strong. And we also, as I mentioned earlier, had very strong performance in some of our specialty facilities that attract from all over the country. We've made some changes in our marketing approach, and we're looking at our spend on Google, which is a generator of patients in some of our service lines. And I think that the team is just very, very focused on making sure they understand the referral sources. We're using some tools to bring in new referral sources. So not just taking what we have now, but targeting individual practices and others that we think could be a referral source for patients. And all of those things are working together to, I think, create the strong volume. Demand is continuing to be strong, and there are individuals that are seeking care, and we have not seen that reduce. We've actually seen it strengthen, and that's contributed to some of our results in the admission area. Todd Young: Bailey, any more questions in the queue? Operator: There are no more questions. This concludes our question-and-answer session. I would like to turn the conference back over to Debbie Osteen for any closing remarks. Debra Osteen: I just want to end by thanking all of our employees and the corporate staff for their dedication and their hard work to ensure that our patients receive excellent care. I thank you all for being with us this morning and for your interest in Acadia Healthcare, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Kip Meintzer: Greetings, and welcome to Check Point Software's 2026 First Quarter Financial Results Video Conference. I'm Kip Meintzer, Global Head of Investor Relations. And joining me today are Chief Executive Officer, Nadav Zafrir; and our Chief Financial Officer, Roei Golan. Before we begin, I'd like to remind everyone this conference is being recorded and will be available for replay on our website at checkpoint.com. During the formal presentation, all participants are in a listen-only mode that will be followed by a Q&A session. During the presentation, Check Point's representatives may make forward-looking statements. Forward-looking statements generally relate to future events or future financial and/or operating performance. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Any forward-looking statements made speak only as of the date hereof, and Check Point Software undertakes no obligation to update publicly any forward-looking statements. In our press release, which has been posted on our website, we present GAAP and non-GAAP results, along with a reconciliation of such results as well as the reasons for our presentation of non-GAAP information. If you have any questions after the call, please feel free to contact Investor Relations by e-mail at kip@checkpoint.com. Now I'd like to turn the call over to Nadav. Nadav Zafrir: Thank you, Kip. And thank you all for joining us. So I'm going to begin with the key operating dynamics of the quarter and obviously talk a little bit about how we're advancing our strategy to drive sustainable long-term growth. So to begin, in our first quarter, we delivered double-digit growth in non-GAAP earnings per share and adjusted free cash flow with revenue growth at 5%. Subscription revenue remained a key strength, driven by strong demand across our emerging technologies, which actually generated 45% growth in calculated billings led by e-mail security CAM and SASE. At the same time, we do see a decrease in times research projects that resulted in lower-than-expected product revenues. As we discussed in our last earnings call, during the second half of 2025, we conducted a comprehensive go-to-market assessment with the objective of accelerating both new logo acquisition and increasing wallet share in large enterprise accounts in order to enable the successful execution of a multi-pillar platform strategy. So based on this, we implemented changes to our go-to-market model to align with these goals. And the transition to the new model did create short-term disruption to the rhythm of our sales execution and primarily affects our appliances business. Now while we're confident that the changes made are spending the sub for success in the mid and long term, we do see a short-term impact on our business that will negatively affect our 2026 revenue projections. We believe these headwinds are transitory and they reflect a deliberate reset to position our business for improved execution and scalability. We're already seeing that the current pipeline trends and ongoing customer engagements and our plans to further invest in our firewall business make us optimistic about the future growth trajectory. Beyond that, our strategy continues to be anchored around our 4-pillar approach, which we believe is well aligned with the evolving security requirements of enterprise, particularly as AI adoption expands the threat landscape. And in support of our go-to-market execution, we're strengthening our leadership team with 4 key appointments. So first, Sherif Seddik has been named Chief Revenue Officer and will lead our go-to-market organization. Sherif has successfully led our international sales business over the past few years. He brings more than 3 decades of global sales leadership experience, and he'll be replacing Itai Greenberg. I want to take this opportunity to thank Itai for his continued support during my first year and for his leadership in the go-to-market changes. Beyond that, [indiscernible], who has led our CTEM offering since the acquisition of Cyberint and has driven 96% year-over-year ARR growth will join the leadership team. You know that as organizations operate in this increasingly [indiscernible] exposure management is becoming mission-critical because it enables security teams to rapidly identify emerging threats. And the most important part is materially accelerate their mediation. And I think we have an advantage here, and I'm happy to welcome [indiscernible]. Alongside that, to lead our AI pillar, I'm happy to say that [ Adam Elin ] has joined as General Manager of AI security, and we'll also join the leadership team. Adam brings deep experience at the intersection of cybersecurity and large-scale enterprise security operations because in his previous roles, he was a CISO fidelity, [indiscernible], but he's also a founder of Blue Box security. I think Adam adds really a proven operator perspective, which is so essential in this time and we will focus on building the platform, our AI security platform to scale with the speed, the rigor and a strong commercial pipeline. And then lastly, Rafi Kretchmer is appointed a VP of Global Marketing. He replaced Brett Theiss, so we wish well on his future endeavors. Beyond that, look, you're all aware, AI is a watershed moment for the security industry. When you look at the emergence of these frontier AI models, including metals and GPT class, they're driving 2 structural shifts in cybersecurity. First one is that the barrier to sophisticated cyber attacks is literally collapsing because AI is democratizing capabilities that were once a exclusive to nation state and some very large elite "criminal organizations" and this is exposing a far broader set of enterprises to material risk. So that's number one. Number two, cyber attacks are undergoing structural industrialization. The Agentic AI enables [indiscernible] to continue scan global infrastructure, and they're generating a continuous flow of novel attack techniques. And so manual operations are giving way to automated attack pipelines. And this is what we call a checkpoint, the AI attack factories. Now when you look at the convergence of these 2 forces, it really creates a different threat environment, larger attack population that is executing more sophisticated campaigns with greater speed and volume and the time to exploit is shrinking dramatically. And we believe -- I believe that this is directly validating our ethos of prevention first, which we're second to none in the industry, in my opinion. Beyond that, a checkpoint, we're not waiting for this threat environment to materialize. Our response is ready and active. It's structured, of course, across our 4-pillar framework. The security for the network through our hybrid mesh, CCAM and workspace security. Now during this quarter, we introduced solutions to secure enterprise AI transformation. As an example, we launched the AI defense plan which is designed to secure the genetic enterprises across employee AI usage, the applications and the agents that both of these use the people and the applications. Beyond that, we introduced the AI factory security blueprint. It's integrated with the NVIDIA GPU service pinning on the server itself. And this provides end-to-end protection for AI infrastructure and we are very bullish about this. Most recently, we also announced our partnership with Google Cloud. We're integrating this AI Defense place with Germany enterprise agent platform. And this can deliver real-time runtime protection at scale. We also delivered AI-driven exposure management, enabling customers to close the remediation gap through: one, improved intelligence, than the risk prioritization and finally safe remediation, which is critical, the time to remediate in organizations today. And then finally, we launched a secure AI advisory service to help enterprise government deploy and ultimately scale AI with security and doing so responsibly. And so to close my opening remarks, our experiencing near-term headwinds in our clients business and adjusting our annual revenue guidance, we remain confident in our ability to gain market share in this expanding security market -- the emerging technologies continue to perform strongly and position Checkpoint in a really good place to secure this rapidly growing enterprise attack surface driven by our adoption and we believe that our differentiated strategy, our core capabilities, our strong financial profile with its industry-leading profitability. And at the end of the day, a disciplined execution over time position us to really benefit from the accelerating demand for secure enterprise and create AI, which is transforming the organizations at scale. So before I take the question, with that, I'll turn to Roei to give you some of the financials. Roei Golan: Thank you, Nadav. So thank you, Nadav, and thank you, everyone, for joining the call. So as Nadav mentioned, the third quarter was a solid quarter with 5% growth in revenues, driven by 11% growth in our subscription revenues. Our total revenues reached $668 million and were $2 million below the midpoint of our projection as a result of lower revenues from firewall appliances that impacted our product revenues. When we are looking around subscription revenues, they grew by 11% to $323 million and were at the midpoint of our projections. Our adjusted free cash flow was very strong and reached $457 million, $70 million above the midpoint of our production and grew by 11%. Our non-GAAP EPS was $2.50 and was exceeded our guidance with 13% growth year-over-year. So as mentioned, we had 5% growth in revenues, while our deferred revenues grew by 8% to $2.06 billion. Our calculated billings totaled to $548 million reflecting a 1% decline year-over-year, while our current calculated billings grew by 2%. Our [indiscernible] performance obligation grew by 7% and reached $2.592 billion. So as we -- as Nadav indicated earlier in the call, we had lower-than-expected product revenues, mainly as a result of the disruption affected by the changes we made in the go-to-market organization. As we are looking in the second quarter -- into the second quarter, we do see this disruption [indiscernible] plants revenue. But based on the finance that we see, we expect to see an improvement in the second half of the year. It is important to note that our new business continues to be stable, and our fire subscription ARI continue to grow year-over. When we are looking on our subscription revenue, we do see projectory for reacceleration, and we do expect to see acceleration in our subscription revenues in the second quarter and for the full year driven by strong demand by emerging pillars, mainly by [indiscernible], system and SASE. So as indicated, our total subscription business continues to be strong. We continue to experience strong demand for our emerging products, which remains the primary driver of our revenue growth. In Q1, our Email Security SASE in ERM in total exceeded growth in ARR and over 45% in calculated billings year-over-year. It is important to note that although the revenues are still not significant for the total business, we see a significant growing finance for our AI security offering and that's together with the [indiscernible] expect to drive the subscription revenue growth in the next few quarters. When we are looking at the revenues by geography, so 46% of our revenues came coming from EMEA, which had 6% growth [indiscernible], 42% of the revenues came from America and believe a 4% growth year-over-year, and the remaining 12% came from Asia Pacific and this had 2% growth. When we are looking on the P&L for this quarter, so gross profit increased from $564 million to $586 million, representing a gross margin of 88%. Our operating expenses, excluding R&D grants, increased by 14%, while on a constant currency basis, our OpEx increased by 12%. Q1 results include approximately $27 million of benefit from R&D grants to be received at the new Israeli incentive program law, which was ratified during the period, and that's reflecting the surge impact in our financial results. Our operating expenses, net of R&D grants were $321 million and increased by 5% year-over-year. When we're looking on these grants, we do expect to have an approximately benefit for the total year of $100 million on our operating income, reflecting the new law that was just approved. So just finalize. The increase in our OpEx is primarily as a result of our increase in our workforce as a result of the investment in our AI security and investments in sales and marketing program. Looking on our non-GAAP operating income, it continues to be strong at $265 million or 40% operating margin. Our non-GAAP net income increased by 8% and reached $265 million, while our GAAP net income reached $192 million similar to last year. Our non-GAAP EPS grew by 13% and reached $2.50 while our GAAP EPS was $1.81, represent 5% increase. Moving into our cash flow and cash position. So our cash balances as of the end of the quarter, together with master [indiscernible] short-term deposits reached $4.4 billion. During February, we completed the acquisition of [indiscernible] for approximately $92 million of net cash consideration. Our adjusted free cash flow increased by 11% and reached $457 million. In addition, we continued our buyback program and purchased 1.9 million shares for a total of $325 million at an average price of $170 per share. To summarize. So strong double-digit growth, non-GAAP EPS and adjusted free cash flow, we do see continuous strong demand for our emerging technologies SASE, e-mail security system. And from the other hand, we did see -- we do see in the near term lower new business from firewall that affected our revenues. When I want to go into the guidance for the second quarter and for the full year. So for the second quarter, our total revenues are expected to be between $660 million to $690 million. Our subscription revenues expected to be between $328 million to $338 million and non-GAAP EPS is between $2.40 to $2.50 while our GAAP EPS expected to be around $0.70 less. While our adjusted free cash flow is expected to be between $145 million to $175 million, regarding the cash flow, the free cash flow, important to say that there is some -- there are some payments, significant payments that moved from Q3 to Q2. But again, that's mostly shifting from Q2 to Q3. When we are looking on the full year guidance, so as a as indicated, we are adjusting the revenue guidance, our cost of revenues guidance for the full year. The new -- the [indiscernible] is between $2.770 billion to $2.850 billion. That's a reflection of expected lower revenues on firewall appliances mainly in the second quarter. Our subscription revenues were not changing. We do see strong demand for emerging products, and we opt to finish in the upper end of the range, but we are keeping the same range for the full year. Same thing for non-GAAP EPS, we are not changing our non-GAAP EPS expected to be between $10.05 to $10.85. GAAP EPS is going to be slightly higher, again, mainly because of lower share count and slightly higher acquisition-related costs. And our adjusted free cash flow, we are not updating the guidance, same as we gave between [indiscernible] I'll stop sharing. [indiscernible] Kip Meintzer: Sorry about that guys, having a little bit of technical difficulty. Starting off today's Q&A is going to be Brian Essex from JPMorgan, followed by Rob in the Piper Sandler. Brian Essex: I wanted to dig into product revenue performance. We'll take the easy question. was macro or customer decisions to sweat assets not a factor at all? And if not, can offer a little more color around the depth of the go-to-market changes. Where was the friction in the process most apparent? Where did the system break down? And what gives you confidence that this is just a near-term issue? Unknown Executive: Thanks. So look, I don't think the macro is the issue here. When you look at our -- the changes that we've made to our go-to-market, they are significant. So it's optimizing accounts to account managers. It's doubling down on our marketing, doubling down on our channels. But it did create a short-term headwind in terms of execution as many of our people changed their role or changed accounts, and I see this as the main driver or the main headwind that we're seeing in terms of the firewall business. So I don't think this is -- we don't see a macro problem. We're actually already seeing that the engagement with our customers and the funnel going back to normal. So we're optimistic that this is sort of a blip but it does take a little time to sort of get the motion back and everybody in their seats, et cetera. But for the long run, we believe this is the right thing to do, and we're going to continue to invest. Now this is just on the workforce, but also leadership changes in America leadership changes in other areas. So there's a process here that we're going through. I think we're at the tail end of the disruption and very optimistic about the future. And at the same time, when I actually look at the demand side, we're seeing different areas of growing. So as an example, we're very bullish on new AI data centers where I think we have a very unique capability for the longer term, that's how we see the market, and we're optimistic. Kip Meintzer: Next up is Rob Owens from Piper Sandler, followed by Joseph Gallo from Jefferies. Robbie Owens: Obviously, the world has been changing quickly over the last 6 weeks. I'd love to understand your perception relative to what's happening and how that's influencing Checkpoint's business. But in line with that, it seems like you're losing momentum at a critical time for cyber here. So how do you ensure that this doesn't lead to longer-term share losses as customers are having to make decisions in the near term to protect against these next-generation threats? Unknown Executive: Well, honestly, I actually think that we're gaining, not losing when you look at the big picture, right, take [indiscernible], an example, right? We think that, as I said, this is going to create a demarketization industrialization and change the nature of the business. And I actually believe that we're really well positioned to answer that. At the same time, when you look at the relevant pillar, [indiscernible] has grown 96%, e-mail, which we are one of the best-in-class in the industry and ready for this AI revolution is growing over 40%, et cetera. So that's one thing. The other thing is when you look at the fundamentals of the change in cybersecurity, I actually think that our ethos of prevention first as an example, if you look at the latest reports by NSS and [indiscernible]. Again, once again, we're at 99.9% ability to stop a tax of known CBEs. This was always important. I think now it's becoming really critical because that's exactly the change that's happening. You're going to have to be able to block as fast as possible or everything that is possible and then you're going to have to remediate extremely fast. I think from both sides of the equation, we actually have an advantage here. Kip Meintzer: Next up is Joseph Gallo from Jefferies, followed by Adam Tindle of Raymond James. Joseph Gallo: I know you talked about the impact to appliance execution, but I think the most exciting part of the story is the subscription growth and the potential for acceleration there. But if you look at current billings, and you take out products, that only grew 3% year-over-year in 1Q. So just you're guiding to 12% subscription growth and acceleration in the back half. Maybe just walk us through a little bit more about the confidence in that? And then just any broader commentary on how we should think about billings going forward. Unknown Executive: So I'll take it. So you're right in terms of current billings, excluding products, but that takes into account also maintenance and software and maintenance updates. And actually, pretty flattish right now. So if you're excluding that, so actually the growth of subscription is much higher subscription billings. And we do see, by the -- we see the final even for the second quarter and also -- and mainly for the second half of the year. We see very strong demand for our subscription packages, our subscription offering, if it's email, [indiscernible] we discussed. And also AI security. Also the numbers are still not significant in terms of bookings for AI security, but we see very significant funnel that was created just in the last few weeks. We see the enthusiasm about it. We have a new leader there. And now that's managing this business. So definitely, we feel positive about the subscription also for the next few quarters to be accelerated. Kip Meintzer: Next up is Adam Tindle from Raymond James, followed by Shaul Eyal of TD Cowen. Adam Tindle: I just wanted to just take a step back to kind of 2 major things that we're having to digest here on this call. The first one, I want to understand what exactly is happening to product revenue that is causing this revision? Is there changes to terms of distributors? Is there issues of supplies and shipping? What exactly is changing and happening that's causing this mechanically? And the second thing that we're digesting here is the go-to-market changes that you're implementing I wonder, we've gone through this before with checkpoint in the past, a number of changes to go-to-market leadership. When you look at these, if you could maybe compare and contrast some of the things that have been done in the past to this time, what you've learned and what might be different with these go-to-market changes? Roei Golan: I can start on the third one, and Nadav will take the second. Yes. So on the -- in terms of the product side, same affected the product. So we did the changes in the go-to-market organization. part of these changes were a lot of changes for assignments for eco managers that will work from large enterprise and enterprises that moves from accounts to other accounts. This has some kind of -- again, something that was expected, but that had more disruption than we expected on the business, mainly on the new business. On the new business on the -- I'll remind you that the funnel for research projects for new business on firewall takes a little bit more time than the sales cycle is longer than a sales cycle for selling send e-mail or other products or this kind of product profile is usually takes longer. And we see disruption in final creation mainly in Q1, that's affecting mainly some of it in Q1, but mainly in the second quarter. And therefore, we see the finance starting. We see a very nice improvement in the last few weeks after all people are on and the relevant roles and they are starting to open their accounts. And we're starting to see the finance creative in the second half or the second half of the year. But as we mentioned, there is a near-term headwind, specifically for the second quarter. Nadav, do you want to take the second one? Nadav Zafrir: Sure. Adam, thanks for the question. Look, we I would say a couple of things. Number one, it's my job to continue and optimize and see that I have, that we have the right leaders in the right place I think that one change that we're doing, which is, I think, a differentiation is beyond just the structural changes that Roei spoke about. We're also investing more in marketing. We're doubling down on the channels. To your question about the personnel changes that we're conducting, we do want to bring strong leaders that come from the security business with the right experience, right? So in our last earnings call, we announced Rachel Roberts, who's taking as President of Americas. We -- and she has experienced vast experience in the cybersecurity market. Tom alone joined us and needing the global Adam Eli comes from the industry and is going to be the AI security. So the idea is to bring seasoned leaders that know this business and then put like we go-to-market organization. So these 2 things work together. And the third thing is, which we've been speaking about is the multi-pillar approach that we're coming with. So all in all, I'm very bullish about where that is going to take us. But I do acknowledge that in the first quarter, this has created a disruption, but I think it sets us up for success as we go forward. And you'll see more people joining us at different levels from different companies as we are just getting the right people, the right data, the right processes to create this sustainable growth. And we have the vision, we have the mission. I really believe that we have a meaningful headwind with the products that we have, and we're bullish about where that's going to take us. Kip Meintzer: All right. Next up is Shaul Eyal, followed by Shrenik Kothari. Shaul Eyal: Nadav [indiscernible] are we maybe sticking with the product revenue question as you guys know, checkpoint as well as its competitors. You guys are selling a number of appliance families, low, mid, high tier markets. Is there a specific market here in which you're seeing increased pressure or the current softness is pretty much across all market tiers? Unknown Executive: It's across what I would say, mainly around the large. And again, many of the results of the disruption in the go-to-market because there were many changes to assignment of enterprise and large enterprises are many consuming the large boxes. So that's -- I would say that. But again, we see the cost of bottom. Unknown Executive: I will say this Shaul that -- I'm trying to put together the trends that are coming. And I know that this is sort of zooming out a little bit, right? But when you think about the priorities of large security organizations in the -- today and in the next couple of years, which I think are going to be chaotic. If you believe that this democratization industrialization of the attackers, and the changes that agentification is doing in everyone's network is real, then I think that our firewalls are actually very well positioned for this future. It's nothing else because of the ability to prevent every known CVE and deploy it through our IPS in hours, not days or weeks. This is becoming more and more critical. I know that we've been preaching this for a long time, but I think this is now going to become more important. And I think gives us an advantage not with -- only with the customer like growing with the customers that we have, but going after new logos, which is actually a part of the change that we've made in the go-to-market organization. Now as [indiscernible] said, getting new logos in CTEM is much faster than getting new logos and firewall. But I think we have what it takes, and we've done the adjustments we put the right people in the right places. We'll continue to do it. It's never good enough. But I think it actually gives us a headwind not only in the emerging categories but also in the core in the firewall, which is alive and kicking it, forget checkpoint for a second. I think when you look at where the world is going right now, network security is becoming so much more important. It's one of the only places where you can really prepare an organization for the AI adoption. It doesn't happen overnight, but I truly believe this is a tailwind for Checkpoint. Kip Meintzer: Next up is Shrenik Kothari followed by Keith Bachman from BMO. Shrenik Kothari: Yes. Just maybe to switch gears from appliances, Nadav, you mentioned about the data [indiscernible] and factory blueprint and between that and the new AI defense plan, the Gemini agent integration, the sector AI, it seems like you are trying to go after multiple layers of the enterprise study strategically very compelling and talk about the opportunity. But just how should we think about monetization of the top from where you see the near-term opportunity this year in the next 12 months? Nadav Zafrir: Yes. So I'll say this, it is a process. We're making very investments, right, in a couple -- I think 6 months ago, we told you about the acquisition of [ Lakera ] as an example. This is where we're building a truly foundational model. We believe that if you look at the security for AI, you won't be able to use existing large language models that can do everything known to humanity right phones and protect. But rather, if you want the latency, the accuracy in the cost, we are going to have to train our own model. So that's a huge investment. We're investing in the researchers, we're investing in the GPUs. We're investing even thinking out of the box, we created a game called Gandalf where we have over 1 million worldwide users that thousands of them attack us every day so that we can put that into the -- to our small language model to continuously breed it so it can get better and better. That's a big investment. Now on top of that, we're building security for AI as a platform, so for users, for employees, for applications, whether they're looking inside or to customers. And both of these, both people and applications using agents. And we're doing the security to the people. We're securing run time. We're doing it, as I said, with Gemini. We're also doing it with Copilot for Microsoft. Now all this is heavy investment. Now Adam is coming in to lead also the commercial side of this. We're hiring the first salespeople to drive this. And we think that it's going to be still a small part of 2026, but each potential for the future. That's one thing. Beyond that, it's also going to feed into our other pillars because by having those foundational models, we also have people that are simulating sort of in what we call the future labs, what these attacks of the future are going to look like. So it's not just the AI pillar. It also feeds into our intelligence, it feeds into our e-mail security it feeds into our endpoint security. And I think over time, the value of real security, real proactive security is going to become more and more important. So at the end of the day, it's a big investor but I think it's essential, and I think it positions us well for what's coming. Kip Meintzer: All right. Next up in place to Keith Bachman is going to be Todd Weller and that will be followed by [indiscernible]. Todd Weller: Just a question on memory pricing. What are you seeing in terms of impact? More importantly, how are you thinking about it kind of going forward over the remainder of this year? And then any kind of additional pricing actions being contemplated? Unknown Executive: So memory pricing continue to inflect to increase. I mean we see this trend continues. As I mean, as for what we are looking at is when I set our revenue -- our product revenues, I talked about it already when we gave the full year guidance. We took into account some disruption from the memory cost, fundamental cost also on the firewall business. Right now, I think it's tough to say if there is anything related to that. I mean we are looking on the final for the second half of the year, we see good finance for firewall. So I mean, tough to say how it will impact right now. I don't know to tell you it impacted the behavior of our customers in terms of buying firewalls buying the clients. But definitely, I can tell you that the memory costs are continued to surge, and I don't see it stop, I mean, in the near term. Kip Meintzer: Next is [indiscernible] with BofA. Unknown Analyst: I keep asking you the same question. I'm going to come back to the same question. You joined the company a few years ago with hope that growth is going to accelerate. You've done many things on sales on products and growth has decelerated instead of accelerating in the sense that we are now at 5% environment. It's just not big enough for such a great space there could not be a better space for you to grow and accelerate revenues -- revenue growth. So the question is, what is not working with the strategy? What is not working? How can you change the growth trajectory to the point that we see double-digit sustainable double-digit growth. And really to synthesize the question, the issue is what is the problem? Meaning, is it about sales execution? Is it about portfolio? Is it about the employee composition and the fact that maybe a culture needs to change. I'm trying to understand -- what do you -- what can you do in order to change the growth trajectory? Unknown Executive: Well, first of all, I totally agree that we couldn't be in a better industry right now. And I think that, like you said, that's why I'm here, and that's what I'm here to do. Look, as we said before, yes, some of it is execution, and that's why we're making these changes that we just spoke about, which are meaningful, hundreds of people, getting new accounts, moving seats, pretty new leaders I think it's essential, giving us a short-term headwind, but I think we'll drive that sustainable growth that you're looking for. At the same time, I do want to say that when you look at the total product portfolio that we have, although it's still not the biggest part of what we do, if you look at the emerging technologies that we have, right, e-mail, CTAM, SASE and hopefully -- and now joining with security for AI, that as [indiscernible], as we spoke about before, is going really, really fast and becoming a bigger piece of what we're doing. So all in all, I think that the vision and the strategy are there, we're making the changes that we need to do. it does take time. And we need to continue course and have the patience to get there because we need to do it with discipline. And that's what we're doing, and it's going to take time. But believe that we're in the right business with the right products. In every one of the pillars that I spoke about, we're also looking at acquisitions. And I believe that when you bake all that together with the leadership that we're putting in place, we'll be in a good place in the future. Kip Meintzer: Next is Joshua Tilton from Wolfe followed by Jonathan Ho of William Blair. Joshua Tilton: I love getting no warning. But with that in mind, I'll take you to one. Maybe one for Roei. Can you just reiterate exactly what you expect in the second half for appliance. I wasn't sure if you said stabilize or recover? And then maybe just talk to kind of the visibility you have or maybe the confidence you have around that view? Unknown Executive: So for the second half of the year, you do expect to see improvement. Right now for the second quarter, we do expect to see a decline sharper decline in the product revenues. But for the third quarter and the fourth quarter, it's going to be gradually. We receive a much better funnel also for the appliances. And we do expect to see improvement there. It doesn't mean that we're going to grow in Q3 and Q4 product revenues. But definitely, we're going to show better performance compared to what we have -- what in -- what we had in Q1 and what's expected for the second quarter [indiscernible] Joshua Tilton: Can you just talk to like what's driving the confidence in that view? Is it just what you see in the funnel? Like any incremental color would be helpful there. Unknown Executive: So we see progress in the -- we see improvement in the [indiscernible] we're looking. We are checking all the time, I mean, these metrics on a week year basis. We see improvement in the final for the second half of the year. We see very nice deals, large deals in the funnel that are progressing. And we -- and again, we are doing these checks. We are doing the discussion with the go-to-market leadership of the world we feel more confident about the second half of the year. We do see the already some nice deals have been we already won over competition, or our competitors, win backs or cloud enterprises. Of course, it's not going to be -- we're not going to see revenues in the second half of the year, but we see some -- these kind of deals being closed and will affect our revenues in the second half of the year. But all of that together put us in much better -- I mean much better view for the second half. Kip Meintzer: Next up is Jonathan Ho, followed by Peter Levine. Jonathan Ho: You referenced some strong growth in your securities for AI solutions, but they're still relatively small contributors. But with that strong pipeline build, particularly in the last couple of weeks, when do you expect AI security to be more of a material contributor? And will this be more sort of stand-alone products or can there be maybe a stronger given the spear type solution where you can land some new customers? So cross-sell within your base versus [indiscernible] Unknown Executive: Yes. Thanks for the question. Look, early innings, right? And I think to become a substantial part of our revenue, that will only happen in -- as a stand-alone that will only happen and it's a big investment. Organizations are going to inevitably even those that are trying to sort of slow down the adoption inevitably need to adopt new AI for their employees, for their applications, et cetera. We're all seeing it in our own personal life. We're seeing it in our businesses, et cetera. but it's a process. And so as a stand-alone business, I think to be substantial to Check Point, 2027. Beyond that, you're right. It's not just the stand-alone. So for example, it's part of our workspace pillar where workspace employee usage is sold as a bundle through our workspace when you look at the infrastructure level, where we spoke about the firewall business, being able to double down on the infrastructure and embed AI in the NVIDIA GPUs. Again, as Roei said, we're only seeing the first links of these projects happening. But as they happen, I think we are gaining advantages. So to answer your question, I think it's both as a standalone and as a contributor to our other pillars. And even to our -- not just as our product is one of the fastest-growing things in security for AI is the AI red teaming, as an example, which is a part of our services business. So it does have an impact on each one of those and as a stand-alone but to be a real impact on our revenue and become a significant part of 2027. Kip Meintzer: All right. Thank you, Jonathan. Next up is Peter Levine, followed by Saket Kalia. Peter Levine: Maybe just to double down. So we last reported mid February, just help us what -- like when do you really see the material impact to the go-to-market strategy? And then maybe help us understand the deals that were impacted are these upsells renewals or like net new deals meeting, what's the level of confidence that if it was net new deals since you're still in the pipeline? Obviously, you talked about stabilization in the second half. But just help us understand like the impact on like where [indiscernible] for? Unknown Executive: I think when we report it back then in February, we were in the middle of deposit. I mean, we are [indiscernible] we started it some time in January, but in the middle of the process. We did expect some kind of disruption back then. But when we looked and after when I -- when we look -- we are looking at February and March, we did see this disruption in our funnel, affecting the funding creation mainly for the second quarter and some for the third quarter, we did see some delays on finance creation. We see that coming with we do see these delays expecting it. And we've seen in the last few weeks, the impact, you see that in the last few years, we do see a significant change in the finance creation. And these delays mainly impact the second half or the first half of the year. And again, there are -- of course, there are several deals that have been pushed from one -- from first half to the second half. It's important to say that renewal business looks stable. We don't see any -- many affected new businesses and in firewall and that's the main change. I mean when we put back -- I mean we are being in the middle of the process. And as Nadav said, today, we are -- I think we are in the last inning, we're almost done with these changes, and we are now more confident what we see for the second half of year. Kip Meintzer: Up next is Saket Kalia, followed by Eric Heath. Saket Kalia: Okay. Great. I want to shift gears a little bit and Roei, maybe the question is for you. The growth in emerging ARR and billings was great to see, 40%, 45%, I think those numbers were. Can you just remind us how big those businesses are in aggregate as a percent of subscription revenue. And then I want to connect that back to some of the go-to-market changes. How can some of the go-to-market changes maybe support growth in those emerging products going forward? Roei Golan: So we don't -- we're not disclosing it, but these specific 3 products are slightly below, I would say, slightly below 30% of our ARR for subscription. So think about that area, the specific 3 products. And Nadav, do you want to talk about [indiscernible] Nadav Zafrir: When you look at the go-to-market adjustments that we've made, it does support exactly what you said, right? We're doubling down investment on these pillars but also integrating our work -- our sales sports together with them. That is when we want to become a multi-pillar organization, we want our account managers to be able not just to do firewalls but also the emerging business. So that's part of the change that we're doing. Beyond that, we need to go to our channels and introduce them to these new products, which some of them are novel to them. So you're right. On the one hand, we need to push these emerging technologies and capabilities faster and we're doing that. But at the same time, we are going to go after new logos, win backs, et cetera, with what I believe is a tailwind of what's happening from the attackers perspective and our capabilities. And at the end of the day, it's obviously the change itself is disruptive. But now I think we're at the tail end of the discussion, as Roei said, we're starting to see the upside but it's never ending. We've got to get the right people. We've got to get the right data. We got to get the right processes. And then again -- but ultimately, it's putting a really big focus on our go-to-market all the way from funnel creation, demand creation, channels, the people, the processes, et cetera. And that's what we're doing. And I think it positions us for the future. Kip Meintzer: All right. Next up is Eric Heath followed by Roger Boyd. Eric Heath: I wanted to come back, I mean, to your comment about M&A. It's been part of the strategy with tuck-ins and you have the balance sheet strength, which is a strong cooper yourself and relatively muted valuations out there, broadly speaking. So just -- anything you can share about more transformational M&A as part of the strategy going forward? Unknown Executive: Yes. Thanks, Eric. So we're looking at this based on our pillar approach, right, which at least in my mind, is very, very clear. What do we want to achieve in the hybrid niche? What do we want to achieve in CTAM, what do we want to achieve in workspace. And in each one of them, our M&A teams are constantly hunting for early-stage start-ups with foundation with technologies that we can take advantage of, but also larger opportunities. And I do think that one, our balance sheet; second, our discipline. And third, the volatility in the market is going to create opportunities for us, and we are going to make those moves when it's strategically within what we want to do in the pillar. We believe that from an execution culture merge -- we have the ability to do it. When all these DUCs are lined up, that's when we're going to make those bigger moves. Kip Meintzer: Next up is Roger Boyd followed by Matthew Hedberg. Roger Boyd: I wanted to come back to emerging products. I think you mentioned 90% growth in CTEM, 40% growth in e-mail. Just any sense on where you are in terms of SASE growth. And to what extent is that business impacted or not impacted by some of the dynamics you're seeing across products and firewall right now? Unknown Executive: Yes. Thank you. So look, SASE has become a fundamental part of the hybrid mesh network security, and we're making really big investments there. We have -- our R&D part is rushing to complete our feature list. We're now able to go upstream to the larger enterprises and creating some differentiated unique capabilities. In terms of the impact, no, I don't think it was impacted by the go-to-market change. I think the go-to-market change primarily affected our core firewall with people moving around. In fact, we're doubling down on our SASE sales capabilities. We joined forces with our CGS, our cloud network security sales force with SASE. So in effect, that we now have a bigger team and more salespeople that can do both. And as this matures, the most important thing for us is to make sure that our general account managers can also be selling SASE and that's sort of the trajectory we're going into. But it is becoming more and more important around our hybrid mesh network security as organizations are moving. And in fact, I think adoption of AI is actually going to make this even more critical. Kip Meintzer: All right. On our last questioner today is going to be Matthew Hedberg. Matthew Hedberg: With all the advancements from some of the AI models and with [indiscernible], I mean it's got to represent an incredible challenge for not only customers, but even for some of your engineers. Like how -- what is the focus internally with keeping up with this rapid change from these frontier models? And like how do we as a secret community adapt to this? Unknown Executive: Yes. Look, I think that's sort of the biggest question that we're all looking at, right? So when you think about it, we're witnessing democratization and industrialization from the attachment side. That's a huge shift. And our networks as they become identified, they really change the nature of the network because if you really want to harness agents, you got to give them the ability to get into different data sets and so that creates different pathways that we haven't seen before. This is not a new shift, but it's accelerating dramatically. And so look, we're preparing for this era for a long time. It's not just about the single model announcement like [indiscernible] and I think we're executing intensively over the past year. I'll give you one example of what sets us apart we have the depth of the research. We have folks in Tel Aviv in Zurich, in San Francisco that are building this foundational model that we're constantly feeding in order to anticipate that future. And again, like I said before, this allows us not just for the latency and accuracy, but also the cost structure. We started working in different verticals like banking, health, energy, with large design partners so that not only we try to anticipate what the attackers are doing, but they also tell us what they are doing in order to optimize their own organizations, irrelevant, not because of cyber, but because how they want to harness these models. And together, we're trying to understand how to security adopt them. One of the things that I I'm very glad to see is that someone like Adam Eli is joining us. And then we're seeing like we're securing Microsoft Copilot. We're securing Gemini at Google. And so you're right. This is a fundamental change. I think at the end of the day, on the one hand, we want to move really fast with AI adoption. On the other hand, we need to use our decades of hardening our environment. so that we can get ahead of the curve before exploits go public. In this case, I think that our IPS signature and WAF rules is best in the industry right now. And so I think it positions us well. I think there are going to be many more models. I think a lot of them are going to become publicly available. And so we're really just seeing the beginning of this on 0 days become 1 day. The time to patch is going to need to accelerate dramatically. This is where we're bringing our CTEM capability. And again, when you put these things together, I really think that we have a proposition to customers that not just going to keep them more safe, but also allow them to do this AI adoption. Having said all that, look, there's a lot of unknown. I want to be very clear about that. Some of the things that we're seeing with these new models is truly a game changer. And so what we're doing in order to try to stay ahead of it is not just to try to see what's happening in the wild, but also to get -- to try to simulate how the attackers are going to take advantage of these tools because the whole attack process, everybody is talking about vulnerabilities, but there are so many other things that we need to be aware of in order to stay ahead of this. In that sense, these are really accelerating time. I think like we said before, this is a good time to be in this industry from a business perspective, but it's also one of the most important times to be in this industry. so that we can keep this digital world running. Kip Meintzer: All right, guys, thank you very much for attending. I'm sure we'll see you guys throughout the quarter, and we'll be speaking to quite a few of you over the next few days. Have a great day, and we'll see you guys soon. Unknown Executive: Bye-bye now. Thank you.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Thryv First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Cameron Lessard, Senior Vice President, Corporate Development and Strategy. Cameron, please go ahead. Cameron Lessard: Good morning, and thank you for joining us for Thryv Holdings First Quarter 2026 Earnings Conference Call. With me today are Joe Walsh, Chairman and Chief Executive Officer; and Paul Rouse, Chief Financial Officer. Before we begin, I'd like to remind you that today's call may contain forward-looking statements, including statements about our business outlook and strategy, future financial results, growth prospects and any other matters that are not historical facts. These statements are subject to risks and uncertainties, and our actual results may differ materially. Please refer to our most recent filings with the SEC for a discussion of factors that could cause our results to differ materially from these forward-looking statements. We do not undertake any obligation to update these statements. In addition, today's discussion will include references to non-GAAP financial measures. Please refer to the press release we issued this morning for a reconciliation of our non-GAAP measures to the most comparable GAAP measures. The press release and accompanying investor presentation are available in the Investor Relations section of our website at investor.thryv.com. With that, I'll turn the call over to Joe Walsh. Joe Walsh: Thank you, Cameron, and good morning, everyone. I will highlight our first quarter results and key trends and hand it over to Paul Rouse to walk you through the numbers, and then Cameron will take you through some of our forward guidance. We had a strong quarter. SaaS revenue of $117 million came in ahead of expectations, and Marketing Services outperformed as well, resulting in total company adjusted EBITDA that beat our guidance. Quality customers now represent 70% of revenue and annualized client spend has eclipsed $4,500. We are now a 70% SaaS revenue company. A few years ago, we were a marketing services business with software on the side. Today, that equation has fully flipped, and it happened because small businesses are telling us through their buying behavior that they need what we offer. The clearest signal of that is Marketing Center, which grew around 30% year-over-year in Q1. Small businesses want to get found online, drive high-quality leads and convert those leads into lasting customer relationships. That's exactly what Marketing Center does, and the growth reflects that fit. It is the centerpiece of our Market, Sell, Grow strategy, and its continued momentum validates that strategy is working. We're also seeing strong results in our upmarket motion, attracting and winning larger small businesses than we've historically served. These are clients with more complexity, more needs and more to spend, and that's showing up directly in our numbers. ARPU grew to $378 a month, up 13% year-over-year with annualized client spend eclipsing $4,500, a direct result of serving higher-caliber clients. And because larger businesses engage more deeply and expand their spend over time and stay longer, the lifetime value of these clients is fundamentally better. You'll remember, we've talked about moving from 4,000 to 8,000 over the next kind of 4 or 5 years. We feel strongly that, that upmarket move is gaining traction at this point. Quality customer count grew 6% year-over-year and now represents 70% of SaaS revenue, up from 62% a year ago. That trajectory tells you the mix shift is working, and it's a dynamic we're leaning into deliberately. I also want to touch on AI because the early results are genuinely encouraging. On prior earnings calls, we shared that we were rolling out a suite of AI-powered capabilities across the platform, and it's validating to come back this quarter and report that the engagement numbers are really strong. AI image generation, AI lead scoring and our AI guided dashboard are all seeing strong early adoption since rollout. AI review responses, our AI website builder and AI caption round out the suite and are performing well, too. These are not features that we are still testing. They're live now. They're being used by clients who are engaging with them. That matters because AI embedded in the daily workflow is what makes Thryv stickier and more valuable over time. We said we were building it, it's built and it's working. In sum, the business is on solid footing. Our core product is growing. Our client base is consistently upgrading toward higher-value relationships and our AI rollout is exceeding early expectations. That's the story of Q1. Now, I'd like to hand it over to Paul Rouse and Cameron to walk you through the numbers and update you on our guidance. Paul Rouse: Thanks, Joe. Let's dive into the numbers. SaaS reported revenue was $116.7 million in the first quarter, representing an increase of 5% year-over-year and exceeding guidance. SaaS adjusted gross margin was 67% and SaaS adjusted EBITDA was $10.8 million in the first quarter, resulting in an adjusted EBITDA margin of 9%. Adjusted gross margin in the first quarter was diluted by the strategic upgrade of our low-margin large digital agency customers from our marketing services base of customers on to SaaS with no change in pricing. Historically, we lacked an upgrade path for these clients with Business Center, but market so grow now provides the motion. With key marketing automations representing a significant upsell opportunity that will drive improved economics over time. This gross margin compression was the primary factor of adjusted EBITDA coming in below guidance for the quarter. We view it as a deliberate near-term investment in a previously underleveraged segment of our customer base. In the first quarter, SaaS ARPU reached $378, an increase of 13% year-over-year. We ended the quarter with 96,000 SaaS subscribers. Seasoned NRR of 93% represents the natural attrition of smaller, lower spend clients, within our base. Importantly, churn among our high-value clients has been trending favorably, underscoring the effectiveness of our client experience initiatives and our confidence in long-term health of the business. Multiproduct adoption continues to accelerate in the first quarter. Clients with 2 or more SaaS products grew to 26,000 or 30% of our base compared to 24,000 or 25% a year ago. Moving over to Marketing Services. First quarter revenue was $50.9 million and above guidance. First quarter Marketing Services adjusted EBITDA was $13.2 million, resulting in an adjusted EBITDA margin of 26%. As anticipated, this performance reflects the natural cadence of our print publication schedule, which is weighed towards the second half of the year from a revenue recognition standpoint. Importantly, this time dynamic has no impact on billings or free cash flow generation as our book-over-book decline patterns have remained consistent and predictable over time. First quarter marketing services billings totaled $54.5 million, down 33% year-over-year, reflecting the intentional shift in our strategy, as we continue to initiate upgrades of legacy digital marketing services products for clients to our SaaS platform. The decline will persist, but at a managed pace. We remain on track to exit marketing services by 2028 with cash flows lasting through 2030, ensuring strong liquidity as we fully transform to a pure-play software business. We ended the first quarter with net debt of $258 million, bringing our leverage ratio to 1.7x. Now, I'll turn the call over to Cameron to walk through the guidance. Cameron Lessard: Thanks, Paul. Let's dive into guidance. For the second quarter, we expect SaaS revenue in the range of $114 million to $115 million. For the full year, we are raising the low end of our SaaS revenue to a range of $463 million to $471 million. For the second quarter, we expect SaaS adjusted EBITDA in a range of $12 million to $13 million. For the full year, we are maintaining SaaS adjusted EBITDA guidance to a range of $70 million to $75 million. For the full year, we are raising our marketing services revenue to be in the range of $157 million to $163 million. For the full year, we are maintaining Marketing Services adjusted EBITDA guidance to a range of $30 million to $35 million. One thing worth keeping in mind as you model the year, Q2 carries a lighter print publication schedule relative to other quarters, which will create some timing variation in EBITDA due to the cadence of revenue recognition. This has no impact on billings or free cash flow and as print volume ramps in the back half of the year, Marketing Services EBITDA will reflect that accordingly. The quarterly phasing is outlined in the investor presentation and the full year range is unchanged. Before we close, I just want to step back for a second. This transformation is working. SaaS is now 70% of our revenue, something that felt like a distant goal not long ago. And as we look towards 2027, we expect to return to overall top line growth. For those of you who have been watching the story and waiting for the other side, we're nearly there. The business is at a genuine inflection point. We're no longer managing around decline. We're leaning into growth, advancing our AI initiatives and building something we're really proud of. We appreciate your continued support and your belief in what we're building. We look forward to updating you next quarter. Thank you. Operator, let's move to questions. Operator: [Operator Instructions] Your first question comes from the line of Scott Berg with Needham & Company. Scott Berg: Joe, I guess first question is, you're talking about your move upmarket that you seem on the SaaS side, at least that you seem to be continually more positive on. Any anecdotal evidence on how many more modules those customers are taking or how much larger the ARPU of your larger kind of customer segment is? I think that would be helpful if you have any details there. Joe Walsh: Sure. Thanks, Scott, for the question. We are moving upmarket. Our overarching plan here is to move our ARPU from $4,000 to $8,000 and we're making steady progress, 13% ARPU growth in the most recent period. As with everything with us, our metrics don't move in a perfect straight line because there's a lot of noise as we continue to transition the old business away. But we're having a lot of success moving upmarket and we're doing it in a few ways. Firstly, and maybe most importantly, we put very sophisticated sales automation in place over the last few years, and we're targeting all of our sales efforts at larger businesses. We literally have a list of who we want you to go and talk to. And what that means is that rather than selling the solopreneur who maybe has $300,000 or $400,000 of annual revenue, we're selling a midsized business that has $1 million of revenue and 12 employees or something. And it makes a big difference for us in terms of retention, their willingness and ability to pay and their ability to buy more from us over time. So, that is actually the big story here is if you look at quality customers, and I know that there's noise in our gross number of customers. And that's because we're transitioning legacy customers and legacy systems as we wind down this gigantic marketing services business, it's bringing over some subscale customers. And sometimes we're able to get those customers moving and engage with software and buying more and heading in the right direction. And sometimes they churn out. And so those -- that process is a little bit noisy, which is why gross numbers haven't been a perfect measure. But if you look at quality customers, it's steadily growing. And ARPU is pretty steadily growing. Again, it bounces around a little bit, but the overall direction is up. So, as far as your question about modules, we're increasingly having more and more success with people buying multiple products from us and becoming stickier. You see that number moving up. And these bigger businesses, a lot of times are coming in bigger to begin with. So, if you look at our new sales velocity, they tend to be bigger. So, you got your finger on the story. It's us moving away from solopreneurs, moving to bigger businesses and all the noise that, that creates, Scott. Scott Berg: Understood. And then Joe, you talked about the engagement story and some of your AI functionalities improving. I think we're all looking for evidence amongst different enterprise software vendors and how customers are leveraging these technologies through these vendors out there today. As you have more experience or your customers have more experience with this functionality, how should we think about the monetization efforts of these going forward? Are you able to monetize any of this functionality separately? Or do you think this is really something that you embed into the core product and we realize some of those financial benefits through just the core pricing maybe improvements over time? Joe Walsh: It's a terrific question. So, that first -- excuse me, the way you finished is, I think, the way we start. And that's that we are massively enhancing the product by putting AI features, by clustering agents around what we're doing so that we can deliver better results, we can dial in people's campaigns. And there's definitely a data moat that builds over time because you get smarter and smarter with their data, with their campaigns and there's a switching cost if someone were to ever leave that. So, I think it helps -- really helps our retention, helps us deliver a better experience with the customer, things -- some things that were harder to do or that they needed to spend time on the software to do can just happen without them even logging in as you move along here. So, I think all of these make the software more attractive, easier to use, will improve retention and improve our ability to get price without having discrete pricing. Now having said that, when I look at our road map of what we're building and what we're doing, I do think that there will be significant monetization opportunities down the road, but we are not going for that at the moment. We're just going for making the product easier to use and more powerful, so that we have stronger retention. Operator: Your next question comes from the line of Arjun Bhatia with William Blair. Alinda Li: This is Alinda Li on for Arjun. Joe, what are the early customer feedbacks from customers on the new AI products? And how are you seeing that in early conversations with prospective customers as well? Joe Walsh: So, I mentioned some of them on the call, things like image generation and review response. Those have been in for a while, and it's just steadily building. People are discovering that when they go to do their social posts, it's just easier to use these tools and so on. So, that's been a steady melt up now for a while and going very well. I think some of the stuff that we're coming out with now is really exciting. We're taking a lot of the key functionality, melding everything together. And we're able now to take a lead, give you a transcript of the lead, grade the lead 1 through 5 based initially on a set of assumptions we make based on the words in the lead, but over time on your own data, dial that in for you. And those people that are using these tools are experiencing quite a bit stronger conversion of leads. No leads are falling through the cracks. So, we've got particularly some of our partners have been taking the lead on that as we've been initially rolling this stuff out in beta and now it's out now, kind of teaching us what's possible with it. So, we're pretty excited about this. We think it's going to be -- make our software easier to use. The dream scenario is that this software helps you efficiently grow a local business without having to log in all the time that gets working in the background for you. And that's the big deal. It's always hard to get the roof or off the roof to get the chiropractor to let go with the patient and go in there and mess with the software. And so, when the tools do it for them, it makes a big, big difference. So that's really -- it's moving it closer to them and making it easier for them to get value. Alinda Li: That's helpful. And last quarter, you talked about the initiative of Market, Sell and Grow. And can you just give us a little bit more update of how that initiative and strategy has been going? I know there's a lot of integration in terms of the Keap automation inside of the Market, Sell and Grow initiative. Can you just give a little bit more color from last quarter? Joe Walsh: Yes. We also, in the last quarter, mentioned the new platform that we're developing. So, at the moment, we have Keap and Marketing Center. We have a method that we're able to deliver the value of both. It's sort of -- I hesitate to say bundle, but it's sort of almost like a bundle where we're using them together. And that's sort of that Market, Sell, Grow footprint of things that we're doing. But the new platform just puts it all together. It's not a bundle, it's not separate. Everything is together and unified. And it's all AI from -- written from the ground up. We basically have rewritten the whole thing. It's been a lot of work to do, but it's incredible. And it's in the hands of some customers right now, and we're dialing, dialing in everything. So -- but Market, Sell, Grow really is -- it's our -- markets are super fast-growing main thrust, which is Marketing Center, which is about efficient growth for local kind of bigger small businesses. And then with Keap, you have what are essentially automations or agentic assistants that help them through the process of responding to leads, if they're busy and they don't follow up right away, it continues to nurture them. And then after a sale is made, it continues to keep that customer warm and stay in touch and create a connection so that the next time they have a need, you get them back. And these are the kinds of things that really genuinely help the small business. These are the tools that they're looking for and that's what Market, Sell, Grow is all about. Operator: Your next question comes from the line of Matt Swanson with RBC. Matthew Swanson: Yes. fantastic. Maybe following up on the question that was just asked, Marketing Center being up 30% is awesome and it clearly shows the success you guys are having with this new go-to-market. Last quarter, I think, Joe, you had mentioned there was some potential for cannibalization just kind of as you shift the focus. Can you just give kind of an update on that, I guess? And just how that 30% growth in Marketing Center will kind of increasingly be reflected in your overall growth rates as maybe some of these other headwinds get offset? Joe Walsh: Yes. I mean I think over time, that is the company is, we're replacing the current Marketing Center platform with a new one very soon. And the new one has Keap fully integrated and is written from the ground up with Agentic tools everywhere and an NCP layer on it. So, I mean, it's very, very cool. But yes, our sales organization and our customer base see the power and results of Marketing Center, and that's the center of gravity for the company. Everything is moving in that direction. And so, the sales reps are not as much running around out there trying to sell stand-alone Keap or stand-alone business center. Everything is driving towards this Market, Sell, Grow platform. Everything is driving toward Marketing Center, particularly the new one. So, your read on it is right. And everything is driving up market. So, if you think about our business, if I were to look at it from the outside, I would look at the quality customer progress and the way that's moving up, and I would look at Marketing Center as really the company and look at those, and I'd put my projections in my ruler on the progress there. We're not going to be building Keap out in the future as a separate thing. We're bringing the powerful unbelievably good functionality it has inside of the main try offering. And similarly, we really are not adding a lot of new business centers. The sales rep when presented with the choice of selling a business center or Marketing Center, all the rapid development, a lot of the heat and light are on Marketing Center. So, that's really what they're selling. So, I think you got to -- I'm reading in the way you asked the question that you haven't figured out. Matthew Swanson: All right. That's good to hear. Another -- the quality SaaS client bar chart in the deck, I think it's also telling a pretty compelling story. Could you just give us some context from like a product standpoint of what that $400 threshold looks like, if that makes sense? Just kind of like what is the customer spending $400? What does that mean from a product standpoint? Joe Walsh: Yes. We've got a bunch of extensions or add-ons that are beginning to sell really well. You will know we control a pretty big part of the kind of marketing universe and there's a -- for small businesses, there's a battle for them out there. When they look at getting customers, there are 2 giant trolls standing between them and their customer, Google and Facebook. And those leads are super expensive. I mean they're very, very efficient at monetizing those leads. And so, when you talk with particularly service type businesses, they're like, is there some way I can get leads around Google or around Facebook, like not have to go to them. And so, think about all the directories we control around the world in Australia and New Zealand and the U.S., we control these big directory sites. And then we've built a network of other directory type sites, whether it's Nextdoor and Yelp and Citi Search and all these other site and we have that all network together. So, we have a pretty significant amount of non-Google traffic that we are able to source. And we've packaged these really cool kind of growth packages together that we're able to sell to customers. And in an age of AI answer engines, they're having renewed buoyancy because the AI answer engine doesn't look it up in Google and then give it to you. It goes out and searches the stuff itself directly. And so when you look at a yp.com fence contractor in Tupelo, Mississippi, that's been on our site for 17 years, they look at that as solid authoritative content that answers the query that you put in, and it delivers that answer. And so, it's pretty cool. So, anyway, back to your question, we've got add-ons where we're drawing from who we've been in the past and pulling all that together. And that's working great because not only are we helping you measure your marketing, but we're helping you do some of it, too. Operator: Your next question comes from the line of Jason Kreyer with Craig-Hallum Capital Group. Jason Kreyer: Joe, can you just maybe step back and talk about the sales motion and the difference between the upmarket clients and those at the low end? And then how do you position the sales team to be in the right place to capitalize on the upsell opportunity? Joe Walsh: Yes. Great question. So, look, we -- job one for us is to wind down the old Directory business. So, every morning we get up, that's the first thing we got to do because we've got this big business, and it's got some legacy technology and legacy processes and systems, and we're winding that business down. And in so doing, we're variabilizing and collapsing that legacy cost structure down. And we're good at this. We're doing it every day. But to do it, a lot of times, we've got customers that are sitting out there on legacy platforms or legacy tools that we need to move off of those in order to shut them down and turn them off. And the upgrade over to our modern stack is phenomenal for them. But there's communication involved. There's a lot we have to do. So, that eats up some of our time. And it does bring over some subscale customers. There are some customers over there that are just solopreneurs or very small businesses that may not be our perfect ICP. That's why you see noise in the gross client number because we brought over some unnatural SaaS customers. And some of them we were able to talk to them and get them moving and they buy more stuff and they say, "Hey, this stuff is really cool, and they become a good source. Others are like, no, it really is not for me. I was just trying to buy listings in a phone book or something. So, that takes some of our time. When we go outside and start prospecting, we, both through our marketing and through our excellent sales force, we're deploying them against a targeted list of our ideal clients. And so, to think about it this way, the HVAC company that has 4 or 5 trucks on the road would be our target versus the guy who works -- his wife runs the office and he does it and his brother-in-law helps him in the summer. That had -- the total company has got like $400,000 of revenue. That's not our target. We're not really going and looking for that guy. We're putting our sales energy against selling the bigger ones that maybe have $1 million of revenue, or $1.2 million or $1.3 million of revenue because they tend to be much stickier and they tend to have a willingness to pay and an ability to buy more stuff over time. And I would say, Jason, if I'm really honest, in this journey. If you could go back and maybe change things or whatever, when we first started our software business, we pretty much would sell anybody who would talk to us. And that gave us a lot of experience because when we studied our customer base, we found that the very, very smallest ones were churnier and the bigger ones were steadier. And that's just a better way to build our business. And now we've spent a lot of time developing Marketing Center for those larger guys, for those bigger businesses. And we brought in Sean Wechter from Boomi, and we've become really good at integrating with other software tools. And so, if you're on ServiceTitan or you're on, I don't know, some other big CRM tool and you need your marketing cared for, we are interconnecting and working well with those tools. So, that was maybe more than you wanted, but gives you some sense of where we're spending our time and how we're focusing. Jason Kreyer: Yes. No, that's good. I do have a follow-up. Maybe this is for Paul, but just trying to get a sense of the trajectory on both the customer count and the dollar retention figures. Just if you have any insights into, are we stabilizing now when those things can start to peak up in the next few quarters? Joe Walsh: I'll tell you what, I'm going to share this answer with Cameron. Cameron is my data expert. So, I'm going to get him involved here. Look, we sort of guided you guys directionally that we would probably be about flattish to maybe down slightly for the year as some of the conversions that we made over the last year or so stick and some didn't. And now the sales that we're making, each sale that we're replacing them with are much larger. So, in some cases, 2 leave and then 1 new coming in is as big as the 2 that left. So, there's a little bit of just qualitation going on, if you will. But let me let Cameron assist with the answer a little bit. Cam? Cameron Lessard: That's right, Joe. So, Jason, what you're seeing in the overall customer count is that effect. You're adding larger customers and losing the subscale customers. So, I think we expect that to stay flat starting from the beginning of the year to the end of the year. On the seasoned NRR metric, that will probably stay around the same range as well. You are losing some subscale customers, and that will weigh on that. But I think if you step back and look at what we've done over the past 12 months, our overall churn has trended in the right direction on the overall customer base, and that will be reflected in the season base overtime. And our quality customers, roughly 70% of the revenue, they have excellent retention as of right now. So, that will start to trend NRR in the right direction as you move out. And so, we want to make sure that we keep those quality customers having the best client experience and making sure that retention stays strong. So overall, I think you won't see a lot of big changes in those metrics throughout the year. So, I would just forecast relative flatness. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings. Welcome to the USA TODAY Company Q1 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Matt Esposito, Head of Investor Relations. You may begin. Matthew Esposito: Thank you. Good morning, everyone, and thank you for joining our call today to discuss USA TODAY Company's First quarter 2026 financial results. Presenting on today's call will be Mike Reed, Chairman and Chief Executive Officer; Trisha Gosser, Chief Financial Officer; and Kristin Roberts, President of USA TODAY Media. If you navigate to the USA TODAY Company website, you will find that we have posted an earnings supplement in addition to our earlier press release. We will be referencing it today on the call as it provides you with additional detail on this quarter's performance. Before we begin, please let me remind you that this call is being recorded. In addition, certain statements made during this call are or may be deemed to be forward-looking statements as defined under the U.S. federal securities laws, including those with respect to future results and events and are based upon current expectations. These statements involve risks and uncertainties that may cause actual results and events to differ materially from those discussed today. We encourage you to read the cautionary statement regarding forward-looking statements in the earnings supplement as well as the risk factors described in our filings made with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update or correct any of the forward-looking statements made during this call. Please keep in mind all comparisons are on a year-over-year basis unless otherwise noted. In addition, we will be discussing non-GAAP financial information during the call, including same-store revenues, free cash flow, total adjusted EBITDA, total adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin and adjusted net income attributable to USA TODAY Company. You can find reconciliations of our non-GAAP measures to the most comparable U.S. GAAP measures in the earnings supplement. Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of offer to purchase any USA TODAY Company securities. The webcast and audio cast are copyrighted material of USA TODAY Company and may not be duplicated, reproduced or rebroadcasted without our prior written consent. With that, I would like to turn the call over to Mike Reed, Chairman and CEO of USA TODAY Company. Michael Reed: Thank you, Matt. Good morning, and thanks to all of you for joining our first quarter earnings call. I am pleased to report that we had an excellent start to the year. In our last call, we laid out our expected path to growth. A critical part of that strategy is improving total revenue trends through digital revenue growth. And in Q1, we saw meaningful progress on both fronts. As you will hear throughout the call this morning, our momentum continues to build, and we believe our first quarter results have set the tone for a promising 2026. Year-over-year, total revenue trends were a bright spot in the quarter, with same-store declines improving to less than 2%, representing our strongest performance in 4 years. This improvement was driven by a return to year-over-year growth in digital-only subscription revenues and continued contributions from our AI partnership agreements. As a result, total digital revenues increased 5% on a same-store basis versus Q1 of last year and accounted for 48% of total revenues, representing an all-time high. In addition to our top line momentum, we drove a marked improvement across several key financial metrics in Q1. Adjusted EBITDA increased 45% year-over-year. Net income increased $27 million over the prior year period. First lien net leverage decreased to 2.3x and we generated positive free cash flow in the quarter. Overall, we believe our strong execution against our most important strategic actions is leading to the results we had anticipated. And therefore, we are reaffirming our full year business outlook. Now with that, I would like to review the operational highlights from the first quarter. Our digital strategy continues to focus on our large organic audience, deepening engagement and improving the revenue of each digital user on our platform. In the first quarter, we continued to attract one of the largest digital audiences in the media industry with 180 million average monthly unique visitors coming to our platforms, which is up slightly from 179 million in Q4. That scale, combined with our ability to stay closely aligned with our readers' preferences, drove 1.4 billion total page views per month across our digital platforms at Newsquest and USA TODAY Media. We believe our large and highly engaged audience positions us well to accelerate total digital revenue growth through highly diversified and predictable revenue streams. One area worth highlighting is our digital-only subscription business. In the first quarter, digital-only subscription revenue returned to year-over-year growth and recorded its third consecutive quarter of sequential growth. We also saw continued strength in digital-only ARPU, reaching a new high and growing 43% year-over-year and 5% sequentially. Regarding digital-only subscription volumes, we are starting to see signs of stabilization. Our start-to-stop ratio is quickly approaching parity, an important inflection point, and as we sustain that trajectory, it sets the stage for sequential volume growth over time. Overall, we feel really good about the progress we have made in our subscription journey. Digital-only ARPU continues to grow, and we expect that momentum to carry through the year. Volumes are stabilizing with a return to sequential growth expected in the next few quarters, and we expect digital-only subscription revenue to continue growing on a year-over-year basis. Now with that, I'll turn the call to Kristin to outline some of the exciting initiatives underway to drive monetization through the expansion of our content experiences and product portfolio. Kristin? Kristin Roberts: Thank you, Mike. USA TODAY Media continues to lead as an organization that prioritizes its audience, experiments with purpose and intent and delivers content that is both relevant and essential. And we're seeing that reflected in our scale as we continue to reach one of the largest digital audiences among content creators in the country. Two verticals that continue to reinforce our position as a leading media organization are sports and entertainment. In sports, we recently expanded our High School Sports hub into 12 additional markets, bringing our total footprint to 35 markets nationwide. These hubs deepen our connection with local communities while enabling us to scale high-impact, locally relevant content that drives audience growth and attracts premium sponsorship opportunities. High School Sports also underscores a key differentiator for us, the ability to follow an athlete throughout their entire career from high school and clubs to college and into professional sports. That continuity allows us to engage fans earlier, sustain engagement over time and drive stronger monetization. In Q1, we also launched our USA TODAY soccer hub, bringing together our domestic and international soccer coverage into a single cohesive destination. We believe this creates a more immersive experience for fans, supports higher time spent on platform and better positions us to capture both audience and advertiser demand, especially as we move into the 2026 World Cup cycle. Our entertainment team also rolled out an exciting initiative in Q1, with the USA TODAY Style Meter. Aligned with the Oscars, Style Meter created a fashion-forward way for audiences to engage by rating red carpet looks through an interactive voting experience. As a result, this feature was part of a strong Oscar season that generated approximately 20 million page views. That's up more than 5% year-over-year. Experiences like Style Meter helped deepen our connection with audiences around key cultural moments while creating incremental e-commerce opportunities. They also opened the door for additional engagement and visibility during high interest events, such as the Met Gala next month. Shifting to our digital-only subscription business. As Mike mentioned, we made meaningful progress in Q1 with digital-only subscription revenues returning to year-over-year growth and marking the third consecutive quarter of sequential growth. As we move through 2026, we will continue to evolve how we monetize our audience with a more deliberate approach in how and where we introduce subscription opportunities across the platform. This comes with an intentional trade-off in page views, but over time, we expect to expand digital revenue per user and ultimately maximize monetization across the customer journey. On that note, we're encouraged by the strong performance in digital-only ARPU in Q1. Moving forward, we believe there is meaningful upside ahead through additional pricing power and stacked products. Introduced late last year, stacking represents a foundational step in our shift toward a more flexible, value-driven subscription model. It provides subscribers with greater flexibility by enabling them to combine complementary offerings such as USA TODAY Play and local publications, into a single tailored experience. As our digital users adopt a more personalized mix, we expect to see increased engagement, improved retention and higher overall revenue contribution relative to single product subscribers. Importantly, second is already showing meaningful potential with digital subscribers who add a second product to their bundle, demonstrating a 20-point improvement in pay-up rates versus single product subscribers. In other words, these users are significantly more likely to choose a paid premium offering rather than remain on free or promotional access. As a result, we view stacked products as a powerful lever to drive continued growth in digital-only subscription revenue, especially as we add more products to the stack this year and next, including Golfweek. We have also moved into a phase of disciplined experimentation focused on monetizing consumers' engagement on their terms. Rather than forcing a single subscription model, we're testing multiple pathways that align with different levels of interest and commitment. This includes a range of pathways from free access to registration and from article level purchases to broader topic or season-based offerings. A clear example is the introduction of our first limited series and single payment subscription offering around the Kentucky Derby, which delivers a 90-day premium event-driven experience. This USA TODAY front aggregates high-intent content, including live race updates, fashion and culture coverage and exclusive on-site reporting within a premium advertising environment designed for both dedicated fans and casual audiences. More broadly, this initiative represents a key step in developing a limited series product model, enabling us to package existing network content into premium time-bound offerings. We believe this approach will drive incremental engagement, first-party data and monetization around major tentpole events, including the World Cup. To recap, our progress in the first quarter was a team effort. I want to express my sincere gratitude to the entire team. We have important work ahead of us to sustain this momentum, but we are executing on our strategy to expand our content and product portfolio, amplify our journalism and drive diversified revenue streams. Back to you, Mike. Michael Reed: Thanks, Kristin. It's encouraging to see these initiatives taking shape, and we believe they will strengthen engagement and enhance monetization across our platform. And as Kristin detailed, through the experiences we're creating and the introduction of more modern payment methods, we are driving registrations and expanding our known user base, which grows our first-party database and over time, should support higher CPMs across our advertising business. At the same time, we are increasingly leveraging AI-driven personalization, combining dynamic paywall decisioning with personalized [ 4U ] placements on the homepage to deliver the right content and subscription prompts to the right users at the right time while balancing engagement, advertising and subscriber growth. These capabilities allow us to translate user behavior signals in real time and surface more relevant offers to audiences with a higher propensity to convert. Now this is a good segue into AI. Over the past 18 months, we have positioned ourselves as a trusted content provider while building the capabilities to act quickly as opportunities emerge. We are doing this through valued and unique content creation on a daily basis at scale, digitizing more of our very large archived content base and deploying blocking technology on our platform to prevent unauthorized use of our valuable content. We have been at the forefront for our industry in terms of putting together licensing deals, and we see this as a continued significant future growth opportunity. Our existing AI agreements, such as with Meta and Microsoft, had a notable impact on our Q1 results, and we continue to maintain an active pipeline across the AI ecosystem, including foundational model providers, start-ups and emerging licensing platforms. As a result, we expect this category to contribute meaningfully to our growth over time. We expect these deals to be lumpy in nature. But when you step back and take a longer term view, this opportunity remains significant. Now turning to LocaliQ. While the return to growth has been slower than anticipated, this business remains an important solution for our advertisers, and we believe having it as a part of our portfolio allows us to capture a broader share of advertising spend across our media platform. The foundational actions we have put in place to shift from a traditional search agency business to a results-driven approach are beginning to take hold, and we can see that progress. As we diversify search, we are expanding higher growth areas like our social offerings, our owned inventory and targeted e-mail, while also deepening CRM integrations. We continue to make Dash a more comprehensive AI-powered platform that helps customers turn more leads into paying customers faster. We are encouraged by the progress and expect these initiatives to improve our revenue trends and position this business for growth in the second half of the year. I'd now like to turn the call over to Trisha to provide additional details and color around our 2026 first quarter financials. Trisha? Trisha Gosser: Thank you, Mike. Good morning, everyone. Please keep in mind, all comparisons are on a year-over-year basis unless otherwise noted. As Mike mentioned, we're very pleased by our business momentum and the progress we made in the first quarter, which is evident in our financial results. In the first quarter, total revenues were $548.5 million, a decrease of 4% or 1.8% on a same-store basis. This represents a same-store improvement of 210 basis points over Q4 and is the second consecutive quarter of top line trend improvement. The strength in total revenues was primarily driven by the expansion of our digital revenues, which delivered solid growth compared to the prior year. Total adjusted EBITDA was $73.1 million in the first quarter, an increase of 44.7% or $22.6 million. Total adjusted EBITDA margin expanded to 13.3% in Q1 compared to 8.8% in the prior year quarter. The growth in total adjusted EBITDA was driven by the improving revenue trends, the impact of the 2025 cost reduction program, along with ongoing cost discipline and the continued execution against our operational priorities. Expense management remains a critical priority. And in the first quarter, we drove an 8.8% reduction in operating costs and SG&A expenses compared to the prior year. Total digital revenues in the first quarter were $261.9 million, up 5.2% on a same-store basis, representing the second consecutive quarter of growth. In the first quarter, total digital revenues accounted for 47.8% of total revenues, an increase of 400 basis points compared to the prior year. Digital advertising revenues decreased 3% in Q1 due to some softness in page views and programmatic revenue. That said, we delivered our strongest quarter of new digital business signings in Q1, which combined with stabilizing retention trends, is expected to drive a notable improvement in our Q2 digital advertising and digital marketing services revenue trends. Page views were down modestly year-over-year, primarily on our local sites. This was driven by lower referrals from Google Discover as well as the deliberate actions we've taken to increase paywall encounters and shift traffic toward higher-value monetizable experiences. As a result, we're seeing improved conversion rates and believe this is the right trade-off as we optimize for revenue per user rather than raw traffic volume. Digital-only subscription revenues totaled $45.9 million in the first quarter, up 6.2% year-over-year and marks the third consecutive quarter of sequential growth. Digital-only subscription volumes continue to reflect the intentional actions to optimize sustainable and predictable profitability by prioritizing long-term monetization over short-term volume. Volume decline slowed in Q1 with new starts approaching parity with stops late in the quarter, indicating stabilization and a potential return to volume growth. In Q1, digital-only ARPU also reached a record high of $10.30, up 42.7% year-over-year. In the first quarter, our digital other revenues, which includes digital content syndication, affiliate content and AI partnerships and licensing revenues, grew 125.6% or $18.8 million. As we noted last quarter, we expect variability in timing and recognition given the structure of these agreements, with Q1 reflecting a strong contribution. We continue to optimize our print and commercial business. And in Q1, print and commercial revenue trends were largely unchanged from Q4 on a same-store basis, and our results reflect the shuttering of a substantial advertising mailer whose closure had no impact on total adjusted EBITDA. Turning to the USA TODAY Media segment. Segment adjusted EBITDA totaled $59.5 million, increasing 89.9%, while segment adjusted EBITDA margin expanded 720 basis points to 14.3%. For Q1, total revenues decreased 5.4%, representing an improvement of 180 basis points from Q4 sequentially. Turning to the Newsquest segment. Total revenues in the first quarter were $59.8 million, up 7%, representing the fourth consecutive quarter of revenue growth. In the first quarter, segment adjusted EBITDA was $14.9 million, up 6.6%, while segment adjusted EBITDA margin totaled 24.9%. And looking at our LocaliQ segment, for Q1, core platform revenue totaled $99.3 million. Segment adjusted EBITDA totaled $6.8 million and reflected the inherent seasonality associated with the first quarter in our LocaliQ business. We ended the quarter with approximately 11,900 core platform average customer count and core platform ARPU remained near record highs at approximately $2,800. Let's now turn to the balance sheets. At the end of the first quarter, our cash balance was $85.2 million and net debt stood at $903.1 million. Free cash flow in the first quarter totaled $6.4 million, and we ended Q1 with $988.3 million of total debt, reflecting $4 million of total debt paydown in the quarter, which combined with our strong total adjusted EBITDA growth, further reduced our first lien net leverage by 12% to 2.3x. On the bottom line, net income totaled $19.9 million, up $27.2 million or 371.3%. As we look forward to the second quarter, we expect to largely sustain the top line momentum with total revenue figures and same-store revenue trends remaining largely in line with Q1. We believe our strong new business activity, combined with stabilizing retention trends, continued growth in digital-only subscription revenue and year-over-year growth in digital other, supports ongoing digital revenue growth. With respect to total adjusted EBITDA, we expect continued year-over-year growth in Q2, though at a notably more moderate pace than Q1. Adjusted EBITDA in Q2 will be impacted by the mix of digital revenue with a higher contribution of DMS revenue and a lower contribution of licensing revenue. We view Q2 as a continuation of the progress we made in Q1, along with significantly higher free cash flow generation quarter-over-quarter. We are reaffirming our full year 2026 business outlook and remain confident in delivering year-over-year free cash flow and profit growth on the back of improving revenue performance. Overall, I'm very excited about the progress achieved through the first quarter. The start of 2026 was successful from both an operational and financial perspective, and we are entering the second quarter with a great deal of optimism. I will now hand it back to the operator for questions, and then we will go back to Mike for some closing thoughts. Operator: [Operator Instructions] Your first question for today is from Giuliano Bologna with Compass Point. Giuliano Anderes-Bologna: Congratulations on the impressive results in the first quarter. As a first question, it seems like you're making very strong progress, especially early in the year, and it's great to see the outlook reiterated. I'm curious if there are any specific drivers that we should be focused on that are driving the results early in the year and how sustainable a lot of those drivers are throughout the year? I'm thinking about the AI potential deals and other things around that, that are obviously great positive contributors at this point? Michael Reed: Yes. Giuliano, thank you. Yes, the -- there is a -- there are a lot of drivers in the first quarter and then there are -- and those are sustainable not only this year, but throughout the coming years. We have -- licensing deals were definitely strong in the first quarter following a strong fourth quarter. And on top of that, their digital subscription revenues have really turned the corner and were a strong performer in the first quarter. Obviously, we expect that to continue not only this year, but for years to come. And our affiliate revenue has really started to turn and grow as well, which is also captured in that digital other category. And we feel really good about the progress we're making on the audience side in terms of engagement, which leads to digital advertising growth. And finally, we feel good about the progress we're making underneath the DMS business, which will also lead to growth in the back half of the year soon. When we look out over the rest of this year, Giuliano, we see all those factors contributing to digital revenue growth, starting with DMS, digital advertising, digital subscription and then digital other with contributions from both licensing and from affiliate revenue. So all of those will be contributors. Giuliano Anderes-Bologna: That's very helpful. And then there's obviously been a lot of progress when it comes to AI licensing deals. I'm curious where things stand in terms of the opportunity set that's still out there and the potential for more transactions or more deals on that front? Michael Reed: Yes, Giuliano, we think there's a lot of opportunity for more deals. As I mentioned on the last call, and I'll say again on this call, it's hard to predict the timing of those deals, so they will be a bit lumpy. However, we are taking all of the appropriate actions in our view, which start with creating really unique, at scale, valuable content every single day, combine that with we're digitizing more and more of our archived content so that we have a larger offering of archived content. And then finally, we're blocking those that don't have licensing deals with us from being able to scrape our content. So creating new content at scale, blocking those that want to scrape and then digitizing more of our archived content, we think make us one of -- probably the premier news media company for AI tech companies to partner with. There are a lot of big companies out there, as you all know, that we have not partnered with yet. We have ongoing conversations with many of them. There are also new entrants and new marketplaces coming on board. So this opportunity is really massive in our view. We're taking a long-term approach rather than near term because in the very near term, it's a little bit lumpy or unpredictable. But over the long term, lots of opportunity. We think we're the premier partner, and we're doing, we think, all the right things to make sure that we are the right partner for those companies. Giuliano Anderes-Bologna: That's very helpful. And there's obviously a great improvement when it comes to your EBITDA margin as well. And I'm curious if there's still any opportunities on the cost side to continue working on your cost structure and other cost improvements around the company? Trisha Gosser: Yes, absolutely. Giuliano, it's Trisha. We think there is opportunity there. We were very smart in the way that we addressed costs last year, took $100 million out of the business. And I think you can see that we're still improving our revenue trends at a pretty good clip even with those expenses coming out of the business. And we'd look to be balanced and thoughtful in how we do it going forward. We're always optimizing our costs around our print infrastructure. We'll continue to do that. You've heard us talk about changes that we're making to our delivery structure, for example. We'll continue to explore those type of things. The other things, we are seeing efficiencies, whether it comes from things like AI licensing or using vendors and partners, outsourced vendors. We're getting efficiencies within the organization. I think more so, those will eventually drive revenue upside for us, but they should also help us manage costs like software or outsourcing with our partners as well. So I would say, yes, long answer, but yes, we have the opportunity to continue to manage our expenses. You saw it in Q1, you'll see it for the rest of the year as well. Giuliano Anderes-Bologna: That's very helpful. And then maybe one final one. I'm just curious if there's any update or changes to kind of the timing or process around litigation and if you have any opinion around that? Michael Reed: Yes. No changes. Obviously, we remain very optimistic there. The next big things are really the -- outside of our case, the DOJ case, we expect the remedies to be ruled on by the judge here any day now. And then that would, we think then lead to the state of Texas's case going to trial probably within 60 days after the remedies ruling. And then with regard to our case specifically, the next big milestones are the judge ruling on Google summary judgment filing, which we expect in the next few months and then a trial date being set, which we expect for either late this year or early next year. Giuliano Anderes-Bologna: That's very helpful. Operator: Your next question is from Matt Condon with Citizens. Matthew Condon: My first one is just on the DMS side of the business. You obviously are seeing some underlying trends that give you confidence in the acceleration of growth in the back half of this year. Can you maybe just dig in on what a few of those catalysts or products that should drive that growth in the back half of this year are? Trisha Gosser: Matt, it's Trisha. Thanks for the question. Yes, we see a lot of promise in our DMS business. I think the first big thing to point out is that it's a product that our advertisers really view as a critical component of their marketing spend. And so we think that having it as part of our portfolio really allows us to capture more dollars across the advertising ecosystem, including on our own platforms. So the things that we've done over the past year or so, things like integrating CRMs, leveraging AI search capabilities with Google on the platform, as well as bringing our own inventory or our owned and operated inventory into the Local IQ platform, really gives us confidence that we can continue to grow our customer account in our business. I think one of the things that we've seen is that we're maintaining near record high ARPU at about $2,800. And so our customers are seeing a lot of value in what we're providing to them. Now the work is really about growing our client count. And the other thing I would highlight is that we're continuing to invest in Dash, which is our AI-driven platform, which allows our customers to address their leads and turn those leads into revenue much faster. As we build out capabilities on that platform, build out CRM-type solutions on that platform, we are finding that customers are stickier, and we should see that play out in our results as well. Michael Reed: Matt, I would add one thing, too, and Trisha mentioned this in her remarks before the Q&A. Both in our O&O on the media side as well as DMS in the first quarter, we saw really nice increases in new client count, but also in budgeted spend with us. And so what we saw specifically in the DMS business that we're referring to that give us a lot of confidence in outward look on revenue trends, a leading indicator for us is the budgeted spend from all of our clients. And we saw a really significant uptick every single month from January through April here, now that we're at the end of April. So the underlying work we're doing, improving retention and becoming stickier with the clients and leading to bigger budgeted spend with us, has all materialized here in the first 4 months of the year. So we're pretty excited about what we're seeing underneath and expect that to really show up in the financials in the back half of the year. Matthew Condon: That's helpful color. Maybe another question just on AI licensing. I think this is a big question is just the sustainability of AI licensing revenue going forward. Specifically, if you have lots of your content archived and used to train these models, on a go-forward basis, just how do you think about the sustainability of that revenue trend? Obviously, there needs to be the refresh of the new content that comes on. Do the value of those contracts go down over time? Again, obviously, it was a key driver in the quarter. I think people are just trying to wrap their minds around just how sustainable that is going forward? Michael Reed: Yes. No, I don't think that they go down. I think they go up. I think the real value in the content we produce is we produce it at scale and it's unique and it's valuable and it's new every single day. And you're right, these models and all of the AI programs out there, products out there need to be refreshed and updated on an ongoing basis. So I actually think the real-time content on a go-forward basis is much more valuable than the archived content, which theoretically can be used one time to train a model. So I actually think that the value of our licensing agreements will grow over time. We are expanding the amount of content we have that is digitized in our archives, which hasn't been available for training. So we think that's also an opportunity for more revenue, but the real value in our eyes is the ongoing kind of new content we create every day. And we're in a lead position because we create more content than most anybody, and it's unique, right, because of the local aspect. So where we feel really good about the sustainability and the ability to grow the AI licensing category over the long-term. Matthew Condon: That's very helpful. And then maybe just a final one. On digital advertising, it sounds like there were some contracts that were signed in the quarter that just give you confidence that, that can accelerate here or improve in 2Q. Maybe just to dig in on just the underlying trends that are going on in digital advertising, what happened in the quarter? And what are the improvements that are taking place under the hood? Kristin Roberts: [indiscernible] Trisha Gosser: Sure, Trisha -- Yes, go ahead Kristin. You can take this. Kristin Roberts: Sure. I'd say that the impact that we're seeing in digital advertising, it has something to do with AI overviews, but it's been much more muted than what much of the industry has been reporting. That said, we have always expected some headwinds in this category in digital advertising, and we've been prepping for it, Matt. I think what's more impactful in Q1 for us has been the shift in Google Discover, and that's been surfacing less local content this quarter. So when we look at these numbers, we expect Google to recalibrate over time, but it does reinforce the point that we've been making for a while now, which is the importance of reducing our reliance on any single traffic source. And a good -- I'd say a good illustration of this was our coverage this weekend of the White House correspondent dinner event. Roughly half of our audience came to us from search referrals, but the other half came from direct visits and social and e-mail and other referral sources. And that indicates that we are building that direct relationship with the audience, and that has been our deliberate focus. We also have the ability to turn the dial a little bit from programmatic revenue to subscription revenue in local, especially now that we have a more profitable subscription strategy. And as we layer in these new AI-driven smart tech insights, new tools, we can really target the right user at the right time with an offer that makes sense for that person, and we can choose to turn the dial more towards subscription. So that's the value of having an audience and a portfolio like ours. We're not overly reliant on any one source of traffic or any one revenue stream for revenue growth. And when you look out longer term, you can see this model gives us the opportunity for more significant overall digital revenue growth of our data and our insights, and importantly, our orchestration capabilities mature, and that includes our digital advertising. I hope that helps. Matthew Condon: Very helpful. Operator: Your next question for today is from Barton Crockett with Rosenblatt. Barton Crockett: I wanted to just drill in a little bit more into the Google Discover thing that you were talking about. And just to be clear, you're saying that this is not related to AI overviews. This is a separate mechanism? I just want to be clear on that. And then could you give us a little bit more kind of quantification of how much of an impact this had? And given that it seems to be like a choice that Google has made, I mean, what can you do about it? Kristin Roberts: I'm happy to take that, Barton, and it's nice to hear from you. Google Discover and the AI overviews are separate issues for us. And so AI overviews have had an impact primarily in local, but not uniformly. Google Discover also has seen -- also is surfacing less of our local content. But what we've been seeing over the course of Q1 has been sort of a new norm. So we've begun to see some calibration, some normalization in what we're seeing from Google. The impact varies. It varies by market, depending on market size, on total number of audience we already have. It also varies between local and USA TODAY. And it is why we have begun moving and shifting our content-related resources to things that we see working in real time. So for example, there are some content categories that continue to overperform for us, whether they're overperforming on local page views or for geo-neutral audience, we are shifting resources to those places. And you can see the impact of that both in local and the USA TODAY. So for example, for local, the things that continue to work for us are obviously sports, from high school all the way through college and pro sports. Also breaking news, also local opinions, these are content categories for us in addition to service journalism that continue to drive significant audience for us. And so we're leaning into those places. And where we see content categories that are not working or not appearing in Google Discover, for example, we are shifting those resources to develop a kind of exclusive and distinctive content that Mike just referenced in his answer to what is the future value of AI deals. Right? On USA TODAY, what we're seeing is we have ongoing ability to drive significant audience via Google, right? And that is around content categories that we have a right to win, where we are, if not the dominant player, in contention to be the dominant player. So think about sports, think about entertainment, again, think about breaking news and think about lifestyle. These are content categories for us that continue to drive significant audience. And it's the reason why, according to Comscore, we are still serving the largest audience in America among content creators. The other piece that I will just throw in here before giving you the mic back Barton is, that video is increasingly driving audience for us, especially on USA TODAY. And so we took a deliberate step last year to begin expanding our catalog of video content, and that's paying off now as Google begins to shift what it is surfacing. Barton Crockett: Okay. And then Mike, I don't know if there's anything to say on this question, but as you guys are aware, a Google executive made a blog post earlier this year about presumably in response to some U.K. proceedings about being open to separating the search crawl from the AI crawl, allowing people essentially to opt out, which presumably would, maybe that happened would give you leverage. Has there been any advancement on that front? Or is there anything happening in the U.K.? Any developments there? Or is that just kind of a post and then follow through? Michael Reed: Yes. No, Barton. To state the obvious, Barton, we're very supportive of that, and we'd like to see that be followed through on. There hasn't been any movement at this case at this point in time, but we're hopeful that, that moves forward. I think it's more likely to move forward in the U.K. before there's any traction here in the U.S., but that's obviously something we would like to see. And Barton, just on the last question, too, because I don't want to overplay anything here on the downside in terms of audience. One of the reasons we mentioned the 180 million uniques and 1.4 billion page views on the call this morning is that those are higher numbers than we saw in the Q4. And so, I know there's so many in the media industry that are seeing overall audience declines, page view declines, things of that nature. We have not seen that. We've been very proactive in driving this business, driving our audience. And our audience does have scale and our biggest opportunity is engagement with that audience. More engagement with that audience is obviously is our biggest opportunity, but we're not seeing any large declines. Google does adjust algorithms all the time, and we have to adjust our strategy based on those changes, and that's what Kristin outlined, and we're confident we'll be able to do that. But the biggest driver for us over the last 2 years in audience growth has been what Kristin mentioned, which is really recognizing you can't be too dependent on one source of referral traffic. And so we've been very aggressive in building traffic from a lot of different sources, including direct, and we really reap the benefit of that. And so we're pretty excited even about the digital advertising strategy going forward and don't view anything that happened in Q1 as permanent or long-term. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Mike for closing remarks. Michael Reed: Yes. Thanks. And before we wrap this morning, let me just quickly recap a few important things. First of all, Q1 was a great quarter. It's the strongest start to the year that we've had in several years. And the truth is what you're seeing in the results reflects the work we have been doing over the last 24 months to strengthen the foundation of the business and to execute against a clear strategy. That work is paying off, and Q1 is a clear signal of that. A few highlights, I think, worth calling out because we're really getting very, very closer tied to some important inflection points that we've been talking about over the last couple of years. First of all, in Q1, total revenue trends were the best we've had in nearly 4 years. And we're nearing that inflection point at down 1.8% to being down 3.9% in Q4 and down -- over 6% in Q3 last year or near around 6% last year in Q3. So we're really nearing that inflection point, and we expect that to come here in 2026. We also saw total digital revenues grow at over 5% in the first quarter and reach 48% of total revenues. We've been talking about inflection point of total digital revenue being 50% of total revenues. We're really nearing that inflection point as well, which we also expect to happen here in 2026. But importantly, with this revenue mix shift and the growth in digital and the improvement in same-store, we're also seeing growth in EBITDA and free cash flow and expanding margins. So this is good profitable revenue, which is very important. And then finally, we're seeing leverage continue to come down, and we've been aiming to get under 2x. We finished the first quarter at 2.3x. So we're getting very close to that 2x mark, too. So a lot of things going in the right direction and a lot of inflection points here to be reached in 2026. You put all that together, we got improving revenue trends, expanding margins, strong and growing cash generation and a healthier balance sheet. A lot for us to be excited about. We're looking ahead to a really strong second quarter as well. And our digital-only subscription business has really turned a great corner. We saw the results in the first quarter, and that will continue to be a big contributor as the year goes on, as will the digital other category, which contains our licensing agreements as well as our affiliate deals. And that's a really nice category for us as well. So expecting a strong second quarter with even stronger free cash flow generation and look forward to updating you all in 3 months with our progress on Q2. And again, thanks for joining us this morning, and thanks for your support. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Adamas Trust First Quarter 2026 Results Conference Call. [Operator Instructions] This conference is being recorded on Thursday, April 30, 2026. I would now like to turn the call over to Kristen Mussallem, Investor Relations. Please go ahead. Kristi Mussallem: Good morning, and welcome to the First Quarter 2026 Earnings Call for Adamas Trust. A press release and supplemental financial presentation with Adamas Trust first quarter 2026 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.adamasreit.com. Additionally, we are hosting a live webcast of today's call, which you can access in the Events and Presentations section of the company's website. At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Adamas Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission. Now at this time, I would like to introduce Jason Serrano, Chief Executive Officer. Jason, please go ahead. Jason Serrano: Good morning. Thank you for joining us today to discuss our first quarter 2026 results. With me is our executive leadership team, President, Nick Mah; and CFO, Kristine Nario. We entered 2026 with strong momentum on what we described last quarter as a strategic inflection point for the company. And I'm pleased to report that our first quarter results reflect both the continuation and acceleration of that trajectory. Let me begin with the macro environment. The first quarter was defined by heightened volatility defined by geopolitical developments in the Middle East resulting in increased rate volatility, periodic spread widening and shifting monetary policy expectations. The Iran conflict introduces the potential for another supply-driven stagflation shock, further complicating the Fed's dual mandate as upside risk to both inflation and unemployment remain elevated. Despite this backdrop, we maintain a positive outlook on the broader fixed income environment. We continue to see a Fed bias towards rate cuts later this year, notwithstanding near-term inflation pressure, also improving technicals for Agency MBS as volatility begins to normalize and attractive value across residential credit on a solid demand base. The current environment reinforces our strategy, pairing stability with scalable earnings growth. Against this volatile backdrop, -- we delivered strong performance across all aspects of our business, generating meaningful book value growth alongside solid earnings expansion, further validating the strength and durability of our business model. The earnings profile of the company continues to build. We delivered GAAP earnings per share of $0.41 and EAD of $0.29 per share, representing a 26% increase from prior quarter and well in excess of our $0.23 dividend. This reflects a clear step-up in earnings power. Based on our earnings trend over the past year, we believe we are operating from a position where EAD is scaling ahead of distributions, demonstrating the operating leverage of the company, durable long-term earnings capacity and the potential for supporting future distribution growth. On the balance sheet side, in the first quarter, GAAP book value increased 4% quarter-over-quarter with adjusted book value up 1.6% -- despite wider spreads into the quarter end, performance was supported by stable trends within our credit assets, improving profitability at constructive, continued positive results and payoffs of our mezzanine lending portfolio and strategic hedges that outperformed as macro conditions evolved in the quarter. Importantly, we were able to grow both earnings and book value in a challenging market environment. The outcome was by design. Our flexible capital allocation framework enables us to actively navigate volatility and optimize risk-adjusted returns relative to more static portfolio structures. Our investment strategy remains anchored in three core pillars: Agency RMBS representing 56% of the equity capital, providing stable earnings and strong downside protection, continued growth in our single-family credit portfolio through BPL rental loans under a disciplined underwriting framework and scaling of our constructive platform, -- as anticipated, we have transitioned constructive to profitability from integration in the fourth quarter to an earnings contributor in the first quarter as operating efficiencies were realized. Our evolution from pairing agency exposure, mortgage credit assets and now a scaled origination platform positions the company to perform through volatility while capturing value as conditions normalize. A diversified allocation strategy is a core strength of the company. Despite this performance and trajectory, our common stock continues to trade at a meaningful discount to what we consider its intrinsic value. Shares began the quarter trading at approximately 32% discount to adjusted book value and notably, a 15% discount to the value of our equity capital invested in agencies alone. We believe this price disconnect sales to reflect the strength of our earnings growth over the past 5 quarters, represented by a 31% year-over-year increase in EAD, the scaling of origination platform for EAD expansion and the durability of our portfolio as illustrated by book value growth. We believe continued execution of our strategy can drive convergence between market price and intrinsic value, which support our decision to repurchase shares during the quarter. We are highly optimistic about the year ahead. Our priorities remain clear: EAD growth through scaling the constructive platform and our loan investment portfolio to expand reoccurring income, grow book value with disciplined investment selection and active portfolio management. And as Jose mentioned, we are focused on closing the valuation gap of Adamas' shares with consistent execution and disciplined capital allocation. We believe Adamas today is positioned for sustainable growth under a more diversified and stable earnings profile. We see several factors that are supportive of our capital allocation plan, which include a meaningful increase in demand for mortgage credit, particularly from insurance capital, alongside renewed GSE MBS purchase activity and a more accommodative capital framework supporting bank demand. Against this backdrop, our balance sheet flexibility positions us to capitalize on the strength of the market to continue delivering exceptional value. I'll now turn the call over to Nick to discuss our portfolio investment activity. Nicholas Mah: Thank you, Jason. We took advantage of the first quarter's market volatility to deploy capital steadily across our residential investment strategies, surpassing $1 billion in acquisitions. In terms of product mix, we invested $510 million in our agency strategy and $502 million in residential credit, with BPL rental making up the bulk of residential credit purchases at $400 million. Our quarterly investment activity in BPL rental reached a record high, reinforcing the strategy's expanding role within our core asset portfolio. It also demonstrates the value of Constructive's integration into our broader organization with its origination and underwriting capabilities providing a direct pipeline of investment. Under current market conditions, we expect to allocate a higher percentage share of capital to BPL rental given its relative value advantage. Our investment portfolio reached $10.9 billion at the end of the first quarter, with further growth expected as we continue to deploy capital through the remainder of 2026. The agency market saw significant volatility in the first quarter. Agency current coupon spreads to treasuries reached multiyear tights of 94 basis points in late January, driven by the administration's mandate for the GSEs to ramp up MBS purchases. The dynamic reversed sharply in late February as the conflict with Iran came to the fore. Agency spreads peaked at 131 basis points in late March before settling back down to 124 basis points by quarter end. Our agency portfolio expanded from $6.6 billion to $6.8 billion. Agency leverage was at 7.8x, slightly above the prior quarter's 7.7x. Within our Agency [ capital ] investments, all purchases this quarter were in 6.0 coupon pools. We rotated up the coupon stack early in the quarter to reduce duration, taking a more defensive posture given especially tight spreads and low rates at the start of the year. That positioning benefited the agency book as rates backed up and spreads widened in the second half of the quarter. Going forward, we are returning to our original stance of adding current coupon spec pools at minimal pay-ups. As Jason mentioned, our expectation is that volatility will eventually moderate, while we aim to opportunistically increase our capital deployment during episodic bouts of price dislocation. At quarter end, Agency MBS comprised roughly 56% of our investment portfolio's capital, and we expect that allocation to remain relatively stable in the near term. Following the rapid repricing of agency spreads quarter-to-date, our view on the agency basis has become more neutral with more attractive relative value emerging in residential credit. We nonetheless anticipate continued agency purchases, albeit at a slower pace than in residential credit. From a hedge positioning perspective, we rotated out of longer tenure swaps into treasury futures in January, a trade that contributed positively to returns under the developing macro backdrop in the quarter. Treasuries underperformed swaps during the quarter, driven by ongoing treasury supply concerns alongside inflation fears. With swap spreads now tightening, we are reversing a meaningful portion of treasury futures hedges back to swaps in the second quarter for more cost-efficient hedging. Alongside our rate hedges, we also employ a range of additional hedge strategies to protect book value against tail events. Amidst softening structural demand for U.S. treasuries and escalating geopolitical tensions, these hedges performed favorably in the first quarter. The price movements of these hedges resulted in positive realized gains contributing to the company's overall quarterly performance. BPL rental remains our largest residential credit asset exposure at $1.8 billion. The portfolio is built on the strong underwriting standards that anchor our purchase program, resulting in minimal tail risks across key credit metrics. Loans with DSCR below 1x represent less than 2% of the portfolio as to those with LTVs above 80%. FICOs below 675 account for less than 3% of the portfolio. Securitization execution was volatile during the quarter, moving in tandem with broader risk markets. Our first BPL rental deal of the year priced in January at around 105 basis points blended AAA spread. Generic non-QM AAA spreads widened to as much as 145 basis points at the end of the first quarter before settling at 120 basis points to 125 basis points today as volatility has since subsided. Despite these larger market fluctuations, the securitization markets have remained well functioning throughout with a broad investor base continuing to allocate capital into bonds backed by residential credit. We are taking advantage of stable capital markets to be on pace to issue 5 BPL to 6 BPL rental securitizations this year, supported primarily by collateral originated by constructive. Our securitization program is supported by a deep and loyal investor base and is well recognized in the market for its underwriting discipline and consistent performance. Collectively, these factors have allowed us to price securitizations at the tighter end of the execution range. Moving to the origination business. Constructive originated $422 million of business purpose loans in the first quarter, modestly below the $439 million produced in Q1 of last year. The slight decline reflects Adamas' influence of a more selective origination posture to better align with our investment program rather than any pullback in capacity. Since onboarding Constructive, we are focused on further aligning production with Adamas' underwriting standards, building on an existing foundation of strong credit quality while maximizing secondary market liquidity. In the quarter, Adamas purchased approximately 2/3 of Constructor's overall loan production. We continue to balance the development of Constructor's third-party distribution channels alongside Adamas' investment portfolio objectives. Constructive's distribution model emphasizes locking loans with end investors early in the process rather than aggregating for bulk sale. This approach reduces monthly pricing risk and enhances our ability to adapt as market conditions evolve. Close coordination with Adamas' trading team to surmise real-time visibility into securitization execution and secondary pricing enables dynamic adjustment of forward pipeline coupons as the market shift. This responsiveness proved particularly valuable amid the rate volatility experienced during the quarter. As we are nearing the end of Constructive's integration into Adamas, our focus has shifted from transition management to optimizing technology, capital and processes across the origination business. We expect these initiatives to translate to improved operating results over time. In the multifamily portfolio, the redemption activity has been substantial with an annualized payoff rate of 30% experienced in the first quarter, higher than the historical average of 26%. During the quarter, one property in our cross-collateralized mezzanine lending portfolio sold and netted a realized gain of $13.8 million to Adamas, a successful execution outcome. Given the seasoning of the portfolio and the stable performance, we expect heightened resolution activity for the remainder of the year, providing us additional capital to reinvest into our core strategies. I will now turn it over to Kristine for commentary on our quarterly financials. Kristine Nario: Thank you, Nick, and good morning, everyone. Jason and Nick touched on some of the major items that contributed to our strong results this quarter, so I will focus on a few additional highlights. For the first quarter, we reported GAAP net income attributable to common stockholders of $36.9 million or $0.41 per share and earnings available for distribution of $0.29 per share, which increased by 26% quarter-over-quarter and 45% year-over-year. After accounting for a $0.23 dividend, we generated a 6.35% economic return on GAAP book value and a 3.76% economic return on adjusted book value. Our GAAP book value increased 4% to $9.98 and adjusted book value rose 1.6% to $10.80 during the quarter. These results reflect continued momentum across our investment portfolio and origination platform. Adjusted net interest income increased to $48.2 million in the first quarter from $46.3 million in the fourth quarter, and net interest spread was at 145 basis points, down from 152 basis points in the fourth quarter. The change in net interest spread reflects the continued transition of our portfolio toward Agency RMBS and BPL rental loans, which carry a lower yield than higher coupon BPL bridge loans that continue to run off, partially offset by improved financing costs. Turning to Constructive. The platform delivered a strong performance this quarter. Mortgage banking income was $15.3 million for the quarter, driven by $9.2 million in gains on residential loans held for sale and $6.1 million in loan origination and other fees. Constructive also generated net interest income of $0.5 million. After direct loan origination costs of $4 million and direct G&A expenses of $9.3 million, Constructive generated approximately $2.5 million profit for the quarter on a stand-alone basis. This marks a meaningful improvement from approximately $2 million stand-alone loss in the prior quarter and reflects the near completion of our integration efforts. We are pleased with Constructive's progress this quarter with ROE of approximately 13%, representing a significant improvement from the prior period and moving closer to our original underwriting target of 15% Total consolidated Adamas G&A were $24.5 million for the quarter, down slightly from $25.1 million in the last quarter. We estimate our quarterly G&A ratio to be approximately 7% to 7.5% in 2026, depending on Constructive's origination volumes. From a capital markets perspective, we continue to strengthen our balance sheet. During the quarter, we issued $90 million of senior unsecured notes due 2031 and redeemed our $100 million senior unsecured notes due 2026 at par, fully retiring the obligation ahead of maturity. We now have no near-term corporate debt maturities, which provides meaningful flexibility and positions us to focus our capital on growing the investment portfolio. At quarter end, we maintained $199 million of available cash and approximately $418 million of total liquidity capacity, including financing available on unencumbered assets and underlevered assets. Our company recourse leverage ratio was 5.2x and portfolio recourse leverage was 4.9x, with leverage primarily concentrated on agency financing. Overall, our first quarter results reflect the continued execution of our strategy and our growing earnings power. We remain focused on disciplined portfolio growth, increasing Constructive's earnings contribution and prudent capital allocation as we look to build on this momentum through the balance of 2026. We are committed to delivering sustainable long-term returns for our stockholders. That concludes our prepared remarks. Operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Marissa Lobo of UBS. Marissa Lobo: On your EAD trajectory, can you give us a framework on how you're thinking about dividend coverage relative to EAD going forward? And you mentioned increasing distributions, but is that on the table near term? Or will you continue accumulating retained earnings? Jason Serrano: This is Jason. Look, we're pleased by the EAD performance exceeding dividend by 26% in the first quarter. We recognize dividend growth is a key priority for shareholders. With the Board, we evaluate a range of factors in assessing appropriate distribution levels. And our focus is sustainably growing earnings while preserving book value. So we delivered on these objectives in the first quarter and look forward to continuing this momentum alongside with our ongoing Board discussions regarding our distribution rate. Our goal is to keep stability and sustainably increase the EAD, which is going to be the discussions that we have with the Board on the dividend discussion. So that's as far as I can go in that direction. Marissa Lobo: Appreciate that. And on the book value gain, what was the relative contribution from? Was it mostly the multifamily sale? Or was it the strategic hedge performance? Just a little color on the drivers. Kristine Nario: Yes. We had a strong quarter across the board. EAD came in at $0.29, up 26% quarter-over-quarter, which reflects really our earnings power through continued portfolio growth and improved financing costs in the quarter. On top of that, we benefited from two additional items that drove net income and book value higher. As you mentioned, we generated -- as you've seen, we generated about $87.8 million in derivative gains, both from mark-to-market due to higher valuations on our hedges as well as realized gains on settlement of derivative instruments during the period. We also recognized gain on sale on a property within our cross-collateralized mezzanine lending, of which $13.8 million is attributable to Adamas. And it was a quarter where both recurring income or EAD and nonrecurring items worked in our favor. Operator: Our next question comes from the line of Bose George of KBW. Bose George: Just a follow-up on the book value question. What's -- any changes to the book value quarter-to-date? Jason Serrano: We estimate adjusted book value being up between 2% to 2.5% quarter-to-date. Bose George: Okay. Great. And then on the multifamily portfolio, actually, how much is the capital that's remaining? Jason Serrano: I saw the assets, but I might have missed how much the capital... The capital and the assets are very similar. We have -- these assets are unlevered on our balance sheet. One of the back pages of our supplemental will show you those numbers. So that's a -- yes, it's generally dollar for dollar. Bose George: Okay. And have you given sort of the time line in terms of the potential runoff of that portfolio? Jason Serrano: Yes. So we've mentioned this on previous calls where it's a very seasoned portfolio. We control rights within many of the assets to -- in the mezzanine loan portfolio to accelerate maturity. So in utilizing those rights, given the seasoning and the ability for the sponsors to pay off the loans to refinance or sale of the property, we can help shorten our duration on these assets, which we've been effectively doing over the course of the last year, 1.5 years. Nick mentioned that the prepayment rate was accelerated in the quarter, and we do expect to continue seeing that through the course of the year. Operator: Our next question comes from the line of Jason Weaver of JonesTrading. Jason Weaver: I wanted to ask, as it pertains to constructive, what's sort of the right baseline for quarterly mortgage banking income for the rest of the year? How much of that is gain on sale versus origination fees? Kristine Nario: Well, majority of it is going to be gain on sale, as you've seen, and that's always been the case for Constructive. We are 13% return on a stand-alone basis, we're pleased with that performance. And as Jason mentioned, our priority is really to increase volume to increase earnings. So that's really our goal for 2026. Jason Weaver: Got it. That makes sense. And then on the BPL rental securitizations, I could be wrong on these numbers, but I think the 1Q deal priced at about 490. And then subsequently, the April deal priced at around 550, quite a bit wider. Is that just market volatility? Or is it sort of deal-specific nature, pool quality? What can you tell me there? Nicholas Mah: Yes, this is Nick. The majority of it is market movements. So rates were higher at the point that we executed the second transaction as well as spreads. So in terms of AAA spreads, for example, in our first securitization, the weighted average AAA spread was around 105 basis points. I mentioned in my prepared remarks, it went out to as much as 140 basis points, 145 basis points. We priced at the tighter end of that range. But still, it was more market conditions. But we were happy with the fact that there was still a well-functioning securitization market, number one. And number two, that our story resonated with the fact that we have strong underwriting quality and performance, which allowed us to price at the tighter end of the range. Operator: Our next question comes from the line of Doug Harter of BTIG. Douglas Harter: You mentioned looking to grow the volume at Constructive. Can you talk -- does that need more capital? Or can you be efficient -- more efficient in turning over the existing capital for Constructive? Nicholas Mah: Doug, so Constructive, we expect the volumes to first stabilize and then continue to grow. As I mentioned in my remarks earlier, the decline year-over-year in terms of Q1 volume was really driven by our influence in terms of making sure that the credit box better aligns with what we put into our securitizations and what the market expects of us. Now Constructive already has a very, very strong collateral profile, which is why the differential wasn't that meaningful. On a go-forward basis, a lot of it has to do with better efficiencies. I would say capital is less of a concern there. Constructive is, at this point, not even utilizing all the capital that is available to them to continue to grow. They continue to expand their broker network. They continue to expand their retail origination platform. They continue to drive more cost efficiencies through better processes. And then also the integration with Adamas has also been helpful in terms of just better capital efficiency in terms of the speed by which trades occur, but not only that also setting up better financing lines and just improving their capital structure and their cost of capital just generally. So there's a few things that we're pushing on. We're going to continue to look at the overall makeup of their originations. The one thing that is very true today is that there is an exceptionally strong institutional demand for this paper and not only the volume, but in particular, the stronger parts of the market and the better credit profiles get stronger bids. And there's going to be an opportunity for us to be able to deliver into that by us growing our platform. That's one of the reasons why we also believe that having a strong distribution network away from just selling to Adamas is an exceptionally important thing, and we hope to capitalize that more in the future. Douglas Harter: Yes. Just a follow-up on that last point. Nick, as volume kind of ultimately grows there, how do you think about the right balance between retaining and selling the production? Nicholas Mah: Yes. So it does fluctuate over time. Last quarter, we purchased about 2/3 of their overall production. I would say in the next couple of quarters, that's a good baseline in terms of where it will be, although obviously, market conditions can change and obviously, the volume can change as well. We expect to continue to sell to the market. We're going to be on the upper end above 50%, but there are other strong relationships that Constructive has with the market, and those relationships have been important in the past, and we believe will be important in the future, and it's -- we're going to make sure that there is some carve-out of volume that is available to them. Operator: I am showing no further questions at this time. So I would like to turn it back to Jason Serrano for closing remarks. Jason Serrano: Yes. Thanks, everybody, for joining us today. We appreciate your time and continued support. We look forward to speaking with you on our July second quarter update. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the first quarter 2026 financial results. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Ms. Suann Guthrie, Senior Vice President of Investor Relations. Please go. Suann Guthrie: Thank you for joining the Darling Ingredients First Quarter 2026 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; and Mr. Bob Day, Chief Financial Officer. Our first quarter 2026 earnings news release and slide presentation are available on the Investor page of our corporate website and will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's press release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. Now I will hand the call over to Randy. Randall Stuewe: Thanks, Suann. Good morning, everyone, and thanks for joining us. Over the last few years, public policy uncertainty and deflationary and volatile commodity markets created a challenging operating environment. During that time, Darling Ingredients remained laser-focused on controlling what we could control. We prioritized operational excellence and maintained strict, disciplined capital allocation with a goal to achieve a meaningful debt reduction. Headwinds have now shifted, and the results we share today confirm a much more favorable operating environment. We are moving forward with significantly improved earnings power, stronger cash flow potential and a more robust foundation for long-term value creation. For the first quarter of 2026, we saw the operating environment allow for expected EBITDA growth and sequential gross margin improvement. Darling's core ingredients business really delivered this quarter, with improved global operations, margin expansion and focused commercial execution. Combined adjusted EBITDA for first quarter was $406.8 million, including $255.6 million from our global ingredients business and $151.2 million from Diamond Green Diesel. Our Feed Ingredients segment had a fantastic quarter. We saw steady volumes with a strong global poultry volumes offsetting stagnant North American cattle herd. Operational excellence remained a key focus this quarter, driving improvements in throughput, cost reduction and product quality, that translated into stronger gross margins. At the same time, our commercial agility allowed us to pivot sales to higher-priced markets. While fat prices were softer earlier in the quarter, our disciplined risk management approach combined with spot sales helped us mitigate the typical lag impacts we would see in that environment. The renewable volume obligation announced at the end of March has been extremely constructive for Darling and DGD. We are already seeing a favorable movement on fat prices as renewable diesel demand grows. DGD overcame a shutdown at Port Arthur that briefly interrupted our supply chain. As those dynamics continue to play out, we anticipate this to be a nice tailwind for our Feed segment for the remainder of 2026. Turning to our Food segment. We are seeing nice growth in collagen, particularly in Europe and Asia. Sales in both collagen and gelatin improved year-over-year, reflecting not only increased customer demand, but new applications for collagen in food, nutrition and health products. Our Nextida glucose control product is currently pending a patent in both in the U.S. for production processes and the use of Nextida as a dietary supplement ingredient, offering a nonpharmaceutical option targeting lower blood glucose. With an interest in food as medicine and increased demand for protein, collagen continues to be positioned well for growth. Now as you can see in our results, our Fuel segment is at an inflection point as renewables margins turned a corner with finalization of the renewable volume obligation. With a very constructive RVO and now a clear path forward, we expect DGD's results to continue to strengthen throughout the year. Diamond Green Diesel delivered a strong quarter with $151.2 million of EBITDA or around $1.11 EBITDA per gallon. Our non-DGD Green Energy businesses continue to deliver stable earnings and will have the opportunity for a slight tailwind due to increased energy prices in Europe. Now with that, I'd like to hand the call over to Bob to take us through some financials. Then I'll come back and discuss my thoughts on the second quarter. Bob? Robert Day: Thank you, Randy. Good morning, everyone. As Randy said, first quarter was very strong across all measures, and the Darling platform is poised to move forward with significantly improved earnings power. For the quarter, combined adjusted EBITDA was $407 million, versus $196 million in first quarter 2025 and $336 million last quarter. Core ingredients, non-DGD, improved both year-over-year and sequentially. For first quarter 2026, core ingredients EBITDA was $256 million, versus $190 million in first quarter 2025 and $278 million last quarter. Total net sales were $1.6 billion, versus $1.4 billion. Raw material volume was 3.8 million metric tons, essentially unchanged. Meanwhile, gross margins for the quarter improved to 26.1%, compared to 22.6% in the first quarter last year and from 25.1% last quarter. Looking at the Feed segment for the quarter, EBITDA improved to $169 million from $111 million a year ago, while total sales were $985 million versus $896 million, and raw material volume was flat at approximately 3.1 million metric tons. Gross margins relative to sales improved nicely to 25.3% in the first quarter, versus 20.3% in the first quarter from last year and 24.6% in the fourth quarter of 2025. In the Food segment, total sales for the quarter were $405 million, compared to $349 million in the first quarter of 2025. Gross margins for the Food segment were 28.9% of sales, compared to 29.3% a year ago. And raw material volumes were flat at around 330,000 metric tons compared to the same time last year. EBITDA for first quarter 2026 was $81 million, versus $71 million in the first quarter of 2025. In the Fuel segment, starting with Diamond Green Diesel, Darling's share of DGD EBITDA for the quarter was $151 million, which includes a favorable LCM inventory valuation adjustment of $97 million at the DGD entity level and sales of around 272 million gallons, an average EBITDA margin of $1.11 per gallon. Darling contributed approximately $190 million to DGD during the quarter, mainly to provide short-term working capital, most or all of which is expected to be returned in subsequent quarters. In addition, during the quarter, Darling monetized $45 million in production tax credit sales, the proceeds of which will be paid in the coming quarters. Other Fuel segment sales not including DGD were $160 million for the quarter versus $135 million in 2025, on strong energy and biogas prices in Europe and relatively flat volumes of around 370,000 metric tons. Combined adjusted EBITDA for the full Fuel segment including DGD was roughly $180 million for the quarter, versus $24 million in the first quarter of 2025. As of quarter-end, total debt net of cash was approximately $4 billion, versus $3.8 billion ending fourth quarter 2025. The increase in debt results from contributions to DGD mentioned earlier and timing of production tax credit payments, some of which will come in the second quarter. Capital expenditures totaled $95 million in the quarter. Our bank covenant preliminary leverage ratio was 3.17x as of quarter-end, versus 2.9x at year-end 2025. In addition, we ended the quarter with approximately $1.1 billion available on our revolving credit facility. We recorded an income tax expense of $38.6 million for the quarter, yielding an effective tax rate of 22%. That rate excluding the impact of the production tax credit and discrete items was 32%, and we paid $20.5 million in income taxes in the first quarter. For 2026, we expect the effective tax rate to be around 25% and cash taxes of approximately $60 million for the remainder of the year. Overall, net income was approximately $134 million for the quarter or $0.83 per diluted share, compared to a net loss of $26 million or negative $0.16 per diluted share for the first quarter of 2025. Last quarter, we mentioned that we have some assets held for sale that are not considered strategic for our business. Those asset sales continue to move forward but have not yet closed. Of those, we have signed an agreement to sell the majority of our grease trap environmental service assets. The sale is pending some permitting transfers, which we expect to be completed in the next few months. We'll have more to say about the trap and other businesses for sale at a later date. With that, I will turn the call back over to Randy. Randall Stuewe: Thanks, Bob. In closing, the progress we shared with you today reflects the discipline and focus we have maintained through a challenging cycle. By controlling what we can control, driving operational excellence, prioritizing capital and focusing on balance sheet strength, we position Darling Ingredients to emerge stronger. With improved but volatile market conditions and a much improved regulatory framework, we believe the company is entering its next phase with momentum that we expect to build as the year progresses. We believe that as the year progresses, we'll drive improved earnings, stronger cash flow, additional debt reduction and long-term value creation for our shareholders. Ultimately, our improved performance will once again provide the company with many opportunities. This confidence is reflected in our core ingredients EBITDA guidance for Q2, which we are now setting at $260 million to $275 million for the quarter. With that, we'll go ahead and open it up to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Heather Jones with Heather Jones Research LLC. Heather Jones: I was just wondering on, first of all, on Diamond Green. Should we expect the hedging and LIFO losses, do you expect that to reverse in Q2? Or will that take longer throughout the year? Robert Day: Heather, this is Bob. So we did realize a lower of cost or market benefit in the first quarter. And I think just to make sure everyone is aware, in order to have the opportunity to realize the benefit in lower of cost or market, you have to have previously taken a loss from that. This quarter, that $97 million at the DGD entity level, that exhausts all available lower of cost or market. So going forward, as long as the business is profitable, we do not anticipate any lower of cost or market benefits. And so then to your question of LIFO, the LIFO will be based on an average cost paid for feedstock during the period. And as the average price increases, if it increases, then we would realize a LIFO loss that is embedded inside of the results. If feedstock prices on average decrease, then there would be a LIFO gain. So really the answer to your question depends on your view of feedstock prices as the average cost of feedstocks paid in the period in question relative to the period prior. And hedges... Heather Jones: And what about on the hedging side? Yes. Robert Day: Yes. So hedges, I guess what I can say about that is, at DGD, we do hedge. We're very disciplined about hedging. There is some flexibility in terms of which instruments we use to hedge our risk, and we don't disclose that for competitive reasons. I think what you can point to this quarter is that clearly we had a significant increase during the period in heating oil futures, in crude oil futures, in soybean oil, whatever sort of instrument you're looking at. And we managed to absorb the cost of whatever hedges we had and still put out a very positive result. And I think it just speaks to the risk management capabilities of the business. Heather Jones: Okay. And then my follow-up is just given the volatility we're seeing in the energy markets and the feedstock markets, this question seems pretty particularly relevant. So I was wondering if you could update us on how we should be thinking about the lags in your model, both core DAR and Diamond Green. I remember at one point, it was more like 30 to 60 days and then I think it increased to 60 to 90. But if you could just update us on how we should be thinking about that. Randall Stuewe: Heather, this is Randy. So clearly, you've kind of framed it pretty well. I mean what we saw in Q1, remember, as we came out of Q4, if you remember, we had forward sales into DGD getting ready to run full that were put on in October as we anticipated the RVO. And then we saw prices soften as the RVO kept getting kind of delayed and delayed. And so ultimately, as we came into Q1, cash prices, FOB, most of the North American factories were actually flat or lower than Q4. Those have now accelerated. They started to accelerate in, really, here in March for us. That will start to flow through very nicely in Q2. When we look at our global rendering business, what we've seen is the tariffs have impacted Brazil pretty sharply. We've had to adjust all of our formulaic or our pricing models down there, what we procure raw material from. That takes 30 to 60 days. So I think we've righted that now. So overall, the ingredients business will have a stronger Q2. How much of the acceleration in prices flow through, that would be reflected in kind of our conservative approach to guidance there. Remember, as I was telling the team here, this is the first call we've done where we haven't ever seen period 1 of the next quarter. And we won't see those numbers here for another week or 2, 1.5 weeks. And ultimately, so really, we're looking at basically a March run rate and extrapolating that with some improvement. And so you'll see that. Conversely, as DGD has done a very nice job of getting out in front of this, I mean we've had a strong bias that feedstock prices would accelerate once the industry wakes up, and so that should flow through in much better margins in DGD as we go through Q2 and through the balance of the year. Operator: Our next question comes from the line of Tom Palmer with JPMorgan. Thomas Palmer: Maybe start out with an industry question, especially when we, I think, think about the biofuel side, there's probably a good amount of idle capacity. I wonder what you think the U.S. biofuels industry is capable of producing currently and then once kind of it fully ramps, and whether that's going to be enough to kind of fulfill mandates or if we do need to kind of shift to imports even with the maybe less favorable tax treatment. Robert Day: Tom, this is Bob. I mean, look, the first thing I'd say is we do believe that quite a bit of biofuel capacity is back online. Margins are attractive enough to bring a lot of that back. There's still an opportunity to bring some more. Ultimately, to answer your question about what we're capable of, it's going to depend a lot on run rates as well as just kind of bringing idle capacity back on the market. And I think as everyone knows, keeping a renewable diesel unit up and running is -- it's got its own challenges to it and circumstances. So it's going to depend a lot on that. Bottom line is we think that the industry is capable of meeting the mandate of the -- or the demand of the RVO. It probably is a combination of some of the things you talked about. It will include some imports of fuel, probably fewer exports as the U.S. market margins need to just incentivize U.S. production to stay in the United States. When you put all those things together and adding capacity and running hard as an industry, and you look at what we did in 2024, it's reasonable to expect that we can meet the demands of the RVO. Thomas Palmer: And a follow-up on second quarter expectations. When we think about 2Q, what are kind of the key drivers of the increase in terms of EBITDA in the base business? Is it mainly just higher market prices in terms of fat? And does that range contemplate where prices are today or that there are any changes relative to that run rate? Randall Stuewe: Yes. There's always a bit of seasonality in the business here. I've always said when the ball park's open, at least in North America, that's -- you'll see a few more in barbecue season. So really, at the end of the day, raw material volumes globally are strong and very strong in South America. Poultry volumes in the U.S. are exceedingly strong, while the downside of that is the cattle herd is really stagnant and at a 75-year low. What's relevant about that, Tom, is that, remember, there's -- it's just like the red meat, white meat discussion here. Red meat has more fat. And so we can process more poultry and still not make as much fat as we were when we were making -- running all the beef. So a little less fat into the discussion. As far as the modeling of guidance here, like I said, that's really March extrapolated with some improvement that's out there. Clearly, towards the -- fat prices are exceedingly much higher than they were in Q1 cash prices right now, and we're out there selling it. So you'll see that flow through. How much goes into Q2 versus Q3, we will see, but we're clearly picking up some speed there. The Rousselot business is doing quite well around the world right now. Gelatin and collagen margins are good. Remember, that business -- remember, 80% of that byproduct that comes out of that business is fat and protein, and so it's feeling a benefit. We're seeing the tariffs had their impacts on our -- what we're going to call our specialty proteins business, and those markets are back open again with the lower tariffs. And so we're seeing a nice improvement in protein prices. But clearly, fat prices that are -- I think the DGD bid right now today is close to $0.80 a pound. Those are big numbers that are down there right now. And those are up anywhere from $0.20, $0.25 from where they were in October, November. So that will start flowing through very nicely here as we get towards the end of the quarter. Operator: Our next question comes from the line of Pooran Sharma with Stephens. Pooran Sharma: Congrats on posting really strong results. Maybe just on Fuel here, and DGD and really just RD. What are your thoughts on kind of diesel prices in regards to kind of what extent you think there are structural constraints, whether infrastructure, refining capacity or even just intermediate-term logistics that could keep diesel markets tighter for maybe longer than people were anticipating? Randall Stuewe: It sounds like a question for our partner, Valero, than us. But Bob, you'll take a shot at it. Robert Day: Yes. I mean -- and I -- look, I think we're not really qualified to answer questions about diesel capacity and constraints and things like that. But I think what we can point to is just an increased cost of the raw material inputs that everyone is using to make fuel energy products. I think what's interesting from our perspective is just how much tighter today renewable fuels are and total cost relative to conventional fuels, and sort of what this conflict has done in terms of bridging the compliance gap in the RVO. I mean, ultimately, I think we fully expected that we would see the margins that we're seeing today in the market. But we thought that it would perhaps take a little bit more time until compliance dates sort of force convergence and cause that margin to occur. This conflict and the higher energy prices underlying all of this is allowing margins in renewable fuels to sort of move to what they probably should be as a result of a strong RVO, and it's just allowing it to happen more quickly. It's also I think showing the world that renewable fuel is an important component of total supply. And without it today, we'd have much higher prices of conventional fuels. Randall Stuewe: Yes. I think the other thing that Bob highlights there is, I mean, as most of you know, I mean, fossil diesel or conventional diesel in Scandinavia is $10 a gallon, and in the Netherlands, it's $12 a gallon. And RD is actually cheaper by almost 25% today. So the industry is going to run as hard as it can. And what's special about RD is it can be used in either at 100%. So you're going to see anybody that can produce RD running at full capacity right now. You're also seeing a lot of other countries in the world that have -- or producers of fats and oils that can use fats and oils within their energy system, meaning the palm oil. You magically start to see palm oil disappear back into energy when the price per barrel gets to where it's at right now. Usually, it starts when it's about $80 a barrel. And clearly, there's a huge incentive right now globally to continue to move fats into energy. And that's going to keep the world feedstock markets pretty constructive until things back off. Pooran Sharma: Appreciate the color. And maybe just shifting to the balance sheet, I wanted to understand with -- I know you're not guiding to DGD, but just kind of the implied step-up in EBITDA, in just the overall business. I think that leverage should just come down naturally. And so I wanted to get a sense of how you're thinking about actively deleveraging versus allocating capital elsewhere. Robert Day: Yes, this is Bob. So I think we've been pretty clear in recent quarters that we're focused on paying down debt. We've talked a lot about trying to get our debt down below $3 billion. We're still committed to that. We do have an Investor Day on May 11. And at that time, we're going to be able to talk more about what our capital plans are. But I think what I'll just summarize right now is just to say that we're focused on getting that debt number down to about $3 billion. At that point in time, that opens up a lot of potential options for Darling in terms of what we do going forward. It will depend on what our outlook is when we get there. But we're certainly very encouraged by the EBITDA run rate that we see from the first quarter and what we're expecting for the balance of the year. And we think we'll get down to that $3 billion number relatively quickly. And at that point in time, we think the outlook is still going to be very strong. Operator: [Operator Instructions] Our next question comes from the line of Manav Gupta with UBS. Manav Gupta: I actually wanted to ask a little bit of a policy question. So you know how EPA is proposing starting 2028 you get 50% RIN on foreign feedstock. And I'm just trying to understand whether it's positive for DAR if that goes through. I mean your domestic UCO and tallow would price higher. Also I think some of the other competitor facilities which are overly dependent on foreign feedstock might be forced to quit the business. But at the same time, I think you are also importing a little bit of tallow through FASA for some of your plants. So I'm just trying to understand the puts and takes if this policy change does go through and you only get 50% RIN for foreign feedstock. Robert Day: Manav, this is Bob. I think the answer -- to be able to answer that question, we'd also need to understand what the tariff structure is at that point in time. I think if we're looking at a 50% RIN and there are no tariffs -- no origin tariffs on any of the feedstocks that we're importing, then it's going to depend on what is the demand for those feedstocks outside the United States and does the value of those international feedstocks adjust for that 50% RIN and the 45Z credit. Ultimately, if the U.S. is the strongest market at that point in time and international feedstocks discount themselves so they can be competitive coming into the United States, then we see all of it as a pretty big positive for Darling because it would be very supportive to our U.S. and Canadian feedstock prices and the DAR core business. But it would also give DGD access to international feedstocks to be able to make fuels, sell those into the United States or re-export for anywhere else. So it's going to really depend on the dynamics and what's happening with fuel markets and feedstock markets outside the United States. But overall, we don't see it as a negative. Manav Gupta: Perfect. My second quick question, on 2Q guidance and where the Street is. When we look at the Street numbers, which I think are closer to 440, and your guidance, to get to that guidance, Street estimates versus your guidance, DAR -- DGD would have to give you about 170 million. That's roughly my calculation. And given where their margins are on DGD, it seems very possible that DGD could easily give you 170 million. So if you could talk a little bit about your guidance versus where the Street is on 2Q, I'd be very grateful. Robert Day: I think, Manav, we won't guide DGD. I think we did say we expect 320 million gallons for the quarter. We are willing to say that we think that second quarter at DGD will be stronger than the first quarter. So if you kind of put all that together, I think what you're saying and backing into doesn't sound unreasonable. But there isn't a lot more we can say about that in DGD's numbers. Randall Stuewe: Yes. I mean, Manav, this is Randy. Bob said it really well, I mean, the DGD margin environment is constructive right now. It's still sorting its way out. We're running at capacity. 320 million is the gallon that we're going to put out there for Q2. And then I suspect Q2 earnings power is greater than Q1 and Q3 will even be stronger. But life is pretty good there right now, but we've just kind of opted to kind of stay away from trying to guide because it's very, very difficult because of timing, et cetera, of sales and then feedstocks. Operator: Our next question comes from the line of Derrick Whitfield with Texas Capital. Derrick Whitfield: Congrats on a strong quarter. For my first question, I wanted to start with Feed. Since March, we've seen a near $0.20 per pound increase in waste FOGs, as I think you highlighted earlier, Randy. While I understand your rendering contracts include purchase price considerations for downstream value, how should we think about the strength of waste FOG realizations flowing through to higher EBITDA from a price sensitivity perspective over the course of the year if prices remain elevated? Randall Stuewe: Yes. I think we've kind of, Derrick, tried to address that. I mean, clearly, obviously, I'm reverting back to I haven't seen April yet, so to see how it's truly flowing through. But what I can tell you around the world is Europe has been truly lagging from where the U.S. run-up has happened because it's now a domestic feedstock game. South America got impacted very hard due to the tariffs, and also higher ocean freight. And so that's trying to -- we always look back. We've always tried -- why we built DGD was to own the arbitrage between animal feed and fuel. Animal feed value today is less than $0.30 a pound and fuel prices are north of $0.70 a pound FOB. So clearly, we've made the right decision there. What we're going to see is as we go into May and June, you will start to see a lot of that flow through. I think we're calling a bottom now in Brazil. We've kind of figured that one out. We had to adjust our spreads. It's a spread management game. In Europe, much more resilient, but it's starting to move up. I've seen South America move, in the last 3 or 4 sales up $50, $100 a ton from the start or mid -- really start of April. So that will start to flow through. That's where I would categorize the guidance that we're putting out there on the core business as potentially somewhat and very conservative right now. But how we see how it flows through, it's kind of hard to call right now. Protein prices have improved. Rousselot, because the tariffs are down. So we're having some improvement all across the line. Our biogas businesses in Europe are very strong right now. So I mean, it's really the tailwinds are building right now. We're just trying to -- maybe we were a little gun shy, would be what I'd say right now, from the last couple of years. So we'll see what they flow through here. Derrick Whitfield: Perfect. And then maybe shifting over to DGD. Given the higher diesel and jet crack spreads we're seeing, really outside of the U.S. but across the world, how are you viewing the international markets relative to what you can get in the U.S.? And if favorable, what degree of flexibility does DGD have to further increase sales into those markets? Robert Day: Yes. Derrick, this is Bob. DGD has always maintained a lot of flexibility and agility in terms of markets it can sell to. We have seen very attractive opportunities all around. I think DGD has been a consistent exporter. We expect that to continue. But I think when you look -- looking forward, and the strength of the RVO in the U.S., it really points to a U.S. market that should continue to increase in margins and keep barrels inside the United States. And I think over time, we'll see the market create that. It won't be because of -- it will be market-driven, and that's what we're expecting to see. Operator: Our next question comes from the line of Dushyant Ailani with Jefferies. Dushyant Ailani: Congrats on a strong quarter, guys. I know the focus has been on RVOs. I just want to pivot a little bit to LCFS where pricing has been weak. It's starting to trend a little higher. Want to just get your thoughts on how you're seeing the California market evolve through the course of the year maybe. Robert Day: Yes, Dushyant, this is Bob. So LCFS, it's an interesting market. It's dynamic and hard to understand, quite frankly. But I think what we saw initially immediately after the RVO was an increased amount of production and more sales into California. So on a very short-term basis, we created some more credits there than -- at least at a rate that was a little bit higher than what we had. But the reality is California has only got around 3.6 billion gallons of total diesel demand. 300 million or 400 million of that is going to be satisfied with biodiesel. And there's probably a little bit of conventional diesel that's going to always stay there. So you're looking at kind of a 3 billion gallon demand market for renewable diesel. And the RVO essentially mandates more production than that. And so if you add up all the LCFS programs in the United States, there's -- the RVO is larger. And certainly, when you include imports as well, it's larger than all those LCFS programs. So we do think we're going to have a lot of supply into those states. But we can't satisfy all of the requirements from the California Air Resources Board just with renewable diesel. So what we expect is we're going to see LCFS credits continue to increase in value. And we'll probably see renewable diesel trading at a discount into California because it's going to be offset by LCFS premiums. So it's a complicated one though, but it's a long way of saying we think LCFS credit premiums are going to increase. Dushyant Ailani: Got it. And then my follow-up, maybe just going back to the core business. I know you guys have been -- your margins have been strong in 1Q, you guys gave some thoughts there. But maybe how do we think about -- obviously, pricing expectations are expected to be elevated. But how do we think about margins across the board, Feed, Food as well? How does that kind of shake out? And maybe operationally, if there are any tweaks that you guys are making, if you can talk to that. Randall Stuewe: Yes. If you look across the ingredient portfolio and kind of a little bit right to left, in the Fuel segment, non-DGD, very much an annuity business, but it's going to get a little bit of lift from the biogas business in Europe as we move forward through the year. Rousselot, very much predictable, more closer to consumer-type business, some where we're getting some tailwind there now as global collagen demand is really picking up. And when you make -- when you do the extraction, you make a raw material or a feedstock, then you can make gelatin or collagen. And as you defer -- directed to the collagen pipeline, you then take it away from the gelatin. And so ultimately, we're seeing some improvement there because gelatin margins came under some pretty significant pressure in the last couple of years due to some capacity additions in South America and China. So ultimately, we look at that segment as pretty stable, maybe a little bit of improvement. Clearly, the Feed segment has the most commodity exposure. It's really just, as we say, a timing exercise right now and how the better proteins and fats on the 3 big rendering continents of North America, Europe and South America all start to flow through. So you'll see some additional, what I'm going to call, margin expansion there. I think that that's really the thing that Bob and I feel so proud about is, is that the businesses in the rendering side are really operating at a high level of capacity and efficiency right now. Any of the challenges that we had in the prior years I think are behind us now, or I believe, I know they're behind us, and we're really starting to do well. The only downside, if we look back at years when there were commodity uplifts like this, we've got less beef in our system today than we've had in the past. And like I said, a chicken is less fat than red meat. So that -- you won't get 100% of what -- if you're trying to extrapolate prior years, but it's still going to be darn good. And it should accelerate throughout the year here. Operator: Our next question comes from the line of Andrew Strelzik with BMO Capital. Andrew Strelzik: I just wanted to follow up on the point that you were just making on kind of the internal improvements in the base business. Is there a way to kind of frame or quantify how much better your plants are running, how much more margin opportunity there is relative to the last time we saw fat prices at these levels kind of net of what you're saying on beef versus chicken? Robert Day: Andrew, yes, this is Bob. I think probably when you think about like the operations of our business and you point back to 2022 and 2023 and the large acquisitions that Darling made with Valley Proteins, FASA and Gelnex, the operations and sort of understanding how these assets all fit together are probably manifesting themselves most right now in the form of the high-quality proteins that we're making and the premiums we're able to capture because of the markets we're able to reach, whether it's high-end pet markets or high-end international markets. As those operations have come together and we understand the quality and demonstrate the consistency that we're able to produce, we're able to hit those markets more consistently. Same is true for the Gelnex acquisition and Rousselot. This is a very complex global supply chain. And our ability now really to leverage the value of these assets by consistently meeting customer needs, moving product internationally from Brazil or wherever in the world to Europe and the United States, we've really been able to identify what are the right origins and destinations, and get maximum value out of that. The value that you see, it's really incremental quarter-to-quarter. But a lot of what's sort of underpinning the strong results that we've had and what we're expecting as we go forward is improvement in our own operations and coordination. It isn't just market tailwinds. Andrew Strelzik: Okay. That's helpful. And then I also wanted to ask on kind of the RIN outlook generally, and I appreciate that there's a lot of focus in the market on the near term right now. I would just be curious to kind of get your perspective on the RIN landscape beyond '26 now that we have the RVOs, and kind of how you're thinking about comparing what the environment could look like then versus what we're seeing today, how much of a kicker that could be versus kind of where we stand today now that we have a formal policy in place. Robert Day: I mean right now, what we can see out as far as through to the end of 2027, that's the RVO that's in place, a lot of the answer to your question, it's going to depend on global prices of fuel energy, conventional energy. It's going to depend on tariffs. It's going to depend on how well the industry performs in the United States and the amount of production and supply that we create for the market. All of those things are -- I'd really have to know the answers to those to answer the question about where RINs are going to go. But what we do see when we look at this RVO through 2027 is that the industry needs to produce, it needs to run really hard. And even when it does, margins need to remain very strong in order to continue to incentivize all of the players to make enough product to meet that RVO. That's the picture we see. And so bottom line is RINs need to play their role in all that to be the great equalizer that creates a good renewable diesel and sustainable aviation fuel margin. Operator: Our next question comes from the line of Ben Kallo with Baird. Ben Kallo: Just a couple of questions on the Food business. Could you just talk about progress there with JV and then just like with a larger partner for the peptide side of the business? And then Randy or Bob, just on the acquisition front, you guys commented last quarter there are some smaller acquisitions. But just use of proceeds of cash, if you could give us an update there? Robert Day: Yes. So starting with the joint venture agreement that we've signed with Tessenderlo and we're hoping to close sometime soon, I think we've been pretty clear that we're in an antitrust review process. And that's really what we need to get through before we're able to close on that deal. Look, we haven't been -- we've never been more excited about the potential of forming that joint venture than we are right now. We continue to see significant increase in demand for hydrolyzed collagen. We continue to develop science and technology around the Nextida portfolio of products. What PB Leiner, the Tessenderlo business, would bring the overall Darling collagen business is added capacity that enables us to really efficiently utilize what they have and be very cost effective in production and continue to increase sales to really feed into this strong and growing collagen market. They also offer the opportunity to originate product and raw materials in a couple of countries where we don't have presence. And so it allows us to continue our growth without having to invest a lot of new capital and which also takes time to add that capacity. So that's still going forward. We're still in this process. And we hope to conclude it sometime soon. The proceeds that we used before that I think you're referring to, is we participated in an auction to buy 3 rendering assets from the Patense Group in Brazil, which was a really fantastic opportunity, through a Chapter 11 process for us to add assets that fit very well with the FASA network of assets that we previously acquired in 2022. Those are the kinds of things that we really look forward to and hope will continue to arise, essentially buying assets at a discount to full value, that fit very well with our network. Operator: Our next question comes from the line of Conor Fitzpatrick with Bank of America. Conor Fitzpatrick: Feed prices continue to run up. Forward soybean oil is in the mid-70s right now. And I guess the question is, how much more room do feed prices have to run up from here? And to answer that, I think we need to know why the ramp in biodiesel utilization appears to be lagging a bit in March. It's possible that higher pricing for physical delivery in parts of the Midwest or cash constraints on realizing 45Z credits or general hesitancy to restart facilities could explain it. Are you seeing any of those factors weighing on marginal biodiesel production and overall feed consumption in the market? Randall Stuewe: Yes. I think Bob and I can tag-team this. I mean, clearly, on the Gen 1 biodiesel business, restarting those plants coming out of winter just takes a little bit of time here. There's a seasonality of demand of that product. Trying to rebuild supply chains that have been shut down for 1.5 years take a little bit of time. So I think you'll see that industry start to ramp up from where it was. Interest rates are higher too. So working capital, people forget that when you don't have that blenders' tax credit, you've got to have a working capital line to run those plants. Clearly, the integrated guys, that's an easy switch for them, and you're seeing that. But the free-stander takes just a little bit longer to get there, would be my read on it. I don't know, what do you think, Bob? Robert Day: Yes. I think the other thing a lot of people miss on this one is for the small, independent biodiesel producer, they really don't have access to the production tax credit, practically speaking. Ultimately, they can get it. They certainly can generate the credit, they can eventually find a way to sell the credit, it would come at a pretty big discount to 100 cents on the dollar. But in the near term, they're not going to have access to that revenue. And so margins need to really increase from where we are today in order to incentivize all of these guys to come back online. It's just going to take a little bit more time. But eventually, that capacity is going to be valuable, in our opinion, because margins are going to move to levels that cause it to be. Conor Fitzpatrick: Okay. Great. And I guess relatedly, since a lot of those biodiesel producers are kind of constrained on the feed optionality side, not having pretreaters, what's kind of the split between opportunity for veg oils which require less pretreating and fat oils and greases that Feed Ingredients produces? The entire complex should run up, but veg oils might have a chance to run up a bit more. Robert Day: Yes. I mean, look, I think the reality is there's enough demand out there that can now utilize the non-veg oil feedstocks where we're probably going to just continue to trade at sort of their CI score adjusted values. So we're not really expecting to see veg oil run up relative to the other products just because, like I said, there's enough capacity that can utilize that. The thing with biodiesel is that it doesn't -- as long as it can buy refined oil or it's able to pretreat or clean the oil from that standpoint, then it doesn't need as much pretreat capability and biodiesel can run on 100% soybean oil. Operator: Our next question comes from the line of Matthew Blair with TPH. Matthew Blair: Could you talk about the feedstock slate at DGD? I know in the past you ran 100% low CI feed. Has that changed? Are you running more soybean oil in 2026 with just some of the changing credit values around 45Z and providing more of a subsidy for veg oil based feeds? Robert Day: Yes, Matthew. DGD is well setup to maximize opportunities depending on what is the lowest cost, net of CI score, feedstock and run for that barrel. That implies that there's an increase in the utilization of veg oils into the mix. I think that -- it's fair to say that that's occurring. But it's just going to depend on -- these markets are -- they move around quite a lot. And so they're just going to be able to take advantage of the opportunity, whichever it is. Matthew Blair: Sounds good. And then the comments earlier I thought were pretty interesting. You mentioned that the RVO will basically require more RD than what the West Coast LCFS markets can handle. And so the implication to us is that the marginal U.S. producer will actually have to sell into non-LCFS markets. But of course, the market will still need the RINs from those marginal producers. So overall, it just seems like a steepening of the cost curve is something that should continue to be pretty supportive for margins, probably likely come through in stronger RIN prices. Is that your take as well? Do you agree? Robert Day: Yes. I think that is how we see it. Ultimately, yes, I think that's how we see it. RIN, at the end of the day, like I said earlier, RINs will need to be the great equalizer that creates the margin that we need to make enough volume to satisfy the RVO. And the extent to which it needs to go is going to depend on all these other factors: feedstock costs, global fuel prices. Certainly, the environment that we're in today eases the burden of the RIN. But even with that, we're seeing very strong RIN values. Operator: Our next question comes from the line of Betty Zhang with Scotiabank. Y. Zhang: I wanted to ask on DGD, the 2Q guide is 320 million gallons. Is that essentially you're running at maximum levels? And if not, is there any reason to not run at max? Robert Day: Betty, it's close to max. I think right now, yes, you look at the margin environment, we are incentivized to run as hard as we can. 320 million is pretty close to max. I don't know what else there is to say. Randall Stuewe: You're being slightly positive, Bob, but it's -- that it's pretty close to full out. Robert Day: Yes. I mean we're going to do our best to run full out in this environment. Y. Zhang: Okay. Perfect. And then I wanted to ask on kind of the differential between SAF and renewable diesel. I know in the past, SAF has had a bit of a premium over RD. But given a lot of moving pieces, including the RVO and so on, can you just speak to maybe the economics of producing SAF versus RD currently? Robert Day: Yes. So I think the short answer is for sales into the United States and the voluntary markets, there's more of a fixed premium to RD, where SAF continues to be a better opportunity and better margin. In Europe, it is more dynamic than that. Europe is based on mandates, and we see times when margins in Europe for RD are better than SAF. We expect that to continue to be kind of volatile or up and down. But we're really happy with the voluntary market we have in the U.S. and the premiums that we can consistently get from SAF. So overall, we're still meeting our commitments from the investment we made in SAF at Port Arthur. Operator: Our next question comes from the line of Jason Gabelman with TD Securities. Jason Gabelman: Given Darling is uniquely positioned running domestic feedstocks and then not only producing but importing feedstocks to DGD from the international market, I was wondering if you could provide some color on if RIN prices today are sufficient enough to attract those international feedstocks to be run in the U.S. market, especially given those feedstocks no longer qualify for the producer tax credit? Robert Day: Yes. Good question. So the answer to that is going to depend on who's making the fuel. For Diamond Green Diesel and given our cost of production, the efficiency, the logistics that are available to us when it comes to importing those international feedstocks, we can make renewable diesel with those products and sell into the United States and make a good margin. I don't think everyone is able to say that. And so for that reason, we do think we'll continue to see margins strengthen. And we expect to see a difference in feedstock prices in North America relative to the rest of the world. Jason Gabelman: And do you expect that biodiesel producers are going to ultimately need to rely on international feedstocks as well in order for the industry to meet the RVO? Robert Day: No. I don't. I think biodiesel producers should see a sufficient amount of U.S. veg oil -- or U.S. and Canadian veg oil to supply their needs. Operator: There are currently no more questions waiting at this time. So I would like to pass the call back over to the management team for any closing remarks. Randall Stuewe: All right. Thanks, everybody, for your questions today. As you know, we'll be hosting an Investor Day on May 11 in New York. It will be simultaneously webcast. It's an exciting time for us as Suann, Bob, Carlos, myself and David van Dorselaer will lay out a lot of these topics that we discussed today in addition to what our future looks like and the 3-year road map as we see it today. So if you have any questions, follow up with Suann. And stay safe and have a great day. Thanks again. Operator: Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect your lines.
Operator: Good day, and welcome to the TriNet Group, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alex Bauer, Head of Investor Relations. Please go ahead. . Alex Bauer: Thank you, and good afternoon, everyone. Joining me today are Irving Tan, WD's Chief Executive Officer; and Kris Sennesael, WD's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations which are subject to various risks and uncertainties. [Technical Difficulty] Good morning, everybody. Sorry for the technical [indiscernible]. My name is Alex Bauer. I'm Head of TriNet's Investor Relations. Thank you for joining us, and welcome to TriNet's first quarter conference call and webcast. I am joined today by our President and CEO, Mike Simonds; and our CFO, Mala Murthy. Before we begin, I would like to preview this morning's call. First, I will pass the call to Mike for his comments regarding our first quarter performance. Mall will then review our Q1 financial performance in greater detail, we comment on our 2026 financial guidance and outlook. Please note that today's discussion will include our 2026 full year financial outlook and other statements that are not historical in nature, are predictive in nature or depend upon or refer to future events or conditions such as our expectations, estimates, predictions, strategies, beliefs or other statements that might be considered forward-looking. These forward-looking statements are based on management's current expectations and assumptions and are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future. Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise. We encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties and changes in circumstances that may affect our future results or the market price of our stock. In addition, our discussion today will include non-GAAP financial measures, including our forward-looking guidance for adjusted EBITDA margin and adjusted net income per diluted share. For reconciliations of our non-GAAP financial measures to our GAAP financial results, Please see our earnings release, 10-Q filings or our 10-K filing, which are available on our website or through the SEC website. Please also note that going forward, these filings may be released up to 48 hours after our earnings release. With that, I will turn the call over to Mike. Mike? Michael Simonds: Thank you, Alex, and good morning, everyone. I'm pleased with our start to 2026. In the first quarter, the TriNet team kept our clients as our first priority, navigating a volatile business and geopolitical environment. For today's call, I'll start with our first quarter performance, then highlight the actions we're taking to drive growth; and finally, discuss the potential impacts of AI, a widely discussed subject during the quarter. Our strong first quarter adjusted earnings per share up 25% over prior year reflect our disciplined approach to both repricing health fees and managing our expenses. Health fee repricing over the last year created a headwind for new sales and retention, including our January 2026 renewal, where attrition was about 2 points worse than prior year. Our pricing addressed both heightened medical cost trend and a cohort of underpriced business. With our January renewals complete, all cohorts within our customer base are now priced in line with more historical practices. And despite the impact of our January repricing, we expect overall 2026 retention to be better than full year 2025. We're already seeing a tangible improvement here in the second quarter where attrition due to health pricing has already declined by 30%, a trend we expect to continue throughout 2026. New sales grew modestly year-over-year in the first quarter. The increasingly volatile business environment pressured March close rates. For sales opportunities in the post proposal stage, we saw the time to close extend by about 15%. However, given pipeline visibility, our pricing position relative to the market and several sales initiatives that are coming online which I'll talk about in just a minute. We expect a solid full year sales growth for 2026. On insurance, performance improved as we benefited from stable health cost trends and disciplined pricing resulting in an 84% insurance cost ratio. A feature of our model is our ability to quickly respond to changes in insurance outcomes. We responded quickly to rising cost trends, and we'll do so again if and when trends moderate. We remain disciplined on expenses, aligning the business to its current scale, automating processes and advancing our talent optimization strategy. As a result, we delivered strong earnings and profitability in Q1 and we believe earnings are now tracking to the top half of our annual guidance. Our strong operating performance enables us to invest further in our products and services through acquisition, partnerships and internal build efforts, we're extending our value prop on issues our clients care about. These new capabilities, in combination with our investment in sales capacity, represent important steps in our return to sustainable growth. During the quarter, we completed the acquisition of Cocoon, an industry-leading employee leave management application aligned with our compliance-first approach. Cocoon should integrate seamlessly into our platform and address a significant customer pain point. With an automated leave of absence solution, we expect improved NPS scoring and increased retention along with further competitive differentiation in our PEO and ASO offerings. Next, we announced partnerships powering TriNet Global and TriNet IT. TriNet Global powered through our partnership with multiplier delivers global workforce visibility, compliance build workflows and localized support, enabling our clients to expand internationally with confidence. TriNet IT powered through our partnership with electric AI, embeds device and asset management into HR workflows, reducing IT effort, lowering costs and improving security. We remain on track to deliver our new benefit bundles, simplifying the buying process and aligning the right set of plans with client needs. As benefit bundles are released during the second quarter, we expect to benefit from their impact during the fall selling season. Alongside these investments in our offering, we continue to invest in our go-to-market capacity. Our broker strategy is increasingly driving deal flow and sales opportunities. Broker RFPs grew by nearly 12% year-over-year in Q1, and we're seeing Q2 broker RFPs accelerate off that number. We improved our broker experience with automated trusted adviser status and enhanced renewal access. In addition, we grew our most senior and productive sales reps by 10% year-over-year in Q1. Our ASCEND program graduates its first class, which will represent over 10% of our sales focus this fall. And with more than 100 trainees in the pipeline by year-end, we believe we can sustainably grow our sales force in 2027, both in terms of number and in terms of quality. In summary, we're improving our product, services and go-to-market capabilities. We've brought health fees in line with risk and increase the accuracy of our pricing processes going forward. As a result, we expect improved conversion rates on new business and higher retention rates in the client base. We're moving quickly on numerous fronts, which is a testament to my colleagues across the company. Increasingly, their efforts are being enabled by investments in AI, which brings me to the last topic I wanted to touch on before turning things over to Mala. We certainly understand that AI is an important topic for all of our stakeholders, and we see AI's impact across 2 dimensions. First, its impact on TriNet's operation sales service model and second, the external impacts on our client base and industry. Starting internally, this March, we launched TriNet Assistant, an AI tool giving our customers and colleagues access to our HR expertise whenever and wherever needed. Already TriNet Assistant is proving its impact. We just navigated tax season. Historically a period that sees a significant spike in inbound volume. Between March 31 and April 16, inbound volumes typically increase on average by 12%. TriNet Assistant successfully handled much of that demand driving a 6% reduction in inbound contacts through the busy period, delivering timely, accurate responses and improving overall service productivity. TriNet assistant will continue to evolve, broaden and become more effective with increased utilization. Similar examples of AI have emerged in our product development processes where 30% of code and 50% of our test cases are now AI generated and moving directly into peer review for production deployment. Sales agents are supporting our prospecting, quoting and closing processes. AI is supporting our colleagues on client engagements, capturing notes, suggesting answers and automating correspondence. As we have talked about on this call for the past few years, TriNet has operated with excellent client-facing technology, but many manual processes behind the scenes. The runway for AI to drive real improvement in client outcomes and efficiency is substantial, and we're excited about the capacity it creates for our colleagues to focus on what matters most, working directly with our clients. The ability to apply judgment, build relationships, manage risk is where my colleagues stand out and where I believe the resilience of our business model lies. During the first quarter, there's been robust discussion about the long-term threats of AI. TriNet sits at the intersection of employers, employees and government where AI supports rather than replaces the human responsibilities we take on behalf of our customers, things like handling payroll, human resources, insurance, taxes, compliance and more. Our customers aren't just buying software or knowledge. They're transferring risk and liability to TriNet. Further, they're buying real and human expertise to step in at high stakes moments, ensuring employees get paid when problems occur that health care coverage is there when needed and having someone in their corner when regulators inquire. As for AI's impact on SMBs, it's early and still very uncertain. We believe SMBs will be impacted differently across the various industry verticals. In verticals where AI adoption is highest, such as technology, client hiring has not changed materially over the past 2 years, suggesting AI is creating as much opportunity as it's replacing. There also seems to be a growing correlation between AI adoption and faster new business formation as small businesses do what they always do, move quickly to innovate and take advantage of new opportunities. Rest assured that TriNet will be there to capture our share of this market. So in summary, AI is undoubtedly driving change, but given our business model, we see AI as a positive opportunity to serve more SMBs and serve them better. Overall, we are off to a strong start, successfully navigating a difficult operating and business environment. Pricing is normalizing, expenses are managed and we're trending toward the favorable end of our 2026 financial guidance. We see significant AI opportunities across our operations and product and we are pursuing them. There's more work ahead but momentum is building, and we look forward to updating you as the year progresses. With that, I'll pass the call to Mala. Mala? Mala Murthy: Thank you, Mike. While the macro environment in the first quarter was uneven, TriNet's solid financial results were driven by disciplined pricing, better-than-expected insurance performance and strong execution. Over multiple cycles, we repriced our health fees in a disciplined and measured way. The impact on new sales and retention was considerable. I'm pleased to say that our trend plus price increases concluded with our January 1 renewal, and our retention outlook is improving. Furthermore, in the first quarter, we saw health costs materialize lower than forecast, which, when combined with our disciplined pricing, drove improved ICR performance. Our discipline extended to expense management. We made difficult decisions in the quarter, which resulted in meaningful run rate cost savings. Expenses are increasingly aligned with the scale of our business, and capital has been made available for investment and for shareholders. As our acquisition of Cocoon shows, we have capital available for acquisitions, supportive of our product and services. With that, let's dive into our fourth quarter financial performance in 2026. Total revenues were $1.2 billion, declining 5% year-over-year in the first quarter as expected. Total revenues in the quarter were supported by insurance and professional service revenue pricing, which were offset by declining WSE volumes. We finished the quarter with approximately 299,000 total WSEs, down 12% year-over-year. As a reminder, total WSEs include platform users or those users who are accessing our platform as well as co-employee WSEs or those users receiving the full benefit of our PO services. We ended the first quarter with approximately 273,000 total co-employed WSEs, down 12%, largely due to the cumulative impact of our repricing actions. Retention improved in February and March as we expected. Our full year retention forecast remains on track. We see year-over-year improvements beginning in Q2 and lasting through Q4, supported by more normal health pricing distribution beginning with our April 1 renewal, a trend we expect to continue through the year. Regarding customer hiring in the first quarter, [indiscernible] was slightly negative, better than our forecast. Professional Services revenue in the first quarter was $189 million, declining 10%, in line with our forecast. The largest impact to professional service revenue was from lower coemployed WSEs, which was offset partially by low single-digit pricing. We saw continued strength from our ASO business. ASO ARR has doubled year-over-year, remaining on track to become a meaningful contributor to professional service revenue growth. We were also pleased with our success in upselling PO2 ASO customers and retaining PO customers in our ASO. As we expand ASO we expect this upsell and retention dynamic to increase in importance. And finally, the headwind from the change in reporting methodology for state tax-related revenue in 1 state, was offset by difficult to predict normal changes in other states. As a result, we no longer expect this to be a headwind to our 2026 professional service revenue. Interest revenue in the first quarter was $14 million, a decline of 22% versus the prior year and in line with our forecast. The expected reduction of cash balances with certain tax credits drove the decline. Turning to Insurance. Insurance Services revenue declined 4% in the first quarter, primarily driven by lower overall WSEs offset by pricing. When divided by average co-employee WSEs, insurance service revenue grew 9.6%, reflecting our repricing efforts. Insurance costs in the first quarter declined by 9% year-over-year. And when divided by average co-employed WSEs, grew just 3.7%. As a result, our first quarter insurance cost ratio came in at 84% and over 4 points year-over-year improvement. Half of our 4-point improvement was expected and the result of our repricing efforts. The other half of the improvement was attributable to favorable development from 2025. So our results were a little better than expected, but one quarter does not make a trend. We passed the prior year favorability into our full year outlook, and we are encouraged by the general direction of our ICR. In the first quarter, operating expenses, which exclude insurance costs and interest expense, grew by 6% year-over-year. Operating expenses were impacted by a $14 million restructuring charge as we rightsize the business for its current size and executed our ongoing talent optimization and automation strategy, including AI implementation. For the first quarter, GAAP earnings per diluted share were $1.90 and adjusted net income per diluted share was $2.48. Our earnings were supported by strong cash generation. During the first quarter, we generated $186 million in adjusted EBITDA, representing an adjusted EBITDA margin of 15.2%. We generated $149 million in net cash provided by operating activities and $123 million in free cash flow. Free cash flow benefited from the 2025 tax law changes and timing of cash tax payments. Our capital priorities remain investing in our business for growth. M&A and returning capital to shareholders via share repurchases and dividends. The first quarter saw us leverage our strong cash generation and deliver on all 3. We returned $71 million to shareholders across share repurchases and dividends. We repurchased approximately 1.3 million shares for $58 million and we paid a $0.275 dividend in the quarter. Furthermore, we announced a 5% dividend increase to $0.29 per share. We also leveraged our cash generation to acquire Cocoon. Cocoon is an industry-leading leave of absence software suite, which addresses a key TriNet customer pain point. From a financial perspective, Cocoon as a stand-alone product is expected to be modestly dilutive to 2026 adjusted earnings per diluted share and neutral to 2027 adjusted earnings per share. The primary benefit of the Cocoon acquisition will come from increased PEO client retention. -- product integration is expected to be completed in 6 months with TriNet reaping the full benefit in 2027 from an improved customer experience and more efficient workflow. Turning to our 2026 outlook. We are reiterating our full year guidance. Revenue is performing in line with our forecast and our stronger than forecast Q1 insurance performance has had the effect of shifting our full year earnings expectations to the top half of our guidance range, assuming no significant uncontrollable event. For 2026, we continue to expect total revenues to be in the range of $4.75 billion to $4.9 billion. Our professional services revenue guidance remains in the range of approximately $625 million to $645 million, and our ICR remains in the range of 90.75% to 89.25%. The -- as I discussed earlier, Q1 IPR outperformed our plan by about 2 points as a result of prior period positive developments from 2025. We do not expect to receive more benefit from the prior year. We believe it is prudent to maintain our full year range, and we acknowledge that our full year ICR is tracking to the lower half of our guidance range. Our adjusted EBITDA margin stays in the range of 7.5% to 8.7% and GAAP earnings per diluted share are in the range of $2.15 to $3.05 and adjusted earnings per diluted share in the range of $3.70 to $4.70. In conclusion, I'm encouraged by our first quarter results. We remain disciplined with our pricing and completed our repricing efforts. Health costs came in lower than forecast in the quarter. and our strong first quarter has us tracking to the top half of our full year earnings guidance. Finally, the macroeconomic environment does remain volatile, but we are optimistic on our future and remain prudent with our investment in that future. With that, I will pass the call to the operator for Q&A. Operator? Operator: [Operator Instructions] And the first question comes from Jared Levine with TD Cowen. Jared Levine: To start, I wanted to double-click on the demand environment in terms of some of those sales cycles being impacted in the month of March, was there any kind of broad flavor in terms of industry vertical, more global clients or clients with significant customer concentrations in the Middle East in terms of that demand impact? Or was it fairly broad-based there? Michael Simonds: Jared, it's Mike. Yes, fairly broad-based. We saw a little bit more as you move upmarket. Those tend to be a little bit elongated anyway, but that's where it was more sensitive. And again, it was good strong start to the quarter slowed or got extended towards the end of the quarter. And we're just going to kind of keep watching it here in the second quarter. But there's a lot -- as we look at the pipeline, the demand is strong. It may just be a bit of the decisiveness part. Jared Levine: Got it. And then I wanted to also touch on Taco here. So I guess, Mike, I guess, part 1 here. Can you discuss the revenue opportunity you see here, whether that's cross-sells with a separate SKU or overall platform pricing increases in the model. Can you just double-click in terms of that revenue contribution for FY '26 here? Michael Simonds: Yes, absolutely. And just I would start by saying welcome to the Cocoon team that is likely listening in this morning. We are delighted to have a very talented group of colleagues join us in a really industry-leading product. We went out commercially and decided Cocoon would be the right fit for us and the discussion led to this strategic outcome. . It's -- the primary benefit, as Mala had in her prepared remarks, is really about delivering better outcomes on these to our PEO clients first. And so teams are very heads down on integrating that into our client base. We know it's a significant opportunity in terms of improving our Net Promoter Score and ultimately, our retention. We've, as many on the phone would know, has just become increasingly complicated given a distributed workforce and a pretty active regulatory environment at the state and local level. So excited about this as another nice investment in our strategy around driving up NPS and retention. We will, on the heels of that be putting it into our ASO offering as a managed service as well. I do think -- it's a high-demand service. So I do think it's going to be additive to what's already some pretty heady growth that we're seeing on the ASO side. And maybe Mala, I'll turn it to you on revenue. Mala Murthy: Yes. Jared, I wouldn't go into further details on that. Just suffice it to say that the revenue contribution to this year is very, very modest. What we are more focused on, as Mike alluded to in his comments is really how do we integrate this product into our overall offering. And we are really looking forward to see the impact of that in improving our NPS and therefore, retention and really hope to capture that in terms of our revenue tailwind as we move into 2027 and beyond. Operator: And the next question comes from Tobey Sommer with Truist. Tyler Barishaw: This is Tyler Barishaw on for Tobey. Just going back to the Cocoon. Was this an opportunistic acquisition? And should we -- or should we expect TriNet to look to do more M&A throughout the year? Michael Simonds: Tyler, thanks for the question. Yes, I would say -- we started with -- we knew this is something that our clients really wanted. And so we were out more from a commercial partnership opportunity that led to -- yes, I would describe it as a strategic opportunity for us. I would say, though, stepping back into the broader part of your question, we feel very fortunate to have such a strong franchise and such a cash-generative business that gives us a lot of flexibility. And our priority is to invest organically in our teams and in our technology to drive growth. But inorganic is a lever that we can pull as well. And I'd sort of think of it across 3 pretty simple buckets. The first is capabilities and Cocoon falls into that. And there may be future opportunities. The SaaS market right now is a little bit depressed and there's some potentially some good opportunities there. I think of those on the relative small size like we've seen here with Cocoon. And then it's about scale and capability in first the PEO and then our small but growing ASO business. And is there an opportunity to bring in some scale there that also maybe matches up with a vertical or a geography where they've got strength and we've got a relative soft spot. So primary focus is organic investment in growth. But yes, where there are opportunities, we'd look for -- tend to be sort of small to midsize and bolt-ons. Mala Murthy: Yes. The thing I would also add, Tyler, is -- as we have said before, we'll stay disciplined in terms of how any of these opportunities align with us both strategically but also importantly, in terms of its financial profile, we'll state disciplined on that. Tyler Barishaw: Makes sense. And then just on free cash flow conversion, up to 66% versus 49% in the prior year quarter. Can you talk through solving the drivers of that improvement? Mala Murthy: Yes. I'd point to essentially a couple of different drivers, right? One is you saw our adjusted EBITDA improved year-over-year. So that certainly has an impact. But the primary driver of our improved conversion is the fact that we had lower cash tax payments with the advantages we have from the one big beautiful bill. So that really is the primary -- the bigger driver of our improved free cash flow conversion. I would say even without that, even excluding that, we did actually improve our free cash flow conversion year-over-year slightly. Operator: And the next question comes from Andrew Nicholas with William Blair. Unknown Analyst: This is Daniel on for Andrew today. I wanted to turn back to the strong outperformance on ICR in the quarter. And then extrapolating that forward, how we should think about the conservatism of the guide maintenance. I know you pointed toward the lower half there, but maybe you can dive deeper on what that means for the cadence of performance in the remaining quarters of the year. Mala Murthy: Yes. What I would say, Daniel, is, as we explained in our prepared remarks, we saw a significant improvement in our year-over-year -- about half of that was expected. The other half of that really is from the favorable development pertaining to 2025. And just to double click on that, the driver of that is, as we went into the second half towards the end of the year, we saw some volatility in how claims ran off -- and we have considered that as we finished up the year. As we moved through Q1 of this year, that actually plays favorably relative to what we had assumed and what our outlook was at the end of 2025. The reason I'm double clicking on that is I would say that is a onetime benefit that we saw in the quarter in addition to the favorability in year-over-year that we were already expecting. And therefore, think about the full year ICR as follows: the reason we said that we are tracking to the top, the more favorable end of our ICR guidance, the more favorable half of our ICR guidance is essentially passing through that benefit in prior period development that we saw in Q1. I'd say on the base run rate, the rest of the performance, I would say, for now, we are keeping expectations as we had in our February guidance. It's still early in the year. As you know, and as we have found from our experience with claims costs things happen. And so we are keeping pretty close watch on it. And we will update our guidance and update you all as we traverse through the year. Unknown Analyst: Okay. Understood. And then maybe turning to the WSE front. It sounds like the first quarter decline was roughly aligned with expectations for the quarter. But can you help us frame when you expect to see the trough in WSE declines this year now that we've lapped the repricing actions and whether that's still yet to come? And if so, when? . Michael Simonds: Yes, I appreciate the question, Daniel. I just would start by saying we absolutely see a real growth opportunity here, and that's our focus, particularly now that we've cleared a pretty big milestone for us with the January 1 renewal and having gotten all of our cohorts relatively in line. And so you take that -- you take what Mala talked about really good outlook for improving retention. That's our biggest lever as we go through the year. And as we think about the actions we've taken, we just talked about the benefits of Cocoon. We talked earlier about trying to assistant. The things that we are doing to improve the quality of our delivery and the value we're delivering to our clients. We see that retention improving and improving, and this is important in a sustainable way. Second piece that we control is sales. We've talked about that. I'm actually really encouraged by the brokerage channel and the volumes that we're seeing coming through there 12% up in RFPs in the first quarter. Second quarter is building considerably higher off of that. And then just having -- keeping a really good tenured senior people and having our ascend well-trained folks coming out into the market this year and building -- by the end of the year, we'll have absolute capacity up in the low double-digit range year-over-year and have done that again in a sustainable, high-quality way. So -- we're optimistic about -- just like with the retention, a year-over-year growth metric, which is encouraging to us. And so you take those 2 and put it together, Daniel, with the CIE expectation that we're just going to hold that very muted levels, and that gives us growing confidence that we can stabilize WSE count here for the balance of the year. And then as we look out from there ultimately drive growth but drive growth in a really sustainable way. Operator: [Operator Instructions] And the next question comes from Kyle Peterson with Needham & Company. Ross Cole: This is Ross Cole on for Kyle. I was wondering if you could double-click on professional services a little bit for the quarter and then your outlook for the year. it seems like it came in about around what we expected for this quarter. Do you see this also reaching the higher end of the guidance? Or maybe you can just kind of walk us through how you're seeing this for the rest of the year. Mala Murthy: Yes. Thanks for the question. As we said in our prepared remarks, professional services revenue declined year-over-year about 10%. And I'd say there are a few puts and takes in that, that I see sort of I'm watching as it plays out through the rest of the year. So obviously, it was heavily impacted by the 12% decline in volumes. But that was partially offset by low single-digit rate benefits that we saw in PSR. I would say, if I think about how that played against our expectations, it was about in line with our expectations. The -- a couple of other components within that is One is we did expect some headwind for the year from our SUDA margins, that is essentially neutral that is relatively modest in the overall scheme of our overall PSR. It's essentially, the benefit is in the single-digit million range. So again, it's relatively modest. And we have talked about ASO growth. ASO ARR, as we talked about in our remarks, actually doubled in the quarter. We are really pleased with the momentum we are seeing in it and if I look at our overall ASO revenue expectations for the year, also in line, it's coming in, in line with our full year forecast at this point in time. So if I sum it all up, what I would say to you is largely in line with our expectations with just a very, very modest speed on the SUTA piece because of the developments we talked about in our prepared remarks. Operator: And the next question comes from Brendan Biles with JPMorgan. Brendan Biles: First of all, like -- congrats on the results. Great to see the insurance cost ratio dynamics. I'd love to take an opportunity to just kind of step back and ask you to share your learnings over the last 2 years as it relates to this whole insurance price cycle change? And what gives you confidence that in future insurance price change cycles that TriNet will be more resilient? And then my second question, if I could tack 1 on, too, is on the AI companies, new AI entrepreneurship. Just a little bit more about that market, how TriNet is showing up, the trends you're seeing in AI-related start-ups or start-ups that have been accelerated by. That would be great. Michael Simonds: Thanks, Brendan. Two excellent questions. So I'll take the second one first. On the start-ups, like we hit earlier, it is pretty remarkable to see new business starts. And certainly, some of those are AI specific. And so we start to see those in our technology vertical and in markets that are really important to us. I would say that we typically will pick up start-ups a little bit later than in the cycle than when they're hitting like the BLS as a new business starts. So I'd be looking out, say, 6 months, 9 months, 12 months from now. Certainly, we're getting some good wins there. But I expect that that's going to build as we go through the year and get into 2027. As those firms scale to the point where there's enough complexity there that looking to a TriNet is going to make a lot of sense for them. . And then on your first question, we think a lot about that one around what have we learned through this part of the cycle. And I'd start by saying, like at the end of the day, it's a risk-taking business. So there is always going to be fluctuations and outcomes. And I wish I could, but I could never sit here and tell you we've cracked the code there and have found a way to kind of eliminate that volatility. I think it is all about getting better at how you're forecasting, how you're assessing the risk and then how you're applying that insight at the client level through your new business and through your renewal processes. And just I've been here a little over 2 years. One of the first things we did was really invest in our Insurance Services group. We brought in Tim Nemer, who has run actuarial and underwriting functions for some of the largest health care organizations on the planet. We've invested in further talent beyond that. We've actually gone through and redone our rating system. We've gone through and looked at how we present our health plan offer through the bundles. So all these factors go into just not fixing the problem and eliminating volatility but really sharpening our pencil and tightening that distribution curve. And I will say from experience in other companies, when you go through a cycle like this, it is really difficult to be as disciplined as we've done it, and it kind of gets embedded in your DNA on a go-forward basis. So I think it's going to be important for us, not just that we've turned this corner, which I do believe we have on the in-force block, but that we work really hard to make sure that the business we bring in going forward is brought in a sustainable way. Operator: And the next question comes from David Grossman with Stifel. David Grossman: Mike, maybe you could just reflect given the repricing of the book and the kind of impact it's had on assuming the insurance markets are fairly efficient, where do these people go. If, in fact, you're now appropriately pricing to risk, where do those clients that are going when they leave . Michael Simonds: Yes. David, obviously, we spent a good amount of time understanding why a client is leaving and then ultimately, wherever we can, understanding where they're going. And the probably unsatisfactory answer is there hasn't been a big change in the distribution of where clients are going. We have seen a big change in the distribution of why. And so we've seen -- and in Q1 is a good example, 2x the reason code for why people are leaving being due to help fee increases has grown to be a very significant amount of the attrition. And -- and that's pretty quickly reversed itself as we've gotten here to [indiscernible] in our outlooks going forward. So that sort of speaks to the why. . [indiscernible] to your question it really does depend. -- down market, you see people going into the open market where they're finding more standardized plan design and rate structures is a better match for their particular risk. You do see some going into other PEOs. And the reality is different competitors have different rating approaches and they're just going to see risk a different way. Upmarket clients may find that some sort of participating in the risk, so we see a little bit of people going into self-insured and level-funded type plans amongst some of the larger terminations. But it is a little bit distributed across that base. I guess, the last thing, David, is like -- you definitely see this -- the problem of what is now 2 years of elevated health care costs , we haven't seen in a long period of time. That is something that everybody has -- the carriers are dealing with it other PEOs are dealing with it. Everyone's got to deal with that same problem. It just leads to a lot more shopping and ultimately, it does drive some attrition. David Grossman: So do you think if the kind of the health care cost dynamic improves. Do you think that becomes a net tailwind for people to reengage with PEO, just more generally speaking? . Michael Simonds: I think that's a reasonable thesis. David Grossman: Got it. Okay. And then just now that you've had a little time to kind of process the changes in your go-to-market strategy. As you think about the broker channel, and I know you gave some statistics on increasing our fees. What do you think is resonating most with the brokers specific to TriNet versus other alternatives that they may have. Michael Simonds: I think the #1 thing is a really good broker cares, first and foremost, about the experience and the value their client is going to get. So where we can get repeated at that and where a broker has referred business in, they've seen kind of the quality of the delivery ultimately, that's our biggest and most important lever. And that's why it takes a little bit of time to build real sustainable momentum in the channel is you've got to prove yourself. But once you do, the leverage is pretty considerable. When you think about the penetration, 95-plus percent of SMBs get their health care through an independent broker or agent. It has a really nice scale effects once you get there. . I think for us, a lot of it is just looking at our processes and including the broker appropriately as an adviser to their clients. So unlike perhaps some other referral channels, in general, take a health insurance broker they're going to want to stay connected at renewal time. They're going to want to have access to and be able to help their client and where we can do that and our teams can go shoulder to shoulder, again, that's building trust in the relationship and in the quality of the delivery. So I would have, and I'm excited to see the first step is they need to give you opportunities, and that's the RFP growth that we've seen, and that's really performing well. The second piece is we need to get wins and get enough wins within the same relationships to sort of prove the value proposition. And that's kind of part of the story that we're at now. David Grossman: Great. And if I could just sneak one more in for Mala. On, should we think about the expense rate going forward the 1Q results less the restructuring action is that $100 million of a good reference point for the balance of the year. . Mala Murthy: David, I would just stay with the -- what we had said in February, right? We had said we expect our operating expense for the full year to be lower than prior year in the mid-single-digit range. And we are still staying with that as part of our overall expectations and guidance. Operator: And this concludes our question-and-answer session. I'd like to turn the conference back over to Mike Simonds for any closing comments. Michael Simonds: Thanks, everybody, for joining the call this morning. I hope you get a sense that we've had an important milestone, and we're starting to turn a corner here at TriNet. There is a real rhythm and consistency to the actions we're taking. It's gratifying to start to see some of those play through. A lot of work to do, and Alex and Mala and I look forward to keeping you posted getting out in a bunch of meetings over the coming weeks and months. And with that, Keith, that concludes our call. Operator: Thank you. And as mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Greetings. Welcome to Cullen/Frost Bankers Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Ed Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin. Unknown Executive: Thanks, Sherry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234. At this time, I'll turn the call over to Phil. Phillip Green: Thanks, A.B. Good afternoon, everyone, and thanks for joining us. As is our practice, today, we'll review the first quarter 2026 results for Cullen/Frost and our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance updates before we take your questions. In the first quarter of 2026, Cullen/Frost earned $169.3 million, an increase of 13.4% compared to the $149.3 million earned in the first quarter of last year. Per share earnings for the first quarter were $2.65, and that was an increase of 15.2% from the $2.30 in the first quarter last year. Our return on average assets and average common equity in the first quarter were 1.32% and 15.15%, respectively and that compares with 1.19% and 15.54% in the first quarter of last year. Average deposits in the first quarter were $42.2 billion, an increase from the $41.7 billion in the same quarter last year and average loans grew to $22 billion in the first quarter, up from $20.8 billion in the first quarter of last year. In past quarters, we've discussed the success of our organic branch expansion strategy in the Houston, Dallas and Austin regions. I thought it would be helpful to point out that those results have excluded the successes of a growing number of new locations that we have opened in markets outside of those announced regions. For example, since the initial launch of our first Houston expansion in late 2018, we've actually opened 8 of these financial centers outside of those announced regions. That's the same number of locations we opened in our 20 -- excuse me, in our Houston 2.0 expansion. So going forward, we'll incorporate all the new locations as we talk about the performance of our branch expansion strategy, and Dan will talk more about these numbers in his prepared remarks. Turning now to our consumer line of business. Our consumer bank earned the J.D. Power award for customer satisfaction in consumer banking in Texas for the 17th consecutive year. While we don't do this for the awards, this sustained consistency in delivering excellence signals that our culture remains strong even after tripling our locations in Dallas doubling our locations in Houston and doubling our footprint in the Austin region. It also sends a powerful message to prospects that Frost is here to help them. In an extremely competitive banking market with many new entrants, our industry-leading customer experience continues to drive what we believe is some of the strongest organic growth results in the industry. Year-over-year, consumer checking households grew 5.3%, and year-over-year consumer loan balances increased 19%. Consumer loan growth totaled $154 million in the first quarter alone, which is nearly double Q1 2025 growth. This success was driven by our mortgage products, which grew $124 million in the quarter and reached $719 million in total outstanding balances. Looking at consumer deposits, I like to... [Technical Difficulty] Operator: Ladies and gentlemen, I apologize for the technical difficulties. I would now like to turn the call back over to management. Phillip Green: We're sorry for the delay. I'll start back approximately where I was or I believe I was when we had a technical difficulty. We were looking at consumer deposits, and I wanted to look at what was happening with consumer checking and savings balances because those 2 categories to me, are less interest-sensitive and reflect, I think, what's happening with households. And if I adjust out the loss of balances from one extremely large account in the fourth quarter, as a result of activities surrounding the administration of this account owners estate, consumer checking and savings balances increased 3% and 2%, respectively, on a linked-quarter basis. Our commercial business continued to perform well, and I am encouraged by the momentum we're seeing in this segment. For example, looking at new relationships. This marked the fourth consecutive quarter where we delivered over 1,000 new relationships. The 1,016 we generated represents our highest first quarter performance on record. 46% of our new relationships came from the 2 big [indiscernible] banks and 8% came from, what I'll call, disruption, represented by organizations going through an acquisition. Looking further at our loan pipeline, our growth pipeline, what I'll call, new opportunities was $6.8 billion and represented a 55% increase over the previous quarter and represented our all-time high. It reflected origination strength across regions, segments and deal sizes. Our 90-day weighted pipeline increased 38% from the prior quarter and at almost $2 billion represented our highest weighted pipeline on record. Our overall credit quality remains good by historical standards with net charge-offs and nonperforming assets both at healthy levels. Nonperforming assets were $73 million at the end of the first quarter and were in line with the $72 million from last quarter and $85 million a year ago. The year-end nonperforming asset figure represents 33 basis points of period-end loans and 14 basis points of total assets, both the same as last quarter. Net charge-offs for the first quarter were $5.8 million compared to the same $5.8 million figure last quarter and $9.7 million a year ago. Annualized net charge-offs for the first quarter represent 11 basis points of average loans, the same as last quarter and down from 19 basis points a year ago. Total problem loans, which we define as risk grade 10 or higher, otherwise known as OAEM, totaled $989 million at the end of the first quarter up from $857 million last quarter and $889 million a year ago. All of the net increase can be attributed to loans in the risk grade 10 category and we expect to see some large resolutions in the second and third quarters. Overall, I continue to be pleased with these results and the success of our people, expanding our business. while providing world-class service as evidenced by the awards we continue to receive. With that, I'll turn it over to Dan for some additional insights. Dan Geddes: Thank you, Phil. Let me start off by giving some additional color on our branch expansion growth. As Phil mentioned, this performance now includes 8 additional branches opened since we began Houston 1.0 and outside of our announced expansions in Houston, Dallas and Austin. During the first quarter, our branch expansion delivered $0.14 or 5.6% of EPS accretion. We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, average loans grew 33% and represents 12.7% of loans up from 10.1% a year ago, while average deposits grew 21%, representing 8.3% of deposits versus 7% in the same period last year. The expansion branches have now grown to $2.9 billion in loans, $3.6 billion in deposits and have added approximately 95,000 new households. As we have said in the past, our organic growth strategy is both durable and scalable. We opened 2 new locations in the first quarter, one in the Austin region and one in the Dallas region. Our current plan is to open an additional 10 to 12 branches over the balance of 2026. Now moving to the first quarter financial performance for the company. Our net interest margin percentage was 3.74% for the quarter, up 8 basis points from the 3.66% reported last quarter. Lower interest-bearing deposits and repos during the quarter, which negatively impacts net interest income had a positive impact on net interest margin due to a lower relative spread to the overnight rates. Looking at our investment portfolio. The total investment portfolio averaged $19.9 billion during the first quarter, flat with the previous quarter. Investment purchases during the quarter totaled $2.3 billion, consisting of $1.23 billion of treasuries, yielding 3.66%, $618 million of Agency MBS securities, yielding 5.09% and $423 million of municipals yielding 5.71% on a tax equivalent basis. Maturities during the quarter included $400 million of treasuries with an average yield of 3.44%, $540 million of municipals at an average tax equivalent yield of 3.53% and $430 million of Agency MBS paydowns. The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.15 billion compared to $1.04 billion reported at the end of the previous quarter. The tax equivalent yield on the total investment portfolio during the quarter was 3.85%, up 3 basis points from the previous quarter. The taxable portfolio averaged $12.7 billion flat with the prior quarter and had a yield of 3.39%, up slightly from 3.38% in the prior quarter. Our tax-exempt municipal portfolio averaged $7.1 billion down $76 million from the prior quarter and had a taxable equivalent yield of 4.73%, up 9 basis points from the prior quarter. At the end of the first quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the fourth quarter was 5.2 years, down from 5.3 years at the end of the fourth quarter. Looking at our funding sources. On a linked-quarter basis, average total deposits of $42.2 billion were down $1.1 billion from the previous quarter. This seasonal decrease was about 30% noninterest-bearing and 70% interest-bearing. The cost of interest-bearing deposits in the first quarter was 1.55%, down 20 basis points from 1.75% in the first quarter. Customer repos for the first quarter averaged $4.2 billion, down $426 million from the fourth quarter. The cost of customer repos for the quarter was 2.70%, down 17 basis points from the fourth quarter. Looking at noninterest income and expenses, I'll point out a couple of seasonal and onetime items impacting the linked quarter results. Regarding noninterest income, insurance commissions and fees were up $6.9 million. Recall that the first quarter is a seasonally strong quarter. Other income was down $4 million as we received our annual VISA volume bonus of $5.4 million in the fourth quarter. Salaries and wages were down $16.3 million compared to the linked quarter. Last quarter included approximately $4.2 million in onetime expenses related to our payroll transition from bi-monthly to biweekly. Additionally, the prior quarter included $7.2 million in higher stock compensation related to our stock awards granted in October of each year, some of which by their nature, require immediate expense recognition. FDIC deposit expense was up $8.6 million compared to a quarter ago as we reversed $8.4 million of our special FDIC insurance accrual in the fourth quarter of last year. Regarding our guidance for full year 2026, our current outlook includes 125 basis point cut for the Fed funds rate in the fourth quarter. We expect net interest ... [Technical Difficulty] Operator: Ladies and gentlemen, thank you for your patience. Due to technical difficulties, we are unable to continue today's call and will need to cancel. We apologize for the inconvenience and ask that you please keep an eye on a press release for rescheduling detail shortly. Thank you for understanding.
Operator: Hello, everyone. Thank you for joining us, and welcome to the ProPetro Holdings First Quarter 2026 Conference Call. [Operator Instructions] I will now hand the conference over to Matt Augustine, ProPetro's Vice President of Finance and Investor Relations. Please go ahead. Matt Augustine: Thank you, and good morning. We appreciate your participation in today's call. With me are Chief Executive Officer, Sam Sledge; Chief Financial Officer, Caleb Weatherl; President and Chief Operating Officer, Adam Munoz; President of PROPWR, Travis Simmering. This morning, we released our earnings results for the first quarter of 2026. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to several risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and risk factors discussed in our filings with the SEC. Also during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. Finally, after our prepared remarks, we will hold a question-and-answer session. With that, I would like to turn the call over to Sam. Sam Sledge: Thanks, Matt, and good morning, everyone. The results we generated in the first quarter of 2026 demonstrate the resilience of our business model. Despite weather-related disruptions that significantly impacted revenue and profitability during the quarter, we delivered positive financial results in our completions business, particularly when measured by adjusted EBITDA less incurred capital expenditures. These results highlight the strength of our industrialized model, which is the result of strategic investments, disciplined asset deployment and rigorous cost management. The strategic actions we implemented throughout 2025 to protect our assets and rightsize our cost structure are now delivering measurable benefits, positioning us for success in the current market environment. We'll continue to leverage the industrialized nature of our completions business to drive expansion of PROPWR, which we expect to fuel future earnings growth and further strengthen our value proposition. With respect to the broader environment, we're still in the early stages of assessing the global and domestic implications of the Iran war. While uncertainty remains, we're starting to see signs of recovery across the broader North American oilfield services sector given a strengthening commodity backdrop that is driving early pricing and activity tailwinds across our completions business. Importantly, structural tightening in the completions market continues to intensify, driven by ongoing attrition, particularly among smaller and less disciplined competitors. This trend was already emerging prior to the onset of the Iran war and has since accelerated with the recent increase in demand for U.S. frac activity. Notably, there was already very little spare frac equipment capacity even before the conflict began, further amplifying current market constraints. These dynamics, combined with ongoing capital investment discipline and pricing discipline have tempered any plans to expand capacity both within ProPetro and among our close peers in the completion space. Collectively, these factors have created a more constructive supply and demand environment for our business over time. We do recognize the impact that the Iran war has created for our business. However, the market remains volatile, and we expect this uncertainty to persist until there is more clarity on the disruptions in the Middle East and the subsequent impacts on global supply and demand dynamics. While external conditions are beyond our influence, we remain focused on what we can control, our commitment to operational excellence, exercising rigorous cost discipline and deploying capital strategically. Our stable and industrialized business model ensures our positioning not only to navigate this volatility, but also to maximize opportunities and emerge stronger as conditions stabilize. Turning briefly to our fleet. Due to the significant diesel to natural gas price discount currently at play in the Permian Basin, we've seen an uptick in demand for next-generation natural gas burning fleet. Currently, approximately 75% of our fleet is next generation, spanning our Tier 4 DGB dual-fuel and FORCE electric fleet. Recently, we've also added a small number of 100% natural gas burning direct drive units that operate at the highest performance standard and complement our existing fleet. These additions are measured and are not intended to expand our overall capacity in the environment, but rather to further enhance our portfolio. We anticipate adding a few more units later this year to capture targeted demand as it required. As we look ahead, early indications suggest that the floor for crude prices has risen and is becoming more stable, which is constructive for our business. Due to the strong demand for next-generation natural gas burning fleet, we're currently sold out across our Tier 4 DGB dual-fuel and FORCE electric fleet, and accordingly expect to run approximately 12 fleets in the second quarter, up from the approximately 11 in the first quarter. Importantly, we do have a few additional Tier 2 diesel fleets available, which we will deploy only if opportunities meet our economic return threshold. Given disciplined deployments and limited capacity in the completions market, we're well positioned to quickly capitalize on new opportunities as they emerge. Now moving over to PROPWER. We've made significant progress across several key initiatives this past quarter, highlighted by our recent announcement of a new strategic framework agreement with Caterpillar. This agreement enables PROPWER to acquire up to approximately 2.1 gigawatts of additional power generation capacity over the next 5 years. When combined with the approximate 550 megawatts previously ordered and upon successful delivery of assets under this agreement, PROPWER is positioned to have approximately 2.6 gigawatts of power generation capacity delivered by year-end 2031 and fully deployed in 2032. Our nearly 20-year strategic partnership with Caterpillar has been instrumental in shaping our long-term growth plan for PROPWER. This collaboration enables us to pursue shared success while providing PROPWER with reliable access to high-quality assets even amidst the challenges of an exceptionally constrained supply chain. Together, we're well positioned to capture the future opportunities and drive mutual value. This agreement underscores PROPWER's leadership in deploying innovative energy solutions, and we're excited about the transformative potential it brings to our company. To support our upsized order backlog, we have built a robust commercial pipeline. Demand for reliable and low-emission power solutions remains very strong, fueling continued growth across the data center, industrial, and oil and gas sectors. Notably, we're pleased to report major advancements representing several hundred megawatts of high potential data center opportunities in a select portion of our data center commercial pipeline. While specific details are contingent on finalizing agreements, these developments highlight our expanding leadership and strategic positioning in the digital infrastructure market. Additionally, we are engaged in advanced contract negotiations for approximately 100 megawatts to support oil and gas microgrid projects with deployment expected later this year. These commercial developments will rapidly expand our total committed capacity beyond the approximately 240 megawatts currently committed under contract. We are confident in PROPWER's future growth and expect to secure additional contracts throughout 2026 as we extend and deepen relationships with both new and existing partners. The majority of future megawatts are anticipated to be contracted within the data center and industrial sectors, driven by their larger load requirements and long-term strategic commitment. Importantly, our near-term focus also remains on disciplined execution, deploying and scaling PROPWER across our contracted customers with a strong emphasis on derisking deployment and building a resilient operational foundation to support sustainable long-term growth and profitability. As we continue to deploy capital to grow PROPWER, we remain committed to maintaining financial flexibility and a strong balance sheet. Our preferred source of funding continues to be free cash flow generated from our completions. This is supplemented by our strong balance sheet, proceeds from our recent equity offering and access to flexible financing arrangements, including our Caterpillar financing facility and lease financing structures that we already have in place. Given the recent increased orders, we will continue to actively pursue low-cost capital and flexible financing solution to support PROPWER's growth. Looking ahead, while we're still in the early days for PROPWER, we've already made significant progress to secure customer commitments and have real momentum and real operation that allow us to negotiate additional contracts from a position of strength and proven service quality. As the demand for reliable low emissions power solutions continues to grow, we expect PROPWER to continue to scale and deliver increasing returns over time. Our approach remains consistent. We're staying nimble and disciplined, while continuing to lean into the opportunity we see at PWER. Stepping back, the strategy we've been executing over the past several years is now working. Our completions business continues to generate resilient financial results and provides the foundation to fund growth, while PROPWER represents a high growth and high return on investment vehicle that we are just beginning to scale. Importantly, ProPetro is a strong company pursuing value-enhancing growth opportunities from a position of strength. We maintain a healthy balance sheet that provides us with the flexibility to invest in PROPWER. At the same time, we're beginning to see tailwinds emerge in our completions business with early signs of tightening supply and improving pricing dynamics. We have a strong balance sheet, first-class customers and a first-class team that continue to execute at a high level while operating safely, efficiently and productively. Taken together, we believe we're well positioned to execute through the current environment and create meaningful long-term value. Caleb Weatherl: Thanks, Sam, and good morning, everyone. As Sam mentioned, ProPetro's first quarter performance once again demonstrated the industrialized and resilient nature of our business. Despite lower revenue, we generated positive financial results in our completions study, which continues to highlight the durability of our company. At the same time, we have made meaningful recent progress in PROPWER, including advancing equipment orders and securing additional capital. These efforts position PROPWER to become an increasingly important contributor to the company's future earnings profile. During the first quarter, ProPetro generated total revenue of $271 million, a decrease of 7% as compared to the prior quarter. Net loss totaled $4 million or $0.03 loss per diluted share compared to net income of $1 million or $0.01 income per diluted share for the fourth quarter of 2025. Adjusted EBITDA totaled $36 million or 13% of revenue and decreased 29% compared to the prior quarter. This includes the lease expense related to our electric fleets of $16 million. As Sam mentioned, the decrease in adjusted EBITDA this quarter was primarily driven by reduced utilization in the completions business, which was significantly impacted by adverse weather conditions. Net cash provided by operating activities was $3 million as compared to $81 million in the prior quarter. The decrease is primarily attributable to lower adjusted EBITDA and working capital headwinds in the first quarter, which consumed approximately $32 million in cash and working capital tailwinds in the prior quarter, which were an approximately $35 million source of cash. During the first quarter, capital expenditures paid were $43 million and capital expenditures incurred were $85 million, including approximately $14 million primarily supporting maintenance in our completions business and approximately $71 million supporting PROPWER orders. Notably, the difference between incurred and paid capital expenditures is primarily comprised of PROPWER-related capital expenditures that have been financed and paid directly by our financing partners and unpaid capital expenditures included in accounts payable and accrued liabilities. Net cash used in investing activities, as shown on the statement of cash flow, during the first quarter of 2026 was $41 million, which included capital expenditures paid of $43 million, offset by $2 million in proceeds from certain asset sales. We currently anticipate full year 2026 capital expenditures incurred to be between $540 million and $610 million, up from the $390 million to $435 million range highlighted in our fourth quarter earnings report. Of this, the completions business is expected to account for approximately $140 million to $160 million, including approximately $40 million to $50 million related to planned lease buyouts for a portion of our FORCE electric fleet portfolio. As a reminder, the 5 FORCE electric fleet leases were secured with an initial 3-year term and include options to either buy out or extend the leases at the end of that period. The intent behind these leases was to defer upfront capital expenditures while securing the equipment at an attractive cost of capital, supported by the earnings from the FORCE electric fleet. This strategy proved successful, enabling ProPetro to rapidly transform our fleet and still generate accretive cash flow. Our current intent to exercise the upcoming lease buyouts reflects the completion of a deliberate and strategic capital allocation decision. By exercising these options, we will take full ownership of the FORCE fleet. Each buyout will immediately reduce our lease expense, currently reflected in operating expenses and strengthen our commercial flexibility. We expect to buy out all 5 fleets with buyouts anticipated to begin in late 2026 and continue through 2028. Also, as a reminder, the completions business guidance range includes capital reserve for refurbishing a portion of the existing Tier 4 DGB fleet, investments in fleet automation technology as well as measured investments in direct drive gas frac units. Investments in our gas burning equipment portfolio are especially valuable in the current market context. Accelerating demand for these fleets is driven by higher diesel prices and a significant diesel to natural gas price discount in the Permian Basin, resulting from the effects of the Iran war. This price differential enhances the economic viability of natural gas-powered fleets, making these investments critical for capitalizing on market opportunities and strengthening our competitive position. Additionally, we anticipate incurring capital expenditures of approximately $400 million to $450 million for our PROPWER business in 2026. This projected increase is attributable to down payments for future deliveries associated with the recently executed framework agreement with Caterpillar. While these PROPWER capital expenditure estimates reflect the total cost of the equipment, they do not account for the impact of financing arrangements, which are expected to reduce the near-term actual cash outflows or cash CapEx required from the company. Cash and liquidity continue to remain healthy. As of March 31, 2026, total cash was $157 million. Total liquidity at the end of the first quarter of 2026 was $289 million, including cash and $132 million of available capacity under the ABL credit facility. Lastly, and as I mentioned last quarter, we'll continue to take a disciplined approach to deploying capital. This commitment ensures ProPetro remains well positioned to fund the strategic growth of our PROPWER business while maintaining a strong financial foundation. To reiterate what Sam already mentioned, we are pleased with our current capital position and our ability to support PROPWER's growth. That said, we continue to actively work to source low-cost and flexible financing, especially in light of recent increased orders. Our priority remains maintaining a strong balance sheet while ensuring we have the resources to capitalize on future opportunities. Sam, back over to you. Sam Sledge: Thanks, Caleb. As we wrap up today's call, I'd like to reiterate a few points. We recognize the improving completions market, which is benefiting from a stronger commodity environment and recent market dynamics, including the impact of the Iran war. Given current supply and demand fundamentals inside the completions market, we remain confident in our ability to respond to additional commercial opportunities as they arrive. At the same time, PROPWR continues to gain momentum, supported by a robust commercial pipeline and our recently announced strategic framework agreement with Caterpillar. Our focus remains on disciplined execution and building a durable platform for long-term growth. We have a well-positioned company with a strong balance sheet, first-class customers that is all paired with exceptional leaders and teammates that enable our success. I'm grateful for how our team navigated the first quarter with focus, discipline and ownership. Their work positions us exceptionally well for the opportunities ahead. We remain confident in our strategy and our ability to create value for our shareholders. With that, operator, we'd now like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from Saurabh Pant with Bank of America. Saurabh Pant: Sam, obviously, a big day with the announcement of the strategic partnership with CAT. The first one, Sam, I was hoping to -- hoping to ask is just up to 2.1 gigawatt of equipment that you may be getting, right? Maybe can you talk to the mix of this equipment? Is this all natural gas resets? Is there a mix of turbines? And how are you thinking about that mix? Maybe just help us think about life cycle cost, CapEx versus OpEx, fuel cost as you run this equipment over the next 10, 15, 20 years, right? Just maybe help us think about that a little bit. Sam Sledge: Sure. Great question, very topical. I'll just make a couple of think high-level remarks, Travis can probably fill in some of the details on the numbers that you asked. Look, this is -- part of this capacity is going to be a little bit more of the same from an equipment standpoint, mainly in the gas reciprocating arena. And then there's a larger portion of this capacity that we can't really speak to in detail right now, but we'll be providing some more details in the future. And look, this is something that we've been working on for quite some time, trying to balance the commercial pipeline with the tightness in the supply chain and to be able to do this with a partner that we have almost 20 years of familiarity with is quite big, and I think sets us up really well from an execution standpoint when we start to take delivery and deploy this equipment. Travis, I don't know if you want to say anything else about economics and fuel efficiency and all that. Travis Simmering: Yes. I think we've said from the beginning, Saurabh, that our strategy has been to choose the right technology for the right project. And I think signing up with Caterpillar gives us probably the widest range of options on the market. So we've continued to lean into the reciprocating engines. That's what we're going to do with this framework agreement. And that's really anchored by the fact that larger, more power dense engines that are highly efficient are really required to provide some differentiation in the data center market. So we think that sets us up in a unique way to be able to kind of expand what we're already getting started in that space. Saurabh Pant: I got it. Okay. Travis, that's helpful. And then one more I think on the financing side of things. I'm getting some questions this morning on that, right? So maybe if you can help us with how should we think about the capital cost of this equipment? I know balance of plants would come later, right, but just the power gen equipment at this point. And then in terms of financing, how are you thinking about financing? Because I'm getting some concerns on potential dilution as you go ahead and seek financing for this, right? I know you've got liquidity, but maybe just help us think through all of that. Travis Simmering: Yes. I'll take the first part there, Saurabh. And as far as the cost of equipment, we've updated our guidance to between 1.4 million and 1.5 million per megawatt, and that's really driven by the type of equipment that we're expecting to put into these longer term or infrastructure-type projects to support the data center. Caleb Weatherl: Yes. Saurabh, this is Caleb. Thanks for the question. So when it comes to funding PROPOWR's growth and the CapEx we see coming over the next few years, first of all, we're going to start with the tools that we already have in place, but we do recognize that we'll need to bring in some additional resources as well. So just to go through those, first off, we always look to our own cash as our preferred source of capital. So that means cash on the balance sheet and cash that we're generating organically from our completions business. And then as PROPOWR ramps up later this year, we expect it to start making more meaningful contributions as well. Secondly, we've got flexible and competitive debt facilities, specifically our ABL and cap finance lines. Third, we have our lease finance facility with Stonebriar, which is committed capital that we can draw down as needed, which we're happy to have. That gives us another layer of strength and flexibility. And so looking ahead, especially with the updated growth guidance for PROPOWR, we are going to stay proactive in sourcing new capital that's both low cost and flexible. We're focused on keeping our balance sheet strong while supporting the business. And it is worth noting that we have great relationships with the major banks and financial partners in our sector. We're already in discussions and evaluating several financing options with very strong interest expressed in helping us to fund these equipment purchases. So we are confident we'll have the right capital in place as PROPOWR continues to grow to help support these orders. Sam Sledge: Yes. And just to add on to what Caleb said, I think it's a great position to be in that we're in today where almost every tools at our disposal. I think the size and scale of our existing business is helpful, but we also have tailwinds kind of in both of these businesses that we're operating in right now. And the flavor of the day is obviously data centers, AI, all that good stuff. So to be kind of in that trend as well, I think it's just kind of a compounding effect. As Caleb said, I think every bank in the world pitch just about every single tool. So as Caleb said, we're kind of proactively working through that. And I think we feel really good about being able to equip PROPOWR and ProPetro from a capital standpoint moving into the future. Saurabh Pant: Right. No, that's helpful, guys. And obviously, I think it's helpful that both cylinders are firing now with the completions market looking like it's recovering. So that's a good place to be. Operator: Our next question comes from Ati Modak with Goldman Sachs. Ati Modak: Sam, I think you mentioned the majority of the new capacity is going to data centers. But I'm curious, how do you evaluate the oil and gas landscape versus the data centers, given my understanding is that the microgrid offering in the oilfield is very different from prevailing solutions? I'm wondering if the landscape is not as large? Is there more competition? Just help us understand how you evaluate that. Sam Sledge: Yes. I think, first off, you could base kind of the proportion of our work that's going to data centers moving forward, not solely, but in a big way, on how just big some of those opportunities are. So as we sit here today, about 240 megawatts contracted, mostly in the oil and gas space. Just one data center deal could completely flip the distribution of that work to majority data centers. So I think that's probably the biggest variable at play just the size and scale of some of these data center opportunities. We referenced in our materials that we're in extended negotiations on opportunities that are in the several hundred of megawatts ZIP code. And the other part of it is, I think your question was kind of who -- like how to choose where to go with some of this. And look, it's a very economical decision for us. What does profitability look like compared with contract term. The data center space is extremely appealing from a size and scale standpoint, just like I mentioned. But pricing is very strong. Pricing and paybacks are also very strong in the oil and gas side of the business. And look, I don't think we can neglect in the last 1.5 years standing up PROPOWR, the opportunity that oil and gas has given us to get to work quickly to prove our services and to be able to have real working equipment and people so that when the next customer calls, whether it be oil and gas or data center customer, we have real operations that we can show them. Travis, I don't know if there's anything you want to add to that. Travis Simmering: I think the only thing I would add is kind of the differentiation between oil and gas and data center, there are some operational nuance. But realistically, the majority of the equipment and the types of services we're performing on site are similar. So we like being able to leverage that across what we're already doing in the oil and gas space, and be able to grow it into the data center space. Ati Modak: That's very helpful. And on the pressure pumping side, I know you talked about the potential to deploy Tier 2 fleets. I'm just wondering how much does pricing need to increase from where leading edge is for the economics to make sense. And is that a little bit more of a Q2, Q3 comment? Would it be fair to assume it's more spot work than a full or multiple quarters? Just any color there. Sam Sledge: It's probably more -- that dynamic putting any more equipment to work and especially bringing some equipment from warm stack to hot stack to field ready, and that's mainly just a diesel Tier 2 story for us, as we said, all of our nat gas burning equipment sold out today. That's probably more of a second half story. That said, there's early indications, and we've experienced some of this in our own portfolio of pricing increases. And if the momentum or developments continue in the direction of which we expect them to, and I think they already are starting to, then it's likely we can make sense of putting some more equipment into the system. That said, we've got a pretty high bar. We've got a pretty high bar from an economic standpoint and a very high bar from a quality service and people standpoint. We're going to require full calendars to do that as well. So I think another thing at play here, we get a lot of questions about how much would it cost to put another fleet back to work and all of that. It is a cost, maybe less of one, but it is definitely an operational variable that I don't think is being talked about enough right now is people. And the companies that are able to acquire and deploy people in a quality manner are going to win. There's just not that much equipment laying around right now, whether it's ours or somebody else's. There's a much lesser amount of people that are ready to go to work back on a frac crew or a drilling rig or something like that. So we've always prided ourselves in being really good at that part of the equation. But I think that that's going to be something to watch for from an execution standpoint, even if pricing does go up, you have to have a workforce to operate, maintain and perform in the field. Operator: Our next question comes from Derek Podhaizer with Piper Sandler. Derek Podhaizer: Back to the power theme. I just wanted to get your thoughts around the balance of plant services that you guys provide and maybe how you see that evolving over time as you get further down these data center contract executions. Just thinking about whether that is batteries or gas delivery or last mile of that gas delivery. This is becoming a bit of a bigger theme here as far as what's going to be provided inside of these contracts. So how should we think about PROPOWR's scope from a balance of plant perspective and how that could evolve over time? Sam Sledge: Good question, Derek. So the balance of plant that we're talking about has already included batteries. So we've been thinking about that from the start in the data center space. We think it's super helpful and value add to manage those loads. And then it's clearly some of the electrical equipment required to make sure that we're getting the power to the data center customer in the most efficient way. So we kind of already have that expertise built into what we offer from a balance of plant perspective. As far as gas delivery goes, that's not something that's been really on the radar in a major way, but obviously being connected to many oil and gas customers as the business that we're in and relationships that we have on the other side of the fence, certainly, that's something we could look at in the future. Derek Podhaizer: Got it. Okay. Exciting. On the frac side, I noticed you've been talking a lot about the direct drive turbine equipment. Obviously, that's 100% natural gas as well. It sounds like it's going to go supplement maybe some of your aging Tier 4 dual-fuel fleets. But maybe just talk to us about that type of kit, how it compares to the FORCE fleets? And would this be something that you would increase over time as far as just your ongoing maintenance cycle or replacement cycle or potential incremental fleets being more direct drive? Just some thoughts around that would be helpful. Sam Sledge: It's definitely not incremental capacity. I think we look at it as more along the lines of replacing existing equipment as it retires. That said, and I think this was mentioned in our scripted remarks, there is a premium on just being able to displace diesel right now, whether you do it with electric, dual-fuel or direct gas. So as these units go to work for us right now, they're mainly going to work alongside dual-fuel operations where they're just increasing diesel displacement and therefore increasing our economics and our customers' economics. Operator: [Operator Instructions] Our next question comes from Eddie Kim with Barclays. Edward Kim: You previously talked about 70 fleets -- active fleets in the Permian today compared to around 90 to 100 fleets at the beginning of last year. If we do see a ramp-up in activity in North America from the E&P, what's the number of fleets you expect that could be added in fairly short order with very little investment? Is that going back up to 80 fleets and then the remaining 10 to 20 fleets to get back up to 90 to 100 would require significantly more investment? Just curious on your thoughts there. Sam Sledge: Yes. I think across the Permian specifically today, we think that number is probably full-time fleets working is between 70, 75. We've got 12 of those. That said, our simul-frac work has increased a little bit. I think 4 of our 12 today are operating in large simul-frac. Look, there's been a lot of -- or some really good industry research done around this recently that we agree with. And I think that there's a hot stacked frac fleets, stuff that can go to work pretty quickly and that maybe has access to people fairly quickly for the whole country is probably in the 10 to 15 range. So you got to assume maybe half of that comes -- around half of that could go to the Permian. So maybe the Permian could grow to 80 pretty quickly. And then you get in a situation where, where is the capital, where is the people, where is the equipment? And that could make for a really tight completions market once you get in that ZIP code. That said, and we've talked about this a little bit in the last couple of quarters, too, that doesn't mean that our pricing and our repositioning inside of our own portfolio can't front run an 80 fleet count in the Permian Basin because as companies start to grab on to the equipment and the people that they want to execute on the projects that they want to, fleets and equipment will start to move around. And when those -- when that happens is when pricing really starts to inflect more aggressively. We already said we're seeing some green shoots of pricing increases in our own portfolio as we sit here today. It's just the beginning. So we don't -- you don't need a wave of capacity to come back to increase pricing. You just need a few customers to make some small decisions to either pick up a rig or a frac fleet or change an existing provider. And then that kind of like leapfrog across the entire sector begins to that's when pricing starts to really change. Edward Kim: Got it. There seems to be a lot of earnings torque in the system right now. So that's great to hear. Sam Sledge: Torque, yes. Edward Kim: Shifting over to POWR. Back in October, you announced a 60-megawatt contract with a data center operator. That deployment was expected to begin in the second quarter of '26. We're in 2Q now. So just curious if that equipment has been deployed or is in the process of being deployed at this point? And how is the learning and experience you'll get with that data center deployment? How do you think that will help you secure more contracts in the data center space going forward? Sam Sledge: Yes. First of all, that is moving as we expected. It's in process. Equipment is on site being installed and commissioned. We think that's a huge advantage when you look at folks that are actually executing and operating behind-the-meter solutions in data centers. It's a pretty small sample set. So once we get that experience behind us and kind of learn what a few others have learned, we think it's going to provide a really big advantage to go secure additional contracts or expanded contracts with that existing customer. Edward Kim: Got it. And just one really quick follow-up. I mean through that experience, I mean have you had any kind of bottlenecks or anything related to permitting or any issues that maybe took longer than expected? It doesn't seem like that's the case, but I'm just curious if there's anything like that. Sam Sledge: No, we haven't. I mean we have the equipment coming well stage, the rest of the supply chain around the balance of plant. I think our team has done a really good job of staying ahead of that, knowing kind of what we need to supply for that type of project. And so we've gotten everything there on site by ordering the right equipment upfront to derisk those deployments. Operator: Our next question comes from Jeff LeBlanc from TPH. Jeffrey LeBlanc: I wanted to see if you could talk on the delivery to deployment timeline as I believe your historical presentation implied a 3- to 6-month delay, while this latest one referenced a 6- to 12-month delay delivery and deployment. Sam Sledge: Yes, it's a good question. So these are bigger assets. These are bigger sites. And so we want to give ourselves enough time to deploy and get those set up correctly given that they'll likely be longer term contracts. That's part of why we've kind of driven to this 4- to 6-year payback on these types of projects because they're a lot more infrastructure type build-outs for longer-term tenors on the contract. Operator: Our next question comes from John Daniel with Daniel Energy Partners. John Daniel: Caleb, maybe this is for you or maybe Adam. But in terms of like inflationary cost pressures right now, can you give us a tour of the P&L, if you will, and walk us around where you're seeing the greatest pressures today and what you might expect if all of a sudden rig count is going up 5%, 10% from here in the next 6 to 9 months, what you'd expect to see? Caleb Weatherl: Yes, John, it's certainly something we're keeping a close eye on. As Sam mentioned, people is always at the forefront of our business. And so that's an area that we want to make sure that we are competitive in so that we can provide the best service to meet our customers' needs. And then we're watching all of the other lines of the P&L closely, things like fuel costs that could drive inflationary pressures and taking actions to mitigate those where possible. Adam Muñoz: Yes. John, Sam. I also kind of remind you and others, we took some proactive fleet deployment decisions mid second half last year to park some fleets that were turning uneconomic because of pricing requests. And that becomes really helpful in a situation like we are in now. You might not avoid all cost inflation, but you might kind of blunt the blow a little bit initially by having some equipment that's stacked a little warmer because of some decisions that we made proactively last year. John Daniel: Do you think -- and I'm just making this number up, Sam, but like let's assume there's a 5% to 10% gain in activity out there. Is that so much that it would have inflationary pressures on labor or no? Sam Sledge: Possibly, yes. I mean I think that could be possible. I think another place, and this is labor maybe a little bit more indirectly, but it takes a lot of other auxiliary support services to run a completions operation. So do you need help rebuilding an engine? Do you need help with some rental or other on-site service? And that's really probably where the people aspect of this gets more acute. And so that could cause inflation in that direction. And I think that's where a company of our size and scale in the Permian Basin is really advantaged because we already have really developed and ongoing sustainable relationships in our own supply chain to be able to mitigate trying to hire or bring on a service or a person that we previously didn't have. It's likely that we already have a lot of that working within the system right now, whether it be internal or external, and that's a hedge against some of this inflation that maybe some of our smaller competitors aren't as well positioned. John Daniel: Fair enough. My final question is when the market, as you guys have alluded to and others for fuel-efficient diesel nat gas-powered equipment is essentially sold out. And I'm curious, is the market tight enough where you think you could force customers into take-or-pay contracts? Or is it still the dedicated agreement type frameworks? Sam Sledge: I mean we already have some of those agreements. John Daniel: No. But on the Tier 4 DGB, I mean, I know you have them on electric, but my impression is that the dedicated or give a little bit more wiggle room than a take-or-pay. So just that's the basis of the question. Sam Sledge: Yes. I mean I think it's always possible. We're really proud of how we've contracted a significant of our fleet. So I think we've got a lot of reps in making sure that we're not only like creating value day 1, but we're creating value that can be sustained. And that's things like take-or-pay are always a lever. We use it -- we use an ask like that in particular places for particular reasons. Operator: Our next question comes from Don Crist from Johnson Rice. Donald Crist: Sam, I just wanted to ask one question on the framework agreement. The language seems very specific that you could purchase up to a certain number, and it's not in a specific order. Is this just the availability for delivery slots? Or do you actually -- are those delivery slots now yours and you're already dedicated to those slots? Just a ton of semantics there. Travis Simmering: Don, this is Travis. So we have secured those assets. And I think the updated growth trajectory that we showed in our investor deck is our expected timeline to receive those units and deploy them. Donald Crist: Okay. So the decision has been made to actually make this order, right? It's not a future order that you have to make a decision point later in time. Travis Simmering: Yes. We have reserved some optionality in the agreement, but for all intents and purposes, they are secured. Donald Crist: Okay. And Sam, if I could ask just one kind of broader macro question. I know you like to opine on this. We've been asking most companies that have reported so far about the disconnect between kind of the physical oil markets and the financial oil markets. And a lot of people are now feel that the strip a couple of years out is really not reflective of what it's going to be. Have you had any customer conversations that are leading you to believe that the strip a couple of years out may be $10 or $15 too low and a lot of activity could come as we move into '27? Sam Sledge: Yes. I'm glad you wrote the customer conversations in there at the end because I hate for you to think that I'm a macro expert by any means. But we do read stuff from a lot of smart people. We have a lot of smart customers. It's really quite puzzling, I think, this kind of like physical paper markets. And if even a portion of what's going on in the Middle East and around Iran as it pertains to the Strait of Hormuz and things like that, if even a portion of that is true, we're undergoing some, I think, major structural changes to the supply and demand and flow functions of oil and gas across the globe. I don't think any of us like war and what -- and all the bad things that come along with war, but I think this is creating a lot of kind of like sobriety and good reality as it pertains to how fragile this whole value chain is. I mean, we're sitting here almost with the oil price almost totally dependent on one narrow waterway on the other side of the world right now. So that's pretty interesting. The other part of it is that I think traditional energy as it pertains to oil and gas is important today as it ever has been. And I think more of the world and more of the politicians across the world are realizing that. But we've been banging that drum. Shoot, my family has been banging that drum for 3 generations. And we've definitely been banging that drum as an industry out here in the Permian Basin for a long, long time. So if anything, we're just glad that the spotlight is back on what's important. And what's important is places like the Permian Basin and our country producing the cleanest, most reliable molecule of energy in the world. We get first option to that, living here kind of right on top of this resource. But as a younger guy in the industry right now, seeing some of the structural stuff happen right now, it's pretty -- feels pretty promising to where we're positioned really in the 2 main drivers of our business, this oilfield service completion focused business and our Power-as-a-Service with PROPOWR. We really like where we sit. We think we're going to have great access to capital. And I think there's some major structural tailwinds here. Operator: This concludes the question-and-answer session. I would like to turn the call back over to Sam Sledge for closing remarks. Sam Sledge: Yes. Thanks, everybody, for joining us today. As I just mentioned in my last answer to Don's question, we're really excited and confident about the 2 main drivers of our business. PROPOWR being aimed right at the center of the Power-as-a-Service industry today, strong commercial traction, great supply chain position as evidenced by our recent announcement with Caterpillar and already high-quality operational execution in the field. And on the more LFS completion side of the business, great structural tailwinds, a great operating position in the best basin to be in here in the Permian Basin. So we look forward to talking to all of you again soon. Have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the Hilton Grand Vacations First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mark Melnyk, Senior Vice President of Investor Relations. Please go ahead, sir. Mark Melnyk: Thank you, operator, and welcome to the Hilton Grand Vacations First Quarter 2026 Earnings Call. Our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements. The statements are effective only as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our SEC filings. Our reported results for all periods reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we're required to defer certain revenues and expenses related to sales made in the period when a project is under construction, and then hold off on recognizing those revenues and expenses until the period when construction is completed. The aggregate of these potentially overlapping deferrals and recognitions from various projects in any given period are known as net deferrals. Please note that in our prepared remarks today, we'll only be referring to metrics that remove the impact of net deferrals, which more accurately reflects the cash flow dynamics of our financial performance during the period. To simplify our discussion today, we've uploaded slides to our Investor Relations site showing these metrics, which we'll be referring to on today's call. I'd urge you to view these slides on our website at investors.hgv.com. On Slide 2 of these materials, you can see the deferral adjusted metrics that we'll be referring to on today's call. Reported results for the quarter do not reflect $25 million of net contract sales deferrals under ASC 606, which had the effect of reducing reported GAAP revenue and were related to presales of our Ka Haku project, partially offset by a recognition associated with our Kyoto project, which opened in March. Also on Slide 2, we defer a net $7 million of direct expenses associated with these revenues. Adjusting for both these items would increase the adjusted EBITDA to shareholders reported in our press release by a net of $18 million to $267 million. With that, let me turn the call over to our CEO, Mark Wang. Mark? Mark Wang: Good morning, everyone, and welcome to our first quarter earnings call. We're off to a strong start this year. And overall, we're pleased with how the quarter came together. The results we delivered in Q1 reflect disciplined execution by our teams across the business and a consistent focus on our strategic initiatives. Contract sales met the expectations we laid out on our prior call and adjusted EBITDA exceeded expectations, growing 8% versus the prior year with 130 basis points of margin expansion. In addition, we drove great new buyer growth, along with cost efficiencies that supported healthy EBITDA flow-through. These results reinforce our confidence that we're on track to achieve our long-term algorithm of consistent growth in sales and EBITDA, and strong free cash generation, along with a commitment to returning capital to our shareholders. We repurchased an additional $150 million of stock during the quarter, bringing the total to nearly $2.3 billion we've returned since becoming a standalone public company. Next, taking a look at our consumer environment. Leisure travel demand among our members remained healthy. Arrivals were strong in the first quarter, and we see trends improving through the fall. And March was our strongest sales month of the quarter with momentum carrying into April. At the same time, we're carefully monitoring the impact of the conflict in the Middle East and the potential broader effects on the leisure travel landscape. But our business model carries several advantages that should help us to navigate the environment. Our members have prepaid their vacations for the year, making them less sensitive to travel costs and new buyers are attracted by the value proposition of our marketing package offerings. In addition, the efficiency initiatives that we already have underway, combined with the variable nature of our cost structure, leaves us well positioned. So while we keep a close eye on the external risks, our focus remains on executing our strategic initiatives and controlling what we can control. Given the results of the first quarter and our purchase of the remainder of the Elara JV to take full control of the project, which I'll cover shortly, I'm pleased to report that we're raising our adjusted EBITDA guidance for the full year. More broadly, the quarter and guidance reinforced the progress we're making as an integrated business and the consistency of our execution against our strategic priorities, which are operational excellence, attracting new customers, product evolution and innovation, and enhancing member lifetime value. Operational excellence drove strong execution in the quarter. While tours outpaced VPG and we saw a higher mix of new owners, our teams effectively managed costs to drive improved EBITDA contribution, and we remain confident in our guidance to grow EBITDA for the full year. We also did a great job of adding new buyers. The investments we made in our marketing pipeline last year supported high single-digit new buyer tour growth in Q1, maintaining the strong pace that we saw in the fourth quarter. In addition, solid conversion of those tours led to the highest level of first quarter new buyer transactions since 2023, up 8% versus the prior year, which is key to driving improved efficiency as well as growing our embedded value. Those new buyers helped to support 29% growth in our HGV Max member base over the prior year to 277,000 members. On the product front, I'm happy to announce that we reached an agreement to purchase the development rights of Elara, our flagship resort in Las Vegas, allowing us to take full control of the project by moving it from a fee-for-service JV to an owned property. As part of the natural progression with our fee-for-service projects, it provides us several significant benefits, including receiving the full economics of the real estate business as well as assuming the existing and future financing business associated with the project, along with providing additional inventory flexibility. Elara has always been very popular with new buyers. But this transaction also unlocks our ability to better sell the project across our entire sales distribution network outside of Las Vegas, enabling owners to upgrade out of the project while simultaneously allowing any of our members to upgrade into Elara. We're also making great progress with our inventory optimization initiative. We've identified a set of 8 properties that no longer fit with our portfolio. And we recently entered into an agreement with a third party for the disposition of our interest in these assets. At high level, dispositions allow us to proactively manage aging and noncore inventory, reduce long-term carry risk and ensure capital is continually recycled into higher-performing opportunities. This discipline helps us to balance between growth, flexibility and profitability. From a strategic standpoint, dispositions support our broader goals by improving the mix and quality of inventory over time, creating capacity to reinvest into priority markets, products and experiences, and reinforcing a proactive rather than reactive approach to inventory management. Taken together with the financial benefits Dan will outline, these dispositions help us to optimize the portfolio and position the business for sustained growth. Turning to the embedded value. We're continuing to expand our industry-leading HGV Max and HGV Ultimate Access offerings to enhance our value proposition and drive member engagement. We recently introduced additional enhancements to Hilton Honor points conversions within the MAX program to complement the suite of benefits that have proven so popular with our Max members. Lastly, our Ultimate Access teams continue to expand our best-in-class experiential platform. In just the past few months alone, our members have enjoyed private concerts with #1 billboard artist Ella Langley, the legendary Beach Boys, and Grammy Award winner Kelly Clarkson. Our partnership with the LPGA provided members in-person access to our tournament and champions to see this year's winner, Nelly Korda, which was televised on NBC and the Golf Channel. HGV will also continue as an official event partner of Formula 1's Heineken Las Vegas Grand Prix, where members have access to exclusive trackside HGV Clubhouse suites and entertainment at Elara. So HGV Ultimate Access is already the biggest and most comprehensive program of its kind, and this year will be even bigger and better. We've got new events planned for new members, including FIFA World Cup events, NASCAR and expanded summer concert series lineup and we'll also be announcing additional exciting programming to further enhance member experiences throughout the year. So to sum it up, I'm happy with the performance at the start of the year. Owners and new buyers continue to respond well to our value proposition. We delivered on our target that we laid out, which allowed us to increase our full year EBITDA guidance. We're continuing to make incremental progress in our evolution as an integrated entity, and we're focused on consistent execution against our strategic priorities as we move through the rest of the year. None of this would be possible without the dedication of our team members and leadership who have built such a strong, innovative and people-first culture. With that, I'll turn it to Dan for more details on the numbers. Dan? Daniel Mathewes: Thank you, Mark, and good morning, everyone. We had great results in the quarter, achieving our contract sales forecast while also exceeding our expectations for EBITDA growth through cost controls that drove margin expansion. As Mark mentioned, the strong performance, along with the momentum that we're carrying into the second quarter, gave us the confidence to raise our full year adjusted EBITDA guidance. Turning to our results for the quarter. Total revenue before cost reimbursements in the quarter grew 2% to $1.2 billion. Adjusted EBITDA to shareholders grew 8% to $267 million with margins, excluding reimbursements of 23%, up 130 basis points over the prior year. Within our real estate business, contract sales of $719 million were down slightly, performing in line with the expectations we laid out on our prior call. The decline was the result of tough comparisons for our Bluegreen business as it normalized against a strong HGV Max launch period last year. New buyer contract sales were over 26% of the total for the quarter, an increase of approximately 160 basis points from the prior year, as we benefited from continued strength in new buyer tours, along with solid execution from our sales teams that drove new buyer transactions to their best first quarter performance since 2023. Tours grew 8.5% during the quarter to more than 189,000 with growth coming from both our new buyer and owner channels. Conversion of the package pipeline we built over the past year fueled new buyer growth, while the strong value proposition of HGV Max continues to drive owner to demand. VPG was nearly $3,800 for the quarter, declining 8% and in line with the expectations of a high single-digit decline we discussed last quarter. As we indicated, the decline was driven by the normalization of owner close rates at Bluegreen due to the lapping of the record HGV Max launch period comparisons, along with higher mix of new buyer sales in the quarter, which carry lower VPGs. Cost of products in the period was 10%, which benefited from higher-than-expected sales mix of lower cost inventory during the quarter. Real estate sales and marketing expense for the quarter was $352 million or 49% of contract sales, 260 basis points lower than the prior year. The strong margin performance was primarily the result of our efficiency initiatives, which the team did a great job executing against. Real estate profit for the quarter was $152 million with margins of 28%, up 350 basis points versus the prior year. Overall, I'm very pleased with our performance this quarter as our focus on efficiency was able to more than offset the margin dilutive effect of lower VPG and higher new buyer mix. In our financing business, first quarter revenue was $138 million and profit was $87 million. Excluding the amortization items associated with our acquired receivables portfolio, financing margins were 65%, up 510 basis points from the prior year. Looking at our portfolio metrics, our weighted average interest rate for originated loans was 14.5%. Combined gross receivables for the quarter were $4.4 billion. Our total allowance for bad debt was $1.3 billion on that $4.4 billion receivable balance or 29% of the portfolio. The portfolio remains in great shape overall. Our annualized default rate for our consolidated portfolios was 10.1% for the quarter, reflecting a slight improvement against the first quarter of the prior year. And as of quarter end, our 31 to 60-day delinquencies expressed as a percentage of the total portfolio remains broadly unchanged relative to the prior year at 1.48% compared with 1.49% a year ago. When measured as a percentage of the total portfolio net of fully reserved loans, delinquency performance reflects a similar trend at 1.7% versus 1.72% in the prior year. Our provision in the first quarter declined sequentially to 14.9%, in line with the expectation we laid out on our prior call, and we continue to feel confident in our expectation of provision remaining in the mid-teens for the full year. In our resort and club business, our consolidated member count was just over 720,000, reflecting strong new buyer additions offset by continued recaptured activity in the period. Revenue grew 1% to $185 million for the quarter and profit was $126 million with margins of 68%. Our expenses were slightly elevated owing to program-related headcount additions, which reduced our margins when combined with our seasonally lower Q1 revenue. However, we expect those effects to diminish as we move into our seasonally stronger quarters of the year. Rental and ancillary revenues were up 5% versus the prior year to $197 million. Revenue growth in the period was driven by higher available room nights and a slight increase in our overall portfolio RevPAR, reflecting continued healthy trends for our rental business. Developer maintenance fees remain the largest driver of our rental and ancillary business profitability trends and were responsible for the $19 million loss in the period. Reducing the burden of developer maintenance fees is a key objective that we'll achieve through both consistent sales growth as well as our inventory optimization initiatives. As Mark mentioned, regarding our inventory optimization, we have signed an agreement with a third party to begin the process for a set of properties that we've selected for disposition. Broadly speaking, we will trade off several revenue streams we currently receive from property HOAs and owners in exchange for savings on the associated carrying cost of the inventory with the net result being a positive contribution to adjusted EBITDA. There are minimum sales generated at these resorts and by transferring that torque flow to other sites within our sales distribution network, we don't expect to sacrifice any sales revenue. We will lose property management fees from the resorts, along with the associated rental income from inventory available for monetization. However, more than offsetting that revenue loss will be a reduction in our developer maintenance fee expense that we are currently paying on unsold inventory at these properties. Our initial estimate for the net of these items is that on a run rate basis, they will benefit our adjusted EBITDA by $10 million to $12 million on an annual basis. I'd note that the agreement is subject to customary closing conditions, and there remains work to be done to get to closing. Therefore, our 2026 adjusted EBITDA guidance does not currently include any contribution from these dispositions. This is subject to change as we move through the process. And in the coming months, we look forward to providing additional financial and timing-related details as they are finalized. Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA, JV EBITDA was $5 million, license fees were $53 million and EBITDA attributable to noncontrolling interest was $2 million. Corporate G&A was $40 million or 3% of pre-reimbursement revenue, in line with our run rate over the past year. Our adjusted free cash flow in the quarter was a use of $37 million, including inventory spending of $71 million, reflecting the timing of our ABS deal activity in the year. We continue to expect our conversion rate for this year will remain in the lower half of our long-term range of 55% to 65%. During the quarter, the company repurchased 3.3 million shares of common stock for $150 million. From April 1 through April 23, we repurchased an additional 904,000 shares for $41 million. And as of April 23, we had $237 million of remaining availability under our current share repurchase plan. We remain committed to capital returns as a primary use of our free cash flow in 2026, and we remain on track to continue repurchasing our shares at a pace of approximately $150 million per quarter, subject to the repurchase activity not increasing our net leverage for the full year. Turning to our Elara transaction. As Mark mentioned, we entered into an agreement to purchase the inventory tail of our Elara JV. This agreement is effective as of today. Given the scale of our Elara project versus prior tail purchases, I think it's important to lay out the effects on our financials in Q2 and beyond. We have been a 25% owner of the JV, and thus, historically, we haven't consolidated their financials into ours. Rather, we reported our share of the JV's income through our EBITDA from unconsolidated affiliates line in our financial statements. In addition, from a revenue perspective, we recognized fee-for-service commission package sales and other fees on our consolidated income statement. And on a KPI basis, contract sales from the project were classified as fee-for-service sales in our real estate business. Given the transaction, as we fully consolidate Elara and recognize the project as owned in Q2 and beyond, you'll notice a reduction in each of those line items, which will be offset by additional sales of VOI, along with the benefits of a new stream of portfolio income in our financing business. Our total initial outflow for the remaining 75% of the entity is approximately $130 million. The acquisition included approximately $85 million from the combination of unpledged eligible ABS collateral and short-term working capital, which we will monetize and will ultimately result in a net cash use of $45 million. This will be a deleveraging transaction and should slightly reduce our corporate net leverage level. We currently expect Elara to contribute approximately $20 million for the remainder of the year, which was not included in our prior 2026 guidance. As Mark mentioned, Elara has been one of the marquee projects for many years and having full control of the asset will be a positive for HGV on a go-forward basis. Turning to our outlook. For the quarter, we outperformed our prior guidance for Q1 adjusted EBITDA growth to be flat to down slightly by approximately $20 million. Due to our strong performance this quarter, along with the additional contribution of Elara, I'm pleased to announce that we're increasing our 2026 guidance for adjusted EBITDA before deferrals to be $1.225 billion and $1.265 billion from the prior $1.185 billion to $1.225 billion for an increase of $40 million at the midpoint. To be more specific, outside of the contribution of Elara's EBITDA, our performance and adjusted EBITDA assumptions in the second, third and fourth quarters remain the same as what was embedded in our initial guidance for the year. From a sales perspective, our prior full year 2026 top line targets remain in place. As a reminder, those include low single-digit contract sales growth with low to mid-single-digit tour growth and VPG down slightly. On a quarterly basis, our expectation for VPG growth for the remainder of the year remain unchanged. We continue to expect VPG to be down slightly for the full year with Q2 and Q3 seeing low to mid-single-digit declines and returning to solid growth in the fourth quarter as we fully lap the Bluegreen Max launch period. In addition, we continue to expect that our 2026 conversion rate will be in the lower half of our target 55% to 65% range as we wrap up spending on Ka Haku projects ahead of its anticipated opening later this year. In addition, despite Q1 outperformance, we still expect that our adjusted EBITDA on a dollar basis will increase sequentially each quarter. For the second quarter specifically, we expect to grow our adjusted EBITDA in the low to mid-single-digit range versus the prior year, which includes approximately $3 million contribution from Elara. Moving on to our liquidity. As of March 31, our liquidity position was $852 million, consisting of $261 million of unrestricted cash and $591 million of availability under our revolving credit facility. Our debt balance at quarter end was comprised of corporate debt of $4.8 billion, and a nonrecourse debt balance of approximately $2.6 billion. At quarter end, we had $150 million of remaining capacity in our warehouse facility. We also had $929 million of notes that were current on payments but unsecuritized. Of that figure, approximately $370 million could be monetized through a combination of warehouse borrowings and securitization, while we anticipate another $367 million will become available following certain customary milestones such as first payments, dating and recording. Turning to our credit metrics. At the end of the quarter, the company's total net leverage on a TTM basis was 3.9x. As you may have seen, just after the end of the first quarter, we also completed our first securitization of the year, an oversubscribed $500 million deal, upsized from $400 million as a result of stronger investor demand. The deal priced with an advance rate of 98% and an average coupon rate of 5.13%, which included a tranche. So despite some of the geopolitical noise, the securitization markets remain open and healthy, and we look forward to completing several more deals later this year. We will now turn the call over to the operator and look forward to your questions. Operator? Operator: [Operator Instructions] The first question is from Patrick Scholes from Truist Securities. Charles Scholes: Dan, I think you made it pretty clear regarding trends in the loan loss provision and propensity to pay really no instability or whatever I think your [indiscernible]. Any additional color you'd like to provide of what you've seen with the new issuances? And then secondly, a follow-up. If you can give us a little color on expectations compare and contrast tour growth versus VPG for 2Q and/or the rest of the year. Daniel Mathewes: Yes. No, absolutely. So I'll jump in on the portfolio, and then I'm sure Mark has some thoughts on VPG and tour trends. But with regards to portfolio, we're really pleased with the performance. I mean, we have a very consistently strong performing portfolio. And if you think about the balance of the portfolio, it's increased year-over-year by almost 8%. The annualized default rates have decreased by about 10 basis points. And as we talked about in our prepared remarks, the early-stage delinquencies are stable to improving. Specifically, even post quarter close, when we look at our early-stage delinquency rates by portfolio, HGV is performing even better. It's down 7% from a delinquency perspective. Diamond is down 10%. Bluegreen is stable and their early, early-stage delinquencies, that 0 to 30-day mark, is actually at a 4-year low and has improved 11% subsequent even quarter end. So that's with all the geopolitical noise, which is very encouraging. And as you probably recall, mid-year last year, we changed the underwriting process for Bluegreen to allow for an enhancement in equity being put down initially. So the actual Bluegreen equity at the table is up 50% compared to 2024 levels. So really pleased with all that performance. So when we look at the provision, sequentially, we dropped from 18% to just under 15%, right in line with our expectations. We're right in that mid-teens level where we expect it to be. So we're really pleased with how that's all coming together. Mark Wang: Yes. And Patrick, on the VPG front, say, first of all, the teams are -- I think they're doing a great job and really in the right direction on the demand front. As we called out on the last call, we expected -- and we saw our VPG headwinds as we lap Max for Bluegreen. So any -- pretty much all of the VPG pressure was related to the Max and Bluegreen launch. So -- but importantly, the teams drove nice growth in new buyer sales and transactions through tour flow. We were up 8% year-over-year on new buyer transactions. So anyways, VPG headwinds were offset by that healthy offset with the foot traffic. So -- and importantly, what we saw is margin expansion, which is really encouraging, especially in a quarter where some of the real estate KPIs would have suggested margin deterioration. So as we focus for Q2 and beyond, our focus is really balancing healthy tour growth with sustainable VPG growth over time, and we expect that balance to improve as we move through the year with headwinds really until we lap the tough comps at the end of Q3. So all in all, pleased with how the teams have managed through the expected headwinds that we anticipated on our VPGs. Operator: The next question is from Ben Chaiken from Mizuho. Jiayi Chen: This is Rita Chen going in for Ben. Could you please elaborate on the inventory optimization initiatives? And do you see more opportunities beyond the 8 resorts that's currently identified? And then as our follow-up, could you also elaborate on Elara, which adds $20 million to the '26 guide? And we would have thought there's a longer term inventory play from -- just benefiting from the mix of own inventory from fee-for-service. Any color there would be helpful. Mark Wang: Okay. Yes, definitely didn't sound like Ben, so thanks for introducing yourself. Look, very -- we're in a really strong inventory position following a decade of building quality and scale into our portfolio. And as we've talked about in the past, we picked up a lot of really good inventory in acquisitions in a lot of great markets. And the optimization that we laid out today and what we'll talk through today is really driven by financial considerations. It's driven by the rebranding, the ability to rebrand these properties, the investments required there that didn't make sense and market overlap. So consistent with what we said in the past, we knew that some of the acquired inventory in these acquisitions wouldn't fit. From a deal standpoint, we've mentioned we entered an agreement on the disposition of the 8 properties. And there's a number of closing conditions, but we're confident that we'll get that achieved in Q3. The economic benefits really is about transferring the ongoing developer maintenance obligation, and Dan covered off on that $10 million to $12 million being run rate and net EBITDA benefit once completed. So that's -- again, that's run rate, and these deals won't be -- we won't get this finalized until probably sometime in the third quarter. So yes, all in all, pleased with this. As far as talking about any future opportunities, we're really focused on executing this transaction, which will have a significant benefit for us. And we're going to continue to be very deliberate in our steps to optimize our portfolio. And this is not about shrinking. It's about upgrading the portfolio. We're monetizing lower quality inventory well, improving the margin and cash flow. So on the Elara front, and I'll let Dan touch on the numbers here. But Elara is -- it's our flagship property in Las Vegas. And we have 38,000 owners and we operate and it's been super productive for us in a very productive and strategic market for us. And Las Vegas has been a core growth engine for the company for multiple decades. And we're excited about this. This is a classic tail acquisition at the right point in the asset's life cycle. And it strategically aligns tightly with our owner-centric and new buyer strategies. So -- and Elara has been very popular with new buyers. And importantly, when you think about what this does, okay, this transaction allows us to unlock all those owners that are sitting within the Elara ownership base. And now they have the potential to upgrade out of that project because historically, over the last 15 years, they've been upgrading within the Elara project. Now they can upgrade outside of it. And simultaneously, it allows our members to upgrade into Elara. So anyways, super excited about this one. And Dan, I don't know if you want to touch on any of the details on the numbers. Daniel Mathewes: Yes. No, I can definitely add some color on that. I mean we talked about the benefit for the year being close to $20 million. But when you think about the transaction in general, we're also picking up from -- included in that $20 million, clearly, but we're also picking up a consumer note portfolio net of impaired that's north of $400 million. So a material increase to the portfolio balance. When you think about other projects that are out there, we -- this is not our only fee-for-service transaction. But to Mark's earlier point, this is a single site transaction. We do have a partner that we've been working with for over a decade at this point in South Carolina with a series of resorts in Myrtle Beach, Charleston, South Carolina, even one here in Orlando. It's a different environment, though. So we're not close to acquiring the tail on that. That's probably anywhere from 4 to 7 years out, just depending on how that runs through. But it will change our fee-for-service percentage. We were in the mid-teens, and it will bring us below 10% with us closing on Elara. Operator: The next question is from David Katz from Jefferies. David Katz: Recognizing that sometimes the press reports can overstate these things, but there definitely was some weather late in 1Q and early 2Q in Hawaii. How -- what are you seeing and/or hearing? Is some of that overstated? Is there some impact that we should be noting? Mark Wang: Yes. Look, definitely some unusual weather in the quarter for Hawaii. And look, I lived in Hawaii for 27 years. It's called the Kona Low, and you get these type of storms about every 20 years. But I can tell you, our teams did a really good job managing through the challenges to minimize the impact. The impact was larger on arrivals than it was for sales. And for instance, if you look at Maui, Maui, which got hit pretty hard, was actually one of our strongest performing sales markets this quarter. So again, the teams did a really good job. But if you look at overall, the weather impact between the ice storms in the Northeast, some of the colder temperatures in Florida and Hawaii, the impact was about $5 million of revenue with the majority of that being contract sales and the balance in rentals. So -- yes, so I'd say not material for us, but I think the teams did a good job managing through it. David Katz: And just following that up, I assume that's -- that minimal impact is reflected in whatever guidance and you're not preparing for anything further or anything ongoing, it was a onetime thing? Mark Wang: That's correct. Yes. Operator: The next question is from Trey Bowers from Wells Fargo. Nicholas Weichel: This is Nick Weichel on for Trey. I just had a really strong new owner performance in the quarter. I was kind of just curious what's driving that? What are you guys doing that's resonating with your owner base, new buyers? And with this and the inventory optimization program and the rebranding cycle you're going through, do you think you're approaching a period where maybe you could put up like sustained positive NOG? Any detail would be great. Mark Wang: Yes. No. Well, first of all, really pleased with how the new buyer trends have been playing out. And we have consistently talked about that being a key focus of ours, and it's critical to the long-term health of the business. And so the trends we saw having 8% increase in transactions and our mix moving up 3 percentage points are all very, very positive. And then we've also talked about just absolute new buyers coming in the system. Over the course of the last 4 years, it has been pretty impressive on a relative basis when you look across the industry. One of the things that we've really been striving on and the teams have been doing a good job is around tour quality. And on the other side, the value proposition. And so all in all, I feel really good about that. I think on NOG, NOG in the near term is more a mechanical outcome of recapture. And ultimately, that's going to improve our cash flow and returns. And what matters for us is EBITDA and lifetime value creation and both of which we continue to grow. So we'll get back to positive NOG at some point, but some of this recapture is healthy, but the trend on new buyers is -- we're pleased with. Operator: The next question is from Stephen Grambling from Morgan Stanley. Stephen Grambling: Just wanted to go back to the -- effectively the disposition or the optimization of the clubs. Is this something that we should be thinking about more consistently going forward? Or is this more of a one-off? And when you were looking at these clubs, was the reason to think about the dispositions mainly because of changes in the individual market? Or is there something when you just think through the structural dynamic of the way these are set up where the HOAs just won't kind of cover the maintenance CapEx over time? Mark Wang: Yes. Look, there's a lot of considerations, a lot of analysis that goes into this, Stephen. And I'd say, first of all, the average age of these properties are 38 years old, right? And that in itself doesn't drive the decision. But when you look at the overlap, 4 of the 8 are in Orlando. And we have 19 properties in Orlando and some of those were picked up through the acquisitions. And so these are, I would say, are the smaller properties and the older properties that when you look from a rebranding perspective, just did not financially make sense. And so -- and then when you look at just kind of the makeup of the inventory or the base of owners in here, the mass majority of the owners were in the trust. So they remain in the trust. So there is not a lot of legacy owners. There's less than 300 legacy owners in these properties. And we're going to be offering them. It's a compelling opportunity to remain into the club, but -- or join the club that these are legacy members and are not part of the club today. So really not a lot of work that had to be done to get past that. I don't know, Dan, if you have anything to add. Daniel Mathewes: Yes. I mean I think the only thing I'd add is very similar to Mark's earlier comments. We always viewed a number of resorts that were not going to be rebranded. So when you think about this, hey, is this a one-off or is this something that we're consistently going to be doing? I'd say it's somewhere in between in the sense that this is an initial set of properties that we've identified. But it's not something that you'll hear from us every single quarter on. Will there be more? Yes. Probably at some point in the next 12 or 24 months, there'll be more. But it's not something that you'll see us do on an annual basis consistently going forward. Mark Wang: Yes. And just to maybe finish up on this particular question. I think we're in a very good inventory position. We're above our long-term targets, which will support a lot of strong free cash flow going forward. But importantly, when you look at our brand stack and the way we're structured now, when you go from luxury, which with our Hilton Club brands, if you look at the property that we're selling right now in Ka Haku, we're getting $175,000 average per week. Now you go down to the other side of it, and that is really being sold to a much more mature customer, I'd say, bloomers, portions of the Gen X. These are people that have higher net worth. And then we have the Bluegreen acquisition really gives us a really good product where we are attracting a lot of new younger buyers into the system. So we like our branding position. We like our inventory position. This is really -- as I mentioned before, it's not about cleaning. It's not about shrinking. It's about upgrading the overall portfolio to better fit on our strategy. Stephen Grambling: Got it. So maybe one quick follow-up just to make sure I understand. So if we think about the club and resort management side then, do you generally expect that segment to grow going forward over the long term? Because I guess this is always a segment that I think was touted as kind of, I don't want say bulletproof, but effectively a perpetuity because you just kind of have inflationary growth every single year. Is any of that changing? Or should we think that this as static? Mark Wang: No, I don't think you should think of this as static. This is going to be a segment that will continue to grow over time. I think we had a couple of onetime things this first quarter. But I don't know, Dan, if you want to jump into any of that. But we're expecting to grow this segment, and it's a high-margin part of our business. And so -- and we're very pleased with the way the teams that are managing that business for us. Daniel Mathewes: Yes. No, I think that's right, Mark. I mean -- we don't look at this being static. We look at growth opportunities. The net result of this impacting resort club and rental is clearly a positive from a cash flow basis, and it's making the organization not only from a portfolio's perspective, but also from an owner's perspective, healthier and stronger position. Operator: The next question is from Chris Woronka from Deutsche Bank. Chris Woronka: I was hoping we could maybe zoom in for a minute on some of the issues that will impact your margins, which I think were maybe a little bit better than you expected in Q1. And really talk about kind of staffing levels and marketing. And maybe if you can just give us a few words on each of those? Are you satisfied with where the budgets are? Is there anything that you -- concerns you with staff attrition or turnover? Or is marketing in line with where you thought based on demand levels? And then I have a follow-up. Daniel Mathewes: Sure. No, I mean when -- I think when you think about Q1 and you think about the outperformance and the margin expansion, there was some element of timing of certain expenses, but we had really strong performance, both in sales and marketing expense as well as the financing business. So some of that trending does carry forward into Q2, 3 and 4. What I would say is you also have -- there is a bit of a mix. So things are going to come in like we originally expected, just in a different way. Clearly, on the financing side, I think everyone would readily recognize that when we gave guidance, we did not anticipate the conflict that we currently see in Iran and its impact on interest rates. So that clearly is priced into our ABS deals going forward, a little bit higher than we originally anticipated this year. But we feel we're in a good strong position there. And from a personnel perspective, I also feel that we're in a good spot. Chris Woronka: Okay. Perfect. And then maybe if we could just circle back for a moment to some of the LLP. I know you've answered a lot of questions on it. I think it all makes sense. But is there any way to maybe if we drill down a little bit to get more granularity on, are you seeing any change in trends, whether it's legacy Bluegreen or legacy Diamond, legacy HGV, are you seeing any trends with demographics or geographic areas? Just curious as to whether we can maybe put to bed some of these concerns about things that are concerns that are out there that haven't yet materialized or any trends you would call out on a more granular level? Daniel Mathewes: Yes. I mean, look, I think there's 2 things worth highlighting here. One, it wouldn't be timeshare if it wasn't a little bit complicated. So when you think about our loan loss provision, it's always going to be dependent upon -- if you ignore macro for a second, for us and specifically, it's going to be dependent upon the mix of the product that we sell. So the more trust we sell, the higher the actual provision will be because that's our entry-level product, and that bears a higher provision. The more deed we sell, the lower the provision will be. In this particular quarter, we had a higher mix of trust being sold, which led to a slightly higher provision especially if you look year-over-year. Sequentially, directionally and absolutely, it landed right in line where we expected it to be. So that always has a little give and take. Now you get a little benefit because the more trust we sell, it has a lower cost of product. So you'll see that we had a lower cost of product in Q1 year-over-year as well. So there's that dynamic. But when you think about trending and the overall stats that we're seeing in the new originations as well as our historical originations, like I said, we are very -- our portfolio is performing extremely well. No deterioration. It's solid performance. And I think that is also well received in the ABS markets. The deal that we closed just a few weeks ago happened to be on one of the days that Trump was saying X, Y and Z, and we still increased the actual offering from $400 million to $500 million and had strong investor demand. Even with the D tranche, we priced just at 5.13 in that kind of environment. So that is all, in our minds, extremely encouraging. Operator: This concludes the question-and-answer session. Before we end, I will turn the call back over to Mark Wang for any closing remarks. Mr. Wang? Mark Wang: All right. Well, thank you again for joining the call today to our members and team members around the globe. Thank you for making HGV a part of your story. We look forward to updating you on our Q2 call. Have a great day. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the First Quarter 2026 Earnings Call for FMC Corporation. This event is being recorded. [Operator Instructions] I will now hand the conference over to Mr. Curt Brooks, Director of Investor Relations for FMC Corporation. Please go ahead. Curt Brooks: Good morning, and welcome to FMC Corporation's 2026 First Quarter Earnings Call. Today's prepared remarks will be provided by Pierre Brondeau, Chairman, Chief Executive Officer and President; and Andrew Sandifer, Executive Vice President and Chief Financial Officer. After prepared comments, we will take questions. Our earnings release and today's slide presentation are available on the FMC Investor Relations website, and the prepared remarks from today's discussion will be made available after the call. Let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to, those factors identified in our earnings release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based on these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, free cash flow, organic revenue growth and revenue, excluding India, all of which are non-GAAP financial measures. Please note that as used in today's discussion, CTPR means Chlorantraniliprole, earnings means adjusted earnings, EBITDA means adjusted EBITDA and sales refers to sales excluding India. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website. With that, I will now turn the call over to Pierre. Pierre Brondeau: Thank you, Curt, and good morning, everyone. During the first quarter, we delivered results that exceeded the midpoint of our guidance range. In addition, we made good progress on our 2026 operational priorities, which are listed on Slide 3. These are strengthening the balance sheet through targeted debt reduction of approximately $1 billion, improving the competitiveness of our core portfolio, managing the post-patent transition for Rynaxypyr and supporting sales growth of new active ingredients, including Isoflex active, fluindapyr and Dodhylex active. I will start by providing an update on the progress of these 4 operational priorities, beginning with the debt reduction. We are continuing to target approximately $1 billion of debt paydown during 2026. The sale of our India commercial business continues to progress very well. We are in late stages with several potential buyers and expect to sign a definitive agreement in May. In addition, we are in advanced discussion with multiple potential partners regarding licensing of one of our new active ingredients, which we expect will include an upfront payment. We anticipate concluding talks in the coming weeks. The remainder of the debt paydown is expected to come from proceeds from the sale of noncore assets, including potential sales of noncore businesses and/or molecules as well as multiple sizable real estate opportunities, some of which are in advanced negotiations. Next, FMC continues to take decisive action to optimize our manufacturing cost structure and rebuild the competitiveness of a non-diamide core portfolio in a market increasingly impacted by low-cost generic competitors. We intend to shift production from high-cost plants to lower-cost sources in Asia. We expect this transition will be completed by Q1 2027 and that will result in a more competitive core portfolio. Additionally, in advance of the sale of our India commercial business, we have already completed the restructuring in Asia to account for the reduced size of the business. We continue to look for opportunities to further optimize our cost structure across the company in 2026. Regarding Rynaxypyr, we continue to advance our post-patent strategy with a clear focus, driving sales growth while keeping overall branded earnings that flat. Our strategy is progressing, and we are seeing early signals that give us confidence. For example, we are observing positive reaction to a price repositioning with strong volume growth for high load formulations and differentiated mixtures. In addition, we are already seeing some small early share gains from other classes of insecticides. On the earnings side, ongoing cost improvements are supporting margin that are in line with our expectations. We continue to pursue additional opportunities for cost reduction, which will further improve the competitiveness of the Rynaxypyr business. We are still in the early stage of a post-patent Rynaxypyr market and believe that some customers are adopting a wait-and-see approach as they gauge the availability and efficacy of CTPR generic offerings. Our strategy will pay out over the coming quarters as we implement our plan. And finally, regarding our new active ingredients, we are seeing solid growth. Sales of these products doubled year-over-year in the first quarter, highlighting the increasing demand from growers. The growth of this product is expected to build momentum, driven in part by new launches and additional registration. For example, we recently received regulatory approval for Isoflex active in the EU. This is a significant achievement as it is the first new herbicide approved in the EU since 2019. We expect product launches to begin in 2027, giving us new or expanded access to more than 55 million planted hectares of cereals, corn, oseedrape and potato in the EU. In addition, many of our customers have requested preregistration exemptions to use Isoflex in Italy, Germany, France and Spain this year. If granted, this will represent upside to outlook for the second half. We continue to concentrate on these 4 operational priorities as the basis for improved results. In parallel, the Board authorized evaluation of strategic alternatives announced in February 2026 is progressing and multiple options are being evaluated. Turning to our first quarter results. Slide 4, 5 and 6 provide details on our performance. First quarter crop protection market conditions were mostly in line with our expectations. Challenging margins and stressed liquidity for customers and growers led to cautious purchasing in most countries. Lower grower margins also increased the willingness to use generic products or skip some preventative applications. As expected, the regions with more pronounced competitive pressure were LatAm and Asia, where generics are more [indiscernible]. First quarter sales of $762 million were $12 million above the midpoint of the guidance, driven by better-than-expected FX and volume. While sales were 4% lower than prior year, sales were up 1% on a like-for-like basis after excluding India from both current and prior year periods. Sales made under the FMC brand grew 6% on a like-for-like basis and included strong volume growth in EMEA and North America in herbicides and Cyazypyr. This was mostly offset by lower sales to diamide partners. These partners accounted for nearly half of our overall price decline of 6%. The remaining drivers of lower price were branded Rynaxypyr price, repositioning to support our post-patent strategy and a competitive market for our legacy core products. Volume grew 2% and FX was a 5% tailwind. The growth portfolio significantly outperformed the core portfolio due to higher sales of branded salzypyr, new active ingredients and plant health. First quarter EBITDA of $72 million was $17 million higher than the high end of our guidance range with FX, cost and volume all favorable to expectations. Adjusted loss per share of $0.23 was $0.15 better than the guidance midpoint due to higher EBITDA. Looking ahead to Q2, our financial outlook is listed on Slide 7. We expect second quarter revenue to be between $850 million and $900 million. The 17% decline at the midpoint is almost entirely due to lower sales to diamide partners and the removal of India. Excluding these 2 factors, our results would be similar to prior year as branded volume growth in most regions and the low single-digit FX tailwind are offset by lower branded pricing due to competitive market in our core products as well as the brand Rynaxypyr pricing action. Adjusted EBITDA is expected to be $130 million to $150 million, down 32% at the midpoint to prior year. Lower sales are driving the decline, partially offset by favorable costs. Adjusted earnings per share is expected to be between $0.16 and $0.26. This represents a decline of 70% at the midpoint to prior year due mainly to lower EBITDA and higher interest expense. Turning to Slide 8. Our full year 2026 financial guidance ranges are unchanged from our last call. Sales of $3.6 billion to $3.8 billion represents a decline of 5% at the midpoint as a mid-single-digit price decline and the removal of India sales are partially offset by volume growth, including strong contribution from new products. EBITDA is expected to be $670 million to $730 million. At the midpoint, this is a 17% decline, mostly in the first half as lower price and FX headwind are partially offset by lower cost and volume growth. Adjusted EPS is expected to be $1.63 to $1.89, which is a 41% decline at the midpoint, mostly due to lower EBITDA and higher interest expense. We are maintaining our full year guidance despite the increased uncertainty related to tariffs and the conflict in Iran. We are beginning to see higher energy, transportation and petrochemical costs flow through to product costs. At the same time, current tariffs are lower, and there is potential to recover previously paid tariffs. At this stage, it remains difficult to forecast product costs or the magnitude and timing of future tariff impact of recoveries given the uncertainty around the duration of the conflict in Iran and potential additional U.S. trade actions. As a result, we are currently assuming that the Iran-related cost pressure and tariff-related benefits largely offset each other. We expect to provide an updated outlook at our next earnings call as we gain greater clarity on how these factors may affect full year results. Slide 9 provides our implied second half guidance using our first quarter results and our second quarter outlook. At the midpoint, we are expecting sales and EBITDA to be largely consistent with last year's second half. Sales, excluding India, are expected to be up 1% at the midpoint versus last year, with volume growth outpacing a mid-single-digit price decline and a minor FX headwind. EBITDA is expected to decline 6% at the midpoint as lower price and minor FX headwinds are partially offset by volume growth and lower costs. Adjusted EPS is expected to be down 15% due to lower EBITDA, higher tax and higher interest expense. Turning to Slide 10. I'll walk through the key factors bridging second half 2025 EBITDA to 2026, and why we are confident in our expectations for the second half. We expect volume contribution to EBITDA to grow with roughly 2/3, driven by new active ingredients, particularly in LatAm and EMEA. We anticipate a mid-single-digit price decline, which is consistent across the full year. An FX headwind is expected to be mostly offset by cost favorability. Our expectation for the second half volume growth are reinforced by positive signals we are seeing in LatAm. At the end of April, we already have orders representing 32% of our H2 direct sales in Brazil, which validates our confidence in the second half outlook. By the end of June, we are expecting orders representing about half of second half direct sales. We have a higher percentage of commitment on a higher sales number versus last year, reflecting the impact of the new direct sales organization put in place in 2025, which is now in full action. The positive signals we are seeing in LatAm, combined with the demand for new active ingredients, give us confidence in achieving our second half targets. By the end of Q2, we also expect to have more clarity on a review of strategic options as well as debt paydown progress. We anticipate communicating these updates at the next earnings call. I will now turn the call over to Andrew. Andrew Sandifer: Thanks, Pierre. I'll start this morning with a few income statement items. First quarter sales benefited from a 5% currency tailwind, primarily coming from strengthening of the euro and the Brazilian real. As we progress through 2026, we expect FX to move from being a tailwind in the first half to being a minor headwind in the second half, resulting in an FX impact on revenue for the full year that is roughly neutral. First quarter interest expense of $64.8 million was up $14.7 million. This increase is driven by 2 factors: the higher rate on the subordinated debt we issued last May and higher short-term domestic borrowing costs. We continue to expect full year 2026 interest expense to be in the range of $255 million to $275 million, up approximately $25 million versus the prior year at the midpoint due to higher borrowing costs of our senior and subordinated notes following the redemption of the notes maturing in October of '26. We continue to expect depreciation and amortization for full year 2026 to be between $160 million and $170 million. The effective tax rate on adjusted earnings in Q1 was 17%, in line with our expected full year effective tax rate of 16% to 18%. Moving next to the balance sheet and leverage. We ended the first quarter with gross debt of approximately $4.5 billion, up $459 million from year-end. Cash on hand decreased $194 million to $391 million, resulting in net debt of approximately $4.1 billion, up $652 million from year-end, consistent with our normal seasonal working capital build. Gross debt to trailing 12-month EBITDA was 5.7x at quarter end, while net debt to EBITDA was 5.2x. We've continued to work with our bank group to further evolve our revolving credit facility to be more in line with our current credit ratings. On April 16, a further amendment to the revolver became effective. This amendment transitions the revolver to being fully secured, moving away from the springing collateral concept included in the prior amendment. The amended agreement maintains the current capacity of $2 billion and the current maturity of June 2028. We added a collateral package to secure revolver lenders worth approximately $6 billion through direct liens and up to approximately $9 billion, including subsidiary guarantees and pledges of stock of subsidiaries. As a result, we are substantially over collateralized. With the latest amendment, we now have 2 maximum leverage covenants. The first is maximum allowable total leverage, which considers all of FMC's outstanding debt. This total leverage covenant will not be measured until December 31, 2026, when it will be reinstated at 6.75x through December 31, 2027. The second is the newly added secured leverage covenant, which limits the amount of secured borrowing allowable to 3.5x trailing 12-month EBITDA over the life of the credit agreement. On March 31, our secured leverage would have been about 1.3x, well below the new covenant. To be clear, while the maximum total leverage covenant was technically waived for the first quarter, we were in compliance with the previous covenant. Total leverage was 5.67x at March 31 as compared to the prior total leverage covenant limit of 6.0x. We are appreciative of the 100% support from our bank group for these changes. We intend to go to market this quarter with a secured high-yield bond offering to redeem $500 million of notes that mature in October, market conditions from renting. Should market conditions turn unfavorable, we have more than adequate available liquidity to redeem the maturing notes if necessary. As we move through the rest of 2026, we will use all proceeds from asset disposals, licensing agreements, real estate opportunities, et cetera, to pay down debt. Moving on to free cash flow on Slide 11. Free cash flow in the first quarter was negative $628 million, $32 million lower than the prior year period. Lower EBITDA drove a decline in cash from operations year-over-year, which was only partially offset by lower capital spending. We continue to expect free cash flow for 2026 to be in the range of negative $65 million to positive $65 million or breakeven at the midpoint. This includes approximately $150 million in restructuring cash spending. Compared to the prior year, lower EBITDA, higher restructuring spending, higher cash interest expense and modestly higher capital expense are expected to be offset by improved working capital performance in the ongoing business, the liquidation of India working capital and lower cash taxes. With that, I'll hand the call back to Pierre. Pierre Brondeau: Thank you, Andrew. I'll close by simply saying that we remain focused on improving the business and results through the 4 operational priorities. I am happy with the progress we have made so far, and I expect that starting 2027, we will see more meaningful benefits reflected in our sales, earnings and balance sheet. Based on the actions we are taking, I believe the first half will represent an earnings trough for the business with higher sequential earnings in the second half of this year, followed by improved full year results in '27 and 2028. With that, we are happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Mike Sison with Wells Fargo. Michael Sison: Good start to the year. Pierre, you gave good detail on your second half outlook. Where do you think the biggest challenges are going to be to sort of hit that? Obviously, Brazil is going to be the biggest part of that. And then I'm just curious, it sounded like you were more confident in racking up orders for the second half. Maybe a little bit more color on the new sales organization and why those orders are coming in maybe better than last year? Pierre Brondeau: Yes. Thanks, Mike. Let me try to do one thing because I think that maybe the most -- the best way to explain H2 is to tell why we do expect such a ramp-up coming from H1 and what are the very key drivers. So I'm going to try to put that into a few buckets and tell you why we are confident. I'm going to take -- if you think about it, our forecast in H2 at the midpoint is about $425 million of sales improvement in H2 versus H1. So I'm going to try to take the 3 main buckets allowing us to have the expectation of this $425 million increase. The first one is the non-diamide core. We are expecting $150 million to $200 million of improvement. And the main driver is direct sales in Brazil. As I said in our prepared comments, we already have a very significant number of orders in hand. By the middle of the year, we should have half of the orders required to deliver our H2 number in Brazil. And that is because the new sales organization is now in fully [indiscernible]. Remember last year, we made that decision that organization was ready to act by April, May. But as you can see with the numbers we are giving of the orders we have in hand, we missed a big part of the season, not this year, and our orders in hand are already much higher than last year on a much bigger target number. Number two, of the improvement, about $50 million to $80 million is Rynaxypyr. Number one driver, and we see that every year, there is nothing new to it. It's always the same sequence. There is significantly less partner headwind in the second half than what we see in the first half. We also have a stronger branded performance in the second half. And the last one, the third one, maybe the most important is our new active ingredients, which are accounting for about $175 million to $200 million, mostly LatAm, North America, but also remember, the cereal season in EMEA in Great Britain, where we sell Isoflex is in the third quarter. So non-diamide, $150 million to $200 million, Rynaxypyr, mostly with the less headwind from partners, $50 million to $80 million and new AI is about $175 million to $200 million. On the AI is very consistent with what we are seeing in the first quarter in terms of demand. Now that gives you a range of $375 million to $480 million for a guidance of $425 million. Puts and takes, obviously, will not be everything at the low end or at the high end. And we do have growth expected in [indiscernible] Plant Health. So that gives us a comfortable range versus a targeted number. If I would do the H2 to H2 '25, '26, that's a very simple story. That's what we had in the prepared remarks. Basically, direct sales are the driver with new active ingredients, and that's offset by FX and price. So Mike, that's about the -- as precisely as I can do of a bridge with much higher level of confidence in each of those 3 buckets with what we are seeing right now. Operator: Your next question comes from the line of Duffy Fischer with Goldman Sachs. Patrick Fischer: So a question on Rynaxypyr and in particular, the partner sales. I think you've talked about that being $200 million in revenue, which for the company would, let's say, be 5% or 6% of total sales. But last year in Q1, your price was down 9%. You called out partner sales as being half of that. You also called out this Q1 partner sales being half of your price decline of 6%. So it seems like collectively, on a 2-year stack, that's been like 7% of total company sales price down on something that's like only 6% or 7% of the company's sales. So the math doesn't triangulate for me at least. So can you talk about how big was that partner sales at the peak? How big is it on the run rate today? And roughly how much is the price fallen for partner sales in particular? Pierre Brondeau: Yes. I'm trying to reconcile those numbers, especially using '25 to '26, that's the easiest comparison. First, in '25 versus '24, remember, that's where we had the highest price drop because that is the time when we had the highest cost reduction in the manufacturing of Rynaxypyr. So we are still seeing an impact as we continue to lower price, but less in '26 than it was in '25. We do expect to keep on reducing cost in '27. So you will also see price down on partner sales, but it will be even less than it is this year. From a size standpoint, maybe to summarize, if you remember what we said last year, our total Rynaxypyr of sales were about $800 million. And that was made of $600 million of branded sales and about $200 million of partner sales. If we look at 2026, we are forecasting $700 million of Rynaxypyr sales. That will be $600 million of branded Rynaxypyr, flat number versus '25, but partner sales decreasing to a number lower than $100 million. So as you can see, partner sales because of price and also volume are going to be accounting in '26 for less than half of what it was last year. We believe that is a trend we're going to keep on seeing. At this point, the partner sales, $100 million going down next year is going to be a very small part of our company. And regarding the brand sales, I think we believe that earnings for this year will be similar to prior year on similar sales. And that's what we are seeing right now is, in fact, as we were expecting, the volume gain, the improved mix, as I said in the prepared comments, a significant move toward high-end mixtures and high load with the new pricing, lower pricing, the cost reduction compensate for the lower price. So flat branded sales at $600 million, flat earnings for branded Rynaxypyr is the target for this year. Partner sales going from $200 million to $100 million. Operator: Your next question comes from the line of Josh Spector with UBS. Joshua Spector: I'm curious if you could talk a little bit about your views around input costs and what that means, particularly out of Asia broadly for your second half and fourth quarter? Is that something that you're going to have to get additional pricing for to offset this year? Or is that more of a 2027 event? And I'm honestly not sure that if generic prices are going up and maybe supply is more constrained, is that a risk or an opportunity for you in the second half? Pierre Brondeau: Thanks, Josh. Listen, we we talked a lot about that when we are doing the forecast for the second half. And we felt we do not have enough information on the future impact on inputs for our business. I mean we all know the situation for fertilizers or for crop protection. Today, we are seeing some impact of the Iran war. We have impact at the level of the transportation, distribution, delays plus cost. There is higher energy cost in some of our plants, especially in India. And we are seeing some of the raw material price increase. But at this stage, we've put a number in a forecast, but left it not at a significant level. It's very hard. If the war stop in the next few weeks, we believe the impact on us will be fairly minor. If it lasts for a long time, then that's going to be another story, but we do not have enough information. So at this stage, we're looking at the impact being pretty muted. We see some impact, but nothing major. We're going to have to be watching very, very carefully how it's evolving depending upon the length of the conflict. Regarding generics, there is 2 aspects. One is the information we are getting the data we are given and what we see on the market. What we see on the market is pricing from generic leveling off. We do not have this pricing spiral down that we've seen over the last 2 years. So it seems like we are at a time at the market level where we are seeing a stable situation. Now information we have would tend to prove that there could be or there should be a price increase in the second half. We have not factored that in our H2 forecast because it's not reached the market yet. For example, I'm sure you've seen the announcement on Rynaxypyr moving from the low 20s to $47 to $50 a kilogram. Those are information which have not yet reached the market. We have not seen a significant jump, but all indication on exports and local pricing is that they are moving up. So to answer your question, we have not factored anything in the forecast, neither in terms of opportunity due to pricing of generics or significant impact of the war. Operator: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent Andrews: Pierre, you mentioned potential other assets for sale. You spoke about real estate. Is there anything else within the FMC portfolio, I don't know, plant health, just to throw something out there. What else are you thinking of monetizing? And can you give us an order of magnitude of roughly what you think potential proceeds could be? And if you could give us a little description of some of the noncore real estate or other types of assets, so just we can have an understanding of what you're looking at? Pierre Brondeau: Yes. I'm going to give you as much detail as I can because, of course, negotiations being ongoing. They are confidential as much the request of the people with whom we are negotiating than for us. But basically, where we are today on the target of $1 billion. Number one is, as I said, is India. We are expecting to close on the India deal in the month of May. We are very, very dense. There is not that many issues remaining with the -- we have a few players still in the race, but we are weeks, maybe days away from signing an agreement. That's number one. Regarding the licensing of an active ingredient, we are in negotiation with multiple parties. We also -- it's a matter of weeks before we make a decision which partner to go with. The negotiations are ongoing. Then there is some -- we've been establishing a list of molecules, which are noncore for us, but which are of significant interest to some companies either because of the market they serve or because they have a specific strength in some crops where we do not play. So we have a few of those, which are right now -- a few molecules, which are right now in negotiation. And finally, we do have a few negotiations which are going on and some are quite advanced on real estate deal, which would be sale and leaseback of sites we have where, first of all, we do not need to own them. Second of all, it's easier to lease back. And third of all, they are much bigger than what we would need. If I put all of these together, and I'm only listing the things which are in active negotiation and well advanced, we have about line of sight to $700 million, about 70% of our target. That's what is currently in a very active negotiation. Operator: Your next question comes from the line of Mike Harrison with Seaport Research Partners. Michael Harrison: I was hoping here that you could talk a little bit more about what you're seeing with Rynaxypyr taking share from other classes of insecticides? I know that's the strategy that you guys put in place by trying to reduce costs and take the price lower to make it more competitive. But maybe just give a little more detail on which specific classes you're seeing some share gains from, and if that gives you confidence that you're going to see further traction with that strategy? Pierre Brondeau: Yes. You will understand I'm going to be a little bit discrete around which specific class of insecticide because that would be talking directly the competitors who are leading those leaders in those different type of insecticide. But yes, we have seen that. Actually the only place where we are seeing concrete results right now of the extension of sales into different type of insecticides for Q1 is in North America. Indications we have is with what our sales force right now with the new pricing is targeting is a strong level of confidence that this is going to work. But North America was the place where we saw that the most in the first quarter. Now it's early stage, lots of players are taking a wait-and-see attitude. So the real proof of how well our Rynaxypyr strategy is working will be in Q3 and Q4. But yes, we have actual sales we have taken from other class of insecticides. The other thing which is going very well and maybe a bit better than we're expecting is the mix. With the new pricing we have for Rynaxypyr, we are seeing more and more of the growers moving toward the high-end part of our portfolio. Those are the high load and those are the advanced mixture. Now, it's always the same. It's Q1. It's not the biggest quarter for Rynaxypyr. It's an early stage, but I would say that the percentage of sales and the new mix for advanced technology is higher than we're expecting, which is very positive for us because it's despite the lower price, still a place where we have a solid price premium. I'd say, in the first quarter, about half of the sales move toward the high-end part of the portfolio. Operator: Your next question comes from the line of Chris Parkinson with Wolfe Research. Christopher Parkinson: Pierre, I'd really like to dive a little bit more into some of the new products, which haven't necessarily been the greatest focus, but seem to be progressing pretty well. Beginning with Isoflex with the new registration and the kind of the tangible market opportunity, can you just kind of give a framework on how you're thinking about the initial opportunity as well as kind of the longer-term opportunity there? And then understanding that Brazil is obviously challenging for pretty much everybody at the end of last season, what's the update of Rynaxypyr in terms of like -- in terms of how your order book that you've been referencing the progress there, how does fit into that as well? Milton Steele: Listen, Isoflex, Isoflex is going to be a very critical product, obviously, in Latin America, but it's going to be a very, very critical product in Europe. We believe that in not too long, that's what our team in Europe would say Isoflex will be very quickly bigger than Rynaxypyr and Cyazypyr together. Where are we on Isoflex, and that's a process which is a bit more complicated in Europe is, first, you need to obtain the registration of the active in the EU, which we just got a few weeks ago. So that's a very important step because only when you have that step, you can start to get registration for the product you would sell in each of the countries, the formulation you would sell in each of the countries. Great Britain is different. We obtained the registration for the formulation last year, and that's going to be the bulk of our sales in 2026. Now that being said, the product is working so well. We're going to have 100% of reorder and growth in Great Britain for this product. And our customers in multiple countries are asking for exemption to be able to use the product. So we don't know if that's going to happen or not. But all in all, going very well, confirming the performance of the product and the target numbers we've been giving so far are being confirmed. There is no showstopper here. fluindapyr, same thing. fluindapyr is growing fast. The only limitation to growth of fluindapyr, including in Brazil is the registration process. We do have 19 right now pending registration, which, as we get them, it allows the product to grow. It's a part of the direct sales. Also, it's one of the driver for the success of direct sales in Brazil. So as I said, Rynaxypyr, we're going to have to see and wait on Q3, Q4. We have a good level of confidence. Fluindapyr, a new product, the level of confidence is higher. I mean that's -- the demand is very strong, so there is no issue here, only the speed at which we are getting the registration. Operator: Your next question comes from the line of Jeff Zekauskas with JPMorgan. Unknown Analyst: In the first quarter, your prices on average were down 6%. If you exclude diamides, what would prices have done? And secondly, in the first quarter, were Cyazypyr prices up or down or flat? Andrew Sandifer: Jeff, it's Andrew. I'll take that one. Look in first quarter for the non-diamide products, prices were down in the low single digits percent on that sales. We saw significant price reductions in branded Rynaxypyr and the partner Rynaxypyr business. But across the non-diamide core portfolio, which is the bulk of the rest of it, it's in the low single digits. It was a very good quarter in terms of repositioning. Volume, not great. We'll keep working that. But I think as we continue to improve competitiveness of those costs, you'll start to see improvement there for the non-diamide core portfolio. For Cyazypyr, prices were relatively flat, but we did see good volume growth, particularly in Europe. So it's been -- it was a good quarter for Cyazypyr. Operator: Your next question comes from the line of Joel Jackson with BMO Capital Markets. Joel Jackson: Just following up on the partnering -- the licensing deal you're trying to do for the One AI with the upfront payment. If I heard correctly, it's One AI that you're looking at getting something close. I imagine you're looking at all of your new AIs. Could you maybe -- if that's correct, can you maybe elaborate a little bit on why one particular AI seems more likely with partners wanting to license it? Or is there something else happening? Or just talk about that dynamic, please? Pierre Brondeau: Yes. It is -- I'm going to give by answering that if you think about it more information maybe than I should. But actually, there is 2 different ways to think about licensing. When a product has full registration, you license the product or mixtures, but it's not a broad licensing of the molecule. For example, we take a product like Rynaxypyr -- sorry, fluindapyr. Fluindapyr is a product for which we have the active being registered and then people can develop formulations and get registration for formulation. So for this kind of product, you go with multiple licensing as you see opportunities. So for example, fluindapyr, we licensed part of the product to Bayer and to Corteva, Corteva last year and Bayer 2 years ago. So it's a very different approach. When you have the most advanced technology for which one of your partner is very interested, it's a broader licensing, which is done because you don't have yet the registration. This work still needs to be done. So it's a full access to the molecule, but it's a very different type of approach because the product is not yet at a point of being commercial. So that's why if you think about our product, there is 3 products for which we have a significant number or start to have some registration and one which is still away from commercialization and registration. It doesn't mean -- by no means does it say that we will not be licensing the other products, but it will most often be licensing without upfront payment and the royalty is being paid as the product is being sold. Operator: Your next question comes from the line of Laurence Alexander with Jefferies. Laurence Alexander: Just on the new product pipeline approvals, what do you need to see in the back half of this year to know that 2027 is on track? Which ones are still pending that you think are particularly important? Pierre Brondeau: I don't have the list on top of my mind. We have a road map with all of the registrations, which need to happen for '27. As I said -- and the number is 19. We have the exact road map. We know exactly where they are for the product. I could not go through the -- each of the country right now, but there is no place where we see specific delay, which would concern us in terms of 2027 target. Andrew Sandifer: Yes. I'll just build on that, Pierre. I think when you look at fluindapyr, a lot of that growth will be growth with existing registrations in existing countries. As we've said, we've gotten pretty much all the registrations for the active ingredient fluindapyr by country that we were targeting. So there's a lot more introduction of new formulations and just penetration of those countries to drive growth from '27 to '26 with fluindapyr. With Isoflex, it's really getting the product -- formulated product registrations in the EU. As Pierre commented earlier, we are seeing formal requests from growers in multiple European countries to try to get exemptions to use those products in advance of getting them fully registered. But certainly, in '27, we would hope to have full product registrations for all of the IsoPlex-based products for particularly EU 27 countries, and that's a big driver of growth. The only really other place where there's big growth in the new active ingredients, we do expect a little bit more growth from Dodhylex. We do anticipate a few new registrations for Dodhylex in 2027. It's not nearly on the same scale of year-on-year growth as the growth from fluindapyr and Isoflex. So I think as we look to '27, it's really a continuation of the trend of fluindapyr and Isoflex that will drive new active ingredient growth with a little extra spice thrown into the mix from first early introductions of Dodhylex in a few other countries. Pierre Brondeau: And as Andrew said, I mean, if you think about fluindapyr, it's going to be mostly in North America and Latin America, and that's where we're getting -- we should be obtaining new formulation registration. Isoflex, we have the EU. It's all of the major country where we should get early in 2027, the registration for Isoflex. And Dodhylex, its registration in Asia. That's what we -- for Dodhylex, I would say 90% of the market is in Asia. So that's where we are expecting and watching the new registration. Operator: Your next question comes from the line of Matthew Dale with Bank of America. Unknown Analyst: I am very far from being a tariff lawyer or anything like that, but is there any possibility that you get refunds that we're seeing kind of along the lines of some of these other companies that have been reporting that an opportunity set? And then you said you're seeing some positive signs on mix improvement in Rynaxypyr in 1Q. I'm assuming the hope is that continues in 2Q, in the second half? And ultimately, the point is it will be a bigger book of business in 2H. What drives the variance around the success of that 2H? Is it the same mix shift? Is there a risk that the price premium you have on the lower end doesn't hold up in Brazil? Like how do we gauge the upside, downside of what this 2H might look like for Rynaxypyr? Pierre Brondeau: Yes. Okay. Let me start with the tariffs and then I'll go to Rynaxypyr, Tariffs, I'm not a tariff lawyer either. There is 2 type of tariffs which we have paid. There is tariffs which have been what's called... Andrew Sandifer: Liquidated. Pierre Brondeau: Liquidated, which means tariffs which have been through the process of being paid, collected and transferred to different place of usage and they are out of the customer. For this, there is no process in place to even file to recover them. It does not mean that we will not recover them. But right now, there is not a defined process. The other tariffs, the one which have not been liquidated, which have been collected by custom, but which have not been gone through the process of being dispatched and are still there, there is a process in place by which you can apply. Applying doesn't mean you get it, but you can apply for it. Those seem to have a higher probability to be collected faster than the other. Ultimately, all of them should be -- with a court decision should be recoverable. One category seem to be faster than the other, but frankly, we do not know. We do not know. It's still something we are watching very closely. We're working with the lawyers who are giving us their input. As I say, one category is very likely. One is don't know if a process will be put in place. Regarding Rynaxypyr, I think when it's Brazil or North America in H2, all the strategy to be fully successful, I think the #1 criteria is how we are going to be performing in growing the percentage of sales on the high-end part -- which is higher the high concentration or the niches and positioning them at the right price to still be competitive. The reason for that is because Rynaxypyr has been on the market for a while, there is resistance very much in in China starting to be significant in Latin America. Those formulations very often help positioning the product and address the resistance issue or the efficacy issue. So I'd say a significant part of our strategy and maybe in H2, more important than the gain of volume against generic with a single is that piece, succeeding in growing as much as we can the high-end part of our portfolio, which we are selling at a premium. It is what happened beyond expectation in Q1, but of course, on a lower volume than what we will see in Q3 and Q4. Also because the patent just run out at the end of '25. generics are starting to be active in some countries like Brazil, North America, but let's face it, they will be more active in Q3, Q4 than they were in Q1. So the real test is in the second half of the year. Operator: This concludes the FMC Corporation earnings call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to The St. Joe Company first quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. If you wish to ask a question via the webcast, please use the Q&A. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker host for today, Jorge Gonzalez, President, CEO, and Chairman of The St. Joe Company. Please go ahead, sir. Jorge Gonzalez: Thank you, and good afternoon. I am Jorge Gonzalez, President, CEO, and Chairman of The St. Joe Company. It is my pleasure to welcome you to our quarterly earnings call. I am joined today by Marek Bakun, our Chief Financial Officer. On Wednesday, after the market closed, we issued our 2026 earnings press release. It can be found in the Investor Relations section of our corporate website at joe.com. This afternoon, we are continuing our commitment to quarterly earnings calls to provide our shareholders and the investor community with an opportunity to ask questions about our business and performance. We have always been an open and transparent company that welcomes all feedback and opinions. Because of the types of assets that we own, we always encourage shareholders to visit us in person so they may assess firsthand the progress of the region and of our assets. If you want to send us questions for later in the call, you may do so by visiting the top right-hand corner of your screen where the words “submit question” are visible. Clicking on that text will take you to the text entry box. You can type your question and then click submit for later in the call. Before we begin discussing our results and answering your questions, I would like to remind everyone that Wednesday’s press release and the statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today’s call, we will discuss non-GAAP measures which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release. Let us go ahead and get started. We assume everyone has already carefully reviewed our earnings release, which provides comprehensive details about our performance, so we are only going to mention a few key highlights of the first quarter before we move on to your questions. For the first quarter, we had a 5% increase in revenue and an 8% increase in operating income. The first quarter revenue of $99.1 million was the company’s highest first quarter revenue outside of the one-time timberland sale in 2014. The increase in total revenue included a 13% increase in hospitality revenue and a 4% increase in real estate revenue when compared to the same period last year. Leasing revenue decreased by 10%, which was primarily due to the sale of the Watercrest senior living property in September 2025. Net income decreased by 21% primarily because of a decrease in equity in income from unconsolidated joint ventures. Equity in income was $3.5 million for the quarter when compared to $10.2 million in 2025. The decrease was primarily attributed to a lower home closing volume in the Latitude Margaritaville Watersound unconsolidated joint venture. Latitude is a large-scale, long-term project that will have ebbs and flows in quarterly and even year-to-year volume and provides benefits to us beyond its financial performance with consumers for our commercial and hospitality segments. We continue to successfully execute our strategy of growing recurring revenue, as evidenced by the first quarter record of $44.7 million in hospitality revenue and $14.7 million in leasing revenue, which together accounted for 60% of total revenue in the quarter. As a result of the successful execution of the strategy to grow recurring revenue, the company has a sustainable business model that is poised for future growth, with a demonstrated ability to grow multiple revenue streams, all while simultaneously increasing the value of the underlying land assets. In addition to the growth in recurring revenue, we are also improving profitability, as evidenced by the increase in gross margins in hospitality and leasing. As we have previously mentioned, since opening five new hotels in 2023 and expanding our club membership program, we have been focused on improving our hospitality operations and increasing margins. The gross margin improved across all hospitality categories to a total of 24% for 2026 as compared to 18% for 2025. Similarly, we have been focused on improving gross margins in leasing revenue to 61% for 2026 when compared to 55% for 2025. Leasing revenue is not as operationally intensive as hospitality revenue, so the strategy to increase profitability and gross margins is to invest in projects with higher margins, and divest from projects with lower margins. We are systematically evaluating our leasing portfolio to execute this strategy. An example of investment in higher-margin projects is the Watersound Town Center, and an example of divesting is the 2025 sale of the lower-margin Watercrest senior living property. In the first quarter, we continued to implement a measured and multifaceted capital allocation strategy, with $20.7 million in capital expenditures primarily for growth, $9.2 million in cash dividends, $5 million in share repurchases, and $10.9 million in reduction of project debt. Project debt is a real cash expense, and not all project debt is the same. The focus of our project debt reduction strategy is on the variable shorter-term higher interest rate debt, like for our hospitality assets, as opposed to our fixed longer-term lower interest rate debt, like for our apartment assets. Outside of the financial numbers, we continue to fill the pipeline for potential future growth. In the first quarter, we were pleased to announce the execution of a contract with PulteGroup for up to 2,653 homesites in our most recently approved Detailed Specific Area Plan, or DSAP. PulteGroup is the third-largest homebuilder in the country, and this is their first entry into the Northwest Florida market. In the first quarter, we were also pleased to execute a long-range utility water and sewer agreement with the utility provider that will service the Lake Powell and West Laird DSAPs, with the potential for thousands of future residential homesites. Work on this infrastructure is planned to commence later this year. Speaking of the future, most developers and national homebuilders will admit that two of the most challenging aspects of their future growth are acquiring and entitling land. In addition to the demonstrated ability to execute our business strategy, it is important to remember that we already own over 165,000 acres of land with many entitlements in a growing part of Florida. Our competitive advantage is clear. Now Marek and I are going to answer your questions. As a reminder, in the top right-hand corner of the screen, the words “submit question” are visible. Clicking that text will take you to the text entry box where you can type your question and click submit. We will now open the call for questions. Marek Bakun: Thank you, Jorge. We have a few questions. Can you elaborate on the pace of takedown at Pigeon Creek DSAP? 1,300 homesites is great, but whether it is over three, five, or ten years makes a big difference. Also, are there protections in the takedown schedule as it relates to the value of the land? Jorge Gonzalez: Thank you for the question. First, as I mentioned in my opening remarks, we are very pleased with the execution of the agreement with PulteGroup. PulteGroup is the third-largest national homebuilder in the country, and they made the decision to enter this market because they see its growth potential. We are pleased with the addition of PulteGroup to our builder group and builder relationships. The best way to answer the question is that, ultimately, pace is set by the market. PulteGroup is planning on having various product types in this community. Each product type will be a little bit different in terms of pricing and the consumer that will be interested in that product. In terms of the agreement itself, we learn every time we do an agreement, particularly of this scale or similar scale, going back many years. We learn how things end up happening in the field, and we adjust. Those lessons learned over the years are incorporated in this agreement and will continue to be incorporated in subsequent agreements. Marek Bakun: And our disclosure was intentional. We used the term “significant variable of revenue” because we do have built-in protections, as the questioner suggests. Jorge Gonzalez: One last thing. When you look at agreements that we executed five, six, seven years ago, those agreements had a time and place, a context. The way that we look at new agreements is based on lessons learned and based on what is happening in the market at the moment. Marek Bakun: Next question. There was a nice uptick in RevPAR at the hotels this quarter. Was any of that attributable to the New York City marketing campaign? Jorge Gonzalez: Thank you for the question. The majority of the uptick was organic. So far, we have been pleased with the early part of the season in our hospitality segment. We have been carefully tracking the increase in bookings from the New York City market that may be based on the campaign we launched in December. We are cautiously optimistic. We have seen an uptick. It is still very early in the campaign. We are assessing the campaign as we measure results every day and make decisions about future phases. So the growth in RevPAR is primarily organic, but we have seen an increase from the New York City market in bookings so far this year. Marek Bakun: With strong national demand for data centers driven by AI, have you considered or pursued marketing positions of Venture Crossing Enterprise Center for data center development? If so, how does that fit into your recurring revenue and land monetization strategy? Jorge Gonzalez: We have had discussions with those types of users, specifically about Venture Crossings. In terms of the business structure and how we would monetize it, as we do in all of those discussions, we would consider a ground lease, which would be recurring revenue, and/or potentially a sale depending on facts and circumstances, time frame, and various factors. Yes, we have had discussions with those types of users for that location. Marek Bakun: Can you provide additional color on the brokerage revenue either by county, average transaction value, or number of transactions? Jorge Gonzalez: We have been pleased with the commencement of the real estate brokerage agency. We started in one location, the WaterColor Town Center. We quickly opened a second location, the Watersound Town Center, and we have plans to open three additional locations. Those three additional locations will be two in Bay County and one in Walton County. We have received a lot of interest from agents in joining the agency. We still do not have a full year of data—the agency opened its doors right before summer of last year. After we finish this year, we will have one full year of data, and that is the kind of data that we will look at to make decisions going forward. Marek Bakun: Pier Park City Center is a beautiful location. When do you expect lease payments to start on the Surf Park? Has there been any progress toward monetizing the space beyond the Surf Park? Jorge Gonzalez: The answer to both questions is yes. We have made significant progress with the Surf Park, and commencement is expected relatively soon. We also have been in discussions with other potential users in that location. We are being very thoughtful about the users that go into that location because it is a special site in the middle of Panama City Beach with a lot of energy and activity. We have made progress on both counts of the question. Marek Bakun: SouthWood was part of the residential under-contract dollar numbers last quarter. Did something change in the contract with SouthWood that led you to remove it this quarter? So the answer is no. There have been no changes to the contract. With adding the Pigeon Creek contract, which is a long-term contract, in the quarter, it made more sense to show it excluding the dollars related to those two specific contracts. But there were no changes to the actual contract itself. Over the past several years, not only has migration seemingly accelerated, but also local migration seems to be picking up, with more folks leaving the area south of Highway 98 to go north of it. The area on both sides of 331 below the bridge is one of the hottest in the region, and I am curious if, given that we have over 20,000 entitled homes in Walton County, including over 3,000 listed in the pipeline, we are looking to accelerate our offerings from the current pace. Given local demand and price points being paid for lots, it does not seem unrealistic for St. Joe to be selling at 250 to 300 homesites per year in Walton County at prices of at least $250,000 per lot. Should we open things up to more than just the current small group of builders? It seems evident that there is not only demand, but also willingness for folks to pay premiums to current pricing if we open things up a bit. Is this something we are able to do in the next few years? Jorge Gonzalez: Thank you for the question. It is a great question, and we agree with the majority of the observations. Ultimately, pace is determined by market demand. We try to have product and inventory available to meet market demand, but we also do not want to get too far ahead where we have inventory sitting in the ground for too many years, when we could be using that capital for other purposes, like buying back shares. It is a delicate balance to ensure we meet demand without overextending and tying up capital. We have opened it up quite a bit. An example is Camp Creek—just about every custom homebuilder has participated and built homes there. In Origins, I would not say we have a small group of builders. We have five or six builders right now, and we are always talking to three or four new ones, which we are currently doing. We agree with the sentiment of the question. We feel very bullish about how the company is positioned to meet demand at the highest prices and highest margins possible. Marek Bakun: The regional growth story remains very strong, yet The St. Joe Company’s current commercial development activities seem modest compared to the broader market pace. As the dominant landowner, how are you thinking about this? Should we expect The St. Joe Company to take a larger percentage of the area’s development activity at some point? How are you thinking about the pros and cons of becoming a more active commercial developer? Jorge Gonzalez: Commercial development, similar to residential, has a market component. How proactive we will be depends on market demand. We are getting many more calls from prospective commercial tenants, particularly national tenants, than we ever have. Many years ago, we were the ones making the calls; now we are getting them, particularly from national retailers, which is very encouraging. If that trend continues, we will make decisions to meet that demand and accelerate our commercial development. Marek Bakun: Adding to that, market demand matters, and our goal is always to have a high lease percentage. Building for market demand is important. Analyst: Latitude available lots are declining. When would you expect to add more lots to that partnership, and do you expect it would be contiguous to the existing project? Do you see a point at which the Watersound Club membership will be full until more facilities are built—e.g., golf course, tennis, gym, amenities, etc.? If so, what is the approximate number? Jorge Gonzalez: We have been in discussions with our partner about the next phase and have made good progress. Yes, it would be to the immediate west of the existing joint venture. Regarding the club, we have made significant investments in facilities to expand capacity in the last few years. Camp Creek is a very sizable facility that accommodates many activities for our club members and was a significant expansion of capacity. Another is the opening of a brand-new golf course, the third, which opened last year. We are constantly discussing where we will build the next facilities and the programming involved. We monitor capacity usage and aim to create more experiences for our members. At this moment, we feel our existing facilities have a good balance of usage. We do not think we are at capacity, but we are constantly planning and looking at where the new facilities are going to be. Marek Bakun: There was a $5 million change within the other expense line item in the Latitude joint venture this quarter. Could you give us more color on what drove this, and if it will continue into future quarters? Looking at the disclosures, the costs are very consistent. There are no operating cost changes. The income was driven purely by volume—the number of closings delivered in the quarter compared to 2025. There were no material changes in costs. The actual margins on a per-unit basis were above the margins a year ago quarter. Marek Bakun: Any updates or information on the custom homesites near the future art park—anticipated number of lots? Jorge Gonzalez: We have been planning another custom residential homesite product in Origins West, to the west of the art park. That is in planning now. We do not have specifics yet in terms of the number of homesites or the time frame, but it is a real project. We have done some preliminary development work in that phase. Look for us to share more information about that project in the subsequent weeks and months. Marek Bakun: Is there any color you can give us on recent migration, population, or even tourism growth and trends in the Bay-Walton area? If you do not have quantitative figures, then even anecdotal examples would be appreciated. Jorge Gonzalez: Beyond the tables, charts, and data that show migration and tourism in our region are growing, it still feels very positive to us on the ground every day. The migration is continuing, not only in terms of numbers, but also in terms of broadening geography—people are moving here from places that have not historically been major sources. Similarly, in hospitality, we are seeing more guests in our hotels from a broader range of locations, and we are seeing a good uptick in occupancy and rates, as noted earlier. Our first quarter results for hospitality show a solid uptick in revenue, which aligns with what we feel: migration and awareness of our region from a broader range of locations are continuing. Marek Bakun: Any notable updates on the Intracoastal Waterway Marina? Jorge Gonzalez: We started work on that marina. We still have a couple more permits to obtain and are in the process of obtaining those. Once we do, we will accelerate the work. We feel positive about market demand for that marina. We do not see any major regulatory challenges in obtaining those permits. It is just a process. As soon as we get the final permits, we will move forward and finalize the marina. Marek Bakun: Based on lot sales and lots under development, it seems like there has been an increase in activity and demand growth at WindMark. Can you give us some color on what is going on there? What future plans and opportunities could occur there and in the area? Jorge Gonzalez: We feel the residential component of WindMark has been one of our success stories. We have been very pleased with the results ever since we made the decision to partner with that one builder. The pace has been good. We see traffic and demand in the pipeline continuing to be positive. We are meeting the demand that the builder is experiencing in their home sales. In terms of future opportunities, we are always assessing what other areas we can look at in that market. We feel very positive about WindMark and are constantly assessing future opportunities. Marek Bakun: Clubs seem to be doing very well. Given the timelines for development and some growing pains related to the size and success of what it has become, do you think it makes sense to accelerate the Lake Powell amenity or anything north of 98? Development can take a long time. The marina has been at various stages of progress for over half a decade. I imagine now the club amenities are at least three years out at best. My concern is that future growth or even quality of the club may be limited until more opens up. Can you share your thoughts and elaborate on the timelines? Jorge Gonzalez: Great question. Part of the answer is what I mentioned earlier regarding capacity of our club, the experiences our members are having, and adding future capacity. We evaluate this constantly. Right now, we feel we are in a really good place. You do not want to be on either extreme—more demand than capacity or way more capacity than demand. We feel balanced in terms of demand and available capacity. We do have several new amenities that we have been planning. We have mentioned one in Lake Powell. We are actively in the planning and design process for that amenity. We do not have an exact start date yet. We are also looking at other locations for future club amenities. We do not want to get too far ahead with excess capacity, but we also do not want to be behind. Right now, we feel we are in a sweet spot. Marek Bakun: What is the expected timeline for starting to realize revenue from homesites at Pigeon Creek and also SouthWood? Jorge Gonzalez: For Pigeon Creek, in terms of closings, it is probably going to be 2027. We are actively working on the engineering and permitting of the first phase, working very closely with PulteGroup. So in terms of closings and realizing revenue, probably the first part of 2027. In SouthWood, we do not have a homesite development strategy. In SouthWood, we sell tracts with master infrastructure to homebuilders. We have several contracts that we are working on, and we are always in discussions with homebuilders in that market who want to purchase those tracts. Marek Bakun: How can we interpret the increase in the advanced deposits figure as a year-over-year increase in bookings demand when it comes to hotels? Jorge Gonzalez: As I said before, we feel good about the start to the season. Our first quarter revenue numbers show that. Looking beyond the first quarter at bookings and overall demand, we feel pretty good. We are cautiously optimistic that our hospitality segment is going to have a good year and a good season this year. Marek Bakun: There are no more questions. Jorge Gonzalez: Let us give it a couple more minutes in case there are any last-minute questions. These have all been great questions. We greatly appreciate the quality of the questions and the depth of knowledge that the individuals asking the questions have about our business and our region. Those types of questions only make us better, so we greatly appreciate them. Okay. We do not see any more questions. Thank you for joining us today. We appreciate your interest in our company, and we look forward to speaking with you again next quarter. As a quick reminder, we are holding our annual meeting of shareholders on May 12 at 9:00 a.m. Central Time at Camp Creek Inn. We hope to see many of you then. Thank you. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome, everyone, to the Northwestern Energy Group Inc First Quarter 2026 Financial Results Webinar. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Travis Meyer. Please go ahead. Travis Meyer: Thank you, Audra. Good afternoon, and thank you for joining Northwestern Energy Group Inc’s financial results webcast for the quarter ended 03/31/2026. My name is Travis Meyer, and I am the Director of Corporate Development and Investor Relations for Northwestern Energy Group Inc. Joining us on the call today are Brian Bird, president and chief executive officer, and Crystal Lail, chief financial officer. They will walk you through our financial results and provide an overall update on the great progress we have had this quarter. Northwestern Energy Group Inc’s results have been released, and the release is available on our website, Energy.com. We also released our 10-Q premarket this morning. Please note that the company's press release, this presentation, comments by presenters, and responses to your questions may contain forward-looking statements. As such, I will direct you to the disclosures contained within our SEC filings and the Safe Harbor provisions included in the second slide of this presentation. Also note that this presentation includes non-GAAP financial measures and information regarding the pending merger transaction. Please note these non-GAAP disclosures, definitions, and reconciliations in the merger-related disclosures included in the appendix of today's presentation materials. This webcast is being recorded. The archived replay will be available shortly after the event and will remain active for one year. Please visit the financial results section on the website to access the replay. With those details behind us, I will now turn the call over to Brian Bird for his opening remarks. Brian Bird: Thanks, Travis. On our recent highlights for the quarter, we reported GAAP diluted EPS of $1.03 and non-GAAP diluted EPS of $1.31, affirming our 2026 earnings guidance range of $3.68 to $3.83. We are also affirming our long-term rate base and EPS growth rate targets of 4% to 6%. From our merger progress perspective, I am sure all of you have noticed that we received shareholder approval of our pending merger with Black Hills and received approval of all proposals. We have also put in place constructive settlements with each of our key intervenors in Montana, Nebraska, and South Dakota associated with the merger dockets. From a regulatory and legislative standpoint, we have had constructive wildfire legislation passed in South Dakota, and we recently submitted a large new load tariff proposal with the MPSC. Regarding data centers, we are happy to announce we signed another development agreement, this time with Quantica Infrastructure, now for a total of three development agreements associated with data centers. Lastly, regarding the dividend, we declared a dividend of $0.67 per share payable 06/30/2026, with a June 15 record date. I will now pass it over to Crystal for our first quarter financial review. Crystal Lail: Thank you, Brian. In my comments today, I will cover our first quarter results, our 2026 earnings outlook, and our capital plan, and then I will turn it back to Brian to give you some of the exciting updates that he mentioned as we started the call. I will begin my comments on slide seven. We delivered GAAP earnings of $1.03, which includes impacts of a historically warm first quarter, merger-related costs, and costs related to incremental Colstrip ownership. On an adjusted basis, we delivered $1.31, or a 7.4% increase off of our 2025 first quarter results. Slide eight provides detail on the key drivers for the quarter, including improved margin, albeit net of the weather I just mentioned, offset by higher operating costs, depreciation, and interest expense. Regarding operating costs, that includes a $12 million increase from the prior quarter due to our incremental ownership of Colstrip and $4 million driven by labor and benefits. We have talked many times about the rationale for owning additional Colstrip and the importance of that facility to serving our customers in Montana. We expect the annual operating cost to be approximately $48 million related to that incremental ownership. On a quarterly basis, you can think about that generally running about $12 million a quarter, and you will see that we have offset approximately $8 million of those here in Q1. The recovery of these costs was impacted by low market power prices, driven by overall conditions that pushed power pricing lower than our expectations. Moving to slide nine to give you more detail regarding margin, margins for the first quarter reflect new rates in Montana. You will recall the timing of our rate filing last year and not having interim rate recovery in the first quarter; you will see that increase here. Also noted are the sales from the Puget Colstrip interest and continued growth in our transmission revenues in the bulk electric system. This was offset by weather, as Montana experienced the warmest winter in over 100 years. Moving to slide 10, that warm weather impacted us as an unfavorable $0.17 versus what we would expect as normal volumetric loads. The quarter also included $0.05 of merger costs and $0.05 of operating expenses from Colstrip that were not recovered, as I just mentioned. Those adjustments result in adjusted earnings of $1.31 for 2026 as compared with $1.22 in the prior quarter. Moving to slide 11, Brian noted that we are reaffirming our guidance for 2026. Looking ahead to the timing of our next rate reviews, which you all typically would expect us to announce here in Q4 or in Q1, the settlement agreements related to the merger include some stay-out provisions, both in Nebraska and South Dakota. For Montana, we have not determined the timing of our next rate review as the 2024 case still remains under reconsideration. In addition, critical to our long-term earnings profile—as we have discussed—are the developments related to our development agreements with Quantica and the large new load filing, all underpinning our ability to reaffirm our guidance over 2026 and beyond. Slide 12 gives you more detail on our capital plan. This remains unchanged from our fourth quarter call at $3.2 billion from 2026 through 2030. I will remind you that this is driven by essential investments to meet our customers' needs. It does not include incremental investments that may be driven by additional regional transmission opportunities that we are very excited about, or serving any of these large loads. It does include, however, what we adjusted for at Q4, which is incremental generating capacity in South Dakota related to the SPP expedited resource adequacy study. We are delivering on our base capital plan without issuing new common equity and have no equity needs in 2026. As we updated you on our Q4 call, incremental capital in 2027 related to the generation capacity in South Dakota will require some equity needs in 2027 and beyond. With that, I will turn it back to Brian for the rest of the update. Brian Bird: Thanks, Crystal. On page 14, we have good news in terms of the South Dakota wildfire bill. Senate Bill 36 was passed by the South Dakota legislature with broad bipartisan support and has been signed into law. First and foremost, no strict liability: strict liability cannot be applied to utility operations alleged to have caused wildfire-related damage. The legal protections for providers and damages, also shown on page 14, are extremely similar to what we have in our Montana legislation. As a matter of fact, if you compare this page to our Montana page, it is very similar. We are very excited about the protection that we have in our two electric states from a wildfire perspective—some of the best wildfire protection in the United States at the state level. We plan to submit our wildfire mitigation plan for the South Dakota PUC approval in 2026, and we expect to update that plan every two years going forward. From a merger perspective with Black Hills and stakeholders, we spent a lot of time talking to shareholders about this: the increased scale and our ability to move from a 4% to 6% EPS grower to 5% to 7%, doubling our rate base on a going-forward basis, expanding investment opportunity, having more resources—not only financial, but personnel—putting the right amount of resources at these opportunities, a stronger balance sheet, and enhanced business diversity in an expanded footprint. That combination represents a highly attractive value creation opportunity. Approximately 86% of our shareholders voted, and of those, 99.7% voted in favor of the merger. This merger will benefit many stakeholders, and certainly customers. Any cost savings that these two companies achieve ultimately accrue back to customers in future rate reviews. We hope, as we move forward with each of the three states, that we ultimately get those approvals. On slide 16, talking about the timeline, we reached settlements in each of the three states where we filed applications for approval. We have already had a hearing in Nebraska, and we will have the hearings in Montana and South Dakota in the May and June timeframe, respectively. In addition, we filed with FERC back in December, and if you look at the 180-day approval timeline, we hope to hear back from FERC by June. The S-4 and joint proxy resulted in shareholder approvals received not too long ago, and Hart-Scott-Rodino has been satisfied with the waiting period expiring. There are a lot of green checks on this timeline, but we are still waiting for the three states to ultimately make decisions, and we still need to have hearings in two of those states. We believe the approvals we need can be achieved in 2026. Regarding data center progress, we continue to see quite a bit of demand. We increased our data center request queue from six to eight since the last time you saw this page. High-level assessments actually came down by one as parties evaluate deposits and costs to move forward; that high-level assessment now stands at four. We have grayed out letters of intent—when Quantica signed a development agreement, we no longer have any LOIs; we move those to the development agreement stage. Of the three in the development agreement phase, we would like to move all of those to an ESA—an energy service agreement. All three developers would like to have an ESA done by 2026. We are doing everything we can to deliver that; we are ready from a 2026 perspective, but they also need to complete certain items on their side. On slide 18, from a regulatory front in terms of large load customers, the big news this quarter is we submitted our large new load tariff with the MPSC in March 2026. There are a lot of questions about data centers and protecting customers. Our large new load tariff is intended to protect customers and the company and provide guidelines on serving large load. We are ready to move forward if we get the large load tariff in Montana, and we are ready today with an ability to serve large load in South Dakota. We were disappointed we were not able to achieve any sales tax relief for data centers in South Dakota, but interest remains strong. Of the three parties we are working with, Zevi has had issues procuring land necessary for their data center; they continue to work through that issue, and we are being patient. Atlas continues to move along the process necessary to get from development agreement to ESA. The big news is our development agreement with Quantica for their load, which goes from 25 megawatts ramping up to 1.1 gigawatts for a targeted start date of early 2029. As is common at this phase, a customer has not been named and will be named if we enter into an ESA. On slide 19, regarding Colstrip, to clarify our intent with our two pieces of incremental Colstrip: we acquired the Avista portion to achieve resource adequacy at 222 megawatts. We procured the 370 megawatts from Puget to move from 30% ownership (with Avista) to 55%, to ensure we have control over Colstrip’s future. The Puget piece is currently in a FERC-regulated entity and will remain there until we have an indication on our large new load tariff. If that tariff is put in place, it is our desire to move that asset into our Montana state-regulated business. From a standalone perspective, Northwestern Energy Group Inc offers a 4% dividend yield and 4% to 6% EPS growth based upon a $3.21 billion capital program, divided relatively evenly between transmission, distribution, and supply—executable and low-risk critical capital to our customers—supporting an 8% to 10% total return. We have incremental opportunities that could help us grow faster than 6%, but we have to deliver on those. None of these opportunities are in our current plan: there is no data center capital, no FERC regional transmission, and no incremental generating capacity beyond the South Dakota capacity already discussed. If we deliver on those, we could see total returns greater than 10%. We believe we can execute this plan even better together with Black Hills. That concludes our presentation. We will now open the call for questions. Operator: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. We will take our first question from Shahriar Pourreza at Wells Fargo. Analyst: Hi, team. This is Whitney Motilama on for Shahriar Pourreza. Good afternoon, and congratulations on the quarter. In your remarks, you stated that there is a need for large loads to get things done on their end before getting to the ESA stage. Does the recent Zevi land situation reinforce the need for strict milestones around site control and permitting before Northwestern Energy Group Inc really begins to treat a project as part of its planning baseline? And then I have a follow-up. Brian Bird: I would say this in context: initially, when we wanted to file the large new load tariff, the intent was for us to take an ESA with one of these large load customers and jointly go in and talk about the large load tariff. One of the things we want to do is ensure that we continue to work with these parties. It is going to take a while, I believe, to ultimately reach a resolution of the large new load tariff. In the meantime, we will be able to continue to work with these three developers on all the necessary things they need to do—and we need to do—to ultimately bring us to an ESA position. Analyst: Yes, that makes sense. Moving to large load numbers, today’s update was notably stronger on the aggregate level, with demand tied to the three large load customers now scaling to 1.1 gigawatts by 2030 versus the prior 500 megawatt framing. Can you help bridge what is driving the increase from the prior outlook? I understand it is mostly Quantica, but is it better visibility on existing counterparties or a broader change in how you are underwriting the pipeline? Brian Bird: The primary change is specifically Quantica. Previously, I think we had something in the 500 megawatt range for them; we are now at 1.1 gigawatts. So the change is primarily associated with Quantica. Analyst: Okay. Sounds good. Thank you so much. Brian Bird: Thank you, Whitney. Operator: We will move next to Aidan Kelly at JPMorgan. Aidan Charles Kelly: Hey, good afternoon. Thanks for the time today. Going back to the large load front, you have demonstrated good progress on getting your third development agreement this quarter. Ahead of ESAs, I would be curious to hear the latest resource planning assumptions for each of these projects. Could you comment on Northwestern Energy Group Inc’s ability to participate in generation opportunities? I think in the past, Brian, you mentioned build-own-transfer as an opportunity. Where are we today, and can you walk through the playbook of what utility participation looks like at this time? Brian Bird: That is a great question. We definitely would like to participate. I have talked in the past about concerns regarding procurement rules in Montana—IRPs, RFPs, and preapproval—it is a long process, and our data center partners would like to move faster. We are looking to see if there is an ability to participate through a build-own-transfer process. They want to be served by the utility through our portfolio rather than standalone behind-the-meter resources. That is what we would like as well, but aligning our procurement timelines with their desire to move quickly is tough. We will have to work together to find a way. The Puget interests are available, if you will, for large load tariffs, which helps. Our existing portfolio is there to serve existing customers, but the Puget 370 megawatts can help large load. Our long-term IRP does have scenarios associated with data center buildout, but that would likely be in the back half of these opportunities. We will work with each developer on resource planning to come together where we can participate, but likely on a lesser interest than some utilities whose procurement rules allow them to provide all resources. We want to participate as much as we can from a generation perspective and plan to do so within our timing constraints. There will also be a tremendous amount of transmission opportunities associated with this, and we are excited to invest alongside our development partners. Aidan Charles Kelly: Thanks for that. One more on the regulatory front: any thoughts on the upcoming Montana commissioner elections and how this might influence your strategy in the state? Brian Bird: In terms of our strategy, we do not tailor our approach to who may be elected. We will work with whoever is elected and do the right things for our customers in Montana. If your question is about how the races are looking, I can go there, but our filing cadence and need to recover costs do not change with elections. Crystal Lail: Aidan, there are many factors in our filing cadence. We have been clear—being a state with elected commissions—that regardless of commissioner turnover, we need to recover our costs. We are investing significantly to serve our customers in Montana, so filings will be fairly frequent. While there is an election with two seats up this year, we will continue our cadence of needing to recover our costs under historic ratemaking. I alluded to the 2023 test period and 2024 known and measurable filing; it is 2026 April, and we still do not have a final outcome. We will need to work within that historic ratemaking context and keep filing. Elections do not change our broader recovery strategy. Aidan Charles Kelly: Makes sense. Appreciate the insight. See you at EEI. Operator: We will move next to Chris Ellinghaus at Seaport Williams and Shank. Chris Ellinghaus: Hey, everybody. Good afternoon. Crystal, was that the largest weather deviation from normal you have ever had? Crystal Lail: Funny you ask, Chris. We actually prepared for that. In 2019, we had a slightly larger deviation, and that one happened to be a colder weather event. We saw incredibly cold weather that winter. While this was not the most material single-quarter weather impact, the overall average warmth across both Q4 and Q1 was probably the most significant we have seen. Chris Ellinghaus: Okay. Brian, you said you would discuss how the races are going. So how are they going? Brian Bird: We have a commissioner up for election in both South Dakota and Nebraska; those primaries are relatively quiet. In Montana, Commissioner Dr. Bukacek has two Republicans running against her in the primary and an unchallenged Democrat. It is early innings. The Pinocci seat is open, and there are a couple of Democrats running for that seat and an unchallenged Democrat as well. Regardless, we are comfortable working with whoever gets elected. Primaries are coming up in the June timeframe, and the window for others to get into those races in Montana has passed. Stay tuned. Chris Ellinghaus: Given the speed that Montana operates at, when I look at your merger approval expectations, the other states operate on a more normal timeline, but Montana is particularly slow. With hearings starting in the middle of next month, and given that orders can take many months after hearings, is there any reason you have confidence in getting approvals in Montana by the end of the year? Brian Bird: It is a good question. We say the latter half of 2026. I am confident for two reasons. First, the important intervenors—the large customer group, the Montana Consumer Counsel, and several others—have agreed and settled. That takes a lot of issues off the table. We have two intervenors remaining with contested issues. Those settlements should help with speed. Second, there is a $10 million benefit that will accrue to customers shortly after the merger. I would expect the commission would want that benefit to get to customers as quickly as possible. Taking those into account, I would like to think this will move faster rather than slower. Chris Ellinghaus: You talked about wanting to take an ESA with you to the commission to talk about the large load filing. Is there not enough precedent in other states—particularly in the South and some of the Midwest—for adding new resources? Is that not enough evidentiary basis for the commission, even without picking a specific customer? Brian Bird: Two things. First, the nice thing about the utility space is we can see what our neighbors do, and we think we have taken the best of the large new load tariffs out there. We have put forward a middle-of-the-fairway proposal aligned with the industry and with strong customer protections. Second, we believed we would have an ESA some time ago. As you know, Zevi ran into land issues that we were not aware of until most recently. We thought the timing of the large new load tariff and an ESA would be about the same. There are a lot of questions about data centers and how we are going to protect customers. We felt it was in everyone’s best interest to file the large new load tariff now. It is very similar to the protections utilities are seeking elsewhere. Crystal Lail: And, Chris, I would add on our filing—if you read the details—we reference other states that have already found a path to prevent cost shifting and provide reasonable asset protections. Our framework does exactly that and specifically benchmarks those other tariff filings. This provides a strong basis for the commission to consider, even without a specific customer contract in front of them. Hopefully, we will have one soon. The tariff framework provides adequate protections for customers in the state while allowing for the benefits of needed system investment that a large load customer should pay for. Chris Ellinghaus: Maybe I could rephrase. The rhetoric last year suggested that some Montana commissioners had not been following how other jurisdictions were proceeding and the protections and customer benefits provided. Do you think they are watching? Brian Bird: I cannot speak for the commissioners. My expectation is that they and staff are following what is happening in other states. I would hope so. Our testimony provides examples of what others have done, and we are proposing similar protections that have already been accepted elsewhere. Chris Ellinghaus: And like you said, the settlement for the merger has benefits, not just protections. You would think they would want to speed those along to customers. Brian Bird: I would argue in all three states—Montana, and with stay-out provisions in South Dakota and Nebraska—there are protections for customers in each of those states. Chris Ellinghaus: Right. Okay. Appreciate the color. Brian Bird: Thank you, Chris. Operator: We will take our next question from Paul Fremont with Ladenburg. Paul Fremont: Thanks a lot. Congratulations on a good quarter. Starting with Quantica, over what period of time would it take for them to reach 1,100 megawatts? Brian Bird: Good question, Paul. From a ramping perspective, starting in 2029, about two years. Crystal Lail: Yes, our materials indicate around 2031 they would be at full ramp. Paul Fremont: Okay, great. When I think about your 4% to 6% and the fact that no data centers are included in the current 4% to 6%, would Zevi and Atlas keep you within the 4% to 6%, or would you expect that Zevi and Atlas could put you above the 4% to 6% EPS growth? Crystal Lail: Each deal will be specific to the needs of the customer and the investment driven by where that customer is located and their requirements. We cannot specifically quantify it until we get to an agreement with them and can clarify the impact to earnings. All else equal, it certainly pushes us upwards in the range. Paul Fremont: Should we assume that the Avista portion of Colstrip would likely be the source of generation that would serve Zevi and Atlas? Brian Bird: No. You should not assume that. The Avista portion got us to resource adequacy to serve existing customer needs. The Puget piece, as I described earlier, increased our ownership to 55% to ensure we have control over Colstrip’s future. That 370 megawatts is not necessary for customers today, and we did not want to burden our customers with $330 million of operating costs for an asset they do not need today. But that 370 megawatts is available to serve large load customers. Paul Fremont: If the Puget piece serves those customers, what other spending would you see associated with Zevi and Atlas if they were to come online? Brian Bird: From a generation perspective, you are right to focus there, but there will also be transmission and other investments necessary to support them. As Crystal pointed out, when we have an ESA, we will be able to talk more specifically. Crystal Lail: I would also add that our large new load filing framework sets the premise that each customer would pay the current embedded rate in the large new load tariff, and then we would surcharge for any incremental investments—such as transmission or generation—specific to that customer. They would come on paying the rate set in base rate cases, which sets the floor of rates they would pay and contribute to the system. Beyond that, we would be able to surcharge based on each individual customer’s needs. Once we sign a specific ESA, we will know what that incremental investment might be. Paul Fremont: How would you realistically serve the Quantica load if it were to ramp beyond what is available out of the Puget piece of Colstrip? Brian Bird: In the timeframe they are targeting, our current IRP base plan did not assume data centers, but it has scenarios where data centers are included. To participate on the back end of their ramp, we may catch the back half of 2030–2031 with some generation. In our discussions with them, they will have to bring their own generation—particularly for 2029 and 2030, and likely a good portion into 2031. We would like to participate, but it will likely be on the back end. We would like the opportunity for build-own-transfer in anything they do. Paul Fremont: My last question has to do with the large customers suggesting they wanted to see you pursue greater integration of your system with Black Hills post-merger. Can you give us an idea of the type of integration work that would make sense to better serve the customers of both systems? Brian Bird: From a generation needs perspective to serve our customers, generation closest to our customers will likely continue to be built in our service territory. The biggest opportunity out of the blocks would be looking at Path 80 from a transmission interconnection perspective. We have also talked about the North Plains Connector and other regional transmission opportunities. Being combined with Black Hills gives us better opportunities to participate in these regional projects. Paul Fremont: And the kV size of that line and how many miles roughly would that be in terms of construction? Brian Bird: For North Plains Connector, we are talking about a 10% or a 300 megawatt interest. I am not sure what has been publicly stated in terms of dollar amounts for that project today. It would be a sizable investment for us. We are evaluating that, continuing to invest in the Colstrip transmission line and upgrades, assessing a Montana-to-Idaho opportunity, and Path 80—connecting Black Hills and our system. We have shared a slide associated with regional transmission in the past. We are in relatively early phases of development, and until we reach certain stages, we will stay away from sharing dollar amounts. We think those would be attractive investments. Paul Fremont: Great. Thank you so much. Brian Bird: Appreciate it, Paul. Operator: That concludes our Q&A session. I will now turn the conference back over to Brian Bird for closing remarks. Brian Bird: I appreciate the comment earlier about a great quarter. Thinking about the progress on the merger—the shareholder vote and the three settlements—I want to thank my team and the Black Hills team for great coordination to make that happen on our timetable. Great work here at Northwestern Energy Group Inc to make progress on the merger, deliver on everything we discussed this quarter, and continue to serve our customers well every day. I am really proud of our group and the great quarter we have had. Thank you very much. Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Warrior Met Coal, Inc. first quarter 2026 conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone, and to withdraw your question, star then 2. Please note this event is being recorded. I would now like to turn the conference over to Mr. Brian M. Chopin. Please go ahead, sir. Brian M. Chopin: Good afternoon, and welcome, everyone, to Warrior Met Coal, Inc.’s first quarter 2026 earnings conference call. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are to different degrees uncertain. These uncertainties, which are described in more detail in the company's annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different from those expected in our forward-looking statements. We do not undertake to update our forward-looking statements whether as a result of new information, future events, or otherwise, except as may be required by law. For more information regarding forward-looking statements, please refer to the company's press releases and SEC filings. We will also be discussing certain non-GAAP financial measures which are defined and reconciled to comparable GAAP financial measures in our first quarter press release furnished to the SEC on Form 8-K, which is also posted on our website. Additionally, we will be filing our Form 10-Q for the quarter ended March 31, 2026, with the SEC this afternoon. You can find additional information regarding the company on our website at warriormetcoal.com, which also includes a first quarter supplemental slide deck that was posted this afternoon. Today on the call with me are Mr. Walter J. Scheller, Chief Executive Officer, and Mr. Dale W. Boyles, Chief Financial Officer. After our formal remarks, we will be happy to answer any questions. With that, I will now turn the call over to Walter J. Scheller. Walter J. Scheller: Thanks, Brian. Hello, everyone, and thanks for taking the time to join us today to discuss our first quarter 2026 results. I will start by providing an overview of the quarter before Dale reviews our results in additional detail. The first quarter marked a defining milestone for Warrior Met Coal, Inc. We completed the final construction and project spending associated with the development of our transformational Blue Creek mine, delivering the project ahead of schedule and fully in line with our capital expenditure guidance. This achievement reflects years of planning, disciplined capital allocation, and exceptional execution by our team and concludes the construction and investment phase of Blue Creek. Our total project capital expenditures were a little over $1 billion. As a reminder, this is on budget and fully paid out of cash from operations without incurring any funded debt. The new Blue Creek mine was a major contributor to higher volumes and profitability in 2026, which led to record quarterly sales and production volumes. Our first quarter volumes were higher than our internal plans and are expected to be higher for the remainder of the year to meet our full-year outlook and guidance. As we look at the first quarter steelmaking coal market conditions, pricing remained notably strong in the premium quality segment and well above our original expectations, while the High Vol A quality segment underperformed expectations. We believe this strength in premium quality pricing was driven by tightness in the segment resulting from supply constraints stemming from weather disruptions and mine production-related challenges in Australia. These factors drove up premium quality prices by 15% in January, leading to noticeably higher demand for our Mine 7 premium quality product. As Australian supply chains have begun to recover from these events, the emergence of a new conflict in the Middle East introduced additional cost pressures, specifically in freight markets, while increasing the uncertainty around global energy availability. Steelmaking coal prices have remained strong as inflationary cost pressures from the rise in oil and diesel prices have asserted a firmer floor despite soft seaborne demand, especially in the spot market. However, from a global seaborne demand perspective, India continues to be a key market supported by firm domestic steel prices, improving margins, and growing steel production, which has helped sustain demand for high-quality steelmaking coal. Global pig iron production decreased by 2.1% for the first two months of 2026 as compared to the same period last year. India continued to demonstrate strength, showing a 3.1% increase for the same period. Chinese pig iron production declined by 2.7% during the two-month period. Our primary index, the PLV FOB Australia, rose very quickly in the first quarter as a result of supply constraints stemming from the previously discussed challenges in Australia, reaching a high of $229 in early February and averaging $213 per short ton. The index average was 17%, or $31 per ton, higher than the fourth quarter 2025 and was 27% higher than 2025. As for main second-tier indices, the Australian LVHCC index price experienced more modest gains and averaged $173 per short ton for the first quarter. This is $19 per ton, or 12%, higher than the fourth quarter 2025, and 30% higher than 2025. As a result, the relativity of the Australian LVHCC index price to the Australian PLV index price decreased from 85% in fourth quarter 2025 to 81% for 2026. In contrast to the Australian LVHCC index price, the average U.S. East Coast HVA index price only increased $8 per ton, or 6%, in the first quarter from 2025 and averaged $144 per short ton. As a result, the relativity decreased from 75% in 2025 to 68% for 2026. More importantly, this relativity dropped to an all-time low of 62% for a brief period during the first quarter and represents a significant spread difference with the Pacific Basin relativity. We achieved a gross price realization of 72% for the first quarter compared to 75% in 2025. Our gross price realization was lower and driven by a combination of factors. First, while the average of both main pricing indices increased in the first quarter compared to the fourth quarter 2025, the price spreads, or relativity, have widened, reaching one of the lowest values ever recorded. Second, our sales mix of High Vol A quality was 11% higher. Third, that higher sales mix was primarily sold in the Pacific Basin on a CFR basis with higher average freight rates due to the conflict in the Middle East. We sold 4% more volume into the Pacific Basin in the first quarter than in 2025. Warrior Met Coal, Inc. achieved a record high quarterly sales volume in the first quarter of 3 million short tons compared to 2.2 million tons in the same quarter of 2025. This represents a 38% increase, primarily due to the additional sales volume from the new Blue Creek mine. Our first quarter sales volume mix was 61% High Vol A, representing a 10% increase over the fourth quarter 2025. As production from Blue Creek continues to increase, we expect our sales volume mix to become more weighted toward High Vol A products and Pacific Basin destinations over time. Our sales by geography in the first quarter break down as follows: 61% into Asia, 25% into Europe, and 14% into South America. Our spot volume was 6% for the first quarter 2026. Sales volumes in the Pacific Basin were 61% for the first quarter, which were 4% higher than the fourth quarter 2025 and 18% higher than the first quarter of last year. Production volume in the first quarter 2026 was a record high 3.5 million short tons compared to 2.3 million in the same quarter of last year, representing a 55% increase. This increase reflects the significant contribution of Blue Creek. Our coal inventory levels increased to 1.9 million short tons at March 31, 2026, compared to 1.6 million tons at December 31, 2025. We expect to manage the excess inventory over the remainder of the year to maximize sales volume, profitability, and free cash flow. I will now ask Dale to address our first quarter results in greater detail. Dale W. Boyles: Thanks, Walt. Let me first highlight our first quarter financial results compared to 2025. Our first quarter adjusted EBITDA of $143 million was 54% higher than 2025, primarily due to the following factors—two positives offset by two negatives. First, our sales volumes were 4% higher in the first quarter, driven by an increase of tons sold from Blue Creek. Second, our average net selling price was $20 per ton, or 15%, higher in the first quarter primarily due to a 10% higher mix of High Vol A volume sold into the Pacific Basin on a CFR basis at elevated freight rates. Third, cash cost per ton were $2 higher in the first quarter, primarily attributable to higher variable costs for transportation and royalties, and were partially offset by Blue Creek's inherently low-cost structure and a $3 per ton benefit from the new 45X production tax credit from the One Big Beautiful Bill Act. And finally, operating cash flows were negative $12 million, which was $88 million lower than 2025. This result is attributed to the increase in working capital, primarily for accounts receivable and inventory. Accounts receivable were higher on higher sales volumes and higher steelmaking coal prices. In addition, sales volume for the quarter was heavily weighted to the month of March by 43%. Our spending for capital expenditures and mine development were a combined $24 million lower in the first quarter compared to 2025, primarily due to lower investments in Blue Creek. Now let me compare 2026 to the prior year's first quarter results. We recorded net income of $72 million, or $1.37 per diluted share, in the first quarter this year, compared to a net loss of $8 million, or $0.16 per diluted share, in the same quarter of 2025. We reported adjusted EBITDA of $143 million in 2026 compared to $39 million in the same quarter of 2025, an increase of 263%. Our adjusted EBITDA margin improved to 31% in 2026 compared to 13% in the same quarter of last year. On a per-ton basis, our adjusted EBITDA margin improved to $48 per short ton for 2026 compared to $18 in last year's first quarter. The primary drivers of these improvements were a 38% increase in sales volumes, a 10% increase in average net selling price, and a 14% reduction in cash costs, reflecting the increasing contribution from our new Blue Creek mine. Total revenues were $459 million in the first quarter of this year compared to $300 million in the same quarter of last year. The total increase of $159 million was primarily due to the impact of higher sales volumes of $113 million and the impact of an increase in average gross selling prices of $69 million. This was partially offset by the impact of a higher mix of High Vol A tons sold of $24 million. In addition, the bridge and other charges were $4 million higher compared to last year's first quarter. This resulted in an average net selling price of $149 per short ton in 2026, compared to $136 in the first quarter of last year. Cash cost of sales were $289 million, or 64% of mining revenues, in the first quarter of this year, compared to $244 million, or 83% of mining revenues, in the first quarter of last year. Of the $45 million net increase in cash cost of sales, there was a $93 million increase in costs which were attributed to the 38% increase in sales volumes and slightly higher variable transportation and royalty costs on higher average steelmaking coal price indices. These higher costs were partially offset by $48 million of lower costs that were driven by the leverage of lower-cost Blue Creek tons sold and $8 million of benefit from the 45X production tax credit. Cash cost of sales per short ton FOB port was approximately $96 in 2026 compared to $112 in the same quarter last year. The 14% decrease was primarily due to the factors I just mentioned on a dollar basis. Cash margins per short ton increased 127% to $53 in the first quarter from $23 in the same quarter of last year. Our first quarter 2026 SG&A expenses were $28 million and were $10 million higher than the same quarter of 2025, primarily due to higher employee-related expenses, including stock compensation expenses. SG&A expenses are on track with our full-year outlook and guidance. Depreciation and depletion expenses were $52 million in the first quarter, which was 15% higher than 2025, primarily due to the additional assets placed into service at Blue Creek and the higher sales volume in 2026. We recorded income tax expense of approximately $6 million on pretax income of $79 million in 2026. Our effective income tax rate varied from the statutory federal income tax rate of 21% primarily due to tax benefits recognized for depletion expense and a foreign-derived intangible income deduction, resulting in an effective income tax rate of 11%. Now let us turn to cash flows for 2026. Cash flows from operating activities were a negative $12 million in 2026 and were $23 million lower than the previous year's first quarter. Working capital increased by $146 million during the first quarter, primarily due to $115 million of higher accounts receivable. This outcome was primarily attributed to higher sales volumes, higher steelmaking coal prices, and the timing of quarterly sales volumes that were 43% weighted to the month of March, thereby pushing cash collections into the second quarter. In addition, inventory was higher as production exceeded sales volume during the first quarter. Free cash flow was a negative $890 million due to $12 million of cash used by operations combined with cash used for capital expenditures of $80 million. This outcome of negative free cash flow was expected and previously communicated on our last earnings call in February. Capital spending included the final $66 million invested for the completion of the Blue Creek development project. Our free cash flow was slightly more negative than anticipated in the first quarter, primarily due to timing of sales volume, and is expected to turn positive in the second quarter. We are pleased that we continue to maintain strong liquidity while delivering higher profitability. The total available liquidity at the end of the first quarter was $364 million and consisted of cash and cash equivalents of $[inaudible], short-term investments of $20 million, and $141 million available under our ABL facility. Finally, let me turn to our current outlook and guidance for the full year 2026, as detailed in our earnings release. We expect the steelmaking coal markets to remain generally consistent with recent trends absent any major disruptions in supply or demand, or a prolonged conflict in the Middle East. First quarter results were all on track and generally consistent with our expectations for the full year, and that is why we are reaffirming our outlook and guidance for 2026 as previously communicated in February. Having said that, there are a few cautionary notes to keep in mind. We are beginning to see some inflationary cost pressures on materials and supplies, such as steel roof supports, insurer bits, as well as diesel fuel. In addition, we are experiencing some tariffs and higher shipping costs on these raw materials. While we have not been materially impacted by inflation so far this year, we believe the remainder of the year could see an increase of a few dollars per ton. At this point, it is extremely difficult to predict any full-year impact to our cash costs. Obviously, we are taking all possible measures to mitigate any impacts of inflation. I will now turn it back to Walt for his final comments. Walter J. Scheller: Thanks, Dale. Warrior Met Coal, Inc. performed very well in the first quarter and our financial and operational results were better than expected as premium quality steelmaking coal prices were higher for a longer period of time and our volumes were slightly ahead of our internal plans. This strong beginning to 2026 supports our full-year outlook and guidance. Our current view of the steel and steelmaking coal markets is both positive and resilient. While we face uncertainty from the Middle East conflict and its effect on the global economy, at this point, the full impact of the conflict and its length are not quantifiable on the full year. As Dale noted, we may have to contend with some inflationary cost pressures. But right now, we see these potential impacts outweighed by higher production as a result of European protectionist measures and rising steel prices across nearly all geographies. As is often the case in such dynamic and unpredictable environments, disruptions may create short-term or region-specific opportunities that we fully intend to take advantage of. For now, expect steelmaking coal prices to remain above their 2025 average levels absent material changes in supply and demand. Most importantly, Warrior Met Coal, Inc. has the tools to continue to drive value creation for our stockholders by continuing to execute our strategy to optimize production, control our costs, and generate free cash flow. With our high-quality assets and low first quartile cost structure, we are as well positioned as we have ever been to thrive in a wide range of steelmaking coal environments. We will now open the call for questions. Operator? Operator: Thank you. We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Our first question for today will come from Nicholas Giles with B. Riley. Please go ahead. Nicholas Giles: Thanks, operator. Good evening, guys. My first question was just, obviously a fairly meaningful working capital build in 1Q, which you had foreshadowed. How much of this could we see unwind in the second quarter? And then another question would be, can you remind us of the cash flow and balance sheet implications for the 45X production tax credit? How much did that contribute to the build, if any? Thanks. Dale W. Boyles: Hey, Nick, it is Dale. Yes, it is hard to predict exactly how much of the working capital will turn around, but it is timing. A large portion will come back. I am not sure we will be back to breakeven. We will be shy of that probably on a year-to-date basis through the first half. As far as the 45X credit, that was worth about $8.4 million, or $3 a ton, for the quarter. Nicholas Giles: Understood. Thanks for that, Dale. You mentioned some initial inflationary pressures stemming from the conflict. I think Warrior Met Coal, Inc. is more insulated, but can you speak to the diesel usage across your operating platform, or if you have any kind of sensitivity or total consumption, just so we can try and understand that impact? Thanks. Walter J. Scheller: We do not do a lot of trucking of coal. We do truck a little bit to the barge load-out, so we are not a high user like strip mines or surface mines. We just do not use a lot of diesel. I do not have a projection for you because I have no idea how long oil prices will stay this high and what those pass-throughs could be. We are subject to pass-through surcharges and things like that, but as I said earlier, we have not seen anything material yet. It depends on how long this continues, so we could see some increase later in the year. We are seeing some other things, like the bits—that is tungsten coming out of China—and that is a challenge right now. We are starting to see and hear it from some other suppliers too on other materials and supplies. We just have not been able to quantify it yet. We are working hard to look for alternative vendors and sources—anything we can do to mitigate it. Nicholas Giles: Understood. That is still helpful perspective. Just one more if I could. Inventories have been rising for the past couple of quarters—I think 1.9 million tons is what you said. Most of the working capital build, I think, was more from receivables. Can you speak to how you could see those inventories unwind in the coming quarters, and what kind of mix we are working with? I assume it is mostly Blue Creek product. Walter J. Scheller: Our sales projections for Blue Creek are actually ahead of schedule from where we thought we would be in terms of placing Blue Creek for the year. It is just production levels have been so much higher that they surpassed our expectations. As we look out through the remainder of the year, we are still doing tests with different potential customers on Blue Creek, and the hope is to get more and more of that coal put to bed. When we look at how much of it is moving in the spot market, it is very little. As we put those tons to bed, we are going to do everything we can to bring inventory back down to what we consider to be a more normal level. It is going to take us all year to work at it. You will see a gradual decline over the next few quarters—nothing dramatic in a single quarter. The mines are running well, so production is coming in pretty good. And obviously, the highest amount of production or inventory that we have is High Vol A. Nicholas Giles: Got it. Okay. Well, sounds like a first-class problem to me. Thanks, guys. Walter J. Scheller: Thank you. Operator: The next question will come from Katja Jancic with BMO Capital Markets. Please go ahead. Katja Jancic: Hi, thank you for taking my questions. Maybe first on the volume that you ship to the Pacific Basin. So the 60% that you shipped there in 1Q—how much of that is on a CFR basis? And can you talk a little bit about the current freight cost to ship—what it currently is versus, let us say, recent quarters? And one last one: you mentioned all your operations are operating very well. Do you have any limitations on how much inventory you can hold at any time? Dale W. Boyles: All of it is on a CFR basis. Walter J. Scheller: Freight rates are averaging much higher. I know we saw some freight rates last week in the mid-$50s. I think it is averaging somewhere in the upper $40s for the second quarter, so it has been pretty significant. As for inventory limits, not really. From where we are today, we can hold a lot more inventory. You have to remember, a lot of this is Blue Creek, and Blue Creek, given its design, has multiple places where we can store significant amounts of inventory. So we are not bounded by anything at this point. Katja Jancic: Okay. Thank you. Operator: The next question will come from Nathan Pierson Martin with The Benchmark Company. Please go ahead. Nathan Pierson Martin: Thanks, operator. Good afternoon, gentlemen. Congrats on wrapping up Blue Creek. Now that the project has wrapped up, it would be great to hear about what your priorities are for free cash flow and shareholder returns going forward. Dale W. Boyles: Once we start to generate cash going forward, we would look to provide more shareholder returns since we have not done so in the last few months and quarters. It is hard to say exactly when—it depends on when we start to generate the cash and have it available to distribute. If we turn positive in the second half, it could be sometime in the second half, maybe the latter part of the year. That would be the earliest I think you could see or expect anything. Nathan Pierson Martin: Appreciate that, Dale. And what form—do you have any preference there? I know historically you have done the regular dividend but also some special dividends. Any thoughts on that versus maybe buybacks? Walter J. Scheller: We think we will stick to something similar to what we have used in the past, which is a rising fixed quarterly dividend supplemented by special dividends and some selected stock buybacks. That has done well for our shareholders that have held on to our stock over time. We have one of the highest PSRs over the last ten years in the sector, and that has worked really well for us. Nathan Pierson Martin: Got it. Appreciate that. And then any thoughts from you guys on how the recent Section 303 determination signed by the administration could impact Warrior Met Coal, Inc.’s business? Walter J. Scheller: If we look at it right now, things are going to continue to move as they are today. I do not think there are going to be any significant changes, so I do not think there will be much of an impact. Nathan Pierson Martin: I appreciate that, Walt. I will leave it there. Continued best of luck. Thanks. Walter J. Scheller: Thanks, Nate. Operator: That will conclude our question and answer session for today. I would like to turn the conference back over to Mr. Walter J. Scheller for any closing remarks. Please go ahead. Walter J. Scheller: That concludes our call this afternoon. Thank you again for joining us today, and we appreciate your interest in Warrior Met Coal, Inc. Operator: Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Exponent, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you wish to signal during the conference call, please signal an operator by pressing the [inaudible]. After the presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then 1 on your touchtone phone. To withdraw your question, you may press star and then 2. Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos. Please go ahead. Joni Konstantelos: Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent, Inc.'s first quarter 2026 financial results conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors.exponent.com. This conference call is the property of Exponent, Inc. and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Catherine Ford Corrigan, president and chief executive officer; Richard L. Schlenker, executive vice president and chief financial officer; John Pye, incoming president; and Eric Anderson, incoming chief financial officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent, Inc.'s market opportunities and future financial results, that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent, Inc.'s periodic SEC filings, including those factors discussed under the caption Risk Factors in Exponent, Inc.'s most recent Form 10-K. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent, Inc. assumes no obligation to update or revise them whether as a result of new developments or otherwise. I will now turn the call over to Catherine Ford Corrigan. Catherine? Catherine Ford Corrigan: Thank you, Joni, and thank you everyone for joining us today. I will start off by reviewing our first quarter 2026 business performance and strategic positioning. Richard will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions. Exponent, Inc. delivered double-digit revenue growth in the first quarter, reflecting the strength of our multidisciplinary portfolio and demand for our specialized expertise across a range of industries. Growth was driven by user research studies for consumer electronics clients who are integrating artificial intelligence into their devices. We are continuing to see diversification of this work not only across our client base, but also across the breadth of products and underlying technologies we support. Growth was also driven by risk management work for utility clients evaluating asset performance under extreme weather conditions. Reactive engagements also contributed to our growth, with increased dispute-related and failure analysis demand across construction projects, energy facilities, and medical devices. We saw increased activity from both domestic and international clients related to complex construction challenges and disputes. In energy, demand increased for work involving critical facilities where reliability, performance, and the consequences of failure are paramount. We also saw increased activity involving medical devices with scrutiny of product safety, quality, and performance. Trends in energy demand, infrastructure risk, and technological innovation continue to support demand for our deep technical capabilities, reinforcing Exponent, Inc.'s essential role in helping clients navigate complex, high-stakes decisions. The integration of AI and other advanced technologies into performance-critical and physical systems, combined with the rising expectations for safety and reliability, is increasing reliance on Exponent, Inc.'s specialized expertise, both proactively and in response to failures. This is evident across a wide range of applications from automated vehicles that must interpret complex real-world environments to avoid collisions, to health-related devices such as automated insulin delivery systems where performance directly affects patient safety, to utility systems using AI to anticipate asset risk and prevent wildfires and other high-consequence hazards. Engagements like these underscore the growing sophistication and interconnectedness of modern technologies as they move from concept to market. As a result, clients rely on Exponent, Inc. to evaluate failure modes, product performance, usability, and risk as they work to develop and deploy these systems quickly and responsibly. In these contexts, the question is no longer simply whether a system functions, but whether it can be trusted to perform reliably in high-stakes real-world conditions, raising the bar for performance across not just expected conditions, but also in edge cases, novel conditions, and complex interactions that fall outside of prior experience. As clients accelerate development timelines, they increasingly rely on Exponent, Inc. not only for the systems themselves, but also for the underlying data, testing, and evaluation strategies that support them. This includes assessing training data and potential bias, evaluating system performance in both laboratory and in-the-wild environments, and supporting the reliability of adjacent infrastructure such as battery energy storage systems and data centers. Across these efforts, the common threads are rising technical complexity and the increasing consequences of failure. This is where Exponent, Inc. stands apart. Our teams combine expertise in engineering, data science, human factors, health, and the physical sciences to help clients navigate challenges that do not fit neatly within a single discipline. As these technologies continue to evolve, we expect demand for Exponent, Inc.'s independent, multidisciplinary expertise to continue to grow. I will now turn the call over to Richard for more detail on our first quarter results as well as discuss our outlook for the second quarter and the full year. Richard L. Schlenker: Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the first quarter of 2026, total revenues increased 14% to $166.3 million, and revenues before reimbursements, or net revenues as I will refer to them from here on, increased 10% to $151.8 million as compared to the same period in 2025. Net income for the first quarter increased 11% to $29.6 million as compared to $26.7 million a year ago, and earnings per diluted share increased 13% to 59¢ as compared to 52¢ in the prior-year period. During the quarter, we realized a negative tax impact associated with accounting for share-based awards of $900 thousand, as compared to $500 thousand in 2025. The change in the tax impact associated with share-based awards was due to the difference of the value of the common stock between the grant date and the release date for the restricted stock units. Inclusive of the tax impact from share-based awards, Exponent, Inc.'s consolidated tax rate was 30.2% in 2026 as compared to 29.4% for the same period in 2025. EBITDA for the quarter increased 15% to $43.1 million, producing a margin of 28.4% of net revenues as compared to $37.5 million, or 27.3% of net revenues, in 2025. Billable hours in the quarter were approximately 399 thousand, an increase of 6% year over year. Average technical full-time equivalent employees in the quarter were 1,013, which is an increase of 5% as compared to one year ago. This increase was due to our recruiting and retention efforts. Utilization in the first quarter was 76%, up from 75% in the same period of 2025. The realized rate increase was approximately 4% as compared to the same period a year ago. In the first quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 9%. Included in total compensation expense is a loss in deferred compensation of $1.1 million as compared to a loss of $9.3 million in the same period of 2025. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the quarter was $9.1 million as compared to $8.2 million in the prior-year period. Other operating expenses in the quarter were up 6% to $12.8 million due to investments in our corporate infrastructure. Included in other operating expenses is depreciation and amortization expense of $2.5 million. G&A expenses increased 24% to $6.2 million for the first quarter. The increase in G&A expenses was primarily due to increases in travel and meals associated with business development, recruiting, and people development activities. Interest income decreased to $1.7 million for the first quarter, driven by a decrease in cash and lower interest rates. Regarding capital allocation, during the quarter, capital expenditures were $2.5 million. We distributed $16.6 million to shareholders through dividend payments and repurchased $79 million of common stock at an average price of $68.09. Additionally, our board approved a $50 million increase in our current stock repurchase program. This is in addition to the $17.7 million available for repurchases as of April 3, 2026, and reflects our conviction in Exponent, Inc.'s long-term growth trajectory. Turning to our segments, Exponent, Inc.'s engineering and other scientific segment represented 85% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 12% in the quarter. Growth during the quarter was driven by user research studies in consumer electronics and risk management in the utility sector, along with reactive engagements in energy and life science sectors. Exponent, Inc.'s environmental and health segment represented 15% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 2% for the first quarter. Growth in this segment was driven primarily by regulatory consulting in the chemicals industry. Turning to our outlook for the second quarter, as compared to one year prior, we expect revenues before reimbursements to grow in the high-single digits and EBITDA to be 27% to 27.8% of revenues before reimbursements. For fiscal year 2026, we are maintaining our revenue and margin guide. We expect revenues before reimbursements to grow in the high-single digits and EBITDA to be 27.6% to 28.1% of revenues before reimbursements. We expect our average technical full-time equivalent employees to increase approximately 5% year over year in 2026 and 4% to 5% for the full year 2026 as compared to 2025. We expect utilization in the second quarter to be 72% to 73% as compared to 72% in the same quarter last year. We continue to expect the full-year utilization to be 72.5% to 73% as compared to 72.5% in 2025. We expect year-over-year realized rate increases to be 3% to 3.5% for the second quarter and full year. For the second quarter of 2026, we expect stock-based compensation to be $6.5 million to $6.7 million. For the full year 2026, we expect stock-based compensation to be $27.9 million to $28.4 million. We continue to believe that our stock-based compensation program effectively attracts, motivates, and retains our top talent. For the second quarter, we expect other operating expenses to be $12.8 million to $13.3 million. For the full year, we expect other operating expenses to be $53 million to $53.5 million. For the second quarter, we expect G&A expenses to be $7.2 million to $7.7 million. For the full year, we expect G&A expenses to be $28.5 million to $29.5 million. We expect interest income to be $700 thousand to $900 thousand per quarter during 2026. In addition, we anticipate miscellaneous income to be approximately $300 thousand per quarter for the remainder of 2026. For the remainder of 2026, we do not expect any additional tax benefit or loss associated with share-based awards. For the second quarter of 2026, we expect our tax rate to be approximately 28% as compared to 27.9% in the same quarter one year ago. For the full year 2026, the tax rate is expected to be 28.5% as compared to 28% in 2025. Capital expenditures for the full year 2026 are expected to be $12 million to $14 million. In closing, we are pleased with our performance this quarter and remain confident in the strength of our business. I will now turn the call back to Catherine for closing remarks. Catherine Ford Corrigan: Thank you, Richard. Exponent, Inc. is well positioned to support the evolving needs of our clients as innovation accelerates and systems grow more complex, particularly as artificial intelligence becomes more deeply embedded in the world. These trends continue to drive demand for our differentiated multidisciplinary expertise, independent evaluation, and trusted insight. Altogether, supported by our exceptional talent and unique position in the marketplace, we remain focused on helping clients navigate their most complex challenges while delivering long-term value for our shareholders. Before opening the call for questions, I would like to introduce incoming president, John Pye, and our incoming chief financial officer, Eric Anderson. John Pye will assume the role of president effective tomorrow, May 1. A 25-year veteran of the firm, John has played a central role in advancing our capabilities and innovation agenda, helping Exponent, Inc. address increasingly complex client challenges as technologies evolve and systems become more sophisticated. John? John Pye: Thank you, Catherine. As a first timer here, let me start by saying how honored and excited I am to step into this role, particularly at such a time of broad opportunity for the firm. Looking across the markets we serve, there is accelerating innovation, there is increasing technical complexity, and there are expectations that are only rising around safety, around health, and around the environment. So much so that I cannot imagine a better time to be an engineer or a scientist, and I cannot imagine a better place to do that than here with my Exponent, Inc. colleagues. When our clients call us with their most challenging issues, they get our deep technical credibility. They get our multidisciplinary approach, and we put those together to help them navigate the challenges of emerging technologies and complex systems of systems, all while staying grounded in delivering real-world impact. I am excited to work with my partners on this call, Catherine, Richard, and you, Eric, as well as our entire leadership team, and continue to advance our capabilities in supporting the firm's long-term growth. Catherine Ford Corrigan: Thank you, John. Eric Anderson will assume the role of chief financial officer also effective tomorrow, May 1. Eric combines rigorous financial discipline with a deep understanding of our strategy and operations. Before I turn to Eric, however, I want to take a moment to thank Richard for his many years of outstanding service as chief financial officer. Richard will continue to play an important role as executive vice president advancing Exponent, Inc.'s strategic priorities while remaining actively engaged with investors. We are grateful for his continued leadership and support. With that, I will now turn the call to Eric. Eric Anderson: Thank you, Catherine. I am honored to step into this role as Exponent, Inc.'s chief financial officer and excited about the opportunity to work alongside our leadership team. I have been a part of this incredible company for over 20 years as part of the finance organization, working closely with our consulting team. I look forward to continuing to support Exponent, Inc.'s long-term growth objectives, strong operating model, and disciplined execution. I am also excited to engage more with the investment community as we move forward. Catherine Ford Corrigan: Thank you, Eric. Operator, we are now ready for questions. Operator: Thank you. We will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble a roster. We have the first question from the line of Tomohiko Sano from JPMorgan. Go ahead. Tomohiko Sano: Hi, everyone. Thank you for taking my questions. I would like to ask you about the macro trends, such as accelerations of AI innovation and rising energy demand impacting the nature of your projects, client base, and competitive positioning. Compared to the traditional engagements, are you seeing changes in the required expertise or the complexity of projects in Q1? And could you provide any more color for the second quarter and after, please? Catherine Ford Corrigan: Thank you, Tomo. The macro trends you mentioned really are driving growth of the business in a number of different dimensions. We mentioned the energy sector. This is one place where we are seeing our engagements evolve across all modalities of technology, from the traditional oil and gas issues that we see, through to wind power to solar power, and starting to look at things like small modular nuclear reactors. You can imagine the different kinds of risk models, proactive as well as reactive work, and the expertise that is required for that type of work. We are also seeing that play into our data center offerings. These are places where the innovation around the cooling systems is crucial, which involves our thermal scientists. We are seeing issues around corrosion, on the materials and metallurgy side. There are challenges connecting to power and the governance and specifications around that. AI is fundamentally that driver that is pushing on energy, and we are seeing both reactive as well as proactive projects. Another place where there is a real opportunity for even more highly specialized expertise is in robotics. This is a place where it would be wonderful to hear from John, as he has been active in growing our robotics efforts across military and other clients. John, would you share a few thoughts about that opportunity to specialize around robotics? John Pye: Thanks, Catherine, and good to hear from you again, Tomo. Robotics have been around a long time, but what is interesting and novel now is that physical AI is being applied to the robotic system. Those robotic systems are not just in factories on assembly lines, but they are in and amongst people, interacting with them in our warehouses and our homes, and maybe the biggest category is automated vehicles that are on our streets. There is opportunity there for a number of our disciplines Catherine mentioned. You have our human factors side where the robots are interacting with people and understanding intent and location. You have our biomechanics pulled in as the interaction becomes physical. You have our data sciences as systems interpret the world around them and try to make decisions. It really pulls on the entire organization across the entire stack that Catherine mentioned, from the power that drives the data center that runs the algorithm that powers the robotic system. We could not be more excited for what is happening there as those opportunities come our way. Tomohiko Sano: Thank you. And just one more, and then congratulations everyone on the new roles. This transition to a new president and CFO along with the changes to the board appears to mark an important new chapter for Exponent, Inc. Could you elaborate on why now is the right time for this leadership and governance refresh? What is the significance of this timing, and how do you see that positioning the company for future growth and transformation, please? Catherine Ford Corrigan: Thank you, Tomo. The timing is strategic with regard to how we are evolving the team because we see the macro trends that you mentioned in your first question—the increases in the penetration of artificial intelligence into physical systems, which is really where Exponent, Inc. lives. These are physical systems that are high performance, high reliability, high risk, and high consequence. The opportunity we see around these systems is from cradle to grave: proactively building the datasets to train them, through the hardware that delivers them, to the consequences of them being in the wild. There is enormous opportunity, and this evolution of leadership reflects that in order to accelerate what the company is doing. We have been demonstrating our ability to execute and capitalize on those opportunities for the last few quarters, and we intend to continue building on that. We must build the talent base around it, widen our competitive moat, and enhance our differentiation. With both John and Eric’s deep experience with the company—John on the technical and innovation side, Eric on the financial side—and with Richard continuing and becoming even more engaged on the governance side, we believe this positions us extremely well to capitalize on all of these trends we are talking about. Operator: Thank you. We have our next question from the line of Andrew Nicholas from William Blair. Please go ahead. Andrew Nicholas: Hi, good afternoon. I appreciate you taking my question, and congratulations to everyone on the call in their new roles. I wanted to touch on, Catherine, your comment on consumer electronics. Specifically, I think you mentioned seeing diversification or broadening of some of that demand across client types and products. Could you spend a little bit more time fleshing that out? And then, if possible, what does that broadening do to your conviction in continued growth in that part of your business? Catherine Ford Corrigan: Thanks, Andrew. There are a few broad categories of products where we are seeing diversification. One is health-related products. This has been an important part of the growth we are seeing in user research and human–machine interaction engagements where algorithms need to be benchmarked against ground truth. We are being asked by clients who want to deploy these technologies and hardware in clinical trials of a new device or a new drug to provide independent, objective advice on the best platforms and how to ensure that what the device is telling us is high-quality data. There are all the human–machine interaction aspects of that as well. Another important category is devices that are taking on novel form factors for the delivery of artificial intelligence. It is no longer just your phone or your tablet. We are talking about glasses, virtual reality and augmented reality systems, and unique hardware that does not have screens but still needs to have high-quality interaction with the human, whether through video, audio, and so forth. These may not be health-related, but they are novel devices that need to perform and ensure that the training datasets will drive the algorithm in the right way. Another category is all the hardware associated with that—think of it as the data center stack. There is everything from the chip to the rack, all the way up to the full system that is essential in the lifecycle of AI. We are all seeing the demand on compute that hyperscalers and others are facing, including the power requirements. These underpin the diversification we are talking about, and we believe it will continue. There is a push around innovation and speed to get that next feature and technology, and that speed of innovation, in addition to all of the safety, health, and risk implications, really make this a perfect area for Exponent, Inc. Andrew Nicholas: Thank you. That is super helpful. For my follow-up, I wanted to ask about the talent environment. Obviously, headcount growth year over year in the quarter was quite good, and you expect that to continue throughout the remainder of this year. Is it any harder in this environment to attract talent given the overlap between what you are doing and what a lot of the fastest-growing companies in the world are focused on with artificial intelligence? And I think part of the reason for the question is that you raised the amount of share-based compensation you expect to pay this year. Is there any through line between those two themes? Richard L. Schlenker: Thanks for the question, Andrew. It has always been a highly competitive market to go to top universities and pursue the top quartile—at times even the top 10%—of the PhD class. That talent has many opportunities, and it remains competitive. Exponent, Inc., as Catherine and John outlined, comes at this with a multidisciplinary approach. It is not about writing a better algorithm than our clients. We are not competing with clients at their core; we are helping them understand the human interaction, the compute that is necessary to have systems perform at the highest level, and all the consequences around that. That allows us to be very active in recruiting across adjacencies. We absolutely need to understand the algorithms—why did a car decide not to stop, or to turn left instead of right?—which comes down to analyzing sensors and software. We can play in that area, but it is about analysis rather than writing the best code. It will remain competitive, but we believe we are doing very well. Our acceptance rate on offers is as high as it has ever been, and that has been the case over the last year or two. We are feeling good about our ability to attract the people we want. We are always replenishing—bringing in 150 to 200 new people a year—adding talent that has been doing research in advanced areas using the newest tools. They have experimented with and used AI and machine learning in their disciplines, which helps us stay on top of our game. We feel pretty good about our ability to attract talent and move forward. Operator: Thank you. Participants, if you wish to ask a question, you may press star and 1. We have our next question from the line of Joshua Chan from UBS. Please go ahead. Joshua Chan: Hi. Good afternoon, and congrats, everybody, on their new roles as well. On the consumer market improvement, could you talk about the durability of these projects? In the past, consumer has been a bit more cyclical, so I am wondering about the pace of improvement here and the durability of this growth tailwind from consumer. Thank you. Richard L. Schlenker: We have definitely seen a gradual step up in the level of activity. We anticipated that early last year in 2025. If you remember, even in Q1 or Q2 we were talking about clients beginning to develop their projects and discussing their road maps. That really played out as anticipated in the late third quarter and into the fourth quarter. That momentum and those developments have continued into the first quarter and are continuing into the second quarter and beyond. Each client will be at a different point in the product lifecycle, so there will be some cycles. We went through an extreme back in 2023; we do not see that as we look across clients today. I cannot predict every quarter or where there might be slight step-downs followed by acceleration, but directionally everything points to the implementation of these algorithms and AI in physical systems. As they progress, what Exponent, Inc. is seeing—and what we are all reading about—is that those systems require much higher reliability. They need stronger curated datasets and testing against gold standards. Those are the things our clients are doing today and will continue developing in the future. The applications they go after will become more sophisticated. We saw this 5 to 10 years ago: fingerprints and facial recognition, then AR and VR, then health applications as clients gained confidence and tackled regulated areas. We think the long-term direction is very positive, especially as these integrate into the robotic world of automated vehicles and humanoids in the home, in retail environments, and everywhere humans interact. Joshua Chan: Thanks for the color, Richard. On the repurchase side of things, could you talk about the decision to repurchase that amount in Q1 and your willingness to continue to be aggressive on buybacks around similar levels? Richard L. Schlenker: We have always had conviction around letting cash build up and having an incremental amount we repurchase every year, while being more aggressive on pullbacks. We believe the company has a very strong future, producing strong profitability and cash flow, which should result in good future performance. As such, on this pullback, over the last four quarters the company bought back approximately $177 million of stock, almost 5% of our shares. We feel good about that, and that is why the board has given us additional authorization as we move forward. Operator: You are welcome. Thank you. We have our next question from the line of Tobey Sommer from Truist. Please go ahead. Tobey Sommer: I was wondering if you could update us on the portfolio of larger projects that the firm has and, reflecting upon prior substantial projects that were points of discussion over time, whether anything about AI or changes in the marketplace would change the scope of large projects going forward. Richard L. Schlenker: Exponent, Inc. has a very diverse portfolio of projects ongoing—we do about 10,000 projects a year. Roughly 20% of those make up 80% of our revenue, which is really traditional. We have had large projects that typically range in the 1% to 2% of revenues; that is a very large project for us. At times, we have had a few projects where the size reached 4% or 5% of revenues, and we called those out when they rose to that level. Those included the unintended acceleration issues for Toyota back in the early 2010s, PG&E’s gas line explosion in San Bruno and the work that followed, and the Camp Fire and analysis around wildfires for PG&E. As we have moved forward, we have large pieces of work, but none that elevate to that level. The portfolio continues to diversify, and the multidisciplinary nature of our firm continues to grow. Catherine Ford Corrigan: I can add on how AI changes the scope of engagements. In automotive product liability, for example—our dispute-related work—that is moving from questions like whether an airbag deployed timely enough to protect occupants, which was a narrower set of issues, to today’s complexity where an AI algorithm makes decisions about braking or steering inputs. Tracing that decision through the algorithm and the associated testing across different scenarios, or comparing products, becomes a much more complex matrix of tests. Where you might have run one test before, now you are running five or 10 to cover multiple scenarios with different systems. Another place we see it is in intellectual property matters. The complexity of products that contain AI algorithms—whether in wireless communications equipment or surgical robotics—drives not only the level of expertise needed but also the complexity of claims and the depth of research required. We always have a diversity of project sizes, but these are examples of how incorporating AI into the physical world increases complexity and therefore scope. Tobey Sommer: Thanks. If I could ask about two industry verticals: chemicals—what is the current and forecast state of demand there? And also the energy and utility sector, which, based on data center demand and other demand, seems to need to come to market with more supply at an atypical pace. With nuclear being involved again, what is the future of the energy and utility outlook from Exponent, Inc.’s perspective? Catherine Ford Corrigan: In chemicals, we have both reactive and proactive work. On the proactive side, this is a lot of regulatory work. Regulatory frameworks continue to become more complex and are relying more heavily on complex simulation technologies in lieu of animal testing. Being able to utilize high-end, sophisticated models is an area where we are well positioned, as technologies evolve—for example, assessing mRNA technologies and testing pesticides and other complex environments for the regulatory side. Think of chemicals like PFAS, where regulatory complexity is increasing. The PFAS environment also drives dispute-related work, whether related to OEM chemical manufacturers or entities using PFAS in their products—consumer products, electronics—and the drive to find substitutes for chemicals that perform so well. We see continued growth opportunity there. On the energy and utility side, the drive for more energy is intense. We are near the limits of available energy, and there is a push to expand to run data centers and deliver the required compute. We are seeing data center operators building their own gas-powered turbines to secure power without tapping the utility. This drives disputes as infrastructure investments are made. We are seeing challenges with backup power systems, including battery energy storage, where we are well positioned. It is also driving more inquiries about proactive risk modeling from utilities. Novel sources of power generation create unanticipated failure modes, and we are helping clients understand and quantify those risks. In both chemicals and energy/utilities, we are seeing growth opportunities across proactive and reactive engagements. Operator: You are welcome. Thank you. Ladies and gentlemen, that concludes the question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Cohu, Inc.'s First Quarter 2026 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jeffrey D. Jones, Chief Financial Officer. Please go ahead. Jeffrey D. Jones: Good afternoon, and welcome to our conference call discussing Cohu, Inc.'s First Quarter 2026 Financial Results and our outlook for 2026. I am joined today by Luis Müller, Cohu, Inc.'s president and CEO, and Matt Hutton, Cohu, Inc.'s VP of strategy and investor relations. If you need a copy of our earnings release, it can be found on our website at cohu.com or by contacting Cohu, Inc. Investor Relations. A slide presentation accompanying today's call is also available in the Investor Relations section of the website. Replays of this call will be accessible via the same page after the conclusion of the call. During this call, we will be making forward-looking statements that reflect management's current expectations concerning Cohu, Inc.'s future business. These statements are based on information available to us at this time but they are subject to rapid and sometimes abrupt changes. We encourage everyone to review the forward-looking statements section of our slide presentation and the earnings release as well as Cohu, Inc.'s filings with the SEC including the most recently filed Form 10-K and Form 10-Q. Our comments are current as of today, 04/30/2026, and Cohu, Inc. does not assume any obligation to update these statements for events occurring after this call. Additionally, we will discuss certain non-GAAP financial measures during this call. Please refer to our earnings release and slide presentation for the reconciliation to the most comparable GAAP measures. Now I would like to turn the call over to Luis Müller, Cohu, Inc.'s president and CEO. Luis? Luis Müller: Thank you for joining our Q1 2026 earnings call. We started the year with strong momentum across multiple product lines with orders up 57% year over year, reflecting both improved semiconductor market conditions and the increasing relevance of our technology portfolio across AI and high performance compute applications. An important driver of this momentum is the [inaudible] of AI workloads and inference processing driving greater computing power density that has become a primary bottleneck. AI accelerators and HPC processors generate immense amounts of heat during operation. Testing these chips requires maintaining precise temperature environments to ensure functional accuracy and long-term reliability. If a chip is tested at the wrong temperature, its performance metrics may be skewed, leading to lower yields, or worse, latent field failures. As a result, Cohu, Inc.'s proprietary and industry leading thermal capabilities are highly valued by customers. Based on current engagements and design activity, we now see a computing segment opportunity pipeline of approximately $750 million, including roughly $650 million in test handlers, and an additional $100 million from HBM inspection, and both growing at rapid rates. For fiscal 2026, we are now increasing our high performance computing revenue outlook to approximately $80 million to $100 million. We are emboldened by the opportunity pipeline across 12 customers with five customers in qualification stage and another seven in early engagement stage. During the first quarter, we continued to benefit from rising device complexity, higher power density, and accelerating AI adoption—trends that are reshaping test, inspection, and manufacturing requirements across the semiconductor value chain. In fact, semiconductor value is moving to the mid and the back end manufacturing, driving substantial growth in the test arena. Estimated semiconductor test utilization also increased sequentially to 78% at the end of the first quarter. Automotive and industrial markets are gradually improving again as customers started investing in test capital. Many of our customers are broadening their product portfolio to serve AI data centers, as these transition to 800-volt DC infrastructure and more power management efficient solutions with gallium nitride technology at rack-scale server boards, such as the new VeriRubin platform. Across each of these applications, our customers are prioritizing quality, performance, and scalability. At the same time, our software platform gained traction as analytics moved from pilot deployments into broader production environments. These wins validate both the technical performance of our solution and the growing appetite for software-enabled yield and productivity investment. There is a significant SAM opportunity for Cohu, Inc. in this space and a significant lifetime value in software subscription. This is illustrated well in the first quarter when a $20 million system order came together with $330,000 a year of software subscription, which over the course of the lifetime of these systems could yield approximately $5 million in recurring revenue. The financial implication of this shift is twofold. First, software subscriptions provide high margin recurring revenue that is less susceptible to CapEx cycles. Second, by improving overall equipment efficiency and reducing mean time to repair for customers, we build deep operational stickiness that makes it difficult for competitors to displace our systems. I would now like to highlight a few customer wins in the first quarter. Starting with our 54% year over year [inaudible]. We secured two major Eclipse orders in the first quarter. The first win supports AI data center applications with our U.S. fabless customer developing server and inference devices. As power density and mechanical complexity increase, Eclipse combined with our T CORE active thermal control enables the customer to standardize on a common handler platform across multiple device generations. This reduces capital risk while extending the life and value of the installed base. Closed-loop junction temperature control was a key differentiator ensuring consistent temperature test quality, higher yields, and faster production ramps. In addition, the customer is adopting Cohu, Inc.-hosted prescriptive analytics software to improve equipment efficiency, increasing system value, enabling recurring revenue for Cohu, Inc., and strengthening long-term engagement. Strategically, this win deepens our computing footprint, embeds Eclipse into the customer's road map, and positions us as the platform of record representing an estimated $100 million incremental revenue opportunity at this account over the next three years. The second order supports data center computing, mobile, and automotive processors at another U.S.-based fabless customer using the Eclipse platform. Our solution allows both the customer and their OSATs to address multiple markets while leveraging T CORE thermal control to maximize yield and asset utilization. Together, these strengthen our engagement across high performance computing and AI markets, driving near-term system revenue and long-term platform, software, and recurring value growth. Our customer engagement for Eclipse expanded in the first quarter with an additional five customers in different stages of qualification representing an incremental $200 million of revenue opportunity starting late this year and into next year. We are very bullish about the customer traction and the growing opportunities to expand our presence in this $750 million high performance computing market. These opportunities are rapidly taking shape as compute power increases, and with the need to actively manage silicon junction temperature at higher power and power densities. Now turning to our inspection and metrology business with orders up 64% year over year. In HBM memory, we continue to see strong momentum for final inspection of HBM3 and HBM4. We are investing in this market and keeping pace with design requirements to support next generation HBM5. We are now forecasting revenue growing 80% year over year to approximately $20 million with our Neon HBM platform. In the first quarter, we also secured a significant volume repeat order for our NEON inspection system from a U.S.-headquartered customer and also from a Korean customer. Our inspection business is growing fast, and we estimate revenue at approximately $70 million this year. Semiconductor test orders recorded an impressive 163% increase year over year. Headlines around AI infrastructure typically focus on the massive compute devices required to train and run large language models along with the memory and networking technologies that enable scale across the data center. Less visible, but equally critical, is power delivery. Every AI system depends on precise, efficient power management to sustain peak performance. This is where the DiamondX precision instrumentation becomes decisive. Our tester was qualified for testing power devices, strategically expanding our footprint in AI-related applications, and embedding it more deeply into our customers' road map. As power density increases, customers are implementing GaN-based technology to minimize energy loss and thermal impact. While GaN offers a clean efficiency advantage, it remains less mature than traditional CMOS, creating technical and economic challenges as customers scale production to meet data center demand. Moving to our Interface Solutions group, we have seen increased adoption of our higher current contactors for AI power applications at existing customers. We also expanded our product offering and received a multi-unit order for a new silicon photonics solution. These photonic switches form the backbone of cloud and AI Ethernet fabric and we are now testing them. In closing, Q1 was a strong start for the year, and a clear validation of our strategy. We see momentum rapidly building across AI infrastructure, high performance compute, power management, and smart manufacturing, driven by rising device complexity and increasing power density. Our expanding presence in thermal handling, advanced inspection, precision test, and high-value software is translating into larger platform wins, recurring revenue opportunities, and deeper customer engagement. With a $750 million computing segment opportunity in front of us, and improving utilization across our core markets, we are accelerating R&D investments to capture new customers, and we are expanding production capacity to move confidently through the remainder of this year and into 2027. These secular tailwinds combined with disciplined execution and continued investment in innovation position Cohu, Inc. to deliver durable value for our customers and shareholders. Thank you for your continued support. I will now turn the call over to Jeff for a deeper review of our financial results and forward-looking guidance. Jeff? Jeffrey D. Jones: Thank you, Luis. Before reviewing the first quarter results and providing second quarter guidance, please note that my comments refer to non-GAAP figures. Details about non-GAAP financial measures, including GAAP to non-GAAP reconciliation and other disclosures, are included in the earnings release and investor presentation on our website. For Q1 2026, revenue exceeded the midpoint of guidance at $125.1 million. Recurring revenue, driven primarily by consumables and typically more stable than systems revenue, represented 60% of total revenue. No customer accounted for more than 10% of total sales during the quarter. Gross margin was 46.5%, above guidance, primarily reflecting a more favorable mix as recurring revenue exceeded our forecast. Operating expenses were higher than guidance at $55 million, reflecting our decision to scale resources to support the rapid increase in high performance compute opportunities. This included accelerated spending on design materials as well as incremental engineering and field support to fulfill production orders and complete new opportunity qualifications. Net interest income, after interest expense and a small foreign currency loss, was approximately $2.1 million. The Q1 tax provision was lower than guidance at $4.8 million. Now moving to the balance sheet. Cash and investments increased approximately $5 million during Q1 to $489 million, and cash from operations was $10 million. No stock repurchases were completed during the quarter. Total debt is $305 million and includes $288 million from the Q4 2025 convertible debt offering. Capital expenditures were approximately $2 million, mainly for facility improvements and IT equipment. We are targeting total capital expenditures to be about 2% of revenue in 2026. Looking ahead, we expect Q2 revenue to increase 15% sequentially and 34% year over year to approximately $144 million, plus or minus $7 million. The increase is driven by demand tied to the ramp in high performance compute opportunities and continued recovery in automotive and industrial segments. We are increasing our full year 2026 revenue outlook for growth over last year of 20% to 25%. Q2 gross margin is projected to be approximately 44%. For the full year 2026, we project gross margin in the mid-40% range as we ramp our supply chain and production capacity to support the rapid business expansion in high performance computing customers. Operating expenses are expected to be lower than Q1 at about $53 million. We intend to continue investing in resources to capitalize on the growing list of HPC opportunities and we expect quarterly operating expenses through the balance of the year to remain in the low-$50 million range, consistent with our Q2 guidance. Net interest income in Q2, after interest expense and foreign currency impacts, is projected to be approximately $2 million at current interest rates. The Q2 tax provision is expected to be about $5.3 million and diluted shares are projected to be approximately 52.6 million, including 4.2 million shares attributable to the convertible debt. Of that amount, 3.3 million shares will be fully offset by the capped call but are required for U.S. GAAP diluted EPS calculations. In summary, our operational focus for 2026 is to support R&D investments and production ramp needed to secure multiple design wins in the compute market including AI data center infrastructure, HBM memory, and physical AI applications while progressively increasing free cash flow generation. That concludes our prepared remarks, and now we will open the call to questions. Operator: Please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from Brian Chin with Stifel. Hi there. Good afternoon. Thanks for letting us ask a few questions. Maybe firstly, breaking down the guidance for Q2 15% quarter-on-quarter growth, can you maybe give us a sense how much of that is the ramping new HPC customer business versus maybe ramp in the broader base business, if that makes sense? And, also, tied to that, if you were to sign up no more new customers to the end of the year, about $100 million, how much of that still remains to be revenue through the second half? Jeffrey D. Jones: Yep. So, at least on your first point here, Brian, the quarter over quarter increase in HPC systems revenue was about $10 million, so it is just under half of our increase quarter over quarter. And that puts us then for HPC, at least systems revenue, in 2026 at roughly about $30 million. Brian Chin: Okay. That is helpful. And in terms of the system margin contribution gross margin relative to the overall blended average company, how should we think about that? Jeffrey D. Jones: What we saw in Q1 was a gross margin split of roughly 50% on recurring, roughly 40% on systems. I think we are going to hold that for the balance of the year. The systems revenue percentage will increase—well, systems revenue is going to increase faster than the recurring—and so that is why we see the 46.5% gross margin in Q1 hitting a little bit of a headwind in the second half. We think we are going to end the year somewhere in the mid-40% gross margin. Brian Chin: Great. And then maybe one other question. You talked about sort of this pipeline where you have customers—was that $100 million kind of the aggregation of this year? Or is that over a multiyear horizon? Luis Müller: No. The qualified $100 million is sort of this year’s spend from these customers. Now, as I said, we are probably going to be getting a portion of that this year, not the entirety of it this year. Brian Chin: Got it. With the other five customers, are they kind of equal size within that $150 million to $200 million? Or how would you gauge which ones are further along or less far along in terms of ones that could be contributors even to the back end of this year? Luis Müller: They are not all equal size, Brian. We have a $10 million to $40 million spread depending on the customer here on an annual basis, the way we see it. We expect to be getting some qualifications completed by early Q3. The question is, do we then have an opportunity to get orders and participate on demand still in 2026? Does our lead time support that as well or not? It is hard to call right now if it is going to end up hitting revenue in Q4—plus, obviously, revenue recognition as well, you have to account for accounting rules—or if this is going to end up spilling more into early 2027 at this point. Brian Chin: Right. And then where do you think you can keep lead times or cycle times this year for the thermal test handler, T CORE, Eclipse? That may also inform what revenue could be this year versus what might have to be captured next year. Luis Müller: We are operating at about a 14-week cycle time—rather than saying lead time—on handlers right now, on our thermal handlers. A bit of the challenge is if you get a $30 million order, not all of it is going to ship in 14 weeks. It is spread over several weeks, several months. As we start layering additional customers, we are working hard to open that manufacturing pipeline both from a supply chain side—meeting regularly now with suppliers and understanding where the choke points are, particularly for our thermal heads—as well as internally. We are hiring resources in Malaysia and we are looking at a re-layout of the facility in Malaysia to open up more floor space. So I can tell you 14 weeks cycle time, but lead time really largely depends on the size of the backlog we have in front of it. Operator: Our next question comes from David Dooley with Steelhead Securities. David Dooley: Yes. Thanks for taking my questions. Congratulations on nice results, particularly the outlook. I was wondering, as far as your core business goes, all of your customers on the conference calls are really talking about how their AI data center businesses are ramping at very rapid growth rates, 50% to 100%. I get the sense that that kind of filled all the excess capacity that might have been pointed from those customers at other end markets. Are you hearing that from your customers—that essentially their AI businesses have filled up their utilization rates, and they are coming in for more larger volume purchase orders going forward? Luis Müller: What I am seeing more, Dave, is actually a bit of a pivot towards CPU—large CPU demand—ASIC accelerators. We are seeing also network processing demand. Up until recently, a lot of it seemed to be very focused on a singular or largely a singular customer driving a lot of GPU capacity in the industry. As of maybe a quarter ago, a little bit more than a quarter ago, that seems to be spreading out more broadly here, as inference is starting to pick up, and with the realization that we need more computing power going along with the GPU power that is being deployed. That is more of what I am seeing. It is that spread out of demand for different types of processors, and network processors inclusive. David Dooley: That leads me to my next question. You used the term XPU—CPUs, GPUs, XPUs, TPUs, whatever you want to call them. All have high voltages and create a lot of heat, so all of these end market customers—from the custom ASIC guys to the GPU guys to the CPU guys—all need some sort of temperature-controlled handling equipment for their processors, correct? Luis Müller: That is correct. David Dooley: And is that the market that you are referring to when you talk about the $750 million SAM? Is that aggregating what most of these customers’ thermally controlled temperature handler demand is? Or how do you come up with that $750 million? Luis Müller: We are calling it more a SAM, to be fair, because we have a pretty defined list of customers and customer device classes that we are tallying up to $750 million. If we were to talk about a TAM, it is likely a bigger number, and we are not attempting to guess that, so we are not going there. We are being very targeted here to the list of 15 customers and customer applications that we have tallied up. That comes up to the $750 million. That is what it is. It is a very targeted list. We know what these customers have for buying patterns this year, and that is how we come up with that number. We also understand that some of these customers are ramping, so I guess the expectation is that that SAM itself could be bigger next year. But like I said, we are not trying to guess the TAM, the total available; we are just estimating here from customer information what we see for their spending this year. David Dooley: Final question for me is could you elaborate a little bit more on the silicon photonics? What exactly is the application you address there, and how big a piece of business could that be next year? I realize we are just starting off now, but please elaborate a little bit more on what you are seeing there. Luis Müller: Sure. That is really a beachhead business at this point. We sold a number of interface products—contactors—for silicon photonics application at one of the large accounts. There are really two major drivers in the industry today and a few others. These are interface products. You are talking about approximately $10,000 contactors, and we sold several of them. We are working to provide solutions that include our handler with the contactors, but I am not going to venture to guess what kind of revenue opportunity for 2027 that is at this point. It is not really included in our $750 million at the moment. David Dooley: But the point is you got your foot in the door with the test contactors, and hopefully you can sell them a piece of capital equipment as well. Luis Müller: That is correct. Operator: Our next question comes from Craig Ellis with B. Riley Securities. Craig Ellis: Yes. Thanks for taking the question and congratulations on the revenue performance in the quarter and the outlook, guys. Luis, I wanted to start by understanding the specific drivers to the increase in HPC system revenues this year. It looks like about a $20 million increase at the midpoint of the prior to the new expected range. Can you detail what is going on inside of that? Luis Müller: Thanks, Craig. We finished with a very successful qualification of the Eclipse at one particular account. That looked like we could capture a bigger share of the revenue in 2026. We qualified in time to catch the next round of orders, and that increased the size of the pipeline for this year. That is simply it. Craig Ellis: Okay. And then nice to see orders up 2% quarter on quarter. Can you help us with some color on where you are seeing that strength? Is there a preponderance towards OSAT versus IDM? Do you expect to ship all those systems this year? Any color on linearity would be helpful. Luis Müller: When we look at orders, depending on the market segment you pick, it is about 30% to 40% increase year over year. There is one segment in particular that is driving—unsurprisingly, given what we are talking about here—it is computing, and it is up about 211% year over year. That is pretty much what is driving the business. I do have to say the industrial segment is picking up a bit as well. That is also strong and came out pretty decently strong in the first quarter. Craig Ellis: And regarding shipment timing for all those orders? Luis Müller: We see a ramp in Q3, and of course some of that will fall into Q4 as well. Craig Ellis: Got it. Going back to the point on the deck where we have the expanded AI computing pipeline with almost a half billion in engagement and then $150 million to $200 million in qualification, can you provide any color on how quickly we can move some of that engagement activity into qualification, and then through qualification how much of that can convert in 2026 versus what you might have your eye on for 2027? Luis Müller: I think at this point, Craig, it is safe to say that we are working to complete the qualification of the about $100 million opportunity in 2026. As I mentioned earlier, we will see if we can get some of that revenue also in 2026, but largely 2027. On the balance here, the remaining approximately $500 million, those engagements are likely to move into qualification later this year and into 2027. I do not expect it to be any sooner than that. Craig Ellis: So a way we could look at it would be you have an opportunity to convert a significant amount this year, but the larger percentage would be something that could convert next year. Is that right, Luis? Luis Müller: That is right. Qualifications of these things take a good six months, and then from there, production ramp. I do have to point out another element. Largely, the recurring portion of this is going to come out about a year after shipping systems. Our systems ship with about a year’s worth of warranty. Once that expires, you start getting the spares and the service. These devices typically have 18 months lifetime anyway. Thereafter, you start getting new kit orders and potentially new thermal head orders for upgrades. It is high performance computing, so those thermal heads are very specific to the application. Maybe you can use it across two generations, but the thermal heads themselves eventually need to be replaced. Within a 12-month time frame, we should start seeing the recurring revenue kicking in. The recurring revenue—maybe it was not really clear on the slide—is included in that $500 million bucket as well. Craig Ellis: Okay. So you have got a nice one-two with the second crunch included in the chart. Thanks, Luis. Thanks, Jeff. Operator: Our next question comes from Robert Merton with TD Cowen. Rob Martins: Hi. This is Rob Martins on for Chris Sankar. Thanks for taking my questions. I believe last quarter you highlighted a Krypton spec metrology system order for an automotive customer that had transitioned to using some positive benefit in your inspection software subscription, and then you mentioned additional software opportunities during this March. I am trying to wrap my head around how we should think about the potential software opportunities throughout your business—if there is a specific platform or area that the software opportunity might be higher. Luis Müller: Sure, Rob. The software right now is very much going hand in hand with our test handlers and inspection systems—the automation pieces. We have an element of software we call PACE Inspection that goes in with the inspection platforms. It helps optimize yield of the inspection systems. Then we have PACE Prescriptive that goes along with both test handlers as well as inspection and metrology systems that help optimize overall equipment efficiency, optimize maintenance predictability, and factory output. Thinking about that software base, we are now currently at an ARR—annual recurring revenue—of about $1.2 million. This is what we have in bookings for annual subscription of software. The attachment rate of that subscription is still pretty low. It is really about 1.3% of our systems that have a software subscription attached to them, so a low number with plenty of room to grow. As I pointed out in the script, the value of that software is pretty big because if you have it in—like we have here in the example given—a $20 million system order with $330,000 of software annual subscription, through the lifetime of that product that is about $5 million of recurring revenue we are going to collect through the lifetime of the product at a pretty high margin. It is still a small piece of the business. It is a growing piece of the business. It is growing fast. We are expecting it to be close to $3 million in revenue this year—that is more than 200% growth year over year—but it does carry a really nice lifetime value recurring component that adds to our overall recurring business. Rob Martins: Got it. Thank you. That is very helpful. And then, you mentioned some incremental strength in the orders from automotive and industrial markets this quarter. How do you expect that business, the auto handler business, to pick up in the back half of the year? And if I can squeeze one last one in, is there any typical seasonality in the RF test business? Luis Müller: On the first portion, I refer back to how Jeff answered the question of what is driving the incremental quarter over quarter into Q2. About half of our Q2 increase in revenue is driven by non-compute markets—fundamentally industrial and, to a smaller degree, auto, but fundamentally industrial. We are seeing that pick up right now. Another interesting data point is industrial test utilization at the end of Q1 was 79%, so it is right there at that capacity-buy threshold of 80%. Industrial is doing well. It had a good increase in orders quarter over quarter and accounts for about half of the revenue growth quarter over quarter going into Q2. On the RF side, we are also seeing a bit of a pickup in RF tester orders and sales in the second quarter. There is typically a seasonality that tends to be late year, like Q4 to early Q1, when RF picks up. It is a little late here—we are going into Q2 and seeing a bit of a pickup in RF. I cannot completely explain why. There are technology transition points that are major drivers in RF, with one coming up in the next 18 months or so associated with FR3, commonly known as 6G. Operator: Our next question comes from Christian Schwab with Craig Hallum. Christian Schwab: Great. Thanks for all the guidance, and congratulations on giving multi-quarter guidance again. My only question has to do with M&A. Previously, we have talked about acquisitions, particularly in recurring revenue streams, that you were looking at and targeting. Can you give us an update on your thoughts on M&A currently? Matt Hutton: Hi, Christian. Matt Hutton here. We continue to look at opportunities. As you can imagine from what Luis and Jeff highlighted, they are mostly opportunities in the recurring space, our growth areas. We will continue to be disciplined, look at buy versus build analysis, and look for opportunities. Unfortunately, a lot of the tailwinds that some of these companies are receiving—that we are receiving—they are also receiving, so valuations remain elevated. But we will continue to be disciplined and look at opportunities in our growth areas. Christian Schwab: Great. And then, Luis, given we are moving now to multi-quarter guidance for 2026, but given all the positive dynamics as well as future orders transitioning to revenue in 2027 instead of 2026, should we assume—if all things remain consistent—that you will grow in 2027 at the same rate that you expect to grow in 2026? Luis Müller: We certainly expect growth in 2027. We have that qualification bucket there of $150 million to $200 million that will add to 2027. We are also encouraged with overall test utilization getting very close to that 80% mark. All things being equal, yes, growth in 2027. At what rate? We have not tried to pencil that in yet, so we are going to reserve another quarter or two before we talk about that. Operator: Our next question comes from Denis Pyatchanin with Needham. Denis Pyatchanin: Great. Thank you. Prior to your HPC forecast, was it $25 million to $30 million for this year and now you have moved it up to about $100 million? And I think in your presentation, it said that about $30 million of the approximately $100 million would be Eclipse. Can you tell us about the remaining approximately $70 million? Is that mostly testers? Is that other handlers? Can you break down that remainder, please? Jeffrey D. Jones: Let us back up a little bit. Initially, we came out and said HPC revenue in the $60 million to $85 million range for 2026. We are now increasing that to $80 million to $100 million. Most of that relates to the Eclipse handler. The NEON for HBM inspection, we previously said was $15 million to $20 million—I think we are at the higher end now of that range. And as Luis mentioned, we have been in qualifications or fixed qualifications for our testers also participating in some HPC revenue. Does that help clarify? Denis Pyatchanin: Yes. Thank you. You also said that you are now expecting 2026 total revenue to be up 20% to 25%. If I just run-rate you at approximately $144 million basically for the rest of the year, you basically get to that number. So are we assuming revenue will be going flat from $144 million through the rest of the year? Will there be a little bit of a dip in Q3? Is there anything more you can say about the cadence of revenue? Jeffrey D. Jones: The way we see it now, we would expect Q3 to be pretty similar to Q2—somewhere in that general range. Q4, we could have some seasonality, so slightly weaker Q4, maybe down mid-single-digit quarter over quarter. Denis Pyatchanin: Lastly, you mentioned some further engagement with the U.S. and Korean customers. Can you tell us more about that, please? Luis Müller: We were talking about the inspection and metrology business. We saw a big increase in orders in inspection and metrology in the first quarter—up 64% year over year. We are expecting that business to hit about $70 million in revenue this year. What is driving that? One is HBM, which we are now guiding to about $20 million in the year. The other is further demand for our inspection products from both a U.S. and a Korean customer with large orders in Q1. Operator: Our next question comes from Vedbhati Shrotra with Evercore ISI. Hi. Thanks for taking my question. I wanted to double click a little bit on the gross margin piece. You have good ramps on the HPC front in the second half. Would the systems gross margins pick up in the second half versus first half? Jeffrey D. Jones: That is a good observation. However, we are incurring some higher initial cost here to ramp the Eclipse supply chain and production. It is coming out very quickly with a new configuration, and so we are having to spend more on supply chain and production. We expect those costs to carry through probably through this year. In 2027, we will see lower costs, particularly for Eclipse. On top of that, similar to other companies, there is a small impact from higher energy and freight costs—something to the tune of about 10 basis points. On top of that, we are also seeing higher cost of memory ICs that we use on our products—another roughly 10 basis points. Vedbhati Shrotra: Are those the drivers for the dip in Q2 gross margins—the approximately 200 bps of decline that you have? Can you characterize what is cost driven versus mix driven? Jeffrey D. Jones: It is a combination. It is definitely cost-driven, as I mentioned, for the Eclipse platform in terms of supply chain and production. To a certain extent, that also relates to mix. But I would say cost first, mix second. Vedbhati Shrotra: Understood. And then in terms of R&D spend, how should we think about R&D intensity for the rest of the year? As you are going after these bigger markets of $750 million in opportunities, what is the right way to think about R&D intensity? Jeffrey D. Jones: I am forecasting Q2 will be lower than Q1, but we are going to still be elevated from the model. We are going to be about $53 million for Q2 operating expense. That is because we are going to continue to invest in the resources to capitalize on these opportunities that we have in HPC. I expect that low-$50 million range to persist through the second half of this year for OpEx. Vedbhati Shrotra: Got it. And then the last one—on the qualifications you have in the pipeline, $150 million to $200 million, how does that split across the five customers? How does that split between Neon versus Eclipse? Luis Müller: These are all Eclipse—Eclipse thermal handler applications tied to some form or another of a processor device. Operator: That concludes today’s question and answer session. I would like to turn the call back to Jeffrey D. Jones for closing remarks. Jeffrey D. Jones: Thank you very much. Before we sign off, I would like to note that we will be attending the following investor conferences during Q2, and those conferences are the TD Cowen Conference on May 27 in New York City, the Craig Hallum Conference on May 28 in Minneapolis, the Stifel Conference on June 2 in Boston, and the Evercore Conference on June 3 in San Francisco. If any of you plan on attending these conferences, please reach out to your conference contacts or let us know and we will arrange for a one-on-one meeting. Thank you for joining today’s call. We look forward to speaking with you again very soon. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon, and welcome to First Solar, Inc.'s first quarter 2026 earnings conference call. This call is being webcast live on the Investors section of First Solar, Inc.'s website at investor.firstsolar.com. All participants are in listen-only mode, and please note that today's call is being recorded. I would now like to turn the conference over to First Solar, Inc. Investor Relations. Byron Jeffers: Good afternoon. Thank you for joining us. We are joined today by Mark R. Widmar, our Chief Executive Officer, and Alexander R. Bradley, our Chief Financial Officer. Mark will provide an overview of our first quarter performance and an update on technology, manufacturing, and market conditions. Alexander will then cover our bookings, financials, and our 2026 outlook. After our prepared remarks, we will open the line for questions. Today's discussion contains forward-looking statements. Actual results may differ materially due to risks and uncertainties as described in our earnings press release, other SEC filings, and earnings materials available at investor.firstsolar.com. We undertake no obligation to update these statements due to new information or future events. We will also reference certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are in our earnings press release and presentation. This non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. With that, I will turn it over to Mark. Thank you, and good afternoon. Beginning on slide four, we delivered a strong start to 2026, with record first quarter revenue, record sales in India, meaningful margin expansion, and adjusted EBITDA above the top end of our first quarter preview range. Since our last earnings call on February 24, we secured gross bookings of 1.9 GW. Excluding domestic India volume, we booked 1.4 GW into our key U.S. utility-scale market at an ASP of approximately $0.35 per watt, inclusive of applicable adjusters. Turning to slide five. Our technology strategy is anchored in the premise that customers value not just nameplate efficiency, but lifetime energy production as well. CURE is central to that strategy. Extensive testing data has validated our expected bifaciality advantage, temperature coefficient, and degradation profile, with CURE anticipated to deliver up to 8% more lifetime specific energy yield than crystalline silicon TOPCon. I am pleased to report that CURE launch is complete in Perrysburg, and the first Series 6 line is ramping consistent with expectations. CURE is scheduled to be replicated across the Series 6 and 7 fleet through 2028 which, if achieved, supports the potential realization of up to $600 million of additional revenue from technology adjusters in the backlog, with the majority anticipated in 2027 and 2028. Turning to slide six. We produced 4.3 GW of modules in the quarter, with approximately 3 GW from our U.S. facilities and 1.3 GW from our international fleet. Our U.S. facilities operated at approximately 96% utilization. The South Carolina finishing facility is on track for production start in 2026, with equipment installation beginning this quarter. Upon completion, this facility is expected to provide finishing capacity for Series 6 modules initiated at our international factories and optimize freight, tariff, and domestic content outcomes, while benefiting from Section 45X module assembly tax credits. Our international facilities in Malaysia and Vietnam continue to operate at a significantly reduced utilization, consistent with current trade dynamics and lower ASP expectations for internationally produced modules. Turning to slide seven. Our competitive position in the United States and India continues to strengthen, underpinned by differentiated technology, a domestic manufacturing footprint and bill of material, and independence from Chinese crystalline silicon supply chains. In the United States, headwinds for crystalline silicon continue to build in our view, including trade remedy enforcement, indications of restrictive FEOP regulations, and the intellectual property litigation actions we have discussed on recent calls. On IP specifically, in March the U.S. International Trade Commission instituted our Section 337 investigation with respondents representing a significant share of TOPCon modules currently imported into the United States. We expect an initial determination within approximately 11 months and a final decision within 15 months. In India, our presence reflects the same strategic logic that underpins our U.S. manufacturing investment: energy security and supply chain independence. The policy framework, including the existing Approved List of Models and Manufacturers, or ALMM, and the anticipated implementation of the ALMM at the cell level, as well as domestic content requirements, currently favors vertically integrated manufacturers such as First Solar, Inc. Near-term demand is supported by both utility-scale and distributed solar applications, including agricultural land developments, where our CdTe technology’s energy yield in hot, humid conditions is a meaningful differentiator. Overall, our differentiated technology, our domestic manufacturing footprint, and our independence from Chinese supply chains are attributes that are increasingly valued by our customers, and we remain well positioned to deliver on our 2026 commitments. I will now turn the call over to Alexander to discuss our bookings, financial results, and outlook. Alexander R. Bradley: Beginning on slide eight, as of 03/31/2026, our contracted backlog was 47.9 GW at an aggregate transaction price of $14.4 billion, exclusive of technology adjusters, with deliveries through 2030. During the first quarter, we sold approximately 3.8 GW, recorded gross bookings of approximately 1.7 GW, and recorded debookings of 0.1 GW. In India, our guidance assumes that production is largely sold domestically in a book-and-bill market at near full capacity. In the first quarter, we sold approximately 1 GW in-country at an average selling price of approximately $0.20 per watt. In the United States, our domestic production is substantially committed through 2028 under existing contracts, resulting in relative pricing clarity through this period. We continue to take a highly selective approach to incremental U.S. bookings as we await clarity from current policy and regulatory matters, in particular, the pending 232 polysilicon derivatives tariff decision and proposed FEOP rulemaking. During the first quarter, our U.S. gross bookings of 0.9 GW were at an average selling price of approximately $0.34 per watt, inclusive of applicable adjusters. With respect to our international fleet, demand for Series 6 modules produced end-to-end in Malaysia and Vietnam remains constrained, which is reflected in the reduced production Mark mentioned earlier. Turning to slide nine. Net sales of $1.0 billion were a record first quarter for the company and grew 24% year-over-year. This was driven by a 31% increase in volume, partially offset by a lower average sales price reflecting a higher proportion of India deliveries. Our gross margin in the first quarter was 47%, and expanded approximately six percentage points as compared to 2025. The drivers were primarily a higher volume of modules qualifying for Section 45X tax benefits, and significantly lower sales freight costs, including lower detention and demurrage. On a per-watt basis, sales freight cost fell to approximately $0.017 per watt, or roughly half of first quarter costs last year. Furthermore, as part of our plan to rationalize approximately $100 million of warehouse costs by 2027, we delivered a $22 million sequential reduction in warehouse costs from Q4 2025. On balance, these savings were partially offset by a lower average sales price due to a higher mix of India sales and an increase in tariff costs year-over-year. Operating expenses for the quarter were $141 million, including R&D of $67 million, up $15 million year-over-year, primarily reflecting perovskite development and ongoing CURE launch work. Adjusted EBITDA was $520 million, above the high end of our first quarter preview range of $400 million to $500 million. Adjusted EBITDA margin was 50%. Net income was $347 million, up 65% year-over-year, with diluted EPS of $3.22. Moving to slide 10. We ended the quarter with $2.4 billion of cash, cash equivalents, restricted cash, and marketable securities, and a net cash position of $2.0 billion, at the high end of our targeted resilient cash range of approximately $1.5 billion to $2.0 billion. Operating cash outflows of $215 million reflected normal first quarter working capital dynamics, a meaningful decrease from outflows of $608 million in 2025. Capital expenditures were $119 million, primarily for our South Carolina finishing facility. We also completed a $45 million scheduled principal payment on our India DFC loan. Turning to slide 11. Our full-year 2026 guidance remains unchanged. For the second quarter, we expect volumes sold between 3.4 and 4.0 GW, and adjusted EBITDA of $400 million to $500 million. In summary, our first quarter performance reaffirmed guidance for the full year and reflects the strength of our strategy of reshoring and scaling domestic manufacturing, progressing our technology roadmap, enforcing our intellectual property, and maintaining a selective approach to new bookings in light of key pending trade and policy determinations. We will now open the call for questions. Operator? Operator: We will now begin the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question, and if you are muted locally, please remember to unmute your device. Your first question comes from the line of Brian K. Lee from Goldman Sachs. Brian K. Lee: Hey, good afternoon. Thanks for taking the questions. Just had two here. First, on the module gross margins, I think it is around 7% in Q1 when we adjust out the 45X even with the high India mix. So curious, the guide for Q2 implies margins are flattish. Why not more improvement given some of the sequential improvement in freight costs, warehousing, etcetera? And then what kind of tailwinds maybe help into Q3 and Q4 for the margins beyond just volume growth? And then on the ASPs, maybe I will just squeeze in the second question here. This could be nitpicking, but on slide eight, you show 900 MW of U.S. bookings at $0.34 in Q1. You mentioned 1.4 GW since the last quarter at $0.35. So it maybe implies recent bookings in March and April are higher at $0.36–$0.37 per watt. Anything to read into that? What kind of customer engagements and discussions are you having here more recently ahead of more policy certainty? Thanks. Mark R. Widmar: I will do the ASP first, Brian, and then Alexander will talk to the gross margin. So the 1.4 is call-to-call, so that is a little bit of a clarification there, which would include a fair half-and-half. So half of that happened after the last call but before the quarter end, and the other half happened after quarter end. And the average ASP for the call-to-call volume of that 1.4 was $0.35. One other note to include in there is that there is about another 700 or so that is an option. We are seeing a lot of M&A activity. What is great about First Solar, Inc., we have had very strong strategic partnerships with very competent, obviously well-capitalized, partners, and they are actually seeing a lot of development acquisition opportunities. We are actually talking with the team about another deal right now that one of our customers is in the process of acquiring. It is looking for incremental volume to support that acquisition. So what happened was we booked a deal for about 700 MW. Our customer is actually now in the process of looking to acquire another development asset, of which then they would exercise that option, which would have to be exercised here over the next several quarters upon completion of that acquisition. So what I would say is there is still a lot of momentum and activity going on, Brian, from a market standpoint. We are being very disciplined, as we have in the prior quarters, with how we are engaging the market and how we are seeing through pricing. So still good momentum, discipline on our part, trying to realize good ASPs, which I think we did here in the last, call it, eight weeks since the last earnings call. Alexander R. Bradley: Brian, on the gross margin, if you think about India on an aggregate per-watt or dollar-contribution basis, it is certainly lower than the U.S. If you look at where India’s pricing sits on a gross margin percent basis, it is not materially different to the U.S. So despite having a high India mix, on a percentage gross margin basis, not a material impact. If you look at the full-year guide, it was 7%. We have not changed the guide. That still holds, and that is right where we came in ex-IRA benefit in Q1. Thinking forward, next quarter we are guiding to the same guide that we had in Q1, so it is relatively flat, which implies the second half is going to be stronger. Incremental volume will be beneficial to gross margin. There is a little bit of value on the fixed-cost side. The other piece in terms of the back end of the year is that right now our assumption on tariffs is that Section 122 tariffs carry through 150 days from announcement, which takes us through to the July timeframe. After that, we are not modeling tariffs beyond that for finished goods coming in. There is still other tariff impact in there on the 232. That is the modeling assumption we have today given uncertainty around what could happen. As you are probably aware, the administration has launched several 301 cases with the intent, we believe, to try and replace the 122 with that 301 later in the year. But as of now, I am not modeling that. So the guide has stayed where it is. The guide assumes no tariff replacement back end of the year. That would imply you might get some incremental gross margin; however, if we do see additional tariffs, we will reflect that in a guide later. And operationally, quarter-on-quarter from a gross margin standpoint, we ran Malaysia and Vietnam at higher utilization rates in the first quarter than we anticipate running in second quarter. So you are going to see more underutilization charges in the second quarter. To your question about sequential gross margin performance, we will see a little bit of headwind in the second quarter because of lower utilization rates for Malaysia and Vietnam. Operator: Your next question comes from the line of Julien Patrick Dumoulin-Smith from Jefferies. Please go ahead. Julien Patrick Dumoulin-Smith: Hey, guys. This is Deshaun here for Julien. I guess two quick ones. Could you quantify the amount of adders on that $0.34 or $0.35 ASP? Is it like $0.02 to $0.03 that you discussed before? And then second, real quick one. How do you think about the Southeast Asian capacity going forward? Thank you. Mark R. Widmar: I will take the adders and Alexander can talk to Southeast Asia. One of the things is now with the launch of CURE, the product we are going to price going forward, given that CURE is being launched, is going to be the technology which we anticipate to deliver in its full entitlement. If you look at the bookings that we reported at 1.4 GW since the last earnings call, half of that volume actually sits out in 2029. So it is encouraging, and we are starting to see more momentum in the outer years, and that is a pure product that we expect to deliver. When you look at the adder, in some cases the volumes that we are seeing right now, there are no adders because we are pricing the technology; therefore, you will not see an adder to that deal. When you look at the blended average of the adder, the entitlement of the adders is still, call it, $0.03 or so, but half of the volume that we booked did not have adders on it; the other half did. So the blended average of the adder is going to be, call it, a penny and a half or something along those lines. As we move forward, especially now with the launch of CURE, we are pricing the technology we will deliver, and we will price all the energy attributes embedded in the base price. We are still in that transitionary period. You are going to see some contracts that potentially have the combination of two: the base being our current semiconductor, which we refer to as QED, plus an adder. For the windows in which we, for sure, are going to be delivering the CURE product, we will just price it as the contract and you will not necessarily continue to see the adders. So as we transition in that direction, you are probably going to see less volume with adders on it and just full entitlement of the technology being priced. Alexander R. Bradley: As it relates to Malaysia and Vietnam, we talked on our previous call about maintaining an option around that capacity, and we are still doing that. What we are waiting on is policy clarity around the 232, which really could spur potential demand around fully finished international product. If you go back to the original guide, we had $115 million to $155 million of underutilization costs. That was a function both of Malaysia/Vietnam underutilization running at very low capacity through the year as well as some of those costs associated with the new finishing line that we are bringing up. Right now, we are continuing to maintain that near-term option. We will continue to evaluate that. Likely, the decision point we are waiting on is around the 232, which we expect most likely to come in Q2. Operator: Your next question comes from the line of Analyst from Barclays. Please go ahead. Analyst: Good evening. Thank you for taking my question. I actually wanted to know if we should think that there is an impact from the Section 232 changes on steel and aluminum for the Southeast Asian imports. I was under the impression that aluminum might be less than 15% of the weight of a full module, but now that you are going to be importing just the front of the module, how should we think about that? And then I think you also said on the last call that 5 GW of the backlog was international modules. Was the plan just to mostly import that at the beginning of the year, and it tails off at the end of the year? If you could just talk about the cadence of that as well. Alexander R. Bradley: I got the first one. Repeat your second question, and I will make sure I have it. Analyst: My second question: the 5 GW of the backlog—I thought that was the international portion. Was it not? Mark R. Widmar: Yes, that is about right. I think that is the approximate number. That was entering the year. We had about 5 GW of Series 6 international backlog. Those shipments would go across 2026, 2027, and then into 2028. So that was a multiyear backlog. We will run that production to meet that demand. That portion of the backlog—call it a little bit more than 25%, around 25%—would be for this year. The balance would sit in the outer years as it relates to that. On the 232, yes, aluminum is still included in the tariffs. I think part of your question was as well, what happens with the semi-finished product that comes into the U.S. That will come in; the glass will come in obviously without the aluminum frame. As of now, we will continue to import the aluminum frames into the U.S., and because they continue to be imported, they will be subject to the applicable rates associated with the 232 for aluminum. So yes, 232 is still applicable for aluminum based on the classification of the product we are bringing in, and no real change to that just because we are bringing in a semi-finished product from Malaysia. Analyst: Okay. And then you have been doing a lot of India volumes in this quarter and the full year assumes full utilization. I just saw in one of your disclosures about India there is a proposal to increase the minimum efficiency of PV modules for manufacturers to be included in the ALMM beginning in 2027. Could you talk through what is going on there and what your options are to work around it? I realize that it is still just a proposal. Mark R. Widmar: A couple of things. There is a lot of moving pieces in India, including the requirements by 2028 to have qualification of the wafer being domestically manufactured in India in order to qualify for any projects that actually connect to the federal grid or the state grid. That is moving in and will, I think, further enhance our opportunity to continue to support the India market given a vertically integrated model. As it relates to the consideration for the efficiency threshold, we will be launching CURE beginning of next year in India. So our first Series 6 facility that we will launch in India will be CURE, which will give us an opportunity to improve the efficiency of the technology as well as continue to enhance the energy attributes—better bifaciality, better temperature coefficient, better long-term degradation rate—as we continue to work with MNRE in particular and other parts of the administration, informing and educating them on the value of energy attributes, which is also what our customers pay for: energy, not labeled efficiency. We have a very good and constructive dialogue in that regard. The key enabler to make sure we manage through any potential revisions to those requirements will be the launch of our next-generation CURE technology in India. Operator: Your next question comes from the line of Analyst from RBC Capital Markets. Please go ahead. Analyst: Thank you. I just wanted to follow up on the earlier question from Jefferies in regards to the Southeast Asia offtake agreement. Can you maybe walk through a bit of the possible decision tree here depending on the tariff outcome or an offtake agreement you are thinking about for that facility, and when would we have a potential decision as to what you all do longer term? Thanks. Alexander R. Bradley: Right now, there is ample demand for the product at a certain price, but when you factor in the tariff implications of bringing that product in, and then the risk allocation around that tariff, it is not necessarily the right risk profile for us to take today. Depending on an outcome of a 232, you could potentially see much higher pricing or risk tolerance from buyers whereby we will be able to more appropriately price that product and more appropriately allocate the risk around changes in tariff policy, which would then enable us to be comfortable long-term contracting that product. So a lot of it depends on availability of supply in the U.S. and where tariff and risk can be allocated. We think the 232 is most likely the main determinant of that. The outcomes there could be: we continue to run that product at full capacity end-to-end and ship fully finished goods into the U.S.; it could be that there is demand and we could add an incremental finishing line in the U.S. and finish that capacity here; or it could be that neither of those occur and then we are into potential shutdown of that capacity. Those are really the pieces we are looking at. Mark R. Widmar: One thing to help remind everyone: historically, we have had about 7 GW of capacity between Malaysia and Vietnam. Half of that is now going to come to the U.S. to support our South Carolina finishing line—so 3.5 GW. That leaves the other 3 to 3.5 GW. As we indicated on the last earnings call, about half of that 3.5 is largely no longer available because we are moving some of that back-end capacity to the U.S. to support our perovskite pilot line. Our perovskite full-size Series 6 pilot line will be available in 2027, so we lose the back-end capacity. As a result, we are losing some throughput for the facility. When you really look at how much of the Malaysia/Vietnam facility would be available as fully manufactured, assembled modules to be shipped into the U.S., there is only about, call it, 1.8 GW—maybe closer to 2 GW—of real capacity. So from a full-size finishing module capacity perspective, there is slightly less than 2 GW that is in play, and that would tether back to a 232 decision point. As you think through your analysis, half of the 7 GW is already going to be coming to the U.S. as a semi-finished product; some capacity has been reduced because we are moving the back-end tools to support our perovskite pilot line; and now we are left with slightly less than 2 GW in Malaysia/Vietnam that will be tethered back to whatever decision is made with 232. Operator: Your next question comes from the line of Philip Shen from Roth Capital Partners. Please go ahead. Philip Shen: Hey, thanks for taking my questions. On the 232, I was wondering if you might be able to share a little bit more color on what the framework of that decision might be. I think we published earlier this week that there could be a minimum import price in the $0.38 per watt level. Does that resonate with you at all? And on your slide number seven, you talked about the timing being Q2. We have seen this push a bunch. It was supposed to be year end 2025, but then the shutdown happened, and a bunch of other reasons have driven this a little bit later. As we are a month into Q2, what is the confidence level that it comes out in May or June? And then on the technology front, Mark, I think you just talked about a full-scale line of perovskite in 2027, which is really interesting. Could you give us a little more color on that—what kind of costs are you seeing? Is that a base CdTe on the bottom cell and then perovskite on the top cell? Any other color in terms of efficiency and durability? Mark R. Widmar: On the 232 framework, there are still a lot of moving pieces. What I can say right now is that the engagement we are having with the administration and the structure of what we are proposing—which again is not a percent; it is basically a cents-per-watt metric on the cell or module, and could include a minimum import price, to your point—the feedback we continue to get is very positive to looking at that as the best way to address polysilicon and its associated derivatives. It is encouraging feedback, but as you know, these things continue to evolve, and we have to stay well connected to continue to advocate for that type of position. On the timing, the feedback we are getting is still a resolution by the end of this quarter. It could move into early Q3 potentially, but it is dependent on other events. The intention is to bring this to a conclusion and communicate an outcome, but, as you know, these things can move. What we represented on the slide is our best information and expectations based on communications around an outcome and communication around 232. On technology, we are currently on a timeline that would have us running a pilot line in 2027 for perovskites. I am not going to get into specific costs. That pilot line, which is a 1 GW pilot line, by definition is not going to be an HVM-type cost entitlement. To get cost out, you need high throughput and scale. For an initial product to get it into the market and to get field validation and customer feedback, we think it is appropriate to do that upon launch. As we continue to evaluate, we will move into scaling, but it is going to be a higher-cost product upon launch. As it relates to the construct—single junction or tandem—we are looking at two different paths and still evaluating the right launch product. The most important thing initially is to get something in the field to validate the performance of the perovskite: degradation, performance across conditions including open circuit and partial shading, etc. There is complexity in a tandem construct—different electrical properties and temperature coefficients—so we want to first validate perovskite durability and bankability in the field before adding that additional complexity. Operator: Your next question comes from the line of Vikram Bagri from Citibank. Please go ahead. Vikram Bagri: Good evening, everyone. My first question, Mark, probably for you. We understand that the market for contracting panels at $0.33 a watt or higher is not as deep, and customers are hesitant in pricing the Section 232 risk as of now. Once it comes out—based on your assumption sometime in late Q2—how quickly can you move to book volumes? Put it another way, how much demand is waiting for Section 232 to come out? What should we look for in bookings immediately after 232 comes out? Mark R. Widmar: There are unknowns. Once it gets communicated, the key will be what the impact is. We have some customers looking at multiple gigawatts of volume, and they are waiting. We have also said to some of those customers that once this gets communicated, depending on the outcome, it could impact the current price at which we are negotiating. The risk we run is that it ends up being lower than anticipated; the risk they run is it ends up being higher than anticipated. There is quite a bit of demand that should provide an opportunity for us to move through and book over a multi-month period. It really depends on the outcome; that is what the current bid-ask relates to. We are trying to create a price point reflective of the midpoint, and we will see what comes out. If we are wrong, we may see a little bit of ASP pressure; if we are right, we may see a little bit of upside relative to that marker we have engaged the market with right now. Operator: Your next question comes from the line of Analyst from Oppenheimer. Please go ahead. Analyst: Thanks so much. It is a two-part question. First, as you move from Series 6 to Series 7 with CURE, can you talk about the key technical elements that you are working on right now and things that we should be watching for success? And then can you talk about any impact that you are seeing from the incremental domestic capacity that is coming online to some of your pricing negotiations? Mark R. Widmar: From a technical standpoint, Series 6 to Series 7 is not really a significant technical challenge; it is more of a form-factor change. For the Series 7 launch, for the front contact buffer, we are working with our glass suppliers to allow them to deposit within their facility so we will receive glass that includes the revised front contact buffer needed for CURE. That will simplify factory operations versus depositing that layer in-house as we do now for Series 6. There are a couple of new tools because the BCAM process is different for CURE versus our existing product, and those tools need to be seasoned and validated for the larger form factor. So it is less about core technical risk and more about process differences and tool scaling. We are validating now and will replicate as quickly as we can across the fleet once comfortable. On capacity, excluding our fully integrated capacity in Ohio, Alabama, and Louisiana, the new facility in South Carolina is semi-finished product. It is a Series 6 form factor; it does have domestic content but not as much as the product manufactured in Ohio. It creates a nice opportunity to blend for our customers, adding value through domestic content and enabling a broader portfolio of projects to benefit from the domestic content bonus, which is extremely valuable—often $0.15 to $0.20 or more per watt at the project level for the ITC. Operator: Your next question comes from the line of Praneeth Satish from Wells Fargo. Please go ahead. Praneeth Satish: Good evening. Thanks. With the IPA tariffs repealed and import tariffs on India-produced modules down to 15%, how are you thinking about selling the India capacity into the U.S. versus selling it in the Indian market? Is that something you are still considering, maybe if we get a positive 232 outcome? And to the extent that you are, what is the lead time and retooling cost required to enable that? And then just a quick housekeeping question on the 1.7 GW of bookings this quarter. Are you able to break out roughly how much of that is from U.S. capacity versus international? Thanks. Mark R. Widmar: Right now, there is a lot of demand in India. We just sold 1 GW last quarter, and if you look at the actual gross margin on that product, effectively it is the highest gross margin that we have, including the benefits of 45X. So the gross margin, on a percentage basis, is attractive. The changeover from fixed-tilt to tracker is not efficient, even though we try to optimize it. We are looking at this through a lens of keeping that product running given demand, at least through the first half of the year. Q3 we see a little bit of softness in India, and then a stronger Q4. There may be a little bit of volume in Q3—tens to low hundreds of megawatts—of WIP share product from India brought into the U.S. and finished here, and we are doing some of that in the first half to help enable U.S. demand. The challenge is the 122s expire in July, and we do not know what happens with the 301s, so until we have a better understanding of the long-term tariff environment after the 150-day window from January, we will focus on a market with very strong demand and continue to support it. Alexander R. Bradley: Praneeth, on the housekeeping question, of the 1.7 GW, 0.9 GW was U.S. and 0.8 GW was India bookings. Operator: Your next question comes from the line of Analyst from Mizuho. Your line is open. Please go ahead. Analyst: Hey, thanks for the questions. Just one housekeeping on the first half versus the second half cadence. If I look at EBITDA versus the volumes, it looks like EBITDA is 36% in the first half, but 44% of the volumes. Is that because India shipping is higher in the first half, or is it SG&A skewing the EBITDA in the first half/second half? Alexander R. Bradley: It is mostly driven by India volumes. As Mark said, we had a strong Q1 for India. It will drop down in Q2 and Q3, and potentially pick back up in Q4. The guide assumes that imbalance, which is why you are seeing that. Analyst: Got it. Thank you. Operator: Your next question comes from the line of Joseph Osha from Guggenheim Securities. Please go ahead. Joseph Osha: Hi. Thank you. I am still trying to understand the composition of 3.5 GW in South Carolina. Is perovskite part of that, and are you saying that no matter what happens, you are going to run 1 GW and change it through a fixed route there, and the rest is optional? I am trying to put together where this 3.5 comes from. Thank you. Mark R. Widmar: Thanks for the question, Joseph. The 3.5 GW in South Carolina is our CURE Series 6 product and has nothing to do with perovskite. Think about it as the substrate glass with deposition on it with cell scribing, then shipped to the U.S. to be finished, which will include the cover glass, junction box, frame, interlayer, and all other components. That is CdTe product. In addition, we will be launching a perovskite pilot line next year. We announced we acquired IP from Oxford PV for perovskites, which enhances the IP we already have. That pilot line will have up to 1 GW of capacity and will be in our Perrysburg facility, leveraging existing space and some back-end processing capabilities there. So South Carolina will be CdTe product started in Vietnam/Malaysia and finished in South Carolina. Alexander R. Bradley: Maybe part of the confusion: of the original 7 GW capacity in Malaysia/Vietnam, 3.5 GW will be used for the front end of the product that then comes to be finished in South Carolina. The remaining 3.5 GW—some of those back-end tools will go into the perovskite line in Perrysburg. That is why the remaining CdTe capacity in Southeast Asia comes down. It is not mixing CdTe and perovskite; it is that some back-end tools will no longer be used there and will be used in that 1 GW pilot line for perovskite. Operator: Our final question comes from the line of Ben Kallo from Baird. Please go ahead. Ben Kallo: Hey, guys. I just have a follow-up question, and then another one. Just to Joe’s question, after all that is done—because I think, Mark, you said that you lose some capacity in Vietnam and Malaysia—I want to make sure we have the volume number correct as we enter next year. And then my follow-up question is on TOPCon and your patent and what Tesla is doing. How do you think about them starting manufacturing here and if that is going to violate your patent? Thank you. Alexander R. Bradley: If you go back to the deck that we presented in February, we gave capacity and production for 2026–2027, and the assumptions have not changed. On a production basis, we said 2027 would be around 19 to 20.5 GW, with $19.7 billion as the midpoint production—those numbers and the geographical breakout are unchanged from that deck. Mark R. Widmar: On Tesla and our TOPCon patent: what we know is that TOPCon products, as reflected by our filings and the number of manufacturers who have produced TOPCon and sold it into the U.S., have been infringing on our IP. If Tesla chooses to go with TOPCon, my assessment, given what I see in the market, is that unless Tesla redesigns the product such that they would not infringe on our IP, there would be some form of infringement. We are more than willing to work with any counterparty to engage in a commercial conversation around the licensing of our IP. We are not prohibiting that conversation. We just want to be paid fair value. That is why we licensed the IP to Trina; Trina is demonstrating willingness to pay fair value for the technology enabling the product they will manufacture. We will do that with other counterparties. If Tesla chooses to use a TOPCon product that uses our IP, then we will enter into a commercial conversation with them and happily engage on licensing that IP. Tesla establishing capability here in the U.S. market—we have always said we need a robust and resilient domestic supply chain, completely vertically integrated, beyond just thin film CdTe; it is also why we are evolving toward perovskite as next-generation thin film. Tesla bringing in that capacity and capability and creating a domestic supply chain enhances and supports the overall strategic intent around long-term energy independence and national security. Operator: At this time, there are no further questions. This concludes today’s call. Thank you all for attending. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Mechanics Bank first quarter 2026 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would like now to turn the call over to our chief financial officer. Please go ahead. Unknown Speaker: Thank you, operator, and good morning, everyone. We appreciate you joining our earnings conference call. With me here today are our President and CEO and our executive chair. The related earnings press release and earnings presentation are available on the News and Events section of our Investor Relations website. Before we begin, I would like to remind everyone that any forward-looking statements are subject to those risks, uncertainties, and other factors that could cause actual results to differ materially from those anticipated future results. Please see our Safe Harbor statements in our earnings press release and in our earnings presentation. All comments expressed or implied during today's call are subject to the Safe Harbor statement. Any forward-looking statements made during this call are made only as of today's date, and we do not undertake any duty to update such forward-looking statements except as required by law. Additionally, during today's call, we may discuss certain non-GAAP financial measures which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure can also be found in our earnings release and in the earnings presentation. Thank you, and good morning. We appreciate everyone joining our call and for your interest in Mechanics Bank. I will kick things off today and will summarize the highlights of our first quarter performance. I will also provide another strategic update on the bank before handing things off to our CFO to review our financials in more detail. We will then open up the call for your questions. With that, let us turn to Slide 4. We had a productive first quarter reporting $44.1 million in net income. On a fully diluted basis, our earnings per share were $0.19. Our tangible book value per share ended the quarter at $7.53, with $0.40 per share of dividends paid to investors in Q1. As anticipated, this was another noisy quarter, so I will walk you through some of the major items. First, we recorded a £6.5 million provision entirely related to qualitative CECL factors tied to geopolitical uncertainty stemming from the Iran war. Importantly, this was not driven by any specific credit deterioration within our loan portfolios. Asset quality metrics remain strong, and I am pleased to report that we have 0 basis points of net charge-offs when you exclude our auto net charge-offs. Our run-off auto portfolio, by the way, is also performing well as it winds down. This provision was a conservative response to the heightened global risk of the Iran war and its potential impact on the U.S. economy, particularly given higher oil prices. Second, we incurred just under £5 million of merger-related expenses as we continue to work through the final phases of our HomeStreet integration. These costs were in line with our expectations and are nearing completion. The third non-core item was a $1.7 million tax provision related to the remeasurement of our deferred tax asset due to a lower anticipated effective tax rate moving forward for the company. For forecasting purposes, we expect our effective tax rate to be approximately 26.5% in 2026, but this could still move around a bit. When you adjust for the non-core items, it adds up to $53.8 million of core net income for the quarter representing a core ROAA of 1% and a core ROTCE of 13%. First quarter is always the seasonally weakest for us for both noninterest expenses and core deposits. On the deposit front, our seasonality primarily stems from our $860 million of food and ag deposit customers who see large inflows in December and outflows in January. This quarter, $137 million of our non-maturity deposit decrease was from these customers, which is normal course activity. Otherwise, core deposits are roughly flat. Importantly, we did see a $640 million reduction in CD balances during the quarter. This was deliberate as we continue to hold the line on CD pricing and let hotter money from legacy HomeStreet customers leave the bank. When we modeled the merger over a year ago, we expected $1 billion in CD runoff by the end of 2026. However, runoff has been greater than anticipated, and we now expect a $1.4 billion cumulative reduction in CDs, with overall Mechanics CD balances expected to stabilize at a $2 billion run rate. This implies an additional reduction in CDs of just under $150 million in Q2. Notably, the vast majority of CDs leaving the bank were from single-account households, and our core deposit retention from the merger has been very strong. Also, nearly all of our CDs have repriced once at our lower rates and have maturities of seven months or less. While this elevated time deposit runoff has a negative impact on earnings, it is higher-risk, low-ROE, non-core money that is better to not have in our bank. Getting a bit smaller also generates excess capital, which provides strategic flexibility. Staying on the topic of risk reduction, legacy HomeStreet construction loans also decreased nearly $100 million during the quarter, as we made the strategic decision to let certain business go that we felt was not priced appropriately relative to the credit exposure we were taking in the bank. In general, competition for loans and deposits remains quite stiff. We are okay getting a bit smaller in the near term to minimize risk to the company and position ourselves for long-term success. Our total assets are now £21.4 billion with total gross loans of $13.9 billion, total deposits of $18.2 billion, and tangible shareholders' equity of $1.7 billion. We remain 100% core funded with no brokered deposits or FHLB borrowings at 03/31/2026, and we paid off $65 million of high-cost senior debt in March that was acquired from legacy HomeStreet. Primarily because of the Iranian war provision, our ACL grew 5 basis points this quarter to 1.13% of loans and now totals $157 million. Our allowance is also a very robust 2.95x our total nonperforming assets as of 03/31/2026, with NPAs generally flat for the quarter. Our capital ratios remain healthy with a 13.9% CET1 ratio and an 8.7% Tier 1 leverage ratio. Our cost of deposits was 1.28% in the first quarter, down 15 bps from Q4, and our spot cost of deposits at 03/31/2026 was 1.21%. Our NIM was 3.61% for the quarter, up 11 bps sequentially, and our CRE concentration ratio was 348%. Turning to Slide 5. I would like to provide you with an update on some of the key strategic initiatives happening at the bank. I am very happy to report that we successfully converted all legacy HomeStreet customers onto our core banking platform in March. This major milestone was achieved thanks to a tremendous amount of planning and hard work from all our employees. We will substantially complete our merger integration during the second quarter and expect to realize significant additional expense synergies moving forward as we will not be paying two core providers. Other redundant contracts will be terminated and final headcount reductions occur. We remain on track to deliver on our budgeted cost synergies from the merger, and reiterate our prior guidance of achieving an annual run-rate noninterest expense excluding CDI of approximately $430 million by the fourth quarter of this year. The $130 million sale of our DUS business line to Fifth Third has taken a bit longer than expected, but we have a high degree of confidence that it will close in the second quarter. Given the pending DUS sale, our first quarter earnings, and our modestly smaller balance sheet, we will have significant excess capital, and we expect to pay approximately $0.70 per share in dividends in Q2, subject to regulatory and Board approval. Merger integration is almost behind us after a very full year of work, and the buildouts of our wealth, commercial banking, and treasury sales teams are substantially complete. It will be nice to move past integration work and focus entirely on growing each of our core business lines with a technology roadmap for the bank that is increasingly focused on leveraging AI tools to improve enterprise productivity. As for the big picture, we expect a relatively flat NIM for the next two to three quarters as auto loan runoff remains a drag, our deposit costs stop declining given we no longer expect any Fed rate cuts, and our CD repricing moderates. Our NIM should begin expanding again in early 2027, as the impact of auto fades, driven by legacy Mechanics Bank earning asset repricing, which will continue to occur over the next five years and will provide a tailwind to earnings growth. We now expect to deliver a 17% to 18% ROTCE and a 1.3% to 1.4% ROAA in 2027 and beyond, with a projected GAAP net income range of $275 million to $300 million for 2027. Our earnings guidance has been reduced primarily due to removing two Fed rate cuts from our projections as well as from a modestly smaller balance sheet due to the lower CD balances. We also expect outstanding construction loans to be roughly $300 million over the rest of the year versus $500 million previously. Let us go to Slide 6, which shows an overview of Mechanics Bank today. Again, we have £21.4 billion in assets, 166 branches, and very competitive deposit market share. We are the fourth largest community bank in both California and on the West Coast, with a branch map that is nearly impossible to replicate. We fully expect Mechanics Bank to be a high-performing bank despite taking very little risk with our earning asset strategy. On the left-hand side of the page, we compare Mechanics Bank to all publicly traded banks with $10 billion to $100 billion in assets, which, including us, now has 77 banks in the comparative group. As you can see, cost of deposits for the first quarter was 1.28% versus the median of the 77 banks of 1.76%, giving us a rank of number 10, and I expect our cost of deposits to continue to drop in the second quarter before flattening the remainder of the year. Next, our noninterest-bearing deposit mix is 36%, which is third out of 77, up one spot from a quarter ago, and the greatest store of value for our company. Our CET1 ratio of 13.9% ranks nineteenth, and our risk-weighted assets to total assets is just 59% versus the group median at 76%, which is the second lowest out of our 77 competitor banks nationwide. Despite this low-risk profile, our expected 2027 ROTCE of 17% ranks eighth of the 77 banks, which would be exceptional. Finally, our 2027 efficiency ratio is now projected to be approximately 50%, which ranks twenty-second out of 77 despite our operating in higher-cost markets and with the majority of our deposits comprised of small-balance consumer accounts. Slide 7 is key to our investment thesis and another way of visualizing some of the important statistics from Page 6. The strength of our deposits and the efficiency with which we run our bank, both from an expense and a capital management standpoint, will allow us to post very strong returns despite having nearly the lowest risk mix of assets in the country. These charts provide a great visual in my opinion, especially the risk-weighted assets to total assets comparison. In fact, we expect our risk-weighted assets as a percentage of total assets to continue to come down over time as our auto loans run off and our CRE concentration ratio is managed below 300%. While we will pay substantial dividends in 2026, we expect moving forward that our dividend payout ratio will be closer to 80% of net income as we retain some capital to support core growth and preserve strategic optionality. To wrap up my section, let us turn to Slide 8. This slide summarizes our investment highlights. First and foremost, we have very strong market share across the West Coast, with a branch footprint that is nearly impossible to replicate. We also expect to have very strong profitability due to our top-notch deposits and efficient business model despite taking very little credit risk. We are 100% core funded with no wholesale borrowings or brokered deposits, and are highly capitalized with a very liquid balance sheet, with a 70% loan-to-deposit ratio forecast for 2027. We are efficient with our capital and plan to pay out substantial dividends, which would imply a very attractive yield at today's share price. There is also firm alignment between our public and private investors as Ford Financial Fund owns 74% of the company. Finally, we have an experienced management team with a strong operating and M&A track record. Overall, the future prospects of Mechanics Bank are quite bright. I am looking forward to finishing the job with the HomeStreet integration and moving on to the next chapter of growth for our great company. With that, let me turn the call over to our CFO to dig into more detail on our first quarter results. Unknown Speaker: Thank you. Starting on Slide 10, for the first quarter, net interest income declined $3.9 million, or 2.2%, to $179 million compared to $183 million in 2025. Our net interest margin expanded 11 basis points to 3.61%, driven primarily by the reduction in deposit costs and the $640 million runoff of higher-cost legacy HomeStreet CDs. First quarter interest income included $12.7 million of discount accretion on loans acquired in the HomeStreet transaction, and we have approximately $150 million of remaining discount on those loans as of 03/31/2026. Lastly, the earning asset mix shifted modestly during the quarter, reflecting lower cash balances as CDs continue to roll off. Turning to Slide 11. Noninterest income declined $57.5 million, or 73%, to $21 million compared to $78.5 million in the linked quarter. As a reminder, the fourth quarter included a $55.1 billion bargain purchase gain related to the write-up of the DUS intangible asset acquired in the HomeStreet merger. Excluding that item, underlying noninterest income declined $2.4 million quarter over quarter, primarily driven by lower trust fees, lower gain on sale of loans, and reduced OREO income. Turning to Slide 12, noninterest expense increased $900,000, or 0.7%, to $130.4 million compared to $129.5 million in the fourth quarter. Merger-related expenses totaled $4.8 million, up modestly from $3.5 million last quarter, and were primarily comprised of professional services and severance costs. Excluding these one-time merger expenses, noninterest expense declined $400,000 versus the linked quarter. The efficiency ratio increased to 61.6% compared to 46.7% in Q4, reflecting the absence of the prior-quarter bargain purchase gain rather than any deterioration in underlying operating efficiency. Turning to Slide 13. Loan interest income declined $12.9 million, or 6.7%, to $181.2 million, and loan yields declined 9 basis points to 5.25%, driven by slightly lower contractual yields and reduced discount accretion. Multifamily and single-family residential yields declined modestly by 6 and 3 basis points, respectively. The CRE concentration ratio increased to 348% at quarter end. During the quarter, we originated $546 million of loan commitments, predominantly in SFR and other consumer categories, and sold $54 million of loans, primarily DUS, multifamily, and residential real estate. Turning to Slide 14. The commercial real estate portfolio remains well diversified and continues to reflect our longstanding focus on lower-risk multifamily lending. Multifamily represents approximately 70% of the total CRE portfolio, with an average loan size of $3.8 million, an average LTV of 56%, and an average debt coverage ratio of 1.55x. The remainder of the CRE portfolio is broadly distributed across retail, office, industrial, hotel, and mixed-use categories, each with modest exposure and conservative credit characteristics. At the end of the first quarter, our CRE concentration was 348%, which would be 101% when excluding our multifamily portfolio. We also continue to manage down the higher-risk segments of the legacy HomeStreet portfolio. During the last six months, we made progress reducing our HomeStreet syndicated loan exposure, with balances declining from approximately $142 million at 09/30/2025 to about $68 million at 03/31/2026. During the first quarter, we sold roughly $9 million of unpaid principal balance, or $18 million of commitments. On Slide 15, you can see both legacy Mechanics Bank asset quality trends and the impact of the HomeStreet merger. Mechanics Bank has historically maintained excellent credit quality with minimal non-auto charge-offs and a very low level of nonperforming assets. As shown on the slide, the majority of our historical charge-offs were auto-related, and as mentioned earlier, that portfolio is in runoff and continues to outperform expectations. As a reminder, the increase in the non-auto charge-offs in 2025 was due to a charge-off of a legacy HomeStreet acquired loan that had specific reserves established, and the actual charge-off was slightly lower than the original anticipated loss. At March 31, nonperforming assets represented 0.25% of total assets, modestly higher from 0.23% in the fourth quarter. The increase reflects the impact of lower loan balances in total and a slight increase in the non-auto nonperforming assets of $2 million. Loan loss reserves to loans held for investment were 1.13% at quarter end compared to 1.08% in the prior quarter. The increase in the allowance reflects incorporation of qualitative factor adjustments, including a $6.35 million pre-tax provision driven by the heightened economic uncertainty related to geopolitical developments. Turning to Slide 16. Securities interest income increased $3.5 billion, or 7%, to $53.1 million from $49.5 million in the fourth quarter. The increase was driven by higher yields on the portfolio, which increased by 11 basis points to 3.97% as compared to the fourth quarter. The increase in the portfolio's yield was due to the full-quarter impact of the $650 million of securities purchased in 2025 at accretive yields to the portfolio. The overall securities portfolio decreased by $83 million in the first quarter due to paydowns and a $33 million reduction in fair value due to higher interest rates. Turning to Slide 17. Total deposits declined $782 million during the quarter, driven by a $640 million reduction in higher-cost time deposits and a $232 million reduction in noninterest-bearing demand and $137 million in seasonal non-maturity deposit outflows, partially offset by money market growth. This mix shift and balance reduction contributed to a $10.7 million, or 15%, decline in the deposit interest expense compared to the prior quarter. The total cost of deposits improved to 1.28%, down 15 basis points from the prior quarter, driven primarily by the continued runoff of the higher-cost legacy HomeStreet time deposits. Spot cost of deposits at March 31 was 1.21%, reflecting ongoing repricing benefits. Noninterest-bearing deposits represented 36% of total deposits, continuing to support our low-cost funding profile. Turning to capital and liquidity on Slide 19. We remain very well capitalized with a 13.9% CET1 ratio and an 8.7% Tier 1 leverage ratio at March 31. Available liquidity totaled approximately $16.3 billion. Book value per share at quarter end was $12.61 and tangible book value per share was $7.53. During the first quarter, we paid a $0.40 per share dividend on our Class A common stock. As discussed earlier, we expect the $130 million sale of our Fannie Mae Delegated Underwriting and Servicing business to Fifth Third to be approved and closed shortly. Pro forma for that transaction, we expect to have approximately $165 million of excess capital, which we intend to return to shareholders through a special dividend of approximately $0.70 per share in the second quarter, subject to regulatory and Board approval. That concludes our prepared remarks. Operator, please open the line for questions. Operator: We will now open the call for questions. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. You are muted locally; please remember to unmute your device. Please stand by while we compile the Q&A roster. It is star 1 on your telephone keypad to ask a question. Your first question comes from Woody Lay with KBW. Operator: Please go ahead. Woody Lay: Hey, thanks for taking my questions. I wanted to start on the net interest margin. Based off the spot rate of deposits you gave, I am a little surprised margin would be flat, or relatively flat, next quarter. Could you walk through the puts and takes to the flat margin over the next couple of quarters and the glide path we need to see in order to hit the $275 million to $300 million of net income in 2027? Unknown Speaker: Sure. Good morning, Woody. I will start, and maybe let our CFO comment as well. Yes, the spot cost of deposits is down, and that will provide a bit of a tailwind, but we expect our deposit cost to be not quite at 1.21%, probably a little higher than that for the quarter overall, as we are really through most of our CD repricing. We also have a bit of a day-count issue with the first quarter and February and how we do some of our yields. The 3.61%, especially in February, which is a short month, is a bit elevated. So that gets some of it. We are very liability sensitive. We are going to add a bit more disclosure around that in our next investor deck in the second quarter, but we do have, of our $18 billion of deposits, $10 billion at basically 1 basis point, noninterest-bearing or very low cost. But we do have $7 billion that is at 2.85% today, and so it is a bit of a barbell for the deposit base. Not getting the rate cuts, having a flat forward curve, is a bit of a negative for us, clearly. We do have about $4 billion of floating-rate assets. So there is a $3 billion gap between our rate-sensitive liabilities and our floating-rate assets, and we have been working to narrow that gap. It has come down; it will continue to come down, but that is putting some pressure on the margin during the year, especially as we still have $600 million or so of auto loans at a 6.5% yield. Those are running off to zero. That is putting pressure on the margin. The offset is we have outsourced the expense for that, and as those loans run off, our NIE continues to proportionally run off with that as well. We have $12 million right now that we are paying, and so as those balances run down, the $12 million also comes down. So the offset to the margin impact is going to show up in noninterest expense. Do you want to add anything to that? Unknown Speaker: Yes, I think you covered most of it. A couple of other items I would add: you gave updated guidance on the construction land balances, which is one of our highest-yielding assets, so there is an impact there. In addition, we have seen interest-bearing transaction costs pick up. Part of that is some of the CD runoff from HomeStreet. Strategically, we have been pushing some of that into interest-bearing transaction accounts, and so we expect that to pick up during the second quarter, along with everything else that you discussed already. Woody Lay: Got it. And then maybe with some of the moving pieces, is there a margin range you expect in 2027 in order to achieve the NII run rate you expect? Unknown Speaker: I would say probably 3.7% to 3.8% in 2027 would be my estimate. Obviously, that is still a ways down the road, and things can change, so I hesitate to give too much there. What I do know is we are 100% core funded, and our deposit costs should be pretty stable, especially if we can grow core deposits, which we think we can do. I think our deposit cost should remain pretty stable once we get through the second quarter. We have at least $5 billion of low-yielding legacy Mechanics Bank assets that are a hangover from the COVID era that will continue to amortize, prepay, cash flow, and reprice. We are going to add some disclosure around that as well in the second quarter, but that is going to be a tailwind. That is happening, and that will push our margin higher every year for the next five years. Eventually this would be a bank that is north of a 4% NIM, and there are levers we can pull to accelerate that. We are going to be continuing to generate excess capital as we are a little smaller, and we have low-yielding loans and low-yielding securities. We may consider a restructure on some of that. It would be small. Eventually, we are going to sell these auto loans. I do not know when that will be, but it is going to be back half of this year, early next year. We are still trying to determine the ideal timing of it, and we may take a modest loss when that occurs, but it will be a pickup to earnings for sure, because that line is losing us money at the moment as we continue our runoff. So there are a lot of levers we can pull, and the underlying earnings power of this bank is very strong, thanks to our rate deposits, and we have not embedded any of that kind of stuff in our guidance. Woody Lay: Maybe just shifting to the balance sheet real quick. As you noted, some of the deposit runoff is coming a little bit more than expected, and I think you said there is another $150 million of planned CDs from HomeStreet that is coming off next quarter. Once we get through that tranche, how are you thinking about the size of the balance sheet? Should it remain pretty stable off those levels, or just given the sale of the auto—potential sale of the auto—portfolio, could we see some additional shrinkage in the back half of the year? Unknown Speaker: Once we get through any remaining CD reductions in the second quarter—and again, the first quarter is also the seasonal low for deposits with us; every first quarter that is the case—expect core deposit growth. We think we should grow 2% to 4% a year in line with our economies, and we have a ton of focus at the bank on growing core deposits. The non-core stuff is basically all out. If we sell auto loans, we will get the proceeds and reinvest somewhere else, so that will not change the size of the balance sheet. I view this as very close to the low. We should be growing; we are budgeting to grow. We have momentum on deposit pipelines and things like that, so I would not expect much, if any, more balance sheet shrinkage—maybe a bit in the second quarter, but that should be the near-term low. Woody Lay: Got it. And then maybe just last for me. You all noted in your opening remarks an 80% payout ratio in 2027 that provides some capital to be strategic with. You noted you could look at restructures, but I was also interested in your thoughts on additional M&A from here, especially once we get past the official core conversion. Unknown Speaker: Good morning, Woody. I think that you have to look at our past to somewhat predict our future. We have always been extremely acquisitive. We are always looking at situational opportunities. Obviously, the opportunities have to be within our footprint. We are not looking to really expand our West Coast footprint, and we do not want to do an M&A transaction simply to get bigger. It has to make us better. And I think the overlay to that is making us better with an M&A transaction gets harder and harder and harder. You heard the 1.28% deposit cost for the quarter and the 1.21% spot rate. We protect these deposits judiciously. I am not talking about our time deposits—the story there is we have run those down intentionally—but it really gets harder and harder to move the needle. I am not saying that we have to buy another bank or acquire another opportunity that has a like deposit cost, but we think the value of a bank—the franchise value of a bank—is demonstrated predominantly by its liability structure and its deposit cost, and so we have to take that into consideration. Frankly, there just are not a lot of banks out there. We are always looking. There are a scant few opportunities that we constantly monitor. Something in our favor is we are trading at a pretty good multiple. All I can say is we are keen to the opportunity set; we are always looking. Being extremely transparent, there is nothing right now on the front burner, and that is simply because there is nothing more important for our bandwidth today than getting this integration right. We only acquired HomeStreet, which significantly increased our size and our footprint, eight months ago, and we are now in the midst of getting our cost out and we spoke to the conversion. Those are the very important things that we have to get done and get right first, and we are getting in the later innings of doing that. Then we will certainly see what is out there. Woody Lay: Awesome. I appreciate you taking my questions and all the color you provided. Unknown Speaker: Of course. Thanks for the questions, Woody. Operator: A reminder, if you would like to ask a question, please press star 1 on your keypad. Your next question is from Dave Rochester with Cantor. Please go ahead. Dave Rochester: Hey, good morning, guys. Unknown Speaker: Good morning, Dave. Dave Rochester: Back on your comments on growth in core deposits, it sounds like you feel pretty good about doing that through the end of this year. I was curious, just given the headwinds in auto and construction, if you think you could still grow the loan book this year. And then I am trying to triangulate into an NII trend with a stable NIM. It sounds like you are still expecting NII to grow through the end of this year as well with—whether it is loan growth or securities growth—through the end of the year, just given that you are growing core deposits. I wanted to get your thoughts on that. Unknown Speaker: From a loan growth standpoint, we expect to grow our consumer loans. We had modest growth in single family; we expect that to pick up throughout the year. Mortgages and HELOCs—we have seen good demand and growth. We are also lending against the cash surrender value of whole-life policies through our partner, Incline. That is growing rapidly. We are now at, I think, $670 million of drawn balances. We expect that over the course of the year to get to $1 billion drawn and really like that business from a risk-adjusted return standpoint, especially given its short duration and a good counter to some of that gap I talked about earlier between our rate-sensitive deposits and our floating-rate assets. So the consumer should grow. We have talked before about our construction balances—we expect those to decrease around $300 million. The homebuilder team that came over from HomeStreet does a great job; they really are a strong team, but that business was thinly priced in some areas, and we are getting it deliberately a little bit smaller. So that will be a bit of a headwind through the year, but we are de-risking. Not doing construction lending can obviously go great for a while, then it can go the other way very quickly, so I think that is prudent. On commercial real estate, we are originating loans, but the plan is still to get that below 300%. I would model us over the next couple of years getting below 300%, so there will be a modest decrease in outstanding multifamily CRE. C&I should be—deliberately we sold some of the syndicated loans that HomeStreet had; that is part of the balance reduction there. That should be close to a nadir and should be starting to grow again. Unknown Speaker: I would add one other comment, and that is the market is extremely—everyone says the same thing, and we have been monitoring earnings releases, and some have had modest loan growth—but I would say the competitive landscape on both term and pricing is as thin and as tight as I have ever seen it. We are tough on credit, and I think that would be an opinion shared by a lot of our lenders that are out in the market today. We are seeing some things out there that may trend to this thing just getting really, really competitive to the extent that it is probably not all that healthy, particularly as it relates to term, which I equate to underwriting. Credit spreads are extremely tight. In my way of thinking, this is not the time to necessarily be pressing the accelerator too hard for loan growth, and with the overlay of our CRE concentration, we have to be very mindful of that. Dave Rochester: Appreciate that. Are you, at this point, still expecting NII growth from the first quarter through the end of the year, or is it more stable along with the margin? Unknown Speaker: It should be pretty stable, I would say, for a couple of quarters, and then start to pick up. The balance sheet is going to be getting a little bit smaller in the second quarter and then should start to grow, but the growth will be modest. I would guide to stable NII and then picking up, I think, pretty materially in 2027. Dave Rochester: You mentioned the upside in the margin as you get into the early part of 2027. Where are you seeing that roll-on, roll-off differential in the earning asset buckets you have at this point? Unknown Speaker: We have a lot of lower-yielding mortgages. Our legacy Mechanics Bank single-family is probably a low 4% coupon. A fair amount of that is starting to prepay and amortize, coming back on the books at, call it, 6%. Multifamily—we have $2.4 billion or something north of $2 billion of multifamily loans that yield low 4% in aggregate. That business today is closer also to 5.75% to 6%. That entire book will reprice—it is all adjustable, five, seven, ten; it was mostly originated in 2021 and 2022. By 2032, it will all have reset to market rates closer to 6%. So there are a lot of tailwinds there. We also have an HTM portfolio that is a drag. It is $1.3 billion today, yielding 1.61%, and $100 million of that amortizes a year. Slower, longer duration, but over time, it will continue to be a tailwind. There is a lot of upside to the bank over time; as time passes, we will have a natural tailwind just from that occurring. This year will be a bit more flat, though, given the flat curve—no Fed cuts—and the final drag of auto. We will make up for some of that in our pretty substantial expense reductions that are coming here in the second and third quarters. Dave Rochester: It looks like between now and the fourth quarter, you are looking at at least a $10 million reduction on a quarterly run-rate basis on expenses, right? How much of that are you expecting to get in 2Q? Unknown Speaker: We are at $474 million, excluding CDI annualized, in the first quarter. We expect to get to $430 million by the fourth quarter. That is $44 million annual—over $10 million a quarter. In the second quarter, we should see—a lot. I do not know the exact number, but there is going to be a significant amount of cost reductions coming off, and that will persist into the third quarter. By the fourth, we will be there. Dave Rochester: Good, that will be good. Switching to the fee side for a minute on the trust business: you were opening an office in Delaware. I think it was this quarter. Is that up and running? If you could just remind us what that does for you and what other expansion you are planning in that business going forward, that would be great. Unknown Speaker: We got a little bit delayed. It is now expected to open in May. We are almost there on the Delaware trust business. We have some demand waiting for us to open that. That is a major step for our wealth group, so that is exciting, but it has been delayed a quarter. Overall, our buildout of the team is complete. We have a great team; a number of folks came over from First Republic after that bank failed right in our backyard. We have been laying the groundwork. We have been very busy with the integration and the merger, and we picked up some private bankers and other new clients from HomeStreet on the deposit side through it, and I think there is opportunity on the trust and wealth side to continue to grow. I am optimistic that that business will continue to grow and be a very accretive business line for us, but the trust business did take longer than we thought. We are at the finish line. Dave Rochester: Maybe just one last one on capital. You mentioned the big payout next quarter—I think it was $165 million of excess that you are looking at. Does that get you down to your target 8.25% Tier 1 leverage, or do you keep a little bit of extra there for flexibility going forward? How are you thinking about that? Unknown Speaker: The way we have been managing capital is 8.25%, but one quarter in arrears, so it is more effectively like 8.5% to 8.6% leverage. This quarter, we are at 8.7%. To your comment, we are going to have excess—my rough math is maybe $35 million this quarter—that we are not paying out. Our dividend is going to be close to $160 million to $162 million this quarter, but there is still some that we are holding back, and we will think about how best to use that. That will persist as we go into the third quarter due to the lag on leveraged assets as the bank gets a bit smaller. Leveraged assets take a quarter to catch up fully, and so we will have some excess capital. The other thing I will point out is there is a lot of CDI amortization that does not show up in GAAP earnings, but it does compound in capital generation for the bank. That is another source of excess capital that we create above and beyond the actual GAAP net income. Dave Rochester: Alright, great. Thanks, appreciate it. Unknown Speaker: Thanks, Dave. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending, and you may now disconnect.
Operator: Morning, ladies and gentlemen, and welcome to the Cousins Properties Incorporated First Quarter Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded. On Thursday, 04/30/2026. I would now like to turn the conference over to Pamela Roper, General Counsel. Please go ahead. Pamela Roper: Thank you. Good morning, and welcome to Cousins Properties Incorporated first quarter earnings conference call. With me today are Colin Connolly, our President and Chief Executive Officer; Richard G. Hickson, our Executive Vice President of Operations; Jane Kennedy Hicks, our Executive Vice President and Chief Investment; and Gregg D. Adzema, our Executive Vice President and Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon as well as furnished on Form 8-Ks. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. If you did not receive a copy, these documents are available through the Quarterly Disclosures and Supplemental SEC Information link on the Investor Relations page of our website, cousins.com. Please be aware that certain matters discussed today may constitute forward-looking statements within the meaning of federal securities laws and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors, including the risk factors set forth in our Annual Report on Form 10-Ks and our other SEC filings. The company does not undertake any duty to update any forward-looking statements whether as a result of new information, future events, or otherwise. The full declaration regarding forward-looking statements is available in the supplemental package posted yesterday and a detailed discussion of the potential risks is contained in our filings with the SEC. We will now turn the call over to Colin Connolly. Colin Connolly: Thank you, Pam, and good morning, everyone. We had an excellent start to 2026 at Cousins Properties Incorporated. On the earnings front, the team delivered $0.73 per share in FFO during the quarter, which was $0.02 per share above consensus. In addition, we increased the midpoint of our FFO guidance by $0.02 per share to $2.94 per share for the full year 2026, which represents 3.5% growth over 2025. This would be our third consecutive year of FFO growth and represents a 3.9% compounded annual growth rate since 2023. Cousins Properties Incorporated earnings growth during this three-year time frame is unmatched among traditional office REITs. Leasing remained robust. We completed 932,000 square feet of leases during the quarter, which is one of the highest quarterly volumes in the history of the company. Our cash rent roll-up on second generation leasing was 15.2%, which marks 48 consecutive quarters of positive rent roll-ups. Significant leasing wins included our large renewal with our largest customer at The Domain in Austin, and new leases with Oracle at Newhof in Nashville, and KPMG at Precinium in Midtown Atlanta. These results underscore the strength of our portfolio and depth of customer demand for high-quality lifestyle office space. I will start with a few broader observations on the trends driving the office. First, most major companies are phasing out remote work. Yesterday, Fidelity became the latest to announce a five-day-a-week office mandate. At Cousins Properties Incorporated, we call it the return to normal, and it is boosting demand across all of our markets. Second, the flight to quality is unrelenting. Customers are prioritizing high-quality, well-amenitized, and well-located buildings to promote engagement and collaboration. According to JLL, nearly all of the positive net absorption in the office sector since the onset of COVID has occurred in buildings that delivered from 2010 to present. Third, the Sunbelt migration has reaccelerated. We have seen a significant uptick in relocation activities as proposals to meaningfully increase personal and business taxes in New York, California, and Washington have advanced. Starbucks recently announced a major East Coast headquarters in Nashville. Apollo is looking for a second headquarters in Texas or Florida. Capital Group announced a major hub in Charlotte. Each of these companies specifically state access to the growing talent pools in these markets is a major reason for their decisions. These are not back-of-house or support jobs that they are creating. We believe that we are still in the early innings of this migration trend and expect these announcements to continue. Lastly, record-high office conversions combined with record-low new development starts are leading to shrinking inventory of office properties. Given the three- to four-year lead time to deliver a new project, this is unlikely to change until 2030 at the earliest. Simply stated, demand is increasing while supply is decreasing. The net result is an emerging shortage of premier lifestyle office space in the best submarkets of the Sunbelt, and one that will become increasingly acute over the next several years and favor landlords. Cousins Properties Incorporated is uniquely positioned to benefit from these trends. Before moving on, I want to briefly address a topic that has received a lot of attention recently, that is artificial intelligence. While AI is shaping how companies operate internally, we are not seeing evidence that it is reducing long-term demand for high-quality office space. In fact, many of the companies most actively deploying AI are also prioritizing collaboration, talent density, and physical presence, which aligns well with our lifestyle office portfolio in the Sunbelt. Ultimately, space decisions are still being driven by people, culture, and access to talent. In that respect, the trends we are seeing in our leasing activity remain very encouraging. Turning to our strategy, as we outlined in prior earnings calls, our focus remains unchanged. We are sharply focused on driving sustainable earnings growth while maintaining our best-in-class balance sheet and continuing to enhance the quality of our Sunbelt lifestyle office portfolio. Our team’s ability to drive both internal and external growth is key to this effort. During the quarter, we advanced that strategy. First, we increased occupancy to 88.9% across the portfolio as a result of robust leasing activity. Second, we closed on the acquisition of 300 South Tryon, a 638,000 square foot trophy office asset in Uptown Charlotte, for approximately $317.5 million. Third, we repurchased 3.9 million shares of our own stock at a weighted average price of $23.36. Lastly, we sold Harborview Plaza in Tampa for $39.5 million and entered into an agreement to sell 111 Congress in Austin. Looking ahead, the number one priority for Cousins Properties Incorporated is to continue to grow occupancy. We have modest lease expirations this year and a robust late-stage leasing pipeline that will support this effort. More broadly, we remain focused on optimizing our portfolio, maintaining flexibility, and creating optionality in our capital allocation decisions. As I mentioned earlier, everything we do is guided by a disciplined approach that prioritizes earnings accretion, balance sheet strength, and continuous improvement in our portfolio quality. We are excited about what lies ahead for Cousins Properties Incorporated. The office market is rebalancing, new construction is virtually nonexistent, and high-quality lifestyle office space is becoming increasingly scarce. Despite ongoing macro concerns and volatility in the public markets, Cousins Properties Incorporated continues to outperform, supported by a strong operating platform, a highly efficient G&A structure, and one of the strongest balance sheets in the office REIT sector. Before turning the call over to Richard, I want to thank our talented Cousins Properties Incorporated team for their commitment to excellence and to serving our customers, the foundation of all of our success. Richard? Richard G. Hickson: Thanks, Colin. Good morning, everyone. Our operations team delivered the strongest start to a calendar year since Cousins Properties Incorporated began its focus as a pure-play owner of trophy Sunbelt office. In the first quarter, our total office portfolio end-of-period leased and weighted average occupancy percentages were 91.8% and 88.9%, respectively. Both metrics increased sequentially and were driven by a combination of organic growth and our recent investment activity. Our portfolio lease percentage increased in nearly every market, with Atlanta, Charlotte, and Austin as the largest contributors in terms of organic growth, while Nashville’s lease percentage increased materially with our recently signed 116,000 square foot new lease with Oracle at Newhof. That project will not be included in our overall portfolio statistics until it is stabilized. The largest market contributors to organic growth in our weighted average occupancy were Atlanta and Austin. Our lease expirations through 2027 now total only 8.3% of contractual rent, which is 320 basis points lower than at the end of 2025. Coming off of a very strong fourth quarter, our leasing activity in the first quarter was record-setting on a number of levels. Our team completed 49 office leases totaling 932,000 square feet during the quarter, with a weighted average lease term of 6.6 years. Our square footage volume was the highest for a first quarter in well over a decade, and was also our highest quarterly level in general since the second quarter 2019. On a square footage basis, 52% of our completed leases this quarter were new and expansion leases, totaling 483,000 square feet. New and expansion leasing volume was essentially in line with our very strong fourth quarter, which we view as a great repeat performance. The team also completed 19 renewals during the first quarter, including a material renewal in Austin that took care of what was previously our largest 2027 expiration. Regarding lease economics, our average net rent this quarter came in at $44.54, approximately 18% higher than the full year 2025. This quarter’s average leasing concessions were essentially in line with the full year 2025. As a result, average net effective rent this quarter came in at a solid $32.28, second only to 2024. Finally, second generation cash rents increased yet again in the first quarter at a strong 15.2%, with cash rents rolling up in every market where we had activity. Beyond our excellent recently completed activity, our overall leasing pipeline remains very healthy, at a level comparable to this time last quarter. In our early March investor presentation, we shared that 1.2 million square feet of activity was either signed first quarter to date or in lease negotiations. Even after completing 932,000 square feet of volume in the first quarter, as of today, we have 1 million square feet of leases either signed second quarter to date or in lease negotiations. This late-stage pipeline has been growing nicely throughout the second quarter. In fact, it has grown by about 200,000 square feet just in the past two weeks and currently includes 450,000 square feet of new and expansion leases. We believe our late-stage pipeline has us very well positioned for continued strong leasing performance in the near term. Turning to our markets, in Atlanta, according to JLL, leasing activity was strong with 2.3 million square feet of leases signed in the first quarter. Sublease availability declined for the eighth consecutive quarter and is now at its lowest level since the start of 2021. Additionally, average asking rents had the largest quarterly increase in two and a half years. We continue to see solid demand in our own portfolio where we signed 192,000 square feet of leases in the first quarter. This included a 105,000 square foot new lease with KPMG at Precinium in Midtown. Subsequent to first quarter end, we also signed a new 46,000 square foot lease with CallRail at 725 Ponce in Midtown. CallRail is a homegrown Atlanta-based technology company that decided to relocate to 725 Ponce from Downtown because of the property’s location, quality, and direct access to the BeltLine. We are excited to welcome them as a customer. Our Atlanta portfolio was 89.3% leased at first quarter end. In Austin, JLL notes that tenant demand increased 30% year over year from about 3.9 million square feet of requirements in 2025 to nearly 5 million square feet today. The market continues to digest speculative development delivered since 02/2023. However, new speculative development is now at its lowest level since 2013. Across our Austin portfolio, we signed an impressive 339,000 square feet of leases in the first quarter, including a 273,000 square foot renewal of a Fortune 10 technology company at Domain 8. This sizable renewal demonstrates a strong commitment to the Austin market and to the value of high-quality office in the core of The Domain. Our Austin portfolio also increased to 95.3% leased as of first quarter end, driven primarily by encouraging new activity in the CBD. In fact, our Austin team has seen a notable increase in overall tenant demand in the CBD since the beginning of the year, and it is focused primarily on availability in the highest-quality office segment. In Charlotte, market-level leasing activity maintained strong momentum in the first quarter with a 74% increase year over year. In our portfolio, we signed 181,000 square feet of leases in the first quarter, 58% of which were new and expansion leases, and the team rolled up cash rents 26%. Activity included a 72,000 square foot new lease with Scout Motors at 550 South, and a 54,000 square foot renewal and 27,000 square foot expansion with a major law firm at our newly purchased 300 South Tryon. Touching on our redevelopments, our 550 South project is very close to completion—within weeks—and with that, we have seen a nice uptick in early-stage leasing interest. Regarding 201 North Tryon, that redevelopment project is well underway and should be substantially complete during 2027. Looking at our recently completed redevelopments—whether it be Buckhead Plaza, the Promenade buildings in Atlanta, or Tempe Gateway and Hayden Ferry in Phoenix—we generally saw a meaningful boost in demand and, importantly, in lease economics once the projects approach completion and prospects could see the finished product. Based on this experience, and also knowing the shortage of available premier space in the market is becoming more acute, we are taking an intentionally patient approach to leasing at the property. In short, we are willing to trade some number of months of timing of occupancy in return for meaningfully better net effective rents and outcomes for shareholders. In Dallas, the market recorded 3.6 million square feet of leasing activity during the first quarter, above first quarter 2025 levels. New supply also remains limited, which is helping to boost top-tier assets and drive rent growth. Flight to quality remains the dominant theme, consistent with all of our markets, with Class A space accounting for 73% of quarterly lease volume. In our 800,000 square foot portfolio, we signed 65,000 square feet of leases, rolling up cash rents over 32%. This past quarter, we also took over the management of Legacy Union One in Plano, and I am pleased to report that subsequent to first quarter end, we signed a 52,000 square foot long-term lease with U.S. Renal Care, representing our first direct lease with an existing subtenant at the property. Our Dallas portfolio was 98.1% leased at the end of the first quarter. Finally, and as I mentioned earlier, our leasing volume this quarter included a 116,000 square foot new lease with Oracle at Newhaft in Nashville. We are very encouraged by this activity, and Kennedy will share more details about Newhof in her remarks. As always, a big thank you to our entire team for the work you put in to make the start of this year an incredibly positive one. We appreciate everything you do. I will now turn the call over to Kennedy. Jane Kennedy Hicks: Thanks, Richard. I will start with updates from our recently completed Newhof project in Nashville. As you may have noticed, we moved this mixed-use project off of our development schedule in our supplement this quarter, given its near-stabilized status. The approximately 400,000 square foot office component is now 84.3% leased, up from 55.3% last quarter, largely driven by the 116,000 square foot new lease with Oracle. The company leased five floors on a long-term basis to accommodate its ongoing rapid growth in Nashville, citing it as the center of Oracle’s cloud and AI growth. We are excited for the company’s employees to take occupancy later this year and add to the vibrancy of this unique project. I am also pleased to share that we are now in lease negotiations for the remaining two full floors of the project, which, if executed, will bring the office component to almost 96% leased. The accelerated interest in Newhof is indicative of the demand we continue to see across our portfolio for best-in-class, differentiated assets. The 542-unit apartment component at Newhawk stabilized this quarter at 92.6% leased. I want to point out that we added Nuhawk Phase Two to the land inventory on page 27 of the supplement. As part of the Phase One development, we completed significant infrastructure including all of the parking for a future office building that is planned to be approximately 300,000 square feet. The costs for this work, including the allocated land value, are now reflected in our total land inventory number, whereas they were previously part of the overall Nuhof project spend. Given the work and investment already completed for this next phase, we believe we will have a significant competitive advantage in terms of both speed and pricing when the time is right to move forward with the development. As a reminder, we own Newhop in a 50/50 joint venture. Turning to our investment activity, we had another busy quarter. In February, as we previously disclosed, we closed on the off-market acquisition of 300 South Tryon in Uptown Charlotte. We acquired the building for $317.5 million, or $497 per square foot, a basis that represents a significant discount to replacement cost. The 638,000 square foot, highly amenitized asset is an excellent strategic fit for our portfolio and representative of the continued advantage we have in the market as a buyer for large, tricky assets. As Richard said in his remarks, we have already executed a renewal and an expansion of a large customer there, enhancing the remaining lease term and validating the mark-to-market in rents that can be achieved at the building. Across the country, the office transactions market has opened up, with sales volumes steadily increasing. Both equity and debt sources are realizing the strengthening fundamentals and are now more constructive around opportunities. Smaller transactions are generating the most depth. Accordingly, we continue to pursue select dispositions within our portfolio that we think line up well with market demand. I will add that we are in the fortunate position that we do not need to sell any of our assets, so we plan to remain disciplined in our approach. In late February, we closed on the previously discussed sale of Harborview Plaza in Westshore, Tampa. The building sold for $39.5 million, or $191 per square foot. The pricing equates to a low 9% cap rate. As I mentioned last quarter, this standalone asset needed capital upgrades and we believed our capital was best focused elsewhere. We remain under contract with a residential developer to sell our 303 Tremont land parcel in South Bend, Charlotte. The contract price for the 2.4 acres is $23.7 million and we expect it to close before the end of the year. We are always evaluating the highest and best use of our land bank and resources and determined that this site is now better suited for residential development as opposed to the office towers that we originally contemplated. We are also now under contract to sell 111 Congress in Austin. This 519,000 square foot asset was built in the late 1980s and is prominently located in Austin’s CBD. Our ownership of this asset dates back to the Parkway transaction in ’20, and similar to Harborview, our view is that this asset is better off in the hands of private capital going forward and we intend to redeploy the proceeds as part of the funding of 300 South Tryon. We were pleased with the process and the positive sentiment towards the asset and the Austin market. We will disclose more details around pricing after closing, which is anticipated to be early in the third quarter. These dispositions are representative of our strategy to continuously monitor our portfolio and identify opportunities to recycle out of non-core assets to fund acquisitions—acquisitions of either assets or our own stock, if that is a better use of proceeds at the time. We only intend to do so in a manner that is neutral or accretive to earnings. We believe that this ongoing portfolio optimization will only enhance the resiliency of our assets and future cash flows. Going forward, we plan to be opportunistic when it comes to both acquisitions and dispositions, as well as other investment opportunities such as development. We have the flexibility to invest in a variety of ways throughout a capital stack, including preferred equity and mezzanine positions, as we have demonstrated in the past. Given the emerging scarcity of available lifestyle office space, we believe that there will be select instances where development is compelling and offers an appropriate return premium to trophy acquisitions. We are currently evaluating opportunities with the goal of breaking ground within the next year. We will provide more insights if and as those transactions materialize. With that, I will turn the call over to Greg. Gregg D. Adzema: Thanks, Kennedy. I will begin my remarks by providing a brief overview of our results, spending a moment on our same property performance, then moving on to our property transactions and capital markets activity, before closing my remarks by updating our 2026 earnings guidance. Overall, as Colin stated upfront, our first quarter results were outstanding. Second generation cash leasing spreads were positive, same property year-over-year cash NOI increased, and leasing velocity was exceptionally strong. Focusing on same property performance for a moment, cash NOI grew 5.5% during the first quarter compared to last year. This was comprised of a 4.5% increase in revenues and a 2.7% increase in expenses. These numbers were positively impacted by a combination of increased occupancy and the expiration of rent abatements, primarily at Promenade Tower, Tempe Gateway, 300 Colorado, and Hayden Ferry. Before moving on, I wanted to take a moment to highlight our recent same property expense performance. Despite lots of talk around accelerating property-level inflation—including taxes, utilities, payroll—we have held same property expenses to an average annual increase of just 1.95% over the past four years. I suspect this sub-2% number is well below most investors’ perception of office expense growth over the past few years. A new and efficient portfolio located in affordable and business-friendly markets is what has allowed us to contain expenses. As Kennedy discussed earlier, we acquired a property in Charlotte during the first quarter. We will fund this acquisition with the sale of three non-core properties. We already sold Harborview during the first quarter, and we are under contract to sell 111 Congress during the third quarter and 303 Tremont land during the fourth quarter. We also received repayment during the first quarter of our $18.2 million mezzanine loan secured by an equity interest in the 110 East property in Charlotte. Moving on to our capital markets activity, it was very busy and very productive. We started by issuing a $500 million seven-year unsecured bond immediately after announcing fourth quarter earnings in early February. It was a great execution, generating a yield to maturity of 5%. With this issuance, we have effectively taken care of all of our 2026 refinancing needs. In total, we have issued four unsecured bonds for $1.9 billion since receiving our investment-grade credit rating in April 2024. As Colin stated upfront, we also repurchased 3.9 million shares at a weighted average price of $23.36 per share during the first quarter. Please note that subsequent to quarter end, the board authorized an increase to our recently launched share repurchase program, taking the authorization from $250 million to $500 million, of which approximately $410 million remains available. We now have both a share repurchase program as well as an ATM program available for use, and we have actively employed both over the past 12 months. In addition to shares we repurchased this past quarter, we issued 2.9 million shares on a forward basis under our ATM program during 2025 at an average price of $30.44 per share. We have not yet settled these forward shares. Finally, on April 1, we closed a new five-year $1.2 billion unsecured credit facility, increasing the prior facility that was scheduled to mature in April 2027 by $200 million. As part of this process, we also amended our existing $400 million and $100 million unsecured term loans, adding two six-month extensions to each. The borrowing spread improved by 15 basis points on both the credit facility and the larger term loan and by 30 basis points on the $100 million term loan. Before closing with guidance, I wanted to briefly provide some context on the leverage. Our goal remains, as it has since 2014, to maintain net debt to EBITDA in the low five-times range. The metric is a bit elevated this quarter at 5.66 times, but it is only a timing issue. Once we complete the asset sales to fund the Charlotte acquisition and we complete the funding of the share repurchase, leverage will return to its historic level. With that, I will close my prepared remarks by updating our 2026 guidance. We currently anticipate full year 2026 FFO between $2.90 and $2.98 per share, with a midpoint of $2.94. This is up from our prior midpoint of $2.92 and represents an increase of approximately 3.5% over the prior year. The increase in FFO guidance is primarily driven by the share repurchases I just discussed as well as better-than-forecast execution of the debt financings, partially offset by the elimination of a prior mid-year SOFR cut assumption. We now have no SOFR cut assumptions during 2026 in our guidance. Our updated guidance assumes the 3.9 million share repurchase that we executed in the first quarter is funded with proceeds from the settlements of the 2.9 million shares we previously issued on a forward basis. In reality, we may ultimately fund some or all of this share repurchase with non-core asset sales. As Kennedy stated earlier, we are constantly monitoring the sales market and exploring additional sales candidates. However, for modeling purposes, we have assumed the settlements of all outstanding forward shares during the second quarter, and this is what is in our guidance. As I mentioned earlier, our guidance also assumes the 300 South Tryon acquisition is funded with proceeds from Harborview, 111 Congress, and 303 Tremont. Finally, our guidance does not include any additional property acquisitions, dispositions, or development starts in 2026. If any of these take place, we will update our guidance accordingly. Bottom line, our first quarter results are among the best we have reported in recent memory. Important operating metrics that we track were outstanding, and we raised full-year guidance. Office fundamentals in the Sunbelt remain strong, and we continue to deploy capital into compelling and accretive opportunities. We look forward to reporting on our progress in the coming quarters. I will now turn the call back over to the operator. Operator: We will now open the call for questions. If you wish to ask a question, press 1 on your touch-tone phone. If you would like to withdraw from the queue, press 2. The first question comes from the line of Blaine Heck from Wells Fargo. Blaine Matthew Heck: Thanks. Good morning. Colin, you commented on the leasing pipeline in the earnings release and again here. Can you, and/or maybe Richard, give any more detail on the size of the pipeline today versus maybe a year or 18 months ago and versus your historical average? And maybe give a little bit more color on any trends you are seeing with respect to tenant size or industry? Are you seeing any specific segments or markets strengthening or weakening? Richard G. Hickson: Sure, Blaine. This is Richard. I will take that and then Colin can add on if he would like. For starters, you specifically asked the size of the pipeline overall today. Certainly, the late stage is what I would focus on more versus, say, a year ago, and it is about 2x the size of this time last year. That is the late-stage pipeline. It is about the same size right now as this time last quarter, but year over year it has grown significantly. Just some additional detail on the overall pipeline: I would note that the number of prospects in the pipeline overall has increased quite a bit—on the order of about 15% since last quarter—so that is encouraging to see. The net size, again, is comparable to last quarter. The mix of industries is roughly the same. I would say technology is slightly ahead of financial services at this point, but they are both neck and neck and very big drivers of our activity. Legal continues to be a significant component of our industry mix, with professional services coming in last and then a good mix beyond that. We have seen particularly strong growth— I mentioned we had about 200,000 square feet that built into the late-stage pipeline here in the last couple of weeks. It has been growing nicely throughout the quarter. We have seen the most increase in activity migrating through the pipeline in Atlanta, especially in Buckhead and in Midtown. Phoenix has had a nice bump, Nashville certainly is contributing as well—as Kennedy mentioned, we are going to leases with two more floors there—and some good activity in Austin. So it is pretty broad-based. Colin Connolly: And, Blaine, it is Colin. I would just add too, as it relates to the 900-plus thousand square feet we leased this quarter and this kind of million-plus square foot pipeline. One piece of commentary that I have seen is that the Sunbelt is largely back-office and support function, and I would characterize just about all of the leasing activity that we are doing as very much front-of-house, revenue-producing employees for very dynamic companies, whether it be in technology, financial services, investment firms—you name it—particularly also AI companies beginning to infiltrate the Sunbelt. So I can very much push back on that narrative. While there are certainly suburban properties in Atlanta with back-office employees, the same holds true with back-office employees in suburban New York. The quality of the pipeline for the portfolio that we have in our lifestyle properties is very much attracting very well-educated, knowledge, revenue-producing employees. Blaine Matthew Heck: Great. That is really helpful commentary. And you all mentioned that asking rents had grown the most this quarter in 2.5 years. I was hoping you could quantify that increase. And also, can you comment on what you think is a reasonable forecast or range for net effective rent growth in your segment—Class A, A+, or trophy—within your markets, and whether there are any standout markets on the positive end of that metric or any that could be more muted? Richard G. Hickson: Sure. This is Richard again. In terms of rent growth, we have a number of different examples we can give on really impressive rent growth across markets. In Atlanta, for instance, at Buckhead Plaza, we have been able to grow rents 20% in the last year or so. In Dallas, Uptown—it has really been breathtaking how much rents have grown, particularly in Uptown. I think the general number is about 40% in growth since 2021, and I think new product and top-of-market asking rents right now are $80 net. So extremely impressive rent growth there. If you look at Charlotte, all the new products that have leased up in the last year or so in the market as they were taking down large blocks, we pegged that rent growth during that process at roughly 10% during that time. In Phoenix, lastly, where we have done our redevelopment of Hayden Ferry, which is now complete, we have grown rents about 20% since 2024. So those are just some examples of some really bright spots where we have been able to push rent growth. It is really just a dynamic market where, as Colin has mentioned, supply is shut down. We are not going to see any new supply really added to virtually any of our markets that is not already leased, and demand is still allowing us to push net effective rents. In terms of how much those will grow, we certainly posted very impressive net effective rent growth this quarter, and it was broad-based. The mix of where we did our leasing this quarter was very favorable in a lot of our highest rent markets. We feel good. It is always hard to pinpoint exactly how much we are going to grow net effective rents in any given quarter versus another, but over time we are confident that we are going to continue to grow them in a manner that we have done so here in the recent past. Blaine Matthew Heck: Great. Thanks. And then just lastly, can you talk a little bit more about the optionality you have for funding the share repurchases? I believe you have issued the forward shares yet. So can you talk about the strategic and economic merits for stock issuance versus additional sales? Are there certain cap rates or other factors that would make you lean towards sales instead of the forward equity? Gregg D. Adzema: Hey, Blaine. Good morning. It is Greg. We have issued the forward shares; we just have not settled them. I just want to make sure everybody understands that. And we have the flexibility right now to settle those shares through year-end 2026, but that can be extended with the banks that helped us issue those shares. So we have ultimate flexibility there. In terms of modeling, you need your models to put in some type of assumption, and so this is the most conservative and cleanest assumption, and that is what we provided. Is that what we actually do at the end of the day? Maybe, maybe not. But as Kennedy talked about in her opening remarks, we are always in the market, exploring the market and liquidity and pricing for our non-core assets. We do not have a lot of non-core assets left, but we do have a handful, and so we are out there exploring. I think how we ultimately pay for the $90 million share repurchase that we executed in the first quarter will depend upon the clarity that we get over the next month or two or three on some of these efforts that Kennedy is out there doing with the non-core assets. We are in a sources and uses business, and ultimately, at the end of the day, we are trying to drive accretion on a leverage-neutral basis. I think one of our secret sauces here at Cousins Properties Incorporated is that we have been very nimble and in a position to be nimble with this balance sheet that we have—to figure out a way to maximize shareholder value but maintain the balance sheet. I think we have done a good job of that in the last few years, and I think we will continue to do so. This transaction—the share repurchase and the funding of it—will just be one more example as we process that strategy. Blaine Matthew Heck: Great. Thank you all, and congrats on a great quarter. Colin Connolly: Thanks, Blaine. Operator: Your next question comes from the line of Analyst from Evercore. Please go ahead. Analyst: Perfect. Thanks for taking the question. In light of the really good leasing volumes, I just wanted to ask about your expectations for second generation CapEx spending going forward. I know you do not necessarily guide to FAD, but I am just trying to understand and square FFO versus FAD growth in the near-term future. Gregg D. Adzema: It is Greg again. Second gen CapEx, as you know if you have looked at our earnings supplement over the last few years, can be super lumpy. It just depends upon the leasing that we do and then, honestly, when the tenants that we lease to come to us and want their TI dollars back. FAD is a cash-basis metric, and so we base it upon when the actual cash goes out the door. Some tenants can ask for it very quickly; some tenants can wait a while before they ask for the money. So it is really hard for us to predict, but it is loosely tied to leasing at the end of the day. You have seen it elevated a little bit over the last few quarters because we have been leasing so much space, and so you could see it for calendar year 2026. Again, I do not want to comment on quarterly numbers because they are very difficult to predict with any accuracy. But for the full year, I think you could see second gen CapEx be a little higher this year than it was the last couple of years, just because we are leasing so much space. But once we stabilize the portfolio in the midterm, as Colin has talked about, you will see second gen CapEx decline to its more historic levels. Analyst: Got it. That is appreciated. I know that you previously talked about your year-end occupancy target for 2026. Now being a quarter in and obviously with leasing being very strong and the pipeline being very large, how do you feel about the occupancy trends by year-end 2026 and how bullish it makes you going forward into 2027? Richard G. Hickson: Sure. This is Richard. When you step back and look at all the building blocks—which we typically do not give at that level of granularity for occupancy guidance—but when we look at all of the building blocks, we are seeing a relatively modest amount of new leasing that we need to do incrementally to what we already have in the pipeline or have already completed to get to a year-end 90% number, which is our goal. We are confident that that modest amount is achievable and still feel good about our expectations for getting to 90%. Analyst: Okay. Thank you so much. I appreciate it. Operator: Your next question comes from the line of John Kim from BMO Capital Markets. Please go ahead. John P. Kim: Thank you. So you have a million square foot pipeline already signed in the second quarter, and that is versus roughly 800,000 square feet expiring this year. You are also selling 111 Congress, which is a little bit under-leased versus your portfolio. So I am just wondering, where do you think occupancy or lease rate could go to either by year-end or maybe over the next 12 months? Colin Connolly: Hey, John. It is Colin. As Richard just outlined, the goal for the end of the year—which we think is achievable—is 90%. And I think over the medium term, our intention is to drive this portfolio back to historical stabilized levels, which is absolutely in the low to mid-90%. That will take a little bit longer to get to. Just keep in mind while we are leasing a lot of space— we leased a lot of space in the first quarter, and we think we are going to lease a lot of space in the second quarter—there is typically a lead time, in many cases of a year plus, from signing of a lease to actual occupancy. So our ability to incrementally keep driving occupancy up will be dependent upon the timing of the need of our customers. But the underlying demand is there, and it is robust, and it is being driven by, certainly, the return to office, which might be more temporary, but more longer term, this flight to quality is insatiable, and the migration to the Sunbelt is only accelerating. John P. Kim: And the large renewal you had in Austin—it sounds like that was with Amazon just based on your commentary—but I am wondering if you could share any insights that you have on your largest tenant, given they talked about reducing a lot of desks, almost 14 million square feet of office space globally. Is there anything we should read in the renewal term? It was a little bit lower at 4.7 years versus the new leases signed this quarter. Colin Connolly: Hey, John. It is Colin. I cannot be overly specific due to certain confidentiality provisions, but you can go look at our supplement, and it seems like you are on a pretty good track there. A couple of thoughts. I shared this last quarter—some commentary specifically around Amazon, which has gotten a lot of publicity for announcing some small reduction in their workforce of, I think, 40,000 employees—but you have to put that in perspective that they grew their headcount over the past five years [inaudible].