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Operator: Good morning, and thank you for standing by. Welcome to Integer Holdings Corporation's First Quarter 2026 Earnings Call. My name is Kate, and I will be your conference operator today. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the conference over to Kristen Stewart, Director of Investor Relations. Please go ahead. Kristen Stewart: Good morning, everyone. Thank you for joining us, and welcome to Integer's First Quarter 2026 Earnings Conference Call. With me today are Payman Khales, President and Chief Executive Officer; and Diron Smith, Executive Vice President and Chief Financial Officer. This morning, we issued a press release announcing our first quarter 2026 financial results. We have posted a presentation to accompany today's call on the Investor Relations page on our website at integer.net. On today's call, Payman will provide opening comments. Diron will then review our adjusted financial results for the first quarter of 2026 and our financial outlook. Payman will provide his closing remarks, and then we'll open the line for your questions. As a reminder, the results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For reconciliations of non-GAAP financial measures, please refer to the appendix of today's presentation, today's earnings press release and the trending schedules, which are available on our website at integer.net. Please note that today's presentation includes forward-looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our actual results to differ materially. With that, I will turn the call over to Payman. Payman Khales: Thank you, Kristen, and thank you to everyone for joining the call today. This morning, we announced our first quarter financial results, which were in line with our February outlook. Sales were up 0.5% on a reported basis versus last year. As expected, our first quarter sales performance primarily reflected the decline associated with the 3 new products, which we first discussed last October as well as the exit of our portable medical business. On an organic basis, sales grew 1.3% versus the prior year. Our adjusted operating income declined 230 basis points, driven primarily by lower fixed cost absorption. This was at the midpoint of our prior outlook commentary. Adjusted earnings per share totaled $1.20, benefiting from lower interest expense, offset by the decline in adjusted operating income. We also announced this morning that we were updating our 2026 outlook ranges to reflect the recent customer forecast updates and further risk adjustments we have made. We now expect reported sales to be in the range of down 1% to 3% compared to the prior year. On an organic basis, we expect sales to be flat to down 1%. We continue to expect a 3% to 4% headwind from the 3 new products. The outlook for these 3 products has not changed. Customer purchase orders and forecast updates are tracking in line with this outlook. We now expect organic sales, excluding the 3 new products, to grow approximately 3% to 4%. This is compared to our prior outlook of 4% to 6% and driven by recent customer forecast updates and further risk adjustments across our portfolio. As a reminder, we received purchase orders from our customers, and those typically provide us with strong visibility for the next 1 to 2 quarters. In addition, we continuously communicate with our customers and most of them regularly share rolling 12-month forecast. Our customers adjust their forecast higher or lower based on their manufacturing plans. Therefore, we typically risk adjust the forecast with a balanced view of the risk and opportunities. The recent customer forecast updates primarily affect the second half outlook for a few products in electrophysiology. Given our recent experience of reductions outside the 3 new products, we further risk adjusted our outlook across our portfolio to minimize the risk of additional forecast erosion. With regards to electrophysiology, over the last couple of years, this market has been very dynamic with the rapid adoption of Pulsed Field Ablation or PFA technologies, which added complexity to forecasting. Understandably, OEMs wanted to ensure sufficient availability of various products used in EP procedures to be prepared for a wide range of potential adoption scenarios. This contributed to increased variability in forecast and ordering patterns. We appear to be entering a period of normalization in the market. We believe there is a clear view of the market dynamics and needs for various EP products. As a result, certain customers have adjusted their forecast for a few products. We expect the impact of these updates to be short term, primarily impacting the second half of 2026. These reductions are not due to in-sourcing or a shift to alternative suppliers. We continue to manufacture these products for our customers. The electrophysiology market continues to be an attractive high-growth market opportunity for us, and we believe we are well positioned. We have strong relationships with the leading players in the market, a broad product portfolio and a strong new product pipeline. Our focus and investments have enabled us to significantly grow our EP business over the past several years. While we are seeing some pressure in 2026, we expect our EP business to contribute to our above-market growth in 2027 and to our growth profile over the long term. And finally, I want to emphasize that we do not take the outlook change lightly. Our outlook reflects additional cost reduction actions underway to mitigate the impact on our bottom line results that do not compromise our ability to service our customers, deliver on our 2027 sales outlook commitments or affect our longer-term growth potential. I will now turn the call over to Diron to review the first quarter results and 2026 outlook in greater detail. Diron Smith: Thank you, Payman. Good morning, everyone, and thank you again for joining today's call. Our first quarter financial results were in line with the outlook commentary we shared in February. First quarter sales totaled $440 million, up 0.5% on a reported basis and up 1.3% on an organic basis. As a reminder, organic sales growth removes the impact of acquisitions, the strategic exit of the portable medical market and foreign currency fluctuations. We delivered $85 million of adjusted EBITDA, down $7 million compared to the prior year or a decrease of 7%. Adjusted operating income declined 14% versus last year, and our adjusted operating margin contracted 230 basis points to 13.9%, both in line with our February outlook. Adjusted net income was $41 million, down 10% year-over-year. Adjusted earnings per share totaled $1.20, down 8% versus the same period last year. Turning to our sales performance by product line. Cardio & Vascular sales increased 1% to $262 million in the first quarter of 2026, which primarily reflected lower electrophysiology sales from the 2 new products we have previously discussed. This was consistent with our expectations. On a trailing 4-quarter basis, C&V sales increased 13% to $1.110 billion, driven by growth in electrophysiology, contribution from acquisitions and strong demand in Neurovascular. Cardiac Rhythm Management Neuromodulation sales increased 5% to $168 million in the first quarter 2026. Cardiac Rhythm Management growth was partially offset by the previously communicated headwind in neuromodulation. This was consistent with our expectations. On a trailing 4-quarter basis, CRM&N sales increased 2% to $677 million. Cardiac Rhythm Management growth was partially offset by the planned decline related to an early spinal cord stimulation customer. Product line detail for other markets is included in the appendix of the presentation, which can be found on our website at integer.net. I'd now like to provide more color on the first quarter's profit performance compared to the prior year. In the first quarter 2026, adjusted net income decreased by $5 million and adjusted earnings per share decreased by $0.11. Consistent with our expectations, the primary driver of our operational decline was lower fixed cost absorption, which affected our gross margin performance. We remain focused on effective cost management, reducing variable costs given the lower sales level and being disciplined in our overhead and operating expense management. Operating expenses were flat versus the prior year, including a decline in selling, general, and administrative expenses and a slight increase in research, development and engineering expenses due to the timing of milestone achievements for customer-funded new product development. As a reminder, the first quarter of the year typically has fewer milestones as compared to later in the year. Interest expense was $4 million lower than the prior year, which contributed $0.10 per share, reflecting the savings from the convertible debt offering completed in March 2025. Our adjusted effective tax rate was 19% versus 17.4% in the first quarter of 2025. We continue to expect our full year tax rate to be in the range of 16% to 18%. The adjusted weighted average shares outstanding in the quarter decreased by 2%, reflecting our share repurchase activity. In the fourth quarter 2025, we completed a $50 million share repurchase of approximately 700,000 shares. And in the first quarter, we completed an additional $50 million share repurchase of approximately 600,000 shares. The lower weighted average share count contributed $0.02 to adjusted earnings per share. In the first quarter 2026, we generated $25 million of cash flow from operations, down $6 million from the prior year, primarily reflecting lower adjusted net income and reduced accounts receivable factoring. CapEx spend was $24 million, which resulted in free cash flow of $1 million. At the end of the first quarter 2026, net total debt was $1.264 billion, an increase of $74 million, primarily driven by the $50 million share repurchase executed in the quarter. Our net total debt leverage at the end of the first quarter was 3.2x trailing 4-quarter adjusted EBITDA within our strategic target range of 2.5 to 3.5x. As Payman noted, we are updating our 2026 financial outlook ranges to reflect recent customer forecast updates and further risk adjustments across our portfolio. For the full year 2026, we now expect reported sales to be in the range of $1.805 billion to $1.835 billion. On a year-over-year basis, we now expect sales to be down 1% to 3% on a reported basis and flat to down 1% on an organic basis. We have also adjusted our profitability outlook ranges. Given the lower sales outlook, we anticipate further margin pressure and are taking additional near-term cost actions to mitigate the profit impact, which are contemplated in our revised outlook. We now expect our adjusted EBITDA to be in the range of $375 million to $399 million, down 1% to 7% versus the prior year. We now expect adjusted operating income to be in the range of $285 million to $305 million, down 5% to 11% and adjusted net income to be in the range between $200 million and $220 million, down 3% to 11% versus the prior year. Lastly, we now expect adjusted earnings per share of between $5.83 and $6.40, flat to down 9% versus the prior year. Taking a closer look at our sales outlook. As I mentioned, we expect sales to be down 1% to 3% on a reported basis and flat to down 1% on an organic basis. As we previously shared, our organic outlook is being impacted by lower sales of the 3 new products. We continue to expect the headwind to be approximately 3% to 4% to our 2026 reported growth. We now expect organic growth, excluding the 3 new products, to be approximately 3% to 4%. This compares to our prior expectation of 4% to 6%, reflecting the impact of recent customer forecast changes and further risk adjustments we have incorporated across the portfolio. We expect an inorganic decline of approximately 1%, which reflects the now completed Portable Medical exit slightly offset by contribution from acquisitions and foreign exchange. We now expect C&V sales to be flat to down low single digits compared to the prior year. This compares to the prior outlook of flat to up low single-digit growth and is due to the recent customer forecast updates that primarily affect our second half outlook for electrophysiology. Regarding our CRM&N outlook, we continue to expect sales to be flat to up low single digits. This growth rate includes the previously communicated headwind from one new neuromodulation product, which is unchanged. In other markets, we now expect a decline of approximately $34 million to $36 million versus our prior range of $30 million to $35 million. The year-over-year decline is primarily due to the Portable Medical exit. As a reminder, other markets sales are primarily related to a manufacturing service agreement with the purchaser of our former Advanced Surgical and Orthopedics business and are outside our targeted markets. In the second quarter, we expect sales to increase sequentially versus the first quarter, resulting in a first half reported sales decline of approximately 2% to 3%, which is in line with our prior outlook. The first half decline in reported sales primarily reflects the significant reduction in sales related to the 3 new products as well as the exit of the Portable Medical business. We continue to expect nominal sales to ramp sequentially throughout 2026. We expect organic sales to return to market growth in the fourth quarter normalized for fiscal calendar production days. As we have previously shared, we have fewer production days in our fourth quarter as compared to the prior year, which represents an approximately 5% headwind to our sales growth rate. We expect our second quarter adjusted operating income margin to improve 80 to 140 basis points sequentially versus the first quarter, and we expect operating income margins to improve sequentially throughout 2026. Turning to our cash flow and debt outlook. We now expect cash flow from operations to be between $185 million to $205 million, a $15 million decrease at the midpoint of the outlook, consistent with the change in our profitability outlook. We continue to expect capital expenditures of between $95 million and $105 million or approximately 5% to 6% of sales. As a result, we expect to generate free cash flow between $85 million and $105 million. We expect our 2026 year-end net total debt to be between $1.185 billion and $1.205 billion. We expect our leverage ratio to be within the targeted range of 2.5 to 3.5x trailing 4-quarter adjusted EBITDA in 2026. I'll now turn it back to Payman for his closing remarks. Payman Khales: Thank you, Diron. In summary, we continue to view 2026 as a transition year. We expect the product headwinds we've discussed to be short term in duration. The long-term fundamentals of our markets and our business remain strong. The medical device markets we serve continue to present an attractive opportunity, and we are focused on high-growth markets such as electrophysiology, structural heart, neurovascular and neuromodulation. We are a trusted partner to the world's top medical device companies and emerging innovators. Our strategy includes engaging with our customers early in the design and development of new products, helping them to accelerate their timeline to market by solving complex engineering challenges and designing for scalable, high-quality manufacturing. We have significantly increased product development sales in recent years, and this has yielded a robust and diverse pipeline. This pipeline, when combined with our underlying business, supports our return to organic sales growth 200 basis points above the market in 2027. Before we transition to Q&A, I would like to address this morning's separate announcement that our Board has initiated a strategic review. Our Board is highly confident in our strategy and our long-term objectives to grow sales above market, expand margins and remain disciplined within a targeted leverage range. At the same time, the Board and the management team continuously evaluate opportunities to enhance shareholder value. As a respected and well-positioned CDMO serving the medical device industry, interest in Integer has historically been strong and has intensified in recent months. Given this recent heightened interest, the Board and the management team believe now is the right time to consider all opportunities to maximize shareholder value, which may include continuing to execute our stand-alone strategy. As is typical with this type of process, there is no deadline or definitive timeline set for the completion of the strategic review, and there is no assurance that the review will result in any transaction or other outcome. I want to emphasize that this review does not change our overall focus, which is being a strategic partner of choice to our customers and advancing their goals through our industry-leading engineering and manufacturing and with a relentless commitment to quality, service and innovation, nor does this change our focus on delivering on our financial commitments. We will now turn the call over to our moderator for the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from Matthew O'Brien with Piper Sandler. Matthew O'Brien: I guess, Payman, for the first one, the second cut on the EP side here announced this morning, can you just talk a little bit more about that? Is that more a function of a market slowdown or inventory work down? Or are there additional products that are not ramping as fast as expected now and the next new headwinds that you're seeing within EP? Payman Khales: Yes. Matt, thanks for the question. So let me expand on that a little bit. So let me clarify first that the adjustments that we're talking about are not related to the 2 products that we had talked about previously. The forecast, the purchase orders that we're tracking and the outlook for those products has remained unchanged. We also do not believe that there is an impact of the market. The market is normalizing. It is slowing down. If you listen to the leaders in the industry and through our own research, we expect the EP market to be in the range of mid-teens to high teens in 2026. This is slower than what it was last year, which was north of 20%, but it is still a very strong market, and we expect it to continue to be very strong in the future in the double digits in the coming years. The products that we're talking about are primarily used in electrophysiology procedures independent of the technology used, whether it's PFA, whether it's RF or other technologies. As we've mentioned before, we participate across the procedures in EP. And these are some of the products that we believe that as the market is normalizing, as our customers have a clear view of what their needs are and they're adjusting their production plans, they have adjusted their forecast on us, and that's what this reflects. As I highlighted in the prepared remarks, this is not a loss of contract in-sourcing or any other change in the supply arrangement, and we believe the impact to be temporary. Matthew O'Brien: Okay. Appreciate that. And just to put a finer point on that, you're saying basically this is not a new PFA catheter that's being impacted. It's maybe some of the accessory products like Crosser or mapping catheter or something along those lines that are kind of normalizing? Is that the right way to frame it? Payman Khales: Yes. I mean the way we had previously discussed it, we had not specified the 2 products, what they were. We had just talked about 2 PFA products. That outlook has not changed. These are products that are used -- primarily products that are used in ablation procedures. As you pointed out, there are different types of products that are used in the procedure. And that's the primary source of the impact. Operator: Our next question comes from Brett Fishbin with KeyBanc Capital Markets. Brett Fishbin: I was hoping you could expand a little bit more on the announcement of the strategic review. More specifically, just interested kind of what it was that led you to make this decision? And then how you're thinking about the tangible next steps regarding some of the outcomes that you mentioned in the press release? Payman Khales: Yes, of course. So we -- I would like to start with our Board and management continue to believe and have confidence in our strategy. We've demonstrated that our strategy is delivering results. We have built a very strong pipeline, a very strong set of capabilities that our customers depend on for their success. And we believe that we have an excellent strategy. And as a result, look, over the years, there has always been interest in Integer, and our Board believes that we can deliver the best shareholder value by continuing our stand-alone strategy. But in recent months, there has been a heightened level of interest in Integer. And our Board, of course, wants to make sure that we explore all options to see what can deliver the most value for shareholders, which is the reason why we're announcing this process now. In terms of the next steps, obviously, we will go through a process, and we will see what the outcome of that process is. As we mentioned, there is no guaranteed outcome with this, and we don't necessarily have a specific time line. Brett Fishbin: All right. Great. Then I just wanted to ask a little bit more about the long-term dynamic. I note that you reiterated the expectation that you expect to return to above-market growth in 2027. Just to put a finer point on that, are you still defining your market as 4% to 6%, even though the 2026 guide assumes 3% to 4%, excluding the new headwinds? And then kind of what gives you the confidence or visibility to reiterate that 2027 directional guidance, just given some of the changes in the last few quarters? Payman Khales: Yes, no problem. Yes, our markets continue to be 4% to 6%. And the reason that we are seeing 3% to 4% this year is because of some of the headwinds that we believe are temporary for the reasons that I mentioned that are primarily in the EP space. So in terms of our growth, our return to growth above market in 2027, as we mentioned, we expect to get back to market growth in the fourth quarter of this year. That will be our exit year into 2027, which is what we expect. And we -- our product -- new product launch schedules, that continues to be very strong. We've talked about that we expect to have new product launches in all of our growth markets in the second half of 2026 as well as 2027. So when you combine the underlying market growth, which we expect to continue to be at 4% to 6% with the addition of NPI, we have confidence that we can get to 200 basis points over market. So I do want to highlight this. The EP market continues to be a very strong market for us. In fact, in the first quarter, our EP business, excluding the 2 new products, had very strong performance. We believe that our performance in EP in 1Q was above market. When you exclude the 2 new products, which, of course, have had an impact. And we have a strong pipeline in electrophysiology, and we believe that this portfolio will continue to give us tailwinds and not only in 2027, but also beyond. Operator: Our next question comes from Richard Newitter with Truist. Richard Newitter: I have 2. Just maybe the first one, I think you gave some explanation for the forecast reduction. It was clearly some discrete EP areas that were not linked to the prior ones that led to the original reduction. So that's one. And then you also mentioned that you took the opportunity to further risk adjust some other areas that felt like as just in case. if you could elaborate on that, what is a discrete forecast reduction in your updated guidance versus what is an adjusted risk adjustment factor and for what? And is it because you think there's something there for that placeholder, if you will? Or is it just to be conservative? And then I have a follow-up. Payman Khales: Yes. Rich, the -- let me confirm the first part of your question that, yes, as you pointed out, the EP reduction, which was the primary source of the forecast adjustment was not related to the 2 other products that we had discussed. The risk adjustment is because we are seeing, as we mentioned, some variability within the EP market after a very dynamic period over the past couple of years and the normalization of the market, we are seeing some forecast adjustments that our customers have a better handle of the market and their needs. We wanted to be prudent. Our guidance philosophy is still to be to take a balanced view, but we have biased it more towards risk adjustment just to minimize the risk of further forecast adjustments as we navigate this period of variability. Richard Newitter: Okay. So just to follow up on that before I get to my second question, you're saying that the further risk adjustment above and beyond the forecast reduction you received was related to the EP areas that you're highlighting right now. Is that right? Payman Khales: It's across the portfolio. And I think part of the question that you had asked, Rich, was whether we have visibility to further potential reduction and erosion. The answer is no. We wanted to make sure that we further risk adjust as we see some variability. That is across the portfolio, not only in EP, just to minimize potential further reduction. Operator: Our next question comes from Nathan Treybeck with Wells Fargo. Nathan Treybeck: Can you share if your wallet share in EP is expanding? Is it stable? Is it declining? And then is your 2027 algorithm dependent on EP reaccelerating? And if so, what would drive that? Payman Khales: Nathan, we have a very strong portfolio in electrophysiology. In fact, that portfolio has expanded substantially in recent years. And that is because of the technologies that we've developed, the participation that we have in the EP portfolio with the major players in the industry. So that is a very strong portfolio for us. In terms of whether our share of wallet increasing or decreasing, we have a very strong portfolio. We believe that we are and expect to be a leader in the CDMO space in EP. We -- as I mentioned earlier, we believe that these headwinds are short term in nature. There are adjustments to a period of variability. And we expect contribution of the EP market -- our EP portfolio to our above-market performance in 2027 and beyond. I do want to highlight that the 2 products that we had previously discussed, we are not counting on any contribution of those 2 products for our growth in 2027. But we believe that our EP portfolio in general as a whole will be a contributor to our growth above market in 2027 and beyond. Nathan Treybeck: Great. And to your response to Rich's question, it seems like you risk-adjusted other parts of the C&V portfolio outside of EP. Can you just talk about the trends you're seeing in those markets? Is there anything specific you would call out? Payman Khales: Yes, nothing that I would call out specifically, Nathan. This is in recognition that we've gone this period of somewhat volatility. Obviously, in the third quarter, we had an event with 3 products that had an adoption challenge. These products that we're talking about is more, we believe, an adjustment to the normalization of the market. We wanted to make sure that we were prudent that we were more measured and further risk-adjusted our portfolio still within a balanced view to minimize further risk of erosion in the event as a normalization continues, there could be some other adjustments. Now I do want to continue to highlight that we believe that our markets continue to grow at 4% to 6%. We expect to get to 4% to 6% in the fourth quarter. And with the product launches that we have and the exit rate, we expect to get back to 200 basis points in 2027. Operator: Our next question comes from Andrew Cooper with Raymond James. Andrew Cooper: Maybe first, you talked about sort of a broader breadth of kind of challenged areas right now within EP. And yet you still talk about the end markets and the EP markets, in particular, still growing like you thought. So what's driving this mismatch? What gives you confidence that this is short term and not something that's a little bit more structural? And kind of how do you think about that at a higher level? Payman Khales: Sure. Andrew, the -- maybe to preface my answer, I would just highlight the fact that we are in the supply chain of our customers. So what that means is that what we sell to our customers are things that likely go into their production sometime 1 to 3 quarters ahead. So there's a little bit of a difference in terms of what our customers sell into market and how they forecast on us. And there's a little bit of a variability there. Our customers sell products on a regular basis, and they adjust, if you will, their forecast on us based on what they see happening in their business, how much product they have on hand, what is their production plans, et cetera, et cetera. So if there is a little bit of a variability, that is normal in normal times, I would call it. This is the reason why we typically point to a rolling 4-quarter look for our business because it takes away, it smooths out some of those potential lumpiness as customers adjust their production needs and then put it on us. This adjustment, we believe, is a little bit unprecedented because of the very rapid change in the EP market caused by the disruption of PFA. Our customers have tried to make sure over the past couple of years, understandably, that they have all products on hand to make sure that they can maximize their opportunities depending on what their customers and physicians use. Well, now the market is normalizing. The growth rates have normalized a little bit. The market itself has stabilized. So the visibility has become clear. And we believe this to be an adjustment to the order patterns, which we believe is onetime and short term. We don't expect it to be something that will continue in the long term. Andrew Cooper: Okay. So maybe just a quick follow-up on that and then tag on a second question. Sounds like maybe you're pointing to some of this might be inventory management at the customer level as they do sort of mature into that more stable environment. Is that a fair takeaway from what you just said? And then secondly, maybe for you and Diron as well. But last quarter, you talked about continuing to spend, continuing your plans sort of regardless of some of these near-term headwinds. Has any of that changed at all? How do you think about the spend and the development work, et cetera, that you have in mind moving forward? And what would have to happen to change that if the view hasn't changed yet? Payman Khales: Yes, sure. So let me -- on your first part of the question, whether there's inventory, yes, there's some. So I think that's likely some of that. I think maybe -- let me start the answer to your second question, and then I'll ask Diron to chime in a little bit. We have a strong pipeline. We continue to invest in our business. We continue to expect to get back to strong performance in 2027 and beyond. So we want to make sure that although we are very -- in a very disciplined fashion, managing our costs that we're not making large changes, if you will, in that to protect our future growth. But I'm going to have Diron chime in and add some more to that. Diron Smith: Yes. So Andrew, thank you for the follow-up call -- a follow-up question. Yes. As Payman mentioned, we're continuing to maintain our disciplined cost management. We shared previously that we were not going to make any structural changes to the business given the lower sales volume and the return to market growth and the 200 basis points above growth in 2027. I would say, philosophically, that is still aligned. But we are looking to be more aggressive on the cost actions and the disciplined cost management but still ensuring that we're not going to damage the ability to return to market growth and the above market. So we are looking to be more aggressive, and we have included that into our forecast and outlook that we have shared. Operator: Our next question comes from Travis Steed with Bank of America. Travis Steed: I wanted to go back on the EP market comments. You were talking about the market was north of 20%, now it's kind of mid- to high teens. But I think a lot of the slowdown has been kind of revenue per procedure, at least that's what we thought at least and would think you're more exposed to volume. And I don't know, like are customers expecting volume in the EP market to slow more from here? I'm curious what kind of volume growth does your 2027 guide assume at this point? Payman Khales: Travis, you are correct that in the past couple of years, a lot of the growth in the market has been because of the price as PFA products have kind of taken over a little bit at a higher price in the market at the OEM level, and it's a little bit less for us. You are correct there that price has been a big factor in the market growth. And the 15% to, I would say, the mid- to high teens that I talked about that our customers talk about. But obviously, that also takes into account their ASPs and their average sale prices. So there is an element of price there. Specific to your question about procedure volumes, yes, procedure volumes are a little less than that, but we still see them as being very strong. Somewhere in the -- close to the high single digits to low double digits, 10% to 12% is kind of what we see procedure volumes. So we consider that to be strong, and we expect it to continue to be strong. Travis Steed: And kind of the follow-up question on inflation kind of coming back to investors' minds again after 2022. I'm just curious if you could remind us how you guys have managed inflation, how you expect to manage inflation, expecting the impact from here, kind of what your -- what kind of things you're exposed to that we can watch from a macro perspective? Payman Khales: Sure. Some of the things that I can point to, obviously, the conflict in the Middle East is causing some inflation across the board. I mean I will start maybe with one of the obvious areas, which is fuel prices. It's relatively limited for us, Travis, in terms of impact. The majority of our customers, because they have strong logistics in place, they pick up product from our manufacturing facilities. So our exposure to fuel prices, if you will, is limited. We are very closely watching our supply chain for 2 things, obviously, for inflation, as you pointed out, but also for any potential disruptions. We believe that the potential disruption is minimal, and we don't see a risk of disruption at this point. And the inflation that we see is not something that is material for our outlook and that we believe it is manageable. So it is not a source of concern for us at this time. Operator: Our next question comes from Joanne Wuensch with Citi. Joanne Wuensch: Looks like a lot of attention has been paid to EP for good reason. But I'm curious what you're seeing in the CRM and neuromod side of the business and how you're seeing that progress? Payman Khales: Yes. No problem. Joanne, our CRM business is performing well. In fact, in the first quarter, our CRM came slightly ahead of expectations. So it continues to perform well. Our neuromod business, as you know, and as we've talked about, is affected in 2026, primarily by a reduction of the one product. So obviously, that has given us some headwinds in 2026. But -- so our neuromod business is expected to be softer in 2026. While we continue to expect neuromod to grow, for example, our emerging customers with PMA products, those products are primarily in the neuromod space. And although we've had a few quarters of softening, we still expect that portfolio to contribute -- to grow at 15% to 20% in that horizon of 3 to 5 years that we have provided previously. Operator: Our next question comes from Suraj Kalia with Oppenheimer. Suraj Kalia: So Payman, I just want to go back to the fundamental question at hand. In your comments, you talked about the attractiveness of med tech markets, normalization in second half, the Board's confidence in the company's strategy. So Payman, the timing of the strategic review seems a little bit hard to digest, especially given where the stock is. Can you help us thread the needle why now? What's driving this? I understand the outside interest, but just if you could just help us understand the different moving parts here. Payman Khales: Sure. Happy to do that, Suraj. So yes, I would like to reiterate that both the Board, management and myself have strong confidence in our strategy, in our pipeline and the future of the company. Our Board has a fiduciary responsibility to always make sure that we are maximizing shareholder value. And although we believe that the strategy that we have is we can do that. Given the heightened interest that we've had in recent months, we believe and our Board believes that now is a good time to explore those strategic alternatives to see whether there is an opportunity to maximize value for shareholders. The outcome of that exercise could be something, some sort of a transaction or could be a determination that our stand-alone strategy is the best way to generate value for shareholders. This is the reason for doing this now is because of the heightened interest that we have received in recent months. Suraj Kalia: Got it. Diron, one question for you. I'll hop back in queue. What percent of your costs would you say are fixed versus variable? And I mean company-wide. Part of the reason I ask is if the Iran war is prolonged and the economic uncertainty lingers, what switches can you turn off temporarily? And then by the same token, how long does it take to turn them on again? Just trying to understand how to model it given the macro level dynamics that are going on. Diron Smith: Yes. Thank you, Suraj. Yes. Look, when you look at our overall footprint as a manufacturer, certainly, we have an amount of fixed cost in our OpEx level, both in the structural elements of supporting the organization. There's a bit of discretionary costs in there, but I would say the OpEx is a highly fixed portion of the business. And then certainly, in gross margins, you're going to have a mix of variable costs between your direct material, your direct labor as well as in your fixed infrastructure for the manufacturing footprint. As an example, rent, repairs and maintenance, utilities, things of that sort. So I think you got to -- you kind of have to look at the fixed versus variable structure when you kind of look at those splits to do the modeling aspects of it. When it relates to dynamics such as conflict in the Middle East or other areas, we look to manage the variable costs very, very closely with our volumes, our sales volume, and that's how we've been managing through this dynamic as well. I think when you look at the sales profile, one of the key things is understanding whether you believe that to be a more longer-term impact or call it, 1 quarter. We've talked about some of the variability that we see at the CDMO on a quarter-to-quarter basis. Our products are not simple products, right? They're complex, which is why we bring great value to our customers. And so as a result, there's a training element for direct labor. So there's an element where that is not turned off and on, on a dime, right? You got to make sure you spend the right time to get the labor trained. And so as you look at the individual quarter variability, that's where we're able to leverage that workforce and look at that. So I think hopefully, that helps you understand a little bit of the nuances of as a complex manufacturer, some of the elements that we have. Operator: Thank you again for joining us today. You can access the replay of this call as well as the presentation on Integer's investor website at integer.net. This concludes today's conference call. You may now disconnect.
Operator: Greetings, and welcome to the Zeta Q1 '26 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Pfau. You may begin. Matthew Pfau: Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's First Quarter 2026 Conference Call. Today's presentation and earnings release are available on Zeta's Investor Relations website at investors.zetaglobal.com, where you will also find links to our SEC filings, along with other information about Zeta. Joining me on the call today are David Steinberg, Zeta's Co-Founder, Chairman and Chief Executive Officer; and Chris Greiner, Zeta's Chief Financial Officer. Before we begin, I'd like to remind everyone that statements made on this call as well as in the presentation and earnings release contain forward-looking statements regarding our financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our products, potential competition, revenues of our products and our goals and strategies. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties include those described in the company's earnings release and other filings with the SEC and speak only as of today's date. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures, which should be considered in addition to, and not as a substitute for, our GAAP results. We use these non-GAAP measures in managing our business and believe they provide useful information for our investors. Reconciliations of the non-GAAP measures to the corresponding GAAP measures, where appropriate, can be found in the earnings presentation available on our website as well as our earnings release and our other filings with the SEC. With that, I will now turn the call over to David. David Steinberg: Thank you, Matt. Good afternoon, everyone, and thank you for joining us today. We delivered our 19th consecutive beat and raise quarter. This consistency is not driven by a single product cycle or a short-term tailwind. It is the result of a structural shift in the market. AI is no longer a feature. It is driving a replacement cycle where enterprises are demanding fewer systems, measurable results and applied intelligence that works today. We are winning in this environment because of the system we have built, proprietary data that improves with every interaction, intelligence that compounds with every decision and a platform with AI at its core that allows customers to consolidate vendors into a single unified operating system. This differentiated approach has been recognized by Forrester, where Zeta was once again named a leader and also reflected in our customer advocacy with an NPS score in line with market leaders, up 23% from our assessment in the prior year. Both come on the heels of Forrester study showing Zeta returns an average of 600% on marketing spend for its customers. Athena by Zeta is an accelerant. It is the user interface that brings AI directly into marketing workflows and removes the barriers to enterprise-wide adoption and impact. Signs of this were evident in Q1 with beta customers plus strong early adoption of Athena contributing to the revenue beat. Our first quarter performance, once again, shows we are the disruptor in the AI-driven marketing ecosystem. First quarter revenue of $396 million, representing year-over-year growth of 50% and up 29% year-over-year ex Marigold, our fourth straight quarter of revenue growth acceleration, excluding acquisitions and political candidate revenue. And adjusted EBITDA was $66 million, up 42% year-over-year. 19 consecutive beat and raise quarters combined with a 4-year revenue CAGR of 30% reflect more than just consistency. They are evidence of sustained demand in a market consolidating around platforms that can deliver measurable outcomes at scale. And that visibility is reflected in our outlook. After raising the midpoint of our range for 2026 revenue guidance last quarter by $25 million, we are again raising it by $30 million, representing growth of 37%. These market share gains are evidence of a shift in the competitive landscape as AI moves from feature to a new way of doing business. Athena is designed to accelerate our share gains by bringing intelligence directly into workflows, turning answers into actions and ultimately changing how marketing is planned, executed and optimized. Athena is currently available to all of our enterprise customers, and its impact is already evident in sales pursuits and results. The number of Athena demos to potential new clients increased dramatically throughout the quarter. The promise of Athena is influencing decision-makers and helping Zeta win deals as customers want to invest in applied AI, not road map AI. One new customer we closed in the quarter commented, "Leapfrogging to the future requires thinking differently today and committing to execution. Interacting with Athena made it clear that Zeta has already made this leap, bringing its vision to life and positioning us to accelerate into a fully agentic marketing future." Athena was a driver in one of the largest deals we have ever closed. The customer is a leading global apparel retailer operating across multiple brands, each with unique customers and over 3,000 locations worldwide. Zeta's platform was purpose-built to handle the complexity required by the largest enterprise companies, and this customer was able to consolidate down from 4 vendors to 1, Zeta. As the legacy Marketing Cloud replacement cycle begins to accelerate, this particular client was a marquee win. We are also seeing rapid adoption among existing customers. Early feedback and usage shows that customers view Athena not as incremental functionality, but as transformational technology. As adoption increases, Athena learns from more data, outcomes improve and usage deepens, driving ARPU expansion and ultimately reinforcing the same flywheel that has powered our growth. That flywheel is powered by more than just Zeta's AI models. It's driven by the data and infrastructure behind them. Zeta SuperGraph, our proprietary identity and intelligence graph, unifies data across the enterprise and enables a complete deterministic view of the consumer that we believe is difficult to replicate at scale. This is translating directly into wins where access to our data is a key driver for customer decisions. For example, our SuperGraph was instrumental in a win with a leading online retailer of pet products in the United States that serves millions of active customers with a highly personalized e-commerce experience, a broad assortment of over 100,000 products and a rapidly expanding ecosystem that includes autoship subscriptions, pharmacy services and pet health offerings. In addition, our proprietary data and the intelligence it generates was a key component in the expansion of a Fortune 100 telco client, expected to drive an 18x increase in spend with Zeta in 2026 versus 2025. As Athena brings that intelligence to our customers in real time, the impact of this data advantage only grows. This foundation of data plus AI continues to power One Zeta. We are consistently seeing that the land, expand, extend model takes hold as customers begin with a single-use case and scale across the platform over time. That expansion is driven by the modern CMO mandate, do more with fewer partners, improve ROI and simplify execution across the organization. The result is larger commitments, deeper adoption and a growing role for Zeta as the marketing operating system and core infrastructure. That momentum is showing up in the data. Super-scaled customer ARPU was up 21% year-over-year, well ahead of our target range. Net retention rate remained above our target range of 110% to 115%. And the number of super-scaled customers using more than one use case was up over 50% year-over-year at scale. It also creates a reinforcing cycle. Consolidation drives adoption, adoption drives results and results drive further expansion. This is the One Zeta model, and it continues to be a powerful driver of durable growth. What stands out for me this quarter is the strength we are building across every part of the business. At the center of this is Athena, which is already beginning to change how our customers operate and how we compete. Together, our data, our platform and our leadership in AI are positioning Zeta not just to participate in this shift but to define it. As always, I want to sincerely thank our customers, our partners and our shareholders for your continued support of our vision. And to team Zeta, thank you for everything you do. It was an honor to be recognized as a Great Place to Work for the third year in a row. This is a reflection of your hard work and collaboration. Now let me turn it over to Chris to discuss our results in greater detail. Chris? Christopher Greiner: Thank you, David, and good afternoon, everyone. Our results, once again, demonstrated the durability, predictability and profitability of Zeta's growth. Revenue growth, excluding acquisitions and political candidate revenue accelerated for the fourth consecutive quarter to 29% in Q1, further cementing the durability of our growth and market share gains. Broad-based strength across the business is resulting in improved visibility, leading us to, once again, raise our 2026 outlook, underscoring the predictability of our growth. Even in doing so, we're maintaining our typical conservatism. And we also saw free cash flow conversion improved to 63%, generating $42 million in free cash flow, demonstrating the increasing profitability of our growth. These results surpassed even our internal stretch goals, coming in $26 million or 7 points above the midpoint of our revenue guidance for the quarter. As I analyzed the strength of our quarter, what stood out was how balanced the upside contribution was. It was not 1 or 2 isolated benefits. Instead, in baseball parlance, it was a lot of singles and doubles, which in my opinion, is healthier. Here are some examples. In terms of revenue growth, excluding Marigold's contribution, approximately 14 points of growth came from existing customers and 15 points from new customers. From an industry lens, 9 out of our top 10 industries grew faster than 20%, with more discretionary industries continuing to be at the upper end, demonstrating why in tougher macro times, data-driven, lower marketing funnel, high ROI attributable marketing is paramount. And finally, as it relates to how customers use our platform, e-mail, connected TV, mobile and social all grew double digits, all while each use case, acquire, grow and retain also grew double digits. Now let me dive deeper into our KPIs, income statement and balance sheet. Total super-scaled customer count grew to 189, up 19% year-over-year and an addition of 5 customers sequentially. This exceeds our Zeta 2028 model of 4% to 8% super-scaled customer count growth. Super-scaled customer additions were especially strong in advertising, marketing, travel and hospitality. Super-scaled customer ARPU was $1.7 million, up 21% year-over-year. This also exceeded our Zeta 2028 model of 12% to 16% ARPU growth. Strong ARPU growth in the quarter was driven by an increase in the number of customers using multiple use cases, which was up over 50% year-over-year, as well as customers using more than 3 channels, which increased 40% year-over-year. Both are great examples of the One Zeta sales motion working and how Athena can unlock more of the platform's capabilities for our customers to use. The forward-looking sales pipeline is also robust, going into a season when Athena will be front and center at multiple industry conferences. In fact, Athena demos were a crucial differentiator versus incumbents and RFP competitors in each of our marquee enterprise and agency wins in Q1. And we expect Athena to play an even bigger role in adding to the sales pipeline, which is already up 40% year-over-year with a subset of discretionary industries up even more, those like retail, advertising, travel, restaurants, furniture and resorts to name a few. This outsized sales pipeline growth in discretionary industries is consistent with what we've seen in previous periods of macro volatility and is another proof point that in times of uncertainty, customers consolidate onto fewer platforms that can drive measurable ROI with AI-driven efficiency. Now moving on to revenue mix. Direct revenue in the first quarter was 75%, above the 73% last year and in line with our target of 70% to 75%. Our GAAP cost of revenue in the quarter was 41%, a 190 basis point increase year-over-year and 50 basis points sequentially. The increase in cost of revenue was driven by new agency wins, driving a higher initial mix of social as a channel. This is consistent with the pattern of business we've seen and spoken to previously when new agencies platform on to Zeta. This is because we offer a substantially more efficient and effective solution for social and has become the first of many channels adopted by new agencies as they migrate. As new agencies scale over time, not only does their aggregate spend increase, but they do so by adding Zeta-owned channels like e-mail, display, video, mobile, CTV and others. It also bears repeating, while social has a higher cost of revenue, it is still accretive to both adjusted EBITDA and free cash flow margins. Further, social drives high customer stickiness as well. In the first quarter, adjusted EBITDA was $66.1 million at a margin of 16.7%, 100 basis points lower year-over-year and $5 million better than the midpoint of our guidance. Marigold integration is progressing rapidly and tracking ahead of our expectations. We took aggressive steps in the quarter to execute operating synergies, which should begin to benefit our adjusted EBITDA margin in Q2 and into the back half of the year. At the same time, Marigold's revenue came in better than we anticipated, and we're seeing encouraging traction from the One Zeta approach of cross-selling Marigold's loyalty product along with Zeta's grow-and-acquire use cases to the combined customer base. Another area we spoke about last quarter was becoming GAAP net income and EPS positive for the full year of 2026, specifically generating between $0.02 and $0.04 of GAAP earnings per share. Our first quarter results have us pacing towards the high end of that range. In Q1, our GAAP net loss was $13.2 million, an improvement from a net loss of $21.6 million in the first quarter of last year. GAAP loss per share was $0.06, coming in ahead of our expectations for the quarter with forecasted costs related to the integration of Marigold being the primary driver and not seen as recurring over the rest of the year. First quarter net cash provided by operating activities was $49.7 million, up 43% year-over-year, with free cash flow of $41.7 million, up 48% year-over-year and representing a margin of 10.5%. This represents a free cash flow conversion of 63%, a 270 basis point improvement from the first quarter of 2025. This also includes a roughly 13-point working capital headwind driven by longer agency payment cycles standard for their industry. During the first quarter, we repurchased 1.5 million shares for $25.7 million and have approximately $138 million remaining on our share repurchase authorization. We expect to remain active buyers of our stock, especially at these price levels, subject to market conditions and other priorities. And we continue to make significant progress in reducing dilution and stock-based compensation expense. Excluding Marigold, our dilution in the first quarter was 0.1%, and we remain on track to achieve our normal course net dilution target of 3% to 4% in 2026. Relatedly, with most of management's previously issued equity now fully vested post-IPO, Zeta's Board of Directors and Compensation Committee, in consultation with an independent compensation consultant, approved a new long-term equity incentive plan for management. This performance-based plan secures continuity of Zeta's named executive officers and management for 6 years and incentivizes management to achieve its long-term revenue and adjusted EBITDA margin objectives while adhering to its principles of lowering dilution, reducing stock-based compensation as a percentage of revenue and achieving GAAP positive earnings. Furthermore, named executive officers who received these incentives will not be rewarded any further equity for the next 6 years. Now on to our increased guidance. For the full year 2026, we're increasing the midpoint of our revenue guidance by $30 million to $1.785 billion, representing a 37% growth rate or 22% year-over-year growth when excluding Marigold and political candidate revenue. None of our guidance increase is related to political candidate revenue, which we continue to assume will be $15 million in 2026 with $7 million in the third quarter and $8 million in the fourth quarter. Additionally, we continue to take a conservative view of Marigold, contributing $47.5 million per quarter to 2026 revenue for the remainder of the year. Our revenue guidance also includes minimal contribution from Athena. And as shared earlier, we have taken into account our typical conservatism of 2% to 5% in setting our outlook. For the second quarter, we now expect revenue of $420 million at the midpoint, $4 million higher than our previous guidance and representing year-over-year growth of 36% or 21% when excluding political candidate and Marigold revenue. For adjusted EBITDA, we're increasing the midpoint of our 2026 guidance to $397 million, up $6 million from our prior guidance and representing a year-over-year increase of 43% at a margin of 22.3%, an improvement of 90 basis points over 2025. For the second quarter of 2026, we now expect adjusted EBITDA of $86.6 million at the midpoint, up from our previous expectation of $84.9 million and representing growth of 47% and a margin of 20.6%, up 155 basis points year-to-year. We are also increasing our 2026 free cash flow guidance to $235 million at the midpoint, up from $231 million, representing year-over-year growth of 43% and a conversion of 59% of adjusted EBITDA, which likely has upside. And here's the broader point. A 19-quarter beat-and-raise track record is obviously something we're proud of and continues to demonstrate our consistency and strong execution. We also recognize the times we're in, specifically the need to underwrite investments in companies with strong free cash flow generation, durable revenue growth and share gains and demonstratable moats. Q1 was an excellent jumping off point for these emerging investor frameworks. Not only did free cash flow set a record in the first quarter, but we are also tracking to the high end of our 2026 GAAP EPS range of $0.02 to $0.04 and long-term 2028 targets. As it relates to durable growth, this was the fourth quarter in a row we accelerated revenue growth, excluding acquisitions and political candidate revenue. And in terms of exhibiting our moats, our marquee wins with enterprises and agencies this quarter came at the expense of legacy marketing clouds and legacy DSPs, where Zeta's proprietary data and Athena operating system were capabilities our competition could not match. With that, I'll hand the call over to the operator for David and me to take your questions. Operator? Operator: [Operator Instructions] And the first question comes from the line of DJ Hynes with Canaccord Genuity. David Hynes: Congrats on a fantastic quarter. Nice start to the year. David, I want to ask you a competitive question. So obviously, there's been more public backlash against the Trade Desk and the agency ecosystem. But I think for those living in the marketing and ad tech world, like that's been going on for a while now, right? So two related questions here. Number one, like how much do you think Zeta has benefited from that dynamic? And then second, if the Trade Desk figures out how to get pricing right or at least make it more transparent, does this rebalance competitive dynamics at all? Or is the horse already out of the barn there? David Steinberg: Well, let's -- I mean, first of all, DJ, thank you. We appreciate it. Could not be happier with this quarter. And I think it really speaks to kicking off the year right and Athena really was a massive driver here. I want to separate the conversation about the agency and other technological platforms like the Trade Desk that are out there and struggling a bit because the agencies continue to thrive and they're not really having any issues from our vantage point. And I just got back from 3 days at the POSSIBLE Conference, where I did 54 meetings in 3 days, hosted 4 dinners and 3 cocktail parties, which is why I'm losing my voice going into this. I think that -- and I don't want to speak to any particular platform, but I think the horse is out of the barn. I think that organizations that have built workflow management tools that do not have proprietary data, they do not have proprietary native artificial intelligence are going to really struggle in this next evolution of where sort of marketing is going as it relates to intelligence. Because if you're not creating intelligence in today's world, you're not winning. And I think that we are a direct reason that a number of our competitors are either growing slower or shrinking as we take meaningful market share. Chris, in his prepared remarks, was very clear about the fact that we had a number of meaningful agency wins in the quarter that will continue to run out through the rest of this year and into future years that are starting with social. We're starting to see those move over to programmatic and connected TV as well. So I think if you separate the agencies, which are doing well and thriving from the technological platforms that have based their business on workflow management, I think they are going to struggle, and we are going to continue to beat them handily in the marketplace. David Hynes: Yes. Perfect and helpful color. Chris, I want to follow up with you. So David gave a bunch of great anecdotal data points around Athena and the early success there. The product is not explicitly monetized, right? So what are the signs that we all, as investors, should be paying attention to from a financial perspective that will signal to us that Athena is moving the needle for Zeta? Christopher Greiner: Great question, DJ. I'm glad you asked. There's a couple of leading indicator data points that I think you can already begin to look at. So as part of the press release, one of the data points that was called out was a 7x increase, and this is just in the first week of Athena's general availability. We saw a 7x increase in the type of -- in the amount of agentic interactions on the platform, coupled by 60% of the AI usage on our platform being driven by Athena. How that should ultimately translate to the usage part of our revenue can be seen through ARPU expansion, some of which you already started to see. So if you look at ARPU in the quarter for super-scaled customers, it was $1.7 million. It was up 21% year-over-year. But if you look underneath that, what drove it are exactly the dynamics that Athena was engineered to be able to do, which is to make more of the platform available and visible for the customers to be able to exploit. If you look at multiple use case customers, it was up over 50% year-over-year. If you look at the customers that are using 4 or more channels, that's up over 40% year-over-year, which again are not just great examples of Athena as an unlock, but also Zeta working well. David Steinberg: And by the way, she's just getting started, DJ. David Hynes: Yes, totally. Congrats, guys. Operator: And the next question comes from the line of Gabriela Borges with Goldman Sachs. Gabriela Borges: David, I want to ask you about the people and process part of Athena, meaning the technology you've demoed, it clearly is able to do a huge amount of knowledge work. My question for you is, how do you then change the end user behavior? What does the training and enablement look like? How do you encourage more people to use it once your customers have already decided to adopt it? David Steinberg: First of all, Gabriela, what a great question. First, let me say that we were incredibly proud that we were able to make the product not just generally available on time, but available to 100% of our enterprise clients, which was not a small task. At the same time, to your exact point, we have a learning and development group that is literally purpose-built to train our clients and get them up and running on this new product. And they've already done. Our top 30 clients have been onboarded through that group, and we're going to be adding all the other clients as we continue to expand out. The other thing that's really important is we're doing a weekly leaders -- I'm sorry, a weekly learning and training program to all of our clients that's virtual, recorded and they're able to then watch it at their convenience inside of the platform when they want to. But we're doing sort of a ask Athena question of the week. Every week, a new question that you could ask Athena goes out to all of our customers so that they can begin they process of using her. And I know I'm sure you've seen the demo, you know how incredibly intuitive she is to use. So what I would say is we're really focusing on it from a relationship management, learning, development, both in-person, virtually and weekly follow-ups. But the intuitive nature of her is, I think, one of the reasons you saw her so powerful. Just in the first week she was live, Athena drove 60% of all AI utilization across our platform. That is off the charts for a new product from an adoption perspective. Gabriela Borges: Very good. And Chris, the follow-up for you on inference cost. So Athena has pieces of Zeta proprietary technology. And then I believe you have some third-party technology in there, too. How do you think about managing those inference costs or optimizing those inference costs? And then same question for your R&D team, your engineering team. We're at the stage where we've been through more token usage is generally better, but also can sort of outrun budgets very quickly. How do you think about managing that internally? David Steinberg: So Gabriela, I'm going to take that one. Sorry, Chris. First and foremost, as the world moves from large language models to inference-based AI, our platform is purpose-built for that as the operating system and infrastructure for our clients. The vast majority of our queries, Gabriela, are done on our own platforms, on our own data. So we are not buying tokens as we roll this out to our customers. It's fully embedded, which is one of the reasons I think you're seeing us project substantially higher growth to profits and cash flow than we are even to revenue. We have put ourselves as sort of the perfect spot as the market moves to inference-based AI. As it relates to our internal consumption, we have built a platform called Spade. Don't ask me what it stands for. It is an acronym. But the reality is that Spade is a tool that we custom built inside of Zeta and is being utilized by a very large percentage of our engineering team, where effectively, an engineer would go into Spade, they would create the construct for the code they are trying to develop. Spade would then automatically choose the most efficient and best large language model to do the coding itself. So if it's security-based, we might choose Claude. If it's general coding based, Spade might choose ChatGPT. If it's complex publishing, Spade might choose Gemini. Now of course, Cursor is sort of at the center of this as we think about where that's expanding. The code is then auto generated by the LLM, which is the only time we utilize tokens. Everything else is sitting on our own platform, our own cloud. The LLM creates the code. It then goes to a program called Zippi because obviously, we have great nomenclature capabilities. And Zippi automatically QAs the code on our platform once again. Once it's done, it sends it to one of our senior architects. They review the code one more time, and they can make it generally available. To put it in perspective, Gabriela, at the end of the first quarter, Zeta was already driving 75% automated new code creation. I believe that puts us even above Google as it relates to that. And the pods working on Athena today, I know for a fact are up from a productivity perspective between 400% and 600% year-over-year from an output and productivity perspective, all the while, the vast, vast majority of the compute and of the tokenization is on our own platform. So as you look at our growth, we will not experience some of the constriction of margin or additional CapEx. We've already allowed for everything in the projections that we've got, and we're very, very comfortable with where we are externally and from an engineering perspective. Operator: And the next question comes from the line of Arjun Bhatia with William Blair. Arjun Bhatia: Congrats guys on a very strong quarter here. David, I have two questions, maybe I'll just do them one at a time. The first on awareness. It seems like the customers that are using it are getting great value out of it. It's early, but for this to have a material impact, for the company as a whole, you have a fairly large revenue base. Like how do you roll this out to all your large customers? Where is it right now in terms of customers having awareness and knowing what Athena can do? And how do you sort of plan to progress that? David Steinberg: Yes. So great question, Arjun. First of all, from an awareness perspective, I would say that our marketing team today is doing the greatest job it's ever done in the history of our company. I just came back from the POSSIBLE Conference where you couldn't walk 5 feet without seeing the brand Athena and without seeing Buy Zeta. And it was really exciting. We did an Athena Suite. We did a Zeta Cafe Powered by Athena. And we're starting to see that we're moving to that next evolution of our brand where it's sort of moved to it's getting the must-have Zeta in our industry. And I didn't think I would say that this early. As it relates to internal awareness, we have built an internal learning and development team, which is doing nothing but training and onboarding our clients. One of the things we're going to be rolling out in the next few months, which I'm super excited about, is an Athena certification. We're going to certify the individuals who work for our clients on Athena utilization. They'll get a full certification that they can put into their resume, and we're very excited about how that's going to be rolling out. So we're also doing sort of a hint of the week, tip of the week, question of the week. It's going out to all of our clients. I would tell you, in all of the years I've run this company, which is a long time now, I have never seen a faster uptake of a technological product that we've rolled out, and it's really been exciting, Arjun. Arjun Bhatia: Awesome. That's great to hear. And then maybe switching gears from Athena for a second. Marigold, that also looks like it was off to a strong start. I think you beat your sort of Q1 target on that front. But where are we on the cross-sell there? And what's the early traction you're seeing on, I guess, the 2-sided cross-sell, both into your base and into Marigold's base? Christopher Greiner: Arjun, I'll take that, and David will wrap it up also. So a couple of places where you can see where it's evident that the cross-selling is working. So we talked about the number of multi-use cases. It's nicely contributing to the growth that we've seen across the base of super-scaled customers. But I think more broadly, if you look at the areas that we talked about being purposely conservative around Marigold, it was around the potential for their SMB and mid-market customers that were on the enterprise platform we anticipated churn. We're not seeing as much as we thought, which is good. There were products that -- and geographies that we thought we would have less growth on and would also see churn. That hasn't happened yet. And then just more broad normal churn at the enterprise level, and it stayed healthy. And by the way, a lot of that is being driven by Zeta's interactions with those customers and partnering with Marigold's people. David Steinberg: So it's been really interesting, Arjun. We've seen a meaningful uptick from existing Marigold clients with us integrating the data cloud into the platform. So the first thing we did and we had it done within 90 days was a full data cloud integration into their platforms, which allowed clients to begin to access data sets that they've never had access to before. So we've seen meaningful growth there. As it relates to cross-selling, we're really -- we're making progress, but not a lot of that is in the numbers yet. These products are complicated, and they're very big. I think you'll see more of that as the year progresses. But I think -- I mean, to say we're very excited about how well we're performing with the asset would be an understatement. And a lot of that today is a result of the data cloud integration. Now whether you want to consider that a cross-sell because we're bundling the Data Cloud in to drive additional utilization or not, that's up to you. But to us, as we're rolling out loyalty to all of our global clients, and we're starting to take sell-through and roll it out to the LiveIntent clients and all of the different things we're doing, that's in the early stages, and I think will drive meaningful growth in the future. Operator: And the next question comes from the line of Jack Nichols with KeyBanc Capital Markets. Jackson Nichols: Maybe pivoting back to Athena. I was wondering if you could walk us through the early adoption trends among the enterprise customer base, specifically around how they're deepening engagement with the platform and then existing use cases today? And then I've got a quick follow-up. David Steinberg: Well, first of all, welcome, Jack. It's great to have you on coverage. We really appreciate you. Second, we have been really blown away by the early adoption of Athena. We made it generally available to 100% of our enterprise clients, and we saw a 7x increase in agentic interactions from our clients in the first week of Athena alone. So we think of that as pretty good. 7x is always something we aspire to. But our long-term goal is for Athena to be the operating system of our clients' businesses, and we're just getting started on that. But early adoption has been very, very exciting. Jackson Nichols: That makes sense. And then pivoting quickly to Marigold and thinking about the recurring revenue mix, as those customers adopt the Zeta platform, should we expect that mix to trend down or up over time or kind of remain in line with the 2025 60% expectation disclosure? Christopher Greiner: Jack, it's Chris. I'll take this. And as David said, welcome. It should go up is the short answer. And I think a really interesting proof point that you'll see in the queue tomorrow is just how substantially RPOs went up quarter-to-quarter. They went up $66 million just from fourth quarter to the first quarter. Obviously, part of that is Marigold, which then helps with visibility. But I think an interesting thing for the audience here to understand is another large piece of that was not only these marquee wins that we talked about with the apparel retailer and the e-commerce pet retailer, but it was also agencies beginning to now also sign long-term committed contracts. That is an exciting proof point for us. It adds to the recurring revenue, which then obviously adds to visibility, which both of those came into our confidence to be able to raise the guidance that we did on the top line by $30 million while continuing to keep to our 2% to 5% conservatism. Operator: And the next question comes from the line of Clark Wright with D.A. Davidson. Clark Wright: Awesome. I wanted to maybe quickly touch on the consolidation story. You noted on one of the marquee wins this quarter that you consolidated 4. And I recognize over the course of the last few quarters, you mentioned consolidation being a key piece. Can you talk about the use cases that beta continues to solve for and how you see that expanding over time? David Steinberg: Yes. Thank you, Clark. Listen, when John and I founded this company, I don't know, 18, 19 years ago at this point, our vision was to put everything a marketer needed into one user interface with one reporting infrastructure. And I would tell you that because of Athena, I think we are finally there. And our ability to consolidate anywhere from 8 to 12 different vendors into one user interface and one reporting infrastructure has never been stronger. In the case of this global company because it's a retailer and a manufacturer of their clothing, we displaced what I think many people think to be certainly the longest serving of the marketing clouds. They made, I think, their acquisition first in the space as they built their marketing cloud. And in fact, this particular client used that company for everything. They consider themselves a you know what shop, so to speak. So decoupling their marketing cloud from everything else they were doing, I think, was a very difficult decision. We also displaced another competitor of ours who tends to be more focused on mobile. They tend to be a little easier to displace because they're so singularly focused on mobile. And neither of those companies brought any data or any activation capabilities to task. When you're working with one of the large marketing clouds and you displace them, you're almost always also displacing a professional service provider, who they have to then spend millions of dollars on to customize their platform versus our platform is pretty much ready to go from a cloud perspective. So that would be a really good example of a -- and we see this as one of the most important wins in our company's history, and it goes back to not just our ability to consolidate other vendors, but to do everything that each one of those point solution does better than they do while simultaneously putting everything into one place. Clark Wright: Got it. That's helpful. And then if I could just add one more. Over the long term, you talked about increasing wallet share with customers. Do you think AI accelerates the rate of share capture, increases the total wallet share or both? David Steinberg: I think both. I mean, remember, the single greatest way, Clark, to get market share is drive meaningful return on investment to your clients. The Forrester study that came out that said we have a 600% return on marketing spend, we're seeing early adopters of Athena at a materially higher return on investment than even that. The higher we drive return on investment, the more wallet share we're naturally going to get. And as you know, our existing global super-scaled customers will spend well over $100 billion to $110 billion on marketing this year. And at the middle of our range, we'll have, call it, 150 to 170 basis points of wallet share. I believe we can get that to 700% to 1,000% of their wallet share in the years to come. The key will be driving better return on investment. Artificial intelligence, specifically Athena, plus our data as a moat into our business is going to drive return on marketing spend up meaningfully, which we think will then drive wallet share. Operator: Our next question comes from Jason Kreyer with Craig-Hallum. Jason Kreyer: Great job. So I wanted to stick with the point on wallet share because you announced some major wins and you've announced some major wins over recent quarters. But I'm curious, when you look at the aggregate data representing somewhere less than 2% of wallet share, how big of deals are you winning today? And how big a deal do you think you can win over time just in terms of the wallet share of those customers? David Steinberg: It's interesting, Jason. I would say the last few wins we've had have been at a comparable wallet share to our current wallet share, but the clients are spending 4 or 5x as much per year on marketing and CRM. So they represent some of the largest deals we've ever done right out of the gate. Does that make sense just mathematically? At the same time, what we're starting to see is some of our clients who have been on the platform for 2, 3, 4, 5 years are getting to that 7% to 10% of wallet share and higher. And we're using that as a road map for how do we take new clients there. So the wins are much bigger than they've ever been, but I'm not sure they're much bigger wallet share only because the companies are so big that we're winning. Now that will give us meaningful upside as they're on the platform, and Chris does a much better job than I do, talking about how ARPU grows the longer a client is with us, and these clients are starting at probably the highest ARPU we've ever seen clients starting. Christopher Greiner: That also drives, Jason, with our sales pipeline. So we talked about its growth. But if you look at deal sizes and particularly the annual contract value of deals are up pretty substantially year-over-year. Jason Kreyer: Perfect. Maybe one quick follow-up, David. You've been doing AI for a long time, but it seems like the release of Athena has certainly put you in a different conversation within the AI industry. I'm curious, how has that translated to conversations with customers? And like do you feel like Zeta is becoming more of an AI thought leader in the marketing ecosystem and that's driving that engagement? David Steinberg: It's interesting, Jason. In some ways, being a native AI company has been complex for us over the last few years because everybody is rolling out shiny new products, most of which are not real, but most of the people are rolling them out. And we've always been seen as sort of like AI is under the engine. Athena is the hood ornament to what we're doing as a company. She is now us announcing ourselves with authority that we are not just an AI company, we are the leader and the disruptor in the AI space. And with the launch of Athena as a marquee product, it has changed the game for the way people are seeing us. And I will tell you, the 2 client wins we talked about in the prepared remarks, there is 0 chance we would have been in the room if we had not launched Athena or started talking about her at Zeta Live. And there's -- I don't think a chance we would have won these accounts without Athena showing that we are the leader in artificial intelligence as it relates to marketing. From an internal perspective, we're also one of the best users of AI. I mean back to what I was saying around the Spade internal platform we've built. If you had told me a year ago, we'd be auto generating 75% of our own code while simultaneously driving the type of quality products we're driving, I would have said that's just not possible. Spade has made that possible. And it's really been very interesting how we've done that in an environment where we're still using a very de minimis percentage of tokens versus what many of our competitors are doing, which is going to allow us to continue expanding our operating margin as we've done over the years. Operator: Our next question is from Matt Swanson with RBC. Matthew Swanson: And my congratulations for the quarter. I think the metric that really jumped out to me was the increase in multi-use case. And I know that's something we had kind of talked about with Athena and its ability to kind of create this organic expansion motion. Given that, that 50% increase was for the full quarter, like is Athena a real part of that? Is there other parts of your go-to-market driving that? If you could just kind of touch a little more there. David Steinberg: The great news is Athena is just getting started. So we had a great trajectory going into our launch. Now I will tell you, every client that was on the beta became multi-use case. So it was -- but that was not a lot of clients, right? So as she rolled out to generally available, we saw an uptick there. But I think that's continued upside to growth in multi-use case. And the One Zeta team continues to just do an exceptional job. I'll remind you, Matt, we really started on the One Zeta mission just 18 months ago. So you've got a massive tailwind coming out of the work we've been doing there. And then I think Athena is going to supercharge that. Christopher Greiner: And Matt, I think the reason why you picked up on it, but for others, empirically, what we know is that when customers use more than one use case, their ARPU is 3 to 5x greater. So I think you're right on that being an exciting data point. Matthew Swanson: Yes. No, I appreciate that. And we'll make sure to take note that 100% of Athena users will become multiuse case. That's what I heard. David Steinberg: I wouldn't go quite there. I mean we -- obviously, that's the goal, Matt, but we certainly didn't say that just yet. Matthew Swanson: Yes. The other one I want to talk about is the independent agencies. I know you called out advertising as a key vertical for you guys. I think your willingness to kind of share the credit with agencies and allow them to white label some of your technology has been part of the reason you've been so successful there. I guess with Athena, how much more can that help you in those deal environments as a lot of these independent agencies are trying to compete with the big holdcos and so on? Christopher Greiner: One of the key wins we had, Matt, in the quarter was with a large independent. If you look at business done a year ago with them was 0. Business done within this quarter was 8 figures with Athena being, again, something that was visible to them as something they could also exploit for their benefit. The same was true with a very large new agency that began piloting Zeta in 2025. The spend was material, call it, a little less than $2 million, but that new agreement that was signed is more than 10x that size. So both the independent as well as the large agency continues to have a lot of runway. In fact, amongst the 5 large holdcos, the number of brands we're working with year-over-year grew by 50%. David Steinberg: And I just want to say, Matt, we're actually big fans of the agencies. They provide incredible services to their clients. And we've had clients approach us to go direct. And we always try to bring the agency back into it because we think it's a very healthy relationship when it's the three of us. And listen, we're good if the agencies make their money because they're providing meaningful services. But as it relates to our business, I'll remind you, none of the agencies really focus on the retain, which, as of last quarter, is about 60% of our business. So we have real greenfield opportunity there as it relates to the activation, which sort of create customers, monetize customers. We're very, very happy to partner and give the credit to the agencies because they've built incredible businesses, and we're very excited now to be working with pretty much all of the large holdcos. I think now it's all. And well, certainly the biggest ones. And then to be partnering with a select number of independent agencies. There's a lot of them out there, but we want to work with only the best. Operator: Our next question comes from Naved Khan with B. Riley. Ethan Widell: This is Ethan Widell calling in for Naved. To start, can we talk about the ideal customer profile for Athena. I'd imagine there are two kind of distinct value propositions there, a, where Athena can drive efficiency gains for your larger enterprises that already have sophisticated marketing teams and whatnot; b, more small and mid-market players where Athena creates access to capabilities that these customers don't necessarily have in-house. So like which of these is management really seeing more of early traction-wise? And what's kind of the ideal customer size that you're leaning into with your early sales motion? David Steinberg: Well, it's interesting you put it that way. I mean, today, to be honest, Ethan, we don't focus on midsize. We're really just focused on very large enterprise, although Athena opens up the midsized market to us at some point because you're very intuitive to understand that the cost of layering Athena out to midsized companies is so de minimis to us that would allow us to move into those -- that vertical -- or I'm sorry, into that sort of category without having to meaningfully hire people to do it. But today, we focus solely on very large enterprise. So I would tell you the two things very large enterprises have really focused on is, a, and you're totally right, efficiency. What they're finding is it takes 70% less labor to manage the Zeta marketing platform with Athena than it did with hands-on keyboard. So you're effectively able to take 70% of your marketing workforce and retask them into other functions where they can be more valuable to your organization. We're also seeing that because -- and this is something I talk about a lot, Ethan, but when you buy software, whether it's us or it's Bloomberg or somebody else, you're buying a stealth fighter, right? We're all spending to build a Stealth fighter of a platform. And most of our clients know how to fly Cessna with -- I mean think about a Bloomberg terminal, the vast majority of their customers only use 5% to 10% of the capabilities. As you look at our platform, being able to fly that Cessna, we're still delivering a 600% return on marketing spend. As clients are able to use Athena as their copilot, they can get right into the cockpit of that stealth fighter, and they can then fly the entire platform, which is driving meaningfully higher return on marketing spend than even that 600%. Ethan Widell: Got it. That makes a lot of sense. And then coming out of first quarter, I think you mentioned 9 out of 10 top industries grew more than 20%. I know you spoke to some customer consolidation being a benefit there. But are there any verticals that you see showing any signs of softening, particularly anything sensitive to the macro and geopolitical risk going on right now on the discretionary? Christopher Greiner: Yes. Short answer, no, Ethan. The 9 out of the 10 were effectively say 9 out of 10 that ended last year. The 1 out of 10 that wasn't growing over 20% is 4% of revenue. So it really gives you a sense for the vast, vast majority of revenues on all of the verticals we support are performing in a very healthy way. Operator: Our next question is from Terry Tillman with Truist. Terrell Tillman: I'll just keep it to one question because I know we're running over time. And maybe I'm getting too far ahead of myself, but I like hearing about 40% increase -- 40% plus increase in the sales pipeline. And I think you said your discretionary markets where you have a lot of activity is even higher. Is it too early to start to say because of the emphasis on agentic in AI in general that's in the market, plus you have Athena that's now credibly in the market and in production, could it start to tip the scales and move in some of this funnel activity faster and you actually close new deals quicker? Or is it just too early or I'm just way too optimistic? Christopher Greiner: I don't think you're too optimistic. But I do think it's -- from an expectation setting perspective and frankly, from a data-driven perspective, and this is a multi-quarter statement I'm about to make. Our deal cycles in good times and in less good times have stayed consistent. What we're seeing is more opportunities in RFPs, many more at-bats than we were given a year ago and certainly 2 years ago. Those by nature take longer. But again, our strategy many times is to work around those processes through pilots and proof of concepts. Those deals are getting bigger, as David said. So yesterday's $100,000 pilot is today is $1 million. But I wouldn't say right now, it's an accelerant, but it's in addition to the pipeline. David Steinberg: And I would concur. But I do want to be clear, Terry, we're getting at bats that we would have never gotten a few years ago. So it's sort of -- it's working really, really well. Operator: Thank you. This concludes the Q&A session and our call. You may disconnect your lines at this time, and have a wonderful day.
Operator: Good afternoon, and thank you for joining us today for Ryan Specialty's Holdings First Quarter 2026 Earnings Conference Call. In addition to this call, the company filed a press release with the SEC earlier this afternoon, which has also been posted to its website at ryanspecialty.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements. Investors should not place undue reliance on any forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Listeners are encouraged to review the more detailed discussion of these risk factors contained in the company's filings with the SEC. The company assumes no duty to update such forward-looking statements in the future, except as required by law. Additionally, certain non-GAAP financial measures will be discussed on this call and should not be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most closely comparable measures prepared in accordance with GAAP are included in the earnings release, which is filed with the SEC and available on the company's website. With that, I'd like to turn the call over to the Founder and Executive Chairman of Ryan Specialty, Pat Ryan. Patrick Ryan: Good afternoon, and thank you for joining us. With me on today's call is our CEO, Tim Turner; our CFO, Janice Hamilton; our CEO of Underwriting Managers, Miles Wuller; and our Head of Investor Relations, Nick Mezick. For the quarter, total revenue grew 15%, driven by organic revenue growth of 11.8% and contributions from M&A. Adjusted EBITDAC grew 15.7% to $232 million. Adjusted EBITDAC margin expanded 10 basis points to 29.2%. Adjusted earnings per share grew 20% year-over-year to $0.47. We also repurchased $40 million of our stock. We are very pleased with our strong start to 2026, especially considering the headwinds our industry is facing. Our first quarter results on both the top line and bottom line speak to the resiliency of the platform we have built. Our founding thesis was to provide innovative specialty insurance solutions to brokers, agents and carriers. That's exactly what we have done. We created a true specialty insurance services firm, expanding our offerings far beyond wholesale broking. We have built one of the most efficient and effective insurance distribution platforms in the world. Through RT Specialty, the second largest wholesale broker, we've assembled world-class expertise across industry verticals, serving global retailers as well as the tens of thousands of retail brokers in the U.S. Ryan Specialty is the largest delegated underwriting authority provider. We deliver leading underwriting solutions, supported by strong alignment and governance, distribution at scale and our position at the intersection of the biggest secular tailwinds in insurance, all driving sustainable, profitable growth. Together, RT Specialty and RSUM form a distribution engine of unmatched scale, sophistication and breadth in the specialty insurance market. This distribution platform is built to unlock all of the innovative solutions we're capable of building. Through our strategic alliances and executive level relationships with key carriers, we've holistically changed the conversation. This goes beyond trust and strong returns. It has evolved into the development of innovative products and solutions to address the complex needs of our clients. Take one of the largest mutual carriers in the country as an example. Our relationship started many years ago when they were looking for access to specialty risk and has evolved into the creation of a new reinsurance market. Over the last 6 years, we created a remarkable business through our reinsurance managing underwriter, Ryan Re, which is strategically positioned to capitalize on expanded opportunities and is quickly approaching $2 billion in premium. We've made acquisitions and brought in top talent across both benefits and alternative risk. With their support, we are building unique capabilities in structured solutions, capital management and funding through group captive or single cell captives. Separately, for a leading global property carrier, we expanded their reach into specialty lines they've never participated in before and are exploring various additional opportunities together. For a blue-chip specialty carrier, we have developed unique solutions throughout our firm across RT, RSUM and with new capital management capabilities, allowing us to launch our flagship alternative capital sidecar, RAC Re. These are not isolated stories. They are the compounding outputs of a distribution platform that gets stronger and more strategic with each relationship. Built on the strength of industry-leading underwriting results, we innovate alongside our clients and capital trading partners and deliver unique solutions that we believe cannot be easily replicated by our competitors. The depth and durability of these strategic alliances, the breadth of products and solutions we deliver to the market and the scale of capital we manage on behalf of our trading partners are the dimensions of value that capture what this platform is truly capable of and what will define our story over time. Our strategy is to continue widening our moat, leveraging the operational flexibility created by Empower and building into the white space that we believe no one else in our industry can match. Turning to the market. We continue to operate in one of the most volatile and reactive insurance markets I've ever witnessed. While volatility in market cycles is inevitable. We are feeling the effects of this across our business, particularly in wholesale brokerage, where we now expect more tempered growth in 2026. With that said, I am very proud of our brokers and underwriters as they're delivering impressive growth in the face of significant pricing pressures and broader economic uncertainty. Turning to AI, which Tim will expand on shortly. I want to say a few words. Through automation and AI, we believe we are unlocking the capacity of our people to more efficiently and effectively do what our clients and trading partners value most. We solve for complexity through our expert-led advice and advocacy and a culture of execution and innovation. We believe our scale, specialized talent, proprietary data, the breadth of trading relationships with brokers and carriers and the significant volume of transactions flowing through our platform and Ryan Specialty, a clear net beneficiary of the AI-driven transformation reshaping our industry. Lastly, on capital allocation, beyond our modest and sustainable dividend, we view both M&A and our share repurchase program as key priorities. We will continue to do what we believe is right for our shareholders, particularly given the continued spread between public and private multiples and the dislocation between our current valuation and our confidence in the near- and long-term outlook of our business. Make no mistake about it, when the right strategic M&A opportunities present themselves, ones that fit our 3 M&A criteria, strong cultural fit, strategic and accretive. We will be the first in line for those high-quality assets, and we'll have the financial capacity to execute on those opportunities. As we look forward, we are confident in our ability to innovate, invest and continue to strengthen and diversify our offerings within the specialty insurance market. Our relentless efforts to navigate this transitioning market all while investing in areas of accelerating growth, give us strong conviction that we will generate industry-leading organic growth over time and remain a leader in the specialty lines insurance sector for years to come. Before I turn the call over to Tim, I want to share one more thing with you. We have announced a onetime option grant program in the second quarter, funded entirely by a portion of my own holdings to make sure the broader team is properly aligned over the long term. It is structured to be neutral to the company's outstanding share count and will function as a direct reinvestment for me into the team that has built this platform. I believe in this team, I believe in this platform, and I believe in the direction Ryan Specialty is heading. As we look forward to the work of the next several years, I want every leader at this company to be aligned to our mission, and I'm offering a meaningful piece of my own capital to support that conviction. With that, I'm pleased to turn the call over to our Chief Executive Officer, Tim Turner. Tim? Timothy Turner: Thank you very much, Pat. I am very proud of how our team performed this quarter. We remain hyper-focused on successfully executing what we can control. Diving right into our results by specialty, our wholesale brokerage specialty continues to deliver in a transitioning market. In property, our team navigated a very challenging environment. Rates continue to decline with large and cat-exposed accounts down 25% to 35%. Capacity continued to increase across insurance, reinsurance and alternative capital and competition intensified broadly, including in the admitted market. However, despite these trends, our property book declined only moderately in the quarter, and we are extremely proud of these results. Again, we are controlling what we can control. We are focused on winning head-to-head against our competitors and capturing new business from the steady flow into the E&S channel. In casualty, the trends remain net favorable for Ryan Specialty, yet the picture is bifurcated. In high hazard large account classes like transportation, habitational, health care, social and human services and public entity, loss trends driven by social inflation continue to drive meaningful rate increases, in many cases, exceeding 10%. At the same time, there is growing competition for small and medium hazard risks. We saw select carriers looking to deploy new capital, adding competitive pressure within the E&S market. Our professional lines team significantly outperformed the market despite continued yet moderating pricing pressure and aided our growth in the quarter. We also had strong construction activity in Q1. We remain optimistic about this pipeline heading into the balance of the year and are well positioned as the leading wholesale broker in the construction space. We are encouraged by the momentum of data center activity we saw this quarter, further supported by a strong pipeline. As we have noted in the past, this business is inherently lumpy and the timing of large project findings is difficult to predict. Taking these trends together, we're anticipating more moderate casualty growth in 2026. Now turning to our delegated authority specialties, which include both binding authority and underwriting management. Our binding authority specialty continued to perform well, though the environment showed signs of heightened competition. We saw pockets of small commercial business move toward the admitted market, consistent with what we've described last quarter. Our underwriting management specialty had an excellent quarter with strong results across transactional liability, international specialty, casualty, financial lines and reinsurance. Zooming in on the transactional liability, our practice once again performed exceptionally well, supported by the investments we've made over the past few years and a more constructive global M&A outlook. Ryan Re delivered an outstanding start to the year with strong renewal retention, especially considering the tough pricing environment. We are encouraged by the Markel portion of the book, which also displayed strong client retention and was supported by expanded relationships across casualty, specialty reinsurance and the London markets. As we do across our entire underwriting management specialty, we exercise underwriting discipline, leaning away from the property cat business where pricing did not meet our standards and leaning into risks with better risk-adjusted returns. Adding to what Pat said, I'd like to update you on our digital transformation and AI strategy. We are making significant and responsible investments in AI leadership and infrastructure and are partnering with leading AI platforms to accelerate our progress. This is a top priority for our management team, and we've rapidly delivered numerous models to our 6,000-plus employees. We are moving quickly live in production in certain areas and are actively developing new tools. Our digital transformation and AI strategy is built around 3 principles: our clients, our people and our process. In practice, we invest behind workflows that improve client outcomes, make our people more productive and make our process faster and more reliable. Let's start with our clients, spanning across brokers, agents and carriers. Faster speed to market, deeper risk analysis and even stronger advocacy. We are deploying AI that helps our underwriters triage a submission in minutes instead of hours, which benefits the flow in both directions. Our broker clients see improved turnaround times and the carriers receive better informed, higher-quality submissions. That is an improved client outcome. AI is also improving underwriting insights. In parts of Ryan Re, we are running enhanced portfolio level analytics like concentration analysis and risk modeling, which gives our carrier trading partners a level of analytical rigor that is extremely challenging to complete manually. Better data leads to better placements and better placements lead to stronger, longer-lasting trading relationships. This also means more proactive service. As our broker workbench capabilities mature, we will enable automated coverage gap identification and AI-assisted cross-sell analysis. These maturing capabilities will assist our brokers in delivering more value to their retail trading partners by being increasingly proactive. The second of our 3 principles is our people. We want our brokers to broker and our underwriters to underwrite. Today, too much of their time is spent on manual processes, ingesting submissions, massaging data, chasing subjectivities and formatting proposals. Not only does AI and automation take that work off their plate, but it will enhance their productivity by giving them capabilities at a speed and scale that weren't possible before. And this goes beyond our brokers and underwriters. We are changing how we train and develop talent. New hires will ramp up faster when our AI tools accelerate institutional knowledge, recommend next steps on unfamiliar risks and provide real-time guidance informed by decades of placement data. What used to take a junior broker 2 years to learn through experience, they will begin accessing in just months, accelerating our return on the most accretive investments we make. Across the organization, AI and automation are improving how we operate. We are enhancing our internal tools and systems to give our leaders better data to make timely informed decisions. When our people are equipped with tools that improve speed and efficiency, our clients get better outcomes. The last of our 3 principles is our process. Put simply, this refers to our scale. We manage over $30 billion in premium across hundreds of products. We are thoughtful in how we're turning manual tasks into reimagined end-to-end automated workflows deployed across our firm. Within our underwriting management specialty, certain projects are beyond the pilot phase. AI-enabled and automated submission processing has reduced turnaround times from approximately 24 hours to under 2 hours and look promising to scale. This digital transformation will assist us in scaling this platform without proportional headcount growth, while maintaining the differentiated specialist expertise that defines us. Lastly, on process, it means building the right foundation, a unified data and technology architecture for the next decade of growth. Now that we've covered our principles, let's talk about how this all fits together across our 2 disciplines: wholesale brokerage and delegated authority. On the brokerage side, we are building a submission gateway and broker workbench. These tools allow us to reimagine, redesign and automate the most time-consuming parts of the broker's day from submission, ingestion and clearance to carrier matching to detailed quote comparison from various carriers. On the delegated authority side, this is where our platform is most differentiated and where some of our most advanced capabilities are operating today. Within Ryan Re, we have built an AI-powered underwriting platform for our facultative reinsurance business. We have reduced average processing time per submission from approximately 2 hours to minutes while increasing the number of submissions each underwriter can evaluate by roughly 10x. Within Velocity, our property catastrophe MGU, we deployed an AI-driven platform that scores every submission on appetite fit and propensity to bind. The result being an 11x uplift in submit to bind ratios for our highest appetite category compared to our lowest. Simultaneously, the speed to quote has improved by 36% on a median basis. These capabilities are changing how our underwriters work every day, and we are preparing to deploy them more broadly across the firm. Lastly, I would like to remind everyone what business we're in and why we believe this platform will endure. We solve for complexity through expert-led advice and advocacy and a culture of execution and innovation. Every placement we touch requires specialist judgment on unique risks, negotiation across multiple carriers and advocacy when the contract needs to perform. That is not a data processing problem. It is an expertise problem and expertise is what we deliver. Disintermediation risk rises as complexity falls. Ryan Specialties portfolio sits on the other end of that spectrum. Now turning to a brief update on our talent investments. The recruiting class from late 2025 is performing very well and contributing to our new business growth. We continue to expect these hires will become margin accretive within 2 to 3 years. Stepping back, we are very pleased with the first quarter. That said, we are clear-eyed about what lies ahead, and Janice will walk you through how we're thinking about the rest of the year. With that, I will now turn the call over to our CFO, Janice Hamilton. Thank you. Janice Hamilton: Thanks, Tim. In Q1, total revenue grew to $795 million, up 15% period-over-period. Growth was driven by organic revenue growth of 11.8%, contributions from M&A, which added over 2 percentage points to our top line and contingent commissions as we continue to deliver strong underwriting profits for our carrier trading partners. As expected, Q1 was aided by Ryan Re, which had a strong start to the year as the Markel portion of the book contributed to our growth. Adjusted EBITDA grew 15.7% to $232 million. Adjusted EBITDAC margin of 29.2% expanded 10 basis points compared to the prior year period. Adjusted earnings per share grew 20% to $0.47. Our adjusted effective tax rate was 26%. We expect a similar rate for the remainder of 2026. On capital allocation, we repurchased $40 million of our stock. As Pat described, our key priorities remain our M&A strategy as well as our repurchase program. When high-quality assets come to market that meet our criteria, we will be first in line and we'll have the capital to execute. We remain willing to temporarily go above our leverage corridor for compelling M&A opportunities that meet our criteria. We ended the quarter at 3.3x total net leverage on a credit basis, well within our 3 to 4x comfort corridor. Based on the current interest rate environment, we expect GAAP interest expense net of interest income on our operating funds of approximately $222 million in 2026 with $58 million to be expensed in the second quarter. We are making good progress on our Empower program and are on track for a cumulative charge of approximately $160 million through 2028, delivering approximately $80 million of annual run rate savings in 2029, with savings ramping through 2027 and 2028. More than the savings themselves, Empower is creating the operational flexibility we need to invest behind the strategic opportunities Pat described. Now turning to our outlook. The platform we have built positions us to navigate this environment with discipline, yet we want to be transparent about the recent trends we are seeing today. As Tim mentioned, current market conditions in both property and casualty continue to evolve rapidly. And as a result, for the full year, we are now guiding to organic revenue growth in the mid-single digits. Our guidance embeds continued property rate declines of 25% to 35% for the most cat-exposed lines and now incorporates the more recent acceleration in competition more broadly, resulting in a meaningful decline in our property book for the full year. In casualty, we are assuming more moderate growth across our book, reflecting growing competition for small and medium hazard risks and new capital being deployed, which Tim described. We continue to expect organic growth to fluctuate quarter-to-quarter. As we have discussed, the second quarter is our seasonally largest property quarter. As of today, we are assuming Q2 organic growth to be near 0, with the biggest uncertainty being how property trends play out. On margins, we are now guiding to a full year adjusted EBITDAC margin that will be down approximately 100 to 150 basis points year-over-year. The pressure will be most pronounced in the second quarter, where we are assuming Q2 margins to be in the low 30s. That said, the year-over-year decline reflects the revenue impact of the current and evolving market conditions beyond what we described last quarter, the continued absorption of our talent investments, lower fiduciary investment income and higher health care and benefits costs. At the same time, we are taking thoughtful action across our cost structure, advancing the operational efficiencies underway through Empower, accelerating the integration of our recent acquisitions and continuing to leverage our digital transformation and AI strategy. These actions are designed to protect our ability to responsibly invest in the areas driving growth and position the platform to capitalize when the market returns. Looking ahead, we continue to expect modest margin expansion in most years, supported by Empower and the natural operating leverage of our growing platform. Before I close, I want to make one important point about our guidance. Our mid-single-digit organic guidance for 2026 reflects what we can see and quantify based on the trends in the market that are impacting our near-term growth. We are encouraged by the momentum we've gained in the strategic alliances and executive level relationships that Pat and Tim described and look forward to updating you in future quarters. Through innovation, we have and will continue to create new differentiated opportunities to aid our growth over time, which is entirely unique to the scale and expertise we have built at Ryan Specialty and something we believe cannot be easily replicated by our wholesale broker peers. This is the framework we want investors to understand. The diversification we have built and the platform we are continuing to expand are not theoretical. They are tangible compounding sources of growth. I am proud of how our team is executing through this environment, continuing to deliver for our clients, advancing our technology and AI investments and driving the Empower program forward with great collaboration. In closing, our first quarter results are a testament to the dedication of our team and the strength of the platform we've built. We are navigating through a transitioning market, and we are doing so with discipline, transparency and a clear focus on the levers within our control. With that, we thank you for your time and would like to open up the call for Q&A. Operator? Operator: [Operator Instructions] Our first question will come from Elyse Greenspan at Wells Fargo. Elyse Greenspan: I guess my first question is on the updated organic growth. I know you did guide the Q2 to be flat. But I guess, how do you define mid-single digits, I guess, is that within range of 4%? Or where are you looking, I guess, for the full year? And then within that mid-single-digit guide, I'm assuming you're expecting property to decline for the full year and see like modest growth within casualty. But can you help us think through, I guess, the moving pieces of how you're expecting organic growth to trend over the course of the year while bucketing in what mid-single digit means? Janice Hamilton: Yes, sure. Elyse, this is Janice. So thank you for the question. All good parts. Hopefully, I can pick them all up here. So maybe just starting with your first one on the mid-single digits. So that is a step down from the high single that we had previously guided to. We think about that, kind of, either side of 5%. We've historically not -- or we've historically guided with a bit more precision with specific numbers, but we think about that just to help you out somewhere between the 4% to 6% range effectively. When we think about how organic growth will play out for the remainder of the year, obviously, we had a really strong start to the year with 11.8%. The additional help that we gave on the second quarter, we typically don't guide by quarter. So we wanted to make sure that just given the concentration of property within the second quarter being our biggest property quarter and the trends that we're seeing, the intensification of some of that competition that is continuing to interact also with the 25% to 35% rate reductions that we've seen that there is a risk that our property book combined with the rest of the portfolio could be effectively near 0 for the second quarter. Playing that out for the remainder of the year, third and fourth quarters obviously are helped out by business mix. That concentration in property disappears. And then when we think about the full year being at that mid-single digits, we've also got other elements of where we think underwriting managers and other parts of the book will go, but then also the build-in or the buildup of the new talent that we brought on in the second half of last year. Elyse Greenspan: And then my follow-up is on margin, right? Recognizing, right, the new guidance obviously factors in, right, this mid-single-digit growth combined, right? You guys are obviously investing in talent, right, that you started to do towards the end of last year. Can you guys help us think through like I understand it takes a couple of years for the hires to be margin accretive and then there's also time to benefit revenue. But how do you guys balance, right, just making these investments now, right, at a time when growth is lower, right? So you're going to see lower growth and then even more pressure on your margin as we're going through what you call like a transitionary period. Janice Hamilton: Yes. So Elyse, I would just start with the guide for what we've just updated, that includes the impact on the top line pressures from a revenue perspective. So we were expecting to be moderately down -- flat to moderately down over where we ended last year. We're now projecting to be 100 to 150 basis points down, and that does reflect the increased pressures on our top line. Similar to the conversation that we just had around the organic, we expect that impact to be most pronounced in the second quarter, just given the concentration of property. But we are taking thoughtful actions around our cost structure. And we really think about the timing and the opportunity and the flexibility that Empower affords us to do that. There are a lot of opportunities we have to advance our operational efficiency program. We are going to be focused on accelerating, integrating our platforms in terms of technology and then also just leveraging our AI and digital transformation strategy. So all of those together create additional flexibility to allow us to continue to invest in the platform. Elyse Greenspan: And then one more, if I could. The second quarter organic for the property book to decline meaningfully. How much of that is within your MGU book of business? Janice Hamilton: Elyse, I would say that when we think about the concentration of property, obviously, we've talked primarily about wholesale brokerage being where the concentration of that is coming from. We talked about the tempering of growth in that area. But I would also mention, and I think Tim shared this as well, that as we continue to face pricing pressures, the importance of exercising discipline in underwriting managers becomes paramount. We want to ensure that we're delivering profitable underwriting results for our carriers. And we will look past certain property risks if they don't meet our return threshold. Operator: Our next question comes from Alex Scott with Barclays. Taylor Scott: Could you describe, I guess, thinking more medium term, what kind of spread do you think you can make over sort of the retail brokerage business? And I think the knee-jerk would be this feeling like growth is coming down closer to where some of the retailers have been. But on the other hand, there's some unique pressure from price on you guys. So I just wanted to understand like where net new business is and how you view that just kind of making a broad comparison. Patrick Ryan: This is Pat. We're anticipating and realizing today the same as our founding thesis. Our role as the intermediary, as an adviser, and an advocate, that role that we're playing brings specialty insurance solutions to brokers, agents and carriers. That's all expanding, particularly providing services to carriers. However, in the soft market, pricing is a headwind. I've been through several soft markets and price does get to be a driver. But it doesn't replace the value proposition that our people bring to our clients. So we're working our way through. We're fighting through, and we're fighting effectively. And we did have a good first quarter. But we don't have the same trajectory that we've had in a hard market. Incidentally, the conditions that caused that hard market are still out there. But as we all know, there were some benign results in wind and other perils and carriers made a lot of money. And so they're buying market share. So we knew we'd be in a soft market, and we built this platform really with that in mind, and we've positioned the firm to really work its way through effectively, and we're confident that we will. And we base that on, we have the largest and most effective distribution capabilities in our niche, thousands of relationships with large and small brokers. As we've said many times, they use us when they need us. But we are constantly expanding the services that we provide so that they need us more. And you're seeing that in our diversification strategy. That diversification strategy was not accidental. That was well thought through, planned for a long time. And that allows us to create new and innovative products and bring new solutions to our retail brokers and yes, even some of our wholesale broker competitors. So creating these new innovative products and solutions strengthens us in reinsurance underwriting. And as Janice mentioned, or Tim mentioned, in facultative property, so expanding the reinsurance capabilities. We're growing very nicely in benefits. And that's tied in also to our alternative risk strategy because alternative risk is growing nicely and bringing solutions to clients who want to put up some of their own capital. So we're applying that same principle on our benefits, whether it be employers are being put in the group captives. And so constantly improving our solutions that we bring to our broker clients. So we've got these strong strategic alliances. And I would submit that no one else in our space has those strategic alliances that allow us to create new solutions, allow us to bring more new capital to our clients' needs. And frankly, those trading -- special trading relationships really make us enthusiastic about our future, but they also enhance our ability to attract and retain talent. And all of this is about talent. Talent gets a little more of a pressure when it's a pricing phenomenon like we're having in a soft market. But we know how to grow in a soft market. But we want to be transparent. We want to make sure that you understand the headwinds we're facing but also understand the tailwinds that we have. So we're in a cycle here that is putting pressure on. But we're absolutely positioned to take advantage when the market turns, and it will. And I would say that we still believe that we will be the industry organic leader, having industry organic revenue growth translating into profit growth over time. Tim, if you want to add anything to that. Timothy Turner: No, I think that covered it, Pat. We're very optimistic that we can grow even in a softening market. And again, our creative, innovative culture gives us that confidence. We have the tools, we have the products, we have the talent, and we look forward to this challenge, and we know we can do it. Thank you. Taylor Scott: As a follow-up, I just wanted to ask about the broader macro environment and just some more volatility, a little more uncertainty out there. Is that affecting things, whether it's construction here in the U.S. or some of the business you do in Europe? Timothy Turner: I'll let Miles talk more about Europe, Alex. But I would say this that our construction float is very strong. There's a little bit of pressure from interest rates. We've mentioned it before. The opportunities are as strong as they've ever been in construction, but there's a delay from submit to quote to buy. So our quotes and our winning RFPs are sitting for a little bit longer. But we are binding them. We're getting a lot of traction in the actual data center area and crypto opportunities. So we remain very bullish on our construction pipeline. Miles Wuller: I'll touch on transactional liability, which is a global product for RSUM. The space remains quite resilient despite macro uncertainties. The market is working extremely efficiently. There's substantial capital on the sidelines. There's efficient access to debt leverage. And so we're seeing dollar value of deals continue to increase. Unit count of deals is down slightly, but we continue to take more than our fair share of those deals in both transactional rep and warranty as well as tax indemnity. Operator: Our next question will come from Bob Huang with Morgan Stanley. [Operator Instructions] Jian Huang: Can you hear me now? Operator: Yes. Jian Huang: Okay. Perfect. Sorry about that. My first question is about the broader macro environment. Just given there is likely higher expected inflation due to the Middle East conflict and inflation into the U.S. Is there any conversation or thoughts on how that might ultimately flow into pricing? When do you think pricing will start to reflect higher inflation through exposure units or through pricing initially? Just curious your view on that. Miles Wuller: Well, so Tim spoke about RT's construction practice. And so maybe I'll tackle that through the lens of RSUM's builders' risk practice, which does tend to service more of the small and midsized builders risk part of the marketplace. Certainly, we would benefit from more certainty in that space. Borrowing rates remain higher, inflation remains high, and the war creates certainty in the smaller part of our -- the U.S. economy. But I think the same outcome, as I said on the -- we've all said in the larger risk and the transactional risks, we have the product, we have the quotes. We're winning more than our share. And we will all simply benefit from more shovels going in the ground as a result of stability. But yes, we are taking inflation into account as we price risk in real time. It does remain a factor in keeping rates firm in certain classes. Jian Huang: Okay. Maybe a follow-up on data center because I want to unpack some of the commentary you had already. If we look at the larger brokers increasing their data center facility size meaningfully versus last quarter, can you maybe talk about the competitive environment here? It feels like the layer that you're playing with, I have a hard time seeing significant competition against you in the data center space. Is that right? And can you maybe give us more commentary around the pipeline for data centers, the great growth contribution in the next few quarters specifically? Timothy Turner: Sure, Bob. For starters, as we've mentioned, we know we're the industry leader in construction in the wholesale market. And we know that our pipeline is full of opportunities for data centers. Having said that, there's quite a difference between property and casualty opportunities with data centers. So we would have to break that down for you. But it all leads to what Pat says frequently, the brokers use us when they need us. And right now, there's a real strain on capacity in the valuation of these projects. And there's a completed operations exposure that long-tail casualty underwriters are leery of. So there's a lot of pressure on building towers and limits in space, and our services are in high demand. So we see this as a great opportunity going forward, all part and parcel of our construction practice group. Operator: Our next question will come from Tracy Benguigui with Wolfe Research. Tracy Benguigui: Pat, you've been in the industry for many decades and seen many cycles. I was struck by your comments that we're in one of the most volatile and reactive markets you ever witnessed. So when I look at turning points in prior wholesale markets, what is different today? Or if I ask this differently, has the E&S market changed so much that what is ahead is less known? Like it used to be that E&S was a dirty word no longer as carriers are well capitalized. Is that part of it? Patrick Ryan: Well, I would say that the rapid increase in property and casualty rates starting back in '19, second half of '19. That rapid and prolonged rise in rates was -- I've never seen anything like that. And then we have a very risky world out there. And the risks have not diminished. They've just taken the hiatus, some of them have. And so what shocked me is how rapidly property rates have declined and now certain parts of casualty. And it's generally understood that casualty results in '21, '22, '23 are putting pressure on reserves, and it's still early. So some people have said caustic remarks about what underwriters are doing. We're not going to say that, but we are saying that it's surprising how quickly declines have emerged. And so it's that whipsaw volatility. And as you know, when you're coming off large increases and then you get large decreases, that puts so much pressure on new business because you're renewing the business, but you're renewing at a lot lower rate. And as you know, we're a straight commission business. And so we rise and fall with how the pricing of our products are being presented to the marketplace. So that's what I mean when I say I've never seen anything like that, particularly because so many hard markets in the past were event driven. This really wasn't an event. This was a recognition of how the world has changed with climate issues and litigation issues, all the litigation finance. None of that has subsided. And so it's surprising that people would take their products or their profits and reinvest so aggressively, property movement into casualty because it seems to have a better rate environment. All of that is sort of that's what's starting to surprise me. And I think it surprised a lot of people. We're one big storm away from some adjustments. And I can't -- I'm not going to comment about people's behavior. It's just surprising that it is so dramatically swing up and swing down as quickly as we have done. Tracy Benguigui: Got it. And you guys tend to talk about how flow is so much more important than pricing. But if I listen to the commentary today, I think it's been mostly on pricing, particularly wholesale that's informing your outlook on organic. Can you touch on if you're though contemplating any reverse flow or even on the underwriting management business, are you seeing any type of MGA cancellations? Timothy Turner: Tracy, I'll start by kind of showing some of the statistics that we've all seen in the marketplace. We know that the non-admitted property and casualty market, the flow into the channel is up 8%, and we're outpacing that as a company. So our opportunities and the flow of business into the channel remain very strong and healthy. And so we -- a lot of our optimism comes from that. We're getting lots of opportunities. It's just the price. The price continues to go down in property and starting to see some headwinds in casualty. But we're confident that the flow will continue. The business has been restructured. Pat talked about the cycles gone by. But one of the biggest changes has been that we now have instead of a dozen or so E&S companies, we have over 100, so structural change there. The percentage of non-admitted business was 4%, 5% pre second quarter of '19, and now it's up to 24%. So it's a very, very healthy flow into our channel. We believe that it will stay in the channel, most of it. We don't see -- we see some moderation back into the admitted standard market, but not very much. It's moderate. And again, the stamping evidence is strong. So we remain very positive that we'll be able to capture our fair share of that flow. Tracy Benguigui: Can I ask also about MGAs? Have they need carriers? How are those relationships going? Anyone cancel a relationship? Is that play in your outlook at all? Miles Wuller: This is Miles. I appreciate the question. It's actually quite the contrary where we continue to attract substantial capital from existing and new partners almost on a daily or weekly basis. I'd add to what my colleagues have said that Ryan's $12 billion delegated platform wins through standard of care, alignment and material investment in our people and our platform. And the reality is that the carriers are printing record ROEs, profit, combined ratios, none of that is at all coincidental. I think we've had a role in this. We've pushed substantial rate, terms and conditions and innovation. Beyond that, through the MGs and distribution, we've guided the highest hazard risk into the monoline -- excuse me, the highest hazard modeling risk into the E&S market where the balance sheets have the best chance of the proper risk-adjusted returns. And the outcome isn't that surprising. There's substantial insurance, reinsurance and alternative capital coming to support the channel. So there is a lot of talk in the industry where the world is always, I guess, essentially looking for an enemy who's driving this. But the answer is really pretty simple. It's an abundance of capital that was driving price pressure through new facilities, the easing of terms and conditions on existing facilities and even existing balance sheets. But as it pertains to, I believe, our role in the delegated space, over 40% of E&S premium is delegated today and delegated is approximately 20% of the U.S. commercial P&C marketplace. So I'm actually quite proud of RSUM's or all of Ryan's delegated underwriting contribution to the exceptional results in the carrier community. And we're convinced that Ryan will continue to contribute to thoughtful underwriting and leading underwriting profit into the future, and that's represented in our forecast. Operator: Our next question will come from Meyer Shields with Keefe, Bruyette, & Woods. Meyer Shields: Am I connected? Janice Hamilton: Yes, Meyer. Meyer Shields: Okay. Great. So really a couple of quick questions. First, I just wanted to confirm that the change in the margin guidance for 2026, is there anything in that other than the change in expected organic growth? Janice Hamilton: Meyer, I would say the simplest thing, the change from where we were last quarter to now is as a result of the top line change. Meyer Shields: Okay. Great. And I'm wondering -- so we're in clearly a weird environment right now in terms of pricing. When you take a 3- to 5-year outlook across the cycle, has your view on Ryan's organic growth potential in that environment changed at all? Janice Hamilton: Meyer, would you mind repeating that one? Meyer Shields: Yes. I'm wondering, I understand that there are particularly surprising and pronounced pricing pressures in 2026. But if you take a step back and say, okay, over the next 3 to 5 years, has your view of the organic growth opportunity changed from that perspective? Patrick Ryan: My perspective on it, Meyer, it's Pat, is that we are much stronger today than we've ever been. We have so much more to offer our brokers and our carriers and these strategic alliances that the opportunity for innovation has never been greater. The data that we're now managing much more effectively as most people are because of the pressure of AI and the opportunity through AI, there's tremendous opportunity to utilize that data to innovate new product. And the way we get organic growth is by bringing innovation and empowering our people to execute on that. And so absolutely remain very, very bullish on being long-term industry leader in organic growth. And we have not given up on double digit. We just are suffering from these price reductions. But in terms of the quality of our solutions, they just keep improving and the quantity keeps improving dramatically because of the innovation. So -- and I would add one other thing. And that is that AI, as Tim talked about, is going to allow us or provide the opportunity for us to take people who are doing administrative support work and get them into the field. And there's nothing more successful than having more boots on the ground talking to clients. And so AI is opening that opportunity for us, and we are moving towards availing ourselves of that opportunity. We're not making any predictions, but for one, we'll have more people out dealing with clients in the quite near term because of the streamlining of our back-office work and taking very talented people that are now experienced enough to go out and work with clients and be successful. In my past life, I experienced the value of bringing young talented people into the marketplace and letting them loose to go out and make calls and develop business. And so our strategy to recruit, train, develop people and bring them into the industry is going to accelerate the impact. That's my opinion. Operator: Our next question will come from Rob Cox with Goldman Sachs. Robert Cox: Yes. My first question was just on retail brokers. I think there's some industry discussion that retailers are working to keep growth as the environment gets more challenging. Are you seeing retail brokers pushing harder to pivot business into retail or admitted markets? And are you seeing retailers look to internalize wholesale business? And is that embedded in your guidance at all? Timothy Turner: Rob, it's Tim. Yes, we are seeing some of that activity, but it's not a lot, and it's not a meaningful amount. There are retailers, global and national, as you know, that have wholesale solutions. For the most part, they're very small and they don't interfere with our flow. But there's pressure, and there's pressure to go direct when they can, and we deal with that every day. But there's 100 wholesale-only P&C companies now in the U.S. and the high hazard classes of business that we're in are very technical and they require expert marketing expertise to achieve the best results for the client. And I would say majority by far of the retailers in the U.S. know that. And they'll continue to count on us. And again, our flow is as strong as it's ever been. So we see a little bit of activity to your question but it's not meaningful. Robert Cox: Okay. That's helpful. And just as a follow-up, yes, I'm curious if you're seeing any insurance product innovation around artificial intelligence and if that's flowing into the E&S market at all? Timothy Turner: No, we have not seen any particular product innovation around that. We've seen coverage enhancements. We've seen some coverage tightening, if you will, carriers creating manuscript endorsements around the exposure. So there's a heightened awareness about what the potential losses could be. So our professional liability brokers are fast at work. And I believe it's inevitable that there'll be new products that emerge from the AI explosion. Robert Cox: Okay. And if I could squeeze one more in. I just wanted to ask; did you guys quantify the RAC Re and Ryan Re deal benefit to organic growth in the quarter? And maybe how much you expect them to contribute next quarter as well? Miles Wuller: Rob, it's Miles here. We do not break those out by line. But I mean, I think behind the numbers that we published, we're proud that across the entire underwriting segment with extremely attractive growth despite the property headwinds, new product development, incremental capital under management, taking share from others and compounding that core organic growth to get to total growth, we had continued increase in profit commissions. And then on top of that would be the Markel transaction, as you highlighted. Patrick Ryan: Going to the Ryan Re part of the question, Rob. We have tremendous, talented team. They've seamlessly taken over Markel Re and growing it really nicely. We can't predict any other subscale reinsurers, but it's certainly a great solution for Markel. And we just have a very, very strong team of management at Ryan Re. And that reinsurance capability permeates our entire strategy in that alternative risk is reinsurance. Our benefits is in funding through group captives, that's reinsurance, facultative capabilities that they have just launched. That's another service to other capital providers where they'll be facilitating facultative coverages. So there's a long runway on reinsurance. And this is not accidental. When I retired from Aon, I said we will not become a competitor as a retail broker or as a reinsurance broker. But I love the reinsurance industry. And it was wide open for an MGU to partner with real solid capital like Nationwide Mutual and get innovated. And that's what's happening, and we're enthusiastic about the future of reinsurance as part of our portfolio. Janice Hamilton: And Rob, just on the question of organic as well. Ryan Re was something that we called out as a contributor. We knew and we expected that with the Markel renewal rights deal, that would have an impact on our first quarter organic, which it did. It was a strong contributor, and it exceeded our expectations as well. Going back to what I said earlier on the call with Elyse just around business mix, we do expect Ryan Re and the Markel book to contribute to our organic for the remainder of the year, but the largest renewal is actually in the first quarter. So just from a seasonality perspective, we would expect the most significant impact to happen in the first quarter. Operator: Our next question will come from Andrew Kligerman with TD Cowen. Andrew Kligerman: Can you hear me? Patrick Ryan: Yes. Andrew Kligerman: Okay. Great. My first question is around delegated authority, which is now actually more than half of net commissions, and it's led by delegated -- I'm sorry, by underwriting management at 37.7%. So I'm wondering in the underwriting management area, what's the deal pipeline looking like? And is there a point when delegated authority is more than 2/3 of net commissions within the next 5 years, say? Patrick Ryan: Well, that's a really interesting and important question because so much of the -- what we call our diversification strategy involves delegated authority. In fact, most of it does. So just by virtue of that, and the already good growth that we have in existing facilities, it's going to become a larger percentage for sure. That was part of the founding thesis, and that's got a lot of runway, Andrew. So we've got a great distribution business in wholesale broking. But as we've said, we're way more than a wholesaler. We love the wholesale broking business. It's been a fantastic growth business and will continue to be. But the diversity around that, these are more than adjacencies. These are really core businesses that integrate very nicely. So yes, I mean, delegators has continued to be a larger percentage. Miles Wuller: Andrew, you asked about -- you asked about pipeline, so I just want to chime in. The focus is on organic buildouts on the platform and launching new products off of the M&A of the last 2 years. And I'd also highlight that the benefit of diversification of the platform is our ability to be an increased solution provider to our capital partners by creating more touch points across the distribution chain, binding programs, MGUs, alternative capital, alternative risk benefits. And we're able to offer a much more holistic approach solving the carrier needs as well, create more FS, create stickiness and create more special relationships that Pat opened with in his intro. Andrew Kligerman: Got it. And my follow-up is around just MGAs, MGUs in general. Some of the specialty carriers and maybe it's just talking their own books, but they've been very critical of MGAs and MGUs and how they're pricing in this declining or decelerating environment. Why is the Ryan MGA platform, the underwriting management platform, why is that different? What kind of distinguishes Ryan from kind of commentary that we're hearing? Patrick Ryan: Millions of dollars, hundreds of millions of dollars of investment. Most MGAs are started by capital backing some underwriters who have a following. We never believed that, that was the appropriate strategy. We always believe the appropriate strategy is to find a niche that needs delegated authority and to equip that with the top-quality services that any carrier would provide. That's actuarial, that's data science, that's cat modeling, and it's great underwriters and it's an overall culture. Culture #1 is we have a duty of care to the capital provider to make an underwriting profit and represent them appropriately in the marketplace. That's not the way historically, MGAs have come and gone in the business. But we don't like being harnessed with that brand because we're totally different. It was part of the founding thesis that this was going to be an evolving -- quickly evolving change in the industry. We seized the opportunity, and we made the investments. And just to put an exclamation point on that, the $2.7 billion that we invested in '23, '24, part of '25 is all delegated authority. That's how much we believe in it. And so I said hundreds of millions, I should have said billions have been invested in that. So that's the difference between us and the run-of-the-mill new MGA. But that run of the new MGA is putting a lot of pressure on pricing, but that's not us, but it's putting a lot of pressure on pricing. So a carrier who wants to put capital to work, doesn't have the talent, knows some underwriters that they did business with a company A and they get together and they form an MGA. The average life cycle of those kinds of MGAs is very short term. At Aon, we had MGAs for many, many, many years, decades now. We have purchased companies that are over 60 years old as MGAs. So we take a totally different approach to it. Andrew Kligerman: That was super helpful, Pat. Maybe just real quickly, the Ryan stock option trust, that's funded entirely by you? Or are there some loans? I read it so quickly. I just wanted to make sure I understood it. Are there loans attached to that? Patrick Ryan: Yes. You're talking about the option plan. Andrew Kligerman: Yes, yes. Janice Hamilton: Andrew, would you just mind repeating the question? Andrew Kligerman: Yes. I just wanted to understand the dynamic. Is that -- is there some kind of loan that Pat is making and then funding it with the stock? Is that how it works? Patrick Ryan: No. No, it's very simple. We have always believed in alignment. We've always believed in a reward system that gives people a long-term interest in their results. So we've, I think, been farsighted in sharing equity. We really believe we have a unique opportunity for our employees because of the tremendous pressure on our shares and the reduction in the share price. That is a unique opportunity to bring more of our people further along to align with all of our efforts, but aligned with our clients, aligned with our shareholders. So to align and reward certain employees. We believe it's a unique opportunity because of the dislocation. I consider it a direct investment in the platform. I believe in the team, I believe in the platform. I believe in the direction we're going. And I want every leader in the company to be aligned in our mission; there I'm offering a meaningful piece of my own capital behind that conviction. There's no loan involved. It's a reward and it's an alignment. And by the way, it's good business. Operator: Our final question will come from Mike Zaremski with Bank of Montreal. Michael Zaremski: My first question is just trying to get some additional kind of macro context around the organic growth guide of mid-single digits. I guess in '25, the E&S market grew -- the U.S. E&S market grew about 7%. Ryan's organic was about 10%. Is there a way we could -- since a lot of us think kind of outside looking in, would your mid-single-digit guide imply the U.S. E&S market is still growing, growing a little bit, a lot, maybe 0%? Is there a way to kind of put that in context? Timothy Turner: Well, I'll try to explain what we think is happening here with the E&S flow. I mentioned it earlier. We continue to see 8% plus growth of new E&S business coming into the market. So the flow remains very strong and very healthy, and we're capturing more than that. We're outpacing that. It's just the prices are coming down, and the premiums are coming down. But in terms of our market share, we're gaining market share all the time, and we're confident that we'll get even more market share this year. It's just, again, price effective flow at the moment, especially in property. Michael Zaremski: Got it. So yes, taking market share. Okay, then I can -- we can work with that. Maybe just also sticking with kind of on a macro level. So back to maybe Meyer's question that over time, if the North Star is still kind of getting back to double-digit organic, how would you break down that organic between flow versus pricing? Is it kind of 50-50 or lopsided towards flow or pricing? Timothy Turner: Well, it fluctuates constantly, not just property and casualty, but there's dozens of product lines within those verticals that have niche firming phenomenon is going on. Prices are going up on classes of business-like transportation, habitational, public entity, lots of health care verticals where, again, the pricing is actually going up, rates are rising, capacity is shrinking. So we give you a macro view of property and casualty, but there's so much more within these segments that are opportunistic for us. So it's kind of hard to break out those rates on a macro basis. Patrick Ryan: I think an important point to add to that, when we say we're still aiming for and believe we can get to down the road back to double digit. We're getting scale in what we call our diversification strategy. We're getting scale, we're getting good scale. And so as that scale rises, it actually has a bigger, obviously, mathematical impact on organic. So the 2 core divisions, each are going to perform well as we believe. But on top of that, we have this diversification with reinsurance, with newly created, we call them de novo delegated authority opportunities, but also alternative risk with new product and of course, benefits. Now those were all de novo, and so you've going through the growth pains, but they're getting scale. So they'll start to contribute more to the overall organic recovery over time. Michael Zaremski: That's helpful. And just lastly, back to the, I think, $52 million stock grant. Any -- are there any terms and conditions that we should be aware of that the stock needs to hit certain hurdles or over certain time frames? Or is it just a straight stock grant that vests over x amount of years? Patrick Ryan: It's the latter. It's 5-year vesting, years 3, 4 and 5. Operator: And our final question of today will come from Rowland Mayor at RBC Capital Markets. Rowland Mayor: Can you hear me? Janice Hamilton: Yes. Rowland Mayor: I wanted just a quick reminder on the timing of recent M&A. As we move through the year, I assume revenue growth should begin to converge with organic growth. Janice Hamilton: Yes. So in terms of our M&A, and I think we shared this in our prepared remarks, the expectation is that more of our material opportunities are going to come potentially later in the year. So we would expect total revenue and organic to converge on that basis, excluding contingents. Patrick Ryan: And the other part of that is that there are properties coming on the market, but not the quality that we're looking for generally. So there will be activity that we're not choosing not to participate in. We have line of sight out in time on potential really good strategic opportunities. But at the earliest, they'd be late in the year and probably '27. But in the meantime, we got a heck of a good investment opportunity in our own shares. Rowland Mayor: Yes. And I did want to follow up on that. The authorization, I think, went in during the middle of the quarter. Is it better to think about the $40 million as for a go-forward basis is like the daily average volume or the $40 million overall? Patrick Ryan: Well, the $40 million is just limited by time and the rules. But let's be clear that within the rules, we want to buy stock. And that's the plan. I think we got a few days that we have to stay dark, but not much longer. Operator: There are no further questions at this time. I will now turn the call over to management for closing remarks. Patrick Ryan: Yes. Well, this is Pat. I'm not going to repeat all the challenges, but we're -- we know we're in a challenging market, but we're also disciplined. I hope you believe, and I think you do, that we're transparent, and we have a really clear focus on the levers we have within our control to bounce back and we're looking at that. We're looking at doing everything we can to bounce back to improve the growth and the margin, which will drive the share price. So we're investing in technology in a significant way, talent always and expanding the capabilities that will allow us to emerge from this current cycle that we're in much stronger. So thanks for your really good questions. Thanks for your support. We look forward to speaking with you next quarter. Thank you.
Operator: Good day, and welcome to the NMI Holdings Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to John Swenson of management. Please go ahead. John Swenson: Thank you, operator. Good afternoon, and welcome to the 2026 First Quarter Conference Call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman; Adam Pollitzer, President and Chief Executive Officer; and Aurora Swithenbank, our Chief Financial Officer. Financial results for the quarter were released after the close today. The press release may be accessed on NMI's website located at nationalmi.com under the Investors tab. During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our filings with the SEC. If and to the extent the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no one should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that on this call, we may refer to certain non-GAAP measures. In today's press release and on our website, we've provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad. Bradley Shuster: Thank you, John, and good afternoon, everyone. I'm pleased to report that in the first quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio and strong financial results. Our lenders and their borrowers continue to turn to us for critical down payment support. And in the first quarter, we generated $12.3 billion of NIW volume. Ending the period with a record $222.3 billion of high-quality, high-performing, primary insurance-in-force. In Washington, our conversations remain active and constructive. We have long noted that there is bipartisan recognition of the unique and valuable role that the private mortgage insurance industry plays. We are in the market every day with a clear mandate and purpose, offering a low-cost, high-value solution that helps borrowers bridge the down payment gap and meaningfully reduces the cash required at the closing table. In the process, we help to make homeownership more affordable and achievable for millions of Americans in communities across the country. With coverage that works to insulate the GSEs and taxpayers from risk and loss in a downturn. National MI and the broader private MI industry have never been stronger or better positioned to provide support than we are today, and we're looking forward to continuing to work with the administration to advance their important housing goals. With that, let me turn it over to Adam. Adam Pollitzer: Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the first quarter, delivering significant new business production, consistent growth in our insured portfolio and strong financial results. We generated $12.3 billion of NIW volume and ended the period with a record $222.3 billion of high-quality, high-performing primary insurance-in-force. Total revenue in the first quarter was a record $183.5 million, and we delivered adjusted net income of $99.4 million or $1.28 per diluted share and a 15.2% adjusted return on equity. Overall, we had a terrific quarter and are confident as we look ahead. The macro environment and housing market have remained resilient through an extended period of headline volatility. Our lender customers and their borrowers continue to rely on us in size for critical down payment support, and we see an attractive and sustained new business opportunity fueled by long-term secular trends. We have an exceptionally high-quality insured portfolio covered by a comprehensive set of risk transfer solutions and our credit performance continues to stand ahead. We're delivering consistent growth and embedded value gains in our insured book. And we continue to manage our expenses and capital position with discipline and efficiency, building a robust balance sheet that's supported by the significant earnings power of our platform. Taken together, we see a clear opportunity for continued outperformance. Notwithstanding these strong positives, however, macro risks do remain and we've maintained a proactive stance with respect to our pricing, risk selection and reinsurance decisioning. It's an approach that has served us well and continues to be the prudent and appropriate course. More broadly, we've been encouraged by the continued discipline that we see across the private MI market. Underwriting standards remain rigorous, and the pricing environment remains balanced and constructive. Overall, we had a terrific quarter, delivering strong operating performance, consistent growth in our insured portfolio and strong financial results. Looking ahead, we're well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio and deliver through the cycle growth, returns and value for our shareholders. With that, I'll turn it over to Aurora. Aurora Swithenbank: Thank you, Adam. We again delivered strong financial results in the first quarter. Total revenue was a record $183.5 million. Adjusted net income was $99.4 million or $1.28 per diluted share, and adjusted return on equity was 15.2%. We generated $12.3 billion of NIW and our primary insurance-in-force grew to $222.3 billion. 12-month persistency was 82.2% in the first quarter compared to 83.4% in the fourth quarter. Net premiums earned in the first quarter were a record $154.8 million compared to $152.5 million in the fourth quarter and $149.4 million in the first quarter of 2025. Net yield for the quarter was 28 basis points, consistent with the fourth quarter. Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was 34 basis points, also unchanged from the fourth quarter. Investment income was $28.6 million in the first quarter compared to $27.5 million in the fourth quarter and $23.7 million in the first quarter of 2025. Total revenue was a record $183.5 million in the first quarter, up 2% compared to the fourth quarter and 6% compared to the first quarter of 2025. Underwriting and operating expenses were $30.6 million in the first quarter compared to $31.1 million in the fourth quarter. Our expense ratio was 19.8% in the quarter compared to 20.4% in the fourth quarter. We have a uniquely high-quality insured portfolio and our credit performance continues to stand out. We had 8,044 defaults at March 31, compared to 7,661 at December 31, and our default rate was 1.17% at quarter end. Claims expense in the first quarter were $20.7 million compared to $21.2 million in the fourth quarter and $4.5 million in the first quarter of 2025. GAAP net income for the first quarter was $99.3 million and diluted earnings per share was $1.28. Adjusted net income was $99.4 million and adjusted diluted EPS was also $1.28. Shareholders' equity as of March 31 was $2.6 billion and book value per share was $34.57. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $35.46, up 3% compared to the fourth quarter and 15% compared to the first quarter of last year. In the first quarter, we repurchased $27.7 million of common stock, retiring 716,000 shares at an average price of $38.65. Since starting our buyback program in 2022, we've repurchased a total of $377 million of common stock, retiring 12.8 million shares at an average price of $29.43. We have $198 million of repurchase capacity remaining under our existing program. At quarter end, we reported $3.6 billion of total available assets under PMIERs and $2.2 billion of risk-based required assets. Excess available assets were $1.5 billion. Overall, we achieved robust financial results during the quarter, delivering consistent growth in our high-quality portfolio, record top line performance, continued expense efficiency and strong bottom line profitability and returns. With that, let me turn it back to Adam. Adam Pollitzer: Thank you, Aurora. We had a terrific quarter, once again delivering significant new business production, consistent growth in our high-quality insured portfolio, and strong financial results. We have a strong customer franchise, a talented team driving us forward every day, an exceptionally high-quality book covered by a comprehensive set of risk transfer solutions, and a robust balance sheet supported by the significant earnings power of our platform. Taken together, we are well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio and deliver through the cycle growth, returns and value for our shareholders. Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions. Operator: [Operator Instructions] The first question today comes from Bose George with KBW. Bose George: First, I wanted to ask what was the default per new notice this quarter versus last quarter, that's a little hard to calculate sometimes just with the intra-quarter cures. Aurora Swithenbank: Sorry, Bose, was the question specifically around the reserve per new notice? Bose George: Yes, yes, the reserve per new notice for this quarter versus last? Aurora Swithenbank: It's $14,200, which is broadly consistent with the $14,500 that we established last quarter. Bose George: Okay. Great. And in terms of the delinquency rate in the first quarter over the fourth quarter, was that in line with expectations given the seasonality increase, but obviously, it's a very modest increase. Adam Pollitzer: Yes. Bose, I think that's right. Look, broadly speaking, I'd say we're really encouraged by the credit performance of our portfolio, including the trends in our default population. We've talked about it. We're continuing to see a natural normalization in our experience tied to just the growth and seasoning of our book. That's nothing new. And then seasonality, you noted there's always going to be a plus/minus around that seasonality. Just one, depending on how things trended in the preceding quarter because it's a period-to-period view what's happening in the macro. And there's other factors also that can play into it, particularly in the first quarter, the timing of when borrowers received their tax refunds, for example. But as you noted, when we look at it, we have an incredibly high-quality portfolio. Our existing borrowers are broadly well situated and the resiliency that we continue to see in the macro environment and housing market continues to set a favorable backdrop. And when all of that comes through performance, we were really encouraged by the performance. Nothing stood out to us that we highlight as a point of concern. Bose George: Okay. Great. Actually, just one more on credit. The loss severity number trended up a little bit as well. Anything to call out there? Or is it just a small cohort of loans there? Aurora Swithenbank: Yes. I think it is that, it's a law of small numbers. And also, it reflects what Adam was just talking about of the growth of the seasoning of our book. More and more of our ultimate claims, both our NODs and those progressing through to claims are from those post-COVID vintages, the '22s and later, which inherently have less embedded equity in them. Adam Pollitzer: Yes. We only paid 170 claims in Q1. So it's still a very small pool to draw from. Bose George: Yes. Yes. Absolutely. Operator: The next question comes from Terry Ma with Barclays. Terry Ma: Maybe just a follow-up on credit. anything kind of notable to kind of call out either within the vintages or regionally that you're kind of seeing? And then just overall, how are you thinking about the macro environment on just the consumer with higher energy prices? Adam Pollitzer: Yes. Maybe I'll take them in reverse order because I think probably useful to talk about the big picture and then to talk about anything that stood out in the quarter. I think we've been -- we use the phrase encouraged right across the board, but we've really been encouraged by the broad resiliency that, that we've seen in the housing market and the economy for a while now. I think headline unemployment is still low. Consumers are still spending. Businesses are continuing to make significant investments. Equity market continues to set new highs. And I think we've got a little bit of stimulus coming in just in the form of larger tax refunds under the One Big Beautiful Bill Act. But real risks do remain, right? The labor market continues to show some signs of strain with the slowdown in hiring activity. Confidence is certainly down on the consumer side. And sort of getting to what you've touched on, I think the conflict in the Middle East has certainly added a new dimension to things. But I think the approach that we've generally been taken all along is to plan for the possibility that stress could emerge. And if it doesn't, we'll be happy to have planned and protected nonetheless. And I think we're in the point now of being happy, right, being happy to have built our business with an eye towards disciplined and long-term risk responsibility to make sure that we can continue to perform through all cycles. But right now, when we look at the backdrop, it's still a broadly encouraging one. And in terms of the impact specifically from higher gas prices I mentioned that the conflict in Iran has added a new dimension. But in terms of gas prices themselves, we really don't expect to see a notable impact. If you parse through all of the data, although oil prices are up dramatically and there is real impact for certain households, they're still below actually where they were in 2022 at the onset of the war in Ukraine. And on an inflation-adjusted basis, they're still below where they were in the late 2000s, early 2010s. Gas today accounts for roughly 3% of household expenditures. And so when you put all of that together, while there will certainly be pockets of the market that are impacted and it will have a impact perhaps on broad consumer behavior, we don't really expect to see anything of consequence comes through in our default activity or claims experience, again, in isolation related to gas prices. As to the second question, as to whether or not there's anything that we would call out in the default population, nothing new at all, I would say, in terms of borrower risk or geographic concentrations that emerged in Q1 compared to where they've been, all the same trends that we've seen for a while, which is a little more strain in higher risk cohorts, right? More default concentration in the geographies that we've had in focus for a while now like Florida and Texas. And just this natural movement that Aurora mentioned in terms of the vintage composition, right, with an incremental portion of our defaults now tracing to '22, '23, '24. But none of this is new. It's just a continuation of the themes that we've been talking about and seeing for a while now. Terry Ma: Got it. That's super helpful. I guess maybe taking a step back, big picture, I think it's well-known and also well messaged that the MI industry is experiencing measured credit normalization. Is there anything in this quarter that may suggest that, that rate of normalization may be accelerating? Because at least from the outside looking in, from what we could see, it looks like new notices are accelerating on a year-over-year basis. The cure rate is lower also relative to last year. So like anything that may suggest that the rate of credit normalization may be accelerating? Or should it just kind of stay stable? Like, any color would be helpful. Adam Pollitzer: Yes, obviously, so much depends on what happens in the world around us, but there's nothing that stood out this quarter that makes us think we will get to normal quicker than where we were otherwise pacing. I do think the quarter-on-quarter trend is obviously instructive and it's valuable to look at. If you broaden the aperture a bit, though and look at, say, how NOD count has trended over the last 6 months, just not the last quarter and you compare the experience that we've had, say, from the end of Q3 '25 to Q1 '26. It actually comps favorably to the experience that we had at the end of the third quarter of '24 to the first quarter of '25. So again, I think there's nothing that really stands out. Borrowers are broadly well situated. The environment around us is still quite a favorable one. And movements quarter-to-quarter, nothing stood out in a way that we call attention to. Aurora Swithenbank: And just on the cure rate, it was down at 28%, but it was 31% in the first quarter of last year. So it was only very nominally down year-over-year. Operator: The next question comes from Rick Shane with JPMorgan. Richard Shane: I apologize, I've got a few things going on here. But look, we -- first quarter, and we talked about this a lot with the consumer finance names. First quarter was sort of a tale of 2 quarters. And I would describe, we had January and February pre-Iran, we're now March and April, we have 2 months post. I am curious how that sort of impacted the contours of your quarter in terms of volume? And also curious if you saw anything else that we should be aware of? Adam Pollitzer: Yes. Rick, it's a good question. I think confidence obviously plays an important role in the consumer decision to purchase a home, right? For most borrowers, it's the single largest item that they'll ever -- assets that they'll ever own. And not only do you need to have -- be at a point in life where it makes sense in terms of family dynamics and want to point downwards to the community and to [indiscernible] consider the school and all these life events and not only just the math have to pencil out from an affordability and a value standpoint, but you have to feel confident to make such a significant leap. So that does play a role in it. But even more important is the arc of interest rates. And so it happens to be that the period you talked about January and February, we saw a continued rally in rates, and we touched towards the end of February a multiyear low with a 5.99% rate. And even though it's just a touch below 6%, I think the psychological value of seeing a rate with a 5 handle on it is really powerful. And since then, rates have sold off and I think today, we closed something close to 6.5% on the 30-year fixed rate mortgage. And so we're seeing some of that come through where that hits most specifically is on the pace of refinancing activity. So the first quarter was a strong quarter for purchase volume. It was an even stronger quarter from a refinancing volume standpoint, and we've seen some of that begin to slow just as rates have moved somewhat higher, right, 50 basis points is a pretty significant move. I think that's going to be a much more significant driver than the psychology and confidence that comes around what's happening in the Middle East. Operator: The next question comes from Mark Hughes with Truist. Mark Hughes: I wonder if you could talk about the competition, the competitive dynamic in the quarter. Your NIW was quite strong year-over-year. I think you just touched on the cancellations, which I assume was a little more refi activity in the quarter. But anything you would say about competition, what that implies for the balance of the year? Adam Pollitzer: Yes. I guess what I mentioned that we see a broadly balanced and constructive market environment around us both in terms of how lenders are engaging, where credit standards are set, but also just the general tone of the competitive environment. And in terms of our performance, we're delighted with our results for the quarter from an NIW volume standpoint, right, up 33% year-on-year is a terrific result. And I point to 2 drivers. One is just, I'd call it, sort of foundational on-the-ground execution, right? Doing what we do every day, adding more customers, providing value-added input to existing accounts so we can win more of their business, doing all the things we've always done around proactively managing our mix of business and flow by borrower, geography, product risk attributes, just the day-to-day that we've always done. But the second is the market, right? I think we've been saying for some time now that despite elevated rates, the MI market presents us with a compelling and durable opportunity. And in Q1, the sort of first 2/3, right, January and February, declining rates really added to that and helped to spur some incremental activity both on the production side -- sorry, on the purchase side, but also on the refi side. So all in, I think because of what we're achieving with our customer franchise in the market and then strengthen the market around us, it was a really constructive market. As we look out across the year, we don't provide guidance, but I'll trace back to some comments that I made on our Q4 call. Coming into the year, we generally expected that 2026 volume would look similar to how 2025 volume trended from an overall market standpoint, right? A strong year where long-term secular drivers of demand and activity continue to come through, where resiliency in house prices continue to support larger loan sizes and where affordability challenges continue to drive a real need for private MI coverage and the down payment support that we provide. And that's absolutely been the case through the first quarter. Obviously, first quarter was stronger than Q1 last year because we had the tailwind of rates. Now that they've sold off as we look ahead through the remainder of the year, I think we're still calibrating off of 2025 performance, which, again, was a highly constructive environment, and we'd be delighted to see that type of experience this year. Mark Hughes: Understood. And then on the expenses, just in absolute terms, you've been last 3 quarters kind of down a little bit, up a little bit. Year-over-year on expenses and that's contributed to nice leverage. Does that pattern continue in subsequent quarters on an absolute basis, maybe just a modest progression? Aurora Swithenbank: I think in terms of absolute dollars of expenditure, we've said this before, we will expect increases over time, but we try to be very disciplined about minimizing those increases. So each individual quarter has its own quirks and certain things that manifest in those quarters. So I think the best comparison is year-over-year. And in the first quarter of last year, we had $30.2 million of expense. This year, it's $30.6 million of expense. So again, as you indicated, a modest increase. But I think we need to balance against that. We have the smallest expense base in absolute dollar terms in the industry, and we want to make sure we're continuing to invest in our people, our systems, our data and analytics and risk management and making sure that we're making those investments for future value. So I think we're going to continue to remain disciplined but you should expect, over time, increases to that absolute dollar expenditure. Operator: [Operator Instructions] The next question comes from Mihir Bhatia with Bank of America. Mihir Bhatia: Adam I wanted to go back to the credit discussion a little bit. Maybe just on credit losses, in-period losses in particular, I think they were up pretty materially like $13 million year-over-year versus new notices up being 300. It sounded like you didn't change any assumption. Maybe just talk a little bit about that. Is that just like the extra $13 million was just from the 300 new notices? Adam Pollitzer: No. It's going to be a combination of things. So one, the environment is never static. And so when we're going through -- we're not applying a blanket homogeneous assumption around frequency or severity. We're actually going out and modeling each individual default and where those defaults sit at the time that we're closing the book. So an estimation of the mark-to-market LTV, for example, of that loan. So we've got just -- there's a different set of actual experiences that go into how we're marking each of those defaults at a given point in time. The default composition themselves, we've talked about this idea of normalizing. So if you rewind a year, there would have been fewer defaults in the overall population a year ago that traces to the post-COVID population, the '22, '23, '24, '25 for example, nothing in the -- of the 2025 year. And now that more of those are coming through they're broadly similar to the loans that have experienced default in prior periods with the one big differential being the mark-to-market LTV position is higher because. Those are loans that while they were originated in a constructive environment didn't get the benefit of the record run of house price appreciation through the pandemic. And that has a big impact on our expectation for ultimate claim outcomes from initial default. So that will factor through. And the other one is that over time, as we're seeing house prices continue to move higher, loan sizes themselves move higher, that the average risk exposure, the average risk in-force for each defaulted loan can grow a bit, and that will contribute to a different reserve per NOD that we're establishing. So it's kind of all of those together will drive the differences. Plus, as you noted, there's a larger number of notices that we reserve for. Mihir Bhatia: Okay. And then is that the same -- like I guess, is this the mix and the mark-to-market of the loss, is that what's also driving the reserve per default assumption higher? Like I'm just trying to understand because obviously, you released $26 million of prior period reserves but the reserve for default is moving higher. Is that just the same thing that's driving that? Aurora Swithenbank: Yes. I'm sorry. It is moving nominally higher. So if you look at our entire -- I referenced the new NODs earlier. If you look at our entire population of NODs, it's [ 26,000 round about 300 ] is the average reserve, which is up approximately 2% quarter-over-quarter. And if you look at what's driving that change, it really is the larger loan size of the loans that are in default. Mihir Bhatia: Got it. Maybe just turning to NIW for a second. I think it's down a little bit quarter-over-quarter. So I know everyone hasn't reported yet, so we don't have like market share. But I'm sure you do some ongoing monitoring. Maybe just decompose some of that for us? Like what are some of the key factors driving it? I imagine a little bit smaller market, but do you see any shift in market share? Is there any mix shift going on, whether from the bulk market or what have you, that's driving that would make you think your results will be different than some of your peers? Adam Pollitzer: No. When we look at it, we -- again, we don't -- because we're talking share, I feel the need to give the caveat. We don't manage to market share at all, right? We never have, and that certainly remains the case today. But in terms of our performance in the quarter, we didn't see any significant moves. There obviously was a bulk transaction that one of our competitors announced over the last few days. So that will just skew the headline number, and you need to normalize for that because that's not flow business that really traces to share. But there were no significant moves. Our NIW was up 33% year-on-year. Rough estimate, we think market is probably up about 35% year-on-year, so right in line with market growth, which is where we want to be, right? We're in a terrific position with our customer franchise as we continue to perform from a new business flow standpoint at that level, we'll just naturally, we've got this embedded growth engine in terms of our share of industry insurance-in-force continuing to accrete higher. Mihir Bhatia: Got it. And then just I'll end with a reinsurance question. The profit commission has been trending a little bit lower. Is that just a function of normalizing credit default, something else going on there? Aurora Swithenbank: Yes, that's -- you put your finger on it. Operator: This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks. Adam Pollitzer: Thank you again for joining us. We'll be participating in the BTIG Housing & Real Estate Conference in New York on May 6, the KBW Virtual Real Estate Finance Conference on May 19 and the Truist Securities Financial Services Conference in New York on May 20. We look forward to speaking with you again soon. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the First Quarter 2026 SPX Technologies Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. Mark Carano. Sir, please begin. Mark Carano: Thank you, operator, and good afternoon, everyone. Thanks for joining us. With me on the call today is Gene Lowe, our President and Chief Executive Officer. I'm also excited to be joined by our new Head of Investor Relations, Johann Rawlinson. He has joined us from the Hertz Corporation, where he served as Head of Investor Relations for the last 5 years. A press release containing our first quarter results was issued today after market close. You can find the release and our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results and comparisons will be to the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation. Our adjusted earnings per share exclude intangible amortization expense, acquisition and integration-related costs, nonservice pension items, among other items. Finally, we look forward to meeting with investors at various events during the upcoming months. And with that, I'll turn the call over to Gene. Eugene Lowe: Thanks, Mark. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the first quarter of 2026 as well as an update on our full year outlook. We had a strong start to the year with year-over-year growth in adjusted EBITDA of 23% and adjusted EPS of 22%. We continue to execute well, driving significant profit growth in both segments and making meaningful progress on several key initiatives. We are raising our full year guidance range to reflect our strong performance in Q1 and outlook for the remainder of the year, partially offset by the impact of the recent changes to the Section 232 tariffs. We do not expect these tariffs to impact 2027 earnings. Looking ahead, we remain well positioned to continue executing on our organic and inorganic value creation initiatives supported by our robust M&A pipeline. Turning to our high-level results for the quarter. We grew revenue by 17.4%, driven by the benefit of recent acquisitions and organic growth in both segments. Adjusted EBITDA increased 23% year-over-year with 90 basis points of margin expansion. As always, I'd like to update you on our value creation initiatives. The capacity expansions across our HVAC facilities to meet the strong demand for our data center cooling and custom air handling solutions are progressing well. They remain on track with the time line and capital requirements outlined last quarter. In Q1, we began producing highly engineered aluminum dampers in TAMCO's new Tennessee facility and expect production to steadily increase throughout the year. We also began production of the OlympusMAX in our Olathe, Kansas facility in the first quarter. Additionally, the Madison, Alabama facility build-out is well underway. We still expect to have assembly capabilities for OlympusMAX and custom air handling products in the second half of this year and initial production capabilities in the first half of 2027. Turning to Detection & Measurement. We continue to advance our new product initiatives across the segment. Our location and inspection platform, recently launched a new locate performance management software that meaningfully expands the real-time analysis of our customers' critical data that is seamlessly transferred from our radio detection precision locators in the field. We believe this solution significantly enhances how our customers locate underground utilities by increasing their efficiency, safety, accuracy and overall data management capabilities. And now I'll turn the call back to Mark to review our financial results. Mark Carano: Thanks, Gene. Our first quarter results were strong. Year-over-year, adjusted EPS grew by 22% to $1.69. For the quarter, total company revenue increased 17.4% year-over-year, primarily driven by the benefit of acquisitions and strong organic growth in HVAC. Consolidated segment income grew by $25 million or 22% to $135 million, while consolidated segment margin increased 100 basis points. In our HVAC segment, revenue grew by 22% year-over-year with 11.5% inorganic growth and a modest FX tailwind. On an organic basis, revenue increased 9.6%, with solid growth in both cooling and heating. Segment income grew by $15 million or 20%, primarily driven by higher volume, while segment margin decreased 40 basis points, largely due to start-up costs associated with the capacity expansions. Segment backlog at quarter end was $755 million, up 38% organically year-over-year, primarily driven by data center demand. In our Detection & Measurement segment, revenue grew by 8.3% year-over-year. The one month of inorganic revenue from KTS contributed 3.9% and FX was a modest tailwind. On an organic basis, revenue increased 3%, primarily driven by higher volumes in our transportation platform. Segment income grew by $10 million or 28% and segment margin increased 410 basis points. Increases in segment income and margin were primarily driven by higher volume and a favorable mix, including greater-than-typical high-margin software volume. Segment backlog at quarter end was $333 million, down modestly year-over-year. Turning now to our financial position at the end of the quarter. We ended Q1 with $158 million of cash on hand and total debt of $674 million. Our leverage ratio, as calculated under our bank credit agreement was approximately 0.9x quarter end, below our long-term target range of 1.5 to 2.5x, giving us significant capacity to pursue accretive growth opportunities. Q1 adjusted free cash flow was approximately $16 million. In addition, during the quarter, we received approximately $60 million in cash proceeds following the completion of the sale of Crawford United's Industrial and Transportation products business. As a reminder, these businesses were reported in discontinued operations and not part of our original 2026 guidance. And net of these proceeds, the implied EBITDA multiple for the acquisitions of the Air Enterprises and Rahn Industries, formerly the Air Handling segment of Crawford United is approximately in line with our average acquisition model. Moving on to our full year 2026 guidance. We are increasing our adjusted EPS guidance by $0.15 to a midpoint of $7.95 to reflect our strong Q1 results, particularly in D&M, and additional data center-related volume anticipated to be delivered in the second half of this year. Our updated guidance reflects a $0.05 to $0.10 impact from the recently announced changes to the Section 232 tariffs. This headwind is expected to predominantly affect HVAC in the second quarter. Excluding this tariff headwind in Q2, we expect first half adjusted EPS gating to be similar to the prior year. As always, you will find our updated 2026 guidance on this slide and modeling considerations in the appendix to our presentation. And with that, I'll turn the call back over to Gene for a review of our end markets and his closing comments. Eugene Lowe: Thanks, Mark. Current market conditions support our 2026 outlook, which implies 21% adjusted EBITDA growth. Within our HVAC segment, our core end markets remain resilient, and we continue to see strong demand for our data center solutions. In Detection & Measurement, our run rate businesses continue to see solid demand supported by new product introductions. For our project-oriented businesses, the front log remains active. In summary, I'm pleased with the strong start to 2026. We are executing at a high level, and our key initiatives, including the capacity expansions and the integration of recent acquisitions are on track. We are confident in our increased full year guidance, which implies adjusted EBITDA growth of 21% at the midpoint, and we remain well positioned to navigate the changing tariff environment. Looking ahead, I'm excited about our future. With a proven strategy and a highly capable experienced team, I see significant opportunities for SPX to continue growing and driving value for years to come. With that, I'll turn the call to Johann. Johann Rawlinson: Thanks, Gene. Operator, we will now go to questions. Operator: [Operator Instructions] Our first question or comment comes from the line of Andrew Obin from Bank of America. Andrew Obin: Can we just talk just on your HVAC business. Very strong growth even with data centers. But if you back data centers out, what end markets really stand out to you in terms of strength? Eugene Lowe: Yes, sure. I think, I'd say, Andrew, if you look at it, our -- you're right, the growth is strongest in data center. With the change in outlook this year, we moved our data center growth somewhere from the neighborhood of 50% to 70%. If you look at the rest of HVAC, where we're mid-single digits, maybe a hair above that. And really, what we're seeing, I'd say, outside of data centers, health care and pharma remains very, very strong. We're seeing power be very strong. And I think some of this is somewhat linked to data center. This would be both on new power and aftermarket. We're seeing some heavy industrial that also a lot of activity there. And then the aftermarket has been very strong for us. So in general, we've seen a number of areas of strength across HVAC. I'd say the areas of softness. They really have not changed a lot quarter-to-quarter. I'd say, commercial real estate still remains at a relatively low level, same with hotels. And what I would say, if you kind of look at more institutional market, universities, government, that's been very healthy over the past couple of years. I'd say that's relatively flattish this year from what we're seeing in the early part of the year. And then we've called out softness in battery and semiconductor, which was very strong a couple of years ago. That has been lower recently. Having said that, we actually see some nice new opportunities coming, some bidding. So that could be something that is coming back on the upswing. But overall, we're feeling very good about our markets, both within data center and outside of data center. Andrew Obin: And on Detection & Measurement, you highlighted strength in transportation. I think military was an area of strength. There was some pull forward. How should we think about that? Any benefit from what's happening? I know you have a very different business, but any benefit from what's happening in Iran, on your business? And just in general, how did the government business do? Eugene Lowe: Yes. So I think we touched the government in a lot of ways. Transportation, it tends to be more the U.S. municipal markets. I'd say the area of exposure that the Iran impact could affect would be more on the CommTech business. What I would say is we've had very strong demand there over the past couple of years, and we expect that to continue that CommTech, as a reminder, would be our legacy TCI ECS business, does a lot of drone detection and so forth with the addition of KTS. So we see continued growth there, but I wouldn't say we see any really step change in growth there because there's been a lot of activity over the past couple of years there. So I'd say it's very active. We like our value proposition. But I don't think it's something that, at least at this point in time, materially changes our mid-single-digit anticipated growth rate for D&M. Andrew Obin: Thanks for the color on CommTech. Operator: Our next question or comment comes from the line of Joe O'Dea from Wells Fargo. Joseph O'Dea: Can we just talk about this? The step-up in the HVAC orders in the quarter, and just the timing of shipments around that, as well as when you talk about the front log, as we see that backlog number step up to where it is, you're just trying to think about moving forward and expectation setting and the degree to which there was a sort of concentrated amount of activity? Or as you look forward, you see that strength persisting? Mark Carano: Yes. Joe, I'll start off. I mean I think with respect to the backlog, I think we -- in our prepared remarks, we talked about data centers and there's real strength there in those markets, and we're seeing those orders come through. We also raised our guide for the year on the HVAC side, I think as you saw again in the slides on the prepared remarks, largely driven by the data center market. So we're seeing opportunities, orders, bookings going into backlog for 2026. And then as we look out into 2027, we're seeing opportunities there that will be executed next year. So that market, I would say, is obviously very healthy. The momentum is strong there. So it sets us up well, I think, for '26, and we'll see as we look into '27. Eugene Lowe: Yes. So I think if you kind of look at the data center market overall, we're just very pleased with what we're seeing. The demand strength is very strong. We would say accelerating. We're seeing this across our different product lines. We're seeing some of our key customers really looking to accelerate, and we're able to expand capacity in this year. That's how we've taken our growth rate from 50% to 70% in data centers this year. But beyond kind of to your question, what does this look like? We actually see some attractive runway looking ahead in '27 and '28. We think we have a really good customer mix here. We have a number of hyperscalers and colos. We have a good global presence here. We're very balanced, and we have a very good line of communication and good visibility with what the expectations of demand are from our data center customers. So overall, we're very pleased with what we're seeing in data center, and we think we're really getting some nice traction in that market, and we would expect that to continue. Joseph O'Dea: I appreciate the color there. And then on the tariff and sort of cost inflation front, just in terms of your response to that? And how much of that is a pricing response? How much of that is a cost mitigation response? And then in particular, where you're manufacturing outside of the U.S., what you see as a time line to bring more of that into the U.S. to help on the mitigation side? Mark Carano: Yes. A couple of comments there, Joe. With respect to sort of sizing that. And we talked about $10 million of kind of gross costs. But that will -- we can offset, we believe, 50% of that, primarily through price, but we've got other levers to pull with respect to that. So that kind of gets you to a net impact. Probably 75%, 80% of that is going to fall within the second quarter of this year. Why is that? Well, it really relates to a couple of our businesses in Canada, the Ing nia business and the Sigma & Omega business that have backlog today that's already priced. But as we go through the back half of the year, we think the impact will be de minimis. And in 2027 I think as we highlighted in our prepared remarks, we don't expect to see any impact from tariffs. We've got the levers in place to offset that. With respect to your kind of second part of your question, we're largely in country for country, really. So we manufacture in the region that we're selling in. So when you think about those Canadian businesses, for example, the TAMCO expansion that we've highlighted in Tennessee and then the Madison facility, a part of that is going to be for the Ing nia product, the custom air handling. We were doing that, a, because there's a lot of demand, obviously, in the U.S. market for those products. But also, it allows us to move that manufacturing into the U.S. and kind of create that in country for country model. Operator: Our next question or comment comes from the line of Brad Hewitt from Wolfe Research. Bradley Hewitt: So you mentioned there were some start-up costs and related inefficiencies with HVAC capacity expansions. Curious if you'd be able to quantify how much of that HVAC margin miss versus your expectations was due to the capacity ramp? And have you seen anything so far that kind of changes your thinking about the near-term timing of the ramp or the margin impact? Mark Carano: Yes. I would -- Brad, I'll start. I think if you're referring to Q1, a couple of comments to make. We had, I think, in our last call, highlighted the start-up costs. I think if you did the math around what we said, it would kind of get you to $8 million to $9 million of start-up costs, predominantly landing in the first half of the year, right? 2/3 of it will impact kind of Q1 and Q2. So you'd see that impact, and I can come back to what those costs were, if that's helpful. But what I would say is first of all, I mean those start-up costs were expected. I think as we thought about the margin performance in Q1, it was on track with where we expected it to be from our perspective. And if you peel out those start-up costs and just look at the operating leverage and the accretion from the acquisitions, you'd see there's sort of sort of roughly 40 basis points of margin lift absent the start-up costs. Bradley Hewitt: Okay. Great. And then maybe switching over to the D&M side of things. Curious if we could kind of unpack some of the moving pieces there with the revenue outlook unchanged, but margins bumped up by 75 bps for the year. It sounds like there may have been some pull forward on transportation, but just any color on how that project timing shifted and kind of the resulting impact on the segment seasonal guide for the year would be helpful. Mark Carano: Yes. Sure. Just back on your last question, just to be clear, I was talking about year-over-year when I made that last kind of comment around the bridge. So when you think about where Q1 actual was and for '26 versus Q1 2025. With respect to the D&M, so it wasn't a project pull forward. What this was, was expanded scope on an existing project we have, or that we're currently executing. It is in the transportation segment. It's one of our larger multiyear projects. And many of these projects, as you know, have a software scope to them. This one did, and the customer decided to expand the scope of that portion of the project. So it wasn't something that was in our forecast or in our backlog. It's sort of effectively by expanding the scope in a way it sort of dropped in, for lack of a better word. So those projects, I think, as you know, the software components, they have high margins. We don't typically disclose what those are just for competitive reasons. But when you think about the software revenue that we have, it has a very high variable margin associated with it. So when you expand that scope, it really leverages through. And that's really what -- when you think about the full year guide and raising it by 75 basis points, it's really driven in large part by the benefit from this expanded scope and project. Operator: Our next question or comment comes from the line of Jamie Cook from Truist Securities. Jamie Cook: Just understanding like some of the margin impact in the quarter that you spoke to for the year related to just tariffs and capacity additions. I guess, Mark, what's your comfort level in the ability to put up normalized incremental margins as we exit 2026? Just concerned capacity could continue to weigh on margins. So I guess it's my first question. And then the second question, was there anything unusual as you think about the cadence of orders or sales throughout the quarter and as we -- we're into, I guess, April, just given some of the macro uncertainty that's out there? Mark Carano: Yes, I'll start on margins. Listen, I'm very confident in our ability to kind of deliver our traditional kind of incremental margins that we see in the HVAC business, particularly through the back half of the year and as we get into next year. When you sort of look at where we ended the year in 2025 and you look at our guide, right? And if you strip out the impact of these expansion costs that I was chatting about just on an earlier call, and a very modest impact from tariffs that we're going to see in Q2. If you pull that out, you're going to see -- if you isolated the revenue, you'd see operating leverage of, let's call it 60 to 70 basis points. And then on top of that, you have the inorganic piece, which I think we've sized is 10 to 20 basis points. So we're seeing it right now when you strip out those costs, I know it's harder for you guys to see all those components. But I've got confidence in what we're doing now, and I'm not worried about it as we go into next year. Eugene Lowe: Yes. On the end markets question, Jamie, I think we're actually feeling very good. We do have a small amount of sales into the Middle East. I think it's under less than 1%. And we are seeing some impact there, which is to be expected, but not really material. And I would say if you look outside the Middle East, in general, across all of our businesses, we actually track our bookings very close in each business by end market. And I would say, we're feeling good about what we're seeing. And I would say we're a little bit ahead about where we thought we would be in bookings. So overall, we're feeling comfortable with what we're seeing on the end market demand side. Operator: Our next question or comment comes from the line of Bryan Blair from Oppenheimer. Bryan Blair: I was curious, how did radio detection perform in Q1? How is your team thinking about Q2 and full year revenue performance? And to what extent is the outlook influenced by the new technology and product rollout that you cited? Eugene Lowe: So well, I'll do the full year and then you guys can get into Q. We're feeling very good about what we're seeing in radio detection. As you know, they're the global leader in underground location equipment, very strong presence, Asia, Europe, U.S. If you look at their revenue, it's been modestly flattish over the past couple of years, but we are seeing -- so part of that's a result of some real slowness on the continent of Europe, U.K., some of the Asian countries. But we actually see some very nice momentum there, both in just the end market demand, but also the innovation that we're bringing to market. We did talk about, or I did mention in the prepared remarks about locate performance management. This is an area we believe we have a very nice advantage to anyone in the market. This is an area that's really getting traction. We've also been a leader in bringing in mapping solutions as well as integration with utility ERP. So we're doing a lot, and it's actually working. So radio -- and you might be asking this question because we've always said this is the canary in the coal mine, but radio is actually performing very well to date. One of the things, Bryan, we talked about -- I talked to every GM on the day of these calls, and we like what we're seeing right now. Mark Carano: Yes. And I think, Bryan, I mean Gene touched on it, right? The order rates are healthy. And particularly in the U.S., that market has performed well. I would say, when I think about that business overall, it's kind of this year, we're forecasting, and I feel confident about kind of mid-single-digit growth, and we're seeing that in the first quarter kind of low to mid-single-digit growth in that business. Bryan Blair: Okay. That's great to hear. And it's obviously very early days, but maybe offer a quick update on the integration of Air Enterprises, Rahn and Thermolec. And has there have been any surprises, positive or negative to date. Then as always, it would be great to hear a little more color on your M&A pipeline and the prospects for capital deployments over the next few quarters. Eugene Lowe: Yes. Sure, Bryan. I think -- I mean, the punchline is we're very pleased with both of these acquisitions. The Air Enterprises, Rahn one was a little more complicated. That was where we acquired Crawford United, the pink sheet public company. And as we had announced, we successfully sold off the noncore piece within the quarter. So very quick. And I really like Air Enterprises and Rahn. I think these really strengthened us. Air Enterprise is a really good custom air handling solution, very unique, very good leakage rates. So very pleased with that. And then Thermolec also, there is such a good team. They have such a good market position. As a reminder, the logic for Thermolec is we believe we're a leader, the leader in electric duct heating in the Americas, but we're always tiny in Canada. We believe Thermolec is the leader in Canada. And we see some really nice synergies where we can help leverage our channels to grow some of their products and technologies. And similarly, we actually think Thermolec has a very nice channel. So we see some real nice synergy there. As a reminder, after the sale, both of these are, I would say, at very attractive valuations. Both of these are right around our normal acquisition before synergy, which is 10.5 to 11x. And so we feel like we've gotten 2 really good businesses, and we're off to a very nice start there. Look at the pipeline, even after doing these 2 acquisitions, as Mark alluded to, we're about 0.9x leverage below our target leverage. We think we'd be down about where we were at the end of last year. So we have a lot of capacity. The areas where we see the most opportunity haven't really changed in HVAC, I would say it still remains engineered air movement and electric heat. The one change I would say is we are seeing more Detection & Measurement opportunities, some intriguing opportunities, both in transportation, CommTech and AtoN at the moment. So what I would say is the pipeline is very robust. We feel like we have a very good opportunity in front of us and the flywheel is working. So there's a lot of activity going on, and we feel good about both the recent acquisitions and then what we have in the pipeline right now. The other point that I would bring up is, as a reminder, we also did Sigma & Omega and KTS last year, and we're also very pleased with these 2. So they fit really nice. KTS has really given more scale and some really nice technology to our CommTech business, and Sigma & Omega just fits in so well with our Hydronix business. So it's very complementary. And so -- yes, I think on our inorganic strategy, I feel very good about what we're seeing in front of us, but also the companies that we brought into the family. Operator: Our next question or comment comes from the line of Joe Giordano from TD Cowen. Joseph Giordano: Just to follow-up on the cap deployment side, what's the sense of like can a disciplined acquirer be successful in the market like this right now? I mean, anything assets touching things that are really attractive right now are kind of like spiraling higher in terms of the valuations paid, and there seems to be people willing to pay it. So how do you think about your discipline in a market that is seemingly lacking a lot of that? Eugene Lowe: That's a great question. I think we have been, if you think about it, if you step back at 30,000 feet and talk about our M&A strategy, we've always said, it always starts with strategy. So everything starts with how we get the full potential out of our businesses organically. So new products, new channels, new geographies, lean, digital AI. And then out of that process is really how we define our M&A strategy. So as a consequence, as you know, approximately half of our M&A targets have been proprietary deals. These are deals where there's no banker involved, there's no one else involved, and we like that. For those that do have a banker involved and our competitive processes, what I would say is you just have to be disciplined. I think there's some segments that are at valuations that we just will never play. As we have talked about, our average valuation over our 18 acquisitions before synergies is in the neighborhood of 10.5 to 11x. If you actually take the synergies that we capture, you're probably talking another 1.5 to 2x. So we're bringing these really strong businesses into our company, and we're getting them for effectively 9x EBITDA. And I think when you do see some craziness, and I would say there is some areas that you will not be likely to see us playing is. There's some areas of Detection & Measurement, kind of larger businesses, you could see going in the high teens or 20x EBITDA. We're not going to play there. We're seeing some data center companies getting acquired for 20, 25, 30x EBITDA. And that's just not -- we will never be there. That's just not our cup of tea. So at the end of the day, I think you focus on strategy, you stay very disciplined. And what I would say is, with what we have in front of us, we have a tremendous amount of opportunities with what we know and what we're working on. So I think we've been able to stay disciplined and still affect capital deployment and growth. So yes, I think -- but today, I tell you, I would agree with you. There are some things you see out there and some of the valuations on there, they're rich. Joseph Giordano: Yes, I agree. Anything noteworthy that you're seeing in terms of inflation. We're seeing some of the readings tick higher here. And just curious how you're planning around that. Mark Carano: Yes. I think, Joe, you're probably referring to some of these costs, input costs like steel, aluminum and things of that nature. Those costs have moved up a little bit over time. I guess the bias is probably upwards. But I think from our perspective, the reality is that as a total cost of goods sold, they represent kind of let's call it, mid-single digits of exposure. But the reality is, just given the nature of our business, a lot of what we do is engineered to order or configured to order. So our ability to pass those incremental costs on price real time, effectively, that really puts us in a good spot and has allowed us to mitigate any of these inflationary pressures so far. So I feel good about where we sit today. It's not something I'm clearly watching, but I'm not overly concerned about. Operator: Our next question or comment comes from the line of Amit Mehrotra from UBS. Amit Mehrotra: Mark, maybe just give us a sense of how you're thinking about the second quarter, just so we can calibrate our expectations. I mean, there's some tariffs, there's new capacity, there's good growth in data centers. Any color on organic growth and margin by segment in the second quarter would just be helpful to calibrate our expectations. Mark Carano: Yes, it's a good question. I mean I think just broadly, I would say those markets that we participate in, I mean, all of them kind of remain healthy, right? We're not seeing any challenges or I wouldn't say we're at the tipping point of anything that would change with respect to that. And when I think about the second quarter, we kind of spoke to that a little bit in the prepared remarks. We kind of suggested the first half gating would be similar to the prior year. So when you look at that absent the tariff impact, you really need to pull that out, to really kind of get a sense for what those numbers are. But I think broadly defined, we're -- we feel good about as we look into the second quarter. I think the other thing I would add to that, I mean, listen, when you think about HVAC revenue, I would expect that to be up sequentially. With respect to D&M, I think, obviously, that business can be impacted by the timing of project revenue and that clearly, as we often talk about, we're pretty good about getting that in the year. But where it ultimately lands quarter-to-quarter can create some variability for us. But we feel good about where we sit from that perspective. Amit Mehrotra: And just on that. When you say sequentially up, are you talking about year-on-year growth is up from the 9.6% or just absolute revenue up sequentially in HVAC? Mark Carano: Well, year-on-year, but also -- yes, absolutely. Amit Mehrotra: Okay. Year-on-year growth. Got you. Yes, yes, of course. Okay. And then just maybe a more -- less tactical question, forgive me for that question. But maybe a more important question for the long term. You're obviously adding a lot of capacity. You raised the data center growth of 50% to 70%. One, can you just update us now on where you think data centers are going to be a percentage of your revenue? Probably low teens I would imagine. And then when you ramp up this capacity, Tennessee, Mirabel, Madison, et cetera, how much more revenue you think you can unlock? Because the question is, it feels like you're more capacity constrained than customers seem like they might want to -- they'll take anything you can give them. And so I'm just curious about when this capacity comes online, how much more revenue you need to unlock for that market? Mark Carano: Yes. Amit, we talked a little bit about this in our last call. Maybe a couple of comments. First of all, when I think about the incremental data center growth that we're going to see this year and that we've added into our guidance, our Olathe facility, which is really the primary driver of that for 2026. That's just come online earlier than anticipated. So we're seeing really nice performance on that, and it is allowing us to meet more of the demand that's out there. But as we look out over the next couple of years in support of all this capacity expansion, I would say, as we sit today, our view hasn't really changed from that perspective. We highlighted that these capacity expansions would give us the ability to serve circa $550 million of revenue in the data center market. These sites though, whether it's Olathe or the new facility in Huntsville, right? They're constructed in a way that gives us flexibility to ultimately, drive the product line that's most available to us at that time. So I'd say our view hasn't changed on that. That capacity is really going to ramp. I think Olathe should be at full capacity as we get into mid-2027. The Tennessee facility, which is the TAMCO business, we expect that to be at full capacity in 2027. And then the ramp on the Madison facility is not going to be as linear as those 2 because we're going to be doing assembly only in the back half of the year. We won't have full production capacity until the first half of '27, and then it will ramp from there. And our stated view and -- from last quarter and still holds that that would be at full capacity -- running at full capacity in middle of 2028. Eugene Lowe: Yes. And one comment, Mark, just to clarify for people on the call, that $550 million was incremental off of a $200 million base. So if you kind of say at -- what is the data center capacity after we get these up and rolling. Really our expansions in our existing facilities are largely in production right now. So those have gone very well. Our TAMCO expansion is they've already got 3 lines up. I believe they're adding the fourth line. They're already shipping. That's done very well. And then the Madison, Alabama facility is the longest lead time, but we will be producing product there in the back half of the year. And we actually will see a nice ramp up there next year. So point being, if you kind of say we're at $200 million last year, say we're in the $350 million neighborhood for data centers this year, you can say that we have about $400 million more capacity. And we actually think there could be some more levers we could pull to potentially push more through that facility. But that's kind of where we sit today. Operator: Our next question or comment comes from the line of Jeff Van Sinderen from B. Riley Securities. Jeff Van Sinderen: A little bit more on the data center area. Are you guys seeing any supply chain delays or any other color on supply chain around data center for you? Eugene Lowe: Not for us, I think that there's several critical components that we have, and before we can take on, more purchase orders, we go through a very rigorous process to ensure that we do have this supply chain, but we've been very fortunate. I think with the rapid growth we have had to expand. As a reminder, we are truly an engineered product. So we really -- everything is pretty unique to us. So if you take our cooling towers, for example, we design and engineer our own fans. We have proprietary fans, proprietary gearboxes, proprietary motors, proprietary heat exchange. And so it's ensuring that we have a supply chain that we can make it or the raw material inputs, we can manufacture that. So yes, it has put a little pressure on us. We've had to expand some new suppliers, but we feel very good about where we are now, and we're actively working to ensure that we feel very comfortable as we look ahead to '27 and '28, where we would expect continued growth. Jeff Van Sinderen: Okay. Great. And then I think you mentioned semiconductors and I'm just wondering what kind of work you're seeing to bid on there. Eugene Lowe: Yes. So I think -- I know there's a couple of -- there's some bidding going on now. I think there's one we believe we're very well positioned to be awarded on. Some of these are under confidentialities. I don't think we can speak to the names at this point in time. What I would say is we are very strong, typically in semiconductor with a lot of the largest OEMs. Some of these have us specified in as the choice for cooling towers. So I think we have a very strong value proposition for that market. So as that market starts to bubble up, we think we'd be very well positioned to capture more opportunity. And it is nice to see some early bidding. So I don't think we'll be back where we were a couple of years ago, but we are getting some new opportunities, which we think we'll be able to convert to revenue. Jeff Van Sinderen: Okay. Great. And then just one more to clarify. It sounds like with the Middle East, I realize only -- or less than 1% of your business is there. But it sounds like you don't anticipate any impact from higher oil prices and the macro around that on your business. Is that a fair assessment? Eugene Lowe: I think Mark alluded to this, and I think it's very true, something that is somewhat unique to us in being an engineered product company is, we don't make a product and then ship that same product for the whole year. So it's very rare. So like every cooling tower, for example, is unique. We don't build a single one of those to inventory. So when we do a proposal that we have real-time information on exactly what our costs are. So it's very rare, we have PPV either positively or negatively because we're very real time. So I think you do have to manage inflation. You do need to be careful about that. But I think we have pretty good systems and processes in place, and the fact that the majority of our business is engineered or configured products also makes it such that you're pricing things in a much more real-time basis. Operator: Our next question or comment comes from the line of Walter Liptak from Seaport Research. Walter Liptak: I want to stick with the data center questions. I don't mean to beat a dead horse on this, but so last quarter, the numbers around data center were $200 million in 2025, going to $300 million. I wasn't sure I fully understood why you're taking that number now up to $350 million. Eugene Lowe: Yes. Well, I'd say the punchline is the demand is there. One of the things we've seen from a lot of our large customers is pushing for accelerated deliveries. And when we put our plan together, we had capacity expansion. We've pulled some different levers, some new lines, and we've found ways to expand our capacity to be able to meet demand. This is predominantly in our Olathe facility as well as our Springfield facility. Walter Liptak: Okay. Great. And kind of a follow-on to that, is the data center demand during the quarter, did your teams make progress with new hyperscalers, with new customers, or is it existing customers that are looking for more capacity and quicker lead times? Eugene Lowe: Yes, yes and yes. So I would say our existing large customers want more and it's interesting the increased CapEx that caused a big stir from the large hyperscalers, we are seeing that front and center. Having said that, several of these are existing customers. There's also some new customers, large hyperscalers and colos that we've talked to. So -- but what I would say, while it's not just 1 or 2 customers, it's very broad-based. We're seeing a lot of activity. And it's both with -- everyone talks about the 4 to 5 hyperscalers, but it's also the chip manufacturers. It's also a lot of the colos. And I think we're very well positioned with our product line here. I think if you look at what we bring to the table, if you look at our different product lines and cooling towers, I do believe we're the global leader in cooling towers for data centers. I think we have a leading position with our TAMCO business, our actuated dampers and air movement technology there is a very strong position. And then a lot of the growth is really coming in the dry and adiabatic area. That's kind of a more of a nascent, newer area. So we're talking to some customers, this is the first time they've bought this, that they're installing these. And I just think we bring a lot to bear in this market because the requirements are so large, and that is where we really excel. We are superb at large, complicated cooling. And so I think our background -- so I think where technology is evolving for these very large-scale data centers, you're seeing some that are gigawatt, some even larger, it fits well with what we are good at. So yes, it's pretty broad-based, and we're very encouraged and very excited about the opportunity. Some of the things customers are looking for, a lot of these customers, they want custom engineering for their particular requirements. It could be size, could be thermal capacity, speed, they want modularity and of course, they want efficiency, both on the power side and the water side. So they're looking at solutions that can help their PUE or their WUE, which they typically report at. And I think that's kind of -- as I said, I think it's in line with what we're typically very strong at. So yes, it's a very active and exciting market. It's moving very quickly. Johann Rawlinson: Thank you all for joining today's call. We look forward to updating you again next quarter. Operator, with that, we can end the call. Thank you. Operator: Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.
Operator: Good afternoon, and thank you for joining the First Quarter 2026 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are Chief Executive Officer, Rich Steinmeier and President and Chief Financial Officer, Matt Audette. Rich and Matt will offer introductory remarks, and then the call will be open for questions. [Operator Instructions] The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I will turn the call over to Mr. Steinmeier. Richard Steinmeier: Thanks, operator, and thank you to everyone for joining our call. It is a pleasure to speak with you again. It's been a strong start to the year for LPL. We delivered solid organic asset growth and continued to progress our build and build our recruiting pipeline. We advanced the operational work in preparation to onboard Commonwealth Financial Network, and we made meaningful progress driving improved operating leverage. We accomplished all this against the backdrop of rising macroeconomic and geopolitical uncertainty and an increasingly loud and often speculative narrative around the role of artificial intelligence and wealth management, whether enabler or disruptor. It's periods like this that serve as a reminder of the value of professional advice, the importance of our responsibility to support our advisers and institutions and the strength and resiliency of our business model. Okay. Now let's turn to our Q1 results. In the quarter, total assets decreased to $2.3 trillion as organic growth was more than offset by lower equity markets. We attracted organic net new assets of $21 billion, representing a 4% annualized growth rate. Our first quarter business results led to strong financial performance with record adjusted EPS of $5.60 and an increase of 9% from a year ago. Next, let's turn to our strategic plan and how we are progressing against our organic and inorganic initiatives. Our vision is clear. We aspire to be the best firm in Wealth Management. To do that, we remain focused on 3 key priorities: one, maintaining the client centricity the firm was built upon. Two, empowering our employees to deliver exceptionally for our advisers and their clients and three, delivering improved operating leverage. Effectively executing on these focus areas will help us sustain our industry-leading growth while advancing the efficiency and effectiveness of our model. With that as context, let's review a few highlights of our business growth. In Q1, recruited assets improved to $17 billion, a solid outcome in what is typically our slowest quarter of the year. Throughout Q1, we advanced opportunities into the later stages of our recruiting pipeline while pushing the overall pipeline to record levels. We continue to expect the pull-through to improve over the course of the year, supporting improved organic growth. In our traditional markets, we added approximately $15 billion in assets during Q1 as we improved on our already industry-leading capture rates of advisers in motion. With respect to our expanded affiliation models, strategic wealth, independent employee and our enhanced RIA offering, we delivered another solid quarter, recruiting roughly $2 billion in assets. Turning to overall asset retention. It was 98% for Q1 and 97% over the last 12 months. This is a testament to our continued efforts to enhance the adviser experience through the delivery of new capabilities and technology and the evolution of our service and operations functions. As for Commonwealth, the integration is progressing well. Advisers are completing their diligence. And as they do, we are pleased that many are deciding to stay with Commonwealth. In terms of asset retention, we are in the mid-80s today, and we continue to track towards our target of 90% retention. At the same time, we are working closely with our Commonwealth partners to jointly map the path forward to ensure we are bringing together the best of Commonwealth and LPL. With several foundational elements we are looking to embrace, for example, Commonwealth's indispensable approach to adviser satisfaction and their commitment to responsiveness is woven into the fabric of their culture and something that must be preserved. As a key step to enable this, we are developing a comprehensive case management solution to serve as a foundation for an evolved approach to how we route work and communicate progress to our advisers. Modernized platform will connect advisers' offices to critical systems from relationship management to service, to operations, to product experience functions helping ensure greater continuity, consistency and follow-through across every step of the adviser experience. Beyond the work we're doing to prepare for the onboarding of Commonwealth advisers in Q4, we've continued to advance our capabilities to better meet the needs of high net worth individuals. We've expanded the inventory of alternative investment products available on the platform and are delivering more personalized investment solutions through enhanced direct indexing and tax loss harvesting capabilities. In closing, the first quarter was a strong start to the year, and we feel great about our position as a critical partner to advisers and institutions. As we continue to improve the efficiency of our operations, we are creating capacity to reinvest in growth while driving stronger operating leverage. We believe this positions us to deliver sustained value for both our advisers and our shareholders. With that, I'll turn the call over to Matt. Matthew Audette: Thanks Rich, I'm glad to speak with everyone on today's call. As we move into 2026, we continue to advance our key priorities, which include driving solid organic growth, driving improved operating leverage by enhancing efficiencies and better monetizing the value we deliver, providing a market-leading adviser experience through ongoing investments in our platform, and advancing our M&A initiatives as we continue our preparation to onboard Commonwealth. Announced the acquisition of Mariner Advisor Network and continue to execute on our liquidity and succession strategy. These efforts resulted in strong first quarter business and financial performance and position us well for the year ahead. Now turning to a few highlights from our Q1 business results. Total client assets were $2.3 trillion, down slightly from Q4 as continued organic growth was more than offset by lower equity markets. Total organic net new assets were $21 billion, an approximately 4% annualized growth rate. As for our Q1 financial results, the combination of organic growth and expense discipline led to adjusted pretax margin of approximately 38% and record adjusted EPS of $5.60. Gross profit was $1.593 billion, up $51 million sequentially. As for the key drivers, commission advisory fees net of payout were $487 million, up $33 million from Q4. Our payout rate was 87.2%, down 80 basis points from Q4 and largely due to the seasonal reset of the production bonus at the beginning of the year. Looking ahead, we expect our payout rate will increase approximately 50 basis points in Q2, driven by the typical seasonal build. With respect to client cash revenue, it was $460 million, up $4 million as the growth in average cash balances more than offset the full quarter impact of short-term rates. Overall client cash balances ended the quarter at $59 billion, down $2 billion, primarily driven by record net buying in Q1. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60% within our target range of 50% to 75%. Looking more closely at ICA yield, it was 336 basis points in Q1, down 5 basis points sequentially and driven by the full quarter impact from the Q4 rate cuts. As we look ahead to Q2, based on where client cash balances and interest rates are today, we expect our ICA yield to be roughly flat. As for service and fee revenue, it was $211 million in Q1, up $30 million from Q4 as the benefits from our previously announced fee changes more than offset the seasonal decline in conference revenue. Looking ahead to Q2, we expect service and fee revenue to increase by approximately $5 million as the previously announced direct mutual fund fees go into effect. Moving on to Q1 transaction revenue. It was $81 million, up $6 million from Q4, driven by record trading volumes. As we look ahead to Q2, we expect trading activity to normalize and transaction revenue to decline by roughly $5 million. With respect to other revenue, it was $4 million in Q1. Going forward, we expect this to be roughly $6 million per quarter. Now turning to our acquisition of Commonwealth. As Rich mentioned, the transaction continues to progress well, and we remain on track to onboard in the fourth quarter. As for the financials, accounting for the market-driven decline in Q1 assets, we now estimate run rate EBITDA of approximately $410 million once fully integrated. Next, let's move on to expenses, starting with core G&A. It was $532 million in Q1, below the low end of our outlook range, reflecting our continued progress in driving greater efficiency and reducing our cost to serve. For the full year, given our progress to date, we are lowering the upper end of our outlook range by $20 million. We now anticipate 2026 core G&A to be in a range of $2.155 billion to $2.19 billion. To give you a sense of the near-term timing of the spend, we expect Q2 core G&A to be in a range of $540 million to $560 million. Turning to TA loan amortization. It was $136 million in Q1, up $3 million from Q4. As we look ahead to the second quarter, we expect TA loan amortization to increase by roughly $10 million, driven by the strengthening of our recruiting activity. As for promotional expense, it totaled $76 million in the first quarter, roughly flat with Q4. Looking ahead to Q2, we expect promotional expense to increase $5 million, driven by conference spend. Moving on to share-based compensation expense. It was $22 million in Q1, and we expect this to increase a few million sequentially as we head into Q2. Turning to our tax rate. It was approximately 26.5% in Q1, and we expect a similar tax rate in Q2. Regarding capital management, we ended Q1 with corporate cash of $567 million, up $98 million from Q4. As for our leverage ratio, it was 1.86x at the end of Q1, just under the midpoint of our target range. Moving on to capital deployment. Our framework remains the same, focused on allocating capital aligned with the returns we generate, investing in organic growth first and foremost, pursuing M&A where appropriate and returning excess capital to shareholders. In Q1, we continued to deploy capital in line with our priorities, investing primarily in organic growth and M&A, where we advanced the Commonwealth integration and continue to allocate capital to our liquidity and succession solution. Regarding share repurchases, a reminder that we paused buybacks following the announcement of the Commonwealth acquisition with a plan to revisit following the onboard. Given our progress to date, with leverage slightly below the midpoint of our target range, the operational work to onboard Commonwealth on track and the dislocation in the price of our stock, we opportunistically resumed buybacks earlier this month with roughly $125 million planned for Q2. We will continue to remain flexible and dynamic with our capital deployment as we advance through the year. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth, deliver operating leverage and create long-term shareholder value. With that, operator, please open the call for questions. Operator: Certainly. And our first question for today comes from the line of Steven Chubak from Wolfe Research. Steven Chubak: Rich and Matt. Richard Steinmeier: Absolutely good to hear from you. Steven Chubak: So there's been much focus on the structural headwinds to cash flow with anticipated adoption of Agentic AI tools. And given the value prop you offer your advisers, both in terms of technology and enhanced service. Can you speak to the flexibility on the pricing side if cash balances do remain in structural decline and have you done any external research or engage with advisers on a potential pivot to a more fee-based model that reduces your reliance on cash monetization? Richard Steinmeier: Yes. Thanks, Steven. So first off, we don't see an imminent risk to further adviser-led cash sorting from AI. But with respect to cash, while the AI and tokenization angle is new, we've heard variations of this question over time. We are well attuned to the recent developments in the sector and understand the focus on this subject. So you should know we're doing the work, to properly assess the opportunities and risks of reducing our reliance on cash sweep economics over time. And as with everything we do, we must ensure we're delivering a fair value exchange with our advisers and their end investors and understand how any change may impact them or position us with prospective advisers. While being cognizant of how our shareholders value predictable recurring earnings rates. However, while the levers are clear, this is grounded in a lot of complex work. On the one hand, we're a monoline business. So theoretically, it should be straightforward to affect change especially since we don't have to contend with the constraints of operating a bank and all that entails. But on the other hand, we only exist to serve the over 30,000 advisers and over 1,000 institutions that have trusted us with their business in the 8 million American families they serve. We must ensure that any potential changes would work for them and also how it might intersect with other services we are delivering in the broader value exchange. So maybe to summarize, we're doing the work, which we know is extremely important However, I would note, it's going to take some time as we work closely with our clients to ensure any potential changes would work for them. We appreciate the question, deeply understand the setup and know that this is top of mind for many of you. Operator: And our next question comes from the line of Alexander Blostein from Goldman Sachs. Alexander Blostein: I was hoping you could speak to your appetite for incremental M&A vis-a-vis the updated share repurchase outlook over the coming several quarters. as you're getting kind of deeper into the Commonwealth integration. Obviously, very nice to get a deal announced here recently. So maybe speak to the pipeline, the engagement you see in the channel now for additional M&A? And again, how to think about that versus share repurchases? Matthew Audette: Yes, Alex, I think maybe I'll speak to the near term and then Rich definitely jump in with anything to add on the longer term. I think more in the near term, Alex, like when you look at our focus on integrating Commonwealth, that's where we're spending our time and energy. So I think from a capital allocation standpoint, what is right in front of us is the opportunities to drive organic growth, which we covered a bit in the prepared remarks on those pipelines building. And then I think they're really clear and compelling returns on buying back our stock. I think that's more of a near-term dynamic. I think the longer-term dynamic, maybe I'll turn it over to you, Rich, to touch on this. I think the longer-term dynamic is still quite compelling. Richard Steinmeier: Yes, I think -- thanks, Matt. So I think longer term, look, our core strategy is to drive organic growth, and M&A is an important component of thinking about that holistic growth story. Historically and continually, we would look at a couple of different categories for M&A. So one would be growing our markets. So broker-dealers and RIAs at different sizes. I think you could look at Mariner as a good example of that, the Mariner Advisor Network. And for us, we've demonstrated that ability to integrate large and complex opportunities and deals better than anyone else. So second would be our liquidity and succession solution, which we've talked extensively about with the ability to help existing and external advisers solve succession needs in ways other firms don't. We'll point that this is a very unique offering in the marketplace for us, and we feel very good about its continued progress in supporting our advisers and opportunistically looking externally. And then third, where appropriate, we'll look at capability transactions and evaluate whether we should allocate capital to build, buy or partner. So in general, our M&A criteria remain, whether a transaction is a good fit strategically, financially, culturally and operationally, but we'll remain disciplined around this framework as we go forward. Operator: And our next question comes from the line of Craig Siegenthaler from Bank of America. Craig Siegenthaler: So AUM retention rebounded to 98.2% in the quarter, but the adviser count declined by 34. Now that's a rounding error, but a little curious on what drove that dynamic and also, how do you expect the financial adviser headcount to trend into year-end? Matthew Audette: Yes, Craig, I'll take that. I think you've got the -- on the Q1 results. That's just a near-term dynamic with respect to Commonwealth. So as we track towards that 90% retention, and we're at in the mid-80s right now, as those folks actually leave, you'll see those come out of head count. So they're still in our headcount until they actually leave. So it's just a little bit of a dynamic there. That was about a net 90 reduction in the quarter from that. So headcount was positive from that. I think to your question on head count going forward, I think it'd be pretty typically tied to our recruiting efforts as those ramp up. And then just always, I think you asked as we went into the end of the year, just always keeping in mind as you get towards the end of the year, especially November and December, so for Q4, that's a lot of times where you see smaller advisers not kind of get out of the business or not renew their licenses. So that would be something where you could have some headcount noise that really has little to no AUM or NNA impact but that would be typical pretty much every year towards the end of the year. Operator: And our next question comes from the line of Devin Ryan from Citizens Bank. Devin Ryan: I want to come back to the topic of artificial intelligence and maybe just a broader question. Can you talk about how you're just thinking about implications right now on LPL's model across areas like adviser productivity. How do you see it impacting demand for advice over time? And then even potentially consolidation towards scale firms or even adviser movement towards scale firms? Just some more color there would be helpful. Richard Steinmeier: Devin, it's Rich. Thanks for the question. A lot of questions out there around AI. I think if you look to historically how we've driven the enhanced value exchange and value proposition at the firm, we have consistently invested in tools and technology and services to support advisers throughout the life cycle of their practice. And so not surprisingly, we view transformative technology and specifically AI as an incredibly powerful tool to help our advisers and not as a replacement. We put it into 3 broad buckets. First would be directly serving the adviser. And so this is where we help them deliver their value to clients and usually helping them accelerate their growth as well. So think about that like note-taking tools, proposal generation tools, enhancements to wealth planning and portfolio construction. I think we're really bullish there that there is ways to build solutions and integrate them into our core workstation, I think will be very valuable and enhance their value delivery to their clients. The second bucket would be processing of transactions and tasks to drive straight-through processing. We've alluded to these before. This is the automation and made more efficient of actual workflows, transaction types, et cetera, follow-up. This will lead to more efficient workflows, fewer errors, less manual intervention, while dramatically reducing our cost to serve and improving the adviser experience. And I think examples in this area, Devin, would be reducing the time and cost of compliance, supervision, marketing reviews, et cetera, things that really sometimes fall to the adviser and oftentimes fall to their staff. And then maybe our last bucket that we think about are foundational improvements in coding and development. This for us is the ability to materially advance the development and deployment of code inside of our systems to modernize our code base and to deliver capabilities more quickly and more robustly. And so in there, we're leaning on tools like GitHub, Copilot, Cursor, Claude Code, et cetera, and are seeing early results that are very encouraging. Taken together, maybe specifically to address your question, we feel really good about the ability for us to integrate those experiences into our value delivery. I think that's why you've seen an increasing move of advisers choosing to join this firm. We that at-scale firm in the independent segment supporting advisers and institutions with a differentiated set of capabilities that are fully integrated. And I think the integration of those capabilities are incredibly important in driving efficiency through the advisers' practice. You marry that with our ability and responsibility to protect our cyber environment through the deployment of AI and enhancement of our controls and governance systems and strengthening our own defenses through AI, like reducing the time required to identify and address emerging risks in an increasingly AI-driven threat environment. When you take that together, we feel like this is an extension and continuation of our strategy and not a marked change, and we are incredibly excited about how AI will help our advisers as well as our bottom line. Operator: And our next question comes from the line of Michael Cho from JPMorgan. Y. Cho: Rich, I just want to touch on NNA and recruiting. I think you mentioned in your prepared remarks about record pipeline exiting Q1 and the expectation of improvement throughout '26. I'm just kind of curious how you think the pace of improvement progresses from here for your recruiting pipeline? And any comments in terms of April since we're at the end of the month anyway. Richard Steinmeier: Michael, thanks. So first, I will tell you, I think we feel really good about, as you're aware, adviser movement has returned to historical norms. And so we feel good about the environment that we're in stabilizing with more advisers beginning to move again. Second, maybe specific to us, given our strong progress with Commonwealth, we're increasingly focusing our recruiting efforts on external opportunities. My interpretation for us was that as we've gotten more and more resources back and available to talk to advisers, I see an increasing responsiveness to the value proposition that we're putting forward in the marketplace. And so I think as you look throughout the year, and it takes time, and we referenced this before, it takes time to build those pipelines to progress those pipelines. But now sitting at record levels, we feel really good about the progression and about the absolute level of engagement we're having with advisers in the marketplace in a marketplace for which more advisers are moving. So you take that together with the strength of our value proposition, I think it leads us to feel very confident in our ability to deliver those mid- to high single-digit growth over time. And if you look at that not just in the near term, but maybe over the longer term, it also supports the long-term systemic leading in organic growth through, one, increasing our win rates in traditional markets; two, further penetration of the wirehouse and regional employee adviser space for which we continue to see progression, and we're up to capturing now 11% of the advisers in that segment in motion, up from 9% just a couple of years ago. And then L&S, I'll tell you as we're in conversations, L&S is a critically important component, not necessarily always just at the time of transition, but as us having a unique and differentiated solution in the marketplace for advisers as they think about their options to transition their business. So you pair that with low attrition and steady contribution from same-store sales, and it sets up collectively to hit a high -- sorry, a mid- to high single-digit growth over the long term as well as the short term. Matthew Audette: Yes. Thanks, Rich. I'll take -- Michael, I think you slipped in 2 questions there, but we'll do it. I'll do the second question. And I'll cover client cash, too, because I think everybody would also be interested in how April is shaping up there, too. So we'll save someone else from asking that. So overall, I think everybody knows, but like April, the seasonality in April, it's typically the -- from an organic growth standpoint, one of the lowest months of the year, if not the lowest month of the year. And then on cash balances, you'll typically see one of the larger declines of the year because of 2 seasonal factors. So starting with client cash. And in addition to advisory fees hitting in the first month of the quarter, which is around $2.5 billion now, given our size, you also have the impact of people paying their annual taxes. That reduced client cash by about $3 billion this year. So those 2 seasonal factors together are a decline of around $5.5 billion. And then from a cash standpoint, outside of that, we continue to see the build that we saw in March. We continue to see the build into April, going up by about $1 billion. So the net of all that would be client cash down by around $4.5 billion. Now on the organic growth side, and those seasonal factors hit organic growth as well and get annualized into that single month. So both taxes, the impact of tax payments and the impact of advisory fees reduced April organic growth by around 3 percentage points. And then we had a little bit of attrition that was earlier in the quarter from a large practice that left in April that impacted as well. Now outside of those factors to what Rich was just highlighting, organic growth has continued to improve as recruiting has continued to pick up. That said, when you put all those factors together for April, we'll probably be in the zone of around 1.5%. But as we move into May and June, as those seasonal factors abate and to the recruiting point, as the pipelines build and the recruiting starts to come on board, we would expect to see organic growth pick up in May and in June. Operator: Our next question comes from the line of Chris Allen from KBW. Christopher Allen: I wanted to ask about the Commonwealth EBITDA run rate being lowered. I realize you talked about mark-to-market dynamics. Just trying to reconcile that versus with the current market level, the improvement we've seen so far in April. I would imagine that the EBITDA was as of the quarter end. So would we expect a positive inflection next quarter? Matthew Audette: Yes, Chris, you got it right. So I think that the reduction from $425 million to $410 million was all market-driven, meaning no changes to expected synergies or things like that. So to your point, if we were to snap the chalk with the market having come back, and that's where it stays until the end of the quarter, I would expect us to be back at $425 million. Operator: And our next question comes from the line of Benjamin Budish from Barclays Benjamin Budish: Maybe just following up on Chris' question there. So the $410 million run rate down sequentially based on the market moves, but that is still below the starting point that you disclosed in Q1, Q2 of '25, but the asset level is still higher than that. So I'm just curious, is there anything else going on under the surface? -- anything mix related or anything like that, that might be impacting the EBITDA run rate today? Matthew Audette: No, not at all. I mean I think we've given updates each quarter on some things that have moved around. But I think that the 2 things that have moved from a market standpoint are going to be the equity market levels and the market levels overall. And maybe the other item just to highlight is cash sweep, which that also has moved around. But that's the only update. No changes to expected synergies. It's simply market movements. And just reiterating what I just said to Chris. As we sit here today, those things have recovered. So -- if we're giving an instant update, which we're not, we would be back at $425 million. Operator: And our next question comes from the line of Michael Cyprys from Morgan Stanley. Michael Cyprys: I wanted to follow up on AI and cash monetization. I was hoping you could help unpack why you don't see more risk or risk of more adviser sorting from AI. Curious what informs your viewpoint there. And then I think you mentioned you're doing some work around reducing reliance on cash economics. I was hoping you could elaborate on what exactly those work entails, how you're going about your analysis? What factors are you considering and also not considering? Richard Steinmeier: It's Rich. Let me take the first part of that, and maybe I'll take both. So on why don't we think it's a risk? I think first, in many ways, the behavior you're alluding to has already happened. We've seen sustained yield seeking over time and cash allocations today are already at historical low levels. And cash is around $5,000 per account, which has been hovering there for nearly 2 years consistently, barring slight seasonal movements. So the system has been adjusting. And what we tend to see is incremental evolution, not step function change first. Second, we've always provided advisers with an abundance of options for managing yield sensitive cash on behalf of their clients. And so we think that this set of offerings, most advisers have adopted that into their practices themselves. And so we don't see behavioral change necessarily occurring, whether a tool be available or not available. In terms of the work, do you want to take the work? Matthew Audette: Yes. Sure. Mike, I just have to unmute myself before I answer. It was a really good answer to start there. Look, I think on -- and just kind of building on or reiterating what Richard said, I think when you look at what the changes could be, like we have straightforward fee-based levers that we can use to manage and sustain our economics. And we've got flexibility in how we price, how we package, how we deliver value across the platform. But I think the core item and just to reiterate what Richard said is like we exist to serve our 30,000 advisers and over 1,000 institutions that have trusted us with their business and the 8 million clients that they have, right? So I think the work that we're describing is all about ensuring any potential changes would work for them and how that would intersect with other services that we're delivering. So that's what I would just underscore. We've got the levers. It's more about what could work for our clients, and that's the work that we have in front of us. Operator: And our next question comes from the line of Jeff Schmitt from William Blair. Jeffrey Schmitt: So one more question on the run rate EBITDA for Commonwealth. What are you assuming for synergies in that estimate that would materialize, I guess, mostly next year? And just what are a few of the biggest drivers of those synergies? Matthew Audette: Yes, Jeff, there's no change there. I think they are the ones that we had covered in the beginning. So they're pretty common from a revenue side when you get things onto our custody and our clearing platform, whether it be cash sweep as well as the sponsor-related revenues. And then you get your typical expense synergies of being on our platform and our self-clearing platform on that side, too. So they are the -- I think the synergies that you would expect and no change there. Operator: And our next question comes from the line of Mike Brown from UBS. Michael Brown: I just wanted to ask another one on AI and AI disruption risk, but maybe more from the risk to the adviser and not from the cash angle. But I think over time, advisers have continued to really prove the value to their customers, but the transformative potential of AI is tough to ignore here. So can you maybe speak to the risk of AI impacting that traditional adviser model with some of these AI-centric platforms and capabilities that are kind of rolling out in real time? Like could we see client behaviors shift to prefer models like this, especially if the economics are more favorable? And how are you kind of thinking about defending the turf of the traditional adviser model? Richard Steinmeier: Thanks, Mike. It's Rich. I think first, what we see historically is that the pies of bind in a relationship are between the adviser and their client. And those aren't necessarily because of efficiency of the delivery of the experience. More often than not, it's because of a trust and extended relationship that for many has extended over years and oftentimes decades. So when we look at the potential for the enhancements to the technology, we see things that actually may commoditize everyday low-value experiences to make them more efficient for the adviser. We see things that allow the personalization of the experience between the adviser and the client to enhance. And more often, what I would say is we'll see more time available to actually serve clients, more insights available to work with those clients, the ability to deliver them where I think you're going to see more of advisers' time spent with clients, but also more of their staff and their team's time in support of those and oftentimes their teams moving away from mundane task delivery into higher value added. I think you see the opportunity there for a significant enhance in the delivery of the EQ element of the adviser experience while you see a commoditization of some of the IQ elements, that being portfolio construction, risk remediation, et cetera, but with a personalization opportunity that is dramatically enhanced. And so we are running headlong into those enhancements through AI that prop the adviser up. And I think we see cases even in the services industry. When you look at radiologists, I think there was a belief that radiologists were going to be minimized with the application of AI in the reading of scans. But in fact, what you see is there are more radiologists today than there were 10 years ago because there are more high value-added services being provided in that experience as well as more folks getting scans. I think you might see an opportunity for advisers to more broadly serve more clients with deeper personalized advice through tools to help them be more productive. And in that regard, those are the applications that we're running at with advisers in partnership with them. And so we don't see the risk exposure nearly as much as we see the opportunity side of that equation. Operator: [Operator Instructions] Our next question comes from the line of Wilma Burdis with Raymond James. Wilma Jackson Burdis: Just a quick one on the payout ratio. It was 87.2% in 1Q, up about 40 bps from just year-over-year and then compared to also '24. Can you go into some of the drivers? And is it related to recent acquisitions or Commonwealth or anything along those lines? Or what else could be driving it? Matthew Audette: Yes, Wilma, that was the primary driver. It was Commonwealth. So a couple of things related to Commonwealth. One, on average, they have advisers with larger AUM. So the payout is higher. And then there's a little bit of noise that's unique to Q1 and the way that our payout works with a production bonus that builds throughout the year. They don't have that. So the mix impact of their payout being higher is most notable in Q1. And now that we've closed on the acquisition, you see that noise in Q1. And then a secondary item, I'd say a relatively minor driver of it is just keep in mind that the payout was driven off of advisory fees that were snapped, if you will, at the end of the year when asset levels are much higher. So for those larger advisers where there's a tiered pricing impact where they get discounts, the larger they are, you had a little bit of that happen as well. But the primary driver is the Commonwealth noise as you suspect. Operator: And our next question is a follow-up from the line of Michael Cho from JPMorgan. Y. Cho: I just had a quick follow-up on G&A. Matt, you talked through G&A and efficiency and you pulled down the top end of the guide. I was wondering if you could just unpack a little bit more where the efficiency gains, I guess, were maybe in the quarter and how we should think about those efficiency gains as you progress through the year in terms of areas for more potential there versus maybe other areas of more organic investments that you're considering? Matthew Audette: Yes. I mean I think broadly on where we're investing is continues to be at the highest level, investments to drive adviser capabilities, our technology, drive organic growth overall, combined with investments to drive efficiency. And I think maybe just to give you a little bit of examples on the efficiency side and building on what Rich talked about a little bit earlier on AI. That's been a big driver of it, and it's a big component of our plans for the year. So we take those kind of 3 areas that we're talking about for AI, for adviser capability, for our own internal operations and efficiency. And then third, our ability to develop technology even faster. I'll just focus in on that second area on the opportunities internally in areas like service and operations. And that's where it's really exciting because not only does it drive the cost story that you're asking about, it also drives an improvement, a materially better adviser experience and I think ultimately puts us in a better place to drive growth as well. But just to give you some examples on the expense savings and what we're doing. Rich touched on it in the annuities area, we're the largest distributor of annuities in our space. And it is a very manually intensive process. And that's where we've been able to deploy AI to not only streamline the costs associated with it, but also increase the pace at which we can improve annuities as an example. Within service, I mean these are probably some of the more expected examples, but being able to provide tools to our advisers to do natural language search, build out AI-enabled chat rather than having to call us, they can ask questions to get those answered themselves. And then for the service team themselves, so our team delivering tools to them so they can answer questions more quickly, more accurately with AI on their side. And then maybe last and one that I think has a big opportunity is just on the operations side. And this is where the Agentic AI that everyone loves to talk about becomes real, where you can do things like non-ACAT transfers, which are intensely manual. And you can deliver agentic AI that can cut cycle times there by significant amounts. I'm talking 90% of the time can be reduced. So not only are you lowering the cost, you're actually improving the experience to move those in, especially when the transfers in. So those are just some examples. I think the broad point a little bit to your question is we're still in the early innings of this. So not only do we have a nice road map for we're building out this year, this is an ongoing opportunity in '27 and beyond as well. So we're excited about it. Operator: Our next question is a follow-up from the line of Steven Chubak from Wolfe Research. Steven Chubak: So I wanted to ask about the long-term NNA outlook beyond the Commonwealth integration. across multiple questions, you spoke about low adviser attrition, record pipelines, steady contribution from same-store sales. How does that inform what you believe is an achievable organic growth rate? And separately, if you can just provide an update on the enterprise opportunity and how that pipeline is tracking. Richard Steinmeier: That's a follow-up with a double dip in it, and I'll take that. So on the first one, Steven, I think that when you take all of that together, I alluded to it a little bit earlier, we do believe that we should be able to sustain mid- to high single-digit growth rate over the long term. I mean we have what we believe is the strongest value proposition in the marketplace. And I think as we get into recruiting more actively back into the recruiting market, what I see in the pipeline, what I see in HOVs, what I see in directly engaging with advisers is that, that value proposition resonates significantly in the marketplace. And you can hear even from third-party recruiters as we're back engaged, I think they feel bullish about our ability to really move back into the position we have historically been, which is the leader in capturing adviser movement and extending that share capture over time. I actually think as you think through even the application of AI and the enhancements that we're going to make in an integrated system that allows all of that not to be in a swivel chair environment, but the AI largely to be integrated into our core operating systems. I think you're going to see that value proposition further extend relative to our historical competitors, I think you're going to see us strengthen even more. So when you put that all together, I think we feel like we have a value proposition that is strong. We see it resonating in the marketplace, and we see it strengthening in time. That reiterates our belief in that sustained mid- to high single-digit growth rate. Now you asked about the institutional segment as well. And I think on the institutional segment, we have -- we are the leader in that partnership in the institutional market. We have demonstrated it over decades of delivering experiences to help firms who want to advance their wealth management business. We have done that first in the financial institution segment, where we have asserted and sustained leadership in supporting banks and credit unions in support of their wealth management businesses. And then we've extended that into adjacent opportunities in the marketplace, most notably recently with insurance and product manufacturers. And I would point out Prudential, who converted a little over a year ago, who by their measures, their business is stronger. We see it in terms of them thriving. We see it in terms of financial performance as well as their attractiveness in the marketplace and then recruiting advisers into their platform. That has a ton to do with them, maybe less so to do with us, but we feel great about how the Prudential delivery allows us to be more active in the marketplace in conversations on the institutional segment. And so across banks, look, some of that's going to be opportunistic. And as we mentioned maybe last quarter, there's a little bit of overhang in some of those discussions just because of the movement in M&A that exists inside of financial institutions at this moment. We see increasing conversations with long lead times in the institutional segment, but I think we feel good about the ability for that to be a meaningful contributor that adds on to that organic growth that is pretty consistent inside of the Adviser movement segment. So having those 2 different killer growth strategies to drive the movement of advisers to the strongest value proposition in the market plus the ability to be strong partners to institutions as they look to outsource and partner. I think we feel good about having 2 anchors to drive that growth and reinforces our belief in that middle -- mid- to high single-digit growth over the long term. Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Rich for any further remarks. Richard Steinmeier: Thank you, operator, and thank you all for joining us. We look forward to speaking to you again in July. Have a good night. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Welcome to the DT Midstream First Quarter 2026 Earnings Call. My name is Rebecca, and I will be your conference operator today. [Operator Instructions] I will now turn it over to our speaker, Todd Lohrmann, Director of Investor Relations. Please go ahead. Todd Lohrmann: Good morning, and welcome, everyone. Before we get started, I would like to remind you to read the safe harbor statement on Page 2 of the presentation, including the reference to forward-looking statements. Our presentation also includes references to non-GAAP financial measures. Please refer to the reconciliations to GAAP contained in the appendix. Joining me this morning are David Slater, Executive Chairman and CEO; Chris Zona, President and COO; and Jeff Jewell, Executive Vice President and CFO. So with that, I'll go ahead and turn the call over to David. David Slater: Thanks, Todd, and good morning, everyone, and thank you for joining. During today's call, I'll touch on our financial results and provide an update on the latest commercial activity and our growth projects. I'll then close with some commentary on the current market fundamentals before turning it over to Jeff to review our financial performance and outlook. So turning to our financial results. We're off to a strong start in 2026, fueled by a strong demand and cold winter, giving us confidence in our full-year plan. We continue to advance organic opportunities from our $3.4 billion project backlog in a very strong market environment that supports our future growth. We are announcing today that DTM has approved investment in two new projects in our Pipeline segment. The first is a mainline expansion of Vector Pipeline, which increases the total capacity of Vector by approximately 400 million cubic feet per day and is anchored by investment-grade utility customers under 20-year negotiated rate contracts with a Q4 2028 expected in service. The next project DTM has approved investment in is Millennium R2R, which is supported by long-term contracts with two utilities and an existing power plant for 70 million cubic feet per day of capacity and is expected to be fully in service in Q1 2027. These investments are supported by strong market fundamentals backed by utility and power-generation customers and will serve the growing demand in the Upper Midwest and New York and New England markets. In addition, we have entered into an agreement to build a pipeline lateral to serve a new utility-scale power development located just off Midwestern pipeline in Indiana, where the developer plans to construct a 900-megawatt power plant, which we expect to serve under a 20-year demand-based contract for approximately 265 million cubic feet per day of capacity. This project is subject to a customer reaching FID in the power plant, which we expect to occur in 2026. Our expected lateral pipeline in-service date is in the first half of 2028. Also, on Midwestern, we recently recontracted approximately 30% of the system's capacity with term extensions ranging from 5 to 25 years, reflecting the importance of this critical capacity and how the market values it. Finally, we commercialized a new interconnect on NEXUS this quarter, which will have a capacity of 250 million cubic feet per day and will provide supply for our behind-the-meter natural gas-fired power generation facility to power a new data center in Ohio. Adding this load to the mainline of NEXUS strengthens the asset over the long term. We are also seeing strong market interest for additional pipeline projects in the Midwest and Northeast and are advancing these potential opportunities towards commercialization. Midwestern Pipeline closed a successful nonbinding open season at the beginning of April for both northbound and southbound expansions to increase capacity by up to 1.5 billion cubic feet per day, and I'm pleased to report that the open season was oversubscribed. Vector Pipeline also recently closed a nonbinding open season for the 2030 expansion project to increase westbound capacity into Chicago by 300 million to 500 million cubic feet per day, which received very strong customer interest and was also oversubscribed. Our next steps with these two projects are to optimize the pipeline and facility design based on the customer requests and then to work with our customers to reach binding commitments. We will keep you updated as we continue to progress these opportunities. Turning to our construction activity. Our Midwestern gas transmission power plant lateral to serve AES Indiana's gas-fired power plant was placed in service on time and under budget, with commercial operations expected to begin in Q2 this year. All of our other in-flight growth investments remain on track and on budget. Finally, I'd like to take a moment to address the recent market movements and the global geopolitical situation. The first quarter of 2026 was a volatile period for the market with significant cold weather in January, driving extreme prices across the country, highlighting capacity constraints in the North American market driven by demand growth, followed by geopolitical developments in the Middle East that are contributing to the broader energy market instability. These events have renewed both domestic and global focus on reliability and security of supply. Internationally, the discussion has largely centered on oil, yet curtailed and constrained LNG volumes from the Middle East region have underscored the value of U.S. LNG as a stable and dependable supply source. We believe this dynamic will favor increased LNG exports from the U.S. Gulf Coast and create additional expansion opportunities for U.S.-based supply, which our Haynesville system is very well positioned to serve with its high degree of both receipt and delivery connectivity. Our LEAP pipeline is currently running full at its design capacity of 2.1 billion cubic feet per day and has the ability to expand to 4 billion cubic feet per day. Turning to the domestic front. We are seeing growing energy reliability and affordability concerns across many regions with much of the pipeline infrastructure operating at maximum capacity. Many regions cannot access low-cost supplies of natural gas produced domestically in our prolific production basins, which highlights the need for incremental natural gas pipeline and storage investments to unlock these low-cost supplies. In the Midwest and Northeast, power demand fundamentals continue to strengthen, driven by data centers and other large load customers. Utilities in these regions are converting potential opportunities into signed load more quickly than previously expected, with multiple gigawatts of contracted demand now backed by binding agreements and capital plans that materially increase peak load projected through the end of the decade with large load tariff frameworks in place to protect affordability. This level of growth is evolving rapidly as construction is underway, energy is flowing to some projects, such as Phase 1 of Microsoft's Mount Pleasant data center in Wisconsin, reinforcing our growth outlook for increased gas-fired generation and natural gas demand. Our interstate gas pipeline footprint is strategically located in this region to serve this growth and the strong response to the recent open seasons on Midwestern and Vector pipelines support these fundamentals. I'll now pass it over to Jeff to walk you through our quarterly financials and outlook. Jeffrey Jewell: Thanks, David, and good morning, everyone. In the first quarter, we delivered adjusted EBITDA of $308 million, representing a $15 million increase from the prior quarter. Our Pipeline segment results were $14 million higher than the prior quarter, driven by seasonally higher EBITDA from our joint venture and interstate pipelines and higher revenue on Stonewall and LEAP. Gathering segment results were $1 million greater than the prior quarter, reflecting higher volumes on Blue Union and Appalachia gathering. Growth capital investment for the first quarter was $72 million, which is in line with our plan, and we expect a ramp in growth capital weighted towards the second half of this year. Operationally, total gathering volumes increased in both regions from the fourth quarter. Haynesville volumes averaged 2.09 Bcf per day, driven by new volumes and recovery from upstream maintenance completed in the fourth quarter. In the Northeast, volumes averaged 1.42 Bcf per day, driven primarily by the Stonewall Mountain Valley pipeline expansion that was placed into service at the beginning of February. As we look at the balance of the year, we expect the second quarter to be in line with our full-year guidance, but to be lower than the strong first quarter, driven by seasonality across our interstate pipelines, including JVs, a rate step-down on Guardian Pipeline and typical seasonal planned maintenance. We remain confident in our full-year outlook and reaffirm our 2026 adjusted EBITDA guidance range and our 2027 adjusted EBITDA early outlook. As David mentioned, DTM has approved investment in the Vector 2028 pipeline expansion, and we expect total DTM investment of $80 million to $100 million for the project. DTM has also approved investment in the Millennium R2R project, which will be completed under our existing regulatory authorization. We've increased our committed capital in 2026 and 2027 to reflect these new investments. 2026 is approximately $400 million and 2027 is approximately $440 million. Finally, today, we also announced that our Board of Directors approved our first quarter dividend of $0.88 per share, unchanged from the prior quarter, and we remain committed to grow the dividend in line with adjusted EBITDA. I'll now pass it back over to David for closing remarks. David Slater: Thanks, Jeff. So in summary, we remain confident in delivering on our guidance, continuing our track record of strong performance we've maintained since we spun the company in 2021. Our high-quality pure-play natural gas pipeline asset portfolio is very well positioned to take advantage of growth opportunities across our network as we execute on our large organic project backlog. The fundamentals supporting natural gas infrastructure remains stronger than ever with a broader realization of the key role U.S. LNG will need to play as a reliable and stable global energy supply and accelerating power generation needs in the Midwest and Northeast, including data center-driven load. And with that, we can now open up the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Blum with Wells Fargo. Michael Blum: I wanted to start with the MIST project. I wonder if you can just give us a little more detail in terms of where you see progress to FID. Anything you can say in terms of the size of the project, how it's scoping in terms of capital? And then would you expect this project to be expanded in phases? Or do you think it's going to be one big expansion? David Slater: Good morning, Michael, great question. I'd say let me start at the highest level, and then I'm going to pass it over to Chris for a few of the details. Really strong market interest in that open season. We were offering both northerly pathways and southerly pathways. I think as we've talked in the past, Midwestern follows a corridor of power generation between Chicago and Nashville. So there's tremendous power generation assets and infrastructure in that corridor. We can talk about what we announced today on the power generation side on Midwestern. I think a big takeaway is that we've attached 565 million a day of power generation load to Midwestern in the last 12 months, which is material. So really strong market interest, very consistent with our thesis, our fundamentals thesis that we've been sharing with the investors. And maybe I'll pass it over to Chris Zona to talk a little more detail around what I'll call the nuts and bolts of the project. Christopher Zona: Yes, sure. Thanks, David. Yes. And so it's early. I'll start with that, Michael. Right now, we are in the process of, okay, we've got the fantastic response here to the open season. Again, electric and gas utility, data center development, generation, power generation, all of the above. And recall, really this MIST expansion is really trying to put a box around the needs in the early cycle here, the '29, '30 time frame and how do we help kind of quantify what that really looks like for those customers and then go through the detailed engineering, get through kind of the solution and then progressing those conversations to FID or binding PAs that can lead to FID. And that's a process that we'll be in here in the next few months here with the shippers. We've already started those conversations. We've already had our customership, our meeting started this week, and I expect over the next few months, we're going to be going through that in more detail. But again, as David mentioned, really exciting demand on both the northbound path and the southbound path. Michael Blum: Great. Appreciate it. And then an interesting comment on this interconnect on NEXUS to serve behind-the-meter project. We're starting to see some pushback from the data center development from both politicians and some local communities. So curious to get your latest thoughts in terms of how you think the behind-the-meter opportunity set is shaping up. I know that was something you talked about a long time ago, and it sort of went quiet a bit, but maybe it is picking back up. David Slater: Yes. I think our view on the, what I'll call, the aggregate power demand load growth, generally speaking, the utilities are winning more than the independent developers. I'll just start there. We're seeing that across the footprint. Ohio, this particular project in Ohio is well into construction and will go commercial very shortly. And that's just an example of, I think, what we've talked about in the past, where we weren't particularly interested in building the lateral to this facility, but bringing the demand to the mainline of NEXUS, it adds 250 million a day of demand onto the mainline of NEXUS, which obviously fundamentally strengthens that asset over time. So we're very excited to have that demand on the mainline. And the whole dialogue around these data centers has really been around the affordability as it relates to what I'll call the retail power customers in each one of the states that we serve. And we're watching a lot of the developers being very sensitive to that reality and making sure that it's very clear that these investments are going to actually lower cost to the retail customers and not increase cost to the retail customers. And you're seeing that playing out in many of the state regulatory forums. It's a very positive development from our perspective because it's helping to frame these investments in these growth opportunities in a constructive positive light for these states and these communities and ultimately, the retail customers. So I think they're doing them in the proper way right now. They're articulating the value that's created for all the stakeholders, including the local retail stakeholders. I think that's the proper way to approach these growth stories here. Operator: Your next question comes from the line of Theresa Chen with Barclays. Theresa Chen: Going back to Midwestern following the strong demand post the nonbinding open season, are you seeing enough demand for up to 1.5 Bcf of capacity going both north and south the entire way through? And given the competition from other pipelines in the northern part of Midwestern, just from a market dynamics perspective, do you think there's enough demand to absorb multiple large-scale expansions? And if not, what do you think are the key competitive advantages of MIST? David Slater: Yes, Theresa. Great question. So we're not going to get into the granular details of where the demand is on the line for, I guess, obvious reasons. Do I think the market is robust to absorb a lot of expansions? Yes. I think we've laid out that our view is that there's a 5 to 8 Bcf a day addressable growth opportunity in this region. So yes, there is room for multiple pipeline expansions. I think the competitive dynamics is somewhat like real estate, it's location. Existing pipelines that are in the right location adjacent to these demand centers, the growing demand centers are going to have an advantage. Expanding an asset in your existing footprint where you have -- you're not greenfielding a brand-new line, you will have an advantage. So these are some of the criteria that I think will, over time, kind of play out as this market expansion unfolds over the next -- the back end of the decade here. We feel really positive about our asset footprint, the connectivity that we have in the portfolio to provide not only the lateral to the demand center, but as we've talked about in the past, the domino effect across the portfolio where we can provide transportation capacity back towards the basin, the supply basin, augment that with storage out of our Michigan facilities. So there's a whole value-chain proposition here with some of these customers. So we're really excited about the opportunity. Like I said on the year-end call, this is very fluid. It's progressing the way we expected, probably progressing faster and stronger than we expected. And we're just very encouraged. I think our job now is to just unpack all this interest that we've received, like Chris described, engineer out the optimal solutions and then progress and commercialize that. So hopefully, I answered your question. Theresa Chen: That's great color. And turning to your Haynesville footprint. Clearly, there is a pull for U.S. LNG highlighted by the war in the Middle East, echoing the point you made in your prepared remarks. Can you talk about your visibility in commercializing incremental expansions on LEAP, also following very recent positive upstream data points from one of your key customers. Can you talk about the strategic positioning here, visibility you have on additional expansions at this point, but also keeping in mind that the area is fiercely competitive. David Slater: Yes. I mean I think the fundamentals, that's the gravity that's going to drive incremental activity. And the fundamentals are extremely strong, like I stated in my prepared remarks. LEAP is running like absolutely full, so at its designed conditions. So that also is a strong indication that the asset is valued and highly utilized. I'm going to hand over to Chris for some commentary on what I'll call sort of the to and fros of the competitive nature in the basin and maybe he can provide some comments on that. Christopher Zona: Sure. Sure, David. Yes. So I think one of the things, Theresa, that I'll say is recognized widely by the market when you look at DTM's assets is the connectivity in the basin, right? So when you compare the amount of outlet capacity that we have through our Blue Union system, the ability to reach other outlet markets through LEAP, that's, I'll call it, a distinctive advantage that we do have in the basin, and that optionality provides a lot of value for our customers. So I'll start with that. I think the other piece, too, is when you look at our ability, our capability here to expand LEAP in, I'll call it, bite-sized expansions, a couple of hundred million a day, we can do that. And I would say we have extremely competitive pricing in the basin and in a timely manner as we have done here for the last few LEAP expansions. And again, I think that is an advantage that we will also hold here in the region, and there's a lot of activity around that as well. David Slater: And maybe I'd add to that, that from my perspective, we're seeing a very active commercial dialogue occurring right now around the assets, Chris. And that is usually a good signal that we're kind of approaching the next wave, I'll call it, the next wave of expansion opportunity. Operator: Your next question comes from the line of Jeremy Tonet with JPMorgan Chase. Jeremy Tonet: Wanted to come back to MIST, if I could, and kind of come at a slightly different maybe simpler angle. I'm just wondering, there's still items to be settled, as you said, a number of things coming together here. But just at a very high level, if we think about the scope of the project, would we think of this somewhat similar to if Guardian is around half a B and this is 1.5 B, this is 3x the scale? Can we make a high-level thought around that? Or just any color there would be great. David Slater: Yes, Jeremy, I mean, I'd say it was a very strong signal we received from the market given that we were oversubscribed on a very large expansion that we kind of went out there with. 1.5 Bcf a day effectively is the capacity of the existing system. So the fact that we saw an oversubscription is just a strong indication of the depth of the demand growth that's occurring in that corridor. So I'll start there. Obviously, there's a lot of work to do between here and FID-ing a project. We have to engineer out, like Chris said, all the details. Customers gave us all the details of what they're interested in locationally, where the supply is coming from, where the demand is on the system. So there's work to do here. But it's certainly -- we're starting in a very positive situation. I mean, that is just a really strong demand signal, very consistent with the fundamentals that we've been talking about. Size and scale, I think it's a little early for us to try to put size and scale to it. But let's just make it up. If we're 50% successful, yes, it would be north of what Guardian -- the current G3 expansion in terms of size and scale. So like I said, really positive position right now. Our job is to do the work that needs to be done and reel it in and commercialize it. But it's very consistent with what we've been saying at the highest level about what we're observing in the whole region, just very strong demand growth. Jeremy Tonet: Got it. That makes sense. No, twice the size, we'll take that. That works well. Just curious, I guess, and the answer might be it's too early in the year. But if I look at your results and I annualize it, you'd already be over the high end of the guide and granted there was some help maybe in the quarter, but it doesn't seem like there's necessarily a ton of seasonality in the business. And so just wondering if there's some other headwinds developing across the balance of the year we should be contemplating here? David Slater: Yes. Maybe I'll start at the high level, Jeremy, and then I'm going to ask Jeff to kind of fill in the details for you. But at the highest level, if we think we were going north of the high end of our guidance, we would tell you that. So let's start there. The winter was very strong. And I somewhat alluded to it in my opening remarks. I mean, we had a really cold winter that illuminated capacity constraints across the entire country for our assets, we broke all-time high utilization like daily flows across almost every one of our assets in the first quarter, which is unprecedented. I haven't seen that in my -- really my entire career. So that is a really strong signal of how demand has crept into the network. And then you had all this extreme price volatility all over our footprint, which was also highly unusual. So what does that mean in terms of our Q1 results? Our commercial team was doing what they're hired to do, which is eking out every opportunity across the asset footprint in a very volatile basis environment. So some of the results of Q1 are a derivative of that phenomenon that played out across the network. So that's very seasonal, and you shouldn't expect that to repeat. And Jeff, maybe you want to just touch on some of the additional details as to why we don't think that quarter is going to repeat for three more quarters. Jeffrey Jewell: Sure. Well, and good morning, Jeremy. Yes. So Jeremy, like David said, we are -- again, when we provide you our view on our guidance for the year, I take that -- we're providing you that guidance what the range is. And if it's different than that, we'll adjust accordingly. So that's probably the first thing. You're right. First quarter was very strong. And then we do have that seasonality across the interstate pipelines and the JVs. That's always going to be there. You've got a little bit of that. There's a step-down on the Guardian, that was baked in from the last rate case. So that happens here in the second quarter. And then also then you're going to have planned maintenance and those types of things that you wouldn't have had in the first quarter. So combination of those things and David's comments, again, we're feeling very good about the guidance range we provided you guys for the full year. Jeremy Tonet: Got it. Still see some conservatism there, but I understand the gives and takes. Operator: Your next question comes from the line of Keith Stanley with Wolfe Research. Keith Stanley: I want to follow up on this just on the disclosure you provided this morning of customer interest above the 1.5 Bcf a day. Is that on a cumulative basis, so adding the North and South legs? Or was the statement meant to express that there's above 1.5 Bcf of demand kind of across each segment? David Slater: The 1.5 Bcf was the cumulative amount of capacity we offered, Keith. So we're not unpacking it between North and South. We're just telling you the total. And the total interest was north of the total capacity we offered. Keith Stanley: Okay. Great. Given the high level of demand, could MIST be upsized even above 1.5 Bcf a day given it was oversubscribed? Or does that make it less competitive from a cost perspective and so less likely? David Slater: We would love it to be above 1.5 Bcf. And Keith, that's the work that Chris was describing and his team is working on as we're engineering out based on the customer specifics. And yes, typically, more volume is more economic. So we will aim high. Operator: Your next question comes from the line of Jean Ann Salisbury with Bank of America. Jean Ann Salisbury: I just wanted to follow up on the discussion about the LEAP potential expansion to 4 Bcfd and make sure I understood the comments in an answer to another question. Is going from the 2.1 Bcfd to 4 Bcfd basically laying a second parallel pipe? And can you kind of talk about, I guess, whether that is indeed like a bite-sized offering, as I think I heard earlier? Or is that more like a large add that you would have to fill out kind of altogether? David Slater: Chris, do you want to take that? Christopher Zona: Yes. No, I can take that. Yes. So it's -- so our expansion up from where we are today to 4 Bcf would be a combination of pipe and compression. It's not necessarily that entire line is not required. I mean this was built as a high-pressure gathering pipeline here, gathering lateral when we first built this. So it's got a very economic and I'll say, ratable expansion path ahead of it to the 4 Bcf. And I'm sorry, I didn't hear the second part of your question. Jean Ann Salisbury: I think that answers that. So I appreciate it. And then I believe that NEXUS, the expansion, the long-awaited expansion had been waiting on some incremental demand. I guess it kind of depends on where in Ohio, the data center connection is and whether it's in Appalachia kind of far enough into the market. But is this new data center connection enough to potentially help drive that expansion forward? David Slater: Well, I'd say it's helpful, right? It's adding another 0.25 Bcf a day of demand onto the mainline. And locationally, it's in the Northwest section of Ohio. So it's going to be constructive and helpful. Step #1 is to connect it. Step #2 is to provide contract capacity on the mainline. So stay tuned as it evolves. But yes, I mean, we're -- I think as we've talked, NEXUS is one of the few pipelines in the region that has available capacity where we've got a couple of hundred million a day that we didn't term out long term when we built the asset. So clearly, that capacity is in play right now to be termed out. So that would be step 1. And then step 2 would be then an expansion on the mainline. So that's kind of how we think about it, Jean Ann. Hopefully, that helps. Jean Ann Salisbury: Yes that helps. Operator: Your next question comes from the line of Julien Dumoulin-Smith with Jefferies. Robert Mosca: This is Rob Mosca on for Julien. So you touched on affordability in your prepared remarks and capacity constraints in certain regions. Could you perhaps give us some updated thoughts on Millennium Pro and whether you need to see a downstream expansion into New England or whether that project can make sense on a stand-alone basis, acknowledging that the regulatory backdrop is kind of a key constraint here? David Slater: Yes, Rob, great question. So maybe we'll start off with R2R, right? Getting R2R commercialized and over the goal line is demonstrating that there is a market need, an incremental market need. That project percolated for a number of years, as you know, and we just stayed at it. And the market is evolving, and there's that recognition of need. I think you're seeing something similar with Algonquin, where they're looking at potential expansion opportunities as well. So we're beginning to see the market unthaw, for lack of a better word, which I think is encouraging, but we're going to have to be patient. For us, for Pro, there's a few critical ingredients that are really important for that project. Number one is New York-specific support. So that would be number one, from customers in New York. Number two is regional governmental support or lack of opposition to a project like that. So those are pretty critical to us before we would consider deploying capital into that region. I think it's very clear at this stage in the game that the demand need is real and there. I mean, you can just look at the prices that people are paying in that region, and they're paying that price because the infrastructure is constrained. So we're optimistic that we're going to be able to move forward, but we're going to be very careful and patient with that particular project. Robert Mosca: Got it. That's helpful, David. And then maybe switching gears to the recent PJM backstop auction. It seems like we could see some more gas demand around your gathering footprint in the Northeast and some of that may be reflected in the opportunities you're pursuing in the way of laterals. But can you frame how much of an incremental benefit this could provide and how risk-adjusted those opportunities are in the current five-year backlog? David Slater: Yes. I think the historical conundrum in PJM has constrained and limited what I'll call utility scale generation in that region. I think there's been a number of ways that they're trying to address that and fix that. You just mentioned the most recent. It feels like that's going to unlock some of these projects and allow capital to come in. I still think we need to see some projects FID to get more comfortable with that, but it's definitely a positive step. It furthers and strengthens the fundamentals in that region that we've talked a lot about to the investor group. So yes, it's a positive -- again, it goes back to my year-end conversation that this is a very fluid dynamic market right now that we're observing. And I put an up arrow on the fundamentals and the fundamentals continue to strengthen, but it is very fluid. And there's -- as you pointed out, we need some of this regulatory modifications and adjustments to enable capital to pour in. And it feels like we're pointed in the right direction. So I'm encouraged by it. Operator: Your next question comes from the line of Spiro Dounis with Citi. Spiro Dounis: I want to start with the capital plan. David, last call, you suggested that the gross backlog of projects was multiples of that $3.4 billion. And today, from what I'm hearing, it sounds like things are accelerating. So I guess I'm just curious to the extent you're successful in commercializing a lot of these additional projects, how are you thinking about the upper bound of growth capital in any given year that the balance sheet can handle? If you just convert that $3.4 billion at 2x, that's over $1 billion a year. I don't think we're there yet to be clear, but just curious how you're thinking about funding that growth and pacing it for the balance sheet. David Slater: Yes. Great question, Spiro. I'd say let's start with the $3.4 billion. We're just derisking the $3.4 billion. As we announce projects and deploy capital and as the year unfolds, I fully expect we're going to continue to announce more and continue to derisk that $3.4 billion. In a market backdrop where there is probably more opportunity today than there was four months ago. And if the fundamentals continue to play out, that probably continues to evolve over the course of the year. So that's a very encouraging market backdrop to operate a company in. So we'll start there. In terms of our capability to address that market reality, the good news, Jeff, Jeff is smiling right now. We've got a really strong balance sheet, investment grade. We have a lot of dry powder on the balance sheet that could be deployed above and beyond that $3.4 billion. So I think we're in a good position with the asset and the footprint that we have to compete in this evolving market. We have the balance sheet that can allow us to grow that investment agenda. So I don't see the balance sheet or our funding capability today as a constraint. And then I would maybe add one more detail that when you look at what we've FID-ed recently, they would be characterized by investment-grade customers, 20-year demand-based contracts. So if we ever did get to the edge of the balance sheet, those projects will be able to attract additional capital without a lot of anxiety or concern, I'll say it that way. Just the nature of those investments are very solid, strong investments that could attract capital. So I just do not see right now a capital constraint in our investment agenda. And Jeff, I don't know if you have anything to add to that. Jeffrey Jewell: Yes. That also spreads. Again, we're deleveraging as we continue to grow. So that obviously adds more open capacity. Also, just as a reminder, our on-balance-sheet top threshold is at ceiling, it was at 4x, and Moody's just moved us up for the off-balance sheet up to 4.25. So that just added even more headroom to what David is talking about. So again, I'm -- we're feeling very confident we can handle all the projects and all the things we've got coming at us and more. So we're feeling very good about that. Spiro Dounis: Great. That's great to hear. Second question, maybe just regarding Guardian. Just curious how you think about the total expansion potential of that pipeline. It seems like there's already some downstream utility interest to pursue maybe even a Phase 4. And if you look beyond 2030, there's some nuclear contracts that are expiring that maybe result in new gas-fired generation, which may underwrite to Phase 5. So apologies for getting ahead of it. But at what point does Guardian need to maybe be twinned? Do you feel like there's a long runway here before you have to do something more greenfield? David Slater: Yes. Great question, Spiro. We actually are looping Guardian. So G3 is beginning a loop. So I think G4 and G5, you're really getting ahead of us on G5. But I think it's -- from an engineering perspective, it's pretty simple is that we will just continue to extend the loops deeper into Wisconsin. The beauty of Guardian is that it's a modern high-pressure system, which gives it a tremendous advantage in a market like this, an expanding market like this, where we can run modern high-pressure system that makes it very efficient and cost effective to expand. Operator: Your next question comes from the line of John Mackay with Goldman Sachs. John Mackay: Maybe just one on the macro. We have seen, kind of, hub a lot lower recently. I'd love just to hear kind of your view on maybe the kind of gas price backdrop overall, but kind of more specifically, just what you're hearing from your Haynesville gathering customers. David Slater: John, good question. We watched that very closely, as you would expect. I think the Haynesville lines were pretty robust in Q1. I expect they're going to be similar in Q2. But typically, where you see producer recalibrating their production is in Q3, if we roll into the summer here and perhaps don't get the short-term weather that they want. Typically, Q3 is where you get some price dislocations. So we're very mindful of that, both in Haynesville and in Appalachia and watch that closely. We're not seeing or hearing anything imminent from any of the producers. But I think that's always a reality or a situation that can play out in the short term, John. And that's something that we have seen historically, and we factor into our guidance as we lay out our guidance. John Mackay: All right. That's clear. Appreciate that. Maybe just staying kind of down in the Haynesville, but going back to some of your LNG comments earlier. I guess I'd just like to put a finer point on that. Are you guys starting to have kind of explicit conversations with new potential LNG customers that are thinking about adding incremental capacity on the back of what's happened in the last two months or so? And maybe just speaking broadly, if someone is talking about FID-ing a new facility next year, a year from now for early 30s in service, when would you be having the kind of pipeline supply agreement conversations with them? Would it be too early for them to come in and underwrite something on LEAP? Or could that happen now ahead of, again, an early 30s in service? David Slater: Yes. And there's a couple of questions in there, John. I'll try to tackle them. I'd say the first question is, are we seeing active conversations in the Haynesville? I'm going to -- Chris is smiling, so I'm going to let him answer that question. Christopher Zona: Yes. Yes. So, John, absolutely. I mean there's a lot of activity going on around that right now, a lot of conversations, especially given the geopolitical issues that we've had here, and I'll say the reliance and the recognition of the importance of North American LNG supply on a global basis, that's certainly, I'll say, a tailwind. I think that's probably going to drive additional LNG development FID sooner than later. So I think that's kind of the trend I'd say, that we're seeing in the market. Operator: Your next question comes from the line of Samya Jain with UBS. Unknown Analyst: Can you provide more color on the Blue Union gathering well pad expansions and build-out? So with a greater number of pipelines going from Waha Eastward, how would you consider future expansion opportunities at Blue Union given its location in the Carthage Hub? And if you could speak to any data center discussions you're seeing in that area that are new? David Slater: Yes. Maybe I'll start at a higher level. I'd say the Blue Union system is really the wellhead gathering and treating system that we operate in the Haynesville. And Chris kind of alluded to it in the last question, we are seeing renewed interest on the -- what I'll call the producer side, incremental drilling, where they're looking for incremental gathering and treating. So that's been very positive. The volumes, as we disclosed, are strong on that network right now. So we're encouraged by that. I think the fundamentals, the high-level fundamentals of the attention that the U.S. LNG complex is getting is causing, I think, some international players to be more attentive or attuned to vertical integration into the basin to serve those facilities. So I think those are all strong fundamentals that are driving additional activity in the region, which we will benefit from over time. So that's a positive fundamental driver for our existing asset, the utilization of the existing asset, but also incremental expansion opportunities. And then I'd say Carthage, Carthage is becoming a landing zone for a lot of Permian. And we're connected to Carthage. We can pull gas from Carthage. So the network is very well connected there, and we will benefit from incremental Permian supply working its way over to the Carthage Hub. Unknown Analyst: Okay. Great. And then in regard to the Vector open season, could you elaborate on the supply you're seeing coming out of Dawn and how the Washington storage complex is especially set to benefit from that? And given the open season, how would you consider any new opportunities and potentially even expanding that storage complex? David Slater: Yes. So I think I'm going to go back to my dominos illustration that we've used over the quarters here with how we're seeing the expansions kind of domino across our footprint -- so as the Guardian expansion -- as the Vector expansion is moving forward, it's feeding the Guardian expansion. It will create opportunity for more supply to come into Vector on NEXUS, also on Rover, also out of the Dawn hub. It also will create and those shippers are very interested in the -- what I'll call the broad storage complex in Michigan and at Dawn. So both us and our partner are large storage operators in that region. So that domino effect or that synergy that the other assets will realize over time is real. And I think, will play out over time. Like I said, the dominos fall one at a time typically. So more to come on that. Stay tuned on that, but I would fully expect that the storage business will be a beneficiary of the existing vector expansion and potentially additional expansions down the road. Like our NEXUS asset, we fully expect that, that will be also a beneficiary of these expansions over time. And like I said, it's just -- it's a domino effect that comes in stages and in waves. Operator: Your final question comes from the line of Van Everen with TPH. Zackery Van Everen: Maybe another one on Midwestern. I understand that you guys don't want to get into the specifics on capacity, but that pipeline does connect to various other pipes that head all the way down to the Gulf. I was curious on the demand you're seeing. Is it mostly around the pipeline? Or are you also seeing interest from whether it's LNG or utilities all the way in the Gulf? David Slater: Zach, that's a great question. And yes, you are correct that we -- on the Southern pathway, we connect to other pipelines that traverse all the way down to the Gulf and connect to other markets. So we just had a really diverse group of shippers respond to the open season. So that's very positive. And we're not going to get into the details on the call here because it's just too early to talk about that. But yes, it was more than just everybody in the neighborhood, I'll say it that way, which, again, is just a strong indication of the macro fundamentals that are unfolding right now across our footprint. Zackery Van Everen: Got you. That's super helpful. And then maybe one just broad-based contracting. It seems the capacity -- existing capacity on these pipes is becoming more and more valuable. And I know you have a lot of long-term contracts across the pipelines. But as these existing contracts roll, do you see operating leverage to charge higher rates? Or are most of your pipes close to that max tariff rate? David Slater: Yes. Great observation, Zach. I mean we're really pleased with how that wave of renewals on Midwestern unfolded, which is why we shared it with the investor base. I mean it just creates durability to the existing asset. And it also demonstrates, and it's another proof point to the fundamentals that we talk about is that not only are we seeing these fundamentals play out, but the existing shippers are seeing the same fundamentals play out and want to make sure that they maintain control of that valuable capacity in a market area where the demand continues to grow. So the question is how do we do we maximize that opportunity? Number one is by terming it out, right? That would be step #1 is you term it out and we don't have to sell anything unless we're selling it at the maximum tariff rate. So terming it out and terming it out at the maximum allowable tariff rate would be the playbook in a market environment like we're in right now, which is exactly what the team did on Midwestern. And you should expect us to do that on all of our assets across the region over time. Operator: I will now turn the call back over to David Slater for closing remarks. David Slater: Well, thank you, everybody, for joining us today. We certainly appreciate your interest in DTM. Thank you for the great questions today, and look forward to seeing everybody in person at the next event. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Welcome to the FTI Consulting First Quarter of 2026 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Mollie Hawkes, Head of Investor Relations. Please go ahead. Mollie Hawkes: Good morning. Welcome to the FTI Consulting conference call to discuss the company's first quarter 2026 earnings results as reported this morning. Management will begin with formal remarks, after which they will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including the company's outlook and expectations for the full year 2026 based on management's current beliefs and expectations. These forward-looking statements involve many risks and uncertainties, assumptions and estimates and other factors that could cause actual results to differ materially from such statements. For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the safe harbor statement in the earnings press release issued this morning, a copy of which is available on our website at www.fticonsulting.com as well as other disclosures under the headings of Risk Factors and forward-looking information in our annual report on Form 10-K for the year ended December 31, 2025, our quarterly reports on Form 10-Q and in our other filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call and will not be updated. FTI Consulting assumes no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. During the call, we will discuss certain non-GAAP financial measures. A discussion of any non-GAAP financial measures addressed on this call and reconciliations to the most directly comparable GAAP measures are included in the press release and the accompanying financial tables that we issued this morning. Lastly, there are 2 items that have been posted to the Investor Relations section of our website for your reference. These include a quarterly earnings presentation and an Excel and PDF of our historical financial and operating data, which have been updated to include our first quarter 2026 results. These formalities out of the way, I'm joined today by Steve Gunby, our CEO and Chairman; and Paul Linton, our Interim Chief Financial Officer and Chief Strategy and Transformation Officer. At this time, I will turn the call over to our CEO and Chairman, Steve Gunpy. Steve Gunby: Thank you, Mollie. Welcome, everybody, and thank you all for joining us today. As you may have seen this morning, we reported once again solid results for the quarter. I will talk to those results in a moment briefly. And then Paul, of course, will talk to them somewhat more extensively. With your permission today, I'd like to start this discussion, however, in a somewhat different place. Typically, in these sessions, I start with some perspectives on the quarter or on the last few quarters and then try to zoom out from those to see if I can draw from them any lessons as to why we've been successful and then some lessons about the future, why typically, I at least continue to believe that, that experience suggests an extraordinarily bright future. Today, let me reverse that order, drawing on some of what we just experienced at our all SMD meeting a couple of weeks ago to see if I can use that experience to perhaps share some perspective on this year and on this quarter. We finished that all SMD meeting just a few days ago. At every one of these meetings, so many people come up to me or others after the meeting and say, just how terrific a meeting they felt it was in terms of the work that got done, but I think for most people, even more powerfully in terms of the sense of pride, sense of excitement, the sense of conviction about the future of the company that people emerge from that meetings with. That's been true at prior meetings. But after this one, my ex co-colleagues and I were struck by just how many people came up to us and shared those thoughts and just how deeply they seem to be feeling them. So I thought I might share a little bit about that, why that might be and why it is that after such a meeting like this, that so many people leave with the conviction about the magnitude of the opportunities yet in front of this company and the conviction that this company is still so much closer to the beginning of the powerful journey we're on in the end. So why was this meeting so good? I think actually, part of the power of the meeting had nothing to do with the meeting itself. It had to do with just how pumped up so many people were coming into the meeting, pumped up particularly about what they had each individually and collectively accomplished over the prior 18 months. Paul and I today will talk about all the stuff we still have to do because there's always stuff to do. We have a long way to go on Compass Lexecon. This quarter, we did also had some of the normal blips. For example, FLC didn't quite perform as we intended. Our tax rate was a little higher than we expected. We had some higher SG&A expenses and so forth. But if you go back 18 months, you might just recall just how many of our businesses were facing truly tough challenges exiting 2024 and heading into 2025. If you remember, Corp Fin has been down 2 quarters in a row. FLC was facing fundamental uncertainty because of tremendous new regulatory changes. Tech was facing a major second request headwind. And StratCom was coming off probably the most challenging 18 months that it faced in a while. People coming into this meeting in Orlando knew that notwithstanding those multitudes of headwinds, in the end, they -- we have managed to deliver a record level of performance as a company in 2025 as a whole and in the bulk of our businesses. And we ended the year with tremendous momentum in most of our businesses. The fact that we have gotten through 2025 and turned every business, Compass Lexecon aside, but every other business back on to its long-term tremendously positive trajectory created, I believe, a powerful sense of pride, motivation and importantly, confidence that people brought into the meeting, even if they credited Mollie and others for creating it in the meeting. So that was one cause. I do think those feelings were powerfully reinforced by some of the stories told in the meeting. The stories of the actions and activities in 2024 and 2025 that led to those results, but also some of the powerful multiyear success stories that were brought to life once again in the meeting. Those stories at an aggregate level were powerful, and they are powerful. I can't talk about all of them. But an example is Mike Eisenband talking about the fact that Corp FIS today is 3x the size it was 8 years ago or perhaps even more powerfully, he and others talking about how folks in the room made that happen. The extension of our restructuring practice around the world, the doubling down of the restructuring practice in the U.S. and U.K., even though it had always been strong, the extension into new businesses and transactions and transformation. or analogous stories about the people in this room in other segments or geographies. For example, Sophie, talking about all the efforts tech -- that took tech from a struggling business that one to one that is in the face of very challenging market conditions is continuing to win and at least in my measure, is growing faster than any other competitor. So I think people came in really motivated, but that motivation got tremendous reinforcement by plenary presentations, but also, I think at least as powerfully by sharing stories with colleagues about the actions that each person had taken, the actions that led to those overall results embedded in the plenary presentations. It suggested it wasn't magic wands that somebody waived. It wasn't markets that gave us those results. It was what people in that room individually and collectively have done that got us to where we are. The third reason that people highlighted and actually, I think probably highlighted more than the first 2 as motivating was just the group of the people in the room. Somebody said to me, you look around and just the group we were proud to be associated with. group of people, some of whom I've known for a while and I've loved working with, but then you also see this terrific group of promotions and these people we have managed to attract. At the end of the opening speech, we asked people to think back to the all-SMD meeting we had at the end of 2018 and ask everyone in the room who had been in that room in 2018 from a bunch of geographies to stand. So we asked anybody from Italy who was in the room today and had been there in 2018 to stand as well as the Nordics and Amsterdam and the Middle East. We started with that group. 0 people stood. Then we asked people from Germany to join them and a few folks stood. I did a few more when we went through the rest of the continent of Europe and the continent of Australia and Asia and Latin America. But in the aggregate, in the room of 700 people, there are a few handfuls of people standing. And then we asked everybody from those markets today to stand and over 200 people got up. We did a similar exercise for the U.S. and U.K. And of course, we had powerful position in the U.S. and the U.K. in 2018. But when we had the entire group of SMBs in the U.S. and U.K. today, it was double the ones that had been there in 2018. We talked about that, the transformation of our capabilities represented by those changes in terms of geography, position in those geographies. We also talked about the fact that we could do the same exercise by segment or practice and see the power of the growth of our capabilities in areas like cyber or transactions or aviation or financial crimes investigations. That standup exercise triggered tremendous terrific capability conversations. But I think actually even more powerful for most of us was at the end of 3 days when people have had working session with the folks who stood, working sessions with long-time colleagues, but also new colleagues, which allowed in a much more tangible sense, not just seeing people stand in the room, but in a tangible sense of just how much capability we have in this firm and how much capability we continue to add to this firm. So my speculation is the reason we got that feedback at the end of the meeting is a combination of those. People brought in pride and conviction to the meeting because what they had accomplished over the prior 18 to 24 months. That pride was reinforced by the stories they heard, but also the stories they shared about the number of places around the world where our teams are building businesses, creating adjacencies, reinforcing core positions, turning around difficult positions. And that, in turn, was reinforced by the power that always comes from deep connection with long-time colleagues who respect people who have inspired confidence for extended periods of time as well as exposure to fabulous new colleagues who are bringing new expertise and new energy. All of that energy ended up getting devoted into work sessions, not only celebrating where we're great today, but importantly, confidence and conviction as to where we can take this business further. I think not surprisingly, people came out of a meeting like that finding myriad opportunities in every practice and every geography, which I think left a lot of people in a position that I've been in for a while, which is the sense of the extraordinary opportunity yet in front of us and feeling incredibly strongly the company is much closer to the beginning of our journey than the end. Let me turn back to the quarter. I think our performance this quarter, the forecast we have for this year are simply consistent with the story. It is a story of a firm that I believe has proven that our essential DNA is a simple one, to support great professionals to help them build businesses that they are passionate about to build and a firm that understands that if we do that, if we find those professionals, support them in their ambitions, though there will be zigs and zags. If we do that, we ultimately control our destiny. We grow market share. We support clients more fully, and we deliver for you, our shareholders. This quarter is consistent with that story. Like all quarters, it doesn't mean we didn't have some zags. Our FLC business, which has been performing incredibly this last while, had a short-term zag this quarter. It doesn't mean that anybody in FLC is less bullish about its future or the capabilities we've built, the aspirations we have or the future we believe we can target. Our tax rate happened to be higher than we expected this quarter. We had some SG&A expenses that exceeded our expectations. These are things we have to look at and can address. We do have one longer-term issue that we've been talking about and that we are still working through, which is Compass Lexecon. Compass Lexecon's performance was in line with where we thought it was going to be this quarter, but that certainly leaves us with multi quarters of work yet to do. But of course, that has also always been true for this company in prior -- in many prior years. We have not always had every business every year set up exactly to soar. This year, we have work to do in Compass Lexecon, and we are doing that work. So we have headwinds, particularly in Econ, but in the face of those headwinds, I hope you saw we grew close to double-digit revenue this quarter. I hope you saw that StratCom delivered yet another record quarter. In corporate delivered double-digit revenue growth year-over-year in all 3 of its sub-businesses. And Tech came out of the other side of the headwinds it faced last year and the non-Compass Lexecon team in Econ is having another great quarter. So Paul will go through the quarter in more detail. To me, what is more powerful than the fact that we delivered yet another solid quarter, and we believe we're on track for the year is that in the context of the last 8 years, 8 years in which we've had some solid quarters, some extraordinary quarters and some quarters that weren't so good, all of which added up, however, to an incredible run of growth in multiple geographies and multiple segments around the world, building a stronger, more capable group of people with a set of leaders with a conviction of where they can take us and putting us on a solidly, with zig zags, but solidly upward sloping set of lines. My view is that if we continue to invest in the ways we know behind great people with ambition and the sort of conviction and drive and energy that was demonstrated at this meeting of people who take responsibility for turning that into results. This firm is and will be much closer to the beginning of this journey than the end. With then, Paul, let me turn this over to you. Paul Linton: Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results for the quarter. First quarter 2026 revenues of $983.3 million increased $85.1 million or 9.5% compared to the first quarter of 2025. The increase was primarily driven by revenue growth in our Corporate Finance, Strategic Communications and Technology segments that partially offset by a revenue decline in our Economic Consulting segment. Excluding an estimated positive impact of FX, revenues increased $60.8 million or 6.8% compared to the prior year quarter. Net income was $57.6 million compared to $61.8 million in the prior year quarter. The decrease was primarily due to higher direct costs and SG&A expenses, which included legal settlement in the prior year quarter as well as an increase in interest expense and a higher effective tax rate compared to the prior year quarter, which more than offset the increase in revenues. Direct costs of $676.5 million compared to $608.9 million in the prior year quarter, primarily due to higher compensation expenses, which included an increase in variable compensation, salaries and forgivable loan amortization compared to Q1 2025. SG&A of $222.3 million or 22.6% of revenues increased $38 million from $184.3 million or 20.5% of revenues in the prior year quarter. The increase was primarily due to higher legal expenses this quarter as compared to Q1 of 2025, which included the benefit from legal settlements that did not recur in Q1 of 2026 as well as higher compensation and T&E expenses. Excluding an estimated negative impact of FX, SG&A increased approximately $32.4 million compared to the prior year quarter. First quarter 2026 adjusted EBITDA of $96.8 million or 9.8% of revenues compared to $115.2 million or 12.8% of revenues in the prior year quarter. Our first quarter 2026 effective tax rate of 26.6% compared to 23.3% in the prior year quarter, primarily due to a less favorable tax benefit related to share-based compensation as fewer shares vested as well as an increase in valuation allowance recorded against current period losses compared to the prior year quarter. While our tax rate this quarter of 26.6% was higher than expected, we continue to expect our full year tax rate to be between 22% and 24%. Weighted average shares outstanding, or WASO, for Q1 of 30.3 million shares compared to 35.5 million shares in the prior year quarter. a 14.6% decrease. Earnings per share of $1.90 compared to $1.74 in the prior year quarter. As a reminder, in Q1 2025, our EPS included a $25.3 million special charge related to severance and other employee-related costs, which reduced GAAP EPS by $0.55. Excluding the $0.55 Q1 2025 special charge, adjusted EPS was $2.29 in Q1 2025. Billable headcount increased by 1.1% with growth in our CorpFin and FLC segments being partially offset by declines in StratCom, Econ and Tech. Non-billable headcount decreased by 0.4% compared to the prior year quarter. Now turning to performance at the segment level. In Corporate Finance, revenues of $409.5 million increased 19.2%, primarily due to higher demand and realized bill rates in turnaround and restructuring, which grew 19%, transactions, which grew 18% and transformation, which grew 20% compared to the prior year quarter. Excluding an estimated positive impact of FX, revenues increased 16.7%. In turnaround and restructuring, revenue growth was driven by roles in some of the largest bankruptcies globally from Spirit Airlines to Saks in the U.S. to Prax Oil Refinery in the U.K. and Azul Airlines in Brazil. Notably, in transactions, our engagements have expanded in size and as we continue to bring more of our services to clients across the deal life cycle. In addition to working for PE-backed clients, we are working on some of the largest mergers, integrations and carve-outs in the market, including Omnicom's merger with IPG, Skyworks Solutions merger with Qorvo and Lumen's sale of their fiber-to-the-home business to AT&T, among many other brand-building cases. In transformation, our performance this quarter exceeded our expectations. In fact, the number of million-plus engagements nearly doubled compared to Q1 2025. We continue to win our share of end-to-end cost takeout, supply chain and operational efficiency mandates in key industries where our experts bring deep real-world expertise such as health care, industrial, communication services and financial services. Segment operating income of $85.2 million compared to $41 million in the prior year quarter. Adjusted segment EBITDA of $88.7 million or 21.6% of segment revenues compared to $55.9 million or 16.3% of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by higher compensation. Sequentially, Corporate Finance revenues decreased 3.2%, primarily due to lower success fees and lower pass-through revenues. Adjusted segment EBITDA increased $8.5 million, primarily due to lower compensation. Turning to FLC. Revenues of $192.9 million increased 1.2% due to higher realized bill rates for risk investigation and construction solutions services, which was partially offset by lower demand for dispute advisory services. Excluding an estimated positive impact of FX, revenues decreased by 0.9%. Segment operating income of $23.1 million compared to $30.1 million in the prior year quarter. Adjusted segment EBITDA of $25.3 million or 13.1% of segment revenues compared to $37.5 million or 19.7% of segment revenues in the prior year quarter. The decrease in adjusted segment EBITDA was primarily due to higher compensation and SG&A expenses, which included an increase in hiring-related expenses and an increase in bad debt. Sequentially, FLC revenues were flat and adjusted segment EBITDA increased by $1.4 million, primarily due to lower compensation expenses, which was partially offset by an increase in hiring-related costs. In general, disruption the world is facing increases the need for our expertise from national security and cyber threats to AI-related risk compliance to shifting geopolitical issues, among others. That, of course, does not play in our favor every quarter. And this quarter, FLC underperformed our expectations. Some of this underperformance is timing driven as there are always quarter-to-quarter volatility in our business. As we've discussed during the last several calls, our team is supporting complex headline and brand-building matters, but those engagements are often large and lumpy with starts and stops that are often driven by factors that are outside of our control. In Economic Consulting, revenues of $175.6 million decreased 2.3%, primarily due to lower demand for antitrust services, which was partially offset by higher demand for financial economic services and higher realized bill rates. Excluding an estimated positive impact of FX, revenues decreased 5.7%. Segment operating loss of $7.3 million compared to segment operating income of $12.1 million in the prior year quarter. Adjusted segment EBITDA was a loss of $5.9 million compared to $14.4 million or 8% of segment revenues in the prior year quarter. The decrease in adjusted segment EBITDA was primarily due to higher compensation, largely related to the increase in forgivable loan amortization and low. Sequentially, Economic Consulting's revenues were essentially flat and adjusted segment EBITDA decreased $2.9 million, primarily due to higher compensation expenses, which was partially offset by lower bad debt. We have, as expected, made some good progress over the past months in Europe, in particular, and we expect that to begin to show up in the P&L as this year goes on. Although we've added terrific talent to our Compass Lexecon antitrust business in North America, we are just beginning to rebuild that revenue base. Technology revenues of $102.3 million increased 5.3%, primarily due to higher demand for litigation and information governance, privacy and security services, which was partially offset by lower demand for investigations and M&A-related second request services. Excluding an estimated positive impact of FX, revenues increased 2.8%. Higher demand for litigation was largely driven by clients in the health care, media and technology industries and demand for information governance, privacy and security services was driven by a large privacy breach. So the complexity of data is compounding. Our tech business combines domain experts, operators, attorneys and investigators with deep technical experts who have worked with artificial intelligence for over a decade to solve their clients' most complex high-stakes issues at the intersection of law and regulation. This combination of experience and expertise has long been a core differentiator for our tech business. And that's why the world's leading AI companies are turning to us for their most complex matters from IP and copyright to privacy, security and data monitoring to building custom depeensable tools for specific client uses and workflows based on our expertise collecting and analyzing massive scale AI system data from activity logs to RAG databases. Segment operating income was $7.7 million compared to $6.6 million in the prior year quarter. Adjusted segment EBITDA was $11.8 million or 11.6% of segment revenues compared to $11.6 million or 11.9% of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation. Sequentially, technology revenues increased 3.3%, primarily due to demand for information governance, privacy and security services, which was partially offset by lower demand for investigation services. Adjusted segment EBITDA decreased $3 million sequentially, primarily due to higher compensation, which more than offset the increase in revenues. Strategic Communications record revenues of $103 million increased 18.4%, primarily due to higher demand for corporate reputation, public affairs and financial communications services. Excluding an estimated positive impact of FX, revenues increased 14.5%. Worth noting, StratCom's continued powerful results reflect the strength of our multiyear investments to build out our higher-margin event-driven offerings in areas such as crisis, cyber, transactions and activism as well as frequently teaming with the other segment to address complex client issues in our largest global cases. Segment operating income of $20.8 million compared to $8.7 million in the prior year quarter. Record adjusted segment EBITDA of $21.9 million or 21.3% of segment revenues compared to $12.9 million or 14.8% of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation expenses largely related to variable compensation. Sequentially, Strategic Communications revenues were up 3.6%, primarily due to higher demand for financial communications and public affairs services. Adjusted segment EBITDA increased 15% sequentially, primarily due to higher revenue. Let me now discuss a few cash flow and balance sheet items. As is typical, we paid the bulk of our annual bonuses in the first quarter. Net cash used in operating activities of $310 million compared to $455.2 million used in the prior year quarter. The year-over-year decrease in net cash used in operating activities was primarily due to a decline in forgivable loan issuances, higher cash collections and lower income tax payments, which was partially offset by an increase in compensation payments. During the quarter, we repurchased 787,098 shares at an average price per share of $161.11 for a total cost of $126.8 million. As of March 31, 2026, approximately $354.9 million remained available for common stock repurchases under the company's stock repurchase program. Total debt net of cash of $556.7 million at March 31, 2026, compared to $8.9 million as of March 31, 2025, and $99.9 million at December 31, 2025. The sequential increase in total debt net of cash was primarily due to annual bonus payments and share repurchases. Turning to our outlook. First, let me remind you of the guidance ranges for 2026 that we provided in February. Revenues of between $3.94 billion and $4.1 billion, EPS of between $8.90 and $9.60. Based on our solid Q1 performance, we are maintaining our guidance ranges, which incorporates the following considerations. First, in our Compass Lexecon business, though we believe our adjusted segment EBITDA in Economic Consulting has hit its low point this quarter, as Steve said, we have multiple quarters of work ahead to get the P&L back to the levels we are happy with. Second, we're an event-driven business, and therefore, our results can be lumpy. As mentioned, we had several jobs in FLC that rolled off during the quarter or started later than expected. We have some large jobs rolling off in other segments where our work is event-driven. However, as mentioned previously, our ability to win the largest headline-making jobs in the market reflects the continued power of our platform and the relevance of our people. Third, the M&A market has had a strong start to the year in terms of deal volume and mega deals. We saw solid demand for our businesses that support M&A-related activity in Corp Fin, Econ, Tech and StratComs. However, we can never be certain how activity will continue through the remainder of the year, particularly amid continued market uncertainties. Fourth, we continue to invest in talent. In 2025, we announced 85 senior hires. In 2026, we plan to add more senior professionals where we see the right opportunities. We have announced 29 SMD and affiliate hires year-to-date in key geographies such as Australia and the Middle East, where we are benefiting from competitive disruptions as well as in key adjacencies such as transaction, transformation, public affairs, cybersecurity, data privacy and AI. We also intend to build teams around these leaders. And in the second half of the year, we expect to increase junior hiring in parts of the business that lagged in hiring in 2025. Fifth, we now expect SG&A expenses for 2026 to be approximately $60 million higher than 2025. The increase is largely due to higher legal and compensation expenses. As a reminder, as Steve mentioned, we held our all SMD meeting in April. We expect Q2 2026 to be the high point for SG&A or approximately $5 million higher than Q1 2026. Before I close, I want to reiterate 4 key themes that I believe continue to underscore the attractiveness of our business. First, in an increasingly uncertain and disruptive world, our powerful platform and unique set of offerings allow us to deliver impactful results for our clients as they navigate their most significant crises and transformations from bankruptcies and M&A transactions to investigations and cyber breaches regardless of business cycles. Second, we continue to attract top talent when the right people are available regardless of short-term economic impacts, particularly in the backdrop when many competitors are facing major challenges from expensive debt and poor liquidity, the heightened client skepticism around the quality of their core offering. Third, as we continue to hire, our management team remains focused on both growth and utilization. And fourth, our business generates excellent free cash flow, and we have a strong balance sheet that provides us the flexibility to boost shareholder value through organic growth, share buybacks and acquisitions when we see the right ones. Before we open the call to your questions, I want to take one more opportunity to welcome our new Chief Financial Officer, Angela Nam, who will join us on May 1. We're looking forward to introducing Angela on our next earnings call in July. With that, let's open up the call for your questions. Operator: [Operator Instructions] And at this time, we will take our first question, which will come from Andrew Nicholas with William Blair. Andrew Nicholas: The first one is just kind of on the macro environment. A lot of helpful color on the puts and takes at the segment level. But I just wanted to ask kind of at a big picture level, CFR, you saw really good growth on both the restructuring side and the transaction side. How feasible is it, whether it's over the course of this year or even multiple years for both of those businesses to grow at such strong rates simultaneously. Typically, you'd expect a little bit of conflict between a restructuring environment or a strong restructuring environment and a strong M&A environment. Just kind of interested in whether or not you see those conflicting in the coming quarters and years. Steve Gunby: Yes. Let me take a crack at that, Paul, you probably have views on that, too, if you want to add. Look, I would say there are a couple of different forces going on there. There's the market forces, which I think you're right, markets that tend to support lots of M&A will often not be markets that are big restructuring markets. And so you have some macroeconomic forces that have historically suggested that these don't all go aligned. I think the other thing that goes on here is that we've actually -- our teams have done a fabulous job of adding talent and expanding the businesses. These are not just U.S. businesses today. They're global businesses where we have powerful positions overseas, and we continue to be attracting talent. So some of what you see here is the market forces come in coalescing in an unusual way and all supportive. I think some of it has to do with actually us gaining share, particularly in like transactions and transformation. And look, that just depends on us doing the right things and the right talent come available and us being bold enough to jump on that talent when it's available. So I think one of them says they're inconsistent, they shouldn't all grow together. The other one says, if we do the right things, we can defy those market realities a bit. Does that help, Andrew? Andrew Nicholas: Yes. No, that's helpful. I appreciate the color. And then for my follow-up on kind of segment margins. I think both FLC and StratCom kind of the first quarter results were a decent bit different than what we've seen over the past several quarters. So just kind of curious how we should think about those 2 segments margins. And with FLC more specifically, last year was a really good year for profitability. I understand that the top line is a little bit lumpy, but is there a margin profile that you think is "normal" for this business that we should kind of gear our models to? Paul Linton: Yes. So I don't think we're going to give any specific guidance on margins, but maybe I can help a little bit with FLC. I mean we have been adding talent in FLC and particularly over the last little while, a lot of the talent we've added has been at the top with -- in terms of SMD. So that investment in building out our expert model, which will allow us to continue to drive the revenue in some of these higher-margin services, we feel is kind of the right investment for the business. There's also some onetime stuff that we talked about in the -- earlier in the call that drove some margin to be a little bit lower than our expectations. But I think in the long term, we feel pretty confident in the business. Steve Gunby: And then StratCom, to the point, has had a fabulous quarter, and we never project people to take the best quarter and multiply it and extend it forever. But let me say this, I think -- so you never want to take a quarter where everything is on fire and just make that the normal quarter. I will say there's stuff underlying in StratCom that is powerful going on. There's been a move over now a number of years, but that starts to show up in the numbers towards much more of the highest value part of its business, crisis, transformation, cyber deals and so forth. And that is a -- it's a lumpier business, but it's, of course, a crisis business, which tends to be a higher-margin business for us. The other thing is I think that's a business that has adjusted its leverage ratio and taking account AI. The high end of that business, the core advisory business is like the rest of our business where crisis is why people are hiring us. We used to need a lot of people to help summarize things like EU regulations. You need fewer of those. So some of the leverage ratios have changed. So look, I think that business is headed in a great trajectory, but you never want to take the quarter where -- I mean, even Paul sounded rapturous about the numbers. We never want to take that and just say, oh, that's the new normal. Does that help, Andrew? Andrew Nicholas: Yes, that's perfect. Operator: And our next question will come from James Yaro with Goldman Sachs. James Yaro: So maybe I just want to -- maybe just starting first on restructuring. I just want to touch a little bit more on that and dig in a little bit on some of the things you've already alluded to. But I'd love to just get your perspective on what the disruptions in private credit and software. And obviously, the 2 are related, but basically, the nexus of those 2 things means for the business. I think a number of investment banks out there have talked about the liability management opportunity potentially over time. Obviously, that's not where your restructuring business is lies. And so I just love to get your perspective on whether private credit and software could have a positive impact or impulse on your restructuring business. Steve Gunby: You want me to take that or you want to take that? Okay. So look, I think we have good relationships with private credit, our business is helping companies that have challenges and private credit in general tends to be companies that lend money to more risky, more venturesome activity. And so they're taking risk. And so when things get stressed, that's where we are the strongest, okay? I would say that has not been the major driver of our growth so far. We have very good relationships there. And we have also relationships that are important, not just in, but in FLC and investigating -- some of these are very covenant-light loans and therefore, covenant-light loans on average have more susceptibility to the statement of frauds and so forth. And we have an FLC business that specializes in fraud investigation. So I would say that depending on how that market evolves, it could be a terrific source of revenue growth for us. I think our private equity clients are hoping it's not that the world is calm going forward. But we are well positioned if it is. You're right, we don't do liability management exercises. But as you know, James, not every liability management exercise works out. And a number of the bankruptcies we're working on now were liability management exercises a couple of years ago. So look, we know these clients well. We think they're valuable clients. We stay close to them, and we stand ready to serve if and when they need us. And I think if they need us, we will get significant revenue from them. Does that help, James? James Yaro: Super helpful, as always. Maybe just zooming out on a somewhat related topic, but Steve, I'd just love to get your perspective on what you think are the businesses that could be most impacted by the disruptions we're seeing, whether it's AI, software, private credit and the global conflict and perhaps in which ways? Steve Gunby: You're talking about our end customers? Or are you talking about our businesses? James Yaro: I guess your business yes, your business. Steve Gunby: Let me think about that... James Yaro: Sorry, Steve, let me just clarify the point. I just want to clarify the point, my apologies. That was imprecise with me. So just to clarify, how do you think those large items could impact your end customers and therefore, drive more business for you? Steve Gunby: Yes. Look, it's -- I think it's true for all of our businesses. I mean our business -- maybe when we acquired all these businesses 15 years ago or 20 years ago now, they were somewhat different. I mean maybe our StratCom people wrote annual reports at that point in time. I mean at this point, so many of our businesses really are businesses that designed to serve companies at their biggest times of change and potential disruption in the marketplace or transformations they're in. And to the extent the world is more disruptive or in response to anticipate disruption, people are transforming their businesses with greater rapidity and more frequently, it's a boon to the businesses. And it's hard for me to pick favorite children out of that because you can see that in StratCom right now. You can see that in restructuring right now. It leads -- all of those things lead to litigation, which we're expert witnesses and testifier. Sometimes people misrepresent things and that leads to fraud. And so I'm pretty bullish about our position to help companies in -- as I think I said once, if the world were the kind of world that we tried to describe to our 2-year-olds, wonderful world, everybody gets along. You're trying to tell your 2-year-old back because he or she is beating up on the 4-year-old. But a peaceful world where everybody is getting along, there's no litigation, there's no crisis and the world isn't changing, that's not what we're set up to serve. To the extent the world has other aspects, it's a pretty big driver for us. Does that respond, James? James Yaro: Yes. Yes. Extremely helpful. And last one just for you, both. Just as you think about hiring, you talked about accelerating hiring towards the back half of this year, you also highlighted a number of -- a substantial number of recent senior hires. I just would love to get your perspective on what gives you the confidence or the ability to accelerate the hiring so substantially? Is it greater disruption -- even greater disruptions among the firms from which you hire or just even more investment on your side or maybe a combination of both? Steve Gunby: Yes. Let me distinguish between the junior hires and the senior hires. The junior hires we're forecasting for the second half of the year is to catch up because we have been so fortunate in the number of senior hires that we've been bringing on that our ratios in a number of our businesses are below where we've historically been, okay? So I think the junior hires in the second half of the year is not based on some forecast of disruption in the world. It's -- we got senior hires. We have to bring in some people below them. The senior hires is really a supply side-driven thing. I think as we've had -- I'll give you an example of Australia. At one point in Australia, we had several good leaders down there, and they couldn't attract anybody. We were not #1 or #2 in any market position. Nobody believed the global network was worth anything. We had really good people trying to recruit people and nobody would come. And it just transformed itself. I think today, we may have more SMDs per capita for GDP, whatever in Australia than any place else because what happened is there was a breakthrough, some of the number of leading restructuring people came over, and they founded a tremendous platform. We made the global network work. That went around the market. Now that led a few additions, but then you're right, competitors had real missteps. And when competitors have real missteps, now we were the destination that everybody wanted to talk to. It didn't mean only us, but everybody wanted to talk to. And then they talked to us and they talk to the people and said, "Wow, these are people I want to join. And then when they join, that gets around the market as well. And so we've gone from a position where nobody would take our calls 10 years ago or 8 years ago, the phone is ringing off the hook. And I don't know if we released the exact number of SMBs, Mollie, she's taking her head, but where it's ringing off the hook. And I think that's what we bet on because if we can get those people, maybe we get those people 3 quarters ahead of where they can bring in revenue or sometimes they have restrictions. And so it's 6 quarters before they can bring in a lot of revenue. But that, we think, is the single best fuel of long-term growth for us, what we bet on. And then what we showed at -- what people were talking about in this all-SMD meeting is why we have driven this. So on the senior headcount, that's the reason, James. Does that respond? James Yaro: Extremely helpful. Paul Linton: Maybe I'll just add to that just a little bit. Part of your question was why do we have the confidence. And I'd point you to StratCom and CorpFin. The growth that you saw in Q1 of 2026, those are investments that were made 3 years ago, 2 years ago, 1 year ago that enabled -- now some of it is pricing, but without the heads, that growth is not possible. So the confidence we're seeing -- the performance we're seeing in those businesses gives us confidence to continue to invest behind those businesses to drive not only restructuring but transactions and transformation and in StratCom, not just financial communications, but all those other event-driven services such as cyber. So we're going to continue to invest if we find the right people in the market because that's the way we delivered the growth you saw this quarter. Operator: And our next question will come from Tobey Sommer with Truist. Tobey Sommer: We've heard from some other management at various consulting firms think that one of the impacts of AI could be a move towards some more fixed pricing structures as well as potentially changes in ratios of juniors to seniors. You made a couple of comments on the leverage ratio of juniors to seniors in different directions or hiring a little bit more in the back half to support some of your new senior hires. How do you see fixed price and changing ratios evolving over a little longer stretch of time? Steve Gunby: Look, it's a good question, Tobey. I think it's one that I talk with the managing partners of a number of law firms. I talk with managing partners of other professional services firm. I mean everybody is thinking through what the pricing dynamics are in an AI environment. I would say nobody has a perfect answer for any of them, and there's lots of experiments going on. In our tech business, where we're using -- we have a really leading set of offerings, AI related. They do require then really smart senior overview to make sure that you don't have the sort of AI hallucination legal issues that some people have. So that has reduced some of the junior most work, but it has required some of the more senior work, which is build out at higher rates. How that nets out, I don't know. Right now, I would say it's probably netting out with fewer hours but us gaining share because we're leading edge. And so there's all these dynamics that are going on. We're clearly, in some places, looking at fixed price contracts because we're focused on trying to use AI to make sure we're delivering more value, which typically means fast the value faster, either broader with deeper sources or faster. And that has more value for your clients as well. But we're experimenting with multiple models in multiple places. Like on most things on AI, the -- it's moving so fast that you have to be ahead of it, but the immediate impact of those pricing decisions right now is muted. It's just that we're staying on top of it because it's pretty damn critical for going ahead. And so we're looking at lots of different versions. Does that help, Tobey? Tobey Sommer: Sure. Yes, it does. So with Economic Consulting, you kind of described a multi-quarter path to trying to grow that business and improve profitability. Could you dig into what the likely path is to improve profitability? Because last year, you handed out a bunch of forgivable loans, and that's going to weigh on things. And I'm just wondering as you placed some of those bets on people who weren't necessarily commercially proven, as they -- some of them do prove themselves and become successful, how do they not get sort of marked to market for that new improved condition? Steve Gunby: Yes. So I don't think we're really too worried about the people getting commercial, that's not going to be a problem for us. We're worried about those who don't get commercial, Tobey. The -- what we did was we bet on some very proven rainmakers, and they've come in and generally been driving revenue, and that's pretty straightforward. We have bet on some very leading-edge academics. I think we've talked about the Meda case that came out and one of the academics from the University of Chicago was behavioral economist was cited by the judge multiple times in that case. Those people are incredible assets for the biggest states litigation, which is the place where we still win we're the leading player in that. And that's -- but those people are not necessarily automatically economic for us because you sign them up and then over time, behavioral economics gets accepted in the courts and then behavioral economics gets used more. We have structures for each of those people as they get used more, they will get paid more, but their forgivable loan doesn't go up. So the economics of them getting used more are positive for us, not worse for us. And we made a lot of those bets, and some of them will take quarters to start to prove out, and some of them will take years to start to prove out. They were very intelligent bets. These are bets on people who -- some of our people are the leading academic journals in economics. and they have insight into people who are really leading edge in the way -- which is the foundation of Compass Lexecon. But many of those bets are not near-term payback. And therefore, we're saying it's a multi-quarter journey for us. Does that help a little bit, Tobey? Tobey Sommer: It does. If I could ask one follow-up. Is there a path or strategy for you to regain your position in competition consulting domestically? Steve Gunby: Yes. Let me just separate out a few things. So as we might imagine, there's like 3 or 4 different parts of our business. Our Europe business was not particularly hard hit by the competitive disruption. Last year, it happened to have a tough year, partly because of distraction by some of this. I think they're on their way back to the position, and they are still the leaders, to my knowledge, of -- we are the leaders in global antitrust based on a terrific team over there. And that's starting to show up as this year goes on, I believe. In the U.S., we've always been the leader, I believe, in the finance practice. And I think our revenue year-on-year has been up in the finance practice. And we still win the largest cases, and I don't think we lost anybody of significance in the competitive disruption. The hit we had was to the U.S. antitrust business. But even there, it's nuanced. The biggest cases in the U.S., when it goes to litigation, people want the depth of expertise we have. And I don't think -- and we have people like Dennis Carlton. We have the people like I just mentioned these affiliates like John List, who were on the Medicase. We have added to that some tremendous people like Doug Bernheim. So we, I think, are still the go-to person for the leading litigation-related cases in antitrust in the U.S. And I think you can check that out with different sources on that. Where we've gotten hit is surprisingly is on the more routine standard merger clearance cases, where we lost some people. And the people we have, we still have some very good people, but they tend to be pretty academics and shy, and they don't -- they're not out there marketing, and we've lost a lot of share on that in the U.S. And that's rebuildable. It's not a unique characteristic, but it does require us going out and meeting the attorneys and so forth, and we've got a ways to go on that. So I think that's doable. But even that, when people have entrenched relationships, it takes a while to get a crack and then approve yourself. And so we've got a ways to go in the more routine -- particularly in the more routine merger agency-related clearances in the United States. Does that help, Tobey? Tobey Sommer: Thank you. Steve Gunby: I want to say thank you to everyone for attendance. And I think since I won't say thank you to Paul for being the CFO yet because we'll wait until Angela is here, and she can thank you, but also because you are not going any place, right? You're going to come back and still be our Chief Transformation Officer. But thank you, everybody, for your time and your support, and I hope this meeting was helpful. Have a great week. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Upbound Group Q1 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Steven Kos of Upbound Investor Relations. Please go ahead. Steven Kos: Good morning, and thank you all for joining to discuss the company's performance for the first quarter of 2026. We issued our earnings release this morning before the market opened and the release and all related materials, including a link to the live webcast are available on our website at investor.upbound.com. On the call today from Upbound Group, we have Fahmi Karam, our Chief Executive Officer; and Hal Khouri, our Chief Financial Officer. As a reminder, some of the statements provided on this call are forward-looking and are subject to factors that could cause actual results to differ materially and adversely from our expectations. These factors are described in our earnings release as well as in the company's most recent Form 10-K, upcoming Form 10-Q and other SEC filings. Upbound Group undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. This call will also include references to non-GAAP financial measures. Please refer to today's earnings release, which can be found on our website for a description of the non-GAAP financial measures and the reconciliations to the most comparable GAAP financial measures. Finally, Upbound Group is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. Please refer to our website for the only authorized webcast. With that, I'll turn the call over to Fahmi. Fahmi Karam: Thank you, Steven, and good morning, everyone. I'll start with a review of our first quarter performance and the progress we're making on our 2026 priorities. I'll then hand it over to Hal for a more detailed discussion of our financial results and outlook. After that, we'll take some of your questions. Our first quarter represented a solid start to 2026 for Upbound. We executed well in a difficult operating environment, delivered results in line with our financial targets, generated robust cash flow and deleveraged our balance sheet while continuing to advance key initiatives that support long-term value creation. We believe Upbound's expanded and increasingly digital portfolio is well suited to meet consumers' needs in this environment as consumers seek flexible, convenient and affordable financial solutions. With our Brigit acquisition last year, we have 3 complementary brands that deliver a wide range of financial solutions to a similar and sizable target consumer base. And that diversification helps us manage through category swings, creates multiple paths to growth and gives us more opportunities to deepen relationships with customers over time. Our work is guided by a set of clear priorities for 2026. We're building Upbound into a more connected, tech-enabled financial platform while fostering sustainable, profitable growth. Across the company, our focus is on using data, advanced analytics and AI to improve personalization, strengthen underwriting and enhance operating efficiency across our organization. When we talk about becoming more connected, this refers to creating a better, deeper experience for customers and a more efficient operating model for the company. That means meeting customers where they are, providing a broader set of solutions across their financial journeys and using data collected at any and every interaction across our brands and channels to make smarter decisions from product development, value proposition, customer acquisition, conversion and underwriting to account management and retention. Over time, this stronger connection should translate into enhanced customer engagement, better outcomes and higher returns on capital. We're also advancing a more unified operating structure for the company. In practical terms, that means a common delivery model, shared resources and shared data foundations that allow each brand to move faster without recreating the same work in multiple places. Ultimately, this operating model helps ensure teams have the clarity, focus and tools necessary to execute effectively across key enterprise initiatives. Alongside that, we're applying analytics and AI in practical ways across the enterprise. Our initial focus is on use cases that improve outcomes in underwriting, customer communications, operating efficiency and enhanced servicing and collections. These are targeted initiatives aimed at enabling better decisions, higher productivity and a better customer experience and we're prioritizing areas where we can measure impact and scale what works. We expect to improve merchant experience and onboarding and to remove friction points, which will enhance both merchant and consumer conversion. These efforts should translate into more loyal customers, repeat interactions, higher LTV per customer and overall lower customer acquisition costs. A big part of delivering on those priorities is leadership and organizational clarity. We've continued investing in key senior leadership roles and talent and we're thrilled to welcome our new Chief Technology Officer, Balaji Kumar. Balaji brings more than 25 years of technology leadership experience across financial services and retail. Bringing Balaji on board strengthens our ability to modernize systems, accelerate execution and build scalable technology capabilities that support the road map we've laid out. With the recent leadership additions of Hal, our CFO; Rebecca Wooters, our Chief Growth Officer; and now Balaji in place, along with the balance of our seasoned executive team, we believe we are well positioned for 2026 and for the long-term future growth. Now let's turn to our segments and how our first quarter performance exemplifies this approach. Beginning with Brigit, we're pleased with the segment's growth and momentum to start the year. In the first quarter, paying subscribers and monthly average revenue per user both increased double digits year-over-year, driving a revenue increase of over 40% year-over-year. This performance reflects strong demand and solid execution. And as a result, the segment remains on track to hit its financial targets for 2026. Brigit continues to invest prudently in the products and marketing that will enable additional growth and profitability in future years as the business continues to enhance its value proposition, driving increased engagement and monetization across the platform. As the brand scales, more and more users are finding value in Brigit's flexible and transparent financial wellness and liquidity solutions and we're excited about the opportunities ahead for Brigit as we continue expanding how and where customers can use the platform. In particular, product development remains an important focus at Brigit with the line of credit pilot continuing to advance. We're preparing for a broader rollout later this year, taking a measured approach that prioritizes unit economics, customer outcomes and long-term value creation. Turning to Acima. The positive results of our targeted efforts to strengthen portfolio health given the challenging operating environment became even clearer in the first quarter as the prudent underwriting actions taken over the past year have proven effective. Lease charge-offs were approximately 8.8% in the first quarter, representing a meaningful improvement from the elevated levels in the second half of last year, including a 130 basis point improvement compared to the fourth quarter. This improvement validates the data-driven approach our team has adopted to protect portfolio quality and improve long-term economics and it supports the foundation for continued investment in the business as we move through 2026. Tightening underwriting, coupled with macro headwinds, which impacted demand, pressured our GMV in the first quarter. GMV finished the quarter below our expectations coming in lower than last year's first quarter performance, which was prior to us making meaningful underwriting changes. In a moment, Hal will go over our guidance and how GMV and the stronger Q1 loss performance are expected to impact our results for the balance of 2026. Acima will continue to be disciplined in its approach and we will continue building toward meaningful growth opportunities. We're sharpening the value proposition of our flexible leasing solutions and expanding our digital capabilities. At the same time, we're investing in merchant relationships and strengthening the customer experience at tens of thousands of retailers across the country as well as online through our direct-to-consumer marketplace, which grew approximately 9% year-over-year in the first quarter. We also remain encouraged by the merchant pipeline across small, medium and large retailers and by the diversity of the merchant base, which helps support resilience when demand varies across categories. During the quarter, we signed a new agreement with an existing merchant partner that furthers our partnership and is expected to drive meaningful GMV in the second half of the year. The revised agreement enhances our integration and provides Acima exclusive rights as a checkout option at the largest e-commerce furniture retailer in the country. At Rent-A-Center, our focus remains on continued cost optimization while strengthening the foundation for more consistent performance. That progress was evident in the first quarter with the segment achieving year-over-year same-store sales growth for the second consecutive quarter following our strategic tightening over the past several months. The team continues to prioritize portfolio quality while advancing initiatives aimed at improving the customer experience and store level execution. This is not a single initiative. It's a consistent integrated operating approach that combines investment in expanding digital capabilities with targeted work to strengthen engagement and execution in the field. In particular, we are focused on measurable initiatives expected to improve performance over time, from reinforcing coworker training and execution in the field to expanding relevant product offering for Rent-A-Center's strongest and most loyal customers. We're also excited about the Amazon partnership we announced last week. While still early, this collaboration enables convenient Amazon order pickup and returns at more than 1,700 Rent-A-Center corporate-owned stores, increasing store relevance, driving brand awareness and in-store traffic and supporting new customer acquisition. These are the type of initiatives that leverage our existing footprint, enhance the customer experience and help us introduce our portfolio of flexible financial solutions to an even greater number of consumers. Before turning to consolidated financial highlights, I want to briefly step back and tie together what we're seeing across the business. Across the enterprise, we continue to strengthen the platform by connecting data, capabilities and teams in more deliberate ways. We are improving personalization, making more targeted data-driven risk decisions and identifying opportunities to engage customers more effectively across brands. This work is focused on execution fundamentals, targeting the right customers across channels while delivering value and service that drives repeat business and then scaling those improvements consistently over time. It's also important to acknowledge the operating environment we're navigating. The non-prime consumer continues to face pressure from elevated costs in essential categories such as groceries, rent, utilities and energy, which influences purchasing behavior and weighs on discretionary spending, particularly for larger ticket items. At the same time, the first quarter featured a stronger-than-normal tax refund season. While that supported liquidity for many consumers, it was partially offset by higher energy prices following recent geopolitical developments. Despite this challenging backdrop in the first quarter, our consolidated results were solid and in line with our expectations. Revenue was $1.2 billion, up 3.7% year-over-year. Adjusted EBITDA increased nearly 8% to $136 million and non-GAAP diluted EPS was $1.08, up 8% from the prior year. These results reflect disciplined execution and improving outcomes across the platform. Cash flow and deleveraging were also strong in the quarter. Net cash provided by operating activities was $171 million, up $23 million year-over-year and free cash flow was $136 million, up from $127 million in the prior year quarter. Strong cash generation supports reinvestment in the business, disciplined deleveraging and our broader capital allocation priorities. We're encouraged by our first quarter results and by the progress the teams are making across the company. We're investing where it matters most, staying disciplined on investments, cost and underwriting and scaling capabilities to support operating leverage over time. As we look ahead, our priorities are clear. Our leadership team is in place and we'll stay focused on execution throughout the rest of 2026. With that, I'll turn the call over to Hal to walk through the financials in more detail. Hal Khouri: Thank you, Fahmi, and good morning, everyone. I'll begin with a review of our segment results for the first quarter, then spend time on capital allocation and liquidity before closing with our outlook and guidance. As you heard from Fahmi, we are executing well in a challenging operating environment, demonstrated through improving portfolio performance and strong cash generation. Those 2 factors are central to how we think about sustainable long-term value creation. Starting with Brigit. The first quarter demonstrated strong performance across the business. Revenue was $68 million, more than double Brigit's revenue contribution to our consolidated results in the first quarter of 2025. As a reminder, Upbound acquired Brigit at the end of January 2025 and did not include Brigit revenue for the first month of last year in its reporting. Excluding timing impact of the acquisition last year, Brigit comparative revenue grew more than 40%, in line with recent performance trends. Revenue growth in the quarter reflected continued expansion in paying users and improved monthly ARPU, which increased nearly 12% year-over-year to $14.41, supported by increased shift towards Brigit's premium tier, deeper engagement with marketplace offers and higher optional expedited transfer revenue. Paying users were approximately 1.6 million at quarter end, up approximately 27% year-over-year. Net advance loss rate was approximately 3.5%, consistent with recent quarters and within expectations. Brigit's adjusted EBITDA contribution in the first quarter, approximately $22.9 million, more than doubled year-over-year as scale benefits continue to build. In the year ahead, we remain focused on disciplined growth and measured product rollout with a clear emphasis on unit economics as we expand capabilities over time. Turning to Acima. First quarter revenue was $649 million, up approximately 2% year-over-year, driven primarily by a nearly 3% increase in rental and fee revenue, partially offset by a 1% decrease in merchandise sales revenue. GMV was approximately $427 million, down approximately 6% year-over-year. This outcome reflects a couple of factors, including tighter consumer conditions that limit discretionary spending, particularly for durable goods and the deliberate underwriting tightening actions taken in 2025 as we remain prudent in customer acquisition. These tightening actions were intentional and focused on improving long-term portfolio economics rather than maximizing near-term volume, particularly given the broader nonprime consumer landscape. That brings us to the other side of that trade-off, loss performance, which was a clear success story in the first quarter. Acima lease charge-offs were approximately 8.8%, representing roughly 130 basis points of sequential improvement and 10 basis points lower year-over-year. The early indicators we monitor, including payment behavior and delinquency trends support our confidence that the portfolio is benefiting from the underwriting actions implemented last year. In the year ahead, we will continue to track macroeconomic trends and focus on optimizing our models accordingly. Adjusted EBITDA for Acima was $89 million, up approximately 4% year-over-year, while adjusted EBITDA margin was 13.7%, an increase of 40 basis points year-over-year. Revenue growth, coupled with a 60 basis point increase in gross margin and improved cost performance outcomes were each contributors to the increase in Acima profitability. As we move through the year, we remain focused on maintaining a balance of sustainable growth paired with solid portfolio performance and profitability. At Rent-A-Center, our disciplined approach led to same-store sales increasing approximately 40 basis points in the first quarter, following its return to same-store sales growth last quarter. First quarter revenue was $482 million, down approximately 2% year-over-year, driven by a decrease in merchandise sales, partially offset by an improvement in rentals and fees revenues and lower revenue contribution from our franchisees. We remain prudent in our approach to underwriting at Rent-A-Center. And as a result, lease charge-offs were approximately 4.7% in the first quarter, representing a 20 basis point sequential decrease and a 10 basis point increase year-over-year, reflecting stable performance within our target range and slightly better than expectations. Adjusted EBITDA for Rent-A-Center was $67 million, down approximately 6% year-over-year. The decline was driven by lower revenue and profit contribution from our franchise business and inflationary pressure on margins. We remain encouraged by initiatives the team is executing, including continued progress on the digital customer experience, the expansion of product offerings to Rent-A-Center's strongest customers and efforts to increase store traffic, such as the Amazon partnership that Fahmi mentioned earlier. Stepping back across the organization, we are pleased with overall performance in the quarter given the broader operating environment. At Brigit, we continue to see strong growth and engagement, while our lease-to-own business continued to adjust dynamically to shifts in consumer demand and payment behaviors. The actions we've taken over the past year are translating into loss performance that is running better than our expectations within Acima and Rent-A-Center. And while some volume-related metrics reflect those actions, taken together, our performance reinforces our confidence in the resilience of our model and our ability to serve our core consumer in an uncertain environment. Turning to cash flow, liquidity and capital allocation. One of the enduring strengths of our model continues to be the ability to convert earnings into cash and the first quarter is another example of that. Net cash provided by operating activities was approximately $171 million, up from $148 million in the prior year quarter and free cash flow was approximately $136 million, up from $127 million a year ago. While the first quarter trends to be a seasonally stronger period for cash flow due in part to the timing of tax refunds and following the holiday shopping season, these figures reflect solid underlying performance and do not yet include all of the anticipated cash tax benefits we discussed on our fourth quarter call. As those benefits materialize later in the year, we expect cash generation to be further supported. We continue to invest capital on key initiatives, which are aligned with the strategy Fahmi outlined and are focused on technology modernization data platform initiatives and digital capabilities that support underwriting, personalization and operating efficiency. We remain selective and returns-oriented in how we deploy capital. Over the full year, we expect capital expenditures to be similar to 2025 and we continue to evaluate pacing and return on investment as we continue to move through 2026. We also drove shareholder return by funding a quarterly dividend of $0.39 per share, which amounted to approximately $23 million during the quarter and represents an approximately 8% dividend yield. The dividend remains an important component of our capital allocation framework. Strong free cash flow allows to support the dividend while also pursuing our other priorities, including reinvesting and deleveraging. Turning to liquidity and debt. Quarter end liquidity was approximately $465 million, reflecting cash on hand and available revolver capacity. Net debt was approximately $1.4 billion and leverage was 2.6x trailing 12-month adjusted EBITDA, a meaningful sequential reduction from 2.9x at year-end 2025. While the leverage ratio may fluctuate slightly due to timing of cash inflow and outflow over the course of the year, we are pleased with the debt reduction achieved in the first quarter. We continue to prioritize disciplined deleveraging as a primary use of incremental cash, targeting leverage in the 2x range over the long term. Taken together, our capital allocation actions during the quarter reflect a disciplined, consistent framework focused on strengthening the balance sheet, supporting returns to shareholders and reinvesting selectively to drive long-term value. That discipline gives us flexibility and positions the company well as we move into the remainder of the year. With that context, let me turn to our outlook and guidance. As we look ahead, our expectations reflect continued prudence in underwriting, disciplined operating execution and steady progress against our strategic priorities. Our outlook assumes a continuation of the current challenging external operating environment, uneven macro factors that pressure our core consumers' discretionary income and demand levels, but also tend to make our complementary range of flexible financial solutions even more relevant to these customers. Considering the trajectory of our business, including first quarter financial results that were generally in line with or above our expectations, we believe that we are well positioned to achieve the target ranges we shared for 2026 revenue, adjusted EBITDA and non-GAAP diluted EPS on our previous earnings call. As a reminder, those targets are consolidated revenue of approximately $4.7 billion to $4.95 billion, adjusted EBITDA of $500 million to $535 million and non-GAAP diluted earnings per share of $4 to $4.35. We also expect free cash flow of approximately $200 million in 2026. As mentioned on our prior earnings call, this guidance is inclusive in an estimated 2026 payment outflow of approximately $70 million in non-ordinary course legal and regulatory settlements and assumes relatively flat CapEx spend to support business growth initiatives. These factors position Upbound favorably to advance its capital allocation priorities as we focus on delivering compelling and sustainable returns for shareholders. I'll now move on to share updated segment level commentary. At Acima, we revised our outlook to account for first quarter results, the deliberate underwriting tightening we've completed and our expectation of continued macro headwinds. We expect 2026 GMV and revenue to be flat to up to low single digits year-over-year. Losses for the year should be slightly better than our original expectations, stabilizing in the low 9% area for the year. Our outlook for Acima margins has improved relative to our previous guidance and we now expect Acima adjusted EBITDA margin to finish the year up slightly relative to 2025, offsetting revenue pressures. Turning to Brigit. Our outlook remains unchanged with annualized revenue growth of over 30% in the $265 million to $285 million range and an adjusted EBITDA in the $50 million to $60 million range. These expectations assume continued growth in paying users while maintaining net advance loss rate around current levels for the year. We remain focused on disciplined growth and measured rollout of new products and capabilities as the year unfolds. At Rent-A-Center, while trends with the company-owned segment have stabilized, lower revenue and profit contribution from our franchise business are expected to have a modest impact on full year performance. As a result, we expect Rent-A-Center segment revenue to be flat to down low single digits for the year. No change to adjusted EBITDA margin, which should remain relatively flat to 2025. Looking to the second quarter of 2026, we expect consolidated revenue of $1.1 billion to $1.2 billion, adjusted EBITDA of $120 million to $130 million and non-GAAP diluted earnings per share of $1 to $1.10. These expectations reflect typical seasonal dynamics and continued underwriting discipline. With respect to loss rates, we expect both Rent-A-Center's and Acima's lease charge-off rate to remain flat to slightly higher sequentially. Second quarter GMV should improve sequentially and be down low to mid-single digits year-over-year with continued improvement over the balance of the year and returning to year-over-year growth in the second half of the year. Brigit's net advance loss rate in the second quarter should be in the mid-3% range, in line with historical quarter-over-quarter trends. Now as we wrap up, I'd like to reinforce a couple of points Fahmi mentioned earlier. During the first quarter, the company continued to execute against its strategic priorities, delivering solid operating and financial performance while maintaining discipline in how we balance growth, risk and returns. The actions taken over the past year to strengthen portfolio performance are showing up in the results, particularly in loss trends and cash generation. Looking ahead, we remain confident in our ability to navigate the current environment and continue building long-term value for shareholders. Our diversified and complementary portfolio, strong cash flow generation and disciplined approach to capital allocation position us well as we move through the remainder of 2026. Thank you for your time this morning. Operator, you may now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Kyle Joseph with Stephens. Kyle Joseph: A lot of moving parts there in the first quarter, obviously, going into it, everyone was focused on elevated tax refunds. And then in March, we got the spike in gas prices. But just kind of hoping if you guys can walk through each segment and kind of walk us through performance and give us a cadence and how the customer was impacted throughout the quarter by those kind of 2 big macro factors. Fahmi Karam: It's Fahmi. I'll start and Hal can chime in. I'll try to cover most of the segments, but just kind of give you just a high-level overview of maybe the consumer because they're directionally the same between the businesses, even though they're impact slightly differently and same with seasonality in our business as well. But maybe I'll start with just the high-level macro and then go into the impacts on the businesses. But we're -- as we said in the prepared remarks, the operating environment is pretty tough for our core consumer. The labor market seems to be cooling a bit. Wage growth slowed a bit throughout the quarter and inflation seems to be pretty sticky. And one of the measures that we follow very closely is fuel prices and that's been obviously very volatile over the last couple of months. So think about a cash-strapped consumer that's going paycheck to paycheck already and that puts a lot of pressure on their discretionary spending. And so people were very cautious with their dollars looking for value, looking to stretch its ability to -- especially on bigger ticket items, which should lend well for our consumer base and as well as -- sorry, as far as our products go. So the non-prime consumer has been resilient and has done that over several cycles. And why it's important for us to get our underwriting right, which we've done over the last several months, especially on Acima, which improved 130 basis points. As far as tax season goes, a little bit of a mixed bag, came in about 10% on average a little higher than year past, which is on the low end of what people were talking about coming into tax season. Start off a little bit slower in February and then caught up in March. And by the time some of the money started to hit, you started having some of the fuel price implications. And so what we saw was people started to still clean up delinquencies and losses, but definitely didn't exercise the payout options as much as they had in years past. And what that does is it has an impact on revenue, but also an impact on our gross profit margin, lesser so on Rent-A-Center, but much more so on Acima and you saw that in our gross profit increasing by about 60 basis points year-over-year. So tax season, in line with what we expected, a little bit of betterment from a gross profit standpoint at Acima. And then with Brigit, tax season seasonality for Brigit, it's our most profitable quarter given that consumers are usually flushed with cash in the first quarter given tax season, we take a light on the marketing spend, and you saw that we generated almost 35% EBITDA margins in the quarter. So a really strong start to the year on Brigit. So try to cover as much as I could, Kyle, in kind of the first question, but I'll leave it for you on a follow-up. Kyle Joseph: Yes. No, that's great. Appreciate it. And then just digging into Acima a little bit, kind of remind us exactly the timing on the underwriting changes. Obviously, they're having their desired effects. But just as we think about kind of the growth trajectory, recognizing GMV is the leading indicator for ultimately revenue over time. Fahmi Karam: Sure. Yes, we really started tightening, I would say, in the second quarter of last year and into the summer months into the third quarter. So we'll start lapping some of the changes, I would say, by Q3 in earnest once we've kind of gotten through most of the changes. But look, we're very pleased with where the portfolio health is at Acima. We were able to recognize some of the softness pretty quickly and within few quarters, get it back in line with our expectations. As we said, it was going to peak around 10% in the fourth quarter. It did that and it dropped 130 basis points into Q1. So the first quarter GMV was a little bit below what we had thought. We were hoping to be flat year-over-year. But given some of the underwriting changes, given some of that macro pressure I just mentioned on the consumer, you couple those together, we were down about 6%. If you take a big step back and look at what Acima has done over the last few years, that GMV growth has been a great story at Acima. If you just take it over the last 2 years, the first quarter is still positive almost mid-single digits for the first quarter in GMV growth. So a little bit soft on GMV, but very, very happy with where the portfolio is and the health of the portfolio. And as you saw on the revised guide, we think the margin will be better than we thought coming into the year. And so again, good news, delinquencies are down, losses are in line. The health of the portfolio is good. And if things get better from here, we know exactly where to go get some GMV and we're exactly to go get some of that growth. But if things get worse from here, we also have a recession playbook that we can activate and be even tighter. Good news is I think we're pretty conservative as it is right now. So if something were to deteriorate and we had to get a little bit tighter, you would expect to see some trade down come our way, which obviously would help with GMV. So I would say, Kyle, by the second half of this year, we should return to growth at GMV. Operator: Your next call comes from the line of Bobby Griffin with Raymond James. Robert Griffin: I guess, Fahmi, I wanted to stay on Acima. Is there any way you can help put some context around like how much of the GMV decline is from the tightening actions versus anything else in the industry? And I'm kind of asking, I guess, in context of the other peers that we look at and fully understanding everyone goes through different customer transitions and stuff at different times and as well as tightening actions. But is there metrics like app growth or active doors or anything like that just to help us understand Acima's positioning remaining kind of strong and nothing else bleeding off to cause the GMV decline? Fahmi Karam: Yes. Look, I think it's a combination of the things I mentioned already, Bobby, between underwriting and just general softness with the consumer. I would say the majority of what we saw in the first quarter is around the underwriting tightness. I think we -- again, we identified where the softness was pretty quickly. We took swift action and you saw that reflected in our GMV, both in the fourth quarter and the first quarter. And just given the uncertainty in the environment, we think that's the right position to take, not knowing exactly how long or the impacts of the volatility in the market and the rising cost, how that's going to impact the consumer. So most of it is on the underwriting side. We feel like that's the right approach given the uncertainty in the market. As far as the categories and maybe where the GMV is coming from, I would say most categories were down year-over-year in the kind of low single digit area. But for us, when you look at when we tightened, we really tightened around the jewelry category, and that was down probably low to mid-teens. But generally, I would say it's an underwriting story around first quarter GMV performance. Robert Griffin: That's helpful. And then maybe just pivoting over to Brigit. We don't have the full context of last year's 1Q, but it looks like it's off to a great start here with $23 million of adjusted EBITDA. Can you just remind us like what's built in, in terms of new products? I know there was a little bit of delay with getting some of the new products out we talked about last quarter, but like what's in the guide again for '26 from a new product introduction? Anything update there as we think about the strong start to 1Q? Fahmi Karam: Sure. Yes, very pleased with Brigit's performance in the quarter. As Hal mentioned, revenue up on a comparative period over 40%, subscriber growth at 27% for the quarter and then ARPU up 12% which is a great sign. EBITDA contribution of $23 million at almost 35% margin. With a loss rate in line with what we thought, a little bit elevated year-over-year as we test out some of those new products and ramping up on the subscribers and just testing out. We have multiple tests in the market with pricing. We've recently increased from the max from 250 to 500 on the EWA. We had that new line of credit product that we've talked about in quarters past that's still scaling, performing in line with our expectations. We're poised to launch that later in the year more broadly than we have today. I've mentioned it a couple of times on past calls for folks that we approve in the pilot, over 90% of them are actually opening an account, which just tells you the level of demand and the level of conversion that product is going to do. We're taking a cautious approach, as we said last quarter, given the uncertainty in the market, any time you roll out a new product, you're focused on customer experience, making sure the underwriting is right, performance is right and the economics, the unit economics are right. So we're making progress there. The guide for the year has us continuing to do those pricing tests and have the line of credit kind of come online later in the year. It's going to be more of a 2027 story than a 2026 story. Just again, being cautious around making sure that we get the early reads on performance before we launch it more broadly. Operator: Your next call comes from the line of Vincent Caintic with BTIG. Vincent Caintic: First, wanted to talk about your human talent. So first, welcome to your new Chief Technology Officer. I was just wondering, you've added a couple of new talents so far, if there's any more talent that you'd like to add to the Upbound team. And then I also saw that there was a turnover at Brigit. So I'm just wondering if there's any change to expectations on the earnouts. Fahmi Karam: Yes, happy to touch on both. I'll start with our new CTO, Balaji, and mention building the team out over the last 6 or 7 months since I've taken over from Mitch. We've got a new CFO and Hal. We have our new Chief Growth Officer, Rebecca. And now we have our new Chief Technology Officer as we continue to try to find -- accelerate our transformation, accelerate our growth and our digital transformation in a pretty competitive and dynamic landscape. And that's what this team is being built to do. And it was important for us to make sure that we have somebody who can tag along with the growth organization and really, again, advance our abilities, both on the AI front as well as the data analytics front and then overall automation and digital platform front across the board. And then Balaji, we're excited to have him in the building and look for big things from him going forward. On the Brigit side, yes, we -- both of the founders are still in the business, but are going to transition into more of an advisory and consulting role in 2026. The CTO Hamel transitioned into advisory role this month in April and Zuben, the CEO, will transition in the second half of the year. And this is a natural evolution that you would expect coming out of the transaction that the founders would eventually move on. They've been fantastic partners throughout the process and feel lucky to have them as long as we had them. Most founders don't stick around this long and want to move on to their next big and exciting thing. And they've been great partners with us so far. And the good news is they built a great business that we have. A lot of different things that we can do with from a synergy standpoint, a cross-sell standpoint and we're just on the forefront of all those things. So we're extremely bullish on our ability to take that business and grow even further from here. And as part of building that great business, as most companies do, they also built a great bench. And so we're excited that we're going to be able to promote from within and have leaders who have been in the business now for several years take on more and more responsibilities and keep the momentum that we have with Brigit going. So again, to me, this is a natural evolution with the founders. They've been fantastic to-date and we look forward to kind of continuing the integration plan with Brigit moving forward. Hal Khouri: It's Hal here. Maybe just to bolt on to Fahmi's point around a strong bench. Obviously, bringing in fantastic leadership at the top of the house across the enterprise. But I'd also say it goes beyond that as we look to bring on additional talent in support of the business across our leadership organization as well, particularly in the areas of digital technology and advancement that we've been talking about, specialized expertise in AI, underwriting and across the platform overall. So very excited by -- to echo Fahmi's point around the broader talent that we have in the organization to kind of continue the momentum that we have going. Vincent Caintic: Okay. Great. Very helpful. Secondly, I actually wanted to switch over to Rent-A-Center. So just kind of seeing the revenues and the EBITDA versus the GMV growth. I'm just wondering when kind of what gets that business growing again in terms of the revenues and EBITDA? And then I also did want to talk about the Amazon partnership. I thought that was really interesting. If you can maybe talk about what we should be expecting in terms of, I don't know, foot traffic or if there's any economics that you can talk about there, that would be great. Fahmi Karam: Yes, happy to switch over to Rent-A-Center a bit. Another strong quarter for the Rent-A-Center business, second consecutive quarter of same-store sales growth coming off 80 basis points in Q4, growing at 40 basis points in Q1. And then again, a tough operating environment. I mean you look at our loss performance improved 20 basis points sequentially, relatively flat year-over-year. And if you compare that for the other businesses, the Rent-A-Center consumer probably has the lowest amount of income and is the most cash strapped. So we have to be very mindful of where the consumer is on the Rent-A-Center business. So in a difficult operating environment to grow 40 basis points, we're very pleased with that and the segment continues to produce significant free cash flow. As far as the Amazon partnership goes, yes, we're super excited about announcing that last week. We've been piloting this concept with them now for several months and tested different ways to go to market. We started out with some lockers, then shifted over to just having it at the counter on both sides, agreeing that, that was the better move. So we'll be up and running in over 1,700 of our corporate-owned stores in June. And as I mentioned in our prepared remarks, this is a way for us to really leverage our footprint, create some new brand awareness, especially with the younger generation, add traffic to the stores and add a bunch of new customers or potential customers. And we know when people walk into our stores, our coworkers are fantastic salespeople along with underwriters and account managers and everything else that we ask them to do. But first and foremost, they are a sales organization and getting folks to walk in the door is going to be great for them. In the pilot, we had about a little over 20 stores, almost 25 stores that were scattered across the country. And what we saw from a traffic standpoint is that we saw about a little over 50 customers come in or consumers come in per store per week. And so heavy traffic and most of them were actually new to the Rent-A-Center business. So you can do the math on that 50 per week per store at 1,700 stores, that's millions of customers coming into the Rent-A-Center business over the year and it's on us to convert those folks into leases. And something that we didn't have the pilot that we have up and running now and will be part of our launch in June. When someone selects Rent-A-Center as their pick-up or drop-off option, we're going to be able to actually, in real time, give them a promotional item right there on the Amazon app. So very real-time marketing. So we're super excited about it. It's a little early to kind of quantify the impacts for us, but it's a great place to start with a partner like Amazon and hopefully also introduce them to some of the other Upbound brands as we move forward. Operator: Your next question comes from the line of Anthony Chukumba with Loop Capital Markets. Anthony Chukumba: So I just wanted to see if I could get a little more color on that partnership that you mentioned with a large online furniture retailer. I'm assuming that's Wayfair. Specifically, if you can just give a little bit more color in terms of the semi-exclusive checkout partner, what exactly does that mean? Fahmi Karam: Yes, another one that's an existing partner of ours that we're going to trying to further expand our relationship with. And what this exclusivity gives us is a checkout option at the face of their website and it gives our ability for consumers to select Acima directly and have our own checkout button versus going through a waterfall where we would obviously have to compete for those applications, but also what this gives us is first look. So it should give us hopefully not just more apps and more leases, but also better quality looks as well so we get rid of some of the competition and some of the adverse selection. So that will be up and running later this quarter and should hopefully produce some nice tailwind for GMV into the second half of the year. Anthony Chukumba: That's helpful. And then just one real quick one on Brigit. So you talked about on a pro forma basis, revenues were up, I think that was pro forma 40%. I thought that the EBITDA margin was down a little -- a couple of hundred basis points on a GAAP basis. I was just wondering what that would be on a kind of a pro forma basis for the adjusted EBITDA margin? Fahmi Karam: It's pretty close, Anthony, as far as we're moving just 1 month that's month of January, it's actually fairly close. Look, the -- between a 33% and a 35%, some of that is just timing of marketing spend and marketing dollars. But very happy with being able to generate that kind of EBITDA and that kind of cash flow, if you will, for Brigit in the first quarter. As I said, seasonally, that's going to be our big quarter. Going into the next quarter, given some of the traction that we're seeing on the marketing side, both from the fourth quarter spend and what we spent in the first quarter, we're going to lean into that into the second quarter. And so we'll get back into the low teens to mid-teens EBITDA margin on Brigit in the second quarter, where if you recall last year, when we got to the second quarter, we didn't see that same level of conversion and traction on the marketing spend. And so we didn't actually spend much last year. Given where we are, we're trying to grow that business and some of the conversion rates that we're seeing and the customer acquisition costs that we're seeing in today's environment, we're going to lean into that in the second quarter. And as you go -- as you look at the guide for the year for Brigit, we're right in line with our targets in the second quarter. It's going to come off that mid-30s and be more in the mid-teens from an EBITDA margin standpoint. Operator: Your next question comes from the line of John Hecht with Jefferies. John Hecht: Most of them have been actually asked and answered. But Acima, focusing on there, the DTC marketplace is showing good momentum. I think it's like 10% GMV growth. How does that cohort compare to the merchant-generated cohort? And how do we think about the focus there? Fahmi Karam: Yes. It's a big focus for us and it's been a nice growth story for us over the last several quarters, John. I think we're starting to lap some of the onboarding of some of the bigger retailers, Amazon, Walmarts that we put on the marketplace a year ago, but still a very nice channel for us that's mostly 99% returning customers. And so it performs relatively well compared to the general population because we're able to market to returning customers. It's a little bit buffered from the overall macro environment. So that's the distinction between maybe just the regular population of retailers and the direct-to-consumers. They're returning customers, so we can market to them better. They're engaged with us already. We still are dabbling in the personalization offers, both Rent-A-Center and Acima. Once we get that dialed in, that channel for both businesses is going to be really strong for us and a theme that you'll hear us talk about going forward. John Hecht: Okay. That's very helpful. And then a follow-up is you expressed your longer-term goals for leverage on the balance sheet. How fast -- like how big of that is a priority for you? Is that something that you think is going to happen in the near term? Or is that just a gradual deployment? And how do we think about just, call it, the capital allocation plans in the meantime? Hal Khouri: Yes. It's Hal here. Maybe I'll take that one. Obviously, our goal and desire is to continue to bring down debt and our overall leverage position. But first and foremost, it's continuing to lean into fueling the overall business. And I think that subject to where we land through the back end of this year around GMV growth, the total overall demand is going to play into the equation as we look at overall free cash flow. But certainly, we do have some distinct headwinds and tailwinds coming in. Certainly, from a tax standpoint, we're seeing some refunds come in as well as the benefits of accelerated tax depreciation from the One Big Beautiful Bill. That's going to be a tailwind. And we're going to leverage and use our cash flow to pay off some of the outstanding litigation that's out there, regulatory liabilities that are there. So we're contemplating paying that off and then aggressively paying down the debt. And so our goal would still be to be in the 2x overall leverage range over time. But there's no real clock on that, I would say, but just ensuring that the sources and uses of cash are being used appropriately. Fahmi Karam: One of the benefits, Hal, if I can just add on to that of being a little bit tighter from an underwriting standpoint is the higher cash flow generation and it gives us the ability to pay down debt if we're not getting the right risk-adjusted margin. And that's the trade-off that we're going to make from an underwriting standpoint is we're focused on maximizing risk-adjusted margin. And if it's there, we'll lean into GMV. And if it's not there, then we'll benefit from the cash flows. Hal Khouri: And maybe just lastly, we've given a view and an outlook of roughly $200 million of free cash flow this year, again, subject to the performance on the overall business and the volumes, there may be some upside to that number as well as we look at the contribution to the balance sheet through the balance of the year. Operator: Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Bradley Thomas: Fahmi, I wanted to just ask again about the underwriting trends. And if you could just help us get a better understanding of maybe what level of conservatism is in sort of the underwriting trends today. I think we're all fearful of an environment where gasoline prices remain higher for longer and that, that just grinds away a bit at consumer spending. And so can you help us think about what kind of buffer you may have in the current underwriting and how that's tied to your guidance? And then maybe just as a quick follow-up to that. Obviously, we have a long history with Rent-A-Center and a medium history with Acima, but just any thoughts on the kind of sensitivity of the Brigit customer to a world where higher gas prices may go on for longer? Fahmi Karam: Sure, Brad. Look, on the underwriting side, we remain highly disciplined, highly, I would say, conservative in our posture. And I just kind of mentioned it on the risk-adjusted margin piece. We are focused on making sure that from a capital allocation standpoint that we actually get the right risk-adjusted margin part of it. So I would say we're fairly conservative right now and the guide has us remaining fairly conservative. I would say from a portfolio yield standpoint on the Acima side, when you have lower 90-day buyouts, you typically have higher yields on those vintages. We're not really forecasting that into the guide. We're taking even a conservative approach there as well. But we think that's the right thing right now in this environment. And as I mentioned earlier, if things get better, we know exactly where to go to get the growth. And if things get worse, we also have a playbook there that we can activate. But going into -- whatever we're going into for the second half of the year, we feel like the portfolio is in a really good spot and we have the right tools and folks around the table to make sure that we stay very disciplined in our approach. As far as the sentiment with the Brigit side, I think very similar to our other businesses around being paycheck to paycheck and cash strapped and that's one of the main benefits of us acquiring Brigit was for us to be more relevant to our consumers and have these liquidity solutions. And I've mentioned a little bit around some of the traction we're getting with our marketing spend. I think it's because people are feeling that pressure and need that extra cash and that extra liquidity. So that bodes well for subscriber growth, that bodes well for our margin profile. And as we test more and more expansion in -- from $250 to $500, the line of credit being $500 over a longer period of time, all those things point to more subscriber growth and hopefully better retention going forward. And the macro backdrop, I think, also supports that thesis as far as those consumers go on the Brigit level. Hal Khouri: And -- it's Hal here. Maybe if I could just tack on there. There is quite a bit of sophistication that goes into our credit and underwriting modeling. Looking at that by business segment, obviously, the customer profiles will look a little bit different in terms of how they perform, looking at that across risk tiers, looking at that across categories as well, looking at that in terms of the origination source that's coming through. But to say we've been prudent around our overall credit management in this operating environment, I think, is the right call. Certainly, there's areas of opportunity for us, particularly as I think about the Brigit business that you referenced in there as well. We could be a little bit more aggressive given the margins there, but we'll monitor that as the next few months unfold and get a better read on the broader environment and that will allow us to get a sense of the ability to kind of loosen up a little bit. Bradley Thomas: That's helpful. And as a clarification question on the new furniture partner agreement that you talked about, I just want to try and be clear. Fahmi, I think you referenced the phrase being exclusive. I'm just trying to understand, is that the exclusivity with the new checkout features? Or do you become the sole rent-to-own provider for this retailer with no other competitors in that tier for them? Fahmi Karam: It's the former, Brad. It's just on having the checkout button. Not exclusively, so just on the button. Operator: Your next question comes from the line of Hoang Nguyen with TD Cowen. Hoang Nguyen: Most of it have been asked, but maybe I want to dig a little bit deeper on Brigit. Obviously, very, very strong growth there. But you continue to reiterate your expectation that some of that growth will get pushed out from '26 to '27. I guess, in the context of more volatile macro environment, I mean, how do you think about that with respect to your product launches at this point, the cadence of growth this year and next year? And what could make you feel more confident to launch these new products earlier or maybe have to push them back? Fahmi Karam: I wouldn't say we're going to push it back. I think we're being pretty cautious right now. The easy thing for us to do is to turn it on broadly right now and add a bunch of subscribers and -- but we're not there yet. We think it's more prudent to take a cautious approach and roll it out over time. The market environment, as I said, it lends itself to more and more subscribers taking us up on our offer. So in one sense, the environment is great for our existing products and we should see some hopefully upside from what we're guiding to now. But the environment doesn't lend us to be really aggressive on the new products. So I think it just -- it's too uncertain for us to go out with new products to new customers, especially when you're going again, we talked about this, the earned wage access product is a -- typically get paid back in 10 to 12 days and it's on average of $75 to $100 exposure per subscriber. The line of credit, it's -- you're up to $500 over a much longer period of time. And so we just want to be very cautious and careful before we roll it out. So like I said, the demand is there. Now we've just got to make sure the performance follows suit and then we'll roll it out. So the environment doesn't lend itself to being more aggressive on new products. But I think what we've guided to between the end of this year and going into 2027 is appropriate. Hoang Nguyen: Got it. And maybe another one. On the legal accrual, I saw that you guys added a couple of million dollars. I think the bulk of it was last quarter when you expected most of these to be resolved pretty soon. So I mean, can you give an update on that? Fahmi Karam: Sure. Yes. It's -- I would say the accrual this quarter was more in the normal course where in quarters past, you saw a much bigger increase because the cases between the multistate and the one that -- the McBurnie one that we've already settled just hadn't paid off yet. We actually paid off post quarter end. But the $2 million that we added this quarter, I think, was just normal course, not related to some of the bigger cases that we've talked about in quarters past. Hal Khouri: Maybe just to bolt on though, that we do feel that the provision and reserve that we do have on the balance sheet for legal settlements is appropriate. And again, cautiously optimistic that we'll look to actually resolve those in the coming months. Operator: Your next question comes from the line of William Reuter. Are you there, William with Bank of America? William Reuter: Sorry, I was on mute. Given it's late in the call, I'll just ask one. When you did see the spike in fuel prices, have you seen an immediate reaction from your customers in terms of reduced activity? I'm wondering how quickly you actually see changes in their behavior. That's it. Fahmi Karam: I would say it was an immediate response to it, probably more gradual. But we definitely saw the impacts of it. We talked about the lower payouts and the people exercising the 90-day buyouts. We definitely -- it was noticeable. But I wouldn't say it was an immediate shock just because people have to also get their arms around where it's going, the impact, how long it's going to be, those kind of things. So it wasn't an immediate spike, but definitely a noticeable change in how they spent their tax refunds this year. Operator: Your next question comes from the line of Casey Coates with Loop Capital Markets. Casey Coates: I just wanted to ask on updates on the product mix. I know furniture continues to be pressured and I believe you mentioned fashion jewelry, but are you seeing any strength in other categories? Fahmi Karam: Yes, I think across the board, I would say, given that most of the reduction in GMV came from us underwriting tightening -- from tightening underwriting that it was pretty broad-based. And as I said earlier in the call, most categories were down low single digits to mid-single digits, but jewelry, given it's the highest loss content and the riskiest segment, that's the one that probably dropped the most when you look at it year-over-year. Operator: I'm showing no further questions at this time. I would now like to turn it back to Fahmi Karam for closing remarks. Fahmi Karam: Thank you, operator, and thank you to everyone who joined us today for an update on our Q1 performance. I'm very thankful for the collective efforts of our exceptionally talented and dedicated coworkers and our merchants who helped deliver strong first quarter results while laying the foundation for the transformational year ahead. We're grateful for your interest and support, and we look forward to updating you all again next quarter. Have a great day, everyone. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Greetings, and welcome to the Floor & Decor Holdings, Inc. First Quarter 2026 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wayne Hood, Senior Vice President of Investor Relations. Thank you. You may begin. Wayne Hood: Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2026 First Quarter Earnings Conference Call. Joining me today are Brad Paulsen, Chief Executive Officer; and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we begin, I want to remind everyone of the company's safe harbor language. Comments made during this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions is a forward-looking statement. These statements are subject to risks and uncertainties that could cause actual future results to differ materially from those expressed in these forward-looking statements for any reason, including those listed at the end of the earnings release and the company's SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss certain GAAP financial measures. We believe these measures enable investors to understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call and related materials will be available on our Investor Relations website. Let me now turn the call over to Brad. Bradley Paulsen: Thank you, Wayne, and thanks to everyone for joining us on our 2026 first quarter earnings conference call. During today's call, I will walk through the key drivers of our performance this quarter, including the operational progress that continues to reinforce our long-term strategy. After that, Bryan will discuss our updated outlook for the remainder of 2026 and how we are positioning the company to advance our strategic priorities, remain resilient in a dynamic environment and deliver sustained long-term shareholder value. Before I turn to our first quarter earnings, I'd like to discuss our capital allocation framework and the actions we announced today. Consistent with our disciplined capital allocation framework, we announced that our Board of Directors has authorized a share repurchase program for up to $400 million of the company's outstanding common stock. This action reflects the continued strength of our operating model, the durability of our cash flows and the increasing efficiency of our new store investment. As we continue to expand our store base, we are optimizing our capital spend per location, which should drive strong returns, enabling us to both fund growth and generate meaningful excess cash flow. This positions us to flex our pace of openings over time while returning capital to shareholders, all while supporting our long-term opportunity to operate 500 warehouse format stores across the United States. The repurchase program is a natural extension of our capital allocation philosophy, which prioritizes capital allocation based on returns that exceed our weighted average cost of capital. First, we prioritize opening new stores and investing in our existing stores with initiatives that are expected to grow and support our core business. Second, we continue to invest in our commercial flooring platforms and new growth concepts, including our outdoor and unfinished flooring offerings. Once these priorities are met, we intend to return excess capital to shareholders in ways that are designed to enhance long-term value while maintaining a strong balance sheet. We do not expect to use incremental debt to support the share repurchase program, and there is no defined time line for the share repurchase program's completion. Guided by this disciplined framework, we believe the current uncertainty across the broader economic and capital markets landscape, particularly within home improvement, has created a clear disconnect between our long-term intrinsic value and our share price. This dislocation provides us with an attractive opportunity to repurchase our shares at valuations we view as compelling. That opportunity is underscored by the strength of our business model as we are uniquely positioned in the marketplace as the only national pure-play hard surface flooring retailer with a warehouse format model that delivers the broadest in-stock job lot assortment, everyday low prices through direct global sourcing and industry-leading customer service. Our differentiated business model resonates with both Pros and homeowners, driving consistent market share gains in a highly fragmented category. With just over 55% of our U.S. store opportunity built out and a large underpenetrated opportunity in commercial flooring, we believe we have a substantial runway for growth ahead. As we scale, we believe our model becomes more efficient, our value proposition strengthens and our competitive advantages deepen, creating what we believe is a durable foundation for long-term value creation and making us an attractive investment for shareholders with a multiyear horizon. Turning to our fiscal 2026 first quarter results. I want to begin by thanking our more than 14,000 associates across the company. We are proud of how our teams executed our strategy in a challenging demand environment for big-ticket discretionary purchases amid adverse weather mid-quarter, elevated 30-year mortgage rates, geopolitical tensions in the Middle East that contributed to higher gas prices and a further decline in consumer sentiment. These dynamics resulted in first quarter earnings coming in weaker than we anticipated. For the quarter, we delivered diluted earnings per share of $0.37 compared to $0.45 in the same period last year. Total sales decreased 0.7% to $1.152 billion from $1.161 billion last year, and comparable store sales declined 3.7%. On a monthly basis, comparable store sales increased 0.4% in January, declined 6.9% in February and declined 4% in March. Our second quarter-to-date comparable store sales declined 4.5%. The decline in our first quarter comparable store sales was driven by a 5.5% decrease in transactions due in part to adverse weather, which accounted for 150 to 200 basis points of pressure, partially offset by a 1.9% increase in average ticket. Our average ticket was negatively impacted by the decline in the laminate and vinyl sales mix as well as customers taking on smaller projects, resulting in meaningfully lower square footage purchases. We continue to see strong sales growth when the designer was involved, which reinforces the value of this free design service and its ability to drive higher quality customer engagements and average ticket growth. From a geographic standpoint, our West region continued to outperform the company and delivered positive comparable store sales, excluding the impact of new store cannibalization. Our East region, followed closely by the South region was the weakest, reflecting adverse weather and broader softening demand. As a reminder, the South region is comparing against Hurricanes Helene and Milton, which benefited sales by approximately 100 basis points in the first quarter of last year. From a merchandise category standpoint, 4 departments outperformed the company's comparable store sales, including installation materials, tile, decorative accessories and wood. Insulation materials continued to generate year-over-year growth as we expand our share of wallet and market share with Pros. That momentum translated into a 1.4% increase in first quarter Pro sales, supported by our supply house merchandising strategies. Tile also remained a consistently strong performer, supported by the continued success of our new Vetta collection. In the vinyl flooring category, we introduced a series of straightforward value-driven offers, including special buys and enhanced in-store displays that group more than 20 in-stock styles priced under $2 per square foot. These additions, coupled with refinements to our price bands are designed to meet Pros where the demand is shifting and to position us to capture market share in a category that continues to contract. Although still early, results from our price band refinements are encouraging with positive elasticity and improving square footage purchase trends. We have plans to expand this to additional stores in the second quarter. That said, we do expect the category to be under pressure for the remainder of 2026. Turning to our connected customer performance. First quarter sales grew 5.4% year-over-year, representing approximately 19% of total sales. Connected customer remains one of our highest priority strategic growth initiatives, and we are investing accordingly in talent, technology and process enhancements. With a defined road map in place and a new digital leader who has successfully executed similar transformations, we are laying the groundwork for a differentiated and more personalized online experience. Our goal is to build a platform that complements our store experience and drive stronger customer engagement and conversion. Let me now turn to our new warehouse store expansion. In the first quarter, we opened 6 new warehouse-format stores compared with 4 stores last year, including Staten Island, New York; Dallas, Texas; Detroit, Michigan; Pittsburgh, Pennsylvania; Vacaville, California; and Fayetteville, North Carolina. These locations strengthen our presence in several large Tier 1 markets where household formation, population growth and home improvement activity remain attractive over the long term. We are encouraged by the early sales performance of these new stores, which reflects both our focus on opening in Tier 1 and Tier 2 markets and the benefits of our improved new store operating processes and consistent execution. We remain on track to open 20 new stores in fiscal 2026, with development primarily concentrated in Tier 1 and Tier 2 markets where we already have a presence. We expect approximately 50% of 2026 openings to occur in the first half of the year compared with 35% last year, providing more operating weeks and further supporting stronger first year productivity. We expect the class of 2026 new stores to average approximately 55,000 square feet. And while smaller in size, we believe this format allows us to enter more dense markets without sacrificing sales productivity. Looking ahead, our teams are aligned around the opportunities with the greatest potential to drive growth. We are focused on improving new store productivity and investing in initiatives that strengthen customer loyalty and expand wallet share with our Pro customers. Our team continues to be excited about the development work being done on our new Pro loyalty program and remain on track to launch this new program in the first quarter of 2027. We are also building a scalable, strategic account-driven B2B platform that supports the phased expansion of our regional commercial account managers. We were pleased with the first quarter sales performance of our regional account managers, which number 76 today, and we are continuing to expand our presence in large strategic markets with additional hires. These multiyear asset-light investments are delivering early results and position us to win in this segment of the commercial market. Turning to Spartan Surfaces. Spartan's first quarter sales and earnings performance reflect the ongoing difficult conditions in the commercial market. And while we anticipated a soft start to the year, results were weaker than expected. That said, customer engagement remains solid, supported by rising quoting activity and stable sample volume. As these opportunities convert and the solid backlog begins to be released, the business is positioned for gradual improvement over the coming quarters. As Brian will discuss, we are committed to maintaining disciplined cost management while continuing to invest in the highest return growth opportunities. This includes aligning store labor hours with sales trends, managing distribution and call center expenses with greater precision and tightening discretionary spending across the organization. Together, these actions are designed to ensure we remain agile, protect profitability and position the company to drive stronger performance. Even in a challenging hard surface flooring market, we do believe we continue to take market share based on all publicly available data, third-party industry sources and feedback from our vendor partners. We remain confident in the resilience of our business model and firmly focused on our core business. That focus is reflected in the commitment we see across our stores where morale remains strong and our culture continues to differentiate us. I'm confident this environment creates an opportunity for us to accelerate market share gains through world-class leadership and disciplined execution. With that, I'll turn the call over to Brian. Bryan Langley: Thanks, Brad. Before we discuss the first quarter results, I want to begin by thanking each and every one of our associates across the company. Their commitment to serving our customers, focusing on execution and staying resilient in this dynamic environment continues to be the foundation of our performance. We continue to achieve all-time high service scores, thanks to what they do every day in our stores to better serve our customers. Now let me discuss our first quarter income statement, balance sheet and statement of cash flows as well as our outlook for the remainder of 2026. We continue to effectively manage our gross margin with our first quarter performance exceeding our expectations. Gross profit decreased $0.7 million or 0.1% compared to the same period last year. The decline was driven by the 0.7% decrease in sales, partially offset by 20 basis points improvement in gross margin, which increased to 44.0% from 43.8% in the prior year period. Our gross margin expansion primarily reflects the timing benefit of our strategic pricing initiatives, partially offset by higher supply chain costs that continue to work their way through our system. The growth in our distribution center network in Seattle and Baltimore was a headwind to gross margin of approximately 60 basis points year-over-year, in line with our expectations. SG&A expenses for the first quarter increased $11.1 million or 2.5% compared to the same period last year. The primary driver of the increase was the 22 new stores we've opened since the first quarter of 2025, which increased personnel and occupancy costs. SG&A for noncomparable stores increased $21.4 million, while SG&A for comparable stores decreased $9.0 million as we continue to tightly manage expenses. As a percentage of sales, SG&A delevered (sic) [ increased ] by approximately 120 basis points to 39.5% from 38.3% in the same period last year. This was mainly due to the impact of new store openings and the decline in comparable store sales. I am pleased to share that we successfully completed portions of our ERP implementation and are now live with financial systems and certain merchandising portions in the first quarter, which is a clear example of the investments we are making to enhance productivity and build a more scalable platform to support future growth. We will still incur implementation costs throughout 2026 as we continue to implement other merchandising portions that will go live later this year or early next year. Our first quarter operating income declined 18.4% to $52.4 million from the same period last year, reflecting the impact of new stores and expense deleverage driven by the 3.7% decline in comp sales. Adjusted EBITDA declined 6.4% to $121.5 million from the same period last year. Our first quarter adjusted EBITDA margin was 10.5% compared with 11.2% in the prior year period. Our first quarter net interest expense decreased $0.4 million or 26.8% to $1.1 million compared to the same period last year, primarily due to higher interest income as a result of higher cash balances. Our first quarter income tax expense was $11.6 million compared to $13.8 million during the same period last year. The effective tax rate was 22.5% for the first quarter compared to 22.0% in the same period last year. The year-over-year effective tax rate increase was primarily due to a decrease in excess tax benefits related to stock-based compensation awards. Turning to the balance sheet. Our financial position remains a core strength of the company. In the first quarter, we generated $109.2 million in cash from operating activities compared with $71.2 million in the same period last year, primarily driven by changes in inventory and trade accounts payable. We ended the quarter with $1,007.2 million in unrestricted liquidity, consisting of $293.6 million in cash and cash equivalents and $713.6 million available under our ABL Facility. This level of liquidity provides meaningful flexibility to navigate the current environment, support working capital needs, invest in other growth initiatives. And as we announced today, our Board of Directors has authorized a share repurchase program for up to $400 million. As Brad mentioned, our capital allocation framework priorities remain intact. First, we will continue to invest in new stores and reinvest in our existing stores. Second, we will continue to invest in commercial flooring platforms and new growth concepts. And lastly, we will utilize excess free cash flows to repurchase common shares while maintaining sufficient liquidity and a healthy lease-adjusted leverage ratio. Our repurchase program is discretionary and how we execute will be dependent upon the environment through both programmatic and opportunistic purchases. As of March 26, 2026, inventory increased 1.4% to $1.1 billion compared to December 25, 2025. This increase reflects store growth and our proactive efforts to stay ahead of demand and ensure we're well stocked to serve our customers. We closed the quarter with $198 million in debt associated with our term loan. Before I walk through our fiscal 2026 earnings guidance, I want to frame the dynamic macro environment our teams continue to navigate and how it informs our updated earnings guidance. Consumers remain cautious about big-ticket discretionary purchases, a trend reinforced by an increase in 30-year mortgage rates, higher gas prices, persistent housing affordability challenges and unexpected geopolitical tensions in the Middle East that have all further weighed on consumer sentiment. The University of Michigan's Consumer Sentiment Index declined sharply to 53.3 in March 2026, near all-time lows. In Housing, the National Association of Realtors reported March existing home sales were $3.98 million, down 3.6% sequentially and 1% year-over-year, which continues to pressure demand for hard surface flooring. Against this backdrop, our teams remain agile and are proactively mitigating portions of both direct and indirect cost pressures stemming from the recent tensions in the Middle East while continuing to strengthen our ability to gain market share. We are seeing rising energy costs and domestic logistics expenses. However, we believe we can effectively mitigate some of the increases and manage the residual through our disciplined approach. This positions us to navigate the uncertainty with confidence while continuing to deliver value to our customers and shareholders. Given the unexpected events that emerged following our fourth quarter earnings release, we believe it is prudent to reflect a wider range of potential outcomes in our fiscal 2026 guidance. If existing home sales further deteriorate and consumer reluctance towards big-ticket discretionary purchases persist longer than previously expected, we would expect to be at the low end of our updated guidance range. At the same time, we remain focused on the elements within our control, executing with discipline, managing expenses thoughtfully and prioritizing investments that will support profitable growth while maintaining the agility needed as conditions evolve. We are confident in our ability to continue gaining market share, effectively managing expenses and generating strong cash flows. I want to remind everyone that fiscal 2026 includes a 53rd week, which will be reported in the fourth quarter. I will highlight the expected contribution from the 53rd week as part of our guidance. Sales are expected to be in the range of $4.770 billion to $4.990 billion or increase by 1.8% to 6.5% from fiscal 2025. The 53rd week is expected to contribute approximately $65 million to sales. Comparable store sales are estimated to be flat to down 4%. Comp average ticket is estimated to be flat to up low single digits and comp transactions is estimated to be down low to mid-single digits. Gross margin is expected to be approximately 43.6% to 43.8%. The first quarter gross margin of 44.0% is likely to represent a high point for the year. From there, we anticipate slight to modest sequential pressure as we move through the remainder of the year, driven by tariff-related costs, the approximately 25 basis points incremental wraparound effect from our distribution center openings and reinvesting into value-driven pricing strategies. SG&A as a percentage of sales is estimated to be approximately 38.0% with the first and fourth quarters being the most pressured from new stores. Interest expense net is expected to be approximately $4 million. Tax rate is expected to be approximately 22.5% to 23.0%. Depreciation and amortization is expected to be approximately $250 million. Adjusted EBITDA is expected to be approximately $545 million to $580 million. The 53rd week is expected to contribute approximately $11 million to adjusted EBITDA. Diluted earnings per share is estimated to be approximately $1.83 to $2.08. The 53rd week is expected to contribute approximately $0.08 to diluted EPS, which implies our 52-week diluted EPS to be approximately $1.75 to $2. Diluted weighted average shares outstanding are estimated to be approximately 109 million shares. CapEx is estimated to be approximately $250 million to $300 million, unchanged from our prior guidance. Operator, we would like to now take questions. Operator: [Operator Instructions] Our first question comes from the line of Seth Sigman with Barclays. Seth Sigman: When you look at the category trends, it's been fairly mixed, but it does seem like laminate and vinyl, it's probably been the biggest problem and continues to underperform the rest of the store. This was one of the best categories for many years, although obviously, in a very different housing backdrop. So I'm just wondering, do you think the issue is still housing? Is there something else going on with the product? Is it innovation? Is it sourcing? Just any more perspective on that because that does seem like it's still one of the biggest holes. Bradley Paulsen: Thanks for the question. And you're right. I mean that category for us is our second largest category. When we look at the opportunity, it's really the vinyl part of laminate and vinyl. And we've seen pressure in this category really since the second half of last year. And the dynamics that we see, we talked a little bit about this in the last call, we saw a shift in consumer preference. A portion of our consumers started to trend down to a lower quality spec and a lower price point. And that price point is sub-$2. So we've taken really, really quick action. I think it's a reflection of how nimble we are. And we've been really open in saying that we're going to respond to those needs or those customer preferences, but we do expect that category to be under pressure. And the reason the category is going to be under pressure at some point, it becomes a math problem. Average selling price is going to be down. We don't see a meaningful lift in square footage coming. But our mindset is we're going to take share. We need that Pro in our store, and we're going to make sure as that shift continues to happen that we've got the product and price points they want. The flip side is we are pleased with performance in our other categories when you think about the other big categories inside of our business, tile, insulation materials, decorative accessories. Really pleased with how they're doing. Obviously, we want to see acceleration in the short term to offset the pressure that we're seeing in laminate and vinyl. But we are squarely focused on getting laminate and vinyl to a level that's much better than what we saw certainly in the first quarter. Seth Sigman: Okay. Great. And then my follow-up is for Bryan. Just thinking about the EPS sensitivity to the sales shortfall, you're lowering your EPS by $0.10 to $0.15, but I think there's about $0.05 below the line. So probably lowering more like $0.05 to $0.10. That's actually in line to a little bit better than the prior rule of thumb, which was $0.10 per comp point. So can you just discuss the extent that this includes the higher energy and logistic costs? And then where are you still finding some of the offsets? Bryan Langley: Thank you for the question. Yes. Look, it's something I'm most proud of with the company is just how we've reacted in this environment. We continue to pressure test the company and do the things, but we're not going to cut to the bone either. I mean you heard me say that our service scores are still the highest they've ever been. So when you think about it, I'll try to unbundle it multiple ways. So the higher energy costs are embedded in there. We do think that, that is going to have a modest impact to the gross margin rate. If the current elevated environment continues longer, we would trend towards the lower end of our guidance. But as you noticed in the call, we were able to actually raise the lower end of our gross margin guidance that I gave on the original call. So we're at 43.6% to 43.8% versus originally we were 43.5% to 43.8%. That allows us to take the low end up a little bit to offset some of the sales pressure. You're right. Historically, we've always said it's $0.10 per comp point. In this environment, again, we've taken a lot of actions. We continue to flex our labor hours to the transactions. 70% of our stores are able to move with the model and even above that a little bit, 30%, we always talk about those as being not able to move those, but we've been able to actually tweak a little bit in our lower volume stores just at a reduced kind of lower rate than we can move the other 70% of our fleet. We continue to push on discretionary spend within the 4-walls. We're managing our distribution center cost in this environment. And we've continued to align our general and administrative expenses to the current environment, and we'll continue to do that as we move along. Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: I wanted to ask about store opening. Can you talk about decision maybe not to slow down a little further? I realize the demand environment is a little weaker. I feel like the build-out environment is a little more costly even though you are making tweaks. So talk about that decision and relative to buying stock back or buying a higher percentage back even. Bradley Paulsen: Sure. So I might give you a little bit longer answer through that piece about capital allocation in there at the end. But you're right. In our prepared remarks, we said we remain committed to 20 stores. We've also been open, I think, for at least the last year saying that we view that kind of new store openings as an opportunity and something that we treat as a priority coming into the -- excuse me, 2026. And I would say it's still very early, but we're encouraged by the initial results that we're seeing in those 6 stores that we've opened, even in a really, really tough environment. In the script, we said we're very much focused on opening stores in Tier 1 and Tier 2 markets. I think the team has done a really nice job of refreshing our grand opening process. Ersan and the team serve a lot of credit for optimizing kind of a smaller store layout. You heard us say the average in '26 is going to be 55,000 square feet, which is a much smaller footprint than we've done in years past. Question I get a lot there is, are we sacrificing the experience? Are we sacrificing the assortment in a store that's 60,000 square foot or less? And we feel like the answer is no. So really pleased with what we're seeing. When we think about capital allocation, for us, we still feel like opening new stores is absolutely the best use of capital that we have. It's critical to our long-term strategy. So we're going to continue to lean into that. And that really has been our capital allocation strategy for quite some time. We are fortunate and we're fortunate that we're at a point in our company's history where as we look at forward projections, we see that we're going to generate enough cash to still fund those new store openings and the reinvestment into existing stores. We can also fund any type of new growth concepts inside or outside the store that would include M&A. And then any excess cash that we have -- I shouldn't say it that way. And then we have the opportunity with excess cash to return that to shareholders in the form of a share repurchase. So we feel really good about our balance sheet, feel good about the priorities that we have in our framework. And as a management team, we are laser-focused on growing the core business. Bryan Langley: Just as a follow-up, just to put in context on the amount of spend because what's helped us continue to open stores in this environment and have better returns is our average store cost is going to be this year approximately $7.5 million to $8 million. If you rewind the clock just a couple of years, we were as high as $11.7 million in 2023. So for all the reasons Brad talked about and what we've done within the box, that just kind of contextualizes it within the numbers for you. Simeon Gutman: A follow-up on value proposition. I think we talked about it a quarter ago. And can you focus especially on the lower end of the value segment, some of the lower-tier product? And I know you've been trying to reassort there, but can you assess how you sit versus the market? Bradley Paulsen: Well, one of the things that's been most surprising to me, and I think the rest of the team has been how resilient the better, best part of our business has held up. I think that's a testament again to the assortment that we have, the jobs that our team do in our stores and really explain the features and benefits of the product that we have. And we've always had a nice presence in the lower end of the spectrum. It hasn't been a high percentage of our sales. But when we do see customer preference shift, like I explained in laminate and vinyl, we can react quickly and get the share that's available in that space. So I don't think it's a huge opportunity for us to reinvent our assortment to push down to the lower end because we're really not seeing that type of preference with laminate and vinyl being the only exception. Operator: Our next question comes from the line of Steven Forbes with Guggenheim Securities. Simeon Gutman: Brad, maybe expanding on Simeon's question around the new stores averaging 55,000 square feet. I'd be curious if you can maybe take us to the box here and talk about some of the newer in-store merchandising initiatives. I know it maybe early, right, extended aisle, F&D Express, wood inspiration center. What are you sort of seeing around these new initiatives that gives you conviction that you're not going to sort of give up productivity or return sort of profiles with this migration. I'd love to hear just conviction behind those. Bradley Paulsen: Yes. So I'll try to hit the headlines. One of the things that I've shared pretty consistently is the team has done a nice job of optimizing the layout of the store. And for those of you that have been in our store, our store really has kind of 2 sections, if you will. We've got the selling floor and then we have the warehouse. So I'll start with the warehouse. I think we continue to get better and better in minimizing the amount of space that we need for warehouse so we can maximize the amount of sales floor that we have in a smaller box. And then when you come into the front of our stores, the first thing you're going to see is cash registers and you're going to see a design center. And when you think about optimizing that experience where it's a benefit to the customers and it's a benefit to our associates, I think we've hit a home run there. The example that I use, I know a lot of you are based in New York. If you get a chance to go out to Staten Island, I think it's the example of what we're talking about. And then from a design center perspective, which is really important to who we are and what we do every day. I think we've shrunk the experience without minimizing the experience, if that makes sense. Our designers still have the ability to drive inspiration with our customers out of the design center. As we said in the script, we've had a lot of effectiveness with our designers no matter the size of the store. So we feel good about that. And when we think about our core categories, and the emphasis that we have on Pro, our Pro desk and our installation assortment is not sacrificed at all. I mean it's, in some cases, as big, if not bigger than you'd see in the larger store. And then our core categories like tile, laminate and vinyl and decorative accessories, really no kind of sacrifice in those categories either. On the tile, tile does take a lot of space in our stores. We've got to be creative, and you'll see different pictures in smaller volume stores that allow us to display more SKUs than we normally would on the floor. And again, we're really excited about what we're seeing. And we don't believe that we're going to sacrifice any type of top line productivity. And that's because -- and I should have said this originally, one of the reasons we're pushing into smaller volume stores is we've got to densify urban markets. That's where a lot of the demand is. And the reality is the 75,000 to 80,000 square foot box isn't available in those markets. And if it is available, it's very, very expensive. So we've done this strategic pivot as an organization. And again, you can tell by my comments, we're optimistic on how it's playing out thus far. Operator: Our next question comes from the line of Steven Zaccone with Citigroup. Steven Zaccone: I wanted to follow up on the guidance change. I was hoping you could just elaborate a little bit more on why the decision to lower guidance at this point in the year. It seems a bit early, right? Because March and April sound pretty similar, and you actually saw somewhat of a 2-year stack acceleration in April. So help us understand what's changed from a cadence of the year? Is this more a function of weaker second half expectations just given some step down in the existing home sales backdrop? Bradley Paulsen: No, I certainly appreciate the question. And if you rewind the tape to our last call, what we communicated is that we came in from a planning perspective, assuming that 2026 was going to look a lot like 2025. We said if there's any level of stability when it comes to existing home sales or improvement, we felt like we had a path to delivering positive comp sales for the first time in a few years. Since that time, obviously, a number of things have occurred that we would consider unexpected. And I think that's how we described it in our script. I'm not going to list them because we listed them more than once in our prepared comments. But obviously, that's changed the demand environment for our business. And really, I assume any kind of high -- big-ticket discretionary item. So we thought it's prudent and responsible at this point in time to recalibrate given what we know now. When you think about the range that we provided, we'll be the first admit wider than we normally would give. But the reality is there's just uncertainty in how our demand drivers are going to play out for the rest of the year. If you look at our current run rate and assume no improvement, then we have a level of confidence that we can hit the midpoint of the guidance. If we see any type of improvement when it comes to those demand drivers, then we feel like we can get closer to the high end of the range. But as you would expect, this is a question that we wrestled with. And we felt like, again, it was just prudent and responsible for us to reset and recalibrate at this point in time. Operator: Our next question comes from the line of Michael Lasser with UBS. Michael Lasser: As outsiders, it is very difficult for us to have an accurate assessment of market share. We tend to look at the performance of the big box retailers, some of the vendors in this space. And it does seem on those metrics that Floor & Decor on a same-store basis is lagging behind the industry. It's hard to explain that given the value proposition, the customer experience and all the other facets of the model. So a, as you look either category by category, geography by geography, are you seeing evidence of market share gain? And, b, how would you explain that market share loss and what is being done to address it? And then I have a quick follow-up. Bradley Paulsen: So -- and probably worth a more in-depth conversation at some point in time, but we don't see that. We don't see that we're losing share. Even on a category like laminate and vinyl, where we admittedly say our performance has been below expectations, that market is under a lot of pressure. So I'm certainly not going to sign up and say that we're taking share in laminate and vinyl in a meaningful way. But I also don't think we're losing share in a meaningful way. And when I look at the other categories, insulation materials, tile, wood, deco, I feel really good about our position. And like we said, and this was part of my close in the comments, when we look at publicly available data, and that would be big box retail. When we look at other third-party data, that all of you look at and then certainly, the feedback from our vendor partners, we are not getting that same interpretation of the data. So we feel good about market share in a really tough environment. Do we want to have better sales performance? Absolutely, absolutely. And I would say our focus is on accelerating share gains. And as I've said kind of time and time again, if we can get any level of stability in our space, we're really, really committed to delivering positive comp sales in our business. Michael Lasser: Understood. My follow-up question is on some of the pricing actions that the corporation has tested, and it sounds like we'll deploy a bit further as the year progresses. Can you quantify what the impact has been from those actions? How have you embedded those in the guidance? And why wouldn't Floor & Decor take up prices more aggressively given that folks who are probably coming in at this point with a low level of overall traffic probably are just going to be inherently less price sensitive? Bradley Paulsen: Yes. The first thing that I would say is I can't compliment Ersan and his team enough and how they've executed through this environment, really performing at a high level and have kept us incredibly well positioned to take share in all of our categories. My general observations around the market and pricing, and I will answer your questions, just bear with me. I continue to see rational behavior, and I describe rational behavior from pricing, kind of low to mid-single-digit increases. We have shared that we've taken modest increases. And the good news is we've been able to pass that price on to customers. I mentioned that better and best penetration has held up, which has been a nice surprise. And for us, we continue to test our pricing strategy. One of the areas of investment that we've made is in our pricing team. We've hired new leadership there or a new pricing leader for our business. We're investing in tools. And even though we're pleased with the execution on our pricing, we know there's always more opportunity there. We're going to continue to test our price bands. For the first time in a long time as we've taken price down in the laminate and vinyl, we have seen that positive reaction to square footage. And we're going to run test to see if that takes place in other categories. And on the same token, take prices up to see what that impact is. We are very, very focused on taking market share and our pricing strategy is going to be reflective of that. Operator: Our next question comes from the line of Zack Fadem with Wells Fargo. Zachary Fadem: Could you remind us how your freight contracts renew and how we should think about how higher ocean and domestic freight flows through? And then for other input cost inflation like PVC, et cetera, any thoughts on exposure or impact there and what's embedded in the guide? Bryan Langley: Zack, this is Bryan. I'll take a stab at it and then Brad can jump in. Our ocean contracts, we typically renegotiate those through the spring and early summer. So we're going through that right now. Again, we typically are on multiyear contracts. I think this go around, we're on more interim contracts, 1-year kind of 2-year basis versus 3 historically that we've kind of blended in. So a lot of those will be renegotiated now. It will take a little bit of time. It will be probably the back half before we start seeing those price changes. And then it takes anywhere from 6 to 8 months depending on those international contracts to really kind of bleed fully through into the P&L just from a flow-through perspective. On the domestic side, it's a lot quicker than that. And so that's why we are starting to see some of the higher energy costs today. That's why I mentioned we are starting to see a modest impact today, and that will continue just depending on how long this environment continues. But for us, on that side, that's just a lot quicker because it's basically our domestic side post distribution center to our stores. So that flows through a lot quicker into what you see into our results. Zachary Fadem: And on the PVC, how that input cost inflation could impact the category? Bryan Langley: Yes. It's still early right now. I mean, look, Ersan's team, again, getting a lot of kudos today. They've done a great job of working with our vendor partners, long-term vendor partners that we've had there. So today, where we see just minimal exposure today, I think we'll always do what we do best, which is negotiate first and foremost, with our current vendor base. If we do see any big sort of pushes or anything else, we can always diversify out. And then whatever is left, we'll push through to our consumers to the extent that we can. Zachary Fadem: Got it. And then on the Pro loyalty revamp, any thoughts on new features you're exploring there? I know we've talked about Pro pricing. On that note, like any updated thoughts on options in terms of discounts versus rebates and how you would plan to balance gross margin versus volume improvement potential? Bradley Paulsen: I'd love to be able to share the details of that program. Unfortunately, I can't do it at this point. But as we said in the prepared remarks, really excited about the progress we're making there. That is an effort that is led by Krysta Zell, our new Chief Customer Officer. She's got deep, deep expertise in building loyalty programs. She's done that at more than one stop along her career. And what I would say is our aim here is to have a differentiated program that is really a comprehensive solution for our Pro customers. And I talk a lot about service assortment, price. It's going to touch on all those components, and it's going to be supported by the right technology. And for me, I think that's going to be a real -- a key piece to how we accelerate share gains from independents. We're really excited about the potential that it has and can't wait to roll it out in the first quarter of next year. Operator: Our next question comes from the line of David Bellinger with Mizuho Securities. David Bellinger: How aggressive could you be -- do you plan to be in the market immediately if shares are currently trading at [Audio Gap] could you be now and through the balance of the year? Bradley Paulsen: So I think the question was how aggressive do we plan to be with the share repurchase. Bryan, do you want to walk through the mechanics of how we're thinking about that program? Bryan Langley: Yes. David, I think this is you. But obviously, we said it on the call, but this will be a discretionary repurchase program, right? We'll purchase both through programmatic and opportunistic given the current dislocation within our stock. We have a healthy balance sheet, and we'll use the excess cash to fund this program as we see fit. So more to come on it. I don't want to commit to anything in the near term or long term. But just know that we'll do both programmatic and opportunistic. We're not trying to be stock pickers, right? So I mean we're going to use our advisers and go through it that way. So we do plan to start executing in the second quarter, but more to come on that kind of as we move forward. Operator: [Operator Instructions] Our next question comes from the line of Chuck Grom from Gordon Haskett. Charles Grom: Curious what you're seeing from independents recently. I would imagine they're under considerable pressure and how you're attacking that opportunity. And then, Bryan, how should we be thinking about the phasing of both comps and earnings over the balance of the year? Bradley Paulsen: Independents, as all of you know, we believe more than half of the market and very, very strong competitor in our local markets. I think I've been on record more than once saying, I think they've done a really nice job in this environment of taking care of their Pro customers, which reinforces the importance of us having a new Pro loyalty and Pro pricing program. I think the independents that cater to the more affluent customer are doing fine in this market. I'm certainly a believer in the K-shaped economy, and there's certainly a portion of that independent. I would say a small portion of the independents that cater to that audience and the higher-end designers, I think they're doing fine. I think everyone else is struggling. That is consistent with kind of the bottom-up feedback that we hear from our store partners and also our vendor partners. Our whole perspective, and you've heard me say it throughout the call is we want to play offense in this environment. We're going to make sure that we're positioned to take market share and really exceed our customers' expectations every single day. And we think that's going to be our path to success. Bryan Langley: And from a comp sequential nature, the biggest variation in the range is our transactions. I think as I alluded to on the prepared remarks, those would expect to be down low single digits to down mid-single digits, where our ticket will be somewhat consistent. but flat to up low single digits is how we would get there. And then from a cadence perspective, on the low end of guidance, Q3 is modeled to be kind of the high quarter for the year. And on the high end, it assumes sequential improvement as we move throughout the year. And then just as a point of reference for you guys, as we talked about quarter-to-date being down 4.5%, I think it is important to call out that last year, we are lapping a 1.7% increase in April, which had acceleration from the Liberation Day last year as we think about that. And then May was also 0.6%. Those are the 2 highest points of all of 2025, just to call that out as well. Operator: Our next question comes from the line of Peter Keith with Piper Sandler. Peter Keith: On the competitive front, to follow up on an earlier question, I want to focus on the big box stores. There is a narrative out there that some of your big box competitors are leaning in and investing more in the flooring category. And I guess maybe the weakness that you're seeing in laminate and vinyl could sort of feed into that narrative. So I'll just ask you directly, what are you seeing from the big box stores? Are you seeing any more competition or more investment on pricing? Bradley Paulsen: Yes. So I would say, just as a reminder for the folks on the call, where we compete with big box retail is an opening price point and the good part of our assortment plus installation materials. And big box retail, terrific companies. And I would say when we think about market share, it's a little bit of a street fight. When we think about our ability to take meaningful share, it's going to be from the independents. And the primary reason for that is a small -- a very, very small percentage of our sales comes from opening price point and good. That being said, I've heard a comment like this numerous times over the last 12 months. And actually, we don't see that. We don't see them leaning into the category. We see, in some cases, them leaning out of the category, and that's more recently than anything else. I don't see anything disruptive from any of the big box retail. But again, great companies, great competitors and companies that we watch very, very closely. But we don't feel like they are, again, having any disruptive impact on our business today. Operator: Our next question comes from the line of Kate McShane with Goldman Sachs. Katharine McShane: We wanted to ask about Spartan. You did mention that the results were weaker than expected, but also seem to indicate that there is an opportunity for better results in the coming quarters. I wondered if you could maybe contextualize the timing a little bit more and what would be driving that. Bradley Paulsen: Yes. So for Spartan, we came into the year, we knew that the first quarter was going to be a little bit softer, ended up being even softer than we expected. As we said, when we look at the leading indicators in that business, we've got a level of confidence that it's just a matter of time. So it's not an if, it's a when. When you think about their core customers, it's multifamily, hospitality, health care, education and senior living. The softness that we're seeing is coming out of multifamily. In some cases, it's timing. In some cases, it's projects getting delayed for an extended period of time. The great news is we've made investment, consistent investment in that business around new sales headcount. So when you talk about taking market share, we feel really good about our ability to rebound from the first quarter, have the gradual progress that we talked about in the script and deliver a nice year from that business. Operator: Our next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: Brad, I had a strategy question. You're evaluating Pro-specific pricing potentially, which maybe you haven't offered in the past. And you're also looking to some smaller format stores than historical standards. I guess, in the past, Floor & Decor has chosen to not offer installation services to avoid conflict with Pro customers. I'm curious if your stance is any different there. Any comment would be helpful. Bradley Paulsen: No, no. And I would say -- so no deviation from the previous strategy when it comes to how we think about installation. And even from a kind of smaller footprint store, I would say I'm building on a strategy that's already in place. One of the reasons we had confidence in our ability to deliver on a 60,000 square foot store in an urban market is because we have stores out there doing that today. Again, I think the team continues to refine that and optimize our experience. But short answer to your question is no, we're not going to deviate from the current strategy around installation services. Operator: Our next question comes from the line of Phillip Blee with William Blair. Phillip Blee: So you've spoken about revamping the Pro loyalty program next year. And I know you have your own internal design program, but same thing kind of a larger scale strategy question. Would you ever consider expanding a loyalty program to the external interior design trade to try and build a relationship with that end of the market and maybe expand your customer base to a little bit of a higher income? Bradley Paulsen: Wow, you're putting me in a tough spot to answer that question. Listen, I think when we look at our business today, I think we have a certain level of success with designer and that customer that really requires a trade discount. We view that as an opportunity. I'll position it that way. We view that as an opportunity that we can lean into more. Now what does that mean from our loyalty program? We're going to have to wait and see as we share that later in the year, what that framework looks like. But I think you're spot on with your observation as far as an opportunity for us to, like I said, lean into that customer segment a little bit more. Operator: Our next question comes from the line of Greg Melich with Evercore ISI. Gregory Melich: I wanted to follow up on the pricing actions and how it influences the ticket through the year that I think it was the flat to low single-digit ticket comp. Does that have 400 or 500 bps of same SKU inflation in it before? And is that still the same kind of number? And how do we think of that flowing through over the course of the year? Bryan Langley: Yes. I don't know if I'm going to quantify that for you on that perspective. But again, the low end of our ticket being flat, we assume continued pressure in laminate and vinyl kind of as Brad has mentioned, leading to smaller basket sizes and also some of the pricing pressures that we're talking about with value-driven options. Those are really kind of what's leading to the lower end of it versus the higher end. It's just the impact that those will have on the ticket itself. Operator: Our final question comes from the line of Peter Benedict with Baird. Peter Benedict: Just one more, I guess, on the buyback. Just a clarification. First, it doesn't look like any is assumed in the outlook, given the share count forecast didn't change. I just want to confirm that. And then just, Bryan, maybe just can you help us think about the minimum amount of cash kind of the business needs to operate on as we start to think about how aggressive you could potentially be in any given quarter with the buyback? Bryan Langley: Yes. I mean, look, it's -- from where we sit today, given where we are in the year, the impact of this year isn't going to be very material. So it's incorporated within the guidance range itself within the outcomes would be the share repurchase. We do think longer term, obviously, this is going to add value to shareholders and continue to grow as we move along and do the program consistently. So as far as -- yes. As far as minimum cash balances, yes, I mean, we think about it from cash, but it's really liquidity. I mean, for us, we've got an ABL out there that's $800 million accordion feature, we can get up to $1 billion. We've got sufficient liquidity over $1 billion today in combination with the two. I always think about it as a minimum cash or minimum liquidity that we need to make sure that the company is healthy and in a good position. For me, that's usually around $500 million, just minimum in liquidity, and that will be a balance of both cash and ABL. That's an absolute minimum. I don't think we'll get anywhere near that. But for me, that's just kind of a floor. And then on the flip side, you heard it in my prepared remarks, but we want to make sure also, Brad said it, we will not be using debt to fund this. And so for us, we'll maintain a very healthy lease-adjusted leverage ratio. Those are kind of the 2 financial guardrails that I look at as well as what we would do to our ROIC. And so we think about all 3 of those as a management team, just making sure that we don't overstretch or do those as we get into this. Bradley Paulsen: Okay. Thanks, Bryan. And thank you, everyone, for your time tonight and support. Have a great night. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.
Operator: Good afternoon, and thank you for joining us for Rivian's First Quarter 2026 Earnings Call. Today, I'm joined by RJ Scaringe, our CEO and Founder; Claire McDonough, our Chief Financial Officer; and Javier Varela, our Chief Operations Officer. Before we begin, matters discussed on this call, including comments and responses to questions, reflect management's views as of today. We will also be making statements related to our business, operations and financial performance that may be considered forward-looking statements under federal securities law. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and the earnings presentation we filed with the SEC today. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of historical non-GAAP to GAAP financial measures is provided in our earnings presentation and press release. Just before the earnings call, we posted our earnings presentation, which includes an overview of our progress over the recent months and replaces our shareholder letter. I encourage you to read it for additional details around some of the items we will cover on today's call. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of keeping our call to 1 hour, we would ask these analysts to limit any follow-on questions to one. With that, I'll turn the call over to RJ. Robert Scaringe: Thanks, Chip. Good afternoon, everyone, and thanks for joining us for today's call. Last week, I was thrilled to celebrate the start of saleable R2 production with our team at our plant in Normal, Illinois. It's an exciting milestone in Rivian's history and the culmination of all the hard work and energy from so many people across the company. As I've said before, I believe the R2 will be a game changer for our customers and will be a key driver of our company's long-term growth and profitability. In an American automotive marketplace starved for high-quality EV choice, I believe R2 is an attractively priced option sized for everyday ventures from school pickups to weekend trips that is targeting the very popular 5-passenger SUV and crossover segment. With R2, we are taking our design, performance and technology and bringing it to a significantly broader audience without losing what makes Rivian unmistakably Rivian. We've started R2 deliveries to our employees, and I have to say I absolutely love having R2 as my daily driver. I could not be more excited to get this vehicle into the hands of lots of customers starting this spring. In developing R2, our team relentlessly focused on achieving structural cost reductions while maintaining the desirability of the product. For R2, our bill of materials is expected to be approximately half of our R1 platform. For non-BOM cost of goods sold, we expect to see a reduction of more than 50%, resulting from a focus on design for manufacturing and leverage fixed cost efficiencies through higher production volumes. This is how we expect to profitably deliver R2 at an accessible price point at scale without compromising performance and utility customers love for Rivian. Key design changes for R2 include part eliminations and reductions through the introduction of large die castings, a structural battery pack, a new highly efficient drive unit, the evolution of our next-generation electrical architecture, which removes miles of copper wire and the consolidation of our high-voltage electronics into a single enclosure. We are also seeing significant sourcing leverage relative to R1 across a variety of components. Now as we begin to scale our operations in Normal with R2, we're very excited to partner with the U.S. Department of Energy to grow our manufacturing footprint in Georgia. R2 provides the opportunity to expand the Rivian brand to millions of drivers. As a result, we made the strategic decision to increase the production capacity for the first phase of our Georgia plant by 50%, bringing it to 300,000 units of annual production capacity for our midsized vehicle platform. This change is expected to boost cost efficiency while still providing significant room for future expansion in later phases and support thousands of jobs in Georgia as we grow American manufacturing and work to ensure the U.S. retains its leadership and innovation in technology and transportation. We remain on track for the production of our midsized vehicle platform to begin in Georgia in late 2028. Turning to our technology road map. In March, we were excited to announce a new strategic partnership with Uber to accelerate our shared autonomous vehicle goals. In the not-too-distant future, I believe advanced autonomy capabilities will be a key differentiator for customers and the driver of market share. At the core of our third-generation autonomy hardware is the Rivian Autonomy Processor or RAP1. The development of our RAP1 chip is on track, and we are progressing well on validation and reliability testing. Our integrated approach allows our hardware team to rapidly iterate with our software team, and our autonomy feature development is progressing well, and we continue to expect to begin rolling out point-to-point capabilities by the end of the year. Finally, in the coming weeks, we are excited to launch the Rivian Assistant on R1 and R2 vehicles. The Rivian Assistant is our new AI-powered voice assistant that is built to be a digital copilot with integration into the vehicle ecosystem and other external apps. In closing, this quarter, our team has executed across many fronts, laying a strong foundation for the years ahead. As an American automotive technology company, we're building for a future that we believe will be fully electric, autonomous, and AI defined. With our category-defining brand, the launch of R2, which is our first mass market vehicle, vertically integrated and extensible technology and the direct-to-consumer sales model, I couldn't be more excited about the opportunity ahead for our customers and for our business. With that, I'll pass the call over to Claire to discuss our financial results. Claire McDonough: Thanks, RJ, and good afternoon, everyone. As RJ shared, the start of saleable R2 production and initial employee deliveries are a landmark moment for Rivian. By building R2 in Normal, we are strategically leveraging our existing manufacturing footprint in Illinois to drive greater fixed cost absorption across our entire vehicle portfolio. As discussed previously, R2 production is starting with a single shift operation, and we expect to scale to 2 shifts by the end of 2026 as we ramp towards our North Star target of profitably delivering 4,000 vehicles per week in normal. Delivering a strong 2026 exit rate for R2 production and deliveries is a key focus for our team as we believe it will directly translate into positive automotive gross profit for the business. Turning to the results for the first quarter. As depicted on Slide 11 of the earnings presentation, our consolidated revenue in the first quarter was approximately $1.4 billion, an 11% increase over the same quarter last year. Consolidated gross profit was $119 million, and our gross margin was 9%. Gross profit included $122 million of depreciation and $27 million of stock-based compensation expense. Adjusted EBITDA losses for the first quarter were $472 million, driven by our $119 million of gross profit and increased adjusted operating expenses as we prepare to scale R2 and invest in our autonomy road map. In the first quarter, we produced 10,236 vehicles and delivered 10,365 vehicles, which was the primary driver of our $908 million of automotive revenue. Automotive gross profit loss was $62 million compared to $92 million of gross profit for the same quarter last year, primarily driven by the $100 million decrease in sales of automotive regulatory credits and lower production volumes, which resulted in a $45 million increase in depreciation and stock-based compensation expense combined. While current macro and geopolitical factors are creating added complexity, cost and uncertainty, our team continues to work hard to manage supply chain risk and offset elevated costs. Our Software and Services segment reported another strong quarter as depicted on Slide 13. During the first quarter, the segment generated $473 million of revenue, a 49% year-over-year increase and $181 million of gross profit. $282 million or approximately 60% of Software and Services revenue was attributable to our joint venture with Volkswagen Group. We also experienced strong growth from remarketing and parts and service. During the quarter, we also recognized $506 million gain in other income in our financials related to the Series A capital raise and related deconsolidation of Mind Robotics from our financial statements. We currently own approximately 38% of Mind Robotics on a shares outstanding basis. Looking at our balance sheet, we ended the quarter with approximately $4.8 billion of cash, cash equivalents and short-term investments. With regard to our funding road map, in 2026, we expect to receive a total of $2.55 billion of capital from our strategic partners. Today, we received $1 billion from Volkswagen Group in exchange for equity following successful completion of the winter testing milestone by RV Tech. The testing program spans several months utilizing reference vehicles from the Volkswagen, Audi and Scout brands. Later this quarter, we expect to receive $300 million from Uber in exchange for equity related to the signing of our partnership agreement, subject to certain conditions. And later this year, we expect to receive $1 billion in nonrecourse debt from Volkswagen Group and an additional $250 million from Uber in exchange for equity, subject to the completion of certain milestones and conditions related to robotaxi development. As outlined on Slide 14, this brings total available liquidity and expected capital in 2026 of nearly $8 billion. Additionally, we're very excited to partner with the U.S. Department of Energy to grow our U.S. manufacturing footprint. The up to $4.5 billion DOE loan, which consists of approximately $4 billion of principal and approximately $500 million of capitalized interest provides low-cost financing for our 300,000 unit capacity greenfield expansion in Georgia, bringing Rivian to meaningful scale. We expect the 515,000 total units of capacity between our Illinois and Georgia plants will provide Rivian a path to free cash flow positive once fully ramped. We expect to draw on the loan by early 2027, subject to certain conditions. Two weeks ago, our normal factory sustained damage from a tornado. I'm proud of the way our teams have rallied together to get production back up and running while we repair the damages. Despite the weather impact, our 2026 guidance remains unchanged. We continue to expect full year deliveries of between 62,000 and 67,000 total vehicles across R1, R2 and our commercial vans. We also continue to expect to deliver approximately 9,000 to 11,000 vehicles in Q2 as we expect the ramp of R2 deliveries will be back half weighted. While we continue to believe our gross profit will increase year-over-year, we expect the complexity of a new vehicle launch will negatively impact our automotive gross profit in the second and third quarters before becoming a benefit for our overall operations in the fourth quarter as we ramp production and deliveries. As a reminder, we believe this is a transition year for the Automotive segment's path towards long-term profitability as we scale R2. For 2026, we continue to expect an adjusted EBITDA loss of between $2.1 billion to $1.8 billion. While economic and geopolitical conditions, including supply chain and international conflicts pose risks, we remain steadfast in our plans to invest behind key growth drivers. We continue to progress our autonomy road map and the expansion of our sales and service footprint as we scale with R2. We believe these strategic investments will deliver long-term value to our shareholders. Finally, for 2026, we are maintaining our capital expenditure guidance of $1.95 billion to $2.05 billion. Our CapEx spend primarily relates to finalizing construction and tooling for R2 in Normal, the continued build-out of our sales, service and charging infrastructure and kicking off construction of our greenfield plant in Georgia. In closing, I'd like to congratulate our teams again for the successful start of saleable R2 production and the strong execution in the first quarter. We continue to believe that R2 and our technology road map will be truly transformative for the growth and profitability of our business. I'd like to turn the call back over to the operator to open the line for Q&A. Operator: [Operator Instructions] Our first question comes from Shreyas Patil from Wolfe Research. Shreyas Patil: Maybe first, just picking up on a comment that you made earlier, Claire. If you could help give us some more color on some of the actions you're taking to mitigate the increase in commodity costs and some of the metals prices that we've seen increase recently? And what's been the magnitude of increase, if you could help frame that? Robert Scaringe: Well, thanks, Shreyas, for the question. Yes, we're spending a lot of time, of course, focused on all the changes that are happening from a supply chain point of view. And in terms of raw materials and some of the cost of metals, specifically aluminum, this has been a big focus for us. Fortunately, we've -- our sourcing team has been sort of -- we've grown our sourcing team and evolved our sourcing team over the last handful of years where supply chain continues to be an area where there's a lot of unknowns, there's a lot of variability and a lot of a need for us to be very hands-on and very proactive. And so we've been proactive in both our relationship with existing suppliers, but also in making sure we have, particularly in some of these key commodities, alternative sources of supply. Shreyas Patil: Okay. Great. And then maybe, Claire, just to clarify, I think you've made a comment about how -- when Normal and the Georgia facility are fully ramped, you'd be getting to free cash flow positive. I just want to make sure if I understood that correctly. And if that's the case, that could be quite a while from now. So maybe just help us understand sort of the trajectory of CapEx maybe near term, but then also as we kind of think ahead and you start to kind of put more in the ground at Georgia? Claire McDonough: Sure. Shreyas, the comment that I made on the Rivian's ramp up, its Normal facility plus Georgia facility is what takes Rivian to free cash flow positive in the future. And as we talked a little bit about in our prepared remarks, importantly, we have the $4.5 billion of capital from the Department of Energy loan, which provides up to 80% loan-to-value against the build-out of our future Georgia facility. So while we certainly will see an anticipated increase in our capital expenditures as we approach the start of production in Georgia, we do have significant offsets from a capital road map. And the $4.5 billion is just one component of the full $13.6 billion of total liquidity and expected capital through both the cash that we have on hand on our balance sheet, the added availability of our ABL facility, and then the expected capital from our partners with both Volkswagen and Uber that we expect to receive over the coming years as well. Shreyas Patil: Okay. Great. And maybe just one quick clarification. The DOE loan, has there been any change to that? I think the original amount was $6.6 billion that was available. Just curious if there's any change there. Claire McDonough: Yes. So included within our financial release today, we provided an update on the Department of Energy loans. So we'll now have $4.5 billion of loan capacity that will go towards the build-out of our first phase of capacity expansion in Georgia. We've also increased the capacity of the Georgia site, the initial capacity from 200,000 units to 300,000 units. And so the comment that I made in my prepared remarks is really the importance of the funding road map, especially as we think about the Georgia site specifically taking Rivian to meaningful scale in the future. Operator: Our next question is from Joe Spak from UBS. Joseph Spak: Claire, just to maybe pick up on the DOE loan part and to clarify, like obviously, this first phase is an increase from that 200,000 to 300,000 units. But and again, admittedly just being able to skim the document, it does seem like maybe the total project scope is now capped at 300,000 units versus -- I know before it was supposed to be 200,000 units -- Phase 1, 200,000 units, Phase 2 for 400,000 units. So I want to make sure I understand that. And then if you still see an opportunity over time to grow further in Georgia. Claire McDonough: So the strategic decision that we took was to increase the initial phase of production capacity to the 300,000 units. On our Georgia site, the full initial capacity will be put on the upper pad at the site. So we have the lower pad, which is still going to be entirely untouched greenfield for future expansion. Joseph Spak: Okay. But -- and that might be funded more organically in the future, not necessarily with loan or it's TBD, I guess. But the loan is really only up for the 300,000 units, correct? Claire McDonough: So the loan is for the initial phase. The important piece is we've increased the loan size associated with the initial phase as we've also scaled the production volume as well. Joseph Spak: Okay. And then just I appreciate the comments on input costs and -- but I guess the other thing that I was wondering about was with tariffs, and this is sort of come with a lot of companies thus far. Can you remind us like what you've paid in IEPA roundabout over the past year? And have you filed for any reimbursement? And was anything booked in the quarter related to any potential reimbursements? Claire McDonough: We did not book anything this quarter associated with IEPA tariffs, but we do believe that the recovery of those IEPA tariffs is possible in the future. And I contextualize the sizing to be in the tens of millions of dollars of future benefit. Joseph Spak: Okay. But that -- and is that considered at all in your reiterated outlook or that would be upside? I guess it's not significant. Claire McDonough: I would characterize it as considered within our current outlook. Joseph Spak: Okay. And then just lastly, like I know you talked with Uber, you talked about pulling forward raising R&D in '27. Does any of that work start to seep into '26? And is there a change to the R&D outlook for this year? Or it's really more of a '27 factor? Claire McDonough: You'll see the pace of acceleration increase in terms of the spend towards autonomy in '27, but we'll certainly see acceleration throughout the course of this year as well. If you look at Q1, our cash R&D expense increased about 22% this year for that quarter. You could directionally think about that as being more of a year-over-year type run rate as we look out over the remainder of the year. Operator: Our next question is from Itay Michaeli from TD Cowen. Itay Michaeli: Just first, going back to the Georgia capacity optimization. Curious if it has any impact on your previous long-term financial targets of 25% gross margin. And maybe on that as well, if you can maybe share your initial kind of takeaways on kind of R2 demand generation since you kind of launched the trends. Robert Scaringe: Well, thanks, Itay. Yes. And I think, obviously, the decision to increase the capacity of the first phase in Georgia coincides with -- I should say, it reflects the level of confidence in our products and our business. I think most importantly, we've just started production on R2 out of our existing Normal, Illinois facility, and we've had early media events and early customer events and the level of enthusiasm for the product has just been outstanding. So everything from the packaging of the vehicle to the way that it drives to the integration of technology, the overall response has been overwhelmingly positive. And so that bodes extremely well for the ramp-up happening over the course of this year and into next year, but it also sets up a wonderful foundation for us as we think about further capacity on this platform, both for R2 as well as R3 and variants of those vehicles out of the Georgia facility. Itay Michaeli: Terrific. And then maybe as a follow-up on the Uber announcement. I'm curious whether the robotaxis themselves that will go into the Uber network will have the kind of exact same hardware set as the personal vehicles. And I ask because if you're going to launch in 2028 in complex domains like San Francisco and Miami, would that not also imply a pretty wide ODD for the personal vehicles if they're both operating on the same hardware? Robert Scaringe: Yes. We talked about this during our Autonomy Day late last year. But I think it's important to recognize there's going to be a whole series of steps we make in terms of progressing towards Level 4. And so in that series of steps, the first later this year on our consumer vehicles is launching our point-to-point capability. And so that's the ability for the vehicle to drive entirely on its own to an address. And I just this week had -- we do lots of regular rides internally, and I had a great ride with James and the team. And it's so exciting to see how much it's progressed and our technology has progressed even since our Autonomy Day late last year. And so we're very encouraged by this. But that first step of making point-to-point available to customers is going to be a really important step for our consumer vehicles. As we continue to go into 2027, we'll be allowing in specific areas, eyes off. And so it's hands-off, eyes off, that's a Level 3 capability. And then as we go into 2028, as you said, that's when we'll have our first deployments of a Level 4 capability in a robotaxi. And in the robotaxi variant, there will be some additional sensing on the vehicle. So it will be different than the pure consumer vehicle. But we are planning to have a personal version of Level 4 as well. And we've talked about that quite a bit. We think the market for a vehicle that you own being able to completely drive itself, do things like drop you at the airport, go to the grocery store, get groceries for you, pick up kids from a sports event. These are really high-value creating activities for the Level 4 capability, and we see them on both robotaxi applications and on personally owned applications. Operator: Our next question is from Dan Levy from Barclays. Dan Levy: I wanted to first start with R2 and the path to getting to positive gross margin, which I think you said would be by the end of the year. Maybe you could just walk through the gating factors. Does -- even with the raw mats, do you still have the confidence you have the right BOM to achieve this? And what milestones do we need to see to make sure that the production ramp is still on track? What are the sort of most limiting factors that you still have to address on this ramp? Robert Scaringe: We've talked a lot about the cost structure of a vehicle and a huge component of this is, of course, the bill of materials. And the bill of materials is different than the non-bill of materials COGS is contractual. So these are negotiations that happen across hundreds of suppliers, and very different than when we sourced R1. We went into the R2 sourcing with a lot of momentum and much better supplier leverage. And just the level of confidence in Rivian as a business and the level of excitement around R2 helped us put together a set of suppliers that are both very enthusiastic, but that's demonstrated through attractive commercial terms. And so as it stands, the bill of materials for R2 is about half that of R1. And there's, of course, things we can't predict like raw material changes and DRAM shortages, but the vast majority of the BOM is very stable, and we have a lot of confidence in being able to achieve that -- the target BOM, which supports the very healthy gross margins we've talked about in the past. Now with regards to the plant, I'll invite Javier just to comment on some of the progress that's happening in terms of ramping up over the course of the next several months. Javier Varela: Yes. Thank you, RJ. Indeed, as you explained some minutes ago, we had last week, the celebration of the first saleable builds and delivers to customers this week. So very proud of the situation we are achieving now. The industrial process is ready. The people is ready as well. We have been through the right training and build cycles. And I would say plant is prepared, process are defined, and we are very confident in our capability to deliver. I feel confident as well regarding what is our team in place. We have brought in a group of seasoned leaders that have done launches back in the past, big experience on that area. And we are, on the other hand, managing the supply chain, making sure that the supplier scales with us. We have boots on the ground supporting some key suppliers. And we are doing this with our mindset and supplier relationship of transparency and collaboration. Resilient supply chain, agility and intelligence are key factors for success. Dan Levy: Great. As a follow-up, RJ, I wanted to double-click on the point you gave in the prior question from Itay about getting to L4. You'll have point-to-point at the end of this year, and you'll only have the vehicles with the LiDAR end of this year, beginning of next year. It does seem like there's probably a lot of testing that has to happen between when you get those cars with the LiDAR out to the point where you have a launch. So just help us understand what the testing curve looks like, what you need to do from when you have the cars with the LiDAR to being able to unlock L4 because it does seem like there's a lot of miles that have to be driven on that new vehicle. Robert Scaringe: I think a really important point to make here is just the way the self-driving system is architected. So this is the platform that we launched actually on our Gen 2 R1 vehicles is designed around an end-to-end approach where we're building really what we call a large driving model, but think of it as a neural net or a foundation model for driving. And that model is being fed with all of our Gen 2 R1 vehicles and of course, our launch R2 vehicles and ultimately, as you said, R2 vehicles that include a LiDAR, but very different than previous architectures around self-driving where there were rules-based and more classically controlled. As you add more perception and as you add more compute, the capability of the model only grows. You don't lose the previous knowledge embedded in the model. And so I often sort of compare it to imagine if you learn to drive with that vision and then I hand into your pair of glasses. You wouldn't forget your knowledge as a driver, you just suddenly be able to see and perceive things that you may have missed previously so you become a better driver. And then imagine we could hand you a 10x multiplier to your compute capability effectively makes your brain 10x smarter. Again, you wouldn't forget what you knew before, but suddenly, you start to notice new patterns in more nuanced ways than you had in the past. And so that's very important to recognize is a very fundamental difference in how the model is built today and what we're creating versus the more AV 1.0 stack where they were, as I described, they're very rules-based and very classically controlled. And so because of that, the data accumulation that's happened already on R1 and that will continue with the growth in our car park with R2, all feeds into our overall LDM into this large driving model. And even as we think about introducing new sensors, things like our LiDAR, this is not as if it's first on the vehicle when it's delivered to customers. We have lots of prototypes today that are running with those. If you're in the Bay Area and happen to be anywhere around Palo Alto, you'll probably see lots of Rivians with a lot of additional sensors and that's part of a ground truth fleet that, again, is feeding into this large driving model to accelerate the speed at which that model is learning. Think of it as a brain, the speed at which we're teaching it to drive. And the work that will go into ultimately launching a customer-facing version of point-to-point, which today, I was -- as I said, I was in one of our cars driving around both point-to-point earlier this week, it's really exciting. But we want to have when it launches to customers had to be extremely robust. But all that work is accretive to what ultimately will be going into our Level 4 platform. Operator: Our next question is from Andrew Percoco from Morgan Stanley. Andrew Percoco: Maybe just to start on the commercial side of your business. It looks like Amazon made up almost 50% of your auto revenue in the quarter, so a little bit above historical run rates. Can you just maybe talk to what you're seeing with that relationship and maybe even outside of Amazon, the level of maybe interest you're seeing in the commercial product since you launched that extended range version of the commercial vehicle? Robert Scaringe: Yes. Our relationship with Amazon continues to be something that we're very proud of. We've spent a lot of time on this program from its initial kickoff quite some time ago in 2019 through its initial launch and now ramping, deploying. That's everything from not only building the vehicles, but on the Amazon side, getting their operations and the infrastructure ready to ingest a lot of EVs. And what we're now seeing is a reflection of all that work, all the cumulative work that's happened to date that's allowing the volumes for our van program within Amazon to grow, as you point out, pretty meaningfully. And we expect that increased demand for vans to continue. And that's super rewarding to see. It's fun to see all the vans on the road, but that's going to continue to ramp up with Amazon. Now in terms of other customers and other applications, of course, Amazon is by a significant degree, the largest operator. And so they're the ideal lead customer, if you will, but there are lots of other opportunities we've seen. But in the immediate term, our focus remains on Amazon and ramping to support them. Andrew Percoco: Okay. That makes sense. And then maybe just -- I just want to ask one more question on the DOE revised loan piece here. I understand the movement in Phase 1 and upsizing that. I'm curious why you might not want to use the DOE funding for the eventual Phase 2. Is this something initiated on your end? Or did maybe they approach you in terms of revising that? Just kind of curious the thought process around why not tap that low-cost funding for the eventual Phase 2 whenever that comes about. Claire McDonough: Thanks, Andrew. As I mentioned in my prepared remarks, we're really excited to partner with the Department of Energy on Rivian's $4.5 billion loan, which enables thousands of American jobs and helps us establish the U.S.'s strength in technology and manufacturing leadership. The DOE loan is uniquely a very cost-efficient form of capital as we spent a little bit of time walking through Rivian's broader road map. But specifically, the importance of this $4.5 billion is the funding of Rivian's scaling its operation up to 515,000 units of overall capacity and the opportunity with that installed capacity base to be free cash flow positive in the future. We'll continue to be opportunistic as it pertains to our capital road map beyond the components that I had outlined in the existing $13.6 billion of liquidity and total expected capital that we've outlined today. Operator: Our next question is from George Gianarikas from Canaccord. George Gianarikas: So I know it's early days, but I was wondering if you could please give us any color on R2 order trends and maybe some color on the conversion ratios relative to previous orders. Robert Scaringe: George, as you said, it is early days for deliveries, but the signals I'd be looking at are just the reception around the product and how -- whether it's expert journalists, automotive journalists or lifestyle journalists or customers that are getting to experience the vehicle, the overall excitement around what we've been able to put together in terms of content features, packaging, just the overall value proposition is really resonating. And I'm really pleased with having spent a very large amount of time in the car and it's my daily driver. I couldn't be more pleased with the result. The work that the teams did to make something that's truly remarkable. And we had a few journalists say this might be the best vehicle ever made. That's wonderful for the teams to hear, and it's really encouraging for us as we get ready to ramp the vehicle. George Gianarikas: And maybe just as a follow-up, I just wanted to confirm that the Gen 3 sensor suite was going to be available later this year on the R2? Robert Scaringe: That's correct. Yes. So the Gen 3 autonomy hardware suite, which is both our in-house RAP1 platform. And so this is our in-house inference platform, 800 tops per chip. We have 2 of those chips in the vehicle. So it's extremely powerful. It's a big increase, roughly a 4x increase relative to the NVIDIA-based platform. And then the inclusion of LiDAR, as was referenced before, along with some other enhancements across the rest of the perception stack. Operator: Our next question is from Mark Delaney from Goldman Sachs. Mark Delaney: Starting on Autonomy, I'm hoping you could provide more details on the monetization of Autonomy+ so far and any data points you can share on that? And what that might mean for growth in the Software and Services business more generally, including if you still think you can grow that segment revenue by about 60% this year? Robert Scaringe: We're encouraged by what we're seeing in the -- as you noted at the start of having paid Autonomy+, and it's exceeding our own models on this. So we're -- the take rate is higher than what we expected. And that bodes really well for us as we're going to be growing the feature set quite significantly over the course of this year. And the introduction of point-to-point, we think is a major value driver for customers. To be clear, this is -- as I said, you can put the address for the location you're going to into the car and the car will fully drive you there. And then following that, allowing you to go eyes off in highway conditions and ultimately everywhere, that means you get your time back. And so we're very bullish on the long-term trajectory to monetize our autonomy on the consumer side. And that's for both hands off, eyes on, hands off, eyes off and then ultimately, Level 4 for personal consumption, we see as a really key driver of value in the long term. Now in terms of what that does for our Software and Services growth, that is going to start to be something we'll see, but it's not something that we're going to be breaking out separately. Mark Delaney: And then my other question was on demand for the R1. I'm curious if Rivian has seen any improvement in order rates for R1 maybe in response to the recent increase in gasoline prices and what that might all mean for R1 volumes this year? I think the company had assumed R1 would decline. Is that still your expectation? Robert Scaringe: We're encouraged by the continued enthusiasm for R1. It continues to be one of the market share leaders in the premium category. And in a number of states, it's the best -- not just one of the best-selling premium electric cars, but one of the best-selling premium SUVs, electric or nonelectric. So that's true in a handful of states, we've talked about that in the past. I think it's hard to say ultimately what's going to happen around demand with the impact of gas prices going up. Of course, it's a consideration, and we do see that manifest in what people are trading in. We're seeing more trades of gasoline vehicles or vehicles are less efficient than what we're building. And so we do see that on the rise. But I think a lot of folks are wondering how long fuel prices are going to stay high like this. Operator: Our next question is from Andres Sheppard from Cantor Fitzgerald. Andres Sheppard-Slinger: Congratulations on the quarter and all the great progress. I think a lot of our questions have been asked. But RJ, I want to go back to a topic I know you're very passionate about, which is Autonomy. And so I guess with R2 beginning customer deliveries over the coming weeks and with the Autonomy+ now having started this month. Just curious on kind of your vision and how you are thinking about that Autonomy customer adoption? What type of Autonomy penetration rate do you expect for your customer-owned vehicles? Do you expect customers will prefer the monthly subscription or the onetime purchase? Just any color here on your overall vision and customer penetration adoption that you might be expecting? Robert Scaringe: Yes. Andres, we're extremely bullish on the importance of Autonomy for customers over the next, call it, 5 years, and the rate at which we see customers adopting and selecting Autonomy+. And then ultimately, as the feature set grows and the capability grows, that adoption rate growing with it. But I think that there's an even bigger question just from a society point of view, we've been on a journey of -- when we think about Autonomy where Level 2 is where your eyes are still on the road, but you're still responsible for driving the vehicle. That's like a small appetizer for what you can actually achieve when you get to higher levels of Autonomy where you can take your eyes off the road and truly get your time back and get your time back without the car, dinging you to say, hey, look back at the road or pay attention or put your hands on the wheel. And so as that starts to occur and as people start to experience what it's like to truly have your time back, so take a 40-minute commute and the idea of getting those 40 minutes back in both directions. We think it's going to be a very sticky experience. And it's going to be something that once you experience it, even if it's indirect, let's say, in a friend's car, it's going to become a very important purchase criteria. And the reason I call this out is we really believe over the next 5 years, the rate of progress of what we're going to achieve with Autonomy will look very, very different, and I'm talking here at an industry level versus what we've achieved over the last 5 years, means that the topology of customer expectations and therefore the way that the vehicle purchases are made and the criteria that are being used to make those vehicles is going to look very, very different in 2030, 2031 than it does today, where Autonomy will be a very critical criteria where customers are willing to pay for it because they want their time back. They want to not have to be paying attention. They want to be able to be on their phone, reading a book, taking a nap, truly getting time back while you're in the car. And so as a result, as you've heard a few times throughout this call, this is an enormous focus area for us as a business. We're very much deploying a lot of our R&D dollars towards this category, and we've made long-term investments in the hardware and the vehicles to support that. Andres Sheppard-Slinger: Got it. That's super helpful. I really appreciate all that color. Maybe just as a quick follow-up, one for Claire. So just regarding your delivery guidance for this year, which is unchanged. I know in the past you've given us some cadence for deliveries in Q2. I think you reaffirmed that on the call just now. Can you just remind us what kind of unit mix we should be expecting for the year across R2, R1 and EDVs? I think in the past, you might have mentioned R1 and EDV is relatively flat. So the delta should be the R2. But I guess for the R2, the $45,000 price range, right, that's on track for next year. Just curious if you can maybe remind us how we should think about unit mix for the rest of this year. Claire McDonough: Sure. As you reiterated, as you think about the composition of the 62,000 to 67,000 deliveries, we anticipate R1 combined with the commercial vans to be roughly flat relative to our 2025 delivery results and then the remainder being comprised of the introduction and ramp of R2, which as implied by the 9,000 to 11,000 of Q2 deliveries suggests more of a back half weighted ramp associated with R2, which is implied within our outlook and guidance. Operator: Our next question is from Edison Yu from Deutsche Bank. Xin Yu: I wanted to come back on robotaxi. Are there any sort of KPIs that you're sort of tracking or that you need to hit for some of the milestones with Uber? And I think in the past the industry has kind of turned to disengagements or miles between intervention. Any flavor on that would be great. Robert Scaringe: On the path to deploying in 2028, there are a number of milestones and some of those tied to the investment unlocks with Uber. The first of those is later this year we'll be deploying vehicles in both San Francisco and Miami with a safety driver. So the vehicles will be running, but with the benefit of a safety driver in the vehicle with them. And there's a handful of additional milestones ramping up to ultimately having the vehicles operate fully on their own as part of a service in 2028. But as we get closer and closer to that date, there will be -- there'll be lots of proof points, if you will, of the progress that's being made that will manifest on the road. You'll actually see them not only being tested, but you'll see them as part of some of these deployed fleets. Xin Yu: Understood. And just a kind of a separate question on more Autonomy more broadly. I think there were some reports that you guys were looking to potentially license some tech to other OEMs. Just wondering anything you can say about that? Is that something that we could potentially expect this year? Anything that would be great. Robert Scaringe: I think there's 2 broad categories of technology we think that as I referenced earlier that will be very, very important for growing or maintaining market share in the next several years. And so the first of those is shifting away from a domain-based network architecture where you have a very large number of supplier sourced ECUs that are -- think of them as little islands of code on little small computers where you might have, depending on the car anywhere from 50 to 150 of those little ECUs, those little computers that are in aggregate, providing the software for the vehicle. But that architecture is incredibly hard to do updates on. It's very, very difficult to do cross-platform or cross-domain integrations. It makes the idea of integrating in a deep way AI into the vehicle and the vehicle experience very difficult borderline impossible to do it well. And so our view is every vehicle on the road will need to shift to a much more centralized compute where you have more of a zonal architecture. So essentially, think of it as a large consolidation of all those little computers into a single or a very small number of large computers that runs a common operating system and for which the code base that's running on the vehicle can be very easily updated without coordinating among, let's say, 50 to 150 suppliers. And so that architecture I just described is, of course, what's in the Rivian vehicle today. It's also the basis of our relationship that we've forged with Volkswagen Group to deploy that technology. And the first application of that technology being deployed outside of Rivian as part of our partnership with Volkswagen Group is going to be in the ID1, which is -- it's an EV that will be launched in Europe with a price point of just over $20,000. And I can't wait for people to buy this car. I'm sure lots of people to buy it and take it apart and tear it down. And I'm certain they'll be blown away with the elegance of how we've executed the ECU -- or I should say, the network architecture and the compute stack topology. And so that's one technology category or one area that we think has a lot of opportunity to be deployed in other manufacturers. And of course, the proof point that we're successfully deploying this into a very large established manufacturer within Volkswagen Group across multiple brands, across multiple price points, different form factors, different geographies is the proof point or the existence proof that the technology is scalable and that we're capable of supporting these types of complex deployments. With that said, the other large category of technology that we see opportunities to have licensing deals is in the autonomy realm. And here, it's in a similar way, it's not just hardware and it's not just software, it's the 2 of them together. So it's the combination of our compute platform that we've developed, the RAP1 in-house inference platform I talked about and the associated computing platform we've designed around that, along with our perception platforms of the cameras, radar, LiDAR that exists. And then very importantly, the large driving model, this foundation model, this neural map that we've created that defines what driving or how to drive a vehicle. And that's -- as hopefully, I made it clear before, is a much more flexible architecture to deploy into different vehicle embodiments. And so we're doing that already within Rivian. We'll be deploying that across R1T, R1S, R2, ultimately our commercial vans, robotaxi applications, but we do see this as a very scalable technology that can be deployed in many ways. Operator: Our next question comes from Alex Perry from Bank of America. Alexander Perry: Just one, I guess, a little bit further on the robotaxi strategy. So you have the Uber deal announcement. I guess is the plan to pursue a partnership model for now? Does the deal with Uber have sort of any exclusivity? And how else will you sort of look to tap into this important market? Robert Scaringe: When you think about the robotaxi space as a business, and so putting aside the technology for a moment, and I should say, and putting aside and recognizing that the technology for Level 4 in a robotaxi or in a personally owned vehicle is the same, meaning a personally owned Level 4 vehicle can't drive -- or should not drive worse than a robotaxi Level 4 vehicle. They're both very capable of managing the same levels of complexity and the same types of driving situations. So it's the same tech stack. But when you think of it through the lens of a business model, the benefit of working to deploy this first with Uber is you have very large density of choice. And so if you're deploying entirely on your own, you have to build enough vehicles to have in the fleet or in the car park such that if you're a user, when you say I want to have a vehicle available, it's immediately available or it's available in a matter of minutes. And so the scale of Uber's platform and the success they've had in creating a really healthy marketplace really makes them an ideal partner for us as we think about launching this technology in an R2 to deploy into providing robotaxi services. And as you've heard me say a couple of times, and we've talked about this in the past, that technology is going to also underpin a consumer personally owned variant as well. And I think we have to recognize that there's going to be lots of innovation around business model that start to emerge as we have Level 4. And so if you think of it in a very simple sense, the 2 bookends in terms of business model are pure ownership or the vehicles dedicated entirely to your household. And the other end of the spectrum is purely mobility as a service, where you don't own the vehicle, you're not using the same vehicle every time, but you ask for a vehicle on a purely variable basis and it shows up. There will be things that emerge in the middle and not to be exhaustive here in the types of things, but you can imagine different forms of sharing vehicles amongst families or within neighborhoods or within apartment buildings. But there's going to be a very exciting time of innovation in terms of how we think about consuming mobility or consuming transportation. And with all that said, just recognizing the trillions of miles that are driven today, the vast majority of those are driven in personally owned vehicles. And so robotaxi represents a portion of those, but we think there will be lots of new models that start to make up the topology of those trillions of miles that are driven. Operator: Our final question comes from James Picariello from BNP Paribas. James Picariello: So I want to ask about the Uber partnership. Can you share any color on the milestones that are associated with the 4 tranches of funding, right, regarding the $950 million in additional additive liquidity. And it does appear right that one of the tranches is already expected to hit this year, $250 million? Claire McDonough: Yes. As RJ had just mentioned, there are a handful of milestones and the milestone that we more specifically expect to be in position to unlock the initial $250 million this year will be the operation of some Rivian vehicles in San Francisco and Miami with safety drivers later this year. And then as you think about the subsequent years, you can think about the ongoing trajectory towards full deployment in a couple of cities in 2028 and then 25 cities by 2031, that would fully unlock the remaining $700 million of capital from Uber. James Picariello: Excellent. That's great color. And then just to maybe level-set expectations on automotive gross margins for the second and third quarters. I mean, this quarter was yet again another strong showcasing of the company's momentum toward positive auto gross profit, right? And this is the last quarter before the R2. Like is there anything you could share for these next 2 quarters regarding the temporary order-of-magnitude impact we can expect to auto profitability? Claire McDonough: Sure. As we think about the subsequent quarters of Q2 and Q3, we'll see the introduction and turn on of both, all of the depreciation expense, the new manufacturing team that is established that will be producing the vehicles. But as they're in the process of ramping up the first shift of operation, we'll see some of the complexity associated with lower volumes on the new R2 line. And so as a result of those attributes, we do anticipate seeing an impact to our automotive gross profit over Q2 and Q3 before we start to see the overall benefits of the ramp, not just on the R2's unit economic profile, but also importantly, the fixed cost leverage that we'll see across the R1 program and EDV program overall. So in total, we still anticipate that we'll exit 2026 with a trajectory of positive automotive gross profit with that being both R2 as well as total Rivian Automotive gross profit being positive, which is important for us as we go into '27 and really fully ramp up the R2 capacity in Normal. Operator: This concludes the Q&A section of the call. I would now like to turn the call back to RJ Scaringe for closing remarks. Robert Scaringe: Thanks, everybody, for joining us today. Hopefully, you can tell we're really looking forward to getting R2s into customer hands. We're very pleased and excited with the product that we've developed and proud of the team for all the great work that went into creating such a special vehicle. Along with that, we are very much focused on the development of our Autonomy platform. And with that, we'll be starting to see some of the fruit of that significant effort, as I said, first, with our point-to-point capabilities later this year and then adding more functionality, more capabilities over the course of 2027 and '28. And again, thank you everybody for joining this call. We're excited for all of you to hopefully experience an R2 and see them on the roads here very soon. Operator: This concludes today's call. Thank you for joining us.
Operator: Greetings, and welcome to the Ingram Micro First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Willa McManmon, Vice President of Investor Relations, for opening remarks. Please go ahead. Willa Mcmanmon: Good afternoon. Before we begin, I would like to remind you that today's presentation may include forward-looking statements within the meaning of applicable securities laws. These statements reflect our current views and expectations regarding future events, including, but not limited to, financial performance, strategic initiatives, market conditions and regulatory developments. Forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Actual results may differ materially from those expressed or implied in these statements due to a variety of factors, including changes in economic conditions, interest rates, competitive pressures and other risks detailed in our most recent filings and public disclosures. We undertake no obligation to update or revise any forward-looking statements to reflect new information or future events, except as required by law. In addition, today's discussion may include certain non-GAAP financial measures, reconciliations to the most directly comparable GAAP measures can be found in our earnings materials, which are available on our Investor Relations website. With that, I will now turn the call over to Paul Bay, our CEO. Paul Bay: Thank you, Willa, and everyone who joined today's call. We delivered another strong first quarter in which we grew net revenue nearly 14% on top of a strong prior year comparable and delivered non-GAAP earnings per share of $0.75. Gross profit rose by nearly 12% from last year, and operating leverage remained strong, resulting in over 20% growth in non-GAAP net income. All of these results were at or above the high end of our guidance. Advanced Solutions and Cloud led to growth, driven in part by large GPU and AI infrastructure deals we captured in North America and Asia Pacific in the back half of the quarter. We also had another quarter of strong growth in networking and servers. Cloud again grew double digits with particular strength in Infrastructure as a Service and client and endpoint solutions also grew with continued strong sales of PCs. Regionally, Asia Pacific grew at double digits and was our second largest region by net revenue. As I mentioned in prior quarters, India continues to make progress and performed to plan in the first quarter, including healthy top line and margin growth, while Latin America continued to deliver outside margins, both powered by our Xvantage platform. North America's double-digit growth was driven by Cloud and Advanced solutions, which included a large GPU and AI infrastructure sales. The growth across all 4 of our regions underscores our unique global reach where we out the ability to serve more than 90% of the world's population, underpinned by a unified platform strategy at global scale. I am encouraged by our performance this quarter and the momentum we see ahead. Our investment in our Xvantage digital B2B platform has increasingly become a competitive moat. We made this investment ahead of the curve because we anticipated the shift now taking place across the market, where B2B customers increasingly expect the same speed, simplicity and personalization they experience in B2C environment. We began the Xvantage journey by bringing together talent from some of the world's largest leading platform companies and combining that expertise with our deep industry knowledge. We then built a real-time data mesh and deployed more than 400 AI and machine learning models designed across the end-to-end customer journey. We have progressed from building the foundation to automating workflows and reducing friction to now scaling intelligence through capabilities like Intelligent Digital Assistant or IDA to improve conversion, optimize pricing and enable more proactive selling. Over time, we see further opportunity for AI to enhance margin quality, life cycle monetization and operating leverage. Xvantage is not a tool or a marketplace. It is the operating system for B2B. It's a global real-time intelligence layer, powering end-to-end B2B execution as we transform from a traditional IT distributor into a platform company. Xvantage's differentiation begins with this architecture and the proprietary technology underneath it. We are pleased that 4 of our 35-plus patent-pending applications have been granted, recognizing and protecting the innovation already delivering value across our platform today. Our IP strategy is centered on solving the fragmented sales and fulfillment processes that define B2B commerce. Let me recap what these granted patents encompass. First, our vendor-agnostic framework uses our AI-driven architecture to integrate with vendors at scale, regardless of the format or underlying systems. This helps solve one of the most persistent challenges in B2B commerce by enabling real-time integration around inventory, pricing and product data across a highly fragmented ecosystem. Second, our dynamic SKU generation capability simplifies historically complex solution configuration, pricing and transaction workflows. What once took days or weeks can now be completed in minutes or even seconds, improving the speed, accuracy, scalability and customer responsiveness. Third, we were granted a patent for our configured and quote-to-order. Configure to order expands funnel creation through automation of complex configurable solutions that were once manual, generating high quote volume, allowing us to touchlessly convert orders through our automated quote-to-order capabilities. This powerful integration of AI throughout the sales life cycle is helping drive materially stronger quote-to-conversion performance. Last, our e-mail to order patent uses generative AI to convert unstructured customer e-mails and attachments into structured transactions. In the first quarter alone, it processed approximately 230,000 e-mails into orders, up 78% year-over-year, enabling more than $1 billion in sales with significantly lower manual touch. We are now leveraging this patent IP to enable other functionality for automating end-to-end workflow, like e-mail to quote, further improving speed, responsiveness and overall customer experience. Taken together, the technology behind these patents is helping improve customer experience while lowering processing costs and increasing operating leverage across the channel. These innovations extend beyond individual capabilities and reflect how we are digitizing the whole transaction life cycle, from automating vendor catalog injection, configuration and pricing to quoting and order execution through a unified AI-driven platform. With the rapid evolution of the AI market, we believe these investments position us well to navigate change and respond more quickly to capitalize on market dynamics. We are increasingly applying intelligence across core business processes as our AI models continue to learn, improve and scale. As an example, IDA and other AI capabilities delivered more than 153,000 proactive engagements in the quarter, helping customers convert more than $800 million in AI-led net sales during the quarter. Importantly, quote-to-conversion performance continues to accelerate with IDA-driven opportunities, converting at nearly 4x our standard baseline. Xvantage is driving stronger engagement, improving the customer and associate experience and supporting better financial outcomes. And we are already seeing that translate into measurable results. We continue to see strong adoption of our self-service capabilities with more than 2 million self-service orders in the quarter, contributing to over 20% growth in average revenue per customer versus the prior year. We are also realizing meaningful productivity gains with both revenue and margin for go-to-market resource increasing as automation enables associates to redirect time for higher-value activities. We believe this is a strong indicator that the digital adoption, automation and AI-enabled selling are driving greater efficiency and increasing operating leverage across the platform. Geographically, we continue to see proof points across markets. These examples reinforce that Xvantage is not limited to 1 region. It is a global operating model. We have moved from proving the model to scaling the model with further future expansion opportunities. In the first quarter, India and Latin America provided clear evidence that we are moving from adoption to performance. Through Xvantage-enabled capabilities, LATAM delivered the highest gross margin across our regions, up 69 basis points year-over-year. By shifting high-velocity SMB demand to self-service and automated quoting and embedding intelligence, our business in the region is scaling efficiently with improved outcomes. In India, Xvantage is providing more pipeline, increased proactive customer engagement, stronger revenue generation, higher quote-to-order conversion and more predictable performance, utilizing the platform. In India, IDA revenue grew more than 200% quarter-over-quarter. We are innovating across the company in other ways as we invest in our partners and build advanced AI competencies. On the vendor side, I am proud to say that we just achieved a specialization for AI apps with Microsoft. Using Azure AI services, we built AI-powered capabilities that help partners close customer yield through increased automation, including streamlining the statement of work generation and accelerating sales productivity. The specialization recognizes our professional services expertise and designing and developing AI solutions using Microsoft AI app and data platforms, which we can leverage on behalf of our partners to deliver more AI projects at scale. One of our key partners, Hans Mize, President of Data41, said about the designation and I quote, "Ingram Micro feels like an extension of our AI practice. Their specialized and validated expertise helps us guide our customers through the full journey from initial assessment to working proof of value and production deployment." This specialization speaks strongly to how we are extending our advanced services capabilities, including our ability to leverage AI with our partners to deliver technology outcomes to the millions of end businesses they serve each and every day. With this quarter's results and the continued momentum I just spoke about, as I look at the remainder of the year, I am confident that Ingram Micro will continue executing both our short- and long-term strategy by further differentiating as a platform company, regardless of the uncertainties. Our customers are at the center of everything we do, and we are grateful for them. And as always, I'm impressed by the talent and drive of our team who continue to deliver. With Xvantage enabling faster innovation, our path to securing our technology edge and AI delivering measurable outcomes, we are moving from proving the platform model to scaling it. It's an exciting time for technology and Ingram Micro's role in the ecosystem continues to expand as we embrace the opportunities ahead in this unprecedented era. And with that, I'll turn the call over to Mike. Mike? Michael Zilis: Thank you, Paul, and good afternoon, everyone. I want to start by reiterating how pleased we are with our first quarter results, which met or beat the top end of each of our guidance ranges. The strong performance was widespread geographically with each of our core regions seeing double-digit year-over-year top line growth in U.S. dollars, but also with solid global growth in our 3 primary lines of business. Looking at the quarter in more detail. Net sales of $13.96 billion were up 13.7% year-over-year in U.S. dollars and up 10% on an FX-neutral basis. We saw strong double-digit growth in both Cloud and Advanced Solutions. Cloud grew 25% year-over-year on an FX-neutral basis and that growth was actually 34% adjusting for the CloudBlue divestiture that closed in Q3 of last year. Advanced Solutions grew 14% year-over-year on an FX-neutral basis, driven by strength in server and networking. This also included continued large-scale enterprise deals in GPU and AI infrastructure product sets, some of which came in late in the quarter. As we discussed in past quarters, these deals come at a low margin, but are low cost to serve. We don't typically stock for these deals, which provides for a strong return on working capital. Turning to Client and Endpoint Solutions or CES. We saw nearly 8% growth on an FX-neutral basis, with strong demand for notebooks and desktops as the refresh cycle continues and AI PC penetration grows. As a note, this 8% growth is on top of what has been solid double-digit growth for CES in Q1 and all other quarters last year. Geographically, we had FX-neutral growth across all 4 of our regions led by just over 12% growth in both APAC and North America. North America net sales came in at $5.0 billion and APAC was our second largest region with net sales of $4.1 billion for the quarter. Both North America and APAC sales were driven by strength in Cloud, and both regions also benefited from large enterprise GPU and AI infrastructure projects I just mentioned. EMEA net sales of $3.9 billion were up 3.8% on an FX-neutral basis with growth across both Client and Endpoint Solutions and Advanced Solutions. But EMEA generated its strongest growth in cloud-based solutions. And this was achieved while navigating around the challenges of the Middle Eastern conflict that started in the final month of the quarter. Finally, net sales in Latin America were up 10.1% on an FX-neutral basis, driven by growth in Client and Endpoint Solutions, notably notebooks and desktops as well as strength in Advanced Solutions and cloud-based solutions. Before I get into more details on our results, I'd like to touch on memory supply constraints and their impact, which is a key ongoing factor in the IT industry. We are seeing increases in average selling prices or ASPs on certain products ranging from single-digit percentage points, well into double-digit percentage points. Also, while it is understandably more difficult for us to quantify with precision, we see some instances of pull forward of demand to get ahead of pricing. But there are other factors to consider as well. First, supply constraints are creating more extended lead times and backlog in said products. While more limited in frequency, we saw a few instances where projects are being indefinitely deferred simply because the product is not available. Second, in some limited cases for end users that have greater price sensitivity, decisions are being made to alter project scope or delay spending. Combined, we estimate the net positive impact of all of these factors on our year-over-year net sales comparison for Q1 to be approximately 2% to 3%. Back to my earlier point regarding pull forward of demand. We have ongoing discussions with many of our vendors affected by supply constraints about potentially using our balance sheet for opportunistic inventory buy-in deals. While we have done some such deals, and we'll continue to evaluate such opportunities going forward, the impact of volumes in our first quarter results have not been material. Now getting into some further specifics on our first quarter results. Gross profit came in at $926 million, up 12% year-over-year, and gross margin came at 6.63% of net sales, down 12 basis points year-over-year. The mix shift towards lower-margin GPU and AI infrastructure projects drove an impact on margins of roughly 35 basis points compared to only about 5 basis points in the first quarter of 2025. Thus, excluding these deals, our Q1 2026 gross margins would have been roughly 7%. This margin performance was a function of growth in our higher-margin Cloud and Advanced Solutions offerings, which surpassed the growth of Client and Endpoint Solutions in this comparison. Q1 operating expenses were $703 million or 5.04% of net sales compared to 5.11% in the same period last year. Looking more specifically at our ongoing selling, general and administrative or SG&A expenses. Our leverage improved year-over-year by 12 basis points. This year-over-year improvement in SG&A leverage was driven by operating efficiencies from cost reductions over the past year, the continued impact of Xvantage in driving leverage and productivity gains, as well as mix factors associated with lower cost to serve categories. And while we continue to invest in Xvantage and in the business, particularly in areas like Cloud and Advanced Solutions, we expect our continued optimization efforts will allow us to keep our SG&A expenses less than 5% of net sales for fiscal 2026. Adjusted income from operations was $262 million, up 14% year-over-year, driven by our strong top line performance and continued operating leverage discipline. Adjusted income from operations margin was 1.88% compared to 1.87% in the first quarter of 2025 as the lower gross margin from mix of sales was offset by the OpEx leverage improvements I just discussed. Non-GAAP net income in the quarter was $175.5 million compared to $144.2 million in Q1 of 2025, an increase of 22%, reflective of not only the strong growth I just noted in adjusted income from operations, but also reflective of reduced interest expense from our paydown of debt and more favorable foreign exchange impacts. First quarter non-GAAP diluted EPS came in at the high end of our guidance range at $0.75, an increase of 23% from our prior year quarter. Moving on to our balance sheet. We ended the first quarter with net working capital of $4.4 billion compared to $4.3 billion to close the same period last year. This increase of only a bit over 2% is far less than the 13.7% increase in net sales year-over-year as our Q1 net working capital days came in at 23 compared to 29 days in the same period in 2025. This improvement in cash cycle reflects disciplined management of our terms with and payments to vendors, our efforts to optimize inventory levels and leveraging the capabilities of the Xvantage platform, which together more than offset a slight increase in collection days. As we mentioned in our earnings call in early March, we finished year-end 2025 with an extraordinarily low level of net working capital and therefore, expected a higher-than-normal seasonal outflow of cash in Q1 of this year. So adjusted free cash flow was an outflow of $962 million, which reflects the factors I just noted, including the natural investment in working capital to fund double-digit net sales growth. While we don't formally guide on free cash flow, we expect free cash flow trends over the next 1 to 2 quarters to be more in line with seasonal norms. I'm also very pleased to note that in early March, we successfully completed a secondary offering of our stock, which further moved the ownership stake of our majority owner into public flow and included us repurchasing $75 million of stock directly from our majority owner. And today, we announced we are further expanding the repurchase program for future use. We also returned $19 million to stockholders through dividends paid during the quarter and today announced an increase in the next quarterly dividend of 2.4% sequentially and 10.5% over the prior year. We ended the quarter with $916 million in cash and cash equivalents and debt of $3.3 billion, bringing our net debt to adjusted EBITDA ratio to 1.7x to close the quarter, which has improved notably from 2.0x in the first quarter of last year and reflective of our continued reduction of debt, including the $200 million of term loan we repaid during Q1. Going forward, we will continue to balance our overall capital allocation to ensure we are making necessary investments in the business and providing return to our stockholders. And to the extent we see opportunities to also continue improving our debt leverage, we will evaluate accordingly. Now shifting to our guidance for Q2 2026. We are guiding net sales of $13.6 billion to $14.0 billion, which represents year-over-year growth of 8% at the midpoint and is notable given the strong Q2 we had last year, in which we saw more than 10% year-over-year growth. From a category perspective, we expect Cloud to continue to lead the way with healthy double-digit year-over-year growth with particular strength in Infrastructure as a Service offerings while we expect Advanced Solutions to also grow higher single digits with ongoing strength in servers, storage and cybersecurity. While we are not necessarily projecting outsized GPU and AI infrastructure projects in our guide, we will continue to participate in these projects. Client and Endpoint Solutions is also still in growth mode with notebook desktop refresh continuing. But overall, we see year-over-year growth for CES at a more moderate lower single-digit pace. Finally, we have assumed the impact of broader memory supply constraints to have a similar impact in Q2 to what I noted earlier for Q1. We expect these growth trends to yield second quarter gross profit of $905 million to $950 million, which represents year-over-year growth in gross profit dollars of 8% to 13% and also represents gross margin growth, both sequentially and year-over-year. We expect non-GAAP diluted EPS to be in the range of $0.68 to $0.78 per diluted share. Included in this guide is a potential negative impact of $0.01 to $0.03 per diluted share on our overall results from the volatile situation in the Middle East, where we have a relatively small but nicely profitable business. Even with this impact incorporated, our guidance calls for growth in non-GAAP diluted EPS between 11% to 28%, reflecting solid profit leverage and a continuing growth environment. Our EPS guidance assumes 232.7 million weighted average shares outstanding and a non-GAAP tax rate of 27% for the quarter. In closing, I'm very pleased with our execution in Q1, and we expect to continue our trend of strong year-over-year net sales growth in Q2. While memory shortages, rising ASPs, the supply-demand dynamics and the geopolitical environment are all fluid, we have a track record of navigating through uncertainty. Our broad geographic reach and breadth and scale of offerings, combined with our long-term partner relationships uniquely position us to perform during such times. We've proven this in the past, and we are even better positioned today with real-time insights and capabilities provided by our Xvantage platform. With that, operator, we can now open up the call to take questions. Operator: [Operator Instructions] Our first question is from Katherine Murphy with Goldman Sachs. Katherine Murphy: You highlighted some headwinds related to projects either being deferred or some more price-sensitive customers altering the scope as it relates to the current cost environment. I was wondering if you could provide some more color on either the types of products or the types of projects that are being most impacted here? And then I have a quick follow-up. Michael Zilis: Yes. Katherine, this is Mike. I can start and Paul will add. I think if we're seeing this probably across a mix of products, but it tends to be more project-based, a little bit more on the Advanced Solutions area, where there's and probably a little bit more geared towards smaller customers where there is a little bit more of that price sensitivity, large enterprise continues to do generally continues to invest. So it's across a spread of different projects. And it's -- and I think as we talked about where we're seeing ranges of price increases, probably the price increases from an ASP perspective has certainly been elevated on the PC space, but we also see that happening across server and storage and some of the components that you use themselves to a lesser degree, when you get into networking and some other categories. So that also gives you a little bit of a flavor where there would be more of that sensitivity. Paul Bay: Yes. Katherine, this is Paul. I'd say we've seen it in pockets. There was one instance in a smaller country in Europe where they needed a specific configuration around PCs and the supply is not there for that specific rollout, it will eventually come. The question is when is it going to come? We thought it was going to happen in Q1, it looks like it may be a quarter or two out. Katherine Murphy: That's very helpful. And knowing that you only guide 1 quarter out, is there anything you can share based on these customer conversations given the demand backdrop about what the back half of the year may look like from a overall enterprise IT demand environment? Paul Bay: Yes. So this is Paul. So again, as you know, we only guide 1 quarter at a time. We're optimistic where we sit today and based off of our guidance that we've given for Q2 to reiterate we -- our expectations are our Client and Endpoint Solutions business will grow at market, Advanced Solutions and Cloud above market and we saw that in Q1. We built that into our guide in Q2. Some of the potential, I would say, tailwinds or opportunities with the AI use cases, and I called out one of those in my prepared remarks, is driving growth and some of the benefits we're getting. If you look at from a customer perspective, we did see some pull forward as Mike had mentioned. It's more about enterprise and mid-market companies. SMB is still responding to the more near term. But what I would say is we haven't seen a significant amount of pull forwards at SMB specifically too, and we're still seeing resiliency in the business as we sit here today. So the back half of the year, we did see, again, continued growth and refresh around PCs and AI PCs. So we feel pretty good about where we are and hope that, that continues to the back half of the year. Operator: Our next question is from Maggie Nolan with William Blair. Matt Dezort: This is Matt on for Maggie at William Blair. I guess given the current environment, I'm wondering if you can provide some more color on what you're seeing change in terms of lead times and order dynamics that you alluded to with clients. And how they're evolving budgets, if at all, are shifting midyear, given the rise in memory prices and inflation? Michael Zilis: I could start on that. I think it's -- this is Mike. So I think the -- I think we sort of answered that a little bit in the last question. I think there's -- if you have a budget going into the year, there's going to be a certain amount of spend. And so as prices go up, we're seeing some reallocation where perhaps it's just a shift in scope to something a little bit less balance shift into maybe a lesser product category and so forth. So that's sort of a demand dynamic. But some of that is also dependent on just how long it takes to get there. Certainly, the situation in the Middle East is exacerbating this with shipping delays, anywhere impacted by that part of the world and branching out. And then on top of that, the allocation of product sets by the OEMs into the higher potential products that are serving the AI demand and some of the things that are driving the constraints in the first place. But -- so it is definitely very dynamic, depending on the category of product, the category of customer, and that gives you maybe a little bit more flavor of what we're seeing. Matt Dezort: Got it. And as a follow-up, in terms of Xvantage, congrats on all the progress there. I know you've alluded to the 3 phases, the OpEx, demand gen, and then we're starting to get into a profitable organic growth. But can you update us on progress in Phase 3 and how that's progressing so far in 2026? And what maybe -- what's the true margin delta for a deal that is sourced and completed in Xvantage versus one of your traditional deals? Paul Bay: Yes. Thanks, Matt, for the question. This is Paul. So as we called out, we continue to talk about you're right, 3 phases and really now it's about applying the intelligence across the business, and I called out a couple of points where we saw significant growth where we're using our intelligence. And have been training our 400-plus models for over a year now. So they're getting better, and they're improving every single day, they continue to learn. And so we point back to IDA, our intelligent digital assistant and the active engagements we had, that was up 50% year-over-year, and what we did, and we talked about it in the prior quarter earnings call. What we're doing is we're fine-tuning those opportunities to be more driven around margin. So when you look at some of the growth we see coming out of cloud and we had a very good cloud quarter. If you look at what we're doing around Advanced Solutions, a lot of that is being fed through the IDA, getting into that third phase of what we're able to offer. And one of the questions we get is how much revenue is going through IDA and I talked about it in our prior quarter, which is mid-single digits for those that are on Xvantage of the countries, the 21 countries that are on Xvantage are going through IDA. We have a lot of headroom to be able to roll out more IDA and our expectations and our commitment, and we're well on our way, is to have that be double digits by the end of the year of the revenue for those Xvantage countries being able to deliver through IDA. So we feel very comfortable where we're at today and the investments that we made and the proof points that we're seeing coming out of the quarter and as we sit here in the current quarter. Operator: Our next question is Erik Woodring with Morgan Stanley. Maya Neuman: This is Maya on for Erik today. I have 2 questions. Maybe just to start, given the degree of pricing increases we're seeing in the market today, is there any risk to your kind of historical cost-plus pricing model? And could we see any like-for-like margin compression just given the degree of inflation throughout the overall device ecosystem, especially on the compute side. And I have a follow-up. Michael Zilis: Yes. I mean just -- this is Mike. I think just as a general dynamic price increases, just like what we've talked about in the past with tariffs and other factors, that's a pass-through for us. So -- but if I get your question, and I think there is certainly a rapid elasticity of demand that exists. But from our perspective, as we continue to distribute the products and the services that we do, we're going to be pricing accordingly off of the prices in the market. So it's really more a question of where does the demand reside, but we're not necessarily going to be conceding margin to try and capture sales. It's about an ROWC equation for us and driving the right returns and profit metrics whenever we do any sale, honestly. Paul Bay: Maya, this is Paul. So let me just add a little color to that. I mean, we've been through these cycles before. We've been through shortages. We've been through macroeconomic headwinds. Based on our -- a couple of thoughts here. Based on our broad vendor and product portfolio, we're able to offer alternatives. So we're helping mitigate price increases that may be constrained. We're working with our vendors to provide bundling solutions, and we're doing that from an automated way, being able to look at. I understand if you have multiple products, maybe you have a PC, if you're buying a microphone, a camera, a display, a headset along with that PC, vendors are willing to provide maybe a better margin profile to bundle together. So we're putting some programs around that also. And with the Xvantage intelligence, as I talk about the model, we can better recommend the substitute configuration, bundled product solutions, alternative vendor suppliers. And then the last thing, I think, which is important also is that we are starting to see some movement to from on-prem solutions to actually cloud. And we're starting to see that, and we expect that to happen going into Q2 too. And so what I'd say is our goal is to help customers solve the business needs regardless of the product availability, and that's what's great about Ingram Micro and our business model. It's global, it's resilient and we can participate in whichever direction the market goes. We're trying to provide tools and resources and alternatives based off of our business, so our solution providers, customers can go out and deliver the expectations and outcomes to their end businesses they serve every day. Maya Neuman: Great. And that partially answers my second question, just on kind of given the persistence of pricing inflation and the strength in Agentic AI. How do you think about that shift from on-prem to the cloud in terms of, like, a long-term risk to Ingram's kind of business model? Paul Bay: I actually think it's a benefit to Ingram's business model. If you look at the investments we've made, actually, our Xvantage platform is built off of the $600-plus million that we built. We are investing ahead of the curve in the early days of the cloud a dozen years ago. And so we really built a platform where you can buy hardware, software and cloud and services all in 1 transaction. So as we see that and you notice by our performance, as Mike called out, minus the CloudBlue divestiture, we're up 34%, and we're guiding towards very strong cloud business in Q2 also. So that solution, which may originally get scoped on-prem, now they're getting predictability, they're getting space, they're able to move that. And I'd also say that our deployments still make up 6 different products and services. So it's not just about 1 solution that you're delivering. It's about bundling and bringing that whole solution together for that business outcome. I actually think it's an opportunity because it's an area that we continue to invest in and we have very strong partnerships with each of the hyperscalers where we can provide that service, whichever direction our customers, and ultimately, those end businesses want to go. Operator: Our next question is from David Paige with RBC Capital. David Paige Papadogonas: I wanted to double-click on the 2Q net sales guide. Maybe if you could just parse out what you're expecting by region. So it looks like there's been momentum sequentially across every region. So I just wanted to think -- how should we think about growth within regions. Michael Zilis: Yes, David, this is Mike. So I think yes, we're pretty happy with the fact that on a U.S. dollar basis, all 4 of our regions grew double digits in Q1. So we said you're right, we did see it fairly widespread. As we look to Q2, I think we would see a little bit of the same sort of trends. I think we're seeing strength just really continue in Asia Pacific for quite some time now and that's coupled with our India business really returning to stability and growth in a more normal way, which is good to see now for a couple of quarters running. So impact probably does stand the chance to lead the way. And we still see a little bit more to the extent we do have any of the GPU or AI infrastructure deals. Those are still tending to be either in the North America or APAC region. So if we do see something more than our guide there, that might create some outsized growth in those markets. And then the only other thing I would say, and we called this out at the tail end of my guidance remarks, our EPS assumption is assuming potentially a little bit of negative impact in the Middle East part of the world. And therefore, that does create a little bit of overhang just more generally on the EMEA region, but we still see growth there as well. David Paige Papadogonas: That's very helpful. And then just 1 other thing. I think you've mentioned for CES low single-digit growth for 2Q. I was wondering if you could parse out network, notebooks and mobile or smartphone. Michael Zilis: Yes. So networks and networking, for instance, would be an Advanced Solutions. So within CES, that low single-digit growth to 2 -- we don't break out the subcomponents, but the 2 biggest sub-pieces of it, just more qualitatively, are PC and desktops and then mobility devices. So we're still seeing runway as Paul said and answered to an earlier question, and it was baked a little bit into our prepared remarks as well on the PC refresh. And AI PCs are growing, but there's still roughly 1/4 of our overall PC base. So we're still seeing growth there in some runway. We see probably a little bit harder compare, which we alluded to even in our guide on the mobility side because we saw quite a bit of mobility sales in the first half actually of last year, but certainly in Q2 of last year. So that compare comes a little bit harder. That would center a little bit more in the Asia Pac region to be clear last year. But that would probably read a little bit of that headwind that normalizes to that lower single-digit kind of growth rate. David Paige Papadogonas: Congrats on the great results. Michael Zilis: Thank you. Operator: Our next question comes from Adam Tindle with Raymond James. Adam Tindle: I wanted to double-click in the Americas region. You've mentioned the AI infrastructure projects that are driving growth. This is obviously a business that has gotten a lot of attention from your primary competitor and investors are particularly interested in this. Maybe a good forum to take a step back and talk about your capabilities around AI infrastructure, Remind us of this business to the extent that you could provide any size on it would be helpful. And any aspiration over time to be more ODM-like, Hyve-like business, or does it make more sense to kind of stay in the supply chain lane? Paul Bay: Yes, I'll start off. Thanks, Adam. This is Paul. So to start off your last point of your question to be ODM-like that is not in our plans today. What we're doing is looking at our partners and where the technology opportunities are. So a lot of it, if you look out from an AI infrastructure standpoint, and GPU chips. So it's GPUs, it's AI infrastructure product which touch server, networking, storage product sets. And many of these large ones are going for proof of concept and/or our specific build for very, very large enterprises. So we're able to help facilitate that. I think over time, I hope that this builds into -- we're just talking about categories and product sets because everything is going to be AI-enabled, but we know it's important on this journey to show how we're participating. So -- and again, to Mike's kind of point that he said before, which is this is a very low cost to serve business and a very good ROWC business for us. And so we're fulfilling a lot of that product today. With that said, we really have a focus around how do we help our general 165,000 solution providers, partners on a global basis. And that's through our Enable AI program. So I talked about it. We have 3 growth tracks around that. How do we prepare and give awareness? How we provide execution and training? That third one is driving outcomes, which I talked about in my prepared remarks this quarter and then also in the prior quarter where we're doing that. And we're encouraged by what we're seeing in terms of how many partners are actually moving through those phases, which means that people are getting more to the deployment side of it. So working on those outcomes, and it's significantly year-over-year, but more importantly, quarter-over-quarter. So that's where we think we can play a key role in. Again, this is about the total solution, the 6 different products or services and what we're doing and our goal is to continue to provide a B2B or B2C experience in a very fragmented B2B business for our intelligent digital experience platform and Xvantage that we continue to focus on and how we extend that out. Michael Zilis: And the only thing I would add is you asked about kind of size and just like we say with other subcomponents, we don't really break it out, but I just give a little bit of color here, I guess, maybe to help. So the bulk of the GPU and AI infrastructure projects or product sales, I should say, fall in Advanced Solutions. There is a bit that straddles into our Client and Endpoint in the form of components, but the bigger share is in Advanced Solutions. And as you can probably tell just from the margin impact we called out, it's been a pretty decent growth factor year-over-year growing faster than the herd average of Advanced Solutions as an example. But it's more about -- we want to continue to be driving that transparency more about where the margin is and where that's driving because it does have more of an impact there, honestly. And most importantly, drive on the fact that, as Paul just reiterated, this is nicely profitable business, even though it's dilutive from a gross margin perspective just because of that low cost to serve and also the really low working capital investment associated with it. Adam Tindle: Got it. Okay. I mean that's probably a good bridge into my follow-up question. Just on overall business and operational trends really. If you were to give me a quarter where Ingram Micro was growing top line 14%, I would say EBIT would grow faster than that. You typically get leverage in these models, but yet on the EBIT line, we're kind of growing in line with revenue. And if I look at it on a sequential basis, revenue is down mid-single digits, EBIT down 25% or so. And I hear Paul, a lot of positives around automation, Xvantage and stuff, and I would think that we would be getting better contribution margin especially given the strong growth. What are maybe the offsets or what am I missing? And how do we kind of get back to a point where we're generating more operating leverage in the model? Michael Zilis: Yes. I think just talking a little bit more about the numbers. I mean I think the mechanics of what you're getting at. EBIT is really a function of where does the margin rate get offset by the operating efficiency. So the operating efficiencies are coming through, as we talked about in my prepared remarks, and I'll just focus on the SG&A number. So you take out a little bit of restructuring as an example, that we call out separately on our -- on the face of our income statement, but we're seeing a double-digit basis point leverage there. So we're offsetting the overall margin factor. And then on top of that, if you -- if it were not for the GPU and AI infrastructure projects, we actually have a year-over-year uptick of nearly 20 basis points in our gross margin as well. So it's really more of that factor and where is that leverage coming through on that growth. Now what you can see is, and you can see this in our guide and even just -- even as you look at our reported results, while it's not EBITDA, when you take into account some of the efficiencies of debt paydowns and other factors, we're seeing healthy growth, more than 1.5 times the rate of growth, in fact, in net income and earnings per share on a non-GAAP basis as a ratio to what our revenue growth is. And our guide is assuming even more of that as we look to Q2 and we continue to see not only a little bit more of the mix factors improving with the outsized growth of Cloud, higher growth in Advanced Solutions and Client and Endpoint, but also the leverage still continuing from an OpEx perspective. Adam Tindle: Okay. And just 1 last quick clarification, Mike. You talked about seasonal on free cash flow, and I'm just trying to put a finer point on that. We understand the dynamics in Q1 starting in about $1 billion hole. Do you think you get to kind of parity or positive free cash flow for the year? Is that what seasonal means? I'm not sure I wanted to understand the parameters on what you were alluding to for free cash flow for the year. Michael Zilis: Yes. We definitely see a little bit more just general seasonality of the cash flow than we historically did over the last 2 to 3 years. I think generally speaking, we're seeing outflows in the early quarters, especially Q1. We always have a little bit of an outflow in Q3 associated with some of the inventory buying for the higher sales level in Q4. And then we're seeing the larger inflow coming at the end of the year as you saw last year. I think last year was exceptional as far as where the balance sheet landed to close the year. So I wouldn't necessarily bank on that. But as I look at the rest of the year, and I would look at those last couple of years just directionally where you see perhaps a more modest outflow, but certainly modest in nature over the next couple of quarters is what we expect. And I would just reiterate what we said coming into this quarter and coming out of the end of last year, while we do expect coming out of last year, having the balance sheet as low as it was and that cash flow that came in Q4 that was an exceptional cash flow for the year, but we do still expect that the ratio of free cash flow to adjusted EBITDA for the 2 years combined will still be north of 30%. So you can kind of bank on that as well as far as what we expect the year goes on here. Operator: Our next question is from Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: Mike, Paul, as you look into the rest of fiscal '26, can you talk about the relative growth of Advanced Solutions versus endpoints, specifically in the endpoint solutions, what PC unit growth are you factoring in for the year? And as you look at demand from SMB versus larger enterprises, is it trending as you had expected? Or is there anything weaker or stronger than you had expected? And same question on the Advanced Solutions side, how are you seeing demand for server, storage, networking trending? And I have a follow-up. Paul Bay: So I'll start. I mean, we saw good growth in all those categories you just mentioned in the quarter. And as we guide, we're looking for strength in all those categories too. I'm actually pleased with the continued momentum in the refresh from a PC standpoint. It was in, call it, the mid- to high teens for the quarter. So when we say double-digit growth, it was good, and we think we're going to continue to see that. Again, that's coming off of very significant growth last year. Our desktop notebook was high double digits. So we continue to grow there. And we are seeing continued networking, server, I'd say also cybersecurity, is we're seeing strength in that also. So we see that, and that's what we built in from a Q2 guide. Again, we're not really looking at from a back half of the year and I go back to some of the ways we're helping mitigate and trying to keep the demand aspect of how we can help fulfill and then some of the opportunities of looking at different solutions, looking at different bundles, how we can focus on if it's an impact moving from an on-prem to a cloud solution. Mike, I don't know if you have any other comment? Michael Zilis: Yes, Ruplu, I would just reiterate what I said earlier on that perhaps CES piece where we're guiding to lower single digits. It's still solid growth. We don't really break into the units as you asked, but we're still seeing solid growth when you blend sort of the mix of units and ASP increases on the PC and desktop and still see some of the traction continuing to grow on the AI PCs as we've talked about. But it's really more of that smartphone compare that level that number off a little bit overall. And remember, not so unlike some other aspects of our business, smartphones are very low margin. They're low cost to serve as well and generally move pretty fast, but it is a lower-margin business that we see down overall year-over-year. Networking, server, cybersecurity on the Advanced Solutions end, all decent growth categories and then cloud, as we talked about, still seeing very healthy double-digit growth, especially around Infrastructure as a Service. Ruplu Bhattacharya: Got it. Mike, can I ask you to talk a little bit about OpEx and CapEx? You've had good success with Xvantage. I mean, how do you see spending more -- spending trending on Xvantage going forward? And how should we think about overall CapEx? And then on the OpEx side, is there -- do you have levers to drive OpEx lower? How should we think about that trending? Michael Zilis: Yes. So good question. I don't think much has changed on this front to answer that initially, and Paul can add to this. I think on the Xvantage story, what we see is probably another 4 to 5 quarters where we see a bit more of the outsized spend continuing. So get into -- once we get into the middle of next year, we see more steady state. And again, it's not too different from what we said a couple of quarters ago where we see that, that kind of a time line playing out here. And that's really more deployment now than it is design. There's always going to be design and development happening as we roll out new functionality. But as we said, we have 21 out of 57 countries deployed with the most significant functionality. So there is some tail there, which sort of segues to the second part of your question. We have deployed this in our largest countries. So a majority of our revenue is now trade through Xvantage, but there is still that tail where we can still bring some of the automation and efficiency to that. Some of those additional countries and that deployment is happening over the coming quarters. Operator: Thank you. This concludes our question-and-answer session. I would now like to turn the floor back over to Paul Bay for any closing remarks. Paul Bay: Thank you for joining us today and for your continued support. We are proud of our Q1 performance and results. We are executing across the business to deliver continued growth and innovation. Our patented Xvantage platform is a clear differentiator and our investments ahead of the curve aligned with the rapidly scaling AI market. We are positioned well to change the IT distribution market, and we are energized at what's ahead. We look forward to updating you on progress next quarter. Have a great day. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, everyone. Welcome to the JAKKS Pacific First Quarter Earnings Conference Call with management, who will review financial results for the first quarter ended March 31, 2026. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's website in the Investors section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter and full fiscal year, along with highlights of recent performance and current business trends, and then John will provide some financial comments around JAKKS Pacific’s financials and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions. [Operator Instructions] Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales, margins, earnings and/or adjusted EBITDA in 2026 as well as any other forward-looking statements concerning 2026 and beyond are subject to safe harbor protection under federal security laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC from time to time. In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded. And with that, I would now like to turn the call over to Stephen Berman. Stephen Berman: Good afternoon, and thank you for joining us today. Our Q1 financial results were roughly in line with our expectations and comparable to our strong Q1 2025 results. And our near-term outlook is better than it was 12 months ago. We continue to see a degree of caution from U.S. accounts. I would characterize many of them as somewhat tentative about the year, many becoming more accustomed to the volatility we've been experiencing. They are, among other things, trying to forecast consumer health. Our industry continues to closely monitor higher oil prices given the implications for resins and transportation costs. As I said before, these are dynamics that come with running a global company. We have dealt with these sort of challenges before, and I'm confident we will successfully navigate our way forward in 2026 and beyond. We continue to invest significantly time, effort and financially on some exciting new initiatives coming together for 2027 and '28 while also executing in the year on our plan and pursuing late incremental opportunities. Globally, our net sales finished at $107 million in Q1, comparable to our first quarter results over the past several years, but down 6% from prior year. Toy and Consumer Product net sales were down 7% with costumes up in one of its smaller quarters. The decline was caused by lower results in North America at $78 million. It was down $15 million or 16%, with both our domestic and FOB business decreasing for the quarter. Roughly 1/4 of that decline was due to a reduction in low-margin closeout sales related to our lower level of U.S. imports last year. Demand for our FOB model remains extremely strong with over 70% of our Q1 North American business shipped FOB. As mentioned above, we see the U.S. retailers remaining somewhat cautious trying to recalibrate cost pressures, pricing resilience and ultimately, consumer behavior. Our international business grew nicely in the quarter, reaching $29 million, a 38% increase versus the prior year. We saw healthy growth in both our domestic business as well as our FOB orders. Latin America declined slightly in the quarter, but grew margin dollars. Although slightly down from last year, we finished the quarter with a very strong gross margin of 33.4%, reflective of our robust product margins from new product introductions and reduced closeout sales in the quarter. SG&A expenses were down 4% in the quarter, offsetting some of the drop in margin dollars, but not enough to avoid a quarterly adjusted EBITDA loss of $371,000 versus a gain of $354,000 recorded at the end of Q1 2025. I will now pass it over to John for some comments, after which I will come back and discuss some product initiatives and areas of focus moving forward. John? John Kimble: Thank you, Stephen, and hi, everybody. The first quarter did not distinguish itself dramatically to the positive or the negative, which is all that one can really ask for in the first quarter in the toy industry. Some of our drop in revenues is attributable to a new dress-up initiative last year not carrying forward in addition to some softness in our private label business. We're happy to see our gross margin percentage holding up at 33.4%, even if it is down 100 basis points from the exuberant 34.4% from this time last year. Deconstructing gross margin prompts the issue of tariffs. For your accounting teaser of the day, U.S. domestic products sold in the quarter would have reflected tariff expense related to when the product entered the country when those sales in the year ago quarter did not have that issue. As to whether Q1 2026 product was imported in Q1 or in previous quarters, there's a level of precision that we don't aspire to. I can tell you we paid $1 million to $2 million in U.S. tariffs in the quarter, where we paid less than $100,000 in the year ago quarter. That gives you a sense for order of magnitude of the numbers here in the quarter and as they relate to prior year. This is also a fine place to mention that we have filed for tariff refunds that we feel are eligible for reclaiming as a result of the relevant Supreme Court decision. We do not intend to go deeper on that topic until we have a much higher degree of confidence that refunds are forthcoming and have figured out any related implications. It would be nice to get some of this money back, but frankly, it's one of the least interesting things to talk about in the business today, so we're moving on. Back to the numbers, $36 million in Q1 gross profit, although down 9% from last year, that is still a very robust number for our business. So we're happy to have that on the scoreboard as we exit the quarter. Our selling expenses were flat from a margin perspective in the quarter, primarily due to favorable timing. On a full year basis, we would expect this area to grow at minimum in tandem with sales, particularly as we restricted spending against some marketing initiatives last year given revenue shortfalls. That projection does not anticipate downside scenarios reflective of higher shipping costs due to higher diesel costs. G&A delevered slightly, but also benefited from some timing elements. We are aiming to hold G&A spending to no more than revenue growth on a full year basis while also making the necessary expenditures to support new 2027 launches. Slightly softer results reduced our trailing 12-month adjusted EBITDA down by 2% to $34.6 million. On an adjusted per share basis, the quarterly loss of $0.17 is lower than the loss of $0.03 per share from this time last year. The diluted share count is based on roughly 11.4 million shares. Turning to the balance sheet. We finished the quarter with $64 million in cash, up a bit from $59 million last year. Inventory was flattish at $53 million, essentially unchanged from last year. As mentioned in our release, the Board approved a Q2 payment of $0.25 per common share payable at the end of Q1. The record date for the dividend is May 29, and the payable date will be June 29. And back to Stephen for some more comments about the year ahead. Stephen Berman: Thank you, John. As first quarter is always the quietest quarter for us, I'd like to update you on what we see as some of our big drivers from a product and revenue perspective on the year. We are certainly thrilled with the positive reaction theatrical release of the Super Mario Galaxy movie has received. The success of the first film took some retailers by surprise. But this time, all accounts are ready and on board, allowing us to secure significant out-of-aisle and promotional space starting in early March. The film has created a lot of excitement in Europe as well with Smyths being a big supporter. The excitement continues with the Mario product line, and we look forward to the streaming announcement and launch later this year. The Sonic-DC crossover product has been expanded to all accounts this spring after being an account exclusive at launch. A new comic book in the series is dropping this quarter to keep the energy around this initiative fresh and on top of mind. As we mentioned last quarter, SEGA is recreating a lot of excitement around Sonic's 35th year anniversary, and we continue to work with them very closely as their anchor toy partner worldwide. One example of a new collaboration we are doing with SEGA is adding the Sonic into our outdoor seasonal business as we reposition that segment into our active and early play segment, which is really a better description of what that team focuses on and the products we market there. The speed and energy central to Sonic's DNA makes them a natural choice for products in this area, and we've been excited to share this range with customers this month during our spring 2027 line reviews. We'll have more details about some of the key items launching in this segment in the months to come. We are seeing nice support for our Disney Princess, Style Collection, ily and Frozen lines with sell-throughs in these segments continue to be very strong. These are evergreen brands and play patterns for young children. We nonetheless are constantly introducing new items to the line and ensure we are earning our place in retail assortments every season. Our 6-inch doll line has been refreshed this spring and is selling extremely well. We've also seen positive reaction to some of our new role play introductions in the Style Collection line. We have strong coverage here at both the below $10 and below $20 retail prices, which are great values and also work especially well given the time of year. We continue to steadily expand our Action Sports portfolio where we see additional opportunities. We are happy to share with you that we recently have added the Almost, Darkstar and Duster brands to our Skateboard portfolio. In our Disguise business, we announced our launch of KPop Demon Hunters during the past quarter. We're happy to be able to deliver authentic costumes for that enthusiastic fan base. The success of the Mario Galaxy film is generating more demand for these costumes. We're also seeing a lot of energy behind Pokémon, which is celebrating its 30-year anniversary this year with significant marketing programs. Our European business for costumes continues to grow steadily. We are shipping several new customers in the U.K. as we have transitioned in as a vendor for some accounts who were previously relying on their in-house sourcing teams. And at last, but not certainly least, since our last call, we have announced our new initiative to capitalize on what we see as a significant opportunity in the world of anime. As we expressed earlier this quarter, JAKKS Pacific is launching a large-scale next-generation Anime, Manga and Digital Creator cultural platform, one of our company's most ambitious strategically significant initiatives. Developed more than 2 years, this multifaceted investment positions JAKKS at the forefront of one of the fastest-growing segments in global entertainment. Anchored by premier anime partners and top-tier collaborators, the platform creates a strong foundation for sustained global growth, enhanced monetization and long-term shareholder value. Through this initiative, JAKKS will design, manufacture and market a broad portfolio of premium collectibles, figures, plush, tech accessories, costumes and role-play products while expanding into high-growth live event and influencer-driven merchandise opportunities. Supporting this effort is a next-generation global distribution infrastructure spanning to direct-to-consumer, specialty and experiential retail and promotional channels designed to accelerate speed to market and deepen consumer reach worldwide. The objective is clear: to lead this category at scale. This platform expands our global footprint, accelerates revenue opportunities and strengthens our connection with highly engaged fans that are shaping future of pop culture. We're not simply entering a category. We are building a durable, repeatable platform designed to deliver sustained multiyear value, building on its legacy of successfully commercializing leading entertainment properties. JAKKS will continue to roll out our partnerships and product lines through 2026 with the initial launch expected in 2027. We are only 1/3 of the way through the year. And although it continues to be very dynamic, we feel confident we are still on track to achieve our goals for this year, inclusive of setting up for an even better and stronger 2027 and beyond. And with that, we will take a couple of questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Thomas Forte of Maxim Group. Thomas Forte: I'll limit myself to 3, and I'll go one at a time. So Stephen, the anime product line sounds amazing. Can you give just high-level comments on what success could look like, including the relative gross margin and contribution margin for that product versus your other efforts? Stephen Berman: Thank you. So firstly, this initiative that we undertook has been well over 2 years working with many of these companies that are in Japan and the way that the companies oversee their IP is very stringent and very strict. So we went to them to various large enterprises, Aniplex, which is Demon Slayer, VIZ Media, Naruto; KODANSHA, which is Attack on Titan, and several others from Cover Corp and Crunchyroll. It's been a long process of making sure that when you create products in this genre, it has a very strong fan base that you got to really focus on and cannot veer from. So we had put together a plan we hired across the board, a very young, passionate group in the Anime, Manga and called Digital Marketers. And we put together a plan of products from collectibles to kid adults, which is very strong to somewhat of some of the other properties to tech accessories, areas that the fan base really likes. In fact, for the VTubers and digital marketers, we created light sticks for them to use at concerts, but all with the authenticity of the actual IP and directed towards the fan. So the launch itself is starting in '27. We will get some of it shipped in '26. it's a very broad launch to various initiatives of retail basis. So think of Miniso, GameStop, independent retailers as well as venue sales. A lot of these concerts, movies and initiatives are done in venues, and there's never been real authentic merchandise at the venue. So we have structured and working with several different partners to do the venue sales as what you would see at concerts like at a Taylor Swift concert or Kendrick Lamar where you have the merchandise that goes straight to the consumer. So all these initiatives are all being really launched together at one time in various segmentations and with various collective initiatives with each of the IP holders, but inclusive, you will see a broad array of product of totality of all the strong Anime, Manga and VTube IP and one segmentation at retail instead of having one licensor do one IP and another one, we've collectively worked with these IP holders to make sure that they were present and they were present and focused together so the consumer knows where to buy them. On the part of margin enhancement, because they're somewhat more focused on kid adult, the price points will be slightly higher and the margin in our area for JAKKS Pacific will be slightly higher. Thomas Forte: Excellent. All right. So then second of 3, I recognize a lot of your product releases are coinciding with movie premieres, but I was wondering for your other SKUs, how should we think about the timing of new product rollouts and if you're holding anything back given the current market challenges? Stephen Berman: First, the market challenges, as we mentioned in our prerecorded is we're used to these challenges. It happens. It's -- JAKKS has been public 30 years. We've been around 31 years. So you have to kind of work through them, work with manufacturers, with the container companies, work with the retailers and work very closely and very entrepreneurial to get through these different times. But with these different times, there's also a very strong opportunity. So as we mentioned in our call, the Super Mario movie itself has done phenomenally well. The product line is expansive. The sell-throughs are great. We will have the forthcoming or upcoming streaming release, whenever, Nintendo and Universal announce it. So that will have its legs and continue with the big tailwinds behind it. Then there's a lot of different initiatives that happen in our, call it, Disguise business. You have the Super Mario movie, Toy Story 5, Descendants 5, PAW Patrol movie, Minions movie and Demon Slayer, which is the anime that we mentioned, which is from Aniplex. So in each of our segments, we have some great excitement. But at the same time, some of our basic evergreen business is what's doing extremely well. In our Disney area, our Disney Darlings, our Disney Style Collection, our Disney Princess has seen sell-through strong and profit dollars up. So that's exciting. Then you go into -- going into the year, we also have various other movies that are coming out that we have a nice product behind, which is Moana live-action, some Minions and other IP that's coming out. But that on top of our Evergreen business is really what's keeping us going and strong. And when we start building throughout the year and going into '27 and '28, our lineup, I couldn't be more proud as CEO, a Co-Founder. It is so strong in the majority of all of our categories from our seasonal business with ABG, which we have Element and Roxy and Quiksilver, which is now just starting to take some real traction getting out to the spring and summer retailers. It's a really exciting time. But at the same time, it's a cautious time because of oil prices and things that are just unknowns. But those unknowns, to us, it's just part and parcel of our business, but we're really excited. I'm really excited to get through the year. This is a quiet first quarter, I even mentioned to John, it's a very quiet period to talk about because there are so many things that are happening through the year. But as the year goes by, we will be going on the road, speaking with retailers, investors. It's really an exciting time at JAKKS. Thomas Forte: Excellent. All right. And then last one. So another high-level question. So there are some people who believe that AI will lead to an explosion in video content, which could materially increase your opportunity set for licensing? I would appreciate your thoughts on that. Stephen Berman: With our IP holders, our licensors, many of them are obviously very strong and very focused in the, call it, what AI could do in the, call it, the production, the -- call it, the quickness to market for digital animation and various initiatives. So I think it's going to be very much pick and choose by each of the, call it, large-scale entertainment companies, whether it's the Walt Disney Company, Netflix, Amazon, we're there to help them out in what they do. And the one thing that we've seen because these things are coming quick to market now because of the time it takes to develop is much less than in the past. The one thing that JAKKS is great at is to go to market and doing things very quickly. And I think that's where we're going to be with working with these companies to get things into the market quicker than a normal company can just based on our scale and what our DNA is. Operator: Our next question comes from the line of Eric Beder of Small Cap Consumer Research. Eric Beder: Congratulations on the solid start to the quarter. When you look at it in terms of the consumer, in terms of normalizing in the U.S., how should we think about kind of how the flows are going to happen here? And when we know kind of what is going to be the new market or what is the market we're going to see post all the disruptions we had last year in the U.S. Stephen Berman: I think at the end of the day, product is king. So if we have the right product and you have the right price points, the consumer will be there, especially in our area of business to where whether it's a holiday, whether it's a birthday, people and parents and grandparents are relative spend on children spend on toys. But in this environment, I think price points are very much a focus during the first 9 months of the year and ensuring that we have the right price points and the majority of our products are in the $10 to $30 range. And then during the fall period, during the holiday period, you need to have that the Wow IP, the Wow item, the Wow product to get that bigger purchase. And I think we have all that accustomed in the majority of our divisions. Remember, primarily, we are an FOB company. So we plan very far ahead differently than a real domestic company. So we have things in line with all of our major retailers worldwide to enhance whether it's exclusivity on products and categories so they could actually enhance their margin dollars and also market those products directly to consumers at the same time, not having price comparisons done by other retailers. So that's a very big enhancement. I don't know if I mentioned earlier, but we had our best EMEA quarter since 2015 and our best ups in France and Spain in over 15 years. So we're talking U.S. and I'm talking worldwide. We see growth international as we're expanding with more IP that goes appropriately in specific territories and countries, both in EMEA, Latin America and now really focused on Asia Pacific for the next few years. So that's great. And in the U.S., you just have to make sure you have the right product for the consumer at the right price point, and we monitor that very, very closely on a week-by-week basis. Eric Beder: You kind of hinted at this. How do you look upon this anime management thing to you in terms of international? Are you getting worldwide rights for most of these players? And how can that help drive international even further? Stephen Berman: So the IP is really selective by each territory and country. So in the anime, and I'm speaking broadly for Anime, Manga and then the VTubers and digital entertainers, each country is vastly different. So for instance, in EMEA, France is #1 for anime. It's known throughout the world as they have such a huge fan base in France. And then it goes in Italy and then goes U.K. and after France, actually, it's Latin America. Mexico is very big. So you have to really pick and choose. You can't just think that each of these IPs are going to work in all these territories. So we look at the fan base. We speak to the content holder, the IP holder, and we work closely with them as they have such decades and decades of information of where their fans are, where they're growing. And we follow what they say is they know their IP better than anyone, and then we take our team and really cultivate it per the market and what's appropriate price point-wise, item-wise and content-wise because some of the items that we make for America may not be appropriate for Europe or for Latin America and vice versa. So we really are focused in each of these areas and segmentations, the right product, the right territory, the right IP. Eric Beder: Great. And when you look at international, it keeps on growing as a percentage of the business. I believe Q1, it was about 30%. Longer term, what should we be thinking of the goal for international versus U.S. penetration? Stephen Berman: Well, the goal is growth, but the growth is -- it won't keep up with that 30%, 40% always going. It's growing for each of the areas. The reason why EMEA has grown significantly, we opened up 5 different distribution centers in various territories to allow us to hit much more and penetrate into the retail market. It's much smaller accounts throughout Europe than it is in America. So you need this distribution platform. Our domestic business has grown internationally because we have to have backup inventory for all these smaller customers. So we are looking for growth. We're looking for growth in market share, also garnishing new IP that's appropriate for the marketplace. So it's a combination. And each of these, call it, countries will have different growth than the others because of certain IPs work great in the U.K. For instance, France is very, very strong in anime, U.K. is strong, but not as strong. So you'll see a much faster growth in anime in France, and you'll see a much stronger growth in our general toy business in U.K. versus France just because of the size and shape. So it's really a really dissective approach by each of the countries, territories and the correct IP. But you'll see that enhance the growth, but not all throughout Europe, except of the IP does not work in Europe. Eric Beder: Okay. And last question. You paid out a dollar dividend last year and cash continues to rise. How do you leverage that? And how do we should look upon that as you being able to take competitive advantage and being able to [indiscernible] capital when you want to? Stephen Berman: So with capital allocation, we bring this up during our Board meeting. In fact, we just had one and it's something that we review. And based on the environment, where cash is king right now in this kind of environment. And we are investing capital more than normal with regards to the anime initiatives, the tooling, all these new initiatives, it's costing us capital, not material, but it does cost us capital. And with that, we're going to be doing much more marketing, more influential marketing to the consumer in some of these areas. And we have some very surprising new initiatives that we'll announce later in the year that will cost capital, but nothing to where it's a huge expenditure, but it's more than we normally spend in tooling, marketing and overhead for these areas and new initiatives. That being said, we will look at what we generate in cash through the year and look at what's appropriate. We are seeing opportunities on the acquisition front. We're getting more inbound calls of companies that are looking to sell. So there's a really nice good opportunity out there. We just want to make sure when we utilize our cash, we utilize it on an accretive basis and not just to use the cash to use it. Operator: This concludes the question-and-answer session. I would now like to turn it back to Stephen Berman for closing remarks. Stephen Berman: Thank you very much. I'm sorry for the brief call and also my voice during the prerecorded, I had a cold. But we're looking forward to speaking shortly and getting on the road and seeing some of the investors throughout the summer and going right into fall. So thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Monolithic Power Systems, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. We are joined by speakers, Michael Hsing, CEO and Founder of MPS; Rob Dean, Interim CFO; Tony Balow, Vice President of Finance. And now I would like to turn the conference over to Arthur Lee to read a safe harbor statement. Please go ahead. Arthur Lee: Earlier today, MPS released a written commentary on our results of operations for the first quarter ended March 31, 2026. This document can be found on our website. Before we begin, I would like to remind everyone that in the course of today's presentation, we may make forward-looking statements and projections within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The risks, uncertainties and other factors that could cause actual results to differ from these forward-looking statements are identified in the safe harbor statements contained in the Q1 2026 earnings commentary and in our SEC filings, including our Form 10-K and Forms 10-Q, which can be found on our website. Our statements are made as of today, and we assume no obligation to update this information. Now I would like to turn the call over to Tony. Tony Balow: Thanks, Arthur. Good afternoon, and welcome to our Q1 2026 earnings call. In Q1, MPS achieved record quarterly revenue of $804 million, 7% higher than the fourth quarter of 2025 and 26% higher than the first quarter of 2025. Our quarterly performance was a result of our continued innovation, our consistent execution and the resilience of our diversified market strategy. Let me call out a few highlights from the quarter. Our communications end market grew 33% sequentially on the strength of our power solutions for optical modules and switches. The pipeline for our automotive and enterprise data end markets, including server continue to accelerate as we won multiple new projects across customers and regions. We sampled our first high-speed interface products for DDR5 at major customers and MPS continued to grow our capacity past our original $4 billion plan with a new goal of reaching $6 billion in the near future. We continue to adjust to the fluid geopolitical and macroeconomic environment, but our diversified market strategy remains unchanged. MPS focuses on innovation and solving our customers' most challenging problems. We consistently invest in new technologies that open new end markets and applications and accelerate our transition from chips only to a full-service silicon-based solution provider. And finally, we continue to expand and diversify our global supply chain, allowing us to capture future growth opportunities, maintain supply stability and rapidly adapt to market changes as they occur. Operator, you may now open the webinar for questions. Operator: [Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Ross Seymore: I just want to dig a little bit into the enterprise data side of things. Can you just talk about the different trends you're seeing between kind of the XPU side versus the CPU -- server CPU side? I know you mentioned in your preamble that the backlog and visibility was improving in both. But given the strength of demand we're hearing elsewhere in the server CPU side of things, I wondered how you guys are doing there. Michael R. Hsing: Both are good. Yes, Tony, you can talk to that. Tony Balow: Yes. I'll give a little more color. And Ross, if you recall, even last year in 2025, we had talked about CPU being a tailwind, and we continue to see that here in 2026. But if you look across enterprise data, for us, right, as we've said, it's increasingly hard to differentiate between sort of AI solutions and CPU. But in general, all the growth drivers are intact. We're ramping new customers. We've been ramping existing customers. We continue to see the transition to modules. And like I said, plan server has been a tailwind, and we think it will continue to be so. Ross Seymore: And I guess the second question would be on the storage and computing side of things that seem to be a little bit better than feared in the first quarter. Talk about the tailwinds or headwinds given what's happening from a macro perspective and then potentially the difference between what you guys do on the storage side versus the computing side? Tony Balow: Yes. I'll start on that one, and then I'll let Michael and Rob jump in. But as you know, right, that segment really has sort of 2 separate businesses in it. The storage side obviously has remained strong as it's really been indexed to a lot of the data center business. And we see strength in DDR5. We see strength in HDD and SDD continue out of last year and into Q1. On the notebook side, we're still more cautious on that side. As you know, there's really 2 dynamics there. I'm sure you've heard other companies talk about potential TAM headwinds associated with memory shortages or elasticity from memory prices. But remember, we also selectively play in that part of the market that has lower margins around consumer. And so I think -- and if we look forward to those 2 -- on that business going through the year, I think we're still very optimistic about storage staying strong, probably much more cautious on the notebook side. Michael R. Hsing: But the notebook, we don't really care this quarter or next quarter as long as we develop -- we developed the best solutions of power density and our customers' ease of use. And these design wins that we have, the revenue will ramp. Operator: Our next question comes from William Stein with Truist Securities. William Stein: Great. First, I'd like to ask about manufacturing. You noted in the press release that you passed the $4 billion target, you're now working to $6 billion capacity, maybe you can update us as to the strategy around geographic placement of your capacity? And maybe remind us what's going on from a technology perspective. This used to be a big focus of the various BCD iterations that you produce. But can you bring us up to speed as to what is the latest BCD generation? Michael R. Hsing: I'll answer your last question first. We are still around 60 nanometers and maybe we'll go down to 40, 45 nanometers. And these ones as a power density, as a market trend, the power increases and we increase the power densities. And it's just old stories. We keep doing the same thing in the last 20 years. And we just do better than our competitors. For the $6 billion goal for manufacturing pipeline. We -- clearly, and we have -- we see our near future, we see a lot more activities, a lot potentials and all these design wins is imminent, they will turn into revenues. Tony Balow: And maybe just to add. Well, I think I'm telling you what you know, but on the $4 billion of capacity, we talked about that being very geographically diverse, both inside and outside of China. And remember, our strategy really is to maintain that supply chain diversity. So we'll continue to try to have that balance going forward. Operator: Our next question comes from Joshua Buchalter with TD Cowen. Joshua Buchalter: Congrats on the results. Maybe to start, can you just help us a little bit with the models? Any help you can give us on the guidance by segment as we think about sort of a 12% sequential growth for the June quarter, which segments should be above and below? Michael R. Hsing: Well, I think, let me start with what you guys are more interested in the most, okay? Bernie, last time talked to you guys, that we have a 50% floors, so 50% floor. I'll let Tony talk about -- give you a better news today, okay? And I'm more excited about the other projects that are deeply involved, okay? I mean the building automations and audio project side and as well as robotics. And these ones will pave the way for our next 2 to 3 years out to remain on the same growth trajectory. Tony Balow: Yes. I'll follow up a little bit as kind of marching through. And Josh, I know the first thing people are interested is enterprise data, so I'll start there. And as you recall, we tend to be fairly conservative in how we look at these things, waiting for the backlog to be in place. So late last year, we talked about 30% to 40% growth year-over-year. In the last call, we kind of rose that to a 50% floor. And the strong ordering patterns that we saw start last year has kind of continued through Q1. So at this point in time, I think we're comfortable raising that floor up to around 85% year-over-year growth. And that will certainly be one of the drivers of growth for the year for MPS. If you look -- sorry, Michael. Michael R. Hsing: I'll let Tony deliver better than our last CFO. Tony Balow: Okay. If you look at the others, Josh, I think we've been signaling on communication as we've become increasingly excited about that end market with not only the optical module growth, but due to switches as well. So we certainly would expect those to be drivers. Auto, I think is a very consistent story. We said that would be roughly flat for the first half of the year and ramping in later in the year. And then storage and compute, we talked about a bit already with Ross, right? There's really 2 different dynamics going in there where we're still very optimistic on storage pulled through by data center, more cautious on notebook. Michael R. Hsing: So again, overall, we cannot predict which quarter goes ramp volumes. And that's not our business to do that. And we're winning strategy is same as the last 20 years. As long as we deliver the best product and service our solving our problem for our customers. And I don't see we lose any socket, okay, the major socket at least. And we'll keep winning. And those business -- those design wins will turn into revenues. Joshua Buchalter: Thank you both for all the color there. Unfortunately, when you deliver good news, you still get annoying follow-up questions. But I guess if we think about the incremental upside since last quarter, any help you can give us on how much of that's coming from CPUs, as Ross mentioned earlier, versus more confidence into either content or visibility into share on the AI accelerator side? Congratulations again. Michael R. Hsing: That's a good try, okay? I'm not going to give it to you. Okay. Tony Balow: Yes, Josh, I think we just fall back and we've talked about all the growth drivers and say they're intact. I don't think we want to try to parse out between volume and content because it can be very specific. Michael R. Hsing: In reality, it's very difficult, okay, to separate it, okay. What is called AI, what is called servers. There's a lot of etching and a small segment and these are very small utility box. We see a lot happening. I mean maybe I don't use the right words and you guys use it, I mean these are portable AI devices. And just based on GPUs. These are happening. And that's clearly overlapped with the CPU and GPU powered. Operator: Our next question comes from Rick Schafer with Oppenheimer & Co. Richard Schafer: I'll add my congratulations and just a wow, I guess, on the outlook. Maybe if I could just for a second, talk about enterprise data. I've got a follow-up, Michael, that you'll like better, but I think -- the top 4 CSPs, I think just last night, I mean now we're over $700 billion in CapEx just from them. I mean it seems like you guys are clearly seeing that increased order velocity, my real question is, are you able to capture all of that upside? I mean is there anything hurting your supplier, your ability to capitalize, Michael? Because in years past, you guys have kind of made your bones on always being ready for that upside and kind of never being caught short. So I'm just kind of curious if that's still the case or kind of what you're seeing? Michael R. Hsing: I think it's exactly right I mean although we have a few more players and -- well, let me go back a few quarters ago. In these AI and in GPU powers in a given time will be the performance and also the manufacturing capabilities and reliability will remain as only a few players. And after a year -- a couple of years, it's been very clear that MPS is one of the players. And as I promised over a year ago or so, and we continue to do well in many aspects, especially for the power density side. We are the best in the market segment because we provide a total monolithic power solutions. And we can use a single piece of silicon versus our competitor use multiple pieces of silicons. And that clearly shows our advantage. And yet, we don't want to be the dominant suppliers, well, we just want to be a part of it. And our goal is to diversify growth. Richard Schafer: Got it. And for my follow-up, Michael, I'm just curious on physical AI. Obviously, it's getting a lot more -- a lot more people talking about it and see a lot more focused. And just if you could flesh out maybe a little more of your plans for that segment. What kind of TAM do you -- have you guys identified there? I mean you called out robotics a minute ago on the call. I mean, can that be a meaningful revenue contributor next year? Or when would we start to see robotics start to drive top line? Michael R. Hsing: We see this year and -- but the volume are still low, but it can kind of move the needle slightly. And if we go up the trends and this is still at the very beginning, and it's very difficult to predict. And many companies have launched the first high-volume robotics that we clearly benefited from it. And after that, we can call -- we cannot call the market segment growth. But the future is there. Clearly, when more AI adopt it in robotics, the application will be widened. Tony Balow: And I think what you see is us try to run the typical MPS playbook, which right now we're trying to engage broadly and win all the designs we can. We can't control when the customers ramp, but we can't control winning the sockets, and that's the broad engagement we really see happening in 2026. Michael R. Hsing: That's very good point. Yes. Operator: Our next question comes from Quinn Bolton with Needham & Company. Quinn Bolton: I'll offer my congratulations as well on the results and outlook. Michael, Tony, I guess I wanted to ask on the comms segment. It was up 33% sequentially. And March, it sounds like it's going to be one of the faster-growing segments in the June quarter. When I look at optical modules, I think 800 gig modules are more than doubling in '26. So -- my question is, do you think the comms segment could actually grow as fast, if not faster, than enterprise data this year given those trends? Michael R. Hsing: Yes. Again, I'll follow for Tony's answer the last one. So we're not in the business to predicting what the market trend is, okay? I mean we provide -- this happens in this particular segment. And we saw a lot of activities and a lot of demand for high-power density product and especially modules. And I think, as I mentioned about maybe a few quarters ago. And so this quarter and it just jumps out. And I -- from what we learned, the power density of the module with a very confined area and the data rate keeps increasing. And with the opticals or with other type of format, the power will keep increasing, okay? And in what rate, I cannot predict. But in the small confined areas and the power density is critical, that's our basic technologies that we could apply in that segment and that we execute fast and we capture the market. Tony Balow: Yes. And I think as ordering patterns have continued to be strong and extend, we still have them all the way through the year. So I think it's pretty tough for us to call all the way through the back half right now. But certainly, we'd put that end market above the corporate average. Quinn Bolton: Got it. Okay. And then... Michael R. Hsing: Same way, I'll go back to servers side and I go back to server side, we -- in the last years, we don't know, the server market will pick up or not picking up, okay? As far as we listen to our customers, we get our inventory ready and when they need it, they have those products. And so we just focus on deliver better product, winning more socket. Tony Balow: Yes. I'm a broken record, but I think it's a great example of, again, diversified approach, you land and you sort of look at the other sockets available to the applications and continue to grow your SAM. Quinn Bolton: My follow-up question. Michael, you guys have been sampling your products for 800 or plus/minus 400 volts for a few quarters now. Wondering if you could provide any feedback on how that activity is going? And can you give us any thoughts on -- there's a lot of debate between whether those higher power conversion steps will be more GaN-based or silicon carbide based. If it goes GaN, will you guys have GaN-based solutions ready for that opportunity? Michael R. Hsing: No, we based on silicon carbide and our -- that's our solutions. We do -- in the past, I openly said I don't believe in GaN, okay? Now start to -- I didn't know what I was talking about, I guess, okay? We -- in the last -- start of last year, we developed our GaN, but it's not for 800 volts, it's for lower voltage and lower power and lower power segments. We start to develop these fundamental technologies in GaN. To answer the first part of your question, yes, we're sampling, and again rather sample or call it sampling co-developed that systems with our customers and also our customers' customers. And it's -- we don't talk about those until I guess, you guys ask us. And 800 volts became a household number -- household names on the Wall Street in GaN. And so we start to talk about it. And our product is working. And I think the overall, the environment and in the new 800 volts power bus data centers, they -- a lot of things has to be resolved. And we just have our -- for that application is ready, and also have 800 volts, go to 10,000 volts, okay? That's another segment and has to be developed a lot more efficient power conversions. And these are all part of the pictures. MPS will play in those segments. Operator: [Operator Instructions] Our next question comes from Tore Svanberg with Stifel. Tore Svanberg: Congrats on another record quarter. I had a question, maybe as a follow-up to a previous question on power. So I do realize there's a lot of focus on 800-volt, but before we get there, there's the move to 2,000-watt GPUs. And I know there's a lot of sort of wannabe power management companies out there, Michael. So just hoping you could touch on 2 of the 3 things that really make MPS so unique and differentiated to handle those types of power levels because that is not like a 2028 time frame, right? I mean, that's already next year. So yes, if you could give us some color there, that would be great. Michael R. Hsing: Yes. Okay. That's a good question. I can touch and one of them I already said earlier, MPS is a focused on the monolithics. And we do what is the most cost effective and we do -- and how we do the integrations. And we have the capabilities to integrate or disintegrate, okay? And the integration we can put it in our modules. And that's a huge advantage. And with the multiple other chips, okay, and if we use particularly discrete power components, discrete power fabs and it's very difficult to do for manufacturing the modules. The second thing that I should mention that we invested in a module development, you note, for other segments, actually, and since 2016, we want to move up from providing silicon-only power conversion. And again, we do a plug-and-play solution. That journey we started 2016. And immediately, we know how we test these devices and how we qualify these devices, not -- and if it's a higher volumes and high qualities, it can't be touched by humans. We develop our own test systems and own reliability systems. These are fully automated. And actually, it's all based on MPS eMotion product. And these ones are very unique. And they -- before these systems putting in production, we can't find anything like this on the market. And that's I think -- to me, this is a huge advantage. And the other one is -- the last one that will go back to semiconductors, like we talked about this. We use 60-nanometer and now we move to 40 nanometers. And those increased the power density by -- last time we talked about 3M per millimeters cube and now we go pass that. Tore Svanberg: Great. And as my follow-up, when you mentioned a new product, I always listen to you because I remember you talked about 800 gig optical components being in your market. And before you knew it, you had a huge business there. And you now mentioned you have your first high-speed interface product sampling for DDR5. So just curious, when should we start to see material revenue from that business? And could that also grow into a several hundred million dollar business over the next few years? Michael R. Hsing: That's absolutely right, okay? And frankly, I don't know anything about this high speed and which is hire the best engineers and cut them loose and then they created this, okay? But from a business side, it's our natural way of expanding the service, total service market that increased our SAM. And we have a pretty good position in PMIC in memory, then we introduced timing drivers and timing control, whatever and also temperature sensors. And now the RCD or whatever the things came and I know it's very difficult. This is beyond my understanding. Our engineers and our people they pull it off. And so we have a few people that compare -- other companies like they have 50 people that design groups, and we will be able to pull it off in a few years. These are brilliant guys and they want to make things happen. That's -- and the revenue, usually we don't talk about it. I can talk about the product and we sample those products. Clearly, in that market segment, our customers are very much welcomed that we have another player. Tony Balow: And Tore, I'll just help you with the model a little bit. I wouldn't really have that as being a contributor to 2026 revenue. I think we're really highlighting it as we continue to expand our footprint in that market. Operator: Our next question comes from Gary Mobley with Loop Capital. Gary Mobley: Let me also extend my congratulations. I'm curious about the comms business that definitely a stand out for the quarter in terms of growth, upside, and I presume carrying through the -- into the second quarter and for the balance of the year as you previewed already. So what I'm most curious about is how much content you have in these 800-gig optical modules and I assume maybe of rack switches, maybe if you can put it in the context of by how much you see your content increasing in rack scale solutions for accelerated compute given this beachhead in these 2 new applications? Michael R. Hsing: I think it's more than a beachhead than not. We're pretty well in the -- well beyond the beach now. Tony, you want to? Tony Balow: Yes, I think we're going to stop short of kind of giving a dollar content. But obviously, in the optical modules, right, we have a module in the module doing that. So we obviously look at more of that than a discrete device. If you talk about switches and things of that sort, you have a whole different number of trays, for example, you have switches, you have NIC cards, you have other things like that, which all require power. And so I think the opportunity is, right, is you have a number of different processors in these that sit in these racks that we can provide power for and that we've been expanding that all sit within our Communications segment. But I think we're -- as usual, right, we're not going to talk about specific content layers, especially for specific customers. Gary Mobley: Okay. As my follow-up, I wanted to ask about distribution channel inventory. I know it's been running lean. Is it still lean relative to where you would normally place your distribution inventory and then as well, maybe if you can talk about the sort of inflationary relating pricing trends that you have to pass along? Tony Balow: I'll take that one. With regards to our distribution channel, we don't have a great deal of perfect visibility there. But what we have seen at least in 2025 and carrying into 2026, is that the channel has been very lean. And that implies to us that we're shipping to what demand is at the end market. But beyond that, we're looking good. Michael R. Hsing: For the pricing, cost pricing, yes, some of the cost is higher, okay? And we see a lot of activities, okay? So we will keep -- the goal is that we're keeping our margin profiles. Tony Balow: Yes. I think and just to add to Michael's, I think we don't -- we're not looking at it a broad-based across the board, but there are places where input costs have gotten higher, people are asking for expedited supply chains and things of that sort. And in those cases, yes, you could see us raise prices to stay within our gross margin model. Operator: Thank you. Our next question comes from Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Maybe just a follow-up there on the gross margin. Wondering if you could just share any of the puts and takes on the guide. It seems like obviously very positive revenue acceleration in kind of not a ton of follow through on gross margin kind of still stay in that range. Michael R. Hsing: Yes. Okay. I -- again, I said the margins in the last couple of quarters, so margins on the low end. And although it's in our model, I mean it's on the low end. And we still improve the yields on the modules. And I think that we don't have much of a headwind, we're moving up. But I don't want to give you a false hope that we're going to jump very high. That's not NPS. We don't do that kind of thing. Tony Balow: I'll expand a little bit on what Michael just said. Historically, we've been very consistent with delivering to our gross margin guidance. For the last 4 quarters, we've been flat at 55.5%. which is at the low end of our gross margin model for growth, which ranges 55 -- mid-50s to upper 50s. For Q2, as you know, we did have the confidence to increase incrementally our gross margins, mainly because we've gotten better visibility to our backlog. We saw this happening in the fourth quarter of last year, and it's continued into the first quarter of this year. So that has again given us some confidence. We do, however, do see some strong headwinds potentially in the second half. And so we're not -- we're remaining cautious for the guidance in the second half of the year. Joseph Quatrochi: Right. That's helpful. Maybe just on the robotics socket opportunities. You talked about up for grabs or to win this year. Are those -- do we think about those as being incremental? So I think you talked about $150 of content like for humanoid back at the Analyst Day. Is that the right way to think about it? Or are those expanding opportunities? Michael R. Hsing: It really varies. I mean, humanoid is the most visible. You see some dancing robots and those kind of -- and the -- what we focus on is in robotics. If it's remote and without power cord plug-in robot and those have battery operations. And so our battery management product plays a role in there. And the other one is the AI side, the compute side, for power the GPUs, okay. And these automated control units and also as well as these sensors. And the other segment is the actuators, the motion side. That's overall we sell -- we offer for the robotic companies. And many applications is in actuators and they can be in a medical assist for rehab purposes, we're seeing those kind of things happening. And for the dollar content, as I go back to your dollar content, it's very difficult to say. It's a variety of applications. We sell in chip and to selling modules, okay? And so the dollar content is also different, and it's very difficult to judge. But the trend is this robot will happened and there will be a lot in the world, will be a lot more automated, and it can assist human to do a lot of things, okay? Operator: [Operator Instructions] Our next question comes from Chris Caso with Wolfe Research. Christopher Caso: Yes. I guess the first question would be about the ED segment. And if you could talk about the growth on Merchant Solutions versus ASIC solutions this year? And what you're expecting with regard to content? I know you've got a strong position in both, but do you expect outsized growth in one area or the other? Any color you could provide would be helpful. Michael R. Hsing: We don't divide it into -- these are the learning side, inferencing side and frankly, we don't know how to separate it and they could use the similar product. What we do is -- why we're winning all these segments is because the power density, as I said earlier, okay? And nobody wants to waste power and efficiency is -- power densities directly related to power efficiency. And so they want a smaller size and they want to have a high efficiency. It really doesn't matter to us which segment. Tony Balow: Chris, the only thing I'd add, right is, I think we're comfortable raising the floor from 50% to 85%, not because there's been a fundamental change in the growth drivers for how we're approaching the market. It's really, as you know, are more comfort about what's in backlog, and we've seen that extended ordering pattern. So I think to Michael's point, I don't think we subdivide it to content and volume. But I just want to make sure you know that I don't think anything has changed other than be able to see more orders in the books going forward. Christopher Caso: Got it. As a follow-up, if I could ask about the auto segment, and you talked about that being flattish in the first half with some growth in the second half. Obviously, auto has been a little more variable in terms of its recovery. There was some data out of China, which was a little weaker in the beginning of the year, perhaps you give some color on the visibility you have at auto and why you think that starts to grow again in the second half? Michael R. Hsing: I don't pay attention to these, which ones are strong -- which segment is strong, which continent and it's more stronger or weaker, because these are chasing the market. We're not chasing the market. Whatever happened happens and we have the product ready, we can deliver. But Tony, you can talk about the near term, I don't pay any attention to it. Tony Balow: Yes. I mean I can add a little bit more there. I think, Chris, the shape of the year, as you said, right, our expectation hasn't necessarily changed. And while we've talked about seeing that ramp later in the year is really on our belief on one of some of these designs that we previously won coming to market. We can't control when our customers ramp. But the pipeline in auto has been expanding. And based on our current belief, we would expect to see that ramp later in the year. So again, as always, right, we'll monitor as things go through, but that's our belief at the moment. Michael R. Hsing: Well, the bottom line is we're winning socket and we're expanding our market share. Operator: Our next question comes from Kelsey Chia with Citi. Wei Chia: Congrats on the results. Could you talk about the rationale behind focusing on silicon carbide for 800-volt step down while focused on gallium nitride just for the lower voltage, lower power segments. It seems like some of your peers are also using GaN for higher voltage step down. How would that influence your competitive positioning? Michael R. Hsing: It's a long question. Okay, it's a long answer starting, okay, I didn't -- I said I didn't believe in GaN, okay? And I still don't believe for high power, I mean, we still have to prove that in the market segment. The reason we use the silicon carbide is these devices are proven in the history like 20 years ago, they're making diodes, made the materials a lot more reliable. And there's some fundamental issues, we started this -- try to improve at start of 2016. And as a result, we have a deep know-how and to make -- to use the silicon carbide. And the MPS is unlike other company, we're selling -- we don't sell silicon carbide fabs. These are passive semiconductor pass-through device. And we always integrate into our modules. So that's a kind of a short story for you, okay? Wei Chia: Got it. And I know that the team historically has been able to gain share in tight supply environments. Could you talk more about your supply chain management strategy and also your confidence in meeting customer demand if other suppliers face capacity constraints? Michael R. Hsing: We -- throughout our history, if you look at it, and especially during 2021, and these are after COVID happened. And MPS always listen to our customers. We don't play a passive role, when customers tell you to pull in too late, okay? And we have actively preemptively and to build these inventory, get these inventory ready and our product life cycle is very long. So we don't have any materials, like a large amount and scrapping and we know this one, sooner or later we'll sell. And again, like you asked me where these products ramping, I don't know, plus/minus years, it will. And we don't mind and have a little higher inventory, although in the last recent quarters, we cannot have enough to build up. Tony Balow: Yes, I just think the last thing I'd add, just so it's really clear is nothing about our outlook or anything we said about enterprise data floors because we see any constraints in the supply chain. It's something we've continuously stayed ahead at. So the root of your question, Kelsey, was whether or not the 85% floor was limited by something, that's not an issue right now. Operator: I'm showing no further questions at this time. I would now like to turn it back to Tony Balow for closing remarks. Tony Balow: Thank you, operator, and thank you all for joining us on this conference call today. I look forward to speaking with you on our next call for our second quarter 2026 results. Thanks, and have a great day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to The Clorox Company Q3 FY '26 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference. Lisah Burhan: Thank you, Jen. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendle, our Chair and CEO; and Luc Bellet, our CFO. Please note that our earnings release and prepared remarks are available on our website at thecloroxcompany.com. Linda will share a few opening comments, and then we'll take your questions. During this call, we may make forward-looking statements, including about our fiscal 2026 outlook. These statements are based on management's current expectations but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP financial information section of our earnings release and the supplemental financial schedule in the Investor Relations section of our website for reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. I'll now turn it over to Linda. Linda Rendle: Thank you for joining us today. As we approached fiscal year 2026, we knew it would take a disciplined, phased approach. In the front half of the year, we intentionally focused on implementing and stabilizing our new ERP. That work was foundational to strengthening how we operate, even though we knew it would create some near-term disruption. As we moved into the back half, our focus turned to rebuilding momentum, getting innovation to shelf and sharpening execution. That sequencing is still the right one and it remains central to our plan. That said, the pace of improvement has been slower than we expected in some businesses and as a result, our third quarter results were mixed and fell short of our expectations. We continue to make progress on market share across much of the portfolio, but more gradually than we anticipated in certain categories. Gross margin also came in below expectations, driven by higher-than-expected supply chain costs and delayed cost savings as we deliberately prioritized stabilizing the ERP. Even with those challenges, we remain confident in the path forward. With the ERP implementation now complete, we're better positioned to convert our innovation, investments and distribution gains into value superiority for our brands and stronger results our focus is squarely on execution, delivering the fundamentals, accelerating innovation performance and finishing the year with momentum as we set up for fiscal year 2027. With that, Luc and I are happy to take your questions. Operator: [Operator Instructions] And our first question comes from Peter Grom with UBS Financial. Peter Grom: I was hoping to start just on the top line trajectory. You touched on some of the macro pressures. But as you just mentioned, the progression of your business has not been in line with your expectations. So I mean, you touched on different areas in the prepared remarks, but do you have any perspective as to why the improvement isn't taking shape the way you hoped? And I guess as you look out to '27, do you have confidence that you will see stronger performance across more pieces of the portfolio? Linda Rendle: Thanks, Peter. I'll get started and Luc can build if there's anything he wants to add to this. I'll start with there's areas of continued momentum in the portfolio that are going as well as we expected or better. I'd call out our cleaning business, which continues to be an area of strength and of course, is our biggest business. Innovation is going extraordinarily well there. And despite a very competitive promotional environment right now, we continue to win and win share. International, despite disruptions around the world, continues to perform with strength. We're seeing Glad make significant progress, so shares quarter after quarter have sequentially improved. We're seeing distribution pick up on that business and some of the actions that we took investing back in price have done really well. Food, we returned to share growth this quarter. So lots of things going well and where momentum continues. And really, the area of the shortfall is a few businesses we expected to make more improvement that did not quite make the improvement that we expected in Q3. We expect continued progress there in Q4 and then continuing to make improvement in fiscal year '27. And I'll talk about a couple of them. The first and most importantly would be Litter. Category tailwinds continue to be exceptionally strong, and we are committed to getting back the share that we have lost, and we're doing that through a complete reinvention. So for those of you who saw what we talked about in CAGNY, this is really a fundamental reset of our Fresh Step business. We changed all of the items. We changed their names. We changed their claims, pack size through price pack architecture, and that began to roll out at the end of Q3. And while largely that foundation is now in place, now we're doing the really difficult work of mapping consumers from what they used to buy in Fresh Step to the new items. I would say the distribution came in generally in line with what we expected, which was an increased amount of TDPs. But unfortunately, some things aren't quite where they need to be, and we're working on improving those in the next few months. And that would relate to shelf placement on a couple of items in key retailers, et cetera. But we're addressing those fast and making changes. So I think Litter is going to be just bumpier, and it's not totally unexpected given the amount of transformation we're taking on there. And I'd also remind you, Litter is going to be a multiyear process. We talked about this was the first important step, but we've got to get innovation back on track to the place where over time, we can begin building or growing share, not just rebuilding share. And then the other area I would just call out would be Food. And although we did grow share in the quarter, and we saw portions of the elements of the things we put in place working, the category was weaker than we had expected. So we expected a low single-digit decline. It was closer to a mid-single-digit decline in the category. We're seeing high promotional intensity and deep discounting from competitors in that category, which is putting pressure on dollars. And we're also seeing some consumer trends that we're watching closely on GLP-1s, et cetera. But the good news for Hidden Valley is we did some price pack architecture work. I think you all recall, we had made a transition where we flipped our bottle upside down, which was consumer preferred right before last February when kind of value superiority really accelerated from a consumer perspective. So we have since reversed that decision and put our regular 16-ounce bottle that everyone knows and loves back on the shelf. That's playing well. In addition, we've just recently launched a number of trend forward Hidden Valley launches, including protein forward options, Avocado Oil item, and we believe that's why we've seen that inflection in share and that, that should continue moving forward. So net, Peter, a lot is going well, and we're making progress in a lot of the areas we expected to. I would just call out Litter making slower progress than we had expected and Food are really working to get that category going again. Peter Grom: Okay. Great. And then I guess I know we'll get '27 guidance in August, but there's just a lot of moving pieces here with the $0.90 and now this inflationary pressure. And I guess if I look at the guidance this year, it would seem the majority of the $0.40 move at the midpoint is related to cost pressures, which if you were to annualize, would seem like a pretty substantial headwind. So just -- is there any way to frame how you see costs and inflation looking out to '27 at this stage? Luc Bellet: Peter, this is Luc. I can try to answer that. I mean, obviously, it's a very dynamic situation and uncertainty. I would say it's too early to share any perspective for next fiscal year. And as you can imagine, we're currently working on next fiscal year, working on a wide range of scenarios, including a wide range of possible -- potential outcomes. Having said that, what you can see in Q4 is the current impact of the higher oil price. Right now, we are assuming about $100 per barrel will be the midpoint of our estimate in Q4, which is about between $20 million and $25 million of headwinds or about 130 basis points of gross margin. So that gives you a point of reference. This is obviously material. But because it's in Q4, we didn't have time yet to deploy any of the mitigation actions. So this is -- we're basically getting the full gross impact in Q4 and not yet any of the mitigations. As we talked in the past, over time, we feel confident in our ability to cover those input increased costs. We have a solid track record over the last few years. And if anything, we've developed a really robust set of tools around integrated margin management. And we have a really strong pipeline of cost savings next year. Now again, I'll get back to my first point, which is it's very hard to predict what might happen in the next few months, next quarters or even the next year. Operator: And we'll move next to Filippo Falorni with Citigroup. Filippo Falorni: Linda, I was hoping you can talk about the shelf space gains that you realized so far versus expectations, especially as we think about Q4 organic sales and as we're heading into fiscal '27. Are they going according to plan, especially around the innovation? And then are you seeing any of the areas of the business where you're seeing maybe more or less shelf space than you were expecting? Linda Rendle: Sure. Thanks, Filippo. So shelf space gains are going according to our plan at an aggregate level, and then I'll touch on a few businesses. So if you look at Q3, total distribution points for Q3 were up over 5%. And we know that our retailers are still resetting our shelves and will through the remainder of Q4. So we expect continued progress on that as we move through this quarter. That being said, what we're watching is not only that we got the gains, but the items are in the right locations. So I'll call it Litter. We got the distribution gains that we expected, but there are places where it was shelved in a different place than we had expected or next to an item that we didn't expect. So we're doing that type of detailed shelf work, but all of the distribution points were there. And I would say a number of the businesses, like I called out Glad that we have been working on, we feel good about where we're landing on distribution points there, and that will continue to accelerate into Q4 as well as food behind our innovation and our price pack architecture work. So on track from a shelf space perspective, but now we'll do that work to ensure that items are placed on the shelf where they should be. Filippo Falorni: Great. That's helpful. And then, Luc, maybe I can follow up on Peter's question on the cost headwinds into next year. I guess as you think about the mitigating -- potential mitigating factors, how are you thinking in terms of order of importance between cost savings, potential from pricing and any other levers that you can pull to mitigate some of those headwinds? Luc Bellet: Filippo, yes, we're looking at a whole set range and looking at essentially all elements of our integrated management set of tools anywhere from leveraging RGM and leaning more in RGM and PPA in some business units to lean more into productivity and cost savings, and it's a whole wide range of potential savings, including potential reformulation, supply chains. And we're also looking to accelerate some more structural cost savings that we had planned maybe later in '28 into '27. And as you probably saw in Q4, we are recognizing a lot of onetime cost, and this is in our gross margin. That's a headwind of 50 basis points, but that's going to allow us to actually accelerate one of those more structural cost savings. So I would say it's across the range of levers. Of course, it will differ by BUs depending on the competitive dynamic as well as the pipeline that was already existing. Operator: And our next question will come from Andrea Teixeira with JPMorgan. Andrea Teixeira: I wanted to just go back to the comments, Linda, you made on the exit of the quarter in the prepared remarks and things got tougher, especially for the Food for Hidden Valley. I'm assuming you -- can you comment a little bit on how you landed as you exit the quarter, the categories. As you said, it was like a mid-single-digit decline for Food, but just in general, in all categories that you're in, if you can give us like an estimate of how much the categories have contracted. And then as you think about like the view that you embedded in there, in terms of the mitigations and all of that, do you feel you can have a potentially an RGM that could allow you to create or maybe pivot into RGM, as you pointed out, even in the first half of the year or that's going to be more of a long, let's say, a long-term shift that you wouldn't be able to make in such a short period of time? Linda Rendle: Thanks, Andrea. I got it. I'll start with the categories, and then I'll move to your question on RGM. So from a category perspective, we thought at the beginning of the year, we would be in the range of flat to up 1% in aggregate for our categories. And what's played out through Q3 is exactly that. So we're about in the middle of the range. What we did see in Q3, though, was market differences in January, February and March. January and February were more in line with what we expected, and March was slightly better, meaning that the categories at the end of Q3 were slightly above our expectation of 1%. What we think happened in March was that people received additional tax refunds and some of that money they spent back in essentials categories on stock-up trips. But we're starting to see that decline a little bit as people are having to spend more money at the pump. But generally, still for the remainder of the year, we expect our categories to be in that range of 0% to 1%. Some of them are higher, as we noted. So Litter is closer to mid-single digits. We're seeing Food down closer to mid-single digits, although we're hoping, again, some of those actions that we've taken are going to help mitigate some of that and then a range between those 2. Most of our categories were positive, though, this quarter, which is good news. I think the important part to note here is that even though the consumer is under stress, and you could argue a lot more stress now given what they're experiencing from gas prices and just the uncertainty of what's going on, they're still really resilient in our categories, and that's a good sign. We're seeing them continue to buy innovation. Private label shares did not increase this quarter. They're still shopping for brands. We're seeing the premiums here in many of our businesses do very well as people are looking for value in all of its forms, whether that be convenience or a little bit of joy in their lives as well as trading up to larger sizes and trading down to smaller sizes. So all of that's playing out. But I would say, generally, again, the consumer is pretty resilient in our categories. And we will watch closely for '27 for what this means. I think what Luc outlined from a cost perspective is the single most important variable, whatever happens in the Middle East and how costs play out, that will impact the consumer environment in '27. But again, what we're focused on is that we have resilient categories. They respond well to innovation. They respond well to growth plans, and that's what we're focused on is improving our superiority and being the leaders in category growth as we move to '27 and making improvement on share. And one of the important levers is the second question you had, which is RGM. And this is something that we are live in action right now. So we gave an example, if you might recall at CAGNY that we did RGM work on glass. And we actually took the price down on one of our items that made a significant difference and grew a significant amount of share. We are doing that work across our businesses. And actually, in the coming weeks, we'll have a couple more tests in market. And if those tests do well, we'll expand those. So we have that built into our Q4 plan, and we would expect additional activity as part of our fiscal year '27 plan. Andrea Teixeira: And that's super helpful. And then if I just can squeeze the GOJO's acquisition. I mean, obviously, you have given the synergies. Did that change as you point out, like the impact that I think if I understood you correctly, Luc, you mentioned 30 basis points gross margin headwind. But how does that change for GOJO's when you gave guidance at the time, it wasn't when we saw oil prices at these levels? Linda Rendle: So for GOJO, and then I'll have Luc walk through the financials just so we're clear, but I'll make a few comments. We closed on April 1 and have been deep at work on integration and integration planning since then. And I'll just say my confidence remains incredibly high on this acquisition, both from a strategic perspective and the fact that it gives us additional growth exposure in health and hygiene, where we have a long history of strong performance. The team, we were able to retain the management team. We're seeing strong results on the business. And as we think about that moving forward, we knew it had a different profile given it's a Pro business, just like our Pro business has a little bit of a different profile. It has higher SG&A, lower advertising, a bit lower gross margin. But overall, this is financially attractive and will be accretive to the company in the near term, and we outlined that in the prepared remarks. And again, I'll have Luc go through it. But I would just say that my confidence continues to increase that this is a great acquisition for the company. Luc Bellet: Yes, I can -- I'll add maybe a little bit more context around how it's impacting the P&L. Maybe what I can do is some of it was already included in our prepared remarks as we think about Q4, but I'll also just give you a sense of how it might impact next year. So maybe let's start with growth. So we're adding a business of $800 million that has a solid track record of growing mid-single digits. And so far, they're progressing as expected during the calendar year. So that means that we will be adding $200 million in Q4, right, which adds about 10% for the quarter and about 3% for the full year, and we'll add the remainder in fiscal year '27. So that's on growth. EBITDA margin, nothing changed. As we discussed, the business EBITDA margin is in line with that of Clorox, right? And so it will be year 1 EBITDA neutral. And of course, as we continue to be confident in generating about at least $50 million of run rate cost synergies. And so that means accretion in EBITDA over time. Now maybe just a comment on how do we think about the integration and strategies. We're really going to prioritize the integration during the first year and expect to start delivering both revenue and cost synergies starting the second year and the third year. We -- the good news here is that we have retained the management team. We have separate resources that are dedicated to the integration, and we also retain an integration partner to help lead through the execution, which is already off to a great start. So that's on EBITDA margin over time. Now on the rest of the P&L, Linda mentioned it, given that the business is about 80% B2B, the P&L looked a little bit different than the average of Clorox, right? So the gross margin is a little dilutive, and so that will be about 50 basis points of dilution in year 1. Now of course, some of the synergies will be in supply chain. And so we would expect gross margin to increase over time and get pretty much in line with -- over time with the average of the company. Now that's going forward, and that's also in the fourth quarter. But in the fourth quarter, you also had the recognition of onetime associated with the transactions, which are related to an inventory value step-up, right? And so just that's onetime that's worth about 150 basis points of headwinds in Q4, but that's nonrepeating. And then if we look at the other line of the P&L, if you look at SG&A, as Linda mentioned, it will be -- it's a little higher than the average of the company. So it will probably add less than 1 point to the total company average when it's fully integrated in year 1. Again, that will go down over time as we start realizing synergies. And advertising is much lower, not that different than our own Pro business. And so that will actually probably bring the advertising as a percentage of sales down by about 1 point initially and probably ramp up as we continue growing the consumer business. So that's for the different line of the P&L. And then the last thing I'll mention, of course, our interest expenses will increase. Our run rate pre-acquisition was about $100 million. And so you will see about an incremental $30 million in Q4. And then next year, we expect about $110 million above and beyond the $100 million run rate. Operator: We'll move next to Robert Moskow with TD Cowen. Robert Moskow: You are one of many HPC companies that have talked about rising inflation from oil-related costs. And the higher costs are all pretty uniform. Is it possible that since everyone is kind of facing the same cost at once, that makes it a little bit easier to go to retailers and argue for either some price increases or maybe some less generous price promotion? Linda Rendle: Robert, yes, I think what you've heard from everyone is we expect rising inflation and what Luc talked about was our ability to handle these over time, and we feel confident about that ability given the toolbox that we've built over the last number of years and certainly how we handled the last round of inflation that we experienced in 2022. That being said, on the pricing front, although we're evaluating pricing and expect that we could take potential targeted pricing, we are approaching this with a high level of discipline and caution. We know the consumer is under stress, and our absolute #1 priority is to ensure that we are driving improvements in value superiority to drive our categories and to drive share. So we do see there's places where we think we can take pricing. There are places where we can do trade optimization. The point that Andrea made on RGM is going to be very important, and we can be very targeted with that activity. So I think these are conversations that certainly everyone in the industry will be facing, which always makes it a more productive conversation because everyone sees what we see. But at the same time, we are all focused on the same thing and our retailers are seeing exactly what we see, a stressed consumer, and we want to make sure that we're doing the things for long-term category growth that are right. And so again, I feel like we have the right tools. I know we can handle this. We'll discuss the pacing between sales and margin as we get a better look at what '27 will bring from an inflation perspective. And our #1 priority will be on driving consumer stability and ensuring we have value superiority to do that. Operator: We'll move next to Anna Lizzul with Bank of America. Anna Lizzul: So your second half guidance here was somewhat hinging on your ability to deliver here on innovation. And I know it's still moving forward, but it's proving challenging, I think, for that to come through fully in this environment. So I was wondering if you can elaborate on the ways maybe how you're adjusting moving forward, meaning have there been any changes made on these innovation investments or marketing spend as you're thinking ahead? We've also seen some greater exposure from private label and the data coming through in certain categories. So wondering if you can comment on this as well. And then longer term, just with GOJO, do you see -- still see your ability here to meet your longer-term IGNITE strategy just given the margin profile of the business and then the potential advantages that come from this acquisition here longer term? Linda Rendle: Thanks, Anna. I'll go through these. And if I miss anything, please come back to me. Innovation, that has been largely very successful in this back half. So despite everything that's going on, our innovation execution, and I'm going to put Litter to the side for a moment, and I'll touch on that again, has been great. So our largest innovation with Clorox PURE, which is our allergen platform, has gone very well. We got early wins on distribution. We were online early. We're getting great reviews. Retailers are very excited and they're excited for the next round that we have coming at the beginning of fiscal year '27. We'll bring them some new benefits in this category. But on that, we got preferred shelf placement. And these are new sections of the store for us, and retailers are partnering with us to ensure we can get this in front of consumers. So feeling terrific about that big innovation platform, its execution and the results, which are at this point from a velocity perspective, above expectations. I'd also note that the other innovations we have in Cleaning, including the expansion of our Scentiva line continue to do really well. We launched a new flavor in Cherry Blossom and that has been our #1 scent, and we're expanding that scent into different forms. But that's a place where, as I talked about, consumers are continuing to willing to pay for a premium experience and joy and scent fit in that bucket and Scentiva continues to personify that. I'd also call out our food launches, which we believe are off to a good start and our Glad line where we have a new absorbent layer in our trash bag, we continue to feel good about the distribution and the plans for that as well as new scent. So generally, innovation, very strong execution and strong performance. Litter, again, early days, and this was a hard conversion. So I would note it's not unexpected where we are, but we just have not proven yet that it is exactly what it needs to be, and we are making the adjustments to the plan. I feel good about the fact that we're offering a better value. The claims are better. The packaging is better. Our digital execution is much stronger, and we're seeing very strong digital pickup on Fresh Step, but we don't have yet the whole thing in market yet to see exactly where we need to make adjustments. The places we do know we need to make adjustments, we are with retailers right now doing that. So I'd call that out as the one place in innovation that is behind our expectation with everything else at or above. And then on -- I'll go to your next question, as long as I've covered innovation sufficiently for you. I'll start with private label. And I think I mentioned in one of my comments that private label shares have been flat over the majority of our categories. It's basically stabilized. We're watching it really carefully because we have seen ticks up in certain time periods as retailers promoted or and bring in a new item. But generally, consumers continue to want brands, and they continue to want value overall, not just the lowest price. There are places where we've seen a bit more pickup in private label. Brita would be one. We're watching that one carefully. We've seen that trend over time. And as we continue to launch innovation, we end up getting some of that share back, but that's a place we're watching carefully. And then I'd say we're watching carefully any other place where retailers are leaning in and making investments. But overall, private label just hasn't had the impact that many would have expected. And I know many of you are asking questions about that. We've continued to see it play the role that it normally does, which is offering a low price for those consumers who need it. And then on GOJO on the long-term algorithm, certainly, GOJO is a strong step to delivering our overall algorithm, which we remain committed to. But also what is also very important is that our categories get back to normalized levels in order for us to deliver that. So because it's accretive from a growth perspective, we see that playing a role in '27 and beyond. And of course, most importantly, we're focused on getting our core categories back up to what they were before in low mid-single digits. Operator: And our next question comes from Chris Carey with Wells Fargo. Christopher Carey: I just wanted to ask about just first and foremost, as a clarification. Was there any kind of like shipment versus consumption dynamic in the quarter? I think just health and wellness and household specifically came in a bit different than expectation. I realize that you had the timing dynamics from last quarter, but I just wanted to check how results compared to underlying consumption as you see it. And I have a follow-up. Luc Bellet: Yes, Chris, I can take that. There was certainly a lot of movement across segments and difference between shipment and consumption. For the total company, U.S. retail, we -- it all netted out to about 1 point of negative timing relative to consumption. Now if you remember, in the second quarter, we shipped volume ahead of consumption in health and wellness ahead of our last wave of manufacturing ERP implementation. So we were expecting that point of favorability in the second quarter to reverse in the third quarter and that happened. So that's on Health and Wellness. But then you had more noise in both household and lifestyle, and they were related to a mix of retailer inventory adjustments, mostly in lifestyle as well as some early shipments in -- mostly in household, both in Litter and in Kingsford. So those 2 offset each other. There were about a point of the company -- a point of total company each. And the retailer inventory adjustment is just onetime and nonrepeating. But of course, the early shipment is something that we expect to reverse in the fourth quarter. So that will be a little less than a point of headwind in the fourth quarter. Now the fourth quarter has a lot of merchandising leading up to July, August, September period. So there might be more noise. And so we'll see what happens. But that's the gist of it as you think about shipment related to consumption. Christopher Carey: Okay. The follow-up question is just around the portfolio. There are some areas of the portfolio which have been challenged for some time. There are some categories where maybe they're not traditionally where you would think you are right to win exists. When you go through moments like this where market shares are maybe progressing a bit slower, there's potentially an opportunity to be even a bit more focused. Are you having those portfolio review conversations? Is that activity becoming a bit sharper? Any context on just when you're going through these kinds of cycles, how you think about them and how you react? Linda Rendle: Sure, Chris. First, I'd start with we're always doing portfolio work, and we have a regular review process as a management team and, of course, importantly, a regular review process as a Board where we're looking at our portfolio, and we're doing a number of things. We're deciding how we allocate resources within the portfolio that we have, where we want to place bets, where we think we need to be more efficient. And we do that on a regular basis. And in fact, we'll do that again coming up here for fiscal year '27. And then we are evaluating the portfolio more strategically as well and looking at inorganic options, and that's led to many of the things that we have done, including the divestiture of Argentina, the acquisition of the majority of the ownership in the JV that we had in Saudi Arabia as well as the sale of VMS and of course, importantly, the acquisition of GOJO and our expansion in our Health and Hygiene portfolio. And that is exactly the result of the work that we have done. And we'll continue to do that work. It's important work to ensure that we have a portfolio set up for success. The thing I would note is some of these issues, we just -- we've got to execute better and we have to deliver better superiority. And a case in point would be Glad. In Glad, trash it can be a tough category. It's very competitive. Consumers can be price sensitive, but innovation works in that category. And we've seen through the work that we've done on getting sharper price points, better innovation, stronger plans that Glad has begun to progress and make progress. We saw the trash category was quite strong this quarter, up over 2 points. And our share is sequentially improving significantly, and we feel good about our Q4 plan. So it's a great example of where we talked about that, that's been a little bit of a thorn for the last couple of years. But putting the right measures in place, being disciplined about cost management, ensuring that we have superiority, we can make progress, and we're doing just that. And I would expect that for any of our businesses. So maybe just to sum up, Chris, yes, we're always doing the portfolio work. That leads to the type of actions like we've taken. And job #1, no matter what, is always ensuring that we have a healthy core, and that's exactly what we're focused on. Operator: Our next question will come from Javier Escalante with Evercore ISI. Javier Escalante Manzo: Hello, everyone. I guess mine are for Luc, I think. So double clicking on the -- hello, can you hear me? Linda Rendle: We can hear you. Yes, perfectly. Javier Escalante Manzo: Okay. Sorry for that. Okay. So perhaps for Luc, I think, because they are very mechanical my questions. One clarification about price mix for household. So reported was flat, right? But Circana data shows pricing running down mid-single digits. So trying to bridge the difference, should we think of that to be some sort of an artifact, meaning that you advance shipments of litter and grilling and that trade and marketing spending will accrue in Q4. So shall we expect pricing to become negative in Q4? And then I have a follow-up on Glad. Luc Bellet: Yes, Javier, in general, like the price/mix for household, I would step back, and we might have a little bit of noise by quarter, but we expect it to be about a point of headwind, meaning that volume would grow about a point ahead of sales. That's the average for the quarters. We'll see a little bit of difference by quarter, and it depends, of course, on promo events. And in household, especially if you have different promo at club, this can actually really distort the data and which might not be fully reflected in the same exact period from a P&L standpoint. So that's maybe what it is. But I wouldn't expect a big shift in Q4. Again, just we're currently tracking as expected on price/mix for the remainder of the year. Javier Escalante Manzo: Very helpful. And on the Glad JV buyout, what category growth and pricing assumptions you guys built as you presented the capital spending model to the Board when you value the acquisition, right, and whether you compare that NPV and return of the buyout against divesting it, for instance? Could you elaborate on that? Linda Rendle: Javier, we won't get into that level of specificity. But what I will say when we are talking about this with the Board and why we feel really great about what we did in Glad, we saw an opportunity to move faster. And that our Glad JV offered great innovation results for a number of years. But we knew that by having full control, we would be able to move faster. We would be able to get innovation to market faster, make changes faster. And we've seen that come to life in the plan, and we believe that's part of the reason we've been able to have an inflection in the Glad business. The other thing I would just note is we look at all the businesses, like I said with Chris, we're always looking at our portfolio. And of course, there's a multitude of things that have to be true. There has to be a buyer. There has to be interest. It has to be the right move for our company. We have to make sure that we're able to execute any time we take very seriously whether we've divested a business like Argentina or VMS or acquired one, the organizational capacity and resources to do that. So we're evaluating all of those things with the Board. And net, where we landed is ending this JV and moving forward with our Glad business was the right thing to do. And we are continuing to be focused on innovation in that category, ensuring that we get prices right and then managing through what -- I don't know exactly what it's going to look like, as Luc said, but a potential difficult cost environment coming up here for an uncertain period of time. Operator: And our next question comes from Olivia Tong with Raymond James. Olivia Tong Cheang: I wanted to ask about a comment that you made in your prepared remarks on Glad and saying that you're prepared to adjust your plans as needed to balance growth and profitability. Obviously, that business is the most impacted by resin costs and if they start to materially move. So we've seen a lot of your staples peers doubling down on brand support and how that isn't going to be an area where companies are going to look to pull back despite the increased anxiety about the consumer -- despite the increased inflation because of the increased anxiety about the consumer. So if you could just sort of elaborate on that comment around the balance of growth and profitability, where you could potentially find areas of flexibility within the P&L given that Glad has started to turn the corner and just understanding your ability to hold that momentum? Linda Rendle: Thanks, Olivia. Yes, we really do mean a balance. And Glad is one, as you rightly note, that does have a big impact depending on energy complexes and then how it plays out into resin costs. And it's one that we have a long history of taking price and actually taking price down over time depending on where those markets are. So too early to say what we're facing in fiscal year '27. So we're evaluating it closely. But I'll just make a comment that's true of Glad and it's true of the entire portfolio. I said a little bit earlier, but I'll emphasize it. Our #1 priority right now and in fiscal year '27 will be on driving value superiority in our brands, investing in them strongly, and I mean that very broadly. I mean that in advertising and sales promotion, and we're strengthening our plans and investments right now on that as we think about '27 ensuring that we have the right RGM activities in the market, as I gave you an example with Glad, and we'll be putting more tests in the market that we think will pan out well and potentially could be more permanent moving forward. Of course, we've invested in data and technology. So we're making all of the spending we have more efficient at the same time, moving more dollars into working media and out of nonworking media, using AI to take costs down. We're focused on just a holistic way that we can get more investments to our brands and drive superiority. And that will absolutely be true of Glad. And we will evaluate is pricing the right move? Would we change trade, et cetera. But that's the order of operations for us. Number one, value superiority in driving categories and shares. Number two, and we believe we will be able to do both of these balance over time is recovering costs. And we think we have the toolbox to do both, and Glad will be no different than the rest of the portfolio. And the other thing that I would note is it's really important that we continue to be focused and we are on innovation. We said we were ramping up the back half. We have. Most of it has gone very well. We expect to continue to make progress in fiscal year '27. We feel great about our innovation pipeline over the next couple of years and getting -- if we can get another point of innovation, that is a significant driver to our top line and to our shares. Operator: And our next question comes from Lauren Lieberman with Barclays. Lauren Lieberman: First thing I just wanted to ask about was just the ERP stabilization that you talked about in this quarter. First, a technical aspect. Sort of where does the incremental cost from that show up in the gross margin bridge you guys share so we could just kind of try to understand the magnitude of the pressure as we think about into next year, the comp. And then just sort of anything that you could add on where you stand? You said, I don't know where -- when during the quarter you felt you reached stabilization and kind of what that entailed? And then I do have a second question afterwards. Linda Rendle: Lauren, thanks for the question. I'll start, and then I'll hand it over to Luc for the technical margin [ question ]. So we were able to complete our ERP in Q3. If you all recall, we did the major portion of the U.S. at the beginning of our fiscal year, but then we had a series of changes at our plant, and that finalized in Q3 with very minimal impact as we had expected. So mainly the ERP stabilization too, is about getting our performance and service levels up, and we continue to stabilize that in Q3, and that was a result of the cost. I think I would just maybe take an opportunity to say again how important this transition is to the company. And we recognize it's created some dispersed focus, but it's critical to having the foundation of the company that allows us to use all of the tools from a data and technology perspective that can help us grow our business, make our business more efficient, and so recognize the noise and certainly the dispersed focus we've had. But we feel good about where we are and the fact that we've gotten to the place where it is -- all 3 rounds are complete. And it did have a margin impact. I think we talked about that last quarter, where we would expect some incremental costs that were a bit higher than we had expected. And I'll have Luc walk through those details now. Luc Bellet: Yes. And Lauren, maybe one more piece of context is we rolled out a lot of different, what we call module as part of the ERP transition. Some of it is supporting our manufacturing operations. Some of it is supporting our logistics, demand fulfillment and order to cash. And if you remember, in the first quarter and second quarter, we've been slower in ramping up our order to cash and stabilizing our service levels. And we knew that we will continue that stabilization through the third quarter and the fourth quarter, right? Now we had expected -- we incurred additional costs in the front half as we stabilize that service level. And those costs are mostly in the area of logistics and fulfillment, right? So think about cost of expediting orders, additional costs moving around inventory more than you should, less than optimal transportation costs and incremental labor costs. So as you -- now we expected those to linger in the third quarter and those costs ended up being a little more than we had anticipated. Now the good news, though, is that as we moved through the third quarter, we started making more progress on stabilization and towards the end of the quarter and this month, we incurred very minimal costs. So we're seeing those come down. And for the fourth quarter, we would expect no incremental costs are very minimal. So that was one portion of the shortfall related to our outlook. And then we also ended up delaying some cost savings and having a little less cost savings than we planned in our outlook, which further put pressure on gross margin. And that, again, related to the stabilization of the order to cash and service level. If you remember, in Q1, Q2, as we were at the peak of the ERP disruption, we had lower cost savings than our historical level, especially in Q1 as we essentially had the organization and operational organization and resource really focused on stabilization and ramping up service levels. And so since it took a little longer to ramp up in the third quarter, we had to further delay some cost savings. And so that will -- some will go in Q4 and some of Q4 will go in next year. Now the good thing here, though, is that we already had a strong pipeline next year, and that will only strengthen the pipeline going forward. Lauren Lieberman: Okay. Great. And then my second question was just about TDPs earlier in the call, Linda, when you shared that TDPs are up 5%, which is great. We can definitely see that when we look at the Nielsen data. But what we have seen is that the velocities have actually been pretty weak. I guess you shared that the items are in the wrong place. So maybe the answer is just that simple. But I just wanted to check in if that's kind of the right way to think about it and that as you get that on-shelf execution more in line with your plan and your thinking that, that's where we should see the indication of change. Is that right? Linda Rendle: That's right, Lauren. We would expect that ramp-up as we get things fully on shelf and we turn on advertising related to those specific items. I'd also note on Litter, if you're specifically referring to velocities there, which you likely are given what we've seen in performance, because that was a hard conversion, and I know you all know this, but I'll take the opportunity to explain it a click more. We took an item and then we completely changed it. So actually changed the UPCs, and that requires a hard conversion at a retailer. So what happens is in the old item, they start to discontinue it and they sell it down before they bring the new item in. And in some places, they don't want to have any overlap in that. So there were places where we had some out of stocks. It's pretty normal in a conversion, which can impact velocities, and that's what we think some of what the noise was in Litter and will continue to be until we get the shelf fully reset is, and we're also noticing there's some change in velocity data, Lauren, due to the fact that people are making value choices with trading up to larger sizes and small, make the velocity information a little noisy. But where it's cleaner, we see strong performance. And as we continue to ramp up spending, we would expect that to continue. But literally, we'll be watching very closely, and we might have to make additional adjustments so we can get those velocities back up. Operator: We'll move next to Stephen Powers with Deutsche Bank. Stephen Robert Powers: Great. I thought I was on mute. I'm glad not. Okay. Fantastic. First question to round out the gross margin. I guess -- and maybe I'm a little slow with the punch here, but can you just, Luc, maybe bridge exactly what's changed and what the drivers are between last quarter's full year outlook for gross margin down around 100 basis points and now down 250 to 300. I think I've got the buckets qualitatively, but I'm having a hard time assigning like numbers to those various drivers. Luc Bellet: Yes. And Steve, just confirming you're asking a bridge for the third quarter or for the fourth quarter? Stephen Robert Powers: For the full year and prior guidance -- current guidance. Luc Bellet: Good. Well, yes, you mentioned it. There's essentially 2 impacts. The third quarter, we just talked about it. It was a little over a point, and we just talked about what drove that. And then there was Q4. And Q4, let me unpack this a little bit because there's certainly some complexity. I guess the most important thing when we look at Q4 projected margin, it's probably important to frame it within the context of several temporary and nonrepeating items. So maybe what I can do is let me do a quick rec versus a year ago and then just talk about what is different in the new outlook. So versus a year ago, we're also -- we're seeing about 5 points of decline versus last Q4 gross margin. 150 basis points of that is coming from the fact that we're lapping strong shipment and operating leverage associated with the ERP transition. So that was in our prior outlook, but it's still significant on a year-over-year basis. And then we have about 200 basis points coming from the GOJO acquisition, right? Now as I mentioned, we'll expect ongoing in the first year to see about 50 basis points of gross margin dilution. And in Q4, we have 150 basis points of onetime items related to -- that are associated with the inventory value step-up of the -- that we acquired. And so that won't be repeating, but that creates a total of 200 basis points. And then the last item is really just recognizing about 100 to 150 basis points of elevated input costs related to the conflict in the Middle East. So that's the 5 points versus year ago. Now what is new, we already had the first item, which was the lapping of the ERP transition. Both the GOJO and the Middle East are new, and that creates most of the variance and then there's a few puts and takes. Probably the most meaningful one is what I mentioned. We have about 50 basis points of headwind associated with some onetime expenses related to a large cost saving projects that we're accelerating into fiscal year '27. So that's the bulk of the difference between our prior outlook and the current outlook. Stephen Robert Powers: Okay. Yes. I actually I follow that. That's very helpful. Okay. My follow-up then is 2 parts. One is you said earlier that the fourth quarter Middle East impact at $100 oil was a pretty full impact at $20 million, $25 million a quarter. So I'm assuming that annualized at $100, your impact at $100 of oil would be $80 million to $100 million. And therefore, we'd be looking at roughly $75 million incremental in fiscal '27, if you follow that kind of math. My second question is on advertising. You held the 11% of sales even as we layered on more sales with the addition of GOJO. So there's implied more advertising dollars in the guide now. And I'm just curious if that incremental A&P is intended to go against the GOJO portfolio or if it goes against your legacy portfolio? And if the latter, kind of where you'd be targeting it? Linda Rendle: Perfect. Steve, I'll start with just maybe a framing on the Middle East and cost, and then I'll hand it over to Luc for a couple more details, and he can cover the advertising in Q4 as well. So just from a Middle East perspective, I think what's important to note, and I'll just go back to what Luc said, I think that's what everyone knows, Q4 is right in front of us. So we can see the energy complex effects that are happening, and you got that right in the $20 million to $25 million. But as we look to the year ahead, what I would just caution us all to do is there are so many impacts potentially depending on how this conflict plays out, how long it goes, other related downstream commodity impacts that can happen that we're watching carefully, and they're just really uncertain and volatile right now. And so if everything were to continue as is, and it was just energy complexes, that would be a fair set of assumptions. But I think based on what we know and what goes through the Strait of Hormuz and things that are happening now across infrastructure, it's -- we'll be better positioned to tell you in '27 exactly what we think that looks like depending on the assumptions that we'll have at that time. But I just -- I wouldn't take that and just multiply that. That's only one of the impacts. And again, we'll be watching the other ones carefully as we move forward. I'll hand it over to Luc. Luc Bellet: No, I think that's right. And I mean, it's still a very helpful number, and it certainly materialize what we're currently seeing. Maybe just switching to your advertising question. So the short answer, Steve, is it's just rounding. So you are correct in Q4 we will see advertising as a percentage of sales going down by 1 point due to the integration of the GOJO business. But because it's only 1 quarter, it's about negative 25 basis points or so for the full year. So we're still rounding to 11%. Operator: And our next question comes from Edward Lewis with Rothschild. Edward Lewis: I guess just a couple of ones for me. Just Linda, you talked about value superiority in the last month. We've heard you talk about this a lot. I guess just wondering now how much of a role does price take when you're considering sort of value superiority, how it's sort of calculated or perceived just in light of what you were saying around the actions you've done about Glad. Just any color on that would be interesting. And then you talked about making some investments to address further cost savings going forward. Can you just elaborate a bit more on those? Because obviously, we've got pretty used to seeing very consistent cost savings coming through. And so interested to hear what you're doing there. Linda Rendle: Ed, I'll start on value superiority, and I'll cover investments as well and if anything Luc wants to add. So on value superiority, that is, by definition, a combination of the entire experience that we provide to a consumer. It's the product, it's the package. Is it where it needs to be? Is the place right? And is the proposition right? Does the brand stand for something? And then, of course, importantly, price. And those 5 things work together, those 5 Ps to give an overall value to a consumer. And what we aim to do is take those 5 and create overall superiority. And what we want to do is drive superiority through a better brand experience, through a better product, through a great package that gives consumers a new way to use a product or an easier way. And then we want to be able to price to that superiority, which usually means we can command a premium, which is what we do in most of our categories. And we just got to make sure we have that balance right. So for example, in Glad on that RGM activity where we took price down on 80 count, we didn't have that quite right. We took the price down, and we got back to a place where we felt we had overall value superiority, but we did need to pull the price lever to get closer in line to the right price gap that we needed. We're testing other things, as I mentioned, in RGM that we'll look at that for other brands where we want to be targeted to ensure that we have that overall equation right and where we think price is playing a little bit more of an important role or because we took 4 price increases as did the industry during that significant period of inflation, and there might be some places and we said we knew we would have to do this where we'd have to adjust. And again, we're testing a few of those now. And we also want to use things like price pack architecture and other RGM levers where we don't have to just take a truckload price, but we can do take pricing in different ways as we trade off benefits. So I would say price plays a very important role, but it is really about connecting it to those other 4 levers and making sure you have overall superiority. The most important thing that we can do, though, is have those other things right. So I'll take PURE, for example. We have a superior product that we know gives consumers more benefits to remove allergies. It's in a great package that consumers love and makes it easy for them to use. The proposition is clear. The claims are clear. We're spending against it strongly. And then we've leaned into digital and on-shelf placement to ensure they get it, and we can command a premium for that experience as a result and velocities are quite strong to start. That's the magic and that's where we want all of our brands to be. But if we need to lean into price in a couple of places to get back in line, we will, Ed. We've done that, like you said on Glad, and we'll do that in other places. Yes. And then moving to the second point on your investment on cost savings. So I won't give specifics on the project. We'll talk about it more later, but it's a big supply chain project that we're able to accelerate and will offer significant savings moving forward. But as we looked ahead into the cost environment in '27, we thought the right thing to do was to go ahead and accelerate that project. And so we made that investment in this quarter, and we'll talk more about what we're doing as we head into fiscal year '27. Luc Bellet: Yes. And Ed, maybe just as added context, we always have onetime investment associated with cost savings and usually plan pretty tightly by quarter. Since we've been removing and delaying some cost saving and accelerating some, that created a little bit of a difference in the fourth quarter. And just the magnitude of the project is a little larger than normally what we see. Those investments can be asset write-off, could be engineering costs, if you look at a manufacturing project -- manufacturing cost saving project as an example. Operator: And this concludes the question-and-answer session. Ms. Rendle, I would now like to turn the program back to you. Linda Rendle: Thanks, Jen. As we close out today's call, I want to reinforce a few points. First, while our third quarter results did not meet our expectations, we're operating from a much stronger foundation. The ERP implementation is complete, service levels have stabilized and complexity and costs are coming down. These are critical enablers of better execution. Second, we see clear signs of progress as we focus on driving value superiority across our portfolio. Innovation across the portfolio is strong. On-shelf presence is improving and teams are sharply focused on the fundamentals that matter most: availability, pricing and promotional effectiveness and end market execution. These actions are essential to building momentum through the fourth quarter. Looking ahead, we're also strengthening our plans and investments in targeted areas to accelerate share gains. And finally, we remain confident in our ability to translate these efforts into improved performance over time. While the environment remains challenging, we have the right strategy, capabilities and teams in place to finish the year stronger and enter fiscal 2027 with greater momentum. We thank you for your time and questions and look forward to updating you on our continued progress next quarter. Operator: And this concludes today's conference call. Thank you for attending.
Christie Masoner: Welcome to GoDaddy's First Quarter 2026 Earnings Call. Thank you for joining us. I'm Christie Masoner, VP of Investor Relations. And with me today are Aman Bhutani, Chief Executive Officer; and Mark McCaffrey, Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. [Operator Instructions] On today's call, we will be referencing both GAAP and non-GAAP financial measures and other operating and business metrics. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations site at investors.godaddy.net or in today's earnings release on our Form 8-K furnished with the SEC. Growth rates represent year-over-year comparisons unless otherwise noted. The matters we'll be discussing today include forward-looking statements, such as those related to future financial results and our strategies or objectives with respect to future operations. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our periodic SEC filings. Actual results may differ materially from those contained in forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, April 30, 2026. And except to the extent required by law, we undertake no obligation to update these statements because of new information or future events. With that, I'm happy to introduce Aman. Amanpal Bhutani: Good afternoon, and thank you for joining us. At GoDaddy, our purpose is to make opportunity more inclusive for all. We serve over 20 million customers globally, helping them establish their identity, build their presence and grow their business. We do this through an integrated platform that brings these capabilities together in a seamless AI-powered experience helping customers move from their idea to execution quickly and at a compelling value. Starting with Q1 results. We delivered revenue growth of 6%. This performance, combined with continued operational execution and structural leverage drove meaningful expansion in normalized EBITDA margin to 33%, up over 200 basis points. This underscores the durability of our model and continued progress towards our financial North Star generating strong free cash flow growth of 15%, while remaining committed to delivering long-term shareholder returns. As AI-driven innovation accelerates, customer expectations for speed, simplicity and measurable outcomes are rising. Customers are increasingly using LLMs across their workflows and getting familiar with chat-based interfaces. We are leaning into this shift, positioning GoDaddy as the platform that helps entrepreneurs turn intent into action through AI-powered experiences and outcomes. Our AI transformation builds on our core strengths of a trusted global brand, leadership in domains, scaled infrastructure, proprietary data, strong engineering talent and a world-class care organization. Together, these form a differentiated platform that allows us to deliver a seamless one-stop shop solution for entrepreneurs. We are moving quickly and intentionally with focus on delivering measurable outcomes for entrepreneurs. The positive impact of our AI transformation is clear in 3 areas: first, the adoption and monetization of our AI-native products; second, the expansion of Agent Name Service as a new identity layer for the Agentic Open Internet; and third, the use of AI to drive operational efficiency. First, we are making strong progress on our AI-native products. Airo AI Builder introduced last quarter on Airo.ai is an AI-native experience that enables customers to move from idea to execution in minutes, automatically creating websites, applications and core business capabilities across identity, presence and commerce. I work directly with customers using Airo AI Builder on a weekly basis and the customer feedback is shaping our roadmap and accelerating development. Our customers are looking for simple, integrated solutions for their core jobs to be done, and we are delivering that through Airo AI Builder. It is delivering strong early adoption and monetization is already scaling with customers. This new Airo AI Builder product offering has rapidly scaled to $10 million plus in annualized bookings run rate within weeks of its beta launch. While still early, the pace of adoption and quality of customer interaction is strong. Customers are building, publishing and purchasing incremental credits as they deepen their use of the product. Momentum continues to build week after week as we expand Airo AI Builder's functionality and distribution. We are expanding distribution of Airo AI Builder on godaddy.com and have begun selling it through Care. In Care, we drive higher adoption of premium plans compared to our online channels and receive direct customer feedback, both positive and constructive to improve the product. As a next step, we are ramping targeted paid marketing in May, funded through efficiencies elsewhere in the business. We are thoughtfully monitoring the mix between new and existing products as we scale, with a focus on optimizing overall customer value and maintaining margin discipline. The second major product initiative we introduced last quarter is the upgrade of Websites + Marketing, bringing AI-native capabilities into the product, while maintaining strong cost discipline for both customers and GoDaddy. This upgrade combines AI-driven capabilities with a powerful editor enabling customers to create and manage their presence more efficiently. The domains funnel remains our largest distribution lever for new customers. And in this quarter, we tested the upgraded product within that path. Early results exceeded our expectations and validated the direction of the product. We are excited to get the upgraded functionality in front of all our customers and are using experimentation to inform improvements on the experience. Our teams have embraced an AI-native approach across our customer products, and we are making meaningful progress delivering customer value. We are expanding these capabilities at a rapid pace, while maintaining disciplined investment as we scale distribution and marketing, we are confident in our ability to compete effectively. The second component of our AI transformation is Agent Name Service or ANS. We are working with large players and seeing continued interest in this technology. ANS extends the role of domains as a digital identity provider in an Agentic Open Web. We signed a couple of partnerships over the last quarter with real-world use cases and are working hard on aligning key players on the open standard and the use of Domain Name Service or DNS for agent identity and discovery. Championing the open standard and partnerships are key to getting to critical mass of support of the open standard and we are encouraged by early results. Non-GoDaddy agents in GoDaddy's ANS implementation now number in the thousands. DNS is the foundation of identity on today's Internet, and domains are uniquely positioned to play a role in agent identity and trust extending domain relevance into the future. Third, we are transforming GoDaddy into an AI-native company by deploying AI across our operations to improve speed, efficiency and customer outcomes. We are driving the most immediate impact in software development where AI is enabling the rapid creation of customer-facing applications with fewer dedicated teams. We are also testing the replacement of smaller third-party SaaS tools with internally built solutions on Airo AI Builder, particularly across corporate functions with the goal of reducing both cost and operational complexity. In Care, we are advancing to the next phase of AI-powered automation. In Q1, we achieved key proof points across both support and sales. On the support side, we launched Airo Care, a new AI-native support technology across voice and chat that handles a wide range of customer queries. We validated it against our existing offering, delivering strong improvements in resolution rates. Our first test improved resolution rate by approximately 50%. Subsequent tests demonstrated that Airo Care can equalize the resolution rates between English and non-English markets improving performance in non-English markets by over 150% and strengthening Care as a global competitive advantage. Airo Care is now rolled out to more than 50 markets and 20 languages. We will continue to expand use cases each month, while maintaining a strong focus on customer satisfaction, resolution rate, sales and cost. On the sales side, our AI-native commerce Airo sales agent makes voice calls and handles the entire commerce sales experience without human intervention. We have optimized the agent over the last few months and last quarter, it delivered conversion rates comparable to human-assisted sales for smaller leads. These are exciting milestones, and we plan to scale these capabilities throughout the year. Alongside these AI transformation initiatives, we continue to execute on pricing and bundling, seamless experience and commerce. These programs continue to drive improvements in conversion, attach and renewal rates. I want to briefly revisit the promotional offer we discussed last quarter. We refined the program to better balance customer acquisition and bookings, and these efforts are delivering results. the promotions drove strong gross customer adds and resulted in new domain registrations accelerating by 6% for independent and partner customer populations. Our strategy remains consistent. We are focused on attracting high-intent customers who attach, convert and grow over time, optimizing for long-term value. Towards this end, we also took the opportunity to remove a lower-value product offering this quarter. This partially offset the customer growth from the promotional offer, but did not materially impact bookings. In closing, we are operating in a dynamic environment with rapid change and leaning into our strengths. We serve more than 20 million customers globally, our domains business and our unwavering focus on microbusiness customers remains foundational, supported by our scaled integrated platform that connects identity, presence and commerce. This combination of global reach, proprietary data, seamless technology and our Care organization creates deep customer insight and consistent execution. Our model is built around attracting high-intent customers and helping entrepreneurs start and grow their ventures over time. This drives durable growth and expanding margin and strong compounding free cash flow. We continue to execute with discipline. And as we look ahead, our path forward is clear. We have a large market opportunity, a strong competitive position and the financial flexibility to continue investing to deliver enduring shareholder value. With that, here's Mark. Mark McCaffrey: Thanks, Aman, and good afternoon, everyone. In the first quarter, our model continued to demonstrate its durability, driving operating leverage, expanding margin and generating attractive, compounding free cash flow. Supported by a strong balance sheet, we had the flexibility to invest in innovation, while still maintaining a disciplined capital allocation framework. We delivered revenue at the high end of our guidance, while expanding our normalized EBITDA margin by over 200 basis points. At the same time, we generated strong free cash flow of $474 million, bringing our trailing 12-month free cash flow to $1.68 billion. We deployed capital through share repurchases, reducing fully diluted shares outstanding to 133 million. Our focus remains on consistent execution and delivering solid financial results as we continue to advance our AI transformation. For the quarter, total revenue grew 6% on both a reported and constant currency basis to $1.3 billion, and ARR grew 6% to $4.3 billion. International revenue grew 7% to $416 million. For our high-margin A&C segment, we drove 12% growth in revenue to $0.5 billion on continued solid attach of our subscription-based solutions. A&C ARR grew 10%, and this segment now represents approximately 40% of our total business. Segment EBITDA margin improved 110 basis points to 45% on product mix. Our Core Platform segment delivered revenue growth of 3% to $769 million, on 5% growth in primary domains with a stronger mix towards higher-priced non-.com TLDs. This was partially offset by softness in non-core GoDaddy hosting. The .CO registry contract expiration and tougher compares in aftermarket. Segment EBITDA margin expanded 150 basis points to 33% on product mix. Total bookings grew 3% to $1.5 billion, reflecting a few points of impact from our promotional offer we shared last quarter, the .CO registry contract expiration and lapping of prior year aftermarket strength. A&C bookings grew 9% and Core Platform bookings declined 1%. As we outlined in February, this quarter reflects the peak impact of both these dynamics, and excluding any FX impact, we expect bookings and revenue growth rates to be at or above parity for the remainder of the year. Our focus on attracting and growing high-intent customers combined with conversion improvements is driving durable growth and higher customer quality. We are driving increased conversion into primary domains and higher attach through Airo. At the same time, we continue to deliberately manage our product portfolio, exiting lower-value offerings and reallocating resources towards higher value opportunities. And our newer Airo cohorts are demonstrating that higher value with second product attach accelerating 30% faster relative to non-Airo cohorts. These cohorts are contributing to the increase in the number of customers spending more than $500 annually, which represents approximately 10% of our customer base. Higher attach and retention rates above 85% drove ARPU growth of 9% to $246. As we look ahead, Airo AI Builder is beginning to contribute directly to bookings. As Aman noted, this offering is already generating millions of dollars in annualized run rate organically and without dedicated marketing support. In parallel, ANS extends our leadership in a digital identity, positioning us to participate in the next evolution of the Internet infrastructure. As the architecture of the Internet evolves, our current strengths remain as relevant as ever, and our AI transformation positions us to consistently deliver profitable growth and capture value going forward. Turning to margins and free cash flow. Normalized EBITDA grew 13% to $414 million, delivering 210 basis points of margin expansion to 33% and exceeding our guide for the quarter. Operational execution, supported by AI-driven efficiencies and favorable product mix continues to drive margin expansion. Our expanded margin reflects the efficiency of our model and gives us the flexibility to invest in our AI transformation, while maintaining a strong balance sheet and a durable free cash flow profile. Free cash flow grew 15% to $474 million, with a normalized EBITDA to free cash flow conversion of greater than 1:1. We exited the quarter with $1.3 billion in cash and total liquidity of $2.3 billion. Net debt was $2.6 billion representing net leverage of 1.4x on a trailing 12-month basis and within our target range. On shareholder returns, we repurchased 3 million shares during the quarter, totaling $280 million. Since 2022, our share repurchase programs have resulted in a gross reduction in fully diluted shares outstanding of over 31%. And we ended the quarter with 133 million shares outstanding. Turning to outlook. We are reaffirming our full year 2026 guidance provided in February and expect total revenue to be within a range of $5.195 billion to $5.275 billion, representing growth of 6% at the midpoint of the range. As a reminder, our full year revenue guide incorporates just over 200 basis points of cumulative impact from the expiration of the .CO registry contract, our consistent exclusion of high-value aftermarket transactions and the impacts of our product evolution and our promotional offer. For Q2, we are targeting total revenue of $1.285 billion to $1.305 billion, representing 6% growth at the midpoint of the range. For both the second quarter and the full year, we expect A&C revenue growth in the low double digits and Core Platform growth in the low single digits. For Q2, we are projecting a normalized EBITDA margin of approximately 33%, and we are reaffirming our target of over 33% for the full year. This reflects our ability to drive continued operational leverage and AI-driven productivity gains, while increasing our investments in our AI-native products, marketing and compute costs. For the full year, we expect normalized EBITDA to maintain a greater than 1:1 conversion to free cash flow, and we reaffirm our full year free cash flow target of approximately $1.8 billion. We continue to be on track to exceed our free cash flow North Star CAGR of 20%. On capital allocation. We operate within a disciplined, return-based framework and have deployed greater than 95% of our free cash flow over the last 4 years towards share repurchases. Our continued commitment to returning capital is a clear expression of confidence and the strength of our cash flow and the long-term value we are creating. We remain focused on allocating capital to its highest value uses with a priority on driving long-term shareholder returns. In closing, the fundamentals of our business remain strong with consistent engagement and durable drivers of ARPU, supporting our long-term trajectory. As we move forward, we remain focused on disciplined execution and continued progress toward our North Star. We look forward to talking about these and other updates at our investor event later this year. I'll now turn it over to Christie to open the line up for questions. Thank you. Christie Masoner: [Operator Instructions] Our first question comes from the line of Vik Kesavabhotla from Baird. Vikram Kesavabhotla: Can you hear me okay? Christie Masoner: We can. Amanpal Bhutani: Yes. Vikram Kesavabhotla: Great. So my first one is on the customer base. And I'm curious, as you navigate all these changes in the product portfolio and in your go-to-market strategy, how do you ensure that you're attracting the right type of customer to the platform? And I think you mentioned in the prepared remarks that customer quality is increasing. Be great if you could elaborate some more on how you measure customer quality and what you're observing in the behavior of some of these recent cohorts that's informing your confidence in the strategy right now? And then separate from that, my second question is on, you talked about all these ways that you're using AI internally across the company's operations and some of the proof points that you're seeing already. As you continue to scale those initiatives, how should we think about the opportunity for those efficiencies to flow through to EBITDA and free cash flow in the near term versus being reinvested back into the business to support your product and marketing needs. And I realize it's probably a tough question to answer in a ton of detail quantitatively, but it'd be great to hear your philosophy around how you're balancing those dynamics during what seems like a pretty significant period of change for the business. Amanpal Bhutani: Vik, let me take the first one, and Mark can take the second. On the cohorts that we're attracting, look, our strategy is to attract high-intent customers. And the way we define high intent is looking at the traffic coming in by channel and then looking at the activation and attach of other products. And what we know from years and years of data across our 20 million customers, is that if we see that activation and attach of other products, we are going to see good renewal at the end of the 1-year term. So that's what really gives us confidence. That's what we're looking for. And when we make these trade-offs and the decision in the business, to attract new customers with end-of-life certain products or retire certain cohorts. What we're looking for is the quality of those, the intent of those customers and measuring it through the activation of the other products that they have. And then on the operations, Mark? Mark McCaffrey: Yes. On the operations, we are balancing several different factors here. One, we have the ability to expand our margins, we have for the past few years. We're continuing to see operational efficiencies by the adoption of AI internally. And then we're playing the -- or paying our attention to the disciplined approach we've had in the past around investing in innovation, but using data points that show our path to return on those data points before we invest. So we're taking a very disciplined framework approach. And I would say we're balancing it with what we think the long-term return is going to be when we make those investments. For example, we have talked about we were going to increase marketing around AI Builder through the remainder of the year is because we are seeing the data points that are showing that return. And while those returns will be immaterial for the current year, we do know the potential to drive future growth for us is there and that makes that return appropriate. Amanpal Bhutani: Yes. I think maybe just to add, the areas that we're looking at, whether it's software development or Care or our use of applications or marketing, all of these areas are accelerated with AI and we see great opportunity to deliver a better outcome for our customers at a lower cost this year and into the future. Christie Masoner: Our next question comes from the line of Ken Wong from Oppenheimer. Hoi-Fung Wong: Can you guys hear me? Christie Masoner: Yes. Amanpal Bhutani: Yes. Hoi-Fung Wong: Fantastic. First question, on the $10 million plus of Airo Builder ARR a lot of your kind of stand-alone AI Builder platform, we've seen them scale up extremely fast. And I realize it's super early, but what's the right way to think about kind of what this business or this product could potentially grow to? Amanpal Bhutani: Yes. Ken, when we talk about the $10 million run rate, what we're really talking about is annualized bookings. And you're right, it's very early data. This includes both subscriptions and credits or tokens. And what we see is customers come in by a subscription, engage with the product, love the product, and they keep coming back and improving the website or whatever actions, whatever job they're trying to complete with the AI Builder. I am directly engaged with a few customers. I actually work with customers every week now, sessions with live customers. And what's magical about the Airo AI Builder and our customers is that our customers have lots of ideas, but it's very hard for them to go through menus and templates and figure it out. So if they can just in natural language explain or just say, I would like this, Airo AI Builder goes and does it for them and it's sort of a magical amazing experience for that. So what happens is the same subscriber ends up using it more and more publishing, republishing and buying more credits. And that's the run rate we're looking at. In terms of what it could be, it's super early. We're very excited about this early adoption, as I shared in the prepared remarks. We just started selling it in Care. We're going to add paid marketing to it starting this month. So there's a lot of things for us to do. And of course, we have the giant funnels, we have with domains or website paths, which we haven't touched yet either. So there is a lot to do to get to what we think the long-term run rate can be, but we're excited about where we started. And we're also keeping an eye on how customers use this product. And does it change how they use our other products because that mix is going to be important for us, too. Hoi-Fung Wong: I appreciate the color there. And then just a follow-up also on AI opportunities. You mentioned ANS opening new infrastructure opportunities. And now with Airo AI Builder pushed in your back end beyond websites, is there the potential to potentially utilize GoDaddy's hosting capacity for additional workload, AI workloads, given the market scarcity there. I mean we're sort of having a moment in hosting all of a sudden. And it seems like that's an area you guys could potentially capitalize on? Amanpal Bhutani: Yes. Actually, Airo AI Builder does use GoDaddy hosting. It's one of our competitive differentiators. We can provide a hosting at scale, that's secure, that's at a great cost. And so there's definitely sort of excitement from our side to be able to take something like Airo AI Builder and power it with our hosting solution. We also have some plans to do more with hosting directly in our -- for our customers, but we're not looking to go out and do something that's for enterprises or something like that. We are very focused on our customer base, the solutions that our customers need. We feel that we serve a unique customer, a lot of the new entrants in the AI space are serving enterprises, and we have this unique relationship with this type of customer. So we're really leaning into that relationship and the needs of that customer. Christie Masoner: Our next question comes from the line of Trevor Young from Barclays. Trevor Young: Great. First one for Mark. On your comments on bookings growth at or above parity with rev growth or the balance of the year, is there a particular shape of the bookings curve to be mindful of? 1Q implicitly the low point, but will 2Q step all the way back up to where rev growth is and 2H bookings a bit above that? Or is 2Q going to be maybe a tad ahead because it has an easier compare? And then second one on capital allocation, buybacks here in 1Q well below free cash flow generation and the 95% payout stat that you've given. Meanwhile, cash at kind of the highest level since middle of '21, if I'm not mistaken. Just any updated thoughts on capital allocation and buyback appetite with the stock at current levels? And in lieu of buybacks, any updated thoughts on M&A? Mark McCaffrey: Right. Thanks, Trevor. On the first, on the bookings, growth rates should be on par or above. We're looking in that both the quarter and on an annual basis for the remainder of the 9 months. So it should give you a sense of the momentum we're starting to gain as we go out throughout the year. On capital allocation, what I always say is don't look at any particular quarter look at our history, our history is a good indicator of how we approach this. We look at the quarter going forward, we make determinations and buybacks are still a strong way or a strong lever for us to return value to our shareholders. So again, look at our track record, our history of what we've done. And it will give you a good idea of how we continue to approach it and the way we look at it hasn't changed. Christie Masoner: Our next question comes from the line of Mark Zgutowicz from Benchmark. Mark Zgutowicz: You just closed $10 million in annualized bookings, the run rate for Airo AI Builder within -- it sounds like weeks of beta. Could you break down the unit economics there? Like what's the average transaction size? How much of that earn rate is coming from credit top-ups versus the initial plan purchase. And what's the margin profile relative to legacy W+M? Amanpal Bhutani: Yes, Mark, overall, we remain committed to what we have shared in the past that we are building a product that serves our customer, but comes at a gross margin and a price point that works for our customer and for GoDaddy. So from the very first day, we have continued to look at this product as a gross margin positive product, as a product that can continue to grow and deliver the economics for the company. In terms of what is subscription and what is credit. We're so early like this has to bake, this has to grow, there are going to be, I think, so many ups and downs as we enter marketing, as we open the channels, as we drive more traffic even from godaddy.com to this product. So it's too early to talk about sort of the more detailed pieces of how -- of what's happening here. In terms of the comparison to Websites + Marketing, as we had shared in the prepared remarks and last quarter as well, we haven't upgraded our Websites + Marketing going out this year. That product focuses more on exactly that need for that customer and the economics that would be needed to make it successful. We did test that product, and it all works together. It's all together with Airo. It's not like going to be something different when it comes out. When we tested that experience, and it did quite well in the test. But as I said last quarter, Websites + Marketing, the current version is an established champion, it is going to take a little while to test their challenger, Websites + Marketing the new version, and we expect to do that this year as we roll through the year, we're going to test sort of the new product, new version a couple of times, and we expect it to win sometime this year. Mark Zgutowicz: Got it. And maybe a follow-up then on the upgrade -- the W+M upgrade, being tested now in the domains funnel, and it sounds like you're having some really solid early results there. Just curious when we should expect pricing to be reimplemented at Websites + Marketing, specifically, and whether you can quantify how much of the historical ARPU accretion that you've witnessed from pricing and bundling has been attributable to W+M versus other products? Amanpal Bhutani: Yes, I can take the first part, and Mark, if you can take the second. On the pricing initiative around Websites + Marketing, because this is a very significant upgrade and there's a lot of moving parts. We're moving from a solution that is template first and uses AI to a solution that balances editor capabilities and AI capabilities. And frankly, it just comes with a different set of COGS and profile that we're working with. Any sort of pricing change would have to wait until we get to parity on the customer experience and metrics like published rates. So that we can be certain that the product is -- the new version is delivering what customers expect. And once we've done that, then we can look at any sort of pricing initiative. Mark McCaffrey: Yes. And on the contribution to ARPU, we don't get into distinguishing between products because it gets very difficult with the concept of bundling because multiple products are involved. But I will highlight that the pricing that we talked about is specific to this area and not to the other bundling aspects that we've had. So there's still contribution in our ARPU related to our pricing and bundling is just not to this one specifically. Christie Masoner: Our next question comes from the line of Arjun Bhatia from William Blair. Willow Miller: I'm Willow on for Arjun Bhatia. Can you unpack A&C bookings growth? Was it largely impacted from the recent promotional activity in the quarter? Or is there anything else to call out? I'm just trying to appreciate the decel and the timeline to inflected growth from initiatives like Airo and then pricing bundling historically. Mark McCaffrey: Yes. Thanks, Willow. Nothing to call out different than what we talked about last quarter. There are various aspects across our bookings that were impacted. The 2 specific to A&C are the go-to-market offer. There is an allocation element when we bundle products together in the initial order that will impact A&C. And then what we're just talking about on the pricing aspect, the pricing and bundling related to the upgrade to the Websites + Marketing product. Those are the 2 impacts on A&C bookings. And obviously, as we go throughout the year, we expect some of that to pass. Now on revenue, it's more evened out because of the subscription nature of what we do. But on bookings, that was mostly peaked in Q1. Christie Masoner: Our next question comes from the line of John Byun on for Brent Thill at Jefferies. Sang-Jin Byun: Can you hear me? Christie Masoner: Yes, we can hear you. Sang-Jin Byun: Just 2 questions. Again, on the Airo AI Builder. In terms of monetization, is it just the subs and the AI credit with the product itself? Or are you starting to generate anything from upsell or cross-sell by the GoDaddy products? And then a follow-up would be international revenue growth seemed to slow a little bit to 7% from, I think, last year was mostly within 10% to 14% range. I don't know if there's anything you can call out there. Amanpal Bhutani: Yes. Thanks, John. On the run rate for Airo AI Builder, that's just the subscription and credits for Airo AI Builder. We have not baked in sort of attach or other products into that yet. All of that is to come. You will see over the next few weeks this product sort of become a bigger, bigger part of the GoDaddy ecosystem. And as it does that, then we can have additional bookings that relate to those customers. But for now, we're just trying to give you the cleanest picture of this new product so that folks can understand the overall AI story at GoDaddy. Mark McCaffrey: And on the international revenue, the only thing to call out is aftermarket last year was with some of the larger transactions hit the aftermarket and contributed to the growth rate overall. We didn't see those type of transactions in Q1, the larger ones. So it's just a tougher compare from aftermarket for Q1. Christie Masoner: Our next question comes from the line of Ella Smith on for Alexei Gogolev at JPMorgan. Eleanor Smith: So first, I was hoping to ask about the ANS. What do you think is GoDaddy's competitive advantage or right to win as it comes to the ANS, especially versus larger competitors? Amanpal Bhutani: So the biggest thing about ANS is that we have put to the world that agents that we believe will be roaming the Internet and were larger in terms of traffic than human traffic soon should be registered on the Internet. And large destinations, whether those are websites, systems, platforms, other organizational enterprises should recognize agents that are registered because if they're not registered it is going to be very difficult to trust agents. It's going to be very difficult to transact with agent, it's going to be very difficult. You just know which agents are real and which are fake and we think we can avoid all of that by registering agents using Agent Name Service, which again is backed by an open standard. The reason GoDaddy has huge right to win here is because within the Agent Name Service open standard, we say that while people should register agents with ANS, they should be -- those agents should be discovered using DNS, which is Domain Name Service. Domain Name Service is a directory on the Internet that everybody uses. It's one directory. It replicates everywhere. Agent registries are popping up in every company. So how do you bring that together? You bring that together by connecting those registries to the one directory. And if we connect it to the one directory and in that directory, put the agents under the domain name then the domain name becomes core to the identity and trust relationship that agents have now and into the future, which as the world's largest domain registrar, it's obviously good for us if domains plays that role. And what we're excited about and we're seeing good reaction from the large players. And of course, they want to take their time to understand things. But what we're really offering to the world here as an open standard is a beautifully elegant, scalable solution, and it already exists. Nobody has to recreate it. So hopefully, that helps a little bit to understand why Agent Name Service is so important and why it links back to GoDaddy as the world's largest domain registrar. Eleanor Smith: That's very clear, Aman. And if I may, a follow-up for the Domain business. We're hoping to ask some question -- or a question about your strategic objectives for the Domain business. Is your intention to maintain or gain share? Or would you be willing to let some lower LTV domain customers go at the expense of your market share? Amanpal Bhutani: So I think we've said that we will let low LTV customers go because our focus is high-intent customers. And if I step back and look at the Domains business, we continue to be the world's largest domain registrar by far. Over the last 30 years, all kinds of competition has come into the world, right? We have seen very low-priced domain registrars. We've seen people use domain as loss leaders. We've seen people who give them for free. We've seen blockchain and the list goes on. And now the new normal includes LLM, some app builders and lots of things. So we are coming to that world with a lot of experience in competing in this business and a lot of tools to compete in this business. But what we have consistently found is that the value is in the high intent customer. The value is in the customer that has good intent, buys a domain and then does other things with it. And by doing those other things, that's what drives LTV for GoDaddy, that's what drives our business. Christie Masoner: Our next question comes from the line of Naved Khan from B. Riley. Naved Khan: I'm curious, Aman, how much of the traffic are you exposing to the website -- to the Airo Website Builder? Is this still something you are testing and iterating or you already kind of rolled it out broadly? So that's one question. The other is just on the App Builder. You said, I think the plan is to put some marketing dollars behind it, maybe you're already doing it. How significant is that? And what will it take for you to go from going from sort of testing the waters or kind of putting more or increasing the allocation that you have on marketing trend behind this? Amanpal Bhutani: Yes. On the first, Naved, from godaddy.com, we are still sending only a small amount of traffic into this new experience. Our largest funnels on godaddy.com are our domains path and they are our create path, which is the website path. And both those paths currently go into the existing champion version of Websites + Marketing. Over this year, we expect that to evolve, but as that evolves, more and more traffic will go to the new products, and I'm super excited about them, and it will definitely grow the usage of the products, the units on the products and the dollars associated with that. So when we look at godaddy.com, it is still a small amount of traffic, and we have ways to go in terms of being able to drive more traffic to it. In terms of the marketing plan for Airo Builder, we expect to spend a significant number of dollars this year, and we are starting in Q2 this year towards that. Now we're going to fund that -- those dollars with other efficiencies in the business. So Mark, he doesn't have to change any of his plans. But when we look at that, it's the same disciplined approach that we have done in the past. When we look at what we are spending, what the return is and then we increase it and we improve it. And this is core to our evidence-based decision-making culture. You'll start to see us spend more in marketing. And what we're looking for is traffic coming to the product, the engagement with the product, they sign up with the product, people buying it, people publishing sites and then people coming back and engaging with their own buying credits. So that's the whole chain we're looking at. And over the next 2 or 3 quarters, our expectation is to ramp that up. Mark McCaffrey: Yes. And just to reiterate, there's no change in the framework of how we approach this. We'll use the data. And when we see the returns, we'll continue to invest into the marketing. Naved Khan: And maybe just to kind of follow up on that on the AI App Builder, how is pricing evolving? Is it something that's set in stone? Or is that something that you're testing and might change? Give us your thoughts then on that. Amanpal Bhutani: We did test a couple of different plans, Naved, and we're happy with the plan we have settled with. That's one of the gates in terms of ramping up marketing spend. So we are happy with the current plans. The current plans include a starter plan that you can get started with for free with a few credits or just free plan and then a starter and a professional and an ultimate plan and it has a subscription and a credit system with it. So we think we have a good setup here and for the foreseeable future, we're going to stick to it. And there are levers that we can pull over time. But for now, we're just going to focus on scaling it as fast as possible. Christie Masoner: Our next question comes from the line of Jack Halpert on for Deepak Mathivanan from Cantor Fitzgerald. Jack, I think you're muted. John Halpert: There we go. You guys hear me now? Christie Masoner: Yes, we can. John Halpert: Just one for me. You guys mentioned removing a lower value product offering this quarter. Can you just give us some more color on what exactly that product was and maybe how much it impacted customer count, revenue and if there are any other lower value products that you're evaluating in the portfolio? Amanpal Bhutani: Yes. Let me take that, and then Mark can jump in. As we talked last quarter, we have taken bold steps in terms of our promotional offers because we are in a dynamic environment, and we need to test faster. We need to move faster. And as part of those promotions, what you saw from us last quarter is we actually saw a significant gain in customer gross adds. In fact, the promotions that we did moved gross adds over 100,000. It brought us over 100,000 new customers. It's a very, very large number for us with a set of promotions. But when we saw those promos and of course, we optimize -- we decided to optimize those promotions to balance bookings and customer growth because we want to stay with a high intent customer. When we look forward, we're really excited about our ability to do that. But when we bring in that many number of customers, we also take the opportunity to make tough decisions on products that we're going to retire. And that's what we did in this last quarter. The promos that we had did very well in attracting customers. We -- what we did is we decided to tune them to balance bookings and customer count, and then we took the opportunity to retire an old product that actually had an impact on customer count, but I think Mark can confirm little to no impact on bookings. Mark McCaffrey: Yes, that's right. And this is the case of a product that we offered in prior years. It wasn't really generating the value that we needed. So we're just not going to support it anymore, and we're going to reallocate those resources, but it didn't have any impact on bookings and did have a slight impact on churn within our customer group. But again, I would look at this, we will continue to evaluate our portfolio because our goal is to optimize for our higher-value offerings and in certain cases, make the choices between that and a lower value offering that may not be getting the return anymore that we need. Christie Masoner: Our next question comes from the line of Kishan Patel on for Josh Beck at Raymond James. Kishan Patel: This is Kishan Patel on for Josh Beck. As chat bots, AI mode and other AI-native discovery surface continue to gain scale. Have you observed any notable changes in top of funnel traffic patterns, customer acquisition behavior or conversion paths. And how are you thinking about GoDaddy's positioning if more customer journeys begin inside AI interfaces rather than traditional search? Amanpal Bhutani: Yes. On the traffic coming to the top of the funnel, I think consistent in the last quarter in terms of what we've talked about before, I think we had shared that we do see some impact to traffic in search because of the move to AI mode, but we were able to offset that impacted traffic by improving conversion on our side. So that same relationship has continued. We haven't seen any further change in that or the trajectory of that versus what we saw in previous quarters. In terms of customer journey starting in AI bots or there's lots of new interfaces and sort of new things that we're looking at. The way I look at it is what we are looking for is wherever customers are starting their journey how can we provide them the value that we have. And when we provide them the value, is there an exchange of value for us. Like are we able to build on it. And the simple example of that is that if people, let's say, if we get to a world where everybody has an agent and that agent goes out and does things, we want to make sure that we have the APIs. We have the offering where those agents can work with GoDaddy as successfully as with anybody else. Because we would slowly developing as the new normal, and that's what we have to compete with. And we've competed over 30 years with lots of companies, with lots of business models, and this is a new one, and we think AI is here to stay. So we're actually excited in organizing our teams to compete in that world. Christie Masoner: Our next question comes from the line of Elizabeth Porter from Morgan Stanley. Kathleen Alexis Keyser: Awesome. This is Katie Keyser for Elizabeth. Just with Airo Care now being rolled out to multiple markets, multiple languages, highlighting kind of improved resolution in those non-English-speaking markets. Does that change your kind of international growth opportunity at all? And I guess, just broadly, how does AI-enabled multilingual Care kind of change or accelerate the approach to entering markets that maybe previously were less attractive because of support or kind of localization costs. Amanpal Bhutani: Yes. As you know, Care is so core to our competitive differentiation and so core for the customer. We know our customer needs that support, whether it's through voice or chat that we provide that capability in many markets in 22 languages all over the world, and whether just our core languages and translate it in even more. So having Airo Care, which natively provides our ability is definitely going to allow us to compete much better in international markets. And we're really, really excited about this first data point where by taking AI or Airo Care and using it within our messaging system, actually, that's the test that I talked about in the prepared remarks. That test being able to perform almost equally globally is great news for us because it's so difficult for us to provide that high level of service that we have that huge NPS that we have in smaller markets, in Asian markets where we may not have a big presence. If we can do that with Airo Care, we can definitely be more aggressive in those markets. So we're looking forward to that. And I think it's an exciting opportunity for the future for us. Christie Masoner: I'll turn the call back over to Aman for closing remarks. Amanpal Bhutani: Thank you, Christie. Thank you all for joining. Super excited to be where we are and a great journey in front of us. A big thank you to all GoDaddy employees for a great quarter, and I'll see you next quarter.
Operator: Hello, everyone. Thank you for joining us, and welcome to Cable One's First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Jordan Morkert, Vice President of Investor Relations. Please go ahead. Jordan Morkert: Good afternoon, and welcome to Cable One's First Quarter 2026 Earnings Call. We're glad to have you join us as we review our results. Before we proceed, I'd like to remind you that today's discussion contains forward-looking statements relating to future events that involve risks and uncertainties, including statements regarding future revenue, customer growth, connects, churn rates and ARPU, the future competitive structure of our markets, the anticipated benefits of our mobile service offering, new product rollouts, future customer retention trends, anticipated cost savings and other benefits to be derived from our billing system migration and our other investments in growth enablement platforms, our plans to expand our multi-gig capabilities in more markets, future cash flow and capital expenditures, potential uses for our cash flow, the upcoming MBI transaction, including the purchase price, MBI's future debt levels, integration timing, anticipated cost and tax efficiencies, combined leverage ratios and closing date, the anticipated timing for closing of the merger of Point Broadband with Clearwave Fiber and expected benefits from that transaction, future tax savings and our future financial performance, capital allocation policy, leverage ratios and financing plans. You can find factors that could cause Cable One's actual results to differ materially from the forward-looking statements discussed during today's call in today's earnings release and in our SEC filings, including our 2025 annual report on Form 10-K and our forthcoming first quarter 2026 quarterly report on Form 10-Q. Cable One is under no obligation and expressly disclaims any obligation, except as required by law, to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, today's remarks will include a discussion of certain financial measures that are not presented in conformity with U.S. generally accepted accounting principles or GAAP. When we refer to free cash flow during today's call, we mean adjusted EBITDA less capital expenditures as defined in our earnings release. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures can be found in our earnings release or on our website at ir.cableone.net. Joining me on today's call is our CEO, Jim Holanda; and CFO, Todd Koetje. With that, I'll turn the call over to Jim. James Holanda: Thanks, Jordan, and good afternoon, everyone. We really appreciate you joining us today. I've now been in the role for a little over 70 days, which has given me the opportunity to spend meaningful time with our teams, get closer to our markets and develop a clear view of where we are performing well and where we need to improve. At a high level, I'd say the work underway across the business is moving in the right direction, but those efforts are not yet showing up consistently in the results. Today, I want to spend my time on 3 things: what we're seeing in the business, what I've learned since stepping into the role and our focus and priorities going forward. Starting with the quarter, we're not yet seeing the full benefit of the changes we are making in the business. Results reflect the broader economic backdrop and continued pressure in our more competitive markets, particularly in customer retention. While we have already begun to make changes in these areas, it remains early and those efforts are not yet meaningfully reflected in our results. At the same time, first quarter connects improved year-over-year, which we view as an early indication that elements of our strategy are beginning to gain traction. In addition, we are roughly 2 months into our MSO-wide mobile launch. And while it is too early to draw conclusions around retention or lifetime value, initial customer response has been encouraging. We continue to believe mobile can become an important component of the broader relationship over time. Even with these challenges, the business is generating substantial free cash flow, reinforcing both the durability of the model and our ability to continue to execute on our debt reduction, strengthen the balance sheet and create long-term shareholder value. In the first quarter, we generated approximately $115 million of free cash flow and $500 million over the past 4 quarters, providing meaningful flexibility to allocate capital in a disciplined manner. Turning to residential services. I want to spend a bit more time on what we're seeing in the business. In the first quarter, we reported 12,600 net residential broadband customer losses on a sequential basis. While this reflects continued pressure in certain areas of the business, there are several underlying dynamics that help frame how we are thinking about the trajectory going forward. Over the course of my career, I've seen firsthand what has and has not worked in operating environments like this, and those lessons are shaping how we are approaching the business today. First, churn was elevated in the quarter, but remained primarily concentrated within our more competitive markets, which allow us to concentrate our retention efforts where they can have the greatest impact. At the same time, new connects improved year-over-year, driven in part by value-conscious customer segments. These customers represent an important part of our segmentation strategy and remain focused on adding them in an accretive way. We also saw year-over-year improvement across certain go-to-market channels, including e-commerce and direct sales, reinforcing our focus on meeting customers where they prefer to engage and expanding on our connect opportunities. From a retention standpoint, we are implementing targeted initiatives to better identify and engage at-risk customers. These include speed upgrades, more gradual stepped promotional roll-offs, AI-driven tools and a new CRM platform expected to go live later this year. We are also deepening multiproduct customer relationships through offerings such as mobile, Whole-Home WiFi, enhanced online security and comprehensive technical support for the connected home, all while continuing to invest in the network to further strengthen the consistent, reliable experience our customers expect. While still early, these are the types of operational actions we believe can improve retention trends over time. Looking at ARPU, results in the quarter reflected downward pressure from go-to-market initiatives and targeted retention offers, partially offset by continued selling to higher speed tiers and the broader multiproduct offerings just mentioned. While we may see some variability from quarter-to-quarter, we continue to expect ARPU trends to remain broadly stable for the year. Taken together, while retention remains the primary challenge, we believe the underlying trends in connects and multiproduct offerings provide a constructive foundation as we work to improve customer outcomes and drive more consistent performance. Turning to business services. Overall performance showed improvements through the back half of the quarter. Under Edwin Butler's leadership since early January of this year, the business services organization has moved quickly from assessment into execution. Targeted investments in sales enablement, go-to-market discipline and a new sales training program drove improved results across our fiber, carrier and enterprise channels. While still early, these trends are encouraging and reinforce our confidence in the actions underway. Todd will address some discrete items in the quarter in more detail. Clearly, competitive intensity persists. However, we believe our network capacity, reliability and local operating presence position us well, and we continue to invest for improved performance. Today, approximately 53% of our markets are multi-gig capable, and we expect to expand that capability to most markets by year-end, reinforcing our ability to meet growing customer demand across the footprint. Against that backdrop, over the past several weeks, it has become clear that our biggest opportunity is improving the consistency of execution across the footprint. Many of the underlying dynamics are consistent with patterns I've seen in prior operating environments. As a leadership team, we've aligned around a focused set of priorities where disciplined execution can drive the most meaningful improvement. These priorities center on strengthening retention and conversion, simplifying our product set and ensuring greater consistency in how we go to market across the footprint. We've already begun to take action in each of these areas with the objectives of improving the customer experience, the price value equation and therefore, the customer trends and the financial performance over time. The work we're doing today will still take some time to show up in our results, and we would not expect it to fully translate into the numbers within a single quarter. Our focus right now is on improving overall execution of the array of operating strategies at our disposal and continuing to strengthen the balance sheet. Stepping back, I remain confident in our long-term opportunity. The durability of our cash flow allows us to continue prioritizing debt reduction while maintaining the flexibility to invest in the business and support long-term shareholder value creation. That confidence is grounded in the strength and the capacity of our network as well as the clear opportunity we see to improve execution within our existing footprint. And with that, I'll turn it over to Todd, who will provide a recap of our financial performance. Todd Koetje: Thanks, Jim. Starting with the top line. Total revenues for the first quarter of 2026 were $353 million versus $380.6 million in the first quarter of 2025, with the year-over-year decrease driven primarily by lower residential video and residential data revenues. Residential video accounted for approximately $10 million of the decrease. Residential data revenues decreased $11.6 million or 5.1% year-over-year due primarily to a 6.1% decline in subscribers. Business data revenues decreased $1 million or 1.8% year-over-year. Operating expenses of $93.9 million for the first quarter of 2026 decreased 6% compared to the first quarter of last year, due primarily to a reduction in programming costs associated with our video business. OpEx was 26.6% and 26.2% of revenues in Q1 of 2026 and Q1 of 2025, respectively. Selling, general and administrative expenses totaled $87.2 million or 24.7% of revenues in the first quarter of 2026 compared to $95.4 million or 25.1% in the first quarter last year. The decrease in SG&A was driven by lower labor costs and a reduction in billing system conversion costs. Adjusted EBITDA for Q1 of 2026 was $183.3 million or 51.9% of revenues compared to $202.7 million or 53.3% of revenues in Q1 of 2025. Capital expenditures were $68.4 million in the first quarter, a decrease of 3.8% year-over-year. During the quarter, we invested $5.1 million of CapEx for new market expansion projects. We continue to track towards 2025 levels for full year CapEx. Adjusted EBITDA less capital expenditures totaled $114.9 million for Q1 of 2026 compared to $131.6 million in Q1 of last year. In March, our $575 million convertible notes matured and were repaid in full with a $575 million revolver draw. Throughout the quarter, we paid down a total of $90.6 million of debt, of which $86.1 million was voluntary. We opportunistically paid down our senior notes by $33.7 million and term loans by $27.4 million at very attractive discounts, along with a $25 million repayment under our revolver at quarter end. Such payments demonstrate our continued commitment to debt reduction. As of March 31, we had $165.6 million of cash and equivalents on hand, and our total debt balance was approximately $3.1 billion, consisting of approximately $1.7 billion of term loans, $550 million of revolver draws, $548 million of unsecured notes, $345 million of convertible notes and $3 million of finance lease liabilities. We also had $700 million of undrawn capacity under our $1.25 billion revolving credit facility at quarter end, providing us additional committed capital. Our net leverage ratio on a last quarter annualized basis was 4x. As Jim mentioned, we are focused on strengthening our balance sheet. While we have the committed capital in place and sufficient excess operating liquidity to affect the MBI acquisition at closing in Q4 2026, as we have stated before, we will remain proactive in our balance sheet management initiatives and continue to evaluate the markets with a focus on optimizing our longer-term capital solutions. Turning to our investment partnerships. We posted updated information about our unconsolidated investments on our Investor Relations website. For the fourth quarter of 2025, these businesses generated approximately $542 million of LQA revenue and $262 million of LQA adjusted EBITDA, representing year-over-year growth of roughly 17% and 36%, respectively. These businesses also grew broadband customers by approximately 22,900 or 7.9% and added over 80,000 new fiber passings during the year. This summary excludes the financial results of MBI as we provide additional detail within our quarterly filings. Additionally, CTI Towers, Ziply and Metronet are no longer reflected in this table following the monetization of those investments, each of which generated attractive returns. We believe these outcomes, including both the operating performance of these businesses and the monetization of certain investments reflect the strength of these assets and the value created over time. And finally, I'll touch on a couple of items related to a recent transaction, along with an update on a pending one. In mid-March, we completed the sale of certain fiber-to-the-tower contract rights for $42 million in cash. We recognized a $26.6 million gain on the sale. Such contracts generated $9 million of business data revenues in 2025 and $2.1 million in Q1, and the sale reduced first quarter business data revenue by approximately $300,000. Results were also modestly impacted by lower revenue from EchoStar as they continue to decommission portions of their 5G network build-out, representing approximately $50,000 in the quarter and roughly $200,000 on an annualized basis, which we believe represents substantially all of our remaining exposure to this activity. Meanwhile, the merger of our Point Broadband and Clearwave Fiber strategic investments remains on track to close during Q2, subject to customary closing conditions. And we continue to work proactively on our pending acquisition of MBI. The Cable One and MBI teams are preparing for an efficient integration of MBI's operations when the transaction closes, which is expected at the beginning of Q4. Before we open it up for questions, I'd reiterate that while the current environment remains competitive, the business continues to generate strong cash flow, and we remain focused on disciplined execution and capital allocation. We are continuing to prioritize debt repayment while investing thoughtfully in the business, and we believe the changes underway position us to deliver improved performance over time. With that, we are ready to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Sebastiano Petti with JPMorgan. Sebastiano Petti: And real quick, I guess just trying to think about the connects being up year-over-year. I think, Jim, you talked about contribution from the value-conscious segment. Maybe help us think about how much of that -- I mean, maybe a little bit of a difficult question to answer, but how much of that is from just improved offer strategy or maybe improvements or expansion of your distribution channels? And then relatedly, as you, I think, talked about defending the base last quarter, help us think about maybe how much ARPU or was there perhaps some dilution in the quarter relative to win back retention efforts that I think, yes, other -- some of your peers are also kind of enacting to try to defend the base? James Holanda: Sebastiano, thank you for the questions. Appreciate it. This is Jim Holanda, everyone. And yes, connects, I think it's kind of twofold, both to your points. The expansion of the direct sales channel and the improvement in the e-commerce channel results, I think, certainly contributed to that, along with, again, our now very targeted segmented offers across how we've chosen to segment the base and being more aggressive and not afraid to be doing price locks in especially those hypercompetitive markets that we find ourselves in, in 15% of the footprint. So I think all of that helped contribute to it. And I think there's still a lot of meaningful room for improvement in regards to executing across all of those channels and all of those strategies. And yes, certainly, on the ARPU side, along with more aggressive go-to-market offers as certain areas get more competitive. Certainly, being more aggressive on the retention side where we feel those competitive pressures has been a focus. Again, I think we're still early on. We saw a little bit of those results then impacting the ARPU numbers in Q1. Operator: Your next question comes from the line of Frank Louthan with Raymond James. Frank Louthan: As you're looking for -- to save customers and so forth and that kind of activity, what kind of pressure do you expect on ARPU in your back book? And then can you give us some color on how MBI is tracking from subscribers and a financial perspective? And I assume there's -- that might impact the price. Do you expect that to be any materially different from what you've kind of signaled is going to be the cost when you close? James Holanda: Well, I'll let Todd go ahead and answer the MBI question real quick. Todd Koetje: Frank, on MBI, so their first quarter, which we put in the Q, net adds were south of 2,000. So they lost 2,000, but that's a meaningful improvement from the run rate at which they were last year. And there are some timing-related adjustments in the first quarter for MBI. But I think if I understood your question correctly, there are not adjustments in the purchase consideration. That is a locked in and disclosed number at $480 as we talked about last quarter. And so that's currently the plan. We did adjust just to address it, the anticipated debt that we will assume or be looking to refinance in conjunction with it into a new range of $895 million to $925 million. So it's slightly higher than what we had as a range before just due to the impacts of their performance last year and slightly lower free cash flow between now and closing. James Holanda: And then on the ARPU pressure piece, Frank, yes, clearly, bringing in customers at lower promotional rates and seeing continued kind of elevated churn in the back book continues to put pressure on ARPU. Certainly, my read of the analyst community from our last earnings call is such that, that's a good thing. In terms of that, again, we do have targeted retention offers in our more competitive markets at lower rates, but we're also simultaneously focused, as we've talked about on adding a ton of value in terms of those higher ARPU existing customers. And again, whether that's with TechAssist, whether that's been with eero's, whether that's been with security product, we now have mobile in our arsenal as it relates to that as well as continuing to give people more speed at no incremental cost in terms of the network capabilities. So those are all things we continue to be very focused on and get out there, quite frankly, as quickly as possible. Frank Louthan: How much of your back book do you think you're going to need to adjust and kind of lower the pricing when it's all said and done? James Holanda: Well, all said and done is a very wide question. I don't know if you're meaning by the end of this year, the end of a 3- or 5-year cycle. Frank Louthan: Well, multiyear. I mean, ultimately, to get kind of competitive parity, your back book is pretty high. What would you expect that to have to adjust to? James Holanda: I think overall, in the $2 to $5 range over time. And I think is realistic and doable given the value adds that we have at our disposal for our existing customer base. Todd Koetje: And Frank, it's Todd, I'll jump in just real quick, too. Keep in mind, if you think about the history of CABO, it was very one size fits all. It wasn't this deeply discounted promo with a high step-up that would result in a wide variation of front book, back book as you're referring to it. So when you think about -- I think you said the back book is really high, which we don't disclose that. It's not a major delta to what we're looking at from new selling. Operator: Your next question comes from the line of Greg Williams with TD Cowen. Gregory Williams: First one is just on satellite broadband. We're hearing a couple of big announcements in the last few weeks. I'm just curious how you view the satellite competition, particularly in your rural areas. And second question, Todd, you mentioned a little bit about refis and you just paid down the converts. I'm curious about next steps on the balance sheet and when you'd be looking to the debt markets and eventually turn that out. James Holanda: Yes. I'll go ahead and take the satellite and then turn it over to Todd. Obviously, we're an avid user of OpenSignal and have pretty accurate and telling data in regards to the competitive landscape of our footprint across the United States. And while satellite shows up in very low circumstances and quantities, it certainly continues to go up. We keep our eye on it very closely. We're not going to let what happened kind of with FWA happen on the satellite front or even going back to my Dish and DIRECTV days back in the early '90s. I think they are formidable competitors that could flush out over time, yet to be determined. And there is no consistency from at least the 2.5 months that I've been here in terms of their offers and their installation costs and their monthly pricing is widely varied territory to territory, market to market. And we have not seen any consistency yet across our footprint in terms of their go-to-market strategy, which I think they will figure out a technological way to overcome at some point in the future, should they choose to allocate their resources and bandwidth there. So we'll continue to keep an eye on it. But at the same time, as you're fighting off 1, 2 or 3 FWA carriers and fiberized LECs and in 15% of the footprint, fiber overbuilders, we feel we have a good playbook to run in order to defend the base that we have and to figure out how we continue to grow the connect side of our business simultaneously. Todd Koetje: And then, Greg, on the balance sheet side, as Jim alluded to, and I commented also in my prepared remarks, meaningful repayments have continued as we attack the numerator. That was over $400 million in 2025, $90 million here this last quarter. Most of those were voluntary and repurchases at attractive discounts on both our term loans and our unsecured notes. And that's an intentional approach as it relates to how we want to think about the balance of the capital structure. As I've mentioned several times, diversity of duration because we are actively evaluating longer-term capital solutions and optimizing the balance sheet to ensure we have the flexibility to continue to reinvest in the business, but also the flexibility to continue to repay debt at attractive levels going forward. But we're also very focused on the diversity of the structure and ensuring that we have both secured that's more attractively prepayable as well as more foundational capital on the unsecured side. And then as it relates to preparation, I think you even asked about timing. I've kind of been pretty consistent for the last few quarters, but we do have our contingency plan in place, but that's not a primary plan. And so we actively evaluate the markets. We're looking at it through the lens of ensuring we have the right disclosures in place. So we started putting more disclosures on MBI as that acquisition will be affected in early Q4 of this year. And we are aware of, obviously, the refinancing that we need to do over the course of the next 2 to 3 years and very actively planning around how we address that. Operator: Your next question comes from the line of Brandon Nispel with KeyBanc. Brandon Nispel: A couple, if I could. It seems like a pretty consistent theme we're seeing across the space is that there's an inverse correlation between ARPUs and subscriber growth. So I'm curious how you guys are expecting to get better performance on the subscriber side while keeping ARPU flat this year. And then if I remember right, historically, your guys' footprint tends to perform best seasonally in the first quarter from a connect standpoint in the third quarter, and if we're looking at trends getting worse in the first quarter here, how should we be thinking about sort of second quarter from a net add standpoint? James Holanda: I'll start, and I'm new, so I can't speak to historical Q1s. I know my experience in my other locations is nothing historical patterns upheld through the pandemic and going forward in a new competitive environment, generally speaking. So that one is probably harder to gauge. Having said that, I think we were pretty clear on last quarter's earnings call that in the third quarter of '25, we saw the spike associated with some very large work done in the back office and with our systems in terms of a billing system consolidation across the family brands that made up Cable One that really put pressure there. We're not going to have those pressures at all this year. And so I think that becomes an opportunity. And like I say, I think the opportunities in terms of all the go-to-market strategies that we've been talking about on these last 2 calls are really the things that can help start to change what have been otherwise historical trends there. And as we think about kind of ARPU versus sub growth, the interesting thing about Cable One and one of the reasons I came here is 40% of our footprint, we're still the only gig provider. And there's not a lot of cable operators out there that can say that. And while we certainly expect that intensity to grow over time and have modeled that out and are thinking in those terms, we also have clear visibility in terms of as ILECs start to fiberize or third-party overbuilders start to come in with a fiber build. We see that coming well in advance, and we think we've built a pretty good playbook in terms of how to defend against that. And so I don't think as you compare us to others, I think we have just a little bit more flexibility in terms of our timing. And I think we have a little bit more opportunity in terms of, again, getting higher speeds and getting a whole host of value-added services into our customers' kitchens and living room to help us as we go forward across those retention pressures. Brandon Nispel: Got it. Todd, if I could just follow up with one for you. I don't think you provided it or an update here, but with the higher debt that you guys are planning to take on with Mega, the trends there and then the EBITDA trends that you guys are seeing, is there an updated thoughts on your closing leverage target once you do close Mega? Todd Koetje: Yes, Brandon, yes, the range is pretty modest relative to the overall debt stack. So that doesn't move that much. But obviously, with the trends from 2025 for both CABO and MBI on a customer basis and how those translate into the effective denominator of that leverage ratio and EBITDA that will be higher than what we previously stated, which was in and around 4x, but still very manageable in our opinion, as it relates to where we close and how quickly we can get that down relative to the ongoing initiatives to focus on debt repayment as well as, of course, stabilize and change the trajectory of the EBITDA base. Operator: Your next question comes from the line of Sam McHugh with BNP Paribas. Samuel McHugh: Two questions, if I can. One on the gross add connect side. Do you have a sense of how many of your gross adds are coming from DSL? And then as DSL kind of just disappears in the next few years, kind of what's the plan to make up that gap? And then secondly, on the tower divestment, Todd, you've given us the revenue number. I wonder if you could give us an EBITDA number of how much that might just take out EBITDA for this year. James Holanda: Yes. Thank you for those questions. On the -- in terms of the connect side, how many are coming from DSL, again, with only 40% of the footprint left that -- where the ILECs are unupgraded, you'll over-index slightly in terms of that connect performance. So if it's 40% of the potential and 50% of the connects, I think that's a pretty consistent rule in terms of the OpenSignal data that helps us kind of support that structure and thought. And having said that, it's interesting, you brought that up because I think that is an opportunity for us to exploit that even further. And given these bigger announced acquisitions by the ILECs and the integration work that they have to do and so forth, I think that gives us a window to hopefully potentially take advantage of that in a bigger way going forward. Todd Koetje: And Sam, I'll just say, of course, as we've talked about in the past, where the LEC has not upgraded to fiber and especially where that LEC has a fixed wireless access product for home broadband. They've been very aggressive on attempting to keep the customers they already have as their initiatives are not only focused on the customer side, but decommissioning that high-cost copper. So that has moved that DSL population down at a more accelerated pace than what it was naturally because of those fixed wireless saves. As it relates to the fiber-to-the-tower contract sale that we affected in the first quarter, it was $42 million of gross proceeds, pretty comparable because of the tax efficiencies that we had from a net proceeds perspective. We used those proceeds to accelerate our debt reduction. The revenue, we did disclose, as you alluded to, that's a high single-digit multiple and margins that are slightly higher than what you see from an enterprise side of the equation. So that should get you to a pretty directionally accurate cash flow number as that rolls through on a GAAP basis throughout this year. Operator: Your final question comes from the line of Julie Zhu with MoffettNathanson. Julie Zhu: Team, last quarter, you had mentioned approaching an equilibrium on fixed wireless competition. I was wondering if you could comment on any updated thoughts there. I know that we saw that Verizon's fixed wireless net adds sharply slowed, but T-Mobile stopped reporting yet and given they're your largest overlap, would love any insight into year-to-date activity and view into the future. And then if I can squeeze a follow-up in about the satellite LEO competitors. Jim, I think you had mentioned that it's sort of a hazard strategy on go-to-market for them. How does that affect how you and the team think about competing in more rural areas? And do you have an updated point of view in terms of the structural market share of satellite connectivity and fixed wireless across your footprint? James Holanda: Wow, that's a lot for 2 questions, Julian. I wouldn't expect anything less, by the way. Thank you. On the satellite piece, and they're somewhat intertwined given the fact that roughly 80% of our footprint now has one or more FWA competitor, which is the latest and greatest information we have from OpenSignal. So we're already in a mode where we are competing fiercely in terms of retaining customers that we have and going after the low end where those product sets are more appealing. And so even as they might have the capacity to come to a more consistent go-to-market strategy. At some point, if you're competing against 2 or 3 FWAs and 1 or 2 other wireline competitors doesn't matter whether there's 6 or 7 in a particular market, we're focused on the things that we can control and the value and the customer experience differentators that we can bring to market and the localism that our network and our people bring to communities in the way that we support them day-to-day throughout the year. So we'll continue to try and take advantage of all of those opportunities to the best of our ability and see how that develops and unfolds. I think your narrative is accurate. I think we haven't seen according to our data, a whole lot of incremental expansion out of the Verizon FWA product, but we do continue to see and expect T-Mobile and AT&T deployment within the market. And I would call theirs slow and steady, but not -- they're not turning on huge additional sloughs from the information we've gotten so far. Todd Koetje: And then, Julie, on the structural market share, we did discuss last quarter, it's an estimate. It's a view, a thesis as it relates to what the future looks like. And when you think about wired broadband, we believe that longer term from an equilibrium perspective, wired broadband based on the capacity needs, the speed needs and the utilization that you see constantly increasing across our both residential and business customer base that, that will be in more of that 80% area. And then I would view the 20% is whether it's wireless only, whether it's mobile fixed wireless access or it's satellite that really comprises that other 20% factor when you think about an adoption being nearly ubiquitous for Internet connectivity. Julie Zhu: Got you. I appreciate the fulsome answers. I think maybe just a quick follow-up. Is it fair to characterize the rate of change for T-Mobile and AT&T fixed wireless as slowing when you say slow and steady? Todd Koetje: No. Consistent. Julie Zhu: Okay, got it. Todd Koetje: Thanks, Julie. Operator: That's all we have time for today. I will now turn the call back to Jim for closing remarks. James Holanda: Thank you, Alexandra. Before we wrap up, I just want to thank all of our associates across the country for welcoming me into the Cable One family and for their continued focus on our customers and each other. And over my first roughly 70 days, I've had the opportunity to meet many of our associates, customers and investors, and I look forward to continuing to engage with our key stakeholders in the quarters ahead. And thank you, everyone, on the call today for your time and your continued interest in Cable One. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings, and welcome to the Axos Bank Third Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you. You may begin. Johnny Lai: Thank you, Diego. Good afternoon, everyone, and thank you for your interest in Axos. Joining us today for Axos Financial, Inc.'s Third Quarter 2026 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick will provide prepared remarks on the financial and operational results for the quarter ended March 31, 2026, then open up the call to a Q&A. Before I begin, I'd like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. Please refer to the safe harbor statement found in today's earnings press release and in our investor presentation for additional details. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I'd like to remind listeners that in addition to the earnings press release, we also issued an earnings supplement and 10-Q for this call. All of these documents can be found on axosfinancial.com. With that, I'd like to turn the call over to Greg. Gregory Garrabrants: Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the third quarter of fiscal 2026 ended March 31, 2026. I thank you for your interest in Axos Financial. We generated another quarter of double-digit year-over-year growth in net interest income, ending loan and deposit balances, earnings per share and book value. We generated almost $700 million in net loan growth linked quarter, resulting in an 11.2% year-over-year increase in net interest income. Excluding the interest income impact of FDIC-purchased loans and 2 fewer days in the March 31, 2026 quarter compared to December 31, 2025 quarter, net interest income increased by $5.7 million on that linked quarter basis. We continue to generate high returns as evidenced by the over 16% return on average common equity and 1.8% return on assets in the 3 months ended March 31, 2026. Other highlights in the quarter include: noninterest income was $86 million for the quarter ended March 31, 2026, up from $53 million in the prior quarter and $33.4 million in the corresponding quarter a year ago. Excluding the benefit of the $22 million legal settlement this quarter, noninterest income was up approximately $10 million linked quarter due to higher mortgage banking income, advisory fee and the addition of rental income from the commercial office building we purchased in January of 2026 that will be used as our future headquarters. Net interest margin was 4.57% for the quarter ended March 31, 2026, compared to 4.94% in the prior quarter. Excluding the impact from the prepayments of FDIC-purchased loans and 2 fewer days in the quarter ended March 31, our net interest margin was down in line with last quarter's guidance of around 10 basis points. We continue to maintain a strong net interest margin with and without the benefit of the accretion from loans purchased from the FDIC, which has now dwindled to around 5 basis points of positive impact. Noninterest expenses were up $1.4 million linked quarter to $186 million. We are seeing some of the benefits from our operational efficiency initiatives and artificial intelligence on our salaries and benefits, data processing and other G&A expenses. The pending completion of the Jenius Bank deposit acquisition also allowed us to moderate growth in advertising and promotional expenses in the March quarter. Net income was approximately $124.7 million in the quarter ended March 31, up 18.5% from $105.2 million in the prior year's third quarter. Diluted EPS was $2.15 for the quarter ended March 31 compared to $1.81 in the third quarter of 2025, representing an 18.7% year-over-year increase. Total originations for investment, excluding single-family warehouse lending, were $5.1 billion for the 3 months ended March 31. Loan growth was strong across a number of lending businesses, including capital calls, real estate lender finance and equipment finance. Jumbo single-family loan balances were up slightly, while single-family warehouse had a seasonal decline of approximately $123 million. Ending loan balances grew by approximately $800 million linked quarter, excluding single-family warehouse. Average loan yields from non-purchased loans for the 3 months ended March 31 were 7.23%, down from 7.63% in the prior quarter. The sequential decline was driven primarily by the full impact from the 2 25 basis point rate cuts in the calendar Q4 2025. Average loan yields for purchased loans were 12.39% compared to 23.32% in the December 31 quarter. Purchased loan yields from the quarter ended December 31 benefited from one FDI-purchased (sic) [ FDIC-purchased ] loan paying approximately -- paying off and resulting in approximately $17 million of purchase discount accretion that was recognized in interest income. The FDIC-purchased loans continue to perform and all the loans in that portfolio remain current. New loan interest rates for the March quarter were 6.9% in both the single-family and C&I portfolios, 6.7% in the multifamily portfolio and 7.8% in our auto portfolio. Ending deposit balances were $22.4 billion, up 11.2% year-over-year. Demand, money market and savings accounts represent 97% of total deposits at March 31, increased by 13% year-over-year. We have a diverse mix of funding across a variety of business verticals with consumer and small business representing 52% of total deposits, commercial cash, treasury management and institutional representing 22%, commercial specialty representing 14% Axos Fiduciary Services representing 5%, Axos Securities, 5% and distribution partners representing 1%. Ending noninterest-bearing deposits were approximately $3.4 billion in the quarter ended March 31, an increase of $143 million from the $3.25 billion in the prior quarter. We deliberately reduced higher cost savings and time deposits and temporarily increased Federal Home Loan Bank advances in anticipation of the roughly $2.3 billion of Jenius Bank deposits coming in the June quarter. Client cash sorting deposits ended the quarter around $1.1 billion. In addition to our Axos Securities deposits on our balance sheet, we had approximately $415 million of deposits off balance sheet at partner banks. We remain focused on adding noninterest-bearing deposits from small business, custody clearing, fiduciary services and commercial and cash and treasury management verticals. Our consolidated net interest margin was 4.57% for the quarter ended March 31 compared to 4.94% in the quarter ended December 31. The early payoff of an FDIC purchase loan in that second quarter increased net interest margin by approximately 25 basis points. Excluding the early loan payoffs, the purchased loan yield was 14.2% in the quarter ended December 31 compared to 12.4% in the quarter ended March 31. With the diminishing impact of the FDIC-purchased loans, we expect reported net interest margin to stay roughly flat on an organic basis, excluding the impact of the deposit purchase premium from the acquired deposits, which we estimate to be around 5 basis points. The diversity of our lending channels provide us with flexibility to maintain strong loan and deposit growth while maintaining our net interest margin. Verdant had another strong quarter, contributing approximately $200 million of new loans and operating leases in the March quarter. We continue to identify opportunities to deepen our relationships with existing Verdant vendors and dealers as well as accelerate growth in a few existing verticals that were previously constrained by capital and size limitations when Verdant was under private ownership. The synergy between the Verdant and non-marine floor plan lending teams is starting to gain traction. We believe that our ability to provide a comprehensive retail and wholesale lending solution to top-tier original equipment manufacturers is a strategic advantage that we can leverage to win more deals. Demand in our commercial specialty real estate, fund finance, real estate lender finance and asset-based lending programs remain strong. Pipelines in the jumbo single-family and multifamily areas are rebounding. We are making steady progress growing our loan pipelines in newer lending verticals such as floor plan and retail marine lending. Taking all these factors into consideration, we are confident that we will generate loan growth by the low -- in the low to mid-teens on an annual basis this year. We had a strong increase in noninterest income as a result of several recurring and nonrecurring item. Mortgage banking income was $3.7 million in the quarter ended March 31, up $2.2 million year-over-year due to a favorable servicing rights fair value adjustment. Advisory fee income was $9.4 million, up $1.3 million year-over-year. Banking and service fees in the quarter included a $22 million onetime favorable legal settlement and the addition of rental income from commercial office properties we purchased in January. Verdant contributed approximately $23.7 million in noninterest income in the March quarter compared to $18.9 million in the December quarter. The credit quality of our loan book remains strong and our historic and current charge-offs remain low. Net charge-offs were 31 basis points in the quarter ended March 31 compared to 9 basis points in the year ago quarter. We charged off $14 million of our principal balance in the C&I cash flow loan that was put on nonaccrual over a year ago when we allocated a specific loan loss reserve. The remaining principal balance is approximately $17 million at March 31 on that loan, and we maintain a $10 million specific loan reserve on this balance. Excluding the charge-off related to that loan, total net charge-offs were $5.1 million in the 3 months ended March 31 or 8 basis points of annualized net charge-offs to average loans. Total nonperforming assets were $180.4 million at the end of the quarter, down approximately $5 million from $185 million at the March 31, 2025 quarter. Nonperforming assets declined by approximately $27 million in the multifamily group and commercial mortgages down by $19 million. One syndicated C&I shared national credit became delinquent this quarter, accounting for a $33 million sequential increase in our nonperforming assets in the C&I loan area. We have taken over as agent in the syndicated loan and are actively working to resolve this nonperforming loan. Total nonperforming assets was 62 basis points at the March 31, 2026 time, down from 71 basis points at June 30, 2025. We remain well reserved for our low levels of credit losses with our allowance for credit losses to nonaccrual loans equal to 192.2% at March 31, 2026. In Axos Clearing, advisory and broker-dealer fees were up sequentially due to higher asset and transaction-based income. Total assets under custody administration were flat at $44 billion. Net new asset growth of approximately $140 million were offset by a decline in the stock market in the first 3 months of 2026. Cash sorting deposit balances were roughly flat quarter-over-quarter despite significant market volatility. We continue to expand the scope and scale of artificial intelligence across the firm to a wide range of businesses and functional units. Having established the governance framework and infrastructure to educate, train and deploy AI tools to all Axos team members, we are now focused on scaling the usage of artificial intelligence across more use cases. We have over 500 team members using Claude Enterprise to improve the speed, quality and productivity of various workflows. Since the beginning of calendar 2026, the number of technical users of artificial intelligence tools has increased by 37%, increasing artificial intelligence's share of committed code to 90%. We are adding specialized agents to test, automate and QC various work products. We continue to evaluate M&A opportunities to augment growth from existing businesses and team lift-outs. The Verdant Equipment Leasing acquisition continues to perform well with good progress across a variety of strategic and operational initiatives. Loan growth remains healthy and profitability continues to improve. We announced the acquisition of approximately $2.3 billion of online saving deposits from Jenius Bank in February of 2026. These deposits are a perfect fit for us, and we're excited to offer additional banking, lending and securities products to the roughly 60,000 individual Jenius Bank digital banking clients. We received regulatory approval last month and expect to complete the deposit conversion and client onboarding next month. Last week, we announced a separate deposit acquisition of approximately $3.2 billion of IRA savings and CDs from Capital One. These are granular retirement savings accounts sourced through digital channels. We submitted our bank merger application for this transaction last week and are actively working with Capital One to determine the exact timing and mechanisms of a conversion and close in the second half of calendar 2026. These 2 opportunistic acquisitions help us with incremental liquidity and funding for future organic and inorganic loan growth opportunities. Our disciplined growth and strong capital allows us to capitalize on organic and inorganic growth. The regulatory environment and dynamics within the banking and fintech landscape have created a wealth of M&A opportunities that we intend to fully review. We continue to invest capital in areas where we see the best risk-adjusted returns and in tools, people and processes that will help us scale. Now I'll turn the call over to Derrick, who will have additional details on our financial results. Derrick Walsh: Thanks, Greg. A quick reminder that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Noninterest expenses were approximately $186 million for the 3 months ended March 31, 2026, up by $1.4 million from the $184.6 million in the 3 months ended December 31, 2025. Salaries and benefit expenses were down $0.6 million on a linked quarter basis and professional services fees were up $1.6 million. FDIC and regulatory fees increased $1.6 million quarter-over-quarter, driven primarily by the fiscal year-to-date loan and deposit growth. Across our noninterest expense categories, we are seeing some of the benefits from operational productivity initiatives, including the increased leverage of our AI tools that we have implemented over the past 12 months. Our income tax rate was 24.6% in the 3 months ended March 31, 2026, compared to the 26.8% in the prior quarter. The primary reason for the sequential decline in our income tax rate was the benefit of RSU vestings and benefits derived from certain tax credits in the current quarter. While we continue to explore tax credit opportunities that could provide future tax rate benefits, our expectation is to maintain an annual tax rate of approximately 26% to 27%, excluding these potential benefits. Provision for credit losses was $41 million in Q3 '26 compared to $25 million in Q2 '26. The primary driver of the quarter-over-quarter increase in the provision for credit losses was a specific reserve of approximately $20 million for C&I loan. We expect to maintain a loan loss reserve of approximately 1.3% to 1.4% of total loans and leases going forward. I'll wrap up with our loan pipeline and growth outlook. Our loan pipeline is robust at approximately $2.6 billion as of April 24, 2026, consisting of $611 million of SFR jumbo mortgage, $82 million of gain on sale agency mortgage, $103 million of multifamily and small balance commercial, $83 million of auto and consumer loans and $1.7 billion across the commercial portfolio. We expect broad-based growth across several lending businesses to drive low to mid-teens organic loan growth in the next year, excluding any potential acquisitions. We will deploy some of the Jenius Bank deposits to reduce the temporary increase in borrowings in the March quarter and plan to use the remaining Jenius Bank deposits in combination with growth in our consumer and commercial banking deposits to fund our strong loan growth. With that, I'll turn the call back over to Johnny. Johnny Lai: Thanks, Derrick. Diego, we're ready to take questions. Operator: [Operator Instructions] Your first question comes from Kyle Peterson with Needham & Company. Kyle Peterson: I want to start off on some of the balance sheet moving pieces. I know there's decent amount of stuff going on with the FHLB stuff and Jenius coming on board. But I guess I noticed the securities balances also went up a decent amount this quarter. So I guess like how much of that is managing some of the liquidity before the Jenius deal closes? Or I guess, do you guys anticipate running at a bit higher securities book in the near term? I just want to think about how we should think about the mix over the next few quarters here. Derrick Walsh: Yes. The -- if you'll notice, cash went down as well. So we have internal policy minimums for the level of cash or liquid assets that we hold. And what we identified in the marketplace back in October, November was kind of a dislocation where if we bought some treasuries in 3-, 5-, 7-year tenures that -- and we're able to hedge them with a SOFR swap, we could actually generate 30 basis points improvement over holding that cash at the Fed Reserve, which is what we would be doing anyway as part of that liquidity requirement. So that was something. It was the widest that spread had gotten in -- other than on the liberation day. And so there are -- that was a pretty rare dislocation in the marketplace. So we took that opportunity and acquired some of those treasuries. We still can actually flip them and borrow against them and we -- and they remain liquid since they're -- or remain rate beneficial from a standpoint since they're swapped. So that's why you see that increase in the securities portfolio and that decrease in the cash. So that was around $750 million that we moved into those securities. Kyle Peterson: Okay. That's helpful. I appreciate all the color there. And then maybe just a follow-up, particularly on capital call, it looks like it had a really nice quarter on the growth front there. So I guess I wanted to see if you guys could give any more color what is either on bigger draws with existing customers? Or how much are you adding new accounts and kind of teams adding the pipeline? Just want to think more about new accounts and clients versus bigger drawdowns and utilization and how sustainable this kind of growth can be at least in the near term? Gregory Garrabrants: Yes. Quite a few new clients. I wouldn't say there's any significantly greater drawdowns, although these -- they tend to take a few quarters, the lines we bring on tend to take a few quarters to reach their -- where they tend to be, but bringing on a lot of new clients mostly. With respect to sustainability, I think that given the diversity of the loan book, it's often the case that different segments will outperform in any one quarter. So I don't expect the cap call side growth will be as big as it was in the next quarter, but I still think it will be pretty decent. Operator: Your next question comes from Gary Tenner with D.A. Davidson. Gary Tenner: Just wanted to ask on the credit front. Just looking at the allowance quarter-over-quarter and the increase there, was that pretty exclusively driven by the C&I nonaccrual add in the quarter? Or what other dynamics were at play in terms of the model on the allowance? Derrick Walsh: The C&I was the biggest aspect of it. There is maybe a little bit tied to obviously the broader economic events or the geopolitical events that obviously flow through the Moody's variables and into the quantitative model, but that C&I addition was the biggest piece of it. Gary Tenner: Okay. I appreciate that. And then just in terms of that credit, in particular, could you provide any additional color on the type of credit and timing of resolution, et cetera? Gregory Garrabrants: Yes. It was a syndicated shared national credit. We were not bank syndicated credit. We were not the agent. It's -- a lot of times with these agents, I think they've made concessions early on that they probably should have been a little bit tougher on. We're now the agent, and we're working with the sponsor, and we'll see where it goes, but we felt it was obviously -- well, it's prudent to put it on nonaccrual and also to take a significant reserve against it. And I think over the next several quarters, we'll know exactly how that's going to turn out. Gary Tenner: Okay. And just related to, Derrick, was there any material impact in terms of reversing interest on that in the quarter? Derrick Walsh: Not significant. Operator: Your next question comes from David Chiaverini with Jefferies. James Dutton: Brooks Dutton on for Dave this afternoon. Can you guys help us quantify the impact that temporary borrowings had on NIM this quarter and whether that pressure should reverse as these borrowings roll off given the pending Jenius acquisition? Derrick Walsh: Sure. So we -- it was maybe a basis point or 2, but for the most part, it was -- we swapped out or allowed a lot of our higher cost deposits to outflow and replace those with deposits. So it really wasn't anything too meaningful from an impact on NIM. Gregory Garrabrants: Yes. On the Jenius side, they've been -- that book has been -- they've priced it at a higher price to some extent that we've priced some of our deposits, but we're probably not going to adjust pricing immediately. So I think that although the Jenius acquisition is super helpful from a volume perspective, we don't really intend to try to optimize a few basis points here or there on NIM just to -- we feel pretty good about where NIM is being flattish going forward other than the -- that 5 bps of amortization of the premium. And I think eventually, we'll kind of be able to normalize that. But I don't want to introduce all those clients to the bank with a rate cut. So we'll probably keep it there. But -- so that's kind of the dynamic. Operator: Your next question comes from Kelly Motta with KBW. Kelly Motta: Maybe it's really nice how these 2 deposit acquisitions help provide avenues to fuel what's been really outstanding growth on your part. I'm wondering with -- as we've seen with the -- the Jenius deposits, I apologize, allowing you to maybe be a little more aggressive with repricing your own deposits. I'm wondering how you're viewing the Capital One deposits, maybe average cost of those? And if similarly, that's going to help you further price down funding or it should be kind of a net add to deposits, just as we think through both the margin and overall size of the balance sheet? Gregory Garrabrants: Yes. No, those are great questions, Kelly. Thank you. I think that we're kind of looking at these as be as absolutely ensuring that we're able to have the funding for the level of loan growth that we're looking forward to having it. I think certainly, it does ensure that we don't have to price up deposits or to increase marketing budgets in order to fund ourselves, which I think is obviously very helpful. But I wouldn't really model in any significant sort of increase in NIM from our ability to say, well, now we're going to try to price down other deposits just based on having that excess. I think we feel pretty good. I know I do, and I think Derrick does, too, feel pretty good about the fact that we've been able to manage this rate cycle really well and that we were able to have almost 100 or better than -- we had NIM expansion on the way up and essentially, for the most part, maintain our net interest margin on the way down. And so that is obviously assisted by this. And we probably would have had to increase marketing expense somewhat otherwise or be a little more aggressive on pricing. So I think it will help on balance, but I would -- I think that our guidance on NIM incorporates those acquisitions and how we're thinking about pricing with respect to them. Kelly Motta: Got it. So as those come on, just as we kind of like think through the balance sheet then in order to fund your growth, could we see a build in liquidity just as you kind of have the dry powder to deploy? And just trying to properly handicap if there's a bigger balance sheet, but a little pressure from the liquidity build there. Derrick Walsh: Yes. I think we've strategically positioned the balance sheet for this quarter and this coming quarter's growth. I mean might there be a little overhang potentially for this fiscal Q4 with relation to the Jenius deposits. But I think that, generally speaking, I think we've lined ourselves up well there, not to have much that's worth kind of modeling out. From the Capital One, it will somewhat depend on the timing of that and of course, on some of our own organic growth and opportunities there. But I would expect that there might be a little bit more of a balance sheet gross up in that kind of later portion of the calendar year 2026 that might roll over into early '27. But again, at that point, with the expectations being greater than $30 billion of assets, and it won't be anything that will be overly significant. Kelly Motta: Got it. That's helpful. Maybe a last question for me is in regards to the Verdant acquisition. You've had some really nice boost in your fee income related to that. As you kind of think ahead, given your really strong pipelines across your businesses, how are you thinking through the operating leases versus on balance sheet? And fair to say some additional fee income growth from that? Or should we see more of that added to the loan portfolio here just as you think through your appetite for that? Derrick Walsh: Yes. It's kind of tough to tell. I think I referenced last quarter that the operating leases are about 1 of every 6 or 1/6 of all the originations roughly. And that could flux up or down depending on just opportunities and the nuances of the accounting around specific leases. So the -- obviously, the objective, both the management team from an incentive standpoint and our business operations back office support are incented to help support and grow that business. And so I think the overall kind of -- it will be in line with our forecasted loan growth and is incorporated into that. So I guess, in summary, I can't give you a specific number or reference as to how that fee income will grow, but the -- it should generally grow. But I think I wouldn't, I guess, model it too significantly from that standpoint, given it's only 1/6 of the origination volume. Operator: [Operator Instructions] Your next question comes from Liam Coohill with Raymond James. Liam Coohill: Liam on for David. On your securities business, it sounds like client acquisition trends remain pretty positive despite the market volatility in the quarter. And we've talked about the opportunity to cross-sell potentially to Jenius customers, but do you maybe see similar opportunity with those Capital One clients? And could you maybe talk about some offerings that could be attractive to them? Gregory Garrabrants: Yes. I think over time, the Capital One clients, they were a little sensitive in some periods to certain kinds of cross-sell. They were not sensitive to securities cross-sell. I do think that there would be opportunities there on the Capital One clients with respect to some of those offerings just because these are retirement accounts. Right now, they're very limited in their product types that they have offered and we'll obviously offer them greater product types. We have no restrictions on our ability to cross-sell securities products to those clients. I think over time, as that develops, they can become more general banking clients as well. So I do think there's those opportunities. Liam Coohill: That's helpful. And Kelly touched on the operating leases a minute ago, but I was also curious to hear about other core noninterest income trends. I mean, could you discuss where you're seeing success and maybe how you expect core fees to move going forward? Derrick Walsh: Sure. I think one of the other things that in there, and Greg referenced it in his quotes or in his prepared remarks was that there was roughly $4 million of rental income from our future headquarters as that building is larger than what we would plan to move in. So that there's a good amount of space there that is -- we -- when we acquired it, that is already leased out. So we have some rental income and then there's corresponding depreciation and other expense that was roughly $2 million to $3 million in the noninterest expense this quarter. But on the staying on the fee income side, that's probably one of the other major items that impacted the fee income this quarter besides, obviously, the Verdant piece and -- the one-time legal settlement. So that's -- otherwise, the growth across that category was driven predominantly by the mortgage banking increase. So there was a positive movement on the valuation of the MSRs at the end of the quarter. And then some of the other fees, advisory, broker-dealer and some of the other just general banking service fees and other income all had more kind of step stone, more increases that weren't overly significant. But I would say, as we grow each of these businesses that we expect those fees to also increase. Liam Coohill: Last one for me. Where do you think there is the most opportunity for M&A today? And where are you seeing valuations that are rational? Is that tending to be more lending teams or larger portfolios? Gregory Garrabrants: We're really looking at some of each. So if you looked at our portfolio, we've got team acquisitions. We've got fintechs that have some kind of element of their business model that they're really good at something, but they need components that we have. We have banks that we're talking with, large and small. So it's -- and there's always the specialty finance side, too, that we continue to look at. And there, it's teams and businesses. So we're very disciplined. We talk to people for a long time. We don't rush into things. We make sure that it's going to fit and that we're able to digest it. But -- so it really -- I think there's a lot of idiosyncrasy and a lot of times, the individual circumstances with respect to people funding, just where different individuals and companies are in their life cycle help fuel different opportunities. And so we're always very active. We talk to a lot of people. We have conversations over long periods of time. We try to build relationships. And then so sometimes it looks like an accident or something happens quickly, but it isn't really that. It's really a pretty deliberate strategy of staying with a lot of different opportunities over time and then building those relationships. And so then when they're ready to transact, we're there for them. Operator: Your next question comes from Edward Hemmelgarn with Shaker Investments. Edward Hemmelgarn: Could you walk me through the balance of loans throughout the quarter. I mean your -- if I'm looking at it correctly, your average balances barely grew from -- if at all, from the ending balance at December 31. Was there something else going on? Derrick Walsh: There were some early prepaid during the quarter. So that's what kind of counteracted some of the, obviously, ending quarter growth. So January, we were down at the end of that quarter from kind of the prior -- from the prior month of December. I think that had the biggest impact from that standpoint. On the -- we did grow on the average balance by $1.15 billion of loans. So I'm not sure if maybe there's something -- maybe you're looking at the assets. The assets did stay relatively flat, and that was as we basically -- we've been sitting on some level of excess cash. And so we did reduce that excess cash. As touched on earlier, some of it went into those investment securities, but it still came down about $800 million on an average balance as we had some surplus in cash previously. Gregory Garrabrants: Yes. And we're converting Jenius this weekend. So that will -- then on Monday, those balances will be at the bank. But yes, no, I think you may be comparing like -- I don't know if you're comparing end of period to average, but... Edward Hemmelgarn: We kind of just surprising because it's the first time I really noticed that there was this much of an adjustment within the quarter. I mean, generally, you have a -- unless something obviously is explaining your average balances grow similar to what the -- or in excess of what your ending balance were the prior quarter? Gregory Garrabrants: Yes. There was a couple -- there was a number of prepays, some of which we -- I don't think we were expecting. I think it was in January. But yes, I think average balance still grew, but that is important, right, because you only earn net interest income on what you're putting out. And if you're growing only at the end of the quarter, then that gets reflected next quarter, but not in the current quarter. So yes, I agree. I think everybody should stop using the quarter end as a mechanism of governing the speed at which they get things done. I agree with you 100%. I'm going to convey that message to everyone in the organization immediately. It will be the first time they've heard it. So... Operator: Your next question comes from Kelly Motta with KBW. Kelly Motta: I just had a real quick one. Just wondering, given the really strong loan growth we're seeing, just wondering how the competition is faring and spreads are holding up. I understand there's quite a bit of difference between businesses, but just trying to get a sense of the direction of loan yields from here. Gregory Garrabrants: Yes. I feel that spreads are stable, I'd say, from where we are. I think that there was -- to the extent that there was compression, I feel like that I'd say that compression has stopped. I do think that in some instances, there has been -- some of the outflows in private credit and things like that have resulted in just a little bit of a different positive competitive dynamic, but it's not enough to say that you're taking back any of that compression that kind of happened over the prior year. But I feel pretty good about where we are now in general. I think we've -- I don't predict that we're going to have further spread compression. There'll be a credit here and there that they're going to be bargaining and fighting about. But I think we've done a pretty good job and have a pretty good mix. And then I think also with respect to some of the like Verdant lending is a little bit higher spreads. I think we've got a pretty good mix that allows us to keep spreads where they are. Operator: And there appears to be no additional questions at this time. So I'll hand the floor back to Johnny Lai for closing remarks. Johnny Lai: Great. Thanks for everyone for joining us, and we'll talk to you next quarter. Operator: This concludes today's call. All parties may disconnect. Have a good day.
Operator: Good day, ladies and gentlemen, and welcome to Universal Display Corporation's First Quarter 2026 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Senior Director of Investor Relations. Please proceed. Darice Liu: Thank you, and good afternoon, everyone. Welcome to Universal Display's First Quarter Earnings Conference Call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Brian Millard, Chief Financial Officer and Treasurer. Before Steve begins, let me remind you that today's call is the property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the expressed written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, April 30, 2026. During this call, we may make forward-looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements. Now I would like to turn the call over to Steve Abramson. Steven V. Abramson: Thanks, Darice, and good afternoon, everyone. Thank you for joining us today and for your continued interest in Universal Display. Let me begin with how we are thinking about the business, both in the context of today's environment and the longer-term opportunity we continue to see ahead. While the near-term backdrop has become more challenging, our long-term view remains unchanged. Our leadership in OLED built on sustained innovation and deep customer integration positions us well to navigate the near-term macro uncertainty while continuing to capture the industry's long-term growth opportunities. We operate a high-margin business model with strong free cash flow generation, long-standing partnerships across the OLED ecosystem and a balance sheet that provides meaningful strategic and financial flexibility. At the same time, visibility across the consumer electronics value chain has become more limited in recent months. A more cautious demand environment, higher component costs and supply constraints are adding complexity to demand forecasting. These dynamics are consistent with what we are hearing broadly across the industry and reflected in newly published conservative outlooks from third-party market research firms. Against this backdrop of increased uncertainty, we believe it is prudent to moderate our near-term revenue expectations. Brian will provide additional details shortly. Despite these near-term dynamics, our profitability, cash flow generation and lean operating model remains strong. We ended the quarter with approximately $911 million in cash and investments, supporting a measured and balanced capital allocation approach centered on investing in innovation, pursuing strategic opportunities and returning capital to shareholders. Over the last 12 months, we returned more than $187 million to shareholders through dividends and share repurchases. We announced today the authorization of a new $400 million share repurchase program following the full utilization of our prior $100 million authorization. While we remain disciplined in our approach, this authorization underscores our confidence in the long-term trajectory of the business and the strength of our cash generation model. Looking beyond the near term, the growth runway for OLEDs remains as compelling as ever. Adoption is expanding across IT, automotive, televisions and foldables and emerging architectures such as tandem. At the same time, performance expectations continue to rise across key dimensions, including brightness, power efficiency, lifetime and color performance. As these requirements increase, materials and technology innovation becomes even more critical, reinforcing the value of our capabilities and our role in enabling progress across the OLED ecosystem. Phosphorescent blue continues to be a significant opportunity for the industry and a key area of focus for us. As specifications advance and new architectures emerge, expectations for blue are becoming more demanding and more varied across applications. In turn, we are aligning our blue development program to meet these increasingly complex specifications. While this evolution is extending the development path, our conviction in the commercialization of phosphorescent blue has not wavered. The value proposition is clear. When adopted, we believe phosphorescent blue has the potential to deliver up to an initial 25% improvement in OLED panel energy efficiency, a meaningful advance at a time when devices are being asked to do more, run longer and perform better. That is a compelling proposition for the industry and the market interest reflects it. We look forward to sharing additional technical detail next week during our invited paper presentation at SID Display Week. Supporting this work is an increasingly powerful in-house R&D engine. We are applying AI and machine learning at greater scale to enhance material discovery, evaluate candidates more effectively and prioritize development pathways. For example, these tools allow us to predict thermal processing stability up to 10,000x faster than traditional density functional theory while achieving near comparable accuracy. By combining AI-driven modeling with more than 20 years of proprietary data, deep device expertise and decades of OLED know-how, we are accelerating progress in phosphorescent blue while also advancing innovation across our next-generation red, green and yellow emissive materials. More broadly, earlier this month at ICDT, China's largest display technical symposium, we highlighted a meaningful shift underway in the industry. As performance requirements continue to broaden, progress increasingly depends on advancing materials, device architecture and display design together with a greater emphasis on energy efficiency. This system-level approach is supporting the development of advanced OLED architectures such as tandem and hybrid structures, advanced pixel layouts and PSF, helping address the evolving performance demands across applications. This direction aligns well with our long-standing development philosophy and reinforces our role in enabling innovative OLED solutions as the industry evolves and grows. One example we shared in the invited paper was the incorporation of our phosphorescent material into the industry's first commercial green PSF product targeting BT2020 specifications introduced by Visionox. This milestone highlights the growing role of our phosphorescent materials in enabling next-generation OLED architectures and reinforces our position at the forefront of OLED innovation. The same depth of collaboration extends across our broader customer base. During the first quarter, we announced new long-term agreements with Tianma and LG Display. These agreements underscore the value we deliver and the trust we have built over multiple technology cycles. At the industry level, we believe OLED is entering the early stages of a multiyear capacity expansion cycle. Significant new Gen 8.6 investments are progressing in Korea and China to support growing adoption across IT and automotive applications. Samsung Display's $3.1 billion facility is reportedly nearing commercial shipments and BOE's $9 billion fab has entered customer sample validation and is targeting mass production in the second half of this year. Visionox has begun equipment move-in at its $7.6 billion facility and TCL China Star continues construction on its $4.1 billion greenfield plant. We view this year as the beginning of a longer ramp with output increasing over time as facilities move through qualification, yield ramp and production scaling. Taken together, these developments across technology road maps, customer engagement and manufacturing capacity reinforce our conviction in OLED's long-term growth trajectory and in the increasingly important role we play in enabling next-generation architectures that advance performance. With our materials leadership, deep customer partnerships, strong financial foundation and disciplined capital allocation, we believe we are uniquely positioned to drive sustainable long-term value creation. And with that, I'll turn the call over to Brian. Brian Millard: Thank you, Steve. Revenue for the first quarter of 2026 was $142 million compared to $166 million in the first quarter of 2025. While material volumes decreased by approximately 4% year-over-year, total revenue decreased by 14%. This year-over-year decrease was primarily driven by customer mix as well as tariff-related purchasing activity by Chinese customers in the prior year period and the softer macro environment between periods. The ratio of materials to royalty and licensing revenue during the first quarter was approximately 1.5:1. For the full year, we continue to expect this ratio to average closer to 1.3:1 as customer mix normalizes. As Steve discussed, the operating environment has become more challenging over the past few months. Near-term visibility has declined as macro pressures weigh on consumer demand assumptions, while higher memory pricing and supply constraints continue to temper end market expectations. Based on current forecast, we expect second quarter revenue to be sequentially higher than the first quarter, and we continue to expect the second half of the year to be stronger than the first half. At the same time, given reduced near-term visibility and the evolving macro backdrop, we believe it is prudent to revise our full year revenue guidance range to $630 million to $670 million from our prior guidance range of $650 million to $700 million. Turning to materials. Total material sales were $84 million in the first quarter compared to $86 million in the first quarter of 2025. Green emitter sales, which include our yellow-green emitters, were $64 million in both periods. Red emitter sales were $20 million in the first quarter of 2026 compared to $21 million in the first quarter of 2025. As we've discussed in the past, material buying patterns can vary quarter-to-quarter. First quarter royalty and licensing fees were $54 million compared to $74 million in the prior year period, primarily reflecting changes in customer mix. Adesis revenue in the first quarter was $4.3 million compared to $6.6 million in the first quarter of 2025. First quarter cost of sales was $36 million, resulting in a total gross margin of 75%, which is consistent with our full year gross margin guidance range of 74% to 76%. This compares to cost of sales of $38 million and total gross margin of 77% in the first quarter of 2025. Operating expenses, excluding cost of sales, were $63 million in the first quarter compared to $58 million in the prior year period. Operating income for the quarter was $43 million, representing an operating margin of approximately 30% compared to operating income of $70 million and an operating margin of approximately 42% in the first quarter of 2025. The year-over-year decline reflects lower volumes, customer and product mix and higher input costs. Nonoperating expense for the quarter was $6.2 million, primarily reflecting foreign exchange and investment-related items. This included a $3 million foreign exchange loss related to movements in the Korean won associated with the tax receivable as well as a $2.7 million investment loss on our marketable equity securities. The income tax rate was 21% in the first quarter of 2026. For the full year, we now expect our effective tax rate to be approximately 20%. Net income for the first quarter was $36 million or $0.76 per diluted share compared to $64 million or $1.35 per diluted share in the first quarter of 2025. We generated $109 million of operating cash flow in the first quarter and ended March with approximately $911 million in cash and investments. During the first quarter, we repurchased approximately 633,000 shares of common stock for $66 million and completed our previously authorized $100 million share repurchase program, having repurchased a total of approximately 924,000 shares under that authorization. Building on this, the Board authorized a new $400 million share repurchase program and declared a cash dividend of $0.50 per share for the second quarter. These actions reflect our continued commitment to a disciplined and balanced capital allocation framework underpinned by strong free cash flow generation. We remain thoughtful but opportunistic in our approach to share repurchases while maintaining the flexibility to invest and support future growth. With that, I'll turn the call back to Steve. Steven V. Abramson: Thanks, Brian. 2.5 weeks ago, we rang the Nasdaq closing bell to mark 30 years as a publicly listed company. We started with a little more than a bold idea to help revolutionize the display industry. At a time when CRT television dominated living rooms. Our journey required tenacity, resilience and a long-term vision. Over these 3 decades, OLED has evolved from a laboratory concept into a global display platform powering billions of devices and supporting an industry estimated at approximately $50 billion this year. We're proud of how far we've come and even more energized by how far we will go in the years ahead. The best of Universal Display is still to come. I would like to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long-term growth and delivering cutting-edge technologies and materials for the industry, for our customers and for our shareholders. And with that, operator, let's start the Q&A. Operator: [Operator Instructions] Our first question is from Brian Lee with Goldman Sachs. Brian Lee: I guess starting with the guidance revision here. I know starting off the year, you guys have kind of talked about how you're always tied to the square meter surface area growth, and you had alluded to sort of mid-single digit, maybe 6% specifically as sort of the guiding principle for your revenue outlook for 2026. Clearly, the year has been weaker, smartphone cuts have accelerated. But are you seeing that in capacity growth, too? And if so, can you quantify? And then as it relates to the smartphone pressures, can you speak to kind of the high end and midrange? Those are the areas that you obviously have the most exposure to given OLED is well represented there. But what's your view on kind of what the high-end, mid-range parts of the market are going to do this year if overall smartphones are now expected to be down, call it, 15%, 20% depending on who you talk to. Brian Millard: Yes. Thanks, Brian. Firstly, on the guidance, there has been an overall change in growth expectations this year, both in terms of area as well as units over the last -- even the last 2 months since February. And on the area, now there's a projection of roughly a 2% growth in square area this year. And as you know, some -- we occasionally do grow below that overall area industry growth because of customer efficiencies and other factors that come into place. As it relates to the capacity, the capacity plans that we've talked about and that Steve reiterated today in his prepared remarks continue to be moving forward at full force. Samsung and BOEs coming online this year and Visionox and China Star thereafter. So that is all really no changes as it relates to that. And to your last point on smartphones this year, certainly, the more premium models are expected to be more insulated from some of the memory concerns. But with OLEDs now having 65-plus percent penetration, we are in the mid and even some of the low-end models as well. So there is exposure that OLED has to the mid and low end that would be subject to some of the memory concerns out there, and that has evolved even over the last 2.5 months here. Brian Lee: Great. That's helpful. And then maybe a couple more here. Just on the China revenue contribution in Q1. That was particularly soft, especially in the context of your Korean customers still spending quite a bit. Can you speak to the trends you're seeing in China? Is there inventory? Is there just end market demand, share issues? Just what's happening with the China backdrop? Because it does seem like your 2 Korean customers spent a pretty good amount here in Q1. Steven V. Abramson: Well, Brian, as you know, the China revenues are much lumpier over the course of the year than the Korean revenues. We still have a very strong position, obviously, in China. We're working closely with all of our Chinese customers, and we believe that, that's going to pick up throughout the year. Brian Lee: Okay. Fair enough. And then last one for me. Maybe this one for you as well, Steve. I think you made a comment during your prepared remarks about different architectures and one caught my attention. You mentioned hybrid architectures, and I think you mentioned Tianma by name. But is there any notable progress or developments that UDC is seeing with TADF hybrid recipes? And maybe bigger picture question, why are customers looking at hybrid to begin with instead of just a full phosphorescent system? Steven V. Abramson: So hybrid means a bunch of different things. And I think it was separate than the Tianma issue. Hybrid in this context means you combine a layer of phosphorescent technology with a layer of fluorescent technology. And what that does is it enables you to get the best of both technologies. So you can get the efficiency from phosphorescence and the color points and lifetimes from fluorescence. And that type of technology can expand the market. And that's, I think, what our customers are looking for. Operator: Our next question is from James Ricchiuti with Needham & Company. James Ricchiuti: I was just wondering, given the softer environment, and you may have given this, Brian, but I'm just wondering how we should be thinking about OpEx as we look out over the balance of the year. Brian Millard: Yes. So we had guided back in February mid- to high single-digit growth in OpEx. This year, I think it's trending more toward mid at this point. And as we've always been -- we've always had a very lean OpEx organization, continuing to fund R&D and all the investment opportunities we need to make there, but maintaining a lean SG&A organization. And that continues to be the case, and we're being very cautious on spend this year just based on the overall environment. James Ricchiuti: Makes sense. With respect to the separate release you made regarding a new presentation, new paper at the upcoming SID show on blue. When last did you guys deliver a paper on blue at that conference? Can you remind me? Brian Millard: It's been a few years. We have -- some of our customers have presented papers on blue in recent years, but it's been a while since we have. And we're excited to share some of the progress that we've made over the last few years in our blue development efforts. And this is really our first blue paper in quite some time. So we're excited to get that out there and share those details next week. James Ricchiuti: And then one final question, if I may, and this relates to the question Brian just asked about China. If we think about what happened regarding tariffs last year, when did you see the biggest stockpiling of materials as it related to some of the tariff concerns that some of the Chinese display manufacturers had? I'm trying to get a sense as to how much that played a role in the decline in China this quarter. Brian Millard: Yes. It was the largest in April, but there certainly was some toward the end of Q1. And at the time -- as time went on, it became clear to us that a lot of the strength that we had in the Chinese market in Q1 of '25 was tariff related. But the largest bit of it was in April following the U.S. tariff announcement and customers placing significant orders thereafter. But it was in both Q1 and Q2 last year. Operator: Our next question is from Scott Searle with ROTH Capital Partners. Scott Searle: Maybe to follow up on the China front a little bit. I was hoping to get a little more granularity in terms of some of the linearity that you're seeing and historic buying patterns ahead of new fab capacity launch, if you could remind us what that's looked like in the past. And also wondering just your latest thoughts in terms of China and exposure more on the smartphone front relative to IT or TVs. Qualcomm last night, I think, was referencing they thought things start to loosen up as we get into the September quarter. So I'm wondering if you're starting to see some of that, I'll call it, optimism or order patterns from your customers in China? And then I have a follow-up. Brian Millard: Sure. So on your point about fab ramps and volumes associated with fab ramps, historically, especially many years ago, there was a good bit of yield issues and challenges as our customers turned on new fabs. They've gotten much more efficient in their use of materials. And -- but we do have a component of our guidance this year is reflective of materials that will be needed to bring on new capacity coming online this year. As it relates to the year and what we're expecting, we do continue to expect mid- to high 40% of revenues to be in the first half and the balance in the second half, which does imply a continued ramp over -- heading into the second half. Scott Searle: Brian, just to follow up on that. Do you have visibility at this point in time to China specifically in that recovery? Brian Millard: We have -- we always get ongoing forecast from customers and have routine conversations with them about what their forecasts are expected. As you know, our China market, as Steve just said a few minutes ago, it's been very lumpy historically, and that continues to be the case. But we have visibility right now to what we expect for the rest of the year, and we feel that our guidance range properly balances the outcomes that we can see ahead of us. And we do expect China revenues to grow in the coming quarters, as Steve mentioned earlier. Scott Searle: Great. And Steve, to maybe follow up on the hybrid architecture. As I understand it, it sounds like that's been complicated the process and time line for the adoption of blue. I'm wondering if you could give us some thoughts in terms of how you're seeing customers looking to implement blue, whether it's in a hybrid architecture or otherwise, if that is part of the -- basically the hesitation or kind of extended the time line for adoption. Steven V. Abramson: Well, I think you've hit an important point. The customers -- I mean customers are looking at a number of different ways to implement blue using phosphorescence and fluorescence. And because you're using multiple materials, the matching in those materials becomes even more complicated. So it does delay -- it delays the time line. It also, as we are continuing our development efforts, we're working on specific implementations to meet our customers' needs. Scott Searle: Got you. And Steve, just to follow up on that, and then I'll get back in the queue. But from an economic standpoint and performance standpoint for the customer, do the hybrid architectures meet what the customers need that these are commercially deployable products and we just kind of, I'll call it, had an extended time line related to the complexity of the new architectures? Steven V. Abramson: Well, I'll answer multiple ways. You have to talk to our customers on the product introduction in terms of the timing. But having said that, it's a question of -- clearly a question of when, not if. And we're working really hard with our customers to make sure that blue gets introduced as quickly as possible. Brian Millard: And Scott, just adding on to Steve's comments, when LG Display, May of last year, they went out at SID Display Week last year and showcased a hybrid tandem tablet using our material. That was using 1 layer of fluorescent, 1 layer of phosphorescent. And they noted at that time, both at the show as well as in their press release that it was a commercially performing display that they had validated using commercial equipment. So that, we believe, evidenced the use of our material in the commercial system. Operator: [Operator Instructions] Our next question is from Martin Yang with Oppenheimer & Company. Martin Yang: My question first is on the guidance. Can you maybe talk about the guidance range when it comes to your expectations broken down by capacity-related ups and downs, product release timing and then underlying market? Brian Millard: Yes. So Martin, it's -- our guidance range really reflects -- specifically, we already knew -- know what capacity is going to be online this year. That was -- is unchanged since February. What has changed is the overall macro environment with certainly the -- what's going on in the Middle East and oil prices being where they are and therefore, gas prices for consumers, all that is new. And we've seen people that we talk to in the industry as well as the market research firms that track the industry, all lowering their estimates over the last 2 months for the year just based on what's out there. As it relates to specific models and end markets, certainly, the midrange smartphones mid -- and to the extent that OLEDs are in the low end, which we are in a few models of low end as well. Those are the areas where I think we're seeing the most pressure. And certainly, the expectations for OLED smartphone growth this year have come down since February as well. Martin Yang: A follow-up on your capacity input guidance because we are getting new Gen 8 fabs online. Do you feel confident that you have a good sense of how those new fabs will consume materials for the year? Brian Millard: Yes. We've not heard that there is any shift in the plans that our customers have to bring that capacity online. And there is an expectation of the equipment -- Samsung is expected in the middle of this year to have their equipment for mass production and BOE shortly thereafter. That has been the case and was expected back in February as well when we issued guidance. And so things from -- in terms of the new capacity coming online, that's really not changed since February, and we do believe that they will come online and our customers are actively working to make sure that capacity is utilized. Martin Yang: Got it. Last question for me on IP. Can you maybe remind us your approach to IP protection? We're starting to see more phosphorescent OLED developers outside of China, mainly in Korea. Can you maybe remind us your IP position as well as your approach to protect your IP? Steven V. Abramson: Well, we firmly believe that when you have inventions, you need to protect them and we protect them with our IP worldwide. We have over 7,000 patents worldwide. And we utilize our IP as part of our product development because we have strong IP protection as well as the best materials on the market. And we believe that, that is a winning combination and has been for quite some time. Operator: This will conclude our question-and-answer session. I would like to turn the program back to Brian Millard for any additional closing remarks. Brian Millard: Thank you for your questions. We remain confident in the long-term opportunities ahead for Universal Display and the OLED industry, and we appreciate your continued interest. We look forward to speaking with you again next quarter. Operator: Thank you. This will conclude today's teleconference. You may disconnect at this time, and thank you for your participation.
Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Internet Bancorp Earnings Conference Call for the First Quarter 2026. [Operator Instructions] Please note this event is being recorded. It is now my pleasure to turn the call over to Julia Ferrara from ICR. You may begin your conference. Julia Ferrara: Thank you, operator. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's first quarter 2026 financial results. The company issued its earnings press release earlier this afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us from the management team today are Chairman and CEO, David Becker; President and COO, Nicole Lorch; and Executive Vice President and CFO, Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results, and then we'll open up the call for your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial conditions of First Internet Bancorp that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David. David Becker: Thank you, Julia. Good afternoon, and thank you for joining us on the call today. We delivered strong first quarter results that demonstrated the resilience and strength of our diversified business model. We generated solid revenue growth, expanded our net interest margin and continued making meaningful progress on credit quality, all the while navigating an uncertain macroeconomic environment. Let me start with some of the highlights for the quarter. Total revenue reached $43.1 million in the first quarter, up 21% year-over-year, driven by a 26% increase in net interest income. Our fully taxable equivalent net interest margin expanded to 2.45%, a 54 basis point improvement from a year ago and 15 basis points sequentially. This margin expansion reflects the benefits of our proactive balance sheet management strategy and the power of our deposit franchise, combined with our scalable nationwide lending platforms. Pre-provision net revenue grew 51% year-over-year to $18.1 million, underscoring our ability to generate strong operating leverage while maintaining disciplined expense management. This performance gives us confidence in our ability to drive sustainable profitability as we continue to work through our credit normalization process. On credit, our overall loan book remains solid and continues to perform in line with industry trends. In addition, we're seeing tangible evidence that the decisive actions we've taken over the past several quarters are yielding favorable results on the 2 problem portfolios, SBA and Franchise. Our provision for credit losses for the quarter came in better than expected, and we're observing improving trends in our portfolio with delinquencies and nonperforming loans headed in the right direction. The credit trends we're seeing, particularly in our SBA portfolio reflect the impact of enhanced underwriting standards, more vigorous portfolio monitoring and responsive problem loan resolution. On the growth front, our commercial lending pipelines remain robust across multiple verticals. Total loans increased to $3.8 billion with particularly strong production in single tenant, lease financing and construction lending as well as in one of our emerging verticals, wealth advisory lending. While we maintain appropriately conservative underwriting standards, we're seeing great opportunities to deploy capital into high-quality commercial relationships at attractive yields. Turning to the other side of our balance sheet. Total deposits reached $5 billion, up from $4.8 billion in the prior quarter. We continue to benefit from the strength and flexibility of our Banking-as-a-Service initiatives. Importantly, we're seeing continued growth in lower-cost fintech deposits, which has also allowed us to let higher cost CDs and broker deposits mature without replacement. Our fintech deposit platform also provides us with significant balance sheet management flexibility. During the quarter, average fintech deposits totaled $2.4 billion, an increase of over 186% from the first quarter of 2025. At quarter end, we have moved approximately $1.5 billion of these deposits off balance sheet, optimizing our asset size while maintaining these valuable customer relationships and the associated fee income streams. This capability is a unique competitive advantage that enhances both our profitability and our capital efficiency. In our SBA business, while seasonality and tightened underwriting resulted in softer loan production for the quarter, we're pleased with the strong foundation we're building and how the business is positioned for long-term profitable growth. To further align our strategy in SBA, we've strengthened the business by promoting Gary Carter to the position of National Sales Manager. Gary rejoined us a year ago as our Senior SBA Credit Officer, bringing deep industry expertise, including his role at Live Oak Bank that will help us continue building this business on a sound foundation. Our capital and liquidity position remains solid as we were able to closely manage the size of the average balance sheet while continuing to grow revenue. Regulatory capital ratios remain well above minimum requirements with a total capital ratio of 12.5% and a Common Equity Tier 1 ratio of 8.97% as well as substantial liquidity coverage. Moving to our strategic investments in technology and artificial intelligence. We continue to invest thoughtfully in digital capabilities that enhance the customer experience, improve operational efficiency and position us for long-term growth. These technology investments aren't just about maintaining our competitive position, they're also about creating sustainable advantages in how we serve customers, manage risk and drive operational excellence. Looking ahead, we're navigating an uncertain macro environment from a position of increasing strength. Our diversified business model is generating strong revenue growth. Our deposit franchise provides funding advantages and strategic flexibility. We've proven our ability to make difficult decisions and execute effectively. The credit challenges we've experienced are manageable in the context of our overall business. We've taken decisive action, strengthening underwriting standards, enhancing risk management and addressing problem loans proactively. We see the benefits in improving trends and expect continued progress throughout 2026. We are not standing still. We're investing in AI and technology to enhance efficiency and customer experience, strengthening our commercial banking capabilities, expanding fintech partnerships and repositioning our SBA business on a stronger foundation. We're confident in our strategy, our team and our ability to deliver value for shareholders. I'll now turn it over to Nicole for operational highlights, including commercial lending, SBA, Banking-as-a-Service and credit. Nicole Lorch: Thank you, David. Starting with commercial real estate, we saw solid first quarter activity with particularly strong production in construction and single-tenant lease financing. These businesses continue to perform well with strong credit quality and attractive risk-adjusted returns on new originations. We were also pleased to see higher balances in a couple of our emerging verticals, wealth advisory lending and equipment finance. The pipeline remains healthy with disciplined underwriting and good yields on new commitments. Turning to SBA. As David mentioned in his comments, the deliberate shift we communicated in our last call that prioritizes credit quality over volume, combined with a seasonally lighter first quarter resulted in lower originations for the quarter. This translated into lower loan sale volume and lower gain on sale revenue compared to the linked quarter. Regarding gain on sale revenue, while premiums have been strong so far this year, we still expect to retain more production on our balance sheet in future periods as the pricing on certain higher-quality deals will not fetch quite the same premiums in the secondary market. We generally look at a 12-month earn-back period when making decisions on whether to sell or hold loans. While this will impact gain on sale revenue for the year, it will be highly additive to net interest income and net interest margin in future periods. Nonetheless, barring any macroeconomic deterioration, we remain optimistic about the previously shared production and gain on sale targets for the full year. Importantly, while we're being selective about growth in this portfolio, we remain committed to small business lending as a core business. This is an attractive lending vertical with good long-term economics, and we have the platform, expertise and relationships to compete effectively once we've fully worked through this current credit cycle. As to credit performance, we've made substantial progress over the past several quarters through proactive and prudent actions. We've significantly enhanced our underwriting standards, added experienced talent to our credit and portfolio management teams and implemented more robust monitoring and early warning systems. We've also been proactive in working with our borrowers to prevent the formation of nonperforming loans, and we're seeing results. As of March 31, delinquencies in the SBA portfolio have improved 118 basis points quarter-over-quarter and 126 basis points year-over-year. As we look ahead, our focus in SBA is on durability and consistency rather than near-term volume. Loans originated under our revised standards are showing more stable early behavior. While these newer vintages are still early in their life cycle, we're encouraged by what we're seeing in terms of borrower performance, responsiveness and overall portfolio dynamics. The operational changes we've made across underwriting, execution and portfolio oversight are now fully embedded in the business. This enables us to remain selective today while preserving the ability to scale responsibly as conditions normalize. Our objective is an SBA portfolio with attractive long-term economics and reduced volatility across cycles, and we are building with that goal in mind. In Franchise Finance, we continue to make progress working through problem loans. Our special assets team was busy during the quarter coming to resolution on several credits. While net charge-off activity remained elevated during the quarter, it more than offset nonperforming loan formation as nonaccrual Franchise Finance loans dropped to their lowest level in 4 quarters. Looking at our Banking-as-a-Service operations, we continue to see strong momentum with our fintech partners. These relationships provide valuable deposit funding, generate attractive fee income and position us at the forefront of innovation in digital banking. We processed over $82 billion in payments volume during the quarter, an increase of over 260% year-over-year through a carefully curated partner network, a reflection of our efforts to strengthen and deepen existing relationships while cultivating new partnerships. We are constantly evaluating new partnership opportunities while ensuring we maintain the highest standards of compliance and risk management. Across the bank, we continue to invest strategically in AI and automation to drive efficiency and enhance customer service. Our strong data foundation built through previous investments in our data warehouse and integrated data sources now supports our infrastructure upgrades for AI agent processing. While scoping our own proprietary agents, we've already deployed third-party AI capabilities with measurable impact, such as fraud detection agents that screen outbound transfers before processing. Additionally, our virtual customer service agent resolves approximately 45% of inquiries, significantly reducing the burden on human agents and improving response times. The effects of this are validated by the favorable results from the Net Promoter Score framework and customer listening program we implemented in the first quarter with our consumer and small business banking team. Out of the gate, our scores are well above industry average. We have built relationships through transparency and delivering on our promises, and that loyalty delivers strong returns. The diversity of our business model is another key strength. We have multiple engines driving growth and profitability. Our commercial lending is performing well. Our consumer lending remains stable. Our fintech partnerships continue to grow, and we're seeing improving trends in SBA. We're executing on all of this with appropriately conservative underwriting standards that position us for sustainable profitable growth. I will now turn it over to Ken for additional insight into our first quarter performance and update to our 2026 outlook. Kenneth Lovik: Thanks, Nicole. We are pleased to report solid first quarter results with net income of $2.5 million or $0.29 per diluted share. Total revenue for the quarter was $43.1 million, a 21% increase over the prior year period and when combined with well-managed expenses, pre-provision net revenue totaled $18.1 million, up 51% year-over-year. These results reflect our diversified business model, strong operational execution and sustained business momentum across our core segments. Net interest income for the first quarter was $31.6 million or $32.8 million on a fully taxable equivalent basis, up about 26% and 25%, respectively, year-over-year. Net interest margin improved to 2.36% or 2.45% on a fully taxable equivalent basis, up 14 and 15 basis points, respectively, from the prior quarter and both up 54 basis points year-over-year. The yield on average interest-earning assets for the quarter rose to 5.67% compared to 5.57% in the prior year period as higher rates on new loan originations more than offset the impact of Federal Reserve rate cuts in late 2025. We also saw a meaningful decline in funding costs during the same period with the cost of interest-bearing deposits falling 56 basis points to 3.45%. The ability to maintain and increase yields on interest-earning assets in conjunction with declining cost of interest-bearing deposits demonstrates delivery on our years-long effort to reposition the balance sheet and optimize our mix of earning assets. Noninterest income for the quarter totaled $11.5 million, up almost 11% year-over-year as fee revenue from our fintech partnerships continued to grow, supplemented by higher net loan servicing revenue following the servicing retained sale of single-tenant lease financing loans in 2025. David and Nicole both touched on our positive momentum in the Banking-as-a-Service space, which is evidenced by the growth in fee revenue with quarterly revenue increasing over 200% compared to the first quarter of 2025 and increasing over 220% on a trailing 12-month basis. Noninterest expense for the quarter totaled $25 million, up only 6% year-over-year despite continued investment in technology and AI to enhance both front and back-office operations and costs related to working out problem loans. Turning to credit. The provision for credit losses was $16.3 million in the first quarter, which was a little better than our initial expectations. The provision for the quarter included net charge-offs of $15.8 million and additional specific reserves in our Franchise Finance portfolio. Relative to our original forecast, the lighter provision was due to a combination of lower loan balances and unfunded commitments as well as updates to the assumptions in the CECL model. Our allowance for credit losses at quarter end was $56.5 million or 1.5% of total loans, up slightly from year-end. Nonperforming loans increased to $61.6 million or 1.63% of total loans. However, a portion of the increase consists of fully guaranteed SBA 7(a) balances where the government guarantee substantially mitigates our loss exposure. Excluding fully guaranteed balances, nonperforming loans to total loans drops to 1.22%. Another component of the increase in nonperforming loans was accruing loans 90 days or more past due. However, the largest portion of this increase, about $6 million, relates to one relationship that we expect to pay off in full in the second quarter. I will also note that our SBA team was successful in bringing some past due borrowers current shortly after quarter end, reducing delinquencies even further. At quarter end, the ratio of the allowance for credit losses to nonperforming loans was 92%. Adjusting nonperforming loans to remove the fully guaranteed SBA balances, the allowance coverage ratio improves to 122%. While we are pleased with the improvement in nonperforming loans and delinquencies, our updated allowance for credit losses model reflects our expectation that the provision for credit losses will remain elevated in the second quarter, but then improve gradually in the second half of the year. Total loans as of March 31, 2026, were $3.8 billion, an increase of $29.1 million or 1% compared to the linked quarter and a decrease of $479 million or 11% compared to March 31, 2025. David and Nicole both covered some of the lending highlights from the quarter where we experienced growth. Overall, origination activity was fairly strong across our commercial and consumer areas. We did, however, experience some early payoff and maturity activity in the Franchise Finance, Public Finance and Recreational Vehicles portfolios and in particular, saw early payoffs of some large balance relationships in the investor commercial real estate portfolio, which impacted total loan growth during the quarter. Total deposits as of March 31, 2026, were $5 billion, representing an increase of $142 million or 3% compared to December 31, 2025, and an increase of $36 million or 1% compared to March 31, 2025. David talked about the continued strong growth in fintech deposits, which has allowed us to further improve the mix of deposits and drive funding costs lower. Average CD and broker deposit balances, our highest cost of deposit funding were down over $180 million from the prior quarter. The weighted average cost of maturing CDs in the first quarter was 4.19%, while the average cost of fintech deposits was 3.19% and the cost of new CDs was 3.62%. As the cost of maturing CDs in the second quarter is 4.11% and in the third quarter is 4.06%, we have the ability to drive funding costs lower throughout the year and hence, drive net interest income and net interest margin higher even in a flat rate environment. Looking at our full year 2026 outlook, we're broadly maintaining the guidance we provided in January. However, we want to acknowledge the heightened macroeconomic uncertainty we're navigating, including volatile energy prices and other potential geopolitical developments. While we're confident in our business momentum and strategic positioning, we're taking a measured approach given the current uncertain environment. With regard to loan growth, while our commercial pipelines remain robust and our consumer business continues to produce solid results, we recognize our full year target could prove ambitious given higher-than-expected loan payoffs and the evolving macro headwinds, which could lead to further tightening of underwriting standards. We're closely monitoring the current environment, and we'll provide updates as the year progresses. In summary, we feel confident in the underlying momentum of our business and our ability to navigate the current macro environment while positioning the business for accelerating profitability in the second half of the year and into 2027. With that, I'll turn it back to the operator for questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Nathan Race with Piper Sandler. Nathan Race: I was wondering if you could just help us kind of unpack the charge-offs a bit more for this quarter. And just generally, what kind of visibility you have into charge-offs over the balance of this year? I know you guys have spent a lot of time scrubbing the SBA portfolio. But just curious within that context, how we should think about the $50 million to $53 million provisioning forecast that was laid out last quarter for this year. Kenneth Lovik: Yes. I think as we think about it, it's -- I think it's still very similar to what we had talked about last quarter where we expect the bulk of it in the second half of the year. In terms of charge-offs for this quarter, we had $15 million to $16 million of charge-offs. I think where SBA -- I think our SBA came in line with what we were forecasting. Our Franchise number was a little bit higher because we took action on some other credits probably sooner rather than later. But I think we still continue to feel like first quarter is probably going to be the worst of the quarters in the second quarter. You can look at -- even though we made progress on reducing nonaccrual unguaranteed SBA balances and Franchise balances, we still have elevated nonperforming loans that we need to work through. But our special assets team is working through those. And I think we'll probably see some resolution on many of those here in the second quarter. And I think by the time we get to the third and fourth quarters, I think our feeling is that we'll be through a lot of the kind of some of the older vintages where there's probably still some potential problems. And by the time we get to the end of the year, the credit costs are going to be at a far more moderate level. Nathan Race: Okay. Got it. That's really helpful. Maybe changing gears to the margin. With the Fed on hold, I think that's a bit of a headwind in terms of deposit repricing. But David, you mentioned a lot of the success you're having bringing on some lower-cost deposits from some fintech relationships. So just curious how you're kind of thinking about the margin trajectory over the next few quarters, assuming the Fed remains on pause and just trying to drive that with the NII growth expectations for this year that were laid out last quarter of, I believe, $155 million to $160 million. David Becker: We're sitting here, Nate, Ken and I are pointing fingers back and forth on it. Yes, the net interest margin, the biggest issue that we have out here even without -- and we did not put in our forecast at the beginning of the year, any rate decreases. We have not come back and modified it with any rate increases yet. But we -- from the get-go, we weren't anticipating any rate fall off this year. But because of the CDs that are maturing and running off, as Ken said earlier, they're north of 4%. New CDs that we're adding and rolling are in the 3.6% range. So there's a gap there, but even better yet on the fintech deposits are coming in at about 3.19%, almost 100 basis points improvement. So that will continue throughout the course of the year. We have another $800 million rolling between now and year-end. So we could be up in that $290 million range by the end of the year. Kenneth Lovik: Yes. I think, Nate, in terms of what we -- I mean, kind of similar to what we talked about last quarter, I think our forecasting still holds that we'll probably -- I mean, feel like a 10 to 15 basis point improvement through the -- 10 to 15 basis point improvement per quarter through the end of the year is a very, very achievable target on our end. Nathan Race: Okay. And then David, I believe you said to get you to the $290 million by the fourth quarter, if I heard you correctly? David Becker: Yes. Operator: Your next question comes from the line of Brett Rabatin with StoneX Group. Brett Rabatin: I wanted to just continue to talk about guidance, and you just mentioned the $290 million guidance. I think for the outlook in January, you mentioned $275 million to $280 million by the fourth quarter. It sounds like the only tweak that you've made, if I'm hearing this right, really is you're a bit more conservative on that 15% to 17% loan growth target, just given some uncertainties. But I was a little surprised you didn't tweak down maybe the expense guide a little bit from the $111 million to $112 million and then also, it seemed like the fee income guide could have increased. Any thoughts on fee income and expense guidance and just the variables that might impact that? Kenneth Lovik: Yes. I think on the expense side, Brett, I think we're -- the guidance we had out there before, I think we're good keeping it there just for conservatism. I do think if, for example, in the macro headwinds, if you will, impact originations or maybe the SBA originations are lighter in the first half of the year or whatever, we have some offsets on the expense side, certainly in incentive compensation tied to loan origination. So there are definitely some offsets there on the expense side that would take that number lower. And then on the fee side, too, there's levers there, too. I mean, as we -- Nicole said in her comments that we expect to retain more balances going forward in SBA, given some of the higher quality deals we're doing. But as we put in our deck, look, premiums are holding in there on gain on sale. So there could be -- if the premium levels hold up near the high end of the range, I mean, there's the opportunity to sell more into the secondary market and drive higher fee income. So there's a number of different levers there that could offset perhaps any shortfall in the loan growth. Brett Rabatin: Okay. So there's leverage to both those line segments. Kenneth Lovik: Yes. Absolutely. Brett Rabatin: And then I know you guys have been working really hard on the Franchise and SBA. When I think about the macro of higher oil prices, I guess the only piece of your portfolio that I start to think about would be the RV portfolio. And I know quite a few of that or a lot of that is not RVs per se. It's horse trailers and things that people use for work. But have you guys seen any migration in the RV book as you've been looking at that portfolio just to watch it as oil prices/gas has been higher? Nicole Lorch: A great question, Brett. I'll take that one. We actually just had a credit committee meeting this morning, and we're talking around the table with all of our lending lines about the impact of fuel prices. I think diesel fuel is up over $1 per gallon and certainly regular gasoline is as well. Our consumers have not been affected. We are not seeing any increase in delinquencies or any problem loans in the consumer book as a result of fuel prices. The horse trailers in particular, have always performed well even with headwinds. Other lines of business that could be -- and in fact, originations are very solid. So even in this first quarter and the conflict has been going on for a little over a month now. So we're not seeing any depreciable decline in new originations with people spooked by the prices. So that's a positive sign. In other lines of business, equipment finance, we do some lending for fleet vehicles. We're not seeing any issues there that are related to fuel prices. We've also done some outbound contacting of our top SBA customers who are most likely based on their industry to be affected by fuel pricing. So that's not just transportation, but it's anything that would have a fuel component to it. And there -- we're hearing no issues related to fuel pricing at this point. Some have had to pass along price increases to their customers. But overall, we're not seeing any weakness in the portfolio as a result. Certainly, we all hope that the conflict gets resolved sooner than later. Brett Rabatin: Yes. That's -- I think everyone knows that. And then if I could just ask one last one just around -- you guys highlighted the $82 billion of payments processed. When I think about some of the stuff that you've been doing in fintech, I guess I look at the fee income and just think that there should be some momentum in fees aside from whatever happens to the SBA bucket. Do we start to see bigger fees related to all these things you're doing in fintech? Or is that just going to be a process over time? It just seems like you're gaining some momentum on the fintech side, but it hasn't yet showed up really in a meaningful way on the fee side. Nicole Lorch: Well, we are seeing some momentum there. And I think what's important is that we have negative net revenue churn, which means we are seeing really good retention from our existing programs, and we have been able to increase our fee structure in a way that helps us to support them and support the growth of the program. We're not bringing on new programs at a rate that we cannot sustain. So we always have a backlog of customers that we've been talking to. We're in due diligence with half a dozen programs, but we're trying to make sure that we're bringing them on in a really responsible way. And we have some solid partners that are meaningful. So I think on a year-over-year basis, we've doubled the fees that we're seeing in our fintech partnership line of business. But it does show up in different ways across our income statement. For instance, the balances that we've been able to push off balance sheet, those are not showing up in the interest income or interest expense, but those are showing up in noninterest income. You're also seeing the fees in the noninterest income. And then we do have a couple of lending programs and those are going to show up then in interest income. Does that help? Brett Rabatin: That is helpful. Do those things show up in the other line? Or what line items did those show up in? Kenneth Lovik: Yes. Brett, they really -- they show up in the other line item. Well, they show up in the other line item. They also show up in the services and fees, service charges and fees line item. But just to put some numbers around that. I mean, in the fourth quarter, we had about just, call it, a little bit over $1 million for the quarter in fee income. This -- in the first quarter of '26, we had a little over $1.5 million of fee income. So to Nicole's point, with some of the momentum that we're getting with some of our existing partners, higher volumes, higher payments volumes, higher deposits, more deposits pushed off balance sheet. I mean if you run rate that, you're talking about a 50% growth year-over-year and you're starting to talk about real dollars. Brett Rabatin: Okay. And Ken, just to be clear, that $1.5 million, that encompasses all of your fintech operations? Kenneth Lovik: Yes. That's just fees, right? That doesn't include any interest income from any of our lending partners. That's just pure fee income. Yes. Operator: Your next question comes from the line of Emily Lee with KBW. Emily Noelle Lee: This is Emily stepping in for Tim Switzer. Yes. So you mentioned you're in due diligence with about half a dozen programs right now on the fintech side. Can you speak more on just those partners in the pipeline and maybe the projected timing of those launches or an idea of kind of potential earnings impact surrounding those? Nicole Lorch: Well, we are not known for being easy in the fintech space. In fact, I think we've gotten a reputation for being one of the tougher due diligence programs out there. So we certainly kick the tires and give them a good opportunity to understand what our expectations are because, in fact, we are the regulators of these programs because they are, in fact, our customers in many cases. So right now, I know we have a couple of lending programs that we are taking a look at. We also have a couple of deposit programs that are out there. We have one that is moving much closer to approval. And so I think that would be a second quarter onboarding event. But some of them will go more slowly, especially when there is a consumer lending program involved, for instance, that's going to be probably the longest due diligence process. Something that might be a business payments program can be a bit faster. It just depends on the nature of the program and when that starts to show up. Also depends on whether or not the program is existing with another financial institution as a sponsor bank. A conversion is a different beast and usually can be quicker to have an impact on the financial statements as opposed to a brand new program that needs to ramp up itself. So it all depends is the very official answer to that, but we have some that we do expect to be bringing on in the next quarter and then the third quarter as well. Emily Noelle Lee: Understood. And then also just on the NIM. You mentioned 10 to 15 basis points of improvement per quarter through the end of the year as a very achievable target. That's if the Fed doesn't cut, but what would be the impact of 125 bps cut? Kenneth Lovik: If they cut -- and this is -- keep in mind, we run this on a static balance sheet. So this doesn't impact -- this doesn't take into account growth. But on a static balance sheet, you're talking about probably $2.2 million to $2.3 million annually of net interest income. Operator: Your next question comes from the line of George Sutton with Craig-Hallum. Logan W Lillehaug: This is Logan on for George. First one for you, Ken. I was wondering if you could just kind of talk about the loan-to-deposit ratio. I've got it kind of stepping down again this quarter, and you've talked about how it's kind of a historically low point for you guys. I wonder if you could just sort of address sort of the path for that from here, especially as we think about potentially lower loan growth this year and just sort of how you plan to manage that? Kenneth Lovik: Well, I think over the course of the year, we expect the loan-to-deposit ratio to increase. We ended the year with pretty healthy cash balances. And it's kind of hard to look at any particular quarter end cash balances because sometimes they're inflated due to payments activity at the end of the month. But we do have, in our minds, excess cash that we can just take out of the cash and deploy. So we probably see that ratio if we're at 75%, 76% this quarter, probably gradually stepping up and probably being somewhere closer to 85% to 90% in the fourth quarter. And I think that's -- we like that because you're obviously -- you're deploying cash into higher interest-earning assets, loans, but on keeping the balance sheet relatively -- keeping balance sheet growth to a minimum. David Becker: We had a couple of very large commercial loans, literally one paid at the last day of the quarter that was over $50 million and knocked it down. So that kind of messed up the ratios pretty quickly. But as we are in that commercial market now, we can have some pretty big swings. And as Ken said, we have swings on the deposit side at quarter end because of bill payment services and we also have people trying to close deals or clear them up by quarter end. So that number didn't intentionally go down. It was just a matter of math and the way things happen in that last week of the quarter. Logan W Lillehaug: Okay. Got it. And then maybe just a high-level one for you, David. I mean the last few quarters, you kind of mentioned that returning to that 1% return on asset level. And obviously, there's a lot of moving dynamics this year. But maybe just talk about sort of the steps that you need to take to sort of get back there and call it, the medium term? David Becker: Yes. We get back to our -- what we think our numbers are for the fourth quarter, that will set us up to be back into the 1% return for 2027. And we just continue the improvements. We've got a great base taking that number forward through our calculations, we'll be right back at 1% by the end of 2027. Operator: Your next question comes from the line of John Rodis with Brean Capital. John Rodis: Ken, the -- what drove the tax benefit this quarter? And how should we think about the tax rate going forward? Kenneth Lovik: The -- again, it's -- when net income is low like it has been, we do get a significant benefit from our tax-exempt businesses, particularly our Public Finance portfolio. So we have to get to a certain level of pretax income before you start applying rates to it. I mean I think if we're in the range of I don't know, call it, maybe $3 million of pretax or less, probably that tax rate is going to be nonexistent to a credit. And then kind of once you get into maybe north of $5 million to $8 million or so, you're probably a low mid-single-digit tax rate. And then if we get into, say, a $10 million to $12 million of pretax income, you're probably looking closer to a 7% to 9% tax rate, effective tax rate that is. It's just when income -- when pretax income is low, we just -- we get such a benefit from the not only the tax-exempt business in public finance, but we also get benefits from some LIHTC investments. And obviously, from last year, we have an NOL that we can carry forward when we make money. So as long as when pretax income is low, we're going to have a pretty -- we're going to have a decent tax credit. John Rodis: Okay. It's a moving target then. Kenneth Lovik: It is. Operator: Your final question comes from the line of Nathan Race with Piper Sandler. Nathan Race: Just on the SBA revenue going forward, I appreciate Nicole's comments earlier around holding some production for a longer seasoning period, I think, was what she was alluding to. So I'm just trying to think about kind of the cadence of SBA revenue. I think in the past, it's been more back half loaded. But I know you guys have made a number of changes to your platform and credit infrastructure over the last handful of quarters. So I was just hoping you could kind of speak to the cadence of kind of SBA revenue within that context. Kenneth Lovik: Yes. I think historically, if we go back in time a couple of years, it's probably like first quarter, you had -- it was seasonally light, although oftentimes, you may reap the benefit of a strong fourth quarter in terms of loan sales. But in terms of originations, first quarter historically has been light and it ramps up in the second, ramps in the third and then usually maybe comes back a little bit in the fourth quarter. I think the way that we're looking at it this year and the experience we saw in the first -- certainly in the first quarter with, again, kind of changing our approach on underwriting and having our team get around that, combined with just the typical seasonality is that probably the way that we're looking at originations this year is that there's just -- there's going to be a ramp-up throughout the year. And second quarter will be a little bit higher than first and third quarter and fourth quarter will be -- I don't want to use the word significantly higher, but we do have those third and fourth quarters ramping up in terms of origination volume, much higher than we have second and first quarter. Nicole Lorch: And our pipeline is building. It's up about 1/3 from where it was at year-end. So that would suggest that we're going to be in a good position to hit that. Nathan Race: Okay. So it sounds like the base case is SBA revenue grows from here and the guidance from last quarter on total fee income, which I believe was $33 million to $35 million, it's going to be higher than that, correct? Kenneth Lovik: Well, I think right now, we think -- keep in mind, that's total fee income. I think last quarter, we said in terms of just pure gain on sale somewhere in the $19 million to $20 million range, just that line item within the fee income. I think as we talked about, I think we still feel good about that total amount. Maybe it just shifts a little bit more towards third and fourth quarter than say, I mean, we had a pretty good first quarter without a doubt. The second -- the third and the fourth quarters are definitely stronger than the second quarter. Operator: I will now turn the call back over to David Becker for closing remarks. David Becker: We thank you for joining us today and for all the thoughtful questions we had. We're pleased with the strong momentum that we built during the first quarter. We remain confident in our ability to execute on the priorities we've outlined for the year. We are very mindful as we have said many times about the macroeconomic uncertainty, but we think we're executing from a position of strength and we're well positioned for improving profitability throughout this year and beyond. So we appreciate your continued support. Look forward to keeping you updated on our progress next quarter. Thank you very much. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.